Index


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

FORM 10-Q

QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 30, 2014
Commission File No. 1-15983

MERITOR, INC.

(Exact name of registrant as specified in its charter)

 
Indiana
38-3354643
 
 
(State or other jurisdiction of incorporation or
(I.R.S. Employer Identification
 
 
organization)
No.)
 
 
 
 
 
2135 West Maple Road, Troy, Michigan
48084-7186
 
 
(Address of principal executive offices)
(Zip Code)
 

(248) 435-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes
X
No
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes
X
No
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer
 
 
Accelerated filer
X
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
No
X
 
97,844,611 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on March 30, 2014.


INDEX
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statement of Operations - - Three and Six Months Ended March 31, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet - -  March 31, 2014 and September 30, 2013
 
 
 
 
 
 
Condensed Consolidated Statement of Cash Flows - - Six Months Ended March 31, 2014 and 2013
 
 
 
 
 
 
Condensed Consolidated Statement of Equity (Deficit) - - Six Months Ended March 31, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

MERITOR, INC.

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements

CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)

 
Three Months Ended
March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
Sales
$
962

 
$
908

 
$
1,869

 
$
1,799

Cost of sales
(846
)
 
(813
)
 
(1,650
)
 
(1,621
)
GROSS MARGIN
116

 
95

 
219

 
178

Selling, general and administrative
(66
)
 
(65
)
 
(125
)
 
(127
)
Restructuring costs
(2
)
 
(11
)
 
(3
)
 
(17
)
Other operating expense
—

 
(1
)
 
(1
)
 
(2
)
OPERATING INCOME
48

 
18

 
90

 
32

Equity in earnings of affiliates
9

 
10

 
17

 
19

Interest expense, net
(48
)
 
(25
)
 
(75
)
 
(54
)
INCOME (LOSS) BEFORE INCOME TAXES
9

 
3

 
32

 
(3
)
Provision for income taxes
(9
)
 
(7
)
 
(19
)
 
(17
)
INCOME (LOSS) FROM CONTINUING OPERATIONS
—

 
(4
)
 
13

 
(20
)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
3

 
—

 
3

 
(5
)
NET INCOME (LOSS)
3

 
(4
)
 
16

 
(25
)
Less: Net income attributable to noncontrolling interests
(2
)
 
—

 
(4
)
 
—

NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
$
1

 
$
(4
)
 
$
12

 
$
(25
)
NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
(2
)
 
$
(4
)
 
$
9

 
$
(20
)
Income (loss) from discontinued operations
3

 
—

 
3

 
(5
)
       Net income (loss)
$
1

 
$
(4
)
 
$
12

 
$
(25
)
BASIC EARNINGS (LOSS) PER SHARE
 
 
 
 
 
 
 
Continuing operations
$
(0.02
)
 
$
(0.04
)
 
$
0.09

 
$
(0.20
)
Discontinued operations
0.03

 
—

 
0.03

 
(0.05
)
       Basic earnings (loss) per share
$
0.01

 
$
(0.04
)
 
$
0.12

 
$
(0.25
)
DILUTED EARNINGS (LOSS) PER SHARE
 
 
 
 
 
 
 
Continuing operations
$
(0.02
)
 
$
(0.04
)
 
$
0.09

 
$
(0.20
)
Discontinued operations
0.03

 
—

 
0.03

 
(0.05
)
       Diluted earnings (loss) per share
$
0.01

 
$
(0.04
)
 
$
0.12

 
$
(0.25
)
 
 
 
 
 
 
 
 
Basic average common shares outstanding
97.6

 
97.2

 
97.5

 
96.9

Diluted average common shares outstanding
97.6

 
97.2

 
99.2

 
96.9



See notes to consolidated financial statements.

3

MERITOR, INC.


CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(in millions)

 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
Net income (loss)
$
3

 
$
(4
)
 
$
16

 
$
(25
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
10

 
3

 
—

 
(1
)
Pension and other postretirement benefit related adjustments
10

 
(2
)
 
20

 
(2
)
Unrealized gain on investments and foreign exchange contracts
2

 
1

 
2

 
—

Other comprehensive income (loss), net of tax
22

 
2

 
22

 
(3
)
Total comprehensive income (loss)
25

 
(2
)
 
38

 
(28
)
Less: Comprehensive income attributable to noncontrolling interest
(2
)
 
—

 
(4
)
 
(1
)
Comprehensive income (loss) attributable to Meritor, Inc.
$
23

 
$
(2
)
 
$
34

 
$
(29
)

See notes to consolidated financial statements.


4

MERITOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)

 
March 31,
2014
 
September 30,
2013
 
(Unaudited)
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
233

 
$
318

Receivables, trade and other, net
618

 
596

Inventories
436

 
414

Other current assets
58

 
56

TOTAL CURRENT ASSETS
1,345

 
1,384

NET PROPERTY
410

 
417

GOODWILL
437

 
434

OTHER ASSETS
339

 
335

TOTAL ASSETS
$
2,531

 
$
2,570

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term debt
$
6

 
$
13

       Accounts and notes payable
696

 
694

Other current liabilities
345

 
339

TOTAL CURRENT LIABILITIES
1,047

 
1,046

LONG-TERM DEBT
1,082

 
1,125

RETIREMENT BENEFITS
868

 
886

OTHER LIABILITIES
316

 
335

TOTAL LIABILITIES
3,313

 
3,392

COMMITMENTS AND CONTINGENCIES (See Note 19)

 

EQUITY (DEFICIT):
 
 
 
Common stock (March 31, 2014 and September 30, 2013, 97.8 and 97.4 shares issued and outstanding, respectively)
97

 
97

Additional paid-in capital
917

 
914

Accumulated deficit
(1,115
)
 
(1,127
)
Accumulated other comprehensive loss
(712
)
 
(734
)
Total deficit attributable to Meritor, Inc.
(813
)
 
(850
)
Noncontrolling interests
31

 
28

TOTAL DEFICIT
(782
)
 
(822
)
TOTAL LIABILITIES AND DEFICIT
$
2,531

 
$
2,570


See notes to consolidated financial statements.

