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

FORM 10-Q
(Mark One)
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 29, 2020

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to

Commission File No. 1-15983

MERITOR, INC.

(Exact name of registrant as specified in its charter)
 
Indiana
 
 
38-3354643
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification 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)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1 Par Value
MTOR
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes
No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Registration S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
Yes
No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
Accelerated Filer
Non-accelerated Filer
 
Smaller Reporting Company
Emerging Growth Company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
No
 
72,259,278 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on April 29, 2020.



INDEX
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


MERITOR, INC.

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2020
 
2019
 
2020
 
2019
 
(Unaudited)
Sales
$
871

 
$
1,156

 
$
1,772

 
$
2,194

Cost of sales
(757
)
 
(982
)
 
(1,531
)
 
(1,879
)
GROSS PROFIT
114

 
174

 
241

 
315

Selling, general and administrative
(59
)
 
(73
)
 
(129
)
 
(107
)
Income from WABCO distribution termination
265

 

 
265

 

Other operating income (expense), net
(10
)
 
1

 
(15
)
 
1

OPERATING INCOME
310

 
102

 
362

 
209

Other income, net
14

 
9

 
24

 
20

Equity in earnings of affiliates
6

 
6

 
12

 
15

Interest expense, net
(16
)
 
(15
)
 
(30
)
 
(29
)
INCOME BEFORE INCOME TAXES
314

 
102

 
368

 
215

Provision for income taxes
(73
)
 
(27
)
 
(86
)
 
(48
)
INCOME FROM CONTINUING OPERATIONS
241

 
75

 
282

 
167

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
1

 
(1
)
 
1

 
(1
)
NET INCOME
242

 
74

 
283

 
166

Less: Net income attributable to noncontrolling interests
(1
)
 
(2
)
 
(3
)
 
(4
)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.
$
241

 
$
72

 
$
280

 
$
162

NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
 
 
 
 
 
 
 
Net income from continuing operations
$
240

 
$
73

 
$
279

 
$
163

Income (loss) from discontinued operations
1

 
(1
)
 
1

 
(1
)
Net income
$
241

 
$
72

 
$
280

 
$
162

BASIC EARNINGS (LOSS) PER SHARE
 
 
 
 
 
 
 
Continuing operations
$
3.27

 
$
0.88

 
$
3.68

 
$
1.94

Discontinued operations
0.01

 
(0.01
)
 
0.01

 
(0.01
)
       Basic earnings per share
$
3.28

 
$
0.87

 
$
3.69

 
$
1.93

DILUTED EARNINGS (LOSS) PER SHARE
 
 
 
 
 
 
 
Continuing operations
$
3.19

 
$
0.85

 
$
3.58

 
$
1.88

Discontinued operations
0.01

 
(0.01
)
 
0.01

 
(0.01
)
       Diluted earnings per share
$
3.20

 
$
0.84

 
$
3.59

 
$
1.87

 
 
 
 
 
 
 
 
Basic average common shares outstanding
73.4

 
83.3

 
75.8

 
84.0

Diluted average common shares outstanding
75.3

 
85.6

 
78.0

 
86.6


See Notes to Condensed Consolidated Financial Statements.


3


MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)


 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2020
 
2019
 
2020
 
2019
 
(Unaudited)
Net income
$
242

 
$
74

 
$
283

 
$
166

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
     Attributable to Meritor, Inc.
(56
)
 
7

 
(35
)
 
3

     Attributable to noncontrolling interest

 

 

 
1

Pension and other postretirement benefit related adjustments
2

 
1

 
5

 
1

Unrealized loss on cash flow hedges
(5
)
 
(1
)
 
(3
)
 

Other comprehensive income (loss), net of tax
(59
)
 
7

 
(33
)
 
5

Total comprehensive income
183

 
81

 
250

 
171

Less: Comprehensive income attributable to noncontrolling interest
(1
)
 
(2
)
 
(3
)
 
(5
)
Comprehensive income attributable to Meritor, Inc.
$
182

 
$
79

 
$
247

 
$
166


See Notes to Condensed Consolidated Financial Statements.


