News Column

MERITOR INC - 10-Q - Management's Discussion and Analysis of Financial Conditions and Results of Operations

January 30, 2014

OVERVIEW Meritor, Inc. (the "company", "our", "we" or "Meritor"), headquartered in Troy, Michigan , is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers ("OEMs") and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, off-highway, military, bus and coach and other industrial OEMs and certain aftermarkets. Meritor common stock is traded on the New York Stock Exchange under the ticker symbol MTOR. 1st Quarter Fiscal Year 2014 results Our sales for the first quarter of fiscal year 2014 were $907 million , an increase compared to $891 million in the prior year. We experienced higher sales in our Commercial Truck & Industrial segment driven primarily by higher production volumes mainly in Europe and South America . Income from continuing operations in the first quarter of fiscal year 2014 was $11 million , or $0.11 per diluted share, compared to loss from continuing operations of $16 million , or $0.17 per diluted share, in the prior year. Net income for the first quarter of fiscal year 2014 was $11 million compared to net loss of $21 million in the prior year. Adjusted EBITDA (see Non-GAAP Financial Measures below) for the first quarter of fiscal year 2014 was $70 million compared to $46 million in the prior year. Our Adjusted EBITDA margin in the first quarter of fiscal year 2014 was 7.7 percent compared to 5.2 percent in the same period a year ago. Total Adjusted EBITDA and Adjusted EBITDA margin increased compared to the prior year primarily as a result of certain pricing actions executed throughout calendar year 2013, reductions in material and structural costs, and higher sales in the first quarter of fiscal year 2014 . Cash flows used by operating activities were $4 million in the first quarter of fiscal year 2014 compared to $91 million in the first quarter of the prior fiscal year. This improvement is primarily due to an increase in factored receivables, less cash used for working capital, and higher net income. Trends and Uncertainties Production Volumes The following table reflects estimated commercial truck production volumes for selected original equipment markets for the three months ended December 31, 2013 and 2012 based on available sources and management's estimates. Three Months Ended December 31, Percent 2013 2012 Change Estimated Commercial Truck production (in thousands) North America , Heavy-Duty Trucks 60 57 5 % North America, Medium-Duty Trucks 52 45 16 % Western Europe, Heavy- and Medium-Duty Trucks 114 95 20 % South America, Heavy- and Medium-Duty Trucks 52 38 37 % During fiscal year 2014, we expect a slight increase in production volumes in North America compared to the levels experienced in fiscal year 2013. We anticipate a slight decrease in production volumes in South America resulting from continued economic uncertainty during fiscal year 2014. In line with our expectations, in the first quarter of fiscal year 2014, production volumes in Europe ramped up in advance of the new commercial truck emission standard requirements. Although we expect volumes to be up slightly year-over-year, we anticipate a decline in production for the remainder of the year from first quarter levels and on a year-over-year basis. Production volumes in China are expected to remain unchanged during fiscal year 2014 compared to levels experienced in fiscal year 2013. We expect the market in India to be down another 8% in fiscal year 2014 given the current economic climate. There is no certainty as to if and when these volumes in the Asia-Pacific region will return to the levels previously experienced. Sales for our primary military program were at their peak during the third quarter of fiscal year 2012 and began to wind down beginning in fiscal year 2013. The program is scheduled to terminate in 2015. We are working to secure our participation in new military programs with various OEMs. However, failure to secure new military contracts could have a longer-term negative impact on our Commercial Truck and Industrial Segment. In addition, even if sales of our military programs do return to historical levels, the profitability on these sales could be lower than what we have recognized in recent periods. 39 -------------------------------------------------------------------------------- MERITOR, INC. Industry-Wide Issues Our business continues to address a number of other challenging industry-wide issues including the following: Uncertainty around the global market outlook; Volatility in price and availability of steel, components and other commodities; Disruptions in the financial markets and their impact on the availability and cost of credit; Higher energy and transportation costs; Impact of currency exchange rate volatility; Consolidation and globalization of OEMs and their suppliers; and Significant pension and retiree medical health care costs. Other Other significant factors that could affect our results and liquidity in fiscal year 2014 and beyond include: Significant contract awards or losses of existing contracts or failure to negotiate acceptable terms in contract renewals (including, without limitation, negotiations with our largest customer, Volvo, which are ongoing regarding our contract with Volvo covering axle supply in Europe , South America and Australia , which is scheduled to expire in October 2014); Failure to obtain new business; Failure to secure new military contracts as our primary military program winds down; Ability to manage possible adverse effects on our European operations, or financing arrangements related thereto, in the event one or more countries exit the European monetary union; Ability to work with our customers to manage rapidly changing production volumes; Ability to recover and timing of recovery of steel price and other cost increases from our customers; Any unplanned extended shutdowns or production interruptions by us, our customers or our suppliers; A