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. COVID-19 Pandemic Update InMarch 2020 , theWorld Health Organization declared a global health pandemic related to the outbreak of a novel coronavirus. While the COVID-19 pandemic adversely affected our financial performance throughout most of fiscal year 2020 and the beginning of fiscal year 2021, the direct adverse impacts of the pandemic on our operations and financial performance started to dissipate over the course of the third fiscal quarter. All of our facilities have been fully operational since the end of fiscal year 2020 and our salaried employees are returning to work in person, 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. Change in Non-GAAP Measures Beginning in the second quarter of fiscal year 2021, we revised our presentation of two non-GAAP measures, adjusted income (loss) from continuing operations and adjusted diluted earnings (loss) per share, to better align with theSEC's guidance. 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 will no longer be included in these two non-GAAP measures; however the underlying availability and the benefits of the tax attributes to offset future taxable income has not changed. For comparability, references to prior period non-GAAP measures have been updated to show the effect of omitting this adjustment from adjusted income (loss) from continuing operations and adjusted diluted earnings (loss) per share. 3rd Quarter Fiscal Year 2021 Results Our sales for the third quarter of fiscal year 2021 were$1,016 million , compared to$514 million in the same period in the prior fiscal year, an increase of 98 percent year over year. The increase in sales was primarily driven by higher global truck production in all markets. Net income attributable toMeritor and net income from continuing operations attributable toMeritor were each$42 million for the third quarter of fiscal year 2021 compared to a net loss of$36 million in the same period in the prior fiscal year. Higher net income year over year was driven by increased sales, partially offset by higher freight, steel and electrification costs. Adjusted income from continuing operations attributable to the company (see Non-GAAP Financial Measures below) for the third quarter of fiscal year 2021 was$45 million compared to a net loss of$26 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 2021 was$107 million compared to$7 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 2021 was 10.5 percent compared to 1.4 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, partially offset by higher freight costs of$18 million , higher steel costs of$11 million and higher electrification costs. Cash provided by operating activities was$39 million in the third quarter of fiscal year 2021 compared to cash used for operating activities of$102 million in the third quarter of fiscal year 2020. The increase in operating cash flow year over year was driven primarily by higher earnings and the impact of accounts receivable factoring as a result of higher balances available under the company's factoring programs, partially offset by an increase in working capital requirements. Capital Markets Transactions During the third quarter of fiscal year 2021, we redeemed all of the outstanding$175 million aggregate principal amount of our 6.25 Percent Notes due 2024 using cash on hand. The redemption price was equal to 101.042% of the principal amount of the 6.25% Notes due 2024 redeemed, plus accrued and unpaid interest. This redemption was accounted for as an extinguishment of debt, and we recognized a loss on debt extinguishment of$3 million . As ofJune 30, 2021 , the 6.25% Notes due 2024 were fully redeemed. 29 -------------------------------------------------------------------------------- MERITOR, INC. Equity Repurchase Authorization In the third quarter of fiscal year 2021, we repurchased 1 million shares of our common stock for$25 million (including commission costs) pursuant to theNovember 2019 equity repurchase authorization described in the Liquidity section below. Certain of these shares were repurchased under a 10b5-1 stock repurchase plan fromMay 21, 2021 throughJune 4, 2021 . The amount remaining available for repurchases under that repurchase authorization was$34 million as ofJune 30, 2021 . InJuly 2021 , the company repurchased an additional$34 million of common stock, an additional approximately 1.5 million shares, completing the existing equity repurchase authorization. OnJuly 28, 2021 , the Board of Directors authorized the repurchase of an additional$250 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. 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 endedJune 30, 2021 and 2020 based on available sources and management's estimates. Nine Months Ended Three Months Ended June 30, Percent June 30, Percent 2021 2020 Change 2021 2020 Change
Estimated Commercial Truck production (in thousands):
67 28 139 % 201 159 26 %
North America, Medium-Duty Trucks 59 37 59 % 181 157 15 %
North America, Trailers 66 46 43 % 182 183 (1) %
Western Europe , Heavy- and Medium-Duty
Trucks 101 53 91 % 323 257 26 %
South America , Heavy- and Medium-Duty
Trucks 41 19 116 % 107 71 51 %
India, Heavy- and Medium-Duty Trucks 31 7 343 % 174 98 78 %
South America : During fiscal year 2021, we expect production volumes to significantly increase from the levels experienced in fiscal year 2020.
