false--09-30FY20190001113256P7Y5000000P3Y6MP3YP3YP3YP3Y0007000000102200000104100000849000008140000023000000100000000300000030000000014009500000075000000147000000600000022000000P3Y0173000002270000060000001000000 0001113256 us-gaap:DefinedBenefitPlanEquitySecuritiesMember us-gaap:FairValueInputsLevel1Member country:US us-gaap:PensionPlansDefinedBenefitMember 2019-09-30false00011132569/30FY20203.5us-gaap:AccountingStandardsUpdate201602Memberus-gaap:PropertyPlantAndEquipmentAndFinanceLeaseRightOfUseAssetAfterAccumulatedDepreciationAndAmortizationus-gaap:DebtCurrentus-gaap:LongTermDebtAndCapitalLeaseObligationsus-gaap:OtherAssetsNoncurrentus-gaap:OtherLiabilitiesCurrentus-gaap:OtherLiabilitiesNoncurrent
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|
| | | | |
| ☒ | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended September 27, 2020
| | | | | |
| ☐ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended September 29, 2019
|
| |
☐ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 1-15983
MERITOR, INC.
(Exact name of registrant as specified in its charter)
|
| | | | | | | | | | | | | | | | |
| Indiana | | 38-3354643 |
(State or other jurisdiction of incorporation
or organization)
| | (I.R.S. Employer
identification no)
|
| | | | | |
| 2135 West Maple Road | | |
| Troy, | Michigan | | | 48084-7186 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (248) (248) 435-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
|
| | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $1 Par Value | MTOR | New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ☒ ] No [ ☐ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ☐ ] No [ ☒ ]
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 [ ☒ ] No [ ☐ ]
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding twelve months (or for such shorter period that the registrant was required to submit such files).
Yes [ ☒ ] No [ ☐ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “accelerated filer,” “large accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | | | | | |
| Large accelerated filer | ☒ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| Emerging growth company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ☐ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ☒ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ☐ ] No [ ☒ ]
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant on March 31, 20192020 (the last business day of the most recently completed second fiscal quarter) was approximately $1,661,010,508$1,024,560,711
78,123,34772,311,617 shares of the registrant’s Common Stock, par value $1 per share, were outstanding on November 12, 2019.11, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the definitive Proxy Statement for the Annual Meeting of Shareholders of the registrant to be held on January 23, 202028, 2021 is incorporated by reference into Part III.
PART I
Item 1. Business.
Overview
Meritor, Inc. ("we", "us" or "our"), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers ("OEMs") and the aftermarket for the commercial vehicle, transportation and industrial sectors. We serve commercial truck, trailer, military, bus and coach, construction, and other industrial OEMs and certain aftermarkets. Our principal products are axles, drivelines, brakes, and suspension systems, drivelines and brakes.
Meritor was incorporated in Indiana in 2000 in connection with the merger of Meritor Automotive, Inc. and Arvin Industries, Inc.systems. As used in this Annual Report on Form 10-K, the terms "company," "Meritor," "we," "us" and "our" include Meritor, its consolidated subsidiaries and its predecessors unless the context indicates otherwise.
Meritor serves a broad range of customers worldwide, including medium- and heavy-duty truck OEMs, specialty vehicle manufacturers, certain aftermarkets, and trailer producers. Our total sales from continuing operations in fiscal year 20192020 were approximately $4.4$3 billion. Our ten largest customers accounted for approximately 7769 percent of fiscal year 20192020 sales from continuing operations. Sales from operations outside North America accounted for approximately 3335 percent of total sales from continuing operations in fiscal year 2019.2020. Our continuing operations also participated in four unconsolidated joint ventures, which we accounted for under the equity method of accounting and that generated revenues of approximately $1.2$0.7 billion in fiscal year 2019.2020.
Our fiscal year ends on the Sunday nearest to September 30. Fiscal year 2020 ended on September 27, 2020, fiscal year 2019 ended on September 29, 2019, and fiscal year 2018 ended on September 30, 2018, and fiscal year 2017 ended on October 1, 2017.2018. All year and quarter references relate to our fiscal year and fiscal quarters unless otherwise stated. For ease of presentation, September 30 is utilized consistently throughout this report to represent the fiscal year end.
Whenever an item in this Annual Report on Form 10-K refers to information under specific captions in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations or Item 8. Financial Statements and Supplementary Data, the information is incorporated in that item by reference.
References in this Annual Report on Form 10-K to our belief that we are a leading supplier or the world's leading supplier, and other similar statements as to our relative market position are based principally on calculations we have made. These calculations are based on information we have collected, including company and industry sales data obtained from internal and available external sources as well as our estimates. In addition to such quantitative data, our statements are based on other competitive factors such as our technological capabilities, engineering, research and development efforts, innovative solutions and the quality of our products and services, in each case relative to that of our competitors in the markets we address.
Our Business
Our reporting segments are as follows:
| |
• | The Commercial Truck The Commercial Trucksegment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks and other applications in North America, South America, Europe and Asia Pacific. It also supplies a variety of undercarriage products and systems for trailer applications in North America. This segment also includes our aftermarket businesses in Asia Pacific and South America.
|
| |
• | The Aftermarket, Industrialand Trailer segment supplies axles, brakes, drivelines, suspension parts and other replacement parts to commercial vehicle and industrial aftermarket customers, primarily in North America and Europe. In addition, this segment supplies drivetrain systems and certain components, including axles, drivelines, brakes and suspension systems for military, construction, bus and coach, fire and emergency and other applications in North America and Europe. It also supplies a variety of undercarriage products and systems for trailer applications in North America.
|
•The Aftermarket and Industrial segment supplies axles, brakes, drivelines, suspension parts and other replacement parts to commercial vehicle and industrial aftermarket customers, primarily in North America and Europe. In addition, this segment supplies drivetrain systems and certain components, including axles, drivelines, brakes and suspension systems for military, construction, bus and coach, fire and emergency and other applications in North America and Europe.
Business Strategies
We are currently a premier global supplier of a broad range of integrated systems, modules and components to OEMs and the aftermarket for the commercial vehicle, transportation and industrial sectors, and we believe we have market-leading positions in many of the markets we serve. We are working to enhance our leadership positions and capitalize on our existing customer, product and geographic strengths. For additional market related discussion, see the Trends and Uncertainties section in Item 7.
Our business continues to address a number of challenging industry-wide issues including the following:
•Uncertainty regarding the duration and severity of the COVID-19 pandemic and its effects on public health, the global economy, financial markets and operations, including additional expense related to enhancing safety measures for our employees;
•Uncertainty around the global market outlook;
•Volatility in price and availability of steel, components, transportation costs and other commodities;commodities, including energy;
•Potential for disruptions in the financial markets and their impact on the availability and cost of credit;
Volatile energy and transportation costs;
•Impact of currency exchange rate volatility; and
•Consolidation and globalization of OEMs and their suppliers.
Other
Other significant factors that could affect our results and liquidity include:
•Significant contract awards or losses of existing contracts or failure to negotiate acceptable terms in contract renewals;
•Ability to successfully execute and implement strategic initiatives, including the ability to launch a significant number of new products, including potential product quality issues, and obtain new business;
•Ability to manage possible adverse effects on European markets or our European operations, or financing arrangements related thereto, following the United Kingdom's decision to exit the European Union, or in the event one or more other countries exit the European monetary union;
•Ability to further implement planned productivity, cost reduction and other margin improvement initiatives;
Ability to successfully execute and implement strategic initiatives;
•Ability to work with our customers to manage rapidly changing production volumes;
Ability to recover, and timingvolumes, including in the event of recovery of, steel price and other cost increases from our customers;
Any unplanned extended shutdowns or production interruptions byaffecting us, our customers or our suppliers;
A significant deterioration or slowdown in economic activity in the key markets in which we operate;
•Competitively driven price reductions to our customers;
Potentialcustomers or potential price increases from our suppliers;
•Additional restructuring actions and the timing and recognition of restructuring charges, including any actions associated with prolonged softness in markets in which we operate;
•Higher-than-planned warranty expenses, including the outcome of known or potential recall campaigns;
•Uncertainties of asbestos claim, environmental and other legal proceedings, the long-term solvency of our insurance carriers and the potential for higher-than-anticipated costs resulting from environmental liabilities, including those related to site remediation;
•Significant pension costs; and
•Restrictive government actions (such as restrictions on transfer of funds and trade protection measures, including import and export duties, quotas and customs duties and tariffs).
Our specific business strategies are influenced by these industry factors and global trends and are focused on leveraging our resources to continue to develop and produce competitive product offerings. We believe the following strategies will allow us to maintain a balanced portfolio of commercial truck, industrial and aftermarket businesses covering key global markets. See Item 1A. Risk Factors below for information on certain risks that could have an impact on our business, financial condition or results of operations in the future.
CompletionLaunch of M2019 Growth-FocusedM2022 Plan
Fiscal year 2019 wasWith the last yearcompletion of our M2019 plan, - see Non-GAAP Financial Measures in Item 7.we have now launched our M2022 Plan, The financial targets we setestablished for thisour M2022 plan were as follows:are the following:
•+$300 million in new business
Grow revenue at 20•12.5 percent cumulatively above market levels, measured from the end of fiscal year 2015.adjusted EBITDA margin
Increase•$4.00 adjusted diluted earnings per share ("EPS")
•75 percent free cash flow conversion (free cash flow / adjusted income from continuing operations by $1.25, measured from fiscal year 2015.operations)
Reduce the ratio of net debt to adjusted EBITDA to less than 1.5 times.(see Non-GAAP Financial Measures in Item 7)
Overall, these were aggressive targets. Driven by an intense focus throughout the organization, we successfully exceeded our adjusted diluted EPS target. Additionally, we made significant progress on both revenue outperformance and the leverage ratio. To achieve these resultsaggressive targets, we are focused on threefour main priorities:areas:
Exceeding customer expectations.•Drive Innovation
Transforming to a growth-oriented organization.•Protect and Grow
Continuing to invest in employees.
Results for each of the financial metrics as follows:
With a target of 20 percent, the company achieved market outperformance of 16 percent or $604 million through diversified growth in the off-highway, specialty, defense and trailer businesses.
The company increased its adjusted diluted EPS by $2.25 against its $1.25 target for a 142-percent increase (compared to an 80-percent target increase). This was achieved a year earlier than planned.
Meritor achieved a ratio of net debt to EBITDA of 1.6 compared to the objective of 1.5 net debt to EBITDA. This result was slightly short of target due to the strategic acquisition of AxleTech in fiscal year 2019.
•Exceed Customer Expectations
•Enable the Business
Drive Innovation
For 110 years, our products have evolved to meet the changing needs of our customers in major regions of the world. As technology has advanced, we have designed products that are more fuel efficient, lighter weight, safer, more durable and more reliable. The MeritorDuring the M2022 cycle, we have targeted the introduction of five new advanced technology products. Our introduction of the Blue Horizon technology brand is well established globally and reflects a broad and growingformalizes our portfolio of high-qualityadvanced solutions for medium and heavy commercial vehicles. With our long history of technical innovation, the product pipeline we expect to bring to market has the potential to transform the value we deliver to customers. Our Blue Horizon brand represents a product portfolio that offers advanced efficiency, connectivity and electric solutions for our customers. It leverages our legacy as a proven partner, yet opens up new possibilities as we evolve.
As the demand for efficiency continues to accelerate, we have developed, or are in the process of developing, several new products including:
•Dis-engageable tandem drive axle that provides the efficiency of a 6x2 with traction of 6x4
•Air disc brake positive pad retraction that eliminates drag for increased fuel economy and pad life
•Super-fast ratios that enable slower revolutions per minute ("RPM") at cruise speed for highway use (every 100 RPM reduced at speed translates to approximately 1% better fuel efficiency)
•Composite drivelines made of carbon fiber mesh with an overlay of fiberglass that can save up to 100 pounds or 45 kilograms over a standard driveline offering more cargo capacity and lessening the overall weight of the vehicle
•Advanced lube management system that uses electronics and pneumatics to manage critical axle components
We also believe connectivity offers many benefits to end users, vehicle manufacturers and Tier 1 suppliers like us. Similar to the increase in demand for smart home devices, our engineers are finding more areas where we can transform our offerings into smart products. The two main areas we are exploring include:
•Real time information to monitor and record product performance for various applications.duty cycles
We have worked hard to becomeare developing an innovation partner to our customers. From concept to launch, we work collaboratively to ensureelectronic lube level monitoring device that eliminates the need for certain maintenance procedures saving time and money. For tire inflation, we are designing reliableusing sensors and high quality productsrelated electronics that meet or exceed their unique expectationsincrease safety and improve efficiency via optimized tire pressure. And as manufacturers explore platooning, pairing and autonomous driving, knowing what is happening within the vehicle’s braking system is especially critical. The systems we are developing build upon our current pad wear sensor system and will monitor overall brake health, allowing strategic maintenance decisions as well as safer overall operation.
Meritor’s expanding range of next-generation technologies includes comprehensive solutions for standard axles, remote- mount configurations and fully electric powertrain systems which furthers our goal of becoming the electric drivetrain supplier of choice. Our 14Xe™ ePowertrain is based on the proven 14X axle design which maintains existing axle mounting hardware for ease of OEM integration. The modular system enables the interchangeability of key components, including electric motors, transmissions, gearing, brakes, wheel ends and housings. The 14Xe™ is designed for scalability and can be adapted to fit various powertrain needs based on the vehicle application and duty cycle. This year, we announced an expansion of our electric drivetrain solutions by introducing the 12Xe™ powertrain for Class 4, 5, 6 and 7 applications and the 17Xe™ powertrain for heavy-duty 4x2 and 6x2 trucks.
This 14Xe™ ePowertrain is already receiving acclaims in the automotive industry. This year, we were recognized as a PACEpilot Honoree by Automotive News for our solutions to power Class 4 through 8 trucks and buses with electric powertrains instead of diesel-based systems, in addition to Diesel Progress’ Achievement of the Year and Electric Application of the Year awards.
To help us achieve our objectives in this important area, in fiscal year 2020 we acquired all outstanding common shares of Transportation Power, Inc. this year, a California-based company that supplies integrated drive systems, full electric truck solutions and energy-storage subsystems to major manufacturers of trucks, school buses, refuse vehicles and terminal tractors. Transportation Power has focused exclusively on developing electric drive solutions since its inception in 2010. With this acquisition, we advance our M2022 plan priorities through increased investment in next-generation technologies.
Representing the first Class 8 production contract for electric drivetrains in the industry, we secured an agreement with PACCAR to be its non-exclusive supplier of ePowertrains for its Kenworth T680 and Peterbilt 579 and 520 battery-electric vehicles. We will be the initial launch partner and primary supplier for the integration of functional battery-electric systems on these refuse and heavy-duty chassis. Production is targeted to begin in 2021. We believe we will be the first supplier to begin production of electric powertrains for Class 8 electric vehicles, and we anticipate additional production contracts in 2021.
Protect and Grow
We know that despite changes and volatility in global market conditions, it is important that we generate profitable top-line growth. We designed the M2022 plan to enable us to achieve the growth we are targeting while operating in a cyclical industry that can be greatly impacted by economic factors. We are increasing our market share with key customers, renewing long-term contracts and winning new business in all of our end markets around the globe across both of our reportable segments.
We expect to broaden our relationships with our global strategic customers, earn the business of new customers, increase aftermarket share in core product areas, expand our gear manufacturing, and enter near adjacent markets that we believe will be a good match with our core competencies.
We achieved major milestones in fiscal year 2020 related to next-generation technologies engineered to fit multiple vehicle applications for customers’ needs now and in the future. Through new business awards with global manufacturers and continued evolution of our Blue Horizon™ powertrain solutions, we are establishing Meritor as a leader in transformative technologies for the commercial vehicle industry.
We have a clear view toward maintaining our leading market positions with best-in-class products and services. This year, we introduced new products, including our single piston air disc brake and a range of high efficiency axles which includes a vocational axle that is the first of its type in decades.
We also signed a long-term agreement with Daimler. This contract that extends our relationship through 2027 and places Meritor in standard position for air disc brakes on the Freightliner Cascadia through 2025. Also in our core businesses, we have new contracts for on-highway and trailer axles, and a new award with Iveco Defence for a military application that will be deployed by the Dutch Department of Defense. Our operations in Australia were honored this year with Supplier of the Year awards from PACCAR and Penske, and our Aftermarket business celebrated production of the 100 millionth remanufactured brake shoe – a benchmark no other company has matched to date.
As industry trends continue to drive the need for equipment that complies with environmental and safety-related regulatory provisions, OEMs select suppliers based not only on the cost and quality of their products, but also on their ability to meet stringent environmental and safety requirements and to service and support the customer after the sale. We use our technological and market expertise to develop and engineer products that address mobility, safety, regulatory and environmental concerns. In fiscal year 2019, we published our first sustainability report to share the work we have done in the areas of advanced technologies; environment, health and safety; manufacturing initiatives; human capital, social responsibility and corporate governance, and we will publish an updated report later this year.
Our commitment to designing and manufacturing braking solutions for the commercial vehicle market has resulted in more commercial vehicles in North America having Meritor brakes than brakes made by other brake manufacturer. We believe our EX+ air disc brakes are among the highest performing brakes in the marketplace. We recently announced the launch of our lightweight, single-piston EX+™ LS air disc brake, a next-generation braking solution designed and engineered for linehaul and trailer applications. This brake, which was recognized by Heavy Duty Trucking magazine as a Top 20 Product, will launch
for trailers first, then trucks, in fiscal year 2021. With this brake, we are in standard position on Daimler’s Freightliner Cascadia through 2025.
We designed the EX+ LS air disc brake to meet fleet expectations for efficiency, safety and weight reduction. Built with exceptional taper wear control, the new air disc brake is designed and validated to perform like a twin-piston brake. Approximately 9 million of our air disc brakes are in operation globally.
We believe the quality of our core product lines, our ability to service our products through our aftermarket capabilities, and our sales and service support teams give us a competitive advantage. An important element of being a preferred supplier is the ability to deliver service through the entire lifecycle of the product. Also, as our industry becomes more international, our manufacturing footprint around the world and our ability to supply customers with regionally-tailored product solutions are competencies of increasing importance.
Exceed Customer Expectations
In addition to technology and product collaboration, we also meet regularly with our customers to review our performance in a number of other areas including quality, delivery and cost.
In our M2019M2022 plan, we set an overall quality target of 25less than 20 parts per million ("PPM"). In fiscal year 2019,2020, Meritor achieved a quality score of 108 parts per million. This score was driven by certain issues experienced at one facility in North America for a specific customer that was ultimately resolved. If this incident was isolated, Meritor's quality score globally would have been 24, just below our M2019 target, despite the 17 percent increase in Class 8 truck production in fiscal year 2019.36 PPM. We believe this level of quality further differentiates us in the commercial vehicle industry. Also this fiscal year, fourfive of Meritor’sour facilities received the PACCAR 10 PPM Quality Award given to suppliers who meet or exceed its rigorous standardand three of 10 or fewer defective parts for every 1 million parts shipped to this customer; twoour joint venture facilities received the Daimler MastersMaster of Quality Award. We also received Daimler's Supplier Award for outstanding performance in quality. During a peak North America commercial vehicle market in 2019, we supplied Daimler with 1.3 million axles, brakes and one facility earneddrivelines, all with a Silver Performance recognition from Motor Coach Industries.low defect rate based on PPM. We were honored to be recognized by Daimler, which has a global reputation for delivering quality products to its customers.
ThisIn fiscal year 2020, we also continued theour excellent OE delivery performance we have demonstratedthis year at greater than 99 percent. Despite production volumes in North America being significantly higher year over year, we achieved on-time deliverythe impact of 99 percentthe COVID-19 pandemic globally and the challenges it created for the three-year plan.entire supply chain, we maintained a very high delivery rate. Our customers rely on Meritorus for this level of delivery performance and it differentiates us withfrom our OEM customers.peers.
We will maintain our focus on driving down operating costs through material cost-reduction and labor and burden improvements with a target achievement of 1.52 percent improvement per year that we achieved throughout fiscal year 2019.year. We are continuing to drive material performance with three different approaches: commercial negotiations, best-cost-country sourcing and technical innovation. And, we are improving in labor and burden by addressing several areas simultaneously, including better equipment utilization, reduced changeover time, elimination of waste, improved shift and asset utilization, investing in equipment to improve cycle time and flexibility and employee involvement.
We believe we effectively manage complexity for low volumes and support our customers’ needs during periods of peak volumes. The quality, durability and on-time delivery of our products has earned us strong positions in the markets we support. As we seek to extend and expand our business with existing customers and establish relationships with new ones, our objective is to ensure we are getting a fair value for the recognized benefits of our products and services and the strong brand equity we hold in the marketplace.
TransformEnable the Business
COVID-19 Pandemic
There has never been a time in our company’s history when we were required to a Growth-Oriented Organization
We know that despite changes and volatility in global market conditions, it is important that we generate profitable top-line growth. We designedcease production at the M2019 plan to enable us to achieve the growth we are targeting while operating in a cyclical industry that can be greatly impacted by economic factors. We are increasing our market share with key customers, renewing long-term contracts and winning new business in allvast majority of our end markets aroundmanufacturing plants within days of each other as was required this year in response to the globe across bothCOVID-19 pandemic. To do this efficiently and safely required a great deal of our reportable segments.collaboration and teamwork. These are the characteristics that Meritor employees are known for and were exemplified during this process.
We have increasedThe global impact of the pace of product introduction over the past several years, which is a key component to growing revenue. Prior to our M2016 plan,COVID-19 pandemic was significant but when we were launching approximately three major programs annually. We have effectively doubled that number each year duringallowed to reopen our facilities, we took every action possible to protect our employees while still serving our role as an important part of the M2019 timeframe. We are developing these products jointly with our customers for their future product programs, and we have linesupply chain in maintaining the flow of sight to revenue streams for each of these products. In fiscal year 2019, we launched six products as follows, and in the three-year M2019 timeframe we launched 21 programs in total.
P5271 Axle - Produced for Volvo in Thailand.
Slipper Suspension - Launched with Ashok Leyland in India to replace the bell crank suspension typically used in the region. Suspension is lighter, easier to align, requires less maintenance and improves fuel efficiency.
13X Axle - Developed specifically for the India market targeting the medium commercial vehicle segment. It is 59 lbs. lighteroriginal equipment and 1 percent more efficient than the current axle being used by Meritor.
DuaLite 146 Axle - Lighter weight fabricated housing versus slot forged housing used for Meritor’s local 146 carrier in China.
17X HE Solo with Superfast Ratio - Launched with Volvo in Europe. Axle is 1 percent more efficient than Meritor’s 17X EVO. It has extended ratio coverage including superfast ratios to enable higher system efficiency.
17X HE Solo with Superfast Ratio - Introduced for the heavy 6x2 market in North America and is 1 percent more efficient than previous axle.
We expect to continue to broaden our relationships with our global strategic customers, earn the business of new customers, increase aftermarket share in core product areas, expand our components business by utilizing our time-proven core competencies of forging, machining and gear manufacturing, and enter near adjacent markets that we believe will be a good match with our core competencies.
Meritor achieved major milestones in fiscal year 2019 related to next-generation technologies engineered to fit multiple vehicle applications for customers’ needs now and in the future. Through new business awards with global manufacturers and continued evolution of its Blue Horizon™ powertrain solutions, the company continued to establish itself as a leader in transformative technologies for the commercial vehicle industry. Specific achievements include:
Twenty-two electrification programs with global manufacturers for a total of 130 fully electric medium- and heavy-duty commercial trucks to be on the road through 2020.
Completion of two multi-year projects for the development, testing and evaluation of advanced, zero-emission electric yard tractors and Class 8 trucks supported with grants from the California Energy Commission. The electric yard tractors are operating at Dole Fresh Fruit’s terminal at the Port of San Diego,products, as well as other locationsproducts required for the manufacturing of specialty and defense vehicles.
We developed a Safe Start plan to protect our employees. It outlined specific policies that were audited at each of our sites including preventative measures in California. The electric trucks are operating at the Port of San Diego.entry and common areas, heat mapping to identify areas that required modifications,
A contract to supply all-electric drivetrain systems for 38 terminal tractors to be used at the Port of Long Beachpersonal protective equipment (PPE), wellness checks, visual indicators and the Port of Oakland, California.
An award to supply drivetrain components including front- and rear-drive steer axles, air disc brakes and an innovative right angle gear box for an electric urban bus developed by Alstom. Production for the manufacturer’s first orders of the all-electric Aptis buses for cities such as Paris and Strasbourg in France are scheduled to begin this summer.
Participation in VWCO’s (Volkswagen Caminhões e Ônibus) e-Consortium to collaborate in the development of electric commercial vehicles in Brazil, beginning with the launch of the OEM’s 11-ton e-Delivery truck equipped with Meritor’s 12X™ drive axle with eOptimized™ gearing, in 2020.
Expansion of its electric drivetrain solutions to include the 12Xe™ for Class 4-7 and the 17Xe™ for heavy duty 4x2 and 6x2 trucks.
While we are planning for the majority of Meritor's growth to be organic, we have allocated capital for targeted acquisitions that would be an accelerant in our growth trajectory. To that end, this year we acquired AxleTech. This transaction advances our M2022 objectives to accelerate global sales and growth by leveraging the company’s core competencies to grow strategically in adjacent markets. The addition of AxleTech enhances Meritor’s growth platform, bringing a highly complementary global product portfoliosocial distance coaches. Safety is our first priority and we will take all necessary precautions to safeguard our employees – in each of our manufacturing plants, labs, distribution centers and offices. To ensure that we followed best practices across the off-highway, defense, specialty and aftermarket segments that includes a full product lineindustry, our general auditor assumed the additional role of independent suspensions, axles, braking solutions and drivetrain components. These capabilities will enable Meritor to offer global customers a wider array of differentiated products and solutions while further diversifyingChief Safety Compliance Officer.
Every day, the company’s portfolio.
As industry trends continue to drive the need for equipment that complies with environmental and safety-related regulatory provisions, OEMs select suppliers based not only on the cost and quality of their products, but also on their ability to meet stringent environmental and safety requirements and to service and support the customer after the sale. We use our technological and market expertise to develop and engineer products that address mobility, safety, regulatory and environmental concerns. In fiscal year 2019, we published Meritor’s first sustainability report to share the work we have done in the areas of Advanced Technologies; Environment, Health and Safety; Manufacturing Initiatives; Human Capital, Social Responsibility and Corporate Governance with our stakeholders.
Our commitment to designing and manufacturing braking solutions for the commercial vehicle market has resulted in more commercial vehicles in North America having Meritor brakes than any other brake manufacturer. We believe Meritor’s EX+ air disc brakes are among the highest performing brakes in the marketplace. We recently announced the launch of our lightweight, single-piston EX+™ LS air disc brake, a next-generation braking solution designed and engineered for linehaul and trailer applications. We designed the EX+ LS air disc brake to meet fleets expectations for efficiency, safety and weight reduction. Built with exceptional taper wear control, the new air disc brake is designed and validated to perform like a twin-piston brake. Meritor brakes represent more than half of the North America Class 8 commercial vehicle market, and more than 8 million of Meritor’s air disc brakes are in operation globally.
We believe the quality of our core product lines, our ability to service our products through our aftermarket capabilities, and our sales and service support teams give us a competitive advantage. An important element of being a preferred supplier is the ability to deliver service through the entire life cycle of the product. Also, as our industry becomes more international, our manufacturing footprint around the world and our ability to supply customers with regionally-tailored product solutions are competencies of increasing importance.
Invest in Employees
The safety of our employees is our top priority. Total case rate is a measure of recordable workplace injuries normalized per 100 employees per year. Our target under the M2019M2022 plan wasis to achieve a case rate of less than 0.65.0.55. In fiscal year 2019,2020, we achieved an overall total recordable case rate of 0.590.57 injuries per 200,000 hours worked, compared to 0.720.59 in the prior year. The total numberMore than 50 percent of our facilities reported no recordable workplace injuries fell by 21 percent compared toduring fiscal year 2018. Our most active quarter for injuries is typically the fourth quarter. This year, we experienced a 48 percent decline compared to the same quarter in the prior fiscal year. Our “I Have A Hand In Safety” campaign drove a 47 percent decrease in hand injuries since the second quarter of fiscal year 2019. In an effort to continually improve our safety rate, we will maintain our diligence through training and education of our employees, reducing certain behaviors that are known to create safety issues and continue to maximize risk identification and hazard assessment.2020.
We believe that our strength to compete in the global market is dependent upon the engagement of every Meritor employee and that a high-performing team is critical to the level of performance we want to achieve. We have a strong and experienced leadership group and a committed team, both of which are focused on sustaining the strong foundation we built under the M2016
and M2019 plans. We will also continue to strengthen the diversity and inclusiveness of our workforce because we recognize the value of different opinions and backgrounds in a company as global as Meritor.
We have established various development and training programs to help our employees grow as we grow. This year, we continued the leadership development programs for managers, directors and senior leaders around the world. For managers, we offeredoffer eLearning modules and courses that address important areas for advancement including accountability, delegation, and providing and receiving feedback. For certain director-level employees, we led our third annualoffer Leadership Edge - a 10-month program whose objective is to develop advanced leadership skills, prepare high-potential leaders for senior level positions and strengthen business acumen. And for certain senior-level leaders, we continuedoffer the Summit leadership development program, which provides executive coaching, the opportunity to attend specific executive training sessions tailored to each individual’s background and career goals, participation in a MBA-level finance course, if needed, and engagement in mentorship opportunities with a member of Meritor’s Board of Directors. To ensure we provide a rich experience for our employees, we will continue to measure employee engagement to build on the competencies that are important to our future.
Launch of New M2022 Plan
With the completion of our M2019 plan, we have now launched our M2022 plan. The financial targets we established for this plan are the following:
•+$300 million in new business
•12.5 percent adjusted EBITDA margin
•$4.00 adjusted diluted earnings per share
•75 percent free cash flow conversion (free cash flow / adjusted incomeAnother objective in this area is to drive inclusiveness. We want to be leaders in this area. Executives facilitated focus groups this year with diverse employees and identified themes from continuing operations)
(see Non-GAAP Financial Measures in Item 7)
Our M2022 plan was designedthose discussions that provided opportunities for improvement. Those themes were related to promotion and advancement, recruiting, and anti-discrimination. As a result, we are making the job posting process more transparent and ensuring that all internal applicants who are not selected for new positions receive feedback. We are also making changes to our hiring and recruitment practices with a focusthe intent to remove any bias from the resume-screening process and we are increasing the level of management oversight on strong operating fundamentals, growth above the market, continued discipline in capital allocation, and building our leadership position in advanced technologies. And, as with our prior three-year plans, we have established specific measurable targets to evaluate our performance against. We believe these clear objectives and targets are the unique differentiator of Meritor’s plans. These targets are well understood by our stakeholders. We believehiring decisions. Longer term, we will be as successful inrefresh our execution of the M2022 plan asunconscious bias training, develop a diversity mentor program, and explore fast-track programs for employees to ensure that we were with the M2019are retaining diverse talent and M2016 plans as we continually raise the bar on our overall performance and subsequently return higher value to Meritor shareholders.providing aggressive career tracks.
Products
Meritor designs, develops, manufactures, markets, distributes, sells, services and supports a broad range of products for use in the transportation and industrial sectors. In addition to sales of original equipment systems and components, we provide our original equipment, aftermarket and remanufactured products to vehicle OEMs, their dealers (who in turn sell to motor carriers and commercial vehicle users of all sizes), independent distributors, and other end-users in certain aftermarkets.
The following chart sets forth, for each of the fiscal years 2020, 2019 2018 and 2017,2018, information about product sales comprising more than 10% of consolidated revenue in any of those years. A narrative description of our principal products follows the chart.
Product Sales:
|
| | | | | | | | |
| | Fiscal Year Ended September 30, |
| | 2019 | | 2018 | | 2017 |
| Axles, Suspension Systems and Drivelines | 73 | % | | 74 | % | | 73 | % |
| Brakes and Brake-Related Components | 25 | % | | 24 | % | | 25 | % |
| Other | 2 | % | | 2 | % | | 2 | % |
| Total | 100 | % | | 100 | % | | 100 | % |
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2020 | | 2019 | | 2018 |
| Axles, Suspension Systems and Drivelines | 70 | % | | 73 | % | | 74 | % |
| Brakes and Brake-Related Components | 25 | % | | 25 | % | | 24 | % |
| Other | 5 | % | | 2 | % | | 2 | % |
| Total | 100 | % | | 100 | % | | 100 | % |
Axles, Suspension Systems & Drivelines
We believe we are one of the world's leading independent suppliers of axles for medium- and heavy-duty commercial vehicles, with the leading market position in axle manufacturing in North America, South America and Europe, and are one of the major axle manufacturers in the Asia-Pacific region. Our extensive truck axle product line includes a wide range of front steer axles and rear drive axles. Our front steer and rear drive axles can be equipped with our cam, wedge or air disc brakes, automatic slack adjusters, and complete wheel-end equipment such as hubs, rotors and drums.
We supply heavy-duty axles in certain global regions for use in numerous off-highway vehicle applications, including construction, material handling, and mining. We also supply axles for use in military tactical wheeled vehicles, principally in North America and Europe. These products are designed to tolerate high tonnage and operate under extreme conditions. We also supply axles for use in buses, coaches and recreational vehicles, fire trucks and other specialty vehicles in North America, Asia Pacific and Europe, and we believe we are a leading supplier of bus and coach axles in North America.
We are one of the major manufacturers of heavy-duty trailer axles in North America. Our trailer axles are available in more than 40 models in capacities from 20,000 to 30,000 pounds for virtually all heavy trailer applications and are available with our broad range of suspension modules and brake products, including drum brakes and disc brakes.
We supply universal joints and driveline components, including our Permalube™ universal joint and RPL Permalube™ driveline, which are maintenance free, permanently lubricated designs used often in the high mileage on-highway market. We supply drivelines in North America for use in numerous on-highway vehicle applications. We also supply transfer cases for use in specialty vehicles in North America, Turkey and Europe. In addition, we supply trailer air suspension systems and products with an increasing market presence in North America. We supply transfer cases and drivelines for use in military tactical wheeled vehicles, principally in North America and Europe. In addition, we also supply advanced suspension modules for use in light-, medium- and heavy-duty military tactical wheeled vehicles, principally in North America, Turkey and Europe.
Brakes and Brake-Related Components
We believe we are one of the leading independent suppliers of air brakes to medium- and heavy-duty commercial vehicle manufacturers in North America and Europe. In Brazil, we believe that Master Sistemas Automotivos Limitada, our 49%-owned joint venture with Randon S. A. Implementos e Participações, is a leading supplier of brakes and brake-related products.
Through manufacturing facilities located in North America, Asia Pacific and Europe, we manufacture a broad range of foundation air brakes, as well as automatic slack adjusters for brake systems. Our foundation air brake products include cam drum brakes, which offer improved lining life and tractor/trailer interchangeability; wedge drum brakes, which are lightweight and provide automatic internal wear adjustment; air disc brakes, which provide enhanced stopping distance and improved fade resistance for demanding applications; and wheel-end components such as hubs, drums and rotors.
Our brakes and brake system components are used in military tactical wheeled vehicles, principally in North America, Turkey and Europe. We supply brakes for use in buses, coaches and recreational vehicles, fire trucks and other specialty vehicles in North America and Europe, and we believe we are the leading supplier of bus and coach brakes in North America. We also supply brakes for commercial vehicles, buses and coaches in Asia Pacific and air and hydraulic brakes for off-highway vehicles in North America and Europe.
Electric Vehicle and Other Products
We supply electric drive systems that include an electric motor and inverter, power electronics, battery pack, electrified accessories, and all associated software and controls for terminal tractors and medium and heavy-duty trucks and buses.
In addition to the products discussed above, we sell other complementary products, including third-party and private label items, through our aftermarket distribution channels. These products are generally sold under master distribution or similar agreements with outside vendors and include brake shoes and friction materials; automatic slack adjusters; yokes and shafts; wheel-end hubs and drums; ABS and stability control systems; shock absorbers and air springs; and air brakes.
Customers; Sales and Marketing
We have numerous customers worldwide and have developed long-standing business relationships with many of these customers. Our ten largest customers accountedaccounted for approximately 7769 percent of our total sales in fiscal year 2019.2020. Sales to customers that accounted for 10 percent or more of our total sales in fiscal year 20192020 included AB Volvo, Daimler AG PACCAR and Navistar,PACCAR, representing approximately 2221 percent, 19 percent, 1317 percent and 1012 percent, respectively. No other customer accounted for 10 percent or more of our total sales in fiscal year 2019.2020.
Original Equipment Manufacturers (OEMs)
In North America, we design, engineer, market and sell products principally to OEMs, dealers and distributors. While our North American sales are typically direct to OEMs, our ultimate commercial truck customers include trucking and transportation fleets. Fleet customers may specify our components and integrated systems for installation in the vehicles they purchase from OEMs. We employ what we refer to as a "push-pull" marketing strategy. We "push" for being the standard product at the OEM. At the same time, our district field managers then call on fleets and OEM dealers to "pull-through" our components on specific truck purchases. For all other markets, we specifically design, engineer, market and sell products principally to OEMs for their market-specific needs or product specifications.
For certain large OEM customers, our supply arrangements are negotiated on a long-term contract basis for a multi-year period that may require us to provide annual cost reductions through price reductions or other cost benefits for the OEMs. If we are unable to generate sufficient cost savings in the future to offset such price reductions, our gross margins will be adversely affected. Sales to other OEMs are typically made through open order releases or purchase orders at market-based prices that do not require the purchase of a minimum number of products. The customer typically has the right to cancel or delay these orders on reasonable notice. We typically compete to either retain business or try to win new business from OEMs when long-term contracts expire.
We have established leading positions in many of the markets we serve as a global supplier of a broad range of drivetrain systems, brakes and components. Based on available industry data and internal company estimates, our market-leading positions include independent truck drive axles (i.e., those manufactured by an independent, non-captive supplier) in North America, Europe, South America and India through a joint venture; truck drivelines in North America; truck air brakes in North America and South America (through a joint venture); and military wheeled vehicle drivetrains, suspensions and brakes in North America.
Our global customer portfolio includesincludes AB Volvo, Daimler AG, PACCAR, Navistar International Corporation, Oshkosh, Traton Group, CNH Industrial, Ashok Leyland, XCMG, Wabash National, and Gillig.
Aftermarket
We market and sell truck, trailer, off-highway and other products principally to, and service such products principally for, OEMs, their parts marketing operations, their dealers and other independent distributors and service garages within the aftermarket industry. Our product sales are generated through long-term agreements with certain of our OEM customers and distribution agreements and sales to independent dealers and distributors. Sales to other OEMs are typically made through open order releases or purchase orders at market-based prices, which do not require the purchase of a minimum number of products. The customer typically has the right to cancel or delay these orders on reasonable notice.
Our product offerings allow us to service all stages of our customers’ vehicle ownership lifecycle. In North America, we stock and distribute thousands of parts from top national brands to our customers or what we refer to as our "all makes" strategy. Our district field managers call on our OEM's, OEM dealers, fleet customers and independent customers to market our full product line capabilities on a regular basis to seek to ensure that we satisfy our customers’ needs. Our aftermarket business sells products under the following brand names: Meritor, Euclid, Trucktechnic, US Gear, AxleTech and Mach.
Based on available industry data and internal company estimates, we believe our North America aftermarket business has the overall market leadership position for the portfolio of products that we offer.
Competition
We compete worldwide with a number of North American and international providers of components and systems, some of which are owned by or associated with some of our customers. The principal competitive factors are price, quality, service, product performance, design and engineering capabilities, new product innovation and timely delivery. Certain OEMs manufacture their own components that compete with the types of products we supply.
Our major competitors for axles are Dana Incorporated and, in certain markets, OEMs that manufacture axles for use in their own products. Emerging competitors for axles include DTNA’s Detroit Axle, Allison, ZF Friedrichshafen in Europe, and Hande, Fuwa and Ankai in China. Our major competitors for brakes are Bendix/Knorr Bremse, ZF and, in certain markets, OEMs that manufacture brakes for use in their own products. Our major competitors for industrial applications are MAN, Oshkosh, AM General, Marmon-Herrington, Dana Incorporated, Knorr Bremse, Kessler & Co., Carraro, NAF, Sisu and, in certain markets, OEMs that manufacture industrial products for use in their own vehicles. Our major competitors for trailer applications are Fuwa, Hendrickson and SAF-Holland.
Raw Materials and Suppliers
Our purchases of raw materials and parts are concentrated over a limited number of suppliers. We are dependent upon our suppliers'suppliers’ ability to meet cost performance targets, quality specifications and delivery schedules. The inability of a supplier to meet these requirements, the loss of a significant supplier, or work stoppages could have an adverse effect on our ability to meet our customers'customers’ delivery requirements.
The cost of our core products is susceptible to changes in overall steel commodity prices, including ingredients used for various grades of steel. We have generally structured our major steel supplier and customer contracts to absorb and pass on normal index-related market fluctuations in steel prices. While we have had steel pricing adjustment programs in place with most major OEMs, the price adjustment programs tend to lag behind the movement in steel costs and have generally not contemplated non-steel index related increases.
Significant future volatility in the commodity markets or a deterioration in product demand may require us to pursue customer price increases through surcharges or other pricing arrangements. In addition, if suppliers are inadequate for our needs, or if prices remain at current levels or increase and we are unable to either pass these prices to our customer base or otherwise mitigate the costs, our operating results could be further adversely affected.
We continuously work to address these competitive challenges by reducing costs and, as needed, restructuring operations. We manage supplier risk by conducting periodic assessments for all major suppliers and more frequent rigorous assessments of high-risk suppliers. On an ongoing basis, we monitor third-party financial statements, conduct surveys through supplier questionnaires, and conduct site visits. We have developed a supplier improvement process where we identify and develop actions to address ongoing financial, quality and delivery issues to further mitigate potential risk. We are proactive in managing our supplier relationships to avoid supply disruption. Our process employs dual sourcing and resourcing trigger points that cause us to take aggressive actions and then monitor the progress closely.
Acquisitions, Divestitures and Restructuring
As described above, our business strategies are focused on enhancing our market position by continuously evaluating the competitive differentiation of our product portfolio, focusing on our strengths and core competencies, and growing the businesses that offer the most attractive returns. Implementing these strategies involves various types of strategic initiatives.
As part of our M2019 plan, we evaluated acquisition opportunities that fit strategically with our core competenciesAcquisitions and growth initiatives and regularly reviewed the prospects of our existing businesses to determine whether any of them should be modified, restructured, sold or otherwise discontinued. On July 26, 2019, we acquired AxleTech for approximately $179 milliondivestitures are discussed in cash, subject to certain purchase price adjustments (see Note 43 of the Notes to the Consolidated Financial Statements under Item 8. Financial Statements and Supplementary DataData.
below). We completed a $3 million investment
Restructuring actions are discussed in Transportation Power, Inc. ("TransPower") in each of the first and third quarters of fiscal year 2019. We also completed a $6 million investment in TransPower in fiscal year 2018 (see Note 147 of the Notes to the Consolidated Financial Statements under Item 8. Financial Statements and Supplementary DataData.
below).
In the third quarter of fiscal year 2018, we completed the acquisition of substantially all of the assets of AA Gear & Manufacturing, Inc. (see Note 4 of the Notes to Consolidated Financial Statements under Item 8.
Financial Statements and Supplementary Data below). In the second quarter of fiscal year 2018, we completed the sale of our equity interest in Meritor Huayang Vehicle Braking Company Ltd. (see Note 7 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below). In the fourth quarter of fiscal year 2017, we completed the sale of our interest in Meritor WABCO Vehicle Control Systems to a subsidiary of our joint venture partner, WABCO Holdings Inc. (see Note 4 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below). In the fourth quarter of fiscal year 2017, we also completed the acquisition of the product portfolio and related technologies of Fabco Holdings, Inc. (see Note 4 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below).
Restructuring Actions
Global Restructuring Programs: On September 27, 2019, we approved and began executing a restructuring plan to reduce salaried and hourly headcount globally. This restructuring plan is intended to reduce labor costs in response to an anticipated decline in most global truck and trailer market volumes. With this restructuring plan, we expect to incur approximately $20 million in employee severance costs across both of our reportable segments. During the fourth quarter of fiscal year 2019, we incurred
$4 million in restructuring costs in the Commercial Truck segment and $3 million in the Aftermarket, Industrial and Trailer segment. Restructuring actions associated with this plan are expected to be substantially complete by the end of the first quarter of fiscal year 2020.
AxleTech Restructuring: On July 29, 2019, shortly after acquiring AxleTech, we approved a restructuring plan related to the integration of the business. This restructuring plan is intended to realize certain targeted synergies, primarily from the elimination of cost overlap. With this restructuring plan, we expect to incur $11 million of total costs in the Aftermarket, Industrial and Trailer segment with approximately $7 million related to employee severance charges and approximately $4 million related to asset impairment. During the fourth quarter of fiscal year 2019, we recorded $3 million of severance related restructuring costs in the Aftermarket, Industrial and Trailer segment. Restructuring associated with severance actions is expected to be substantially completed during fiscal year 2020.
Segment Realignment Program: On March 12, 2018, we announced a realignment of operations to further drive long-term strategic objectives while also assigning new responsibilities as part of our commitment to leadership development. As a part of this program, we approved various labor restructuring actions in the Aftermarket, Industrial and Trailer segment. We recorded $3 million of restructuring costs during fiscal year 2018 in connection with this program. These actions were substantially complete as of September 30, 2018.
Other Restructuring Actions: During fiscal year 2018, we recorded restructuring costs of $3 million primarily associated with labor reduction programs in the Commercial Truck segment and Aftermarket, Industrial and Trailer segment.
Fiscals 2017 & 2016 Aftermarket Actions: During the third quarter of fiscal year 2016, we approved various restructuring plans in the North American and European Aftermarket businesses. We recorded $5 million of restructuring costs during the third quarter of fiscal year 2016 and $4 million of restructuring costs during fiscal year 2017. Restructuring actions associated with these plans were substantially complete as of September 30, 2017.
Joint Ventures
As the industries in which we operate have become more globalized, joint ventures and other cooperative arrangements have become an important element of our business strategies. These strategic alliances provide for sales, product design, development and manufacturing in certain product and geographic areas. As of September 30, 2019,2020, our continuing operations participated in the following non-consolidated joint ventures:
| | | | | | | | | | | |
| Key Products | | Country |
| | | |
| Key Products | | Country |
| Master Sistemas Automotivos Limitada | Braking systems | | Brazil |
| | | |
| Sistemas Automotrices de Mexico S.A. de C.V. | Axles, drivelines and brakes | | Mexico |
| Ege Fren Sanayii ve Ticaret A.S. | Braking systems | | Turkey |
| Automotive Axles Limited | Rear drive axle assemblies and braking systems | | India |
In the fourth quarter of fiscal year 2017, we closed on the sale of our interest in Meritor WABCO Vehicle Control Systems to a subsidiary of our joint venture partner, WABCO Holdings Inc.
Aggregate sales of our non-consolidated joint ventures were $696 million, $1,231 million $1,101 million and $1,156$1,101 million in fiscal years 2020, 2019 2018 and 2017,2018, respectively.
In accordance with accounting principles generally accepted in the United States, our Consolidated Financial Statements include the financial position and operating results of those joint ventures in which we have control. For additional information on our unconsolidated joint ventures and percentage ownership thereof see Note 1512 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below.
Research and Development
We have significant research, development, engineering and product design capabilities. We spent $74 million in fiscal year 2020, $75 million in fiscal year 2019 and $73 million in fiscal year 2018 and $69 million in fiscal year 2017 on company-sponsored research, development and engineering. We employ professional engineers and scientists globally and have additional engineering capabilities through contract arrangements in low-cost countries. We also have advanced technical centers in North America, South America, Europe and India.
Patents and Trademarks
We own or license many United States and foreign patents and patent applications in our engineering and manufacturing operations and other activities. While in the aggregate these patents and licenses are considered important to the operation of our businesses, management does not believe that the loss or termination of any one of them would materially affect a business segment or Meritor as a whole.
Our registered trademarks for Meritor® and the Bull design are important to our business. Other significant trademarks owned by us include Euclid® and Trucktechnic® for aftermarket products.
Substantially all of our U.S.-held intellectual property rights are subject to a first-priority perfected security interest securing our obligations to the lenders under our credit facility. See Note 1815 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below.
Employees
At September 30, 2019,2020, we had approximately 9,1008,600 employees (which includes consolidatedcomposed of approximately 7,200 hourly and salaried employees, 780 employees from our joint ventures).ventures, and 620 other employees. At that date, 77September 30, 2020, 68 employees in the United States were covered by collective bargaining agreements. Most of our facilities outside of the United States and Canada are unionized. We strive to foster and maintain positive relationshipsrelationships with our hourly and salaried employees.
We believe that our ability to compete in the global market depends on the engagement of every one of our employees, and that a high-performing team is critical to the level of performance we want to achieve. By maintaining relationships with leading universities, we are able to identify and recruit top talent. In order to attract the best candidates, we offer market competitive compensation and benefits around the globe, annual incentive programs for salaried and hourly employees, long-term incentive programs for executives and health and wellness benefits. To retain top talent, we encourage professional
development through internal and external training opportunities, in addition to a leadership fundamentals program for managers, the Leadership Edge program for high potential leaders and the Summit for senior level leaders.
To ensure we provide a rich experience for our employees, we measure organizational culture and engagement to build on the competencies that are important for our future success. We routinely engage independent third parties to conduct cultural and employee engagement surveys. These include corporate culture assessments, as well as real-time feedback on employee engagement and a holistic approach survey on employee well-being focused on physical, emotional, social and financial health.
In addition, we aim to diversify our workforce because we recognize the value of engaging different opinions and backgrounds in a global company. We are committed to recruiting, developing and retaining a high-performing and diverse workforce. We are in the process of initiating a mentoring program for diverse employees, implementing various recruitment initiatives, refreshing mandatory unconscious bias training, targeting efforts to attract qualified women and underrepresented minorities for positions at all levels of the company and employee led resource groups, including the African American Resource Group, the Women’s Employee Resource Group and the LGBT Resource Group.
Environmental Matters
Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have, and will continue to have, an impact on our operations. We record liabilities for environmental issuesEnvironmental matters are discussed in the accounting period in which they are considered to be probable and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, we record a liability for our allocable share of costs related to our involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which we are the only potentially responsible party, we record a liability for the total estimated costs of remediation before consideration of recovery from insurers or other third parties.
We have been designated as a potentially responsible party at ten Superfund sites, excluding sites as to which our records disclose no involvement or as to which our liability has been finally determined. In addition to Superfund sites, various other lawsuits, claims and proceedings have been asserted against us, alleging violations of federal, state and local environmental protection requirements or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. We have established reserves for these liabilities when they are considered to be probable and reasonably estimable. See Note 2522 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below for information as to our estimates of the total reasonably possible costs we could incur and the amounts recorded as a liability as of September 30, 2019, and as to changes in environmental accruals during fiscal year 2019.Data.
The process of estimating environmental liabilities is complex and dependent on physical and scientific data at the site, uncertainties as to remedies and technologies to be used, and the outcome of discussions with regulatory agencies. The actual amount of costs or damages for which we may be held responsible could materially exceed our current estimates because of uncertainties, including the financial condition of other potentially responsible parties, the success of the remediation and other factors that make it difficult to predict actual costs accurately. However, based on management's assessment, after consulting with Meritor's Chief Legal Officer and with outside advisors who specialize in environmental matters, and subject to the difficulties inherent in estimating these future costs, we believe that our expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on our business, financial condition or results of operations. In addition, in future periods, new laws and regulations, changes in remediation plans, advances in technology and additional information about the ultimate clean-up remedy could significantly change our estimates. Management cannot assess the possible effectimpact of compliance with future requirements.
Seasonality; Cyclicality
We may experience seasonal variations in the demand for our products, to the extent OEM vehicle production fluctuates. Historically, for most of our operations, demand has been somewhat lower in the quarters ended September 30 and December 31, when OEM plants may close for summer shutdowns and holiday periods or when there are fewer selling days during the quarter. Our aftermarket business and our operations in India generally experience seasonally higher demand in the quarter ending March 31.
In addition, the industries in which we operate have been characterized historically by periodic fluctuations in overall demand for trucks, trailers and other specialty vehicles for which we supply products, resulting in corresponding fluctuations in demand for our products. Production and sales of the vehicles for which we supply products generally depend on economic conditions and a variety of other factors that are outside of our control, including freight tonnage, customer spending and preferences, vehicle age, labor relations and regulatory requirements. See Item 1A. Risk Factors below. Cycles in the major vehicle industry markets of North America and Europe are not necessarily concurrent or related but do tend to be correlated to general economic trends.
See Trends and Uncertainties in Item 7. Management's Discussion and Analysis for estimated commercial truck production volumes for selected original equipment markets based on available sources and management's estimates.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings we make with the Securities and Exchange Commission ("SEC") are available free of charge on our website (www.Meritor.com), as soon as reasonably practicable after they are filed. The information contained on theour company’s website is not included in, or incorporated by reference into, this Annual Report on Form 10-K.
Cautionary Statement
This Annual Report on Form 10-K contains statements relating to future results of the company (including certain outlooks, 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 the duration and severity of the COVID-19 pandemic and its effects on public health, the global economy, financial markets and operations; reliance on major 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 European markets or our European operations, or financing arrangements related thereto following the United Kingdom's decision to exit the European Union or, in the event one or more other countries exit the European monetary union; risks inherent in operating abroad (including foreign currency exchange rates, restrictive government actions regarding trade, implications of foreign regulations relating to pensions and potential disruption of production and supply due to terrorist attacks or acts of aggression); risks related to our joint ventures; rising costs of pension benefits; the ability to achieve the expected benefits of strategic initiatives and restructuring actions; our ability to successfully integrate the products and technologies of Fabco Holdings, Inc., AA Gear Mfg., Inc., AxleTech and AxleTechTransportation Power, Inc. and future results of such acquisitions, including their generation of revenue and their being accretive; the demand for commercial and specialty vehicles for which we supply products; whether our liquidity will be affected by declining vehicle production in the future; OEM program delays; demand for and market acceptance of new and existing products; successful development and launch 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 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 proceedings or related liabilities with respect to environmental, asbestos-related, or other 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. These forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update
or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.
Item 1A. Risk Factors
Our business, financial condition and results of operations can be impacted by a number of risks, including those described below and elsewhere in this Annual Report on Form 10-K, any one of which could cause our actual results to vary materially from recent results or from anticipated future results. Any of these individual risks could materially and adversely affect our business, financial condition and results of operations. This effect could be compounded if multiple risks were to occur.
Industry and Operational Risks
The ongoing coronavirus pandemic is having, and is expected to continue to have, an adverse effect on our business.
In March 2020 the World Health Organization declared a global health pandemic related to the outbreak of a novel coronavirus. The COVID-19 pandemic is adversely affecting, and could adversely affect public health, the global economy and financial markets, as well as our industry, operations, workforce, supply chains and distribution systems throughout 2021. We have experienced, and expect to continue to experience, unpredictable reductions in demand for certain of our products, as well as the potential for restrictions on our ability to operate. In response to the COVID-19 pandemic, government health officials have recommended and mandated at times precautions to mitigate the spread of the virus, including shelter-in-place orders, prohibitions on public gatherings, travel restrictions and other similar measures. As a result, we and certain of our customers and suppliers temporarily closed select manufacturing locations during the second half of fiscal year 2020. It is currently unclear if further closures may be necessary in the future. Our results will be adversely impacted by any such closures and other actions taken to contain the spread or mitigate the impact of the COVID-19 pandemic. There is uncertainty around the duration
and breadth of the COVID-19 pandemic, and as a result the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time. The situation is rapidly evolving and additional impacts, which we are unable to predict or plan for, including expenses related to subsequent commercial or employment related litigation, may arise.
We may not be able to execute our M2022 Plan.
In the first quarter of fiscal 2019, we announced our M2022 plan, a multi-year plan to drive growth, expand margins, expand earnings per share, and generate cash and value.In connection with the plan, we established certain financial goals relating to securing new revenue, profit improvement and cash flow generation. The M2022 plan is based on our current planning assumptions, and achievement of the plan is subject to a number of risks. Our plan includes assumptions that we are able to successfully launch new products, secure new business wins, expand our current customer relationships, reduce costs, and that demand for our products recovers from the effects of the COVID-19 pandemic and any price increases in raw materials prices are substantially offset by customer recovery mechanisms.If our assumptions are incorrect, if management is not able to execute the plan or if our business suffers from any number of additional risks set forth herein, we may not be able to achieve the financial goals we have announced for the M2022 plan.
We depend on large OEM customers, and loss of sales to these customers or failure to negotiate acceptable terms in contract renewal negotiations, or to obtain new customers, could have an adverse impact on our business.
We are dependent upon large OEM customers with substantial bargaining power with respect to price and other commercial terms. In addition, we have long-term contracts with certain of these customers that are subject to renegotiation and renewal from time to time. Loss of all or a substantial portion of sales to any of our large volume customers for whatever reason (including, but not limited to, loss of contracts or failure to negotiate acceptable terms in contract renewal negotiations, loss of market share by these customers, insolvency of such customers, reduced or delayed customer requirements, plant shutdowns, strikes or other work stoppages affecting production by such customers), continued reduction of prices to these customers, or a failure to obtain new customers, could have a significant adverse effect on our financial results. There can be no assurance that we will not lose all or a portion of sales to our large volume customers, or that we will be able to offset any reduction of prices to these customers with reductions in our costs or by obtaining new customers.
During fiscal year 2019,2020, sales to customers that accounted for 10 percent or more of our total sales includedincluded AB Volvo, Daimler AG PACCAR and Navistar,PACCAR, which represented approximately 2221 percent, 19 percent, 1317 percent and 1012 percent, respectively. No other customer accounted for 10 percent or more of our total sales in fiscal year 2019.2020.
The levelamount of our sales to large OEM customers, including the realization of future sales from awarded business or obtaining new business or customers, is inherently subject to a number of risks and uncertainties, including the number of vehicles that these OEM customers actually produce and sell. Several of our significant customers have major union contracts that expire periodically and are subject to renegotiation. Any strikes or other actions that affect our customers' production during this process would also affect our sales. Further, to the extent that the financial condition, including bankruptcy or market share, of any of our largest customers deteriorates or their sales otherwise continue to decline, our financial position and results of operations could be adversely affected. In addition, our customers generally have the right to replace us with another supplier under certain circumstances. Accordingly, we may not in fact realize all of the future sales represented by our awarded business. Any failure to realize these sales could have a material adverse effect on our financial condition and results of operations.
Our ability to manage rapidly changing production and sales volume in the commercial vehicle market may adversely affect our results of operations.
Production and sales in the commercial vehicle market have historically been volatile. Our business may experience difficulty in adapting to rapidly changing production and sales volumes. In an upturn of the cycle, when demand increases for production, we may have difficulty in meeting such extreme or rapidly increasing demand. This difficulty may include not having sufficient manpower or working capital to meet the needs of our customers or relying on other suppliers who may not be able to respond quickly to a changed environment when demand increases rapidly. In addition, certain volume requirements can necessitate premium freight and the associated costs to support the customer demand. In contrast, in the downturn of the cycle, we may have difficulty sustaining profitability given fixed costs (as further discussed below).
AThe downturn in the global economy could materially adversely affectis having, and is expected to continue to have, an adverse effect on our results of operations, financial condition and cash flows.flows.
PastThe COVID-19 pandemic has led to a significant downturn in the global economy, which is adversely affecting, and is expected to continue to adversely affect during fiscal year 2021, our results of operations, financial condition and cash flows. There is uncertainty around the duration and breadth of the COVID-19 pandemic, and as a result the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time. In addition, past recessions have had a significant adverse impact on our business, customers and suppliers. Our cash and liquidity needs wereare impacted by the level, variability and timing of our customers' worldwide vehicle production and other factors outside of our control. If the global economy were to takeexperiences another significant downturn, depending upondecline in the length, duration and severity of another recession,future, our results of operations, financial condition and cash flow would be materially adversely affected again.affected.
Our levels of fixed costs can make it difficult to adjust our cost base to the extent necessary, or to make such adjustments on a timely basis, and continued volume declines can result in non-cash impairment charges as the value of certain long-lived assets is reduced. As a result, our financial condition and results of operations have been and would be expected to continue to be adversely affected during periods of prolonged declining production and sales volumes in the commercial vehicle markets.
The negative impact on our financial condition and results of operations from continued volume declines could also have negative effects on our liquidity. If cash flows are not available from our operations, we may be required to rely on the banking and credit markets to meet our financial commitments and short-term liquidity needs; however, we cannot predict whether that funding will be available at all or on commercially reasonable terms. In addition, in the event of reduced sales, levels of receivables would decline, which would lead to a decline in funding available under our U.S. receivables facilities or under our European factoring arrangements.
Our working capital requirements may negatively affect our liquidity and capital resources.
Our working capital requirements can vary significantly, depending in part on the level, variability and timing of our customers' worldwide vehicle production and the payment terms with our customers and suppliers. As production volumes increase, our working capital requirements to support the higher volumes generally increase. If our working capital needs exceed our other cash flows from operations, we would look to our cash balances and availability for borrowings under our borrowing arrangements to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms or in adequate amounts.
In addition, since many of our accounts receivable factoring programs support our working capital requirements in Europe, any dissolution of the European monetary union, if it were to occur, or any other termination of our European factoring agreements could have a material adverse effect on our liquidity if we were unable to renegotiate such agreements or find alternative sources of liquidity.
One of our consolidated joint ventures in China participates in bills of exchange programs to settle accounts receivable from its customers and obligations to its trade suppliers. These programs are common in China and generally require the participation of local banks. Any disruption in these programs, if it were to occur, could have an adverse effect on our liquidity if we were unable to find alternative sources of liquidity.
We operate in an industry that is cyclical and that has periodically experienced significant year-to-year fluctuations in demand for vehicles; we also experience seasonal variations in demand for our products.
The industries in which we operate have been characterized historically by significant periodic fluctuations in overall demand for medium- and heavy-duty trucks and other vehicles for which we supply products, resulting in corresponding fluctuations in demand for our products. The length and timing of any cycle in the vehicle industry cannot be predicted with certainty.
Production and sales of the vehicles for which we supply products generally depend on economic conditions and a variety of other factors that are outside our control, including freight tonnage, customer spending and preferences, vehicle age, labor relations and regulatory requirements. In particular, demand for our Commercial Truck segment products can be affected by a pre-buy before the effective date of new regulatory requirements, such as changes in emissions standards. Historically, implementation of new, more stringent, emissions standards has increased heavy-duty truck demand prior to the effective date of the new regulations,standards, and correspondingly decreased this demand after the new standards are implemented. In addition, any expected increase in the heavy-duty truck demand prior to the effective date of new emissions standards may be offset by instability in the financial markets and resulting economic contraction in the U.S. and worldwide markets.
Sales from the aftermarket portion of our Aftermarket Industrial and TrailerIndustrial segment depend on overall levels of truck ton miles and gross domestic product (GDP), among other things, and may be influenced by times of slower economic growth or economic contraction based on the average age of commercial truck fleets.
We may also experience seasonal variations in the demand for our products to the extent that vehicle production fluctuates. Historically, for most of our business, demand has been somewhat lower in the quarters ended September 30 and December 31, when OEM plants may close during model changeovers and vacation and holiday periods or when there are fewer selling days during the quarter. In addition, our aftermarket business and our operations in India generally experience seasonally higher demand in the quarter ending March 31.
Continued fluctuation in the prices of raw materials and transportation costs has adversely affected our business and, together with other factors, will continue to pose challenges to our financial results.
Prices of raw materials, primarily steel, for our manufacturing needs and costs of transportation have fluctuated sharply in past years, including rapid increases which had a negative impact on our operating income for certain periods. These steel price increases, along with increasing transportation costs, created pressure on profit margins, and as they recur in the future, they could unfavorably impact our financial results going forward. While we have had steel pricing adjustment programs in place with most major OEMs, the price adjustment programs typically lag the increase in steel costs and have generally not contemplated all non-index-related increases in steel costs. Raw material price fluctuation, together with the volatility of the commodity markets, which can be impacted by a variety of factors, including changes in trade laws and tariffs, will continue to pose risks to our financial results. If we are unable to pass price increases on to our customer base or otherwise mitigate the costs, our operating income could be adversely affected.
Escalating price pressures from customers may adversely affect our business.
To a certain extent, pricing pressure by OEMs is a characteristic of the commercial vehicle industry. Virtually all OEMs have price reduction initiatives and objectives each year with their suppliers, and such actions are expected to continue in the future. Accordingly, we must be able to reduce our operating costs in order to maintain our current margins. Price reductions have impacted our margins and may do so in the future. There can be no assurance that we will be able to avoid future customer price reductions or offset future customer price reductions through improved operating efficiencies, new manufacturing processes, sourcing alternatives or other cost reduction initiatives.
We operate in a highly competitive industry.
Each of Meritor's businesses operates in a highly competitive environment. We compete worldwide with a number of North American and international providers of components and systems, some of which are owned by or associated with some of our customers. Certain OEMs manufacture products for their own use that compete with the types of products we supply, and any future increase in this activity could displace Meritor's sales. In addition, cost reduction strategies in our industry have led to an increase in the consolidation and globalization of OEMs and their suppliers, which could increase the amount of competition or displacement we face from OEMs that manufacture products similar to ours for their own use or from suppliers that are affiliated with or otherwise supported by OEMs.
The commercial vehicle market is also experiencing a period of significant technological change as a result of the trends toward electrified drivetrains and the integration of advanced electronics into traditional products. These trends have led to an increase in the significance of technology to our current and future products and the amount of capital we need to invest to develop these new technologies, as well as an increase in the amount of competition we face from technology focused new market entrants. If we misjudge the amount of capital to invest or are otherwise unable to continue providing products that meet our customers’ needs in this environment of rapid technological change, our market competitiveness could be adversely affected.
Exchange rate fluctuations could adversely affect our financial condition and results of operations.
As a result of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, including risks in connection with our transactions that are denominated in foreign currencies. While we employ financial instruments to hedge certain of our foreign currency exchange risks relating to these transactions, our efforts to manage these risks may not be successful. In addition, we translate sales and other results denominated in foreign currencies into U.S. dollars for purposes of our consolidated financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies generally will have a negative impact on our reported revenues and operating income, while depreciation of the U.S. dollar against these foreign currencies will generally have a positive effect on reported revenues and operating income. For fiscal years 2018 and 2017, our reported financial results benefited from depreciation of the U.S. dollar against foreign currencies. For fiscal year 2019, our reported financial results were adversely affected by appreciation of the U.S. dollar against foreign currencies.
A disruption in supply of raw materials or parts could impact our production and increase our costs.
Some of our significant suppliers have experienced weak financial conditionconditions in the past. In addition, some of our significant suppliers are located in developing countries. We are dependent upon the ability of our suppliers to meet performance and quality specifications and delivery schedules. The inability of a supplier to meet these requirements, the loss of a significant supplier, or any labor issues or work stoppages at a significant supplier could disrupt the supply of raw materials and parts to our facilities and could have an adverse effect on us.
Work stoppages or similar difficulties could significantly disrupt our operations.
A work stoppage at one or more of our manufacturing facilities could have a material adverse effect on our business. In addition, if a significant customer were to experience a work stoppage, that customer could halt or limit purchases of our products, which could result in shutting down the related manufacturing facilities. Also, a significant disruption in the supply of a key component due to a work stoppage at one of our suppliers could result in shutting down manufacturing facilities, which could have a material adverse effect on our business.
Our international operations are subject to a number of risks.
We have a significant number of facilities and operations outside the United States, including investments and joint ventures in developing countries. During fiscal year 2019,2020, approximately 4041 percent of our sales from continuing operations were generated outside of the United States. Our strategy to grow in emerging markets may put us at risk due to the risks inherent in operating in such markets. Our international operations are subject to a number of risks inherent in operating abroad, including, but not limited to:
•risks with respect to currency exchange rate fluctuations (as more fully discussed above);
•risks to our liquidity if the European monetary union were to dissolve and we were unable to renegotiate European factoring agreements or find alternative sources of liquidity;
•risks arising from the United Kingdom's decision to exit the European Union, or in the event one or more other countries exit the European monetary union;
•local economic and political conditions;
•disruptions of capital and trading markets;
•possible terrorist attacks or acts of aggression that could affect vehicle production or the availability of raw materials or supplies;
•restrictive governmental actions (such as restrictions on transfer of funds and trade protection measures, including import and export duties, quotas and customs duties and tariffs);
•changes in legal or regulatory requirements;
•import or export licensing requirements;
•limitations on the repatriation of funds;
•difficulty in obtaining distribution and support;
•nationalization;
•the laws and policies of the United States and foreign governments affecting trade, foreign investment and loans;
•the ability to attract and retain qualified personnel;
•tax laws; and
•labor disruptions.
There can be no assurance that these risks will not have a material adverse impact on our ability to increase or maintain our foreign sales or on our financial condition or results of operations.
Certain of our operations are conducted through joint ventures, which have unique risks.
We conduct certain of our operations through joint ventures, many of which act as our suppliers, pursuant to the terms of the agreements that we entered into with our partners. We may share management responsibilities and information with one or
more partners that may not share our goals and objectives. Additionally, one or more partners may fail to satisfy contractual obligations, conflicts may arise between us and any of our partners, the ownership of one of our partners may change or our ability to control decision making or compliance with applicable rules and regulations may be limited. Additionally, our ability to sell our interest in a joint venture may be subject to contractual and other limitations. Accordingly, any of the foregoing could adversely affect our results of operations, financial condition and cash flow.
Our strategic initiatives may be unsuccessful, may take longer than anticipated, or may result in unanticipated costs.
The success and timing of any future divestitures and acquisitions will depend on a variety of factors, many of which are not within our control. If we engage in acquisitions, we may finance these transactions by borrowing or issuing additional debt or equity securities. The additional debt from any such acquisitions, if consummated, could increase our debt to capitalization ratio. In addition, the ultimate benefit of any acquisition would depend on our ability to successfully integrate the acquired entity or assets into our existing business and to achieve any projected synergies. There is also no assurance that the total costs associated with any current andor future restructuring will not exceed our estimates, or that we will be able to achieve the intended benefits of these restructurings.
Changes in U.S. trade policy, including the imposition of tariffs and the resulting consequences, could adversely affect our results of operations.
The U.S. government has adopted a new approach to trade policy and in some cases has attempted to renegotiate or terminate certain existing bilateral or multi-lateral trade agreements. It has also imposed tariffs on certain foreign goods, including steel and certain commercial vehicle parts, which have begun to result in increased costs for goods imported into the U.S. In response to these tariffs, a number of U.S. trading partners have imposed retaliatory tariffs on a wide range of U.S. products, which makes it more costly for us to export our products to those countries. If we are unable to pass price increases on to our customer base or otherwise mitigate the costs, or if demand for our exported products decreases due to the higher cost, our results of operations could be materially adversely affected. In addition, further tariffs have been proposed by the U.S. and its trading partners and additional trade restrictions could be implemented on a broader range of products or raw materials. The resulting environment of retaliatory trade or other practices could have a material adverse effect on our business, results of operations, customers, suppliers and the global economy.
Financial Risks
Our liquidity, including our access to capital markets and financing, could be constrained by limitations in the overall credit market, our credit ratings, our ability to comply with financial covenants in our debt instruments, and our suppliers suspending normal trade credit terms on our purchases, or by other factors beyond our control.
Our current senior secured revolving credit facility matures in June 2024. Upon expiration of this facility, we will require a new or renegotiated facility (which may be smaller and have less favorable terms than our current facility) or other financing arrangements. Our ability to access additional capital in the long term will depend on availability of capital markets and pricing on commercially reasonable terms, as well as our credit profile at the time we are seeking funds, and there is no guarantee that we will be able to access additional capital.
On November 11, 2019,10, 2020, our Standard & Poor’s corporate credit rating and senior unsecured credit rating were BB and BB-, respectively, and our Moody’s Investors Service corporate credit rating and senior unsecured credit rating were Ba3 and B1, respectively. Any lowering of our credit ratings could increase our cost of future borrowings, and could reduce our access to capital markets and result in lower trading prices for our securities.
Our liquidity could also be adversely impacted if our suppliers were to suspend normal trade credit terms and require more accelerated payment terms, including payment in advance or payment on delivery of purchases. If this were to occur, we would be dependent on other sources of financing to bridge the additional period between payment of our suppliers and receipt of payments from our customers.
Disruptions in the financial markets could impact the availability and cost of credit which could negatively affect our business.
Disruptions in the financial markets, including the bankruptcy, insolvency or restructuring of certain financial institutions, and the lack of liquidity generally could impact the availability and cost of incremental credit for many companies and may adversely affect the availability of credit already arranged. Such disruptions could adversely affect the U.S. and world economy,
further negatively impacting consumer spending patterns in the transportation and industrial sectors. In addition, as our customers and suppliers respond to rapidly changing consumer preferences, they may require access to additional capital. If that capital is not available or its cost is prohibitively high, their businessbusinesses would be negatively impacted, which could result in further restructuring, insolvency or even reorganization under bankruptcy laws. Any such negative impact, in turn, could negatively affect our business either through loss of sales to any of our customers so affected or through inability to meet our commitments (or inability to meet them without excess expense) because of loss of supplies from any of our suppliers so affected. There are no assurances that government responses to these disruptions would restore consumer confidence or improve the liquidity of the financial markets.
In addition, disruptions in the capital and credit markets could adversely affect our ability to draw on our senior secured revolving credit facility or our U.S. accounts receivable securitization facility. Our access to funds under the facilities is dependent on the ability of the banks that are parties to the facilities to meet their funding commitments. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from Meritor and other borrowers within a short period of time. Longer-term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged.
A violation of the financial covenants in our senior secured revolving credit facility could result in a default thereunder and could lead to an acceleration of our obligations under this facility and, potentially, other indebtedness.
Our ability to borrow under our existing financing arrangements depends on our compliance with covenants in the related agreements, and on our performance againstincluding covenants in our banksenior secured revolving credit facility that require compliance with certain financial ratios as of the end of each fiscal quarter. To the extent that we are unable to maintain compliance with these requirements or to perform against the financial ratio covenants due to one or more of the various risk factors discussed herein or otherwise, our ability to borrow, and our liquidity, would be adversely impacted.
Availability under the senior secured revolving credit facility is subject to a financial covenant based on the ratio of our priority debt (consisting principally of amounts outstanding under the senior secured revolving credit facility, U.S. accounts receivable securitization and factoring programs, and third-party non-working capital foreign debt) to EBITDA. We are required to maintain a total priority-debt-to-EBITDA ratio, as defined in the agreement, of not more than 2.25 to 1.00 as of the last day of each fiscal quarter through maturity.
If an amendment or waiver is needed (in the event we do not meetcomply with one of these covenants) and not obtained, we would be in violation of that covenant, and the lenders would have the right to accelerate the obligations upon the vote of the lenders holding more than 50% of outstanding loans thereunder. A default under the senior secured revolving credit facility could also constitute a default under our outstanding convertible notes, as well as our U.S. receivables facility, and could result in the acceleration of these obligations. In addition, a default under our senior secured revolving credit facility could result in a cross-default or the acceleration of our payment obligations under other financing agreements. If our obligations under our senior secured revolving credit facility and other financing arrangements are accelerated as described above, our assets and cash flow may be insufficient to fully repay these obligations, and the lenders under our senior secured revolving credit facility could institute foreclosure proceedings against our assets.
The phaseout of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate, may have an adverse effect on our business.
In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established or if alternative rates or benchmarks will be adopted. Our senior secured revolving credit facility, current term loan, U.S. accounts receivables securitization facility and certain of our accounts receivable factoring programs utilize LIBOR as a benchmark for calculating the applicable interest rate. Changes in the method of calculating LIBOR, the elimination of LIBOR or the replacement of LIBOR with an alternative rate or benchmark may require us to renegotiate or amend these facilities, loans and programs, which may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flows and liquidity. We cannot predict the effect of the potential changes to or elimination of LIBOR or the establishment and use of alternative rates or benchmarks and the corresponding effects on our cost of capital.
Exchange rate fluctuations could adversely affect our financial condition and results of operations.
As a result of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, including risks in connection with our transactions that are denominated in foreign currencies. While we employ financial instruments to hedge certain of our foreign currency exchange risks relating to these transactions, our efforts to manage these risks may not be successful. In addition, we translate sales and other results denominated in foreign currencies into U.S. dollars for purposes of our consolidated financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies generally will have a negative impact on our reported revenues and operating income, while depreciation of the U.S. dollar against these foreign currencies will generally have a positive effect on reported revenues and operating income. For fiscal year 2018, our reported financial results benefited from depreciation of the U.S. dollar against foreign currencies. For fiscal year 2019, our reported financial results were adversely affected by appreciation of the U.S. dollar against foreign currencies. For fiscal year 2020, our reported financial results were adversely affected by appreciation of the U.S. dollar against foreign currencies.
Environmental, Asbestos, Tax and and Other Regulatory Risks
We are exposed to environmental, health and safety and product liabilities.
Our business is subject to liabilities with respect to environmental, health and safety matters. In addition, we are required to comply with federal, state, local and foreign laws and regulations governing the protection of the environment and health and safety, and we could be held liable for damages arising out of human exposure to hazardous substances or other environmental or natural resource damages. Environmental, health and safety laws and regulations are complex, change frequently and tend to be increasingly stringent. As a result, our future costs to comply with such laws and regulations may increase significantly. There is also an inherent risk of exposure to warranty and product liability claims, as well as product recalls, in the commercial vehicle industry if our products fail to perform to specifications or are alleged to cause property damage, injury or death.
With respect to environmental liabilities, we have been designated as a potentially responsible party at ten Superfund sites (excluding sites as to which our records disclose no involvement or as to which our liability has been finally determined). In addition to the Superfund sites, various other lawsuits, claims and proceedings have been asserted against us alleging violations of U.S. and foreign federal, state and local and foreign environmental protection requirements or seeking remediation of alleged environmental impairments. We establish reserves for these liabilities when we determine that the company has a probable obligation and we can reasonably estimate it, but the process of estimating environmental liabilities is complex and dependent on evolving physical and scientific data at the site, uncertainties as to remedies and technologies to be used, and the outcome of discussions with regulatory agencies. The actual amount of costs or damages for which we may be held responsible could materially exceed our current estimates because of these and other uncertainties which make it difficult to predict actual costs accurately. In future periods, new laws and regulations, changes in remediation plans, advances in technology and additional information about the ultimate clean-up remedy could significantly change our estimates and have a material impact on our financial position and results of operations. Management cannot assess the possible effect of compliance with future requirements.
We are exposed to asbestos litigation liability.
We, along with many other companies, have been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos used in certain components of products of Rockwell International Corporation ("Rockwell"). Liability for these claims was transferred to us at the time of the spin-off of Rockwell's automotive business to Meritor in 1997.
The uncertainties of asbestos claims and other litigation, including the outcome of litigation with insurance companies regarding the scope of asbestos coverage and the long-term solvency of our insurance carriers, make it difficult to predict accurately the ultimate resolution of asbestos claims. The possibility of adverse rulings or new legislation affecting asbestos claim litigation or the settlement process increases that uncertainty. Although we have established reserves to address asbestos liability and corresponding receivables for recoveries from our insurance carriers, if our assumptions with respect to the nature of pending and future claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for asbestos-related claims, and the effect on us, could differ materially from our current estimates and, therefore, could have a material impact on our financial position and results of operations.
Changes in U.S. trade policy, including the imposition of tariffs and the resulting consequences, could adversely affect our results of operations.
The U.S. government has adopted a new approach to trade policy and in some cases has attempted to renegotiate or terminate certain existing bilateral or multi-lateral trade agreements. It has also imposed tariffs on certain foreign goods, including steel and certain commercial vehicle parts, which have begun to result in increased costs for goods imported into the U.S. In response to these tariffs, a number of U.S. trading partners have imposed retaliatory tariffs on a wide range of U.S. products, which makes it more costly for us to export our products to those countries. If we are unable to pass price increases on to our customer base or otherwise mitigate the costs, or if demand for our exported products decreases due to the higher cost, our results of operations could be materially adversely affected. In addition, further tariffs have been proposed by the U.S. and its trading partners and additional trade restrictions could be implemented on a broader range of products or raw materials. The resulting environment of retaliatory trade or other practices could have a material adverse effect on our business, results of operations, customers, suppliers and the global economy.
We are exposed to the rising cost of pension benefits.
The commercial vehicle industry, like other industries, continues to be impacted by the cost of pension benefits. In estimating our expected obligations under our pension benefit plans, we make certain assumptions as to economic and demographic factors, such as discount rates, and investment returns. If actual experience of these factors is worse than our assumptions, our obligations could grow which could in turn increase the amount of mandatory contributions to these plans in the coming years. Our pension plans were underfunded by $122 million as of September 30, 2019.
Impairment in the carrying value of long-lived assets and goodwill could negatively affect our operating results and financial condition.
We have a significant amount of long-lived assets and goodwill on our Consolidated Balance Sheet. Under U.S. generally accepted accounting principles, long-lived assets, excluding goodwill, are required to be reviewed for impairment whenever adverse events or changes in circumstances indicate a possible impairment. If business conditions or other factors cause our operating results and cash flows to decline, we may be required to record non-cash impairment charges. Goodwill must be evaluated for impairment at least annually. If the carrying value of our reporting units exceeds their current fair value, the goodwill is considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and conditions that could result in
impairment in the value of our long-lived assets and goodwill include changes impacting the industries in which we operate, particularly the impact of any downturn in the global economy, as well as competition and advances in technology, adverse changes in the regulatory environment, or other factors leading to reduction in expected long-term sales or operating results. If the value of long-lived assets or goodwill is impaired, our earnings and financial condition could be adversely affected.
The value of our deferred tax assets could become impaired, which could materially and adversely affect our results of operations and financial condition.
In accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 "Income Taxes," each quarter we determine the probability of the realization of deferred tax assets using significant judgments and estimates with respect to, among other things, historical operating results, expectations of future earnings and tax planning strategies. If we determine in the future that there is not sufficient positive evidence to support the valuation of these assets, due to the risk factors described herein or other factors, we may be required to adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in material non-cash expenses in the period in which the valuation allowance is adjusted and could have a material adverse effect on our results of operations and financial condition. In addition, future changes in laws or regulations could have a material impact on the company's overall tax position.
Our overall effective tax rate is equal to our total tax expense as a percentage of our total earnings before tax. However, tax expenses and benefits are determined separately for each tax paying component (an individual entity) or group of entities that is consolidated for tax purposes in each jurisdiction. Losses in certain jurisdictions that have valuation allowances against their deferred tax assets provide no current financial statement tax benefit unless required under the intra-period allocation requirements of FASB ASC Topic 740., "Income Taxes" ("ASC Topic 740"). As a result, changes in the mix of projected earnings between jurisdictions, among other factors, could have a significant impact on our overall effective tax rate.
Our unrecognized tax benefits recorded in accordance with FASB ASC Topic 740 could significantly change.
FASB ASC Topic 740, "Income Taxes," defines the confidence level that a tax position must meet in order to be recognized in the financial statements. This topic requires that the tax effects of a position be recognized only if it is "more-likely-than-not" to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more likely than not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. In the event that the more-likely-than-not threshold is not met, we would be required to change the relevant tax position, which could have an adverse effect on our results of operations and financial condition.
We may be restricted on the use of tax attributes from a tax law "ownership change."
SectionSections 382 and 383 of the U.S. Internal Revenue Code of 1986, as amended, limitslimit the ability of a corporation that undergoes an "ownership change" to use its tax attributes, such as net operating losses and tax credits. In general, an "ownership change" occurs if shareholders owning five percent or more (applying certain look-through rules) of an issuer's outstanding common stock, collectively, increase their ownership percentage by more than fifty percentage points within any three-year period over such shareholders' lowest percentage ownership during this period. If we were to issue new shares of stock, such new shares could contribute to such an "ownership change" under U.S. tax law. Moreover, not every event that could contribute to such an "ownership change" is within our control. If an "ownership change" under SectionSections 382 or 383 were to occur, our ability to utilize tax attributes in the future may be limited.