significant deterioration or slowdown in economic activity in the key markets in which we operate; Higher than planned price reductions to our customers; Potential price increases from our suppliers; Additional restructuring actions and the timing and recognition of restructuring charges; Higher than planned warranty expenses, including the outcome of known or potential recall campaigns; Our ability to implement planned productivity, cost reduction, and other margin improvement initiatives; Uncertainties of asbestos claim litigation and the outcome of litigation with insurance companies regarding the scope of coverage and the long-term solvency of our insurance carriers; and Restrictive government actions by foreign countries (such as restrictions on transfer of funds and trade protection measures, including export duties and quotas and customs duties and tariffs). NON-GAAP FINANCIAL MEASURES In addition to the results reported in accordance with accounting principles generally accepted in the United States (GAAP), we have provided information regarding non-GAAP financial measures. These non-GAAP financial measures include Adjusted income (loss) from continuing operations, Adjusted diluted earnings (loss) per share from continuing operations, Adjusted EBITDA, Adjusted EBITDA margin, Free cash flow and Free cash flow from continuing operations before restructuring payments. 40 -------------------------------------------------------------------------------- MERITOR, INC. Adjusted income (loss) from continuing operations and Adjusted diluted earnings (loss) per share from continuing operations are defined as reported income or loss from continuing operations and reported diluted earnings or loss per share from continuing operations before restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA is defined as income (loss) from continuing operations before interest, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by consolidated sales. Free cash flow is defined as cash flows provided by (used for) operating activities less capital expenditures. Management believes Adjusted EBITDA and Adjusted income (loss) from continuing operations are meaningful measures of performance as they are commonly utilized by management and investors to analyze ongoing operating performance and entity valuation. Management, the investment community and banking institutions routinely use Adjusted EBITDA and Adjusted EBITDA margin, together with other measures, to measure operating performance in our industry. Further, management uses Adjusted EBITDA for planning and forecasting future periods. In addition, we use Segment EBITDA as the primary basis to evaluate the performance of each of our reportable segments. Management believes that Free cash flow and Free cash flow from continuing operations before restructuring are useful in analyzing our ability to service and repay debt. Adjusted income (loss) from continuing operations and Adjusted diluted earnings (loss) per share from continuing operations and Adjusted EBITDA should not be considered a substitute for the reported results prepared in accordance with GAAP and should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. Free cash flow and Free cash flow from continuing operations before restructuring should not be considered a substitute for cash provided by (used for) operating activities, or other cash flow statement data prepared in accordance with GAAP, or as a measure of financial position or liquidity. In addition, these non-GAAP cash flow measures do not reflect cash used to service debt or cash received from the divestitures of businesses or sales of other assets and thus do not reflect funds available for investment or other discretionary uses. These non-GAAP financial measures, as determined and presented by the company, may not be comparable to related or similarly titled measures reported by other companies. Set forth below are reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP. Adjusted income (loss) from continuing operations and Adjusted diluted earnings (loss) per share are reconciled to income (loss) from continuing operations and diluted earnings (loss) per share below (in millions, except per share amounts). Three Months Ended December 31, 2013 2012 Adjusted income (loss) from continuing operations $ 12 $ (11 ) Restructuring costs, net of tax (1 ) (5 ) Income (loss) from continuing operations $ 11 $ (16 ) Adjusted diluted earnings (loss) per share from continuing operations $ 0.12 $ (0.11 ) Impact of adjustments on diluted earnings (loss) per share (0.01 ) (0.06 ) Diluted earnings (loss) per share from continuing operations $ 0.11 $ (0.17 ) 41 -------------------------------------------------------------------------------- MERITOR, INC. Free cash flow and Free cash flow from continuing operations before restructuring payments are reconciled to cash flows used for operating activities below (in millions). Three Months Ended December 31 , 2013 2012 Cash used for operating activities - continuing operations $ (1 ) $ (81 ) Capital expenditures - continuing operations (12 ) (15 ) Free cash flow - continuing operations (13 ) (96 ) Cash used for operating activities - discontinued operations (3 ) (10 ) Free cash flow - discontinued operations (3 ) (10 ) Free cash flow - total company $ (16 ) $ (106 ) Free cash flow - continuing operations $ (13 ) $ (96 ) Restructuring payments - continuing operations 3 5 Free cash flow from continuing operations before restructuring payments $ (10 ) $ (91 ) 42 -------------------------------------------------------------------------------- MERITOR, INC. Adjusted EBITDA is reconciled to net income attributable to Meritor, Inc. in "Results of Operations" below. Results of Operations The following is a summary of our financial results is (in millions, except per share amounts): Three Months Ended December 31, 2013 2012 SALES: Commercial Truck & Industrial $ 727 $ 715 Aftermarket & Trailer 208 203 Intersegment Sales (28 ) (27 ) SALES $ 907 $ 891 SEGMENT