During fiscal year 2021, we expect production volumes to increase from the levels experienced in fiscal year 2020.
During fiscal year 2021, we expect production volumes to significantly increase from the levels experienced in fiscal year 2020.
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MERITOR, INC.
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, operations, workforce, supply chains, distribution systems and
demand for our products;
•Uncertainty around the global economic outlook;
•Volatility in price and availability of steel, components, transportation costs
and other commodities, including energy;
•Potential for disruptions in the financial markets and their impact on the
availability and cost of credit;
•Impact of currency exchange rate volatility; and
•Consolidation and globalization of OEMs and their suppliers.
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, following the United
Kingdom's decision to exit the European Union , or in the event one or more other
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).
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MERITOR, INC.
NON-GAAP FINANCIAL MEASURES
In addition to the results reported in accordance with accounting principles
generally accepted in the United States ("GAAP"), we have provided information
regarding non-GAAP financial measures. These non-GAAP financial measures include
adjusted income (loss) from continuing operations 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 and adjusted diluted
earnings (loss) per share.
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) 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.
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MERITOR, INC.
Adjusted income (loss) from continuing operations attributable to the company
and adjusted diluted earnings (loss) per share from continuing operations are
reconciled to Income (loss) from continuing operations attributable to the
company and Diluted earnings (loss) per share from continuing operations below
(in millions, except per share amounts).
Three Months Ended June 30, Nine Months Ended June 30,
2021 2020 (3) 2021 2020 (3)
Income (loss) from continuing operations
attributable to the company $ 42 $ (36) $ 137 $ 243
Restructuring 1 12 9 27
Loss on debt extinguishment 3 - 11 -
Income from WABCO distribution termination - - - (265)
Brazil value added tax (VAT) Credit (1) - - (22) -
Transaction costs - - - 5
Tax effect of adjustments (2) (1) (2) 3 55
Adjusted income (loss) from continuing
operations attributable to the company $ 45 $
(26) $ 138
Diluted earnings (loss) per share from continuing operations $ 0.58$ (0.50) $ 1.87$ 3.19 Impact of adjustments on diluted earnings per share 0.04 0.14 0.02 (2.34) Adjusted diluted earnings (loss) per share from continuing operations $ 0.62 $
(0.36) $ 1.89
(1) Amount relates to a pre-tax loss recovery, net of legal expenses, on the overpayment of VAT inBrazil . (2) Amount for the three months endedJune 30, 2021 includes$1 million of income tax benefits related to restructuring and the loss on debt extinguishment. Amount for the nine months endedJune 30, 2021 includes$7 million of income tax expense related to the Brazil VAT credit,$2 million of income tax benefits for the loss on debt extinguishment and$2 million of income tax benefits related to restructuring. The three months endedJune 30, 2020 includes$2 million of income tax benefits related to restructuring. The nine months endedJune 30, 2020 includes$62 million of income tax expense related to the WABCO distribution arrangement termination,$6 million of income tax benefits related to restructuring and$1 million of income tax benefits related to AxleTech transaction costs. (3) For comparability, amounts for the three and nine months endedJune 30, 2020 have been updated to show the effect of omitting the non-cash tax adjustment from the calculation of adjusted