Intellectual Property, Information Security and Pension Risks
Assertions against us or our customers relating to intellectual property rights could materially impact our business.
Our industry is characterized by companies that hold large numbers of patents and other intellectual property rights and that vigorously pursue, protect and enforce intellectual property rights. From time to time, third parties may assert against us and our customers and distributors their patents and other intellectual property rights to technologies that are important to our business.
Claims that our products or technology infringe third-party intellectual property rights, regardless of their merit or resolution, are frequently costly to defend or settle, and divert the efforts and attention of our management and technical personnel. In addition, many of our supply agreements require us to indemnify our customers and distributors from third-party infringement claims, which have in the past and may in the future require that we defend those claims and might require that we pay damages in the case of adverse rulings. Claims of this sort also could harm our relationships with our customers and might deter future customers from doing business with us. We do not know whether we will prevail in these proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If any pending or future proceedings result in an adverse outcome, we could be required to:
•cease the manufacture, use or sale of the infringing products or technology;
•pay substantial damages for infringement;
•expend significant resources to develop non-infringing products or technology;
•license technology from the third-party claiming infringement, which license may not be available on commercially reasonable terms, or at all;
•enter into cross-licenses with our competitors, which could weaken our overall intellectual property portfolio;
•lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others;
•pay substantial damages to our customers or end users to discontinue use or replace infringing technology with non-infringing technology; or
•relinquish rights associated with one or more of our patent claims, if our claims are held invalid or otherwise unenforceable.
Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations.
We utilize a significant amount of intellectual property in our business. If we are unable to protect our intellectual property, our business could be adversely affected.
Our success depends in part upon our ability to protect our intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, trademarks and trade secrets, as well as customary contractual protections with our customers, distributors, employees and consultants, and security measures to protect our trade secrets. We cannot guarantee that:
•any of our present or future patents will not lapse or be invalidated, circumvented, challenged, abandoned or, in the case of third-party patents licensed or sub-licensed to us, be licensed to others;
•any of our pending or future patent applications will be issued or have the coverage originally sought;
•our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; or
•any of the trademarks, trade secrets or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged, abandoned or licensed to others.
In addition, we may not receive competitive advantages from the rights granted under our patents and other intellectual property rights. Our competitors may develop technologies that are similar or superior to our proprietary technologies, duplicate our proprietary technologies, or design around the patents we own or license. Our existing and future patents may be circumvented, blocked, licensed to others, or challenged as to inventorship, ownership, scope, validity or enforceability. Effective intellectual property protection may be unavailable or more limited in one or more relevant jurisdictions relative to those protections available in the U.S., or may not be applied for in one or more relevant jurisdictions. If we pursue litigation to assert our intellectual property rights, an adverse decision in any of these legal actions could limit our ability to assert our intellectual property rights, limit the value of our technology or otherwise negatively impact our business, financial condition and results of operations.
We are a party to a number of patent and intellectual property license agreements. Some of these license agreements require us to make one-time or periodic payments. We may need to obtain additional licenses or renew existing license agreements in the future. We are unable to predict whether these license agreements can be obtained or renewed on acceptable terms.
A breach or failure of our information technology infrastructure could adversely impact our business and operations.
We recognize the increasing volume of cyber-attacks and employ commercially practical efforts to provide reasonable assurance such attacks are appropriately mitigated. Each year, we evaluate the threat profile of our industry to stay abreast of trends and to provide reasonable assurance our existing countermeasures will address any new threats identified. Despite our implementation of security measures, our IT systems and those of our service providers are vulnerable to circumstances beyond our reasonable control, including acts of malfeasance, acts of terror, acts of government, natural disasters, civil unrest, and denial of service attacks, any of which may lead to the theft of our intellectual property and trade secrets or business disruption. To the extent that any disruption or security breach results in a loss or damage to our data or an inappropriate disclosure of confidential information, it could cause significant damage to our reputation, affect our relationships with our customers, suppliers and employees, lead to claims against the companyus and ultimately harm our business. Additionally, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
We are exposed to the rising cost of pension benefits.
The commercial vehicle industry, like other industries, continues to be impacted by the cost of pension benefits. In estimating our expected obligations under our pension plans, we make certain assumptions as to economic and demographic factors, such as discount rates and investment returns. If actual experience with these factors is worse than our assumptions, our obligations could be larger than estimated which could in turn increase the amount of mandatory contributions to these plans in the coming years. Our pension plans were overfunded by $40 million as of September 30, 2020.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
At September 30, 2019,2020, our operating segments, including all consolidated joint ventures, had the following facilities in the United States, Europe, South America, Canada, Mexico and the Asia-Pacific region. For purposes of these numbers, multiple facilities in one geographic location are counted as one facility.
| | | | Manufacturing and Distribution Facilities | | Engineering Facilities, Sales Offices, Warehouses and Service Centers | | Manufacturing and Distribution Facilities | | Engineering Facilities, Sales
Offices, Warehouses and
Service Centers |
| Commercial Truck | 17 | | 9 | Commercial Truck | 22 | | 8 |
| Aftermarket, Industrial and Trailer | 17 | | 7 | |
| Aftermarket and Industrial | | Aftermarket and Industrial | 13 | | 7 |
| Other | — | | 4 | Other | — | | 4 |
| Total | 34 | | 20 | Total | 35 | | 19 |
These facilities had an aggregate floor space of approximately 11.110.9 million square feet, substantially all of which is in use. We owned approximately 5962 percent and leased approximately 4138 percent of this floor space. Substantially all of our owned domestic plants and equipment are subject to liens securing our obligations under our revolving credit facility with a group of banks (see Note 1815 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary
Data). In the opinion of management, our properties have been well maintained, are in sound operating condition and contain all equipment and facilities necessary to operate at present levels.
A summary of floor space (in square feet) of these facilities at September 30, 2019,2020 (including new space under construction) is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Owned Facilities | | Leased Facilities | | |
| Region | | Commercial Truck | | Aftermarket and Industrial | | Other | | Commercial Truck | | Aftermarket and Industrial | | Other | | Total |
| United States | | 1,611,763 | | | 1,807,790 | | | 417,800 | | | 697,695 | | | 1,097,016 | | | — | | | 5,632,064 | |
| Canada | | — | | | — | | | — | | | — | | | 40,517 | | | — | | | 40,517 | |
| Europe | | 1,438,000 | | | 320,441 | | | — | | | 528,077 | | | 98,109 | | | 7,861 | | | 2,392,488 | |
| Asia Pacific | | 623,941 | | | — | | | — | | | 995,913 | | | 71,673 | | | — | | | 1,691,527 | |
| Latin America | | 494,913 | | | — | | | — | | | 571,743 | | | 33,356 | | | — | | | 1,100,012 | |
| Total | | 4,168,617 | | | 2,128,231 | | | 417,800 | | | 2,793,428 | | | 1,340,671 | | | 7,861 | | | 10,856,608 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Owned Facilities | | Leased Facilities | | |
| Region | | Commercial Truck | | Aftermarket, Industrial and Trailer | | Other | | Commercial Truck | | Aftermarket, Industrial and Trailer | | Other | | Total |
| United States | | 1,274,763 |
| | 2,144,790 |
| | 417,800 |
| | 391,939 |
| | 1,653,431 |
| | — |
| | 5,882,723 |
|
| Canada | | — |
| | — |
| | — |
| | — |
| | 40,517 |
| | — |
| | 40,517 |
|
| Europe | | 1,870,150 |
| | 257,257 |
| | — |
| | 543,558 |
| | 164,272 |
| | 8,117 |
| | 2,843,354 |
|
| Asia Pacific | | 406,941 |
| | — |
| | — |
| | 1,055,819 |
| | 59,086 |
| | — |
| | 1,521,846 |
|
| Latin America | | 204,368 |
| | — |
| | — |
| | 571,743 |
| | 33,356 |
| | — |
| | 809,467 |
|
| Total | | 3,756,222 |
| | 2,402,047 |
| | 417,800 |
| | 2,563,059 |
| | 1,950,662 |
| | 8,117 |
| | 11,097,907 |
|
Item 3. Legal Proceedings.
| |
• | See Note 25•See Note 22 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data for information with respect to litigation related to asbestos and product liability and environmental proceedings, which is incorporated herein by reference. •Financial Statements and Supplementary Data for information with respect to litigation related to asbestos and product liability, which is incorporated herein by reference thereto. |
| |
• | See Item 1. Business, "Environmental Matters" and Note 25 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data for information relating to environmental proceedings, which is incorporated herein by reference thereto.
|
In March 2016, two virtually identical complaints were filed against ourthe company and other defendants in the United States District Court for the Eastern District of Michigan. The complaints are proposed class actions, alleging that we violated federal and state antitrust and other laws in connection with a former business of ours that manufactured and sold exhaust systems for automobiles. The first proposed class iswas composed of persons and entities that purchased or leased a passenger vehicle during a specified time period;period and the second is a purportedproposed class was composed of automobile dealers. We accepted service of these complaints in July 2016. We2016 and settled both of these lawsuits for a total of $1 million. The settlements were preliminarily approved by the court in June and September 2018. A third complaint on behalf of a proposed class of direct purchasers was filed against ourthe company and other defendants in the same court in November 2016; we2016. We accepted service of this complaint in April 2017. We settled this lawsuit for $1 million. In December 2017, we were served with a similar suit naming the company as a defendant on behalf of a purported class of purchasersCanadian purchasers. The complaint was filed in Alberta, Canada, andOntario, Canada. We were served with a nearly identical complaintcomplaints in British Columbia, Canada in March 2018.2018 and May 2019 and Quebec, Canada in March 2019. The Quebec claims against the company were discontinued in February 2020. We settled the Ontario and British Columbia claims for $0.1 million. In August 2017, our subsidiary, Meritor do Brasil Sistema Automotivos Ltda., received notice that it was made a formal party to an investigation by the antitrust authority of the Brazilian government relating to the alleged existence of a cartel in the exhaust systems and components market in Brazil. In September 2019, the Brazilian antitrust authority issued a non-binding opinion imputing the conduct of the cartel to Meritor. We do not know whenThe public prosecutor issued a legal opinion in favor of Meritor, and the Brazilian antitrust authority issued a binding ruling will be issued byending the Brazilian antitrust authority. We intendinvestigation with respect to defend ourselves vigorously against the unsettled claims and currently believe the risk of loss would not be material to our financial statements.Meritor.
•Various other lawsuits, claims and proceedings have been or may be instituted or asserted against Meritorthe company or ourits subsidiaries relating to the conduct of our business, including those pertaining to product liability, tax, warranty or recall claims,claims; intellectual property,property; safety and health, contracthealth; commercial and employment matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to Meritor, management believes, after consulting with Meritor's Chief Legal Officer, that the disposition of matters that are pending will not have a material effect on our business, financial condition or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 4A. Information About OurExecutive Officers of the Registrant.
The name, age, positions and offices held with Meritor and principal occupations and employment during the past five years of each of our executive officers as of November 12, 2019,2020, are as follows:
Jeffrey A. Craig, 5960 (Caucasian/White Male) - Chief Executive Officer and President since April 2015 and2015. Director of Meritor since April 2015; President and Chief Operating Officer from June 2014 until April 2015. Mr. Craig has served as a director of Meritor since April 2015; Senior Vice President and President of Commercial Truck & Industrial from February 2013 until May 2014; Senior Vice President and Chief Financial Officer from May 2008 until January 2013; Acting Controller from May 2008 to January 2009; Senior Vice President and Controller from May 2007 until May 2008; Vice President and Controller from May 2006 until April 2007;2007. Prior to joining Meritor, heMr.Craig was President and Chief Executive Officer of General Motors Acceptance Corporation ("GMAC") Commercial Finance (commercial lending service) from 2001 to May 2006 and President and Chief Executive Officer of GMAC’s Business Credit division from 1999 to 2001. He joined GMAC as general auditor in 1997 from Deloitte & Touche, where he served as an audit partner.
Carl D. Anderson II, 5051 (Caucasian/White Male) - Senior Vice President and Chief Financial Officer since March 2019. Group Vice President of Finance from March 2018 until March 2019; Vice President and Treasurer from February 2012 until March 2018; Assistant Treasurer from August 2009 until February 2012; Director of Capital Markets from September 2006 until August 2009. Prior to joining Meritor, Mr. Anderson was Senior Manager of Structured Finance at GMAC from 2003 until 2006; Manager of Treasury GMAC (2002-2003);(GMAC) from 2002 to 2003; Manager of Leasing Group GMAC,(GMAC) from 2000 until 2002; and Senior Analyst, Financial Planning & Analysis GMAC, 1997-2000.(GMAC) from 1997 to 2000. He also held various positions at First Chicago NBD Bank from 1992 until 1996.
April Miller BoiseHannah Lim-Johnson, 5148 (Asian Female) - Senior Vice President, Chief Legal Officer and Corporate Secretary since August 2016.2020. Prior to joining Meritor, Ms. BoiseLim-Johnson was Senior Vice President and Chief Legal Officer at Kelly Services from September 2017 until March 2020; Deputy General Counsel, Head of Global MergersChief Litigation Counsel and Acquisitions andAssistant Corporate Secretary at Avintiv, Inc. (formerly known as The Polymer Group). From 2011Public Service Enterprise Group (PSEG) from October 2016 until 2015, she wasMay 2017; Vice President, General Counsel, Corporate SecretaryChief Litigation and Chief PrivacyCompliance Officer at Veyance Technologies, Inc. (formerly known as Goodyear Engineered Products). From 1999the ADT Corporation from November 2014 to 2010, Ms. Boise was an attorney with Thompson Hine LLP, where she held positions of increasing responsibility, including Managing Partner, ClevelandSeptember 2016 and Vice President and Chief Litigation Officer (ADT Corporation) from June 2012 to November 2014; Senior Litigation Counsel at Tyco International from June 2007 until June 2012; Senior Counsel at Weitz & Luxenberg, P.C. from May 2004 until June 2007; Deputy Attorney General at the Attorney General’s Office Executive Committee Memberin Trenton, New Jersey from August 1998 until May 2004; and Hiring Partner, 2009-2010; Chair, Private Equity Group, 2007-2010; Co-Founder and Chair, Women’s Initiative, 2006-2009; and Partner, Corporate Transactions and Securities, 2002-2010.Law Clerk to Honorable Randolph Michael Subryan from May 1997 until August 1998.
Timothy Heffron, 5556 (Caucasian/White Male) - Senior Vice President, Human Resources and Chief Information Officer since August 2013;2013. Vice President, Chief Information Officer and Shared Services from July 2011 until August 2013; Vice President of Shared Services from June 2008 until July 2011; Prior to joining Meritor, Mr. Heffron was Executive Vice President and Chief Information Officer of GMAC Commercial Finance from January 2002 until June 2008; Director of Reengineering for GMAC from December 1999 until December 2001,2001; Director of Global Information Technology Audit for General Motors Corporation from June 1999 until November 1999; and Assistant General Auditor for GMAC from March 1998 until May 1999. Prior to that, Mr. Heffron spent nine years in public accounting, most recently as an audit senior manager with Ernst & Young.
Chris Villavarayan, 4950 (Indian/South Asian Male) - SeniorExecutive Vice President andPresident, Global Truck Chief Operating Officer since January 2018;2020. Senior Vice President and President of Global Truck from January 2018 to January 2020; Senior Vice President and President for Americas from February 2014 until January 2018; Vice President of Global Manufacturing and Supply Chain Management from June 2012 until February 2014; Managing Director of Meritor India and CEO of MHVSIL and Automotive Axles Ltd. (joint venture between Meritor and Kalyani Group of India) from December 2009 until June 2012; General Manager of European Operations and Worldwide Manufacturing Planning and Strategy from June 2007 until December 2009; Director of Manufacturing Performance Plus from November 2006 until June 2007; Regional Manager of Continuous Improvement from July 2005 until November 2006; Industrialization Project Manager from September 2001 until July 2005; and Site Manager of Meritor St. Thomas, Ontario facility from June 2000 until September 2001.
Joseph Plomin, 57- Senior Vice President and President, Aftermarket, Industrial and Trailer since March 2019; Senior Vice President and President, Aftermarket & Trailer and Quality from January 2018 until March 2018; Vice President and President, International from January 2014 until January 2018; Vice President of International from July 2013 until January 2014; Vice President of Global Brakes from June 2012 until January 2013; Vice President of Truck North America and South America from July 2011 until May 2012; Vice President of Commercial Vehicle Systems Truck from September 2007 until July 2011. Prior to joining Meritor, Mr. Plomin held a variety of executive positions at Delco Remy International, including Senior Vice President of Sales/Marketing/Product Line Management from October 2006 until September 2007; President of Electrical Aftermarket from February 2006 until October 2006; General Manager/Senior Vice President of Heavy Duty/Industrial Division from June 2001 until February 2006; and Senior Vice President of Sales and Marketing, Electrical Division from September 1998 until December 2000.
There are no family relationships, as defined in Item 401 of Regulation S-K, between any of the above executive officers and any director, executive officer or person nominated to become a director or executive officer. No officer of Meritor was selected pursuant to any arrangement or understanding between him or her and any person other than Meritor. All executive officers are elected annually.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Meritor's common stock, par value $1 per share ("Common Stock"), is listed on the New York Stock Exchange ("NYSE") and trades under the symbol "MTOR." On November 12, 2019,11, 2020, there were 9,8759,441 shareholders of record of Meritor's Common Stock.
Our senior secured revolving credit facility permits us to declare and pay up to $65 million of dividends in any fiscal year provided that no default or unmatured default, as defined in the agreement,senior secured revolving credit facility, has occurred and is continuing at the date of declaration or payment.
Additionally, our indentures permit us to pay dividends under the following primary conditions:
•if a default on the notes, as defined in the indentures, has not occurred and is not continuing or shall not occur as a consequence of the payment;
•if the interest coverage ratio, as defined in the indentures, is greater than 2.00 to 1.00 after giving effect to the dividend;
•if the cumulative amount of the dividends paid does not exceed certain cumulative cash and earnings measurements;
•if the dividends are less than $60 million per fiscal year (with a carryover to the next fiscal year of up to $60 million if unused in the current fiscal year); and
•if after giving effect to the dividend, the total leverage ratio, as defined in the indenture,indentures, would not exceed 4.00 to 1.00.
See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for information on securities authorized for issuance under equity compensation plans.
Issuer repurchases
The table below sets forth information with respect to purchases made by or on behalf of us of shares of our Common Stock during the three months ended September 30, 2019:2020:
|
| | | | | | | | | | |
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
| July 1- 31, 2019 | — |
| $ | — |
| — |
| $ | 250,000,000 |
|
| August 1- 31, 2019 | 1,320,453 |
| $ | 18.93 |
| 1,320,453 |
| $ | 225,000,021 |
|
| September 1- 30, 2019 | — |
| $ | — |
| — |
| $ | 225,000,021 |
|
| Total | 1,320,453 |
| | | 1,320,453 |
| |
|
|
| | | | | | | | | | | | | | | | | | | | |
(1)Period | On November 2, 2018, our BoardTotal Number of Directors authorizedShares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the repurchase of up to $200 million of our common stock and up to $100 million aggregate principal amount of any of our debt securities (including convertible debt securities), in each case from time to time through open market purchases, privately negotiated transactionsPlans or otherwise, subject to compliance with legal and regulatory requirements and our debt covenants. These authorizations superseded the prior Programs (1)(2) |
July 2016 repurchase authorizations. On July 26, 2019, the Board of Directors authorized the repurchase of up to $250 million of our common stock from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and our debt covenants. This authorization supersedes the remaining authority under the prior November 2018 equity repurchase authorization.1- 31, 2020 | — | | $ | — | | — | | $ | 59,199,494 | |
| August 1- 31, 2020 | — | | $ | — | | — | | $ | 59,199,494 | |
| September 1- 30, 2020 | — | | $ | — | | — | | $ | 59,199,494 | |
| Total | — | | | | — | | | |
(1) On July 26, 2019, the Board of Directors authorized the repurchase of up to $250 million of the company’s common stock from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and the company’s debt covenants. This authorization superseded the remaining authority under the prior November 2018 equity repurchase authorization. On November 7, 2019, the Board of Directors increased the amount of the repurchase authorization to $325 million.
(2) On March 25, 2020, the company suspended activity under its share repurchase program as a result of uncertainties in the global economy due to the COVID-19 pandemic.
The independent trustee of our 401(k) plans purchases shares in the open market to fund investments by employees in our Common Stock, one of the investment options available under such plans, and any matching contributions in company stock we provide under certain of such plans. In addition, our stock incentive plans permit payment of an option exercise price by means of cashless exercise through a broker and permit the satisfaction of the minimum statutory tax obligations upon exercise of options and the vesting of restricted stock units through stock withholding. However, the company does not believe such purchases or transactions are issuer repurchases for the purposes of this Item 5 of this Annual Report on Form 10-K. In
addition, our stock incentive plans also permit the satisfaction of tax obligations upon the vesting of restricted stock through stock withholding. There were no shares withheld in fiscal year 2019.
Shareholder Return Performance Presentation
The line graph below compares the cumulative total shareholder return of the S&P 500, Meritor, Inc. and the peer group of companies for the period from September 30, 20142015 to September 30, 2019,2020, assuming a fixed investment of $100 at the respective closing prices on the last day of each fiscal year and reinvestment of cash dividends.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 9/15 | | 9/16 | | 9/17 | | 9/18 | | 9/19 | | 9/20 |
| Meritor, Inc. | | 100.00 | | | 104.70 | | | 244.68 | | | 182.13 | | | 174.04 | | | 196.99 | |
| S&P 500 | | 100.00 | | | 115.43 | | | 136.91 | | | 161.43 | | | 168.30 | | | 193.80 | |
Peer Group(1) | | 100.00 | | | 120.09 | | | 166.20 | | | 145.37 | | | 156.93 | | | 196.03 | |
|
| | | | | | | | | | | | | | | | | | |
| | | 9/14 | | 9/15 | | 9/16 | | 9/17 | | 9/18 | | 9/19 |
| Meritor, Inc. | | 100.00 |
| | 97.97 |
| | 102.58 |
| | 239.72 |
| | 178.43 |
| | 170.51 |
|
| S&P 500 | | 100.00 |
| | 99.39 |
| | 114.72 |
| | 136.07 |
| | 160.44 |
| | 167.27 |
|
Peer Group(1) | | 100.00 |
| | 89.13 |
| | 104.90 |
| | 143.55 |
| | 123.51 |
| | 134.51 |
|
| |
(1)The peer group consists of representative commercial vehicle suppliers of approximately comparable products to Meritor. The peer group consists of Commercial Vehicle Group, Inc., Cummins Inc., Dana Incorporated, Haldex AB, Modine Manufacturing Company, SAF-Holland SA, and Stoneridge, Inc.
| The peer group consists of representative commercial vehicle suppliers of approximately comparable products to Meritor. The peer group consists of Commercial Vehicle Group, Inc., Cummins Inc., Dana Incorporated, Haldex AB, Modine Manufacturing Company, SAF-Holland SA, Stoneridge, Inc., and Wabco Holdings Inc. |
The information included under the heading "Shareholder Return Performance Presentation" is not to be treated as "soliciting material" or as "filed" with the SEC, and is not incorporated by reference into any filing by the company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that is made on, before or after the date of filing of this Annual Report on Form 10-K.
Item 6. Selected Financial Data.
The following sets forth selected consolidated financial data. The data should be read in conjunction with the information included under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data below.
| | | | Year Ended September 30, | | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | (in millions, except per share amounts) | | (in millions, except per share amounts) |
| SUMMARY OF OPERATIONS | | | | | |
| | | | | SUMMARY OF OPERATIONS | | | | | | | | | |
| Sales | | | | | |
| | | | | Sales | | | | | | | | | |
Commercial Truck (1) | $ | 3,252 |
| | $ | 3,172 |
| | $ | 2,469 |
| | $ | 2,309 |
| | $ | 2,594 |
| Commercial Truck (1) | $ | 2,190 | | | $ | 3,456 | | | $ | 3,325 | | | $ | 2,606 | | | $ | 2,465 | |
Aftermarket, Industrial and Trailer (1) | 1,313 |
| | 1,176 |
| | 1,032 |
| | 1,027 |
| | 1,069 |
| |
Aftermarket and Industrial (1) | | Aftermarket and Industrial (1) | 981 | | | 1,100 | | | 1,024 | | | 900 | | | 886 | |
Intersegment Sales (1) | (177 | ) | | (170 | ) | | (154 | ) | | (137 | ) | | (158 | ) | Intersegment Sales (1) | (127) | | | (168) | | | (171) | | | (159) | | | (152) | |
| Total Sales | $ | 4,388 |
|
| $ | 4,178 |
| | $ | 3,347 |
| | $ | 3,199 |
| | $ | 3,505 |
| Total Sales | $ | 3,044 | | | $ | 4,388 | | | $ | 4,178 | | | $ | 3,347 | | | $ | 3,199 | |
| | | | | | | | | | | | | | | | | | | | |
Operating Income (2) | $ | 363 |
| | $ | 292 |
| | $ | 218 |
| | $ | 224 |
| | $ | 213 |
| Operating Income (2) | $ | 332 | | | $ | 363 | | | $ | 292 | | | $ | 218 | | | $ | 224 | |
| Income Before Income Taxes | 377 |
| | 278 |
| | 381 |
| | 155 |
| | 67 |
| Income Before Income Taxes | 326 | | | 377 | | | 278 | | | 381 | | | 155 | |
| Net Income Attributable to Noncontrolling Interests | (5 | ) | | (9 | ) | | (4 | ) | | (2 | ) | | (1 | ) | Net Income Attributable to Noncontrolling Interests | (4) | | | (5) | | | (9) | | | (4) | | | (2) | |
| Net Income Attributable to Meritor, Inc.: | | | | | | | | | |
| Net Income Attributable to Meritor, Inc.: | |
| Income from Continuing Operations | $ | 290 |
| | $ | 120 |
| | $ | 325 |
| | $ | 577 |
| | $ | 65 |
| Income from Continuing Operations | $ | 244 | | | $ | 290 | | | $ | 120 | | | $ | 325 | | | $ | 577 | |
| Income (loss) from Discontinued Operations | 1 |
| | (3 | ) | | (1 | ) | | (4 | ) | | (1 | ) | Income (loss) from Discontinued Operations | 1 | | | 1 | | | (3) | | | (1) | | | (4) | |
| Net Income | $ | 291 |
| | $ | 117 |
| | $ | 324 |
| | $ | 573 |
| | $ | 64 |
| Net Income | $ | 245 | | | $ | 291 | | | $ | 117 | | | $ | 324 | | | $ | 573 | |
| | | | | | | | | | | | | | | | | | | | |
| BASIC EARNINGS (LOSS) PER SHARE | | | | | | | |
| | | BASIC EARNINGS (LOSS) PER SHARE | | | | | | | | | |
| Continuing Operations | $ | 3.49 |
| | $ | 1.37 |
| | $ | 3.69 |
| | $ | 6.40 |
| | $ | 0.67 |
| Continuing Operations | $ | 3.30 | | | $ | 3.49 | | | $ | 1.37 | | | $ | 3.69 | | | $ | 6.40 | |
| Discontinued Operations | 0.01 |
| | (0.03 | ) | | (0.01 | ) | | (0.04 | ) | | (0.01 | ) | Discontinued Operations | 0.01 | | | 0.01 | | | (0.03) | | | (0.01) | | | (0.04) | |
| Basic Earnings per Share | $ | 3.50 |
| | $ | 1.34 |
| | $ | 3.68 |
| | $ | 6.36 |
| | $ | 0.66 |
| Basic Earnings per Share | $ | 3.31 | | | $ | 3.50 | | | $ | 1.34 | | | $ | 3.68 | | | $ | 6.36 | |
| | | | | | | | | | | | | | | | | | | | |
| DILUTED EARNINGS (LOSS) PER SHARE | | | | | |
| | | | | DILUTED EARNINGS (LOSS) PER SHARE | | | | | | | | | |
| Continuing Operations | $ | 3.36 |
| | $ | 1.31 |
| | $ | 3.60 |
| | $ | 6.27 |
| | $ | 0.65 |
| Continuing Operations | $ | 3.23 | | | $ | 3.36 | | | $ | 1.31 | | | $ | 3.60 | | | $ | 6.27 | |
| Discontinued Operations | 0.01 |
| | (0.03 | ) | | (0.01 | ) | | (0.04 | ) | | (0.01 | ) | Discontinued Operations | 0.01 | | | 0.01 | | | (0.03) | | | (0.01) | | | (0.04) | |
| Diluted Earnings per Share | $ | 3.37 |
| | $ | 1.28 |
| | $ | 3.59 |
| | $ | 6.23 |
| | $ | 0.64 |
| Diluted Earnings per Share | $ | 3.24 | | | $ | 3.37 | | | $ | 1.28 | | | $ | 3.59 | | | $ | 6.23 | |
| | | | | | | | | | | | | | | | | | | | |
| | FINANCIAL POSITION AT SEPTEMBER 30 | | | | | |
| | | | | FINANCIAL POSITION AT SEPTEMBER 30 | | | | | | | | | |
| Total Assets | $ | 2,815 |
| | $ | 2,726 |
| | $ | 2,782 |
| | $ | 2,494 |
| | $ | 2,195 |
| Total Assets | $ | 2,884 | | | $ | 2,815 | | | $ | 2,726 | | | $ | 2,782 | | | $ | 2,494 | |
| Short-term Debt | 41 |
| | 94 |
| | 288 |
| | 14 |
| | 15 |
| Short-term Debt | 39 | | | 41 | | | 94 | | | 288 | | | 14 | |
| Long-term Debt | 902 |
| | 730 |
| | 750 |
| | 982 |
| | 1,036 |
| Long-term Debt | 1,188 | | | 902 | | | 730 | | | 750 | | | 982 | |
(1)Fiscal years 2019, 2018, 2017 2016 and 20152016 have been recast to reflect reportable segment changes.
(2)Fiscal years 2018, 2017, 2016 and 2015 have been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715).
Income (loss) from continuing operations attributable to Meritor, Inc. in the selected financial data presented above includes the following items specific to the period of occurrence (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Pretax items: | | | | | | | | | |
| Restructuring costs | $ | (27) | | | $ | (8) | | | $ | (6) | | | $ | (6) | | | $ | (16) | |
| Loss on debt extinguishment | — | | | — | | | (8) | | | (36) | | | — | |
| Asset impairment charges, net of noncontrolling interests | (8) | | | (10) | | | (3) | | | (4) | | | — | |
| Asbestos-related liability remeasurement | — | | | 31 | | | (79) | | | (4) | | | (4) | |
| Transaction costs | (5) | | | (6) | | | — | | | — | | | — | |
| Asbestos-related insurance settlements, net | — | | | — | | | 43 | | | 13 | | | 30 | |
| Impact of pension settlement losses and curtailment gain | — | | | — | | | (6) | | | — | | | — | |
| Gain on sale of equity investment | — | | | — | | | — | | | 243 | | | — | |
| Income from WABCO distribution termination | 265 | | | — | | | — | | | — | | | — | |
| Legal settlement charge related to joint venture | — | | | — | | | — | | | (10) | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Supplier litigation settlement | — | | | — | | | — | | | — | | | 6 | |
| | | | | | | | | |
| After tax items: | | | | | | | | | |
Tax valuation allowance reversal, net and other (1) | — | | | 3 | | | 7 | | | 68 | | | 454 | |
| U.S. tax reform impacts | — | | | 3 | | | (89) | | | — | | | — | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Pretax items: | | | | | | | | | |
| Restructuring costs | $ | (8 | ) | | $ | (6 | ) | | $ | (6 | ) | | $ | (16 | ) | | $ | (16 | ) |
| Loss on debt extinguishment | — |
| | (8 | ) | | (36 | ) | | — |
| | (25 | ) |
| Asset impairment charges, net of noncontrolling interests | (10 | ) | | (3 | ) | | (4 | ) | | — |
| | (2 | ) |
| Asbestos-related liability remeasurement | 31 |
| | (79 | ) | | (4 | ) | | (4 | ) | | (1 | ) |
| AxleTech transaction costs | (6 | ) | | — |
| | — |
| | — |
| | — |
|
| Asbestos-related insurance settlements, net | — |
| | 43 |
| | 13 |
| | 30 |
| | — |
|
| Impact of pension settlement losses and curtailment gain | — |
| | (6 | ) | | — |
| | — |
| | (59 | ) |
| Gain on sale of equity investment | — |
| | — |
| | 243 |
| | — |
| | — |
|
| Legal settlement charge related to joint venture | — |
| | — |
| | (10 | ) | | — |
| | — |
|
| Goodwill impairment charges | — |
| | — |
| | — |
| | — |
| | (15 | ) |
| Supplier litigation settlement | — |
| | — |
| | — |
| | 6 |
| | — |
|
| Non-operating gains, net | — |
| | — |
| | — |
| | — |
| | 5 |
|
| After tax items: | | | | | | | | | |
Tax valuation allowance reversal, net and other (1) | 3 |
| | 7 |
| | 68 |
| | 454 |
| | 16 |
|
| U.S. tax reform impacts | 3 |
| | (89 | ) | | — |
| | — |
| | — |
|
| |
(1)(1)The fiscal year September 30, 2019 includes a $3 million decrease in valuation allowances for certain U.S. state jurisdictions. The fiscal year ended September 30, 2018 includes a $9 million reversal of a Brazil valuation allowance, partially offset by a $2 million increase in valuation allowances for certain U.S. state jurisdictions. The fiscal year ended September 30, 2017 includes non-cash income tax benefit (expense) of $52 million related to the partial reversal of the U.S. valuation allowance, $15 million related to capital losses associated with the sale of an equity investment and $1 million related to other correlated tax relief. The fiscal year ended September 30, 2016 includes non-cash income tax benefit (expense) of $438 million related to the partial reversal of the U.S. valuation allowance, ($9) million related to the establishment of a valuation allowance in Brazil and $25 million related to other correlated tax relief.
| The fiscal year ended September 30, 2019 includes $3 million decrease in valuation allowances for certain U.S. state jurisdictions. The fiscal year ended September 30, 2018 includes a $9 million reversal of a Brazil valuation allowance, partially offset by a $2 million increase in valuation allowances for certain U.S. state jurisdictions. The fiscal year ended September 30, 2017 includes non-cash income tax benefit (expense) of $52 million related to the partial reversal of the U.S. valuation allowance, $15 million related to capital losses associated with the sale of an equity investment and $1 million related to other correlated tax relief. The fiscal year ended September 30, 2016 includes non-cash income tax benefit (expense) of $438 million related to the partial reversal of the U.S. valuation allowance, ($9) million related to the establishment of a valuation allowance in Brazil and $25 million related to other correlated tax relief. The fiscal year ended September 30, 2015 includes non-cash income tax benefit of $16 million related to the reversal of valuation allowances in Germany, Italy, Mexico and Sweden. |
Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
Overview
Headquartered in Troy, Michigan, we are a premier global supplier of a broad range of integrated systems, modules and components to OEMs and the aftermarket for the commercial vehicle, transportation and industrial sectors. We serve commercial truck, trailer, military, bus and coach, construction, and other industrial OEMs and certain aftermarkets. Meritor common stock is traded on the New York Stock Exchange under the ticker symbol MTOR.
COVID-19 Pandemic Update
In March 2020 the World Health Organization declared a global health pandemic related to the outbreak of a novel coronavirus. The COVID-19 pandemic adversely affected our financial performance in the second, third and fourth quarters of fiscal year 2020 and could have an impact throughout fiscal year 2021. In response to the COVID-19 pandemic, government health officials have recommended and mandated precautions to mitigate the spread of the virus, including shelter-in-place orders, prohibitions on public gatherings and other similar measures. As a result, we and certain of our customers and suppliers temporarily closed select manufacturing locations beginning late in the second quarter of fiscal year 2020, continuing into the third quarter of fiscal year 2020. As of May 31, 2020, all of our global facilities were back open and operating with limited production. Production volume levels continued to increase through the fourth quarter of fiscal year 2020. Our salaried employees are primarily working remotely until further notice. There is uncertainty around the duration and breadth of the COVID-19 pandemic, as well as the impact it will have on our operations, supply chain and demand for our products. As a result, the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time.
Employee Health and Safety
We established and executed a “Safe Start” plan for the reopening of plants, test labs, distribution centers and administrative facilities. We intend to operate under these enhanced safety guidelines for the foreseeable future. To ensure consistent application and compliance with these safety protocols, we have expanded the role of our Vice President and General Auditor to include responsibilities as Chief Safety Compliance Officer.
Operations
We have complied with various shelter-in-place and similar government orders in various locations around the world, as applicable. The impact of the COVID-19 pandemic led to suspended production in most of our global commercial truck manufacturing facilities at some point during fiscal year 2020. Our operations in China were temporarily suspended in mid-January and resumed production in mid-February while our other manufacturing facilities were suspended late in the second quarter and continued into the third quarter. All of our facilities were fully operational at the end of fiscal year 2020.
As we serve the transportation, industrial and defense industries, we also continued to support customers who are actively engaged in the COVID-19 pandemic response. Our Aftermarket business remained fully operational to maintain the supply of critical replacement parts to the vital truck and trailer transportation network. Our Industrial businesses also remained operational at varying levels to support the production of vehicles deemed critical, including defense, bus and coach, terminal tractor, fire and rescue and off-highway applications. As the COVID-19 situation evolves, we will continue to monitor government and other mandates to understand the potential impact on our operations.
Cost Reductions
In March 2020, we implemented a series of cost reduction measures to preserve our financial flexibility, including a reduction to the base salary of each of our executive officers and salaried employees in the United States and Canada of between 40 percent and 60 percent effective April 1 through April 30, 2020, a reduction between 20 percent and 60 percent effective May 1, 2020 through June 15, 2020 and a reduction between 10 percent and 20 percent effective July 16, 2020 through August 31, 2020. Effective September 1, 2020, base pay for salaried employees was fully restored to pre-pandemic amounts. In March 2020, we implemented a 60 percent reduction to the retainer fees paid to non-employee directors effective April 1, 2020 through June 30, 2020 and a 20 percent reduction from July 1, 2020 through August 31, 2020. Effective September 1, 2020, retainer fees paid to non-employee directors were fully restored to pre-pandemic amounts. We also suspended certain employer-paid retirement and pension contributions and modified certain retiree health benefits effective May 1, 2020. Additionally, on June 2, 2020, we approved a restructuring plan to reduce headcount globally that affects
approximately 8 percent of our global salaried positions, as well as eliminated certain hourly roles. This restructuring plan is intended to reduce labor costs in response to an anticipated decline in most global truck and trailer market volumes. With this restructuring plan, we expect to incur approximately $25 million in employee severance costs across both of our reportable segments. Restructuring actions associated with this plan are expected to be substantially complete by the end of fiscal year 2021. We will continue to evaluate further cost reduction measures as the impact of the COVID-19 pandemic becomes clearer.
Special Incentive Plan
On June 10, 2020, we approved a special incentive plan to better align the compensation of our employees with the strategic goals of the company for the remainder of fiscal year 2020 given the impacts of the ongoing COVID-19 pandemic. Awards under the special incentive plan were also designed to give employees an opportunity, if certain performance targets were met, to recoup lost salary stemming from the base pay reductions instituted by us in response to the pandemic, which were in effect through August 31, 2020. The special incentive plan targets were based on liquidity and cost reduction targets.
Fiscal Year 2020 Results
Our sales for fiscal year 20192020 were $4,388$3,044 million, an increasea decrease from $4,178$4,388 million in the prior year. The increasedecrease in sales was driven by higher truck production,lower market volumes primarily in North America, and increased Aftermarket and Industrial volumes across North America, partially offset by the strengtheningdue to decreased customer demand as a result of the U.S. dollar against most currencies. Sales were also favorably impacted by revenue outperformance.COVID-19 pandemic.
Net income attributable to Meritor for fiscal years 2020 and 2019 was $245 million and 2018 was $291 million, and $117 million, respectively. InLower net income year over year was driven primarily by lower revenues as a result of significantly reduced market volumes due to the COVID-19 pandemic, as well as higher restructuring costs related to actions taken in fiscal year 2018, we incurred $892020. This decrease was partially offset by $203 million of after tax expense related toincome associated with the enactmenttermination of the Tax Cuts and Jobs Actcompany's distribution arrangement with WABCO Holdings, Inc. ("U.S. tax reform"WABCO"), that did not repeat. In in fiscal year 2019, we recognized $31 million of income related to remeasuring the Maremont asbestos liability.2020.
Net income from continuing operations attributable to the company for fiscal years 2020 and 2019 and 2018 was $290$244 million and $120$290 million, respectively. Adjusted income from continuing operations attributable to the company for fiscal years 2020 and 2019 and 2018 was $330$85 million and $276$330 million, respectively (see Non-GAAP Financial Measures below). The decreases in net income and adjusted income from continuing operations attributable to the company year over year were driven primarily by lower revenues as a result of reduced market volumes due to the COVID-19 pandemic.
Adjusted EBITDA (see Non-GAAP Financial Measures below) for fiscal year 20192020 was $520$272 million compared to $474$520 million in fiscal year 2018.2019. Our adjusted EBITDA margin (see Non-GAAP Financial Measures below) in fiscal year 20192020 was 11.98.9 percent compared to 11.311.9 percent in the same period a year ago. Higher adjustedThe decreases in adjusted EBITDA andand adjusted EBITDA margin year over year were driven primarily by conversion on higher revenue andlower revenues as a result of reduced market volumes due to the COVID-19 pandemic. Cost reduction actions executed primarily in the second half of fiscal year 2020 partially offset the impact of Aftermarket pricing actions implemented earlier this year, partially offset by higher material costs and the strengthening of the U.S. dollar against most currencies.from lower revenue.
Cash flows provided by operating activities were $256$265 million in fiscal year 20192020 compared to $251$256 million in the prior fiscal year. Higher earningsThe increase in cash provided by operating activities was driven primarily by $265 million of cash received from the termination of the distribution arrangement with WABCO in fiscal year 2019 were offset by the2020 and a one-time $48 million cash contribution of cash and loan repayment of a loan to fund the Maremont 524(g) Trust following the confirmation of the Maremont plan of reorganization by the bankruptcy courtmade in fiscal year 2019 (see Note 2522 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data)., which did not repeat, largely offset by lower fiscal year 2020 revenues as a result of significantly reduced market volumes primarily due to the impact of the COVID-19 pandemic.
Equity Repurchase Authorization
On July 26, 2019, our Board of Directors authorized the repurchase of up to $250 million of our common stock from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and our debt covenants. This authorization supersedes the remaining authority under the prior November 2018 equity repurchase authorization. InDuring fiscal year 2019,2020, we repurchased 1.310.4 million shares of our common stock for $25$241 million (including commission costs) pursuant to the common stock repurchase authorization described in the Liquidity section below. As of September 30, 2020, the amount remaining available for repurchases was $59 million under this common stock repurchase authorization. On November 7, 2019,March 25, 2020, we suspended activity under our share repurchase program as a result of uncertainties in the Board of Directors increasedglobal economy due to the amount of this repurchase authorization to $325 million.COVID-19 pandemic.
WABCO Distribution Arrangement
On November 2, 2018, our Board of Directors authorized the repurchase of up to $200 millionSeptember 13, 2019, we gave notice of our common stockintention to exercise our option to terminate the aftermarket distribution arrangement with WABCO. On March 13, 2020, we closed on the transaction and received $265 million from time to time through open market purchases, privately negotiated transactions or otherwise, subject to complianceWABCO in connection with legal and regulatory requirements and our debt covenants. In fiscal year 2019, we repurchased 4 million shares of our common stock for $71 million (including commission costs) under this repurchase authorization.
Acquisition of AxleTech Business
On July 26, 2019, we acquired 100 percentthe termination of the voting equity interest of the AxleTech group companies for approximately $179 million in cash, subject to certain purchase price adjustments. The addition of AxleTech enhances our growth platform with the addition of a complementary product portfolio that includes a full line of independent suspensions, axles, braking solutions and drivetrain components across the off-highway, defense, specialty and aftermarket markets.arrangement.
Reportable Segment Changes
On March 13, 2019,May 4, 2020, we realigned our operations resulting in a change to our operating and reportable segments. As of the secondthird quarter of fiscal year 2019,2020, the reportable segments are (1) Commercial Truck and (2) Aftermarket Industrial and Trailer.Industrial. Prior year reportable segment financial results have been recast for these changes.
Maremont Bankruptcy
InOn June 8, 2020, we issued $300 million of 6.25 percent senior unsecured notes due 2025. Net proceeds from the first quarter of fiscal year 2019, Maremont and its three wholly-owned subsidiaries, Maremont Exhaust Products, Inc., AVM, Inc., and Former Ride Control Operating Company, Inc., began to solicit votes from asbestos claimants in favor of a Joint Pre-Packaged Plan of Reorganization (the "Plan"). On January 18, 2019, the Plan was approved by voting asbestos claimants and, on January 22, 2019, Maremont and its subsidiaries voluntarily filed cases under Chapter 11offering of the U.S. Bankruptcy Code in6.25 percent notes due 2025, as well as cash on hand, were used to repay the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") seeking to implement the Plan through the Chapter 11 cases. Among other things, the Plan was intended to permanently resolve all current and future asbestos claims related to Maremont's historical asbestos-related activities through the creation of a trust pursuant to Section 524(g) of the U.S. Bankruptcy Code (the "524(g) Trust"). Meritor determined that the net amount of $51then outstanding $304 million Maremont would be required to contribute to the 524(g) Trust according to the Plan represented Meritor's best estimate of Maremont's net asbestos liability. As a result, Meritor recognized $31 million of income related to remeasuring the Maremont net asbestos liability based on the terms of the Plan.balance under our senior secured revolving credit facility.
As of January 22, 2019, Maremont and its subsidiaries were deconsolidated from the Consolidated Balance Sheet and the results of Maremont’s operations were eliminated from the company’s consolidated results of operations as Maremont became subject to the control of a court. Deconsolidation had an insignificant impact on the Consolidated Statement of Operations.
The Plan was confirmed by the U.S. Bankruptcy Court for the District of Delaware on May 17, 2019 and approved by the United States District Court for the District of Delaware on June 27, 2019. On July 9, 2019, the company contributed $48 million, consisting of cash and repayment of a loan to Maremont, and Maremont funded the 524(g) Trust with such cash and its other assets, including its existing insurance policies. As a result, all current and future asbestos claims related to the Maremont’s historical asbestos-related activities have been channeled to the 524(g) Trust, which will process and satisfy all such claims going forward pursuant to its resolution and payment procedures.
Trends and Uncertainties
Industry Production Volumes
The following table reflects estimated on-highway commercial truck production volumes for selected original equipment (OE) markets based on available sources and management's estimates.
| | | | Year Ended September 30, | | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Estimated Commercial Truck production (in thousands): | | | | | | | | | | Estimated Commercial Truck production (in thousands): | | | | | | | | | |
| North America, Heavy-Duty Trucks | 359 |
|
| 307 |
|
| 237 |
|
| 253 |
|
| 328 |
| North America, Heavy-Duty Trucks | 218 | | | 359 | | | 307 | | | 237 | | | 253 | |
| North America, Medium-Duty Trucks | 288 |
|
| 264 |
|
| 246 |
|
| 239 |
|
| 235 |
| North America, Medium-Duty Trucks | 221 | | | 287 | | | 264 | | | 246 | | | 239 | |
| North America, Trailers | 335 |
| | 313 |
| | 282 |
| | 292 |
| | 303 |
| North America, Trailers | 231 | | | 336 | | | 313 | | | 282 | | | 292 | |
| Western Europe, Heavy- and Medium-Duty Trucks | 485 |
|
| 484 |
|
| 469 |
|
| 449 |
|
| 403 |
| Western Europe, Heavy- and Medium-Duty Trucks | 345 | | | 485 | | | 484 | | | 469 | | | 449 | |
| South America, Heavy- and Medium-Duty Trucks | 109 |
|
| 102 |
|
| 73 |
|
| 61 |
|
| 89 |
| South America, Heavy- and Medium-Duty Trucks | 99 | | | 109 | | | 102 | | | 73 | | | 61 | |
| | India, Heavy- and Medium-Duty Trucks | 410 |
| | 464 |
| | 315 |
| | 339 |
| | 297 |
| India, Heavy- and Medium-Duty Trucks | 134 | | | 376 | | | 464 | | | 315 | | | 339 | |
Across most regions, we are expecting production build to decreaseincrease in fiscal year 2020,2021, as discussed below.
North America:
Production volumes in fiscal year 2019 increased2020 significantly decreased from the production levels experienced in fiscal year 2018.2019. We expect fiscal 20202021 Heavy-Duty Truck production volumes to decrease approximately 30 percentincrease compared with the levels experienced in fiscal year 2019.2020.
Western Europe:
During fiscal year 2019,2020, production volumes in Western Europe remained relatively consistent withsignificantly decreased from the production levels experienced in fiscal year 2018.2019. We expect fiscal year 20202021 production volumes to be down modestlyincrease compared with the levels experienced in fiscal year 2019.2020.
South America:
During fiscal year 2019,2020, production volumes in South America increased slightly from the levels experienced in fiscal year 2018. We expect fiscal year 2020 production volumes to increase slightly from the levels experienced in fiscal year 2019.
China:
During fiscal year 2019, production volumes in China decreased from the levels experienced in fiscal year 2018.2019. We expect fiscal year 2021 production volumes to increase from the levels experienced in fiscal year 2020.
China:
During fiscal year 2020, production volumes in China significantly increased from the levels experienced in fiscal year 2019. We expect fiscal year 2021 production volumes in China to decrease from the levels experienced in fiscal year 2019.2020.
India:
During fiscal year 2019,2020, production volumes in India significantly decreased from the levels experienced in fiscal year 2018.2019. We expect fiscal year 20202021 production volumes in India to decreasesignificantly increase from the levels experienced in fiscal year 2019.2020.
Industry-Wide Issues and Other Significant Issues
Our business continues to address a number of challenging industry-wide issues including the following:
•Uncertainty regarding the duration and severity of the COVID-19 pandemic and its effects on public health, the global economy, financial markets and operations, including additional expense related to enhancing safety measures for our employees;
•Uncertainty around the global marketeconomic outlook;
•Volatility in price and availability of steel, components, transportation costs and other commodities;commodities, including energy;
•Potential for disruptions in the financial markets and their impact on the availability and cost of credit;
Volatile energy and transportation costs;
•Impact of currency exchange rate volatility; and
•Consolidation and globalization of OEMs and their suppliers.
Other
Other significant factors that could affect our results and liquidity include:
•Significant contract awards or losses of existing contracts or failure to negotiate acceptable terms in contract renewals;
•Ability to successfully execute and implement strategic initiatives, including the ability to launch a significant number of new products, including potential product quality issues, and obtain new business;
•Ability to manage possible adverse effects on European markets or our European operations, or financing arrangements related thereto, following the United Kingdom's decision to exit the European Union, or in the event one or more other countries exit the European monetary union;
•Ability to further implement planned productivity, cost reduction and other margin improvement initiatives;
Ability to successfully execute and implement strategic initiatives;
•Ability to work with our customers to manage rapidly changing production volumes;
Ability to recover, and timingvolumes, including in the event of recovery of, steel price and other cost increases from our customers;
Any unplanned extended shutdowns or production interruptions byaffecting us, our customers or our suppliers;
A significant deterioration or slowdown in economic activity in the key markets in which we operate;
•Competitively driven price reductions to our customers;
Potentialcustomers or potential price increases from our suppliers;
•Additional restructuring actions and the timing and recognition of restructuring charges, including any actions associated with prolonged softness in markets in which we operate;
•Higher-than-planned warranty expenses, including the outcome of known or potential recall campaigns;
•Uncertainties of asbestos claim, environmental and other legal proceedings, the long-term solvency of our insurance carriers and the potential for higher-than-anticipated costs resulting from environmental liabilities, including those related to site remediation;
•Significant pension costs; and
•Restrictive government actions (such as restrictions on transfer of funds and trade protection measures, including import and export duties, quotas and customs duties and tariffs); and.
Significant pension costs.
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 attributable to the company, adjusted diluted earnings (loss) per share from continuing operations, adjusted EBITDA, adjusted EBITDA margin, segment adjusted EBITDA, segment adjusted EBITDA margin, and free cash flow and net debt.flow.
Adjusted income (loss) from continuing operations attributable to the company and adjusted diluted earnings (loss) per share from continuing operations are defined as reported income (loss) from continuing operations and reported diluted earnings (loss) per share from continuing operations before restructuring expenses, asset impairment charges, non-cash tax expense, including the use of deferred tax assets in jurisdictions with net operating loss carry forwards or tax credits, 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. Segment adjusted 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, asset impairment charges and other special items as determined by management. Segment adjusted EBITDA excludes unallocated legacy and corporate expense (income), net. Segment adjusted EBITDA margin is defined as segment adjusted EBITDA divided by consolidated sales from continuing operations, either in the aggregate or by segment as applicable. Free cash flow is defined as cash flows provided by (used for) operating activities less capital expenditures. Net debt is defined as total debt less cash and cash equivalents.
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, adjusted EBITDA, adjusted EBITDA margin, segment adjusted EBITDA, segment adjusted EBITDA margin, adjusted income (loss) from continuing operations attributable to the company and adjusted diluted earnings (loss) per share from continuing operations are meaningful measures of performance to investors as they are commonly utilized to analyze financial performance in our industry, perform analytical comparisons, benchmark performance between periods and measure our performance against externally communicated targets.
Free cash flow is used by investors and management to analyze our ability to service and repay debt, and return value directly to shareholders. Net debtFree cash flow over adjusted EBITDAincome from continuing operations is a specific financial measure in our current M2019M2022 plan used to measure the company’s leverage in ordercompany's ability to assist management in its assessment of appropriate allocation of capital.convert earnings to free cash flow.
Management uses the aforementioned non-GAAP financial measures for planning and forecasting purposes, and segment adjusted EBITDA is also used as the primary basis for the Chief Operating Decision Maker ("CODM") to evaluate the performance of each of our reportable segments.
Our Board of Directors uses adjusted EBITDA margin, free cash flow, adjusted diluted earnings (loss) per share from continuing operations and net debtfree cash flow over adjusted EBITDAincome from continuing operations as key metrics to determine management’s performance under our performance-based compensation plans.
Adjusted income (loss) from continuing operations attributable to the company, adjusted diluted earnings (loss) per share from continuing operations, adjusted EBITDA, adjusted EBITDA margin, segment adjusted EBITDA and segment adjusted EBITDA margin should not be considered a substitute for the reported results prepared in accordance with GAAP and should not be considered as an alternativealternatives to net income as an indicatorindicators of our financial performance. 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, this non-GAAP cash flow measure does not reflect cash used to repay debt or cash received from the divestituresdivestiture of businesses or sales of other assets and thus does not reflect funds available for investment or other discretionary uses. Net debt should not be considered a substitute for total debt as reported on the balance sheet. 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).
| | | | Year Ended September 30, | | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 | | 2020 | | 2019 | | 2018 |
| Income from continuing operations attributable to the company | $ | 290 |
| | $ | 120 |
| | $ | 325 |
| Income from continuing operations attributable to the company | $ | 244 | | | $ | 290 | | | $ | 120 | |
Restructuring costs | 8 |
| | 6 |
| | 6 |
| Restructuring costs | 27 | | | 8 | | | 6 | |
| Loss on debt extinguishment | — |
| | 8 |
| | 36 |
| Loss on debt extinguishment | — | | | — | | | 8 | |
Asset impairment charges, net of noncontrolling interests (1) | 10 |
| | 3 |
| | 3 |
| |
| Gain on sale of equity investment | — |
| | — |
| | (243 | ) | |
Non-cash tax expense (2) | 51 |
| | 36 |
| | 37 |
| |
U.S. tax reform impacts (3) | (3 | ) | | 89 |
| | — |
| |
Tax valuation allowance reversal, net and other (4) | (3 | ) | | (7 | ) | | (68 | ) | |
Income tax expense (benefits) (5) | 2 |
| | (10 | ) | | 74 |
| |
Pension settlement loss (6) | — |
| | 6 |
| | — |
| |
AxleTech transaction costs (7) | 6 |
| | — |
| | — |
| |
| Asset impairment charges | | Asset impairment charges | 8 | | | 10 | | | 3 | |
| Non-cash tax expense (1) | | Non-cash tax expense (1) | 12 | | | 51 | | | 36 | |
U.S. tax reform impacts (2) | | U.S. tax reform impacts (2) | — | | | (3) | | | 89 | |
Tax valuation allowance reversal, net and other (3) | | Tax valuation allowance reversal, net and other (3) | — | | | (3) | | | (7) | |
Income tax expense (benefits) (4) | | Income tax expense (benefits) (4) | 54 | | | 2 | | | (10) | |
Pension settlement loss (5) | | Pension settlement loss (5) | — | | | — | | | 6 | |
Transaction costs (6) | | Transaction costs (6) | 5 | | | 6 | | | — | |
| Income from WABCO distribution termination | | Income from WABCO distribution termination | (265) | | | — | | | — | |
Asbestos related items (8)(7) | (31 | ) | | 25 |
| | — |
| — | | | (31) | | | 25 | |
| Adjusted income from continuing operations attributable to the company | $ | 330 |
|
| $ | 276 |
| | $ | 170 |
| Adjusted income from continuing operations attributable to the company | $ | 85 | | | $ | 330 | | | $ | 276 | |
| | | | | | | | | | | | |
| Diluted earnings per share from continuing operations | $ | 3.36 |
| | $ | 1.31 |
| | $ | 3.60 |
| Diluted earnings per share from continuing operations | $ | 3.23 | | | $ | 3.36 | | | $ | 1.31 | |
| Impact of adjustments on diluted earnings per share | 0.46 |
| | 1.72 |
| | (1.72 | ) | Impact of adjustments on diluted earnings per share | (2.11) | | | 0.46 | | | 1.72 | |
| Adjusted diluted earnings per share from continuing operations | $ | 3.82 |
| | $ | 3.03 |
| | $ | 1.88 |
| Adjusted diluted earnings per share from continuing operations | $ | 1.12 | | | $ | 3.82 | | | $ | 3.03 | |
(1) The year ended September 30, 2019 includes $9 million related to the impairment of the customer relationships intangible asset and $1 million related to impairment of other assets.
(2) Represents tax expense including the use of deferred tax assets in jurisdictions with net operating loss carry forwards or tax credits.
(3)(2) The year ended September 30, 2019 includes a one time net charge of $9 million recorded for an election made that will allow for future tax-feetax-free repatriation of cash to the United States and $12 million of non-cash tax benefit related to the one time deemed repatriation of accumulated foreign earnings.Theearnings. The year ended September 30, 2018 includes $57 million of non-cash tax expense related to the revaluation of our deferred tax assets and liabilities as a result of the U.S. tax reform, $26 million of non-cash tax expense related to the one-time deemed repatriation of accumulated foreign earnings and $6 million of non-cash tax expense related to other adjustments.
(4)(3) The year ended September 30, 2019 includes a $3 million decrease in valuation allowances for certain U.S. state jurisdictions. The year ended September 30, 2018 includes a $9 million reversal of a Brazil valuation allowance, partially offset by a $2 million increase in valuation allowances for certain U.S. state jurisdictions.
(4) The year ended September 30, 20172020 includes non-cash$62 million of income tax benefit (expense) of $52 millionexpense related to the partial reversalWABCO distribution arrangement termination, $6 million of the U.S. valuation allowance, $15 millionincome tax benefits related to capital losses associated with the salerestructuring, $1 million of an equity investmentincome tax benefits related to transaction costs and $1 million of income tax benefits related to other correlated tax relief.
(5)asset impairment charges. The year ended September 30, 2019 includes $2 million of income tax benefits related to restructuring, $2 million of income tax benefits related to asset impairment and $6 million income tax expense related to asbestos related items. The year ended September 30, 2018 includes $2 million of income tax benefits related to thea loss on debt extinguishment, $6 million of income tax benefits related to asbestos related items, $1 million of restructuring and $1 million of asset impairment. The year ended September 30, 2017 includes $89 million of income tax expensebenefits related to the gain on sale of an equity investment, $14 million of income tax benefit related to the loss on debt extinguishmentrestructuring and $1 million of income tax benefits related to other adjustments.asset impairment.
(6)(5) The year ended September 30, 2018 includes $6 million related to the U.K. pension settlement loss.
(7)(6) Represents acquisition transaction fees and inventory step-up amortization.
(8)(7) The year ended September 30, 2019 includes $31 million related to the remeasurement of the Maremont net asbestos liability based on the Plan.Maremont plan of reorganization (see Note 22 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data). The year ended September 30, 2018 includes $25 million related to the change in estimate resulting from change in estimated forecast horizon and the 2018 asbestos insurance settlement.
Free cash flow is reconciled to cash flows provided by operating activities below (in millions).
| | | | Year Ended September 30, | | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 | | 2020 | | 2019 | | 2018 |
| Cash provided by operating activities | $ | 256 |
| | $ | 251 |
| | $ | 176 |
| Cash provided by operating activities | $ | 265 | | | $ | 256 | | | $ | 251 | |
| Capital expenditures | (103 | ) | | (104 | ) | | (95 | ) | Capital expenditures | (85) | | | (103) | | | (104) | |
Free cash flow (1) | $ | 153 |
| | $ | 147 |
| | $ | 81 |
| Free cash flow (1) | $ | 180 | | | $ | 153 | | | $ | 147 | |
| Free cash flow conversion (2) | | Free cash flow conversion (2) | 212 | % | | 46 | % | | 53 | % |
(1) The year ended September 30, 2020 includes $265 million of cash received from termination of the WABCO distribution arrangement. The year ended September 30, 2019 includes a $48 million contribution of cash to fund the Maremont 524(g) Trust,trust, as well as $2 million of Maremont cash
Adjusted EBITDA and segment adjusted EBITDA are reconciled to net income attributable to Meritor, Inc. below (in(dollars in millions).
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| Net income attributable to Meritor, Inc. | $ | 245 | | | $ | 291 | | | $ | 117 | |
| Less: Loss (income) from discontinued operations, net of tax, attributable to Meritor, Inc. | (1) | | | (1) | | | 3 | |
| Income from continuing operations, net of tax, attributable to Meritor, Inc. | $ | 244 | | | $ | 290 | | | $ | 120 | |
| | | | | |
| | | | | |
| | | | | |
| Interest expense, net | 66 | | | 57 | | | 67 | |
| Gain on sale of equity investment | — | | | — | | | — | |
| Provision for income taxes | 78 | | | 82 | | | 149 | |
| Depreciation and amortization | 101 | | | 87 | | | 84 | |
| Restructuring costs | 27 | | | 8 | | | 6 | |
| Asbestos related items | — | | | (31) | | | 25 | |
| Transaction costs | 5 | | | 6 | | | — | |
| Pension settlement loss | — | | | — | | | 6 | |
| Loss on sale of receivables | 4 | | | 6 | | | 5 | |
| Asset impairment charges | 8 | | | 10 | | | 3 | |
| Income from WABCO distribution termination | (265) | | | — | | | — | |
| Noncontrolling interests | 4 | | | 5 | | | 9 | |
| Adjusted EBITDA | $ | 272 | | | $ | 520 | | | $ | 474 | |
| | | | | |
Adjusted EBITDA margin (1) | 8.9 | % | | 11.9 | % | | 11.3 | % |
| | | | | |
Unallocated legacy and corporate expense (income), net (2) | (6) | | | (3) | | | 13 | |
| Segment adjusted EBITDA | $ | 266 | | | $ | 517 | | | $ | 487 | |
| | | | | |
Commercial Truck (3) | | | | | |
| Segment adjusted EBITDA | $ | 116 | | | $ | 342 | | | $ | 345 | |
Segment adjusted EBITDA margin (4) | 5.3 | % | | 9.9 | % | | 10.4 | % |
| | | | | |
Aftermarket and Industrial (3) | | | | | |
| Segment adjusted EBITDA | $ | 150 | | | $ | 175 | | | $ | 142 | |
Segment adjusted EBITDA margin (4) | 15.3 | % | | 15.9 | % | | 13.9 | % |
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 |
| Net income attributable to Meritor, Inc. | $ | 291 |
| | $ | 117 |
| | $ | 324 |
|
| Loss from discontinued operations, net of tax, attributable to Meritor, Inc. | (1 | ) | | 3 |
| | 1 |
|
| Income from continuing operations, net of tax, attributable to Meritor, Inc. | $ | 290 |
| | $ | 120 |
| | $ | 325 |
|
| | | | | | |
| Interest expense, net | 57 |
| | 67 |
| | 119 |
|
| Gain on sale of equity investment | — |
| | — |
| | (243 | ) |
| Provision for income taxes | 82 |
| | 149 |
| | 52 |
|
| Depreciation and amortization | 87 |
| | 84 |
| | 75 |
|
| Restructuring costs | 8 |
| | 6 |
| | 6 |
|
| Asbestos related items | (31 | ) | | 25 |
| | — |
|
| AxleTech transaction costs | 6 |
| | — |
| | — |
|
| Pension settlement loss | — |
| | 6 |
| | — |
|
| Loss on sale of receivables | 6 |
| | 5 |
| | 5 |
|
| Asset impairment charges, net of noncontrolling interests | 10 |
| | 3 |
| | 4 |
|
| Noncontrolling interests | 5 |
| | 9 |
| | 4 |
|
| Adjusted EBITDA | $ | 520 |
| | $ | 474 |
| | $ | 347 |
|
| | | | | | |
Adjusted EBITDA margin (1) | 11.9 | % | | 11.3 | % | | 10.4 | % |
| | | | | | |
Unallocated legacy and corporate expense (income), net (2) | (3 | ) | | 13 |
| | 3 |
|
| Segment adjusted EBITDA | $ | 517 |
| | $ | 487 |
| | $ | 350 |
|
| | | | | | |
Commercial Truck (3) | | | | | |
| Segment adjusted EBITDA | $ | 327 |
| | $ | 337 |
| | $ | 224 |
|
Segment adjusted EBITDA margin (4) | 10.1 | % | | 10.6 | % | | 9.1 | % |
| | | | | | |
Aftermarket, Industrial and Trailer (3) | | | | | |
| Segment adjusted EBITDA | $ | 190 |
| | $ | 150 |
| | $ | 126 |
|
Segment adjusted EBITDA margin(4) | 14.5 | % | | 12.8 | % | | 12.2 | % |
(1) Adjusted EBITDA margin equals adjusted EBITDA divided by consolidated sales from continuing operations.
(2) Unallocated legacy and corporate expense (income), net represents items that are not directly related to the company's business segments. These items primarily include asbestos-related charges and settlements, pension and retiree medical costs associated with sold businesses, and other legacy costs for environmental and product liability.
(3) Amounts for the years ended September 30, 20182019 and 20172018 have been recast to reflect reportable segment changes.
(4) Segment adjusted EBITDA margin equals segment adjusted EBITDA divided by consolidated sales from continuing operations, either in the aggregate or by segment as applicable.
Net debt is reconciled to total debt below (dollars in millions).
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Short-term debt | $ | 41 |
| | $ | 94 |
|
| Long-term debt | 902 |
| | 730 |
|
| Total debt | 943 |
| | 824 |
|
| Less: Cash and cash equivalents | (108 | ) | | (115 | ) |
| Net debt | $ | 835 |
| | $ | 709 |
|
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Adjusted EBITDA | $ | 520 |
| | $ | 474 |
|
| | | | |
| Net debt over adjusted EBITDA | 1.6 |
| | 1.5 |
|
Non-Consolidated Joint Ventures
At September 30, 2019,2020, our continuing operations included investments in joint ventures that are not majority owned or controlled and are accounted for under the equity method of accounting. Our investments in non-consolidated joint ventures totaled $107 million at September 30, 2020 and $110 million at September 30, 2019 and $102 million at September 30, 2018.2019.
These strategic alliances provide for sales, product design, development and/or manufacturing in certain product and geographic areas. Aggregate sales of our non-consolidated joint ventures were $696 million, $1,231 million $1,101 million and $1,156$1,101 million in fiscal years 2020, 2019 and 2018, and 2017, respectively.
Our equity in the earnings of affiliates was $14 million, $31 million, $27 million and $48$27 million in fiscal years 2020, 2019 2018 and 2017,2018, respectively. The decrease in equity in earnings of affiliates for fiscal year 20182020 compared to fiscal year 20172019 was primarily attributable to Meritor WABCO earnings that were included in fiscal year 2017 results but not in fiscal year 2018. Our equity indecreased production due to the earnings of Meritor WABCO was $27 million in fiscal year 2017.COVID-19 pandemic. We received cash dividends from our affiliates of $10 million, $23 million $17 million and $44$17 million in fiscal years 2020, 2019 and 2018, and 2017, respectively. We received cash dividends from Meritor WABCO of $36 million in fiscal year 2017, which includes a $8 million final partnership distribution received immediately prior to closing of the sale transaction on October 1, 2017.
For more information about our non-consolidated joint ventures, see Note 1512 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Results of Operations
Fiscal Year 2020 Compared to Fiscal Year 2019
Sales
The following table reflects total company and business segment sales for fiscal years 2020 and 2019 (dollars in millions). 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Dollar Change Due To |
| 2020 | | 2019 (1) | | Dollar
Change | | %
Change | | Currency | | Volume/ Other |
| Sales: | | | | | | | | | | | |
| Commercial Truck | | | | | | | | | | | |
| North America | $ | 1,181 | | | $ | 1,966 | | | $ | (785) | | | (40) | % | | $ | — | | | $ | (785) | |
| Europe | 465 | | | 659 | | | (194) | | | (29) | % | | (5) | | | (189) | |
| South America | 169 | | | 248 | | | (79) | | | (32) | % | | (36) | | | (43) | |
| China | 134 | | | 153 | | | (19) | | | (12) | % | | (4) | | | (15) | |
| India | 71 | | | 197 | | | (126) | | | (64) | % | | (1) | | | (125) | |
| Other | 60 | | | 84 | | | (24) | | | (29) | % | | (1) | | | (23) | |
| Total External Sales | $ | 2,080 | | | $ | 3,307 | | | $ | (1,227) | | | (37) | % | | $ | (47) | | | $ | (1,180) | |
| Intersegment Sales | 110 | | | 149 | | | (39) | | | (26) | % | | (3) | | | (36) | |
| Total Sales | $ | 2,190 | | | $ | 3,456 | | | $ | (1,266) | | | (37) | % | | $ | (50) | | | $ | (1,216) | |
| | | | | | | | | | | |
| Aftermarket and Industrial | | | | | | | | | | | |
| North America | $ | 803 | | | $ | 974 | | | $ | (171) | | | (18) | % | | $ | (2) | | | $ | (169) | |
| Europe | 156 | | | 107 | | | 49 | | | 46 | % | | (1) | | | 50 | |
| Other | 5 | | | — | | | 5 | | | N/A | | — | | | 5 | |
| Total External Sales | $ | 964 | | | $ | 1,081 | | | $ | (117) | | | (11) | % | | $ | (3) | | | $ | (114) | |
| Intersegment Sales | 17 | | | 19 | | | (2) | | | (11) | % | | (1) | | | (1) | |
| Total Sales | $ | 981 | | | $ | 1,100 | | | $ | (119) | | | (11) | % | | $ | (4) | | | $ | (115) | |
| | | | | | | | | | | |
| Total External Sales | $ | 3,044 | | | $ | 4,388 | | | $ | (1,344) | | | (31) | % | | $ | (50) | | | $ | (1,294) | |
(1) Amounts for the year ended September 30, 2019 have been recast to reflect reportable segment changes.
Commercial Truck sales were $2,190 million in fiscal year 2020, down 37 percent from fiscal year 2019. Lower sales were driven by significantly lower market volumes driven by decreased customer demand and government mandates as a result of the COVID-19 pandemic. The majority of our production facilities were idled during the month of April with production increasing throughout the remainder of fiscal year 2020.
Aftermarket and Industrial sales were $981 million in fiscal year 2020, down 11 percent from fiscal year 2019. Lower sales were primarily driven by decreased volumes across the segment. While Aftermarket sites were not idled during fiscal year 2020, sales were lower compared to fiscal year 2019 due to changes in customer demand and the impact from the termination of the WABCO distribution arrangement. Industrial sales were also down, driven primarily by decreased volumes as a result of the impact of the COVID-19 pandemic, partially offset by the revenue generated from the AxleTech business.
| | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended | | | | |
| 2020 | | 2019 | | Increase (Decrease) | | %
Change |
| Sales | $ | 3,044 | | | $ | 4,388 | | | $ | (1,344) | | | (31) | % |
| Cost of sales | (2,716) | | | (3,748) | | | (1,032) | | | (28) | % |
| GROSS MARGIN | 328 | | | 640 | | | (312) | | | (49) | % |
| Selling, general and administrative | (221) | | | (256) | | | (35) | | | (14) | % |
| Income from WABCO distribution termination | 265 | | | — | | | 265 | | | N/A |
| Other operating expense, net | (40) | | | (21) | | | 19 | | | 90 | % |
| OPERATING INCOME | 332 | | | 363 | | | (31) | | | (9) | % |
| Other income | 46 | | | 40 | | | 6 | | | 15 | % |
| Equity in earnings of affiliates | 14 | | | 31 | | | (17) | | | (55) | % |
| Interest expense, net | (66) | | | (57) | | | 9 | | | 16 | % |
| INCOME BEFORE INCOME TAXES | 326 | | | 377 | | | (51) | | | (14) | % |
| Provision for income taxes | (78) | | | (82) | | | (4) | | | (5) | % |
| INCOME FROM CONTINUING OPERATIONS | 248 | | | 295 | | | (47) | | | (16) | % |
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax | 1 | | | 1 | | | — | | | — | % |
| NET INCOME | 249 | | | 296 | | | (47) | | | (16) | % |
| Less: Net income attributable to noncontrolling interests | (4) | | | (5) | | | (1) | | | (20) | % |
| NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 245 | | | $ | 291 | | | $ | (46) | | | (16) | % |
Cost of Sales and Gross Profit
Cost of sales primarily represents material, labor and overhead production costs associated with the company’s products and production facilities. Cost of sales for fiscal year 2020 was $2,716 million, compared to $3,748 million in the prior year, representing a 28 percent decrease, primarily driven by decreased market volumes. Total cost of sales was approximately 89 percent of sales for fiscal year 2020, compared to approximately 85 percent for the prior fiscal year.
The following table summarizes significant factors contributing to the changes in costs of sales during fiscal year 2020 compared to the prior fiscal year (in millions):
| | | | | |
| Cost of Sales |
| Fiscal year ended September 30, 2019 | $ | 3,748 | |
| Volumes, mix and other, net | (985) | |
| Foreign exchange | (47) | |
| Fiscal year ended September 30, 2020 | $ | 2,716 | |
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 | $ | (911) | |
| Lower labor and overhead costs | (130) | |
| Other, net | 9 | |
| Total change in cost of sales | $ | (1,032) | |
Materialcosts represent the majority of our cost of sales and include raw materials, composed primarily of steel and purchased components. Material costs decreased by $911 million compared to the prior fiscal year primarily due to significantly lower volumes. The third quarter of fiscal year 2020 was significantly impacted by the idling of production facilities. The majority of the company’s manufacturing facilities were idled during the month of April 2020 with production increasing throughout the remainder of fiscal year 2020.
Labor and overhead costs decreased by $130 million compared to the prior fiscal year primarily year primarily due to lower volumes. During the third quarter of fiscal year 2020, we executed certain cost actions in order to decrease the impacts of the significantly lower production levels. These actions included hourly employee layoffs and other discretionary spending reductions. Incentive compensation costs were also lower compared to the prior fiscal year.
Gross margin for fiscal year 2020 was $328 million,compared to $640 million in fiscal year 2019. Gross margin, as a percentage of sales, was 10.8 percent and 14.6 percent for fiscal years 2020 and 2019, respectively. Gross margin as a percentage of sales decreased as lower sales more than offset the lower material, labor and overhead costs.
Other Income Statement Items
Selling, general and administrative expenses ("SG&A")were $221 million in fiscal year 2020, compared to $256 million in fiscal year 2019, a decrease of $35 million. In fiscal year 2019, we recognized $31 million related to remeasuring the Maremont asbestos liability based on the Plan in the first quarter of fiscal year 2019 (see Note 22 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data). Excluding Maremont, SG&A was lower primarily in fiscal year 2020 due to certain actions executed in the third quarter of fiscal year 2020, that continued through the fourth quarter of fiscal year 2020, in order to decrease the impacts of the significantly lower production levels. These actions included temporary salary reductions, employee headcount reductions, and other discretionary spend reductions. Incentive compensation costs were also lower compared to the prior year. This was partially offset by additional costs generated from our AxleTech business, which acquired in the fourth quarter of fiscal year 2019, as well as higher electrification costs.
Operating income for fiscal year 2020 was $332 million, compared to $363 million in fiscal year 2019. Key items affecting income are discussed above.
Other income, net for fiscal year 2020 was $46 million, compared to $40 million in fiscal year 2019. The increase was primarily driven by higher pension and retiree medical income in the current year.
Equity in earnings of affiliates was $14 million in fiscal year 2020, compared to $31 million in the prior year. The decrease was primarily attributable to lower earnings across all our joint ventures due to decreased volumes.
Interest expense, net was $66 million in fiscal year 2020, compared to $57 million in fiscal year 2019. The increase in interest expense was primarily attributable to new 6.25% notes due 2025 that were issued in June of fiscal year 2020, as well as higher utilization of our senior secured revolving credit facility during fiscal year 2020 compared to fiscal year 2019.
Provision for income taxes was $78 million in fiscal year 2020, compared to $82 million in fiscal year 2019. The decrease in tax expense is primarily related to lower earnings in certain jurisdictions that do not have a tax valuation allowance, largely offset by the tax effect on the proceeds received from the termination of the WABCO distribution arrangement.
Income from continuing operations (before noncontrolling interests) was $248 million for fiscal year 2020, compared to $295 million for fiscal year 2019. The reasons for the decrease are discussed above.
Net income attributable to Meritor, Inc. was $245 million for fiscal year 2020, compared to $291 million for fiscal year 2019. Various factors that contributed to the decrease in net income are discussed above.
Segment Adjusted EBITDA and Segment Adjusted EBITDA Margins
The following table reflects segment adjusted EBITDA and segment adjusted EBITDA margins for fiscal years 2020 and 2019 (dollars in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Segment adjusted EBITDA | | Segment adjusted EBITDA Margins |
| 2020 | | 2019 (1) | | Change | | 2020 | | 2019 (1) | | Change |
| Commercial Truck | $ | 116 | | | $ | 342 | | | $ | (226) | | | 5.3 | % | | 9.9 | % | | (4.6) | pts |
| Aftermarket and Industrial | 150 | | | 175 | | | (25) | | | 15.3 | % | | 15.9 | % | | (0.6) | pts |
| Segment adjusted EBITDA | $ | 266 | | | $ | 517 | | | $ | (251) | | | 8.7 | % | | 11.8 | % | | (3.1) | pts |
(1) Amounts for the year ended September 30, 2019 have been recast to reflect reportable segment changes.
Significant items impacting year-over-year segment adjusted EBITDA include the following (in millions):
| | | | | | | | | | | | | | | | | |
| Commercial Truck | | Aftermarket and Industrial | | TOTAL |
Segment adjusted EBITDA - Year Ended September 30, 2019 (1) | $ | 342 | | | $ | 175 | | | $ | 517 | |
| Volume, mix, performance and other | (178) | | | (20) | | | (198) | |
| Lower earnings from unconsolidated affiliates | (17) | | | — | | | (17) | |
| Lower short- and long-term variable compensation | (33) | | | (8) | | | (41) | |
| Higher pension and retiree medical income, net | 2 | | | 3 | | | 5 | |
| Segment adjusted EBITDA - Year Ended September 30, 2020 | $ | 116 | | | $ | 150 | | | $ | 266 | |
(1) Amounts for the year ended September 30, 2019 have been recast to reflect reportable segment changes.
Commercial Truck Segment adjusted EBITDA was $116 millionin fiscal year 2020, compared to $342 million in the prior fiscal year. Segment adjusted EBITDA margin decreased to 5.3 percent in fiscal year 2020 from 9.9 percent in the prior fiscal year. The decrease in segment adjusted EBITDA and segment adjusted EBITDA margin were primarily driven by significantly decreased market volumes for most regions across the segment, primarily due to the COVID-19 pandemic, partially offset by the cost reduction actions executed in the second half of fiscal year 2020 and lower incentive compensation costs.
Aftermarket and Industrial Segment adjusted EBITDA was $150 million in fiscal year 2020, compared to $175 million in the prior fiscal year. Segment adjusted EBITDA margin decreased to 15.3 percent in fiscal year 2020 from 15.9 percent in fiscal year 2019. The decrease in segment adjusted EBITDA and segment adjusted EBITDA margin was primarily driven by lower volumes and the impact from the termination of the WABCO distribution arrangement, partially offset by the cost reduction actions executed in the second half of fiscal year 2020 and lower incentive compensation costs.
Fiscal Year 2019 Compared to Fiscal Year 2018
Sales
The following table reflects total company and business segment sales for fiscal years 2019 and 2018 (dollars in millions). 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.
| | | | | | | | | | | | Dollar Change Due To | | | | | | | | | | Dollar Change Due To |
| | 2019 | | 2018 (1) | | Dollar
Change | | %
Change | | Currency | | Volume/ Other | | 2019 (1) | | 2018 (1) | | Dollar
Change | | %
Change | | Currency | | Volume/ Other |
| Sales: | | | | | | | | | | | | Sales: | | | | | | | | | | | |
| Commercial Truck | | | | | | | | | | | | Commercial Truck | |
| North America | $ | 1,769 |
| | $ | 1,562 |
| | $ | 207 |
| | 13 | % | | $ | — |
| | $ | 207 |
| North America | $ | 1,966 | | | $ | 1,696 | | | $ | 270 | | | 16 | % | | $ | — | | | $ | 270 | |
| Europe | 659 |
| | 715 |
| | (56 | ) | | (8 | )% | | (38 | ) | | (18 | ) | Europe | 659 | | | 715 | | | (56) | | | (8) | % | | (38) | | | (18) | |
| South America | 248 |
| | 224 |
| | 24 |
| | 11 | % | | (25 | ) | | 49 |
| South America | 248 | | | 224 | | | 24 | | | 11 | % | | (25) | | | 49 | |
| China | 153 |
| | 196 |
| | (43 | ) | | (22 | )% | | (10 | ) | | (33 | ) | China | 153 | | | 196 | | | (43) | | | (22) | % | | (10) | | | (33) | |
| India | 197 |
| | 231 |
| | (34 | ) | | (15 | )% | | (12 | ) | | (22 | ) | India | 197 | | | 231 | | | (34) | | | (15) | % | | (12) | | | (22) | |
| Other | 84 |
| | 109 |
| | (25 | ) | | (23 | )% | | (2 | ) | | (23 | ) | Other | 84 | | | 109 | | | (25) | | | (23) | % | | (2) | | | (23) | |
| Total External Sales | $ | 3,110 |
| | $ | 3,037 |
| | $ | 73 |
| | 2 | % | | $ | (87 | ) | | $ | 160 |
| Total External Sales | $ | 3,307 | | | $ | 3,171 | | | $ | 136 | | | 4 | % | | $ | (87) | | | $ | 223 | |
| Intersegment Sales | 142 |
| | 135 |
| | 7 |
| | 5 | % | | (12 | ) | | 19 |
| Intersegment Sales | 149 | | | 154 | | | (5) | | | (3) | % | | (12) | | | 7 | |
| Total Sales | $ | 3,252 |
| | $ | 3,172 |
| | $ | 80 |
| | 3 | % | | $ | (99 | ) | | $ | 179 |
| Total Sales | $ | 3,456 | | | $ | 3,325 | | | $ | 131 | | | 4 | % | | $ | (99) | | | $ | 230 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Aftermarket, Industrial and Trailer | | | | | | | | | | | | |
| Aftermarket and Industrial | | Aftermarket and Industrial | |
| North America | $ | 1,171 |
| | $ | 1,020 |
| | $ | 151 |
| | 15 | % | | $ | (3 | ) | | $ | 154 |
| North America | $ | 974 | | | $ | 886 | | | $ | 88 | | | 10 | % | | $ | (3) | | | $ | 91 | |
| Europe | 107 |
| | 121 |
| | (14 | ) | | (12 | )% | | (6 | ) | | (8 | ) | Europe | 107 | | | 121 | | | (14) | | | (12) | % | | (6) | | | (8) | |
| Total External Sales | $ | 1,278 |
| | $ | 1,141 |
| | $ | 137 |
| | 12 | % | | $ | (9 | ) | | $ | 146 |
| Total External Sales | $ | 1,081 | | | $ | 1,007 | | | $ | 74 | | | 7 | % | | $ | (9) | | | $ | 83 | |
| Intersegment Sales | 35 |
| | 35 |
| | — |
| | — | % | | (6 | ) | | 6 |
| Intersegment Sales | 19 | | | 17 | | | 2 | | | 12 | % | | (6) | | | 8 | |
| Total Sales | $ | 1,313 |
| | $ | 1,176 |
| | $ | 137 |
| | 12 | % | | $ | (15 | ) | | $ | 152 |
| Total Sales | $ | 1,100 | | | $ | 1,024 | | | $ | 76 | | | 7 | % | | $ | (15) | | | $ | 91 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total External Sales | $ | 4,388 |
| | $ | 4,178 |
| | $ | 210 |
| | 5 | % | | $ | (96 | ) | | $ | 306 |
| Total External Sales | $ | 4,388 | | | $ | 4,178 | | | $ | 210 | | | 5 | % | | $ | (96) | | | $ | 306 | |
(1)Amounts for the yearyears ended September 30, 2019 and September 30, 2018 have been recast to reflect reportable segment changes.
