Annual Reports

 
Quarterly Reports

  • 10-Q (May 2, 2014)
  • 10-Q (Jan 30, 2014)
  • 10-Q (Aug 1, 2013)
  • 10-Q (May 3, 2013)
  • 10-Q (Feb 1, 2013)
  • 10-Q (Aug 3, 2012)

 
8-K

 
Other

ArvinMeritor 10-Q 2011
meritor_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT
 
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended April 3, 2011
 
Commission File No. 1-15983
 
MERITOR, INC.
(Formerly ArvinMeritor, Inc.)
>
(Exact name of registrant as specified in its charter)
 
  Indiana 38-3354643 
  (State or other jurisdiction of incorporation or (I.R.S. Employer Identification 
  organization) No.) 

  2135 West Maple Road, Troy, Michigan 48084-7186 
  (Address of principal executive offices) (Zip Code) 

(248) 435-1000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
  Yes        X       No           

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files).
 
       Yes [ X ] No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
  Large accelerated filer               X           Accelerated filer                   
  Non-accelerated filer     Smaller reporting company          

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
  Yes               No     X     

94,448,940 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on April 3, 2011.
 

 

INDEX
 
PART I. FINANCIAL INFORMATION:  
         
  Item 1.       Financial Statements: Page
No.
         
      Consolidated Statement of Income - - Three and Six Months Ended March 31, 2011 and 2010 3
         
      Condensed Consolidated Balance Sheet - - March 31, 2011 and September 30, 2010 4
         
      Condensed Consolidated Statement of Cash Flows - - Six Months Ended March 31, 2011 and 2010 5
         
      Condensed Consolidated Statement of Equity (Deficit) - - Six Months Ended March 31, 2011 and 2010 6
         
      Notes to Consolidated Financial Statements 7
         
  Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
         
  Item 3.   Quantitative and Qualitative Disclosures About Market Risk 51
         
  Item 4.   Controls and Procedures 52
         
PART II. OTHER INFORMATION:  
     
  Item 1.   Legal Proceedings 52
         
  Item 1A.   Risk Factors 52
         
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 53
         
  Item 5.   Other Information 53
         
  Item 6.   Exhibits 54
 
Signatures       55

2
 

 

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
 
MERITOR, INC.
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share amounts)
 
  Three Months Ended   Six Months Ended
  March 31,   March 31,
  2011       2010       2011       2010
  (Unaudited)
Sales $     1,192     $     868     $     2,163     $     1,668  
Cost of sales   (1,074 )     (771 )     (1,941 )     (1,482 )
GROSS MARGIN   118       97       222       186  
       Selling, general and administrative   (71 )     (68 )     (143 )     (134 )
       Restructuring costs   (11 )           (14 )      
       Other operating expense   (2 )           (2 )      
OPERATING INCOME   34       29       63       52  
       Other income (loss)   (2 )     1       (2 )     1  
       Equity in earnings of affiliates   17       12       30       21  
       Interest expense, net   (24 )     (31 )     (51 )     (54 )
INCOME BEFORE INCOME TAXES   25       11       40       20  
       Provision for income taxes   (19 )           (39 )     (10 )
                                
INCOME FROM CONTINUING OPERATIONS   6       11       1       10  
INCOME FROM DISCONTINUED OPERATIONS, net of tax   16       6       23       10  
NET INCOME   22       17       24       20  
Less: Income attributable to noncontrolling interests   (5 )     (4 )     (9 )     (7 )
NET INCOME ATTRIBUTABLE TO MERITOR, INC. $ 17     $ 13     $ 15     $ 13  
 
NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.                              
       Net income (loss) from continuing operations $ 1     $ 7     $ (8 )   $ 3  
       Income from discontinued operations   16       6       23       10  
       Net income $ 17     $ 13     $ 15     $ 13  
BASIC EARNINGS (LOSS) PER SHARE                              
       Continuing operations $ 0.01     $ 0.09     $ (0.08 )   $ 0.04  
       Discontinued operations   0.17       0.07       0.24       0.13  
       Basic earnings per share $ 0.18     $ 0.16     $ 0.16     $ 0.17  
DILUTED EARNINGS (LOSS) PER SHARE                              
       Continuing operations $ 0.01     $ 0.09     $ (0.08 )   $ 0.04  
       Discontinued operations   0.17       0.07       0.24       0.13  
       Diluted earnings per share $ 0.18     $ 0.16     $ 0.16     $ 0.17  
 
Basic average common shares outstanding   94.3       80.3       93.8       76.4  
Diluted average common shares outstanding   96.9       83.1       93.8       79.0  

See notes to consolidated financial statements. Amounts for prior periods have been recast for discontinued operations.
 
3
 

 

MERITOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
 
  March 31,   September 30,
  2011       2010
  (Unaudited)
ASSETS              
CURRENT ASSETS:              
       Cash and cash equivalents $     195     $     343  
       Receivables, trade and other, net   734       579  
       Inventories   462       382  
       Other current assets   75       76  
       Assets of discontinued operations   3       341  
              TOTAL CURRENT ASSETS   1,469       1,721  
NET PROPERTY   402       389  
GOODWILL   437       432  
OTHER ASSETS   367       337  
              TOTAL ASSETS $ 2,675     $ 2,879  
 
LIABILITIES AND EQUITY (DEFICIT)              
CURRENT LIABILITIES:              
       Short-term debt $ 84     $  
       Accounts payable   822       670  
       Other current liabilities   357       358  
       Liabilities of discontinued operations   1       362  
              TOTAL CURRENT LIABILITIES   1,264       1,390  
LONG-TERM DEBT   948       1,029  
RETIREMENT BENEFITS   1,162       1,162  
OTHER LIABILITIES   307       321  
EQUITY (DEFICIT):              
       Common stock (March 31, 2011 and September 30, 2010, 94.4 and 94.1              
              shares issued and outstanding, respectively)   93       92  
       Additional paid-in capital   895       886  
       Accumulated deficit   (1,205 )     (1,220 )
       Accumulated other comprehensive loss   (829 )     (812 )
              Total deficit attributable to Meritor, Inc.   (1,046 )     (1,054 )
       Noncontrolling interest   40       31  
              TOTAL EQUITY (DEFICIT)   (1,006 )     (1,023 )
              TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 2,675     $ 2,879  

See notes to consolidated financial statements
 
4
 

 

MERITOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
 
  Six Months Ended March 31,
  2011       2010
  (Unaudited)
OPERATING ACTIVITIES              
       CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (See Note 9) $     (44 )   $     92  
INVESTING ACTIVITIES              
       Capital expenditures   (42 )     (24 )
       Other investing activities   1       3  
              Net investing cash flows used for continuing operations   (41 )     (21 )
       Net investing cash flows used for discontinued operations   (71 )     (2 )
CASH USED FOR INVESTING ACTIVITIES   (112 )     (23 )
FINANCING ACTIVITIES              
              Payments on revolving credit facility, net         (28 )
              Payments on accounts receivable securitization program, net         (83 )
              Proceeds from debt issuance         245  
              Repayment of notes         (175 )
              Payments on lines of credit and other, net         (2 )
       Net change in debt         (43 )
       Proceeds from exercise of stock options   6        
       Proceeds from stock issuance         209  
       Issuance and debt extinguishment costs         (44 )
       Other financing activities         (1 )
              Net financing cash flows provided by continuing operations   6       121  
       Net financing cash flows used for discontinued operations         (12 )
CASH PROVIDED BY FINANCING ACTIVITIES   6       109  
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE              
       RATES ON CASH AND CASH EQUIVALENTS   2       1  
CHANGE IN CASH AND CASH EQUIVALENTS   (148 )     179  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   343       95  
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 195     $ 274  

See notes to consolidated financial statements. Amounts for prior periods have been recast for discontinued operations.
 
5
 

 

MERITOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF
EQUITY (DEFICIT)
(In millions)
(unaudited)
 
                      Accumulated                        
        Additional           Other   Total Deficit                
  Common   Paid-in   Accumulated   Comprehensive   Attributable to   Noncontrolling        
  Stock   Capital   Deficit   Loss   Meritor, Inc.   Interests   Total
Beginning balance at                                                              
       September 30, 2010 $     92   $     886   $     (1,220 )   $     (812 )   $     (1,054 )   $     31     $     (1,023 )
Equity based compensation                                                  
       expense       3                 3             3  
Exercise of stock options   1     5                 6             6  
Net income           15             15       9       24  
Foreign currency translation                                                  
       adjustments                 38       38             38  
Impact of sale of business                 (62 )     (62 )           (62 )
Pension adjustment                 9       9             9  
Other       1           (2 )     (1 )           (1 )
Ending Balance at                                                  
       March 31, 2011 $ 93   $ 895   $ (1,205 )   $ (829 )   $ (1,046 )   $ 40     $ (1,006 )
 
Beginning balance at                                                  
       September 30, 2009 $ 72   $ 699   $ (1,232 )   $ (734 )   $ (1,195 )   $ 29     $ (1,166 )
Issuance of common stock   20     180                 200             200  
Equity based compensation                                                  
       expense       4          
 
    4             4  
Net income           13             13       7       20  
Foreign currency translation                                                  
       adjustments                 30       30             30  
Impact of sale of business                
35
      35             35  
Other                 3       3             3  
Dividends declared or paid                             (3 )     (3 )
Ending Balance at                                                  
       March 31, 2010 $ 92   $ 883   $ (1,219 )   $ (666 )   $ (910 )   $ 33     $ (877 )
                                                   
See notes to consolidated financial statements.
 
