MERITOR, INC. OVERVIEW
Meritor, Inc. (the "company," "our," "we" or "Meritor"), headquartered inTroy, 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.Meritor common stock is traded on theNew York Stock Exchange under the ticker symbol MTOR. As previously announced, onFebruary 21, 2022 ,Meritor , Cummins Inc., anIndiana corporation ("Cummins"), andRose NewCo Inc. , anIndiana 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. OnMay 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. As previously announced, onMay 19, 2022 we entered into an agreement with Siemens Aktiengesellschaft ("Siemens") to acquire its Commercial Vehicles business, which develops, designs and produces high-performance electric drive systems. The transaction is expected to close by calendar year-end, subject to regulatory approvals and customary closing conditions. In accordance with the terms of the previously announced Merger Agreement under which Cummins agreed to acquireMeritor , Cummins consented to and is supportive ofMeritor entering into the agreement and completing its acquisition of the Siemens Commercial Vehicles business. 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.
3rd Quarter Fiscal Year 2022 Results
Our sales for the third quarter of fiscal year 2022 were
Net income attributable toMeritor and net income from continuing operations attributable toMeritor were each$73 million for the third quarter of fiscal year 2022 compared to$42 million for each in the same period in the prior fiscal year. Higher net income year over year was driven by higher sales volumes and pricing actions, partially offset by increased freight and material costs. Adjusted income from continuing operations attributable to the company (see Non-GAAP Financial Measures below) for the third quarter of fiscal year 2022 was$77 million compared to$45 million in the same period in the prior fiscal year. Adjusted EBITDA (see Non-GAAP Financial Measures below) for the third quarter of fiscal year 2022 was$142 million compared to$107 million in the same period in the prior fiscal year. Our adjusted EBITDA margin (see Non-GAAP Financial Measures below) in the third quarter of fiscal year 2022 increased to 11.7 percent compared to 10.5 percent in the same period in the prior fiscal year. The increase in adjusted EBITDA and adjusted EBITDA margin year over year was driven primarily by higher sales volumes and pricing actions, partially offset by higher freight and material costs. Cash provided by operating activities was$117 million in the third quarter of fiscal year 2022 compared to$39 million in the same period in the prior fiscal year. The increase in operating cash flow year over year was driven primarily by higher earnings and lower working capital. 26 --------------------------------------------------------------------------------
MERITOR, INC.
Trends and Uncertainties
Industry Production Volumes
The following table reflects estimated on-highway commercial truck production
volumes for selected original equipment markets for the three and nine months
ended June 30, 2022 and 2021 based on available sources and management's
estimates.
Three Months Ended June 30, Percent Nine Months Ended June 30, Percent
2022 2021 Change 2022 2021 Change
Estimated Commercial Truck production (in thousands):
78 67 16 % 219 201 9 %
North America, Medium-Duty Trucks 63 59 7 % 178 181 (2) %
Western Europe , Heavy- and Medium-Duty Trucks 124 101 23 % 362 323 12 %South America , Heavy- and Medium-Duty Trucks 37 41 (10) % 112 107 5 % India, Heavy- and Medium-Duty Trucks 94 49 92 % 287 213 35 %
South America : During fiscal year 2022, we expect production volumes to remain consistent with the levels experienced in fiscal year 2021.
During fiscal year 2022, we expect production volumes to significantly decrease from the levels experienced in fiscal year 2021.
During fiscal year 2022, we expect production volumes to significantly increase from the levels experienced in fiscal year 2021.
Industry-Wide and Other Significant Issues
Our business continues to address a number of challenging industry-wide issues, including the following:
•Uncertainty regarding the duration and severity of the COVID-19 pandemic and its effects on public health, the global economy and financial markets, as well as our industry, customers, operations, workforce, supply chains, distribution systems and demand for our products;
•Uncertainty around the global market outlook;
•Uncertainty stemming from the conflict between
•Volatility in price and availability of steel, components, labor, transportation costs and other commodities, including energy;
•Potential for disruptions in the financial markets and their impact on the availability and cost of credit;
•Technological changes in our industry as a result of the trends toward electrified drivetrains and the integration of advanced electronics and their impact on the demand for our products and services;
•Impact of currency exchange rate volatility; and
•Consolidation and globalization of OEMs and their suppliers.
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MERITOR, INC. Other significant factors that could affect our results and liquidity include:
•Significant contract awards or losses of existing contracts or failure to negotiate acceptable terms in contract renewals;
•Ability to successfully execute and implement strategic initiatives, including the ability to launch a significant number of new products, potential product quality issues, and obtain new business; •Ability to manage possible adverse effects on European markets or our European operations, or financing arrangements related thereto, or in the event one or more countries exit the European monetary union;
•Ability to further implement planned productivity, cost reduction and other margin improvement initiatives;
•Ability to work with our customers to manage rapidly changing production volumes, including in the event of production interruptions affecting us, our customers or our suppliers;
•Competitively driven price reductions to our customers or potential price increases from our suppliers;
•Additional restructuring actions and the timing and recognition of restructuring charges, including any actions associated with prolonged softness in markets in which we operate;
•Higher-than-planned warranty expenses, including the outcome of known or potential recall campaigns;
•Uncertainties of asbestos claim, environmental and other legal proceedings, the long-term solvency of our insurance carriers and the potential for higher-than-anticipated costs resulting from environmental liabilities, including those related to site remediation;
•Significant pension costs; and
•Restrictive government actions (such as restrictions on transfer of funds and trade protection measures, including import and export duties, quotas and customs duties and tariffs).