5

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)

 
Six Months Ended March 31,
 
2014
 
2013
 
(Unaudited)
OPERATING ACTIVITIES
 
 
 
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (See Note 9)
$
18

 
$
(109
)
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(25
)
 
(23
)
        Net investing cash flows provided by discontinued operations
3

 
6

CASH USED FOR INVESTING ACTIVITIES
(22
)
 
(17
)
FINANCING ACTIVITIES
 
 
 
Repayment of notes and term loan
(308
)
 
(236
)
Proceeds from debt issuance
225

 
225

Debt issuance costs
(9
)
 
(6
)
Other financing activities
13

 
2

CASH USED FOR FINANCING ACTIVITIES
(79
)
 
(15
)
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES ON CASH AND CASH EQUIVALENTS
(2
)
 
1

CHANGE IN CASH AND CASH EQUIVALENTS
(85
)
 
(140
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
318

 
257

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
233

 
$
117


See notes to consolidated financial statements.

6

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)
(In millions)
(Unaudited)

 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total Deficit
Attributable to
Meritor, Inc.
 
Noncontrolling
Interests
 
Total
Beginning balance at September 30, 2013
$
97

 
$
914

 
$
(1,127
)
 
$
(734
)
 
$
(850
)
 
$
28

 
$
(822
)
Comprehensive income
—

 
—

 
12

 
22

 
34

 
4

 
38

Equity based compensation expense
—

 
3

 
—

 
—

 
3

 
—

 
3

Noncontrolling interest dividends
—

 
—

 
—

 
—

 
—

 
(1
)
 
$
(1
)
Ending Balance at March 31, 2014
$
97

 
$
917

 
$
(1,115
)
 
$
(712
)
 
$
(813
)
 
$
31

 
$
(782
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance at September 30, 2012
$
96

 
$
901

 
$
(1,105
)
 
$
(915
)
 
$
(1,023
)
 
$
41

 
$
(982
)
Comprehensive income (loss)
—

 
—

 
(25
)
 
(4
)
 
(29
)
 
1

 
(28
)
Vesting of restricted stock
1

 
(1
)
 
—

 
—

 
—

 
—

 
—

Repurchase of convertible notes
—

 
(2
)
 
—

 
—

 
(2
)
 
—

 
(2
)
Issuance of convertible notes
—

 
9

 
—

 
—

 
9

 
—

 
9

Equity based compensation expense
—

 
3

 
—

 
—

 
3

 
—

 
3

Noncontrolling interest dividends
—

 
—

 
—

 
—

 
—

 
(14
)
 
(14
)
Ending Balance at March 31, 2013
$
97

 
$
910

 
$
(1,130
)
 
$
(919
)
 
$
(1,042
)
 
$
28

 
$
(1,014
)

See notes to consolidated financial statements.

7
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1. Basis of Presentation
Meritor, Inc., (the "company" or "Meritor"), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers (“OEMs”) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, off-highway, military, bus and coach and other industrial OEMs and certain aftermarkets. The consolidated financial statements are those of the company and its consolidated subsidiaries.
Certain businesses are reported in discontinued operations in the consolidated statement of operations, statement of cash flows and related notes for all periods presented. Additional information regarding discontinued operations is discussed in Note 4.
In the opinion of the company, the unaudited financial statements contain all adjustments, consisting solely of adjustments of a normal, recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These statements should be read in conjunction with the company’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K, for the fiscal year ended September 30, 2013 . The results of operations for the three and six months ended March 31, 2014 , are not necessarily indicative of the results for the full year.
The company’s fiscal year ends on the Sunday nearest September 30. The second quarter of fiscal years 2014 and 2013 ended on March 30, 2014 and March 31, 2013 , respectively. All year and quarter references relate to the company’s fiscal year and fiscal quarters, unless otherwise stated. For ease of presentation, September 30 and March 31 are used consistently throughout this report to represent the fiscal year end and second quarter end, respectively.
2. Earnings per Share
Basic earnings per share is calculated using the weighted average number of shares outstanding during each period. Diluted earnings per share calculation includes the impact of dilutive common stock options, restricted stock, performance share awards and convertible securities, if applicable.
A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):
 
Three Months Ended
March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Basic average common shares outstanding
97.6

 
97.2

 
97.5

 
96.9

Impact of stock options
—

 
—

 
—

 
—

Impact of restricted and performance shares
—

 
—

 
1.7

 
—

Diluted average common shares outstanding
97.6

 
97.2

 
99.2

 
96.9

On November 7, 2013, the Board of Directors approved a grant of performance restricted share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock upon achievement of certain performance and time vesting criteria. The fair value of each share unit is $7.97 , the company’s share price on the grant date of December 1, 2013.
The actual number of performance units that will vest will depend upon the company’s performance relative to the established M2016 goals for the three -year performance period of October 1, 2013 to September 30, 2016, measured at the end of the performance period. The number of shares that vest will be between 0% and 200% of the estimated grant date amount of 1.5 million shares. For both the three and six months ended March 31, 2014 , compensation cost recognized related to the performance shares was $1 million .

8
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


For the three and six months ended March 31, 2014 and 2013, options to purchase 0.8 million and 0.5 million shares of common stock, respectively, were excluded from the computation of diluted earnings per share because their exercise price exceeded the average market price for the period and thus their inclusion would be anti-dilutive. The potential effect of 2 million restricted and performance shares is excluded from the diluted earnings per share calculation for the three months ended March 31, 2014 because inclusion in a loss from continuing operations period would reduce the loss per share from continuing operations attributable to common shareholders. The potential effects of restricted shares and share units were excluded from the diluted earnings per share calculation for the three and six months ended March 31, 2013 because their inclusion in a net loss period would reduce the net loss per share. The company’s convertible senior unsecured notes are excluded from the computation of diluted earnings per share, as the company's average stock price during each period is less than the conversion pr ice.
3. New Accounting Standards
Accounting standards implemented during fiscal year 2014
In January 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The company adopted this guidance at the beginning of its first quarter of fiscal year 2014 within Note 17.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires that reclassification adjustments for items that are reclassified from accumulated other comprehensive income to net income be presented on the financial statements or in a note to the financial statements. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The company adopted this guidance at the beginning of its first quarter of fiscal year 2014 within Note 20.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 eliminates the option of presenting unrecognized tax benefits as a liability or as a reduction of a deferred tax asset for a net operating loss or tax credit carryforward. An unrecognized tax benefit, or portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 with early adoption permitted. The company adopted this guidance at the beginning of its first quarter of fiscal year 2014. The adoption of ASU 2013-11 did not affect the company's consolidated statement of financial position, results of operations, or cash flows.
Accounting standards to be implemented
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. A strategic shift could include a disposal of: (1) a major geographical area of operations; (2) a major line of business; and (3) a major equity method investment. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

9
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


4. Discontinued Operations
Results of discontinued operations are summarized as follows (in millions):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2014
 
2013
 
2014
 
2013
Sales
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Loss before income taxes
$
(1
)
 
$
—

 
(2
)
 
(5
)
Benefit for income taxes
4

 
—

 
5

 
—

Income (Loss) from discontinued operations attributable to Meritor, Inc.
$
3

 
$
—

 
$
3

 
$
(5
)
     Pre-tax loss from discontinued operations for the three and six months ended March 31, 2014 and 2013 was primarily due to environmental remediation costs. The benefit for income taxes was primarily attributable to the expiration of the statue of limitations on certain tax contingencies of previously divested businesses.