Commercial Trucksales were $3,252$3,456 million in fiscal year 2019, up 34 percent from fiscal year 2018. The increase in sales was primarily driven primarily by higher truck production in North America and increased market share, partially offset by the strengthening of the U.S. dollar against most currencies.
Aftermarket Industrial and TrailerIndustrial sales were $1,313$1,100 million in fiscal year 2019, up 127 percent from fiscal year 2018. The increase in sales was primarily driven primarily by increased Aftermarket and Industrial volumes across North America. The increase in sales was also partially attributable to revenue from AxleTech, which we acquired in the fourth quarter of fiscal year 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended | | | | |
| 2019 | | 2018 | | Increase (Decrease) | | %
Change |
| Sales | $ | 4,388 | | | $ | 4,178 | | | $ | 210 | | | 5 | % |
| Cost of sales | (3,748) | | | (3,553) | | | 195 | | | 5 | % |
| GROSS MARGIN | 640 | | | 625 | | | 15 | | | 2 | % |
| Selling, general and administrative | (256) | | | (313) | | | (57) | | | (18) | % |
| | | | | | | |
| Other operating expense, net | (21) | | | (20) | | | 1 | | | 5 | % |
| OPERATING INCOME | 363 | | | 292 | | | 71 | | | 24 | % |
| Other income | 40 | | | 26 | | | 14 | | | 54 | % |
| Equity in earnings of affiliates | 31 | | | 27 | | | 4 | | | 15 | % |
| Interest expense, net | (57) | | | (67) | | | (10) | | | (15) | % |
| INCOME BEFORE INCOME TAXES | 377 | | | 278 | | | 99 | | | 36 | % |
| Provision for income taxes | (82) | | | (149) | | | (67) | | | (45) | % |
| INCOME FROM CONTINUING OPERATIONS | 295 | | | 129 | | | 166 | | | 129 | % |
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax | 1 | | | (3) | | | 4 | | | 133 | % |
| NET INCOME | 296 | | | 126 | | | 170 | | | 135 | % |
| Less: Net income attributable to noncontrolling interests | (5) | | | (9) | | | (4) | | | (44) | % |
| NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 291 | | | $ | 117 | | | $ | 174 | | | 149 | % |
Cost of Sales and Gross Profit
Cost of sales primarily represents material, labor and overhead production costs associated with the company’s products and production facilities. Cost of sales for fiscal year 2019 was $3,748 million, compared to $3,553 million in the prior fiscal year, representing a 5 percent increase, primarily driven by increased volumes. Total cost of sales was approximately 85.485 percent of sales for fiscal year 2019 compared to approximately 85.085 percent for the prior fiscal year.
The following table summarizes significant factors contributing to the changes in costs of sales during fiscal year 20182019 compared to the prior fiscal year (in millions):
|
| | | |
| | Cost of Sales |
Fiscal year ended September 30, 2018 (1) | $ | 3,553 |
|
| Volumes, mix and other, net | 286 |
|
| Foreign exchange | (91 | ) |
| Fiscal year ended September 30, 2019 | $ | 3,748 |
|
| | | | | |
(1) | Amounts for theCost of Sales |
Fiscal year ended September 30, 2018 have been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715). For the | $ | 3,553 | |
| Volumes, mix and other, net | 286 | |
| Foreign exchange | (91) | |
Fiscal year ended September 30, 2018, $29 million was reclassified out of Cost of goods sold and into Non-operating income.2019 | $ | 3,748 | |
Changes in the components of cost of sales year over year are summarized as follows (in millions):
|
| | | |
| Change in Cost of Sales |
| Higher material costs | $ | 185 |
|
| Higher labor and overhead costs | 10 |
|
| Total change in costs of sales | $ | 195 |
|
| | | | | |
| Change in Cost of Sales |
| Higher material costs | $ | 185 | |
| Higher labor and overhead costs | 10 | |
| |
| Total change in cost of sales | $ | 195 | |
Material costs represent the majority of our cost of sales and include raw materials, composed primarily of steel and purchased components. Material costs increased by $185 million compared to the prior fiscal year primarily due to higher volumes and higher steel prices.
Labor and overhead costs increased by $10 million compared to the prior fiscal year primarily due to higher volumes.
Gross margin for fiscal year 2019 was $640 million $640 million, compared to $625 million in fiscal year 2018. Gross margin, as a percentage of sales, was 14.6 percent and 15.0 percent for fiscal years 2019 and 2018, respectively. Gross margin as a percentage of sales decreased primarily due to higher layered capacity costs driven by production levels, which more than offset the impact of conversion on higher revenue.
Other Income Statement Items
Selling, general and administrative expenses ("SG&A")for were $256 million in fiscal yearsyear 2019, and 2018 are summarizedcompared to $313 million in fiscal year 2018. The decrease of $57 million was primarily attributable to asbestos related items as follows (dollars in millions):discussed below:
|
| | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018(1) | | Increase (Decrease) |
| | Amount | | % of sales | | Amount | | % of sales | | | | |
| SG&A | | | | | | | | | | | |
| Short- and long-term variable compensation | $ | 54 |
| | 1.2 | % | | $ | 60 |
| | 1.4 | % | | $ | (6 | ) | | (0.2 | ) pts |
| Loss on sale of receivables | 6 |
| | 0.1 | % | | 5 |
| | 0.1 | % | | $ | 1 |
| | — |
|
| Asbestos-related liability remeasurement | (31 | ) | | (0.7 | )% | | 79 |
| | 1.9 | % | | $ | (110 | ) | | (2.6 | ) pts |
| Asbestos-related expense, net of asbestos related insurance recoveries | — |
| | — | % | | (52 | ) | | (1.2 | )% | | $ | 52 |
| | 1.2 | pts |
| All other SG&A | 227 |
| | 5.2 | % | | 221 |
| | 5.3 | % | | $ | 6 |
| | (0.1 | ) pts |
| Total SG&A expense (income) | $ | 256 |
| | 5.8 | % | | $ | 313 |
| | 7.5 | % | | $ | (57 | ) | | (1.7 | ) pts |
| |
(1)
| Amounts for the year ended September 30, 2018 have been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715). For the year ended September 30, 2018, $4 million was reclassified out of SG&A and into Other income. |
Asbestos-related liability remeasurement
In fiscal year 2019, we recognized $31 million related to remeasuring the Maremont asbestos liability based on the Planplan of reorganization in the first quarter of fiscal year 2019 (see(refer to Note 2522 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data). In fiscal year 2018, we recorded a $79 million charge related to the change in estimated asbestos liability
resulting from the change in estimated forecast horizon for estimating pending and future asbestos claims (refer to Note 25 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data).claims.
Asbestos-related expense, net of asbestos related insurance recoveries
In the fourth quarter of fiscal 2018, we entered into a settlement agreement with an insurer associated with Rockwell International Corporation ("Rockwell") asbestos liabilities to resolve disputed coverage resulting from asbestos claims. As a result, we recognized $31 million in probable recoveries of defense and indemnity costs related to that settlement agreement and from the change in estimated asbestos liability resulting fromestimate to the change in estimated forecast horizon (refer to Note 2522 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data). For the full fiscal year 2018, because we changed our estimated forecast horizon, we recognized an additional $32 million related to previous settlements with other insurance companies for probable recoveries of defense and indemnity costs associated with asbestos liabilities resulting from the change in estimate to the estimated forecast horizon (refer to Note 25 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data).horizon.
Restructuring costs were $8 million in fiscal year 2019, compared to $6 million in fiscal year 2018. In fiscal years 2019 and 2018, these costs primarily related to employee severance costs recognized by both segments. Restructuring costs are recorded in Other operating expense, net.
Operating income for fiscal year 2019 was $363 million, compared to $292 million in fiscal year 2018. Key items affecting income are discussed above.
Other income (expense), net for fiscal year 2019 was $40 million, compared to $26 million in fiscal year 2018. The increase was driven primarily by higher pension and retiree medical income in the current year. Amounts for fiscal year 2018 have been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715). For fiscal year 2018, $29 million of income and $4 million of expense was reclassified out of Cost of sales and SG&A, respectively, and into Non-operating income.
Equity in earnings of affiliates was $31 million in fiscal year 2019, compared to $27 million in the prior year. The increasewas primarily attributable to higher earnings across all our joint ventures.
Interest expense, net was $57 million in fiscal year 2019, compared to $67 million in fiscal year 2018. The decrease in interest expense was primarily attributable to the loss on debt extinguishment of $8 million recognized in the first quarter of fiscal year 2018 that did not repeat.
Provision for income taxes was $82 million in fiscal year 2019, compared to $149 million in fiscal year 2018. Higher tax expense in fiscal year 2018 was primarily driven by $57 million of non-cash tax expense related to the remeasurement of our deferred tax attributes as a result of the U.S. tax reform and $26 million of non-cash tax expense related to the one-time deemed repatriation of accumulated foreign earnings, which had no cash impact due to the use of foreign tax credits; partially offset by stronger fiscal year 2019 earnings from nonin jurisdictions for which we do not have a valuation allowance jurisdictions.allowance.
Income from continuing operations (before noncontrolling interests) was $295 million for fiscal year 2019 was $295 million compared to $129 million forin fiscal year 2018. The reasons for the increasedecrease are discussed above.
Net income attributable to Meritor, Inc. was $291 million for fiscal year 2019, compared to $117 million for fiscal year 2018. Various factors affectingthat contributed to the increasedecrease in net income were previously discussed.are discussed above.
Segment Adjusted EBITDA and Segment Adjusted EBITDA Margins
The following table reflects segment adjusted EBITDA and segment adjusted EBITDA margins for fiscal years 2019 and 2018 (dollars in millions).
| | | | Segment adjusted EBITDA | | Segment adjusted EBITDA Margins | | Segment adjusted EBITDA | | Segment adjusted EBITDA Margins |
| | 2019 | | 2018 (1) | | Change | | 2019 | | 2018 (1) | | Change | | 2019 (1) | | 2018 (1) | | Change | | 2019 (1) | | 2018 (1) | | Change |
| Commercial Truck | $ | 327 |
| | $ | 337 |
| | $ | (10 | ) | | 10.1 | % | | 10.6 | % | | (0.5 | ) pts | Commercial Truck | $ | 342 | | | $ | 345 | | | $ | (3) | | | 9.9 | % | | 10.4 | % | | (0.5) | pts |
| Aftermarket, Industrial and Trailer | 190 |
| | 150 |
| | 40 |
| | 14.5 | % | | 12.8 | % | | 1.7 | pts | |
| Aftermarket and Industrial | | Aftermarket and Industrial | 175 | | | 142 | | | 33 | | | 15.9 | % | | 13.9 | % | | 2.0 | pts |
| Segment adjusted EBITDA | $ | 517 |
| | $ | 487 |
| | $ | 30 |
| | 11.8 | % | | 11.7 | % | | 0.1 | pts | Segment adjusted EBITDA | $ | 517 | | | $ | 487 | | | $ | 30 | | | 11.8 | % | | 11.7 | % | | 0.1 | pts |
(1)Amounts for the yearyears ended September 30, 2019 and September 30, 2018 have been recast to reflect reportable segment changes.
Significant items impacting year-over-year segment adjusted EBITDA include the following (in millions):
| | | | Commercial Truck | | Aftermarket and Industrial | | TOTAL |
Segment adjusted EBITDA - Year Ended September 30, 2018 (1) | | Segment adjusted EBITDA - Year Ended September 30, 2018 (1) | $ | 345 | | | $ | 142 | | | $ | 487 | |
| | Higher earnings from unconsolidated affiliates | | Higher earnings from unconsolidated affiliates | 4 | | | — | | | 4 | |
| | Higher short- and long-term variable compensation | | Higher short- and long-term variable compensation | 4 | | | 3 | | | 7 | |
| | Higher pension and retiree medical income, net | | Higher pension and retiree medical income, net | 2 | | | 2 | | | 4 | |
| | | | Commercial Truck | | Aftermarket, Industrial and Trailer | | TOTAL | |
Segment adjusted EBITDA–Year ended September 30, 2018 (1) | $ | 337 |
| | $ | 150 |
| | $ | 487 |
| |
| Volume, mix, performance and other | (19 | ) | | 34 |
| | 15 |
| Volume, mix, performance and other | (13) | | | 28 | | | 15 | |
| Higher earnings from unconsolidated affiliates | 4 |
| | — |
| | 4 |
| |
| Lower short- and long-term variable compensation | 3 |
| | 4 |
| | 7 |
| |
| Higher pension and retiree medical income, net | 2 |
| | 2 |
| | 4 |
| |
| Segment adjusted EBITDA – Year ended September 30, 2019 | $ | 327 |
| | $ | 190 |
| | $ | 517 |
| |
Segment adjusted EBITDA - Year Ended September 30, 2019 (1) | | Segment adjusted EBITDA - Year Ended September 30, 2019 (1) | $ | 342 | | | $ | 175 | | | $ | 517 | |
(1)Amounts for the yearyears ended September 30, 2019 and September 30, 2018 have been recast to reflect reportable segment changes.
Commercial Truck Segment adjusted EBITDA was $327 million $342 million in fiscal year 2019, compared to $337$345 million in the prior fiscal year. Segment adjusted EBITDA margin decreased to 10.19.9 percent in fiscal year 2019 from 10.6compared to 10.4 percent in the prior fiscal year. The decrease in segment adjusted EBITDA was primarily driven primarily by higher net steel and layered capacity costs and the strengthening of the U.S. dollar against most currencies, partially offset by conversion on higher revenue and continued material performance. The decrease in segment adjusted EBITDA margin was primarily driven primarily by higher steel and layered capacity costs.
Aftermarket Industrial and TrailerIndustrial Segment adjusted EBITDA was $190$175 million in fiscal year 2019, compared to $150$142 million in the prior fiscal year. Segment adjusted EBITDA margin increased to 14.515.9 percent in fiscal year 2019 from 12.8compared to 13.9 percent in fiscal year 2018. The increase in segment adjusted EBITDA and segment adjusted EBITDA margin was primarily driven primarily by higher revenue, including pricing actions within our Aftermarket business.
Fiscal Year 2018 Compared to Fiscal Year 2017
Sales
The following table reflects total company and business segment sales for fiscal years 2018 and 2017 (dollars in millions). 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.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Dollar Change Due To |
| | 2018 (1) | | 2017 (1) | | Dollar Change | | % Change | | Currency | | Volume/ Other |
| Sales: | | | | |
|
| |
|
| | | | |
| Commercial Truck | | | | |
|
| |
|
| | | | |
| North America | $ | 1,562 |
| | $ | 1,172 |
| | $ | 390 |
| | 33 | % | | $ | — |
| | $ | 390 |
|
| Europe | 715 |
| | 607 |
| | 108 |
| | 18 | % | | 42 |
| | 66 |
|
| South America | 224 |
| | 168 |
| | 56 |
| | 33 | % | | (18 | ) | | 74 |
|
| China | 196 |
| | 127 |
| | 69 |
| | 54 | % | | 9 |
| | 60 |
|
| India | 231 |
| | 184 |
| | 47 |
| | 26 | % | | (3 | ) | | 50 |
|
| Other | 109 |
| | 89 |
| | 20 |
| | 22 | % | | — |
| | 20 |
|
| Total External Sales | $ | 3,037 |
| | $ | 2,347 |
| | $ | 690 |
| | 29 | % | | $ | 30 |
| | $ | 660 |
|
| Intersegment Sales | 135 |
| | 122 |
| | 13 |
| | 11 | % | | 7 |
| | 6 |
|
| Total Sales | $ | 3,172 |
| | $ | 2,469 |
| | $ | 703 |
| | 28 | % | | $ | 37 |
| | $ | 666 |
|
| | | | | | | | | | | | |
| Aftermarket, Industrial and Trailer | | | | | | | | | | | |
| North America | $ | 1,020 |
| | $ | 891 |
| | $ | 129 |
| | 14 | % | | $ | 2 |
| | $ | 127 |
|
| Europe | 121 |
| | 109 |
| | 12 |
| | 11 | % | | 8 |
| | 4 |
|
| Total External Sales | $ | 1,141 |
| | $ | 1,000 |
| | $ | 141 |
| | 14 | % | | $ | 10 |
| | $ | 131 |
|
| Intersegment Sales | 35 |
| | 32 |
| | 3 |
| | 9 | % | | 9 |
| | (6 | ) |
| Total Sales | $ | 1,176 |
| | $ | 1,032 |
| | $ | 144 |
| | 14 | % | | $ | 19 |
| | $ | 125 |
|
| | | | | | | | | | | | |
| Total External Sales | $ | 4,178 |
| | $ | 3,347 |
| | $ | 831 |
| | 25 | % | | $ | 40 |
| | $ | 791 |
|
(1)Amounts for the years ended September 30, 2018 and September 30, 2017 have been recast to reflect reportable segment changes.
Commercial Truck sales were $3,172 million in fiscal year 2018, up 28 percent from fiscal year 2017. The increase in sales was driven primarily by higher production in all of our major markets, as well as market share increases and new business wins.
Aftermarket, Industrial and Trailer sales were $1,176 million in fiscal year 2018, up 14 percent from fiscal year 2017. The increase in sales was driven primarily by higher volumes in our Industrial business and revenue from the Fabco business we acquired in the fourth quarter of fiscal year 2017.
Cost of Sales and Gross Profit
Cost of sales primarily represents material, labor and overhead production costs associated with the company’s products and production facilities. Cost of sales for fiscal year 2018 was $3,553 million compared to $2,850 million in the prior year, representing a 25 percent increase, primarily driven by increased sales revenue. Total cost of sales was approximately 85.0 percent of sales for fiscal year 2018 compared to approximately 85.2 percent for the prior fiscal year.
The following table summarizes significant factors contributing to the changes in costs of sales during fiscal year 2018 compared to the prior fiscal year (in millions):
|
| | | |
| | Cost of Sales |
Fiscal year ended September 30, 2017(1) | $ | 2,850 |
|
Volumes, mix and other, net(1) | 683 |
|
| Foreign exchange | 20 |
|
Fiscal year ended September 30, 2018(1) | $ | 3,553 |
|
(1) Amounts for the years ended September 30, 2018 and September 30, 2017 have been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715). For the years ended September 30, 2018 and 2017, $29 million and $13 million were reclassified out of Cost of goods sold and into Non-operating income (expense), respectively.
Changes in the components of cost of sales year over year are summarized as follows (in millions):
|
| | | |
| | Change in Cost of Sales |
| Higher material costs | $ | 569 |
|
| Higher labor and overhead costs | 118 |
|
Other, net(1) | 16 |
|
| Total change in costs of sales | $ | 703 |
|
(1) Amount has been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715).
Materialcosts represent the majority of our cost of sales and include raw materials, composed primarily of steel and purchased components. Material costs increased by $569 million compared to the prior fiscal year primarily due to higher volumes.
Labor and overhead costs increased by $118 million compared to the prior fiscal year primarily due to higher volumes.
Gross margin for fiscal year 2018 was$625 million compared to $497 million in fiscal year 2017. Gross margin, as a percentage of sales, was 15.0 percent and 14.8 percent for fiscal years 2018 and 2017, respectively. Gross margin as a percentage of sales increased due to the impacts of higher sales.
Other Income Statement Items
SG&A for fiscal years 2018 and 2017 are summarized as follows (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | 2018(1) | | 2017(1) | | Increase (Decrease) |
| | Amount | | % of sales | | Amount | | % of sales | | | | |
| SG&A | | | | | | | | | | | |
| Loss on sale of receivables | $ | 5 |
| | 0.1 | % | | $ | 5 |
| | — | % | | $ | — |
| | 0.1 | pts |
| Short- and long-term variable compensation | 60 |
| | 1.4 | % | | 51 |
| | 1.5 | % | | $ | (9 | ) | | (0.1 | ) pts |
| Asbestos-related liability remeasurement | 79 |
| | 1.9 | % | | 4 |
| | 0.1 | % | | $ | (75 | ) | | 1.8 | pts |
| Asbestos-related expense, net of asbestos related insurance recoveries | (52 | ) | | (1.2 | )% | | 10 |
| | 0.3 | % | | $ | 62 |
| | (1.5 | ) pts |
| Legal settlement charge | — |
| | — | % | | 10 |
| | 0.3 | % | | $ | 10 |
| | (0.3 | ) pts |
| All other SG&A | 221 |
| | 5.3 | % | | 186 |
| | 5.7 | % | | $ | (35 | ) | | (0.4 | ) pts |
| Total SG&A expense (income) | $ | 313 |
| | 7.5 | % | | $ | 266 |
| | 7.9 | % | | $ | (47 | ) | | (0.4 | ) pts |
| |
(1)
| Amounts for the years ended September 30, 2018 and September 30, 2017 have been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715). For the years ended September 30, 2018 and 2017, $4 million and $2 million were reclassified out of SG&A and into Other income (expense), respectively. |
Asbestos-related liability remeasurement
In fiscal year 2018, we recorded a $79 million charge related to the change in estimate resulting from the change in estimated forecast horizon for estimating pending and future asbestos claims (refer to Note 25 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data).
Asbestos-related expense, net of asbestos related insurance recoveries
In the fourth quarter of fiscal 2018, we entered into a settlement agreement with an insurer associated with Rockwell International Corporation ("Rockwell") asbestos liabilities to resolve disputed coverage resulting from asbestos claims. As a result, we recognized $31 million in probable recoveries of defense and indemnity costs related to that settlement agreement and from the change in estimate to the estimated forecast horizon (refer to Note 25 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data). For the full fiscal year 2018, because we changed our estimated forecast horizon, we recognized an additional $32 million related to previous settlements with other insurance companies for probable recoveries of defense and indemnity costs associated with asbestos liabilities resulting from the change in estimate to the estimated forecast horizon (refer to Note 25 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data). We recognized $13 million related to previous cash settlements with insurance companies for recoveries of defense and indemnity costs associated with asbestos liabilities in fiscal year 2017.
Litigation Settlements
We recognized a $10 million charge for a legal settlement related to a dispute with a joint venture in the second quarter of fiscal year 2017 (refer to Note 25 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data).
All other SG&A
All other SG&A, which represents normal selling, general and administrative expense, increased to support new programs and growth initiatives, but decreased as a percentage of sales.
Restructuring costs were $6 million in fiscal years 2018 and 2017. In fiscal years 2018 and 2017, these costs primarily related to employee severance costs recognized by our Aftermarket, Industrial and Trailer segment.
Other operating expense, net was $14 million in fiscal year 2018, compared to $7 million in fiscal year 2017. In fiscal year 2018, these costs primarily related to environmental remediation. In fiscal year 2017, $4 million related to impairment charges and $3 million related to environmental remediation costs. Of the $4 million of impairment charges, $3 million was the result of the carrying value of a business, classified as held for sale, exceeding its fair value less costs to sell in fiscal year 2017.
Operating income for fiscal year 2018 was $292 million, compared to $218 million in fiscal year 2017. Key items affecting income are discussed above.
Other income (expense), net for fiscal year 2018 was $26 million, compared to non-operating expense of $9 million in fiscal year 2017. The increase was primarily driven by higher pension and retiree medical income in fiscal year 2018. Amounts for fiscal years 2018 and 2017 have been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715). For the year ended September 30, 2018, $29 million of income and $4 million of expense was reclassified out of Cost of sales and SG&A, respectively, and into Non-operating income. For the year ended September 30, 2017, $13 million of expense and $2 million of income was reclassified out of Cost of sales and SG&A, respectively, and into Non-operating expense.
Gain on sale of equity investment of $243 million was recognized in fiscal year 2017 associated with the sale of our 50 percent ownership interest in Meritor WABCO in the fourth quarter of fiscal year 2017.
Equity in earnings of affiliates was $27 million in fiscal year 2018, compared to $48 million in the prior year. The decrease in equity in earnings of affiliates was primarily driven by Meritor WABCO earnings that were included in fiscal year 2017 results but not in fiscal year 2018. This decrease was partially offset by improved earnings in our remaining joint ventures.
Interest expense, net was $67 million in fiscal year 2018, compared to $119 million in fiscal year 2017. In fiscal year 2018, we recognized an approximately $8 million loss on debt extinguishment, which is included in Interest expense, net, related to the redemption of our 6.75 Percent Notes. The decrease in Interest expense, net was primarily attributable to the decrease in fixed-rate debt as a result of capital markets transactions completed in the fourth quarter of fiscal year 2017 and the first quarter of fiscal year 2018, which lowered our total average debt balance and associated weighted average interest rate, as well as the benefits of cross-currency swaps entered into during the third quarter of fiscal year 2018. In the fourth quarter of fiscal year 2017, we recognized
approximately $5 million loss on debt extinguishment, related to the redemption of our 6.75 percent notes due 2021. In addition, we recognized approximately $23 million and $8 million losses on debt extinguishment related to the repurchase of our 7.875 percent convertible senior notes due 2026 and 4.0 percent convertible senior notes due 2027, respectively, in the fourth quarter of fiscal year 2017. The loss on debt extinguishment related to these repurchases is included in Interest expense, net in the Consolidated Statement of Operations.
Provision for income taxes was $149 million in fiscal year 2018 compared to $52 million in fiscal year 2017. The year-over-year increase in tax expense was primarily driven by $57 million of non-cash tax expense related to the remeasurement of our deferred tax attributes as a result of the U.S. tax reform and $26 million of non-cash tax expense related to the one-time deemed repatriation of accumulated foreign earnings, which had no cash impact due to the use of foreign tax credits. Also, a tax planning strategy was implemented that resulted in a $4 million tax benefit from the reversal of a tax valuation allowance in Sweden.
Income from continuing operations (before noncontrolling interests) for fiscal year 2018 was $129 million compared to $329 million in fiscal year 2017. The reasons for the decrease are discussed above.
Loss from discontinued operations, net of tax for fiscal year 2018 was $3 million compared to $1 million in the prior year. The increase was primarily attributable to changes in estimates related to legal costs incurred in connection with a previously divested business.
Net income attributable to noncontrolling interests was $9 million in fiscal year 2018 compared to $4 million in fiscal year 2017. Noncontrolling interests represent our minority partners’ share of income or loss associated with our less than 100 percent-owned consolidated subsidiaries. The increase was primarily attributable to higher production in these subsidiaries' respective markets.
Net income attributable to Meritor, Inc. was $117 million for fiscal year 2018 compared to $324 million for fiscal year 2017.Various factors affecting the decrease in net income were previously discussed.
Segment Adjusted EBITDA and Segment Adjusted EBITDA Margins
The following table reflects segment adjusted EBITDA and segment adjusted EBITDA margins for fiscal years 2018 and 2017 (dollars in millions).
|
| | | | | | | | | | | | | | | | | | | |
| | Segment adjusted EBITDA | | Segment adjusted EBITDA Margins |
| | 2018 (1) | | 2017 (1) | | Change | | 2018 (1) | | 2017 (1) | | Change |
| Commercial Truck | $ | 337 |
| | $ | 224 |
| | $ | 113 |
| | 10.6 | % | | 9.1 | % | | 1.5 |
| Aftermarket, Industrial and Trailer | 150 |
| | 126 |
| | 24 |
| | 12.8 | % | | 12.2 | % | | 0.6 |
| Segment adjusted EBITDA | $ | 487 |
| | $ | 350 |
| | $ | 137 |
| | 11.7 | % | | 10.5 | % | | 1.2 |
(1)Amounts for the years ended September 30, 2018 and September 30, 2017 have been recast to reflect reportable segment changes.
Significant items impacting year-over-year segment adjusted EBITDA include the following (in millions):
|
| | | | | | | | | | | |
| | Commercial Truck | | Aftermarket, Industrial and Trailer | | TOTAL |
Segment adjusted EBITDA–Year ended September 30, 2017 (1) | $ | 224 |
| | $ | 126 |
| | $ | 350 |
|
| Lower earnings from sale of interest in Meritor WABCO joint venture | (27 | ) | | — |
| | (27 | ) |
| Higher earnings from unconsolidated affiliates | 6 |
| | — |
| | 6 |
|
| Higher short- and long-term variable compensation | (9 | ) | | (3 | ) | | (12 | ) |
| 2017 litigation settlement | 10 |
| | — |
| | 10 |
|
| Higher pension and retiree medical income, net | 13 |
| | 29 |
| | 42 |
|
| Volume, mix, performance and other | 120 |
| | (2 | ) | | 118 |
|
Segment adjusted EBITDA – Year ended September 30, 2018 (1) | $ | 337 |
| | $ | 150 |
| | $ | 487 |
|
(1)Amounts for the years ended September 30, 2018 and September 30, 2017 have been recast to reflect reportable segment changes.
Commercial Truck Segment adjusted EBITDA was$337 million in fiscal year 2018, compared to $224 million in the prior fiscal year. Segment adjusted EBITDA margin increased to 10.6 percent in fiscal year 2018 compared to 9.1 percent in the prior fiscal year. The increases in segment adjusted EBITDA and segment adjusted EBITDA margin were driven primarily by conversion on higher revenue, the favorable impact of changes to retiree medical benefits and a one-time legal charge related to a dispute with a joint venture in the prior year that did not repeat, partially offset by lower affiliate earnings arising from the sale of our interest in the Meritor WABCO joint venture in the previous year and higher variable compensation.
Aftermarket, Industrial and Trailer Segment adjusted EBITDA was $150 million in fiscal year 2018, compared to $126 million in the prior fiscal year. Segment adjusted EBITDA margin increased to 12.8 percent in fiscal year 2018 compared to 12.2 percent in fiscal year 2017. The increases in both segment adjusted EBITDA and segment adjusted EBITDA margin were driven by the favorable impact of changes to retiree medical benefits and conversion on higher sales, partially offset by higher material and freight costs, primarily in our aftermarket business.
Cash Flows (in millions)
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| OPERATING CASH FLOWS | | | | | |
| Income from continuing operations | $ | 248 | | | $ | 295 | | | $ | 129 | |
| | | | | |
| Depreciation and amortization | 101 | | | 87 | | | 84 | |
| Loss on debt extinguishment | — | | | — | | | 8 | |
| Deferred income tax expense | 38 | | | 40 | | | 74 | |
| Pension and retiree medical income | (42) | | | (37) | | | (31) | |
| Pension settlement loss | — | | | — | | | 6 | |
| | | | | |
| | | | | |
| Asset impairment | 8 | | | 10 | | | 3 | |
| | | | | |
| Equity in earnings of affiliates | (14) | | | (31) | | | (27) | |
| Restructuring costs | 27 | | | 8 | | | 6 | |
| | | | | |
| Dividends received from equity method investments | 10 | | | 23 | | | 17 | |
| Pension and retiree medical contributions | (15) | | | (16) | | | (21) | |
| Asbestos related liability remeasurement | — | | | (31) | | | — | |
| Contribution to Maremont trust | — | | | (48) | | | — | |
| | | | | |
| | | | | |
| Restructuring payments | (25) | | | (5) | | | (8) | |
| Increase in working capital | 61 | | | (14) | | | (113) | |
| Changes in off-balance sheet accounts receivable securitization and factoring | (77) | | | (18) | | | 11 | |
| Other, net | (55) | | | (7) | | | 114 | |
| Cash flows provided by continuing operations | 265 | | | 256 | | | 252 | |
| Cash flows used for discontinued operations | — | | | — | | | (1) | |
| CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | $ | 265 | | | $ | 256 | | | $ | 251 | |
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 |
| OPERATING CASH FLOWS | | | | | |
| Income from continuing operations | $ | 295 |
| | $ | 129 |
| | $ | 329 |
|
| Depreciation and amortization | 87 |
| | 84 |
| | 75 |
|
| Loss on debt extinguishment | — |
| | 8 |
| | 36 |
|
| Deferred income tax expense | 40 |
| | 74 |
| | 38 |
|
| Pension and retiree medical expense (income) | (37 | ) | | (31 | ) | | 11 |
|
| Pension settlement loss | — |
| | 6 |
| | — |
|
| Gain on sale of equity investment | — |
| | — |
| | (243 | ) |
| Asset impairment | 10 |
| | 3 |
| | 4 |
|
| Equity in earnings of affiliates | (31 | ) | | (27 | ) | | (48 | ) |
| Restructuring costs | 8 |
| | 6 |
| | 6 |
|
| Dividends received from equity method investments | 23 |
| | 17 |
| | 44 |
|
| Pension and retiree medical contributions | (16 | ) | | (21 | ) | | (38 | ) |
| Asbestos related liability remeasurement | (31 | ) | | — |
| | — |
|
| Contribution to Maremont trust | (48 | ) | | — |
| | — |
|
| Restructuring payments | (5 | ) | | (8 | ) | | (15 | ) |
| Increase in working capital | (14 | ) | | (113 | ) | | (70 | ) |
| Changes in off-balance sheet accounts receivable securitization and factoring | (18 | ) | | 11 |
| | 26 |
|
| Other, net | (7 | ) | | 114 |
| | 24 |
|
| Cash flows provided by continuing operations | 256 |
| | 252 |
| | 179 |
|
| Cash flows used for discontinued operations | — |
| | (1 | ) | | (3 | ) |
| CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | $ | 256 |
| | $ | 251 |
| | $ | 176 |
|
Cash provided by operating activities for fiscal year 20192020 was $265 million, compared to $256 million compared toin fiscal year 2019 and $251 million in fiscal year 2018 and $176 million2018. The increase in cash flow provided by operating activities in fiscal year 2017.2020 was driven primarily by $265 million of cash received from the termination of the distribution arrangement with WABCO in fiscal year 2020, largely offset by 2020 lower revenues as a result of significantly lower market volumes due to the impact of the COVID-19 pandemic. The increase in cash flows provided by operating activities in fiscal year 2019 compared to fiscal year 2018 was due to higher earnings in fiscal year 2019 and lower working capital investments that were offset by the $48 million contribution of cash and repayment of a loan to fund the Maremont 524(g) Trusttrust following the confirmation of the Plan. The increase in cash flows provided by operating activities in fiscal year 2018, compared to fiscal year 2017 was primarily driven by conversion on higher sales year over year.plan or reorganization.
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| INVESTING CASH FLOWS | | | | | |
| Capital expenditures | $ | (85) | | | $ | (103) | | | $ | (104) | |
| Proceeds from sale of equity method investment | — | | | — | | | 250 | |
| Cash paid for business acquisitions, net of cash acquired | — | | | (168) | | | (35) | |
| | | | | |
| Cash paid for investment in Transportation Power, Inc. | (13) | | | (6) | | | (6) | |
| | | | | |
| | | | | |
| Other investing activities | 9 | | | 6 | | | 6 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | $ | (89) | | | $ | (271) | | | $ | 111 | |
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 |
| INVESTING CASH FLOWS | | | | | |
| Capital expenditures | $ | (103 | ) | | $ | (104 | ) | | $ | (95 | ) |
| Proceeds from sale of equity method investment | — |
| | 250 |
| | — |
|
| Cash paid for business acquisitions, net of cash acquired | (168 | ) | | (35 | ) | | (34 | ) |
| Cash paid for investment in Transportation Power, Inc. | (6 | ) | | (6 | ) | | — |
|
| Other investing activities | 6 |
| | 6 |
| | — |
|
| Net investing cash flows provided by discontinued operations | — |
| | — |
| | 2 |
|
| CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | $ | (271 | ) | | $ | 111 |
| | $ | (127 | ) |
Cash used for investing activities was $89 million in fiscal year 2020, compared to cash used for investing activities of $271 million in fiscal year 2019 compared toand cash provided by investing activities of $111 million in fiscal year 2018 and2018. The decrease in cash used for investing activities of $127 millionin the fiscal year 2020 was primarily driven by lower acquisition activity in fiscal year 2017.2020 as compared to fiscal year 2019. The decrease in cash provided by investing activities in fiscal year 2019 compared to fiscal year 2018 was driven by $168 million of cash paid for the acquisition of AxleTech, net of cash acquired, in the fourth quarter of fiscal year 2019.
The increase in cash provided by investing activities Capital expenditures were $85 million in fiscal year 20182020, compared to fiscal year 2017 was driven by $250 million of proceeds received in the first quarter of fiscal year 2018 from the sale of our interest in Meritor WABCO in the fourth quarter of fiscal year 2017, partially offset by cash used for the acquisition of substantially all of the assets of AA Gear & Manufacturing, Inc. ("AAG"). Further, capital expenditures continue to increase as we invest in new product development to support our revenue growth and operational performance initiatives. Capital expenditures were $103 million in fiscal year 2019 compared toand $104 million in fiscal year 2018 and $95 million in fiscal year 2017.2018.
| | | | | | | | | | | | | | | | | |
| | Year September 30, |
| | 2020 | | 2019 | | 2018 |
| FINANCING CASH FLOWS | | | | | |
| Repayment of notes and term loan | $ | (8) | | | $ | — | | | $ | — | |
| Securitization | (8) | | | (38) | | | (43) | |
| Borrowings against revolving line of credit | 304 | | | 190 | | | 55 | |
| Repayments of revolving line of credit | (304) | | | (190) | | | (55) | |
| Term loan borrowings | — | | | 175 | | | — | |
| Proceeds from debt issuance | 300 | | | — | | | — | |
| Redemption of notes | — | | | (24) | | | (181) | |
| Deferred issuance costs | — | | | (4) | | | — | |
| Debt issuance costs | (5) | | | — | | | — | |
| Other financing activities | (2) | | | (2) | | | (5) | |
| Net change in debt | 277 | | | 107 | | | (229) | |
| Repurchase of common stock | (241) | | | (96) | | | (100) | |
| CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | $ | 36 | | | $ | 11 | | | $ | (329) | |
|
| | | | | | | | | | | |
| | Year September 30, |
| | 2019 | | 2018 | | 2017 |
| FINANCING CASH FLOWS | | | | | |
| Repayment of notes and term loan | $ | — |
| | $ | — |
| | $ | (408 | ) |
| Securitization | (38 | ) | | (43 | ) | | 89 |
|
| Term loan borrowings | 175 |
| | — |
| | — |
|
| Proceeds from debt issuance | — |
| | — |
| | 325 |
|
| Redemption of notes | (24 | ) | | (181 | ) | | (103 | ) |
| Deferred issuance costs | (4 | ) | | — |
| | — |
|
| Debt issuance costs | — |
| | — |
| | (12 | ) |
| Other financing activities | (2 | ) | | (5 | ) | | (13 | ) |
| Net change in debt | 107 |
| | (229 | ) | | (122 | ) |
| Repurchase of common stock | (96 | ) | | (100 | ) | | — |
|
| CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | $ | 11 |
| | $ | (329 | ) | | $ | (122 | ) |
Cash provided by financing activities was $36 million in fiscal year 2020, compared to cash provided by financing activities of $11 million in fiscal year 2019 compared toand cash used for financing activities of $329 million in fiscal year 2018 and $122 million2018. The increase in cash provided by financing activities in fiscal year 2017.2020 compared to fiscal year 2019 was primarily related to the proceeds from the issuance of the $300 million principal amount of our 6.25 percent notes due 2025 (see Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data), partially offset by the repurchase of 10.4 million shares of our common stock for $241 million (see Note 17 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data). The decrease in cash used for financing activities in fiscal year 2019 compared to fiscal year 2018 was primarily related to a $175 million term loan facility utilized for our acquisition of AxleTech.
The increase in cash used for financing activities in fiscal year 2018 compared to fiscal year 2017 was primarily related to proceeds from the issuance of the $325 million principal amount of our 3.25 percent convertible senior notes due 2037 (the "3.25 Percent Convertible Notes") in fiscal year 2017 that did not repeat in fiscal year 2018 and the redemption of our 6.75 percent notes due 2021 (the "6.75 Percent Notes") in the first quarter of fiscal year 2018. We paid $185 million in fiscal year 2018 to redeem $175 million principal amount of our 6.75 Percent Notes (see Note 18 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data). The increase in cash used for financing activities in fiscal year 2018 was also driven by the repurchase of 4.5 million shares of our common stock for $100 million (including commission costs) pursuant to the July 2016 equity repurchase authorization (see Note 20 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data) and a reduction in outstanding borrowings against our securitization facility.
In fiscal year 2017, cash was provided by financing activities through the issuance of $325 million principal amount of the 3.25 Percent Convertible Notes and outstanding borrowings against our securitization facility of $89 million. The net proceeds from the offering of the 3.25 Percent Convertible Notes were used, together with cash on hand, to repurchase portions of our outstanding 7.875 percent convertible senior notes due 2026 (the "7.875 Percent Convertible Notes") and our 4.0 Percent Convertible Notes. In fiscal year 2017, we spent approximately $272 million on the repurchase of $117 million principal amount of the 7.875 Percent Convertible Notes (see Note 18 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data) and approximately $139 million on the repurchase of $119 million principal amount of the 4.0 Percent Convertible Notes (see Note 18 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data). In addition, we spent approximately $105 million on the redemption of $100 million principal amount of the 6.75 Percent Notes in fiscal year 2017.
Contractual Obligations
As of September 30, 2019,2020, we are contractually obligated to make payments as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | 2021 (2) | | 2022 | | 2023 | | 2024 (3) | | 2025 (4) | | Thereafter (5) |
Total debt (1) | $ | 1,265 | | | $ | 36 | | | $ | 18 | | | $ | 13 | | | $ | 573 | | | $ | 300 | | | $ | 325 | |
| Operating leases | 93 | | | 17 | | | 14 | | | 13 | | | 9 | | | 7 | | | 33 | |
| Interest payments on long-term debt | 364 | | | 58 | | | 58 | | | 58 | | | 40 | | | 23 | | | 127 | |
| Total | $ | 1,722 | | | $ | 111 | | | $ | 90 | | | $ | 84 | | | $ | 622 | | | $ | 330 | | | $ | 485 | |
(1) Total debt excludes unamortized discount on convertible notes of $29 million, unamortized issuance costs of $14 million, and original issuance discount of an insignificant amount.
(2) Includes the 7.875 percent convertible notes due 2026, which will be early redeemed on December 1, 2020 (refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data).
(3) Includes the 6.25 percent senior notes due 2024, which contain a call feature that allows for early redemption (refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data).
(4) Includes the 6.25 percent senior notes due 2025, which contain a call feature that allows for early redemption (refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 (2) | | Thereafter (3) |
Total debt (1) | $ | 989 |
| | $ | 10 |
| | $ | 11 |
| | $ | 19 |
| | $ | 28 |
| | $ | 573 |
| | $ | 348 |
|
| Operating leases | 98 |
| | 18 |
| | 15 |
| | 14 |
| | 13 |
| | 13 |
| | 25 |
|
| Interest payments on long-term debt | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 1,087 |
| | $ | 28 |
| | $ | 26 |
| | $ | 33 |
| | $ | 41 |
| | $ | 586 |
| | $ | 373 |
|
| |
(1) | Total debt excludes unamortized discount on convertible notes of $34 million, unamortized issuance costs of $12 million, and original issuance discount of an insignificant amount.
|
| |
(2) | Includes the 6.25 percent senior notes, which contain a call feature that allows for early redemption |
| |
(3) | Includes the 3.25 Percent Convertible Notes and 7.875 Percent Convertible Notes, which contain a put and call feature that allows for earlier redemption beginning in 2025 and 2020, respectively (refer to Note 18(5) Includes the 3.25 percent convertible notes due 2037, which contain a put and call feature that allows for early redemption beginning in 2025 (refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data).
|
We also sponsor defined benefit pension plans that cover certain of our U.S. employees and certain non-U.S. employees. Our funding practice provides that annual contributions to the pension trusts will be at least equal to the minimum amounts required by ERISA in the U.S. and the actuarial recommendations or statutory requirements in other countries. Management expects funding for our retirement pension plans of approximately $6 million in fiscal year 2020.2021.
We also sponsor retirement medical plans that cover certain of our U.S. and non-U.S. employees and retirees, including certain employees of divested businesses, and provide for medical payments to eligible employees and dependents upon retirement. Management expects gross retiree medical plan benefit payments of approximately $11 million, $9 million, $8 million, $6 million, $5 million, $5 million, $4 million and $5$4 million in fiscal years 2020, 2021, 2022, 2023, 2024 and 2024,2025, respectively, before consideration of any Part D reimbursement from the U.S. government.
Contractual obligations identified in the table above do not include liabilities associated with uncertain tax positions of $46$73 million due to the high degree of uncertainty regarding the future cash outflows associated with these amounts. For additional discussion of uncertain tax positions, refer to Note 2421 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Liquidity
Our outstanding debt, net of discounts and unamortized debt issuance costs where applicable, is summarized below (in millions). For a detailed discussion of terms and conditions related to this debt, see Note 1815 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
| | | | September 30, | | September 30, |
| | 2019 | | 2018 | | 2020 | | 2019 |
| Fixed-rate debt securities | $ | 444 |
| | $ | 444 |
| Fixed-rate debt securities | $ | 741 | | | $ | 444 | |
| Fixed-rate convertible notes | 342 |
| | 364 |
| Fixed-rate convertible notes | 343 | | | 342 | |
| Term loan | 175 |
| | — |
| Term loan | 166 | | | 175 | |
| Unamortized discount on convertible notes | (34 | ) | | (37 | ) | Unamortized discount on convertible notes | (29) | | | (34) | |
| Other borrowings | 16 |
| | 53 |
| Other borrowings | 6 | | | 16 | |
| Total debt | $ | 943 |
| | $ | 824 |
| Total debt | $ | 1,227 | | | $ | 943 | |
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 20202021 capital expenditures to be approximately $120$85 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 or common equity, issue new equity or debt securities or enter into new financing arrangements if conditions warrant.
In December 2017, we filed a shelf registration statement with the Securities and Exchange Commission, registering an indeterminate amount of debt and/or equity securities that we may offer in one or more offerings on terms to be determined at the time of sale.
We believe our current financing arrangements provide us with the financial flexibility required to maintain our operations during the uncertain times of the COVID-19 pandemic 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 June 2024.
Sources of liquidity as of September 30, 2019,2020, in addition to cash on hand, are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Facility
Size | | Utilized as of 9/30/20 | | Readily Available as of
9/30/20 | | Current Expiration |
| On-balance sheet arrangements: | | | | | | | |
Senior secured revolving credit facility (1) | $ | 625 | | | $ | — | | | $ | 625 | | | June 2024 (1) |
Committed U.S. accounts receivable securitization(2) | 95 | | | 3 | | | 80 | | | December 2022 |
| Total on-balance sheet arrangements | 720 | | | 3 | | | 705 | | | |
Off-balance sheet arrangements: (2) | | | | | | | |
Committed Swedish Factoring Facility (3)(4) | $ | 181 | | | $ | 100 | | | $ | — | | | March 2024 |
Committed U.S. Factoring Facility (3) | 75 | | | 30 | | | — | | | February 2023 |
| Uncommitted U.K. Factoring Facility | 29 | | | 1 | | | — | | | February 2022 |
| Uncommitted Italy Factoring Facility | 35 | | | 9 | | | — | | | June 2022 |
Other uncommitted factoring facilities (5) | N/A | | 14 | | | N/A | | None |
| | | | | | | |
| Total off-balance sheet arrangements | 320 | | | 154 | | | — | | | |
| Total available sources | $ | 1,040 | | | $ | 157 | | | $ | 705 | | | |
|
| | | | | | | | | | | | | |
| | Total Facility Size | | Utilized as of 9/30/19 | | Readily Available as of 9/30/19 | | Current Expiration |
| On-balance sheet arrangements: | | | | | | | |
Revolving credit facility (1) | $ | 625 |
| | $ | — |
| | $ | 625 |
| | June 2024 (1) |
Committed U.S. accounts receivable securitization(2) | 115 |
| | 13 |
| | 101 |
| | December 2022 |
| Total on-balance sheet arrangements | 740 |
| | 13 |
|
| 726 |
| | |
Off-balance sheet arrangements: (2) | | | | | | | |
Committed Swedish Factoring Facility (3) | $ | 169 |
| | $ | 119 |
| | $ | — |
| | March 2020 |
Committed U.S. Factoring Facility (3) | 75 |
| | 58 |
| | — |
| | February 2023 |
| Uncommitted U.K. Factoring Facility | 27 |
| | 6 |
| | — |
| | February 2022 |
| Uncommitted Italy Factoring Facility | 33 |
| | 23 |
| | — |
| | June 2022 |
Other uncommitted factoring facilities (4) | N/A |
| | 20 |
| | N/A |
| | None |
| Total off-balance sheet arrangements | 304 |
| | 226 |
| | — |
| | |
| Total available sources | $ | 1,044 |
|
| $ | 239 |
| | $ | 726 |
| | |
| |
(1)(1)The availability under the senior secured revolving credit facility is subject to a collateral test and a priority debt-to-EBITDA ratio covenant. The facility will expire in November 2023 if the outstanding amount of the 6.25 percent notes due 2024 is greater than $75 million at that time.
| The availability under the revolving credit facility is subject to a collateral test and a priority debt-to-EBITDA ratio covenant. The facility will expire in November 2023 if the outstanding amount of the 6.25 percent notes due 2024 is greater than $75 million at that time. |
(2)Availability subject to adequate eligible accounts receivable available for sale.
(3)Actual amounts may exceed bank's commitment at bank's discretion.
| |
(4)(4)The facility is backed by a 364-day liquidity commitment from Nordea Bank which extends through June 22, 2021. (5)There is no explicit facility size under the factoring agreement, but the counterparty approves the purchase of receivable tranches at its discretion.
| There is no explicit facility size under the factoring agreement, but the counterparty approves the purchase of receivable tranches at its discretion. |
Cash and Liquidity Needs – At September 30, 2019,2020, we had $108$315 million in cash and cash equivalents, of which $48$32 million was held in jurisdictions outside of the U.S. that, if repatriated, could result in withholding taxes. We plan to repatriate approximately $39$21 million of this cash, forwith respect to which we've recorded an immaterial deferred tax liability for the relatedno withholding taxes.taxes are expected to be owed. In addition, we plan to utilize ongoing cash flow from domestic operations and external borrowings to meet our liquidity needs in the U.S.
Our availability under the senior secured revolving credit facility is subject to a priority debt-to-EBITDA ratio covenant, as defined in the credit agreement, which may limit our borrowings under such agreement as of each quarter end. As long as we are in compliance with this covenant as of the quarter end, we have full availability under the senior secured 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 senior secured 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 senior secured revolving credit facility. At September 30, 2019,2020, we were in compliance with thisthe priority debt to EBITDA ratio covenant under our credit agreement.
Equity Repurchase Authorization- On July 21, 2016, our Board of Directors authorized the repurchase of up to $100 million of our common stock from time to time through open market purchases, privately negotiated transactions or otherwise, until September 30, 2019, subject to compliance with legal and regulatory requirements and our debt covenants. During the second quarter of fiscal year 2018, we repurchased 1.4 million shares of our common stock for $33 million (including commission costs) pursuant to this authorization. During the third quarter of fiscal year 2018, we repurchased 1.4 million shares of our common stock for $30 million (including commission costs) pursuant to this authorization. During the fourth quarter of fiscal year 2018, we repurchased 1.7 million shares of our common stock for $37 million (including commission costs) pursuant to this authorization. The repurchases under this authorization were complete as of September 30, 2018.
On November 2, 2018, our Board of Directors authorized the repurchase of up to $200 million of our common stock from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and our debt covenants. This authorization superseded the prior July 2016 equity repurchase authorization. In the first quarter of fiscal year 2019, we repurchased 3.0 million shares of common stock for $50 million (including commission costs) pursuant to this repurchase authorization. In the third quarter of fiscal year 2019, we repurchased 1.0 million shares of common stock for $21 million (including commission costs) pursuant to this authorization.
On July 26, 2019, our Board of Directors authorized the repurchase of up to $250 million of our common stock from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and our debt covenants. This authorization supersedes the remaining authority under the prior November 2018 equity repurchase authorization described above. In the fourth quarter of fiscal year 2019, we repurchased 1.3 million shares of our common stock for $25 million (including commission costs). The amount remaining available for repurchases under this repurchase authorization was $225 million as of September 30, 2019. On November 7, 2019, the Board of Directors increased the amount of this repurchase authorization to $325 million.
Debt Repurchase Authorization - On July 21, 2016, our Board of Directors authorized the repurchase of up– Refer to $150 million aggregate principal amount of any of our debt securities (including convertible debt securities) from time to time through open market purchases, privately negotiated transactions or otherwise, until September 30, 2019, subject to compliance with legal and regulatory requirements and our debt covenants. The amount remaining available for repurchases under this authorization was $50 million as of September 30, 2018.
On November 2, 2018, our Board of Directors authorized the repurchase of up to $100 million aggregate principal amount of any of our debt securities (including convertible debt securities) from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and our debt covenants. This authorization supersedes the prior July 2016 debt repurchase authorization. The amount remaining available for repurchases under this repurchase authorization was $76 million as of September 30, 2019.
Redemption of 6.75 Percent Notes - On September 28, 2017, we redeemed $100 million of the outstanding $275 million aggregate principal amount of our 6.75 Percent Notes at a price of $1,033.75 per $1,000 of principal amount, plus accrued and unpaid interest. As a result, a loss on debt extinguishment of $5 million was recorded in the Consolidated Statement of Operations within Interest expense, net during fiscal year 2017. The redemption was made pursuant to the July 2016 debt repurchase authorization (see Note 2017 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplemental DataSupplementary Data.).
On November 2, 2017, we redeemed the remaining $175 million aggregate principal amount outstanding of the 6.75 Percent Notes at a price of $1,033.75 per $1,000 of principal amount, plus accrued and unpaid interest. As a result, a loss on debt extinguishment of $8 million was recorded in the Consolidated Statement of Operations within Interest expense, net. The redemption was made pursuant to a special authorization from the Board of Directors in connection with the sale of Meritor WABCO.
Redemption of 4.0 Percent Notes - On February 15, 2019, we redeemed $19 million of the outstanding $24 million aggregate principal amount outstanding of the 4.0 Percent Convertible Notes at a price of 100 percent of the accreted principal amount, plus accrued and unpaid interest. On June 7, 2019, we redeemed the remaining $5 million aggregate principal amount outstanding of the 4.0 Percent Convertible Notes at a price equal to 100 percent of the accreted principal amount, plus accrued and unpaid interest. The 4.0 Percent Convertible Notes were classified as current as of September 30, 2018 as the securities were redeemable at the option of the holder on February 15, 2019, at a repurchase price in cash equal to 100 percent of the accreted principal amount of the securities to be repurchased plus accrued and unpaid interest.
due 2027, Senior Secured Revolving Credit Facility,- On June 7, 2019, we amended and restated our revolving credit facility. Pursuant to the revolving credit agreement, as amended, we have a $625 million revolving credit facility and a $175 million term loan facility, which was utilized for our acquisitionIssuance of AxleTech, that mature in June 2024 (with a springing maturity in November 2023 if the outstanding amount of the 6.25 Percent Notes is greater than $75 million).due 2025
The availability under the revolving credit facility is subject–Refer to a financial covenant based on 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. 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 September 30, 2019, we were in compliance with this covenant under the revolving credit facility with a ratio of approximately 0.5x for the priority debt-to-EBITDA ratio covenant.
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 or our total leverage ratio, as defined in the agreement. At September 30, 2019, the margin over LIBOR rate was 200 basis points, and the commitment fee was 30 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 100 basis points.
Certain of our 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 our indentures (see Note 2915 of the Notes to the Consolidated Financial Statements in Item 8. Financial Statements and Supplemental Data)Supplementary Data..
No borrowings were outstanding under the revolving credit facility as of September 30, 2019 and September 30, 2018. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. As of September 30, 2019 and September 30, 2018, there were no letters of credit outstanding under the revolving credit facility.
U.S. Securitization Program – As of September 30, 2018, the U.S. accounts receivable securitization facility size was $100 million. On September 16, 2019, we entered into an amendment that increased the size of the facilityRefer to $115 million and extended its expiration date to December 2022. The maximum permitted priority debt-to-EBITDA ratio as of the last day of each fiscal quarter under the facility is 2.25 to 1.00. This program is provided by PNC Bank, National Association, as Administrator and Purchaser, and the other Purchasers and Purchaser Agents party to the agreement from time to time (participating lenders). 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 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 Consolidated Balance Sheet. As of September 30, 2019, $9 million was outstanding under this program, and $4 million was outstanding under related letters of credit. As of September 30, 2018, $46 million was outstanding under this program, and $11 million was outstanding under related letters of credit. This securitization program contains a cross default to our revolving credit facility. As of September 30, 2019, we were in compliance with all covenants under our credit agreement (see Note 188 of the Notes to the Consolidated Financial Statements). 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 received from our customers throughout the month to repay the borrowings under the program. Accordingly, during any given month, we may borrow under this programStatements in amounts exceeding the amounts shown as outstanding at fiscal year ends.Item 8. Financial Statements and Supplementary Data.
CapitalFinance Leases – We had $6 million and $7 million of outstanding capitalfinance lease arrangements as of September 30, 2020 and 2019, and 2018.respectively.
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 September 30, 20192020 and 2018,2019, we had $30$16 million and $22$30 million, respectively, outstanding under this program at more than one bank.
Credit Ratings –At– At November 11, 2019,10, 2020, our Standard & Poor’s corporate credit rating and senior unsecured credit rating were BB and BB-, respectively, and our Moody’s Investors Service corporate credit rating and senior unsecured credit rating are Ba3 and B1, 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.
Subsidiary Guarantees of Debt –Certain of the company's 100% owned subsidiaries, as defined in the credit agreement for the senior secured revolving credit facility (collectively, the "Guarantors") irrevocably and unconditionally guarantee amounts outstanding under the senior secured revolving credit facility on a joint and several basis. Similar subsidiary guarantees are provided for the benefit of the holders of the notes outstanding under the company's indentures. The notes are guaranteed on a senior unsecured basis by each of the company’s subsidiaries from time to time guaranteeing its senior secured revolving credit facility, as it may be amended, extended, replaced or refinanced, or any subsequent credit facility. The guarantees remain in effect until the earlier to occur of payment in full of the notes or termination or release of the applicable corresponding guarantee under the company’s senior secured revolving credit facility, as it may be amended, extended, replaced or refinanced, or any subsequent credit facility. The guarantees rank equally with existing and future senior unsecured indebtedness of the Guarantors and are effectively subordinated to all of the existing and future secured indebtedness of the Guarantors, to the extent of the value of the assets securing such indebtedness.
The following represents summarized financial information, in millions, of Meritor, Inc ("Parent") and the Guarantors (collectively, the "Combined Entities"). The information has been prepared on a combined basis and excludes any investments of the Parent or Guarantors in non-guarantor subsidiaries. Intercompany transactions and amounts between the Combined Entities have been eliminated. Equity income from continuing operations of subsidiaries has been eliminated.
| | | | | | | | | | | | | | |
| Statement of Operations Information | | Year Ended
September 30, 2020 | | Year Ended
September 30, 2019 |
| Net Sales | | $ | 1,863 | | | $ | 2,731 | |
| Gross profit | | 188 | | | 368 | |
| Net income from continuing operations | | 190 | | | 123 | |
| Net income | | 191 | | | 124 | |
| Net income attributable to Meritor, Inc. | | 191 | | | 124 | |
| | | | |
| Balance Sheet Information | | September 30, 2020 | | September 30, 2019 |
| Current Assets | | $ | 566 | | | $ | 447 | |
| Non-current Assets | | 1,053 | | | 1,178 | |
| Current Liabilities | | 413 | | | 559 | |
| Non-current Liabilities | | 1,639 | | | 1,376 | |
| | | | |
| Redeemable Preferred Stock | | — | | | — | |
| Noncontrolling Interest | | — | | | — | |
| | | | |
At September 30, 2020 and 2019, amounts owed by the Combined Entities to non-guarantor entities totaled approximately $100 million and $13 million, respectively, and amounts owed to the Combined Entities from non-guarantor entities totaled approximately $156 million and $202 million, respectively. For the years ended September 30, 2020 and 2019, intercompany sales from the Combined Entities to non-guarantor subsidiaries were $79 million and $110 million, respectively. For the years ended September 30, 2020 and 2019, intercompany sales from non-guarantor subsidiaries to the Combined Entities were $102 million and $201 million, respectively.
Off-Balance Sheet Arrangements
Accounts Receivable Factoring Arrangements – We participate in accounts receivable factoring programs with total amounts utilized at September 30, 20192020 of $226$154 million, of which $177$130 million was attributable to committed factoring facilities involving the sale of AB Volvo accounts receivables. The remaining amount of $49$24 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.
TheOur Swedish factoring facility, which is backed by a 364-day liquidity commitment from Nordea Bank, which was renewed through January 10, 2020.June 22, 2021. 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-Refer to Note 15 of the Notes to the Consolidated Financial Statements in Item 8. Financial Statements 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, which expired in March 2019, we had the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $25 million. This facility contained covenants and events of default generally similar to those existing in our public debt indentures. There were $1 million of letters of credit outstanding under this facility at September 30, 2018. On March 20, 2019, we allowed this facility to expire. The letters of credit previously provided under this facility were replaced with letters of credit issued under our U.S. accounts receivable securitization facility with PNC Bank.Supplementary Data. There were $8 million of off-balance sheet letters of credit outstanding through other letter of credit facilities as of September 30, 20192020 and 2018. 2019.
Contingencies
Contingencies related to environmental, asbestos and other matters are discussed in Note 2522 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Critical Accounting Policies
Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations. These policies require management’s most difficult, subjective or complex judgments in the preparation of the financial statements and accompanying notes. Management makes estimates and assumptions about the effect of matters that are inherently uncertain, relating to the reporting of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Our most critical accounting policies are discussed below.
Pensions — 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. Our pension obligations are determined annually and were measured as of September 30, 20192020 and 2018.2019.
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. We reviewed the new SOA mortality and mortality improvement tables and utilized our actuary to conduct a study based on our plan participants.
The U.S. plans include a qualified and non-qualified pension plan. In fiscal years 20192020 and 2018,2019, the only significant non-U.S. plan is a pension plan located in the U.K. The following are the significant assumptions used in the measurement of the projected benefit obligation ("PBO") and net periodic pension expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| | U.S. | | U.K. | | U.S. | | U.K. |
| Assumptions as of September 30: | | | | | | | | | | | | | | | |
| Discount rate | 2.50% - 2.60% | | 1.70% | | 3.10% - 3.15% | | 1.80% |
Assumed return on plan assets (beginning of the year)(1) | 7.75% | | 5.75% | | 7.75% | | 6.00% |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| | U.S. | | U.K. | | U.S. | | U.K. |
| Assumptions as of September 30: | | | | | | | | | | | | | | | |
| Discount rate | 3.10% | | 1.80% | | 4.30% | | 2.90% |
Assumed return on plan assets (beginning of the year)(1) | 7.75% | | 6.00% | | 7.75% | | 6.00% |
| |
| The assumed return on plan assets for fiscal year 2020 is 7.75 percent for the U.S. plan and 5.75 percent for the U.K. plan. |
The discount rate is used to calculate the present value of the PBO at the balance sheet date and net periodic pension expense for the subsequent fiscal year. The rate used reflects a rate of return on high-quality fixed income investments that match the duration of expected benefit payments. Generally we use a portfolio of long-term corporate AA/Aa bonds that match
the duration
of the expected benefit payments, except for our U.K. pension plan which uses an annualized yield curve to establish the discount rate for this assumption.
The assumed return on plan assets is used to determine net periodic pension expense. The rate of return assumptions are based on projected long-term market returns for the various asset classes in which the plans are invested, weighted by the target asset allocations. An incremental amount for diversification, rebalancing and active management, where appropriate, is included in the rate of return assumption. The return assumptions are reviewed annually.
These assumptions reflect our historical experience and our best judgments regarding future expectations. The effects of the indicated increase and decrease in selected assumptions, assuming no changes in benefit levels and no amortization of gains or losses for the plans in 2019,2020, are shown below (in millions):
|
| | | | | | | | | |
| | Effect on All Plans – September 30, 2019 |
| | Percentage Point Change | | Increase (Decrease) in PBO | | Increase (Decrease) in Pension Expense |
| Assumption: | | | | | |
| Discount rate | -0.5 pts | | $ | 120 |
| | $ | — |
|
| | +0.5 pts | | (107 | ) | | — |
|
| Assumed return on plan assets | -1.0 pts | | N/A (1) |
| | 14 |
|
| | +1.0 pts | | N/A (1) |
| | (14 | ) |
| | | | | | | | | | | | | | | | | |
| Effect on All Plans - September 30, 2020 |
| Percentage Point Change | | Increase (Decrease) in
PBO | | Increase (Decrease) in
Pension Expense |
| Assumption: | | | | | |
| Discount rate | -0.5 pts | | $ | 112 | | | $ | — | |
| +0.5 pts | | (100) | | | — | |
| Assumed return on plan assets | -1.0 pts | | N/A (1) | | 15 | |
| +1.0 pts | | N/A (1) | | (15) | |
(1) Not Applicable
Accounting guidance applicable to pensions does not require immediate recognition of the effects of a deviation between actual and assumed experience and the revision of an estimate. This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted and disclosed as an unrecognized gain or loss in the footnotes.Accumulated other comprehensive loss. Based on the September 30, 20192020 and 20182019 measurement dates, we had an unrecognized loss of $806$676 million and $699$806 million, respectively. A portion of this loss is amortized into earnings each fiscal year. Unrecognized losses for the U.S. and U.K. plans are being amortized into net periodic pension expense over the average life expectancy of the inactive participants of approximately 16 years and 2625 years, respectively.
In recognition of the long-term nature of the liabilities of the pension plans, we have targeted an asset allocation strategy designed to promote asset growth while maintaining an acceptable level of risk over the long term. Asset-liability studies are performed periodically to validate the continued appropriateness of these asset allocation targets. The asset allocation ranges for the U.S. planplans are 20–50 percent equity investments, 30–60 percent fixed income investments and 10–25 percent alternative investments. Alternative investments include private equity, real estate, hedge funds and partnership interests. The target asset allocation ranges for the non-U.S. plans are 15–20–35 percent equity investments, 30–6040 percent fixed income investments, 0–1015 percent real estate and 10–3015–35 percent alternative investments. The asset class mix and the percentage of securities in any asset class or market may vary as the risk/return characteristics of either individual market or asset classes vary over time.
The investment strategies for the pension plans are designed to achieve an appropriate diversification of investments as well as safety and security of the principal invested. Assets invested are allocated to certain global sub-asset categories within prescribed ranges in order to promote international diversification across security type, issuer type, investment style, industry group, and economic sector. Assets of the plans are both actively and passively managed. Policy limits are placed on the percentage of plan assets that can be invested in a security of any single issuer and minimum credit quality standards are established for debt securities. Meritor securities did not comprise any of the value of our worldwide pension assets as of September 30, 2019.2020.
Based on current assumptions, the fiscal year 20202021 net pension income is estimated to be $21$29 million.
Retiree Medical — We have retirement medical plans that cover certain of our U.S. and non-U.S. employees and provide for medical payments to eligible employees and dependents upon retirement. Our retiree medical obligations were measured as of September 30, 20192020 and September 30, 2018.2019.
The following are the significant assumptions used in the measurement of the accumulated postretirement benefit obligation (APBO)("APBO"):
|
| | | | | |
| | 2019 | | 2018 |
| Assumptions as of September 30: | | | |
| Discount rate | 2.98 | % | | 4.05 | % |
| Health care cost trend rate | 6.36 | % | | 6.18 | % |
| Ultimate health care trend rate | 4.69 | % | | 4.63 | % |
| Year ultimate rate is reached | 2028 |
| | 2024 |
|
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Assumptions as of September 30: | | | |
| Discount rate | 2.56 | % | | 2.98 | % |
| Health care cost trend rate | 6.07 | % | | 6.36 | % |
| Ultimate health care trend rate | 4.67 | % | | 4.69 | % |
| Year ultimate rate is reached | 2028 | | 2028 |
The discount rate is the rate used to calculate the present value of the APBO. The rate is determined based on high-quality fixed income investments that match the duration of expected benefit payments. We used the corporate AA/Aa bond rate for this assumption.
The health care cost trend rate represents our expected annual rates of change in the cost of health care benefits. Our projection for fiscal year 20202021 is 6.366.07 percent. For measurement purposes, the annual increase in health care costs was assumed to decrease gradually to 4.694.67 percent by fiscal year 2028 and remain at that level thereafter.
A one-percentage point change in the assumed health care cost trend rate for all years to, and including, the ultimate rate would have the following effects (in millions):
|
| | | | | | | |
| | 2019 | | 2018 |
| Effect on total of service and interest cost | | | |
| 1% Increase | $ | — |
| | $ | — |
|
| 1% Decrease | — |
| | — |
|
| Effect on APBO | | | |
| 1% Increase | 5 |
| | 4 |
|
| 1% Decrease | (4 | ) | | (4 | ) |
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Effect on total of service and interest cost | | | |
| 1% Increase | $ | — | | | $ | — | |
| 1% Decrease | — | | | — | |
| Effect on APBO | | | |
| 1% Increase | 6 | | | 5 | |
| 1% Decrease | (5) | | | (4) | |
Based on current assumptions, fiscal year 20202021 retiree medical income is estimated to be approximately $20$21 million.
Product Warranties — Our business segments record estimated product warranty costs at the time of shipment of products to customers. Liabilities for product recall campaigns are recorded at the time our obligation is known 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.
Significant factors and information used by management when estimating product warranty liabilities include:
•Past claims experience;
•Sales history;
•Product manufacturing and industry developments; and
•Recoveries from third parties, where applicable.
Asbestos — Contingencies for asbestos related matters are discussed in Note 22 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Income Taxes —Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If it is more likely than not that the deferred tax asset will be realized, no valuation allowance is recorded. Management's judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against the net deferred tax assets. The valuation allowance would need to be adjusted in the event future taxable income is materially different than amounts estimated. Significant judgments, estimates and factors considered by management in its determination of the probability of the realization of deferred tax assets include:
•Historical operating results;
•Expectations of future earnings;
•Tax planning strategies; and
•The extended period of time over which retirement medical and pension liabilities will be paid.
Refer to Note 21 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, for additional information on income tax related matters.
New Accounting Pronouncements — New Accounting Pronouncements are discussed in Note 2 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Item 7A. 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 fiscal year 2020, our reported financial results were adversely affected by appreciation of the U.S. dollar against foreign currencies. For fiscal year 2019, our reported financial results were adversely affected by appreciation of the U.S. dollar against foreign currencies.
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 as cash flow hedges of underlying foreign currency forecasted purchases and sales. Changes in the fair value of these contracts are recorded in Accumulated other comprehensive loss in the Consolidated Statement of Shareholders’ Equity and is recognized in operating income when the underlying forecasted transaction impacts earnings. These contracts generally mature within 18 months.
We use option contracts to mitigate foreign exchange exposure on expected future foreign currency-denominated purchases. We 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.
We use option contracts to mitigate the risk of volatility in the translation of foreign currency earnings to U.S. dollars. These option contracts did not qualify for a hedge accounting election. Changes in fair value associated with these contracts are recorded in the Consolidated Statement of Operations in other income, net.
We use cross-currency swap contracts to hedge a portion of our net investment in a foreign subsidiary against volatility in foreign exchange rates. These derivative instruments are designated and qualify as hedges of net investments in foreign operations. Settlements and changes in fair values of the instruments are recognized in foreign currency translation adjustments, a component of other comprehensive income (loss) on the Consolidated Statement of Comprehensive Income, to offset the changes in the values of the net investments being hedged.
In the third quarter of fiscal year 2018, we entered into multiple cross-currency swaps. These swaps hedged a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate. In the third quarter of fiscal year 2019, we unwound these cross-currency swaps and received proceeds of $19 million, $2 million of which related to net accrued interest receivable. In the third quarter of fiscal year 2019, we also entered into multiple new cross-currency swaps with a combined notional amount of $225 million. These swaps hedged a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate. In the second quarter of fiscal year 2020, we settled these cross-currency swap contracts and received proceeds of $11 million, $1 million of which related to net accrued interest receivable.
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 (in millions). The model assumes a 10% hypothetical change (increase or decrease) in exchange rates and instantaneous, parallel shifts of 50 basis points in interest rates.
| | | | | | | | | | | | | | | | | |
| Market Risk | Assuming a
10% Increase
in Rates | | Assuming a
10% Decrease
in Rates | | Change
In |
| Foreign Currency Sensitivity: | | | | | |
Forward contracts in USD (1) | (0.4) | | | 0.4 | | | Fair Value |
Forward contracts in Euro (1) | (2.1) | | | 2.1 | | | Fair Value |
Foreign currency denominated debt (2) | 0.4 | | | (0.4) | | | Fair Value |
| Foreign currency option contracts in USD | 1.7 | | | (0.6) | | | Fair Value |
| Foreign currency option contracts in Euro | (0.3) | | | 1.1 | | | Fair Value |
| | | | | |
| | | | | |
| Interest Rate Sensitivity: | Assuming a 50
BPS Increase in
Rates | | Assuming a 50
BPS Decrease in
Rates | | Change
In |
Debt - fixed rate (3) | $ | (35.0) | | | $ | 37.0 | | | Fair Value |
| Debt - variable rate | (0.8) | | | 0.8 | | | Cash Flow |
| | | | | |
(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.
(2) At September 30, 2020, the fair value of outstanding foreign currency denominated debt was $3.6 million. A 10% decrease in quoted currency exchange rates would result in a decrease of $0.4 million in foreign currency denominated debt. At September 30, 2020, a 10% increase in quoted currency exchange rates would result in an increase of $0.4 million in foreign currency denominated debt.
(3) At September 30, 2020, the fair value of outstanding debt was $1,317 million. A 50 basis points decrease in quoted interest rates would result in an increase of $37.0 million in the fair value of fixed rate debt. A 50 basis points increase in quoted interest rates would result in a decrease of $35.0 million in the fair value of fixed rate debt.
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholdersand the Board of Directors of Meritor, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Meritor, Inc. and subsidiaries (the "Company") as of September 27, 2020 and September 29, 2019, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the three years in the period ended September 27, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 27, 2020 and September 29, 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 27, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 27, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 12, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Contingencies — Asbestos —Rockwell — ArvinMeritor, Inc. ("AM"), a predecessor of Meritor, along with many other companies, has been named as a defendant in lawsuits alleging personal injury as a result of exposureRefer to asbestos used in certain components of Rockwell products many years ago. Liability forNote 22 to the financial statements
Critical Audit Matter Description
Reserves related to these claims was transferred at the timeconsist of the spin-offprojected indemnity and defense costs of the automotive business from Rockwell in 1997. Rockwell had approximately 1,400 pending active asbestos claims in lawsuits that name AM, together with many other companies, as defendants at September 30, 2019 and 2018.
A significant portion of the claims do not identify any of Rockwell’s products or specify which of the claimants, if any, were exposed to asbestos attributable to Rockwell’s products, and past experience has shown that the vast majority of the claimants will likely never identify any of Rockwell’s products. Historically, AM has been dismissed from the vast majority of similar claims filed in the past with no payment to claimants. For those claimants who do show that they worked with Rockwell’s products, management nevertheless believes it has meritorious defenses, in substantial part due to the integrity of the products involved and the lack of any impairing medical condition on the part of many claimants.
Pending and Future Claims: Wefuture asbestos-related claims. The Company engaged a third-party advisor with extensive experience in assessing asbestos-related liabilities to conduct a study to estimate its potential undiscounted liability for pending and future asbestos-related claims as of September 30, 2018. On a continual basis, management monitors the underlying claims data and experience, for the purpose of assessing the appropriateness of the assumptions used to estimate the liability. The increase in the estimated liability from the prior year study at both the low end and high end reflects a change in the forecast horizon utilized to estimate future claims, excluding legal costs and any potential recovery from insurance carriers. Previously, our pending and future claims estimates were based on a ten-year forecast period. In fiscal year 2018, we moved to a penultimate horizon for estimating our pending and future claims estimates. The penultimate horizon is defined as the second-to-last day of claims estimated to occur. The longer horizon estimate is now considered reasonable based on factors including our recent history and experience, the disciplined management of asbestos related litigation, an observance of trends indicating diminished volatility and greater consistency in the company's observable claims data, the maturity of the asbestos litigation overall and experience in recent insurance negotiations.
claims. As of September 30, 2019,27, 2020, the estimated probable rangebest estimate of equally likely possibilities of ourthe company’s obligation for asbestos-related claims over the next 4038 years is $91 million to $181$78 million. Based on the information contained in the actuarial study, and all other available information considered, management concluded that no amount within the range of potential liability was more likely than any other and, therefore, recorded the low end of the range. We recognized a liability for pending and future claims of $91 million as of September 30, 2019 compared to a liability of $103 million as of September 30, 2018. 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.
Recoveries: We identified asbestos-related reserves for Rockwell has insurance coverage that management believes coversas a critical audit matter because estimating projected indemnity and defense costs of pending and future asbestos-related claims involves significant estimation by management due to variables that are difficult to predict. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists, when performing audit procedures to evaluate whether the asbestos related reserves were appropriately recorded as of September 27, 2020.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the asbestos-related reserves for Rockwell included the following, among others:
•We tested the effectiveness of controls related to asbestos-related reserves, including management’s controls over estimating projected indemnity and above self-insurance retentions,defense costs of pending and future asbestos-related claims.
•We assessed the qualifications, experience, and objectivity of management’s third-party advisor.
•We tested the underlying data that served as the basis for the actuarial analysis, including historical claims, to test the inputs to the actuarial estimate for completeness and accuracy.
•We compared management’s prior-year projected indemnity and defense costs of pending and future asbestos-related claims to actual costs incurred during the current year to identify potential bias in the determination of the reserve, as well as to assess management’s ability to estimate the reserve.
•With the assistance of our actuarial specialists that have experience in the area of asbestos-related reserves, we assessed the reasonableness of the valuation methodology and significant assumptions.
| | | | | |
| /s/ | DELOITTE & TOUCHE LLP |
| DELOITTE & TOUCHE LLP |
Detroit, Michigan
November 12, 2020
We have served as the Company's auditor since 1996.
MERITOR, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| Sales | $ | 3,044 | | | $ | 4,388 | | | $ | 4,178 | |
| Cost of sales | (2,716) | | | (3,748) | | | (3,553) | |
| GROSS MARGIN | 328 | | | 640 | | | 625 | |
| Selling, general and administrative | (221) | | | (256) | | | (313) | |
| Income from WABCO distribution termination | 265 | | | 0 | | | 0 | |
| | | | | |
| | | | | |
| Other operating expense, net | (40) | | | (21) | | | (20) | |
| OPERATING INCOME | 332 | | | 363 | | | 292 | |
| Other income | 46 | | | 40 | | | 26 | |
| Equity in earnings of affiliates | 14 | | | 31 | | | 27 | |
| Interest expense, net | (66) | | | (57) | | | (67) | |
| INCOME BEFORE INCOME TAXES | 326 | | | 377 | | | 278 | |
| Provision for income taxes | (78) | | | (82) | | | (149) | |
| INCOME FROM CONTINUING OPERATIONS | 248 | | | 295 | | | 129 | |
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax | 1 | | | 1 | | | (3) | |
| NET INCOME | 249 | | | 296 | | | 126 | |
| Less: Net income attributable to noncontrolling interests | (4) | | | (5) | | | (9) | |
| NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 245 | | | $ | 291 | | | $ | 117 | |
| NET INCOME ATTRIBUTABLE TO MERITOR, INC. | | | | | |
| Net income from continuing operations | $ | 244 | | | $ | 290 | | | $ | 120 | |
| Income (loss) from discontinued operations | 1 | | | 1 | | | (3) | |
| Net income | $ | 245 | | | $ | 291 | | | $ | 117 | |
| BASIC EARNINGS (LOSS) PER SHARE | | | | | |
| Continuing operations | $ | 3.30 | | | $ | 3.49 | | | $ | 1.37 | |
| Discontinued operations | 0.01 | | | 0.01 | | | (0.03) | |
| Basic earnings per share | $ | 3.31 | | | $ | 3.50 | | | $ | 1.34 | |
| DILUTED EARNINGS (LOSS) PER SHARE | | | | | |
| Continuing operations | $ | 3.23 | | | $ | 3.36 | | | $ | 1.31 | |
| Discontinued operations | 0.01 | | | 0.01 | | | (0.03) | |
| Diluted earnings per share | $ | 3.24 | | | $ | 3.37 | | | $ | 1.28 | |
| Basic average common shares outstanding | 74.0 | | | 83.2 | | | 87.5 | |
| Diluted average common shares outstanding | 75.6 | | | 86.3 | | | 91.2 | |
See Notes to Consolidated Financial Statements.
MERITOR, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2020 | | 2019 | | 2018 |
| Net income | $ | 249 | | | $ | 296 | | | $ | 126 | |
| Other comprehensive income: | | | | | |
| Foreign currency translation adjustments | (21) | | | (18) | | | (51) | |
| Pension and other postretirement benefit related adjustments (net of tax of $27, $22 and $6 for the year ended September 30, 2020, 2019 and 2018, respectively | 89 | | | (96) | | | 24 | |
| Unrealized gain (loss) on cash flow hedges | 0 | | | (2) | | | 4 | |
| | | | | |
| | | | | |
| Total comprehensive income | 317 | | | 180 | | | 103 | |
| Less: Comprehensive income attributable to noncontrolling interest | (5) | | | (4) | | | (7) | |
| Comprehensive income attributable to Meritor, Inc. | $ | 312 | | | $ | 176 | | | $ | 96 | |
See Notes to Consolidated Financial Statements.
MERITOR, INC.