NON-GAAP FINANCIAL MEASURES In addition to the results reported in accordance with accounting principles generally accepted inthe United States ("GAAP"), we have provided information regarding non-GAAP financial measures. These non-GAAP financial measures include adjusted income (loss) from continuing operations attributable to the company, adjusted diluted earnings (loss) per share from continuing operations, adjusted EBITDA, adjusted EBITDA margin, segment adjusted EBITDA, segment adjusted EBITDA margin, free cash flow and free cash flow conversion. Adjusted income (loss) from continuing operations attributable to the company and adjusted diluted earnings (loss) per share from continuing operations are defined as reported income (loss) from continuing operations and reported diluted earnings (loss) per share from continuing operations before restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA is defined as income (loss) from continuing operations before interest, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA margin is defined as adjusted EBITDA divided by consolidated sales from continuing operations. Segment adjusted EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, noncontrolling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense, asset impairment charges and other special items as determined by management. Segment adjusted EBITDA excludes unallocated legacy and corporate expense (income), net. Segment adjusted EBITDA margin is defined as segment adjusted EBITDA divided by consolidated sales from continuing operations, either in the aggregate or by segment as applicable. Free cash flow is defined as cash flows provided by (used for) operating activities less capital expenditures. Free cash flow conversion is defined as free cash flow over adjusted income from continuing operations attributable to the company. Beginning in the second quarter of fiscal year 2021, the company no longer includes an adjustment for non-cash tax expense related to the use of deferred tax assets in jurisdictions with net operating loss carryforwards or tax credits in adjusted income (loss) from continuing operations attributable to the company and adjusted diluted earnings (loss) per share from continuing operations. 28 -------------------------------------------------------------------------------- MERITOR, INC. Management believes these non-GAAP financial measures are useful to both management and investors in their analysis of the company's financial position and results of operations. In particular, adjusted EBITDA, adjusted EBITDA margin, segment adjusted EBITDA, segment adjusted EBITDA margin, adjusted income (loss) from continuing operations attributable to the company, adjusted diluted earnings (loss) per share from continuing operations and free cash flow conversion are meaningful measures of performance to investors as they are commonly utilized to analyze financial performance in our industry, perform analytical comparisons, measure value creation, benchmark performance between periods and measure our performance against externally communicated targets. Free cash flow is used by investors and management to analyze our ability to service and repay debt and return value directly to shareholders. Free cash flow conversion is a specific financial measure of our M2022 plan used to measure the company's ability to convert earnings to free cash flow and provides useful information about our ability to achieve strategic goals. Management uses the aforementioned non-GAAP financial measures for planning and forecasting purposes, and segment adjusted EBITDA is also used as the primary basis for the Chief Operating Decision Maker ("CODM") to evaluate the performance of each of our reportable segments. Our Board of Directors uses adjusted EBITDA margin, free cash flow, adjusted diluted earnings (loss) per share from continuing operations and free cash flow conversion as key metrics to determine management's performance under our performance-based compensation plans, provided that, solely for this purpose, adjusted diluted earnings (loss) per share from continuing operations also includes an adjustment for the use of deferred tax assets in jurisdictions with net operating loss carryforwards or tax credits. Adjusted income (loss) from continuing operations attributable to the company, adjusted diluted earnings (loss) per share from continuing operations, adjusted EBITDA, adjusted EBITDA margin, segment adjusted EBITDA, segment adjusted EBITDA margin and free cash flow conversion should not be considered a substitute for the reported results prepared in accordance with GAAP and should not be considered as an alternative to net income or cash flow conversion calculations as an indicator of our financial performance. Free cash flow and free cash flow conversion should not be considered a substitute for cash