5. Goodwill
In accordance with FASB Accounting Standards Codification (ASC) Topic 350-20, “Intangibles – Goodwill and Other”, goodwill is reviewed for impairment annually during the fourth quarter of the fiscal year or more frequently if certain indicators arise. If business conditions or other factors cause the operating results and cash flows of a reporting unit to decline, the company may be required to record impairment charges for goodwill at that time. The company tests goodwill for impairment at a level of reporting referred to as a reporting unit, which is an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a single reporting unit. An operating segment is deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component.
A summary of the changes in the carrying value of goodwill by the company's two reportable segments are presented below (in millions):
 
Commercial Truck & Industrial
 
Aftermarket
& Trailer
 
Total
Beginning balance at September 30, 2013
$
262

 
$
172

 
$
434

Foreign currency translation
2

 
1

 
3

Balance at March 31, 2014
$
264

 
$
173

 
$
437



10
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


6. Restructuring Costs
     At both March 31, 2014 and September 30, 2013 , $10 million and $12 million , respectively, of restructuring reserves primarily related to unpaid employee termination benefits remained in the consolidated balance sheet. The changes in restructuring reserves for the six months ended March 31, 2014 and 2013 are as follows (in millions):
 
Employee
Termination
Benefits
 
Asset
Impairment
 
Plant
Shutdown
& Other
 
Total
Beginning balance at September 30, 2013
$
12

 
$
—

 
$
—

 
$
12

Activity during the period:
 
 
 
 
 
 

Charges to continuing operations
3

 
—

 
—

 
3

Cash payments – continuing operations
(4
)
 
—

 
—

 
(4
)
Other
(1
)
 
—

 
—

 
(1
)
Total restructuring reserves at March 31, 2014
10

 
—

 
—

 
10

Less: non-current restructuring reserves
(3
)
 
—

 
—

 
(3
)
Restructuring reserves – current, at March 31, 2014
$
7

 
$
—

 
$
—

 
$
7

 
 
 
 
 
 
 
 
Balance at September 30, 2012
$
15

 
$
—

 
$
—

 
$
15

Activity during the period:
 
 
 
 
 
 
 
Charges to continuing operations
15

 
1

 
1

 
17

Asset write-offs
—

 
(1
)
 
—

 
(1
)
Cash payments – continuing operations
(12
)
 
—

 
—

 
(12
)
Other
—

 
—

 
(1
)
 
(1
)
Total restructuring reserves at March 31, 2013
18

 
—

 
—

 
18

Less: non-current restructuring reserves
(3
)
 
—

 
—

 
(3
)
Restructuring reserves – current, at March 31, 2013
$
15

 
$
—

 
$
—

 
$
15

Variable Labor Reductions: During the fourth quarter of fiscal year 2012, the company initiated a global variable labor headcount reduction plan intended to reduce labor and other costs in response to market conditions. As part of this action, the company eliminated approximately 600 hourly and 120 salaried positions and incurred $10 million of restructuring costs in the Commercial Truck & Industrial segment, primarily severance benefits, of which $5 million was recognized in fiscal year 2013 and $5 million was recognized in fiscal year 2012. Restructuring actions associated with the variable labor reductions were substantially complete as of March 31, 2014 .
Remanufacturing Consolidation: During the first quarter of fiscal year 2013, the company announced the planned consolidation of its remanufacturing operations in the Aftermarket & Trailer segment resulting in the closure of one remanufacturing plant in Canada. The closure resulted in the elimination of 85 hourly positions including approximately 65 positions which were transferred to the company's facility in Indiana. The company recorded restructuring charges of $3 million during fiscal year 2013, primarily associated with employee severance charges. Restructuring actions associated with the remanufacturing consolidation were substantially complete as of March 31, 2014 .
Segment Reorganization and Asia Pacific Realignment : On November 12, 2012, the company announced a revised management reporting structure resulting in two business segments to drive efficiencies. On January 8, 2013, the company announced restructuring actions related to this business segment rationalization. On March 26, 2013, the company announced plans to consolidate its operations in China by transferring manufacturing operations to the company's off-highway facility and closing its facility in Wuxi, China.
    
During fiscal year 2013, the company recorded employee severance charges and other exit costs associated with the elimination of approximately 200 salaried positions (including contract employees) and 50 hourly positions of $8 million and $3 million in the Commercial Truck & Industrial and Aftermarket & Trailer segments, respectively, as well as $3 million at a corporate location. The company also recognized $2 million within the Commercial Truck & Industrial segment related to a lease termination. Restructuring actions associated with this program were substantially complete as of March 31, 2014 .

