SEC Filing | Meritor, Inc.

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mtor-20220703

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 July 3, 2022


☐			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 Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1 Par Value	MTOR	New York Stock Exchange

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

☒

☐

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

☒

☐

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

☐

☒

70,864,196 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on 8/1/2022.

INDEX


			Page No.
PART I.	FINANCIAL INFORMATION:

	Item 1.	Financial Statements:

		Condensed Consolidated Statement of Operations - - Three and Nine Months Ended June 30, 2022 and 2021	3

		Condensed Consolidated Statement Of Comprehensive Income - - Three and Nine Months Ended June 30, 2022 and 2021	4

		Condensed Consolidated Balance Sheet - - June 30, 2022 and September 30, 2021	5

		Condensed Consolidated Statement of Cash Flows - - Nine Months Ended June 30, 2022 and 2021	6

		Condensed Consolidated Statement of Equity - - Three and Nine Months Ended June 30, 2022 and 2021	7

		Notes to Condensed Consolidated Financial Statements	9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

	Item 4.	Controls and Procedures	43

PART II.	OTHER INFORMATION:

	Item 1.	Legal Proceedings	45

	Item 1A.	Risk Factors	45

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

	Item 5.	Other Information	46

	Item 6.	Exhibits	47

Signatures			48

MERITOR, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share amounts)


	Three Months Ended June 30,				Nine Months Ended June 30,
	2022		2021		2022		2021
	(Unaudited)
Sales	$	1,212	$	1,016	$	3,350	$	2,888
Cost of sales	(1,058)		(884)		(2,932)		(2,493)
GROSS PROFIT	154		132		418		395
Selling, general and administrative	(63)		(69)		(195)		(203)


Other operating expense, net	(2)		(4)		(6)		(13)
OPERATING INCOME	89		59		217		179
Other income, net	10		12		38		49
Equity in earnings of affiliates	12		8		30		24
Interest expense, net	(14)		(20)		(39)		(65)
INCOME BEFORE INCOME TAXES	97		59		246		187
Provision for income taxes	(21)		(14)		(48)		(43)
INCOME FROM CONTINUING OPERATIONS	76		45		198		144
INCOME FROM DISCONTINUED OPERATIONS, net of tax	—		—		1		—
NET INCOME	76		45		199		144
Less: Net income attributable to noncontrolling interests	(3)		(3)		(10)		(7)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.	$	73	$	42	$	189	$	137
NET INCOME ATTRIBUTABLE TO MERITOR, INC.
Net income from continuing operations	$	73	$	42	$	188	$	137
Income from discontinued operations	—		—		1		—
Net income	$	73	$	42	$	189	$	137
BASIC EARNINGS PER SHARE
Continuing operations	$	1.03	$	0.58	$	2.67	$	1.90
Discontinued operations	—		—		0.01		—
Basic earnings per share	$	1.03	$	0.58	$	2.68	$	1.90
DILUTED EARNINGS PER SHARE
Continuing operations	$	1.02	$	0.58	$	2.63	$	1.87
Discontinued operations	—		—		0.01		—
Diluted earnings per share	$	1.02	$	0.58	$	2.64	$	1.87

Basic average common shares outstanding	70.7		72.0		70.5		72.2
Diluted average common shares outstanding	71.8		72.8		71.5		73.2

See Notes to Condensed Consolidated Financial Statements.

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in millions)


	Three Months Ended June 30,				Nine Months Ended June 30,
	2022		2021		2022		2021
	(Unaudited)
Net income	$	76	$	45	$	199	$	144
Other comprehensive income (loss):
Foreign currency translation adjustments:
Attributable to Meritor, Inc.	(61)		15		(60)		48
Attributable to noncontrolling interests	(3)		—		(3)		—

Pension and other postretirement benefit related adjustments	1		3		4		8
Unrealized gain (loss) on cash flow hedges	(1)		—		(1)		1
Other comprehensive income (loss), net of tax	(64)		18		(60)		57
Total comprehensive income	12		63		139		201
Less: Comprehensive income attributable to noncontrolling interests	—		(3)		(7)		(7)
Comprehensive income attributable to Meritor, Inc.	$	12	$	60	$	132	$	194

See Notes to Condensed Consolidated Financial Statements.

MERITOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions)


	June 30, 2022		September 30, 2021
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	105	$	101

Receivables, trade and other, net	753		534
Inventories	710		601
Other current assets	60		50
TOTAL CURRENT ASSETS	1,628		1,286
NET PROPERTY	501		517
GOODWILL	497		507
OTHER ASSETS	628		628
TOTAL ASSETS	$	3,254	$	2,938
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short-term debt	$	19	$	19
Accounts and notes payable	797		573
Other current liabilities	301		308
TOTAL CURRENT LIABILITIES	1,117		900
LONG-TERM DEBT	1,023		1,008
RETIREMENT BENEFITS	160		191
OTHER LIABILITIES	220		224
TOTAL LIABILITIES	2,520		2,323
COMMITMENTS AND CONTINGENCIES (See Note 17)

EQUITY:
Common stock (June 30, 2022 and September 30, 2021, 104.7 and 104.0 shares issued and 70.9 and 70.1 shares outstanding, respectively)	106		105
Additional paid-in capital	770		798
Retained earnings	1,141		935
Treasury stock, at cost (June 30, 2022 and September 30, 2021, 33.9 and 33.9 shares, respectively)	(632)		(632)
Accumulated other comprehensive loss	(689)		(632)
Total equity attributable to Meritor, Inc.	696		574
Noncontrolling interests	38		41
TOTAL EQUITY	734		615
TOTAL LIABILITIES AND EQUITY	$	3,254	$	2,938

See Notes to Condensed Consolidated Financial Statements.