provided by (used for) operating activities, or other cash flow statement data prepared in accordance with GAAP, or as a measure of financial position or liquidity. In addition, these non-GAAP cash flow measures do not reflect cash used to repay debt or cash received from the divestitures of businesses or sales of other assets and thus do not reflect funds available for investment or other discretionary uses. These non-GAAP financial measures, as determined and presented by the company, may not be comparable to related or similarly titled measures reported by other companies. Set forth below are reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP. 29 -------------------------------------------------------------------------------- MERITOR, INC. Adjusted income from continuing operations attributable to the company and adjusted diluted earnings per share from continuing operations are reconciled to income from continuing operations attributable to the company and diluted earnings per share from continuing operations below (in millions, except per share amounts). Three Months Ended June 30, Nine Months Ended June 30, 2022 2021 2022 2021 Income from continuing operations attributable to the company $ 73$ 42 $ 188$ 137 Restructuring 1 1 5 9 Loss on debt extinguishment - 3 - 11 Brazil VAT Credit (1) - - - (22) Transaction costs (2) 3 - 12 - Tax effect of adjustments (3) - (1) (1) 3 Adjusted income from continuing operations attributable to the company $ 77 $
45 $ 204
Diluted earnings per share from continuing operations $ 1.02$ 0.58 $ 2.63$ 1.87 Impact of adjustments on diluted earnings per share 0.05 0.04 0.22 0.02 Adjusted diluted earnings per share from continuing operations $ 1.07 $
0.62 $ 2.85
(1) Amount relates to a pre-tax loss recovery, net of legal expenses, on the overpayment of VAT inBrazil . (2) Represents transaction expenses primarily related to the Merger. (3) Amount for the nine months endedJune 30, 2022 includes$1 million of income tax benefits related to restructuring. The three months endedJune 30, 2021 includes$1 million of income tax benefits related to restructuring and the loss on debt extinguishment. The nine months endedJune 30, 2021 includes$7 million of income tax expense related to the Brazilian VAT Credit,$2 million of income tax benefits for the loss on debt extinguishment and$2 million of income tax benefits related to restructuring. Free cash flow is reconciled to cash provided by operating activities below (in millions). Three Months Ended June 30, Nine Months Ended June 30, 2022 2021 2022 2021 Cash provided by operating activities $ 117$ 39 $ 79 $ 146 Capital expenditures (24) (21) (63) (47) Free cash flow $ 93$ 18 $ 16 $ 99 Free cash flow / Net income from continuing operations attributable to the company 127 % 43 % 9 % 72 % Free cash flow conversion (Free cash flow / Adjusted income from continuing operations attributable to the company) 121 % 40 % 8 % 72 % 30
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MERITOR, INC.
Adjusted EBITDA and segment adjusted EBITDA are reconciled to net income
attributable to
Three Months Ended June 30, Nine Months Ended June 30,
2022 2021 2022 2021
Net income attributable to Meritor, Inc. $ 73 $ 42 $ 189 $ 137
Income from discontinued operations, net of
tax, attributable to Meritor, Inc. - - (1) -
Income from continuing operations, net of tax,
attributable to Meritor, Inc. $ 73 $ 42 $ 188 $ 137
Interest expense, net 14 20 39 65
Provision for income taxes 21 14 48 43
Depreciation and amortization 25 26 75 78
Noncontrolling interests 3 3 10 7
Loss on sale of receivables 2 1 5 3
Restructuring 1 1 5 9
Transaction costs (1) 3 - 12 -
Brazil VAT Credit (2) - - - (22)
Adjusted EBITDA $ 142 $ 107 $ 382 $ 320
Adjusted EBITDA margin (3) 11.7 % 10.5 % 11.4 % 11.1 %
Unallocated legacy and corporate income, net
(4) (5) (2) (16) (10)
Segment adjusted EBITDA $ 137 $ 105 $ 366 $ 310
Commercial Truck
Segment adjusted EBITDA $ 92 $ 69 $ 239 $ 205
Segment adjusted EBITDA margin (5) 9.3 % 8.6 % 8.8 % 9.0 %
Aftermarket & Industrial
Segment adjusted EBITDA $ 45 $ 36 $ 127 $ 105
Segment adjusted EBITDA margin (5) 16.9 % 14.0 % 16.5 % 14.2 %
(1) Represents transaction expenses primarily related to the Merger.
(2) Amount relates to a pre-tax loss recovery, net of legal expenses, on the
overpayment of VAT in Brazil .
(3) Adjusted EBITDA margin equals adjusted EBITDA divided by consolidated sales
from continuing operations.
(4) Unallocated legacy and corporate income, net represents items that are not
directly related to the company's business segments. These items primarily
include pension and retiree medical costs associated with sold businesses and
other legacy costs for environmental.
(5) Segment adjusted EBITDA margin equals segment adjusted EBITDA divided by
consolidated sales from continuing operations, either in the aggregate or by
segment as applicable.