11
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



M2016 Footprint Actions: As part of the company's M2016 Strategy, a three -year plan to achieve sustainable financial strength, the company approved a North American footprint realignment action and a European Shared Services Reorganization. As part of these actions, the company eliminated 74 hourly and 27 salaried positions and incurred $2 million of restructuring costs, primarily related to severance benefits, in the Commercial Truck & Industrial segment during fiscal year 2013.
7. Income Taxes
For each interim reporting period, the company makes an estimate of the effective tax rate expected to be applicable for the full fiscal year pursuant to FASB ASC Topic 740-270, “Accounting for Income Taxes in Interim Periods.” The rate so determined is used in providing for income taxes on a year-to-date basis. Jurisdictions with a projected loss for the year or an actual year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.
Income tax expense (benefit) is allocated between continuing operations, discontinued operations and other comprehensive income (OCI). Such allocation is applied by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category, such as discontinued operations or OCI, income tax expense is allocated to the other sources of income, with a related benefit recorded in continuing operations.
For the first six months of fiscal years 2014 and 2013 , the company had approximately $36 million and $52 million , respectively, of net pre-tax losses in tax jurisdictions in which a tax benefit is not recorded. Losses arising from these jurisdictions resulted in increasing the valuation allowance, rather than reducing income tax expense.
8. Accounts Receivable Factoring & Securitization
     Off-balance sheet arrangements 
Swedish Factoring Facility: The company has an arrangement to sell trade receivables due from AB Volvo through one of its European subsidiaries. Under this arrangement, which was renewed on June 10, 2013 and which now terminates on June 28, 2014, the company can sell up to, at any point in time, €150 million ( $206 million ) of eligible trade receivables. Prior to maturity, the company plans to extend the arrangement. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized €135 million ( $185 million ) and €148 million ( $199 million ) of this accounts receivable factoring facility as of March 31, 2014 and September 30, 2013 , respectively.
U.S. Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo and its subsidiaries. Under this arrangement, which was renewed on October 29, 2013 and which now terminates on October 29, 2014, the company can sell up to, at any point in time, €65 million ( $89 million ) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized €51 million ( $70 million ) and €48 million ( $65 million ) of this accounts receivable factoring facility as of March 31, 2014 and September 30, 2013 , respectively.
     The above facilities are backed by 364 -day liquidity commitments from Nordea Bank which were renewed through October 2014. The commitments are subject to standard terms and conditions for these types of arrangements.
      United Kingdom Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo and its European subsidiaries through one of its United Kingdom subsidiaries. Under this arrangement, which was renewed on January 24, 2013 and which now expires in February 2018, the company can sell up to, at any point in time, €25 million ( $35 million ) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized €6 million ( $8 million ) and €7 million ( $9 million ) of this accounts receivable factoring facility as of March 31, 2014 and September 30, 2013 , respectively. The agreement is subject to standard terms and conditions for these types of arrangements including a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the program.

12
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


     Italy Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo and its European subsidiaries through one of its Italian subsidiaries. Under this arrangement, which expires in June 2017, the company can sell up to, at any point in time, €30 million ( $41 million ) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized €10 million ( $14 million ) of this accounts receivable factoring facility as of March 31, 2014 and September 30, 2013 , respectively. The agreement is subject to standard terms and conditions for these types of arrangements including a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the program.
     In addition, several of the company’s subsidiaries, primarily in Europe, factor eligible accounts receivable with financial institutions. Certain receivables are factored without recourse to the company and are excluded from accounts receivable in the consolidated balance sheet. The amount of factored receivables excluded from accounts receivable was $20 million and $18 million at March 31, 2014 and September 30, 2013 , respectively.
Brazil Factoring Facility: The company entered into an arrangement to sell trade receivables from MAN and its subsidiaries. Under this arrangement, which began in October 2013 and is valid for invoices dated no later than March 31, 2014, the company can sell up to, at any point in time, R$100 million ( $44 million ) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized R$56 million ( $25 million ) of this accounts receivable factoring facility as of March 31, 2014 . The agreement is subject to standard terms and conditions for these types of arrangements including a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the program.
     Total costs associated with all of the off-balance sheet arrangements described above were $5 million and $3 million in the six months ended March 31, 2014 and 2013 , respectively, and are included in selling, general and administrative expenses in the consolidated statement of operations.
     On-balance sheet arrangements
The company has a $100 million U.S. accounts receivables securitization facility. On June 21, 2013, the company entered into a one -year extension of the facility expiration date, which after the amendment, expires on June 18, 2016. On October 11, 2013, the company entered into an amendment whereby Market Street Funding, LLC assigned its purchase commitment to PNC Bank National Association (PNC). This program is provided by PNC, as Administrator and Purchaser, and the other Purchasers and Purchaser Agents from time to time (participating lenders), which are party to the agreement. Under this program, the company has the ability to sell an undivided percentage ownership interest in substantially all of its trade receivables (excluding the receivables due from AB Volvo and subsidiaries eligible for sale under the U.S. Factoring Facility) of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings from participating lenders under a loan agreement. This program also includes a letter of credit facility pursuant to which ARC may request the issuance of letters of credit issued for the company's U.S. subsidiaries (originators) or their designees, which when issued will constitute a utilization of the facility for the amount of letters of credit issued. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the consolidated balance sheet. At March 31, 2014 , no amounts, including letters of credit, were outstanding under this program. This program contains a financial covenant related to the company's priority-debt-to-EBITDA ratio, which is 2.00 to 1.00 as of the last day of the fiscal quarter throughout the remaining term of the agreement. At March 31, 2014 , the company was in compliance with all covenants under its credit agreement (see Note 16).

13
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


9. Operating Cash Flow
The reconciliation of net income (loss) to cash flows provided by (used for) operating activities is as follows (in millions):
 
Six Months Ended March 31,
 
2014
 
2013
OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
16

 
$
(25
)
Less: Income (loss) from discontinued operations, net of tax
3

 
(5
)
Income (loss) from continuing operations
13

 
(20
)
Adjustments to income (loss) from continuing operations to arrive at cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
33

 
33

Restructuring costs
3

 
17

Loss on debt extinguishment
21

 
5

Equity in earnings of affiliates
(17
)
 
(19
)
Pension and retiree medical expense
20

 
22

Other adjustments to income (loss) from continuing operations
5

 
7

Dividends received from affiliates
11

 
7

Pension and retiree medical contributions
(19
)
 
(48
)
Restructuring payments
(4
)
 
(12
)
Changes in off-balance sheet accounts receivable factoring
17

 
(44
)
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, foreign currency adjustments and discontinued operations
(60
)
 
(44
)
Operating cash flows provided by (used for) continuing operations
23

 
(96
)
Operating cash flows used for discontinued operations
(5
)
 
(13
)
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
$
18

 
$
(109
)

10. Inventories
Inventories are stated at the lower of cost (using FIFO or average methods) or market (determined on the basis of estimated realizable values) and are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Finished goods
$
190

 
$
184

Work in process
38

 
32

Raw materials, parts and supplies
208

 
198

Inventories
$
436

 
$
414


14
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


11. Other Current Assets
     Other current assets are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Current deferred income tax assets
$
22

 
$
23

Asbestos-related recoveries (see Note 19)
12

 
12

Deposits and collateral
5

 
4

Prepaid and other
19

 
17

Other current assets
$
58

 
$
56

12. Net Property
     Net property is summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Property at cost:
 
 
 