6
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1. Basis of Presentation
 
     Meritor, Inc., formerly named ArvinMeritor, Inc., (the "company" or "Meritor"), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers (“OEMs”) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, off-highway, military, bus and coach and other industrial OEMs and certain aftermarkets. The consolidated financial statements are those of the company and its consolidated subsidiaries.
 
     Certain businesses are reported in discontinued operations in the consolidated statement of income, statement of cash flows and related notes for all periods presented. Additional information regarding discontinued operations is discussed in Note 4.
 
     In the opinion of the company, the unaudited financial statements contain all adjustments, consisting solely of adjustments of a normal, recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These statements should be read in conjunction with the company’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2010. The results of operations for the six months ended March 31, 2011, are not necessarily indicative of the results for the full year.
 
     The company’s fiscal year ends on the Sunday nearest September 30. The second quarter of fiscal years 2011 and 2010 ended on April 3, 2011 and April 4, 2010, respectively. All year and quarter references relate to the company’s fiscal year and fiscal quarters, unless otherwise stated. For ease of presentation, September 30 and March 31 are used consistently throughout this report to represent the fiscal year end and second quarter end, respectively.
 
     The company has evaluated subsequent events through the date that the consolidated financial statements were issued.
 
2. Shareowners’ Equity (Deficit) and Earnings per Share
 
     In March 2010, we completed an equity offering of 19,952,500 common shares, par value of $1 per share, at a price of $10.50 per share. The proceeds of the offering of $200 million, net of underwriting discounts and commissions, were primarily used to repay outstanding indebtedness under the revolving credit facility and under the U.S. accounts receivable securitization program. The offering was made pursuant to a shelf registration statement filed with the Securities and Exchange Commission on November 20, 2009, which became effective December 23, 2009 (the “Shelf Registration Statement”), registering $750 million aggregate debt and/or equity securities that may be offered in one or more series on terms to be determined at the time of sale.
 
     Basic earnings per share is calculated using the weighted average number of shares outstanding during each period. Diluted earnings per share calculation includes the impact of dilutive common stock options, restricted stock, performance share awards and convertible securities, if applicable.
 
     A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):
 
  Three Months Ended   Six Months Ended
  March 31,   March 31,
  2011       2010       2011       2010
Basic average common shares outstanding 94.3   80.3   93.8   76.4
Impact of stock options 0.2      
Impact of restricted shares and share units 2.4   2.8     2.6
Diluted average common shares outstanding 96.9   83.1   93.8   79.0

     For the three months ended March 31, 2011 and March 31, 2010, options to purchase 0.4 million and 1.5 million shares of common stock, respectively, were not included in the computation of diluted earnings per share because their exercise price exceeded the average market price for the period and thus their inclusion would be anti-dilutive. In addition, for the six months ended and March 31, 2010, options to purchase 1.5 million shares of common stock were not included in the computation of diluted earnings per share because their exercise price exceeded the average market price for the period. For the six months ended March 31, 2011, options to purchase 1.0 million shares of common stock were not included in the computation of diluted earnings per share because their inclusion in a net loss period would reduce the net loss per share. In addition, 0.2 million restricted shares and 3.3 million share units were also excluded from the computation of diluted earnings per share for the six months ended March 31, 2011 as their inclusion in a net loss period would reduce the net loss per share. The company’s convertible senior unsecured notes are excluded from the computation of diluted earnings per share, as the stock price at the end of the quarter is less than the conversion price.
 
7
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
3. New Accounting Standards
 
   Accounting standards implemented in fiscal year 2011
 
     In June 2009, the Financial Accounting Standards Board (FASB) issued guidance on accounting for transfer of financial assets, which changes the requirements for recognizing the transfer of financial assets and requires additional disclosures about a transferor’s continuing involvement in transferred financial assets. The guidance also eliminates the concept of a qualifying special purpose entity when assessing transfers of financial instruments. As required, the company adopted this guidance effective October 1, 2010. The adoption of this guidance did not have any impact on the company’s consolidated financial statements.
 
     In June 2009, the FASB issued guidance for the consolidation of variable interest entities (VIEs) to address the elimination of the concept of a qualifying special purpose entity. This guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of the variable interest entity, and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, the new guidance requires any enterprise that holds a variable interest in a variable interest entity to provide enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. As required, the company adopted this guidance effective October 1, 2010. The adoption of this guidance did not have any impact on the company’s consolidated financial statements.
 
     The company holds a variable interest in a joint venture accounted for under the equity method of accounting. The joint venture manufactures components for commercial vehicle applications primarily on behalf of the company. The variable interest relates to a supply arrangement between the company and the joint venture whereby the company supplies certain components to the joint venture at 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 March 31, 2011, the company’s investment in the joint venture was $30 million, classified as Other Assets in the condensed consolidated balance sheet (see Note 13), representing the company’s maximum exposure to loss.
 
4. Discontinued Operations
 
     Results of discontinued operations are summarized as follows (in millions):
 
  Three Months Ended   Six Months Ended
  March 31,   March 31,
  2011       2010       2011       2010
Sales $     3     $     339     $     306     $     698  
Operating income, net $     $ 9     $ 17     $ 18  
Net gain on sale of businesses   19             19       8  
Restructuring costs               (1 )     (2 )
Other   (5 )     (8 )     (8 )     (16 )
       Income before income taxes   14       1       27       8  
Benefit (provision) for income taxes   2       5       (4 )     2  
       Income from discontinued operations attributable                              
              to Meritor, Inc. $ 16     $ 6     $ 23     $ 10  
                               
     In conjunction with the company’s long-term strategic objective to focus on supplying the commercial vehicle on- and off-highway markets for original equipment manufacturers, aftermarket and industrial customers, the company previously announced its intent to divest its Light Vehicle Systems (LVS) businesses. After completion of the sale of the Body Systems and Gabriel Europe businesses in the second quarter of fiscal year 2011, as discussed in more detail below, the company has substantially completed its transformation. The remaining non-core business consists of a small damper business located in Leicester, England, for which the company continues to pursue alternatives. Results of the company’s LVS businesses are reflected in discontinued operations through the date of disposition.
 
8
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
   Body Systems
 
     On January 3, 2011, the company completed the sale of its Body Systems business to Inteva Products Holding Coöperatieve U.A., an assignee of 81 Acquisition LLC and an affiliate of Inteva Products, LLC. Pursuant to the sale agreement signed in August 2010, total consideration was approximately $35 million, subject to certain potential adjustments for items such as working capital fluctuations. The actual purchase price at the closing was $27 million (excluding estimated closing expenses for outside advisory fees of $12 million), consisting of $12 million in cash at closing (adjusted for estimated balances in working capital and other items at the time of the closing) and a five year, 8 percent promissory note for $15 million, payable in five annual installments. The current portion of the promissory note is included in receivables, trade and other, net in the accompanying condensed consolidated balance sheet. The long-term portion of the note is included in other assets in the accompanying condensed consolidated balance sheet.
 
     In addition to the purchase price, the company expects to receive the cash held at the time of the sale by the Body Systems entities operating in China and Brazil of approximately $33 million, before applicable taxes and other withholding, at such time as it becomes available for distribution, as provided in the sale agreement. At March 31, 2011, the company has recognized a receivable of $28 million, net of applicable taxes and other withholding, for cash balances available for distribution based on the current distribution capacity. The company expects to recognize a receivable for the remaining amount of approximately $2 million, before applicable taxes and other withholding, at such time when the balance becomes available for distribution by the respective entities. The receivable recognized at March 31, 2011 is included in receivables, trade and other, net in the accompanying condensed consolidated balance sheet. Cash outflows as a result of the sale of Body Systems are included in net investing cash flows used for discontinued operations in the accompanying condensed consolidated statement of cash flows.
 
     In connection with the sale of Body Systems business, the company recognized a pre-tax gain of $32 million ($32 million after tax) in the second quarter of fiscal year 2011. Upon sale of the Body Systems business, net accumulated foreign currency translation gains of $62 million were recognized into income and included in the gain on sale of this business. These net accumulated foreign currency translation gains were previously deferred and included in accumulated other comprehensive loss in the condensed consolidated statement of equity (deficit).
 
     The sale agreement contains certain customary representations, warranties and covenants of the seller and the purchaser as further set forth in the agreement. The agreement also includes provisions governing post-closing indemnities between the seller and the purchaser for losses arising from specified events. At March 31, 2011, the company recognized estimates for such indemnities, primarily related to income tax matters, of $5 million. This amount is included in other liabilities in the accompanying condensed consolidated balance sheet.
 
     Gabriel Europe – On February 6, 2011, the company sold its Gabriel Europe (Bonneval) facility to TRW Automotive Holdings France. Gabriel Europe manufactured ride control parts (shock absorbers) for sale in Europe. In connection with the sale, the company made a cash capital contribution of $15 million to Gabriel Europe prior to the completion of the sale transaction. This capital contribution is included in net investing cash flows used for discontinued operations in the accompanying condensed consolidated statement of cash flows.
 