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MERITOR, INC.Results of Operations
Three Months Ended
Sales
The following table reflects total company and business segment sales for the three months endedJune 30, 2022 and 2021 (dollars in millions). The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales. Business segment sales include intersegment sales. Three Months Ended June 30, Dollar Change Due To Dollar % 2022 2021 Change Change Currency Volume/ Other Sales: Commercial Truck North America$ 541 $ 414 $ 127 31 % $ - $ 127 Europe 187 166 21 13 % (23) 44 South America 117 82 35 43 % 6 29 China 26 41 (15) (37) % (1) (14) India 52 30 22 73 % (3) 25 Other 27 31 (4) (13) % (2) (2) Total External Sales$ 950 $ 764 $ 186 24 %$ (23) $ 209 Intersegment Sales 41 36 5 14 % (6) 11 Total Sales$ 991 $ 800 $ 191 24 %$ (29) $ 220 Aftermarket & Industrial North America$ 230 $ 205 $ 25 12 % $ - $ 25 Europe 32 46 (14) (30) % (4) (10) Other - 1 (1) (100) % - (1) Total External Sales$ 262 $ 252 $ 10 4 %$ (4) $ 14 Intersegment Sales 5 6 (1) (17) % (3) 2 Total Sales$ 267 $ 258 $ 9 3 %$ (7) $ 16 Total External Sales$ 1,212 $ 1,016 $ 196 19 %$ (27) $ 223 Commercial Truck sales were$991 million in the third quarter of fiscal year 2022, up 24 percent compared to the third quarter of fiscal year 2021. The increase in sales in the third quarter of fiscal year 2022 was primarily driven by higher truck production in most global markets and pricing actions. Aftermarket & Industrial sales were$267 million in the third quarter of fiscal year 2022, up 3 percent compared to the third quarter of fiscal year 2021. The increase in sales in the third quarter of fiscal year 2022 was primarily due to pricing. 32 --------------------------------------------------------------------------------
MERITOR, INC.
Three Months Ended June 30,
Dollar %
2022 2021 Change Change
Sales $ 1,212 $ 1,016 $ 196 19 %
Cost of sales (1,058) (884) 174 20 %
GROSS PROFIT 154 132 22 17 %
Selling, general and administrative (63) (69) (6) (9) %
Other operating expense, net (2) (4) (2) (50) %
Other income, net 10 12 (2) (17) %
Equity in earnings of affiliates 12 8 4 50 %
Interest expense, net (14) (20) (6) (30) %
INCOME BEFORE INCOME TAXES 97 59 38 64 %
Provision for income taxes (21) (14) 7 50 %
INCOME FROM CONTINUING OPERATIONS 76 45 31 69 %
Less: Net income attributable to
noncontrolling interests (3) (3) - - %
NET INCOME ATTRIBUTABLE TO MERITOR, INC. $ 73 $ 42 $ 31 74 %
Cost of Sales and Gross Profit
Cost of sales primarily represents materials, labor and overhead production costs associated with the company's products and production facilities. Cost of sales for the three months endedJune 30, 2022 was$1,058 million compared to$884 million in the same period in the prior fiscal year, representing an increase of 20 percent, primarily driven by increased sales. Total cost of sales was 87.3 percent and 87.0 percent of sales for the three-month periods endedJune 30, 2022 and 2021, respectively. Material costs represent the majority of our cost of sales and include raw materials, composed primarily of steel, and purchased components. Material costs for the three months endedJune 30, 2022 increased$149 million compared to the same period in the prior fiscal year primarily due to higher volumes and higher freight and material costs. Labor and overhead costs for the three months endedJune 30, 2022 increased$28 million compared to the same period in the prior fiscal year primarily due to higher volumes and wage increases.
Other, net for the three months ended
Gross profit was$154 million and$132 million for the three-month periods endedJune 30, 2022 and 2021, respectively. Gross profit as a percentage of sales was 12.7 percent and 13.0 percent for the three-month periods endedJune 30, 2022 and 2021, respectively.
Other Income Statement Items
Selling, general and administrative was
Interest expense, net was$14 million and$20 million for the three months endedJune 30, 2022 and 2021, respectively. Interest expense, net was lower in the third quarter of fiscal year 2022 primarily due to the adoption of ASU 2020-06 in fiscal year 2022, which resulted in reduced interest expense due to the derecognition of the unamortized debt discount on the 3.25 Percent Convertible Notes (see Notes 3 and 14) and which will no longer be amortized to interest expense. Provision for income taxes was$21 million for the three months endedJune 30, 2022 compared to$14 million in the same period in the prior fiscal year. The increase in tax expense is primarily related to higher earnings in jurisdictions that do not have a tax valuation allowance. 33 --------------------------------------------------------------------------------MERITOR, INC.