Land and land improvements
$
34

 
$
35

Buildings
242

 
239

Machinery and equipment
919

 
915

Company-owned tooling
155

 
152

Construction in progress
49

 
48

Total
1,399

 
1,389

Less: Accumulated depreciation
(989
)
 
(972
)
Net property
$
410

 
$
417

13. Other Assets
     Other assets are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Investments in non-consolidated joint ventures
$
111

 
$
102

Asbestos-related recoveries (see Note 19)
59

 
59

Non-current deferred income tax assets, net
9

 
13

Unamortized debt issuance costs
33

 
32

Capitalized software costs, net
26

 
28

Prepaid pension costs
60

 
55

Other
41

 
46

Other assets
$
339

 
$
335

In accordance with FASB ASC Topic 350-40, costs relating to internally developed or purchased software in the preliminary project stage and the post-implementation stage are expensed as incurred. Costs in the application development stage that meet the criteria for capitalization are capitalized and amortized using the straight-line basis over the estimated economic useful life of the software.

15
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The company holds a variable interest in a joint venture accounted for under the equity method of accounting. The joint venture manufactures components for commercial vehicle applications primarily on behalf of the company. The variable interest relates to a supply arrangement between the company and the joint venture whereby the company supplies certain components to the joint venture on a cost-plus basis. The company is not the primary beneficiary of the joint venture, as the joint venture partner has shared or absolute control over key manufacturing operations, labor relationships, financing activities and certain other functions of the joint venture. Therefore, the company does not consolidate the joint venture. At March 31, 2014 , the company’s investment in the joint venture was $39 million representing the company’s maximum exposure to loss. This amount is included in investments in non-consolidated joint ventures in the table above.
14. Other Current Liabilities
     Other current liabilities are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Compensation and benefits
$
137

 
$
141

Income taxes
17

 
8

Taxes other than income taxes
49

 
47

Accrued interest
15

 
16

Product warranties
24

 
20

Restructuring (see Note 6)
7

 
9

Asbestos-related liabilities (see Note 19)
18

 
18

Indemnity obligations (see Note 19)
12

 
12

Other
66

 
68

Other current liabilities
$
345

 
$
339


The company records estimated product warranty costs at the time of shipment of products to customers. Warranty reserves are primarily based on factors that include past claims experience, sales history, product manufacturing and engineering changes and industry developments. Liabilities for product recall campaigns are recorded at the time the company’s obligation is probable and can be reasonably estimated. Policy repair actions to maintain customer relationships are recorded as other liabilities at the time an obligation is probable and can be reasonably estimated. Product warranties, including recall campaigns, not expected to be paid within one year are recorded as a non-current liability.
A summary of the changes in product warranties is as follows (in millions):
 
Six Months Ended March 31,
 
2014
 
2013
Total product warranties – beginning of period
$
57

 
$
44

Accruals for product warranties
9

 
12

Payments
(12
)
 
(8
)
Change in estimates and other
3

 
(2
)
Total product warranties – end of period
57

 
46

Less: Non-current product warranties
(33
)
 
(29
)
Product warranties – current
$
24

 
$
17


16
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


15. Other Liabilities
Other liabilities are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Asbestos-related liabilities (see Note 19)
$
96

 
$
96

Restructuring (see Note 6)
3

 
3

Non-current deferred income tax liabilities
102

 
100

Liabilities for uncertain tax positions
11

 
17

Product warranties (see Note 14)
33

 
37

Environmental
10

 
11

Indemnity obligations
20

 
26

Other
41

 
45

Other liabilities
$
316

 
$
335

16. Long-Term Debt
     Long-Term Debt, net of discounts where applicable, is summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
8.125 percent notes due 2015
$
84

 
$
84

10.625 percent notes due 2018 (net of issuance discount of $3)
—

 
247

4.625 percent convertible notes due 2026 (1)
55

 
55

4.0 percent convertible notes due 2027 (1)
200

 
200

7.875 percent convertible notes due 2026   (net of issuance discount of $22 and $23, respectively) (1)
228

 
227

6.75 percent notes due 2021 (2)
275

 
275

6.25 percent notes due 2024 (2)
225

 
—

Term loan
—

 
45

Capital lease obligation
28

 
28

Other borrowings
31

 
18

Unamortized gain on interest rate swap termination
2

 
2

Unamortized discount on convertible notes
(40
)
 
(43
)
Subtotal
1,088

 
1,138

Less: current maturities
(6
)
 
(13
)
Long-term debt
$
1,082

 
$
1,125

(1) The 4.625 percent, 4.0 percent and 7.875 percent convertible notes contain a put and call feature, which allows for earlier redemption beginning in 2016, 2019 and 2020, respectively.
(2) The 6.75 percent and 6.25 percent notes contain a call option, which allows for early redemption.
Revolving Credit Facility
On February 13, 2014, the company amended and restated its revolving credit facility. Pursuant to the revolving credit agreement as amended, the company has a $499 million revolving credit facility, $89 million of which matures in April 2017 for banks not electing to extend their commitments under the revolving credit facility, and $410 million of which matures in February 2019. The availability under this facility is dependent upon various factors, including performance against certain financial covenants as highlighted below.


17
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


  The availability under the revolving credit facility is subject to certain financial covenants based on (i) the ratio of the company's priority debt (consisting principally of amounts outstanding under the revolving credit facility, U.S. accounts receivable securitization and factoring programs, and third-party non-working capital foreign debt) to EBITDA and (ii) the amount of annual capital expenditures. The company is required to maintain a total priority-debt-to-EBITDA ratio, as defined in the agreement, of 2.25 to 1.00 as of the last day of the fiscal quarter throughout the term of the agreement. At March 31, 2014 , the company was in compliance with all covenants under the revolving credit facility with a ratio of approximately 0.34 x for the priority debt-to-EBITDA covenant.
     Availability under the revolving credit facility is also subject to a collateral test, pursuant to which borrowings on the revolving credit facility cannot exceed 1.0 x the collateral test value. The collateral test is performed on a quarterly basis. At March 31, 2014 , the revolving credit facility was collateralized by approximately $604 million of the company's assets, primarily consisting of eligible domestic U.S. accounts receivable, inventory, plant, property and equipment, intellectual property and the company's investment in all or a portion of certain of its wholly-owned subsidiaries.
     Borrowings under the revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin and a commitment fee on undrawn amounts, both of which are based upon the company's current corporate credit rating for senior secured facilities. At March 31, 2014 , the margin over LIBOR rate was 350 basis points , and the commitment fee was 50 basis points . Overnight revolving credit loans are at the prime rate plus a margin of 250 basis points .
Certain of the company's subsidiaries, as defined in the revolving credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the revolving credit facility. Similar subsidiary guarantees are provided for the benefit of the holders of the notes outstanding under the company's indentures (see Note 22).
No borrowings were outstanding under the revolving credit facility at March 31, 2014 and September 30, 2013. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. At March 31, 2014 and September 30, 2013, there were no letters of credit outstanding under the revolving credit facility.