     Meritor Suspension Systems Company (MSSC) – On June 24, 2009, the company entered into a binding letter of intent to sell its 57 percent interest in MSSC, a joint venture that manufactured and supplied automotive coil springs, torsion bars and stabilizer bars in North America, to the joint venture partner, a subsidiary of Mitsubishi Steel Mfg. Co., LTD (MSM). The sale transaction closed in October 2009. The purchase price was $13 million, which included a cash dividend of $12 million received by the company in June 2009. The remaining purchase price was received by the company at the time of closing. In connection with the sale of its interest in MSSC, the company provided certain indemnifications to the buyer for its share of potential obligations related to taxes, pension funding shortfall, environmental and other contingencies, and valuation of certain accounts receivable and inventories. The company’s estimated exposure under these indemnities is approximately $14 million and is included in other liabilities in the condensed consolidated balance sheet at March 31, 2011.
 
     Wheels – In September 2009, the company completed the sale of its Wheels business to Iochpe-Maxion S.A., a Brazilian producer of wheels and frames for commercial vehicles, railway freight cars and castings, and affiliates.
 
     Gabriel Ride Control Products North America – The company’s Gabriel Ride Control Products North America (Gabriel Ride Control) business supplied motion control products, shock absorbers, struts, ministruts and corner modules, as well as other automotive parts to the passenger car, light truck and sport utility vehicle aftermarket industries. During fiscal year 2009, the company completed the sale of Gabriel Ride Control to Ride Control, LLC, a wholly owned subsidiary of OpenGate Capital, a private equity firm.
 
9
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
     Gabriel de Venezuela – The company’s former consolidated subsidiary, Gabriel de Venezuela, supplied shock absorbers, struts, exhaust systems and suspension modules to light vehicle industry customers, primarily in Venezuela and Colombia. On June 5, 2009, the company sold its 51 percent interest in Gabriel de Venezuela to its joint venture partner.
 
     The following summarizes significant items included in income from discontinued operations in the consolidated statement of income for the three- and six-month periods ended March 31, 2011 and 2010:
 
     Net gain on sale of businesses: In the second quarter of fiscal year 2011, the company recognized a pre-tax gain of $32 million ($32 million after tax) on the sale of the Body Systems business and a pre-tax loss of $13 million ($13 million after tax) on the sale of its Gabriel Europe business. In first six months of fiscal year 2010, the company recognized a pre-tax gain of $16 million ($16 million after tax) on the sale of its interest in MSSC, net of estimated of indemnity obligations as described above. Also included in net gain on sale of businesses for the first six months of fiscal year 2010 are $8 million of charges associated with the Gabriel Ride Control working capital adjustments.
 
     Operating income from discontinued operations represents income from normal operating activities of businesses included in discontinued operations before such businesses were sold.
 
     Restructuring costs: Restructuring costs relate to charges associated with certain actions in the company’s Body Systems and Gabriel Europe businesses prior to their sale.
 
     Other: Other charges primarily relate to charges for changes in estimates and adjustments related to certain assets and liabilities retained from previously sold businesses and indemnities provided at the time of sale, and costs associated with the divestiture actions.
 
5. Goodwill
 
A summary of the changes in the carrying value of goodwill are presented below (in millions):
 
  Commercial         Aftermarket      
  Truck       Industrial       & Trailer       Total
Balance at September 30, 2010 $     151   $     109   $     172   $     432
       Foreign currency translation   2         3     5
Balance at March 31, 2011 $ 153   $ 109   $ 175   $ 437
                       
6. Restructuring Costs
 
     At March 31, 2011 and at September 30, 2010, $17 million and $11 million, respectively, of restructuring reserves, primarily related to unpaid employee termination benefits, remained in the consolidated balance sheet. The changes in restructuring reserves for the six months ended March 31, 2011 and 2010 are as follows (in millions):
 
  Employee                
  Termination   Asset        
  Benefits       Impairment       Total
Balance at September 30, 2010 $     11     $         $     11  
Activity during the period:                      
       Charges to continuing operations, net of reversals   13       1       14  
       Asset write-offs         (1 )     (1 )
       Cash payments - continuing operations   (8 )           (8 )
       Other   1             1  
Balance at March 31, 2011 $ 17     $     $ 17  
 
Balance at September 30, 2009 $ 28     $     $ 28  
Activity during the period:                      
       Charges to discontinued operations, net of reversals(1)   2             2  
       Cash payments - continuing operations   (8 )           (8 )
       Cash payments - discontinued operations   (6 )           (6 )
Balance at March 31, 2010 $ 16     $     $ 16  
____________________                      
 
(1)        Charges to discontinued operations are included in income from discontinued operations in the consolidated statement of income

10
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
     Performance Plus: During fiscal year 2007, the company launched a long-term profit improvement and cost reduction initiative called “Performance Plus.” As part of this program, the company identified significant restructuring actions which would eliminate up to 2,800 positions in North America and Europe and consolidate and combine certain global facilities. The company’s continuing operations recognized restructuring costs in its Commercial Truck business segment of $8 million in the first six months of fiscal year 2011 related to Performance Plus. These costs primarily relate to employee headcount reductions in the company’s European Truck operations. Cumulative restructuring costs recorded for this program as of March 31, 2011 are $154 million, including $93 million reported in discontinued operations in the consolidated statement of income. These costs primarily relate to employee severance and related costs of $110 million, asset impairment charges of $19 million and $25 million primarily associated with pension termination benefits. The company’s Commercial Truck segment has recognized cumulative restructuring costs associated with Performance Plus of $50 million. Cumulative restructuring costs of $11 million were recognized by corporate locations and the company’s Aftermarket & Trailer segment. The majority of the restructuring actions associated with Performance Plus were complete as of March 31, 2011, with remaining costs of approximately $8 million expected to be incurred in the remainder of fiscal year 2011 and fiscal year 2012, primarily in the company’s Commercial Truck segment.
 
     European Trailer: In the second quarter of fiscal year 2011, the company announced the planned closure of its European trailer business and recognized approximately $6 million of restructuring costs in the Aftermarket & Trailer segment primarily associated with employee severance costs. Total restructuring costs associated with this planned shutdown are currently estimated to be in the range of $12 million to $18 million.
 
7. Income Taxes
 
     For each interim reporting period, the company makes an estimate of the effective tax rate expected to be applicable for the full fiscal year pursuant to FASB’s Accounting Standards Codification (ASC) Topic 740-270, “Accounting for Income Taxes in Interim Periods.” The rate so determined is used in providing for income taxes on a year-to-date basis. Jurisdictions with a projected loss for the year or an actual year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.
 
     Income tax expense (benefit) is allocated between continuing operations, discontinued operations and other comprehensive income (OCI). Such allocation is applied by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category, such as discontinued operations or OCI, income tax expense is first allocated to the other sources of income, with a related benefit recorded in continuing operations.
 
     For the first six months of fiscal year 2011, the company had approximately $95 million of net pre-tax losses in tax jurisdictions in which a tax benefit is not recorded. Tax benefits arising from these jurisdictions resulted in increasing the valuation allowance, rather than reducing income tax expense.
 
8. Accounts Receivable Securitization and Factoring
 
     Off-balance sheet arrangements
 
     Swedish Securitization Facility: In 2006, the company entered into a European arrangement to sell trade receivables due from AB Volvo through one of its European subsidiaries. Under this arrangement, which expires in July 2011, the company can sell up to, at any point in time, €150 million of eligible trade receivables. The receivables under this program are sold at face value and excluded from the consolidated balance sheet. The company continues to perform collection and administrative functions related to these receivables. The gross amount of proceeds received from the sale of receivables under this arrangement was $266 million and $160 million for the six months ended March 31, 2011 and 2010, respectively. The company had utilized €99 million ($140 million) and €62 million ($84 million) of this accounts receivable securitization facility as of March 31, 2011 and September 30, 2010, respectively. The company had notes receivable from the purchaser of the receivables of $5 million and $3 million under this program at March 31, 2011 and September 30, 2010, respectively. Renewal for this facility is currently in process and management believes the facility will be successfully renewed.
 
     French Factoring Facility: In November 2007, the company entered into an arrangement to sell trade receivables through one of its French subsidiaries. Under this arrangement, the company can sell up to, at any point in time, €125 million of eligible trade receivables. The receivables under this program are sold at face value and excluded from the consolidated balance sheet. The company had utilized €56 million ($80 million) and €36 million ($49 million) of this accounts receivable securitization facility as of March 31, 2011 and September 30, 2010, respectively.
 
11
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
     Both of the above facilities are backed by 364-day liquidity commitments from Nordea Bank which were renewed through June 2011 for the French facility and July 2011 for the Swedish facility. The commitments are subject to standard terms and conditions for these types of arrangements (including, in the case of the French commitment, a sole discretion clause whereby the bank retains the right to not purchase receivables, which to the company’s knowledge has never been invoked). Renewals for these liquidity commitments are currently in process and management believes both of these commitments will be successfully renewed.
 