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)


	Nine Months Ended June 30,
	2022		2021
	(Unaudited)
OPERATING ACTIVITIES
Net income	$	199	$	144
Less: Income from discontinued operations, net of tax	1		—
Income from continuing operations	198		144
Adjustments to income from continuing operations to arrive at cash provided by operating activities:
Depreciation and amortization	75		78
Deferred income tax expense	—		1
Restructuring costs	5		9
Stock compensation expense	13		14
Equity in earnings of affiliates	(30)		(24)
Pension and retiree medical income	(40)		(39)
Loss on debt extinguishment	—		11

Dividends received from equity method investments	15		7
Pension and retiree medical contributions	(7)		(8)
Restructuring payments	(9)		(11)


Changes in off-balance sheet accounts receivable securitization and factoring programs	134		35
Changes in receivables, inventories and accounts payable	(251)		(103)
Changes in other current assets and liabilities	(19)		26
Changes in other assets and liabilities	(2)		6
Operating cash flows provided by continuing operations	82		146
Operating cash flows used for discontinued operations	(3)		—
CASH PROVIDED BY OPERATING ACTIVITIES	79		146
INVESTING ACTIVITIES
Capital expenditures	(63)		(47)





Other investing activities	5		(3)



CASH USED FOR INVESTING ACTIVITIES	(58)		(50)
FINANCING ACTIVITIES



Redemption of notes	—		(458)
Proceeds from debt issuances	—		275
Redemption of convertible notes	—		(53)
Debt issuance costs	—		(5)
Term loan payments	(13)		(9)
Other financing activities	—		(1)
Net change in debt	(13)		(251)
Repurchase of common stock	—		(25)
CASH USED FOR FINANCING ACTIVITIES	(13)		(276)
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS	(4)		3
CHANGE IN CASH AND CASH EQUIVALENTS	4		(177)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	101		315
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	105	$	138

See Notes to Condensed Consolidated Financial Statements.

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(in millions)

(Unaudited)


	Three months ended June 30, 2022
	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 March 31, 2022	$	106	$	765	$	1,068	$	(632)	$	(628)	$	679	$	41	$	720
Comprehensive income	—		—		73		—		(61)		12		—		12


Equity based compensation expense	—		5		—				—		5		—		5

Noncontrolling interest dividends	—		—		—		—		—		—		(3)		(3)



Ending Balance at June 30, 2022	$	106	$	770	$	1,141	$	(632)	$	(689)	$	696	$	38	$	734

	Three months ended June 30, 2021
	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 March 31, 2021	$	106	$	788	$	831	$	(573)	$	(575)	$	577	$	36	$	613
Comprehensive income	—		—		42		—		18		60		3		63



Equity based compensation expense	—		4		—		—		—		4		—		4



Repurchase of common stock	—		—		—		(25)		—		(25)		—		(25)


Ending Balance at June 30, 2021	$	106	$	792	$	873	$	(598)	$	(557)	$	616	$	39	$	655

See Notes to Condensed Consolidated Financial Statements.

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(in millions)

(Unaudited)


	Nine months ended June 30, 2022
	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, 2021	$	105	$	798	$	935	$	(632)	$	(632)	$	574	$	41	$	615
Comprehensive income	—		—		189		—		(57)		132		7		139
Equity based compensation expense	—		13		—		—		—		13		—		13
Vesting of equity based awards	1		(1)		—		—		—		—		—		—


Adjustments upon adoption of ASU 2020-06	—		(40)		17		—		—		(23)		—		(23)
Noncontrolling interest dividend	—		—		—		—		—		—		(10)		(10)

Ending Balance at June 30, 2022	$	106	$	770	$	1,141	$	(632)	$	(689)	$	696	$	38	$	734

	Nine Months Ended June 30, 2021
	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, 2020	$	105	$	808	$	736	$	(573)	$	(614)	$	462	$	33	$	495
Comprehensive income	—		—		137		—		57		194		7		201
Repurchase of convertible notes	—		(30)		—		—		—		(30)		—		(30)

Equity based compensation expense	—		14		—		—		—		14		—		14
Vesting of equity based awards	1		(1)		—		—		—		—		—		—


Repurchase of common stock	—		—		—		(25)		—		(25)		—		(25)
Noncontrolling interest dividend	—		—		—		—		—		—		(1)		(1)
Other equity adjustments	—		1		—		—		—		1		—		1
Ending Balance at June 30, 2021	$	106	$	792	$	873	$	(598)	$	(557)	$	616	$	39	$	655

See Notes to Condensed Consolidated Financial Statements.