income from continuing operations attributable to the company and adjusted diluted earnings per share from continuing operations. Free cash flow is reconciled to cash provided by operating activities below (in millions). Three Months Ended June 30, Nine Months Ended June 30, 2021 2020 2021 2020 Cash provided by (used for) operating activities$ 39 $ (102) $ 146 $ 188 Capital expenditures (21) (12) (47) (45) Free cash flow$ 18 $ (114) $ 99$ 143 Free cash flow / Net income from continuing operations attributable to the company 43 % N/A 72 % 59 % Free cash flow conversion (Free cash flow / Adjusted income from continuing operations attributable to the company) 40 % N/A 72 % 220 % 33
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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,
2021 2020 2021 2020
Net income (loss) attributable to Meritor,
Inc. $ 42 $ (36) $ 137 $ 244
Income from discontinued operations, net of
tax, attributable to Meritor, Inc. - - - (1)
Income (loss) from continuing operations, net
of tax, attributable to Meritor, Inc. $ 42 $ (36) $ 137 $ 243
Interest expense, net 20 17 65 47
Provision (benefit) for income taxes 14 (13) 43 73
Depreciation and amortization 26 24 78 74
Noncontrolling interests 3 2 7 5
Loss on sale of receivables 1 1 3 3
Restructuring 1 12 9 27
Transaction costs - - - 5
Income from WABCO distribution termination - - - (265)
Brazil VAT Credit (1) - - (22) -
Adjusted EBITDA $ 107 $ 7 $ 320 $ 212
Adjusted EBITDA margin (2) 10.5 % 1.4 % 11.1 % 9.3 %
Unallocated legacy and corporate expense
(income), net (3) (2) 1 (10) (4)
Segment adjusted EBITDA $ 105 $ 8 $ 310 $ 208
Commercial Truck
Segment adjusted EBITDA $ 69 $ (23) $ 205 $ 92
Segment adjusted EBITDA margin (4) 8.6 % (6.8) % 9.0 % 5.6 %
Aftermarket & Industrial
Segment adjusted EBITDA $ 36 $ 31 105 $ 116
Segment adjusted EBITDA margin (4) 14.0 % 15.3 % 14.2 % 15.4 %
(1) Amount relates to a pre-tax loss recovery, net of legal expenses, on the
overpayment of VAT in Brazil .
(2) Adjusted EBITDA margin equals adjusted EBITDA divided by consolidated sales
from continuing operations.
(3) Unallocated legacy and corporate expense (income), net represents items that
are not directly related to the company's business segments. These items
primarily include asbestos-related charges and settlements, pension and retiree
medical costs associated with sold businesses, and other legacy costs for
environmental and product liability.
(4) 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, 2021 and 2020 (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 % 2021 2020 Change Change Currency Volume/ Other Sales: Commercial Truck North America$ 414 $ 164 $ 250 152 % $ - $ 250 Europe 166 70 96 137 % 14 82 South America 82 21 61 290 % 2 59 China 41 41 - - % 4 (4) India 30 5 25 500 % 1 24 Other 31 14 17 121 % 2 15 Total External Sales$ 764 $ 315 $ 449 143 %$ 23 $ 426 Intersegment Sales 36 21 15 71 % 5 10 Total Sales$ 800 $ 336 $ 464 138 %$ 28 $ 436 Aftermarket & Industrial North America$ 205 $ 164 $ 41 25 %$ 3 $ 38 Europe 46 33 13 39 % 4 9 Other 1 2 (1) N/A - (1) Total External Sales$ 252 $ 199 $ 53 27 %$ 7 $ 46 Intersegment Sales 6 4 2 50 % 2 - Total Sales$ 258 $ 203 $ 55 27 %$ 9 $ 46 Total External Sales$ 1,016 $ 514 $ 502 98 %$ 30 $ 472 Commercial Truck sales were$800 million in the third quarter of fiscal year 2021, up 138 percent compared to the third quarter of fiscal year 2020. The increase in sales in the third quarter of fiscal year 2021 was primarily driven by higher global truck production in all markets. Aftermarket & Industrial sales were$258 million in the third quarter of fiscal year 2021, up 27 percent compared to the third quarter of fiscal year 2020. The increase in sales in the third quarter of 2021 was primarily due to higher volumes across the segment. 35 --------------------------------------------------------------------------------
MERITOR, INC.