CONSOLIDATED BALANCE SHEET
(In millions)
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| ASSETS | | | |
| CURRENT ASSETS: | | | |
| Cash and cash equivalents | $ | 315 | | | $ | 108 | |
| Receivables, trade and other, net | 479 | | | 551 | |
| Inventories | 435 | | | 526 | |
| Other current assets | 54 | | | 31 | |
| TOTAL CURRENT ASSETS | 1,283 | | | 1,216 | |
| NET PROPERTY | 515 | | | 515 | |
| GOODWILL | 501 | | | 478 | |
| OTHER ASSETS | 585 | | | 606 | |
| TOTAL ASSETS | $ | 2,884 | | | $ | 2,815 | |
| LIABILITIES AND EQUITY | | | |
| CURRENT LIABILITIES: | | | |
| Short-term debt | $ | 39 | | | $ | 41 | |
| Accounts and notes payable | 423 | | | 610 | |
| Other current liabilities | 264 | | | 285 | |
| TOTAL CURRENT LIABILITIES | 726 | | | 936 | |
| LONG-TERM DEBT | 1,188 | | | 902 | |
| RETIREMENT BENEFITS | 196 | | | 336 | |
| OTHER LIABILITIES | 279 | | | 226 | |
| TOTAL LIABILITIES | 2,389 | | | 2,400 | |
| COMMITMENTS AND CONTINGENCIES (NOTE 22) | | | |
| | | |
| | | |
| EQUITY: | | | |
| Common stock (September 30, 2020 and 2019,103.7 and 104.1 shares issued and 72.3 and 81.4 shares outstanding, respectively | 105 | | | 104 | |
| Additional paid-in capital | 808 | | | 803 | |
| Retained earnings | 736 | | | 491 | |
| Treasury stock, at cost (September 30, 2020 and September 30, 2019, 31.4 and 22.7 shares, respectively) | (573) | | | (332) | |
| Accumulated other comprehensive loss | (614) | | | (681) | |
| Total equity attributable to Meritor, Inc. | 462 | | | 385 | |
| Noncontrolling interests | 33 | | | 30 | |
| TOTAL EQUITY | 495 | | | 415 | |
| TOTAL LIABILITIES AND EQUITY | $ | 2,884 | | | $ | 2,815 | |
See Notes to Consolidated Financial Statements.
MERITOR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| OPERATING ACTIVITIES | | | | | |
| CASH PROVIDED BY OPERATING ACTIVITIES (see Note 25) | $ | 265 | | | $ | 256 | | | $ | 251 | |
| INVESTING ACTIVITIES | | | | | |
| Capital expenditures | (85) | | | (103) | | | (104) | |
| Proceeds from sale of equity method investment | 0 | | | 0 | | | 250 | |
| Cash paid for business acquisitions, net of cash acquired | 0 | | | (168) | | | (35) | |
| | | | | |
| Cash paid for investment in Transportation Power, Inc. | (13) | | | (6) | | | (6) | |
| | | | | |
| | | | | |
| Other investing activities | 9 | | | 6 | | | 6 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | (89) | | | (271) | | | 111 | |
| FINANCING ACTIVITIES | | | | | |
| Securitization | (8) | | | (38) | | | (43) | |
| Proceeds from debt issuances | 300 | | | 0 | | | 0 | |
| Borrowings against revolving line of credit | 304 | | | 190 | | | 55 | |
| Repayments of line of credit | (304) | | | (190) | | | (55) | |
| Term loan borrowings | 0 | | | 175 | | | 0 | |
| Redemption of notes | 0 | | | (24) | | | (181) | |
| Repayment of notes and term loan | (8) | | | 0 | | | 0 | |
| Deferred issuance costs | 0 | | | (4) | | | 0 | |
| Debt issuance costs | (5) | | | 0 | | | 0 | |
| Other financing activities | (2) | | | (2) | | | (5) | |
| Net change in debt | 277 | | | 107 | | | (229) | |
| Repurchase of common stock | (241) | | | (96) | | | (100) | |
| CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | 36 | | | 11 | | | (329) | |
| EFFECT OF CHANGES IN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | (5) | | | (3) | | | (6) | |
| CHANGE IN CASH AND CASH EQUIVALENTS | 207 | | | (7) | | | 27 | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 108 | | | 115 | | | 88 | |
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 315 | | | $ | 108 | | | $ | 115 | |
See Notes to Consolidated Financial Statements.
MERITOR, INC.
CONSOLIDATED STATEMENT OF EQUITY
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common
Stock | | Additional
Paid-in
Capital | | Retained Earnings | | Treasury Stock | | Accumulated
Other
Comprehensive
Loss | | Total Equity
Attributable to
Meritor, Inc. | | Non-
controlling
Interests | | Total |
| Beginning balance at September 30, 2019 | $ | 104 | | | $ | 803 | | | $ | 491 | | | $ | (332) | | | $ | (681) | | | $ | 385 | | | $ | 30 | | | $ | 415 | |
| Comprehensive income | — | | | — | | | 245 | | | — | | | 67 | | | 312 | | | 5 | | | 317 | |
| Vesting of restricted stock | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Equity based compensation
expense | — | | | 7 | | | — | | | — | | | — | | | 7 | | | — | | | 7 | |
| | | | | | | | | | | | | | | |
| Repurchase of common stock | — | | | — | | | — | | | (241) | | | — | | | (241) | | | — | | | (241) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Non-controlling interest
dividends | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
| Other | — | | | (1) | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
| Ending balance at September 30, 2020 | $ | 105 | | | $ | 808 | | | $ | 736 | | | $ | (573) | | | $ | (614) | | | $ | 462 | | | $ | 33 | | | $ | 495 | |
| | | | | | | | | | | | | | | |
Beginning balance at
September 30, 2018 | $ | 102 | | | $ | 787 | | | $ | 200 | | | $ | (236) | | | $ | (566) | | | $ | 287 | | | $ | 30 | | | $ | 317 | |
| Comprehensive income (loss) | — | | | — | | | 291 | | | — | | (115) | | | 176 | | | 4 | | | 180 | |
| Vesting of restricted stock | 2 | | | (2) | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Equity based compensation expense | — | | | 18 | | | — | | | — | | | — | | | 18 | | | — | | | 18 | |
| Repurchase of common stock | — | | | — | | | — | | | (96) | | | — | | | (96) | | | — | | | (96) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Non-controlling interest dividends | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
| | | | | | | | | | | | | | | |
Ending balance at
September 30, 2019 | $ | 104 | | | $ | 803 | | | $ | 491 | | | $ | (332) | | | $ | (681) | | | $ | 385 | | | $ | 30 | | | $ | 415 | |
| | | | | | | | | | | | | | | |
Beginning balance at
September 30, 2017 | $ | 101 | | | $ | 765 | | | $ | 83 | | | $ | (136) | | | $ | (545) | | | $ | 268 | | | $ | 27 | | | $ | 295 | |
| Comprehensive income (loss) | — | | | — | | | 117 | | | — | | | (21) | | | 96 | | | 7 | | | 103 | |
| Vesting of restricted stock | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Equity based compensation expense | — | | | 20 | | | — | | | — | | | — | | | 20 | | | — | | | 20 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Convertible securities with cash settlement | — | | | 1 | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| Repurchase of common stock | — | | | — | | | — | | | (100) | | | — | | | (100) | | | — | | | (100) | |
| Non-controlling interest dividends | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
| Other | — | | | 2 | | | — | | | — | | | — | | | 2 | | | (2) | | | 0 | |
Ending balance at
September 30, 2018 | $ | 102 | | | $ | 787 | | | $ | 200 | | | $ | (236) | | | $ | (566) | | | $ | 287 | | | $ | 30 | | | $ | 317 | |
See Notes to Consolidated Financial Statements.
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.BASIS OF PRESENTATION
Meritor, Inc. (the "company" or "Meritor"), headquartered in Troy, Michigan, is a significant portionpremier global supplier of these claims. 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 Consolidated Financial Statements are those of the company and its consolidated subsidiaries.
The company’s fiscal year ends on the Sunday nearest September 30. The 2020, 2019 and 2018 fiscal years ended on September 27, 2020, September 29, 2019 and September 30, 2018, respectively. All year and quarter references relate to the company’s fiscal year and fiscal quarters, unless otherwise stated. For ease of presentation, September 30 is used consistently throughout this report to represent the fiscal year end.
COVID-19 Pandemic Update
In 2004, we initiated litigation againstMarch 2020, the World Health Organization declared a global health pandemic related to the outbreak of a novel coronavirus. The COVID-19 pandemic adversely affected the company's financial performance in the second, third and fourth quarters of fiscal year 2020 and could have an impact throughout fiscal year 2021. In response to the COVID-19 pandemic, government health officials have recommended and mandated precautions to mitigate the spread of the virus, including shelter-in-place orders, prohibitions on public gatherings and other similar measures. As a result, the company and certain of these carriersthe company's customers and suppliers temporarily closed select manufacturing locations beginning late in the second quarter of fiscal year 2020, continuing into the third quarter of fiscal year 2020. As of May 31, 2020, all of the company's global facilities were back open and operating with limited production. Production volume levels continued to enforce the insurance policies. Duringincrease through the fourth quarter of fiscal year 2016, we executed settlement agreements2020. Most of the company’s salaried employees are primarily working remotely until further notice. There is uncertainty around the duration and breadth of the COVID-19 pandemic, as well as the impact it will have on the company's operations, supply chain and demand for its products. As a result, the ultimate impact on the company's business, financial condition or operating results cannot be reasonably estimated at this time.
2.SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in accordance with twoaccounting principles generally accepted in the United States of these carriers, thereby resolvingAmerica (GAAP) requires the litigation against those particular carriers. Pursuantuse of estimates and assumptions related to the termsreporting of oneassets, liabilities, revenues, expenses and related disclosures. Actual results could differ from these estimates. Significant estimates and assumptions were used to review goodwill and other long-lived assets for impairment (see Notes 6 and 10), environmental liabilities (see Notes 13, 14 and 22), product warranty liabilities (see Note 13), long-term incentive compensation plan obligations (see Note 18), retiree medical and pension obligations (see Notes 19 and 20), income taxes (see Note 21), and contingencies, including asbestos (see Note 22).
Concentration of Credit Risk
In the normal course of business, the company provides credit to customers. The company limits its credit risk by performing ongoing credit evaluations of its customers and maintaining reserves for potential credit losses and through accounts receivable factoring programs. The company’s accounts receivables are generally due from medium- and heavy-duty truck OEMs, specialty vehicle manufacturers, aftermarket customers, and trailer producers. The company’s ten largest customers accounted for 69 percent, 77 percent and 75 percent of sales in fiscal years 2020, 2019 and 2018, respectively. Sales to the company's top three customers were 50 percent, 54 percent and 52 percent of total sales in fiscal years 2020, 2019 and 2018, respectively. At September 30, 2020 and 2019, 25 percent and 26 percent of the company's trade accounts receivable were from the company's three largest customers.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Consolidation and Joint Ventures
The Consolidated Financial Statements include the accounts of the company and those subsidiaries in which the company has control. All intercompany balances and transactions are eliminated in consolidation. The results of operations of controlled subsidiaries are included in the Consolidated Financial Statements and are offset by a related noncontrolling interest recorded for the noncontrolling partners’ ownership. Investments in affiliates that are not controlled are reported using the equity method of accounting (see Note 12).
Foreign Currency
Local currencies are generally considered the functional currencies for operations outside the U.S. For operations reporting in local currencies, assets and liabilities are translated at year-end exchange rates with cumulative currency translation adjustments included as a component of Accumulated Other Comprehensive Loss in the Consolidated Balance Sheet. Income and expense items are translated at average rates of exchange during the year.
Impairment of Long-Lived Assets
Long-lived assets, excluding goodwill, to be held and used are reviewed for impairment whenever adverse events or changes in circumstances indicate a possible impairment. An impairment loss is recognized when a long-lived asset group is not recoverable, based on undiscounted cash flows over the remaining useful life of the primary asset of the group, and the long lived asset group's carrying value exceeds the fair value.
Long-lived assets held for sale are recorded at the lower of their carrying amount or estimated fair value less cost to sell.
Allowance for Doubtful Accounts
An allowance for uncollectible trade receivables is recorded when accounts are deemed uncollectible based on consideration of write-off history, aging analysis, and any specific, known troubled accounts.
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 restricted shares, restricted share units, performance share units, and convertible securities, if applicable.
A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| Basic average common shares outstanding | 74.0 | | | 83.2 | | | 87.5 | |
| | | | | |
| Impact of restricted shares, restricted share units and performance share units | 0.8 | | | 2.2 | | | 2.8 | |
| Impact of convertible notes | 0.8 | | | 0.9 | | | 0.9 | |
| Diluted average common shares outstanding | 75.6 | | | 86.3 | | | 91.2 | |
In November 2019, 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 1 share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $25.25, which was the company’s share price on the grant date of December 1, 2019. The Board of Directors also approved a grant of 0.3 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $25.25, which was the company's share price on the grant date of December 1, 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2019 to September 30, 2022, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin, new business wins, free cash flow conversion and adjusted diluted earnings per share from continuing operations, each of which is weighted at 25%. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.4 million performance share units.
In November 2018, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the company's long-term incentive plan. Each performance share unit represents the right to receive 1 share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $16.50, which was the company’s share price on the grant date of December 1, 2018. The Board of Directors also approved a grant of 0.4 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $16.50, which was the company's share price on the grant date of December 1, 2018.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2018 to September 30, 2021, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin and adjusted diluted earnings per share from continuing operations at the following weights: 50% associated with achieving an adjusted EBITDA margin target and 50% associated with achieving an adjusted diluted earnings per share from continuing operations target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.5 million performance share units.
In November 2017, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive 1 share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $24.79, which was the company’s share price on the grant date of December 1, 2017. The Board of Directors also approved a grant of 0.3 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $24.79, which was the company's share price on the grant date of December 1, 2017.
The actual number of performance share units that vested depended upon the company’s performance relative to the established goals for the three-year performance period of October 1, 2017 to September 30, 2020, which was measured at the end of the performance period.
Other
Other significant accounting policies are included in the related notes, specifically, goodwill (Note 6), inventories (Note 9), property and depreciation (Note 10), product warranties (Note 13), financial instruments (Note 16), equity based compensation (Note 18), retirement medical plans (Note 19), retirement pension plans (Note 20), income taxes (Note 21) and environmental and asbestos-related liabilities (Note 22).
Accounting standards implemented during fiscal year 2020
On October 1, 2019, the company implemented Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842). The company elected the practical expedient package, which allowed the company to not reassess whether existing contracts contain a lease and to not reassess classification of existing leases. The company also adopted ASU 2018-11, Leases (Topic 842) Targeted Improvements, electing to not separate lease and non-lease components in contracts that contain both and electing to not restate comparative periods when adopting ASU 2016-02. As a result, the company recognized a right-of-use asset and lease liability as a lessee for substantially all existing operating leases and has included new and expanded disclosures (Note 4).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounting standards to be implemented
The following represent the standards that may result in a significant change in practice and/or have a significant financial impact on the company.
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including accounts receivable. The ASU also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The company expects to adopt this guidance in the first quarter of fiscal year 2021. The guidance is expected to have an impact on the company's accounting policies and procedures related to calculation of allowance for doubtful accounts receivable but is not expected to have a material impact on its Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU add, modify, and eliminate certain disclosure requirements on fair value measurements in Topic 820. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Certain amendments should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. Others should be applied retrospectively. The company expects to adopt this guidance in the first quarter of fiscal year 2021. The company is currently evaluating the potential impact of this guidance on its accounting policies and its Consolidated Financial Statements.
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (Subtopic 815-40). The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASC 470-20 outlines five models to allocate the proceeds attributable to the issuance of a convertible debt instrument. This ASU removes from U.S. GAAP the separation models for convertible debt with a cash conversion feature (CCF) and convertible debt with a beneficial conversion feature (BCF). As a result of adopting this ASU, entities are not required to separately present in equity an embedded conversion feature in such debt. Instead, they should account for a convertible debt instrument wholly as debt. Applying the separation models in ASC 470-20 to convertible instruments with a CCF or BCF involved the recognition of a debt discount, which is amortized to interest expense. The elimination of CCF and BCF models will reduce reported interest expense and increase reported net income for convertible instruments issued within the scope of those settlement agreements,models before the adoption of ASU 2020-06. The amendments in this update are required to be adopted by public business entities in fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal year beginning after December 15, 2020, including interim periods within those fiscal years. Entities are permitted to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The company is currently evaluating the potential impact of this guidance on its accounting policies and its Consolidated Financial Statements.
3. ACQUISITIONS AND DIVESTITURE
Acquisition of TransPower Business
On January 16, 2020, Meritor acquired 100 percent of the voting equity interest of Transportation Power, Inc. ("TransPower") for a cash purchase price of approximately $15 million, subject to certain purchase price adjustments. Prior to the acquisition, the fair value of the company’s investment in TransPower was $12 million. The TransPower acquisition was accounted for as a business combination. With the addition of TransPower's product portfolio, Meritor advances its strategic priorities through increased investment in next-generation technologies.
Pro forma financial information of the company is presented in the following table for the twelve months ended September 30, 2020 and 2019 as if the TransPower acquisition had occurred on October 1, 2018. The pro forma financial
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
information is unaudited and is provided for informational purposes only and does not purport to be indicative of the results which would have actually been attained had the acquisition occurred on October 1, 2018 (in millions).
| | | | | | | | | | | |
| Twelve Months Ended September 30, |
| 2020 | | 2019 |
| | | |
| Sales | $ | 3,045 | | | $ | 4,394 | |
| Net income attributable to Meritor, Inc. | 244 | | | 282 | |
The purchase price was allocated on a provisional basis as of January 16, 2020. Assets acquired and liabilities assumed were recorded at estimated fair values based on management's estimates, available information, and reasonable and supportable assumptions. Additionally, the company is utilizing a third-party to assist with certain estimates of fair values. The provisional purchase price allocation, which is subject to change and may be subsequently adjusted to reflect final valuation results and other adjustments, is shown below (in millions). The company is reviewing and may record other additional measurement period adjustments in fiscal year 2021. All goodwill resulting from the acquisition of TransPower was assigned to the Commercial Truck reportable segment (see Note 6).
| | | | | | | | | | | | | | | | | |
| Estimated Fair Value |
| As of
January 16, 2020 | | Measurement Period Adjustments | | As of
September 30, 2020 |
| Purchase price | $ | 15 | | | $ | 0 | | | $ | 15 | |
| Investments in TransPower | 12 | | | 0 | | | 12 | |
| $ | 27 | | | $ | 0 | | | $ | 27 | |
| Assets acquired and liabilities assumed: | | | | | |
| Cash | 2 | | | 0 | | | 2 | |
| Receivables, net | 5 | | | 0 | | | 5 | |
| Inventories, net | 8 | | | 0 | | | 8 | |
| PP&E | 10 | | | (1) | | | 9 | |
| Identifiable intangible assets | 0 | | | 11 | | | 11 | |
| Other assets | 0 | | | (1) | | | (1) | |
| Accounts payable | (3) | | | 0 | | | (3) | |
| Other current liabilities | (17) | | | 0 | | | (17) | |
| Total identifiable net assets acquired | 5 | | | 9 | | | 14 | |
| | | | | |
| Goodwill and other intangible assets resulting from the acquisition of TransPower | 22 | | | (9) | | | 13 | |
| $ | 27 | | | $ | 0 | | | $ | 27 | |
Acquisition of AxleTech Business
On July 26, 2019, the company acquired 100 percent of the voting equity interest of the AxleTech group companies for approximately $179 million in cash, subject to certain purchase price adjustments. The company funded the acquisition with the term loan under the senior secured revolving credit agreement (see Note 15). The AxleTech acquisition was accounted for as a business combination.
The addition of AxleTech enhanced Meritor’s growth platform with the addition of a complementary product portfolio that includes a full line of independent suspensions, axles, braking solutions and drivetrain components across the off-highway, defense, specialty and aftermarket markets. AxleTech operates within Meritor’s Aftermarket and Industrial segment.
As of September 30, 2020, the company finalized all measurement period adjustments related to the AxleTech acquisition. Since completion of initial estimates in the fourth quarter of fiscal year 2016 we received $322019, the company recorded a net $5 million measurement period adjustment to decrease the fair value of identifiable net assets acquired in the AxleTech transaction,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
resulting in a corresponding $5 million increase to goodwill. These adjustments were made to reflect additional available information and updated valuation results, which included valuation of technology and customer relationships. All goodwill resulting from the AxleTech acquisition was assigned to the Aftermarket and Industrial reportable segment (see Note 6). Recorded goodwill consists largely of the synergies and economies of scale expected from combining the operations of the company and AxleTech.
The company incurred acquisition related costs of $1 million and $6 million as of September 30, 2020, and September 30, 2019, respectively, which were recorded as incurred and have been classified as either cost of sales or selling, general, and administrative expenses in the Consolidated Statement of Operations for the years ended September 30, 2020 and September 30, 2019.
| | | | | | | | | | | | | | | | | |
| Estimated Fair Value |
| As of
September 30, 2019 | | Measurement Period Adjustments | | As of
September 30, 2020 |
| Purchase price | $ | 179 | | | $ | (2) | | | $ | 177 | |
| | | | | |
| | | | | |
| Assets acquired and liabilities assumed: | | | | | |
| Cash | 11 | | | 0 | | | 11 | |
| Receivables, net | 37 | | | (2) | | | 35 | |
| Inventories, net | 70 | | | (2) | | | 68 | |
| Identifiable intangible assets | 46 | | | 7 | | | 53 | |
| Other assets | 9 | | | (1) | | | 8 | |
| PP&E | 26 | | | 7 | | | 33 | |
| Accounts payable | (33) | | | 1 | | | (32) | |
| Other liabilities | (48) | | | (17) | | | (65) | |
| Total identifiable net assets acquired | 118 | | | (7) | | | 111 | |
| | | | | |
| Goodwill and other intangible assets resulting from the acquisition of AxleTech | 61 | | | 5 | | | 66 | |
| $ | 179 | | | $ | (2) | | | $ | 177 | |
Acquisition of AAG Business
On April 30, 2018, the company acquired substantially all of the assets of AA Gear & Manufacturing, Inc. ("AAG") for a cash from an insurer,purchase price of which $10approximately $35 million and the assumption of certain liabilities. AAG provides low-to-medium volume batch manufacturing for complex gear and shaft applications, as well as quick-turnaround prototyping solutions and emergency plant support. The AAG acquisition was recognizedaccounted for as a reduction in asbestos expense, and $22business combination. Of the $35 million, $11 million was recorded as a liability to the insurance carrier as it is required to be returned to the carrier if additional asbestos liability is not ultimately incurred. During fiscal years 2018various tangible assets acquired and 2017, Rockwell recognized an additionalliabilities assumed, $12 million was recorded related to amortizable intangibles and $10$12 million respectivelywas recorded as goodwill.
Sale of the cash settlement proceeds as a reductionOwnership Interest in asbestos expense. DuringMeritor WABCO JV
In the fourth quarter of fiscal year 2018, we entered into2017, Meritor, Inc. closed on the sale of its interest in Meritor WABCO Vehicle Control Systems ("Meritor WABCO") to a settlementsubsidiary of its joint venture partner, WABCO Holdings Inc. ("WABCO"). The total purchase price for the sale was $250 million.
The company remained the exclusive distributor of a certain range of WABCO's aftermarket products in the United States and Canada and the non-exclusive distributor of these products in Mexico for a period of up to 10 years following the completion of the transaction. The purchase agreement included a provision regarding certain future options of the parties to resolve additional disputed coverage resulting from asbestos claims.terminate the distribution arrangement at certain points during the first three and a half years after the closing at an exercise price of between $225 million and $265 million based on the earnings of the business. On September 15, 2018, we13, 2019, the company gave notice of its intention to exercise its option to terminate the aftermarket distribution arrangement with WABCO. On March 13, 2020 the company closed on the transaction and received $3$265 million, from WABCO in cashconnection with the termination of the arrangement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. LEASES
The company’s lease portfolio is comprised of leases of real estate, including manufacturing and office facilities, and leases of personal property, including machinery and other equipment and IT equipment. Operating leases with an initial term of 12 months or less are not recorded in the Consolidated Balance Sheet and related lease expense is recognized on a $28 million insurance receivablestraight-line basis over the lease term. Short-term lease costs and variable lease costs were insignificant in the twelve months ended September 30, 2020.
For all asset classes, the company has elected to adopt the practical expedient under ASC 842 to not separate lease and non-lease components in contracts that contain both. These lease agreements are accounted for as a single lease component for all classes of underlying assets. The company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As the discount rate implicit in the lease is typically unknown, the discount rate used to determine the lease liability for the majority of our leases is the collateralized incremental borrowing rate in the applicable geographic area for a similar term and amount as the lease agreement.
Components of lease expense (in millions)
| | | | | |
| September 30, 2020 |
| |
| |
| |
| Finance lease costs | $ | 3 | |
| |
| Operating lease costs | 20 | |
| |
| Total lease costs | $ | 23 | |
The following table provides a summary of the location and amounts related to this settlement. finance leases recognized in the Consolidated Balance Sheet (in millions).
| | | | | | | | | | | |
| Classification | | September 30, 2020 |
| Finance lease right-of-use assets | Net Property | | $ | 5 | |
| Finance lease liabilities | Short-term debt | | 3 | |
| Finance lease liabilities | Long-term debt | | 3 | |
The insurance receivables for Rockwell’s asbestos-related liabilities totaled $61 millionfollowing table provides a summary of the location and $68 millionamounts related to operating leases recognized in the Consolidated Balance Sheet (in millions).
| | | | | | | | | | | |
| Classification | | September 30, 2020 |
| Operating lease right-of-use assets | Other assets | | $ | 70 | |
| Operating lease liabilities | Other current liabilities | | 15 | |
| Operating lease liabilities | Other liabilities | | 59 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables summarize additional information related to our lease agreements.
Supplemental cash flow information related to leases (in millions)
| | | | | |
| September 30, 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| Operating cash flows used for operating leases | $ | 19 | |
| |
| Financing cash flows used for finance leases | 2 | |
| Right-of-use assets obtained in exchange for lease obligations: | |
| Operating leases | 8 | |
| Finance leases | 3 | |
Supplemental balance sheet information related to leases
| | | | | |
| September 30, 2020 |
| Weighted-average remaining lease term (years): | |
| Operating leases | 8.55 |
| Finance leases | 2.21 |
| Weighted-average discount rate: | |
| Operating leases | 4.5 | % |
| Finance leases | 5.0 | % |
Maturities (in millions)
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
| 2021 | 17 | | | 3 | |
| 2022 | 14 | | | 2 | |
| 2023 | 13 | | | 1 | |
| 2024 | 9 | | | 0 | |
| Thereafter | 40 | | | 0 | |
| Total lease payments | 93 | | | 6 | |
| Less: Impact of discounting future lease payments | (19) | | | 0 | |
| Present value of lease liabilities | $ | 74 | | | $ | 6 | |
Disclosures related to periods prior to adoption of ASU 2016-02
Cash obligations under future minimum rental commitments under operating leases as of September 30, 2019 and 2018, respectively. Includedare shown in the table below (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total |
| Lease commitments | $ | 18 | | | $ | 15 | | | $ | 14 | | | $ | 13 | | | $ | 13 | | | $ | 25 | | | $ | 98 | |
5.REVENUE
Revenue is measured based on the consideration to which the company expects to be entitled, and is presented net of any estimates of customer sales allowances, incentives, rebates, and returns. The company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the company from a customer, are excluded from revenue.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost, as opposed to a distinct performance obligation, and are included in cost of sales.
Nature of goods and services
The following is a description of principal activities - separated by reportable segments - from which the company generates its revenue.
The Commercial Truck segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks and other applications in North America, South America, Europe and Asia Pacific. It also supplies a variety of undercarriage products and systems for trailer applications in North America. This segment also includes the company's aftermarket businesses in Asia Pacific and South America.
The Aftermarket and Industrial segment supplies axles, brakes, drivelines, suspension parts and other replacement parts to commercial vehicle and industrial aftermarket customers, primarily in North America and Europe. In addition, this segment supplies drivetrain systems and certain components, including axles, drivelines, brakes and suspension systems for military, construction, bus and coach, fire and emergency and other applications in North America and Europe.
Although the company may enter into long-term supply arrangements with its major customers, the prices and volumes are not fixed over the term of the arrangements and a contract does not exist under the scope of Topic 606 until prices and volumes are known. As such, individual customer releases or purchase orders represent the contract with the customer.
The company accounts for individual products and services separately if they are distinct (i.e., if a product or service is separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The company has identified certain performance obligations related to brake pad fitting and axle dressing where it is acting as an agent and, therefore, recognizes revenue on a net basis for satisfaction of those performance obligations.
The company recognizes revenue for the sale of goods at the point in time when the customer takes control of the goods. As such, revenue is recognized upon shipment of product and transfer of ownership to the customer. The amount of revenue recognized is based on the purchase order price and adjusted for variable consideration (i.e., customer sales allowances, incentives, rebates, and returns). Provisions for customer sales allowances, incentives, rebates, and returns are recorded as a reduction of sales at the time of revenue recognition based primarily on historical experience. The company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 90 days.
The company provides warranties on some of its products. The company records estimated product warranty costs at the time of shipment of products to customers (see Note 13 and Note 14).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Disaggregation of revenue
In the following tables, revenue is disaggregated for each of our reportable segments by primary geographical market for the year ended September 30, 2018 amount is an increase2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Year Ended September 30, 2020 | | | | |
| Primary Geographical Market | | Commercial Truck | | Aftermarket and Industrial | | Total | | | | |
| U.S. | | $ | 1,052 | | | $ | 731 | | | $ | 1,783 | | | | | |
| Canada | | 0 | | | 54 | | | 54 | | | | | |
| Mexico | | 129 | | | 18 | | | 147 | | | | | |
| Total North America | | 1,181 | | | 803 | | | 1,984 | | | | | |
| Sweden | | 202 | | | 0 | | | 202 | | | | | |
| Italy | | 153 | | | 13 | | | 166 | | | | | |
| United Kingdom | | 105 | | | 9 | | | 114 | | | | | |
| Other Europe | | 5 | | | 134 | | | 139 | | | | | |
| Total Europe | | 465 | | | 156 | | | 621 | | | | | |
| Brazil | | 170 | | | 2 | | | 172 | | | | | |
| China | | 134 | | | 1 | | | 135 | | | | | |
| India | | 70 | | | 2 | | | 72 | | | | | |
| Other Asia-Pacific | | 60 | | | 0 | | | 60 | | | | | |
| Total sales | | $ | 2,080 | | | $ | 964 | | | $ | 3,044 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Year Ended September 30, 2019 (1) | | | | |
| Primary Geographical Market | | Commercial Truck | | Aftermarket and Industrial | | Total | | | | |
| U.S. | | $ | 1,737 | | | $ | 885 | | | $ | 2,622 | | | | | |
| Canada | | 0 | | | 69 | | | 69 | | | | | |
| Mexico | | 229 | | | 20 | | | 249 | | | | | |
| Total North America | | 1,966 | | | 974 | | | 2,940 | | | | | |
| Sweden | | 276 | | | 0 | | | 276 | | | | | |
| Italy | | 218 | | | 16 | | | 234 | | | | | |
| United Kingdom | | 155 | | | 10 | | | 165 | | | | | |
| Other Europe | | 10 | | | 81 | | | 91 | | | | | |
| Total Europe | | 659 | | | 107 | | | 766 | | | | | |
| Brazil | | 248 | | | 0 | | | 248 | | | | | |
| China | | 153 | | | 0 | | | 153 | | | | | |
| India | | 197 | | | 0 | | | 197 | | | | | |
| Other Asia-Pacific | | 84 | | | 0 | | | 84 | | | | | |
| Total sales | | $ | 3,307 | | | $ | 1,081 | | | $ | 4,388 | | | | | |
(1)Amounts for the year ended September 30, 2019 have been recast to previous settlementreflect reportable segment changes.
Contract balances
As of September 30, 2020 and September 30, 2019, Trade receivables, resulting fromnet, which are included in Receivables, trade and other, net, on the extended forecast horizon which led to a balance of $40Consolidated Balance Sheet, were $421 million for those previous settlement receivablesand $517 million, respectively.
For the year ended September 30, 2020, the company had no material bad-debt expense and there were no material contract
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
assets, contract liabilities or deferred contract costs recorded on the Consolidated Balance Sheet as of September 30, 20182020.
Contract costs
The amounts recorded forcompany applies the asbestos-related reservespractical expedient provided in Topic 606 and recoveries from insurance companiesrecognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the company otherwise would have recognized is one year or less. The costs which are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities and recoveries for asbestos-related claims are subject to considerable uncertainty because such liabilities and recoveries are influenced by variables that are difficult to predict. The future litigation environment for Rockwell could change significantly from its past experience, due, for example, to changes in the mix of claims filed against Rockwell in terms of plaintiffs’ law firm, jurisdiction and disease; legislative or regulatory developments; our approach to defending claims; or payments to plaintiffs from other defendants. Estimated recoveries are influenced by coverage issues among insurers and the continuing solvency of various insurance companies. If the assumptions with respect to the estimation period, the nature of pending claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Rockwell asbestos-related claims, and the effect on us, could differ materially from current estimates and, therefore, could have a material impact on our financial condition and results of operations.
Assumptions: The following assumptions were made by us after consultation with consultants andnot capitalized are included in the study:cost of sales.
Pending
6. GOODWILL
In accordance with ASC Topic 350-20, "Intangibles – Goodwill and future claims were estimated for a 41-year period ending in fiscal year 2059;
The litigation environment remains consistent throughout the forecast horizon;
On a per claim basis, defense and indemnity costs for pending and future claims will be at the level consistent with our recent experience;
Goodwill — GoodwillOther", 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, wethe company may be required to record impairment charges for goodwill at that time. The company tests goodwill for impairment at a level of reporting referred to as a reporting unit, which is an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a single reporting unit. An operating segment is deemed to be a reporting unit if all of its components are similar, if none of its components are a reporting unit, or if the segment comprises only a single component.
We have the optionASC Topic 350 allows entities to first assessperform an initial qualitative factorsevaluation to determine whether the existence of events or circumstances leads us to determine that it is more likely than not that the fair value of each of our reporting units is less than its respective carrying
amount. If after assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair value of thea reporting unit is less than its carrying amount, then a subsequentamount. The results of this qualitative assessment determine whether it is necessary to perform the quantitative one-step impairment test is unnecessary. If we conclude otherwise, then we are requiredtest. As allowed by the revised guidance, the company has elected to test goodwillbypass the qualitative assessment for impairment under a subsequent process. We may elect to forgo this assessmentfiscal year 2020 and proceed directly to the quantitative one-step process.impairment test.
TheExcluding the qualitative evaluation discussed above, the quantitative goodwill impairment test consists ofreview is a comparison of the fair value of a reporting unit with its carrying amount. Estimates of fair value are primarily determined by using discounted cash flows and market multiples on earnings. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge based on that difference will be recorded. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit.
The impairment review is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions have a significant impact on the amount of any impairment charge recorded. Discounted cash flow methods are dependent upon assumptions of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual cash flows in the future may differ significantly from those previously forecasted.
For fiscal year 2020, the fair value of all of the company’s reporting units exceeded their carrying values.
RealignmentREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholdersand the Board of Reporting UnitsDirectors of Meritor, Inc.
As discussed in Note 26Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Meritor, Inc. and subsidiaries (the "Company") as of September 27, 2020 and September 29, 2019, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the three years in the period ended September 27, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 27, 2020 and September 29, 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 27, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 27, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 12, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Contingencies — Asbestos —Rockwell —Refer to Note 22 to the financial statements
Critical Audit Matter Description
Reserves related to these claims consist of the projected indemnity and defense costs of pending and future asbestos-related claims. The Company engaged a third-party advisor with extensive experience in assessing asbestos-related liabilities to conduct a study to estimate its potential undiscounted liability for pending and future asbestos-related claims. As of September 27, 2020, the best estimate of the company’s obligation for asbestos-related claims over the next 38 years is $78 million.
We identified asbestos-related reserves for Rockwell as a critical audit matter because estimating projected indemnity and defense costs of pending and future asbestos-related claims involves significant estimation by management due to variables that are difficult to predict. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists, when performing audit procedures to evaluate whether the asbestos related reserves were appropriately recorded as of September 27, 2020.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the asbestos-related reserves for Rockwell included the following, among others:
•We tested the effectiveness of controls related to asbestos-related reserves, including management’s controls over estimating projected indemnity and defense costs of pending and future asbestos-related claims.
•We assessed the qualifications, experience, and objectivity of management’s third-party advisor.
•We tested the underlying data that served as the basis for the actuarial analysis, including historical claims, to test the inputs to the actuarial estimate for completeness and accuracy.
•We compared management’s prior-year projected indemnity and defense costs of pending and future asbestos-related claims to actual costs incurred during the current year to identify potential bias in the determination of the reserve, as well as to assess management’s ability to estimate the reserve.
•With the assistance of our actuarial specialists that have experience in the area of asbestos-related reserves, we assessed the reasonableness of the valuation methodology and significant assumptions.
| | | | | |
| /s/ | DELOITTE & TOUCHE LLP |
| DELOITTE & TOUCHE LLP |
Detroit, Michigan
November 12, 2020
We have served as the Company's auditor since 1996.
MERITOR, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| Sales | $ | 3,044 | | | $ | 4,388 | | | $ | 4,178 | |
| Cost of sales | (2,716) | | | (3,748) | | | (3,553) | |
| GROSS MARGIN | 328 | | | 640 | | | 625 | |
| Selling, general and administrative | (221) | | | (256) | | | (313) | |
| Income from WABCO distribution termination | 265 | | | 0 | | | 0 | |
| | | | | |
| | | | | |
| Other operating expense, net | (40) | | | (21) | | | (20) | |
| OPERATING INCOME | 332 | | | 363 | | | 292 | |
| Other income | 46 | | | 40 | | | 26 | |
| Equity in earnings of affiliates | 14 | | | 31 | | | 27 | |
| Interest expense, net | (66) | | | (57) | | | (67) | |
| INCOME BEFORE INCOME TAXES | 326 | | | 377 | | | 278 | |
| Provision for income taxes | (78) | | | (82) | | | (149) | |
| INCOME FROM CONTINUING OPERATIONS | 248 | | | 295 | | | 129 | |
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax | 1 | | | 1 | | | (3) | |
| NET INCOME | 249 | | | 296 | | | 126 | |
| Less: Net income attributable to noncontrolling interests | (4) | | | (5) | | | (9) | |
| NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 245 | | | $ | 291 | | | $ | 117 | |
| NET INCOME ATTRIBUTABLE TO MERITOR, INC. | | | | | |
| Net income from continuing operations | $ | 244 | | | $ | 290 | | | $ | 120 | |
| Income (loss) from discontinued operations | 1 | | | 1 | | | (3) | |
| Net income | $ | 245 | | | $ | 291 | | | $ | 117 | |
| BASIC EARNINGS (LOSS) PER SHARE | | | | | |
| Continuing operations | $ | 3.30 | | | $ | 3.49 | | | $ | 1.37 | |
| Discontinued operations | 0.01 | | | 0.01 | | | (0.03) | |
| Basic earnings per share | $ | 3.31 | | | $ | 3.50 | | | $ | 1.34 | |
| DILUTED EARNINGS (LOSS) PER SHARE | | | | | |
| Continuing operations | $ | 3.23 | | | $ | 3.36 | | | $ | 1.31 | |
| Discontinued operations | 0.01 | | | 0.01 | | | (0.03) | |
| Diluted earnings per share | $ | 3.24 | | | $ | 3.37 | | | $ | 1.28 | |
| Basic average common shares outstanding | 74.0 | | | 83.2 | | | 87.5 | |
| Diluted average common shares outstanding | 75.6 | | | 86.3 | | | 91.2 | |
See Notes to Consolidated Financial Statements Statements.
MERITOR, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in Item 8. millions)
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2020 | | 2019 | | 2018 |
| Net income | $ | 249 | | | $ | 296 | | | $ | 126 | |
| Other comprehensive income: | | | | | |
| Foreign currency translation adjustments | (21) | | | (18) | | | (51) | |
| Pension and other postretirement benefit related adjustments (net of tax of $27, $22 and $6 for the year ended September 30, 2020, 2019 and 2018, respectively | 89 | | | (96) | | | 24 | |
| Unrealized gain (loss) on cash flow hedges | 0 | | | (2) | | | 4 | |
| | | | | |
| | | | | |
| Total comprehensive income | 317 | | | 180 | | | 103 | |
| Less: Comprehensive income attributable to noncontrolling interest | (5) | | | (4) | | | (7) | |
| Comprehensive income attributable to Meritor, Inc. | $ | 312 | | | $ | 176 | | | $ | 96 | |
See Notes to Consolidated Financial Statements.
MERITOR, INC.
CONSOLIDATED BALANCE SHEET
(In millions)
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| ASSETS | | | |
| CURRENT ASSETS: | | | |
| Cash and cash equivalents | $ | 315 | | | $ | 108 | |
| Receivables, trade and other, net | 479 | | | 551 | |
| Inventories | 435 | | | 526 | |
| Other current assets | 54 | | | 31 | |
| TOTAL CURRENT ASSETS | 1,283 | | | 1,216 | |
| NET PROPERTY | 515 | | | 515 | |
| GOODWILL | 501 | | | 478 | |
| OTHER ASSETS | 585 | | | 606 | |
| TOTAL ASSETS | $ | 2,884 | | | $ | 2,815 | |
| LIABILITIES AND EQUITY | | | |
| CURRENT LIABILITIES: | | | |
| Short-term debt | $ | 39 | | | $ | 41 | |
| Accounts and notes payable | 423 | | | 610 | |
| Other current liabilities | 264 | | | 285 | |
| TOTAL CURRENT LIABILITIES | 726 | | | 936 | |
| LONG-TERM DEBT | 1,188 | | | 902 | |
| RETIREMENT BENEFITS | 196 | | | 336 | |
| OTHER LIABILITIES | 279 | | | 226 | |
| TOTAL LIABILITIES | 2,389 | | | 2,400 | |
| COMMITMENTS AND CONTINGENCIES (NOTE 22) | | | |
| | | |
| | | |
| EQUITY: | | | |
| Common stock (September 30, 2020 and 2019,103.7 and 104.1 shares issued and 72.3 and 81.4 shares outstanding, respectively | 105 | | | 104 | |
| Additional paid-in capital | 808 | | | 803 | |
| Retained earnings | 736 | | | 491 | |
| Treasury stock, at cost (September 30, 2020 and September 30, 2019, 31.4 and 22.7 shares, respectively) | (573) | | | (332) | |
| Accumulated other comprehensive loss | (614) | | | (681) | |
| Total equity attributable to Meritor, Inc. | 462 | | | 385 | |
| Noncontrolling interests | 33 | | | 30 | |
| TOTAL EQUITY | 495 | | | 415 | |
| TOTAL LIABILITIES AND EQUITY | $ | 2,884 | | | $ | 2,815 | |
See Notes to Consolidated Financial Statements.
MERITOR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| OPERATING ACTIVITIES | | | | | |
| CASH PROVIDED BY OPERATING ACTIVITIES (see Note 25) | $ | 265 | | | $ | 256 | | | $ | 251 | |
| INVESTING ACTIVITIES | | | | | |
| Capital expenditures | (85) | | | (103) | | | (104) | |
| Proceeds from sale of equity method investment | 0 | | | 0 | | | 250 | |
| Cash paid for business acquisitions, net of cash acquired | 0 | | | (168) | | | (35) | |
| | | | | |
| Cash paid for investment in Transportation Power, Inc. | (13) | | | (6) | | | (6) | |
| | | | | |
| | | | | |
| Other investing activities | 9 | | | 6 | | | 6 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | (89) | | | (271) | | | 111 | |
| FINANCING ACTIVITIES | | | | | |
| Securitization | (8) | | | (38) | | | (43) | |
| Proceeds from debt issuances | 300 | | | 0 | | | 0 | |
| Borrowings against revolving line of credit | 304 | | | 190 | | | 55 | |
| Repayments of line of credit | (304) | | | (190) | | | (55) | |
| Term loan borrowings | 0 | | | 175 | | | 0 | |
| Redemption of notes | 0 | | | (24) | | | (181) | |
| Repayment of notes and term loan | (8) | | | 0 | | | 0 | |
| Deferred issuance costs | 0 | | | (4) | | | 0 | |
| Debt issuance costs | (5) | | | 0 | | | 0 | |
| Other financing activities | (2) | | | (2) | | | (5) | |
| Net change in debt | 277 | | | 107 | | | (229) | |
| Repurchase of common stock | (241) | | | (96) | | | (100) | |
| CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | 36 | | | 11 | | | (329) | |
| EFFECT OF CHANGES IN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | (5) | | | (3) | | | (6) | |
| CHANGE IN CASH AND CASH EQUIVALENTS | 207 | | | (7) | | | 27 | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 108 | | | 115 | | | 88 | |
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 315 | | | $ | 108 | | | $ | 115 | |
See Notes to Consolidated Financial Statements.
MERITOR, INC.
CONSOLIDATED STATEMENT OF EQUITY
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common
Stock | | Additional
Paid-in
Capital | | Retained Earnings | | Treasury Stock | | Accumulated
Other
Comprehensive
Loss | | Total Equity
Attributable to
Meritor, Inc. | | Non-
controlling
Interests | | Total |
| Beginning balance at September 30, 2019 | $ | 104 | | | $ | 803 | | | $ | 491 | | | $ | (332) | | | $ | (681) | | | $ | 385 | | | $ | 30 | | | $ | 415 | |
| Comprehensive income | — | | | — | | | 245 | | | — | | | 67 | | | 312 | | | 5 | | | 317 | |
| Vesting of restricted stock | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Equity based compensation
expense | — | | | 7 | | | — | | | — | | | — | | | 7 | | | — | | | 7 | |
| | | | | | | | | | | | | | | |
| Repurchase of common stock | — | | | — | | | — | | | (241) | | | — | | | (241) | | | — | | | (241) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Non-controlling interest
dividends | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
| Other | — | | | (1) | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
| Ending balance at September 30, 2020 | $ | 105 | | | $ | 808 | | | $ | 736 | | | $ | (573) | | | $ | (614) | | | $ | 462 | | | $ | 33 | | | $ | 495 | |
| | | | | | | | | | | | | | | |
Beginning balance at
September 30, 2018 | $ | 102 | | | $ | 787 | | | $ | 200 | | | $ | (236) | | | $ | (566) | | | $ | 287 | | | $ | 30 | | | $ | 317 | |
| Comprehensive income (loss) | — | | | — | | | 291 | | | — | | (115) | | | 176 | | | 4 | | | 180 | |
| Vesting of restricted stock | 2 | | | (2) | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Equity based compensation expense | — | | | 18 | | | — | | | — | | | — | | | 18 | | | — | | | 18 | |
| Repurchase of common stock | — | | | — | | | — | | | (96) | | | — | | | (96) | | | — | | | (96) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Non-controlling interest dividends | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
| | | | | | | | | | | | | | | |
Ending balance at
September 30, 2019 | $ | 104 | | | $ | 803 | | | $ | 491 | | | $ | (332) | | | $ | (681) | | | $ | 385 | | | $ | 30 | | | $ | 415 | |
| | | | | | | | | | | | | | | |
Beginning balance at
September 30, 2017 | $ | 101 | | | $ | 765 | | | $ | 83 | | | $ | (136) | | | $ | (545) | | | $ | 268 | | | $ | 27 | | | $ | 295 | |
| Comprehensive income (loss) | — | | | — | | | 117 | | | — | | | (21) | | | 96 | | | 7 | | | 103 | |
| Vesting of restricted stock | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Equity based compensation expense | — | | | 20 | | | — | | | — | | | — | | | 20 | | | — | | | 20 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Convertible securities with cash settlement | — | | | 1 | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| Repurchase of common stock | — | | | — | | | — | | | (100) | | | — | | | (100) | | | — | | | (100) | |
| Non-controlling interest dividends | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
| Other | — | | | 2 | | | — | | | — | | | — | | | 2 | | | (2) | | | 0 | |
Ending balance at
September 30, 2018 | $ | 102 | | | $ | 787 | | | $ | 200 | | | $ | (236) | | | $ | (566) | | | $ | 287 | | | $ | 30 | | | $ | 317 | |
See Notes to Consolidated Financial Statements.
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Consolidated Financial Statements are those of the company and Supplementary Dataits consolidated subsidiaries.
The company’s fiscal year ends on the Sunday nearest September 30. The 2020, 2019 and 2018 fiscal years ended on September 27, 2020, September 29, 2019 and September 30, 2018, respectively. All year and quarter references relate to the company’s fiscal year and fiscal quarters, unless otherwise stated. For ease of presentation, September 30 is used consistently throughout this report to represent the fiscal year end.
COVID-19 Pandemic Update, we realigned our operations
In March 2020, the World Health Organization declared a global health pandemic related to the outbreak of a novel coronavirus. The COVID-19 pandemic adversely affected the company's financial performance in the second, third and fourth quarters of fiscal year 2020 and could have an impact throughout fiscal year 2021. In response to the COVID-19 pandemic, government health officials have recommended and mandated precautions to mitigate the spread of the virus, including shelter-in-place orders, prohibitions on public gatherings and other similar measures. As a result, the company and certain of the company's customers and suppliers temporarily closed select manufacturing locations beginning late in the second quarter of fiscal year 2019, resulting in a change2020, continuing into the third quarter of fiscal year 2020. As of May 31, 2020, all of the company's global facilities were back open and operating with limited production. Production volume levels continued to our reportable segments.increase through the fourth quarter of fiscal year 2020. Most of the company’s salaried employees are primarily working remotely until further notice. There is uncertainty around the duration and breadth of the COVID-19 pandemic, as well as the impact it will have on the company's operations, supply chain and demand for its products. As a result, the ultimate impact on the company's business, financial condition or operating results cannot be reasonably estimated at this time.
2.SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures. Actual results could differ from these estimates. Significant estimates and assumptions were used to review goodwill and other long-lived assets for impairment (see Notes 6 and 10), environmental liabilities (see Notes 13, 14 and 22), product warranty liabilities (see Note 13), long-term incentive compensation plan obligations (see Note 18), retiree medical and pension obligations (see Notes 19 and 20), income taxes (see Note 21), and contingencies, including asbestos (see Note 22).
Concentration of Credit Risk
In the normal course of business, the company provides credit to customers. The company limits its credit risk by performing ongoing credit evaluations of its customers and maintaining reserves for potential credit losses and through accounts receivable factoring programs. The company’s accounts receivables are generally due from medium- and heavy-duty truck OEMs, specialty vehicle manufacturers, aftermarket customers, and trailer producers. The company’s ten largest customers accounted for 69 percent, 77 percent and 75 percent of sales in fiscal years 2020, 2019 and 2018, respectively. Sales to the company's top three customers were 50 percent, 54 percent and 52 percent of total sales in fiscal years 2020, 2019 and 2018, respectively. At September 30, 2020 and 2019, 25 percent and 26 percentof the change in reportable segments, our reporting units changed. The Commercial Truck segment contains one reporting unit. The Aftermarket, Industrialcompany's trade accounts receivable were from the company's three largest customers.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Consolidation and Trailer segment contains five reporting units. Goodwill was reassigned to the new reporting units using a relative fair value allocation.Joint Ventures
Acquisition of AxleTech Business
On July 26, 2019, we acquired 100 percent of the voting equity interest of the AxleTech group companies for approximately $179 million in cash, subject to certain purchase price adjustments. We funded the acquisition with the term loan under our credit agreement (see Note 18 of the Notes toThe Consolidated Financial Statements include the accounts of the company and those subsidiaries in Item 8. which the company has control. All intercompany balances and transactions are eliminated in consolidation. The results of operations of controlled subsidiaries are included in the Consolidated Financial Statements and Supplementary Data). Weare offset by a related noncontrolling interest recorded a provisional amount of goodwill of $61 million for the excessnoncontrolling partners’ ownership. Investments in affiliates that are not controlled are reported using the equity method of consideration paid overaccounting (see Note 12).
Foreign Currency
Local currencies are generally considered the fair value offunctional currencies for operations outside the individualU.S. For operations reporting in local currencies, assets acquired and liabilities assumed, excluding identifiable intangible assets. The addition of AxleTech enhances our growth platformare translated at year-end exchange rates with the addition of a complementary product portfolio that includes a full line of independent suspensions, axles, braking solutions and drivetrain components across the off-highway, defense, specialty and aftermarket markets. AxleTech operates within the Aftermarket, Industrial and Trailer segment.
Acquisition of AA Gear & Manufacturing, Inc. Business
On April 30, 2018, we acquired substantially all of the assets of AAG for a cash purchase price of approximately $35 million. The AAG acquisition was accounted forcumulative currency translation adjustments included as a business combination. We recorded goodwillcomponent of Accumulated Other Comprehensive Loss in the amountConsolidated Balance Sheet. Income and expense items are translated at average rates of $12 million forexchange during the excess of consideration paid over the fair value of the individual assets acquired and liabilities assumed, excluding identifiable intangible assets. This recorded goodwill consists largely of the synergies and economies of scale expected from combining our operations. All of the goodwill was assigned to the Aftermarket, Industrial and Trailer reportable segment. All goodwill recognized is expected to be deductible for income tax purposes over the next 15 years.year.
Acquisition of Fabco Holdings, Inc. Business
On August 31, 2017, for a cash purchase price of $34 million, we acquired certain assets, including the product portfolio and related technologies, of Fabco Holdings, Inc. ("Fabco") and its subsidiaries and assumed certain liabilities. The Fabco acquisition was accounted for as a business combination. As a result, we recorded goodwill in the amount of $20 million for the excess of consideration paid over the fair value of the individual assets acquired and liabilities assumed, excluding identifiable intangible assets. This recorded goodwill consists largely of the synergies and economies of scale expected from combining our operations. All of the goodwill was assigned to the Aftermarket, Industrial and Trailer reportable segment.
For fiscal year 2019, the fair value of all of our reporting units exceeded their carrying values.
Impairment of Long-Lived Assets —
Long-lived assets, excluding goodwill, to be held and used are reviewed for impairment whenever adverse events or changes in circumstances indicate a possible impairment. An impairment loss is recognized when a long-lived asset group is not recoverable, based on undiscounted cash flows over the remaining useful life of the primary asset of the group, and the long-livedlong lived asset group’sgroup's carrying value exceeds the fair value. If business conditions or other factors cause the operating results and cash flows to decline, we may be required to record impairment charges at that time.
Long-lived assets held for sale are recorded at the lower of their carrying amount or estimated fair value less cost to sell. Significant judgments and estimates used by management when evaluating long-lived assets
Allowance for impairment include:Doubtful Accounts
An assessmentallowance for uncollectible trade receivables is recorded when accounts are deemed uncollectible based on consideration of write-off history, aging analysis, and any specific, known troubled accounts.
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 restricted shares, restricted share units, performance share units, and convertible securities, if applicable.
A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| Basic average common shares outstanding | 74.0 | | | 83.2 | | | 87.5 | |
| | | | | |
| Impact of restricted shares, restricted share units and performance share units | 0.8 | | | 2.2 | | | 2.8 | |
| Impact of convertible notes | 0.8 | | | 0.9 | | | 0.9 | |
| Diluted average common shares outstanding | 75.6 | | | 86.3 | | | 91.2 | |
In November 2019, the Board of Directors approved a grant of performance share units to whether an adverse eventall executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive 1 share of common stock or circumstance has triggeredits cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $25.25, which was the needcompany’s share price on the grant date of December 1, 2019. The Board of Directors also approved a grant of 0.3 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $25.25, which was the company's share price on the grant date of December 1, 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for an impairment review;the three-year performance period of October 1, 2019 to September 30, 2022, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin, new business wins, free cash flow conversion and adjusted diluted earnings per share from continuing operations, each of which is weighted at 25%. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.4 million performance share units.
Undiscounted futureIn November 2018, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the company's long-term incentive plan. Each performance share unit represents the right to receive 1 share of common stock or its cash flows generated byequivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $16.50, which was the asset;company’s share price on the grant date of December 1, 2018. The Board of Directors also approved a grant of 0.4 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $16.50, which was the company's share price on the grant date of December 1, 2018.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2018 to September 30, 2021, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin and
Probability and estimated future cash flows adjusted diluted earnings per share from continuing operations at the following weights: 50% associated with alternative coursesachieving an adjusted EBITDA margin target and 50% associated with achieving an adjusted diluted earnings per share from continuing operations target. The number of actionperformance share units that are being considered to recovervest will be between 0% and 200% of the carryinggrant date amount of 0.5 million performance share units.
In November 2017, the Board of Directors approved a long-lived asset.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 1 share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $24.79, which was the company’s share price on the grant date of December 1, 2017. The Board of Directors also approved a grant of 0.3 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $24.79, which was the company's share price on the grant date of December 1, 2017.
DuringOther
Other significant accounting policies are included in the related notes, specifically, goodwill (Note 6), inventories (Note 9), property and depreciation (Note 10), product warranties (Note 13), financial instruments (Note 16), equity based compensation (Note 18), retirement medical plans (Note 19), retirement pension plans (Note 20), income taxes (Note 21) and environmental and asbestos-related liabilities (Note 22).
Accounting standards implemented during fiscal year 2020
On October 1, 2019, the company implemented Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842). The company elected the practical expedient package, which allowed the company to not reassess whether existing contracts contain a lease and to not reassess classification of existing leases. The company also adopted ASU 2018-11, Leases (Topic 842) Targeted Improvements, electing to not separate lease and non-lease components in contracts that contain both and electing to not restate comparative periods when adopting ASU 2016-02. As a result, the company recognized a right-of-use asset and lease liability as a lessee for substantially all existing operating leases and has included new and expanded disclosures (Note 4).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounting standards to be implemented
The following represent the standards that may result in a significant change in practice and/or have a significant financial impact on the company.
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including accounts receivable. The ASU also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The company expects to adopt this guidance in the first quarter of fiscal year 2021. The guidance is expected to have an impact on the company's accounting policies and procedures related to calculation of allowance for doubtful accounts receivable but is not expected to have a material impact on its Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU add, modify, and eliminate certain disclosure requirements on fair value measurements in Topic 820. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Certain amendments should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. Others should be applied retrospectively. The company expects to adopt this guidance in the first quarter of fiscal year 2021. The company is currently evaluating the potential impact of this guidance on its accounting policies and its Consolidated Financial Statements.
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (Subtopic 815-40). The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASC 470-20 outlines five models to allocate the proceeds attributable to the issuance of a convertible debt instrument. This ASU removes from U.S. GAAP the separation models for convertible debt with a cash conversion feature (CCF) and convertible debt with a beneficial conversion feature (BCF). As a result of adopting this ASU, entities are not required to separately present in equity an embedded conversion feature in such debt. Instead, they should account for a convertible debt instrument wholly as debt. Applying the separation models in ASC 470-20 to convertible instruments with a CCF or BCF involved the recognition of a debt discount, which is amortized to interest expense. The elimination of CCF and BCF models will reduce reported interest expense and increase reported net income for convertible instruments issued within the scope of those models before the adoption of ASU 2020-06. The amendments in this update are required to be adopted by public business entities in fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal year beginning after December 15, 2020, including interim periods within those fiscal years. Entities are permitted to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The company is currently evaluating the potential impact of this guidance on its accounting policies and its Consolidated Financial Statements.
3. ACQUISITIONS AND DIVESTITURE
Acquisition of TransPower Business
On January 16, 2020, Meritor acquired 100 percent of the voting equity interest of Transportation Power, Inc. ("TransPower") for a cash purchase price of approximately $15 million, subject to certain purchase price adjustments. Prior to the acquisition, the fair value of the company’s investment in TransPower was $12 million. The TransPower acquisition was accounted for as a business combination. With the addition of TransPower's product portfolio, Meritor advances its strategic priorities through increased investment in next-generation technologies.
Pro forma financial information of the company is presented in the following table for the twelve months ended September 30, 2020 and 2019 as if the TransPower acquisition had occurred on October 1, 2018. The pro forma financial
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
information is unaudited and is provided for informational purposes only and does not purport to be indicative of the results which would have actually been attained had the acquisition occurred on October 1, 2018 (in millions).
| | | | | | | | | | | |
| Twelve Months Ended September 30, |
| 2020 | | 2019 |
| | | |
| Sales | $ | 3,045 | | | $ | 4,394 | |
| Net income attributable to Meritor, Inc. | 244 | | | 282 | |
The purchase price was allocated on a provisional basis as of January 16, 2020. Assets acquired and liabilities assumed were recorded at estimated fair values based on management's estimates, available information, and reasonable and supportable assumptions. Additionally, the company is utilizing a third-party to assist with certain estimates of fair values. The provisional purchase price allocation, which is subject to change and may be subsequently adjusted to reflect final valuation results and other adjustments, is shown below (in millions). The company is reviewing and may record other additional measurement period adjustments in fiscal year 2021. All goodwill resulting from the acquisition of TransPower was assigned to the Commercial Truck reportable segment (see Note 6).
| | | | | | | | | | | | | | | | | |
| Estimated Fair Value |
| As of
January 16, 2020 | | Measurement Period Adjustments | | As of
September 30, 2020 |
| Purchase price | $ | 15 | | | $ | 0 | | | $ | 15 | |
| Investments in TransPower | 12 | | | 0 | | | 12 | |
| $ | 27 | | | $ | 0 | | | $ | 27 | |
| Assets acquired and liabilities assumed: | | | | | |
| Cash | 2 | | | 0 | | | 2 | |
| Receivables, net | 5 | | | 0 | | | 5 | |
| Inventories, net | 8 | | | 0 | | | 8 | |
| PP&E | 10 | | | (1) | | | 9 | |
| Identifiable intangible assets | 0 | | | 11 | | | 11 | |
| Other assets | 0 | | | (1) | | | (1) | |
| Accounts payable | (3) | | | 0 | | | (3) | |
| Other current liabilities | (17) | | | 0 | | | (17) | |
| Total identifiable net assets acquired | 5 | | | 9 | | | 14 | |
| | | | | |
| Goodwill and other intangible assets resulting from the acquisition of TransPower | 22 | | | (9) | | | 13 | |
| $ | 27 | | | $ | 0 | | | $ | 27 | |
Acquisition of AxleTech Business
On July 26, 2019, the company acquired 100 percent of the voting equity interest of the AxleTech group companies for approximately $179 million in cash, subject to certain purchase price adjustments. The company funded the acquisition with the term loan under the senior secured revolving credit agreement (see Note 15). The AxleTech acquisition was accounted for as a business combination.
The addition of AxleTech enhanced Meritor’s growth platform with the addition of a complementary product portfolio that includes a full line of independent suspensions, axles, braking solutions and drivetrain components across the off-highway, defense, specialty and aftermarket markets. AxleTech operates within Meritor’s Aftermarket and Industrial segment.
As of September 30, 2020, the company finalized all measurement period adjustments related to the AxleTech acquisition. Since completion of initial estimates in the fourth quarter of fiscal year 2019, we determined that we had an impairment triggerthe company recorded a net $5 million measurement period adjustment to decrease the fair value of identifiable net assets acquired in the AxleTech transaction,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
resulting in a corresponding $5 million increase to goodwill. These adjustments were made to reflect additional available information and updated valuation results, which included valuation of technology and customer relationships. All goodwill resulting from the AxleTech acquisition was assigned to the Aftermarket and Industrial reportable segment (see Note 6). Recorded goodwill consists largely of the synergies and economies of scale expected from combining the operations of the company and AxleTech.
The company incurred acquisition related costs of $1 million and $6 million as of September 30, 2020, and September 30, 2019, respectively, which were recorded as incurred and have been classified as either cost of sales or selling, general, and administrative expenses in the Consolidated Statement of Operations for the years ended September 30, 2020 and September 30, 2019.
| | | | | | | | | | | | | | | | | |
| Estimated Fair Value |
| As of
September 30, 2019 | | Measurement Period Adjustments | | As of
September 30, 2020 |
| Purchase price | $ | 179 | | | $ | (2) | | | $ | 177 | |
| | | | | |
| | | | | |
| Assets acquired and liabilities assumed: | | | | | |
| Cash | 11 | | | 0 | | | 11 | |
| Receivables, net | 37 | | | (2) | | | 35 | |
| Inventories, net | 70 | | | (2) | | | 68 | |
| Identifiable intangible assets | 46 | | | 7 | | | 53 | |
| Other assets | 9 | | | (1) | | | 8 | |
| PP&E | 26 | | | 7 | | | 33 | |
| Accounts payable | (33) | | | 1 | | | (32) | |
| Other liabilities | (48) | | | (17) | | | (65) | |
| Total identifiable net assets acquired | 118 | | | (7) | | | 111 | |
| | | | | |
| Goodwill and other intangible assets resulting from the acquisition of AxleTech | 61 | | | 5 | | | 66 | |
| $ | 179 | | | $ | (2) | | | $ | 177 | |
Acquisition of AAG Business
On April 30, 2018, the company acquired substantially all of the assets of AA Gear & Manufacturing, Inc. ("AAG") for a cash purchase price of approximately $35 million and the assumption of certain liabilities. AAG provides low-to-medium volume batch manufacturing for complex gear and shaft applications, as well as quick-turnaround prototyping solutions and emergency plant support. The AAG acquisition was accounted for as a business combination. Of the $35 million, $11 million was recorded as various tangible assets acquired and liabilities assumed, $12 million was recorded related to amortizable intangibles and $12 million was recorded as goodwill.
Sale of Ownership Interest in Meritor WABCO JV
In the AAG business,fourth quarter of fiscal year 2017, Meritor, Inc. closed on the sale of its interest in Meritor WABCO Vehicle Control Systems ("Meritor WABCO") to a subsidiary of its joint venture partner, WABCO Holdings Inc. ("WABCO"). The total purchase price for the sale was $250 million.
The company remained the exclusive distributor of a certain range of WABCO's aftermarket products in the United States and by performingCanada and the recoverability test, we concluded thatnon-exclusive distributor of these products in Mexico for a period of up to 10 years following the undiscountedcompletion of the transaction. The purchase agreement included a provision regarding certain future cash flows could not recoveroptions of the net assetsparties to terminate the distribution arrangement at certain points during the first three and a half years after the closing at an exercise price of between $225 million and $265 million based on the earnings of the business. We then determinedOn September 13, 2019, the company gave notice of its intention to exercise its option to terminate the aftermarket distribution arrangement with WABCO. On March 13, 2020 the company closed on the transaction and received $265 million, from WABCO in connection with the termination of the arrangement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. LEASES
The company’s lease portfolio is comprised of leases of real estate, including manufacturing and office facilities, and leases of personal property, including machinery and other equipment and IT equipment. Operating leases with an initial term of 12 months or less are not recorded in the Consolidated Balance Sheet and related lease expense is recognized on a straight-line basis over the lease term. Short-term lease costs and variable lease costs were insignificant in the twelve months ended September 30, 2020.
For all asset classes, the company has elected to adopt the practical expedient under ASC 842 to not separate lease and non-lease components in contracts that contain both. These lease agreements are accounted for as a single lease component for all classes of underlying assets. The company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As the discount rate implicit in the lease is typically unknown, the discount rate used to determine the lease liability for the majority of our leases is the collateralized incremental borrowing rate in the applicable geographic area for a similar term and amount as the lease agreement.
Components of lease expense (in millions)
| | | | | |
| September 30, 2020 |
| |
| |
| |
| Finance lease costs | $ | 3 | |
| |
| Operating lease costs | 20 | |
| |
| Total lease costs | $ | 23 | |
The following table provides a summary of the location and amounts related to finance leases recognized in the Consolidated Balance Sheet (in millions).
| | | | | | | | | | | |
| Classification | | September 30, 2020 |
| Finance lease right-of-use assets | Net Property | | $ | 5 | |
| Finance lease liabilities | Short-term debt | | 3 | |
| Finance lease liabilities | Long-term debt | | 3 | |
The following table provides a summary of the location and amounts related to operating leases recognized in the Consolidated Balance Sheet (in millions).
| | | | | | | | | | | |
| Classification | | September 30, 2020 |
| Operating lease right-of-use assets | Other assets | | $ | 70 | |
| Operating lease liabilities | Other current liabilities | | 15 | |
| Operating lease liabilities | Other liabilities | | 59 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables summarize additional information related to our lease agreements.
Supplemental cash flow information related to leases (in millions)
| | | | | |
| September 30, 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| Operating cash flows used for operating leases | $ | 19 | |
| |
| Financing cash flows used for finance leases | 2 | |
| Right-of-use assets obtained in exchange for lease obligations: | |
| Operating leases | 8 | |
| Finance leases | 3 | |
Supplemental balance sheet information related to leases
| | | | | |
| September 30, 2020 |
| Weighted-average remaining lease term (years): | |
| Operating leases | 8.55 |
| Finance leases | 2.21 |
| Weighted-average discount rate: | |
| Operating leases | 4.5 | % |
| Finance leases | 5.0 | % |
Maturities (in millions)
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
| 2021 | 17 | | | 3 | |
| 2022 | 14 | | | 2 | |
| 2023 | 13 | | | 1 | |
| 2024 | 9 | | | 0 | |
| Thereafter | 40 | | | 0 | |
| Total lease payments | 93 | | | 6 | |
| Less: Impact of discounting future lease payments | (19) | | | 0 | |
| Present value of lease liabilities | $ | 74 | | | $ | 6 | |
Disclosures related to periods prior to adoption of ASU 2016-02
Cash obligations under future minimum rental commitments under operating leases as of September 30, 2019 are shown in the table below (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total |
| Lease commitments | $ | 18 | | | $ | 15 | | | $ | 14 | | | $ | 13 | | | $ | 13 | | | $ | 25 | | | $ | 98 | |
5.REVENUE
Revenue is measured based on the consideration to which the company expects to be entitled, and is presented net of any estimates of customer sales allowances, incentives, rebates, and returns. The company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the company from a customer, are excluded from revenue.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost, as opposed to a distinct performance obligation, and are included in cost of sales.
Nature of goods and services
The following is a description of principal activities - separated by reportable segments - from which the company generates its revenue.
The Commercial Truck segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks and other applications in North America, South America, Europe and Asia Pacific. It also supplies a variety of undercarriage products and systems for trailer applications in North America. This segment also includes the company's aftermarket businesses in Asia Pacific and South America.
The Aftermarket and Industrial segment supplies axles, brakes, drivelines, suspension parts and other replacement parts to commercial vehicle and industrial aftermarket customers, primarily in North America and Europe. In addition, this segment supplies drivetrain systems and certain components, including axles, drivelines, brakes and suspension systems for military, construction, bus and coach, fire and emergency and other applications in North America and Europe.
Although the company may enter into long-term supply arrangements with its major customers, the prices and volumes are not fixed over the term of the arrangements and a contract does not exist under the scope of Topic 606 until prices and volumes are known. As such, individual customer releases or purchase orders represent the contract with the customer.
The company accounts for individual products and services separately if they are distinct (i.e., if a product or service is separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The company has identified certain performance obligations related to brake pad fitting and axle dressing where it is acting as an agent and, therefore, recognizes revenue on a net basis for satisfaction of those performance obligations.
The company recognizes revenue for the sale of goods at the point in time when the customer takes control of the goods. As such, revenue is recognized upon shipment of product and transfer of ownership to the customer. The amount of revenue recognized is based on the purchase order price and adjusted for variable consideration (i.e., customer sales allowances, incentives, rebates, and returns). Provisions for customer sales allowances, incentives, rebates, and returns are recorded as a reduction of sales at the time of revenue recognition based primarily on historical experience. The company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 90 days.
The company provides warranties on some of its products. The company records estimated product warranty costs at the time of shipment of products to customers (see Note 13 and Note 14).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Disaggregation of revenue
In the following tables, revenue is disaggregated for each of our reportable segments by primary geographical market for the year ended September 30, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Year Ended September 30, 2020 | | | | |
| Primary Geographical Market | | Commercial Truck | | Aftermarket and Industrial | | Total | | | | |
| U.S. | | $ | 1,052 | | | $ | 731 | | | $ | 1,783 | | | | | |
| Canada | | 0 | | | 54 | | | 54 | | | | | |
| Mexico | | 129 | | | 18 | | | 147 | | | | | |
| Total North America | | 1,181 | | | 803 | | | 1,984 | | | | | |
| Sweden | | 202 | | | 0 | | | 202 | | | | | |
| Italy | | 153 | | | 13 | | | 166 | | | | | |
| United Kingdom | | 105 | | | 9 | | | 114 | | | | | |
| Other Europe | | 5 | | | 134 | | | 139 | | | | | |
| Total Europe | | 465 | | | 156 | | | 621 | | | | | |
| Brazil | | 170 | | | 2 | | | 172 | | | | | |
| China | | 134 | | | 1 | | | 135 | | | | | |
| India | | 70 | | | 2 | | | 72 | | | | | |
| Other Asia-Pacific | | 60 | | | 0 | | | 60 | | | | | |
| Total sales | | $ | 2,080 | | | $ | 964 | | | $ | 3,044 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Year Ended September 30, 2019 (1) | | | | |
| Primary Geographical Market | | Commercial Truck | | Aftermarket and Industrial | | Total | | | | |
| U.S. | | $ | 1,737 | | | $ | 885 | | | $ | 2,622 | | | | | |
| Canada | | 0 | | | 69 | | | 69 | | | | | |
| Mexico | | 229 | | | 20 | | | 249 | | | | | |
| Total North America | | 1,966 | | | 974 | | | 2,940 | | | | | |
| Sweden | | 276 | | | 0 | | | 276 | | | | | |
| Italy | | 218 | | | 16 | | | 234 | | | | | |
| United Kingdom | | 155 | | | 10 | | | 165 | | | | | |
| Other Europe | | 10 | | | 81 | | | 91 | | | | | |
| Total Europe | | 659 | | | 107 | | | 766 | | | | | |
| Brazil | | 248 | | | 0 | | | 248 | | | | | |
| China | | 153 | | | 0 | | | 153 | | | | | |
| India | | 197 | | | 0 | | | 197 | | | | | |
| Other Asia-Pacific | | 84 | | | 0 | | | 84 | | | | | |
| Total sales | | $ | 3,307 | | | $ | 1,081 | | | $ | 4,388 | | | | | |
(1)Amounts for the year ended September 30, 2019 have been recast to reflect reportable segment changes.
Contract balances
As of September 30, 2020 and September 30, 2019, Trade receivables, net, which are included in Receivables, trade and other, net, on the Consolidated Balance Sheet, were $421 million and $517 million, respectively.
For the year ended September 30, 2020, the company had no material bad-debt expense and there were no material contract
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
assets, contract liabilities or deferred contract costs recorded on the Consolidated Balance Sheet as of September 30, 2020.
Contract costs
The company applies the practical expedient provided in Topic 606 and recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the carrying valuecompany otherwise would have recognized is one year or less. The costs which are not capitalized are included in cost of sales.
6. GOODWILL
In accordance with ASC Topic 350-20, "Intangibles – Goodwill and Other", goodwill is reviewed for impairment annually during the fourth quarter of the business exceeded its fair value. As a result, an impairment charge of $9 million was recorded within other operating expense, net. Earlier in fiscal year 2019, an unrelated $1 millionor more frequently if certain indicators arise. If business conditions or other factors cause the operating results and cash flows of other long-lived asseta reporting unit to decline, the company may be required to record impairment charges were recorded.
During fiscal year 2017, we determinedfor goodwill at that time. The company tests goodwill for impairment at a level of reporting referred to as a reporting unit, which is an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the carrying value ofcomponent constitutes a business held for sale exceededwhich discrete financial information is available and segment management regularly reviews the fair value less costs to sell. Asoperating results of that component. When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a result, an impairment charge of $3 million was recorded within othersingle reporting unit. An operating expense, net. During fiscal year 2017, an additional $1 million of other long-lived asset impairment charges were recorded.
Income Taxes —Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expectedsegment is deemed to be recovereda reporting unit if all of its components are similar, if none of its components are a reporting unit, or settled. Ifif the segment comprises only a single component.
Annual Impairment Analysis
ASC Topic 350 allows entities to perform an initial qualitative evaluation to determine whether it is more likely than not that the deferred tax asset will be realized, no valuation allowancefair value of a reporting unit is recorded. Management's judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against the net deferred tax assets.less than its carrying amount. The valuation allowance would need to be adjusted in the event future taxable income is materially different than amounts estimated. Significant judgments, estimates and factors considered by management in its determination of the probability of the realization of deferred tax assets include:
Historical operating results;
Expectations of future earnings;
Tax planning strategies; and
The extended period of time over which retirement medical and pension liabilities will be paid.
In prior years, we established valuation allowances against the net deferred tax assets of its 100%-owned subsidiaries in France, Germany, Brazil, the U.K. and certain other countries. In evaluating our ability to recover these net deferred tax assets, we utilized a consistent approach which considers its historical operating results, including an assessment of the degree to which any gains or losses are driven by items that are unusual in nature and tax planning strategies. In addition, we reviewed changes in near-term market conditions and other factors that impact future operating results.
During the fourth quarter of fiscal year 2018, as a result of sustained profitability in Brazil evidenced by strong earnings history, future forecasted income, and additional positive evidence, we determined it was more likely than not we would be able to realize the deferred tax assets in Brazil. Accordingly, we reversed the valuation allowance, resulting in a non-cash income tax benefit of $9 million.
As of September 30, 2019, we continue to maintain the valuation allowances in France, Germany, the U.K. and certain other jurisdictions, as we believe the negative evidence continues to outweigh the positive evidence that it will be able to recover these net deferred tax assets. If, in the future, we generate taxable income on a sustained basis, our conclusion regarding the need for valuation allowances in these jurisdictions could change.
The expiration periods for deferred tax assets related to net operating losses and tax credit carryforwards as of September 30, 2019 are included below (in millions). Also included are the associated valuation allowances on these deferred tax assets (in millions).
|
| | | | | | | | | | | | | | | |
| | Fiscal Year Expiration Periods |
| | 2020-2024 | 2025-2034 | 2035-2039 | Indefinite | Total |
| Net Operating Losses and Tax Credit Carryforwards | $ | 14 |
| $ | 30 |
| $ | 11 |
| $ | 175 |
| $ | 230 |
|
| Valuation Allowances on these Deferred Tax Assets | $ | 5 |
| $ | 11 |
| $ | — |
| $ | 172 |
| $ | 188 |
|
On December 22, 2017, the U.S. government enacted the U.S. tax reform. The U.S. tax reform made broad and complex changes to the U.S. tax code that affected our fiscal year ended September 30, 2018, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent and requiring a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.
The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the U.S. tax reform. SAB 118 provides a measurement period that should not extend beyond one year from the U.S. tax reform enactment date for companies to complete the accounting under ASC 740. We completed our accounting for the enactment date income tax effects of U.S. tax reform as of December 31, 2018. As reflected in the September 30, 2019 financial statements, the results of this accounting were a reductionqualitative assessment determine whether it is necessary to perform the quantitative impairment test. As allowed by the revised guidance, the company has elected to bypass the qualitative assessment for fiscal year 2020 and proceed directly to the estimated tax expense at September 30, 2018 from $89 million to $87 million forquantitative impairment test.
Excluding the refinementqualitative evaluation discussed above, the quantitative goodwill impairment review is a comparison of the U.S. tax reform items.
Additionally, we have accounted for the tax impacts related to the Global Intangible Low Tax Income ("GILTI"), Base Erosion Anti Abuse Tax ("BEAT") and Foreign Derived Intangible Income ("FDII") regimes as well as all other provisions of the U.S. tax reform that are effective in fiscal year 2019. We have elected to treat GILTI as a period cost and, therefore, have not recognized deferred taxes for basis differences that may reverse as GILTI tax in future periods.
New Accounting Pronouncements — New Accounting Pronouncements are discussed in Note 2 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Item 7A. 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 fiscal year 2019, our reported financial results were adversely affected by appreciation of the U.S. dollar against foreign currencies. For fiscal year 2018, our reported financial results benefited from depreciation of the U.S. dollar against foreign currencies.
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 as cash flow hedges of underlying foreign currency forecasted purchases and sales. Changes in the fair value of these contractsa reporting unit with its carrying amount. Estimates of fair value are recorded in Accumulated other comprehensive lossprimarily determined by using discounted cash flows and market multiples on earnings. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge based on that difference will be recorded. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit.
The impairment review is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions have a significant impact on the amount of any impairment charge recorded. Discounted cash flow methods are dependent upon assumptions of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual cash flows in the Consolidated Statement of Shareholders’ Equity and is recognized in operating income when the underlying forecasted transaction impacts earnings. These contracts generally mature within 18 months.future may differ significantly from those previously forecasted.
We use foreign currency option contracts to mitigate foreign currency exposure on expected future Indian Rupee-denominated purchases. In the fourth quarter of
For fiscal year 2016, we entered into a new series of foreign currency option contracts with expiration dates from the start of the first quarter of fiscal year 2017 through the end of fiscal year 2018. In the third quarter of fiscal year 2017, we monetized our outstanding foreign currency option contracts and, in the third and fourth quarters of fiscal year 2017, entered into a new series of foreign currency option contracts with expiration dates in fiscal year 2018 and fiscal year 2019. In the third quarter of fiscal year 2018, we entered into a new series of foreign currency option contracts with expiration dates in fiscal year 2020. Changes in fair value associated with these contracts are recorded in cost of sales in the Consolidated Statements of Operations.
We use foreign currency option contracts to mitigate foreign currency exposure on expected future South Korean won-denominated purchases. In the first quarter of fiscal year 2018, we entered into a new series of foreign currency option contracts with expiration dates from the start of the third quarter of fiscal year 2018 through the end of fiscal year 2018. In the fourth quarter of fiscal year 2018, we entered into a new series of foreign currency option contracts with expiration dates from the start of the first quarter of fiscal year 2019 through the end of fiscal year 2019. In the third quarter of fiscal year 2019, we entered into a new series of foreign currency option contracts with expiration dates from the fourth quarter of fiscal year 2019 through the third quarter of fiscal year 2020. Changes in fair value associated with these contracts are recorded in cost of sales in the Consolidated Statements of Operations.
We use foreign currency option contracts to mitigate foreign currency exposure on expected future Brazilian real-denominated purchases. In the third quarter of fiscal year 2018, we entered into a new series of foreign currency option contracts with expiration dates from the start of the fourth quarter of fiscal year 2018 through the end of fiscal year 2019. In the fourth quarter of fiscal year 2018, we entered into a new series of foreign currency option contracts with expiration dates from the last two quarters of fiscal year 2019 through the first two quarters of fiscal year 2020. Changes in fair value associated with these contracts are recorded in cost of sales in the Consolidated Statements of Operations.
In the first quarter of fiscal year 2016, due to the risk of volatility of the euro as compared to the U.S. dollar, we entered into a series of foreign currency option contracts that did not qualify for hedge accounting but were expected to mitigate foreign currency translation exposureof euro earnings to U.S. dollars. In the third and fourth quarters of fiscal year 2017, we entered into a new series of foreign currency option contracts with expiration dates in fiscal year 2017 and fiscal year 2018. In the second and third quarters of fiscal year 2019, we entered into a new series of foreign currency option contracts with expiration dates in the third and fourth quarters of fiscal year 2019. In the fourth quarter of fiscal year 2019, we entered into a new series of foreign currency option contracts with expiration dates in the first and second quarters of fiscal year 2020. Changes in fair value associated with these contracts were recorded in other income, net, in the Consolidated Statement of Operations.
In the first quarter of fiscal year 2016, due to the risk of volatility of the Swedish krona as compared to the U.S. dollar, we entered into a series of foreign currency option contracts that did not qualify for hedge accounting but were expected to mitigate foreign currency translation exposureof Swedish krona earnings to U.S. dollars. In the fourth quarter of fiscal year 2017, we entered into a new series of foreign currency option contracts with expiration dates in fiscal year 2018. In the second and third quarters of fiscal year 2019, we entered into a new series of foreign currency option contracts with expiration dates in the third and fourth quarters of fiscal year 2019. Changes in fair value associated with these contracts were recorded in other income, net, in the Consolidated Statements of Operations.
We use cross-currency swap contracts to hedge a portion of our net investment in a foreign subsidiary against volatility in foreign exchange rates. These derivative instruments are designated and qualify as hedges of net investments in foreign operations. Settlements and changes in fair values of the instruments are recognized in foreign currency translation adjustments, a component of other comprehensive loss on the Consolidated Statement of Comprehensive Income, to offset the changes in the values of the net investments being hedged.
In the third quarter of fiscal year 2018, we entered into multiple cross-currency swaps. These swaps hedged a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate. In the third quarter of fiscal year 2019, we unwound these cross-currency swaps and received proceeds of $19 million, $2 million of which related to net accrued interest receivable. We also entered into multiple new cross-currency swaps with a combined notional amount of $225 million. These swaps hedge a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate. They mature in October 2022.