Segment Adjusted EBITDA and Segment Adjusted EBITDA Margins
The following table reflects segment adjusted EBITDA and segment adjusted EBITDA margins for the three months endedJune 30, 2022 and 2021 (dollars in millions). Segment adjusted EBITDA Segment adjusted EBITDA margins Three Months Ended June 30, Three Months Ended June 30, 2022 2021 Change 2022 2021 Change Commercial Truck $ 92$ 69 $ 23 9.3 % 8.6 % 0.70 pts Aftermarket & Industrial 45 36 9 16.9 % 14.0 % 2.90
pts
Segment adjusted EBITDA$ 137 $ 105 $ 32 11.3 % 10.3 % 1.00 pts Significant items impacting year-over-year segment adjusted EBITDA include the following (in millions): Aftermarket & Commercial Truck Industrial Total Segment adjusted EBITDA - Quarter ended June 30, 2021 $ 69 $ 36$ 105 Lower short-and long-term variable compensation 7 2 9 Higher earnings from unconsolidated affiliates 4 - 4 Volume, mix, pricing and other 12 7 19 Segment adjusted EBITDA - Quarter ended June 30, 2022 $ 92 $ 45$ 137 Commercial Truck segment adjusted EBITDA was$92 million in the third quarter of fiscal year 2022, up$23 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin was 9.3 percent in the third quarter of fiscal year 2022, compared to 8.6 percent in the same period of the prior fiscal year. The increase in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by higher sales volumes and pricing actions, partially offset by higher freight and material costs. Aftermarket & Industrial segment adjusted EBITDA was$45 million in the third quarter of fiscal year 2022, up$9 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin was 16.9 percent in the third quarter of fiscal year 2022, compared to 14.0 percent in the same period of the prior year. The increase in segment adjusted EBITDA and segment adjusted EBITDA margin was primarily driven by pricing, partially offset by higher freight costs. 34
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MERITOR, INC. Results of Operations
Nine Months Ended
Sales
The following table reflects total company and business segment sales for the nine months endedJune 30, 2022 and 2021 (dollars in millions). The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales. Business segment sales include intersegment sales. Nine Months Ended June 30, Dollar Change Due To Dollar % 2022 2021 Change Change Currency Volume/ Other Sales: Commercial Truck North America$ 1,429 $ 1,141 $ 288 25 % $ - $ 288 Europe 543 510 33 6 % (41) 74 South America 306 219 87 40 % 12 75 China 77 105 (28) (27) % 1 (29) India 153 113 40 35 % (5) 45 Other 87 78 9 12 % (3) 12 Total External Sales$ 2,595 $ 2,166 $ 429 20 %$ (36) $ 465 Intersegment Sales 119 102 17 17 % (10) 27 Total Sales$ 2,714 $ 2,268 $ 446 20 %$ (46) $ 492 Aftermarket & Industrial North America$ 641 $ 588 $ 53 9 % $ - $ 53 Europe 114 131 (17) (13) % (8) (9) Other - 3 (3) (100) % - (3) Total External Sales$ 755 $ 722 $ 33 5 %$ (8) $ 41 Intersegment Sales 15 17 (2) (12) % (5) 3 Total Sales$ 770 $ 739 $ 31 4 %$ (13) $ 44 Total External Sales$ 3,350 $ 2,888 $ 462 16 %$ (44) $ 506 Commercial Truck sales were$2,714 million in the first nine months of fiscal year 2022, up 20 percent compared to the first nine months of fiscal year 2021, driven by higher truck production in most global markets and pricing actions. Aftermarket & Industrial sales were$770 million in the first nine months of fiscal year 2022, up 4 percent compared to the first nine months of fiscal year 2021 primarily due to pricing actions. 35 --------------------------------------------------------------------------------
MERITOR, INC.
Nine Months Ended June 30,
Dollar %
2022 2021 Change Change
Sales $ 3,350 $ 2,888 $ 462 16 %
Cost of sales (2,932) (2,493) 439 18 %
GROSS PROFIT 418 395 23 6 %
Selling, general and administrative (195) (203) (8) (4) %
Other operating expense, net (6) (13) (7) (54) %
Other income, net 38 49 (11) (22) %
Equity in earnings of affiliates 30 24 6 25 %
Interest expense, net (39) (65) (26) (40) %
INCOME BEFORE INCOME TAXES 246 187 59 32 %
Provision for income taxes (48) (43) 5 12 %
INCOME FROM CONTINUING OPERATIONS 198 144 54 38 %
INCOME FROM DISCONTINUED OPERATIONS, net of
tax 1 - 1 N/A
NET INCOME 199 144 55 38 %
Less: Net income attributable to
noncontrolling interests (10) (7) 3 43 %
NET INCOME ATTRIBUTABLE TO MERITOR, INC. $ 189
38 %
Cost of Sales and Gross Profit
Cost of sales primarily represents materials, labor and overhead production costs associated with the company's products and production facilities. Cost of sales for the nine months endedJune 30, 2022 was$2,932 million compared to$2,493 million in the same period in the prior fiscal year, representing an increase of 18 percent, primarily due to higher production volumes. Total cost of sales was 87.5 percent and 86.3 percent of sales for the nine-month periods endedJune 30, 2022 and 2021, respectively. Material costs represent the majority of our cost of sales and include raw materials, composed primarily of steel, and purchased components. Material costs for the nine months endedJune 30, 2022 increased$402 million compared to the same period in the prior fiscal year due to increased volumes and higher freight and steel costs. Labor and overhead costs for the nine months endedJune 30, 2022 increased$42 million compared to the same period in the prior fiscal year primarily due to higher volumes in our markets and wage increases.
Other, net for the nine months ended
Gross profit was$418 million and$395 million for the nine-month periods endedJune 30, 2022 and 2021, respectively. Gross profit as a percentage of sales was 12.5 percent and 13.7 percent for the nine-month periods endedJune 30, 2022 and 2021, respectively.