Three Months Ended June 30,
Dollar %
2021 2020 Change Change
Sales $ 1,016 $ 514 $ 502 98 %
Cost of sales (884) (486) 398 82 %
GROSS PROFIT 132 28 104 371 %
Selling, general and administrative (69) (52) 17 33 %
Income from WABCO distribution termination - - - N/A
Other operating expense, net (4) (17) (13) (76) %
Other income, net 12 12 - - %
Equity in earnings of affiliates 8 (1) 9 (900) %
Interest expense, net (20) (17) 3 18 %
INCOME (LOSS) BEFORE INCOME TAXES 59 (47) 106 (226) %
Benefit (provision) for income taxes (14) 13 27 (208) %
INCOME (LOSS) FROM CONTINUING OPERATIONS 45 (34) 79 (232) %
INCOME FROM DISCONTINUED OPERATIONS, net of
tax - - - N/A
NET INCOME (LOSS) 45 (34) 79 (232) %
Less: Net income attributable to
noncontrolling interests (3) (2) 1 (50) %
NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR,
INC. $ 42 $ (36) $ 78 (217) %
Cost of Sales and Gross Profit
Cost of sales primarily represents materials, labor and overhead production
costs associated with the company's products and production facilities. Cost of
sales for the three months ended June 30, 2021 was $884 million compared to $486
million in the same period in the prior fiscal year, representing an increase of
82 percent, primarily driven by increased market volumes. Total cost of sales
was 87.0 percent and 94.6 percent of sales for the three-month periods ended
June 30, 2021 and 2020, 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 ended June 30, 2021 increased $332 million compared to the
same period in the prior fiscal year due to higher volumes, higher steel costs
and increased freight costs.
Labor and overhead costs for the three months ended June 30, 2021 increased by
$68 million compared to the same period in the prior fiscal year primarily due
to higher volumes in our markets.
Other, net for the three months ended June 30, 2021 decreased by $2 million
compared to the same period in the prior fiscal year.
Gross profit was $132 million and $28 million for the three-month periods ended
June 30, 2021 and 2020, respectively. Gross profit as a percentage of sales was
13.0 percent and 5.4 percent for the three-month periods ended June 30, 2021 and
2020, respectively.
Other Income Statement Items
Selling, general and administrative expenses ("SG&A") for the three months ended
June 30, 2021 and 2020 were $69 million and $52 million , respectively. The
increase is primarily due to higher incentive compensation costs in fiscal year
2021.
Other operating expense, net for the three months ended June 30, 2021 and 2020
were $4 million and $17 million , respectively. Other operating expense, net was
lower in the third quarter of fiscal year 2021 primarily due to lower
restructuring expense.
Equity in earnings of affiliates for the three months ended June 30, 2021 was $8
million and equity in losses of affiliates for the three months ended June 30,
2020 was $1 million . Equity in earnings of affiliates was higher in the third
quarter of fiscal year 2021 primarily due to higher production volumes at our
joint ventures.
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MERITOR, INC.
Provision for income taxes was $14 million for the three months ended June 30,
2021 compared to income tax benefit of $13 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.
Segment Adjusted EBITDA and Segment Adjusted EBITDA Margins
The following table reflects segment adjusted EBITDA and segment adjusted EBITDA
margins for the three months ended June 30, 2021 and 2020 (dollars in millions).
Segment adjusted EBITDA Segment adjusted EBITDA margins
Three Months Ended June 30, Three Months Ended June 30,
2021 2020 Change 2021 2020 Change
Commercial Truck $ 69 $ (23) $ 92 8.6 % (6.8) % 15.40 pts
Aftermarket & Industrial 36 31 5 14.0 % 15.3 % (1.30) pts
Segment adjusted EBITDA$ 105 $ 8 $ 97 10.3 % 1.6 % 8.70 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, 2020 $ (23) $ 31$ 8 Higher short-and long-term variable compensation (7) (3) (10) Higher earnings from unconsolidated affiliates 9 - 9 Impact of foreign currency exchange rates 8 1 9 Volume, mix, pricing and other 82 7 89 Segment adjusted EBITDA - Quarter ended June 30, 2021 $ 69 $ 36$ 105 Commercial Truck segment adjusted EBITDA was$69 million in the third quarter of fiscal year 2021, up$92 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin was 8.6 percent in the third quarter of fiscal year 2021, compared to negative 6.8 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 conversion on higher revenue, partially offset by higher freight, steel and electrification costs. Aftermarket & Industrial segment adjusted EBITDA was$36 million in the third quarter of fiscal year 2021, up$5 million from the same period in the prior fiscal year. The increase in segment adjusted EBITDA was driven primarily by higher sales volumes, partially offset by higher freight costs. Segment adjusted EBITDA margin was 14.0 percent in the third quarter of fiscal year 2021, compared to 15.3 percent in the same period of the prior year. The decrease in segment adjusted EBITDA margin was due primarily to higher freight costs, which more than offset conversion on higher sales. 37
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MERITOR, INC.