     U.S. Factoring Facility: In October 2010, the company entered into a two-year arrangement to sell trade receivables from AB Volvo and its subsidiaries. Under this arrangement, the company can sell up to, at any point in time, €32 million ($45 million) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized $42 million of this accounts receivable securitization facility as of March 31, 2011.
 
     In addition, several of the company’s subsidiaries, primarily in Europe, factor eligible accounts receivable with financial institutions. Certain receivables are factored without recourse to the company and are excluded from accounts receivable in the consolidated balance sheet. The amount of factored receivables excluded from accounts receivable was $15 million and $5 million at March 31, 2011 and September 30, 2010, respectively.
 
     Total costs associated with these off-balance sheet arrangements were $3 million and $2 million in each of the six month periods ended March 31, 2011 and 2010, respectively, and are included in operating income in the consolidated statement of income.
 
     On-balance sheet arrangements
 
     Since 2005 the company participated in a U.S. accounts receivable securitization program to enhance financial flexibility and lower interest costs. In September 2009 the company entered into a new, two year $125 million U.S. receivables financing arrangement which is provided on a committed basis by a syndicate of financial institutions led by GMAC Commercial Finance LLC. In October 2010, the company extended the expiration of the program to October 2013. Under this program, the company has the ability to sell substantially all of the trade receivables of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings under a loan agreement with participating lenders. 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 March 31, 2011 and September 30, 2010, no amount was outstanding under this program. This program does not have specific financial covenants; however, it does have a cross-default provision to the company’s revolving credit facility agreement.
 
12
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
9. Operating Cash Flow >
 
     The reconciliation of net income to cash flows provided by (used for) operating activities is as follows (in millions):
 
  Six Months Ended
  March 31,
  2011       2010
OPERATING ACTIVITIES              
Net income $      24     $      20  
Less: income from discontinued operations, net of tax   23       10  
       Income from continuing operations   1       10  
       Adjustments to income from continuing operations to arrive at cash              
              provided by (used for) operating activities:              
                     Depreciation and amortization   33       36  
                     Restructuring costs, net of payments   6       (8 )
                     Equity in earnings of affiliates, net of dividends   (23 )     (18 )
                     Loss on debt extinguishment         13  
                     Other adjustments to income from continuing operations   8       1  
                     Pension and retiree medical expense   35       45  
       Pension and retiree medical contributions   (35 )     (42 )
       Interest proceeds from note receivable         12  
       Changes in off-balance sheet receivable securitization and factoring   140       40  
       Changes in assets and liabilities, excluding effects of acquisitions, divestitures, foreign              
              currency adjustments and discontinued operations   (181 )     (22 )
       Operating cash flows provided by (used for) continuing operations   (16 )     67  
       Operating cash flows provided by (used for) discontinued operations   (28 )     25  
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ (44 )   $ 92  
 
10. Inventories
 
     Inventories are stated at the lower of cost (using FIFO or average methods) or market (determined on the basis of estimated realizable values) and are summarized as follows (in millions):
 
  March 31,       September 30,
  2011   2010
Finished goods $      178   $      156
Work in process   68     62
Raw materials, parts and supplies   216     164
       Total $ 462   $ 382

11. Other Current Assets
 
     Other current assets are summarized as follows (in millions):
 
  March 31,       September 30,
  2011   2010
Current deferred income tax assets, net $      37   $      46
Asbestos-related recoveries (see Note 19)   11     11
Deposits and collateral   11     3
Prepaid and other   16     16
       Other current assets $ 75   $ 76

13
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
12. Net Property
 
     Net property is summarized as follows (in millions):
 
  March 31,   September 30,
  2011       2010
Property at cost:          
       Land and land improvements $       44     $        42  
       Buildings   268       267  
       Machinery and equipment   914       909  
       Company-owned tooling   149       150  
       Construction in progress   54       40  
Total   1,429       1,408  
Less accumulated depreciation   (1,027 )     (1,019 )
       Net Property $ 402     $ 389  

13. Other Assets
 
     Other assets are summarized as follows (in millions):
 
  March 31,       September 30,
  2011   2010
Investments in non-consolidated joint ventures $      190   $      164
Asbestos-related recoveries (see Note 19)   55     55
Non-current deferred income tax assets, net   21     23
Unamortized debt issuance costs   29     32
Capitalized software costs, net   22     21
Note receivable, non-current   12    
Prepaid pension costs   10     8
Other   28     34
 
       Other assets $ 367   $ 337

     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 criteria for capitalization are capitalized and amortized using the straight-line basis over the estimated economic useful life of the software.
 
14. Other Current Liabilities
 
     Other current liabilities are summarized as follows (in millions):
 
  March 31,       September 30,
  2011   2010
Compensation and benefits $      142   $      179
Income taxes   31     18
Taxes other than income taxes   36     32
Product warranties   28     28
Restructuring (see Note 6)   17     11
Asbestos-related liabilities (see Note 19)   19     18
Other   84     72
       Other current liabilities $ 357   $ 358

14
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
     The company records estimated product warranty costs at the time of shipment of products to customers. Warranty reserves are primarily based on factors that include past claims experience, sales history, product manufacturing and engineering changes and industry developments. Liabilities for product recall campaigns are recorded at the time the company’s obligation is 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.
 
     A summary of the changes in product warranties for continuing operations is as follows (in millions):
 
  Six Months Ended
  March 31,
  2011       2010
Total product warranties – beginning of period $      54     $      70  
       Accruals for product warranties   12       9  
       Payments   (11 )     (15 )
       Change in estimates and other   (2 )     (3 )
Total product warranties – end of period   53       61  
Less: Non-current product warranties (see Note 15)   (25 )     (30 )
       Product warranties – current $ 28     $ 31  
____________________
 
(1)       At September 30, 2009 and March 31, 2010, product warranty liabilities of $39 million and $41 million, respectively, related to light vehicle businesses are not included in the table above. These liabilities were part of the net assets of businesses sold during the second quarter of fiscal year 2011.
 
15. Other Liabilities
 
     Other liabilities are summarized as follows (in millions):
 
  March 31,       September 30,
  2011   2010
Asbestos-related liabilities (see Note 19) $      66   $      66
Non-current deferred income tax liabilities   88     94
Liabilities for uncertain tax positions   37     47
Product warranties (see Note 14)   25     26
Environmental   9     13
Indemnity obligations   41     32
Other   41     43
       Other liabilities $ 307   $ 321

15
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
16. Long-Term Debt
 
     Long-Term Debt, net of discounts where applicable, is summarized as follows (in millions):
 
  March 31,       September 30,
  2011   2010
8-3/4 percent notes due 2012 $      84     $         84  
8-1/8 percent notes due 2015   250       250  
10-5/8 percent notes due 2018   245       245  
4.625 percent convertible notes due 2026(1)   300       300  
4.0 percent convertible notes due 2027(1)   200       200  
Lines of credit and other   9       9  
Unamortized gain on interest rate swap termination   16       18  
Unamortized discount on convertible notes   (72 )     (77 )
       Subtotal   1,032       1,029  
Less: current maturities   84        
       Long-term debt $ 948     $ 1,029  

____________________
 
(1)       The 4.625 percent and 4.0 percent convertible notes contain a put and call feature, which allows for earlier redemption beginning in 2016 and 2019, respectively.
 
   Debt Securities
 
     On March 3, 2010, the company completed a public offering of debt securities consisting of the issuance of $250 million 8-year fixed rate 10-5/8 percent notes due March 15, 2018. The offering was made pursuant to the Shelf Registration Statement. The notes were issued at a discounted price of 98.024 percent of their principal amount. The proceeds from the sale of the notes, net of discount, were $245 million and were primarily used to repurchase $175 million of the company’s previously outstanding $276 million 8-3/4 percent notes due 2012.
 
     On March 23, 2010, the company completed the debt tender offer for its 8-3/4 percent notes due March 1, 2012. The notes were repurchased at 109.75 percent of their principal amount. The repurchase of $175 million of 8-3/4 percent notes was accounted for as an extinguishment of debt and, accordingly, the company recognized a net loss on debt extinguishment of approximately $13 million, which is included in interest expense, net in the consolidated statement of income. The loss on debt extinguishment primarily relates to the $17 million paid in excess of par to repurchase the $175 million of 8-3/4 percent notes, partially offset by a $6 million gain associated with the acceleration of previously deferred unamortized interest rate swap gains associated with the 8-3/4 percent notes.
 
     On June 15, 2010, the company purchased in the open market $17 million of its 8-3/4 percent notes due March 1, 2012. The notes were repurchased at 104.875 percent of their principal amount. On June 17, 2010, the company purchased in the open market $1 million of its 8-1/8 percent notes due September 15, 2015. The notes were repurchased at 94.000 percent of their principal amount.
 