Term Loan
     On February 13, 2014, the company repaid the outstanding balance on the term loan of $41 million and recognized a $2 million loss on the repayment associated with unamortized debt issuance costs.
Debt Securities
In February 2012, the company filed a shelf registration statement with the Securities and Exchange Commission, which was amended in November 2012, registering up to $750 million of debt and/or equity securities that may be offered in one or more series on terms to be determined at the time of sale. The amount remaining at March 31, 2014 is $250 million .
Issuance of Debt Securities - 2024 Notes
On February 13, 2014, the company completed an offering of debt securities consisting of the issuance of $225 million of 10 -year, 6.25 percent notes due February 15, 2024 (the "2024 Notes"). The offering and sale were made pursuant to an existing indenture dated as of April 1, 1998. The 2024 Notes were issued at 100 percent of their principal amount. The proceeds from the sale of the 2024 Notes were $225 million and were primarily used to redeem the company’s previously outstanding $250 million 10.625 percent notes due 2018.
The 2024 Notes mature on February 15, 2024 and bear interest at a fixed rate of 6.25 percent per annum. The company pays interest on the 2024 Notes semi-annually, in arrears, on February 15 and August 15 of each year. The 2024 Notes constitute senior unsecured obligations of the company and rank equally in right of payment with existing and future senior unsecured indebtedness, and effectively junior to existing and future secured indebtedness to the extent of the security therefor. The 2024 Notes are guaranteed on a senior unsecured basis by each of the company's subsidiaries from time to time guaranteeing its senior secured credit facility. The guarantees rank equally with existing and future senior unsecured indebtedness of the guarantors and will be 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.

18
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Prior to February 15, 2019, the company may redeem, at its option, from time to time, the 2024 Notes, in whole or in part, at a redemption price equal to 100 percent of the principal amount of the 2024 Notes to be redeemed plus an applicable premium (as defined in the indenture under which the 2024 Notes were issued) and any accrued and unpaid interest. On or after February 15, 2019, the company may redeem, at its option, from time to time, the 2024 Notes, in whole or in part, at the redemption prices (expressed as percentages of the principal amount of the 2024 Notes to be redeemed) set forth below, plus accrued and unpaid interest, if any, if redeemed during the 12-month period beginning on February 15 of the years indicated below:
Year
     
Redemption Price
2019
 
103.125%
2020
 
102.083%
2021
 
101.042%
2022 and thereafter
 
100.000%
Prior to February 15, 2017, the company also may redeem, at its option, from time to time, up to 35 percent of the aggregate principal amount of the 2024 Notes with the net cash proceeds of one or more public sales of the company's common stock at a redemption price equal to 106.25 percent of the principal amount, plus accrued and unpaid interest, if any, so long as at least 65 percent of the aggregate principal amount of 2024 Notes originally issued remains outstanding after each such redemption and notice of any such redemption is mailed within 90 days of any such sale of common stock.
If a Change of Control (as defined in the indenture under which the 2024 Notes were issued) occurs, unless the company has exercised its right to redeem the 2024 Notes, each holder of 2024 Notes may require the company to repurchase some or all of such holder's 2024 Notes at a purchase price equal to 101 percent of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest, if any.
Repurchase of Debt Securities
On March 15, 2014, the company exercised a call option on its 10.625 percent notes due March 15, 2018. The notes were redeemed at a premium of 5.313 percent of their principal amount. The repurchase of $250 million of 10.625 percent notes was accounted for as an extinguishment of debt and, accordingly, the company recognized a net loss on debt extinguishment of $19 million , which consist of $6 million of unamortized discount and deferred issuance costs, and $13 million of premium. The net loss on debt extinguishment is included in interest expense, net in the consolidated statement of operations.
2013 Convertible Senior Unsecured Notes
In December 2012, the company issued $250 million of 7.875 percent convertible senior unsecured notes due 2026 (the “2013 Convertible Notes”). The 2013 Convertible Notes were sold by the company to qualified institutional buyers in a private placement exempt from the registration requirements of the Securities Act of 1933. The 2013 Convertible Notes have an initial principal amount of $900 per note and will accrete to $1,000 per note on December 1, 2020 at an effective interest rate of 10.9 percent . Net proceeds received by the company, after issuance costs and discounts, were approximately $220 million .
The company pays 7.875 percent cash interest on the principal amount at maturity of the 2013 Convertible Notes semi-annually in arrears on June 1 and December 1 of each year to holders of record at the close of business on the preceding May 15 and November 15, respectively, and at maturity to the holders that present the 2013 Convertible Notes for payment. Interest accrues on the principal amount at maturity thereof from and including the date the 2013 Convertible Notes are issued or from, and including, the last date in respect of which interest has been paid or provided for, as the case may be, to, but excluding, the next interest payment date.
The 2013 Convertible Notes are fully and unconditionally guaranteed on a senior unsecured basis by certain of the company's subsidiaries. The 2013 Convertible Notes are senior unsecured obligations and rank equally in right of payment with all of the company's existing and future senior unsecured indebtedness and are junior to any of the company existing and future secured indebtedness.
The 2013 Convertible Notes will be convertible in certain circumstances into cash up to the principal amount at maturity of the 2013 Convertible Notes surrendered for conversion and, if applicable, shares of the company's common stock (subject to a conversion share cap as described below), based on an initial conversion rate, subject to adjustment, equivalent to 83.3333 shares per $1,000 principal amount at maturity of 2013 Convertible Notes (which represents an initial conversion price of $12.00 per share), only under the following circumstances:

19
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(1) Prior to June 1, 2025, during any calendar quarter after the calendar quarter ending December 31, 2012, if the closing sale price of the Company's common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120 percent of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter;
(2) Prior to June 1, 2025, during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount at maturity of 2013 Convertible Notes was equal to or less than 97 percent of the conversion value of the 2013 Convertible Notes on each trading day during such five consecutive trading day period;
(3) Prior to June 1, 2025, if the company has called the 2013 Convertible Notes for redemption;
(4) Prior to June 1, 2025, upon the occurrence of specified corporate transactions; or
(5) At any time on or after June 1, 2025.
On or after December 1, 2020, the company may redeem the 2013 Convertible Notes at its option, in whole or in part, at a redemption price in cash equal to 100 percent of the principal amount at maturity of the 2013 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Further, holders may require the company to purchase all or a portion of their 2013 Convertible Notes at a purchase price in cash equal to 100 percent of the principal amount at maturity of the 2013 Convertible Notes to be purchased, plus accrued and unpaid interest, on December 1, 2020 or upon certain fundamental changes. The maximum number of shares of common stock those 2013 Convertible Notes are convertible into is 19,208,404 shares.
The company used the net proceeds of approximately $220 million from the offering of the 2013 Notes (after discounts and issuance costs) and additional cash to acquire a portion of its outstanding 4.625 percent convertible senior notes due 2026 (the “ 4.625 percent notes”) in transactions that settled concurrently with the closing of the 2013 Convertible Note offering. Approximately $245 million of $300 million principal amount of the 4.625 percent notes were acquired for an aggregate purchase price of approximately $236 million (including accrued interest). The company recognized a loss on debt extinguishment of $5 million .
Accounting guidance requires that cash-settled convertible debt, such as the company's 2013 Convertible Notes be separated into debt and equity components at issuance and a value be assigned to each. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, is recorded as a debt discount. The company measures the debt component at fair value by utilizing a discounted cash flow model. This model utilizes observable inputs such as contractual repayment terms, benchmark forward yield curves, and yield curves and quoted market prices of its own nonconvertible debt. The yield curves are acquired from an independent source that is widely used in the financial industry and reviewed internally by personnel with appropriate expertise in valuation methodologies. The estimated fair value of the debt component of the Notes was $216 million (Level 2). The amount of the equity component recognized was $9 million .
Capital Leases
     On March 20, 2012, the company entered into an arrangement to finance equipment acquisitions for various U.S. locations. Under this arrangement, the company can request financing from GE Capital Commercial, Inc. (GE Capital) for progress payments for equipment under construction, not to exceed $10 million at any point in time. The financing rate is equal to the 30-day LIBOR plus 475 basis points per annum. Under this arrangement, the company can also enter into lease arrangements with GE Capital for completed equipment. The lease term is 60 months and the lease interest rate is equal to the 5-year Swap Rate published by the Federal Reserve Board plus 564 basis points . As of March 31, 2014 , the company had $28 million outstanding under these and other capital lease arrangements.

20
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Letter of Credit Facilities
On February 21, 2014, the company entered into an arrangement to amend and restate the letter of credit facility with Citicorp USA, Inc., as administrative agent and issuing bank, and the other lenders party thereto. Under the terms of this amended credit agreement, the company has the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $30 million through December 19, 2015. From December 20, 2015 through March 19, 2019 the aggregate availability is $25 million . This facility contains covenants and events of default generally similar to those existing in our public debt indentures. There were $26 million and $27 million of letters of credit outstanding under this facility at March 31, 2014 and September 30, 2013, respectively. In addition, the company had another $10 million and $9 million of letters of credit outstanding through other letter of credit facilities at March 31, 2014 and September 30, 2013, respectively.
17. Financial Instruments
     Fair values of financial instruments are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Cash and cash equivalents
$
233

 
$
233

 
$
318

 
$
318

Short-term debt
6

 
6

 
13

 
13

Long-term debt
1,082

 
1,312

 
1,125

 
1,266

Foreign exchange forward contracts (asset)
1

 
1

 
—

 
—

Foreign exchange forward contracts (liability)
—

 
—

 
1

 
1


The following table reflects the offsetting of derivative assets and liabilities (in millions):
 
March 31, 2014
 
September 30, 2013
 
Gross
Amounts Recognized
 
Gross Amounts
Offset
 
Net Amounts
Reported
 
Gross
Amounts Recognized
 
Gross Amounts
Offset
 
Net Amounts
Reported
Derivative Asset
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contract
1

 
—

 
1

 
—

 
—

 
—

Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contract
—

 
—

 
—

 
1

 
—

 
1


Fair Value
The current FASB guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical instruments (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
•
Level 1 inputs use quoted prices in active markets for identical instruments.
 
•
Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar instruments in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

•
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related instrument.

21
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The company's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
Fair value of financial instruments by the valuation hierarchy at March 31, 2014 is as follows (in millions):
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
$
233

 
$
—

 
$
—

Short-term debt
—

 
—

 
6

Long-term debt
—

 
1,259

 
53

Foreign exchange forward contracts (asset)
—

 
1

 
—

Foreign exchange forward contracts (liability)
—

 
—

 
—


Cash and cash equivalents — All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. The carrying value approximates fair value because of the short maturity of these instruments. The company did not have any cash equivalents at March 31, 2014 or September 30, 2013 .
     Short- and Long-term debt — Fair values are based on transaction prices at public exchange for publicly traded debt. For debt instruments that are not publicly traded, fair values are based on interest rates that would be currently available to the company for issuance of similar types of debt instruments with similar terms and remaining maturities.
Foreign exchange forward contracts — The company uses foreign exchange forward purchase and sale contracts with terms of one year or less to hedge its exposure to changes in foreign currency exchange rates. The fair value of foreign exchange forward contracts is based on a model which incorporates observable inputs including quoted spot rates, forward exchange rates and discounted future expected cash flows utilizing market interest rates with similar quality and maturity characteristics.
18. Retirement Benefit Liabilities
     Retirement benefit liabilities consisted of the following (in millions):
 
March 31,
2014
 
September 30,
2013
Retiree medical liability
$
506

 
$
513

Pension liability
391

 
396

Other
19

 
25

Subtotal
916

 
934

Less: current portion (included in compensation and benefits, Note 14)
(48
)
 
(48
)
Retirement benefits
$
868

 
$
886



22
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The components of net periodic pension and retiree medical expense included in continuing operations for the three months ended March 31 are as follows (in millions):
 