4


MERITOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)

 
March 31,
2020
 
September 30,
2019
 
(Unaudited)
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
508

 
$
108

Receivables, trade and other, net
466

 
551

Inventories
529

 
526

Other current assets
35

 
31

TOTAL CURRENT ASSETS
1,538

 
1,216

NET PROPERTY
509

 
515

GOODWILL
500

 
478

OTHER ASSETS
678

 
606

TOTAL ASSETS
$
3,225

 
$
2,815

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term debt
$
138

 
$
41

       Accounts and notes payable
541

 
610

Other current liabilities
257

 
285

TOTAL CURRENT LIABILITIES
936

 
936

LONG-TERM DEBT
1,203

 
902

RETIREMENT BENEFITS
315

 
336

OTHER LIABILITIES
347

 
226

TOTAL LIABILITIES
2,801

 
2,400

COMMITMENTS AND CONTINGENCIES (See Note 20)

 

 
 
 
 
EQUITY:
 
 
 
Common stock (March 31, 2020 and September 30, 2019, 103.7 and 104.1 shares issued and 72.3 and 81.4 shares outstanding, respectively)
105

 
104

Additional paid-in capital
803

 
803

Retained earnings
771

 
491

Treasury stock, at cost (March 31, 2020 and September 30, 2019, 31.4 and 22.7 shares, respectively)
(573
)
 
(332
)
Accumulated other comprehensive loss
(714
)
 
(681
)
Total equity attributable to Meritor, Inc.
392

 
385

Noncontrolling interests
32

 
30

TOTAL EQUITY
424

 
415

TOTAL LIABILITIES AND EQUITY
$
3,225

 
$
2,815


See Notes to Condensed Consolidated Financial Statements.

5


MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
 
Six Months Ended March 31,
 
2020
 
2019
 
(Unaudited)
OPERATING ACTIVITIES
 
 
 
Net income
$
283

 
$
166

Less: Income (loss) from discontinued operations, net of tax
1

 
(1
)
Income from continuing operations
282

 
167

Adjustments to income from continuing operations to arrive at cash provided by operating activities:
 
 
 
Depreciation and amortization
50

 
43

Deferred income tax expense (benefit)
(4
)
 
16

Restructuring costs
15

 
(1
)
Equity in earnings of affiliates
(12
)
 
(15
)
Pension and retiree medical income
(21
)
 
(19
)
Asbestos related liability remeasurement

 
(31
)
Other adjustments to income from continuing operations
1

 
8

Dividends received from equity method investments

 
1

Pension and retiree medical contributions
(7
)
 
(8
)
Restructuring payments
(15
)
 
(1
)
Changes in off-balance sheet accounts receivable securitization and factoring programs
20

 
22

Changes in receivables, inventories and accounts payable
(8
)
 
(91
)
Changes in other current assets and liabilities
(49
)
 
(33
)
Changes in other assets and liabilities
38

 
(6
)
Operating cash flows provided by continuing operations
290

 
52

Operating cash flows used for discontinued operations

 
(1
)
CASH PROVIDED BY OPERATING ACTIVITIES
290

 
51

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(33
)
 
(44
)
Cash paid for acquisition of Transportation Power, Inc., net of cash acquired
(13
)
 
(3
)
Other investing activities
9

 

CASH USED FOR INVESTING ACTIVITIES
(37
)
 
(47
)
FINANCING ACTIVITIES
 
 
 
Securitization
96

 
48

Borrowings against revolving line of credit
304

 

Redemption of notes

 
(19
)
Term loan payments
(4
)
 

Other financing activities
(1
)
 
(1
)
Net change in debt
395

 
28

Repurchase of common stock
(241
)
 
(50
)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
154

 
(22
)
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES ON CASH AND CASH EQUIVALENTS
(7
)
 
1

CHANGE IN CASH AND CASH EQUIVALENTS
400

 
(17
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
108

 
115

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
508

 
$
98


See Notes to Condensed Consolidated Financial Statements.

6


MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(in millions)
(Unaudited)


 
Three months ended March 31, 2020
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total Equity Attributable to
Meritor, Inc.
 