Results of Operations
Nine Months Ended June 30, 2021 Compared to Nine Months Ended June 30, 2020 Sales
The following table reflects total company and business segment sales for the nine months endedJune 30, 2021 and 2020 (dollars in millions). The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales. Business segment sales include intersegment sales. Nine Months Ended June 30, Dollar Change Due To Dollar % 2021 2020 Change Change Currency Volume/ Other Sales: Commercial Truck North America$ 1,141 $ 877 $ 264 30 % $ - $ 264 Europe 510 351 159 45 % 43 116 South America 219 124 95 77 % (33) 128 China 105 101 4 4 % 9 (5) India 113 49 64 131 % (1) 65 Other 78 42 36 86 % 5 31 Total External Sales$ 2,166 $ 1,544 $ 622 40 %$ 23 $ 599 Intersegment Sales 102 86 16 19 % 10 6 Total Sales$ 2,268 $ 1,630 $ 638 39 %$ 33 $ 605 Aftermarket & Industrial North America$ 588 $ 620 $ (32) (5) %$ 3 $ (35) Europe 131 118 13 11 % 10 3 Other 3 4 (1) (25) % - (1) Total External Sales$ 722 $ 742 $ (20) (3) %$ 13 $ (33) Intersegment Sales 17 13 4 31 % 6 (2) Total Sales$ 739 $ 755 $ (16) (2) %$ 19 $ (35) Total External Sales$ 2,888 $ 2,286 $ 602 26 %$ 36 $ 566 Commercial Truck sales were$2,268 million in the first nine months of fiscal year 2021, up 39% percent compared to the first nine months of fiscal year 2020, driven by higher global truck production in all markets. Aftermarket & Industrial sales were$739 million in the first nine months of fiscal year 2021, down 2% percent compared to the first nine months of fiscal year 2020 primarily due to the impact from the termination of the WABCO distribution arrangement. 38 --------------------------------------------------------------------------------
MERITOR, INC.
Nine Months Ended June 30,
Dollar %
2021 2020 Change Change
Sales $ 2,888 $ 2,286 $ 602 26 %
Cost of sales (2,493) (2,017) 476 24 %
GROSS PROFIT 395 269 126 47 %
Selling, general and administrative (203) (181) 22 12 %
Income from WABCO distribution termination - 265 (265) N/A
Other operating expense, net (13) (32) (19) (59) %
Other income, net 49 36 13 36 %
Equity in earnings of affiliates 24 11 13 118 %
Interest expense, net (65) (47) 18 38 %
INCOME (LOSS) BEFORE INCOME TAXES 187 321 (134) (42) %
Benefit (provision) for income taxes (43) (73) (30) (41) %
INCOME (LOSS) FROM CONTINUING OPERATIONS 144 248 (104) (42) %
INCOME FROM DISCONTINUED OPERATIONS, net of
tax - 1 (1) 100 %
NET INCOME (LOSS) 144 249 (105) (42) %
Less: Net income attributable to
noncontrolling interests (7) (5) 2 40 %
NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR,
INC. $ 137 $ 244 $ (107) (44) %
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 ended June 30, 2021 was $2,493 million compared to
$2,017 million in the same period in the prior fiscal year, representing an
increase of 24 percent, primarily due to higher production volumes. Total cost
of sales was 86.3 percent and 88.2 percent of sales for the nine-month periods
ended June 30, 2021 and 2020, 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 ended June 30, 2021 increased $379 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 increased $101 million compared to the same period in
the prior fiscal year primarily due to higher volumes in our markets.
Other, net for the nine months ended June 30, 2021 decreased $4 million compared
to the same period in the prior fiscal year.
Gross profit was $395 million and $269 million for the nine-month periods ended
June 30, 2021 and 2020, respectively. Gross profit as a percentage of sales was
13.7 percent and 11.8 percent for the nine-month periods ended June 30, 2021 and
2020, respectively.
Other Income Statement Items
Selling, general and administrative expenses for the nine months ended June 30,
2021 and 2020 were $203 million and $181 million , respectively. The increase is
primarily due to higher incentive compensation costs and electrification costs,
partly offset by headcount reductions and reduced travel expenditures.