EBITDA: Commercial Truck & Industrial $ 53 $ 34 Aftermarket & Trailer 19 13 SEGMENT EBITDA 72 47 Unallocated legacy and corporate costs, net (1) (2 ) (1 ) ADJUSTED EBITDA 70 46 Interest expense, net (27 ) (29 ) Provision for income taxes (10 ) (10 ) Depreciation and amortization (16 ) (16 ) Noncontrolling interests (2 ) - Loss on sale of receivables (3 ) (1 ) Restructuring costs (1 ) (6 ) INCOME (LOSS) FROM CONTINUING OPERATIONS, attributable to Meritor, Inc. $ 11 $ (16 ) LOSS FROM DISCONTINUED OPERATIONS, net of tax, attributable to Meritor, Inc. - (5 ) NET INCOME (LOSS) attributable to Meritor, Inc. $ 11 $ (21 ) DILUTED EARNINGS (LOSS) PER SHARE attributable to Meritor, Inc. Continuing operations $ 0.11 $ (0.17 ) Discontinued operations - (0.05 ) Diluted earnings (loss) per share $ 0.11 $ (0.22 ) DILUTED AVERAGE COMMON SHARES OUTSTANDING 98.7 96.7 (1) Unallocated legacy and corporate costs, net represent items that are not directly related to our business segments. These costs primarily include pension and retiree medical costs associated with recently sold businesses and other legacy costs for environmental and product liability. 43 -------------------------------------------------------------------------------- MERITOR, INC. Three Months Ended December 31, 2013 Compared to Three Months Ended December 31, 2012 Sales The following table reflects total company and business segment sales for the three months ended December 31, 2013 and 2012. The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales. Business segment sales include intersegment sales (in millions). Three months Ended Dollar Change Due To December 31, Dollar % Volume / 2013 2012 Change Change Currency Other Sales: Commercial Truck & Industrial $ 727 $ 715 $ 12 2 % $ (11 ) $ 23 Aftermarket & Trailer 208 203 5 2 % 3 2 Intersegment Sales (28 ) (27 ) (1 ) (4 )% (2 ) 1 TOTAL SALES $ 907 $ 891 $ 16 2 % $ (10 ) $ 26 Commercial Truck & Industrial sales were $727 million in the first three months of fiscal year 2014, up 2% percent compared to the first three months of fiscal year 2013. The increase was primarily due to higher commercial truck production in Europe , driven by pre-buy associated with the Euro 6 regulation impact. In addition, South America revenue was higher on a year-over-year basis as production volumes a year ago were still challenged following the Euro 5 emissions standards change. These increases were partially offset by a sales decrease in North America associated with the planned step down in volumes for the FMTV program and continued weakness in India compared to the prior year. Aftermarket & Trailer sales were $208 million in the first three months of fiscal year 2014, up 2% percent compared to the first three months of fiscal year 2013. Cost of Sales and Gross Profit Cost of sales primarily represents materials, labor and overhead production costs associated with the company's products and production facilities. Cost of sales for the three months ended December 31, 2013 was $804 million compared to $808 million in the prior year, representing a slight decrease of less than 1 percent. Total cost of sales was approximately 89 percent and 91 percent of sales for the three month periods ended December 31, 2013 and 2012, respectively. The following table summarizes significant factors contributing to the changes in costs of sales during the three months of fiscal year 2014 compared to the same period in the prior year (in millions): Cost of Sales Three months ended December 31, 2012 $ 808 Volume, mix and other, net 3 Foreign exchange (7 ) Three months ended December 31, 2013 $ 804 Changes in the components of cost of sales year over year are summarized as follows (in millions): Change in Cost of Sales Higher (lower) material costs $ (10 ) Higher (lower) labor and overhead costs 9 Other, net (3 ) Total change in costs of sales $ (4 ) 44 -------------------------------------------------------------------------------- MERITOR, INC. Material costs represent the majority of our cost of sales and include raw materials, composed primarily of steel and purchased components. Material costs for the three months ended December 31, 2013 decreased $10 million compared to the same period in the prior year primarily as a result of net material savings. Labor and overhead costs increased $9 million compared to the same period in the prior year primarily as a result of higher volume. Other, net decreased $3 million compared to the same period in the prior year. The decrease was primarily due to currency losses in our operations compared to the prior year. Gross profit for the three months ended December 31, 2013 was $103 million compared to $83 million in the same period last year. Gross profit, as a percentage of sales, was 11.4 percent and 9.3 percent for the three months ended December 31, 2013 and 2012, respectively. Other Income Statement Items Selling, general and administrative expenses for the three months ended December 31, 2013 and 2012 are summarized as follows (in millions): Three Months Ended Three Months Ended December 31, 2013 December 31, 2012 Increase (Decrease) SG&A Amount % of sales Amount % of sales Loss on sale of receivables $ (3 ) (0.3 )% $ (1 ) (0.1 )% $ 2 0.2pts Short- and long-term variable compensation (6 ) (0.7 )% (5 ) (0.6 )% 1 0.1pts Long-term liability reduction 5 0.6 % - - % (5 ) (0.6)pts All other SG&A (55 ) (6.1 )% (56 ) (6.2 )% (1 ) (0.1)pts Total SG&A $ (59 ) (6.5 )% $ (62 ) (6.9 )% $ (3 ) (0.4)pts All other SG&A represents normal selling, general and administrative expense and decreased $1 million year over year. In the first quarter of fiscal year 2014, we executed a change to our long-term disability benefit plan reducing the duration for which we provide medical and dental benefits to individuals on long-term disability to be more consistent with market practices. This resulted in a $5 million reduction in the liability associated with these benefits. Restructuring costs of $1 million were recorded during the three months ended December 