Other Income Statement Items
Other operating expense, net for the nine months ended
Other income, net for the nine months ended
Interest expense, net for the nine months ended
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MERITOR, INC. expense due to the derecognition of the unamortized debt discount on the 3.25 Percent Convertible Notes and which are no longer amortized to interest expense.
Segment Adjusted EBITDA and Segment Adjusted EBITDA Margins
The following table reflects segment adjusted EBITDA and segment adjusted EBITDA margins for the nine months endedJune 30, 2022 and 2021 (dollars in millions). Segment adjusted EBITDA Segment adjusted EBITDA margins Nine Months Ended June 30, Nine Months Ended June 30, 2022 2021 Change 2022 2021 Change Commercial Truck$ 239 $ 205 $ 34 8.8 % 9.0 % (0.2) pts Aftermarket & Industrial 127 105 22 16.5 % 14.2 % 2.3 pts Segment adjusted EBITDA$ 366 $ 310 $ 56 10.9 % 10.7 % 0.2 pts Significant items impacting year-over-year segment adjusted EBITDA include the following (in millions): Aftermarket & Commercial Truck Industrial Total
Segment adjusted EBITDA - Nine Months Ended
$ 205 $ 105 $ 310
Lower short-and long-term variable compensation 14 6 20
Higher earnings from unconsolidated affiliates 6 - 6
Volume, mix, pricing and other 14 16 30
Segment adjusted EBITDA - Nine Months Ended
$ 239
$ 127
Commercial Truck segment adjusted EBITDA was$239 million in the first nine months of fiscal year 2022, up$34 million from the same period in the prior fiscal year. The increase in segment adjusted EBITDA was driven primarily by higher sales volumes, partially offset by higher net steel and freight costs. Segment adjusted EBITDA margin decreased from 9.0 percent in the first nine months of fiscal year 2021 to 8.8 percent in the first nine months of fiscal year 2022. The decrease in segment adjusted EBITDA margin was primarily driven by higher net steel and freight costs which unfavorably impacted the conversion on sales. Aftermarket & Industrial segment adjusted EBITDA was$127 million in the first nine months of fiscal year 2022, up$22 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin increased from 14.2 percent in the first nine months of fiscal year 2021 to 16.5 percent in the first nine months of fiscal year 2022. The increase in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by pricing actions and cost savings from the footprint optimization restructuring initiatives implemented after the first quarter last year, partially offset by higher freight costs. 37 --------------------------------------------------------------------------------
MERITOR, INC.
Financial Condition
Cash Flows (in millions)
Nine Months Ended June 30,
2022 2021
OPERATING CASH FLOWS
Income from continuing operations $ 198 $ 144
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 receivables, inventories and accounts payable (251) (103)
Changes in off-balance sheet accounts receivable securitization and factoring programs
134 35
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
Cash provided by operating activities in the first nine months of fiscal year 2022 was$79 million compared to cash provided by operating activities of$146 million in the same period of fiscal year 2021. The decrease in operating cash flows was due primarily to an increase in working capital requirements. Nine Months Ended June 30, 2022 2021 INVESTING CASH FLOWS Capital expenditures $ (63)$ (47) Other investing activities 5 (3) CASH USED FOR INVESTING ACTIVITIES $ (58)$ (50)
Cash used for investing activities was
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MERITOR, INC.
Nine Months Ended June 30,
2022 2021
FINANCING CASH FLOWS
Proceeds from debt issuances $ - $ 275
Redemption of notes - (458)
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)
Cash used for financing activities was$13 million in the first nine months of fiscal year 2022 compared to cash used for financing activities of$276 million in the same period of fiscal year 2021. The decrease in cash used for financing activities is primarily related to redemption of$450 million aggregate principal amount of our 6.25 Percent Notes due 2024 and the remaining$23 million of the 7.875 Percent Convertible Notes, partially offset by the issuance of$275 million aggregate principal amount of our 4.50 Percent Notes in fiscal year 2021. Liquidity
Our outstanding debt, net of discounts and unamortized debt issuance costs, where applicable, is summarized in the table below (in millions).
June 30, 2022 September 30, 2021
Fixed-rate debt securities $ 568 $ 566
Fixed-rate convertible notes 321 321
Unamortized discount on convertible notes - (23)
Term loan 140 153
Other borrowings 13 10
Total debt $ 1,042 $ 1,027
Overview - Our principal operating and capital requirements are for working
capital needs, capital expenditure requirements, debt service requirements,
funding of retiree medical costs and restructuring and product development
programs. We expect fiscal year 2022 capital expenditures for our business
segments to be approximately
We generally fund our operating and capital needs with cash on hand, cash flows from operations, our various accounts receivable securitization and factoring arrangements and availability under our revolving credit facility. Cash in excess of local operating needs is generally used to reduce amounts outstanding, if any, under our revolving credit facility orU.S. accounts receivable securitization program. Our ability to access additional capital in the long term will depend on availability of capital markets and pricing on commercially reasonable terms, as well as our credit profile at the time we are seeking funds. We continuously evaluate our capital structure to ensure the most appropriate and optimal structure and may, from time to time, retire, repurchase, exchange or redeem outstanding indebtedness or common equity, issue new equity or debt securities or enter into new lending arrangements if conditions warrant. We believe our current financing arrangements provide us with the financial flexibility required to maintain our operations during the uncertain times of the COVID-19 pandemic and fund future growth, including actions required to improve our market share and further diversify our global operations, through the term of our revolving credit facility, which matures inJune 2024 . 39 --------------------------------------------------------------------------------MERITOR, INC.