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) in2020, the fair value of financial instruments with exposure to market risk (in millions). The model assumes a 10% hypothetical change (increase or decrease) in exchange rates and instantaneous, parallel shiftsall of 50 basis points in interest rates.the company’s reporting units exceeded their carrying values.
|
| | | | | | | | | |
| 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) | 1.7 |
| | (1.7 | ) | | Fair Value |
Forward contracts in Euro (1) | (4.2 | ) | | 4.2 |
| | Fair Value |
Foreign currency denominated debt (2) | 0.5 |
| | (0.5 | ) | | Fair Value |
| Foreign currency option contracts in USD | 1.5 |
| | 0.1 |
| | Fair Value |
| Foreign currency option contracts in Euro | (0.3 | ) | | 4.2 |
| | Fair Value |
| Cross-currency swaps | (25.1 | ) | | 25.1 |
| | Fair Value |
| | | | | | |
| Interest Rate Sensitivity: | Assuming a 50 BPS Increase in Rates | | Assuming a 50 BPS Decrease in Rates | | Increase / (Decrease) In |
Debt - fixed rate (3) | $ | (31.7 | ) | | $ | 31.3 |
| | Fair Value |
| Debt - variable rate | (0.9 | ) | | 0.9 |
| | Cash Flow |
____________________
| |
(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. |
| |
(2) | At September 30, 2019, the fair value of outstanding foreign currency denominated debt was $4.9 million. A 10% decrease in quoted currency exchange rates would result in a decrease of $0.5 million in foreign currency denominated debt. At September 30, 2019, a 10% increase in quoted currency exchange rates would result in an increase of $0.5 million in foreign currency denominated debt. |
| |
(3) | At September 30, 2019, the fair value of outstanding debt was $1,013 million. A 50 basis points decrease in quoted interest rates would result in an increase of $31.3 million in the fair value of fixed rate debt. A 50 basis points increase in quoted interest rates would result in a decrease of $31.7 million in the fair value of fixed rate debt. |
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Meritor, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Meritor, Inc. and subsidiaries (the "Company") as of September 29, 201927, 2020 and September 30, 2018,29, 2019, the related consolidated statements of operations, comprehensive income, equity, (deficit), and cash flows, for each of the three years in the period ended September 29, 2019,27, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 29, 201927, 2020 and September 30, 2018,29, 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 29, 2019,27, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 29, 2019,27, 2020, based on criteria established in Internal Control - — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 13, 2019,12, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Contingencies - Asbestos-related reserves - — Asbestos —Rockwell - —Refer to Note 2522 to the financial statements
Critical Audit Matter Description
Reserves related to these claims consist of the projected indemnity and defense costs of pending and future asbestos-related claims. The Company engaged a third-party advisor with extensive experience in assessing asbestos-related liabilities to conduct a study to estimate its potential undiscounted liability for pending and future asbestos-related claims. As of September 29, 2019,27, 2020, the estimated probable range of equally likely possibilitiesbest estimate of the Company’scompany’s obligation for asbestos-related claims over the next 4038 years is $91 million to $181$78 million. Based on the information contained in the actuarial study, and all other available information considered, management concluded that no amount within the range of potential liability was more likely than any other and, therefore, recorded the low end of the range. The Company recognized a liability for pending and future claims of $91 million as of September 29, 2019.
We identified asbestos-related reserves for Rockwell as a critical audit matter because estimating projected indemnity and defense costs of pending and future asbestos-related claims involves significant estimation by management due to variables that are difficult to predict and the range of possible outcomes.predict. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists, when performing audit procedures to evaluate whether the asbestos related
reserves were appropriately recorded as of September 29, 2019.27, 2020.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the asbestos-related reserves for Rockwell included the following, among others:
•We tested the effectiveness of controls related to asbestos-related reserves, including management’s controls over estimating projected indemnity and defense costs of pending and future asbestos-related claims.
•We assessed the qualifications, experience, and objectivity of management’s third-party advisor.
•We tested the underlying data that served as the basis for the actuarial analysis, including historical claims, to test the inputs to the actuarial estimate for completeness and accuracy.
•We compared management’s prior-year projected indemnity and defense costs of pending and future asbestos-related claims to actualsactual costs incurred during the current year to identify potential bias in the determination of the reserve, as well as to assess management’s ability to estimate the reserve.
•With the assistance of our actuarial specialists that have experience in the area of asbestos-related reserves, we assessed the reasonableness of the valuation methodology and significant assumptions, and the range of probable outcomes estimated by management.
|
| | | | |
| /s/ | DELOITTE & TOUCHE LLP |
| DELOITTE & TOUCHE LLP |
Detroit, Michigan
November 13, 201912, 2020
We have served as the Company's auditor since 1996.
MERITOR, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Inin millions, except per share amounts)
| | | | Year Ended September 30, | | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 | | 2020 | | 2019 | | 2018 |
| Sales | $ | 4,388 |
| | $ | 4,178 |
| | $ | 3,347 |
| Sales | $ | 3,044 | | | $ | 4,388 | | | $ | 4,178 | |
| Cost of sales | (3,748 | ) | | (3,553 | ) | | (2,850 | ) | Cost of sales | (2,716) | | | (3,748) | | | (3,553) | |
| GROSS MARGIN | 640 |
| | 625 |
| | 497 |
| GROSS MARGIN | 328 | | | 640 | | | 625 | |
| Selling, general and administrative | (256 | ) | | (313 | ) | | (266 | ) | Selling, general and administrative | (221) | | | (256) | | | (313) | |
| Restructuring costs | (8 | ) | | (6 | ) | | (6 | ) | |
| Income from WABCO distribution termination | | Income from WABCO distribution termination | 265 | | | 0 | | | 0 | |
| | Other operating expense, net | (13 | ) | | (14 | ) | | (7 | ) | Other operating expense, net | (40) | | | (21) | | | (20) | |
| OPERATING INCOME | 363 |
| | 292 |
| | 218 |
| OPERATING INCOME | 332 | | | 363 | | | 292 | |
| Other income (expense), net | 40 |
| | 26 |
| | (9 | ) | |
| Gain on sale of equity investment | — |
| | — |
| | 243 |
| |
| Other income | | Other income | 46 | | | 40 | | | 26 | |
| Equity in earnings of affiliates | 31 |
| | 27 |
| | 48 |
| Equity in earnings of affiliates | 14 | | | 31 | | | 27 | |
| Interest expense, net | (57 | ) | | (67 | ) | | (119 | ) | Interest expense, net | (66) | | | (57) | | | (67) | |
| INCOME BEFORE INCOME TAXES | 377 |
| | 278 |
| | 381 |
| INCOME BEFORE INCOME TAXES | 326 | | | 377 | | | 278 | |
| Provision for income taxes | (82 | ) | | (149 | ) | | (52 | ) | Provision for income taxes | (78) | | | (82) | | | (149) | |
| INCOME FROM CONTINUING OPERATIONS | 295 |
| | 129 |
| | 329 |
| INCOME FROM CONTINUING OPERATIONS | 248 | | | 295 | | | 129 | |
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax | 1 |
| | (3 | ) | | (1 | ) | INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax | 1 | | | 1 | | | (3) | |
| NET INCOME | 296 |
| | 126 |
| | 328 |
| NET INCOME | 249 | | | 296 | | | 126 | |
| Less: Net income attributable to noncontrolling interests | (5 | ) | | (9 | ) | | (4 | ) | Less: Net income attributable to noncontrolling interests | (4) | | | (5) | | | (9) | |
| NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 291 |
| | $ | 117 |
| | $ | 324 |
| NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 245 | | | $ | 291 | | | $ | 117 | |
| NET INCOME ATTRIBUTABLE TO MERITOR, INC. | | | | | | NET INCOME ATTRIBUTABLE TO MERITOR, INC. | | | | | |
| Net income from continuing operations | $ | 290 |
| | $ | 120 |
| | $ | 325 |
| Net income from continuing operations | $ | 244 | | | $ | 290 | | | $ | 120 | |
| Income (loss) from discontinued operations | 1 |
| | (3 | ) | | (1 | ) | Income (loss) from discontinued operations | 1 | | | 1 | | | (3) | |
| Net income | $ | 291 |
| | $ | 117 |
| | $ | 324 |
| Net income | $ | 245 | | | $ | 291 | | | $ | 117 | |
| BASIC EARNINGS (LOSS) PER SHARE | | | | | | BASIC EARNINGS (LOSS) PER SHARE | | | | | |
| Continuing operations | $ | 3.49 |
| | $ | 1.37 |
| | $ | 3.69 |
| Continuing operations | $ | 3.30 | | | $ | 3.49 | | | $ | 1.37 | |
| Discontinued operations | 0.01 |
| | (0.03 | ) | | (0.01 | ) | Discontinued operations | 0.01 | | | 0.01 | | | (0.03) | |
| Basic earnings per share | $ | 3.50 |
| | $ | 1.34 |
| | $ | 3.68 |
| Basic earnings per share | $ | 3.31 | | | $ | 3.50 | | | $ | 1.34 | |
| DILUTED EARNINGS (LOSS) PER SHARE | | | | | | DILUTED EARNINGS (LOSS) PER SHARE | | | | | |
| Continuing operations | $ | 3.36 |
| | $ | 1.31 |
| | $ | 3.60 |
| Continuing operations | $ | 3.23 | | | $ | 3.36 | | | $ | 1.31 | |
| Discontinued operations | 0.01 |
| | (0.03 | ) | | (0.01 | ) | Discontinued operations | 0.01 | | | 0.01 | | | (0.03) | |
| Diluted earnings per share | $ | 3.37 |
| | $ | 1.28 |
| | $ | 3.59 |
| Diluted earnings per share | $ | 3.24 | | | $ | 3.37 | | | $ | 1.28 | |
| Basic average common shares outstanding | 83.2 |
| | 87.5 |
| | 88.0 |
| Basic average common shares outstanding | 74.0 | | | 83.2 | | | 87.5 | |
| Diluted average common shares outstanding | 86.3 |
| | 91.2 |
| | 90.2 |
| Diluted average common shares outstanding | 75.6 | | | 86.3 | | | 91.2 | |
See Notes to Consolidated Financial Statements. Prior periods have been recast, see Note 2.
MERITOR, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
| | | | Year Ended September 30, | | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 | | 2020 | | 2019 | | 2018 |
| Net income | $ | 296 |
| | $ | 126 |
| | $ | 328 |
| Net income | $ | 249 | | | $ | 296 | | | $ | 126 | |
| Other comprehensive income: | | | | | | Other comprehensive income: | |
| Foreign currency translation adjustments | (18 | ) | | (51 | ) | | 25 |
| Foreign currency translation adjustments | (21) | | | (18) | | | (51) | |
| Pension and other postretirement benefit related adjustments (net of tax of $22, $6 and $147 for the year ended September 30, 2019, 2018 and 2017, respectively) | (96 | ) | | 24 |
| | 240 |
| |
| Pension and other postretirement benefit related adjustments (net of tax of $27, $22 and $6 for the year ended September 30, 2020, 2019 and 2018, respectively | | Pension and other postretirement benefit related adjustments (net of tax of $27, $22 and $6 for the year ended September 30, 2020, 2019 and 2018, respectively | 89 | | | (96) | | | 24 | |
| Unrealized gain (loss) on cash flow hedges | (2 | ) | | 4 |
| | (1 | ) | Unrealized gain (loss) on cash flow hedges | 0 | | | (2) | | | 4 | |
| | Total comprehensive income | 180 |
| | 103 |
| | 592 |
| Total comprehensive income | 317 | | | 180 | | | 103 | |
| Less: Comprehensive income attributable to noncontrolling interest | (4 | ) | | (7 | ) | | (4 | ) | Less: Comprehensive income attributable to noncontrolling interest | (5) | | | (4) | | | (7) | |
| Comprehensive income attributable to Meritor, Inc. | $ | 176 |
| | $ | 96 |
| | $ | 588 |
| Comprehensive income attributable to Meritor, Inc. | $ | 312 | | | $ | 176 | | | $ | 96 | |
See Notes to Consolidated Financial Statements.
MERITOR, INC.
CONSOLIDATED BALANCE SHEET
(In millions)
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| ASSETS | | | |
| CURRENT ASSETS: | | | |
| Cash and cash equivalents | $ | 108 |
| | $ | 115 |
|
| Receivables, trade and other, net | 551 |
| | 588 |
|
| Inventories | 526 |
| | 477 |
|
| Other current assets | 31 |
| | 46 |
|
| TOTAL CURRENT ASSETS | 1,216 |
| | 1,226 |
|
| NET PROPERTY | 515 |
| | 483 |
|
| GOODWILL | 478 |
| | 421 |
|
| OTHER ASSETS | 606 |
| | 596 |
|
| TOTAL ASSETS | $ | 2,815 |
| | $ | 2,726 |
|
| LIABILITIES, MEZZANINE EQUITY AND EQUITY | | | |
| CURRENT LIABILITIES: | | | |
| Short-term debt | $ | 41 |
| | $ | 94 |
|
| Accounts and notes payable | 610 |
| | 700 |
|
| Other current liabilities | 285 |
| | 290 |
|
| TOTAL CURRENT LIABILITIES | 936 |
| | 1,084 |
|
| LONG-TERM DEBT | 902 |
| | 730 |
|
| RETIREMENT BENEFITS | 336 |
| | 262 |
|
| OTHER LIABILITIES | 226 |
| | 332 |
|
| TOTAL LIABILITIES | 2,400 |
| | 2,408 |
|
| COMMITMENTS AND CONTINGENCIES (NOTE 25) |
| |
|
| MEZZANINE EQUITY | | | |
| Convertible debt with cash settlement | — |
| | 1 |
|
| EQUITY: | | | |
| Common stock (September 30, 2019 and 2018, 104.1 and 102.2 shares issued and 81.4 and 84.9 shares outstanding, respectively) | 104 |
| | 102 |
|
| Additional paid-in capital | 803 |
| | 787 |
|
| Retained earnings | 491 |
| | 200 |
|
| Treasury stock, at cost (September 30, 2019 and September 30, 2018, 22.7 and 17.3 shares, respectively) | (332 | ) | | (236 | ) |
| Accumulated other comprehensive loss | (681 | ) | | (566 | ) |
| Total equity attributable to Meritor, Inc. | 385 |
| | 287 |
|
| Noncontrolling interests | 30 |
| | 30 |
|
| TOTAL EQUITY | 415 |
| | 317 |
|
| TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY | $ | 2,815 |
| | $ | 2,726 |
|
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| ASSETS | | | |
| CURRENT ASSETS: | | | |
| Cash and cash equivalents | $ | 315 | | | $ | 108 | |
| Receivables, trade and other, net | 479 | | | 551 | |
| Inventories | 435 | | | 526 | |
| Other current assets | 54 | | | 31 | |
| TOTAL CURRENT ASSETS | 1,283 | | | 1,216 | |
| NET PROPERTY | 515 | | | 515 | |
| GOODWILL | 501 | | | 478 | |
| OTHER ASSETS | 585 | | | 606 | |
| TOTAL ASSETS | $ | 2,884 | | | $ | 2,815 | |
| LIABILITIES AND EQUITY | | | |
| CURRENT LIABILITIES: | | | |
| Short-term debt | $ | 39 | | | $ | 41 | |
| Accounts and notes payable | 423 | | | 610 | |
| Other current liabilities | 264 | | | 285 | |
| TOTAL CURRENT LIABILITIES | 726 | | | 936 | |
| LONG-TERM DEBT | 1,188 | | | 902 | |
| RETIREMENT BENEFITS | 196 | | | 336 | |
| OTHER LIABILITIES | 279 | | | 226 | |
| TOTAL LIABILITIES | 2,389 | | | 2,400 | |
| COMMITMENTS AND CONTINGENCIES (NOTE 22) | | | |
| | | |
| | | |
| EQUITY: | | | |
| Common stock (September 30, 2020 and 2019,103.7 and 104.1 shares issued and 72.3 and 81.4 shares outstanding, respectively | 105 | | | 104 | |
| Additional paid-in capital | 808 | | | 803 | |
| Retained earnings | 736 | | | 491 | |
| Treasury stock, at cost (September 30, 2020 and September 30, 2019, 31.4 and 22.7 shares, respectively) | (573) | | | (332) | |
| Accumulated other comprehensive loss | (614) | | | (681) | |
| Total equity attributable to Meritor, Inc. | 462 | | | 385 | |
| Noncontrolling interests | 33 | | | 30 | |
| TOTAL EQUITY | 495 | | | 415 | |
| TOTAL LIABILITIES AND EQUITY | $ | 2,884 | | | $ | 2,815 | |
See Notes to Consolidated Financial Statements.
MERITOR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 |
| OPERATING ACTIVITIES | | | | | |
| CASH PROVIDED BY OPERATING ACTIVITIES (see Note 28) | $ | 256 |
| | $ | 251 |
| | $ | 176 |
|
| INVESTING ACTIVITIES | | | | | |
| Capital expenditures | (103 | ) | | (104 | ) | | (95 | ) |
| Proceeds from sale of equity method investment | — |
| | 250 |
| | — |
|
| Cash paid for business acquisitions, net of cash acquired | (168 | ) | | (35 | ) | | (34 | ) |
| Cash paid for investment in Transportation Power, Inc. | (6 | ) | | (6 | ) | | — |
|
| Other investing activities | 6 |
| | 6 |
| | — |
|
| Net investing cash flows provided by (used for) continuing operations | (271 | ) | | 111 |
| | (129 | ) |
| Net investing cash flows provided by discontinued operations | — |
| | — |
| | 2 |
|
| CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | (271 | ) | | 111 |
| | (127 | ) |
| FINANCING ACTIVITIES | | | | | |
| Securitization | (38 | ) | | (43 | ) | | 89 |
|
| Proceeds from debt issuances | — |
| | — |
| | 325 |
|
| Term loan borrowings | 175 |
| | — |
| | — |
|
| Redemption of notes | (24 | ) | | (181 | ) | | (103 | ) |
| Repayment of notes and term loan | — |
| | — |
| | (408 | ) |
| Deferred issuance costs | (4 | ) | | — |
| | — |
|
| Debt issuance costs | — |
| | — |
| | (12 | ) |
| Other financing activities | (2 | ) | | (5 | ) | | (13 | ) |
| Net change in debt | 107 |
| | (229 | ) | | (122 | ) |
| Repurchase of common stock | (96 | ) | | (100 | ) | | — |
|
| CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | 11 |
| | (329 | ) | | (122 | ) |
| EFFECT OF CHANGES IN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | (3 | ) | | (6 | ) | | 1 |
|
| CHANGE IN CASH AND CASH EQUIVALENTS | (7 | ) | | 27 |
| | (72 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 115 |
| | 88 |
| | 160 |
|
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 108 |
| | $ | 115 |
| | $ | 88 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| OPERATING ACTIVITIES | | | | | |
| CASH PROVIDED BY OPERATING ACTIVITIES (see Note 25) | $ | 265 | | | $ | 256 | | | $ | 251 | |
| INVESTING ACTIVITIES | | | | | |
| Capital expenditures | (85) | | | (103) | | | (104) | |
| Proceeds from sale of equity method investment | 0 | | | 0 | | | 250 | |
| Cash paid for business acquisitions, net of cash acquired | 0 | | | (168) | | | (35) | |
| | | | | |
| Cash paid for investment in Transportation Power, Inc. | (13) | | | (6) | | | (6) | |
| | | | | |
| | | | | |
| Other investing activities | 9 | | | 6 | | | 6 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | (89) | | | (271) | | | 111 | |
| FINANCING ACTIVITIES | | | | | |
| Securitization | (8) | | | (38) | | | (43) | |
| Proceeds from debt issuances | 300 | | | 0 | | | 0 | |
| Borrowings against revolving line of credit | 304 | | | 190 | | | 55 | |
| Repayments of line of credit | (304) | | | (190) | | | (55) | |
| Term loan borrowings | 0 | | | 175 | | | 0 | |
| Redemption of notes | 0 | | | (24) | | | (181) | |
| Repayment of notes and term loan | (8) | | | 0 | | | 0 | |
| Deferred issuance costs | 0 | | | (4) | | | 0 | |
| Debt issuance costs | (5) | | | 0 | | | 0 | |
| Other financing activities | (2) | | | (2) | | | (5) | |
| Net change in debt | 277 | | | 107 | | | (229) | |
| Repurchase of common stock | (241) | | | (96) | | | (100) | |
| CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | 36 | | | 11 | | | (329) | |
| EFFECT OF CHANGES IN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | (5) | | | (3) | | | (6) | |
| CHANGE IN CASH AND CASH EQUIVALENTS | 207 | | | (7) | | | 27 | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 108 | | | 115 | | | 88 | |
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 315 | | | $ | 108 | | | $ | 115 | |
See Notes to Consolidated Financial Statements.
MERITOR, INC. CONSOLIDATED STATEMENT OF EQUITY (DEFICIT) (In millions) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Equity (Deficit) Attributable to Meritor, Inc. | | Non- controlling Interests | | Total |
Beginning balance at
September 30, 2018 | $ | 102 |
| | $ | 787 |
| | $ | 200 |
| | $ | (236 | ) | | $ | (566 | ) | | $ | 287 |
| | $ | 30 |
| | $ | 317 |
|
| Comprehensive income (loss) | — |
| | — |
| | 291 |
| | — |
| | (115 | ) | | 176 |
| | 4 |
| | 180 |
|
| Vesting of restricted stock | 2 |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Equity based compensation
expense | — |
| | 18 |
| | — |
| | — |
| | — |
| | 18 |
| | — |
| | 18 |
|
| Repurchase of common stock | — |
| | — |
| | — |
| | (96 | ) | | — |
| | (96 | ) | | — |
| | (96 | ) |
Non-controlling interest
dividends | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
Ending balance at
September 30, 2019 | $ | 104 |
|
| $ | 803 |
|
| $ | 491 |
|
| $ | (332 | ) |
| $ | (681 | ) |
| $ | 385 |
|
| $ | 30 |
|
| $ | 415 |
|
| | | | | | | | | | | | | | | | |
Beginning balance at
September 30, 2017 | $ | 101 |
| | $ | 765 |
| | $ | 83 |
| | $ | (136 | ) | | $ | (545 | ) | | $ | 268 |
| | $ | 27 |
| | $ | 295 |
|
| Comprehensive income (loss) | — |
| | — |
| | 117 |
| | — |
| | (21 | ) | | 96 |
| | 7 |
| | 103 |
|
| Vesting of restricted stock | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Equity based compensation expense | — |
| | 20 |
| | — |
| | — |
| | — |
| | 20 |
| | — |
| | 20 |
|
| Repurchase of common stock | — |
| | — |
| | — |
| | (100 | ) | | — |
| | (100 | ) | | — |
| | (100 | ) |
| Convertible securities with cash settlement | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Non-controlling interest dividends | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
| Other | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
| | (2 | ) | | — |
|
Ending balance at
September 30, 2018 | $ | 102 |
| | $ | 787 |
| | $ | 200 |
|
| $ | (236 | ) | | $ | (566 | ) | | $ | 287 |
| | $ | 30 |
| | $ | 317 |
|
| | | | | | | | | | | | | | | | |
Beginning balance at
September 30, 2016 | $ | 99 |
| | $ | 876 |
| | $ | (241 | ) | | $ | (136 | ) | | $ | (809 | ) | | $ | (211 | ) | | $ | 25 |
| | $ | (186 | ) |
| Comprehensive income (loss) | — |
| | — |
| | 324 |
| | — |
| | 264 |
| | 588 |
| | 4 |
| | 592 |
|
| Vesting of restricted stock | 2 |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Repurchase of convertible notes | — |
| | (156 | ) | | — |
| | — |
| | — |
| | (156 | ) | | — |
| | (156 | ) |
| Issuance of convertible notes | — |
| | 41 |
| | — |
| | — |
| | — |
| | 41 |
| | — |
| | 41 |
|
| Equity based compensation expense | — |
| | 19 |
| | — |
| | — |
| | — |
| | 19 |
| | — |
| | 19 |
|
| Debt issuance costs | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Stock option exercises | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Convertible securities with cash settlement | — |
| | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Non-controlling interest dividends | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
| Other | — |
| | (12 | ) | | — |
| | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) |
Ending balance at
September 30, 2017 | $ | 101 |
| | $ | 765 |
| | $ | 83 |
|
| $ | (136 | ) | | $ | (545 | ) | | $ | 268 |
| | $ | 27 |
| | $ | 295 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common
Stock | | Additional
Paid-in
Capital | | Retained Earnings | | Treasury Stock | | Accumulated
Other
Comprehensive
Loss | | Total Equity
Attributable to
Meritor, Inc. | | Non-
controlling
Interests | | Total |
| Beginning balance at September 30, 2019 | $ | 104 | | | $ | 803 | | | $ | 491 | | | $ | (332) | | | $ | (681) | | | $ | 385 | | | $ | 30 | | | $ | 415 | |
| Comprehensive income | — | | | — | | | 245 | | | — | | | 67 | | | 312 | | | 5 | | | 317 | |
| Vesting of restricted stock | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Equity based compensation
expense | — | | | 7 | | | — | | | — | | | — | | | 7 | | | — | | | 7 | |
| | | | | | | | | | | | | | | |
| Repurchase of common stock | — | | | — | | | — | | | (241) | | | — | | | (241) | | | — | | | (241) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Non-controlling interest
dividends | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
| Other | — | | | (1) | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
| Ending balance at September 30, 2020 | $ | 105 | | | $ | 808 | | | $ | 736 | | | $ | (573) | | | $ | (614) | | | $ | 462 | | | $ | 33 | | | $ | 495 | |
| | | | | | | | | | | | | | | |
Beginning balance at
September 30, 2018 | $ | 102 | | | $ | 787 | | | $ | 200 | | | $ | (236) | | | $ | (566) | | | $ | 287 | | | $ | 30 | | | $ | 317 | |
| Comprehensive income (loss) | — | | | — | | | 291 | | | — | | (115) | | | 176 | | | 4 | | | 180 | |
| Vesting of restricted stock | 2 | | | (2) | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Equity based compensation expense | — | | | 18 | | | — | | | — | | | — | | | 18 | | | — | | | 18 | |
| Repurchase of common stock | — | | | — | | | — | | | (96) | | | — | | | (96) | | | — | | | (96) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Non-controlling interest dividends | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
| | | | | | | | | | | | | | | |
Ending balance at
September 30, 2019 | $ | 104 | | | $ | 803 | | | $ | 491 | | | $ | (332) | | | $ | (681) | | | $ | 385 | | | $ | 30 | | | $ | 415 | |
| | | | | | | | | | | | | | | |
Beginning balance at
September 30, 2017 | $ | 101 | | | $ | 765 | | | $ | 83 | | | $ | (136) | | | $ | (545) | | | $ | 268 | | | $ | 27 | | | $ | 295 | |
| Comprehensive income (loss) | — | | | — | | | 117 | | | — | | | (21) | | | 96 | | | 7 | | | 103 | |
| Vesting of restricted stock | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Equity based compensation expense | — | | | 20 | | | — | | | — | | | — | | | 20 | | | — | | | 20 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Convertible securities with cash settlement | — | | | 1 | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| Repurchase of common stock | — | | | — | | | — | | | (100) | | | — | | | (100) | | | — | | | (100) | |
| Non-controlling interest dividends | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
| Other | — | | | 2 | | | — | | | — | | | — | | | 2 | | | (2) | | | 0 | |
Ending balance at
September 30, 2018 | $ | 102 | | | $ | 787 | | | $ | 200 | | | $ | (236) | | | $ | (566) | | | $ | 287 | | | $ | 30 | | | $ | 317 | |
See Notes to Consolidated Financial Statements.
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Consolidated Financial Statements are those of the company and its consolidated subsidiaries.
The company’s fiscal year ends on the Sunday nearest September 30. The 2020, 2019 2018 and 20172018 fiscal years ended on September 27, 2020, September 29, 2019 and September 30, 2018, and October 1, 2017, respectively. All year and quarter references relate to the company’s fiscal year and fiscal quarters, unless otherwise stated. For ease of presentation, September 30 is used consistently throughout this report to represent the fiscal year end.
COVID-19 Pandemic Update
In March 2020, the World Health Organization declared a global health pandemic related to the outbreak of a novel coronavirus. The COVID-19 pandemic adversely affected the company's financial performance in the second, third and fourth quarters of fiscal year 2020 and could have an impact throughout fiscal year 2021. In response to the COVID-19 pandemic, government health officials have recommended and mandated precautions to mitigate the spread of the virus, including shelter-in-place orders, prohibitions on public gatherings and other similar measures. As a result, the company and certain of the company's customers and suppliers temporarily closed select manufacturing locations beginning late in the second quarter of fiscal year 2020, continuing into the third quarter of fiscal year 2020. As of May 31, 2020, all of the company's global facilities were back open and operating with limited production. Production volume levels continued to increase through the fourth quarter of fiscal year 2020. Most of the company’s salaried employees are primarily working remotely until further notice. There is uncertainty around the duration and breadth of the COVID-19 pandemic, as well as the impact it will have on the company's operations, supply chain and demand for its products. As a result, the ultimate impact on the company's business, financial condition or operating results cannot be reasonably estimated at this time.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures. Actual results could differ from these estimates. Significant estimates and assumptions were used to review goodwill and other long-lived assets for impairment (see Notes 76 and 13)10), environmental liabilities (see Notes 1613, 14 and 17)22), product warranty liabilities (see Note 16)13), long-term incentive compensation plan obligations (see Note 21)18), retiree medical and pension obligations (see Notes 2219 and 23)20), income taxes (see Note 24)21), and contingencies, including asbestos (see Note 25)22).
Concentration of Credit Risk
In the normal course of business, the company provides credit to customers. The company limits its credit risk by performing ongoing credit evaluations of its customers and maintaining reserves for potential credit losses and through accounts receivable factoring programs. The company’s accounts receivables are generally due from medium- and heavy-duty truck OEMs, specialty vehicle manufacturers, aftermarket customers, and trailer producers. The company’s ten largest customers accounted for 69 percent, 77 percent and 75 percent and 74 percent of salessales in fiscal years 2020, 2019 2018 and 2017,2018, respectively. Sales to the company's top three customers were 50 percent, 54 percent and 52 percent and 49 percent of total sales in fiscal years 2020, 2019 2018 and 2017,2018, respectively. At September 30, 2020 and 2019, and 2018, 2625 percent and 2326 percent of the company's trade accounts receivable were from the company's three largest customers.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Consolidation and Joint Ventures
The Consolidated Financial Statements include the accounts of the company and those subsidiaries in which the company has control. All intercompany balances and transactions are eliminated in consolidation. The results of operations of controlled subsidiaries are included in the Consolidated Financial Statements and are offset by a related noncontrolling interest recorded for the noncontrolling partners’ ownership. Investments in affiliates that are not controlled are reported using the equity method of accounting (see Note 15)12).
Foreign Currency
Local currencies are generally considered the functional currencies for operations outside the U.S. For operations reporting in local currencies, assets and liabilities are translated at year-end exchange rates with cumulative currency translation adjustments included as a component of Accumulated Other Comprehensive Loss in the Consolidated Balance Sheet. Income and expense items are translated at average rates of exchange during the year.
Impairment of Long-Lived Assets
Long-lived assets, excluding goodwill, to be held and used are reviewed for impairment whenever adverse events or changes in circumstances indicate a possible impairment. An impairment loss is recognized when a long-lived asset group is not recoverable,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
based on undiscounted cash flows over the remaining useful life of the primary asset of the group, and the long lived asset goup'sgroup's carrying value exceeds the fair value.
Long-lived assets held for sale are recorded at the lower of their carrying amount or estimated fair value less cost to sell.
Allowance for Doubtful Accounts
An allowance for uncollectible trade receivables is recorded when accounts are deemed uncollectible based on consideration of write-off history, aging analysis, and any specific, known troubled accounts.
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 restricted shares, restricted share units, performance share units, and convertible securities, if applicable.
A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| Basic average common shares outstanding | 74.0 | | | 83.2 | | | 87.5 | |
| | | | | |
| Impact of restricted shares, restricted share units and performance share units | 0.8 | | | 2.2 | | | 2.8 | |
| Impact of convertible notes | 0.8 | | | 0.9 | | | 0.9 | |
| Diluted average common shares outstanding | 75.6 | | | 86.3 | | | 91.2 | |
|
| | | | | | | | |
| | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 |
| Basic average common shares outstanding | 83.2 |
| | 87.5 |
| | 88.0 |
|
| Impact of restricted shares, restricted share units and performance share units | 2.2 |
| | 2.8 |
| | 1.7 |
|
| Impact of convertible notes | 0.9 |
| | 0.9 |
| | 0.5 |
|
| Diluted average common shares outstanding | 86.3 |
| | 91.2 |
| | 90.2 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2019 to September 30, 2022, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin, new business wins, free cash flow conversion and adjusted diluted earnings per share from continuing operations, each of which is weighted at 25%. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.4 million performance share units.
In November 2018, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the company's long-term incentive plan. Each performance share unit represents the right to receive 1 share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $16.50, which was the company’s share price on the grant date of December 1, 2018. The Board of Directors also approved a grant of 0.4 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $16.50, which was the company's share price on the grant date of December 1, 2018.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2018 to September 30, 2021, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin and adjusted diluted earnings per share from continuing operations at the following weights: 50% associated with achieving an adjusted EBITDA margin target and 50% associated with achieving an adjusted diluted earnings per share from continuing operations target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.5 million performance share units.
In November 2017, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive 1 share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $24.79, which was the company’s share price on the grant date of December 1, 2017. The Board of Directors also approved a grant of 0.3 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $24.79, which was the company's share price on the grant date of December 1, 2017.
The actual number of performance share units that will vest dependsvested depended upon the company’s performance relative to the established performance metricsgoals for the three-year performance period of October 1, 2017 to September 30, 2020, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin and adjusted diluted
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
earnings per share from continuing operations at the following weights: 50% associated with achieving an adjusted EBITDA margin target and 50% associated with achieving an adjusted diluted earnings per share from continuing operations target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.3 million performance share units.
In November 2016, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive 1 share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $12.77, which was the company’s share price on the grant date of December 1, 2016. The Board of Directors also approved a grant of 0.5 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $12.77, which was the company's share price on the grant date of December 1, 2016.
The actual number of performance share units that vested depended upon the company’s performance relative to the established M2019 goals for the three-year performance period of October 1, 2016 to September 30, 2019, which was measured at the end of the performance period.
For the years ended September 30, 2019, 2018 and 2017, the dilutive impact of previously issued restricted shares, restricted share units, and performance share units was 2.2 million, 2.8 million and 1.7 million, respectively. For the years ended September 30, 2019, 2018 and 2017, compensation cost related to restricted shares, restricted share units, performance share units and stock options was $18 million, $20 million and $19 million, respectively.
For the fiscal years ended 2019, 2018 and 2017, 0.9 million, 0.9 million and 0.5 million shares, respectively, 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.
Other
Other significant accounting policies are included in the related notes, specifically, goodwill (Note 7)6), inventories (Note 11)9), property and depreciation (Note 13), capitalized software (Note 14)10), product warranties (Note 16)13), financial instruments (Note 19)16), equity based compensation (Note 21)18), retirement medical plans (Note 22)19), retirement pension plans (Note 23)20), income taxes (Note 24)21) and environmental and asbestos-related liabilities (Note 25)22).
Accounting standards implemented during fiscal year 20192020
In May 2014,On October 1, 2019, the Financial Accounting Standards Board ("FASB") issuedcompany implemented Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, followed by various related amendments (ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, ASU 2017-05, ASU 2017-06, ASU 2017-13, and ASU 2017-14) collectively referred to as "Topic 606", which requires companies to recognize revenue when a customer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service and requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts.2016-02, Leases (Topic 842). The company elected the practical expedient package, which allowed the company to not reassess whether existing contracts contain a lease and to not reassess classification of existing leases. The company also adopted Topic 606ASU 2018-11, Leases (Topic 842) Targeted Improvements, electing to not separate lease and non-lease components in the first quarter of the fiscal year beginning October 1, 2018.contracts that contain both and electing to not restate comparative periods when adopting ASU 2016-02. As a result, the company has changed its accounting policyrecognized a right-of-use asset and lease liability as a lessee for revenue recognition as detailed below.
The company applied Topic 606 using the modified retrospective approach (i.e., by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity at October 1, 2018). Therefore, the comparative information for periods prior to our adoption date has not been adjusted and continues to be reported under Topic 605. There was no adjustment to the opening balance of equity at October 1, 2018 as there was no significant impact to previously recorded revenue or expense. The guidance has been applied tosubstantially all existing contracts at the date of initial application. The adoption of Topic 606 had an immaterial impact on our Consolidated Balance Sheet, Consolidated Statement of Operations,operating leases and Consolidated Statement of Cash Flows but did require enhancedhas included new and expanded disclosures to meet the new disclosure requirements; those enhanced disclosures are included in Note 6.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The guidance requires entities to only include the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, are to be included in a separate line item(s) outside of any sub-total of operating income. ASU 2017-07 also provides guidance that only the service cost component of net benefit cost is eligible for capitalization. The revisions in this amendment are to be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The company adopted this standard in the first quarter of fiscal year 2019. Amounts previously reflected in Operating Income were reclassified to Other income (expense) in accordance with the provisions of ASU 2017-07. For fiscal years 2018 and 2017, the non-service cost components of the net periodic pension and OPEB income were $25 million of income and $11 million of expense respectively, and are presented in other income. We used the practical expedient for retrospective presentation of the fiscal years 2018 and 2017 other expense components in this disclosure.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements. The amendments in this ASU result from the FASB’s standing project to address suggestions on the Accounting Standards Codification ("ASC") and to make other incremental improvements to GAAP. The amendments include changes to clarify the ASC or correct unintended application of guidance that is not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities.
Some of the amendments in this ASU were effective upon issuance. Others have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities, or are conforming amendments that have been made to recently issued guidance that is not yet effective that may require application of the transition and effective date guidance in the original ASU.
The company adopted certain amendments in this ASU in the first quarter of fiscal year 2019. Those certain amendments had effective dates for annual periods beginning after December 15, 2017, for public business entities. The amendments that were adopted in the first quarter of fiscal year 2019 did not have a material impact on the company's Consolidated Financial Statements. The company plans to implement the remaining amendments beginning October 1, 2019 and is currently evaluating the potential impact on its Consolidated Financial Statements.
The company also adopted the following ASUs during fiscal year 2019, none of which had a material impact on the Consolidated Financial Statements or financial statement disclosures:
|
| | |
ASU | | Effective Date |
2016-01 | Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities | October 1, 2018 |
2016-15 | Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) | October 1, 2018 |
2016-16 | Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory | October 1, 2018 |
2016-18 | Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) | October 1, 2018 |
2017-01 | Business Combinations (Topic 805): Clarifying the Definition of a Business | October 1, 2018 |
2017-09 | Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting | October 1, 2018 |
2018-03 | Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities | October 1, 2018 |
2018-04 | Investments—Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (SEC Update) | October 1, 2018 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounting standards to be implemented
The following represent the standards that may result in a significant change in practice and/or have a significant financial impact on the company.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update will require lessees to recognize a right-of-use asset and lease liability for substantially all leases. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2019, and is currently assessing the potential impact of this guidance on its accounting policies and its Consolidated Financial Statements. The company plans to implement this standard using the additional and optional transition method as provided by ASU 2018-11. Please see discussion of ASU 2018-11 below.
In June 2016, the FASBFinancial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including accounts receivable. The ASU also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The amendments in this update are requiredcompany expects to be adopted by public business entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The company is currently evaluating the potential impact ofadopt this guidance in the first quarter of fiscal year 2021. The guidance is expected to have an impact on itsthe company's accounting policies and its Consolidated Financial Statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effectsprocedures related to the Tax Cuts and Jobs Actcalculation of 2017 ("U.S. tax reform") from accumulated other comprehensive income into retained earnings. ASU 2018-02allowance for doubtful accounts receivable but is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The company is currently evaluating the potentialnot expected to have a material impact of this new guidance on its Consolidated Financial Statements.
In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842. The amendments in this ASU affect narrow aspects of the guidance issued in ASU 2016-02, Leases (Topic 842), which is not yet effective. The effective date and transition requirements for this ASU are the same as those for ASU 2016-02 as described above. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2019 in connection with its planned implementation of ASU 2016-02 and is currently assessing the potential impact of this new guidance on its accounting policies and its Consolidated Financial Statements.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. The amendments in this ASU affect the guidance issued in ASU 2016-02, Leases (Topic 842), which is not yet effective. The amendments provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments also provide lessors with a practical expedient to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component in certain circumstances. The effective date for this ASU are the same as those for ASU 2016-02 as described above. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2019 in connection with its planned implementation of ASU 2016-02 and is currently assessing the potential impact of this new guidance on its accounting policies and its Consolidated Financial Statements. Based on the company's lease portfolio, the company currently anticipates recognizing a lease liability and related right-of-use asset on its balance sheet between $75 million and $95 million, with an immaterial impact on it's income statement compared to the current lease accounting model. Additionally, the company is implementing an enterprise-wide lease management system to assist in the accounting and evaluating additional changes to it's processes and internal controls to ensure the company meets the standard’s reporting and disclosure requirements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU add, modify, and eliminate certain disclosure requirements on fair value measurements in Topic 820. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Certain amendments should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. Others should be applied retrospectively. Early adoption is permitted. An entity is permittedThe company expects to early adopt any removed or modified disclosures upon issuancethis guidance in the first quarter of this ASU and delay adoption of the additional disclosures until their effective date.fiscal year 2021. The company is currently evaluating the potential impact of this new guidance on its accounting policies and its Consolidated Financial Statements.
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (Subtopic 815-40). The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASC 470-20 outlines five models to allocate the proceeds attributable to the issuance of a convertible debt instrument. This ASU removes from U.S. GAAP the separation models for convertible debt with a cash conversion feature (CCF) and convertible debt with a beneficial conversion feature (BCF). As a result of adopting this ASU, entities are not required to separately present in equity an embedded conversion feature in such debt. Instead, they should account for a convertible debt instrument wholly as debt. Applying the separation models in ASC 470-20 to convertible instruments with a CCF or BCF involved the recognition of a debt discount, which is amortized to interest expense. The elimination of CCF and BCF models will reduce reported interest expense and increase reported net income for convertible instruments issued within the scope of those models before the adoption of ASU 2020-06. The amendments in this update are required to be adopted by public business entities in fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal year beginning after December 15, 2020, including interim periods within those fiscal years. Entities are permitted to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The company is currently evaluating the potential impact of this guidance on its accounting policies and its Consolidated Financial Statements.
3. ACQUISITIONS AND DIVESTITURE
Acquisition of TransPower Business
On January 16, 2020, Meritor acquired 100 percent of the voting equity interest of Transportation Power, Inc. ("TransPower") for a cash purchase price of approximately $15 million, subject to certain purchase price adjustments. Prior to the acquisition, the fair value of the company’s investment in TransPower was $12 million. The TransPower acquisition was accounted for as a business combination. With the addition of TransPower's product portfolio, Meritor advances its strategic priorities through increased investment in next-generation technologies.
Pro forma financial information of the company is presented in the following table for the twelve months ended September 30, 2020 and 2019 as if the TransPower acquisition had occurred on October 1, 2018. The pro forma financial
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In April 2019,information is unaudited and is provided for informational purposes only and does not purport to be indicative of the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this ASU affect a variety of Topics inresults which would have actually been attained had the Codification (ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities; ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Lossesacquisition occurred on Financial Instruments; and ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities)October 1, 2018 (in millions).
| | | | | | | | | | | |
| Twelve Months Ended September 30, |
| 2020 | | 2019 |
| | | |
| Sales | $ | 3,045 | | | $ | 4,394 | |
| Net income attributable to Meritor, Inc. | 244 | | | 282 | |
For the amendments in this ASU that are applicable to ASU 2016-01, whichThe purchase price was allocated on a provisional basis as of January 16, 2020. Assets acquired and liabilities assumed were recorded at estimated fair values based on management's estimates, available information, and reasonable and supportable assumptions. Additionally, the company has adoptedis utilizing a third-party to assist with certain estimates of fair values. The provisional purchase price allocation, which is subject to change and did not have a material impact on the Consolidated Financial Statements, the effective datemay be subsequently adjusted to reflect final valuation results and other adjustments, is the first quarter of fiscal year 2021 with early adoption permitted. For the amendmentsshown below (in millions). The company is reviewing and may record other additional measurement period adjustments in this ASU that are applicable to ASU 2016-13, which the company has not yet adopted, the effective date is the first quarter of fiscal year 2021. ForAll goodwill resulting from the amendments in this ASU that are applicable to ASU 2017-12, which the company has adopted, the effective date is the first quarteracquisition of fiscal year 2020 with early adoption permitted. The company has not yet adopted any of these amendments and is currently evaluating the potential impact of this new guidance on its Consolidated Financial Statements.
3.DISCONTINUED OPERATIONS
Results of the discontinued operations are summarized as follows (in millions):
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 |
| Sales | $ | — |
| | $ | — |
| | $ | — |
|
| Litigation settlement | — |
| | (2 | ) | | — |
|
| Other, net | 1 |
| | (2 | ) | | (1 | ) |
| Income (loss) before income taxes | 1 |
| | (4 | ) | | (1 | ) |
| Benefit from income taxes | — |
| | 1 |
| | — |
|
| Income (loss) from discontinued operations attributable to Meritor, Inc. | $ | 1 |
| | $ | (3 | ) | | $ | (1 | ) |
Loss from discontinued operations attributableTransPower was assigned to the company for the twelve months ended September 30, 2018 was primarily related to changes in estimates related to legal costs incurred in connection with a previously divested business.Commercial Truck reportable segment (see Note 6).
4. ACQUISITIONS AND DIVESTITURE | | | | | | | | | | | | | | | | | |
| Estimated Fair Value |
| As of
January 16, 2020 | | Measurement Period Adjustments | | As of
September 30, 2020 |
| Purchase price | $ | 15 | | | $ | 0 | | | $ | 15 | |
| Investments in TransPower | 12 | | | 0 | | | 12 | |
| $ | 27 | | | $ | 0 | | | $ | 27 | |
| Assets acquired and liabilities assumed: | | | | | |
| Cash | 2 | | | 0 | | | 2 | |
| Receivables, net | 5 | | | 0 | | | 5 | |
| Inventories, net | 8 | | | 0 | | | 8 | |
| PP&E | 10 | | | (1) | | | 9 | |
| Identifiable intangible assets | 0 | | | 11 | | | 11 | |
| Other assets | 0 | | | (1) | | | (1) | |
| Accounts payable | (3) | | | 0 | | | (3) | |
| Other current liabilities | (17) | | | 0 | | | (17) | |
| Total identifiable net assets acquired | 5 | | | 9 | | | 14 | |
| | | | | |
| Goodwill and other intangible assets resulting from the acquisition of TransPower | 22 | | | (9) | | | 13 | |
| $ | 27 | | | $ | 0 | | | $ | 27 | |
Acquisition of AxleTech Business
On July 26, 2019, the company acquired 100 percent of the voting equity interest of the AxleTech group companies for approximately $179 million in cash, subject to certain purchase price adjustments. The company funded the acquisition with the term loan under the senior secured revolving credit agreement (see Note 18)15). The AxleTech acquisition was accounted for as a business combination.
The addition of AxleTech enhancesenhanced Meritor’s growth platform with the addition of a complementary product portfolio that includes a full line of independent suspensions, axles, braking solutions and drivetrain components across the off-highway, defense, specialty and aftermarket markets. AxleTech operates within Meritor’s Aftermarket Industrial and TrailerIndustrial segment.
Pro forma financial informationAs of September 30, 2020, the company is presentedfinalized all measurement period adjustments related to the AxleTech acquisition. Since completion of initial estimates in the following table forfourth quarter of fiscal year 2019, the years ended September 30, 2019 and 2018 as ifcompany recorded a net $5 million measurement period adjustment to decrease the fair value of identifiable net assets acquired in the AxleTech acquisition had occurred on October 1, 2017. The pro forma financial information is unaudited and is provided for informational purposes only and does not purport to be indicative of the results which would have actually been attained had the acquisition occurred on October 1, 2017 (in millions).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | |
| | Pro Forma Combined |
| | Year Ended September 30, |
| | 2019 | | 2018 |
| | (Unaudited) |
| Sales | $ | 4,590 |
| | $ | 4,413 |
|
Net income attributable to Meritor, Inc. (1) | $ | 360 |
| | $ | 121 |
|
(1) Fiscal year 2019 includes the sale of EV Systems
Actual amounts of revenue and earnings includedresulting in the consolidated financial statements for the year ended September 30, 2019a corresponding $5 million increase to goodwill. These adjustments were not material.
The purchase price was allocated on a provisional basis as of July 26, 2019. Assets acquired and liabilities assumed were recorded at estimated fair values based on management's estimates,made to reflect additional available information and reasonable and supportable assumptions. Additionally, the Company is utilizing a third-party to assist with certain estimates of fair values.The provisional purchase price allocation, which is subject to change and may be subsequently adjusted to reflect finalupdated valuation results, which included valuation of technology and other adjustments, is shown below (in millions).
|
| | | |
| | July 26, 2019 |
| Purchase price | $ | 179 |
|
| | |
| Assets acquired and liabilities assumed | |
| Cash | 11 |
|
| Receivables | 37 |
|
| Inventories | 70 |
|
| Identifiable intangible assets | 46 |
|
| Other assets | 9 |
|
| PP&E | 26 |
|
| Accounts payable | (33 | ) |
| Other liabilities | (48 | ) |
| Identifiable net assets acquired | 118 |
|
| | |
| Goodwill resulting from the acquisition of AxleTech | 61 |
|
| | $ | 179 |
|
The company recorded provisionalcustomer relationships. All goodwill inresulting from the amount of $61 million forAxleTech acquisition was assigned to the excess of consideration paid over the fair value of the individual assets acquiredAftermarket and liabilities assumed. This recordedIndustrial reportable segment (see Note 6). Recorded goodwill consists largely of the synergies and economies of scale expected from combining the operations of the company and AxleTech. All of the goodwill was provisionally assigned to the Aftermarket, Industrial and Trailer reportable segment. The assignment of goodwill to reporting units is not complete.
The company incurred acquisition related costs of $1 million and $6 million as of September 30, 2020, and September 30, 2019, respectively, which were recorded as incurred and have been classified as either cost of sales or selling, general, and administrative expenses in the Consolidated Statement of Operations for the yearyears ended September 30, 2020 and September 30, 2019.
| | | | | | | | | | | | | | | | | |
| Estimated Fair Value |
| As of
September 30, 2019 | | Measurement Period Adjustments | | As of
September 30, 2020 |
| Purchase price | $ | 179 | | | $ | (2) | | | $ | 177 | |
| | | | | |
| | | | | |
| Assets acquired and liabilities assumed: | | | | | |
| Cash | 11 | | | 0 | | | 11 | |
| Receivables, net | 37 | | | (2) | | | 35 | |
| Inventories, net | 70 | | | (2) | | | 68 | |
| Identifiable intangible assets | 46 | | | 7 | | | 53 | |
| Other assets | 9 | | | (1) | | | 8 | |
| PP&E | 26 | | | 7 | | | 33 | |
| Accounts payable | (33) | | | 1 | | | (32) | |
| Other liabilities | (48) | | | (17) | | | (65) | |
| Total identifiable net assets acquired | 118 | | | (7) | | | 111 | |
| | | | | |
| Goodwill and other intangible assets resulting from the acquisition of AxleTech | 61 | | | 5 | | | 66 | |
| $ | 179 | | | $ | (2) | | | $ | 177 | |
Acquisition of AAG Business
On April 30, 2018, the company acquired substantially all of the assets of AA Gear & Manufacturing, Inc. ("AAG") for a cash purchase price of approximately $35 million and the assumption of certain liabilities. AAG provides low-to-medium volume batch manufacturing for complex gear and shaft applications, as well as quick-turnaround prototyping solutions and emergency plant support. The AAG acquisition was accounted for as a business combination. Of the $35 million, $11 million was recorded in
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
as various tangible assets acquired and liabilities assumed, and $12 million was recorded related to amortizable intangibles and $12 million of goodwill were recorded.
Acquisition of Fabco Business
On August 31, 2017, the company acquired certain assets of Fabco Holdings, Inc. ("FABCO"), including the product portfolio and related technologies, for a cash purchase price of $34 million and the assumption of certain liabilities. The Fabco acquisition was accounted forrecorded as a business combination.
As of September, 30, 2018, the company finalized all measurement period adjustments related to the Fabco acquisition. Since completion of initial estimates in the fourth quarter of fiscal year 2017, the company recorded a net $1 million measurement period adjustment to decrease the fair value of identifiable net assets acquired in the Fabco transaction, resulting in a corresponding $1 million increase to goodwill. These adjustment were made to reflect additional available information and updated valuation results, which included valuation of trademarks, technology and customer relationships. All goodwill resulting from the Fabco acquisition was assigned to the Aftermarket, Industrial and Trailer reportable segment (see Note 7).
|
| | | | | | | | | | | | |
| | | Estimated Fair Value |
| | | As of September 30, 2017 | | Measurement Period Adjustments | | As of September 30, 2018 |
| Purchase price | $ | 34 |
| | $ | — |
| | $ | 34 |
|
| | | | | | | |
| Assets acquired and liabilities assumed | | | | | |
| | Receivables | 5 |
| | — |
| | 5 |
|
| | Inventories | 13 |
| | (1 | ) | | 12 |
|
| | Property, plant and equipment | 9 |
| | (2 | ) | | 7 |
|
| | Intangible assets | — |
| | 3 |
| | 3 |
|
| | Accounts payable | (6 | ) | | — |
| | (6 | ) |
| | Other current liabilities | (6 | ) | | (1 | ) | | (7 | ) |
| Total identifiable net assets acquired | 15 |
| | (1 | ) | | 14 |
|
| | | | | | | |
| Goodwill resulting from the acquisition of Fabco | 19 |
| | 1 |
| | 20 |
|
| | | $ | 34 |
| | $ | — |
| | $ | 34 |
|
Sale of Ownership Interest in Meritor WABCO JV
In the fourth quarter of fiscal year 2017, Meritor, Inc. closed on the sale of its interest in Meritor WABCO Vehicle Control Systems ("Meritor WABCO") to a subsidiary of its joint venture partner, WABCO Holdings Inc. ("WABCO"). The total purchase price for the sale was $250 million. The Company also received a final partnership distribution of $8 million in the fourth quarter of fiscal year 2017, immediately prior to closing.
The company remained the exclusive distributor of a certain range of WABCO Holdings Inc.’sWABCO's aftermarket products in the United States and Canada and the non-exclusive distributor of these products in Mexico for a period of up to 10 years following the completion of the transaction. The purchase agreement included a provision regarding certain future options of the parties to terminate the distribution arrangement at certain points during the first three and a half years after the distribution arrangementclosing at an exercise price of between $225 million and $265 million based on the earnings of the business. On September 13, 2019, Meritor exercisedthe company gave notice of its intention to exercise its option to terminate the aftermarket distribution arrangement with WABCO, basedWABCO. On March 13, 2020 the company closed on a WABCO change in control triggering event, in exchange for a payment of between $225 millionthe transaction and received $265 million, based onfrom WABCO in connection with the earningstermination of the business through the closing date. This transaction is expected to close in fiscal year 2020.
5. ASSETS AND LIABILITIES HELD FOR SALE
As of September 30, 2019, there were $1 million of assets held for sale, all within the Aftermarket, Industrial and Trailer reporting segment. The company expects to sell the assets within one year. In fiscal year 2018, management approved plans to sell $2 million of property in various locations, of which $1 million was within the Aftermarket, Industrial and Trailer reporting
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
segment
4. LEASES
The company’s lease portfolio is comprised of leases of real estate, including manufacturing and $1 million was within corporate locations.office facilities, and leases of personal property, including machinery and other equipment and IT equipment. Operating leases with an initial term of 12 months or less are not recorded in the Consolidated Balance Sheet and related lease expense is recognized on a straight-line basis over the lease term. Short-term lease costs and variable lease costs were insignificant in the twelve months ended September 30, 2020.
For all asset classes, the company has elected to adopt the practical expedient under ASC 842 to not separate lease and non-lease components in contracts that contain both. These lease agreements are accounted for as a single lease component for all classes of underlying assets. The assets metcompany’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As the criteriadiscount rate implicit in the lease is typically unknown, the discount rate used to determine the lease liability for presentationthe majority of our leases is the collateralized incremental borrowing rate in the applicable geographic area for a similar term and amount as held for salethe lease agreement.
Components of lease expense (in millions)
| | | | | |
| September 30, 2020 |
| |
| |
| |
| Finance lease costs | $ | 3 | |
| |
| Operating lease costs | 20 | |
| |
| Total lease costs | $ | 23 | |
The following table provides a summary of the location and amounts related to finance leases recognized in the Consolidated Balance Sheet (in millions).
| | | | | | | | | | | |
| Classification | | September 30, 2020 |
| Finance lease right-of-use assets | Net Property | | $ | 5 | |
| Finance lease liabilities | Short-term debt | | 3 | |
| Finance lease liabilities | Long-term debt | | 3 | |
The following table provides a summary of the location and amounts related to operating leases recognized in the Consolidated Balance Sheet (in millions).
| | | | | | | | | | | |
| Classification | | September 30, 2020 |
| Operating lease right-of-use assets | Other assets | | $ | 70 | |
| Operating lease liabilities | Other current liabilities | | 15 | |
| Operating lease liabilities | Other liabilities | | 59 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables summarize additional information related to our lease agreements.
Supplemental cash flow information related to leases (in millions)
| | | | | |
| September 30, 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| Operating cash flows used for operating leases | $ | 19 | |
| |
| Financing cash flows used for finance leases | 2 | |
| Right-of-use assets obtained in exchange for lease obligations: | |
| Operating leases | 8 | |
| Finance leases | 3 | |
Supplemental balance sheet information related to leases
| | | | | |
| September 30, 2020 |
| Weighted-average remaining lease term (years): | |
| Operating leases | 8.55 |
| Finance leases | 2.21 |
| Weighted-average discount rate: | |
| Operating leases | 4.5 | % |
| Finance leases | 5.0 | % |
Maturities (in millions)
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
| 2021 | 17 | | | 3 | |
| 2022 | 14 | | | 2 | |
| 2023 | 13 | | | 1 | |
| 2024 | 9 | | | 0 | |
| Thereafter | 40 | | | 0 | |
| Total lease payments | 93 | | | 6 | |
| Less: Impact of discounting future lease payments | (19) | | | 0 | |
| Present value of lease liabilities | $ | 74 | | | $ | 6 | |
Disclosures related to periods prior to adoption of ASU 2016-02
Cash obligations under future minimum rental commitments under operating leases as of September 30, 2019 and 2018.
Meritor Huayang Vehicle Braking Company Ltd.
During the first quarter of fiscal year 2017, management approved a plan to sell Meritor Huayang Vehicle Braking Company Ltd. within the Commercial Truck reporting segment. The company expected to sell the business within one year from management's approval of the plan. The business and its associated assets and liabilities met the criteria for presentation as held for sale as of September 30, 2017.
Assets and liabilities held for sale are measured at the lower of the carrying value or fair value less costs to sell. Upon meeting the held for sale criteria, the company determined the carrying value of the business exceeded the fair value less costs to sell. As a result, an impairment charge of $3 million was recorded within other operating expense, netshown in the company’s Consolidated Statement of Operations during fiscal year 2017.table below (in millions).
On February 7, 2018, Meritor completed the sale of its equity interest in Meritor Huayang Vehicle Braking Company Ltd. All assets and liabilities of the business were transferred at closing.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total |
| Lease commitments | $ | 18 | | | $ | 15 | | | $ | 14 | | | $ | 13 | | | $ | 13 | | | $ | 25 | | | $ | 98 | |
6.
5. REVENUE
Revenue is measured based on the consideration to which the company expects to be entitled, and is presented net of any estimates of customer sales allowances, incentives, rebates, and returns. The company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the company from a customer, are excluded from revenue.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost, as opposed to a distinct performance obligation, and are included in cost of sales.
Nature of goods and services
The following is a description of principal activities - separated by reportable segments - from which the company generates its revenue.
The Commercial Truck segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks and other applications in North America, South America, Europe and Asia Pacific. It also supplies a variety of undercarriage products and systems for trailer applications in North America. This segment also includes the company's aftermarket businesses in Asia Pacific and South America.
The Aftermarket Industrial and TrailerIndustrial segment supplies axles, brakes, drivelines, suspension parts and other replacement parts to commercial vehicle and industrial aftermarket customers, primarily in North America and Europe. In addition, this segment supplies drivetrain systems and certain components, including axles, drivelines, brakes and suspension systems for military, construction, bus and coach, fire and emergency and other applications in North America and Europe. It also supplies a variety of undercarriage products and systems for trailer applications in North America.
Although the company may enter into long-term supply arrangements with its major customers, the prices and volumes are not fixed over the term of the arrangements and a contract does not exist under the scope of Topic 606 until prices and volumes are known. As such, individual customer releases or purchase orders represent the contract with the customer.
The company accounts for individual products and services separately if they are distinct (i.e., if a product or service is separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The company has identified certain performance obligations related to brake pad fitting and axle dressing where it is acting as an agent and, therefore, recognizes revenue on a net basis for satisfaction of those performance obligations.
The company recognizes revenue for the sale of goods at the point in time when the customer takes control of the goods. As such, revenue is recognized upon shipment of product and transfer of ownership to the customer. The amount of revenue recognized is based on the purchase order price and adjusted for variable consideration (i.e., customer sales allowances, incentives, rebates,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
and returns). Provisions for customer sales allowances, incentives, rebates, and returns are recorded as a reduction of sales at the time of revenue recognition based primarily on historical experience. The company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 90 days.
The company provides warranties on some of its products. The company records estimated product warranty costs at the time of shipment of products to customers (see Notes 16Note 13 and Note 17)14).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Disaggregation of revenue
In the following tables, revenue is disaggregated for each of our reportable segments by primary geographical market for the year ended September 30, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Year Ended September 30, 2020 | | | | |
| Primary Geographical Market | | Commercial Truck | | Aftermarket and Industrial | | Total | | | | |
| U.S. | | $ | 1,052 | | | $ | 731 | | | $ | 1,783 | | | | | |
| Canada | | 0 | | | 54 | | | 54 | | | | | |
| Mexico | | 129 | | | 18 | | | 147 | | | | | |
| Total North America | | 1,181 | | | 803 | | | 1,984 | | | | | |
| Sweden | | 202 | | | 0 | | | 202 | | | | | |
| Italy | | 153 | | | 13 | | | 166 | | | | | |
| United Kingdom | | 105 | | | 9 | | | 114 | | | | | |
| Other Europe | | 5 | | | 134 | | | 139 | | | | | |
| Total Europe | | 465 | | | 156 | | | 621 | | | | | |
| Brazil | | 170 | | | 2 | | | 172 | | | | | |
| China | | 134 | | | 1 | | | 135 | | | | | |
| India | | 70 | | | 2 | | | 72 | | | | | |
| Other Asia-Pacific | | 60 | | | 0 | | | 60 | | | | | |
| Total sales | | $ | 2,080 | | | $ | 964 | | | $ | 3,044 | | | | | |
|
| | | | | | | | | | | | |
| | | Twelve Months Ended September 30, 2019 |
| Primary Geographical Market | | Commercial Truck | | Aftermarket, Industrial and Trailer | | Total |
| U.S. | | $ | 1,569 |
| | $ | 1,053 |
| | $ | 2,622 |
|
| Canada | | — |
| | 69 |
| | 69 |
|
| Mexico | | 200 |
| | 49 |
| | 249 |
|
| Total North America | | 1,769 |
| | 1,171 |
| | 2,940 |
|
| Sweden | | 276 |
| | — |
| | 276 |
|
| Italy | | 218 |
| | 16 |
| | 234 |
|
| United Kingdom | | 155 |
| | 10 |
| | 165 |
|
| Other Europe | | 10 |
| | 81 |
| | 91 |
|
| Total Europe | | 659 |
| | 107 |
| | 766 |
|
| Brazil | | 248 |
| | — |
| | 248 |
|
| China | | 153 |
| | — |
| | 153 |
|
| India | | 197 |
| | — |
| | 197 |
|
| Other Asia-Pacific | | 84 |
| | — |
| | 84 |
|
| Total sales | | $ | 3,110 |
| | $ | 1,278 |
| | $ | 4,388 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Year Ended September 30, 2019 (1) | | | | |
| Primary Geographical Market | | Commercial Truck | | Aftermarket and Industrial | | Total | | | | |
| U.S. | | $ | 1,737 | | | $ | 885 | | | $ | 2,622 | | | | | |
| Canada | | 0 | | | 69 | | | 69 | | | | | |
| Mexico | | 229 | | | 20 | | | 249 | | | | | |
| Total North America | | 1,966 | | | 974 | | | 2,940 | | | | | |
| Sweden | | 276 | | | 0 | | | 276 | | | | | |
| Italy | | 218 | | | 16 | | | 234 | | | | | |
| United Kingdom | | 155 | | | 10 | | | 165 | | | | | |
| Other Europe | | 10 | | | 81 | | | 91 | | | | | |
| Total Europe | | 659 | | | 107 | | | 766 | | | | | |
| Brazil | | 248 | | | 0 | | | 248 | | | | | |
| China | | 153 | | | 0 | | | 153 | | | | | |
| India | | 197 | | | 0 | | | 197 | | | | | |
| Other Asia-Pacific | | 84 | | | 0 | | | 84 | | | | | |
| Total sales | | $ | 3,307 | | | $ | 1,081 | | | $ | 4,388 | | | | | |
(1)Amounts for the year ended September 30, 2019 have been recast to reflect reportable segment changes.
Contract balances
As of September 30, 20192020 and September 30, 2018,2019, Trade receivables, net, which are included in Receivables, trade and other, net, on the Consolidated Balance Sheet, were $517$421 million and $566$517 million, respectively.
For the year ended September 30, 2019,2020, the company had no material bad-debt expense and there were no material contract
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
assets, contract liabilities or deferred contract costs recorded on the Consolidated Balance Sheet as of September 30, 2019.2020.
Contract costs
The company applies the practical expedient provided in Topic 606 and recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the company otherwise would have recognized is one year or less. The costs which are not capitalized are included in cost of sales.
7.6. GOODWILL
In accordance with 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
for goodwill at that time. The company tests goodwill for impairment at a level of reporting referred to as a reporting unit, which is an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a single reporting unit. An operating segment is deemed to be a reporting unit if all of its components are similar, if none of its components are a reporting unit, or if the segment comprises only a single component.
Annual Impairment Analysis
ASC Topic 350 allows entities to perform an initial qualitative evaluation to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The results of this qualitative assessment determine whether it is necessary to perform the quantitative impairment test. As allowed by the revised guidance, the company has elected to bypass the qualitative assessment for fiscal year 20192020 and proceed directly to the quantitative impairment test.
Excluding the qualitative evaluation discussed above, the quantitative goodwill impairment review is a comparison of the fair value of a reporting unit with its carrying amount. Estimates of fair value are primarily determined by using discounted cash flows and market multiples on earnings. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge based on that difference will be recorded. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit.
The impairment review is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions have a significant impact on the amount of any impairment charge recorded. Discounted cash flow methods are dependent upon assumptions of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual cash flows in the future may differ significantly from those previously forecasted.
For fiscal year 2019,2020, the fair value of all of the company’s reporting units exceeded their carrying values.
Realignment of Reporting Units
As discussed in Note 26,23, the company realigned its operations in the secondthird quarter of fiscal year 2019,2020, resulting in a change to its reportable segments. The company's reporting units did not change asAs a result of the change in reportable segments.segments, the company’s reporting units changed. The Commercial Truck segment contains 1 reporting unit. The Aftermarket Industrial and TrailerIndustrial segment contains 52 reporting units.
Acquisition of AxleTech Business
On July 26, 2019, the company acquired 100 percent of the voting equity interest of the AxleTech group companiesSee Note 3 for approximately $179 million in cash, subject to certain purchase price adjustments. The AxleTech acquisition was accounted forgoodwill recorded as a business combination. The company recorded a provisional amountresult of goodwill of $61 million for the excess of consideration paid over the fair value of the individual assets acquired and liabilities assumed, excluding identifiable intangible assets. This recorded goodwill consists largely of the synergies and economies of scale from combining the operations of the company and AxleTech. All of the goodwill was assigned to the Aftermarket, Industrial and Trailer reportable segment.acquisitions in fiscal year 2020.
Acquisition of AA Gear & Manufacturing, Inc. Business
On April 30, 2018, the company acquired substantially all of the assets of AAG for a cash purchase price of approximately $35 million and the assumption of certain liabilities. The AAG acquisition was accounted for as a business combination. The company recorded goodwill in the amount of $12 million for the excess of consideration paid over the fair value of the individual assets acquired and liabilities assumed. This recorded goodwill consists largely of the synergies and economies of scale expected from combining the operations of the company and AAG. All of the goodwill was assigned to the Aftermarket, Industrial and Trailer reportable segment. All goodwill recognized is expected to be deductible for income tax purposes over the next 15 years.
Acquisition of Fabco Holdings, Inc. Business
On August 31, 2017, the company acquired certain assets of Fabco, including its product portfolio and related technologies, for a cash purchase price of $34 million and the assumption of certain liabilities. The Fabco acquisition was accounted for as a business combination. As a result, we recorded goodwill in the amount of $20 million for the excess of consideration paid over the fair value of the individual assets acquired and liabilities assumed. This recorded goodwill consists largely of the synergies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
and economies of scale expected from combining the operations of the company and Fabco. All of the goodwill was assigned to the Aftermarket, Industrial and Trailer reportable segment.
A summary of the changes in the carrying value of goodwill is presented below (in millions):
|
| | | | | | | | | | | |
| | Commercial Truck | | Aftermarket, Industrial and Trailer | | Total |
Goodwill (1) | $ | 269 |
| | $ | 160 |
| | $ | 429 |
|
Accumulated impairment losses (1) | — |
| | (15 | ) | | (15 | ) |
Balance at September 30, 2017 (1) | 269 |
| | 145 |
| | 414 |
|
Adjustment due to sale of a business (1) | (1 | ) | | — |
| | (1 | ) |
Fabco measurement period adjustment (1) | — |
| | 1 |
| | 1 |
|
Goodwill acquired from acquisition (1) | — |
| | 9 |
| | 9 |
|
Foreign currency translation (1) | (2 | ) | | — |
| | (2 | ) |
Balance at September 30, 2018 (1) | 266 |
| | 155 |
| | 421 |
|
| AAG measurement period adjustment (see Note 4) | — |
| | 3 |
| | 3 |
|
| Goodwill acquired from acquisition (see Note 4) | — |
| | 61 |
| | 61 |
|
| Foreign currency translation | (5 | ) | | (2 | ) | | (7 | ) |
| Balance at September 30, 2019 | $ | 261 |
| | $ | 217 |
| | $ | 478 |
|
| | | | | | | | | | | | | | | | | |
| Commercial Truck | | Aftermarket and Industrial | | Total |
| | | | | |
| | | | | |
Goodwill (1) | $ | 289 | | | $ | 147 | | | $ | 436 | |
Accumulated impairment losses (1) | 0 | | | (15) | | | (15) | |
| | | | | |
Balance at September 30, 2018 (1) | 289 | | | 132 | | | 421 | |
| AAG measurement period adjustment (see Note 3) | 3 | | | 0 | | | 3 | |
| Goodwill acquired from acquisition (see Note 3) | 0 | | | 61 | | | 61 | |
| Foreign currency translation | (5) | | | (2) | | | (7) | |
Balance at September 30, 2019 (1) | 287 | | | 191 | | | 478 | |
| | | | | |
| | | | | |
| AxleTech measurement period adjustment (see Note 3) | 0 | | | 5 | | | 5 | |
| Goodwill acquired from acquisition (see Note 3) | 13 | | | 0 | | | 13 | |
| Foreign currency translation | 4 | | | 1 | | | 5 | |
| Balance at September 30, 2020 | $ | 304 | | | $ | 197 | | | $ | 501 | |
(1) Amounts have been recast to reflect reportable segment changes (see Note 26)23).
8.
7. RESTRUCTURING COSTS
At September 30, 20192020 and 2018, $82019, $10 million and $4$8 million,, respectively, of restructuring reserves primarily related to unpaid employee termination benefits remained in the Consolidated Balance Sheet.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes changes in restructuring reserves (in millions):
| | | | | | | | | | | | | | | | | | | |
| Employee
Termination
Benefits | | | | Plant
Shutdown
& Other | | Total |
| Balance at September 30, 2017 | $ | 5 | | | | | $ | 1 | | | $ | 6 | |
| Activity during the period: | | | | | | | |
| Charges to continuing operations | 6 | | | | | 0 | | | 6 | |
| | | | | | | |
| | | | | | | |
| Cash payments – continuing operations | (7) | | | | | (1) | | | (8) | |
| | | | | | | |
| | | | | | | |
| Balance at September 30, 2018 | 4 | | | | | 0 | | | 4 | |
| Activity during the period: | | | | | | | |
| Charges to continuing operations | 8 | | | | | 0 | | | 8 | |
| | | | | | | |
| | | | | | | |
| Cash payments – continuing operations | (5) | | | | | 0 | | | (5) | |
| | | | | | | |
| Other | 1 | | | | | 0 | | | 1 | |
| Balance at September 30, 2019 | 8 | | | | | 0 | | | 8 | |
| Activity during the period: | | | | | | | |
| Charges to continuing operations | 27 | | | | | 0 | | | 27 | |
| | | | | | | |
| Cash payments – continuing operations | (25) | | | | | 0 | | | (25) | |
| | | | | | | |
| Total restructuring reserves, end of year | 10 | | | | | 0 | | | 10 | |
| Less: non-current restructuring reserves | 0 | | | | | 0 | | | 0 | |
| Restructuring reserves – current, at September 30, 2020 | $ | 10 | | | | | $ | 0 | | | $ | 10 | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | |
| | Employee Termination Benefits | | Plant Shutdown & Other | | Total |
| Balance at September 30, 2016 | $ | 15 |
| | $ | 1 |
| | $ | 16 |
|
| Activity during the period: | | | | | |
| Charges to continuing operations | 5 |
| | 1 |
| | 6 |
|
| Cash payments – continuing operations | (14 | ) | | (1 | ) | | (15 | ) |
| Other | (1 | ) | | — |
| | (1 | ) |
| Balance at September 30, 2017 | 5 |
| | 1 |
| | 6 |
|
| Activity during the period: | |
| | |
| | |
|
| Charges to continuing operations | 6 |
| | — |
| | 6 |
|
| Cash payments – continuing operations | (7 | ) | | (1 | ) | | (8 | ) |
| Balance at September 30, 2018 | 4 |
| | — |
| | 4 |
|
| Activity during the period: | | | | | |
| Charges to continuing operations | 8 |
| | — |
| | 8 |
|
| Cash payments – continuing operations | (5 | ) | | — |
| | (5 | ) |
| Other | 1 |
| | — |
| | 1 |
|
| Total restructuring reserves, end of year | 8 |
|
| — |
| | 8 |
|
| Less: non-current restructuring reserves | — |
| | — |
| | — |
|
| Restructuring reserves – current, at September 30, 2019 | $ | 8 |
| | $ | — |
| | $ | 8 |
|
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restructuring costs attributable to the company’s business segments during fiscal years 2020, 2019, 2018 and 20172018 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Truck | | Aftermarket and Industrial | | Corporate | | Total |
| Fiscal year 2020 | | | | | | | |
| Global Restructuring Program 2020 | $ | 7 | | | $ | 3 | | | $ | 0 | | | $ | 10 | |
| Global Restructuring Program 2019 | 11 | | | 2 | | | 0 | | | 13 | |
| | | | | | | |
| | | | | | | |
| AxleTech | 0 | | | 2 | | | 0 | | | 2 | |
| Other | 1 | | | 1 | | | 0 | | | 2 | |
| Total restructuring costs | $ | 19 | | | $ | 8 | | | $ | 0 | | | $ | 27 | |
Fiscal year 2019 (1): | | | | | | | |
| Global Restructuring Program 2019 | 6 | | | 1 | | | 0 | | | 7 | |
| AxleTech | 0 | | | 3 | | | 0 | | | 3 | |
| | | | | | | |
| | | | | | | |
| Other | (1) | | | (1) | | | 0 | | | (2) | |
| Total restructuring costs | $ | 5 | | | $ | 3 | | | $ | 0 | | | $ | 8 | |
Fiscal year 2018 (1): | | | | | | | |
| | | | | | | |
| Segment Realignment Program | 0 | | | 3 | | | 0 | | | 3 | |
| | | | | | | |
| | | | | | | |
| Other | 1 | | | 1 | | | 1 | | | 3 | |
| Total restructuring costs | $ | 1 | | | $ | 4 | | | $ | 1 | | | $ | 6 | |
(1) Fiscal years 2019 and 2018 have been recast to reflect reportable segment changes.
|
| | | | | | | | | | | | | | | |
| | Commercial Truck | | Aftermarket, Industrial and Trailer | | Corporate | | Total |
| Fiscal year 2019: | | | | | | | |
| Global Restructuring Program | $ | 4 |
| | $ | 3 |
| | $ | — |
| | $ | 7 |
|
| AxleTech | — |
| | 3 |
| | — |
| | 3 |
|
| Other | (1 | ) | | (1 | ) | | — |
| | (2 | ) |
| Total restructuring costs | $ | 3 |
| | $ | 5 |
| | $ | — |
| | $ | 8 |
|
Fiscal year 2018 (1): | |
| | | | | | |
|
| Segment Realignment Program | — |
| | 3 |
| | — |
| | 3 |
|
| Other | 1 |
| | 1 |
| | 1 |
| | 3 |
|
| Total restructuring costs | $ | 1 |
| | $ | 4 |
| | $ | 1 |
| | $ | 6 |
|
Fiscal year 2017 (1): | | | | | | | |
| Aftermarket actions | — |
| | 4 |
| | — |
| | 4 |
|
| Other | 2 |
| | — |
| | — |
| | 2 |
|
| Total restructuring costs | $ | 2 |
| | $ | 4 |
| | $ | — |
| | $ | 6 |
|
| |
(1)Footprint Actions: On November 11, 2020, the company approved a restructuring plan to close 3 U.S. manufacturing plants and 1 European administration office in its Aftermarket and Industrial segment and consolidate their operations into existing facilities. The site closures include:
• Chicago, Illinois (acquired through AxleTech acquisition) • Livermore, California (acquired through Fabco acquisition) • Livonia, Michigan (acquired through Fabco acquisition) • Zurich, Switzerland
The closures impact approximately 150 hourly and salaried workers. These restructuring plans are intended to optimize the company’s manufacturing footprint, reduce costs and increase efficiencies. With this restructuring plan, the company expects to incur approximately $19 million in restructuring charges in the Aftermarket and Industrial segment, consisting of impairment of long-lived assets of $9 million, severance related costs of $5 million and other associated costs of $5 million. Restructuring actions associated with this plan are expected to be substantially complete by the end of 2021. | Fiscal years 2018 and 2017 have been recast to reflect reportable segment changes. |
Global Restructuring Programs: On June 2, 2020, the company approved and began executing a restructuring plan to reduce labor costs and align with current market forecasts. Under this program, the company expects to incur approximately $25 million in employee severance costs in connection with approximately 8 percent of its global salaried positions, and will eliminate certain hourly roles. During fiscal year 2020, the company incurred $10 million in restructuring costs related to this program, of which $7 million was in the Commercial Truck segment and $3 million was in the Aftermarket and Industrial segment. Restructuring actions associated with this plan are expected to be substantially complete by the end of fiscal year 2021.
On September 27, 2019, the company approved and began executing a restructuring plan to reduce salaried and hourly headcount globally. This restructuring plan iswas intended to reduce labor costs in response to an anticipated decline in most global truck and trailer market volumes. With this restructuring plan, the company expectsexpected to incur
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
approximately $20$26 million in employee severance costs in the aggregate across both of its reportable segments. During the fourth quarter of fiscal year 2019, the company incurred $4$6 million in restructuring costs in the Commercial Truck segment and $3$1 million in the Aftermarket and Industrial segment. During fiscal year 2020, the company incurred $11 million in restructuring costs in the Commercial Truck segment and Trailer$2 million in the Aftermarket and Industrial segment. Restructuring actions associated with this plan are expected to be substantially complete by the end of the first quarter of fiscal year 2020.2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AxleTech: On July 29, 2019, shortly after acquiring AxleTech, the company approved a restructuring plan related to the integration of the AxleTech business. This restructuring plan iswas intended to realize certain targeted synergies, primarily from the elimination of cost overlap. With this restructuring plan, the company expectsexpected to incur $11 million of total costs in the Aftermarket Industrial and TrailerIndustrial segment with approximately $7 million related to employee severance charges and approximately $4 million related to asset impairment. During the fourth quarter of fiscal year 2019, the company recorded $3 million of severance related restructuring costs in the Aftermarket and Industrial segment. During fiscal year 2020, the company recorded $2 million of severance related restructuring costs in the Aftermarket and TrailerIndustrial segment. Restructuring associated with severance actions is expected to beare substantially completed duringcomplete as of the end of fiscal year 2020.
Segment Realignment Program: On March 12, 2018, the company announced a realignment of operations to further drive long-term strategic objectives while also assigning new responsibilities as part of its commitment to leadership development. As a part of this program, the company approved various labor restructuring actions in the Aftermarket Industrial and TrailerIndustrial segment. The company recorded $3 million of restructuring costs during fiscal year 2018, in connection with this program. These actions were substantially complete as of fiscal year 2018.
Other Restructuring Actions: During fiscal year 2018, the company recorded restructuring costs of $3 million primarily associated with labor reduction programs in the Commercial Truck segment and Aftermarket Industrial and TrailerIndustrial segment.
Fiscals 2017 & 2016 Aftermarket Actions: During the third quarter of fiscal year 2016, the company approved various restructuring plans in the North American and European Aftermarket businesses. The company recorded $5 million of restructuring costs during the third quarter of fiscal year 2016 and $4 million of restructuring costs during fiscal year 2017. Restructuring actions associated with these plans were substantially complete as of September 30, 2017.