Noncontrolling
Interests
 
Total
Beginning Balance at December 31, 2019
$
105

 
$
804

 
$
530

 
$
(432
)
 
$
(655
)
 
$
352

 
$
32

 
$
384

Comprehensive income (loss)

 

 
241

 

 
(59
)
 
182

 
1

 
183

Equity based compensation expense

 
(2
)
 

 

 

 
(2
)
 

 
(2
)
Repurchase of common stock

 

 

 
(141
)
 

 
(141
)
 

 
(141
)
Noncontrolling interest dividend

 

 

 

 

 

 
(1
)
 
(1
)
Other equity adjustments

 
1

 

 

 

 
1

 

 
1

Ending Balance at March 31, 2020
$
105

 
$
803

 
$
771

 
$
(573
)
 
$
(714
)
 
$
392

 
$
32

 
$
424

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2019
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total Equity Attributable to
Meritor, Inc.
 
Noncontrolling
Interests
 
Total
Beginning Balance at December 31, 2018
$
104

 
$
790

 
$
290

 
$
(286
)
 
$
(569
)
 
$
329

 
$
33

 
$
362

Comprehensive income

 

 
72

 

 
7

 
79

 
2

 
81

Equity based compensation expense

 
3

 

 

 

 
3

 

 
3

Noncontrolling interest dividends

 

 

 

 

 

 
(1
)
 
(1
)
Ending Balance at March 31, 2019
$
104

 
$
793

 
$
362

 
$
(286
)
 
$
(562
)
 
$
411

 
$
34

 
$
445








See Notes to Condensed Consolidated Financial Statements.


7


MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(in millions)
(Unaudited)

 
Six months ended March 31, 2020
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total Equity Attributable to
Meritor, Inc.
 
Noncontrolling
Interests
 
Total
Beginning Balance at September 30, 2019
$
104

 
$
803

 
$
491

 
$
(332
)
 
$
(681
)
 
$
385

 
$
30

 
$
415

Comprehensive income (loss)

 

 
280

 

 
(33
)
 
247

 
3

 
250

Equity based compensation expense

 
1

 

 

 

 
1

 

 
1

Vesting of equity based awards
1

 
(1
)
 

 

 

 

 

 

Repurchase of common stock

 

 

 
(241
)
 

 
(241
)
 

 
(241
)
Noncontrolling interest dividend

 

 

 

 

 

 
(1
)
 
(1
)
Ending Balance at March 31, 2020
$
105

 
$
803

 
$
771

 
$
(573
)
 
$
(714
)
 
$
392

 
$
32

 
$
424

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended March 31, 2019
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total Equity Attributable to
Meritor, Inc.
 
Noncontrolling
Interests
 
Total
Beginning Balance at September 30, 2018
$
102

 
$
787

 
$
200

 
$
(236
)
 
$
(566
)
 
$
287

 
$
30

 
$
317

Comprehensive income

 

 
162

 

 
4

 
166

 
5

 
171

Equity based compensation expense

 
8

 

 

 

 
8

 

 
8

Vesting of equity based awards
2

 
(2
)
 

 

 

 

 

 

Repurchase of common stock

 

 

 
(50
)
 

 
(50
)
 

 
(50
)
Noncontrolling interest dividends

 

 

 

 

 

 
(1
)
 
(1
)
Ending Balance at March 31, 2019
$
104

 
$
793

 
$
362

 
$
(286
)
 
$
(562
)
 
$
411

 
$
34

 
$
445





See Notes to Condensed Consolidated Financial Statements.