Other operating expense, net for the nine months ended June 30, 2021 and 2020
was $13 million and $32 million , respectively. Other operating expense, net was
lower primarily due to lower restructuring expense.
Other income, net for the nine months ended June 30, 2021 and 2020 was $49
million and $36 million , respectively. Other income, net increased primarily due
to the recognition of $10 million of other income related to VAT credits in our
wholly-owned Brazilian subsidiary during the second quarter of fiscal year 2021.
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MERITOR, INC.
Equity in earnings of affiliates was $24 million for the nine months ended June
30, 2021 compared to $11 million in the same period in the prior year. The
increase was primarily due to improved earnings at our joint ventures and the
recognition of a VAT credit of $6 million at our joint venture in Brazil during
the first quarter of fiscal year 2021.
Interest expense, net for the nine months ended June 30, 2021 and 2020 was
$65 million and $47 million , respectively. The increase in interest expense, net
is attributable to higher interest costs year over year as well as $11 million
of debt extinguishment costs incurred in fiscal year 2021.
Provision for income taxes was $43 million in the first nine months of fiscal
year 2021 compared to $73 million in the same period in the prior fiscal year.
The decrease in tax expense is primarily related to the tax effect of the
proceeds received from the termination of the WABCO distribution arrangement
during the second quarter of fiscal year 2020, partially offset by increased
earnings in jurisdictions which do not have a tax valuation allowance.
Segment Adjusted EBITDA and Segment Adjusted EBITDA Margins
The following table reflects segment adjusted EBITDA and segment adjusted EBITDA
margins for the nine months ended June 30, 2021 and 2020 (dollars in millions).
Segment adjusted EBITDA Segment adjusted EBITDA margins
Nine Months Ended June 30, Nine Months Ended June 30,
2021 2020 Change 2021 2020 Change
Commercial Truck $ 205 $ 92 $ 113 9.0 % 5.6 % 3.4 pts
Aftermarket & Industrial 105 116 (11) 14.2 % 15.4 % (1.2) pts
Segment adjusted EBITDA$ 310 $ 208 $ 102 10.7 % 9.1 % 1.6 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
$ 92 $ 116 $ 208
Higher short-and long-term variable compensation (25) (9) (34)
Higher earnings from unconsolidated affiliates 13 - 13
Impact of foreign currency exchange rates (5) 5 -
Volume, mix, pricing and other 130 (7) 123
Segment adjusted EBITDA - Nine Months Ended
$ 205
$ 105
Commercial Truck segment adjusted EBITDA was$205 million in the first nine months of fiscal year 2021, up$113 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin increased from 5.6 percent in the first nine months of fiscal year 2020 to 9.0 percent in the first nine months of fiscal year 2021. The increase in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by conversion on higher revenue, partially offset by higher steel and freight costs, incentive compensation, and electrification costs in fiscal year 2021. Aftermarket & Industrial segment adjusted EBITDA was$105 million in the first nine months of fiscal year 2021, down$11 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin decreased from 15.4 percent in the first nine months of fiscal year 2020 to 14.2 percent in the first nine months of fiscal year 2021. The decrease in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by the impact from the termination of the WABCO distribution arrangement and higher incentive compensation costs, offset by increased sales volumes. 40 --------------------------------------------------------------------------------
MERITOR, INC.
Financial Condition
Cash Flows (in millions)
Nine Months Ended June 30,
2021 2020
OPERATING CASH FLOWS
Income from continuing operations $ 144 $ 248
Depreciation and amortization 78 74
Deferred income tax expense (benefit) 1 (4)
Restructuring costs 9 27
Stock compensation expense 14 3
Equity in earnings of affiliates (24) (11)
Pension and retiree medical income (39) (31)
Loss on debt extinguishment 11 -
Dividends received from equity method investments 7 8
Pension and retiree medical contributions (8) (11)
Restructuring payments (11) (21)
Changes in receivables, inventories and accounts payable (103) 11
Changes in off-balance sheet accounts receivable factoring 35 (104)
Changes in other current assets and liabilities 26 (26)
Changes in other assets and liabilities 6 25
Cash flows provided by continuing operations 146 188
Cash flows used for discontinued operations - -
CASH PROVIDED BY OPERATING ACTIVITIES $
146
Cash provided by operating activities in the first nine months of fiscal year 2021 was$146 million compared to$188 million in the same period of fiscal year 2020. The decrease in cash provided by operating activities was due to$265 million of cash received from the WABCO distribution arrangement termination in the second quarter of fiscal year 2020, partially offset by the impact of accounts receivable factoring as a result of higher balances available under our factoring programs. Nine Months Ended June 30, 2021 2020 INVESTING CASH FLOWS Capital expenditures $ (47)$ (45) Cash paid for acquisition of TransPower, net of cash acquired - (13) Other investing activities (3) 9 CASH USED FOR INVESTING ACTIVITIES $
(50)
Cash used for investing activities was
41
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MERITOR, INC.