31, 2013 compared to $6 million a year ago. Our Commercial Truck & Industrial segment recognized the majority of the restructuring costs in the first three months of fiscal year 2014 primarily related to employee severance costs. During the first quarter of fiscal year 2013, we recognized restructuring costs of $2 million in our Commercial Truck & Industrial segment related to employee severance costs. Our Aftermarket & Trailer segment recognized $4 million of restructuring cost during the first three months of fiscal year 2013 primarily related to the remanufacturing consolidation program. Operating income for the first three months of fiscal year 2014 was $42 million , compared to $14 million in the prior year. Key items affecting income are discussed above. Equity in earnings of affiliates was $8 million in the first three months of fiscal year 2014, compared to $9 million in the same period in the prior year. The decrease is primarily due to the sale of our ownership interest in the Suspensys joint venture in the fourth quarter of fiscal year 2013. Interest expense, net for the first three months of fiscal year 2014 was $27 million , compared to $29 million in the prior year. During the first quarter ended December 31, 2012 , we repurchased approximately $245 million of $300 million principal amount of the 4.625 percent convertible notes due 2026. We recognized a $5 million loss on debt extinguishment associated with the repurchase. Excluding the impact of the debt extinguishment in the prior year, interest expense increased due to additional interest costs associated with debt securities issued during fiscal year 2013. Provision for income taxes was $10 million in the first three months of fiscal year 2014 and fiscal year 2013, respectively. Income from continuing operations (before noncontrolling interests) for the first three months of fiscal year 2014 was $13 million , compared to loss of $16 million , in the prior year. The reasons for the increase are discussed above. 45 -------------------------------------------------------------------------------- MERITOR, INC. Loss from discontinued operations, net of tax was $5 million for the three months ended December 31, 2012 primarily related changes in estimates and adjustments related to environmental remediation charges for previously divested businesses and indemnities provided at the time of sale. Net income attributable to Meritor, Inc. was $11 million for the first three months of fiscal year 2014 compared to a loss of $21 million in the first three months of fiscal year 2013. The various factors affecting net income are discussed above. Segment EBITDA and EBITDA Margins Segment EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, noncontrolling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense and asset impairment charges. We use Segment EBITDA as the primary basis for the CODM to evaluate the performance of each of our reportable segments. The following table reflects Segment EBITDA and Segment EBITDA margins for the three months ended December 31, 2013 and 2012 (dollars in millions). Segment EBITDA Segment EBITDA Margins December 31, December 31, 2013 2012 $ Change 2013 2012 Change Commercial Truck & Industrial $ 53 $ 34 $ 19 7.3 % 4.8 % 2.5pts Aftermarket & Trailer 19 13 6 9.1 % 6.4 % 2.7pts Segment EBITDA $ 72 $ 47 $ 25 7.9 % 5.3 % 2.6pts Significant items impacting year-over-year Segment EBITDA include the following: Commercial Aftermarket Truck & Industrial & Trailer TOTAL Segment EBITDA- three months ended December 31, 2012 $ 34 $ 13 $ 47 Lower earnings from unconsolidated affiliates - (1 ) (1 ) Foreign exchange - transaction and translation (5 ) 2 (3 ) Volume, mix, pricing and other, net 24 5 29 Segment EBITDA - three months ended December 31, 2013 $ 53 $ 19 $ 72 Commercial Truck & Industrial Segment EBITDA was $53 million in the first three months of fiscal year 2014, up $19 million compared to the same period in the prior year. Segment EBITDA margin increased to 7.3 percent compared to 4.8 percent in the prior year. Year-over-year reductions in material and structural costs and the favorable impact of higher revenue in Europe and South America more than offset the unfavorable impact of the planned step-down in our defense revenue. Aftermarket & Trailer Segment EBITDA was $19 million in the first three months of fiscal year 2014, up $6 million compared to the same period in the prior year. The increase in segment EBITDA margin was primarily due to pricing actions executed throughout calendar year 2013 and lower material and structural costs. 46 -------------------------------------------------------------------------------- MERITOR, INC. Financial Condition Cash Flows (in millions) Three Months Ended December 31, 2013 2012 OPERATING CASH FLOWS Income (loss) from continuing operations $ 13 $ (16 ) Depreciation and amortization 16 16 Restructuring costs 1 6 Loss on debt extinguishment - 5 Equity in earnings of affiliates (8 ) (9 ) Pension and retiree medical expense 10 10 Dividends received from equity method investments 5 3 Pension and retiree medical contributions (9 ) (15 ) Restructuring payments (3 ) (5 ) Increase in working capital (85 ) (98 ) Changes in off-balance sheet accounts receivable factoring 81 33 Other, net (22 ) (11 ) Cash flows used for continuing operations (1 ) (81 ) Cash flows used for discontinued operations (3 ) (10 ) CASH USED FOR OPERATING ACTIVITIES $ (4 ) $ (91 ) Cash used by operating activities for the first three months of fiscal year 2014 was $4 million compared to cash used by operating activities of $91 million in the same period of fiscal year 2013. The improvement is primarily due to an increase in factored receivables, less cash used for working capital and higher net income. Three Months Ended December 31, 2013 2012 INVESTING CASH FLOWS Capital expenditures $ (12 ) $ (15 ) CASH USED FOR INVESTING ACTIVITIES $ (12 ) $ (15 ) Cash used for investing activities was $12 million in the first three months of fiscal year 2014 compared