   Revolving Credit Facility
 
     On February 5, 2010 the company signed an agreement to amend and extend its revolving credit facility, which became effective February 26, 2010. In addition, on March 31, 2011, the company exercised the accordion feature of the agreement, which allowed it to increase the size of the credit facility with an additional revolving credit loan with a new lender in the amount of $30 million. As a result, the company has a $567 million revolving credit facility (excluding approximately $29 million of commitments that are currently unavailable due to the bankruptcy of Lehman Brothers in 2008), $141 million of which matures in June 2011 for banks that elected not to extend their original commitments (non-extending banks) and the other $426 million matures in January 2014 for banks that elected to extend their commitments (extending banks). In April 2011, the company exercised the accordion feature of the agreement to add a second additional lender, which increased the size of the revolving credit facility by $15 million. Availability under the revolving credit facility is 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 and under the most recent collateral test, the full amount of the revolving credit facility was available for borrowing at March 31, 2011. Availability under the revolving credit facility is also subject to certain financial covenants based on (i) the ratio of the company’s priority debt (consisting principally of amounts outstanding under the revolving credit facility, U.S. securitization program, and third-party non-working capital foreign debt) to EBITDA and (ii) the amount of annual capital expenditures. The company is required to maintain a total priority debt-to-EBITDA ratio, as defined in the agreement, of (i) 2.50 to 1 as of the last day of each fiscal quarter commencing with the fiscal quarter ended September 30, 2010 through and including the fiscal quarter ended June 30, 2011; (ii) 2.25 to 1 as of the last day of each fiscal quarter commencing with the fiscal quarter ended September 30, 2011 through and including the fiscal quarter ended June 30, 2012 and (iii) 2.00 to 1 as of the last day of each fiscal quarter thereafter through maturity. At March 31, 2011, the company was in compliance with all covenants under its credit agreement with a ratio of approximately 0.15x for the priority debt-to-EBITDA covenant.
 
16
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
     The revolving credit facility includes a $100 million limit on the issuance of letters of credit. At March 31, 2011, and September 30, 2010, approximately $2 million and $26 million of letters of credit were issued, respectively. In addition, the company has another letters of credit facility with an availability limit of $30 million and had approximately $28 million outstanding at March 31, 2011. The company also had additional $2 million outstanding at each of March 31, 2011 and September 30, 2010 of letters on credit available through other facilities.
 
     Borrowings under the revolving credit facility are collateralized by approximately $620 million of the company’s assets, primarily consisting of eligible domestic U.S. accounts receivable, inventory, plant, property and equipment, intellectual property and the company’s investment in all or a portion of certain of its wholly-owned subsidiaries.
 
     Borrowings under the revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin, and a commitment fee on undrawn amounts, both of which are based upon the company’s current credit rating for the senior secured facility. At March 31, 2011, the margin over the LIBOR rate was 250 basis points for the $141 million available under the facility from non-extending banks, and the commitment fee was 50 basis points. At March 31, 2011, the margin over LIBOR rate was 425 basis points for the $426 million available under the revolving credit facility from extending banks, and the commitment fee was 50 basis points.
 
     Certain of the company’s subsidiaries, as defined in the credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the revolving credit facility. Similar subsidiary guarantees are provided for the benefit of the holders of the publicly-held notes outstanding under the company’s indentures (see Note 22).
 
17. Financial Instruments
 
     The company’s financial instruments include cash and cash equivalents, short-term debt, long-term debt and foreign exchange forward contracts. The company uses derivatives for hedging and non-trading purposes in order to manage its interest rate and 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 (the “contracts”) as cash flow hedges of underlying forecasted foreign currency purchases and sales. The effective portion of changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive Loss (AOCL) in the consolidated balance sheet and is recognized in operating income when the underlying forecasted transaction impacts earnings. The terms of the foreign exchange 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 at any time. 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. The company’s foreign exchange contracts generally mature within twelve months.
 
     At March 31, 2011, the company had outstanding contracts with notional amounts of $135 million under its foreign currency cash flow hedging program. These notional values consisted primarily of contracts for the European euro, Swedish krona and Canadian dollar, and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates. The fair value of these 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. At March 31, 2011, fair value of these foreign exchange forward contracts was not significant and there was no unrealized income recorded in AOCL. At September 30, 2010, the company had no foreign exchange contracts outstanding under its foreign currency cash flow hedging program.
 
17
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
     The company classifies the cash flows associated with the 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.
 
     The company generally has not hedged against its foreign currency exposure related to translations to U.S. dollars of financial results denominated in foreign currencies. In the fourth quarter of fiscal year 2010, due to the volatility of the Brazilian real as compared to the U.S. dollar, the company entered into foreign currency option contracts to reduce volatility in the translation of Brazilian real earnings to U.S. dollars. Gains and losses on these option contracts are recorded in other income (expense), net, in the consolidated statement of income, generally reducing the exposure to translation volatility during a full-year period. The impact of these option contracts was not significant to the results of operations or financial position at March 31, 2011.
 
   Fair Value
 
     Fair values of financial instruments are summarized as follows (in millions):
 
  March 31,   September 30,
  2011   2010
  Carrying   Fair   Carrying   Fair
  Value   Value   Value   Value
Cash and cash equivalents $      195       $      195       $      343       $      343
Short-term debt   84     88        
Long-term debt   948     1,079     1,029     1,132

     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-term and long-term debt — 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.
 
18. Retirement Benefit Liabilities
 
     Retirement benefit liabilities consisted of the following (in millions):
 
  March 31,       September 30,
  2011   2010
Retiree medical liability $       599     $         594  
Pension liability   588       595  
Other   28       26  
       Subtotal   1,215       1,215  
Less: current portion (included in other current liabilities)   (53 )     (53 )
       Retirement benefit liabilities $ 1,162       1,162  
 
     Certain active employees and retirees of a German subsidiary of the company were covered by a defined benefit pension plan. In connection with the sale of the company’s Body Systems business (see Note 4), projected benefit obligation (PBO) of approximately $21 million related to the active employees of divested business was transferred to the buyer. The PBO related to these employees was classified in the liabilities of discontinued operations at September 30, 2010. The transfer of this obligation required a remeasurement of the plan as of January 3, 2011. As a result of the remeasurement and transfer, the company’s total PBO decreased by $30 million and accumulated other comprehensive loss (AOCL) decreased by $9 million. The decrease in AOCL is reflected in the condensed consolidated statement of equity (deficit).

 
18
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
     The components of net periodic pension and retiree medical expense from continuing operations for the three months ended March 31 are as follows:
 
  2011       2010
  Pension       Retiree Medical   Pension       Retiree Medical
Service cost $      1     $                    $      4     $                1  
Interest cost   22       6       21       7  
Assumed return on plan assets   (28 )           (26 )      
Amortization of prior service costs         (1 )           (3 )
Recognized actuarial loss   10       7       9       9  
       Total expense $ 5     $ 12     $ 8     $ 14  

     The components of net periodic pension and retiree medical expense from continuing operations for the six months ended March 31 are as follows:
 
  2011       2010
  Pension       Retiree Medical   Pension       Retiree Medical
Service cost $      4     $                    $      8     $                1  
Interest cost   46       13       44       15  
Assumed return on plan assets   (58 )           (54 )      
Amortization of prior service costs         (4 )           (5 )
Recognized actuarial loss   19       15       18       18  
       Total expense $ 11     $ 24     $ 16     $ 29  

 
19. Contingencies
 
   Environmental
 
     Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have, and will continue to have, an impact on the operations of the company. The process of estimating environmental liabilities is complex and dependent upon evolving physical and scientific data at the sites, uncertainties as to remedies and technologies to be used and the outcome of discussions with regulatory agencies. The company records liabilities for environmental issues in the accounting period in which they are considered to be probable and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the company records a liability for its allocable share of costs related to its involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which Meritor is the only potentially responsible party, the company records a liability for the total probable and estimable costs of remediation before consideration of recovery from insurers or other third parties.
 
     The company has been designated as a potentially responsible party at eight 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 March 31, 2011 to be approximately $20 million, of which $3 million is recorded as a liability.
 
     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 March 31, 2011 to be approximately $40 million, of which $16 million is recorded as a liability.
 
19
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
     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 a discount rate of five-percent and is approximately $7 million at March 31, 2011. The undiscounted estimate of these costs is approximately $11 million.
 
     Following are the components of the Superfund and non-Superfund environmental reserves (in millions):
 
  Superfund Sites       Non-Superfund Sites       Total
Balance at September 30, 2010 $        3     $        18     $      21  
Accruals   2       1       3  
Payments and other   (2 )     (3 )     (5 )
Balance at March 31, 2011 $ 3     $ 16     $ 19  
 

     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 adverse effect on the company’s business, financial condition or results of operations. In addition, in future periods, new laws and regulations, changes in remediation plans, advances in technology and additional information about the ultimate clean-up remedies could significantly change the company’s estimates. Management cannot assess the possible effect of compliance with future requirements.
 
   Asset Retirement Obligations
 
     The company has identified conditional asset retirement obligations for which a reasonable estimate of fair value could not be made because the potential settlement dates cannot be determined at this time. Due to the long term, productive nature of the company’s manufacturing operations, absent plans or expectations of plans to initiate asset retirement activities, the company was not able to reasonably estimate the settlement date for the related obligations. Therefore, the company has not recognized conditional asset retirement obligations for which there are no plans or expectations of plans to retire the asset.
 