Nine Months Ended June 30,
2021 2020
FINANCING CASH FLOWS
Securitization $ - $ (8)
Borrowings against revolving line of credit - 304
Repayments of revolving line of credit - (304)
Proceeds from debt issuance 275 300
Redemption of notes (458) -
Repurchase of convertible notes (53) -
Debt issuance costs (5) (4)
Term loan payments (9) (6)
Other financing activities (1) (1)
Net change in debt (251) 281
Repurchase of common stock (25) (241)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES $
(276)
Cash used for financing activities was$276 million in the first nine months of fiscal year 2021 compared to cash provided by financing activities of$40 million in the same period of fiscal year 2020. The increase in cash used for financing activities is primarily related to the 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.
Liquidity
Our outstanding debt, net of discounts and unamortized debt issuance costs, where applicable, is summarized in the table below (in millions).
June 30, 2021 September 30, 2020
Fixed-rate debt securities $ 566 $ 741
Fixed-rate convertible notes 321 343
Unamortized discount on convertible notes (25) (29)
Term loan 157 166
Other borrowings 11 6
Total debt $ 1,030 $ 1,227
Overview - Our principal operating and capital requirements are for working
capital needs, capital expenditure requirements, debt service requirements,
funding of pension and retiree medical costs and restructuring and product
development programs. We expect fiscal year 2021 capital expenditures for our
business segments to be approximately $95 million .
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 or U.S. accounts receivable
securitization program. Our ability to access additional capital in the long
term will depend on availability of capital markets and pricing on commercially
reasonable terms, as well as our credit profile at the time we are seeking
funds. We continuously evaluate our capital structure to ensure the most
appropriate and optimal structure and may, from time to time, retire,
repurchase, exchange or redeem outstanding indebtedness 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 in June 2024 .
42
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MERITOR, INC.
Sources of liquidity as of June 30, 2021 , in addition to cash on hand, are as
follows (in millions):
Total Readily
Facility Utilized as of Available as of
Size 6/30/2021 6/30/2021 Current Expiration
On-balance sheet arrangements:
Senior secured revolving credit facility (1) $ 685 $ - $ 499 June 2024 (1)
Committed U.S. accounts receivable
securitization (2) 110 3 107 March 2024
Total on-balance sheet arrangements $ 795 $ 3 $ 606
Off-balance sheet arrangements: (2)
Committed Swedish factoring facility (3)(4) $ 184 $ 95 $ - March 2024
Committed U.S. factoring facility (3) 75 48 - February 2023
Uncommitted U.K. factoring facility 30 8 - February 2022
Uncommitted Italy factoring facility 35 18 - June 2022
Other uncommitted factoring facilities (5) N/A 29 N/A N/A
Total off-balance sheet arrangements $ 324 $ 198 $ -
Total available sources $ 1,119 $ 201 $ 606
(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 2021 due primarily to lower EBITDA in the fourth quarter of fiscal year 2020, which was impacted by the COVID-19 pandemic. The company has full availability until the next measurement point at the end of the fourth quarter of fiscal year 2021. The facility will expire inNovember 2023 if the outstanding principal amount of the 6.25 percent notes due 2024 is greater than$75 million at that time. (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 fromNordea Bank throughJune 22, 2022 . (5)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 - AtJune 30, 2021 , we had$138 million in cash and cash equivalents. We plan to repatriate approximately$30 million of cash held by subsidiaries outside ofthe United States , with respect to which no withholding taxes are expected to be owed.$43 million of cash and cash equivalents is held in jurisdictions where the cash is not freely transferable to theU.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 theU.S. OnMarch 31, 2021 , theU.S. accounts receivable securitization facility with PNC bank was increased from$95 million to$110 million . 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. AtJune 30, 2021 , we were in compliance with the priority debt-to-EBITDA ratio covenant with a ratio of approximately 0.59x. Equity Repurchase Authorization - OnNovember 7, 2019 , the Board of Directors authorized the repurchase of up to$325 million of the company's common stock, which was an increase from the prior$250 million authorization approved onJuly 26, 2019 . 