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 products, 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.

As previously announced, on February 21, 2022, Meritor, Cummins Inc., an Indiana corporation (“Cummins”), and Rose NewCo Inc., an Indiana corporation (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which, among other things, Merger Sub will merge with and into the company (the “Merger”), with the company surviving the Merger as a wholly owned subsidiary of Cummins. On May 26, 2022, the company's shareholders voted in favor of the Merger. The companies are working to complete the acquisition in the coming week as all regulatory approvals to close the transaction have been received.

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, 2021. The Condensed Consolidated Balance Sheet data as of September 30, 2021 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 nine months ended June 30, 2022 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 third quarter of fiscal years 2022 and 2021 ended on July 3, 2022 and July 4, 2021, respectively. Fiscal year 2021 ended on October 3, 2021. 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 June 30 are used consistently throughout this report to represent the fiscal year end and third fiscal quarter end, respectively.

COVID-19 Pandemic Update

The COVID-19 pandemic adversely affected our financial performance during the beginning of fiscal year 2021, however the direct adverse impacts of the pandemic on our operations and financial performance started to dissipate over the course of the third fiscal quarter of fiscal year 2021. All of our facilities have been fully operational since the end of fiscal year 2020 and our salaried employees have returned to work on a hybrid in person basis consistent with local, regional and business requirements, in each case under enhanced safety guidelines. Although we are optimistic that the worst of the pandemic is behind us, the progression of the pandemic, and its direct and indirect impacts on our markets, operations and financial performance, have been unpredictable. As a result of this continued uncertainty, there may still be impacts on our industry, operations, workforce, supply chains, distribution systems and demand for our products in the future which cannot be reasonably estimated at this time.

2. Earnings per Share

Basic earnings per share is calculated using the weighted average number of shares outstanding during each period. The diluted earnings 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.

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):


	Three Months Ended June 30,		Nine Months Ended June 30,
	2022	2021	2022	2021
Basic average common shares outstanding	70.7	72.0	70.5	72.2
Impact of restricted shares, restricted share units and performance share units	1.1	0.8	1.0	1.0



Diluted average common shares outstanding	71.8	72.8	71.5	73.2

In November 2021, the Board of Directors approved a grant of 0.4 million 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 equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $25.65, which was the company’s share price on the grant date of December 1, 2021. 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 $25.65, which was the company's share price on the grant date of December 1, 2021.

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, 2021 to September 30, 2024, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin and adjusted diluted earnings per share from continuing operations which are each weighted at 50%. 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.

On December 1, 2020, in response to retention and attrition concerns resulting from the COVID-19 pandemic’s impact on the company’s incentive compensation plans, and to continue to incentivize executive performance in a difficult and uncertain environment, the Compensation Committee of the Board of Directors adjusted the threshold level of the performance metrics required to be achieved for payout for the fiscal 2019-2021 performance cycle. The target and maximum levels were not modified. The impact of this adjustment did not have a material impact on the company's Condensed Consolidated Financial Statements.

3. New Accounting Standards

Accounting standards implemented during fiscal year 2022

On October 1, 2021, the company adopted Accounting Standards Update ("ASU") 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (Subtopic 815-40). As a result of adopting this ASU, entities are no longer required to separately present in equity an embedded conversion feature in such debt and instead should account for a convertible debt instrument wholly as debt. ASU 2020-06 also amended the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments.

The company elected to adopt the ASU using the modified retrospective method. The cumulative effect of the changes following implementation on October 1, 2021 was as follows:


	Balance at September 30, 2021		Adjustments Upon Adoption of ASU 2020-06		Balance at October 1, 2021
Liabilities
Long-Term debt	$	1,008	$	23	$	1,031
Equity
Additional paid-in capital	$	798	$	(40)	$	758
Retained earnings	$	935	$	17	$	952

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The prior period consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for that period. Interest expense recognized in future periods will be reduced as a result of the derecognition of the unamortized debt discount on the 3.25 Percent Convertible Notes (see Note 14), which will no longer be amortized to interest expense. The reduction in interest expense will have a favorable impact on both basic and diluted earnings per share.

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 nine months ended June 30, 2022 and 2021 (in millions).



	Three Months Ended June 30, 2022
Primary Geographical Market	Commercial Truck		Aftermarket & Industrial		Total
U.S.	$	482	$	206	$	688
Canada	—		15		15
Mexico	59		9		68
Total North America	541		230		771
Sweden	80		—		80
Italy	65		3		68
United Kingdom	39		2		41
Other Europe	3		27		30
Total Europe	187		32		219
Brazil	117		—		117
China	26		—		26
India	52		—		52
Other Asia-Pacific	27		—		27
Total sales	$	950	$	262	$	1,212



	Three Months Ended June 30, 2021
Primary Geographical Market	Commercial Truck		Aftermarket & Industrial		Total
U.S.	$	365	$	183	$	548
Canada	—		16		16
Mexico	49		6		55
Total North America	414		205		619
Sweden	65		—		65
Italy	61		4		65
United Kingdom	37		3		40
Other Europe	3		39		42
Total Europe	166		46		212
Brazil	82		1		83
China	41		—