   Asbestos
 
     Maremont> Corporation (“Maremont”), a subsidiary of Meritor, manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. Arvin Industries, Inc., a predecessor of the company, acquired Maremont in 1986. Maremont and many other companies are defendants in suits brought by individuals claiming personal injuries as a result of exposure to asbestos-containing products. Maremont had approximately 26,000 pending asbestos-related claims at March 31, 2011 and September 30, 2010. Although Maremont has been named in these cases, in the cases where actual injury has been alleged, very few claimants have established that a Maremont product caused their injuries. Plaintiffs’ lawyers often sue dozens or even hundreds of defendants in individual lawsuits on behalf of hundreds or thousands of claimants, seeking damages against all named defendants irrespective of the disease or injury and irrespective of any causal connection with a particular product. For these reasons, Maremont does not consider the number of claims filed or the damages alleged to be a meaningful factor in determining its asbestos-related liability.
 
     Maremont’s asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
 
  March 31, 2011       September 30, 2010
Asbestos-related reserves for pending and future claims $ 67   $ 67
Asbestos-related insurance recoveries   57     57

     A portion of the asbestos-related recoveries and reserves are included in Other Current Assets and Liabilities, with the majority of the amounts recorded in Other Assets and Liabilities (see Notes 11, 13, 14 and 15).
 
     Prior to February 2001, Maremont participated in the Center for Claims Resolution (“CCR”) and shared with other CCR members in the payment of defense and indemnity costs for asbestos-related claims. The CCR handled the resolution and processing of asbestos claims on behalf of its members until February 2001, when it was reorganized and discontinued negotiating shared settlements. Since the CCR was reorganized in 2001, Maremont has handled asbestos-related claims through its own defense counsel and has taken a more aggressive defensive approach that involves examining the merits of each asbestos-related claim. Although the company expects legal defense costs to continue at higher levels than when it participated in the CCR, the company believes its litigation strategy has reduced the average indemnity cost per claim.
 
20
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
     Pending and Future Claims: Maremont engages Bates White LLC (Bates White), a consulting firm with extensive experience estimating costs associated with asbestos litigation, to assist with determining the estimated cost of resolving pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Maremont. Bates White prepares these cost estimates on a semi-annual basis in March and September each year. Although it is not possible to estimate the full range of costs because of various uncertainties, Bates White advised Maremont that it would be possible to determine an estimate of a reasonable forecast of the cost of the probable settlement and defense costs of resolving pending and future asbestos-related claims, based on historical data and certain assumptions with respect to events that may occur in the future.
 
     Bates White provided an estimate of the reasonably possible range of Maremont’s obligation for asbestos personal injury claims over the next ten years of $64 million to $76 million. After consultation with Bates White, Maremont determined that as of March 31, 2011 the most likely and probable liability for pending and future claims over the next ten years is $64 million. The ultimate cost of resolving pending and future claims is estimated based on the history of claims and expenses for plaintiffs represented by law firms in jurisdictions with an established history with Maremont.
 
     Assumptions: The following assumptions were made by Maremont after consultation with Bates White and are included in their study:
  • Pending and future claims were estimated for a ten year period ending in fiscal year 2021. The ten-year assumption is considered appropriate as Maremont has reached certain longer-term agreements with key plaintiff law firms and filings of mesothelioma claims have been relatively stable over the last few years resulting in an improvement in the reliability of future projections over a longer time period;
  • Maremont believes that the litigation environment will change significantly beyond ten years and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims will decline for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain;
  • The ultimate cost of resolving pending and future claims filed in Madison County, Illinois, a jurisdiction where a substantial amount of Maremont’s claims are filed, will decline to reflect average outcomes throughout the United States;
  • Defense and processing costs for pending and future claims filed outside of Madison County, Illinois will be at the level consistent with Maremont’s prior experience; and
  • The ultimate indemnity cost of resolving nonmalignant claims with plaintiffs’ law firms in jurisdictions without an established history with Maremont cannot be reasonably estimated. Recent changes in tort law and insufficient settlement history make estimating a liability for these nonmalignant claims difficult and uncertain.
     Recoveries: Maremont has insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The coverage also reimburses Maremont for any indemnity paid on those claims. The coverage is provided by several insurance carriers based on insurance agreements in place. Incorporating historical information with respect to buy-outs and settlements of coverage, and excluding any policies in dispute, the insurance receivable related to asbestos-related liabilities is $57 million as of March 31, 2011 and September 30, 2010. The difference between the estimated liability and insurance receivable is primarily related to proceeds received from settled insurance policies. Certain insurance policies have been settled in cash prior to the ultimate settlement of the related asbestos liabilities. Amounts received from insurance settlements generally reduce recorded insurance receivables. Receivables for policies in dispute are not recorded.
 
     The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities and recoveries for asbestos-related claims are subject to considerable uncertainty because such liabilities and recoveries are influenced by variables that are difficult to predict. The future litigation environment for Maremont could change significantly from its past experience, due, for example, to changes in the mix of claims filed against Maremont in terms of plaintiffs’ law firm, jurisdiction and disease; legislative or regulatory developments; Maremont’s approach to defending claims; or payments to plaintiffs from other defendants. Estimated recoveries are influenced by coverage issues among insurers and the continuing solvency of various insurance companies. If the assumptions with respect to the nature of pending and future claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Maremont’s asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial condition and results of operations.
 
21
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
     Rockwell International >(Rockwell) — 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 to the company at the time of the spin-off of the automotive business to Meritor from Rockwell in 1997. Currently there are thousands of claimants in lawsuits that name the company, together with many other companies, as defendants. However, the company does not consider the number of claims filed or the damages alleged to be a meaningful factor in determining asbestos-related liabilities. 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. 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. The company defends these cases vigorously. Historically, Meritor has been dismissed from the vast majority of similar claims filed in the past with no payment to claimants.
 
     The company engages Bates White to assist with determining whether it would be possible to estimate the cost of resolving pending and future Rockwell legacy asbestos-related claims that have been, and could reasonably be expected to be, filed against the company. Although it is not possible to estimate the full range of costs because of various uncertainties, Bates White advised the company that it would be able to determine an estimate of probable defense and indemnity costs which could be incurred to resolve pending and future Rockwell legacy asbestos-related claims. After consultation with Bates White, the company determined that as of March 31, 2011 and September 30, 2010 the probable liability for pending and future claims over the next four years is $18 million and $17 million, respectively. The accrual estimates are based on historical data and certain assumptions with respect to events that may occur in the future. The uncertainties of asbestos claim litigation and resolution of the litigation with the insurance companies make it difficult to predict accurately the ultimate resolution of asbestos claims beyond four years. That uncertainty is increased by the possibility of adverse rulings or new legislation affecting asbestos claim litigation or the settlement process.
 
     Rockwell maintained insurance coverage that management believes covers indemnity and defense costs, over and above self-insurance retentions, for most of these claims. The company has initiated claims against these carriers to enforce the insurance policies, which are currently being disputed. The company expects to recover some portion of defense and indemnity costs it has incurred to date, over and above self-insured retentions, and some portion of the costs for defending asbestos claims going forward. Based on consultation with advisors and underlying analysis performed by management, the company has recorded an insurance receivable related to Rockwell legacy asbestos-related liabilities of $9 million at March 31, 2011 and September 30, 2010. If the assumptions with respect to 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.
 
   Indemnifications
 
     In December 2005, the company guaranteed a third party’s obligation to reimburse another party for payment of health and prescription drug benefits to a group of retired employees. The retirees were former employees of a wholly-owned subsidiary of the company prior to it being acquired by the company. The wholly-owned subsidiary, which was part of the company’s light vehicle aftermarket business, was sold by the company in fiscal year 2006. Prior to May 2009, except as set forth hereinafter, the third party met its obligations to reimburse the other party. In May 2009, the third party filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code requiring the company to recognize its obligations under the guarantee. The company recorded a $28 million liability in fiscal year 2009 for this matter. During the second quarter of fiscal year 2011, the company recorded a $4 million charge to increase the liability based on current demographic data. This amount is included in income from discontinued operations in the accompanying condensed consolidated statement of income. The estimated liability for this matter was approximately $24 million and $21 million at March 31, 2011 and September 30, 2010, respectively.
 
     The company has provided indemnifications in conjunction with certain transactions, primarily divestitures. These indemnities address a variety of matters, which may include environmental, tax, asbestos and employment-related matters, and the periods of indemnification vary in duration. The company’s maximum obligations under these indemnifications cannot be reasonably estimated. The company is not aware of any claims or other information that would give rise to material payments under such indemnifications. The company provided additional indemnifications in connection with the sale of its Body Systems business and its 57 percent interest in MSSC (see Note 4).
 
22
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
   Other
 
     On March 31, 2008, S&E Quick Lube, a filter distributor, filed suit in U.S. District Court for the District of Connecticut alleging that twelve filter manufacturers, including a prior subsidiary of the company, engaged in a conspiracy to fix prices, rig bids and allocate U.S. customers for aftermarket automotive filters. This suit is a purported class action on behalf of direct purchasers of filters from the defendants. Several parallel purported class actions, including on behalf of indirect purchasers of filters, have been filed by other plaintiffs in a variety of jurisdictions in the United States and Canada. The cases have been consolidated into a multi-district litigation proceeding in Federal court for the Northern District of Illinois. On April 16, 2009, the Attorney General of the State of Florida filed a complaint with the U.S. District Court for the Northern District of Illinois based on these same allegations. On May 25, 2010, the Office of the Attorney General for the State of Washington informed the company that it also was investigating the allegations raised in these suits. On August 9, 2010, the County of Suffolk, New York, filed a complaint in the Eastern District of New York based on the same allegations. The case has been transferred to the multi-district litigation proceeding in Illinois. On April 14, 2011, the judge in that multi-district litigation granted a stay on discovery and depositions until July 25, 2011. The company intends to vigorously defend the claims raised in all of these actions. The company is unable to estimate a range of exposure, if any, at this time.
 