9.8. ACCOUNTS RECEIVABLE FACTORING AND SECURITIZATION
The company has a U.S. accounts receivable securitization facility with PNC Bank and participates in various accounts receivable factoring programs, primarily with Nordea Bank for trade receivables from AB Volvo as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Current Expiration | | Total Facility Size as of 9/30/19 | | Utilized as of 9/30/19 | | Utilized as of 9/30/18 |
| | | | | EUR | | USD | | EUR | | USD | | EUR | | USD |
| On-balance sheet arrangement: | | | | | | | | | | | | | | |
Committed U.S. accounts receivable securitization (1) | | December 2022 | | N/A |
| | $ | 115 |
| | N/A |
| | $ | 13 |
| | N/A |
| | $ | 57 |
|
Total on-balance sheet arrangement: (1) | | | | N/A |
| | $ | 115 |
| | N/A |
| | $ | 13 |
| | N/A |
| | $ | 57 |
|
| Off-balance sheet arrangements: | | | |
| |
| |
| |
| |
| |
|
Committed Swedish factoring facility (2)(3) | | March 2020 | | € | 155 |
| | $ | 169 |
| | € | 109 |
| | $ | 119 |
| | € | 136 |
| | $ | 158 |
|
Committed U.S. factoring facility (2) | | February 2023 | | N/A |
| | 75 |
| | N/A |
| | 58 |
| | 45 |
| | 53 |
|
| Uncommitted U.K. factoring facility | | February 2022 | | 25 |
| | 27 |
| | 6 |
| | 6 |
| | 8 |
| | 9 |
|
| Uncommitted Italy factoring facility | | June 2022 | | 30 |
| | 33 |
| | 21 |
| | 23 |
| | 24 |
| | 28 |
|
Other uncommitted factoring facilities (4) | | None | | N/A |
| | N/A |
| | 18 |
| | 20 |
| | 11 |
| | 12 |
|
| Total off-balance sheet arrangements | | | | € | 210 |
| | € | 304 |
| | € | 154 |
| | $ | 226 |
| | € | 224 |
| | $ | 260 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Current Expiration | | Total Facility Size as of 9/30/20 | | Utilized as of 9/30/20 | | Utilized as of 9/30/19 |
| | | | EUR | | USD | | EUR | | USD | | EUR | | USD |
| On-balance sheet arrangement: | | | | | | | | | | | | | | |
Committed U.S. accounts receivable securitization (1) | | December 2022 | | N/A | | $ | 95 | | | N/A | | $ | 3 | | | N/A | | $ | 13 | |
Total on-balance sheet arrangement: (1) | | | | N/A | | $ | 95 | | | N/A | | $ | 3 | | | N/A | | $ | 13 | |
| Off-balance sheet arrangements: | | | | | | | | | | | | | | |
Committed Swedish factoring facility (2)(3) | | March 2024 | | € | 155 | | | $ | 181 | | | € | 86 | | | $ | 100 | | | € | 109 | | | $ | 119 | |
Committed U.S. factoring facility (2) | | February 2023 | | N/A | | 75 | | | N/A | | 30 | | | N/A | | 58 | |
| Uncommitted U.K. factoring facility | | February 2022 | | 25 | | | 29 | | | 1 | | | 1 | | | 6 | | | 6 | |
| Uncommitted Italy factoring facility | | June 2022 | | 30 | | | 35 | | | 8 | | | 9 | | | 21 | | | 23 | |
Other uncommitted factoring facilities (4) | | None | | N/A | | N/A | | 12 | | | 14 | | | 18 | | | 20 | |
| Total off-balance sheet arrangements | | | | € | 210 | | | $ | 320 | | | € | 107 | | | $ | 154 | | | € | 154 | | | $ | 226 | |
(1) Availability subject to adequate eligible accounts receivable available for sale. The utilized amount includes $4$3 million and $11$4 million of letters of credit as of September 30, 20192020 and September 30, 2018,2019, respectively.
(2) Actual amounts may exceed the bank's commitment at the bank's discretion.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(3) The facility is backed by a 364-day liquidity commitment from Nordea Bank which extends through January 10, 2020.June 22, 2021.
(4) There is no explicit facility size under the factoring agreement, but the counterparty approves the purchase of receivable tranches at its discretion.
On-balance sheet arrangement
U.S. Securitization Facility: As of September 30, 2018,2019, the U.S. accounts receivables securitization facility with PNC bank had a facility size of $100$115 million. On September 16, 2019,April 20, 2020, the company entered into an amendment that increaseddecreased the size of the facility to $115 million and extended its expiration date to December 2022.$95 million. The maximum permitted priority debt-to-EBITDA ratio as of the last day of each fiscal quarter under the facility is 2.25 to 1.00.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
This program is provided by PNC Bank, National Association, as Administrator and Purchaser, and the other Purchasers and Purchaser Agents party to the agreement from time to time (participating lenders). Under this program, the company has the ability to sell an undivided percentage ownership interest in substantially all of its trade receivables (excluding the receivables due from AB Volvo and subsidiaries eligible for sale under the U.S. accounts receivable factoring facility) of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation ("ARC"), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings from participating lenders under a loan agreement. This program also includes a letter of credit facility pursuant to which ARC may request the issuance of letters of credit issued for the company’s U.S. subsidiaries (originators) or their designees, which when issued will constitute a utilization of the facility for the amount of letters of credit issued. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the Consolidated Balance Sheet. As of September 30, 2019, $9 million was2020, there were 0 borrowings outstanding under this program, and $4$3 million was outstanding under related letters of credit. As of September 30, 2018, $462019, $9 million was outstanding under this program, and $11$4 million was outstanding under related letters of credit. This securitization program contains a cross-default to the revolving credit facility. At certain times during any given month, the company may sell eligible accounts receivable under this program to fund intra-month working capital needs. In such months, the company would then typically utilize the cash received from customers throughout the month to repay the borrowings under the program. Accordingly, during any given month, the company may borrow under this program in amounts exceeding the amounts shown as outstanding at fiscal year ends.
Off-balance sheet arrangements
Total costs associated with all of the off-balance sheet arrangements described above were $4 million,$6 million in fiscal year 2019 and $5 million in bothin fiscal years 2020, 2019 and 2018, and 2017,respectively, and are included in selling, general and administrative expenses in the Consolidated Statement of Operations.
10. OTHER OPERATING EXPENSE, NET
Other operating expense, net for fiscal year 2019 primarily relates to asset impairment. In fiscal years 2018 and 2017, this primarily relates to environmental remediation costs incurred by the company (see Note 25).
11.9. 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):
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| Finished goods | $ | 119 | | | $ | 153 | |
| Work in process | 38 | | | 39 | |
| Raw materials, parts and supplies | 278 | | | 334 | |
| Total | $ | 435 | | | $ | 526 | |
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Finished goods | $ | 153 |
| | $ | 170 |
|
| Work in process | 39 |
| | 41 |
|
| Raw materials, parts and supplies | 334 |
| | 266 |
|
| Total | $ | 526 |
| | $ | 477 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. OTHER CURRENT ASSETS
Other current assets are summarized as follows (in millions):
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Asbestos-related recoveries (see Note 25) | $ | 6 |
| | $ | 16 |
|
| Prepaid and other | 25 |
| | 30 |
|
| Other current assets | $ | 31 |
| | $ | 46 |
|
13.10. NET PROPERTY
Property is stated at cost. Depreciation of property is based on estimated useful lives, generally using the straight-line method. Estimated useful lives for buildings and improvements range from 10 to 50 years and estimated useful lives for machinery and equipment range from 3 to 2025 years. Significant improvements are capitalized, and disposed or replaced property is written off. Maintenance and repairs are charged to expense in the period they are incurred. Company-owned tooling is classified as property and depreciated over the shorter of its expected life or the life of the production contract, generally not to exceed three years.
In accordance with the FASB guidance on property, plant and equipment, the company reviews the carrying value of long-lived assets, excluding goodwill, to be held and used, for impairment whenever events or changes in circumstances indicate a possible impairment. An impairment loss is recognized when a long-lived asset’s carrying value is not recoverable and exceeds estimated fair value.
Net property is summarized as follows (in millions):
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Property at cost: | | | |
| Land and land improvements | $ | 31 |
| | $ | 29 |
|
| Buildings | 224 |
| | 228 |
|
| Machinery and equipment | 935 |
| | 914 |
|
| Company-owned tooling | 136 |
| | 130 |
|
| Construction in progress | 74 |
| | 81 |
|
| Total | 1,400 |
| | 1,382 |
|
| Less: accumulated depreciation | (885 | ) | | (899 | ) |
| Net property | $ | 515 |
| | $ | 483 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| Property at cost: | | | |
| Land and land improvements | $ | 32 | | | $ | 31 | |
| Buildings | 228 | | | 224 | |
| Machinery and equipment | 1,002 | | | 935 | |
| Company-owned tooling | 151 | | | 136 | |
| Construction in progress | 63 | | | 74 | |
| Total | 1,476 | | | 1,400 | |
| Less: Accumulated depreciation | (961) | | | (885) | |
| Net property | $ | 515 | | | $ | 515 | |
14.
11. OTHER ASSETS
Other assets are summarized as follows (in millions):
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| Prepaid pension costs (see Note 20) | $ | 179 | | | $ | 149 | |
| Deferred income tax assets (see Note 21) | 30 | | | 122 | |
| Investments in non-consolidated joint ventures (see Note 12) | 107 | | | 110 | |
| Other | 269 | | | 225 | |
| Other assets | $ | 585 | | | $ | 606 | |
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Investments in non-consolidated joint ventures (see Note 15) | $ | 110 |
| | $ | 102 |
|
| Asbestos-related recoveries (see Note 25) | 55 |
| | 76 |
|
| Unamortized revolver debt issuance costs | 7 |
| | 7 |
|
Capitalized software costs, net (1) | 20 |
| | 26 |
|
| Deferred income tax assets (see Note 24) | 122 |
| | 140 |
|
| Assets for uncertain tax positions (see Note 24) | 55 |
| | 53 |
|
| Prepaid pension costs (see Note 23) | 149 |
| | 152 |
|
Intangible assets (2) | 50 |
|
| 18 |
|
| Other | 38 |
| | 22 |
|
| Other assets | $ | 606 |
| | $ | 596 |
|
| |
(1) | 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. |
| |
(2) | Primarily relates to customer relationships. As of September 30, 2019, the gross carrying value was $56 million and the accumulated amortization was $6 million. As of September 30, 2018, the gross carrying value was $22 million and the accumulated amortization was $4 million. The weighted average amortization periods for customer relationships is approximately 15 years. |
The company holds a variable interest in a joint venture that is a variable interest entity ("VIE") 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 September 30, 20192020 and September 30, 2018,2019, the company’s investment in the joint venture was $69$65 million and $63$69 million, respectively.
AAG Business
During fiscal year 2019, the company determined it had an impairment trigger related to its AAG business, and by performing the recoverability test, the company concluded that the undiscounted future cash flows could not recover the net assets of the business. The company then determined that the carrying value of the business exceeded its fair value. As a result, an impairment charge of $9 million was recorded within Other operating expense, net in the Aftermarket, Industrial and Trailer reportable segment. Earlier in fiscal year 2019, an unrelated $1 million of other long-lived asset impairment charges were recorded.
TransPower
Meritor completed $3 million strategic investments in Transportation Power, Inc. ("TransPower") in each of the first and third quarters of fiscal year 2019. Investments of $3 million in TransPower were also made in each of the first and third quarters of fiscal year 2018. The company holds a variable interest in TransPower, a VIE. TransPower develops electrical drive solutions and supplies integrated drive systems, full electric truck solutions and energy-storage subsystems to major manufacturers of trucks, school buses, refuse vehicles and terminal tractors. The company is not the primary beneficiary of TransPower, as other owners have control over the significant activities of TransPower, including the development of intellectual property and manufacturing.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Therefore, the company does not consolidate TransPower. At September 30, 2019 and 2018, the company’s investment in TransPower was $12 million and $6 million, respectively, representing the company’s maximum exposure to loss.
15.12. INVESTMENTS IN NON-CONSOLIDATED JOINT VENTURES
The company’s non-consolidated joint ventures and related direct ownership interest are as follows:
|
| | | | | | | | |
| | September 30, |
| | 2019 | | 2018 | | 2017 |
| Master Sistemas Automotivos Ltda. (Commercial Truck) | 49 | % | | 49 | % | | 49 | % |
| Sistemas Automotrices de Mexico S.A. de C.V. (Commercial Truck) | 50 | % | | 50 | % | | 50 | % |
| Ege Fren Sanayii ve Ticaret A.S. (Commercial Truck) | 49 | % | | 49 | % | | 49 | % |
| Automotive Axles Limited (Commercial Truck) | 36 | % | | 36 | % | | 36 | % |
| | | | | | | | | | | | | | | | | |
| September 30, |
| 2020 | | 2019 | | 2018 |
| Master Sistemas Automotivos Ltda. | 49 | % | | 49 | % | | 49 | % |
| Sistemas Automotrices de Mexico S.A. de C.V. | 50 | % | | 50 | % | | 50 | % |
| Ege Fren Sanayii ve Ticaret A.S. | 49 | % | | 49 | % | | 49 | % |
| Automotive Axles Limited | 36 | % | | 36 | % | | 36 | % |
The company’s investments in non-consolidated joint ventures are as follows (in millions):
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 (1) |
| Commercial Truck | $ | 110 |
| | $ | 102 |
|
| Aftermarket, Industrial and Trailer | — |
| | — |
|
| Total investments in non-consolidated joint ventures | $ | 110 |
| | $ | 102 |
|
(1)$107 million Amounts for the year endedas of September 30, 2018 have been recast to reflect reportable segment changes.
2020 and $110 million as of September 30, 2019. The company’scompany's equity in earnings of non-consolidated joint ventures is as follows (in millions): are $14 million and $31 million for the fiscal years ended September 30, 2020 and September 30, 2019, respectively. The results of the company's non-consolidated joint ventures are included in the Commercial Truck reporting segment.
|
| | | | | | | |
| | Year Ended September 30, |
| | 2019 | | 2018 (1) |
| Commercial Truck | $ | 31 |
| | $ | 27 |
|
| Aftermarket, Industrial and Trailer | — |
| | — |
|
| Total equity in earnings of affiliates | $ | 31 |
| | $ | 27 |
|
79
(1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Amounts for the year ended September 30, 2018 have been recast to reflect reportable segment changes.
The summarized financial information presented below represents the combined accounts of the company’s non-consolidated joint ventures related to its continuing operations (in millions):
| | | | | | | | | | | |
| | September 30, |
| 2020 | | 2019 |
| Current assets | $ | 308 | | | $ | 427 | |
| Non-current assets | 200 | | | 211 | |
| Total assets | $ | 508 | | | $ | 638 | |
| | | |
| Current liabilities | $ | 209 | | | $ | 305 | |
| Non-current liabilities | 87 | | | 109 | |
| Total liabilities | $ | 296 | | | $ | 414 | |
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Current assets | $ | 427 |
| | $ | 390 |
|
| Non-current assets | 211 |
| | 163 |
|
| Total assets | $ | 638 |
| | $ | 553 |
|
| | | | |
| Current liabilities | $ | 305 |
| | $ | 282 |
|
| Non-current liabilities | 109 |
| | 66 |
|
| Total liabilities | $ | 414 |
| | $ | 348 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 |
| Sales | $ | 1,231 |
| | $ | 1,101 |
| | $ | 1,156 |
|
| Gross profit | 147 |
| | 154 |
| | 200 |
|
| Net income | 63 |
| | 59 |
| | 101 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| Sales | $ | 696 | | | $ | 1,231 | | | $ | 1,101 | |
| Gross profit | 76 | | | 147 | | | 154 | |
| Net income | 30 | | | 63 | | | 59 | |
Dividends received from the company’s non-consolidated joint ventures were $10 million in fiscal year 2020, $23 million in fiscal year 2019 and $17 million in fiscal year 2018 and $44 million in fiscal year 2017. Dividends from Meritor WABCO were $36 million in fiscal year 2017, which includes a $8 million final partnership distribution received immediately prior to closing of the sale transaction on October 1, 2017.2018.
The company had sales to its non-consolidated joint ventures of approximately $9 million, $7$9 million and $2$7 million in fiscal years 2020, 2019 2018 and 2017,2018, respectively. These sales exclude sales of $92 million, $193 million $196 million and $138$196 million in fiscal years 2020, 2019 2018 and 2017,2018, respectively, to a joint venture in the company’s Commercial Truck segment, which are eliminated as the company purchases these components back after value add provided by the joint venture. The company had purchases from its non-consolidated joint ventures of approximately $509 million, $940 million $843 million and $787$843 million in fiscal years 2020, 2019 2018 and 2017,2018, respectively. Additionally, the company leases space and provides certain administrative and technical services to various non-consolidated joint ventures. The company collected $14 million, $12 million $11 million and $6$11 million for such leases and services during fiscal years 2020, 2019 2018 and 2017,2018, respectively.
Amounts due from the company’s non-consolidated joint ventures were $34$23 million and $43$34 million at September 30, 20192020 and 2018,2019, respectively, and are included in Receivables, trade and other, net in the Consolidated Balance Sheet. Amounts due to the company’s non-consolidated joint ventures were $80$56 million and $110$80 million at September 30, 20192020 and 2018,2019, respectively, and are included in Accounts and notes payable in the Consolidated Balance Sheet.
The fair value of the company’s investment in its Automotive Axles Limited joint venture was approximately $75$54 million and $91$75 million at September 30, 20192020 and 2018,2019, respectively, based on quoted market prices, as this joint venture is listed and publicly traded on the Bombay Stock Exchange in India.
16.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows (in millions):
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Compensation and benefits | $ | 125 |
| | $ | 122 |
|
| Income taxes | 24 |
| | 27 |
|
| Taxes other than income taxes | 14 |
| | 25 |
|
| Accrued interest | 11 |
| | 11 |
|
| Product warranties | 18 |
| | 19 |
|
| Environmental reserves (see Note 25) | 3 |
| | 8 |
|
| Restructuring (see Note 8) | 8 |
| | 3 |
|
| Asbestos-related liabilities (see Note 25) | 9 |
| | 18 |
|
| Indemnity obligations (see Note 25) | 1 |
| | 1 |
|
| Other | 72 |
| | 56 |
|
| Other current liabilities | $ | 285 |
| | $ | 290 |
|
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| Compensation and benefits | $ | 91 | | | $ | 125 | |
| Income taxes | 6 | | | 24 | |
| Product warranties | 19 | | | 18 | |
| Other | 148 | | | 118 | |
| Other current liabilities | $ | 264 | | | $ | 285 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
and industry developments. Liabilities for product recall campaigns are recorded at the time the company’s obligation is probable and can be reasonably estimated. Policy repair actions to maintain customer relationships are recorded as other liabilities at the time an obligation is probable and can be reasonably estimated. Product warranties, including recall campaigns, not expected to be paid within one year are recorded as a non-current liability.
A summary of the changes in product warranties is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| September 30, |
| | 2020 | | 2019 | | 2018 |
| Total product warranties – beginning of year | $ | 50 | | | $ | 54 | | | $ | 45 | |
| Accruals for product warranties | 25 | | | 23 | | | 22 | |
| Payments | (19) | | | (20) | | | (16) | |
| Change in estimates and other | (2) | | | (7) | | | 3 | |
| | | | | |
| | | | | |
| Total product warranties – end of year | 54 | | | 50 | | | 54 | |
| Less: non-current product warranties (see Note 14) | (35) | | | (32) | | | (35) | |
| Product warranties – current | $ | 19 | | | $ | 18 | | | $ | 19 | |
|
| | | | | | | | | | | |
| | September 30, |
| | 2019 | | 2018 | | 2017 |
| Total product warranties – beginning of year | $ | 54 |
| | $ | 45 |
| | $ | 44 |
|
| Accruals for product warranties | 23 |
| | 22 |
| | 14 |
|
| Payments | (20 | ) | | (16 | ) | | (17 | ) |
| Change in estimates and other | (7 | ) | | 3 |
| | 4 |
|
| Total product warranties – end of year | 50 |
| | 54 |
| | 45 |
|
| Less: non-current product warranties (see Note 17) | (32 | ) | | (35 | ) | | (27 | ) |
| Product warranties – current | $ | 18 |
| | $ | 19 |
| | $ | 18 |
|
17.14. OTHER LIABILITIES
Other liabilities are summarized as follows (in millions):
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| Asbestos-related liabilities (see Note 22) | $ | 67 | | | $ | 82 | |
| Liabilities for uncertain tax positions (see Note 21) | 73 | | | 46 | |
| Product warranties (see Note 13) | 35 | | | 32 | |
| Other | 104 | | | 66 | |
| Other liabilities | $ | 279 | | | $ | 226 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Asbestos-related liabilities (see Note 25) | $ | 82 |
| | $ | 193 |
|
| Restructuring (see Note 8) | — |
| | 1 |
|
| Deferred income tax liabilities (see Note 24) | 15 |
| | 16 |
|
| Liabilities for uncertain tax positions (see Note 24) | 46 |
| | 48 |
|
| Product warranties (see Note 16) | 32 |
| | 35 |
|
| Environmental (see Note 25) | 12 |
| | 9 |
|
| Indemnity obligations (see Note 25) | 7 |
| | 9 |
|
| Other | 32 |
| | 21 |
|
| Other liabilities | $ | 226 |
| | $ | 332 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
18.15. LONG-TERM DEBT
Long-Term Debt,Long-term debt, net of discounts where applicable, is summarized as follows (in millions):
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
3.25 percent convertible notes due 2037 (1)(3) | $ | 319 |
| | $ | 318 |
|
4.0 percent convertible notes due 2027(1)(4) | — |
| | 24 |
|
7.875 percent convertible notes due 2026(1)(5) | 23 |
| | 22 |
|
| Term loan | 175 |
| | — |
|
6.25 percent notes due 2024(2)(6) | 444 |
| | 444 |
|
| Capital lease obligation | 7 |
| | 7 |
|
| Borrowings and securitization | 9 |
| | 46 |
|
Unamortized discount on convertible notes (7) | (34 | ) | | (37 | ) |
| Subtotal | 943 |
| | 824 |
|
| Less: current maturities | (41 | ) | | (94 | ) |
| Long-term debt | $ | 902 |
| | $ | 730 |
|
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| | | |
3.25 percent convertible notes due 2037 (1)(3) | $ | 320 | | | $ | 319 | |
| | | |
7.875 percent convertible notes due 2026(1)(4) | 23 | | | 23 | |
6.25 percent notes due 2025(2)(5) | 295 | | | 0 | |
| Term loan due 2024 | 166 | | | 175 | |
6.25 percent notes due 2024(2)(6) | 446 | | | 444 | |
| Finance lease obligation | 6 | | | 7 | |
| Borrowings and securitization | 0 | | | 9 | |
| | | |
Unamortized discount on convertible notes (7) | (29) | | | (34) | |
| Subtotal | 1,227 | | | 943 | |
| Less: current maturities | (39) | | | (41) | |
| Long-term debt | $ | 1,188 | | | $ | 902 | |
(1) The 3.25 percent 4.0 percentconvertible notes due 2037 and 7.875 percent convertible notes due 2026 contain a put and call feature, which allows for earlierearly redemption beginning in 2025 2019 and 2020, respectively.
(2) The 6.25 percent notes due 2024 and 2025 contain a call option, which allows for early redemption by Meritor.
(3) The 3.25 percent convertible notes due 2037 are presented net of $6$5 million and $7$6 million unamortized issuance costs as of September 30, 20192020 and September 30, 2018,2019, respectively.
(4)The 4.0 percent convertible notes due 2027 are presented net of unamortized issuance costs of an insignificant amount as of September 30, 2018.
(5) The 7.875 percent convertible notes due 2026 are presented net of unamortized issuance costs of an insignificant amount as of September 30, 20192020 and September 30, 2018,2019, and an insignificant amount and $1 millionoriginal issuance discount as of September 30, 20192020 and September 30, 2018,2019, respectively.
(5) The 6.25 percent notes due 2025 are presented net of $5 million unamortized issuance costs as of September 30, 2020.
(6) The 6.25 percent notes due 2024 are presented net of $4 million and $6 million unamortized issuance costs as of September 30, 20192020 and September 30, 2018.2019, respectively
(7) The carrying amount of the equity component related to convertible debt.
Repurchase of Debt Securities
On February 15, 2019, the company redeemed $19 million aggregate principal amount outstanding of the company'sits 4.0 percent convertible notes due 2027 (the "4.0 Percent Convertible Notes") at a price of 100 percent of the accreted principal amount, plus accrued and unpaid interest. On June 7, 2019, the company redeemed the remaining $5 million aggregate principal amount outstanding of the 4.0 Percent Convertible Notes at a price equal to 100 percent of the accreted principal amount, plus accrued and unpaid interest. As of September 30, 2019, the 4.0 Percent Convertible notes were fully redeemed.
On September 28, 2017, the company redeemed $100 millionCurrent Classification of the $275 million aggregate principal amount outstanding of the company's 6.75 percent notes due 2021 (the "6.757.875 Percent Notes") at a price of $1,033.75 per $1,000 of principal amount, plus accrued and unpaid interest. As a result, a loss on debt extinguishment of $5 million was recorded in the Consolidated Statement of Operations within Interest expense, net. The redemption was made under the company's July 2016 debt repurchase authorization (see Note 20). On November 2, 2017, the company redeemed the remaining $175 million aggregate principal amount outstanding of the company's 6.75 PercentConvertible Notes at a price of $1,033.75 per $1,000 of principal amount, plus accrued and unpaid interest. The redemption resulted in a loss on debt extinguishment of approximately $8 million. The loss on debt extinguishment is included in Interest expense, net in the Consolidated Statement of Operations. The redemption was made pursuant to a special authorization from the Board of Directors in connection with the sale of the company's interest in Meritor WABCO in the fourth quarter of fiscal year 2017.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The company used the net proceeds, after issuance costs and discounts, of approximately $317 million from the offering of the 3.25 percent convertible notes due 2037 (the "3.25 Percent Convertible Notes") to acquire portions of its outstandingcompany's 7.875 percent convertible notes due 2026 (the "7.875 Percent Convertible Notes") and its 4.0 Percent Convertible Notes in transactionswere classified as current as of September 30, 2020. On October 16, 2020, the company announced that settled concurrently with the closingit had issued a notice of redemption for all of the 3.25 Percent Convertible Note offering on September 22, 2017. In total, the company repurchased $117outstanding $23 million of the $140 millionaggregate accreted principal amount of itsthe 7.875 Percent Convertible Notes. The redemption date is December 1, 2020 and the redemption price will be equal to 100% of the accreted principal amount of the 7.875 Percent Convertible Notes to be redeemed, plus accrued and $119 millionunpaid interest, if any (including additional interest, if any), thereon up to but excluding the redemption date.
From and after the redemption date, the 7.875 Percent Convertible Notes will no longer be outstanding, and interest will cease to accrue unless the company defaults in making the redemption payment.
As a result of the $143 millionissuance of the notice of redemption, the 7.875 Percent Convertible Notes are convertible at any time prior to the close of business on November 30, 2020 at a rate of 83.3333 shares of common stock per $1,000 original principal
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
amount of its 4.0the 7.875 Percent Convertible Notes.Notes (which is equivalent to a conversion price of approximately $12.00 per share). The 7.875 Percent Convertible Notes and 4.0 Percent Convertible Notes were repurchased at premiums equalsurrendered for conversion will be settled in cash up to 130 percent and 16 percent, respectively, above theirthe accreted principal amount. These repurchases were accounted for as extinguishmentsamount of debt, and accordingly the company recognized a loss on debt extinguishment of $31 million in the aggregate ($23 million with respect to the 7.875 Percent Convertible Notes surrendered for conversion and $8 millioncash, stock or a combination of cash and stock, at the company's election, for the remainder of the conversion obligation, if any, in excess of the accreted principal amount, in accordance with respect to the 4.0 Percent Convertible Notes). The loss on extinguishment was recorded inprovisions of the Consolidated Statement of Operations within Interest expense, net during fiscal year 2017.
Current Classification ofindenture that governs the 7.875 Percent Convertible NotesNotes.
The 7.875 Percent Convertible Notes were classified as current as of September 30, 2019 as the holders arewere entitled to convert all or a portion of their 7.875 Percent Convertible Notes at any time beginning October 1, 2019 and prior to the close of business on December 31, 2019 at a rate of 83.3333 shares of common stock per $1,000 principal amount at maturity of the 7.875 Percent Convertible Notes (representing a conversion price of approximately $12.00 per share). The 7.875 Percent Convertible Notes arewere convertible as the closing price of shares of the company's common stock for at least 20 trading days during the 30 consecutive trading-day period ending on September 30, 2019 was greater than 120 percent of the $12.00 conversion price associated with the 7.875 Percent Convertible Notes.
The 7.875 Percent Convertible Notes were classified as current as of September 30, 2018 as the holders were entitled to convert all or a portion of their 7.875 Percent Convertible Notes at any time beginning October 1, 2018 and prior to the close of business on December 31, 2018 at a rate of 83.3333 shares of common stock per $1,000 principal amount at maturity of the 7.875 Percent Convertible Notes (representing a conversion price of approximately $12.00 per share). The 7.875 Percent Convertible Notes are convertible as the closing price of shares of the company's common stock for at least 20 trading days during the 30 consecutive trading-day period ending on September 28, 2018 was greater than 120 percent of the $12.00 conversion price associated with the 7.875 Percent Convertible Notes.
The 7.875 Percent Convertible Notes surrendered for conversion, if any, would be settled in cash up to the principal amount at maturity of the 7.875 Percent Convertible Notes and cash, stock or a combination of cash and stock, at the company’s election, for the remainder of the conversion value of the 7.875 Percent Convertible Notes in excess of the principal amount at maturity and cash in lieu of any fractional shares, subject to and in accordance with the provisions of the indenture that governsindenture.
6.25 Percent Notes due 2025
On June 8, 2020, the 7.875company completed the offering and sale of $300 million aggregate principal amount of its 6.25 percent notes due 2025 (the "6.25 Percent Convertible Notes.
AsNotes due 2025") to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and to non-U.S. persons in offshore transactions in reliance of Regulation S under the Securities Act in a resultprivate placement, exempt from the registration requirements of the 7.875Securities Act. The 6.25 Percent Convertible Notes becoming currently convertible for cash updue 2025 were issued pursuant to the company's indenture dated as of April 1, 1998, as supplemented. The net proceeds from the sale of the 6.25 Percent Notes due 2025 were $295 million and were used to repay approximately $295 million of the outstanding $304 million balance under the company's senior secured revolving credit facility.
The 6.25 Percent Notes due 2025 will mature on June 1, 2025 and bear interest at a fixed rate of 6.25 percent per annum. The company will pay interest on the 6.25 Percent Notes due 2025 semi-annually, in arrears, on June 1 and December 1 of each year, beginning December 1, 2020. The 6.25 Percent Notes due 2025 will constitute senior unsecured obligations of the company and will rank equally in right of payment with its existing and future senior unsecured indebtedness, and effectively junior to its existing and future secured indebtedness to the extent of the security therefor.
The 6.25 Percent Notes due 2025 provide that, prior to June 1, 2022, the company may redeem, at its option, from time to time, the 6.25 Percent Notes due 2025, in whole or in part, at a redemption price equal to the sum of (i) 100 percent of the principal amount of $23 millionthe 6.25 Percent Notes due 2025 to be redeemed, plus (ii) the applicable premium as of the redemption date on the 6.25 Percent Notes due 2025 to be redeemed, plus (iii) accrued and unpaid interest, if any, to, but not including, the redemption date (subject to the right of holders of record on the relevant regular record date to receive interest due on an interest payment date that is on or prior to the redemption date) on the 6.25 Percent Notes due 2025 to be redeemed. For purposes of such calculation, the “applicable premium” means, with respect to the 6.25 Percent Notes due 2025 at any redemption date, the greater of (i) 1.0 percent of the principal amount of such 6.25 Percent Notes due 2025 and (ii) the excess of (A) the present value at such redemption date of (1) 103.125 percent of the principal amount of such 6.25 Percent Notes due 2025 plus (2) all remaining required interest payments due on such 6.25 Percent Notes due 2025 through June 1, 2022 (excluding accrued and unpaid interest, if any, to the redemption date), computed using a discount rate equal to the treasury rate plus 50 basis points, over (B) 100 percent of the principal amount of such 6.25 Percent Notes due 2025.
The 6.25 Percent Notes due 2025 provide that, on or after June 1, 2022, the company may redeem, at its option, from time to time, the 6.25 Percent Notes due 2025, in whole or in part, at the holder'sredemption prices (expressed as percentages of the principal amount of the 6.25 Percent Notes due 2025 to be redeemed) set forth below, plus accrued and unpaid interest, if any, to, but not including, the redemption date (subject to the right of holders of record on the relevant regular record date to receive interest due on an interest payment date that is on or prior to the redemption date) on the 6.25 Percent Notes due 2025 to be redeemed, if redeemed during the 12-month period beginning on June 1 of the years indicated below:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | |
| Year | | Redemption Price |
| 2022 | | 103.125 | % |
| 2023 | | 101.563 | % |
| 2024 and thereafter | | 100.000 | % |
The 6.25 Percent Notes due 2025 provide that, prior to June 1, 2022, the company may redeem, at its option, $1 millionfrom time to time, up to 35 percent of permanent equity was reclassifiedthe aggregate principal amount of the 6.25 Percent Notes due 2025 with the net cash proceeds of one or more public sales of the company’s common stock at a redemption price equal to 106.25 percent of the principal amount of the 6.25 Percent Notes due 2025 to be redeemed, plus accrued and unpaid interest, if any, to, but not including, the redemption date (subject to the right of holders of record on the relevant regular record date to receive interest due on an interest payment date that is on or prior to the redemption date) on the 6.25 Percent Notes due 2025 to be redeemed so long as mezzanine equity asat least 65 percent of September 30, 2018.the aggregate principal amount of the 6.25 Percent Notes due 2025 remains outstanding after each such redemption and notice of any such redemption is mailed within 90 days of any such sale of common stock.
Senior Secured Revolving Credit Facility
On June 7, 2019, the company amended and restated its senior secured revolving credit facility. Pursuant to the revolving credit agreement, as amended, the company has a $625 million senior secured revolving credit facility and a $175 million term loan facility, which was utilized for the company's acquisition of AxleTech, that mature in June 2024 (with a springing maturity in November 2023 if the outstanding amount of the company's 6.25 percent notes due 2024 is greater than $75 million at that time). The availability under this facility is dependent upon various factors, including performance against certain financial covenants as highlighted below.
The availability under the senior secured revolving credit facility is subject to a financial covenant based on the ratio of the company’s priority debt (consisting principally of amounts outstanding under the revolving credit facility, the U.S. accounts receivable securitization and factoring programs, and third-party non-working capital foreign debt) to EBITDA. The company is required to maintain a total priority-debt-to-EBITDA ratio, as defined in the revolving credit agreement, of 2.25 to 1.00 or less as of the last day of each fiscal quarter throughout the term of the agreement.
Borrowings under the senior secured revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin and a commitment fee on undrawn amounts, both of which are based upon the company's current corporate credit rating. At September 30, 2019,2020, the margin over LIBOR rate was 200 basis points, and the commitment fee was 30 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 100 basis points.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Certain of the company's 100% owned subsidiaries, as defined in the revolving credit agreement (collectively, the "Guarantors") irrevocably and unconditionally guarantee amounts outstanding under the senior secured revolving credit facility.facility on a joint and several basis. Similar subsidiary guarantees are provided for the benefit of the holders of the publicly held notes outstanding under the company's indentures (see Note 29).indentures. The notes are guaranteed on a senior unsecured basis by each of the company’s subsidiaries from time to time guaranteeing its senior secured revolving credit facility, as it may be amended, extended, replaced or refinanced, or any subsequent credit facility. The guarantees remain in effect until the earlier to occur of payment in full of the notes or termination or release of the applicable corresponding guarantee under the company’s senior secured revolving credit facility, as it may be amended, extended, replaced or refinanced, or any subsequent credit facility. The guarantees rank equally with existing and future senior unsecured indebtedness of the Guarantors and are effectively subordinated to all of the existing and future secured indebtedness of the Guarantors, to the extent of the value of the assets securing such indebtedness.
NaN borrowings were outstanding under the senior secured revolving credit facility at September 30, 20192020 and September 30, 2018.2019. The amended and extended senior secured revolving credit facility includes $100 million of availability for the issuance of letters of credit. At September 30, 20192020 and September 30, 2018,2019, there were 0 letters of credit outstanding under the senior secured revolving credit facility.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On November 9, 2020, the senior secured revolving credit facility was increased by $60 million to $685 million through the addition of a new lender.
Debt Securities
In December 2017, the company filed a shelf registration statement with the SEC, registering an indeterminate amount of debt and/or equity securities that the company may offer in one or more offerings on terms to be determined at the time of sale. The December 2017 shelf registration statement superseded and replaced the shelf registration statement filed in December 2014, as amended.
3.25 Percent Convertible Notes
On September 22, 2017, the company issued $325 million principal amount of theThe company's 3.25 percent convertible notes due 2037 (the "3.25 Percent Convertible Notes. The 3.25 Percent Convertible Notes were sold in an underwritten offering to qualified institutional buyers in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. The 3.25 Percent Convertible Notes were issued in minimum denominations of $1,000 principal amount per note and multiples of $1,000 in excess thereof. Net proceeds received by the company, after issuance costs and discounts, were approximately $317 million.
The company pays 3.25 percent cash interest per year on the principal amount of the 3.25 Percent Convertible Notes, payable semi-annually in arrears on April 15 and October 15 of each year, beginning April 15, 2018, to holders of record at the close of business on the preceding April 1 or October 1, respectively. Interest accrues on the principal amount of the 3.25 Percent Convertible Notes from and including the date the 3.25 Percent Convertible Notes were issued or from and including the last date in respect of which interest has been paid or provided for, as the case may be, to, but excluding, the next interest payment date.
The 3.25 Percent Convertible NotesNotes") are fully and unconditionally guaranteed on a senior unsecured basis by the company’s wholly-owned subsidiaries that guarantee the company’s amended and restated revolving credit facility.Guarantors. The 3.25 Percent Convertible Notes are the company’s senior unsecured obligations and rank equally in right of payment with all of the company’s existing and future senior unsecured indebtedness and effectively junior to any of the company’s existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness. The guarantee by each subsidiary guarantor will rankGuarantor ranks equally with existing and future senior unsecured indebtedness of such subsidiaryGuarantor and effectively junior to all of the existing and future secured indebtedness of such subsidiary,Guarantor, to the extent of the value of the assets securing such indebtedness.
The 3.25 Percent Convertible Notes will be convertible into cash up to the principal amount of the 3.25 Percent Convertible Notes surrendered for conversion and the company will pay or deliver, as the case may be, cash, shares of the company’s common stock or a combination of cash and shares of the company’s common stock, at the company’s election, in respect of the remainder, if any, of the company’s conversion obligation in excess of the principal amount of the notes being converted. The initial conversion rate, subject to adjustment, is 25.0474 shares of common stock per $1,000 principal amount of the 3.25 Percent Convertible Notes (which represents an initial conversion price of $39.92 per share). Holders may convert their notes, at their option, only under the following circumstances prior to the close of business on the business day immediately preceding July 15, 2037, other than during the period from and including July 15, 2025 to the close of business on the business day immediately preceding October 15, 2025:
•during any calendar quarter after the calendar quarter ending on December 31, 2017, if the closing sale price of the company’s common stock for 20 or more trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on and including the last trading day of the immediately preceding calendar quarter equals or exceeds 130 percent of the applicable conversion price on each applicable trading day;
•during the 5 business day period after any 5 consecutive trading day period in which the trading price per $1,000 principal amount of the 3.25 Percent Convertible Notes for each trading day during such 5 consecutive trading day period was less than 98 percent of the product of the closing price of the company’s common stock and the conversion rate on each such trading day;
•if the company calls any of the 3.25 Percent Convertible Notes for redemption, at any time from the delivery of the redemption notice through the close of business on the scheduled trading day immediately preceding the redemption date; or
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
•upon the occurrence of specified corporate transactions.
During the period from and including July 15, 2025 to the close of business on the business day immediately preceding October 15, 2025, and on or after July 15, 2037 until the close of business on the business day immediately preceding the maturity date, holders may convert 3.25 Percent Convertible Notes at any time, regardless of the foregoing circumstances.
On or after October 15, 2025, but prior to July 15, 2037, the company may redeem the 3.25 Percent Convertible Notes at the company’s option, in whole or in part, at a redemption price in cash equal to 100 percent of the principal amount of the 3.25 Percent Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Further, holders may require the company to purchase all or a portion of their 3.25 Percent Convertible Notes at a purchase price in cash equal to 100 percent of the principal amount of the 3.25 Percent Convertible Notes to be purchased, plus accrued and unpaid interest to, but excluding, the repurchase date, on October 15, 2025 or upon certain fundamental changes. The maximum number of shares of common stock into which the 3.25 Percent Convertible Notes are convertible is approximately 8 million shares.
Accounting guidance requires that cash-settled convertible debt, such as the 3.25 Percent Convertible Notes, be separated into debt and equity components at issuance and a value be assigned to each. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, is recorded as a debt discount. The company measures the debt component at fair value by utilizing a discounted cash flow model. This model utilizes observable inputs such as contractual repayment terms, benchmark forward yield curves, yield curves and quoted market prices of its own nonconvertible debt. The yield curves are acquired from an independent source that is widely used in the financial industry and reviewed internally by personnel with appropriate expertise in valuation methodologies.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6.25 Percent Notes due 2024
On February 13, 2014, the company completed a public offering of debt securities consisting of the issuance of $225 million principal amount of 10-year,The 6.25 percent notes due 2024 (the "Initial 6.25 Percent Notes"). The offering and sale were made pursuant to the company's February 2012 shelf registration statement. The Initial ("6.25 Percent Notes were issued under the company's indenture dated as of April 1, 1998, as supplemented. The Initial 6.25 Percent Notes were issued at 100 percent of their principal amount. The proceeds from the sale of the Initial 6.25 Percent Notes were $225 million and, together with cash on hand, were primarily used to repurchase $250 million principal amount of the company’s previously outstanding 10.625 percent notes due 2018.
On June 11, 2015, the company completed a public offering of an additional $225 million aggregate principal amount of 6.25 percent notes due 2024 (the "Additional 6.25 Percent Notes"2024") in an underwritten public offering pursuant to the company's December 2014 shelf registration statement. The proceeds from the sale of the Additional 6.25 Percent Notes were used to replenish available cash used to pay $179 million, including premium and fees, to repurchase $110 million principal amount at maturity of the company's 7.875 Percent Convertible Notes. The company used the remaining net proceeds to purchase an annuity to satisfy its obligations under the Canadian and German pension plans for its employees and for general corporate purposes. The Additional 6.25 Percent Notes constitute a further issuance of, and are fungible with, the $225 million aggregate principal amount of Initial 6.25 Percent Notes that the company issued on February 13, 2014 and form a single series with the Initial 6.25 Percent Notes (collectively, the "6.25 Percent Notes"). The Additional 6.25 Percent Notes have terms identical to the Initial 6.25 Percent Notes, other than issue date and offering price, and have the same CUSIP number as the Initial 6.25 Percent Notes. Upon completion of the offering, the aggregate principal amount of outstanding 6.25 Percent Notes was $450 million.
The 6.25 Percent Notes bear interest at a fixed rate of 6.25 percent per annum. The company pays interest on the 6.25 Percent Notes semi-annually in arrears on February 15 and August 15 of each year. The 6.25 Percent Notes constitute senior unsecured obligations of the company and rank equally in right of payment with existing and future senior unsecured indebtedness and effectively junior to existing and future secured indebtedness. The 6.25 Percent Notes due 2024 are guaranteed on a senior unsecured basis by each of the company's subsidiaries from time to time guaranteeing its senior secured credit facility.Guarantors. The guarantees rank equally with existing and future senior unsecured indebtedness of the guarantorsGuarantors and will beare effectively subordinated to all of the existing and future secured indebtedness of the guarantors,Guarantors, to the extent of the value of the assets securing such indebtedness.
Prior to February 15, 2019, the company could redeem, at its option, from time to time, the 6.25 Percent Notes due 2024, in whole or in part, at a redemption price equal to 100 percent of the principal amount of the 6.25 Percent Notes due 2024 to be redeemed, plus an applicable make-whole premium (as defined in the indenture under which the 6.25 Percent Notes due 2024 were issued) and any accrued and unpaid interest. On or after February 15, 2019, the company may redeem, at its option, from time to time, the 6.25 Percent Notes due 2024, in whole or in part, at the redemption prices (expressed as percentages of the principal amount of the 6.25 Percent Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
due 2024 to be redeemed) set forth below, plus accrued and unpaid interest, if any, if redeemed during the 12-month period beginning on February 15 of the years indicated below:
| | | | | | | | |
| Year | | Redemption Price |
| 2019 | | 103.125% |
| 2020 | | 102.083% |
| 2021 | | 101.042% |
| 2022 and thereafter | | 100.000% |
If a Change of Control (as defined in the indenture under which the 6.25 Percent Notes due 2024 were issued) occurs, unless the company has exercised its right to redeem the 6.25 Percent Notes due 2024, each holder of 6.25 Percent Notes due 2024 may require the company to repurchase some or all of such holder's 6.25 Percent Notes due 2024 at a purchase price equal to 101 percent of the principal amount of the 6.25 Percent Notes due 2024 to be repurchased, plus accrued and unpaid interest, if any.
6.75 Percent Notes
On May 31, 2013, the company completed an offering of debt securities consisting of the issuance of $275 million principal amount of the 6.75 Percent Notes. The offering and sale were made pursuant to the company's February 2012 shelf registration statement. The 6.75 Percent Notes were issued under the company's indenture dated as of April 1, 1998, as supplemented. The 6.75 Percent Notes were issued at 100 percent of their principal amount. The proceeds from the sale of the 6.75 Percent Notes were $275 million and were primarily used to complete a cash tender offer for $167 million of the 8.125 percent notes due 2015.
The 6.75 Percent Notes bore interest at a fixed rate of 6.75 percent per annum. The company paid interest on the 6.75 Percent Notes semi-annually in arrears on June 15 and December 15 of each year. The 6.75 Percent Notes constituted senior unsecured obligations of the company and ranked equally in right of payment with existing and future senior unsecured indebtedness and effectively junior to existing and future secured indebtedness to the extent of the security therefor. The 6.75 Percent Notes were guaranteed on a senior unsecured basis by each of the company's subsidiaries from time to time guaranteeing its senior secured credit facility. The guarantees ranked equally with existing and future senior unsecured indebtedness of the guarantors and were effectively subordinated to all of the existing and future secured indebtedness of the guarantors, to the extent of the value of the assets securing such indebtedness.
Prior to June 15, 2016, the company could redeem, at its option, from time to time, the 6.75 Percent Notes, in whole or in part, at a redemption price equal to 100 percent of the principal amount of the 6.75 Percent Notes to be redeemed plus an applicable make-whole premium (as defined in the indenture under which the 6.75 Percent Notes were issued) and any accrued and unpaid interest. On or after June 15, 2016, the company could redeem, at its option, from time to time, the 6.75 Percent Notes, in whole or in part, at the redemption prices (expressed as percentages of the principal amount of the 6.75 Percent Notes to be redeemed) set forth below, plus accrued and unpaid interest, if any, had they been redeemed during the 12-month period beginning on June 15 of the years indicated below:
|
| | |
| Year | | Redemption Price |
| 2016 | | 105.063% |
| 2017 | | 103.375% |
| 2018 | | 101.688% |
| 2019 and thereafter | | 100.000% |
Prior to June 15, 2016, the company could also redeem, at its option, from time to time, up to 35 percent of the aggregate principal amount of the 6.75 Percent Notes with the net cash proceeds of one or more public sales of the company's common stock at a redemption price equal to 106.75 percent of the principal amount, plus accrued and unpaid interest, if any, so long as at least 65 percent of the aggregate principal amount of 6.75 Percent Notes originally issued remained outstanding after each such redemption and notice of any such redemption was mailed within 90 days after any such sale of common stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
If a Change of Control (as defined in the indenture under which the 6.75 Percent Notes were issued) occurred, unless the company had exercised its right to redeem the 6.75 Percent Notes, each holder of 6.75 Percent Notes could have required the company to repurchase some or all of such holder's 6.75 Percent Notes at a purchase price equal to 101 percent of the principal amount of the 6.75 Percent Notes to be repurchased, plus accrued and unpaid interest, if any.
As of September 30, 2018, the 6.75 Percent Notes were fully redeemed. As of September 30, 2017, $173 million principal amount of the 6.75 Percent Notes remained outstanding.
7.875 Percent Convertible Notes
In December 2012, the company issued $250 million principal amount of 7.875 Percent Convertible Notes. The 7.875 Percent Convertible Notes were sold by the company to qualified institutional buyers in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. The 7.875 Percent Convertible Notes have an initial principal amount of $900 per note and will accrete to $1,000 per note on December 1, 2020 at an effective interest rate of 10.9 percent. Net proceeds received by the company, after issuance costs and discounts, were approximately $220 million.
The company pays 7.875 percent cash interest on the principal amount of the 7.875 Percent Convertible Notes semi-annually in arrears on June 1 and December 1 of each year to holders of record at the close of business on the preceding May 15 and November 15, respectively, and at maturity to the holders that present the 7.875 Percent Convertible Notes for payment. Interest accrues on the principal amount thereof from and including the date the 7.875 Percent Convertible Notes were issued or from and including the last date in respect of which interest has been paid or provided for, as the case may be, to, but excluding, the next interest payment date.
The 7.875 Percent Convertible Notes are fully and unconditionally guaranteed on a senior unsecured basis by certaineach of the company's subsidiaries.Guarantors. The 7.875 Percent Convertible Notes are senior unsecured obligations and rank equally in right of payment with all of the company's existing and future senior unsecured indebtedness and are junior to any of the company's existing and future secured indebtedness.
The 7.875 Percent Convertible Notes will be convertible into cash up to the principal amount at maturity of the 7.875 Percent Convertible Note surrendered for conversion and, if applicable, shares of the company's common stock (subject to a conversion share cap as described below), based on an initial conversion rate, subject to adjustment, equivalent to 83.3333 shares per $1,000 principal amount at maturity of 7.875 Percent Convertible Notes (which represents an initial conversion price of $12.00 per share), only under the following circumstances:
•prior to June 1, 2025, during any calendar quarter after the calendar quarter ending December 31, 2012, if the closing sale price of the company's common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120 percent of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter;
•prior to June 1, 2025, during the 5 business day period after any 5 consecutive trading day period in which the trading price per $1,000 principal amount at maturity of 7.875 Percent Convertible Notes was equal to or less than 97 percent of the conversion value of the 7.875 Percent Convertible Notes on each trading day during such 5 consecutive trading day period;
•prior to June 1, 2025, if the company has called the 7.875 Percent Convertible Notes for redemption;
•prior to June 1, 2025, upon the occurrence of specified corporate transactions; or
•at any time on or after June 1, 2025.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On or after December 1, 2020, the company may redeem the 7.875 Percent Convertible Notes at its option, in whole or in part, at a redemption price in cash equal to 100 percent of the principal amount at maturity of the 7.875 Percent Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Further, holders may require the company to purchase all or a portion of their 7.875 Percent Convertible Notes at a purchase price in cash equal to 100 percent of the principal amount at maturity of the 7.875 Percent Convertible Notes to be purchased, plus accrued and unpaid interest, on December 1, 2020 or upon certain fundamental changes. The maximum number of shares of common stock into which the 7.875 Percent Convertible Notes are convertible is approximately 2 million shares.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The company used the net proceeds of approximately $220 million from the offering of the 7.875 Percent Convertible Notes (after discounts and issuance costs) and additional cash to acquire a portion of its outstanding 4.625 Percent Convertible Notes in transactions that settled concurrently with the closing of the 7.875 Percent Convertible Note offering. Approximately $245 million of $300 million principal amount of the 4.625 Percent Convertible Notes were repurchased for an aggregate purchase price of approximately $236 million (including accrued interest).
Accounting guidance requires that cash-settled convertible debt, such as the 7.875 Percent Convertible Notes, be separated into debt and equity components at issuance and a value be assigned to each. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, is recorded as a debt discount. The company measures the debt component at fair value by utilizing a discounted cash flow model. This model utilizes observable inputs such as contractual repayment terms, benchmark forward yield curves, yield curves and quoted market prices of its own nonconvertible debt. The yield curves are acquired from an independent source that is widely used in the financial industry and reviewed internally by personnel with appropriate expertise in valuation methodologies.
Approximately $23 million principal amount of the 7.875 Percent Convertible Notes remained outstanding as of September 30, 2019 and September 30, 2018.
4.0 Percent Convertible Notes
In February 2007, the company issued $200 million principal amount of 4.0 Percent Convertible Notes. The 4.0 Percent Convertible Notes bore cash interest at a rate of 4.0 percent per annum from the date of issuance through February 15, 2019, payable semi-annually in arrears on February 15 and August 15 of each year. After February 15, 2019, the principal amount of the notes was subject to accretion at a rate that provided holders with an aggregate annual yield to maturity of 4.0 percent.
The 4.0 Percent Convertible Notes were convertible into shares of the company’s common stock at an initial conversion rate, subject to adjustment, equivalent to 37.4111 shares of common stock per $1,000 initial principal amount of notes, which represented an initial conversion price of approximately $26.73 per share. If converted, the accreted principal amount would be settled in cash and the remainder of the company’s conversion obligation, if any, in excess of such accreted principal amount would be settled in cash, shares of common stock, or a combination thereof, at the company’s election. Holders could convert their 4.0 Percent Convertible Notes at any time on or after February 15, 2025. The maximum number of shares of common stock into which the 4.0 Percent Convertible notes were convertible was approximately 1 million shares.
Prior to February 15, 2025, holders could convert their notes only under the following circumstances:
during any calendar quarter, if the closing sale price of the company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeded 120 percent of the applicable conversion price;
during the 5 business day period after any 5 consecutive trading day period in which the average trading price per $1,000 initial principal amount of notes was equal to or less than 97 percent of the average conversion value of the notes during such 5 consecutive trading day period;
upon the occurrence of specified corporate transactions; or
if the notes were called by the company for redemption.
On or after February 15, 2019, the company could redeem the 4.0 Percent Convertible Notes, in whole or in part, for cash at a redemption price equal to 100 percent of the accreted principal amount, plus any accrued and unpaid interest. On each of February 15, 2019 and 2022, or upon certain fundamental changes, holders may require the company to purchase all or a portion of their 4.0 Percent Convertible Notes at a purchase price in cash equal to 100 percent of the accreted principal amount, plus any accrued and unpaid interest.
The 4.0 Percent Convertible Notes were fully and unconditionally guaranteed by certain subsidiaries of the company that currently guaranteed the company’s obligations under its senior secured credit facility and other publicly held notes (see Revolving Credit Facility above).
As of September 30, 2019, the 4.0 Percent Notes were fully redeemed. Approximately $24 million principal amount of the 4.0 Percent Convertible Notes remained outstanding as of September 30, 2018.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounting guidance requires that cash-settled convertible debt, such as the 4.0 Percent Convertible Notes, be separated into debt and equity components at issuance and a value be assigned to each. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, is recorded as a debt discount. The company measures the debt component at fair value by utilizing a discounted cash flow model. This model utilizes observable inputs such as contractual repayment terms, benchmark forward yield curves, yield curves and quoted market prices of its own nonconvertible debt. The yield curves are acquired from an independent source that is widely used in the financial industry and reviewed internally by personnel with appropriate expertise in valuation methodologies.
The following table summarizes the principal amounts and related unamortized discount on all convertible notes (in millions):
|
| | | | | | | |
| | September 30,
2019 | | September 30,
2018 |
| Principal amount of convertible notes | $ | 348 |
| | $ | 372 |
|
| Unamortized discount on convertible notes and issuance costs | (40 | ) | | (45 | ) |
| Net carrying value | $ | 308 |
| | $ | 327 |
|
| | | | | | | | | | | |
| September 30, |
| 2020 | | 2019 |
| Principal amount of convertible notes | $ | 348 | | | $ | 348 | |
| Unamortized discount on convertible notes and issuance costs | (34) | | | (40) | |
| Net carrying value | $ | 314 | | | $ | 308 | |
The following table summarizes other information related to the convertible notes:
|
| | | | | | | |
| | Convertible Notes |
| | | | 7.875% | | 3.25% |
| Total amortization period for debt discount (in years): | | | 8 |
| | 8 |
|
| Remaining amortization period for debt discount (in years): | | | 1 |
| | 6 |
|
| Effective interest rates on convertible notes: | | | 10.9 | % | | 5.6 | % |
| | | | | | | | | | | | | | | |
| | | | | Convertible Notes |
| | | | | 7.875% | | 3.25% |
| Total amortization period for debt discount (in years): | | | | | 8 | | 8 |
| Remaining amortization period for debt discount (in years): | | | | | 0 | | 5 |
| Effective interest rates on convertible notes: | | | | | 10.9 | % | | 5.6 | % |
The following table summarizes interest costs recognized on convertible notes (in millions):
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 |
| Contractual interest coupon | $ | 17 |
| | $ | 17 |
| | $ | 17 |
|
| Amortization of debt discount | 2 |
| | 2 |
| | 8 |
|
| Repurchase of convertible notes | — |
| | — |
| | 31 |
|
| Total | $ | 19 |
| | $ | 19 |
| | $ | 56 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| 2020 | | 2019 | | 2018 |
| Contractual interest coupon | $ | 17 | | | $ | 17 | | | $ | 17 | |
| Amortization of debt discount | 2 | | | 2 | | | 2 | |
| | | | | |
| Total | $ | 19 | | | $ | 19 | | | $ | 19 | |
Debt Maturities
As of September 30, 2019,2020, the company is contractually obligated to make payments as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | 2021 (2) | | 2022 | | 2023 | | 2024 (3) | | 2025 (4) | | Thereafter (5) |
Total debt (1) | $ | 1,265 | | | $ | 36 | | | $ | 18 | | | $ | 13 | | | $ | 573 | | | $ | 300 | | | $ | 325 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 (2) | | Thereafter (3) |
Total debt (1) | $ | 989 |
| | $ | 10 |
| | $ | 11 |
| | $ | 19 |
| | $ | 28 |
| | $ | 573 |
| | $ | 348 |
|
| |
(1) | Total debt excludes unamortized discount on convertible notes of $34 million, unamortized issuance costs of $12 million, and original issuance discount of (2) Includes the 7.875 Percent Convertible Notes, which will be early redeemed on December 1, 2020an insignificant amount. |
| |
(2) | Includes the 6.25 Percent Notes, which contains a call feature that allows for early redemption |
| |
(3) | Includes the 3.25 Percent Convertible Notes and 7.875 Percent Convertible Notes, which contain a put and call feature that allows for earlier redemption beginning in 2025 and 2020, respectively. |
Capital Leases
The company had $7 million of outstanding capital lease arrangements as of September 30, 2019(3) Includes the 6.25 Percent Notes due 2024, which contain a call feature that allows for early redemption
(4) Includes the 6.25 Percent Notes due 2025, which contain a call feature that allows for early redemption
(5) Includes the 3.25 Percent Convertible Notes which contain a put and 2018.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of September 30, 2019, the future minimum lease payments for noncancelable capital leases with initial terms in excess of one year were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
| Capital lease obligation | $ | 8 |
| | $ | 2 |
| | $ | 3 |
| | $ | 2 |
| | $ | 1 |
| | $ | — |
| | $ | — |
|
| Less: amounts representing interest | (1 | ) | | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Principal on capital lease | $ | 7 |
| | $ | 1 |
| | $ | 3 |
| | $ | 2 |
| | $ | 1 |
| | $ | — |
| | $ | — |
|
Letter of Credit Facilities
On February 21, 2014, the company entered into an arrangement to amend and restate the letter of credit facility with Citicorp USA, Inc., as administrative agent and issuing bank, and the other lenders party thereto. Under the terms of this amended credit agreement, which expired in March 2019, the company had the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $25 million. This facility contained covenants and events of default generally similar to those existing in the company’s public debt indentures. There were $1 million of letters of credit outstanding under this facility at September 30, 2018. On March 20, 2019, the company allowed this facility to expire. The letters of credit previously provided under this facility were replaced with letters of credit issued under the company's U.S. accounts receivables securitization facility with PNC Bank.
The company had $12$11 million and $19$12 million of letters of credit outstanding through other letter of credit facilities as of September 30, 2020 and 2019, and 2018, respectively.
Other
One of the company's consolidated joint ventures in China participates in a bills of exchange program to settle its obligations with its trade suppliers. These programs are common in China and generally require the participation of local banks. Under these programs, the company's joint venture issues notes payable through the participating banks to its trade suppliers. If the issued notes payable remain unpaid on their respective due dates, this could constitute an event of default under the company’s revolving credit facility if the unpaid amount exceeds $35 million per bank. As of September 30, 20192020 and 2018,2019, the company had $30$16 million and $22$30 million, respectively, outstanding under this program at more than one bank.
Operating Leases
The company has various operating leasing arrangements. Future minimum lease payments under these operating leases are $18 million in 2020, $15 million in 2021, $14 million in 2022, $13 million in 2023, $13 million in 2024 and $25 million thereafter.
19.16. FINANCIAL INSTRUMENTS
The company’s financial instruments include cash and cash equivalents, short-term debt, long-term debt, and foreign exchange forward and options contracts. The company uses derivatives for hedging and non-trading purposes in order to manage its foreign exchange rate exposures.
Foreign Exchange Contracts
As a result of the company’s substantial international operations, it is exposed to foreign currency risks that arise from normal business operations, including in connection with transactions that are denominated in foreign currencies. In addition, the company translates sales and financial results denominated in foreign currencies into U.S. dollars for purposes of its Consolidated Financial Statements. As a result, appreciation of the U.S. dollar against these foreign currencies generally will have a negative impact on 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.
The company has a foreign currency cash flow hedging program to reduce the company’s exposure to changes in exchange rates on foreign currency purchases and sales. The company uses foreign currency forward contracts to manage the company’s exposures arising from foreign currency exchange risk. Gains and losses on the underlying foreign currency exposures are partially offset with gains and losses on the foreign currency forward contracts. Under this foreign currency cash flow hedging program, the company has designated the foreign exchange contracts as cash flow hedges of underlying forecasted foreign currency purchases
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
and sales. Changes in the fair value of these contracts are recorded in accumulated other comprehensive income (AOCI) in the Consolidated Balance Sheet and are recognized in operating income when the underlying forecasted transaction impacts earnings. The terms of these contracts generally require the company to place cash on deposit as collateral if the fair value of these contracts represents a liability for the company and exceeds the collateral threshold. The fair values of the foreign exchange derivative instruments and any related collateral cash deposits are presented on a net basis as the derivative contracts are subject to master netting arrangements.
At September 30, 2020, 2019 2018 and 2017,2018, the notional amount of the company's foreign exchange contracts outstanding under its foreign currency cash flow hedging program was $65 million, $110 million, $154 million, and $126$154 million, respectively. The company classifies the cash flows associated with these contracts in cash flows from operating activities in the Consolidated Statement of Cash Flows. This is consistent with the classification of the cash flows associated with the underlying hedged item.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
From time to time the company hedges against foreign currency exposure related to translations to U.S. dollars of financial results denominated in foreign currencies. Changes in fair value associated with these contracts are recorded in other income (expense), net, in the Consolidated Statement of Operations. The company also uses option contracts to mitigate foreign currency exposure on expected future foreign currency-denominated purchases. Changes in fair value associated with these contracts are recorded in cost of sales in the Consolidated Statement of Operations.
The following table summarizes the impact of the company’s derivatives instruments on comprehensive income for fiscal years ended September 30 (in millions):
|
| | | | | | | | | | | | | |
| | Location of Gain (Loss) | | 2019 | | 2018 | | 2017 |
| Derivatives designated as hedging instruments: | | | | | | | |
| Amount of gain (loss) recognized in AOCI | AOCI | | $ | 19 |
| | $ | 3 |
| | $ | (1 | ) |
Amount of gain (loss) reclassified from AOCI into income | Cost of Sales | | 4 |
| | (1 | ) | | 1 |
|
Derivatives not designated as hedging instruments: Amount of gain (loss) recognized in income | Cost of Sales | | — |
| | (2 | ) | | 1 |
|
Derivatives not designated as hedging instruments: Amount of gain (loss) recognized in income | Other Income (expense) | | 1 |
| | 2 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Location of
Gain (Loss) | | 2020 | | 2019 | | 2018 |
| Derivatives designated as hedging instruments: | | | | | | | |
| Amount of gain recognized in AOCI | AOCI | | $ | 4 | | | $ | 19 | | | $ | 3 | |
Amount of gain (loss) reclassified from AOCI into income | Cost of Sales | | (1) | | | 4 | | | (1) | |
Derivatives not designated as hedging instruments:
Amount of gain (loss) recognized in income | Cost of Sales | | 0 | | | 0 | | | (2) | |
Derivatives not designated as hedging instruments:
Amount of gain recognized in income | Other Income (expense) | | 1 | | | 1 | | | 2 | |
Fair Value
Fair values of financial instruments are summarized as follows (in millions):
|
| | | | | | | | | | | | | | | |
| | September 30,
2019 | | September 30,
2018 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Cash and cash equivalents | $ | 108 |
| | $ | 108 |
| | $ | 115 |
| | $ | 115 |
|
| Short-term debt | 41 |
| | 60 |
| | 94 |
| | 116 |
|
| Long-term debt | 902 |
| | 953 |
| | 730 |
| | 776 |
|
| Foreign exchange forward contracts (other assets) | — |
| | — |
| | 2 |
| | 2 |
|
| Cross-currency swap (others assets) | 10 |
| | 10 |
| | 6 |
| | 6 |
|
| Cross-currency swaps (other liabilities) | 5 |
| | 5 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | September 30, 2019 |
| Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| Cash and cash equivalents | $ | 315 | | | $ | 315 | | | $ | 108 | | | $ | 108 | |
| Short-term debt | 39 | | | 58 | | | 41 | | | 60 | |
| Long-term debt | 1,188 | | | 1,259 | | | 902 | | | 953 | |
| Foreign currency option contracts (other assets) | 1 | | | 1 | | | 0 | | | 0 | |
| Foreign exchange forward contracts (other liabilities) | 1 | | | 1 | | | 0 | | | 0 | |
| | | | | | | |
| | | | | | | |
| Cross-currency swap (other assets) | 0 | | | 0 | | | 10 | | | 10 | |
| Cross-currency swaps (other liabilities) | 0 | | | 0 | | | 5 | | | 5 | |
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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Foreign exchange forward contracts — The company uses foreign exchange forward purchase and sale contracts with terms of 18 months or less to hedge its exposure to changes in foreign currency exchange rates. As of September 30, 2020 and September 30, 2019, the notional amount of the company's foreign exchange contracts outstanding under its foreign currency cash flow hedging program was $65 million and $110 million, respectively. The fair value of foreign exchange forward contracts is based on a model which incorporates observable inputs including quoted spot rates, forward exchange rates and discounted future expected cash flows utilizing market interest rates with similar quality and maturity characteristics. For derivative instruments that are designated and qualify as cash flow hedges, changes in the fair value of the contracts are recorded in AOCI in the Consolidated Statement of Shareholders’ Equity and is recognized in operating income when the underlying forecasted transaction impacts earnings.
Foreign currency option contracts — The company uses option contracts to mitigate foreign exchange exposure on expected future Indian Rupee-denominatedforeign currency-denominated purchases. As of September 30, 20192020 and September 30, 2018,2019, the notional amount of the company's Indian rupee foreign exchange contracts outstanding was $92 million and $180 million, respectively. The company did not elect hedge accounting for these derivatives. Changes in fair value associated with these contracts are recorded in cost of sales in the Consolidated Statement of Operations.
The company uses option contracts to mitigate foreign exchange exposure on expected future South Korean won-denominated purchases. As of September 30, 2019 and September 30, 2018, the notional amount of the company’s South Korean won foreign exchange option contracts outstanding was $47$39 million and $41$139 million, respectively. The company did not elect hedge accounting for these derivatives. Changes in fair value associated with these contracts are recorded in cost of sales in the Consolidated Statement of Operations.
The company uses foreign currency option contracts to mitigate foreign currency exposure on expected future Brazilian real-denominated purchases. As of September 30, 2019, there were 0 Brazilian real foreign exchange option contracts outstanding. As of September 30, 2018, the notional amount of the company's Brazilian real foreign exchange option contracts outstanding was $16 million. The company did
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
not elect hedge accounting for these derivatives. Changes in fair value associated with these contracts are recorded in cost of sales in the Consolidated Statement of Operations.
The company uses option contracts to mitigate the risk of volatility in the translation of euroforeign currency earnings to U.S. dollars. As of September 30, 2020 and September 30, 2019, the the notional amount of the company's euro foreign exchange option contracts outstanding was $24 million and $28 million. As of September 30, 2018, there were 0 euro foreign exchange option contracts outstanding.million, respectively. These option contracts did not qualify for a hedge accounting election. Changes in fair value associated with these contracts are recorded in the Consolidated Statement of Operations in other income, net.
The fair value of foreign exchange option contracts is based on third-party proprietary models, which incorporate inputs at varying unobservable weights of quoted spot rates, market volatility, forward rates and time utilizing market instruments with similar quality and maturity characteristics.
Cross-currency swap contracts — The company uses cross-currency swap contracts to hedge a portion of its net investment in a foreign subsidiary against volatility in foreign exchange rates. These derivative instruments are designated and qualify as hedges of net investments in foreign operations using the spot method to assess effectiveness. Settlements and changes in fair values of the instruments are recognized in foreign currency translation adjustments, a component of other comprehensive income (loss) on the Consolidated Statement of Comprehensive Income (Loss), to offset the changes in the values of the net investments being hedged.
In the third quarter of fiscal year 2018,2019, the company entered into multiple new cross-currency swaps with a combined notional amount of $225 million which matureand maturities in May 2021.October 2022. As of September 30, 2018,2019, the notional amount of the company's outstanding cross-currency swap contracts outstandingswaps was $225 million. These swaps hedged a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate. In the second quarter of fiscal year 2020, the company settled these cross-currency swap contracts and received proceeds of $11 million, $1 million of which related to net accrued interest receivable.
In the third quarter of fiscal year 2018, the company entered into multiple cross-currency swaps with a combined notional amount of $225 million, which were to mature in May 2021. These swaps hedged a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate. In the third quarter of fiscal year 2019, the company unwound the cross-currency swaps and received proceeds of $19 million, $2 million of which related to net accrued interest receivable. The company also entered into new multiple cross-currency swaps with a combined notional amount of $225 million, with maturities in October 2022. As of September 30, 2019, the notional amount of the company's cross-currency swap was $225 million. These swaps hedged a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate.
The fair value of cross-currency swap 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.
The following table reflects the offsetting of derivative assets and liabilities (in millions):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | September 30, 2018 |
| | Gross
Amounts Recognized | | Gross Amounts
Offset | | Net Amounts
Reported | | Gross
Amounts Recognized | | Gross Amounts
Offset | | Net Amounts
Reported |
| Derivative Asset | | | | | | | | | | | |
| Foreign exchange forward contract | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Cross-currency swaps | 10 |
| | — |
| | 10 |
| | 6 |
| | — |
| | 6 |
|
| Derivative Liabilities | | | | | | | | | | | |
| Foreign exchange forward contract | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Cross-currency swaps | 5 |
| | — |
| | 5 |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| September 30, 2020 | | September 30, 2019 |
| Gross
Amounts Recognized | | Gross Amounts
Offset | | Net Amounts
Reported | | Gross
Amounts Recognized | | Gross Amounts
Offset | | Net Amounts
Reported |
| Derivative Asset | | | | | | | | | | | |
| Foreign currency option contract | 1 | | | 0 | | | 1 | | | 0 | | | 0 | | | 0 | |
| Cross-currency swaps | 0 | | | 0 | | | 0 | | | 10 | | | 0 | | | 10 | |
| Derivative Liabilities | | | | | | | | | | | |
| Foreign exchange forward contract | 1 | | | 0 | | | 1 | | | 0 | | | 0 | | | 0 | |
| Cross-currency swaps | 0 | | | 0 | | | 0 | | | 5 | | | 0 | | | 5 | |
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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
•Level 1 inputs use quoted prices in active markets for identical instruments.
•Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar instruments in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
•Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related instrument.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest priority level input that is significant to the valuation. The company's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
Fair value of financial instruments by the valuation hierarchy at September 30, 20192020 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 |
| Cash and cash equivalents | $ | 315 | | | $ | 0 | | | $ | 0 | |
| Short-term debt | 0 | | | 43 | | | 15 | |
| Long-term debt | 0 | | | 1,103 | | | 156 | |
| | | | | |
| Foreign exchange forward contracts (asset) | 0 | | | 0 | | | 0 | |
| Foreign exchange forward contracts (liability) | 0 | | | 1 | | | 0 | |
| Foreign currency option contracts (other assets) | 0 | | | 1 | | | 0 | |
| Cross-currency swaps (other assets) | 0 | | | 0 | | | 0 | |
| Cross-currency swaps (other liabilities) | 0 | | | 0 | | | 0 | |
|
| | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 |
| Cash and cash equivalents | $ | 108 |
| | $ | — |
| | $ | — |
|
| Foreign exchange forward contracts (asset) | — |
| | — |
| | — |
|
| Foreign exchange forward contracts (liability) | — |
| | — |
| | — |
|
| Foreign currency option/collar contracts (other assets) | — |
| | — |
| | — |
|
| Cross-currency swaps (other assets) | — |
| | 10 |
| | — |
|
| Cross-currency swaps (other liabilities) | — |
| | 5 |
| | — |
|
Fair value of financial instruments by the valuation hierarchy at September 30, 20182019 is as follows (in millions):
|
| | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 |
| Cash and cash equivalents | $ | 115 |
| | $ | — |
| | $ | — |
|
| Foreign exchange forward contracts (asset) | — |
| | 2 |
| | — |
|
| Foreign exchange forward contracts (liability) | — |
| | — |
| | — |
|
| Foreign currency option/collar contracts (other assets) | — |
| | — |
| | — |
|
| Cross-currency swap (other assets) | — |
| | 6 |
| | — |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 |
| Cash and cash equivalents | $ | 108 | | | $ | 0 | | | $ | 0 | |
| Short-term debt | 0 | | | 49 | | | 11 | |
| Long-term debt | 0 | | | 782 | | | 171 | |
| | | | | |
| Foreign exchange forward contracts (asset) | 0 | | | 0 | | | 0 | |
| Foreign exchange forward contracts (liability) | 0 | | | 0 | | | 0 | |
| Foreign currency option contracts (other assets) | 0 | | | 0 | | | 0 | |
| Cross-currency swaps (other assets) | 0 | | | 10 | | | 0 | |
| Cross-currency swaps (other liabilities) | 0 | | | 5 | | | 0 | |
The tables below provide a reconciliation of changes in fair value of the Level 3 financial assets and liabilities measured at fair value in the Consolidated Balance Sheet for the twelve months ended September 30, 20192020 and September 30, 2018,2019, respectively. No transfers of assets between any of the Levels occurred during these periods.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | Twelve months ended September 30, 2019 (in millions) | | Short-term foreign currency option contracts (asset) | | Long-term foreign currency option contracts (asset) | | Total | |
| Fair Value as of September 30, 2018 | | $ | — |
| | $ | — |
| | $ | — |
| |
| Total unrealized gains (losses): | | | | | | | |
| Twelve months ended September 30, 2020 (in millions) | | Twelve months ended September 30, 2020 (in millions) | | Short-term foreign currency option contracts (asset) | | Long-term foreign currency option contracts (asset) | | Total |
| Fair Value as of September 30, 2019 | | Fair Value as of September 30, 2019 | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Total unrealized gains: | | Total unrealized gains: | |
| Included in other income | | (1 | ) | | — |
| | (1 | ) | Included in other income | | 0 | | | 0 | | | 0 | |
| Included in cost of sales | | 1 |
| | — |
| | 1 |
| Included in cost of sales | | 0 | | | 0 | | | 0 | |
| Total realized gains (losses): | | | | | | | |
| Total realized gains: | | Total realized gains: | |
| Included in other income | | 1 |
| | — |
| | 1 |
| Included in other income | | 1 | | | 0 | | | 1 | |
| Included in cost of sales | | — |
| | — |
| | — |
| Included in cost of sales | | 0 | | | 0 | | | 0 | |
| Purchases, issuances, sales and settlements: | | | | | | | Purchases, issuances, sales and settlements: | |
| Purchases | | — |
| | — |
| | — |
| Purchases | | 2 | | | 0 | | | 2 | |
| Settlements | | (1 | ) | | — |
| | (1 | ) | Settlements | | (2) | | | 0 | | | (2) | |
Transfer in and / or out of Level 3 (1) | | — |
| | — |
| | — |
| Transfer in and / or out of Level 3 (1) | | 0 | | | 0 | | | 0 | |
| Reclass between short-term and long-term | | — |
| | — |
| | — |
| Reclass between short-term and long-term | | 0 | | | 0 | | | 0 | |
| Fair Value as of September 30, 2019 | | $ | — |
| | $ | — |
| | $ | — |
| |
| Fair Value as of September 30, 2020 | | Fair Value as of September 30, 2020 | | $ | 1 | | | $ | 0 | | | $ | 1 | |
(1) Transfers as of the last day of the reporting period
| | | Twelve months ended September 30, 2018 (in millions) | | Short-term foreign currency option/collar contracts (asset) | | Long-term foreign currency option/collar contracts (asset) | | Total | |
| Fair Value as of September 30, 2017 | | $ | 2 |
| | $ | 1 |
| | $ | 3 |
| |
| Total unrealized gains (losses): | | | | | | | |
| Twelve months ended September 30, 2019 (in millions) | | Twelve months ended September 30, 2019 (in millions) | | Short-term foreign currency option/collar contracts (asset) | | Long-term foreign currency option/collar contracts (asset) | | Total |
| Fair Value as of September 30, 2018 | | Fair Value as of September 30, 2018 | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Total unrealized gains: | | Total unrealized gains: | |
| Included in other income | | — |
| | — |
| | — |
| Included in other income | | (1) | | | 0 | | | (1) | |
| Included in cost of sales | | (1 | ) | | (1 | ) | | (2 | ) | Included in cost of sales | | 1 | | | 0 | | | 1 | |
| Total realized gains (losses): | | | | | | | |
| Total realized gains: | | Total realized gains: | |
| Included in other income | | 1 |
| | — |
| | 1 |
| Included in other income | | 1 | | | 0 | | | 1 | |
| Included in cost of sales | | — |
| | — |
| | — |
| Included in cost of sales | | 0 | | | 0 | | | 0 | |
| Purchases, issuances, sales and settlements: | | | | | | | Purchases, issuances, sales and settlements: | |
| Purchases | | — |
| | — |
| | — |
| Purchases | | 0 | | | 0 | | | 0 | |
| Settlements | | (2 | ) | | — |
| | (2 | ) | Settlements | | (1) | | | 0 | | | (1) | |
Transfer in and / or out of Level 3 (1) | | — |
| | — |
| | — |
| Transfer in and / or out of Level 3 (1) | | 0 | | | 0 | | | 0 | |
| Reclass between short-term and long-term | | — |
| | — |
| | — |
| Reclass between short-term and long-term | | 0 | | | 0 | | | 0 | |
| Fair Value as of September 30, 2018 | | $ | — |
| | $ | — |
| | $ | — |
| |
| Fair Value as of September 30, 2019 | | Fair Value as of September 30, 2019 | | $ | 0 | | | $ | 0 | | | $ | 0 | |
(1) Transfers as of the last day of the reporting period
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
20.17. SHAREHOLDERS’ EQUITY
There were 0 dividends declared or paid by the company in fiscal years 2020, 2019 2018 or 2017.2018. The payment of cash dividends and the amount of any dividend are subject to review and change at the discretion of the company's Board of Directors.
Common Stock
The company is authorized to issue 500 million shares of common stock, with a par value of $1$1 per share, and 30 million shares of Preferred Stock,preferred stock, without par value ("Preferred Stock"), of which 2 million shares are designated as Series A Junior Participating Preferred Stock ("Junior Preferred Stock"). NaN shares of Preferred Stock or Junior Preferred Stock have been issued.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In the first quarter of fiscal year 2018,December 2017, the company filed a shelf registration statement with the SEC, registering an indeterminate amount of debt and/or equity securities that may be offered in one or more offerings on terms to be determined at the time of sale.
The company has reserved approximately 134 million shares of common stock in connection with its 20102020 Long-Term Incentive Plan as amended ("LTIP") for grants of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance shares, restricted share units and stock awards to key employees and directors. At September 30, 2019,2020, there were 2.94.1 million shares available for future grants under the LTIP.
Repurchase Authorizations
On July 26, 2019, the Board of Directors authorized the repurchase of up to $250 million of the company’s common stock from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and the company’s debt covenants. This authorization supersedessuperseded the remaining authority under the prior November 2018 equity repurchase authorization described below. On November 7, 2019, the Board of Directors increased the amount of the repurchase authorization to $325 million. During fiscal year 2019,2020, the company repurchased 1.310.4 million shares of common stock for $25$241 million (including commission costs) pursuant to the common stock repurchase authorization. As of September 30, 2019,2020, the amount remaining available for repurchases was $225$59 million under this common stock repurchase authorization. On November 7, 2019, the Board of Directors increased the amount of this repurchase authorization to $325 million.
On November 2, 2018, the Board of Directors authorized the repurchase of up to $200 million of the company's common stock and up to $100 million aggregate principal amount of any of the company's debt securities (including convertible debt securities), in each case from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and the company's debt covenants. During fiscal year 2019, the company repurchased 4.0 million shares of common stock for $71 million (including commission costs) pursuant to the common stock repurchase authorization. As of September 30, 2019,2020, the amount remaining available for debt repurchases was $76 million under the debt repurchase authorization. This authorization superseded the remaining authority under the prior July 2016 repurchase authorizations.
On July 21, 2016, the Board of Directors authorized the repurchase of up to $100 million of the company’s common stock and up to $150 million aggregate principal amount of any of the company’s debt securities (including convertible debt securities), in each case from time to time through open market purchases, privately negotiated transactions or otherwise, until September 30, 2019, subject to compliance with legal and regulatory requirements and the company's debt covenants.
During fiscal year 2018, the company repurchased 4.5 million shares of common stock for $100 million (including commission costs), pursuant to the July 2016 common stock repurchase authorization. The repurchase program under the July 2016 authorization was complete as of September 30, 2018. The amount remaining available for repurchases under the debt repurchase authorization was $50 million as of September 30, 2018. There was an insignificant amount of common stock and $100 million in debt security repurchases that were made under these authorizations during fiscal year 2017.
Accumulated Other Comprehensive Income (AOCI)
The components of AOCI as reported in the Consolidated Balance Sheet and Statement of Equity, (Deficit), and the changes in AOCI by components, net of tax, are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Employee Benefit Related Adjustments | | Unrealized Income (Loss) on cash flow hedges | | Total |
| Balance at September 30, 2019 | $ | (107) | | | $ | (572) | | | $ | (2) | | | $ | (681) | |
| Other comprehensive income (loss) before reclassification | (22) | | | 79 | | | (1) | | | 56 | |
| Amounts reclassified from accumulated other comprehensive income | 0 | | | 10 | | | 1 | | | 11 | |
| Net current-period other comprehensive income (loss) | $ | (22) | | | $ | 89 | | | $ | 0 | | | $ | 67 | |
| Balance at September 30, 2020 | $ | (129) | | | $ | (483) | | | $ | (2) | | | $ | (614) | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | | | | | | | |
| 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 | | | | |
| Amortization of prior service benefit | | $ | (36) | | | (a) |
| Amortization of actuarial losses | | 47 | | | (a) |
| | | | |
| | 11 | | | Total before tax |
| | (1) | | | Tax (benefit) expense |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total reclassifications for the period | | $ | 10 | | | Net of tax |
| | | | |
|
|
|
|
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Notes 19 and 20 for additional details), which is recorded in other income (expense), net.
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Employee Benefit Related Adjustments | | Unrealized Income (Loss) on cash flow hedges | | Total |
| Balance at September 30, 2018 | $ | (90) | | | $ | (476) | | | $ | 0 | | | $ | (566) | |
| Other comprehensive income (loss) before reclassification | (17) | | | (100) | | | 2 | | | (115) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | 0 | | | 4 | | | (4) | | | 0 | |
| Net current-period other comprehensive loss | $ | (17) | | | $ | (96) | | | $ | (2) | | | $ | (115) | |
| Balance at September 30, 2019 | $ | (107) | | | $ | (572) | | | $ | (2) | | | $ | (681) | |
| | | | | | | | | | | | | | |
| 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 | | | | |
| Amortization of prior service benefit | | $ | (35) | | | (a) |
| Amortization of actuarial losses | | 39 | | | (a) |
| | 4 | | | Total before tax |
| | 0 | | | Tax (benefit) expense |
| | | | |
| | | | |
| | | | |
| Total reclassifications for the period | | $ | 4 | | | Net of tax |
| | | | |
|
|
|
|
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Notes 19 and 20 for additional details), which is recorded in other income (expense), net.