8


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



1. Basis of Presentation
Meritor, Inc. (the "company" or "Meritor"), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers ("OEMs") and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, military, bus and coach, construction and other industrial OEMs and certain aftermarkets. The Condensed Consolidated Financial Statements are those of the company and its consolidated subsidiaries.
In the opinion of the company, the unaudited Condensed Consolidated 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 company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019. The Condensed Consolidated Balance Sheet data as of September 30, 2019 was derived from audited financial statements but does not include all annual disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the three and six months ended March 31, 2020 are not necessarily indicative of the results for the full year.
The company’s fiscal year ends on the Sunday nearest September 30, and its fiscal quarters generally end on the Sundays nearest December 31, March 31 and June 30. The second quarter of fiscal years 2020 and 2019 ended on March 29, 2020 and March 31, 2019, respectively. Fiscal year 2019 ended on September 29, 2019. 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 fiscal quarter end, respectively.
COVID-19 Pandemic Update
In March 2020 the World Health Organization declared a global health pandemic related to the recent outbreak of a novel coronavirus. The COVID-19 pandemic adversely affected the company's financial performance in the second quarter of fiscal year 2020 and will continue to have an adverse impact for at least the remainder of fiscal year 2020.  In response to the COVID-19 pandemic, government health officials have recommended and mandated precautions to mitigate the spread of the virus, including shelter-in-place orders, prohibitions on public gatherings and other similar measures. As a result, the company and certain of the company's customers and suppliers have temporarily closed select manufacturing locations beginning late in the second quarter of fiscal year 2020, continuing into the third quarter of fiscal year 2020. The company’s salaried employees are working remotely until further notice. There is uncertainty around the duration and breadth of the COVID-19 pandemic, as well as the impact it will have on the company's operations, supply chain and demand for its products. As a result, the ultimate impact on the company's business, financial condition or operating results cannot be reasonably estimated at this time.
2. Earnings per Share
Basic earnings (loss) per share is calculated using the weighted average number of shares outstanding during each period. The diluted earnings (loss) per share calculation includes the impact of dilutive common stock options, restricted shares, restricted share units, performance share unit 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 March 31,
 
Six Months Ended March 31,
 
2020
 
2019
 
2020
 
2019
Basic average common shares outstanding
73.4

 
83.3

 
75.8

 
84.0

Impact of restricted shares, restricted share units and performance share units
1.1

 
1.5

 
1.3

 
1.9

Impact of convertible notes
0.8

 
0.8

 
0.9

 
0.7

Diluted average common shares outstanding
75.3


85.6


78.0


86.6


In November 2019, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock or its cash

9


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


equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $25.25, which was the company’s share price on the grant date of December 1, 2019. The Board of Directors also approved a grant of 0.3 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $25.25, which was the company's share price on the grant date of December 1, 2019.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2019 to September 30, 2022, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin, new business wins, free cash flow conversion and adjusted diluted earnings per share from continuing operations which are all weighted at 25%. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.4 million performance share units.

3. New Accounting Standards
Accounting standards implemented during fiscal year 2020
On October 1, 2019, the company implemented Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842). The company elected the practical expedient package which allowed the company to not reassess whether existing contracts contain a lease and to not reassess classification of existing leases. The company also adopted ASU 2018-11 Leases (Topic 842) Targeted Improvements, electing to not separate lease and non-lease components in contracts that contain both and electing to not restate comparative periods when adopting ASU 2016-02. As a result, the company recognized a right-of-use asset and lease liability as a lessee for substantially all existing operating leases and has included new and expanded disclosures. (See Note 5)
Accounting standards to be implemented
The following represent the standards that may result in a significant change in practice and/or have a significant financial impact on the company.
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including accounts receivable. The ASU also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The amendments in this update are required to be adopted by public business entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The company is currently evaluating the potential impact of this guidance on its accounting policies and its Condensed Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU add, modify, and eliminate certain disclosure requirements on fair value measurements in Topic 820. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Certain amendments should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. Others should be applied retrospectively. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The company is currently evaluating the potential impact of this guidance on its accounting policies and its Condensed Consolidated Financial Statements.

4. Revenue
Disaggregation of revenue

In the following tables, revenue is disaggregated for each of our operating segments by primary geographical market for the three and six months ended March 31, 2020 and 2019 (in millions).

10


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


 
 
Three Months Ended March 31, 2020
Primary Geographical Market
 
Commercial Truck
 
Aftermarket, Industrial and Trailer
 
Total
U.S.
 
$
269

 
$
248

 
$
517

Canada
 

 
15

 
15

Mexico
 
36

 
9

 
45

Total North America
 
305

 
272

 
577

Sweden