Sources of liquidity as of
Total Readily
Facility Utilized as of Available as of
Size 6/30/22 6/30/22 Current Expiration
On-balance sheet arrangements:
Senior secured revolving credit facility (1) $ 685 $ - $ 646 June 2024 (1)
Committed U.S. accounts receivable
securitization (2) 110 2 108 March 2024
Total on-balance sheet arrangements $ 795 $ 2 $ 754
Off-balance sheet arrangements: (2)
Committed Swedish factoring facility (3)(4) $ 162 $ 149 $ - March 2024
Committed U.S. factoring facility (3) 75 77 - February 2023
Uncommitted U.K. factoring facility (5) 26 6 - February 2025
Uncommitted Italy factoring facility 32 28 - June 2025
Other uncommitted factoring facilities (6) N/A 21 N/A None
Total off-balance sheet arrangements $ 295 $ 281 $ -
Total available sources $ 1,090 $ 283 $ 754
(1)The availability under the senior secured revolving credit facility is
subject to a priority debt-to-EBITDA ratio covenant, as measured on the last day
of the quarter based on trailing twelve month EBITDA as defined in the credit
agreement. Availability was constrained on the last day of the third quarter of
fiscal year 2022 due primarily to an elevated priority debt balance. The company
has full availability until the next measurement date at the end of the fourth
quarter of fiscal year 2022.
(2)Availability subject to adequate eligible accounts receivable available for
sale.
(3)Actual amounts may exceed the bank's commitment at the bank's discretion.
(4)The facility is backed by a 364-day liquidity commitment from Nordea Bank
through June 22, 2023 .
(5)On March 23, 2022 , the company's U.K. factoring facility was amended to
enable the factoring of Pound Sterling denominated accounts receivable in
addition to Euro denominated accounts receivable.
(6)There is no explicit facility size under the agreement, but the counterparty
approves the purchase of receivable tranches at its discretion.
Cash and Liquidity Needs - At June 30, 2022 , we had $105 million in cash and
cash equivalents. We plan to repatriate approximately $20 million of cash held
by subsidiaries outside of the United States , with respect to which no
withholding taxes are expected to be owed. $57 million of cash and cash
equivalents is held in jurisdictions where the cash is not freely transferable
to the U.S. without intervention by the foreign jurisdiction or minority joint
venture partner. We plan to utilize ongoing cash flow from domestic operations
and external borrowings, to meet our liquidity needs in the U.S.
Our availability under the senior secured revolving credit facility is subject
to a priority debt-to-EBITDA ratio covenant, as defined in the credit agreement,
which may limit our borrowings under such agreement as of each quarter end. As
long as we are in compliance with this covenant as of the quarter end, we have
full availability under the senior secured revolving credit facility every other
day during the quarter. Our future liquidity is subject to a number of factors,
including access to adequate funding under our senior secured revolving credit
facility, access to other borrowing arrangements such as factoring or
securitization facilities, vehicle production schedules and customer demand.
Even taking into account these and other factors, management expects to have
sufficient liquidity to fund our operating requirements through the term of our
senior secured revolving credit facility. At June 30, 2022 , we were in
compliance with the priority debt-to-EBITDA ratio covenant with a ratio of
approximately 0.53x.
Common Stock and Debt Repurchase Authorization - On July 28, 2021 , the Board of
Directors authorized the repurchase of up to $250 million of the company's
common stock. Repurchases can be made from time to time through open market
purchases, privately negotiated transactions or otherwise, subject to compliance
with legal and regulatory requirements and the company's debt covenants. As of
June 30, 2022 and September 30, 2021 , the amount remaining available for
repurchases was $250 million under this common stock repurchase authorization.
On February 21, 2022 , the company suspended activity under its share repurchase
program due to the Merger Agreement.
On November 7, 2019 , the Board of Directors authorized the repurchase of up to
$325 million of the company's common stock. Repurchases could be made from time
to time through open market purchases, privately negotiated transactions or
otherwise, subject to compliance with legal and regulatory requirements and the
company's debt covenants. During fiscal year 2021, the company repurchased
2.5 million shares of common stock for $59 million (including commission costs)
pursuant to this authorization. No amounts remained outstanding under this
common stock repurchase authorization as of September 30, 2021 .
40
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MERITOR, INC.