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Employee Benefit Related Adjustments | | Unrealized Income (Loss) on cash flow hedges | | Total |
| Balance at September 30, 2017 | $ | (41) | | | $ | (500) | | | $ | (4) | | | $ | (545) | |
| Other comprehensive income (loss) before reclassification | (49) | | | 8 | | | 3 | | | (38) | |
| Amounts reclassified from accumulated other comprehensive income | 0 | | | 16 | | | 1 | | | 17 | |
| Net current-period other comprehensive income (loss) | $ | (49) | | | $ | 24 | | | $ | 4 | | | $ | (21) | |
| Balance at September 30, 2018 | $ | (90) | | | $ | (476) | | | $ | 0 | | | $ | (566) | |
|
| | | | | | | | | | | | | | | |
| | Foreign Currency Translation | | Employee Benefit Related Adjustments | | Unrealized Income (Loss) on cash flow hedges | | Total |
| Balance at September 30, 2018 | $ | (90 | ) | | $ | (476 | ) | | $ | — |
| | $ | (566 | ) |
| Other comprehensive income (loss) before reclassification | (17 | ) | | (100 | ) | | 2 |
| | (115 | ) |
| Amounts reclassified from accumulated other comprehensive income | — |
| | 4 |
| | (4 | ) | | — |
|
| Net current-period other comprehensive income (loss) | $ | (17 | ) | | $ | (96 | ) | | $ | (2 | ) | | $ | (115 | ) |
| Balance at September 30, 2019 | $ | (107 | ) | | $ | (572 | ) | | $ | (2 | ) | | $ | (681 | ) |
94
|
| | | | | | | |
| | 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 | | | | |
| | Amortization of prior service costs | | $ | (35 | ) | | (a) |
| | Amortization of actuarial losses | | 39 |
| | (a) |
| | | | 4 |
| | Total before tax |
| | | | — |
| | Tax (benefit) expense |
| | | | $ | 4 |
| | Net of tax |
| | Total reclassifications for the period | | $ | 4 |
| | Net of tax |
| | | | | | |
| | (a) These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Notes 22 and 23 for additional details), which is recorded in other income (expense), net. |
| |
|
| | | | | | | | | | | | | | | |
| | Foreign Currency Translation | | Employee Benefit Related Adjustments | | Unrealized Income (Loss) on cash flow hedges | | Total |
| Balance at September 30, 2017 | $ | (41 | ) | | $ | (500 | ) | | $ | (4 | ) | | $ | (545 | ) |
| Other comprehensive income (loss) before reclassification | (49 | ) | | 8 |
| | 3 |
| | (38 | ) |
| Amounts reclassified from accumulated other comprehensive income | — |
| | 16 |
| | 1 |
| | 17 |
|
| Net current-period other comprehensive income (loss) | $ | (49 | ) | | $ | 24 |
| | $ | 4 |
| | $ | (21 | ) |
| Balance at September 30, 2018 | $ | (90 | ) | | $ | (476 | ) | | $ | — |
| | $ | (566 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | | | | | | | |
| 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 | | | | |
| Amortization of prior service benefit | | $ | (35) | | | (a) |
| Amortization of actuarial losses | | 46 | | | (a) |
| Recognized prior service costs due to settlement | | 6 | | | (a) |
| | 17 | | | Total before tax |
| | (1) | | | Tax (benefit) expense |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total reclassifications for the period | | $ | 16 | | | Net of tax |
| | | | |
|
|
|
|
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Notes 19 and 20 for additional details), which is recorded in other income (expense), net.
|
| | | | | | | |
| | 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 | | | | |
| | Amortization of prior service costs | | $ | (35 | ) | | (a) |
| | Amortization of actuarial losses | | $ | 46 |
| | (a) |
| | Recognized prior service costs and actuarial losses due to settlement | | 6 |
| | (a) |
| | | | 17 |
| | Total before tax |
| | | | (1 | ) | | Tax (benefit) expense |
| | | | $ | 16 |
| | Net of tax |
| | Total reclassifications for the period | | $ | 16 |
| | Net of tax |
| | (a) These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Notes 22 and 23 for additional details), which is recorded in other income (expense), net. |
| |
|
| | | | | | | | | | | | | | | |
| | Foreign Currency Translation | | Employee Benefit Related Adjustments | | Unrealized Income (Loss) on cash flow hedges | | Total |
| Balance at September 30, 2016 | $ | (66 | ) | | $ | (740 | ) | | $ | (3 | ) | | $ | (809 | ) |
| Other comprehensive income (loss) before reclassification | 25 |
| | 200 |
| | (1 | ) | | 224 |
|
| Amounts reclassified from accumulated other comprehensive income | — |
| | 40 |
| | — |
| | 40 |
|
| Net current-period other comprehensive income (loss) | $ | 25 |
| | $ | 240 |
| | $ | (1 | ) | | $ | 264 |
|
| Balance at September 30, 2017 | $ | (41 | ) | | $ | (500 | ) | | $ | (4 | ) | | $ | (545 | ) |
|
| | | | | | | |
| | 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 | | | | |
| | Amortization of prior service costs | | $ | (5 | ) | | (a) |
| | Amortization of actuarial losses | | 45 |
| | (a) |
| | | | 40 |
| | Total before tax |
| | | | (12 | ) | | Tax (benefit) expense |
| | | | $ | 28 |
| | Net of tax |
| | Total reclassifications for the period | | $ | 28 |
| | Net of tax |
| | | | | | |
| | (a) These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Notes 22 and 23 for additional details), which is recorded in other income (expense), net. |
| |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
21.18. EQUITY BASED COMPENSATION
Stock Options
Under the company’s incentive plans, stock options are typically granted at prices equal to the fair value on the grant date and have a maximum term of 10 years. Stock options generally vest over a three-year period from the grant date. There were 0.2 million stock options that were exercised in fiscal year 2017. NaN stock options were granted or exercised during fiscal year 2018. NaN stock options were granted in fiscal year 2017. There were 0 stock options outstanding as of September 30, 2019 and September 30, 2018.
Stock-based compensation is measured at the grant date based on the fair value of the award and is generally recognized as expense ratably on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. No compensation cost is ultimately recognized for awards for which employees do not render the requisite service and that are forfeited.
Compensation expense is recognized for the non-vested portion of previously issued stock options. NaN compensation expense associated with the expensing of stock options was recognized in fiscal years 2019, 2018 or 2017.
Restricted Stock and Restricted Share Units
The company has granted shares of restricted stock and restricted share units to certain employees and non-employee members of the Board of Directors in accordance with theits existing plans. The company measures the grant date fair value of these stock-based awards at the market price of the company’s common stock as of the date of the grant. Employee awards typically vest at the end of three years and are subject to continued employment by the employee. Compensation cost associated with stock-based awards is recognized ratably over the vesting period. Cash dividends on the restricted stock, if any, are reinvested in additional shares of common stock during the vesting period.
The following is a rollforward of the company’s non-vested restricted stock and restricted share units as of September 30, 2019,2020, and the activity during fiscal year 20192020 is summarized as follows (shares in thousands):
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant-Date Fair Value |
| Balance at September 30, 2018 | 1,464 |
| | $ | 14.59 |
|
| Granted | 523 |
| | 17.24 |
|
| Vested | (563 | ) | | 9.78 |
|
| Forfeited | (104 | ) | | 16.86 |
|
| Balance at September 30, 2019 | 1,320 |
| | 17.55 |
|
| | | | | | | | | | | |
| Number of
Shares | | Weighted-Average
Grant-Date Fair
Value |
| Balance at September 30, 2019 | 1,320 | | | $ | 17.55 | |
| Granted | 558 | | | 23.77 | |
| Vested | (533) | | | 13.57 | |
| Forfeited | (170) | | | 21.41 | |
| Balance at September 30, 2020 | 1,175 | | | 21.75 | |
In fiscal years 2020, 2019 2018 and 2017,2018, the company granted 0.6 million, 0.5 million, 0.4 million, and 0.60.4 million shares of restricted stock and restricted share units, respectively. The grant date weighted average fair value of these shares of restricted stock and restricted share units was $23.77, $17.24 $24.93 and $13.29$24.93 for shares of restricted stock and restricted share units granted in fiscal years 2020, 2019 and 2018, and 2017, respectively. The number of non-vested restricted shares and restricted share units as
As of September 30, 2019 was 1.3 million. The per share weighted average fair value of these non-vested shares was $17.55.
As of September 30, 2019,2020, there was $7$9 million of total unrecognized compensation costs related to non-vested shares of restricted sharesstock and restricted share units. These costs are expected to be recognized over a weighted average period of 1.691.84 years. Total compensation expense recognized for restricted stock and restricted share units was $8 million $8 million and $7 million in each of fiscal years 2020, 2019 2018 and 2017, respectively.2018.
Performance Share Units
The company has granted performance share units to all executives eligible to participate in the LTIP. The company measures the grant date fair value of these units-based awards at the market price of the company’s common stock as of the date of the grant. Compensation cost associated with these stock-based awards is recognized ratably over the vesting period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In November 2018, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the LTIP. Each performance share unit represents the right to receive 1 share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $16.50, which was the company’s share price on the grant date of December 1, 2018. The Board of Directors also approved a grant of 0.4 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $16.50, which was the company's share price on the grant date of December 1, 2018.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2018 to September 30, 2021, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin and adjusted diluted earnings per share from continuing operations at the following weights: 50% associated with achieving an adjusted EBITDA margin target and 50% associated with achieving an adjusted diluted earnings per share from continuing operations target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.5 million performance share units.
In November 2017, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the LTIP. Each performance share unit represents the right to receive 1 share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $24.79, which was the company’s share price on the grant date of December 1, 2017. The Board of Directors also approved a grant of 0.3 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $24.79, which was the company's share price on the grant date of December 1, 2017.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2017 to September 30, 2020, measured at the end of the performance period. The actual number of performance share units that will vest will depend on adjusted EBITDA margin and adjusted diluted earnings per share from continuing operations at the following weights: 50% associated with achieving an adjusted EBITDA margin target and 50% associated with achieving an adjusted diluted earnings per share from continuing operations target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.3 million performance share units.
In November 2016, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the LTIP. Each performance share unit represents the right to receive 1 share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $12.77, which was the company’s share price on the grant date of December 1, 2016. The Board of Directors also approved a grant of 0.5 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $12.77, which was the company's share price on the grant date of December 1, 2016.
The actual number of performance share units that vested depended upon the company’s performance relative to the established M2019 goals for the three-year performance period of October 1, 2016 to September 30, 2019, which was measured at the end of the performance period.
The following is a rollforward of the company’s non-vested performance share units as of September 30, 2019,2020, and the activity during fiscal year 20192020 is summarized as follows (shares in thousands):
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant-Date Fair Value |
| Balance at September 30, 2018 | 1,612 |
| | $ | 14.18 |
|
| Granted | 1,172 |
| | 13.39 |
|
| Vested | (1,305 | ) | | 10.23 |
|
| Forfeited | (154 | ) | | 16.75 |
|
| Balance at September 30, 2019 | 1,325 |
| | 17.08 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | | | | |
| Number of
Shares | | Weighted-Average
Grant-Date Fair
Value |
| Balance at September 30, 2019 | 1,325 | | | $ | 17.08 | |
| Granted | 732 | | | 19.42 | |
| Vested | (851) | | | 12.92 | |
| Forfeited | (170) | | | 20.90 | |
| Balance at September 30, 2020 | 1,036 | | | 21.52 | |
There were 1.20.7 million performance share units granted during fiscal 20192020 which includes the performance achievement of 0.60.3 million performance share units related to the fiscal year 20162017 to 20182019 LTIP cycle. There were 1.3 million of non-vested performance shares as ofFor the year ended September 30, 2019. The per share weighted average fair value of2020, compensation costs recognized for the performance share units was $17.08 as$1 million of September 30, 2019.
income due to decreased performance payouts. For the years ended September 30, 2019 2018 and 2017,2018, compensation cost recognized related to the performance share units waswere $10 million, $14 million and $14 million, respectively. As of September 30, 2019,2020, there were $9 million of total unrecognized compensation costs related to non-vested performance share unit equity compensation arrangements. These costs are expected to be recognized over a weighted average period of 1.691.86 years.
22.19. RETIREMENT MEDICAL PLANS
The company has retirement medical plans that cover certain of its U.S. and non-U.S. employees, including certain employees of divested businesses, and provide for medical payments to eligible employees and dependents upon retirement. These plans are unfunded.
On September 17, 2020, the company notified certain medical plan participants that it will further amend the benefits provided to these former union employee retirees. Under these modifications, which may be amended at the company’s discretion at any time, the company reduced the defined contribution to $500 per year until 2024. These benefit modifications generated a $7 million prior service credit in September 2020, which will be amortized over the retirees’ average life expectancy, which is currently estimated to be 9 years.
On September 23, 2019, the company notified certain medical plan participants that it will amend the benefits provided to these former union employee retirees. Under these modifications, which may be amended at the company’s discretion at any time, the company reduced the defined contribution to $3,000 in 2020, decreasing by $600 each year thereafter until 2024. These benefit modifications generated a $15 million prior service credit in September 2019, which will be amortized over the retirees’ average life expectancy, which is currently estimated to be 9 years.
On September 8, 2017, the company determined to modify the benefits provided to certain former union employee retirees. Under these modifications, which may be amended at the company’s discretion at any time, the company expectsexpected to provide (i) each retiree over the age of 65 with a defined contribution of $4,000 annually and (ii) each retiree under the age of 65 with a level of benefits generally equivalent to those currently provided to the company’s active employees, in each case and as currently contemplated, for a period of seven years. These benefit modifications generated a $315 million prior service credit in September 2017, which will be amortized over the retirees’ average life expectancy, which is currently estimated to be 9 years.
On September 23, 2019, the Company notified certain medical plan participants that it will amend the benefits provided to these former union employee retirees. Under these modifications, which may be amended at the company’s discretion at any time, the company reduced the defined contribution to $3,000 in 2020, decreasing by $600 each year thereafter until 2024. These benefit modifications generated a $15 million prior service credit in September 2019, which will be amortized over the retirees’ average life expectancy, which is currently estimated to be 9 years.
The mortality assumptions for participants in the company’s U.S. plans incorporates future mortality improvements from tables published by the Society of Actuaries ("SOA"). The company reviewed the new SOA mortality and mortality improvement tables and utilized an actuary to conduct a study based on the company’s plan participants. The company determined that the best representation of the plans' mortality is to utilize the new SOA mortality and mortality improvement tables as the reference table for credibility-weighted mortality rates, blended with company-specific mortality based on the study conducted by the actuary. . The company considers improvement scales released annually by the SOA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The company’s retiree medical obligations were measured as of September 30, 2020, 2019, 2018, and 2017.2018. The following are the assumptions used in the measurement of the accumulated postretirement benefit obligation ("APBO") and retiree medical expense:
|
| | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Discount rate | 2.98 | % | | 4.05 | % | | 3.32 | % |
| Health care cost trend rate | 6.36 | % | | 6.18 | % | | 6.52 | % |
| Ultimate health care trend rate | 4.69 | % | | 4.63 | % | | 4.65 | % |
| Year ultimate rate is reached | 2028 |
| | 2024 |
| | 2024 |
|
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| Discount rate | 2.56 | % | | 2.98 | % | | 4.05 | % |
| Health care cost trend rate | 6.07 | % | | 6.36 | % | | 6.18 | % |
| Ultimate health care trend rate | 4.67 | % | | 4.69 | % | | 4.63 | % |
| Year ultimate rate is reached | 2028 | | 2028 | | 2024 |
The assumptions noted above are used to calculate the APBO for each fiscal year end and retiree medical expense for the subsequent fiscal year.
The discount rate is used to calculate the present value of the APBO. This rate is determined based on high-quality fixed income investments that match the duration of expected retiree medical benefits. The company has used the corporate AA/Aa bond rate for this assumption. The health care cost trend rate represents the company’s expected annual rates of change in the cost of health care benefits. The company’s projection for fiscal year 20202021 health care cost trend rate is 6.366.07 percent.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The APBO as of the September 30, 20192020 and 20182019 measurement dates are summarized as follows (in millions):
|
| | | | | | | |
| | 2019 | | 2018 |
| Retirees | $ | 67 |
| | $ | 86 |
|
| Employees eligible to retire | — |
| | — |
|
| Total | $ | 67 |
| | $ | 86 |
|
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Retirees | $ | 52 | | | $ | 67 | |
| Employees eligible to retire | 0 | | | 0 | |
| | | |
| Total | $ | 52 | | | $ | 67 | |
The following reconciles the change in APBO and the amounts included in the Consolidated Balance Sheet for years ended September 30, 20192020 and 2018,2019, respectively (in millions):
| | | | | | | | | | | |
| | 2020 | | 2019 |
| APBO — beginning of year | $ | 67 | | | $ | 86 | |
| | | |
| Interest cost | 2 | | | 3 | |
| | | |
| Actuarial loss (gain) | 0 | | | 4 | |
| Plan amendment | (7) | | | (15) | |
| | | |
| | | |
Benefit payments (1) | (10) | | | (11) | |
| APBO — end of year | 52 | | | 67 | |
| | | |
| Retiree medical liability | $ | 52 | | | $ | 67 | |
(1) Net of subsidies and rebates available under Employer Group Waiver Plan ("EGWP").
|
| | | | | | | |
| | 2019 | | 2018 |
| APBO — beginning of year | $ | 86 |
| | $ | 104 |
|
| Interest cost | 3 |
| | 3 |
|
| Actuarial (gain) loss | 4 |
| | (5 | ) |
| Plan amendment | (15 | ) | | — |
|
| Foreign currency rate changes | — |
| | (1 | ) |
Benefit payments (1) | (11 | ) | | (15 | ) |
| APBO — end of year | 67 |
| | 86 |
|
| Retiree medical liability | $ | 67 |
| | $ | 86 |
|
| |
(1)
| Net of subsidies and rebates available under Employer Group Waiver Plan ("EGWP"). |
Actuarial losses(gains) relateloss (gain) relates to changes in the discount rate and other actuarial assumptions. In accordance with ASC Topic 715, "Compensation – Retirement Benefits", a portion of the actuarial losses is not subject to amortization. The actuarial losses that are subject to amortization are generally amortized over the average lifetime of inactive participants of approximately 911 years.
The retiree medical liability is included in the Consolidated Balance Sheet as follows (in millions):
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| Current — included in compensation and benefits | $ | 6 | | | $ | 11 | |
| Long-term — included in retirement benefits | 46 | | | 56 | |
| Retiree medical liability | $ | 52 | | | $ | 67 | |
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Current — included in compensation and benefits | $ | 11 |
| | $ | 13 |
|
| Long-term — included in retirement benefits | 56 |
| | 73 |
|
| Retiree medical liability | $ | 67 |
| | $ | 86 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the amounts included in AOCL net of tax related to retiree medical liabilities as of September 30, 20192020 and 20182019 and changes recognized in Other Comprehensive Income (Loss) net of tax for the years ended September 30, 20192020 and 2018.2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | |
| | Net Actuarial Loss | | Prior Service Cost (Benefit) | | Total |
| Balance at September 30, 2018 | $ | 76 |
| | $ | (178 | ) | | $ | (102 | ) |
| Net actuarial loss for the year | 4 |
| | — |
| | 4 |
|
Recognized prior service costs due to plan amendment
| — |
| | (15 | ) | | (15 | ) |
| Amortization for the year | (15 | ) | | 35 |
| | 20 |
|
| Deferred tax impact | 5 |
| | (7 | ) | | (2 | ) |
| Balance at September 30, 2019 | $ | 70 |
| | $ | (165 | ) | | $ | (95 | ) |
| | | | | | |
| Balance at September 30, 2017 | $ | 92 |
| | $ | (203 | ) | | $ | (111 | ) |
| Net actuarial gain for the year | (5 | ) | | — |
| | (5 | ) |
| Amortization for the year | (17 | ) | | 35 |
| | 18 |
|
| Deferred tax impact | 6 |
| | (10 | ) | | (4 | ) |
| Balance at September 30, 2018 | $ | 76 |
| | $ | (178 | ) | | $ | (102 | ) |
| | | | | | | | | | | | | | | | | |
| Net Actuarial
Loss | | Prior
Service
Cost
(Benefit) | | Total |
| Balance at September 30, 2019 | $ | 70 | | | $ | (165) | | | $ | (95) | |
| Net actuarial loss for the year | 0 | | | 0 | | | 0 | |
| | | | | |
| Recognized prior service costs due to plan amendment | 0 | | | (7) | | | (7) | |
| Amortization for the year | (14) | | | 36 | | | 22 | |
| Deferred tax impact | 8 | | | (3) | | | 5 | |
| Balance at September 30, 2020 | $ | 64 | | | $ | (139) | | | $ | (75) | |
| | | | | |
| Balance at September 30, 2018 | $ | 76 | | | $ | (178) | | | $ | (102) | |
| Net actuarial gain for the year | 4 | | | 0 | | | 4 | |
| Recognized prior service costs due to plan amendment | 0 | | | (15) | | | (15) | |
| Amortization for the year | (15) | | | 35 | | | 20 | |
| | | | | |
| Deferred tax impact | 5 | | | (7) | | | (2) | |
| Balance at September 30, 2019 | $ | 70 | | | $ | (165) | | | $ | (95) | |
The net actuarial loss and prior service benefit that are estimated to be amortized from AOCL into net periodic retiree medical income in fiscal year 20202021 are $14$(13) million and $36$35 million, respectively.
The components of retiree medical expense for the years ended September 30 are as follows (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Service cost | $ | — |
| | $ | — |
| | $ | — |
|
| Interest cost | 3 |
| | 3 |
| | 14 |
|
| Amortization of: | | | | | |
| Prior service benefit | (35 | ) | | (35 | ) | | (5 | ) |
| Actuarial losses | 15 |
| | 17 |
| | 15 |
|
| Retiree medical (income) expense | $ | (17 | ) | | $ | (15 | ) | | $ | 24 |
|
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| Service cost | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Interest cost | 2 | | | 3 | | | 3 | |
| Amortization of: | | | | | |
| Prior service benefit | (36) | | | (35) | | | (35) | |
| Actuarial losses | 14 | | | 15 | | | 17 | |
| | | | | |
| Retiree medical income | $ | (20) | | | $ | (17) | | | $ | (15) | |
A one-percentage point change in the assumed health care cost trend rate for all years to, and including, the ultimate rate would have the following effects (in millions):
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Effect on total service and interest cost | | | |
| 1% Increase | $ | 0 | | | $ | 0 | |
| 1% Decrease | 0 | | | 0 | |
| Effect on APBO | | | |
| 1% Increase | 6 | | | 5 | |
| 1% Decrease | (5) | | | (4) | |
|
| | | | | | | |
| | 2019 | | 2018 |
| Effect on total service and interest cost | | | |
| 1% Increase | $ | — |
| | $ | — |
|
| 1% Decrease | — |
| | — |
|
| Effect on APBO | | | |
| 1% Increase | 5 |
| | 4 |
|
| 1% Decrease | (4 | ) | | (4 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The company expects future benefit payments as follows (in millions):
| | | | | | | | | | | |
| Gross
Benefit
Payments | | Gross Receipts (1) |
| Fiscal 2021 | $ | 6 | | | $ | 0 | |
| Fiscal 2022 | 5 | | | 0 | |
| Fiscal 2023 | 5 | | | 0 | |
| Fiscal 2024 | 4 | | | 0 | |
| Fiscal 2025 | 4 | | | 0 | |
| Fiscal 2026 – 2029 | 13 | | | 2 | |
(1) Consists of subsidies and rebates available under EGWP.
|
| | | | | | | |
| | Gross Benefit Payments | | Gross Receipts (1) |
| Fiscal 2020 | $ | 11 |
| | $ | — |
|
| Fiscal 2021 | 9 |
| | — |
|
| Fiscal 2022 | 8 |
| | — |
|
| Fiscal 2023 | 6 |
| | — |
|
| Fiscal 2024 | 5 |
| | — |
|
| Fiscal 2025 – 2029 | 14 |
| | 1 |
|
| |
(1)
| Consists of subsidies and rebates available under EGWP. |
23.20. RETIREMENT PENSION PLANS
The company sponsors defined benefit pension plans that cover certain of its U.S. and non-U.S. employees. Pension benefits for salaried employees are based on years of credited service and compensation. Pension benefits for hourly employees are based on years of service and specified benefit amounts. The company’s funding policy provides that annual contributions to the pension trusts will be at least equal to the minimum amounts required by ERISA in the U.S. and the actuarial recommendations or statutory requirements in other countries.
The mortality assumptions for participants in the company’s U.S. plans incorporates future mortality improvements from tables published by the SOA. The company reviewed the new SOA mortality and mortality improvement tables and utilized an actuary to conduct a study based on the company’s plan participants. The company determined that the best representation of the plans' mortality is to utilize the new SOA mortality and mortality improvement tables as the reference table for credibility-weighted mortality rates, blended with company specific mortality based on the study conducted by the actuary. .
On August 1, 2010, the company amended itsThe company's defined benefit pension plan in the United Kingdom was amended to cease the accrual of future benefits for all of its active plan participants. Subsequent to the freeze date, the company began making contributions to its defined contribution savings plan on behalf of the affected employees. The amount of the savings plan contribution is based on a percentage of the employees’ pay. These changes did not affect then-current retirees. The company began recording the impact of the plan freeze in the fourth quarter of fiscal year 2010. Subsequent to the plan freeze, accumulated actuarial losses are being amortized into net periodic pension expense over the average life expectancy of inactive plan participants of approximately 2625 years rather than over their remaining average service life.service.
The U.K. pension program provides participants with the election to receive a lump-sum settlement of their remaining pension benefit that, if accepted, would settle the company's obligation to them. The company recognized a $6 million settlement loss during the fourth quarter of fiscal year 2018 associated with these payouts.
In April 2007, the company announced a freeze of its defined benefit pension plan for salaried and non-represented employees in the United States effective January 1, 2008. The change affected approximately 3,800 employees including certain employees who continued to accrue benefits for an additional transition period, ending June 30, 2011.is frozen. After these freeze dates,the plan was frozen, the company started making additional contributions to its defined contribution savings plan on behalf of the affected employees. These additional contributions have been suspended since May 2020 and are anticipated to be suspended for the foreseeable future. The amount of the savings plan contribution is based on a percentage of the employees’ pay, with the contribution percentage increasing as a function of employees’ age. These changes do not affect plan participants who had retired prior to the freeze dates or represented employees. Accumulated actuarial losses are being amortized into net periodic pension expense over the average life expectancy of inactive plan participants of approximately 16 years.
In June 2013, the company amended itsThe company's U.S. Retirement Plan to allow all terminated vested participants with an accrued benefit of $5,000 or less to receive a full lump-sum distribution of their benefit. The lump-sum amounts were rolled into individual retirement accounts for those participants that had an accrued benefit of $1,000 to $5,000 who did not make an affirmative election to receive their benefits. For those participants with an accrued benefit of less than $1,000, the benefits were automatically distributed to the participant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Effective October 2014, the company amended the U.S. Retirement Plan to includeincludes an additional distribution option in the form of a lump sum benefit from the plan. The majority of plan members are eligible for this distribution option following termination or when making their retirement payment election. The lump sum benefit equals the present value of a member's vested accrued benefit paid in one lump sum payment.
The company’s pension obligations are measured as of September 30, 2020, 2019 2018 and 2017.2018. The U.S. plans include qualified and non-qualified pension plans. The company’s only significant remaining non-U.S. plan is located in the United Kingdom.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following are the significant assumptions used in the measurement of the projected benefit obligation ("PBO") and net periodic pension expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans |
| | 2020 | | 2019 | | 2018 |
| Discount rate | 2.50% - 2.60% | | 3.10% - 3.15% | | 4.30% |
| Assumed return on plan assets (beginning of the year) | 7.75% | | 7.75% | | 7.75% |
|
| | | | | | | | | | | |
| | U.S. Plans |
| | 2019 | | 2018 | | 2017 |
| Discount rate | 3.10% | - | 3.15% | | 4.30% | | 3.70% | — | 3.75% |
| Assumed return on plan assets (beginning of the year) | 7.75% | | 7.75% | | 7.75% |
|
| | | | | | | | | | | |
| | U.K. Plan |
| | 2019 | | 2018 | | 2017 |
| Discount rate | 1.80% | | 2.90% | | 2.80% |
| Assumed return on plan assets (beginning of the year) | 6.00% | | 6.00% | | 6.00% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.K. Plan |
| | 2020 | | 2019 | | 2018 |
| Discount rate | 1.70% | | 1.80% | | 2.90% |
| Assumed return on plan assets (beginning of the year) | 5.75% | | 6.00% | | 6.00% |
| | | | | |
The discount rate is used to calculate the present value of the PBO at the balance sheet date and net periodic pension expense for the subsequent fiscal year. The rate used reflects a rate of return on high-quality fixed income investments that match the duration of expected benefit payments. Generally, the company uses a portfolio of long-term corporate AA/Aa bonds that match the duration of the expected benefit payments, except for the company's U.K. pension plan which uses an annualized yield curve, to establish the discount rate for this assumption.
The assumed return on plan assets is used to determine net periodic pension expense. The rate of return assumptions are based on projected long-term market returns for the various asset classes in which the plans are invested, weighted by the target asset allocations. An incremental amount for active plan asset management and diversification, where appropriate, is included in the rate of return assumption. The return assumption is reviewed annually.
The rate of compensation increase represents the long-term assumption for expected increases to salaries for pay-related plans. The accompanying disclosures include pension obligations associated with businesses classified as discontinued operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table reconciles the change in the PBO, the change in plan assets and amounts included in the Consolidated Balance Sheet for the years ended September 30, 20192020 and 2018,2019, respectively (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| | U.S. | | Non- U.S. | | Total | | U.S. | | Non- U.S. | | Total |
| PBO — beginning of year | $ | 922 |
| | $ | 554 |
| | $ | 1,476 |
| | $ | 1,036 |
| | $ | 599 |
| | $ | 1,635 |
|
| Interest cost | 37 |
| | 16 |
| | 53 |
| | 38 |
| | 16 |
| | 54 |
|
| Actuarial (gain) loss | 122 |
| | 111 |
| | 233 |
| | (70 | ) | | (9 | ) | | (79 | ) |
| Prior service cost | — |
| | 8 |
| | 8 |
| | — |
| | — |
| | — |
|
| Acquisitions | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
|
| Settlements | — |
| | (3 | ) | | (3 | ) | | — |
| | (18 | ) | | (18 | ) |
| Benefit payments | (75 | ) | | (30 | ) | | (105 | ) | | (82 | ) | | (19 | ) | | (101 | ) |
| Foreign currency rate changes | — |
| | (36 | ) | | (36 | ) | | — |
| | (15 | ) | | (15 | ) |
| PBO — end of year | $ | 1,006 |
| | $ | 621 |
| | $ | 1,627 |
| | $ | 922 |
| | $ | 554 |
| | $ | 1,476 |
|
| Change in plan assets | | | | | | | | | | | |
| Fair value of assets — beginning of year | $ | 744 |
| | $ | 702 |
| | $ | 1,446 |
| | $ | 821 |
| | $ | 730 |
| | $ | 1,551 |
|
| Actual return on plan assets | 67 |
| | 139 |
| | 206 |
| | — |
| | 32 |
| | 32 |
|
| Employer contributions | 5 |
| | — |
| | 5 |
| | 5 |
| | 1 |
| | 6 |
|
| Settlements | — |
| | (3 | ) | | (3 | ) | | — |
| | (22 | ) | | (22 | ) |
| Benefit payments | (75 | ) | | (30 | ) | | (105 | ) | | (82 | ) | | (19 | ) | | (101 | ) |
| Foreign currency rate changes | — |
| | (44 | ) | | (44 | ) | | — |
| | (20 | ) | | (20 | ) |
| Fair value of assets — end of year | $ | 741 |
| | $ | 764 |
| | $ | 1,505 |
| | $ | 744 |
| | $ | 702 |
| | $ | 1,446 |
|
| Funded status | $ | (265 | ) | | $ | 143 |
| | $ | (122 | ) | | $ | (178 | ) | | $ | 148 |
| | $ | (30 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| | U.S. | | Non- U.S. | | Total | | U.S. | | Non- U.S. | | Total |
| PBO — beginning of year | $ | 1,006 | | | $ | 621 | | | $ | 1,627 | | | $ | 922 | | | $ | 554 | | | $ | 1,476 | |
| | | | | | | | | | | |
| Interest cost | 31 | | | 11 | | | 42 | | | 37 | | | 16 | | | 53 | |
| Actuarial (gain) loss | 64 | | | (24) | | | 40 | | | 122 | | | 111 | | | 233 | |
| Prior service cost | 0 | | | 0 | | | 0 | | | 0 | | | 8 | | | 8 | |
| Acquisitions | 0 | | | 0 | | | 0 | | | 0 | | | 1 | | | 1 | |
| Settlements | 0 | | | 0 | | | 0 | | | 0 | | | (3) | | | (3) | |
| Benefit payments | (74) | | | (25) | | | (99) | | | (75) | | | (30) | | | (105) | |
| Foreign currency rate changes | 0 | | | 19 | | | 19 | | | 0 | | | (36) | | | (36) | |
| PBO — end of year | $ | 1,027 | | | $ | 602 | | | $ | 1,629 | | | $ | 1,006 | | | $ | 621 | | | $ | 1,627 | |
| Change in plan assets | | | | | | | | | | | |
| Fair value of assets — beginning of year | $ | 741 | | | $ | 764 | | | $ | 1,505 | | | $ | 744 | | | $ | 702 | | | $ | 1,446 | |
| Actual return on plan assets | 221 | | | 12 | | | 233 | | | 67 | | | 139 | | | 206 | |
| Employer contributions | 5 | | | 0 | | | 5 | | | 5 | | | 0 | | | 5 | |
| Settlements | 0 | | | 0 | | | 0 | | | 0 | | | (3) | | | (3) | |
| Benefit payments | (74) | | | (25) | | | (99) | | | (75) | | | (30) | | | (105) | |
| Foreign currency rate changes | 0 | | | 25 | | | 25 | | | 0 | | | (44) | | | (44) | |
| Fair value of assets — end of year | $ | 893 | | | $ | 776 | | | $ | 1,669 | | | $ | 741 | | | $ | 764 | | | $ | 1,505 | |
| Funded status - over (under) | $ | (134) | | | $ | 174 | | | $ | 40 | | | $ | (265) | | | $ | 143 | | | $ | (122) | |
Amounts included in the Consolidated Balance Sheet at September 30, 20192020 and 20182019 are comprised of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| | U.S. | | Non-U.S. | | Total | | U.S. | | Non-U.S. | | Total |
| Non-current assets | $ | 0 | | | $ | 179 | | | $ | 179 | | | $ | 0 | | | $ | 149 | | | $ | 149 | |
| Current liabilities | (5) | | | 0 | | | (5) | | | (5) | | | 0 | | | (5) | |
| Retirement benefits-non-current | (129) | | | (5) | | | (134) | | | (260) | | | (6) | | | (266) | |
| Net amount recognized | $ | (134) | | | $ | 174 | | | $ | 40 | | | $ | (265) | | | $ | 143 | | | $ | (122) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| | U.S. | | Non-U.S. | | Total | | U.S. | | Non-U.S. | | Total |
| Non-current assets | $ | — |
| | $ | 149 |
| | $ | 149 |
| | $ | — |
| | $ | 152 |
| | $ | 152 |
|
| Current liabilities | (5 | ) | | — |
| | (5 | ) | | (5 | ) | | — |
| | (5 | ) |
| Retirement benefits-non-current | (260 | ) | | (6 | ) | | (266 | ) | | (173 | ) | | (4 | ) | | (177 | ) |
| Net amount recognized | $ | (265 | ) | | $ | 143 |
| | $ | (122 | ) | | $ | (178 | ) | | $ | 148 |
| | $ | (30 | ) |
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables summarize the amounts included in AOCL net of tax related to pension liabilities as of September 30, 20192020 and 20182019 and changes recognized in Other Comprehensive Income (Loss) net of tax for the year ended September 30, 2019.2020.
|
| | | | | | | | | | | |
| | Net Actuarial Loss |
| | U.S. | | Non-U.S. | | Total |
| Balance at September 30, 2018 | $ | 394 |
| | $ | 184 |
| | $ | 578 |
|
| Net actuarial loss for the year | 113 |
| | 20 |
| | 133 |
|
| Amortization for the year | (20 | ) | | (4 | ) | | (24 | ) |
| Deferred tax impact | (20 | ) | | — |
| | (20 | ) |
| Balance at September 30, 2019 | $ | 467 |
| | $ | 200 |
| | $ | 667 |
|
| | | | | | |
| Balance at September 30, 2017 | $ | 418 |
| | $ | 193 |
| | $ | 611 |
|
| Net actuarial gain for the year | (11 | ) | | 3 |
| | (8 | ) |
| Amortization for the year | (23 | ) | | (6 | ) | | (29 | ) |
| Deferred tax impact | 10 |
| | — |
| | 10 |
|
| Settlements | — |
| | (6 | ) | | (6 | ) |
| Balance at September 30, 2018 | $ | 394 |
| | $ | 184 |
| | $ | 578 |
|
| | | | | | | | | | | | | | | | | |
| | Net Actuarial Loss |
| | U.S. | | Non-U.S. | | Total |
| Balance at September 30, 2019 | $ | 467 | | | $ | 200 | | | $ | 667 | |
| | | | | |
| Net actuarial loss for the year | (101) | | | 3 | | | (98) | |
| Amortization for the year | (26) | | | (7) | | | (33) | |
| Deferred tax impact | 22 | | | 0 | | | 22 | |
| | | | | |
| Balance at September 30, 2020 | $ | 362 | | | $ | 196 | | | $ | 558 | |
| | | | | |
| Balance at September 30, 2018 | $ | 394 | | | $ | 184 | | | $ | 578 | |
| | | | | |
| Net actuarial loss for the year | 113 | | | 20 | | | 133 | |
| Amortization for the year | (20) | | | (4) | | | (24) | |
| | | | | |
| Deferred tax impact | (20) | | | 0 | | | (20) | |
| | | | | |
| Balance at September 30, 2019 | $ | 467 | | | $ | 200 | | | $ | 667 | |
The company estimates that $32$31 million of net actuarial losses will be amortized from AOCL into net periodic pension expense during fiscal year 2020.2021. The non-current portion of the pension liability is included in Retirement Benefits in the Consolidated Balance Sheet as follows (in millions):
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Pension liability | $ | 266 |
| | $ | 177 |
|
| Retiree medical liability — long term (see Note 22) | 56 |
| | 73 |
|
| Other | 14 |
| | 12 |
|
| Total retirement benefits | $ | 336 |
| | $ | 262 |
|
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| Pension liability | $ | 134 | | | $ | 266 | |
| Retiree medical liability — long term (see Note 19) | 46 | | | 56 | |
| Other | 16 | | | 14 | |
| Total retirement benefits | $ | 196 | | | $ | 336 | |
In accordance with FASB guidance, the PBO, accumulated benefit obligation ("ABO") and fair value of plan assets are required to be disclosed for all plans where the ABO is in excess of plan assets. The difference between the PBO and ABO is that the PBO includes projected compensation increases.
Additional information is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| ABO
Exceeds
Assets | | Assets
Exceed
ABO | | Total | | ABO
Exceeds
Assets | | Assets
Exceed
ABO | | Total |
| PBO | $ | 1,032 | | | $ | 597 | | | $ | 1,629 | | | $ | 1,012 | | | $ | 615 | | | $ | 1,627 | |
| ABO | 1,032 | | | 597 | | | 1,629 | | | 1,012 | | | 615 | | | 1,627 | |
| Plan Assets | 893 | | | 776 | | | 1,669 | | | 741 | | | 764 | | | 1,505 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| | ABO Exceeds Assets | | Assets Exceed ABO | | Total | | ABO Exceeds Assets | | Assets Exceed ABO | | Total |
| PBO | $ | 1,012 |
| | $ | 615 |
|
| $ | 1,627 |
| | $ | 926 |
| | $ | 550 |
| | $ | 1,476 |
|
| ABO | 1,012 |
| | 615 |
| | 1,627 |
| | 926 |
| | 550 |
| | 1,476 |
|
| Plan Assets | 741 |
| | 764 |
| | 1,505 |
| | 744 |
| | 702 |
| | 1,446 |
|
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The components of net periodic pension expense are as follows (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Service cost | $ | — |
| | $ | — |
| | $ | — |
|
| Interest cost | 53 |
| | 54 |
| | 53 |
|
| Assumed rate of return on plan assets | (97 | ) | | (99 | ) | | (96 | ) |
| Amortization of — | | | | | |
| Actuarial losses | 24 |
| | 29 |
| | 30 |
|
| Settlement loss | — |
| | 6 |
| | — |
|
| Net periodic pension income | $ | (20 | ) | | $ | (10 | ) | | $ | (13 | ) |
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| Service cost | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Interest cost | 42 | | | 53 | | | 54 | |
| Assumed rate of return on plan assets | (97) | | | (97) | | | (99) | |
| | | | | |
| Amortization of actuarial losses | 33 | | | 24 | | | 29 | |
| | | | | |
| Settlement loss | 0 | | | 0 | | | 6 | |
| Net periodic pension income | $ | (22) | | | $ | (20) | | | $ | (10) | |
Disclosures on investment policies and strategies, categories of plan assets, fair value measurements of plan assets, and significant concentrations of risk are included below.
Investment Policy and Strategy
The company’s primary investment objective for its pension plan assets is to generate a total investment return sufficient to meet present and future benefit payments while minimizing the company’s cash contributions over the life of the plans. In order to accomplish this objective, the company maintains target allocations to identify and manage exposures. The target asset allocation ranges for the U.S. planplans are 20–50 percent equity investments, 30–60 percent fixed income investments and 10–25 percent alternative investments. Alternative investments include private equities, real estate, hedge funds, diversified growth funds, and partnership interests. The target asset allocation ranges for the non-U.S. plans are 15–20–35 percent equity investments, 30–6040 percent fixed income investments, 0–1015 percent real estate and 10–3015–35 percent alternative investments.
Investment strategies and policies for the company’s pension plan assets reflect a balance of risk-reducing and return-seeking considerations. The objective of minimizing the volatility of assets relative to liabilities is addressed primarily through asset diversification. Assets are broadly diversified across several asset classes to achieve risk-adjusted returns that accomplish this objective.
The majority of pension plan assets are externally managed through active managers. Managers are only permitted to invest within established asset classes and follow the strategies for which they have been appointed. The company uses investment guidelines and reviews asset returns and investment decisions made by the managers to ensure that they are in accordance with the company’s strategies.
Concentration of Risk
The company seeks to mitigate risks relative to performance of the plan assets. Assets are invested in various classes with different risk and return characteristics in order to ensure that they are sufficient to pay benefits. The company’s investment strategies incorporate a return-seeking approach through equity and alternative investments, while seeking to minimize the volatility of the plans’ assets relative to its liabilities through investments in fixed income securities. The significant areas of risk related to these strategies include equity, interest rate, and operating risk.
A portion of plan assets is allocated to equity and alternative investments that are expected, over time, to earn higher returns. Within this return-seeking portfolio, asset diversification is utilized to reduce uncompensated risk.
Plan assets are also allocated to fixed income investments, which seek to minimize interest rate risk volatility relative to pension liabilities. The fixed income portfolio partially matches the long-dated nature of the pension liabilities reducing interest rate risk. Interest rate decreases generally increase the value of fixed income assets, partially offsetting the related increase in the liabilities, while interest rate increases generally result in a decline in the value of fixed income assets while reducing the present value of the liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Operating risks consist of the risks of inadequate diversification and weak controls. The company has established policies and procedures in order to mitigate this risk by monitoring investment manager performance, reviewing periodic compliance information, and ensuring that the plans’ managers invest in accordance with the company’s investment strategies.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fair Value of Investments
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 assets (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 assets that the Plan has the ability to access.
•Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
•Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset.
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.
Following are descriptions, valuation methodologies and other information related to plan assets.
Cash and cash equivalents: The fair value of cash and cash equivalents is valued at cost.
Equity Securities: The overall equity category includes common and preferred stocks issued by U.S. and international companies as well as equity funds that invest in these instruments. All investments generally allow near-term (within 90 days of the measurement date) liquidity and are held in issues that are actively traded to facilitate transactions at minimum cost. The aggregate equity portfolio is diversified to avoid exposure to any investment strategy, single economic sector, industry group, or individual security.
The fair value of equity securities is determined by either direct or indirect quoted market prices. When the value of assets held in separate accounts is not published, the value is based on the underlying holdings, which are primarily direct quoted market prices on regulated financial exchanges.
Most of the equity investments allow daily redemptions, with some providing monthly liquidity or requiring a 30-day30-60 day notice.
Fixed Income Securities: The overall fixed income category includes U.S. dollar-denominated and international marketable bonds and convertible debt securities as well as fixed income funds that invest in these instruments. All assets generally allow near-term liquidity and are held in issues which are actively traded to facilitate transactions at minimum cost. The aggregate fixed income portfolio is diversified to avoid exposure to any investment strategy, maturity, issuer or credit quality.
The fair value of fixed income securities is determined by either direct or indirect quoted market prices. When the value of assets held in separate accounts is not published, the value is based on the underlying holdings, which are primarily direct quoted market prices on regulated financial exchanges.
U.S. fixed income securities typically offer daily liquidity, with only one investment allowing quarterly redemptions. International and emerging fixed income investment vehicles generally provide daily liquidity.
Commingled Funds: The fair value of commingled funds is determined by a custodian. The custodian obtains valuations from underlying fund managers based on market quotes for the most liquid assets and alternative methods for assets that do not have sufficient trading activity to derive prices. The company and custodian review the methods used by the underlying managers to value the assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Real Estate: Real estate provides an indirect investment into a diversified and multi-sector portfolio of property assets. The fair value of real estate investments is valued by the fund managers. The fund managers value the real estate investments via independent third-party appraisals on a periodic basis. Assumptions used to revalue the properties are updated every quarter.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the component of the real estate portfolio under development, the investments are carried at cost, which approximates fair value, until they are completed and valued by a third-party appraiser.
Due to the long-term nature of real estate investments, liquidity is provided on a quarterly basis.
Insurance Contract: The plan entered into a pensioner buy-in insurance contract which reimburses the plan for specified benefit payment streams. The valuation for the buy-in contract is calculated on an insurer pricing basis and is estimated using observable inputs, by adjusting the premium paid for cash flows and movements in gilt yields during the reporting period.
Futures Contracts: The plan enters into futures contracts in the normal course of its investing activities to manage market risk and to achieve overall investment portfolio objectives. The credit risk associated with these contracts is minimal as they are traded on organized exchanges and settled daily. The fair value of futures contracts is determined by direct quoted market prices. Cash margin for these futures contracts is included in Cash and Cash Equivalents in the leveling table.
Alternatives/Partnerships/Private Equity: This category includes investments in private equity and hedge funds.funds in addition to entering into futures contracts across various asset classes. Such investments may be made directly or through pooled funds, including fund of funds structures. The fair market value of the company’s interest in partnerships and private equity is valued by the fund managers. The valuation is based on the net present value of observable inputs (dividends, cash flows, earnings, etc.), which are discounted at applicable discount rates. The company and custodian review the methods used by the underlying managers to value the assets.
Most of these investments offer quarterly redemption opportunities.opportunities while some offer daily liquidity. Some partnerships and private equity investments, due to the nature of their investment strategy and underlying holdings, offer less frequent liquidity. When available, liquidity events are closely evaluated.
The valuation methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of plan assets at September 30, 2020 by asset category is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | 2020 |
| Asset Category | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity investments | | | | | | | |
| U.S. – Large cap | $ | 209 | | | $ | 0 | | | $ | 0 | | | $ | 209 | |
| U.S. – Small cap | 15 | | | 0 | | | 0 | | | 15 | |
| | | | | | | |
| | | | | | | |
| International equity | 12 | | | 0 | | | 0 | | | 12 | |
| | | | | | | |
Equity investments measured at net asset value (1) | — | | | — | | | — | | | 189 | |
| Total equity investments | $ | 236 | | | $ | 0 | | | $ | 0 | | | $ | 425 | |
| Fixed income investments | | | | | | | |
| U.S. fixed income | $ | 9 | | | $ | 270 | | | $ | 0 | | | $ | 279 | |
| Emerging fixed income | 0 | | | 13 | | | 0 | | | 13 | |
| | | | | | | |
| | | | | | | |
| Partnerships fixed income | 0 | | | 0 | | | 0 | | | 0 | |
Fixed income investments measured at net asset value (1) | — | | | — | | | — | | | 26 | |
| Total fixed income | $ | 9 | | | $ | 283 | | | $ | 0 | | | $ | 318 | |
| Alternatives | 9 | | | 0 | | | 0 | | | 9 | |
| Alternatives – Partnerships | 0 | | | 0 | | | 5 | | | 5 | |
Alternatives – Partnerships measured at net asset value (1) | — | | | — | | | — | | | 74 | |
| Cash and cash equivalents | 0 | | | 62 | | | 0 | | | 62 | |
| Total assets at fair value | $ | 254 | | | $ | 345 | | | $ | 5 | | | $ | 893 | |
| | | | | | | |
| Non-U.S. Plans | 2020 |
| Asset Category | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity investments | | | | | | | |
| International equity | $ | 180 | | | $ | 0 | | | $ | 0 | | | $ | 180 | |
| | | | | | | |
| Total equity investments | $ | 180 | | | $ | 0 | | | $ | 0 | | | $ | 180 | |
| Fixed income investments | | | | | | | |
| | | | | | | |
| Other fixed income investments | $ | 5 | | | $ | 214 | | | $ | 0 | | | $ | 219 | |
Fixed income investments measured at net asset value (1) | — | | | — | | | — | | | 71 | |
| Total fixed income | $ | 5 | | | $ | 214 | | | $ | 0 | | | $ | 290 | |
| Commingled funds | 0 | | | 2 | | | 0 | | | 2 | |
Alternative investments measured at net asset value (1) | — | | | — | | | — | | | 127 | |
Real estate measured at net asset value (1) | — | | | — | | | — | | | 37 | |
| Cash and cash equivalents | 0 | | | 9 | | | 0 | | | 9 | |
| Insurance contract | 0 | | | 131 | | | 0 | | | 131 | |
| Total assets at fair value | $ | 185 | | | $ | 356 | | | $ | 0 | | | $ | 776 | |
(1)In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of plan assets at September 30, 2019 by asset category is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | 2019 |
| Asset Category | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity investments | | | | | | | |
| U.S. – Large cap | $ | 38 | | | $ | 0 | | | $ | 0 | | | $ | 38 | |
| U.S. – Small cap | 15 | | | 0 | | | 0 | | | 15 | |
| | | | | | | |
| Private equity | 0 | | | 0 | | | 19 | | | 19 | |
| International equity | 21 | | | 0 | | | 0 | | | 21 | |
| | | | | | | |
Equity investments measured at net asset value (1) | — | | | — | | | — | | | 154 | |
| Total equity investments | $ | 74 | | | $ | 0 | | | $ | 19 | | | $ | 247 | |
| Fixed income investments | | | | | | | |
| U.S. fixed income | $ | 3 | | | $ | 233 | | | $ | 0 | | | $ | 236 | |
| Emerging fixed income | 0 | | | 16 | | | 0 | | | 16 | |
| | | | | | | |
| | | | | | | |
| Partnerships fixed income | 12 | | | 0 | | | 0 | | | 12 | |
Fixed income investments measured at net asset value (1) | — | | | — | | | — | | | 27 | |
| Total fixed income | $ | 15 | | | $ | 249 | | | $ | 0 | | | $ | 291 | |
| Alternatives – Partnerships | 0 | | | 0 | | | 86 | | | 86 | |
Alternatives – Partnerships measured at net asset value (1) | — | | | — | | | — | | | 78 | |
| Cash and cash equivalents | 0 | | | 39 | | | 0 | | | 39 | |
| Total assets at fair value | $ | 89 | | | $ | 288 | | | $ | 105 | | | $ | 741 | |
| | | | | | | |
| Non-U.S. Plans | 2019 |
| Asset Category | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity investments | | | | | | | |
| International equity | $ | 170 | | | $ | 0 | | | $ | 0 | | | $ | 170 | |
| | | | | | | |
| Total equity investments | $ | 170 | | | $ | 0 | | | $ | 0 | | | $ | 170 | |
| Fixed income investments | | | | | | | |
| | | | | | | |
| Other fixed income investments | $ | 6 | | | $ | 222 | | | $ | 0 | | | $ | 228 | |
Fixed income investments measured at net asset value (1) | — | | | — | | | — | | | 189 | |
| Total fixed income | $ | 6 | | | $ | 222 | | | $ | 0 | | | $ | 417 | |
| Commingled funds | 0 | | | 3 | | | 0 | | | 3 | |
| | | | | | | |
Alternative investments measured at net asset value (1) | — | | | — | | | — | | | 124 | |
Real estate measured at net asset value (1) | — | | | — | | | — | | | 38 | |
| Cash and cash equivalents | 0 | | | 12 | | | 0 | | | 12 | |
| Total assets at fair value | $ | 176 | | | $ | 237 | | | $ | 0 | | | $ | 764 | |
|
| | | | | | | | | | | | | | | |
| U.S. Plans | 2019 |
| Asset Category | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity investments | | | | | | | |
| U.S. – Large cap | $ | 38 |
| | $ | — |
| | $ | — |
| | $ | 38 |
|
| U.S. – Small cap | 15 |
| | — |
| | — |
| | 15 |
|
| Private equity | — |
| | — |
| | 19 |
| | 19 |
|
| International equity | 21 |
| | — |
| | — |
| | 21 |
|
Equity investments measured at net asset value (1) | — |
| | — |
| | — |
| | 154 |
|
| Total equity investments | $ | 74 |
| | $ | — |
| | $ | 19 |
| | $ | 247 |
|
| Fixed income investments | | | | | | | |
| U.S. fixed income | $ | 3 |
| | $ | 233 |
| | $ | — |
| | $ | 236 |
|
| Emerging fixed income | — |
| | 16 |
| | — |
| | 16 |
|
| Partnerships fixed income | 12 |
| | — |
| | — |
| | 12 |
|
Fixed income investments measured at net asset value (1) | — |
| | — |
| | — |
| | 27 |
|
| Total fixed income | $ | 15 |
| | $ | 249 |
| | $ | — |
| | $ | 291 |
|
| Alternatives – Partnerships | — |
| | — |
| | 86 |
| | 86 |
|
Alternatives – Partnerships measured at net asset value (1) | — |
| | — |
| | — |
| | 78 |
|
| Cash and cash equivalents | — |
| | 39 |
| | — |
| | 39 |
|
| Total assets at fair value | $ | 89 |
|
| $ | 288 |
|
| $ | 105 |
|
| $ | 741 |
|
| | | | | | | | |
| Non-U.S. Plans | 2019 |
| Asset Category | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity investments | | | | | | | |
| International equity | $ | 170 |
| | $ | — |
| | $ | — |
| | $ | 170 |
|
| Total equity investments | $ | 170 |
| | $ | — |
| | $ | — |
| | $ | 170 |
|
| Fixed income investments | | | | | | | |
| Other fixed income investments | $ | 6 |
| | $ | 222 |
| | $ | — |
| | $ | 228 |
|
Fixed income investments measured at net asset value (1) | — |
| | — |
| | — |
| | 189 |
|
| Total fixed income | $ | 6 |
|
| $ | 222 |
|
| $ | — |
|
| $ | 417 |
|
| Commingled funds | — |
| | 3 |
| | — |
| | 3 |
|
Alternative investments measured at net asset value (1) | — |
| | — |
| | — |
| | 124 |
|
Real estate measured at net asset value (1) | — |
| | — |
| | — |
| | 38 |
|
| Cash and cash equivalents | — |
| | 12 |
| | — |
| | 12 |
|
| Total assets at fair value | $ | 176 |
|
| $ | 237 |
|
| $ | — |
|
| $ | 764 |
|
| |
(1)
| In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of plan assets at September 30, 2018 by asset category is as follows (in millions):
|
| | | | | | | | | | | | | | | |
| U.S. Plans | 2018 |
| Asset Category | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity investments | | | | | | | |
| U.S. – Large cap | $ | 51 |
| | $ | — |
| | $ | — |
| | $ | 51 |
|
| U.S. – Small cap | 24 |
| | — |
| | — |
| | 24 |
|
| Private equity | — |
| | — |
| | 17 |
| | 17 |
|
| International equity | 29 |
| | — |
| | — |
| | 29 |
|
Equity investments measured at net asset value (1) | — |
| | — |
| | — |
| | 191 |
|
| Total equity investments | $ | 104 |
| | $ | — |
| | $ | 17 |
| | $ | 312 |
|
| Fixed income investments | | | | | | | |
| U.S. fixed income | $ | 1 |
| | $ | 164 |
| | $ | — |
| | $ | 165 |
|
| Emerging fixed income | — |
| | 20 |
| | — |
| | 20 |
|
| Partnerships fixed income | 13 |
| | — |
| | — |
| | 13 |
|
Fixed income investments measured at net asset value (1) | — |
| | — |
| | — |
| | 34 |
|
| Total fixed income | $ | 14 |
| | $ | 184 |
| | $ | — |
| | $ | 232 |
|
| Alternatives – Partnerships | — |
| | — |
| | 83 |
| | 83 |
|
Alternatives – Partnerships measured at net asset value (1) | — |
| | — |
| | — |
| | 85 |
|
| Cash and cash equivalents | — |
| | 32 |
| | — |
| | 32 |
|
| Total assets at fair value | $ | 118 |
|
| $ | 216 |
|
| $ | 100 |
|
| $ | 744 |
|
| | | | | | | | |
| Non-U.S. Plans | 2018 |
| Asset Category | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity investments | | | | | | | |
| International equity | $ | 171 |
| | $ | — |
| | $ | — |
| | $ | 171 |
|
| Total equity investments | $ | 171 |
| | $ | — |
| | $ | — |
| | $ | 171 |
|
| Fixed income investments | | | | | | | |
| Other fixed income investments | $ | 5 |
| | $ | 145 |
| | $ | — |
| | $ | 150 |
|
Fixed income investments measured at net asset value (1) | — |
| | — |
| | — |
| | 194 |
|
| Total fixed income | $ | 5 |
| | $ | 145 |
| | $ | — |
| | $ | 344 |
|
| Commingled funds | — |
| | 5 |
| | — |
| | 5 |
|
Alternative investments measured at net asset value (1) | — |
| | — |
| | — |
| | 137 |
|
Real estate measured at net asset value (1) | — |
| | — |
| | — |
| | 41 |
|
| Cash and cash equivalents | — |
| | 4 |
| | — |
| | 4 |
|
| Total assets at fair value | $ | 176 |
|
| $ | 154 |
|
| $ | — |
|
| $ | 702 |
|
| |
(1)
| In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Unfunded Commitment
As of September 30, 2019,2020, the U.S. plan had $13$1 million of unfunded investment commitments related to plan assets. The majority of this amount is attributed to partnership investments that the plan will invest in gradually over the course of several years. Non-U.S. plans currently do not have any unfunded commitments.
The following table summarizes the changes in Level 3 pension plan assets measured at fair value on a recurring basis for the year ended September 30, 20192020 (in millions):
| | | U.S. Plans | 2019 | U.S. Plans | 2020 |
| | Fair Value at October 1, 2018 | | Return on Plan Assets: Attributable to Assets Held at September 30, 2019 | | Purchases | | Settlements | | Net Transfers Into (Out of) Level 3 | | Fair Value at September 30, 2019 | | Fair Value at October 1, 2019 | | Return on Plan Assets: Attributable to Assets Held at September 30, 2020 | | Purchases | | Settlements | | Net Transfers Into (Out of) Level 3 | | Fair Value at September 30, 2020 |
| Asset Category | | | | | | | | | | | | Asset Category | | | | | | | | | | | |
| Private equity | $ | 17 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 19 |
| Private equity | $ | 19 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (19) | | | $ | 0 | |
| | Alternatives – | | | | | | | | | |
| | | Alternatives – | | | | | | | | | | | |
| Partnerships | 83 |
| | 4 |
| | — |
| | (1 | ) | | — |
| | 86 |
| Partnerships | 86 | | | 1 | | | 0 | | | (1) | | | (81) | | | 5 | |
| Total Level 3 fair value | $ | 100 |
| | $ | 6 |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 105 |
| Total Level 3 fair value | $ | 105 | | | $ | 1 | | | $ | 0 | | | $ | (1) | | | $ | (100) | | | $ | 5 | |
The following table summarizes the changes in Level 3 pension plan assets measured at fair value on a recurring basis for the year ended September 30, 20182019 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | 2018 |
| | Fair Value at October 1, 2017 | | Return on Plan Assets: Attributable to Assets Held at September 30, 2018 | | Purchases | | Settlements | | Net Transfers Into (Out of) Level 3 | | Fair Value at September 30, 2018 |
| Asset Category | |
| | |
| | |
| | |
| | |
| | |
|
| Private equity | $ | 19 |
| | $ | (3 | ) | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 17 |
|
| Alternatives – | | | | | | | | | |
| | |
| Partnerships | 77 |
| | 6 |
| | — |
| | — |
| | — |
| | 83 |
|
| Total Level 3 fair value | $ | 96 |
| | $ | 3 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 100 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | 2019 |
| | Fair Value at October 1, 2018 | | Return on Plan Assets: Attributable to Assets Held at September 30, 2019 | | Purchases | | Settlements | | Net Transfers Into (Out of) Level 3 | | Fair Value at September 30, 2019 |
| Asset Category | | | | | | | | | | | |
| Private equity | $ | 17 | | | $ | 2 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 19 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Alternatives – | | | | | | | | | | | |
| Partnerships | 83 | | | 4 | | | 0 | | | (1) | | | 0 | | | 86 | |
| Total Level 3 fair value | $ | 100 | | | $ | 6 | | | $ | 0 | | | $ | (1) | | | $ | 0 | | | $ | 105 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Information about the expected cash flows for the U.S. and non-U.S. pension plans is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | U.S. | | Non U.S. | | Total |
| Expected employer contributions: | | | | | |
| Fiscal 2021 | $ | 5 | | | $ | 1 | | | $ | 6 | |
| Expected benefit payments: | | | | | |
| Fiscal 2021 | 70 | | | 25 | | | 95 | |
| Fiscal 2022 | 70 | | | 25 | | | 95 | |
| Fiscal 2023 | 68 | | | 25 | | | 93 | |
| Fiscal 2024 | 67 | | | 25 | | | 92 | |
| Fiscal 2025 | 66 | | | 25 | | | 91 | |
| Fiscal 2026-2030 | 302 | | | 124 | | | 426 | |
|
| | | | | | | | | | | |
| | U.S. | | Non U.S. | | Total |
| Expected employer contributions: | | | | | |
| Fiscal 2020 | $ | 5 |
| | $ | 1 |
| | $ | 6 |
|
| Expected benefit payments: | | | | | |
| Fiscal 2020 | 71 |
| | 30 |
| | 101 |
|
| Fiscal 2021 | 70 |
| | 30 |
| | 100 |
|
| Fiscal 2022 | 70 |
| | 30 |
| | 100 |
|
| Fiscal 2023 | 67 |
| | 30 |
| | 97 |
|
| Fiscal 2024 | 67 |
|
| 30 |
| | 97 |
|
| Fiscal 2025-2029 | 308 |
| | 152 |
| | 460 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The company also sponsors certain defined contribution savings plans for eligible employees. Expense related to these plans, including company matching contributions, was $21$14 million, $21 million and $18$21 million for fiscal years 2020, 2019, 2018 and 2017,2018, respectively.
24.21. INCOME TAXES
The income tax provisions were calculated based upon the following components of income before income taxes (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| U.S. income | $ | 194 |
| | $ | 85 |
| | $ | 252 |
|
| Foreign income | 183 |
| | 193 |
| | 129 |
|
| Total | $ | 377 |
| | $ | 278 |
| | $ | 381 |
|
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| U.S. income | $ | 268 | | | $ | 194 | | | $ | 85 | |
| Foreign income | 58 | | | 183 | | | 193 | |
| Total | $ | 326 | | | $ | 377 | | | $ | 278 | |
The components of the provision (benefit) for income taxes are summarized as follows (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Current tax expense: | | | | | |
| U.S. | $ | 1 |
| | $ | 24 |
| | $ | 1 |
|
| Foreign | 40 |
| | 51 |
| | 11 |
|
| State and local | 1 |
| | — |
| | 2 |
|
| Total current tax expense | 42 |
| | 75 |
| | 14 |
|
| Deferred tax expense (benefit): | | | | | |
| U.S. | 34 |
| | 76 |
| | 28 |
|
| Foreign | 6 |
| | (5 | ) | | 9 |
|
| State and local | — |
| | 3 |
| | 1 |
|
| Total deferred tax expense | 40 |
| | 74 |
| | 38 |
|
| Income tax expense | $ | 82 |
| | $ | 149 |
| | $ | 52 |
|
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| Current tax expense: | | | | | |
| U.S. | $ | 20 | | | $ | 1 | | | $ | 24 | |
| Foreign | 16 | | | 40 | | | 51 | |
| State and local | 4 | | | 1 | | | 0 | |
| Total current tax expense | 40 | | | 42 | | | 75 | |
| Deferred tax expense (benefit): | | | | | |
| U.S. | 40 | | | 34 | | | 76 | |
| Foreign | (5) | | | 6 | | | (5) | |
| State and local | 3 | | | 0 | | | 3 | |
| Total deferred tax expense | 38 | | | 40 | | | 74 | |
| Income tax expense | $ | 78 | | | $ | 82 | | | $ | 149 | |
The deferred tax expense or benefit represents tax effects of current year deductions or items of income that will be recognized in future periods for tax purposes. The fiscal year 2018 deferred income tax expense in the U.S. was primarily attributable to the revaluation of deferred tax assets for the new effective tax rate and the utilization of the foreign tax credit related to the transition tax. The deferred income tax expense in the U.S. in fiscal year 2017 was primarily attributable to the tax effect of the gain on sale of equity investment, partially offset by the additional reversal of a valuation allowance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net deferred income tax assets (liabilities) included in the Consolidated Balance Sheet consist of the tax effects of temporary differences related to the following (in millions):
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| Accrued compensation and benefits | $ | 13 | | | $ | 19 | |
| Accrued product warranties | 11 | | | 11 | |
| Inventory costs | 12 | | | 7 | |
| Receivables | 8 | | | 8 | |
| Asbestos and environmental | 5 | | | 8 | |
| Accrued retiree healthcare benefits | 13 | | | 16 | |
| Retirement pension plans | 25 | | | 59 | |
| Property | 9 | | | 7 | |
| Lease liabilities | 18 | | | 0 | |
| Loss and credit carryforwards | 215 | | | 230 | |
| Other | 16 | | | 18 | |
| Sub-total | 345 | | | 383 | |
| Less: Valuation allowances | (226) | | | (207) | |
| Deferred income taxes - asset | $ | 119 | | | $ | 176 | |
| Taxes on undistributed income | $ | (11) | | | $ | (10) | |
| Intangible assets | (65) | | | (51) | |
| Lease assets | (17) | | | 0 | |
| Debt basis difference | (7) | | | (8) | |
| Deferred income taxes - liability | $ | (100) | | | $ | (69) | |
| Net deferred income tax assets | $ | 19 | | | $ | 107 | |
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Accrued compensation and benefits | $ | 19 |
| | $ | 15 |
|
| Accrued product warranties | 11 |
| | 11 |
|
| Inventory costs | 7 |
| | 6 |
|
| Receivables | 8 |
| | 8 |
|
| Asbestos and environmental | 8 |
| | 28 |
|
| Accrued retiree healthcare benefits | 16 |
| | 21 |
|
| Retirement pension plans | 59 |
| | 41 |
|
| Property | 7 |
| | 10 |
|
| Loss and credit carryforwards | 230 |
| | 278 |
|
| Other | 18 |
| | 19 |
|
| Sub-total | 383 |
| | 437 |
|
| Less: Valuation allowances | (207 | ) | | (236 | ) |
| Deferred income taxes - asset | $ | 176 |
| | $ | 201 |
|
| Taxes on undistributed income | $ | (10 | ) | | $ | (14 | ) |
| Intangible assets | (51 | ) | | (54 | ) |
| Debt basis difference | (8 | ) | | (9 | ) |
| Deferred income taxes - liability | $ | (69 | ) | | $ | (77 | ) |
| Net deferred income tax assets | $ | 107 |
| | $ | 124 |
|
Net deferred income tax assets (liabilities) are included in the Consolidated Balance Sheet as follows (in millions):
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Other assets (see Note 14) | $ | 122 |
| | $ | 140 |
|
| Other liabilities (see Note 17) | (15 | ) | | (16 | ) |
| Net deferred income taxes — asset | $ | 107 |
| | $ | 124 |
|
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| | | |
| | | |
| | | |
| | | |
| Other assets (see Note 11) | $ | 30 | | | $ | 122 | |
| Other liabilities (see Note 14) | (11) | | | (15) | |
| Net deferred income taxes — asset | $ | 19 | | | $ | 107 | |
Valuation Allowances
In prior years, the company established valuation allowances against the net deferred tax assets of its 100%-owned subsidiaries in France, Germany, Brazil, the U.K. and certain other countries. In evaluating its ability to recover these net deferred tax assets, the company utilizes a consistent approach which considers its historical operating results, including an assessment of the degree to which any gains or losses are driven by items that are unusual in nature and tax planning strategies. In addition, the company reviews changes in near-term market conditions and other factors that impact future operating results.
During the fourth quarter of fiscal year 2018, as a result of sustained profitability in Brazil evidenced by strong earnings history, future forecasted income, and additional positive evidence, the company determined it was more likely then not it would be able to realize the deferred tax assets in Brazil. Accordingly, the company reversed the valuation allowance, resulting in a non-cash income tax benefit of $9 million.
As of September 30, 2019,2020, the company continues to maintain the valuation allowances in France, Germany, the U.K. and certain other jurisdictions, as the company believes the negative evidence continues to outweigh the positive evidence that it will be able to recover these net deferred tax assets. If, in the future, the company generates taxable income on a sustained basis, its conclusion regarding the need for valuation allowances in these jurisdictions could change.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The expiration periods for deferred tax assets related to net operating losses and tax credit carryforwards as of September 30, 20192020 are included below (in millions). Also included are the associated valuation allowances on these deferred tax assets (in millions).
|
| | | | | | | | | | | | | | | |
| | Fiscal Year Expiration Periods |
| | 2020-2024 | 2025-2034 | 2035-2039 | Indefinite | Total |
| Net Operating Losses and Tax Credit Carryforwards | $ | 14 |
| $ | 30 |
| $ | 11 |
| $ | 175 |
| $ | 230 |
|
| Valuation Allowances on these Deferred Tax Assets | $ | 5 |
| $ | 11 |
| $ | — |
| $ | 172 |
| $ | 188 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | | | | | | | | | | |
| Fiscal Year Expiration Periods |
| 2021-2025 | 2026-2035 | 2036-2040 | Indefinite | Total |
| Net Operating Losses and Tax Credit Carryforwards | $ | 7 | | $ | 15 | | $ | 0 | | $ | 193 | | $ | 215 | |
| Valuation Allowances on these Deferred Tax Assets | $ | 6 | | $ | 13 | | $ | 0 | | $ | 188 | | $ | 207 | |
Realization of deferred tax assets representing net operating loss and tax credit carryforwards for which a valuation allowance has not been provided is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that such deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if the company is unable to generate sufficient future taxable income during the carryforward period.
The company’s provision (benefit) for income taxes was different from the provision for income taxes calculated at the U.S. statutory rate for the reasons set forth below (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Expense for income taxes at statutory tax rate | $ | 79 |
| | $ | 68 |
| | $ | 133 |
|
| State and local income taxes | 3 |
| | 2 |
| | 14 |
|
| Foreign income taxed at rates other than statutory | 11 |
| | 4 |
| | (9 | ) |
| Legislative changes | 1 |
| | 126 |
| | — |
|
| Joint venture equity income | (6 | ) | | (6 | ) | | (7 | ) |
| Correlated tax relief | — |
| | — |
| | (7 | ) |
| U.S. tax impact on non-U.S. earnings | — |
| | 4 |
| | 8 |
|
| Nondeductible expenses | 16 |
| | 8 |
| | 10 |
|
| Tax credits | (11 | ) | | (9 | ) | | (14 | ) |
| Valuation allowances | (7 | ) | | (40 | ) | | (56 | ) |
| Impact of capital loss | — |
| | (1 | ) | | (15 | ) |
| Other | (4 | ) | | (7 | ) | | (5 | ) |
| Income tax expense | $ | 82 |
| | $ | 149 |
| | $ | 52 |
|
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| Expense for income taxes at statutory tax rate | $ | 68 | | | $ | 79 | | | $ | 68 | |
| State and local income taxes | 5 | | | 3 | | | 2 | |
| Foreign income taxed at rates other than statutory | 2 | | | 11 | | | 4 | |
| Legislative changes | (10) | | | 1 | | | 126 | |
| Joint venture equity income | (3) | | | (6) | | | (6) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| U.S. tax impact on non-U.S. earnings | 0 | | | 0 | | | 4 | |
| Nondeductible expenses | 11 | | | 16 | | | 8 | |
| Tax credits | (8) | | | (11) | | | (9) | |
| Valuation allowances | 10 | | | (7) | | | (40) | |
| | | | | |
| Tax audit adjustments | 5 | | | 0 | | | 0 | |
| | | | | |
| | | | | |
| Other | (2) | | | (4) | | | (8) | |
| Income tax expense | $ | 78 | | | $ | 82 | | | $ | 149 | |
On December 22, 2017, the U.S. government enacted the U.S. tax reform. The U.S. tax reform made broad and complex changes to the U.S. tax code that affected the company's fiscal year ended September 30, 2018, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent and requiring a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.
The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the U.S. tax reform. SAB 118reform, provides a measurement period that should not extend beyond one year from the U.S. tax reform enactment date for companies to complete the accounting under ASC 740. The company completed theirits accounting for the enactment date income tax effects of U.S. tax reform as of December 31, 2018. As reflected in the September 30,company's fiscal year 2019 financial statements,Consolidated Financial Statements, the results of this accounting were a reduction to the estimated tax expense at September 30, 2018 from $89 million to $87 million for the refinement of the U.S. tax reform items.
At September 30, 2020 and 2019, $1,161 million and $1,163 million, respectively, of non-U.S. earnings arewere considered indefinitely reinvested in operations outside the U.S., for which deferred taxes have not been provided. Quantification of the deferred tax liability, if any, associated with permanently reinvested earnings is not practicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Additionally, the company has accounted for the tax impacts related to the Global Intangible Low Tax Income ("GILTI"), Base Erosion Anti Abuse Tax ("BEAT") and Foreign Derived Intangible Income ("FDII") regimes as well as all other provisions of the U.S. tax reform that are effective in fiscal year 2019.2020. The company has elected to treat GILTI as a period cost and, therefore, has not recognized deferred taxes for basis differences that may reverse as GILTI tax in future periods.
The total amount of gross unrecognized tax benefits the company recorded in accordance with ASC Topic 740 as of September 30, 20192020 was $276$283 million, of which $230$234 million represents the amount that, if recognized, would favorably affect the effective income tax rate in future periods.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period is as follows (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Balance at beginning of the period | $ | 261 |
| | $ | 269 |
| | $ | 243 |
|
| Additions to tax positions recorded during the current year | 11 |
| | — |
| | — |
|
| Additions to tax positions recorded during the prior year | 9 |
| | — |
| | 26 |
|
| Reductions to tax position recorded in prior years | — |
| | (6 | ) | | — |
|
| Reductions to tax positions due to lapse of statutory limits | (4 | ) | | (1 | ) | | (2 | ) |
| Translation, other | (1 | ) | | (1 | ) | | 2 |
|
| Balance at end of the period | $ | 276 |
| | $ | 261 |
| | $ | 269 |
|
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| Balance at beginning of the period | $ | 276 | | | $ | 261 | | | $ | 269 | |
| Additions to tax positions recorded during the current year | 4 | | | 11 | | | 0 | |
| Additions to tax positions recorded during the prior year | 5 | | | 9 | | | 0 | |
| Reductions to tax position recorded in prior years | (1) | | | 0 | | | (6) | |
| Reductions to tax positions due to lapse of statutory limits | (4) | | | (4) | | | (1) | |
| Translation, other | 3 | | | (1) | | | (1) | |
| Balance at end of the period | $ | 283 | | | $ | 276 | | | $ | 261 | |
The company’s continuing practice is to recognize interest and penalties on uncertain tax positions in the provision for income taxes in the Consolidated Statement of Operations. At September 30, 20192020 and 2018,2019, the company recorded assets of $12$13 million and $13$12 million, respectively, of interest on uncertain tax positions in the Consolidated Balance Sheet. In addition, penalties of $2 million and $1 million were recorded as of September 30, 2020 and 2019, and 2018.respectively. The income tax expensebenefit related to interest was $1 million and income tax benefit of $4 million and $5 million, for the fiscal years ended September 30, 2019, 20182020 and 2017, respectively.2019. The income tax benefit related to interest was $4 million for the fiscal year ended September 30, 2018. The income tax expense related to penalties was $1 million for fiscal year ended September 30, 2020. The income tax expense related to penalties was immaterial infor fiscal years ended September 30, 2019 2018 and 2017.2018.
The company files tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. The company’s Canadian federal income tax returns for fiscal years 2015 and 2016 are currently under audit. The company's German subsidiary is currently under audit for fiscal years 2008 through 2013. The company's Indian subsidiary is currently under audit for fiscal years 2015 and 2016. The company's U.K. subsidiaries are under audit for fiscal years 2015 and 2016. In addition, the company is under audit in various state tax jurisdictions for various years. It is reasonably possible that audit settlements, the conclusion of current examinations or the expiration of the statute of limitations in several jurisdictions could change the company’s unrecognized tax benefits during the next twelve months. It is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefit in the next twelve months.
In addition to the audits listed above, the company has open tax years primarily from 2001-20182001-2019 with various significant taxing jurisdictions, including the U.S., Brazil, Canada, China, Italy, Mexico, Sweden and the U.K. These open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenue and expenses or the sustainability of income tax credits for a given audit cycle. The company has recorded a tax benefit only for those positions that meet the more-likely-than-not standard.
25.
22. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
of costs related to insolvent parties or unidentified shares. At environmental sites inat which the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
company 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 10 Superfund sites, excluding sites as to which the company’s records disclose no involvement or as to which the company’s liability has been finally determined. Management estimates the total reasonably possible costs the company could incur for the remediation of Superfund sites at September 30, 20192020 to be approximately $24 million, of which $11 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. Environmental remediation costs recorded with respect to the Superfund sites were $4 million in fiscal year 2020, $2 million in fiscal year 2019 and $12 million in fiscal year 2018 and were not substantial in 2017.2018.
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 September 30, 20192020 to be approximately $14 million, of which $4$5 million is probable and recorded as a liability. During each of fiscal years 2020, 2019, 2018 and 2017,2018, the company recorded environmental remediation costs of $2 million $2 million and $3 million, respectively, with respect to these matters, resulting from revised estimates to remediate these sites.
Included in the company’s environmental liabilities are costs for on-going operation, maintenance and monitoring at environmental sites in which remediation has been put into place. This liability is discounted using discount rates in the range of 2.251.50 to 3.002.25 percent and is approximately $13 million at September 30, 2019.2020. The undiscounted estimate of these costs is approximately $15 million.
The following are the components of the Superfund and non-Superfund environmental reserves (in millions):
|
| | | | | | | | | | | |
| | Superfund Sites | | Non-Superfund Sites | | Total |
| Balance at September 30, 2018 | $ | 12 |
| | $ | 5 |
| | $ | 17 |
|
| Payments and other | (3 | ) | | (3 | ) | | (6 | ) |
| Accruals | 2 |
| | 2 |
| | 4 |
|
| Balance at September 30, 2019 | $ | 11 |
| | $ | 4 |
| | $ | 15 |
|
| | | | | | | | | | | | | | | | | |
| Superfund
Sites | | Non-Superfund
Sites | | Total |
| Balance at September 30, 2019 | $ | 11 | | | $ | 4 | | | $ | 15 | |
| | | | | |
| Payments and other | (4) | | | (1) | | | (5) | |
| Accruals | 4 | | | 2 | | | 6 | |
| Balance at September 30, 2020 | $ | 11 | | | $ | 5 | | | $ | 16 | |
There were $6 million, $3 million, $12 million, and $3$12 million of environmental remediation costs recognized in other operating expense in the Consolidated Statement of Operations in fiscal years 2020, 2019 2018 and 2017,2018, respectively.
Environmental reserves are included in Other Current LiabilitiesLiabilities (see Note 16)13) and Other Liabilities (see(see Note 17)14) in the Consolidated Balance Sheet.
The actual amount of costs or damages for which the company may be held responsible could materially exceed the foregoing estimates because of uncertainties, including the financial condition of other potentially responsible parties, the success of the remediation, discovery of new contamination and other factors that make it difficult to predict actual costs accurately. However, based on management’s assessment, after consulting with outside advisors that specialize in environmental matters, and subject to the difficulties inherent in estimating these future costs, the company believes that its expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material effect on the company’s business, financial condition or results of operations. In addition, in future periods, new laws and regulations, changes in remediation plans, advances in technology and additional information about the ultimate clean-up remedies could significantly change the company’s estimates. Management cannot assess the possible effect of compliance with future requirements.
In April 2016, the company was served with several complaints filed against the company and other defendants in the United States District Court for the Northern District of Mississippi. The complaints were amended in July 2016. These complaints allege damages, including diminution of property value, concealment/fraud and emotional distress resulting from alleged environmental
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
pollution in and around a neighborhood in Grenada, Mississippi. Rockwell owned and operated a facility
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
near the neighborhood from 1965 to 1985. The company filed answers to the complaints in July 2016. In May 2017, the company was served with a complaint filed against the company and other defendants by the Mississippi Attorney General in the Chancery Court of Grenada County, Mississippi. The complaint alleged that operations at the above-referenced Grenada facility caused contamination of off-site groundwater and surface waters. Subsequently, the company removed this action to the United States District Court for the Northern District of Mississippi. However, plaintiffs’ motion to remand the case to the Chancery Court was granted in March 2018. In April, May and July 2018, the company was served with additional property damage, personal injury and wrongful death lawsuits naming the company and others as defendants, which were brought by current and former residents of the same neighborhood. The company has reached settlements with some, but not all of the plaintiffs, and continues to vigorously defend itself while continuing settlement discussions in the unresolved matters. The company recorded an accrual in the second quarter of fiscal year 2019.
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.
In the first quarter of fiscal year 2019, Maremont and its three wholly-owned subsidiaries, Maremont Exhaust Products, Inc., AVM, Inc., and Former Ride Control Operating Company, Inc., began to solicit votes from asbestos claimants in favor of a Joint Pre-Packaged Plan of Reorganization (the "Plan"). On January 18, 2019, the Plan was approved by voting asbestos claimants and, on January 22, 2019, Maremont and its subsidiaries voluntarily filed cases under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") seeking to implement the Plan through the Chapter 11 cases. Among other things, the Plan was intended to permanently resolve all current and future asbestos claims related to Maremont's historical asbestos-related activities through the creation of a trust pursuant to Section 524(g) of the U.S. Bankruptcy Code (the "524(g) Trust"). Meritor determined that the net amount of $51 million Maremont would be required to contribute to the 524(g) Trust according to the Plan represented Meritor's best estimate of Maremont's net asbestos liability. As a result, Meritor recognized $31 million of income related to remeasuring the Maremont net asbestos liability based on the terms of the Plan.
As of January 22, 2019, Maremont and its subsidiaries were deconsolidated from the Consolidated Balance Sheet and the results of Maremont’s operations were eliminated from the company’s consolidated results of operations as Maremont became subject to the control of a court. Deconsolidation had an insignificant impact on the Consolidated Statement of Operations.
The Plan was confirmed by the U.S. Bankruptcy Court for the District of Delaware on May 17, 2019 and approved by the United States District Court for the District of Delaware on June 27, 2019. On July 9, 2019, the company contributed $48 million, consisting of cash and repayment of a loan, to Maremont, and Maremont funded the 524(g) Trust with such cash and its other assets, including its existing insurance policies. As a result, all current and future asbestos claims related to the Maremont’s historical asbestos-related activities have been channeled to the 524(g) Trust, which will process and satisfy all such claims going forward pursuant to its resolution and payment procedures.