to $15 million in the same period a year ago. Capital expenditures cash flows decreased by $3 million in the three months of fiscal year 2014 compared to the same period of the prior year. Three Months Ended December 31, 2013 2012 FINANCING CASH FLOWS Repayment of notes and term loan (4 ) (233 ) Proceeds from debt issuance - 225 Debt issuance costs - (5 ) Other financing activities 3 1 CASH USED BY FINANCING ACTIVITIES $ (1 ) $ (12 ) Cash used for financing activities was $1 million for the first three months of fiscal year 2014 compared to cash used by financing activities of $12 million for the first three months of fiscal year 2013. In December 2012 , we issued $250 million of 7.875 percent convertible senior notes due 2026. Net proceeds from the issuance of these notes were used along with available cash to retire a portion of our outstanding 4.625 percent convertible senior notes due 2026. We incurred $5 million of issuance costs related to these transactions. 47 -------------------------------------------------------------------------------- MERITOR, INC. Liquidity Our outstanding debt, net of discounts where applicable, is summarized as follows (in millions). December 31, September 30, 2013 2013 Fixed-rate debt securities $ 606 $ 606 Fixed-rate convertible notes 482 482 Term loan 41 45 Lines of credit and other 48 46 Unamortized gain on interest rate swap termination 2 2 Unamortized discount on convertible notes (41 ) (43 ) Total debt $ 1,138 $ 1,138 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 2014 capital expenditures for our business segments to be in the range of $80 million to $90 million . We generally fund our operating and capital needs with cash on hand, cash flow from operations, our various accounts receivable securitization and factoring arrangements and availability under our revolving credit facility. Cash in excess of local operating needs is generally used to reduce amounts outstanding, if any, under our revolving credit facility or U.S. accounts receivable securitization program. Our ability to access additional capital in the long term will depend on availability of capital markets and pricing on commercially reasonable terms as well as our credit profile at the time we are seeking funds. We continuously evaluate our capital structure to ensure the most appropriate and optimal structure and may, from time to time, retire, repurchase, exchange or redeem outstanding indebtedness, issue new equity or debt securities or enter into new lending arrangements if conditions warrant. In February 2012 , we filed a shelf registration statement with the Securities and Exchange Commission , which was amended in November 2012 , registering up to $750 million of debt and/or equity securities that may be offered in one or more series on terms to be determined at the time of sale. The amount remaining at December 31, 2013 is $475 million . We believe our current financing arrangements provide us with the financial flexibility required to maintain our operations and fund future growth, including actions required to improve our market share and further diversify our global operations, through the term of our revolving credit facility, which matures in April 2017 . 48 -------------------------------------------------------------------------------- MERITOR, INC. Sources of liquidity as of December 31, 2013 , in addition to cash on hand, are as follows: Total Facility Unused as of Current Size 12/31/13 Expiration On-balance sheet arrangements: April Revolving credit facility(1) $ 429 $ 429 2017(1) Committed U.S. accounts receivable securitization(2) 100 100 June 2016 Total on-balance sheet arrangements 529 529 Off-balance sheet arrangements:(2) Swedish Factoring Facility 205 - June 2014 U.S. Factoring Facility 89 18 October 2014 February U.K. Factoring Facility 34 22 2018 Italy Factoring Facility 41 23 June 2017 Other uncommitted factoring facilities 70 14 Various November Letter of credit facility 30 4 2015 Total off-balance sheet arrangements 469 81 Total available sources $ 998 $ 610 (1) The availability under the revolving credit facility is subject to a collateral test as discussed under "Revolving Credit Facility" below. On April 23, 2012 , we entered into an agreement to amend and extend the revolving credit facility through April 2017 . $14 million of the revolving credit facility matured in January 2014 for a bank not electing to extend its commitments. See further discussion below under "Revolving Credit Facility". (2) Availability subject to adequate eligible accounts receivable available for sale. Cash and Liquidity Needs - Our cash and liquidity needs have been affected by the level, variability and timing of our customers' worldwide vehicle production and other factors outside of our control. At December 31, 2013 , we had $300 million in cash and cash equivalents. Our availability under the revolving credit facility is subject to a collateral test and a priority debt to EBITDA ratio covenant, as defined in the agreement, which may limit our borrowings under the agreement as of each quarter end. As long as we are in compliance with this covenant as of the quarter end, we have full availability under the revolving credit facility every other day during the quarter. Our future liquidity is subject to a number of factors, including access to adequate funding under our revolving credit facility, vehicle production schedules and customer demand and access to other borrowing arrangements such as factoring or securitization facilities. Even taking into account these and other factors, management expects to have sufficient liquidity to fund our operating requirements through the term of our revolving credit facility. At December 31, 2013 , the company was in compliance with all covenants under its credit agreement (see Note 15). Debt Repurchase Program - On January 23, 2014 , the Offering Committee of our Board of Directors approved a repurchase program for up to $100 million of any of our public debt securities (including without limitation convertible debt securities) from time to time through open market purchases or privately negotiated transactions or otherwise, until December 15, 2014 . Issuance of New Debt Securities - On May 31, 2013 , we completed a public offering of debt securities consisting of the issuance of $275 million 8-year, 6.75 percent notes due June 15, 2021 (the "2021 Notes"). The 2021 Notes were offered and sold pursuant to our shelf registration statement. The proceeds from the sale of the 2021 notes, net of fees, were $269 million and were primarily used to repurchase $167 million of the company's outstanding $250 million 8.125 percent notes due 2015. The 2021 Notes constitute senior unsecured obligations of the company and rank equally in right of payment with its existing and future senior unsecured indebtedness, and effectively junior to existing and future secured indebtedness to the extent of the security therefor. They are guaranteed on a senior unsecured basis by each of the company's subsidiaries from time to time guaranteeing the senior secured credit facility. Prior to June 15, 2016 , the company may redeem up to 35 percent of the aggregate principal amount of the 2021 Notes issued on the initial issue date with the net cash proceeds of certain public sales of common stock at a redemption price equal to 106.75 percent of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest, if any, on the 2021 Notes to be redeemed. On or after June 15, 2016 , 2017, 2018, and 2019 the company has the option to redeem the 2021 Notes, in whole or in part, at the redemption price of 105.063 percent, 103.375 percent, 101.688 percent, and 100.000 percent, respectively. 49 -------------------------------------------------------------------------------- MERITOR, INC. If a Change of Control (as defined in the indenture under which the 2021 Notes were issued) occurs, unless the company has exercised its right to redeem the securities, each holder of the 2021 Notes may require the company to repurchase some or all of such holder's securities at a purchase price equal to 101 percent of the principal amount, plus accrued and unpaid interest. Repurchase of 2015 Notes - On June 5, 2013 , we completed the cash tender offer for our 8.125 percent notes due 2015. These notes were repurchased at approximately 114 percent of their principal amount. The repurchase of $167 million of 8.125 percent notes was accounted for as an extinguishment of debt and, accordingly, we recognized a net loss on debt extinguishment of $19 million , which is included in interest expense, net in the consolidated statement of operations. Revolving Credit Facility - On April 23, 2012 , we amended and restated our revolving credit facility. Pursuant to the revolving credit agreement as amended, we have a $429 million revolving credit facility, $14 million of which matured in January 2014 for a bank not electing to extend its commitments under the revolving credit facility and the remaining $415 million of which matures in April 2017 . The availability under this facility is dependent upon various factors, including principally performance against certain financial covenants. No borrowings were outstanding under the revolving credit facility at December 31, 2013 and September 30, 2013 . The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. No letters of credit were outstanding on December 31, 2013 and September 30, 2013 . At certain times during any given month, we could draw on our revolving credit facility to fund intra-month working capital needs. In such months, we would then typically utilize the cash we receive from our customers throughout the month to repay borrowing under the facility. Accordingly, during any given month, we may draw down on this facility in amounts exceeding the amounts shown as outstanding at fiscal quarter ends. The availability under the revolving credit facility is subject to certain financial covenants based on (i) the ratio of our priority debt (consisting principally of amounts outstanding under the revolving credit facility, U.S. accounts receivable securitization and factoring programs, and third-party non-working capital foreign debt) to EBITDA and (ii) the amount of annual capital expenditures. We are required to maintain a total priority-debt-to-EBITDA ratio, as defined in the agreement, of (i) 2.50 to 1.00 as of the last day of the fiscal quarter commencing with the fiscal quarter ending on or about March 31, 2012 through and including the fiscal quarter ending on or about September 30, 2012 , (ii) 2.25 to 1.00 as of the last day of each fiscal quarter commencing with the fiscal quarter ending on or about December 31, 2012 through and including the fiscal quarter ending on or about September 30, 2013 , and (iii) 2.00 to 1.00 as of the last day of each fiscal quarter thereafter. At December 31, 2013 , we were in compliance with all covenants under the revolving credit agreement with a ratio of approximately 0.52x for the priority debt-to-EBITDA covenant. Availability under the revolving credit facility is also subject to a collateral test, pursuant to which borrowings on the revolving credit facility cannot exceed 1.0x the collateral test value. The collateral test is performed on a quarterly basis. At December 31, 2013 , the revolving credit facility was collateralized by approximately $573 million of the company's assets, primarily consisting of eligible domestic U.S. accounts receivable, inventory, plant, property and equipment, intellectual property and the company's investment in all or a portion of certain of its wholly-owned subsidiaries. Borrowings under the revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin, and a commitment fee on undrawn amounts, both of which are based upon our current corporate credit rating for the senior secured facilities. At December 31, 2013 , the margin over LIBOR rate was 425 basis points and the commitment fee was 50 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 325 basis