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 ofJune 30, 2021 andSeptember 30, 2020 , the amount remaining available for repurchases under this common stock repurchase authorization was$34 million and$59 million , respectively. OnJuly 28, 2021 , the Board of Directors authorized the repurchase of up to$250 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. 43 --------------------------------------------------------------------------------MERITOR, INC. Debt Repurchase Authorization - OnNovember 2, 2018 , our Board of Directors authorized the repurchase of up to$100 million aggregate principal amount of any of our 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 our debt covenants. The amount remaining available for repurchases under this repurchase authorization was$76 million as ofJune 30, 2021 andSeptember 30, 2020 . OnMay 4, 2021 , we issued a notice of redemption for all of the remaining$175 million principal amount of the 6.25 Percent Notes due 2024. The redemption was made pursuant to a special authorization from the Board of Directors. Refer to Note 13 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report. Revolving Credit Facility - The senior secured revolving credit facility is discussed in Note 13 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report. Redemption of 7.875 Percent Convertible Notes, Redemption of 6.25 Percent Notes Due 2024, and Issuance of 4.50 Percent Notes - Refer to Note 13 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report. Other - Refer to Note 13 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report. Credit Ratings - AtAugust 3, 2021 , 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. 44
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MERITOR, INC.
Nine Months Ended Year ended
Statement of Operations Information June 30, 2021 September 30, 2020
Net Sales $ 1,612 $ 1,863
Gross profit 163 188
Net income (loss) from continuing operations (22) 190
Net income (loss) (22) 191
Net income (loss) attributable to Meritor, Inc. (22) 191
Balance Sheet Information June 30, 2021 September 30, 2020
Current Assets $ 479 $ 566
Non-current Assets 1,075 1,053
Current Liabilities 499 413
Non-current Liabilities 1,350 1,639
Redeemable Preferred Stock - -
Noncontrolling Interest - -
At June 30, 2021 and September 30, 2020 , amounts owed by the Combined Entities
to non-guarantor entities totaled approximately $52 million and $100 million ,
respectively, and amounts owed to the Combined Entities from non-guarantor
entities totaled approximately $224 million and $156 million , respectively. For
the nine months ended June 30, 2021 , intercompany sales from the Combined
Entities to non-guarantor subsidiaries was $70 million . For the nine months
ended June 30, 2021 , intercompany sales from non-guarantor subsidiaries to the
Combined Entities was $123 million . For the year ended September 30, 2020 ,
intercompany sales from the Combined Entities to non-guarantor subsidiaries was
$79 million . For the year ended September 30, 2020 , intercompany sales from
non-guarantor subsidiaries to the Combined Entities was $102 million .
Off-Balance Sheet Arrangements
Accounts Receivable Factoring Arrangements - We participate in accounts
receivable factoring programs with a total amount utilized at June 30, 2021 of
$198 million , of which $143 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 from Nordea
Bank , which was renewed through June 22, 2022 . Commitments under all of our
factoring facilities are subject to standard terms and conditions for these
types of arrangements (including, in the case of the U.K. and Italy 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 $12 million and $8 million of
off-balance sheet letters of credit outstanding through letter of credit
facilities as of June 30, 2021 and September 30, 2020 , respectively.
Contingencies
Contingencies related to environmental, asbestos and other matters are discussed
in Note 16 of the Notes to the 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 ended September 30, 2020 (the "2020 Form 10-K").
Our critical accounting estimates are consistent with those described in Item 7
of our 2020 Form 10-K.
New Accounting Pronouncements
New Accounting Pronouncements are discussed in Note 3 of the Notes to the
Condensed Consolidated Financial Statements in Part I of this Quarterly Report.
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