     In addition, various other 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 adverse effect on the company’s business, financial condition or results of operations.
 
20. Comprehensive Income (Loss)
 
     Comprehensive income (loss) includes net income and components of other comprehensive income, such as foreign currency translation adjustments, and unrealized gains and losses on derivatives and equity securities.
 
     Comprehensive income (loss) is summarized as follows (in millions):
 
    Three Months Ended   Six Months Ended
    March 31,   March 31,
    2011   2010       2011       2010
Net income       $ 22     $ 17     $ 24     $ 20  
Foreign currency translation adjustments     11       17       38       30  
Impact of sale of business     (62 )           (62 )     35  
Pension adjustment     9             9        
Other     (2 )     1       (2 )     3  
       Comprehensive income (loss)     (22 )     35       7       88  
Net income attributable to noncontrolling interests     (5 )     (4 )     (9 )     (7 )
Comprehensive income (loss) attributable to Meritor, Inc.   $      (27 )       $      31     $      (2 )   $      81  
                                 
21. Business Segment Information
 
     The company defines its operating segments as components of its business where separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The company’s chief operating decision maker (CODM) is the Chief Executive Officer.
 
     In the fourth quarter of fiscal year 2010, as a result of the divestiture activity described in Note 4, the company included its former LVS reporting segment in discontinued operations. All prior period amounts have been recast to reflect the classification of the company’s former LVS reporting segment as discontinued operations. The company has three reportable segments at March 31, 2011, as follows:
23
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  • The Industrial segment supplies drivetrain systems including axles, brakes, drivelines and suspensions for off-highway, military, construction, bus and coach, fire and emergency and other industrial applications. This segment also includes the company’s OE businesses in Asia Pacific, including all on- and off-highway activities; and
  • The Aftermarket & Trailer segment supplies axles, brakes, drivelines, suspension parts and other replacement and remanufactured parts, including transmissions, to commercial vehicle aftermarket customers. This segment also supplies a wide variety of undercarriage products and systems for trailer applications.
     Segment EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring costs and asset impairment charges. The company uses Segment EBITDA as the primary basis for the CODM to evaluate the performance of each of its reportable segments. In fiscal year 2010, the company modified the definition of Segment EBITDA to include the entire EBITDA from the company’s consolidated joint ventures before making adjustment for non-controlling interests, and to exclude restructuring costs and asset impairment charges. Including the entire EBITDA of our consolidated joint ventures, consistent with the related revenues, better reflects the performance of our Industrial segment and is consistent with how the CODM currently measures segment performance. All prior period amounts have been recast to reflect these changes.
 
     The accounting policies of the segments are the same as those applied in the Consolidated Financial Statements, except for the use of Segment EBITDA. The company may allocate certain common costs, primarily corporate functions, between the segments differently than the company would for stand alone financial information prepared in accordance with the U.S. generally accepted accounting principles. These allocated costs include expenses for shared services such as information technology, finance, communications, legal and human resources. The company does not allocate interest expense and certain legacy and other corporate costs not directly associated with the Segments’ EBITDA.
 
     Segment information is summarized as follows (in millions):
 
    Commercial         Aftermarket              
        Truck       Industrial       & Trailer       Eliminations       Total
Three months ended March 31, 2011:                                
       External Sales   $ 635   $ 289   $ 268   $     $ 1,192
       Intersegment Sales     58     17     4     (79 )    
              Total Sales   $ 693     306   $ 272   $ (79 )   $ 1,192
                                 
Three months ended March 31, 2010:                                
       External Sales   $ 401   $ 231   $ 236   $     $ 868
       Intersegment Sales     57     17     2     (76 )    
              Total Sales   $ 458   $ 248   $ 238   $ (76 )   $ 868
 
    Commercial           Aftermarket              
    Truck   Industrial   & Trailer   Eliminations   Total
Six months ended March 31, 2011:                                
       External Sales   $ 1,166     506     491   $     $ 2,163
       Intersegment Sales     102     30     6     (138 )    
              Total Sales   $ 1,268     536     497   $ (138 )   $ 2,163
                                 
Six months ended March 31, 2010:                                
       External Sales   $ 774   $ 438   $ 456   $     $ 1,668
       Intersegment Sales     117     36     4     (157 )    
              Total Sales   $      891   $      474   $ 460   $      (157 )   $      1,668
                                 
24
 

 

MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
    Three Months Ended   Six Months Ended
    March 31,   March 31,
    2011   2010   2011   2010
Segment EBITDA:                                
       Commercial Truck   $ 40     $ 15     $ 73       28  
       Industrial     18       31       35       55  
       Aftermarket & Trailer     28       17       41       34  
              Segment EBITDA     86       63       149       117  
Unallocated legacy and corporate costs (1)     (5 )     (2 )     (6 )     (5 )
Loss on sale of receivables     (2 )     (1 )     (3 )     (2 )
Depreciation and amortization     (17 )     (18 )     (33 )     (36 )
Noncontrolling interests     (5 )     (4 )     (9 )     (7 )
Other loss     (2 )           (2 )      
Interest expense, net     (24 )     (31 )     (51 )     (54 )
Restructuring costs     (11 )           (14 )      
Provision for income taxes     (19 )           (39 )     (10 )
       Income (loss) from continuing operations                                
              attributable to Meritor, Inc.       $      1         $      7         $      (8 )       $      3  
____________________
 
(1)   Unallocated legacy and corporate costs represent items that are not directly related to the 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.
 
22. Supplemental Guarantor Condensed Consolidating Financial Statements
 
     Certain of the company’s wholly-owned subsidiaries, as defined in the credit agreement (the Guarantors) irrevocably and unconditionally guarantee amounts outstanding under the senior secured revolving credit facility. Similar subsidiary guarantees were provided for the benefit of the holders of the publicly-held notes outstanding under the company’s indentures (see Note 16).
 
     In lieu of providing separate financial statements for the Guarantors, the company has included the accompanying condensed consolidating financial statements. 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 distributions and other equity changes. The Guarantor subsidiaries are combined in the condensed consolidating financial statements.
 
25
 

 

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(In millions)
 
    Three Months Ended March 31, 2011
                    Non-                
    Parent       Guarantors   Guarantors       Elims       Consolidated
Sales                                        
       External   $     $ 395     $ 797     $     $ 1,192  
       Subsidiaries           40       20       (60 )      
Total sales           435       817       (60 )     1,192  
Cost of sales     (15 )     (397 )     (722 )     60       (1,074 )
GROSS MARGIN     (15 )     38       95             118  
       Selling, general and administrative     (25 )     (20 )     (26 )           (71 )
       Restructuring costs                 (11 )           (11 )
       Other operating expense     (2 )                       (2 )
OPERATING INCOME (LOSS)     (42 )     18       58             34  
       Other income (expense), net     25       (8 )     (19 )           (2 )
       Equity in earnings of affiliates           9       8             17  
       Interest income (expense), net     (31 )     6       1             (24 )
INCOME (LOSS) BEFORE INCOME TAXES     (48 )     25       48             25  
       Benefit (provision) for income taxes     1       (1 )     (19 )           (19 )
       Equity income from continuing operations of subsidiaries     48       20             (68 )      
INCOME (LOSS) FROM CONTINUING OPERATIONS     1       44       29       (68 )     6  
INCOME FROM DISCONTINUED OPERATIONS, net of tax     16     $ 36     $ 44     $ (80 )   $ 16  
NET INCOME     17       80       73       (148 )     22  
Less: Net income attributable to noncontrolling interests                 (5 )           (5 )
NET INCOME ATTRIBUTABLE TO MERITOR, INC.       $      17     $      80         $      68     $      (148 )   $      17  
                                         
26
 

 

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(In millions)
 
    Three Months Ended March 31, 2010
                    Non-                
    Parent       Guarantors   Guarantors       Elims       Consolidated
Sales                                        
       External   $     $ 348     $ 520     $     $ 868  
       Subsidiaries           29       16       (45 )      
Total sales           377       536       (45 )     868  
Cost of sales     (17 )     (323 )     (476 )     45       (771 )
GROSS MARGIN     (17 )     54       60             97  
       Selling, general and administrative     (33 )     (16 )     (19 )           (68 )
OPERATING INCOME (LOSS)     (50 )     38       41             29  
       Other income (expense), net         24       (11 )     (12 )           1  
       Equity in earnings of affiliates           5       7             12  
       Interest income (expense), net     (47 )     18       (2 )           (31 )
INCOME (LOSS) BEFORE INCOME TAXES     (73 )     50       34             11  
       Benefit (provision) for income taxes           (2 )     2              
       Equity income from continuing operations of subsidiaries     80       28             (108 )      
INCOME FROM CONTINUING OPERATIONS     7       76       36       (108 )     11  
INCOME FROM DISCONTINUED OPERATIONS, net of tax     6       8       19       (27 )     6  
NET INCOME     13       84       55       (135 )     17  
Less: Net income attributable to noncontrolling interests                 (4 )           (4 )
                                         