On November 2, 2018 , the Board of Directors authorized the repurchase of up to
$100 million aggregate principal amount of any of the company's debt securities
(including convertible debt securities), from time to time through open market
purchases, privately negotiated transactions or otherwise, subject to compliance
with legal and regulatory requirements and the company's debt covenants. As of
June 30, 2022 and September 30, 2021 , the amount remaining available for
repurchase under this debt repurchase authorization was $76 million .
Revolving Credit Facility - The senior secured revolving credit facility is discussed in Note 14 of the Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report.
Other - Refer to Note 14 of the Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report.
Credit Ratings - AtAugust 1, 2022 , ourStandard & Poor's corporate credit rating and senior unsecured credit rating were BB and BB-, respectively, and our Moody's Investors Service corporate credit rating and senior unsecured credit rating were Ba3 and B1, respectively. Any lowering of our credit ratings could increase our cost of future borrowings and could reduce our access to capital markets and result in lower trading prices for our securities. Subsidiary Guarantees of Debt - Certain of the company's 100% owned subsidiaries, as defined in the credit agreement for the senior secured revolving credit facility (collectively, the "Guarantors") irrevocably and unconditionally guarantee amounts outstanding under the senior secured revolving credit facility on a joint and several basis. Similar subsidiary guarantees are provided for the benefit of the holders of the notes outstanding under the company's indentures. The notes are guaranteed on a senior unsecured basis by each of the company's subsidiaries from time to time guaranteeing its senior secured revolving credit facility, as it may be amended, extended, replaced or refinanced, or any subsequent credit facility. The guarantees remain in effect until the earlier to occur of payment in full of the notes or termination or release of the applicable corresponding guarantee under the company's senior secured revolving credit facility, as it may be amended, extended, replaced or refinanced, or any subsequent credit facility. The guarantees rank equally with existing and future senior unsecured indebtedness of the Guarantors and are effectively subordinated to all of the existing and future secured indebtedness of the Guarantors, to the extent of the value of the assets securing such indebtedness. The following represents summarized financial information, in millions, ofMeritor, Inc. ("Parent") and the Guarantors (collectively, "the Combined Entities"). The information has been prepared on a combined basis and excludes any investments of the Parent or Guarantors in non-guarantor subsidiaries. Intercompany transactions and amounts between the Combined Entities have been eliminated. Equity income from continuing operations of subsidiaries has been eliminated. Nine Months Ended Year ended Statement of Operations Information June 30, 2022 September 30, 2021 Net Sales $ 1,922 $ 2,159 Gross profit 178 223 Net income from continuing operations 28 27 Net income 27 26 Net income attributable to Meritor, Inc. 27 26 Balance Sheet Information June 30, 2022 September 30, 2021 Current Assets $ 564 $ 519 Non-current Assets 1,141 990 Current Liabilities 611 496 Non-current Liabilities 1,302 1,342 Redeemable Preferred Stock - - Noncontrolling Interest - - 41
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MERITOR, INC.
At June 30, 2022 and September 30, 2021 , amounts owed by the Combined Entities
to non-guarantor entities totaled approximately $28 million and $52 million ,
respectively, and amounts owed to the Combined Entities from non-guarantor
entities totaled approximately $249 million and $87 million , respectively. For
the nine months ended June 30, 2022 , intercompany sales from the Combined
Entities to non-guarantor subsidiaries was $145 million . For the nine months
ended June 30, 2022 , intercompany sales from non-guarantor subsidiaries to the
Combined Entities was $69 million . For the year ended September 30, 2021 ,
intercompany sales from the Combined Entities to non-guarantor subsidiaries was
$102 million . For the year ended September 30, 2021 , intercompany sales from
non-guarantor subsidiaries to the Combined Entities was $161 million .
Off-Balance Sheet Arrangements
Accounts Receivable Factoring Arrangements - We participate in accounts receivable factoring programs with a total amount utilized atJune 30, 2022 of$281 million , of which$226 million was attributable to committed factoring facilities involving the sale of AB Volvo accounts receivables. The remaining amount of$55 million was related to factoring by certain of our European subsidiaries under uncommitted factoring facilities with financial institutions. The receivables under all of these programs are sold at face value and are excluded from the consolidated balance sheet. Total facility size, utilized amounts, readily available amounts and expiration dates for each of these programs are shown in the table above under Liquidity. The Swedish facility is backed by a 364-day liquidity commitment fromNordea Bank , which was renewed throughJune 22, 2023 . Commitments under all of our factoring facilities are subject to standard terms and conditions for these types of arrangements (including, in the case of theU.K. andItaly commitments, a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the respective programs).
Letter of Credit Facilities - There were
Contingencies
Contingencies related to environmental, asbestos and other matters are discussed in Note 17 of the Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report. Critical Accounting Policies Our significant accounting policies are consistent with those described in Note 2 to our Consolidated Financial Statements in Item 8 of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 (the "2021 Form 10-K"). Our critical accounting estimates are consistent with those described in Item 7 of our 2021 Form 10-K.
New Accounting Pronouncements
New Accounting Pronouncements are discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report.
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