points. Certain of the company's subsidiaries, as defined in the revolving credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the revolving credit facility. Similar subsidiary guarantees are provided for the benefit of the holders of the publicly-held notes outstanding under the company's indentures, including the 2021, and the 7.875 percent convertible notes issued in December 2012 (see Note 15 to the consolidated financial statements). Term Loan - As part of the amendment and restatement of the revolving credit facility, on April 23, 2012 we also entered into a $100 million term loan agreement with a maturity date of April 23, 2017 . On December 27, 2013 , we prepaid the principal balance on our term loan by $4 million . The remaining term loan balance will amortize over the next three years in annual payments of $3 million , $5 million and $5 million , respectively, with a $28 million principal payment due in fiscal year 2017. Principal payments will be made on a quarterly basis for the duration of the term loan. As of December 31, 2013 , the margin over LIBOR rate was 425 basis points. We may prepay the term loan at any time without penalty or premium. At December 31, 2013 , the outstanding balance on the term loan was $41 million . Convertible Securities - In December 2012 , we issued $250 million of 7.875 percent convertible senior notes due 2026 (the "2013 Convertible Notes") and used the proceeds thereof primarily to repurchase outstanding convertible notes. The 2013 Convertible Notes were sold by us to qualified institutional buyers in a private placement exempt from the registration requirements of the Securities Act of 1933. The 2013 Convertible Notes have an initial principal amount of $900 per note and will accrete to $1,000 per note on December 1, 2020 . Net proceeds received, after issuance costs and discounts, were approximately $220 million . 50 -------------------------------------------------------------------------------- MERITOR, INC. We pay 7.875 percent cash interest on the principal amount at maturity of the 2013 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 2013 Convertible Notes for payment. Interest accrues on the principal amount at maturity thereof from and including the date the 2013 Convertible Notes are issued or from, and including, the last date in respect of which interest has been paid or provided for, as the case may be, to, but excluding, the next interest payment date. The 2013 Convertible Notes are fully and unconditionally guaranteed on a senior unsecured basis by certain of our subsidiaries. The 2013 Convertible Notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future senior unsecured indebtedness and junior to any of our existing and future secured indebtedness. The 2013 Convertible Notes will be convertible in certain circumstances into cash up to the principal amount at maturity of the 2013 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 2013 Convertible Notes (which represents an initial conversion price of $12.00 per share), only under the following circumstances: (1) Prior to June 1, 2025 , during any calendar quarter after the calendar quarter ending December 31, 2012 , if the closing sale price of the company's common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120 percent of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (2) Prior to June 1, 2025 , during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount at maturity of Notes was equal to or less than 97 percent of the conversion value of the Notes on each trading day during such five consecutive trading day period; (3) Prior to June 1, 2025 , if the company has called the Notes for redemption; (4) Prior to June 1, 2025 , upon the occurrence of specified corporate transactions; or (5) At any time on or after June 1, 2025 . On or after December 1, 2020 , the company may redeem the 2013 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 2013 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 Notes at a purchase price in cash equal to 100 percent of the principal amount at maturity of the 2013 Convertible Notes to be purchased, plus accrued and unpaid interest, on December 1, 2020 or upon certain fundamental changes. U.S. Securitization Program - We have a $100 million U.S. accounts receivables securitization facility. On June 21, 2013 the company entered into a one-year extension of the facility expiration date to June 18, 2016 . On October 11, 2013 , the company entered into an amendment whereby Market Street Funding, LLC assigned its purchase commitment to PNC Bank, National Association (PNC). This program is provided by PNC, as Administrator and Purchaser, and the other Purchasers and Purchaser Agents from time to time (participating lenders), which are party to the agreement. Under this program, we have the ability to sell an undivided percentage ownership interest in substantially all of our trade receivables (excluding the receivables due from AB Volvo and subsidiaries eligible for sale under the U.S. Factoring Facility) of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings from participating lenders under a loan agreement. This program also includes a letter of credit facility pursuant to which ARC may request the issuance of letters of credit issued for our U.S. subsidiaries (originators) or their designees, which when issued will constitute a utilization of the facility for the amount of letters of credit issued. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the consolidated balance sheet. At both December 31, 2013 and September 30, 2013 , no amounts, including letters of credit, were outstanding under this program. This program contains a financial covenant related to our priority-debt-to-EBITDA ratio, which is identical to the corresponding covenant in our revolving credit facility as it exists on the date of the agreement. In addition, this securitization program contains a cross default to our revolving credit facility. At certain times during any given month, we may sell eligible accounts receivable under this program to fund intra-month working capital needs. In such months, we would then typically utilize the cash we receive from our customers throughout the month to repay the borrowings under the program. Accordingly, during any given month, we may borrow under this program in amounts exceeding the amounts shown as outstanding at fiscal quarter ends. 51 -------------------------------------------------------------------------------- MERITOR, INC. Capital Leases - On March 20, 2012 , we entered into an arrangement to finance equipment acquisitions at our various U.S. locations. Under this arrangement, we can request financing from GE Capital Commercial, Inc. ( GE Capital ) for progress payments for equipment under construction, not to exceed $10 million at any point in time. The financing rate is equal to the 30-day LIBOR plus 575 basis points per annum. Under this arrangement, we can also enter into lease arrangements with GE Capital for completed equipment. The lease term is 60 months and the lease interest rate is equal to the 5-year Swap Rate published by the Federal Reserve Board plus 564 basis points. As of December 31, 2013 and September 30, 2013 , we had $27 million and $28 million , respectively, outstanding under these and other capital arrangements. 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 the company's revolving credit facility if the defaulted amount were to exceed $35 million . As of December 31, 2013 and September 30, 2013 , we had $16 million and $21 million , respectively, outstanding under this program. Credit Ratings - At December 31, 2013 , Standard & Poor's corporate credit rating, senior secured credit rating, and senior unsecured credit rating for our company are B, BB- and B-, respectively. Moody's Investors Service corporate credit rating, senior secured credit rating, and senior unsecured credit rating for our company are B2, Ba2 and B3, respectively. Any lowering of our credit ratings could increase our cost of future borrowings and could reduce our access to capital markets and result in lower trading prices for our securities. Off-Balance Sheet Arrangements Accounts Receivable Factoring Arrangements - We participate in accounts receivable factoring programs with total amounts utilized at December 31, 2013 , of approximately $383 million , of which $297 million was attributable to committed factoring facilities involving the sale of AB Volvo accounts receivables. The remaining amount of $86 million was related to factoring by certain of our European and Brazilian subsidiaries under uncommitted factoring facilities with financial institutions. The receivables under these programs are sold at face value and are excluded from the consolidated balance sheet. Total facility size, unused amounts and expiration dates for each of these programs are shown in the table above under "Overview." The Swedish and U.S. factoring facilities are backed by 364-day liquidity commitments from Nordea Bank which were renewed through October 2014 . 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. , Italy , and Brazil 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). Since many of our accounts receivable factoring programs support our working capital requirements in Europe , we are monitoring developments with respect to the European monetary union. If the European monetary union were to dissolve and we were unable to renegotiate our European factoring agreements or find alternative sources of funding it could have a material adverse effect on our liquidity. Letter of Credit Facilities - We entered into a five-year credit agreement dated as of November 18, 2010 with Citicorp USA , Inc., as administrative agent and issuing bank, the other lenders party thereto and the Bank of New York Mellon, as paying agent. Under the terms of this credit agreement, as amended, we have the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $30 million . This facility contains covenants and events of default generally similar to those existing in our public debt indentures. At December 31, 2013 and September 30, 2013 , we had $26 million and $27 million , respectively, of letters of credit outstanding under this facility. In addition, we had another $10 million and $9 million of letters of credit outstanding through other letter of credit facilities at December 31, 2013 and September 30, 2013 , respectively. Contingencies Contingencies related to environmental, asbestos and other matters are discussed in Note 18 of the Notes to Condensed Consolidated Financial Statements. 52 -------------------------------------------------------------------------------- MERITOR, INC. New Accounting Pronouncements Accounting standards implemented during fiscal year 2014 In January 2013 , the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013 . We have adopted this guidance effective with our first quarter of fiscal year 2014 within Note 16. In February 2013 , the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires that reclassification adjustments for items that are reclassified from accumulated other comprehensive income to net income be presented on the financial statements or in a note to the financial statements. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012 . We have adopted this guidance effective with our first quarter of fiscal year 2014 within Note 19. In July 2013 , the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 eliminates the option of presenting unrecognized tax benefits as a liability or as a reduction of a deferred tax asset for a net operating loss or tax credit carryforward. An unrecognized tax benefit, or portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 with early adoption permitted. We have adopted this guidance effective with our first quarter of fiscal year 2014. The adoption of ASU 2013-11 did not affect our consolidated statement of financial position, results of operations, or cash flows.


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