Pending and Future Claims as of September 2018:
Previously, Maremont engaged a third-party advisor with extensive experience in assessing asbestos-related liabilities to conduct a study to estimate its potential undiscounted liability for pending and future asbestos-related claims. Management continuously monitored the underlying claims data and experience for the purpose of assessing the appropriateness of the assumptions used to estimate the liability.
As of September 30, 2018, the estimated range of equally likely possibilities of Maremont’s obligation for asbestos-related claims over the next 41 years was $107 million to $195 million. Based on the information contained in the actuarial study, and all other available information considered, Maremont concluded that no amount within the range of potential liability was more likely than any other and, therefore, recorded a liability at the low end of the range. Maremont recognized a liability for pending and future claims over the next 41 years of $107 million as of September 30, 2018.
Recoveries as of September 2018: Maremont had historically had insurance that reimburses a meaningful portion of the costs incurred defending against asbestos-related claims. The expected insurance receivable related to future asbestos-related liabilities was $24 million as of September 30, 2018.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Rockwell — ArvinMeritor, Inc. ("AM"), a predecessor of Meritor, along with many other companies, has also been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos used in certain components of Rockwell products many years ago. Liability for these claims was transferred at the time of the spin-off of the automotive business from Rockwell in 1997. Rockwell had approximately 1,200 and 1,400 pending active asbestos claims in lawsuits that name AM as a defendant at September 30, 2020 and 2019, and 2018.respectively.
A significant portion of the claims do not identify any of Rockwell’s products or specify which of the claimants, if any, were exposed to asbestos attributable to Rockwell’s products, and past experience has shown that the vast majority of the claimants will likely never identify any of Rockwell’s products. Historically, AM has been dismissed from the vast majority of similar claims filed in the past with no payment to claimants. For those claimants who do show that they worked with Rockwell’s products, management nevertheless believes it has meritorious defenses, in substantial part due to the integrity of the products involved and the lack of any impairing medical condition on the part of many claimants.
Pending and Future Claims: The company engaged a third-party advisor with extensive experience in assessing asbestos-related liabilities to conduct a study to estimate its potential undiscounted liability for pending and future asbestos-related
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
claims as of September 30, 2019.2020. On a continual basis, management monitors the underlying claims data and experience, for the purpose of assessing the appropriateness of the assumptions used to estimate the liability.
As of September 30, 2019,2020, the estimated probable range of equally likely possibilitiesbest estimate of the company’s obligation for asbestos-related claims over the next 4038 years is $91 million to $181$78 million. Based on the information contained in the actuarial study, and all other available information considered, management concluded that no amount within the range of potential liability was more likely than any other and, therefore, recorded the low end of the range. The company recognized a liability for pending and future claims of $78 million as of September 30, 2020 and $91 million as of September 30, 2019 and $103 million as of September 30, 2018.2019. 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.
Recoveries: Rockwell has insurance coverage that management believes covers indemnity and defense costs, over and above self-insurance retentions, for a significant portion of these claims. In 2004, the company initiated litigation against certain of these carriers to enforce the insurance policies. During the fourth quarter of fiscal year 2016, the company executed settlement agreements with two of these carriers, thereby resolving the litigation against those particular carriers. Pursuant to the terms of one of those settlement agreements, in the fourth quarter of fiscal year 2016 the company received $32 million in cash from an insurer, of which $10 million was recognized as a reduction in asbestos expense, and $22 million was recorded as a liability to the insurance carrier as it is required to be returned to the carrier if additional asbestos liability is not ultimately incurred. During fiscal years 2018 and 2017, Rockwell recognized an additional $12 million and $10 million, respectively, of the cash settlement proceeds as a reduction in asbestos expense. Pursuant to the terms of a second settlement agreement, in the fourth quarter of fiscal year 2016 the company recorded a $12 million receivable to reflect expected reimbursement of future defense and indemnity payments under a coverage-in-place arrangement with that insurer. During the fourth quarter of fiscal year 2018, the company entered into a settlement agreement to resolve additional disputed coverage resulting from asbestos claims. On September 15, 2018, the company received $3 million in cash and recorded $28 million recorded as an insurance receivable related to this settlement. The insurance receivables for Rockwell’s asbestos-related liabilities totaled $61$62 million and $68$61 million as of September 30, 2020 and 2019, and 2018, respectively. Included in the September 30, 2018 amount is an increase to previous settlement receivables resulting from the extended forecast horizon which led to a balance of $40 million for those previous settlement receivables as of September 30, 2018.
The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities and recoveries for asbestos-related claims are subject to considerable uncertainty because such liabilities and recoveries are influenced by variables that are difficult to predict. The future litigation environment for Rockwell could change significantly from its past experience, due, for example, to changes in the mix of claims filed against Rockwell in terms of plaintiffs’ law firm, jurisdiction and disease; legislative or regulatory developments; the company’s approach to defending claims; or payments to plaintiffs from other defendants. Estimated recoveries are influenced by coverage issues among insurers and the continuing solvency of various insurance companies. If the assumptions with respect to the estimation period, the nature of pending claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Rockwell asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial condition and results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Rockwell legacy asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
|
| | | | | | | |
| | September 30, |
| | 2019 | | 2018 |
| Pending and future claims | $ | 91 |
| | $ | 103 |
|
| Billed but unpaid claims | 2 |
| | 2 |
|
| Asbestos-related liabilities | $ | 93 |
| | $ | 105 |
|
| Asbestos-related insurance recoveries | $ | 61 |
| | $ | 68 |
|
| | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| Pending and future claims | $ | 78 | | | $ | 91 | |
| Billed but unpaid claims | 1 | | | 2 | |
| Asbestos-related liabilities | $ | 79 | | | $ | 93 | |
| Asbestos-related insurance recoveries | $ | 62 | | | $ | 61 | |
Assumptions: The following assumptions were made by the company after consultation with consultants and are included in the study:
•Pending and future claims were estimated for a 4038 year period ending in fiscal year 2059;2058;
•The litigation environment remains consistent throughout the forecast horizon;
•On a per claim basis, defense and indemnity costs for pending and future claims will be at the level consistent with the company’s recent experience.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Indemnification
The company has agreed to indemnify others 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.
The company is not aware of any other claims or other information that would give rise to material payments under such indemnities.
Other
In addition, various lawsuits, claims and proceedings, other than those specifically disclosed in the Consolidated Financial Statements, have been or may be instituted or asserted against the company, relating to the conduct of the company’s business, including those pertaining to product liability, warranty or recall claims, intellectual property, safety and health, contract and employment matters. Although the outcome of other litigation cannot be predicted with certainty, and some lawsuits, claims or proceedings may be disposed of unfavorably to the company, management believes the disposition of matters that are pending will not have a material effect on the company’s business, financial condition, results of operations or cash flows.
26.
23. BUSINESS SEGMENT INFORMATION
The company defines its operating segments as components of its business where separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The company’s Chief Operating Decision Maker ("CODM") is the Chief Executive Officer.
In the secondthird quarter of fiscal year 2019,2020, the company realigned its operations resulting in a change to its operating and reportable segments. As of the secondthird quarter of fiscal year 2019,2020, the reportable segments are (1) Commercial Truck and (2) Aftermarket Industrial and Trailer.Industrial. Prior year reportable segment financial results have been recast for these changes.
The company has 2 reportable segments at September 30, 2019,2020, as follows:
| |
• | •The Commercial Truck segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks and other applications in North America, South America, Europe and Asia Pacific. It also supplies a variety of undercarriage products and systems for trailer applications in North America. This segment also includes the company's aftermarket businesses in Asia Pacific and South America. •The Aftermarket and Industrial segment supplies axles, brakes, drivelines, suspension parts and other replacement parts to commercial vehicle and industrial aftermarket customers, primarily in North America and Europe. In addition, this segment supplies drivetrain systems and certain components, including axles, drivelines, brakes and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks and other applications in North America, South America, Europe and Asia Pacific. This segment also includes the company's aftermarket businesses in Asia Pacific and South America. |
| |
• | The Aftermarket, Industrial and Trailer segment supplies axles, brakes, drivelines, suspension parts and other replacement parts to commercial vehicle and industrial aftermarket customers, primarily in North America and Europe. In addition, this segment supplies drivetrain systems and certain components, including axles, drivelines, brakes and
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
suspension systems for military, construction, bus and coach, fire and emergency and other applications in North America and Europe. It also supplies a variety of undercarriage products and systems for trailer applications in North America.
Segment adjusted EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense, asset impairment charges and other special items as determined by management. Segment adjusted EBITDA excludes unallocated legacy and corporate income (expense), net. The company uses segment adjusted EBITDA as the primary basis for the CODM to evaluate the performance of each of its reportable segments.
The accounting policies of the segments are the same as those applied in the Consolidated Financial Statements, except for the use of segment adjusted EBITDA. The company may allocate certain common costs, primarily corporate functions, between the segments differently than the company would for stand alone financial information prepared in accordance with GAAP. These allocated costs include expenses for shared services such as information technology, finance, communications, legal and human resources. The company does not allocate interest expense and certain legacy and other corporate costs not directly associated with the segment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Segment information is summarized as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Truck | | | | Aftermarket and Industrial | | Elims | | Total |
| Fiscal year 2020 Sales: | | | | | | | | | |
| External Sales | $ | 2,080 | | | | | $ | 964 | | | $ | 0 | | | $ | 3,044 | |
| Intersegment Sales | 110 | | | | | 17 | | | (127) | | | 0 | |
| Total Sales | $ | 2,190 | | | | | $ | 981 | | | $ | (127) | | | $ | 3,044 | |
Fiscal year 2019 Sales (1): | | | | | | | | | |
| External Sales | $ | 3,307 | | | | | $ | 1,081 | | | $ | 0 | | | $ | 4,388 | |
| Intersegment Sales | 149 | | | | | 19 | | | (168) | | | 0 | |
| Total Sales | $ | 3,456 | | | | | $ | 1,100 | | | $ | (168) | | | $ | 4,388 | |
Fiscal year 2018 Sales (1): | | | | | | | | | |
| External Sales | $ | 3,171 | | | | | $ | 1,007 | | | $ | 0 | | | $ | 4,178 | |
| Intersegment Sales | 154 | | | | | 17 | | | (171) | | | 0 | |
| Total Sales | $ | 3,325 | | | | | $ | 1,024 | | | $ | (171) | | | $ | 4,178 | |
(1) Fiscal years 2019 and 2018 have been recast to reflect reportable segment changes.
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2020 | | 2019 | | 2018 |
| Segment adjusted EBITDA: | | | | | |
Commercial Truck (1) | $ | 116 | | | $ | 342 | | | $ | 345 | |
| | | | | |
Aftermarket and Industrial (1) | 150 | | | 175 | | | 142 | |
| Segment adjusted EBITDA | 266 | | | 517 | | | 487 | |
Unallocated legacy and corporate income (expense), net (2) | 6 | | | 3 | | | (13) | |
| Interest expense, net | (66) | | | (57) | | | (67) | |
| Gain on sale of equity investment | 0 | | | 0 | | | 0 | |
| Provision for income taxes | (78) | | | (82) | | | (149) | |
| Depreciation and amortization | (101) | | | (87) | | | (84) | |
| Loss on sale of receivables | (4) | | | (6) | | | (5) | |
| Restructuring costs | (27) | | | (8) | | | (6) | |
| | | | | |
| Transaction costs | (5) | | | (6) | | | 0 | |
| | | | | |
Asbestos related items (3) | 0 | | | 31 | | | (25) | |
Pension settlement loss (4) | 0 | | | 0 | | | (6) | |
| Asset impairment charges | (8) | | | (10) | | | (3) | |
| | | | | |
| | | | | |
| Income from WABCO distribution termination | 265 | | | 0 | | | 0 | |
| Noncontrolling interests | (4) | | | (5) | | | (9) | |
| Income from continuing operations attributable to Meritor, Inc. | $ | 244 | | | $ | 290 | | | $ | 120 | |
(1)Fiscal years 2019 and 2018 have been recast to reflect reportable segment changes.
(2)Unallocated legacy and corporate income (expense), net represents items that are not directly related to the company's business segments. These items primarily include asbestos-related charges and settlements, pension and retiree medical costs associated with sold businesses, and other legacy costs for environmental and product liability.
(3)The year ended September 30, 2019 includes $31 million related to the remeasurement of the Maremont net asbestos liability based on the Plan. The year ended September 30, 2018 includes $25 million related to the change in estimate resulting from change in estimated forecast horizon and an asbestos insurance settlement.
|
| | | | | | | | | | | | | | | |
| | Commercial Truck | | Aftermarket, Industrial and Trailer | | Elims | | Total |
| Fiscal year 2019 Sales: | | | | | | | |
| External Sales | $ | 3,110 |
| | $ | 1,278 |
| | $ | — |
| | $ | 4,388 |
|
| Intersegment Sales | 142 |
| | 35 |
| | (177 | ) | | — |
|
| Total Sales | $ | 3,252 |
| | $ | 1,313 |
| | $ | (177 | ) | | $ | 4,388 |
|
Fiscal year 2018 Sales (1): | | | | | | | |
| External Sales | $ | 3,037 |
| | $ | 1,141 |
| | $ | — |
| | $ | 4,178 |
|
| Intersegment Sales | 135 |
| | 35 |
| | (170 | ) | | — |
|
| Total Sales | $ | 3,172 |
| | $ | 1,176 |
| | $ | (170 | ) | | $ | 4,178 |
|
Fiscal year 2017 Sales (1): | | | | | | | |
| External Sales | $ | 2,347 |
| | $ | 1,000 |
| | $ | — |
| | $ | 3,347 |
|
| Intersegment Sales | 122 |
| | 32 |
| | (154 | ) | | — |
|
| Total Sales | $ | 2,469 |
| | $ | 1,032 |
| | $ | (154 | ) | | $ | 3,347 |
|
117
| |
(1)
| Fiscal years 2018 and 2017 have been recast to reflect reportable segment changes. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(4)The year ended September 30, 2018 includes $6 million related to the U.K. pension settlement loss.
| | | | | | | | | | | | | | | | | |
| Year ended September 30, |
| 2020 | | 2019 (1) | | 2018 (1) |
| Depreciation and Amortization: | | | | | |
| Commercial Truck | $ | 76 | | | $ | 73 | | | $ | 72 | |
| Aftermarket and Industrial | 25 | | | 14 | | | 12 | |
| Total depreciation and amortization | $ | 101 | | | $ | 87 | | | $ | 84 | |
| Capital Expenditures: | | | | | |
| Commercial Truck | $ | 68 | | | $ | 88 | | | $ | 88 | |
| Aftermarket and Industrial | 17 | | | 15 | | | 16 | |
| Total capital expenditures | $ | 85 | | | $ | 103 | | | $ | 104 | |
| | | | | |
| | | September 30, |
| | | 2020 | | 2019 (2) |
| Segment Assets: | | | | | |
| Commercial Truck | | | $ | 1,666 | | | $ | 1,745 | |
| Aftermarket and Industrial | | | 658 | | | 729 | |
| Total segment assets | | | 2,324 | | | 2,474 | |
Corporate (3) | | | 714 | | | 567 | |
Less: Accounts receivable sold under off-balance sheet factoring programs (4) | | | (154) | | | (226) | |
| Total assets | | | $ | 2,884 | | | $ | 2,815 | |
(1)Fiscal years 2019 and 2018 have been recast to reflect reportable segment changes.
(2)Amounts as of September 30, 2019 have been recast to reflect reportable segment changes, including the reallocation of goodwill.
(3)Corporate assets consist primarily of cash, deferred income taxes and prepaid pension costs.
(4)At September 30, 2020 and September 30, 2019, segments assets include $154 million and $226 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.
|
| | | | | | | | | | | |
| Segment adjusted EBITDA: | 2019 | | 2018 (2) | | 2017 (2) |
| Commercial Truck | $ | 327 |
| | $ | 337 |
| | $ | 224 |
|
| Aftermarket, Industrial and Trailer | 190 |
| | 150 |
| | 126 |
|
| Segment adjusted EBITDA | 517 |
| | 487 |
| | 350 |
|
Unallocated legacy and corporate income (expense), net (1) | 3 |
| | (13 | ) | | (3 | ) |
| Interest expense, net | (57 | ) | | (67 | ) | | (119 | ) |
| Gain on sale of equity investment | — |
| | — |
| | 243 |
|
| Provision for income taxes | (82 | ) | | (149 | ) | | (52 | ) |
| Depreciation and amortization | (87 | ) | | (84 | ) | | (75 | ) |
| Loss on sale of receivables | (6 | ) | | (5 | ) | | (5 | ) |
| Restructuring costs | (8 | ) | | (6 | ) | | (6 | ) |
AxleTech transactions costs (3) | (6 | ) | | — |
| | — |
|
Asbestos related items (4) | 31 |
| | (25 | ) | | — |
|
Pension settlement loss (5) | — |
| | (6 | ) | | — |
|
| Asset impairment charges | (10 | ) | | (3 | ) | | (4 | ) |
| Noncontrolling interests | (5 | ) | | (9 | ) | | (4 | ) |
| Income from continuing operations attributable to Meritor, Inc. | $ | 290 |
| | $ | 120 |
| | $ | 325 |
|
| |
(1)
| Unallocated legacy and corporate income (expense), net represents items that are not directly related to the company's business segments. These items primarily include asbestos-related charges and settlements, pension and retiree medical costs associated with sold businesses, and other legacy costs for environmental and product liability. |
| |
(2)
| Fiscal years 2018 and 2017 have been recast to reflect reportable segment changes. |
| |
(3)
| Represents transaction fees. |
| |
(4)
| The year ended September 30, 2019 includes $31 million related to the remeasurement of the Maremont net asbestos liability based on the Plan. The year ended September 30, 2018 includes $25 million related to the change in estimate resulting from change in estimated forecast horizon and an asbestos insurance settlement. |
| |
(5)
| The year ended September 30, 2018 includes $6 million related to the U.K. pension settlement loss. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | |
| Depreciation and Amortization: | 2019 | | 2018 (1) | | 2017 (1) |
| Commercial Truck | $ | 68 |
| | $ | 68 |
| | $ | 64 |
|
| Aftermarket, Industrial and Trailer | 19 |
| | 16 |
| | 11 |
|
| Total depreciation and amortization | $ | 87 |
| | $ | 84 |
| | $ | 75 |
|
| Capital Expenditures: | 2019 | | 2018 (1) | | 2017 (1) |
| Commercial Truck | $ | 82 |
| | $ | 83 |
| | $ | 79 |
|
| Aftermarket, Industrial and Trailer | 21 |
| | 21 |
| | 16 |
|
| Total capital expenditures | $ | 103 |
| | $ | 104 |
| | $ | 95 |
|
| | | | | | |
| | September 30, | | |
| Segment Assets: | 2019 | | 2018 (2) | | |
| Commercial Truck | $ | 1,659 |
| | $ | 1,764 |
| | |
| Aftermarket, Industrial and Trailer | 815 |
| | 589 |
| | |
| Total segment assets | 2,474 |
| | 2,353 |
| | |
Corporate (3) | 567 |
| | 633 |
| | |
Less: Accounts receivable sold under off-balance sheet factoring programs (4) | (226 | ) | | (260 | ) | | |
| Total assets | $ | 2,815 |
| | $ | 2,726 |
| | |
| |
(1)
| Fiscal years 2018 and 2017 have been recast to reflect reportable segment changes. |
| |
(2)
| Amounts as of September 30, 2018 have been recast to reflect reportable segment changes, including the reallocation of goodwill. |
| |
(3)
| Corporate assets consist primarily of cash, deferred income taxes and prepaid pension costs. |
| |
(4)
| At September 30, 2019 and September 30, 2018, segments assets include $226 million and $260 million, respectively, of accounts receivable sold under off-balance sheet accounts receivable factoring programs (see Note 9). These sold receivables are included in segment assets as the CODM reviews segment assets inclusive of these balances. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Sales by geographic area are based on the location of the selling unit. Information on the company’s geographic areas is summarized as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year ended September 30, |
| | 2020 | | 2019 | | 2018 |
| Sales by Geographic Area: | | | | | |
| U.S. | $ | 1,783 | | | $ | 2,622 | | | $ | 2,289 | |
| Canada | 54 | | | 69 | | | 72 | |
| Mexico | 147 | | | 249 | | | 221 | |
| Total North America | 1,984 | | | 2,940 | | | 2,582 | |
| Sweden | 202 | | | 276 | | | 311 | |
| Italy | 166 | | | 234 | | | 243 | |
| United Kingdom | 114 | | | 165 | | | 179 | |
| Other Europe | 139 | | | 91 | | | 103 | |
| Total Europe | 621 | | | 766 | | | 836 | |
| Brazil | 172 | | | 248 | | | 224 | |
| China | 135 | | | 153 | | | 196 | |
| India | 72 | | | 197 | | | 231 | |
| Other Asia-Pacific | 60 | | | 84 | | | 109 | |
| Total sales | $ | 3,044 | | | $ | 4,388 | | | $ | 4,178 | |
|
| | | | | | | | | | | |
| Sales by Geographic Area: | | | | | |
| | 2019 | | 2018 | | 2017 |
| U.S. | $ | 2,622 |
| | $ | 2,289 |
| | $ | 1,761 |
|
| Canada | 69 |
| | 72 |
| | 69 |
|
| Mexico | 249 |
| | 221 |
| | 234 |
|
| Total North America | 2,940 |
| | 2,582 |
| | 2,064 |
|
| Sweden | 276 |
| | 311 |
| | 273 |
|
| Italy | 234 |
| | 243 |
| | 210 |
|
| United Kingdom | 165 |
| | 179 |
| | 149 |
|
| Other Europe | 91 |
| | 103 |
| | 83 |
|
| Total Europe | 766 |
| | 836 |
| | 715 |
|
| Brazil | 248 |
| | 224 |
| | 168 |
|
| China | 153 |
| | 196 |
| | 127 |
|
| India | 197 |
| | 231 |
| | 184 |
|
| Other Asia-Pacific | 84 |
| | 109 |
| | 89 |
|
| Total sales | $ | 4,388 |
| | $ | 4,178 |
| | $ | 3,347 |
|
|
| | | | | | | |
| Assets by Geographic Area: | | | |
| | 2019 | | 2018 |
| U.S. | $ | 1,504 |
| | $ | 1,350 |
|
| Canada | 39 |
| | 36 |
|
| Mexico | 197 |
| | 224 |
|
| Total North America | 1,740 |
| | 1,610 |
|
| Sweden | 130 |
| | 138 |
|
| Italy | 81 |
| | 86 |
|
| United Kingdom | 241 |
| | 263 |
|
| Other Europe | 173 |
| | 171 |
|
| Total Europe | 625 |
| | 658 |
|
| Brazil | 187 |
| | 161 |
|
| China | 124 |
| | 123 |
|
| India | 84 |
| | 100 |
|
| Other Asia-Pacific | 55 |
| | 74 |
|
| Total | $ | 2,815 |
| | $ | 2,726 |
|
| | | | | | | | | | | |
| September 30, |
| | 2020 | | 2019 |
| Assets by Geographic Area: | | | |
| U.S. | $ | 1,458 | | | $ | 1,504 | |
| Canada | 35 | | | 39 | |
| Mexico | 190 | | | 197 | |
| Total North America | 1,683 | | | 1,740 | |
| Sweden | 136 | | | 130 | |
| Italy | 111 | | | 81 | |
| United Kingdom | 270 | | | 241 | |
| Other Europe | 269 | | | 173 | |
| Total Europe | 786 | | | 625 | |
| Brazil | 132 | | | 187 | |
| China | 130 | | | 124 | |
| India | 76 | | | 84 | |
| Other Asia-Pacific | 77 | | | 55 | |
| Total | $ | 2,884 | | | $ | 2,815 | |
Sales to AB Volvo represented approximately 21 percent, 22 percent 23 percent and 2223 percent of the company’s sales in fiscal years 2020, 2019 2018 and 2017,2018, respectively. Sales to Daimler AG represented approximately 1917 percent, 1719 percent and 17 percent of the company’s sales in fiscal years 2020, 2019 2018 and 2017,2018, respectively. Sales to PACCAR represented approximately 12 percent, 13 percent 12 percent and 1012 percent of the company's sales in fiscal years 2020, 2019 2018 and 2017,2018, respectively. Sales to Navistar represented approximately 108 percent, 910 percent and 9 percent of the company’s sales in fiscal years 2020, 2019 2018 and 2017,2018, respectively. No other customer comprised 10 percent or more of the company’s total sales in any of the three fiscal years ended September 30, 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
27.24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a condensed summary of the company’s unaudited quarterly results of continuing operations for fiscal years 20192020 and 2018.2019. Per share amounts are based on the weighted average shares outstanding for that quarter. Earnings per share for the year may not equal the sum of the four fiscal quarters’ earnings per share due to changes in basic and diluted shares outstanding.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 Fiscal Quarters (Unaudited) |
| | First | | Second | | Third | | Fourth | | 2020 |
| | (In millions, except share related data) |
| Sales | $ | 901 | | | $ | 871 | | | $ | 514 | | | $ | 758 | | | $ | 3,044 | |
| Cost of sales | (774) | | | (757) | | | (486) | | | (699) | | | (2,716) | |
| Gross margin | 127 | | | 114 | | | 28 | | | 59 | | | 328 | |
| Benefit (provision) for income taxes | (13) | | | (73) | | | 13 | | | (5) | | | (78) | |
| Net income (loss) | 41 | | | 242 | | | (34) | | | 0 | | | 249 | |
| Net income (loss) from continuing operations attributable to Meritor, Inc. | 39 | | | 240 | | | (36) | | | 1 | | | 244 | |
| Net income (loss) attributable to Meritor, Inc. | 39 | | | 241 | | | (36) | | | 1 | | | 245 | |
| Basic earnings (loss) per share from continuing operations | $ | 0.50 | | | $ | 3.27 | | | $ | (0.50) | | | $ | 0.01 | | | $ | 3.30 | |
| Diluted earnings (loss) per share from continuing operations | $ | 0.48 | | | $ | 3.19 | | | $ | (0.50) | | | $ | 0.01 | | | $ | 3.23 | |
|
| | | | | | | | | | | | | | | | | | | |
| | 2019 Fiscal Quarters (Unaudited) |
| | First | | Second | | Third | | Fourth | | 2019 |
| | (In millions, except share related data) |
| Sales | $ | 1,038 |
| | $ | 1,156 |
| | $ | 1,166 |
| | $ | 1,028 |
| | $ | 4,388 |
|
| Cost of sales | (897 | ) | | (982 | ) | | (987 | ) | | (882 | ) | | (3,748 | ) |
| Gross margin | 141 |
| | 174 |
| | 179 |
| | 146 |
| | 640 |
|
| Provision for income taxes | (21 | ) | | (27 | ) | | (21 | ) | | (13 | ) | | (82 | ) |
| Net income | 92 |
| | 74 |
| | 89 |
| | 41 |
| | 296 |
|
| Net income from continuing operations attributable to Meritor, Inc. | 90 |
| | 73 |
| | 85 |
| | 42 |
| | 290 |
|
| Net income attributable to Meritor, Inc. | 90 |
| | 72 |
| | 86 |
| | 43 |
| | 291 |
|
| Basic earnings per share from continuing operations | $ | 1.06 |
| | $ | 0.88 |
| | $ | 1.02 |
| | $ | 0.51 |
| | $ | 3.49 |
|
| Diluted earnings per share from continuing operations | $ | 1.03 |
| | $ | 0.85 |
| | $ | 0.99 |
| | $ | 0.50 |
| | $ | 3.36 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 Fiscal Quarters (Unaudited) |
| | First | | Second | | Third | | Fourth | | 2019 |
| | (In millions, except share related data) |
| Sales | $ | 1,038 | | | $ | 1,156 | | | $ | 1,166 | | | $ | 1,028 | | | $ | 4,388 | |
| Cost of sales | (897) | | | (982) | | | (987) | | | (882) | | | (3,748) | |
| Gross margin | 141 | | | 174 | | | 179 | | | 146 | | | 640 | |
| Provision for income taxes | (21) | | | (27) | | | (21) | | | (13) | | | (82) | |
| Net income | 92 | | | 74 | | | 89 | | | 41 | | | 296 | |
| Net income from continuing operations attributable to Meritor, Inc. | 90 | | | 73 | | | 85 | | | 42 | | | 290 | |
| Net income attributable to Meritor, Inc. | 90 | | | 72 | | | 86 | | | 43 | | | 291 | |
| Basic earnings per share from continuing operations | $ | 1.06 | | | $ | 0.88 | | | $ | 1.02 | | | $ | 0.51 | | | $ | 3.49 | |
| Diluted earnings per share from continuing operations | $ | 1.03 | | | $ | 0.85 | | | $ | 0.99 | | | $ | 0.50 | | | $ | 3.36 | |
The company recognized restructuring income and costs in its continuing operations during fiscal year 2019 as follows: an insignificant amount in the first quarter, $1 million of income in the second quarter, $1 million of income in the third quarter and $10 million of restructuring costs in the fourth quarter (see Note 8)7). During the first quarter of fiscal year 2019 a $31 million adjustment was made relating to the remeasurement of the Maremont asbestos liability based on the Plan. The year ended September 30, 2019 includes $12 million of non-cash tax benefit related to the one-time deemed repatriation of accumulated foreign earnings and a one-time net charge of $9 million recorded for an election made that will allow for a future tax-free repatriation of cash to the United States.
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 Fiscal Quarters (Unaudited) (1) |
| | First | | Second | | Third | | Fourth | | 2018 |
| | (In millions, except share related data) |
| Sales | $ | 903 |
| | $ | 1,066 |
| | $ | 1,129 |
| | $ | 1,080 |
| | $ | 4,178 |
|
| Cost of sales | (771 | ) | | (895 | ) | | (959 | ) | | (928 | ) | | (3,553 | ) |
| Gross margin | 132 |
| | 171 |
| | 170 |
| | 152 |
| | 625 |
|
| Provision for income taxes | (83 | ) | | (22 | ) | | (26 | ) | | (18 | ) | | (149 | ) |
| Net income (loss) | (34 | ) | | 60 |
| | 67 |
| | 33 |
| | 126 |
|
| Net income (loss) from continuing operations attributable to Meritor, Inc. | (35 | ) | | 57 |
| | 66 |
| | 32 |
| | 120 |
|
| Net income (loss) attributable to Meritor, Inc. | (36 | ) | | 57 |
| | 64 |
| | 32 |
| | 117 |
|
| Basic earnings (loss) per share from continuing operations | $ | (0.40 | ) | | $ | 0.64 |
| | $ | 0.76 |
| | $ | 0.37 |
| | $ | 1.37 |
|
| Diluted earnings (loss) per share from continuing operations | $ | (0.40 | ) | | $ | 0.63 |
| | $ | 0.73 |
| | $ | 0.36 |
| | $ | 1.31 |
|
(1)
Amounts for the 2018 fiscal quarters have been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715).
The company recognized restructuring costs in its continuing operations during fiscal year 2018 as follows: $2 million in the first quarter, $1 million in the second quarter, $3 million in the third quarter and 0 restructuring costs in the fourth quarter (see Note 8). During the fourth quarter of fiscal year 2018, the company recognized a $6 million loss associated with the UK pension settlement. During the fourth quarter of fiscal year 2018, the company recognized $25 million net expense, related to the change
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
in estimate resulting from change in estimated forecast horizon and an asbestos insurance settlement. The year ended September 30, 2018 includes $57 million of non-cash tax expense related to the revaluation of the company's deferred tax assets and liabilities as a result of the U.S. tax reform, $26 million of non-cash tax expense related to the one-time deemed repatriation of accumulated foreign earnings and $6 million of non-cash tax expense related to other adjustments. During the fourth quarter of fiscal year 2018, the company recognized a $9 million reversal of a Brazil valuation allowance, partially offset by a $2 million increase in valuation allowances for certain U.S. state jurisdictions.
28.25. OPERATING CASH FLOWS AND OTHER SUPPLEMENTAL FINANCIAL INFORMATION
| | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| (in millions) |
| OPERATING ACTIVITIES | | | | | |
| Net income | $ | 249 | | | $ | 296 | | | $ | 126 | |
| Less: Income (loss) from discontinued operations, net of tax | 1 | | | 1 | | | (3) | |
| Income from continuing operations | 248 | | | 295 | | | 129 | |
| Adjustments to income from continuing operations to arrive at cash provided by operating activities: | | | | | |
| Depreciation and amortization | 101 | | | 87 | | | 84 | |
| Deferred income tax expense | 38 | | | 40 | | | 74 | |
| Restructuring costs | 27 | | | 8 | | | 6 | |
| Loss on debt extinguishment | 0 | | | 0 | | | 8 | |
| Asset impairment | 8 | | | 10 | | | 3 | |
| | | | | |
| Equity in earnings of affiliates | (14) | | | (31) | | | (27) | |
| Stock compensation expense | 7 | | | 18 | | | 20 | |
| Provision for doubtful accounts | 0 | | | 0 | | | (1) | |
| Pension and retiree medical income | (42) | | | (37) | | | (31) | |
| Pension settlement loss | 0 | | | 0 | | | 6 | |
| Asbestos related liability remeasurement | 0 | | | (31) | | | 0 | |
| Contribution to Maremont trust | 0 | | | (48) | | | 0 | |
| | | | | |
| | | | | |
| | | | | |
| Dividends received from equity method investments | 10 | | | 23 | | | 17 | |
| Pension and retiree medical contributions | (15) | | | (16) | | | (21) | |
| Restructuring payments | (25) | | | (5) | | | (8) | |
| Changes in off-balance sheet receivable securitization and factoring programs | (77) | | | (18) | | | 11 | |
| Changes in assets and liabilities, excluding effects of acquisitions, divestitures, foreign currency adjustments and discontinued operations: | | | | | |
| Receivables | 147 | | | 80 | | | (98) | |
| Inventories | 100 | | | 9 | | | (112) | |
| Accounts payable | (186) | | | (103) | | | 97 | |
| Other current assets and liabilities | (64) | | | (3) | | | 36 | |
| Other assets and liabilities | 2 | | | (22) | | | 59 | |
| Operating cash flows provided by continuing operations | 265 | | | 256 | | | 252 | |
| Operating cash flows used for discontinued operations | 0 | | | 0 | | | (1) | |
| CASH PROVIDED BY OPERATING ACTIVITIES | $ | 265 | | | $ | 256 | | | $ | 251 | |
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2019 | | 2018 | | 2017 |
| | (in millions) |
| OPERATING ACTIVITIES | | | | | |
| Net income | $ | 296 |
| | $ | 126 |
| | $ | 328 |
|
| Less: Income (loss) from discontinued operations, net of tax | 1 |
| | (3 | ) | | (1 | ) |
| Income from continuing operations | 295 |
| | 129 |
| | 329 |
|
| Adjustments to income from continuing operations to arrive at cash provided by operating activities: | | | | | |
| Depreciation and amortization | 87 |
| | 84 |
| | 75 |
|
| Deferred income tax expense | 40 |
| | 74 |
| | 38 |
|
| Restructuring costs | 8 |
| | 6 |
| | 6 |
|
| Loss on debt extinguishment | — |
| | 8 |
| | 36 |
|
| Asset impairment | 10 |
| | 3 |
| | 4 |
|
| Equity in earnings of affiliates | (31 | ) | | (27 | ) | | (48 | ) |
| Stock compensation expense | 18 |
| | 20 |
| | 19 |
|
| Provision for doubtful accounts | — |
| | (1 | ) | | 1 |
|
| Pension and retiree medical expense (income) | (37 | ) | | (31 | ) | | 11 |
|
| Pension settlement loss | — |
| | 6 |
| | — |
|
| Asbestos related liability remeasurement | (31 | ) | | — |
| | — |
|
| Contribution to Maremont trust | (48 | ) | | — |
| | — |
|
| Gain on sale of equity method investment | — |
| | — |
| | (243 | ) |
| Dividends received from equity method investments | 23 |
| | 17 |
| | 44 |
|
| Pension and retiree medical contributions | (16 | ) | | (21 | ) | | (38 | ) |
| Restructuring payments | (5 | ) | | (8 | ) | | (15 | ) |
| Changes in off-balance sheet receivable securitization and factoring programs | (18 | ) | | 11 |
| | 26 |
|
| Changes in assets and liabilities, excluding effects of acquisitions, divestitures, foreign currency adjustments and discontinued operations: | | | | | |
| Receivables | 80 |
| | (98 | ) | | (160 | ) |
| Inventories | 9 |
| | (112 | ) | | (43 | ) |
| Accounts payable | (103 | ) | | 97 |
| | 133 |
|
| Other current assets and liabilities | (3 | ) | | 36 |
| | 16 |
|
| Other assets and liabilities | (22 | ) | | 59 |
| | (12 | ) |
| Operating cash flows provided by continuing operations | 256 |
| | 252 |
| | 179 |
|
| Operating cash flows used for discontinued operations | — |
| | (1 | ) | | (3 | ) |
| CASH PROVIDED BY OPERATING ACTIVITIES | $ | 256 |
| | $ | 251 |
| | $ | 176 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | |
| | September 30, |
| | 2019 | | 2018 | | 2017 |
| | (In millions) |
| Balance sheet data: | | | | | |
| Allowance for doubtful accounts | $ | 3 |
| | $ | 4 |
| | $ | 5 |
|
| Statement of operations data: | | | | | |
| Maintenance and repairs expense | 55 |
| | 52 |
| | 46 |
|
| Research, development and engineering expense | 75 |
| | 73 |
| | 69 |
|
| Depreciation expense | 76 |
| | 74 |
| | 67 |
|
| Rental expense | 19 |
| | 18 |
| | 14 |
|
| Interest income | 4 |
| | 3 |
| | 3 |
|
| Interest expense | (61 | ) | | (70 | ) | | (122 | ) |
| Statement of cash flows data: | | | | | |
| Interest payments, net of receipts | 41 |
| | 49 |
| | 75 |
|
| Income tax payments, net of refunds | 64 |
| | 33 |
| | 22 |
|
| Non-cash investing activities - capital asset additions from capital leases | — |
| | 4 |
| | — |
|
29. SUPPLEMENTAL PARENT AND 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 on a joint and several basis. Similar subsidiary guarantees were provided for the benefit of the holders of the publicly-held notes outstanding under the company's indentures (see Note 18).
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. As of September 30, 2019, net assets of certain subsidiaries in China and India and certain unconsolidated subsidiaries that are restricted by law from transfer by cash dividends, loans or advances to Meritor, Inc did not exceed 25 percent of the consolidated net assets of Meritor, Inc. As of September 30, 2019 the amount of the net assets restricted from transfer by law was $73 million.
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 Guarantor subsidiaries are combined in the Condensed Consolidating Financial Statements.
| | | | | | | | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 | | 2018 |
| | (In millions) |
| Balance sheet data: | | | | | |
| Allowance for doubtful accounts | $ | 3 | | | $ | 3 | | | $ | 4 | |
| Statement of operations data: | | | | | |
| Maintenance and repairs expense | 47 | | | 55 | | | 52 | |
| Research, development and engineering expense | 74 | | | 75 | | | 73 | |
| Depreciation expense | 87 | | | 76 | | | 74 | |
| Rental expense | 19 | | | 19 | | | 18 | |
| Interest income | 4 | | | 4 | | | 3 | |
| Interest expense | (70) | | | (61) | | | (70) | |
| Statement of cash flows data: | | | | | |
| Interest payments, net of receipts | 48 | | | 41 | | | 49 | |
| Income tax payments, net of refunds | 55 | | | 64 | | | 33 | |
| Non-cash investing activities - capital asset additions from finance leases | 0 | | | 0 | | | 4 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (In millions) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Fiscal Year Ended September 30, 2019 |
| | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
| Sales | | | | | | | | | |
| External | $ | — |
| | $ | 2,621 |
| | $ | 1,767 |
| | $ | — |
| | $ | 4,388 |
|
| Subsidiaries | — |
| | 110 |
| | 201 |
| | (311 | ) | | — |
|
| Total sales | — |
| | 2,731 |
| | 1,968 |
| | (311 | ) | | 4,388 |
|
| Cost of sales | (65 | ) | | (2,298 | ) | | (1,696 | ) | | 311 |
| | (3,748 | ) |
| GROSS MARGIN | (65 | ) | | 433 |
| | 272 |
| | — |
| | 640 |
|
| Selling, general and administrative | (92 | ) | | (127 | ) | | (37 | ) | | — |
| | (256 | ) |
| Restructuring costs | — |
| | (6 | ) | | (2 | ) | | — |
| | (8 | ) |
| Other operating expense, net | (3 | ) | | (10 | ) | | — |
| | — |
| | (13 | ) |
| OPERATING INCOME (LOSS) | (160 | ) | | 290 |
| | 233 |
| | — |
| | 363 |
|
| Other income (expense), net | 50 |
| | 36 |
| | (46 | ) | | — |
| | 40 |
|
| Equity in earnings of affiliates | — |
| | 21 |
| | 10 |
| | — |
| | 31 |
|
| Interest income (expense), net | (130 | ) | | 47 |
| | 26 |
| | — |
| | (57 | ) |
| INCOME (LOSS) BEFORE INCOME TAXES | (240 | ) | | 394 |
| | 223 |
| | — |
| | 377 |
|
| Benefit (provision) for income taxes | 53 |
| | (84 | ) | | (51 | ) | | — |
| | (82 | ) |
| Equity income from continuing operations of subsidiaries | 477 |
| | 108 |
| | — |
| | (585 | ) | | — |
|
| INCOME FROM CONTINUING OPERATIONS | 290 |
| | 418 |
| | 172 |
| | (585 | ) | | 295 |
|
| LOSS FROM DISCONTINUED OPERATIONS, net of tax | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| NET INCOME | 291 |
| | 418 |
| | 172 |
| | (585 | ) | | 296 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
| NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 291 |
| | $ | 418 |
| | $ | 167 |
| | $ | (585 | ) | | $ | 291 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) (In millions) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Fiscal Year Ended September 30, 2019 |
| | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
| Net income | $ | 291 |
| | $ | 418 |
| | $ | 172 |
| | $ | (585 | ) | | $ | 296 |
|
| Other comprehensive income, net of tax | (115 | ) | | (62 | ) | | (64 | ) | | 125 |
| | (116 | ) |
| Total comprehensive income | 176 |
| | 356 |
| | 108 |
| | (460 | ) | | 180 |
|
Less: Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Comprehensive income attributable to Meritor, Inc. | $ | 176 |
| | $ | 356 |
| | $ | 104 |
| | $ | (460 | ) | | $ | 176 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (In millions) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Fiscal Year Ended September 30, 2018 (1) |
| | Parent | | Guarantors | | Non-Guarantors | | Elims | | Consolidated |
| Sales | | | | | | | | | |
| External | $ | — |
| | $ | 2,290 |
| | $ | 1,888 |
| | $ | — |
| | $ | 4,178 |
|
| Subsidiaries | — |
| | 143 |
| | 219 |
| | (362 | ) | | — |
|
| Total sales | — |
| | 2,433 |
| | 2,107 |
| | (362 | ) | | 4,178 |
|
| Cost of sales | (74 | ) | | (2,037 | ) | | (1,804 | ) | | 362 |
| | (3,553 | ) |
| GROSS MARGIN | (74 | ) | | 396 |
| | 303 |
| | — |
| | 625 |
|
| Selling, general and administrative | (91 | ) | | (104 | ) | | (118 | ) | | — |
| | (313 | ) |
| Restructuring costs | (1 | ) | | (3 | ) | | (2 | ) | | — |
| | (6 | ) |
| Other operating expense, net | (14 | ) | | (1 | ) | | 1 |
| | — |
| | (14 | ) |
| OPERATING INCOME (LOSS) | (180 | ) | | 288 |
| | 184 |
| | — |
| | 292 |
|
| Other income (expense), net | 77 |
| | 17 |
| | (68 | ) | | — |
| | 26 |
|
| Equity in earnings of affiliates | — |
| | 19 |
| | 8 |
| | — |
| | 27 |
|
| Interest income (expense), net | (118 | ) | | 29 |
| | 22 |
| | — |
| | (67 | ) |
| INCOME (LOSS) BEFORE INCOME TAXES | (221 | ) | | 353 |
| | 146 |
| | — |
| | 278 |
|
| Benefit (provision) for income taxes | (2 | ) | | (81 | ) | | (66 | ) | | — |
| | (149 | ) |
| Equity income from continuing operations of subsidiaries | 343 |
| | 88 |
| | — |
| | (431 | ) | | — |
|
| INCOME FROM CONTINUING OPERATIONS | 120 |
| | 360 |
| | 80 |
| | (431 | ) | | 129 |
|
| LOSS FROM DISCONTINUED OPERATIONS, net of tax | (3 | ) | | (1 | ) | | (1 | ) | | 2 |
| | (3 | ) |
| NET INCOME | 117 |
| | 359 |
| | 79 |
| | (429 | ) | | 126 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | (9 | ) | | — |
| | (9 | ) |
| NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 117 |
| | $ | 359 |
| | $ | 70 |
| | $ | (429 | ) | | $ | 117 |
|
(1) Prior period has been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) (In millions) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Fiscal Year Ended September 30, 2018 (1) |
| | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
| Net income | $ | 117 |
| | $ | 359 |
| | $ | 79 |
| | $ | (429 | ) | | $ | 126 |
|
| Other comprehensive income, net of tax | (21 | ) | | (42 | ) | | (41 | ) | | 81 |
| | (23 | ) |
| Total comprehensive income | 96 |
| | 317 |
| | 38 |
| | (348 | ) | | 103 |
|
Less: Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
| Comprehensive income attributable to Meritor, Inc. | $ | 96 |
| | $ | 317 |
| | $ | 31 |
| | $ | (348 | ) | | $ | 96 |
|
(1) Prior period has been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (In millions) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Fiscal Year Ended September 30, 2017 (1) |
| | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
| Sales | | | | | | | | | |
| External | $ | — |
| | $ | 1,762 |
| | $ | 1,585 |
| | $ | — |
| | $ | 3,347 |
|
| Subsidiaries | — |
| | 123 |
| | 149 |
| | (272 | ) | | — |
|
| Total sales | — |
| | 1,885 |
| | 1,734 |
| | (272 | ) | | 3,347 |
|
| Cost of sales | (37 | ) | | (1,583 | ) | | (1,502 | ) | | 272 |
| | (2,850 | ) |
| GROSS MARGIN | (37 | ) | | 302 |
| | 232 |
| | — |
| | 497 |
|
| Selling, general and administrative | (82 | ) | | (100 | ) | | (84 | ) | | — |
| | (266 | ) |
| Restructuring costs | 2 |
| | (2 | ) | | (6 | ) | | — |
| | (6 | ) |
| Other operating expense, net | (3 | ) | | (1 | ) | | (3 | ) | | — |
| | (7 | ) |
| OPERATING INCOME (LOSS) | (120 | ) | | 199 |
| | 139 |
| | — |
| | 218 |
|
| Other income (expense), net | 14 |
| | (11 | ) | | (12 | ) | | — |
| | (9 | ) |
| Gain on sale of equity investment | — |
| | 243 |
| | — |
| | — |
| | 243 |
|
| Equity in earnings of affiliates | — |
| | 42 |
| | 6 |
| | — |
| | 48 |
|
| Interest income (expense), net | (168 | ) | | 35 |
| | 14 |
| | — |
| | (119 | ) |
| INCOME (LOSS) BEFORE INCOME TAXES | (274 | ) | | 508 |
| | 147 |
| | — |
| | 381 |
|
| Benefit (provision) for income taxes | 96 |
| | (126 | ) | | (22 | ) | | — |
| | (52 | ) |
| Equity income from continuing operations of subsidiaries | 503 |
| | 114 |
| | — |
| | (617 | ) | | — |
|
| INCOME FROM CONTINUING OPERATIONS | 325 |
| | 496 |
| | 125 |
| | (617 | ) | | 329 |
|
| LOSS FROM DISCONTINUED OPERATIONS, net of tax | (1 | ) | | (1 | ) | | (1 | ) | | 2 |
| | (1 | ) |
| NET INCOME | 324 |
| | 495 |
| | 124 |
| | (615 | ) | | 328 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 324 |
| | $ | 495 |
| | $ | 120 |
| | $ | (615 | ) | | $ | 324 |
|
(1) Prior period has been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) (In millions) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Fiscal Year Ended September 30, 2017 (1) |
| | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
| Net income | $ | 324 |
| | $ | 495 |
| | $ | 124 |
| | $ | (615 | ) | | $ | 328 |
|
| Other comprehensive income, net of tax | 264 |
| | 21 |
| | 23 |
| | (44 | ) | | 264 |
|
| Total comprehensive income | 588 |
| | 516 |
| | 147 |
| | (659 | ) | | 592 |
|
Less: Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Comprehensive income attributable to Meritor, Inc. | $ | 588 |
| | $ | 516 |
| | $ | 143 |
| | $ | (659 | ) | | $ | 588 |
|
(1) Prior period has been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING BALANCE SHEET (In millions) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | September 30, 2019 |
| | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
| CURRENT ASSETS | | | | | | | | | |
| Cash and cash equivalents | $ | 4 |
| | $ | 4 |
| | $ | 100 |
| | $ | — |
| | $ | 108 |
|
| Receivables, trade and other, net | 3 |
| | 92 |
| | 456 |
| | — |
| | 551 |
|
| Inventories | — |
| | 292 |
| | 234 |
| | — |
| | 526 |
|
| Other current assets | 6 |
| | 10 |
| | 15 |
| | — |
| | 31 |
|
| TOTAL CURRENT ASSETS | 13 |
| | 398 |
| | 805 |
| | — |
| | 1,216 |
|
| NET PROPERTY | 21 |
| | 260 |
| | 234 |
| | — |
| | 515 |
|
| GOODWILL | — |
| | 337 |
| | 141 |
| | — |
| | 478 |
|
| OTHER ASSETS | 170 |
| | 225 |
| | 211 |
| | — |
| | 606 |
|
| INVESTMENTS IN SUBSIDIARIES | 4,432 |
| | 899 |
| | — |
| | (5,331 | ) | | — |
|
| TOTAL ASSETS | $ | 4,636 |
| | $ | 2,119 |
| | $ | 1,391 |
| | $ | (5,331 | ) | | $ | 2,815 |
|
| CURRENT LIABILITIES | | | | | | | | | |
| Short-term debt | $ | 32 |
| | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | 41 |
|
| Accounts and notes payable | 53 |
| | 283 |
| | 274 |
| | — |
| | 610 |
|
| Other current liabilities | 77 |
| | 109 |
| | 99 |
| | — |
| | 285 |
|
| TOTAL CURRENT LIABILITIES | 162 |
| | 392 |
| | 382 |
| | — |
| | 936 |
|
| LONG-TERM DEBT | 898 |
| | — |
| | 4 |
| | — |
| | 902 |
|
| RETIREMENT BENEFITS | 312 |
| | 1 |
| | 23 |
| | — |
| | 336 |
|
| INTERCOMPANY PAYABLE (RECEIVABLE) | 2,833 |
| | (3,005 | ) | | 172 |
| | — |
| | — |
|
| OTHER LIABILITIES | 46 |
| | 112 |
| | 68 |
| | — |
| | 226 |
|
| MEZZANINE EQUITY | — |
| | — |
| | — |
| | — |
| | — |
|
EQUITY ATTRIBUTABLE TO MERITOR, INC. | 385 |
| | 4,619 |
| | 712 |
| | (5,331 | ) | | 385 |
|
| NONCONTROLLING INTERESTS | — |
| | — |
| | 30 |
| | — |
| | 30 |
|
| TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY | $ | 4,636 |
| | $ | 2,119 |
| | $ | 1,391 |
| | $ | (5,331 | ) | | $ | 2,815 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING BALANCE SHEET (In millions) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | September 30, 2018 |
| | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
| CURRENT ASSETS | | | | | | | | | |
| Cash and cash equivalents | $ | 24 |
| | $ | 6 |
| | $ | 85 |
| | $ | — |
| | $ | 115 |
|
| Receivables, trade and other, net | 2 |
| | 62 |
| | 524 |
| | — |
| | 588 |
|
| Inventories | — |
| | 242 |
| | 235 |
| | — |
| | 477 |
|
| Other current assets | 6 |
| | 12 |
| | 28 |
| | — |
| | 46 |
|
| TOTAL CURRENT ASSETS | 32 |
| | 322 |
| | 872 |
| | — |
| | 1,226 |
|
| NET PROPERTY | 24 |
| | 241 |
| | 218 |
| | — |
| | 483 |
|
| GOODWILL | — |
| | 250 |
| | 171 |
| | — |
| | 421 |
|
| OTHER ASSETS | 179 |
| | 182 |
| | 235 |
| | — |
| | 596 |
|
| INVESTMENTS IN SUBSIDIARIES | 3,583 |
| | 855 |
| | — |
| | (4,438 | ) | | — |
|
| TOTAL ASSETS | $ | 3,818 |
| | $ | 1,850 |
| | $ | 1,496 |
| | $ | (4,438 | ) | | $ | 2,726 |
|
| CURRENT LIABILITIES | | | | | | | | | |
| Short-term debt | $ | 47 |
| | $ | — |
| | $ | 47 |
| | $ | — |
| | $ | 94 |
|
| Accounts and notes payable | 64 |
| | 297 |
| | 339 |
| | — |
| | 700 |
|
| Other current liabilities | 77 |
| | 71 |
| | 142 |
| | — |
| | 290 |
|
| TOTAL CURRENT LIABILITIES | 188 |
| | 368 |
| | 528 |
| | — |
| | 1,084 |
|
| LONG-TERM DEBT | 726 |
| | — |
| | 4 |
| | — |
| | 730 |
|
| RETIREMENT BENEFITS | 241 |
| | — |
| | 21 |
| | — |
| | 262 |
|
| INTERCOMPANY PAYABLE (RECEIVABLE) | 2,325 |
| | (2,640 | ) | | 315 |
| | — |
| | — |
|
| OTHER LIABILITIES | 50 |
| | 124 |
| | 158 |
| | — |
| | 332 |
|
| MEZZANINE EQUITY | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| EQUITY ATTRIBUTABLE TO MERITOR, INC. | 287 |
| | 3,998 |
| | 440 |
| | (4,438 | ) | | 287 |
|
| NONCONTROLLING INTERESTS | — |
| | — |
| | 30 |
| | — |
| | 30 |
|
| TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY | $ | 3,818 |
| | $ | 1,850 |
| | $ | 1,496 |
| | $ | (4,438 | ) | | $ | 2,726 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (In millions) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Fiscal Year Ended September 30, 2019 |
| | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
| CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | $ | 91 |
| | $ | 49 |
| | $ | 116 |
| | $ | — |
| | $ | 256 |
|
| INVESTING ACTIVITIES | | | | | | | |
| | |
| Capital expenditures | (4 | ) | | (50 | ) | | (49 | ) | | — |
| | (103 | ) |
| Cash paid for investment in Transportation Power, Inc. | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) |
| Cash paid for business acquisitions, net of cash acquired | (168 | ) | | — |
| | — |
| | — |
| | (168 | ) |
| Other investing activities | 6 |
| | — |
| | — |
| | — |
| | 6 |
|
| CASH (USED FOR) INVESTING ACTIVITIES | (172 | ) | | (50 | ) | | (49 | ) | | — |
| | (271 | ) |
| FINANCING ACTIVITIES | | | | | | | |
| | |
| Securitization | — |
| | — |
| | (38 | ) | | — |
| | (38 | ) |
| Redemption of notes | (24 | ) | | — |
| | — |
| | — |
| | (24 | ) |
| Term loan borrowings | 175 |
| | — |
| | — |
| | — |
| | 175 |
|
| Intercompany advances | 11 |
| | — |
| | (11 | ) | | — |
| | — |
|
| Repurchase of common stock | (96 | ) | | — |
| | — |
| | — |
| | (96 | ) |
| Deferred issuance costs | (4 | ) | | — |
| | — |
| | — |
| | (4 | ) |
| Other financing activities | (1 | ) | | (1 | ) | | — |
| | — |
| | (2 | ) |
| CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | 61 |
| | (1 | ) | | (49 | ) | | — |
| | 11 |
|
| EFFECT OF CHANGES IN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| CHANGE IN CASH AND CASH EQUIVALENTS | (20 | ) | | (2 | ) | | 15 |
| | — |
| | (7 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 24 |
| | 6 |
| | 85 |
| | — |
| | 115 |
|
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 4 |
| | $ | 4 |
| | $ | 100 |
| | $ | — |
| | $ | 108 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (In millions) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Fiscal Year Ended September 30, 2018 |
| | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
| CASH PROVIDED BY OPERATING ACTIVITIES | $ | 59 |
| | $ | 55 |
| | $ | 137 |
| | $ | — |
| | $ | 251 |
|
| INVESTING ACTIVITIES | | | | | | | |
| | |
| Capital expenditures | (10 | ) | | (49 | ) | | (45 | ) | | — |
| | (104 | ) |
| Cash paid for business acquisitions, net of cash acquired | (35 | ) | | — |
| | — |
| | — |
| | (35 | ) |
| Cash paid for investment in Transportation Power, Inc. | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) |
| Proceeds from sale of equity method investment | 250 |
| | — |
| | — |
| | — |
| | 250 |
|
| Other investing activities | 4 |
| | — |
| | 2 |
| | — |
| | 6 |
|
| CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | 203 |
| | (49 | ) | | (43 | ) | | — |
| | 111 |
|
| FINANCING ACTIVITIES | | | | | | | |
| | |
| Securitization | — |
| | — |
| | (43 | ) | | — |
| | (43 | ) |
| Redemption of notes | (181 | ) | | — |
| | — |
| | — |
| | (181 | ) |
| Repurchase of common stock | (100 | ) | | — |
| | — |
| | — |
| | (100 | ) |
| Other financing activities | (2 | ) | | (3 | ) | | — |
| | — |
| | (5 | ) |
| Intercompany advances | 35 |
| | — |
| | (35 | ) | | — |
| | — |
|
| CASH USED FOR FINANCING ACTIVITIES | (248 | ) | | (3 | ) | | (78 | ) | | — |
| | (329 | ) |
| EFFECT OF CHANGES IN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | — |
| | — |
| | (6 | ) | | — |
| | (6 | ) |
| CHANGE IN CASH AND CASH EQUIVALENTS | 14 |
| | 3 |
| | 10 |
| | — |
| | 27 |
|
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 10 |
| | 3 |
| | 75 |
| | — |
| | 88 |
|
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 24 |
| | $ | 6 |
| | $ | 85 |
| | $ | — |
| | $ | 115 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (In millions) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Fiscal Year Ended September 30, 2017 |
| | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
| CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | $ | 33 |
| | $ | 85 |
| | $ | 58 |
| | $ | — |
| | $ | 176 |
|
| INVESTING ACTIVITIES | | | | | | | | | |
| Capital expenditures | (9 | ) | | (51 | ) | | (35 | ) | | — |
| | (95 | ) |
| Cash paid for business acquisitions, net of cash acquired | — |
| | (32 | ) | | (2 | ) | | — |
| | (34 | ) |
| Net investing cash flows provided by discontinued operations | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| CASH USED FOR INVESTING ACTIVITIES | (9 | ) | | (81 | ) | | (37 | ) | | — |
| | (127 | ) |
| FINANCING ACTIVITIES | | | | | | | | | |
| Securitization | — |
| | — |
| | 89 |
| | — |
| | 89 |
|
| Proceeds from debt issuance | 325 |
| | — |
| | — |
| | — |
| | 325 |
|
| Redemption of notes | (103 | ) | | — |
| | — |
| | — |
| | (103 | ) |
| Repayment of notes and term loan | (408 | ) | | — |
| | — |
| | — |
| | (408 | ) |
| Other financing activities | (1 | ) | | (3 | ) | | (9 | ) | | — |
| | (13 | ) |
| Debt issuance costs | (12 | ) | | — |
| | — |
| | — |
| | (12 | ) |
| Intercompany advances | 95 |
| | — |
| | (95 | ) | | — |
| | — |
|
| CASH USED FOR FINANCING ACTIVITIES | (104 | ) | | (3 | ) | | (15 | ) | | — |
| | (122 | ) |
| EFFECT OF CHANGES IN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| CHANGE IN CASH AND CASH EQUIVALENTS | (80 | ) | | 1 |
| | 7 |
| | — |
| | (72 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 90 |
| | 2 |
| | 68 |
| | — |
| | 160 |
|
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 10 |
| | $ | 3 |
| | $ | 75 |
| | $ | — |
| | $ | 88 |
|
Basis of Presentation
Certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. As of September 30, 2019 and 2018, Parent-only obligations included $315 million and $248 million, respectively, of pension and retiree medical benefits (see Notes 22 and 23). All debt is debt of the Parent other than $13 million and $51 million at September 30, 2019 and 2018, respectively, (see Note 18) 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 $29 million, $29 million and $1 million for 2019, 2018, and 2017, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
As required by Rules 13a-15(e) and 15d - 15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), management, with the participation of the chief executive officer (CEO) and chief financial officer (CFO), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2019.2020. Based upon that evaluation, our CEO and CFO have concluded that 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 (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the company’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of the CEO and CFO, assessed the effectiveness of the company’s internal control over financial reporting as of September 30, 2019.2020. This evaluation was based on the criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on management’s assessment and the criteria set forth by COSO, we assessed that the internal control over financial reporting was effective as of September 30, 2019.
In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal control over financial reporting for the first fiscal year in which the acquisition occurred. Our management's evaluation of internal control over financial reporting excluded the internal control activities of AxleTech, which we acquired on July 26, 2019, as discussed in Note 4 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. Total revenues subject to AxleTech's internal control over financial reporting were not material to the company for the fiscal year ended September 30, 2019. Total assets subject to AxleTech's internal control over financial reporting represented approximately 9 percent of the company's consolidated total assets for the fiscal year ended September 30, 2019. We will include AxleTech in our assessment of the effectiveness of internal control over financial reporting by fiscal year end 2020.
The independent registered public accounting firm of Deloitte & Touche LLP, as auditors of the Consolidated Balance Sheets of Meritor as of September 30, 20192020 and the related Consolidated Statements of Operations, Comprehensive Income, Cash Flows and Equity for the year ended September 30, 2019,2020, has issued an attestation report on Meritor’s internal control over financial reporting, which is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during our most recently completed fiscal quarter, and there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Meritor, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Meritor, Inc. and subsidiaries (the "Company"“Company”) as of September 29, 2019,27, 2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 29, 2019,27, 2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended September 29, 2019,27, 2020, of the Company and our report dated November 13, 201912, 2020 expressed an unqualified opinion on those financial statements.
As described in Management Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at AxleTech, which was acquired on July 26, 2019, and whose financial statements constitute approximately 9% of total assets and less than 1% of revenues of the consolidated financial statement amounts as of and for the year ended September 29, 2019. Accordingly, our audit did not include the internal control over financial reporting at AxleTech.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
| | | | |
| /s/ | DELOITTE & TOUCHE LLP |
| DELOITTE & TOUCHE LLP |
Detroit, Michigan
November 13, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Item 9B. Other Information.
None.On November 5, 2020, the Board of Directors approved amendments to Section 2.1, Section 2.4, Section 2.6 and Section 2.8A of the Amended and Restated By-laws of the Company to allow for virtual shareholders’ meetings. The Amended and Restated By-laws are attached hereto as Exhibit 3-b and are incorporated herein by reference.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 10 regarding directors is incorporated by reference from the information under the caption Election of Directors – Information as to Nominees for Director and Continuing Directors in Meritor’s definitive Proxy Statement for its 20202021 Annual Meeting (the "2020"2021 Proxy Statement"), which is expected to be filed within 120 days after Meritor’s fiscal year end. The information required by Item 10 regarding executive officers is set forth in Item 4A of Part I of this Form 10-K. The other information required by Item 10, including regarding the audit committee, audit committee financial expert disclosure and our code of ethics, is incorporated by reference from the information under the captions Code of Ethics, Board of Directors and Committees and Director Qualifications and Nominating Procedures in the 20202021 Proxy Statement. Disclosure of delinquent Section 16 filers pursuant to Item 405 of Regulation S-K will be contained in the 20202021 Proxy Statement.
Item 11. Executive Compensation.
See the information under the captions Director Compensation in Fiscal Year 2019,2020, Executive Compensation and CEO Pay Ratio in the 20202021 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Security Ownership of Certain Beneficial Owners and Management
See the information under the captions Voting Securities and Ownership by Management of Equity Securities in the 20202021 Proxy Statement.
Securities Authorized for Issuance under Equity Compensation Plans
The number of stock options outstanding under our equity compensation plans, the weighted average exercise price of outstanding options, and the number of securities remaining available for issuance, as of September 30, 2019,2020, were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| Plan Category | | (column a)
Number of securities
to be issued upon
exercise of outstanding
options, warrants and rights1 | | | (column b)
Weighted average
exercise price of
outstanding options, warrants and rights | | (column c)
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in column a) |
| Equity compensation plans approved by security holders | | — |
| | $ | —$ |
| | 2,873,073 |
| |
| Equity compensation plans not approved by security holders | | — |
| | — |
| | — |
| |
| Total | | — |
| | $ | —$ |
| | 2,873,073 |
| |
____________________
| |
11In addition to stock options, shares of common stock, restricted shares of common stock, restricted share units and performance share units, all of which do not have an exercise price, have been awarded under the Company’s equity compensation plans and were outstanding at September 30, 2020. The number of weighted average shares in column (a) and the weighted average exercise price reported in column (b) does not take these awards into account. | In addition to stock options, shares of common stock, restricted shares of common stock, restricted share units and performance share units, all of which do not have an exercise price, have been awarded under the Company’s equity compensation plans and were outstanding at September 30, 2019. The number of weighted average shares in column (a) and the weighted average exercise price reported in column (b) does not take these awards into account. |
All of the equity compensation plans under which grants are outstanding as shown above were approved by Meritor shareholders.
The following number of shares remained available for issuance under our equity compensation plans at September 30, 2018.2020. Grants may be in the form of any of the listed type of awards.
|
| | | | | | | |
| Plan | Number of shares | Type of award |
20102020 Long-Term Incentive Plan* | 2,873,0734,104,642 | Stock options, stock appreciation rights, stock awards and other stock-based awards |
____________________
| |
* | The 2010 Long-Term Incentive Plan was approved by the Company’s shareholders on January 28, 2010. At that time, the 2007 Long-Term Incentive Plan and the 2004 Directors Stock Plan were terminated. No further awards will be made under those plans, and no stock awards will be made under the Incentive Compensation Plan. On January 20, 2011, January 23, 2014 and January 26, 2017, the Company’s shareholders approved amendments to the 2010 Long-Term Incentive Plan to increase the maximum number of shares that may be granted under the plan. Earlier equity compensation plans were terminated on January 26, 2007, in connection with the approval of the 2007 Long-Term Incentive Plan by the Company’s shareholders. |
* The 2020 Long-Term Incentive Plan was approved by the Company’s shareholders on January 23, 2020. At that time the 2010 Long-Term Incentive Plan was terminated and no new awards will be made under the 2010 Long-Term Incentive Plan. The 2007 Long-Term Incentive Plan and the 2004 Directors Stock Plan were terminated on January 28, 2010. Earlier equity compensation plans were terminated on January 26, 2007.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
See the information under the captions Board of Directors and Committees and Certain Relationships and Related Transactions in the 20202021 Proxy Statement.
Item 14. Principal Accountant Fees and Services.
See the information under the caption Independent Accountants’ Fees in the 20202021 Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements (all financial statements listed below are those of the company and its consolidated subsidiaries):
Consolidated Statement of Operations, years ended September 30, 2020, 2019 2018 and 2017.2018.
Consolidated Statement of Comprehensive Income, years ended September 30, 2020, 2019 2018 and 2017.2018.
Consolidated Balance Sheet, September 30, 20192020 and 2018.2019.
Consolidated Statement of Cash Flows, years ended September 30, 2020, 2019 2018 and 2017.2018.
Consolidated Statement of Shareholders' Equity, years ended September 30, 2020, 2019 2018 and 2017.2018.
Notes to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm.
(2) Financial Statement Schedule for the years ended September 30, 2020, 2019 2018 and 2017.2018.
Schedules not filed with this Annual Report on Form 10-K are omitted because of the absence of conditions under which they are required or because the information called for is shown in the financial statements or related notes.
Item 16.Form 10-K Summary.
None.
| | | | | | | | |
| (3) Exhibits |
| | |
(3) Exhibits |
| 3-a | | |
3-a | | |
| | |
3-b-23-b** | | |
| | |
| 4-a** | | |
| | |
| 4-b | | |
| | |
| 4-b-1 | | First Supplemental Indenture, dated as of July 7, 2000, to the Indenture, dated as of April 1, 1998, between Meritor and The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Midwest Trust Company as successor to The Chase Manhattan Bank), as trustee, filed as Exhibit 4-b-1 to Meritor's Annual Report on Form 10-K (File No. 001-15983) for the fiscal year ended September 30, 2000, is incorporated herein by reference. |
| | |
| 4-b-2 | | Third Supplemental Indenture, dated as of June 23, 2006, to the Indenture, dated as of April 1, 1998, between Meritor and The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Midwest Trust Company as successor to The Chase Manhattan Bank), as trustee (including Subsidiary Guaranty dated as of June 23, 2006), filed as Exhibit 4.2 to Meritor’s Current Report on Form 8-K (File No. 001-15983) filed on June 27, 2006, is incorporated herein by reference. |
| | |
| 4-b-3 | | Sixth Supplemental Indenture, dated as of May 31, 2013, to the Indenture, dated as of April 1, 1998, between Meritor and The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Midwest Trust Company as successor to The Chase Manhattan Bank), as trustee, filed as Exhibit 4 to Meritor's Current Report on Form 8-K filed on May 31, 2013, is incorporated herein by reference. |
| | |
| 4-b-4 | | Seventh Supplemental Indenture, dated as of February 13, 2014, to the Indenture, dated as of April 1, 1998, between Meritor and The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Midwest Trust Company as successor to The Chase Manhattan Bank), as trustee, filed as Exhibit 4.1 to Meritor's Current Report on Form 8-K filed on February 13, 2014, is incorporated herein by reference. |
| | |
4-c | | |
| | |
| | |
| | |
| 4-b-5 | | Eighth Supplemental Indenture, dated as of June 8, 2020, to the Indenture, dated as of April 1, 1998, between Meritor, U.S. Bank National Association, as trustee, and The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Midwest Trust company as successor to The Chase Manhattan Bank), as predecessor trustee, filed as Exhibit 4-a to Meritor's Current Report on Form 8-k filed on June 8, 2020, is incorporated herein by reference. |
| | |
| 4-c | | |
| | |
4-d | | | | | | | | |
| 4-d | | |
| | |
| 4-e | | |
| | |
| 10-a-1 | | Fourth Amendment and Restatement Agreement relating to Fourth Amended and Restated Credit Agreement, dated as of June 7, 2019, among Meritor, ArvinMeritor Finance Ireland (“AFI”), the financial institutions party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, filed as Exhibit 10-a to Meritor’s Current Report on Form 8-K filed on June 10, 2019, is incorporated herein by reference. |
| | |
| 10-a-2 | | Third Amended and Restated Pledge and Security Agreement, dated as of March 31, 2017, by and among Meritor, the subsidiaries named therein, the financial institutions party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, filed as Exhibit 10-b to Meritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 2017, is incorporated herein by reference. |
|
| | |
*10-b10-a-3 | | Amendment No. 1 to Fourth Amended and Restated Credit Agreement, dated as of March 12, 2020, among Meritor, the subsidiaries named therein, the financial institutions party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, filed as Exhibit 10-a to Meritor's Quarterly report on Form 10-Q for the fiscal quarter ended March 29, 2020, is incorporated herein by reference. |
| | |
| 10-a-4 | | Amendment No. 2 to Fourth Amended and Restated Credit Agreement and Amendment No. 2 to Third Amended and Restated Pledge and Security Agreement, dated as of June 26, 2020, among Meritor, the subsidiaries named therein, the financial institutions party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, filed as Exhibit 10-a to Meritor's Quarterly report on Form 10-Q for the fiscal quarter ended June 28, 2020, is incorporated herein by reference. |
| | | | | | | | | | | |
| *10-b | | | |
| | | |
| *10-b-1 | | | |
| | | |
| *10-c | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| *10-c-1 | | | |
| | | |
| *10-c-2 | | | |
| | | |
| *10-c-3 | | | |
| | | |
| *10-c-4 | | | |
| | | |
| | | |
| | | |
| *10-d | | | |
| | | |
|
| | |
| | | |
| *10-g-1 | | | |
| | | |
| *10-g-2 | | | |
| | | |
10-h10-h** | | | |
| | | |
| 10-h-1 | | | |
| | | |
| 10-h-2 | | | |
| | | |
| 10-h-3 | | | |
| | | |
| 10-h-4 | | | |
| | | |
| 10-h-5 | | | |
| | | |
| 10-i | | Receivables Purchase Agreement dated as of February 19, 2019, by and among Meritor Heavy Vehicle Braking Systems (USA), LLC and Meritor Heavy Vehicle Systems, LLC, as sellers, and Nordea Bank AB, as purchaser, filed as Exhibit 10-a to Meritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2019, is incorporated herein by reference. | |
| | | |
10-i | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 10-j | | Receivables Purchase Agreement dated as of March 22, 2017, by and among Meritor HVS AB, as seller, and Viking Asset Purchaser No 7 IC, as purchaser, and Citicorp Trustee Company Limited, as programme trustee, filed as Exhibit 10-c to Meritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 2017, is incorporated herein by reference. | |
| | | |
10-j10-j-1 | | Extension dated March 19, 2020 of Receivables Purchase Agreement dated as of March 22, 2017, by and among Meritor HVS AB, as seller, and Viking Asset Purchaser No 7 IC, as purchaser, and Citicorp Trustee Company Limited, as programme trustee, filed as Exhibit 10-b to Meritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2020, is incorporated herein by reference. | |
| | | |
| | | | | | | | | | | |
| 10-k | | | |
| | | |
10-j-110-k-1 | | Extension dated January 24, 2013 of Receivable Purchase Agreement dated February 2, 2012 between Meritor Heavy Vehicle Braking Systems (UK) Limited, as seller, and Viking Asset Purchaser No. 7 IC, as purchaser, and Citicorp Trustee Company Limited, as programme trustee, filed as Exhibit 10-d to Meritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 30, 2012, is incorporated herein by reference. | |
| | | |
10-j-210-k-2 | | Extension dated January 23, 2018 of Receivable Purchase Agreement dated February 2, 2012 between Meritor Heavy Vehicle Braking Systems (UK) Limited, as seller, and Viking Asset Purchaser No. 7 IC, as purchaser, and Citicorp Trustee Company Limited, as programme trustee, filed as Exhibit 10-c to Meritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2017, is incorporated herein by reference. | |
| | | |
10-k10-l | | | |
| | | | | | | | |
| | |
10-k-110-l-1 | | |
| | |
10-l10-m | | Receivables Purchase Agreement dated June 18, 2012 among ArvinMeritor Receivables Corporation, as seller, Meritor, Inc., as initial servicer, the various Conduit Purchasers, Related Committed Purchasers, LC Participants and Purchaser Agents from time to time party thereto, and PNC Bank, National Association, as issuers of Letters of Credit and as Administrator, filed as Exhibit 10-b to the Quarterly Report on Form 10-Q (File No. 001-15983) for the fiscal quarter ended July 1, 2012, is incorporated herein by reference. |
| | |
10-l-110-m-1 | | First Amendment to Receivables Purchase Agreement dated as of December 14, 2012 among ArvinMeritor Receivables Corporation, as seller, Meritor, Inc., as initial servicer, PNC Bank, National Association, as a Related Committed Purchaser, as an LC Participant, as a Purchaser Agent, as LC Bank and as Administrator, and Market Street Funding, LLC, as a Conduit Purchaser, filed as Exhibit 10-a to Meritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 30, 2012, is incorporated herein by reference. |
| | |
10-l-210-m-2 | | Second Amendment to Receivables Purchase Agreement dated June 21, 2013 among ArvinMeritor Receivables Corporation, as seller, Meritor, Inc., as initial servicer, PNC Bank, National Association, as a Related Committed Purchaser, as an LC Participant, as a Purchaser Agent, as LC Bank and as Administrator, and Market Street Funding LLC, as a Conduit Purchaser, filed as Exhibit 10 to Meritor’s Current Report on Form 8-K filed on June 21, 2013, is incorporated herein by reference. |
|
| | |
| 10-m-3 | | |
10-l-3 | | Third Amendment to Receivables Purchase Agreement dated as of October 11, 2013 among ArvinMeritor Receivables Corporation, as seller, Meritor, Inc., as servicer, PNC Bank, National Association, as a Related Committed Purchaser, as an LC Participant, as a Purchaser Agent, as LC Bank, as Administrator and as Assignee, and Market Street Funding LLC, as Conduit Purchaser and as Assignor, filed as Exhibit 10-m-16 to Meritor's Annual Report on Form 10-K for the fiscal year ended September 29, 2013 (the "2013 Form 10-K"), is incorporated herein by reference. |
| | |
10-l-410-m-4 | | Fourth Amendment to the Receivables Purchase Agreement dated as of October 15, 2014, by and among ArvinMeritor Receivables Corporation, as Seller, Meritor, Inc., as Initial Servicer, and PNC Bank, National Association, as a Related Committed Purchaser, as an LC Participant, as a Purchaser Agent, as LC Bank and as Administrator, filed as Exhibit 10 to Meritor’s Current Report on Form 8-K filed on October 20, 2014, is incorporated herein by reference. |
| | |
10-l-510-m-5 | | Fifth Amendment to the Receivables Purchase Agreement dated as of December 4, 2015, by and among ArvinMeritor Receivables Corporation, as Seller, Meritor, Inc., as Initial Servicer, and PNC Bank, National Association, as a Related Committed Purchaser, as an LC Participant, as a Purchaser Agent, as LC Bank and as Administrator, filed as Exhibit 10-a to Meritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 3, 2016, is incorporated herein by reference. |
| | |
| | | | | | | | |
10-l-610-m-6 | | Sixth Amendment to the Receivables Purchase Agreement dated as of December 5, 2016, by and among ArvinMeritor Receivables Corporation, as Seller, Meritor, Inc., as Initial Servicer, and PNC Bank, National Association, as a Related Committed Purchaser, as an LC Participant, as a Purchaser Agent, as LC Bank and as Administrator, filed as Exhibit 10-c to Meritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 1, 2017, is incorporated herein by reference. |
| | |
10-l-710-m-7 | | Seventh Amendment to the Receivables Purchase Agreement dated as of June 22, 2017, by and among ArvinMeritor Receivables Corporation, as Seller, Meritor, Inc., as Initial Servicer, and PNC Bank, National Association, as a Related Committed Purchaser, as an LC Participant, as a Purchaser Agent, as LC Bank and as Administrator, filed as Exhibit 10-b to Meritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 2, 2017, is incorporated herein by reference. |
| | |
10-l-810-m-8 | | Eighth Amendment to the Receivables Purchase Agreement dated as of December 5, 2017, by and among ArvinMeritor Receivables Corporation, as Seller, Meritor, Inc., as Initial Servicer, and PNC Bank, National Association, as a Related Committed Purchaser, as an LC Participant, as a Purchaser Agent, as LC Bank and as Administrator, filed as Exhibit 10-b to Meritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2017, is incorporated herein by reference. |
| | |
10-l-910-m-9 | | Ninth Amendment to the Receivables Purchase Agreement dated as of October 4, 2018, by and among ArvinMeritor Receivables Corporation, as Seller, Meritor, Inc., as Initial Servicer, and PNC Bank, National Association, as a Related Committed Purchaser, as an LC Participant, as a Purchaser Agent, as LC Bank and as Administrator, filed as Exhibit 10-1-9 to Meritor's Annual Report on Form 10-K for the fiscal year ended September 30, 2018, is incorporated herein by reference. |
| | |
10-1-10**10-m-10 | | Tenth Amendment to the Receivables Purchase Agreement dated as of September 16, 2019, by and among ArvinMeritor Receivables Corporation, as Seller, Meritor, Inc., as Initial Servicer, and PNC Bank, National Association, as a Related Committed Purchaser, as an LC Participant, as a Purchaser Agent, as LC Bank and as Administrator.Administrator, filed as Exhibit 10-l-10 to Meritor's Annual report on Form 10-K for the fiscal year ended September 29, 2019, is incorporated herein by reference.
|
| | |
10-m10-n | | Fourth Amended and Restated Purchase and Sale Agreement dated June 18, 2012 among Meritor Heavy Vehicle Braking Systems (U.S.A.), LLC, and Meritor Heavy Vehicle Systems, LLC, as originators, Meritor, Inc., as initial servicer, and ArvinMeritor Receivables Corporation, as buyer, filed as Exhibit 10-a to the Quarterly Report on Form 10-Q (File No. 001-15983) for the fiscal quarter ended July 1, 2012, is incorporated herein by reference. |
| | |
10-m-110-n-1 | | Letter Agreement relating to Fourth Amended and Restated Receivables Purchase Agreement dated as of December 14, 2012 among Meritor Heavy Vehicle Braking Systems (U.S.A.), LLC, Meritor Heavy Vehicle Systems, LLC, ArvinMeritor Receivables Corporation, Meritor, Inc. and PNC Bank, National Association, filed as Exhibit 10-b to Meritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 30, 2012, is incorporated herein by reference. |
| | |
|
| | |
10-n | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| 10-o | | |
| | |
*10-o10-p | | Agreement and Plan of Merger dated as of May 3, 2019 by and among Meritor, Inc., Janus Merger Sub, LLC, CAX Parent, LLC, and Carlyle Equity Opportunity GP, L.P., solely in its capacity as Holder Representative, filed as Exhibit 10-a to Meritor’s Current Report on Form 8-K filed on May 8, 2019, is incorporated herein by reference.
|
| | |
*10-p10-q | | |
| | |
*10-q10-r | | |
| | |
*10-r | | |
| | |
| | | | | | | | |
| *10-s | | |
| | |
*10-s**10-t | | |
| | |
| *10-u** | | |
| | |
*10-t*10-v** | | |
| | |
| | |
| | |
| 21** | | |
| | |
23-a*22** | | |
| | |
| 23-a** | | |
| | |
| 23-b** | | |
| | |
| | |
| | |
| 24** | | |
| | |
| 31-a** | | |
| | |
| 31-b** | | |
| | |
| 32-a** | | |
| | |
| 32-b** | | |
|
| | | | | | | |
| |
| 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 |
____________________
*Management contract or compensatory plan or arrangement.
** Filed herewith.
Item 16.Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. | |
| | |
| By: | /s/ April Miller Boise | Hannah S. Lim-Johnson |
| April Miller BoiseHannah S. Lim-Johnson |
| Senior Vice President, Chief Legal Officer and Corporate Secretary |
Date: November 13, 201912, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 1312th day of November, 20192020 by the following persons on behalf of the registrant and in the capacities indicated.
|
| | | | |
| William R. Newlin* | Chairman of the Board of Directors |
| |
| Steven Beringhause, Jan A. Bertsch, Rodger L. Boehm, | |
Rhonda L. Brooks, Ivor J. Evans, William J. Lyons,Fazal Merchant, | Directors |
| Thomas L. Pajonas, Lloyd G. Trotter* | |
| |
| Jay A. Craig* | Chief Executive Officer and President (Principal Executive Officer) and Director |
| |
| Carl D. Anderson II* | Senior Vice President, Chief Financial Officer (Principal Financial Officer) |
| |
| Paul D. Bialy* | Vice President, Chief Accounting Officer (Principal Accounting Officer) |
|
| | | | |
| * By: | /s/ April Miller BoiseHannah S. Lim-Johnson |
| April Miller BoiseHannah S. Lim-Johnson |
| Attorney-in-fact ** |
** By authority of powers of attorney filed herewith.