NET INCOME ATTRIBUTABLE TO MERITOR, INC.   $      13     $      84         $      51     $      (135 )   $ 13  
                                         
27
 

 

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(In millions)
 
    Six Months Ended March 31, 2011
                    Non-                
    Parent   Guarantors       Guarantors       Elims   Consolidated
Sales                                            
       External   $     $     698     $ 1,465     $              $      2,163  
       Subsidiaries           71       37       (108 )      
Total sales           769       1,502       (108 )     2,163  
Cost of sales     (29 )     (705 )     (1,315 )     108       (1,941 )
GROSS MARGIN     (29 )     64       187             222  
       Selling, general and administrative     (54 )     (43 )     (46 )           (143 )
       Restructuring costs                 (14 )           (14 )
       Other operating expense     (2 )                       (2 )
OPERATING INCOME (LOSS)     (85 )     21       127             63  
       Other income (expense), net     24       (8 )     (18 )           (2 )
       Equity in earnings of affiliates           16       14             30  
       Interest income (expense), net     (61 )     15       (5 )           (51 )
INCOME (LOSS) BEFORE INCOME TAXES     (122 )     44       118             40  
       Benefit (provision) for income taxes     1       (6 )     (34 )           (39 )
       Equity income from continuing operations of subsidiaries     113       69             (182 )      
INCOME (LOSS) FROM CONTINUING OPERATIONS     (8 )     107       84       (182 )     1  
INCOME FROM DISCONTINUED OPERATIONS, net of tax     23     $ 53     $ 57     $ (110 )   $ 23  
NET INCOME     15       160       141       (292 )     24  
Less: Net income attributable to noncontrolling interests                 (9 )           (9 )
NET INCOME ATTRIBUTABLE TO MERITOR, INC.   $      15         $ 160     $      132     $ (292 )   $ 15  
                                         
28
 

 

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(In millions)
 
    Six Months Ended March 31, 2010
                    Non-                
    Parent   Guarantors   Guarantors   Elims       Consolidated
Sales                                        
       External   $          $ 681     $ 987     $     $ 1,668  
       Subsidiaries           55       31       (86 )      
Total sales           736       1,018       (86 )     1,668  
Cost of sales     (31 )     (626 )     (911 )     86       (1,482 )
GROSS MARGIN     (31 )     110       107             186  
       Selling, general and administrative     (61 )     (39 )     (34 )           (134 )
OPERATING INCOME (LOSS)     (92 )     71       73             52  
       Other income (expense), net     24       (12 )     (11 )           1  
       Equity in earnings of affiliates           9       12             21  
       Interest income (expense), net     (79 )     33       (8 )           (54 )
INCOME (LOSS) BEFORE INCOME TAXES     (147 )     101       66             20  
       Provision for income taxes           (5 )     (5 )           (10 )
       Equity income from continuing operations of subsidiaries     150       54             (204 )      
INCOME FROM CONTINUING OPERATIONS     3       150       61       (204 )     10  
INCOME FROM DISCONTINUED OPERATIONS, net of tax     10     $ 15     $ 45     $ (60 )   $ 10  
NET INCOME     13       165       106       (264 )     20  
Less: Net income attributable to noncontrolling interests                 (7 )               (7 )
NET INCOME ATTRIBUTABLE TO MERITOR, INC.       $ 13         $      165         $      99     $      (264 )   $      13  
                                         
29
 

 

MERITOR, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
 
    March 31, 2011
                    Non-                
    Parent   Guarantors   Guarantors   Elims   Consolidated
CURRENT ASSETS                                      
       Cash and cash equivalents       $ 62     $ 4     $ 129   $     $ 195  
       Receivables, net     9       18       707           734  
       Inventories           172       290           462  
       Other current assets     8       18       49           75  
       Assets of discontinued operations                 3           3  
              TOTAL CURRENT ASSETS     79       212       1,178           1,469  
NET PROPERTY     10       123       269           402  
GOODWILL           275       162           437  
OTHER ASSETS     44       168       155           367  
INVESTMENTS IN SUBSIDIARIES     1,170       232           (1,402 )      
              TOTAL ASSETS   $ 1,303     $ 1,010     $ 1,764   $ (1,402 )   $ 2,675  
                                           
CURRENT LIABILITIES                                      
       Short-term debt   $ 84     $     $   $     $ 84  
       Accounts payable     48       208       566           822  
       Other current liabilities     108       67       182           357  
       Liabilities of discontinued operations                 1           1  
              TOTAL CURRENT LIABILITIES     240       275       749           1,264  
LONG-TERM DEBT     939             9           948  
RETIREMENT BENEFITS     989             173           1,162  
INTERCOMPANY PAYABLE (RECEIVABLE)     90       (661 )     571                
OTHER LIABILITIES     91       143       73           307  
EQUITY (DEFICIT) ATTRIBUTABLE TO MERITOR,                                      
       INC.     (1,046 )     1,253       149     (1,402 )     (1,046 )
NONCONTROLLING INTERESTS                     40           40  
              TOTAL LIABILITIES AND EQUITY (DEFICIT)   $      1,303         $      1,010     $      1,764   $      (1,402 )   $      2,675  
 
30
 

 

MERITOR, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
 
    September 30, 2010
                    Non-                
    Parent       Guarantors   Guarantors       Elims   Consolidated
CURRENT ASSETS                                      
       Cash and cash equivalents   $ 47     $ 6     $ 290   $  —     $      343  
       Receivables, net     4       14       561           579  
       Inventories           148       234           382  
       Other current assets     17       20       39           76  
       Assets of discontinued operations           12       329           341  
              TOTAL CURRENT ASSETS     68       200       1,453           1,721  
NET PROPERTY     10       122       257           389  
GOODWILL           275       157           432  
OTHER ASSETS     49       158       130           337  
INVESTMENTS IN SUBSIDIARIES     1,011       154           (1,165 )      
              TOTAL ASSETS   $ 1,138     $ 909     $ 1,997   $ (1,165 )   $ 2,879  
                                       
CURRENT LIABILITIES                                          
       Accounts payable   $ 36     $ 186     $ 448   $         $ 670  
       Other current liabilities     109       106       143           358  
       Liabilities of discontinued operations           9       353           362  
              TOTAL CURRENT LIABILITIES     145       301       944           1,390  
LONG-TERM DEBT     1,021             8           1,029  
RETIREMENT BENEFITS     974             188           1,162  
INTERCOMPANY PAYABLE (RECEIVABLE)     (41 )     (473 )         514            
OTHER LIABILITIES     92       130       99           321  
EQUITY (DEFICIT) ATTRIBUTABLE TO MERITOR,                                      
       INC.     (1,053 )     951       213     (1,165 )     (1,054 )
NONCONTROLLING INTERESTS                 31           31  
              TOTAL LIABILITIES AND EQUITY (DEFICIT)   $      1,138     $      909     $      1,997   $      (1,165 )   $ 2,879  
                                       
 
31
 

 

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
 
    Six Months Ended March 31, 2011
                    Non-              
    Parent   Guarantors   Guarantors   Elims       Consolidated
CASH FLOWS PROVIDED BY (USED FOR)                                      
       OPERATING ACTIVITIES   $ 160     $ 11     $ (215 )   $   $ (44 )
                                       
INVESTING ACTIVITIES                                      
Capital expenditures     (2 )     (15 )     (25 )         (42 )
Other investing activities           2       (1 )         1  
                                       
Net cash flows used for discontinued operations     (15 )           (56 )         (71 )
CASH USED FOR INVESTING ACTIVITIES     (17 )     (13 )         (82 )         (112 )
                                       
FINANCING ACTIVITIES                                      
Intercompany advances     (134 )           134            
Other financing activities     6                       6  
CASH PROVIDED BY (USED FOR) FINANCING                                      
       ACTIVITIES     (128 )           134           6  
                                       
EFFECT OF FOREIGN CURRENCY EXCHANGE                                      
       RATES ON CASH AND CASH EQUIVALENTS                 2           2  
                                       
CHANGE IN CASH AND CASH EQUIVALENTS     15       (2 )     (161 )         (148 )
                                       
CASH AND CASH EQUIVALENTS AT BEGINNING                                      
       OF PERIOD         47       6       290           343  
CASH AND CASH EQUIVALENTS AT END OF                                      
       PERIOD   $      62         $      4     $      129         $        $      195  
 
32
 

 

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
 
    Six Months Ended March 31, 2010
                    Non-              
    Parent   Guarantors   Guarantors   Elims   Consolidated
CASH FLOWS PROVIDED BY (USED FOR)                                      
       OPERATING ACTIVITIES       $ (51 )   $ 4     $ 139     $   $ 92  
                                       
INVESTING ACTIVITIES                                      
Capital expenditures           (11 )     (13 )         (24 )
Other investing activities                 3           3  
Net cash flows provided by (used for) discontinued                                      
       operations           5       (7 )         (2 )
                                       
CASH USED FOR INVESTING ACTIVITIES