2014
 
2013
 
Pension
 
Retiree Medical
 
Pension
 
Retiree Medical
Service cost
$
—

 
$
—

 
$
—

 
$
1

Interest cost
20

 
7

 
22

 
5

Assumed return on plan assets
(26
)
 
—

 
(28
)
 
—

Amortization of prior service costs
—

 
(2
)
 
—

 
(2
)
Recognized actuarial loss
6

 
5

 
6

 
6

Settlement charge
—

 
—

 
2

 
—

Total expense
$
—

 
$
10

 
$
2

 
$
10


The components of net periodic pension and retiree medical expense included in continuing operations for the six months ended March 31 are as follows (in millions):
 
2014
 
2013
 
Pension
 
Retiree Medical
 
Pension
 
Retiree Medical
Service cost
$
—

 
$
—

 
$
1

 
$
1

Interest cost
40

 
13

 
43

 
10

Assumed return on plan assets
(52
)
 
—

 
(57
)
 
—

Amortization of prior service costs
—

 
(4
)
 
—

 
(4
)
Recognized actuarial loss
12

 
11

 
13

 
13

Settlement charge
—

 
—

 
2

 
—

Total expense
$
—

 
$
20

 
$
2

 
$
20


19. Contingencies
Environmental
     Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have, and will continue to have, an impact on the operations of the company. The process of estimating environmental liabilities is complex and dependent upon evolving physical and scientific data at the sites, uncertainties as to remedies and technologies to be used and the outcome of discussions with regulatory agencies. The company records liabilities for environmental issues in the accounting period in which they are considered to be probable and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the company records a liability for its allocable share of costs related to its involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which Meritor is the only potentially responsible party, the company records a liability for the total probable and estimable costs of remediation before consideration of recovery from insurers or other third parties.
     The company has been designated as a potentially responsible party at nine Superfund sites, excluding sites as to which the company’s records disclose no involvement or as to which the company’s liability has been finally determined. Management estimates the total reasonably possible costs the company could incur for the remediation of Superfund sites at March 31, 2014 to be approximately $18 million , of which $2 million is probable and recorded as a liability. Included in reasonably possible amounts are estimates for certain remediation actions that may be required if current actions are deemed inadequate by the regulators.

23
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


     In addition to the Superfund sites, various other lawsuits, claims and proceedings have been asserted against the company, alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, management has estimated the total reasonably possible costs the company could incur at March 31, 2014 to be approximately $37 million , of which $17 million is probable and recorded as a liability.
     Included in the company’s environmental liabilities are costs for on-going operation, maintenance and monitoring at environmental sites in which remediation has been put into place. This liability is discounted using discount rates in the range of 0.25 to 3 percent and is approximately $9 million at March 31, 2014 . The undiscounted estimate of these costs is approximately $10 million .
     Following are the components of the Superfund and non-Superfund environmental reserves (in millions):
 
Superfund Sites
 
Non-Superfund Sites
 
Total
Beginning balance at September 30, 2013
$
2

 
$
17

 
$
19

Payments and other
—

 
(3
)
 
(3
)
Accruals
—

 
3

 
3

Balance at March 31, 2014
$
2

 
$
17

 
$
19


Environmental reserves are included in Other Current Liabilities (see Note 14) and Other Liabilities (see Note 15) in the consolidated balance sheet.
     The actual amount of costs or damages for which the company may be held responsible could materially exceed the foregoing estimates because of uncertainties, including the financial condition of other potentially responsible parties, the success of the remediation, discovery of new contamination and other factors that make it difficult to predict actual costs accurately. However, based on management’s assessment, after consulting with outside advisors that specialize in environmental matters, and subject to the difficulties inherent in estimating these future costs, the company believes that its expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material effect on the company’s business, financial condition or results of operations. In addition, in future periods, new laws and regulations, changes in remediation plans, advances in technology and additional information about the ultimate clean-up remedies could significantly change the company’s estimates. Management cannot assess the possible effect of compliance with future requirements.
Asset Retirement Obligations
The company has identified conditional asset retirement obligations for which a reasonable estimate of fair value could not be made because the potential settlement dates cannot be determined at this time. Due to the long term, productive nature of the company’s manufacturing operations, absent plans or expectations of plans to initiate asset retirement activities, the company was not able to reasonably estimate the settlement date for the related obligations. Therefore, the company has not recognized conditional asset retirement obligations for which there are no plans or expectations of plans to retire the asset.
Asbestos
     Maremont Corporation (“Maremont”), a subsidiary of Meritor, manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. Arvin Industries, Inc., a predecessor of the company, acquired Maremont in 1986. Maremont and many other companies are defendants in suits brought by individuals claiming personal injuries as a result of exposure to asbestos-containing products. Maremont had approximately 5,700 and 5,400 pending asbestos-related claims at March 31, 2014 and September 30, 2013 , respectively. Although Maremont has been named in these cases, in the cases where actual injury has been alleged, very few claimants have established that a Maremont product caused their injuries. Plaintiffs’ lawyers often sue dozens or even hundreds of defendants in individual lawsuits on behalf of hundreds or thousands of claimants, seeking damages against all named defendants irrespective of the disease or injury and irrespective of any causal connection with a particular product. For these reasons, Maremont does not consider the number of claims filed or the damages alleged to be a meaningful factor in determining its asbestos-related liability.

24
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


     Maremont’s asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Pending and future claims
$
73

 
$
73

Billed but unpaid claims
1

 
1

Asbestos-related liabilities
74

 
74

Asbestos-related insurance recoveries
58

 
58

A portion of the asbestos-related recoveries and reserves are included in Other Current Assets and Liabilities, with the majority of the amounts recorded in Other Assets and Liabilities (see Notes 11, 13, 14 and 15).
         Pending and Future Claims: Maremont engages Bates White LLC (Bates White), a consulting firm with extensive experience estimating costs associated with asbestos litigation, to assist with determining the estimated cost of resolving pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Maremont. Bates White prepares these cost estimates annually in September. Although it is not possible to estimate the full range of costs because of various uncertainties, Bates White advised Maremont that it would be possible to determine an estimate of a reasonable forecast of the cost of the probable settlement and defense costs of resolving pending and future asbestos-related claims, based on historical data and certain assumptions with respect to events that may occur in the future.
     Bates White provided an estimate of the reasonably possible range of Maremont's obligation for asbestos personal injury claims over the next ten years of $73 million to $80 million . Management recognized a liability of $73 million as of March 31, 2014 and September 30, 2013 , as the most likely and probable liability for pending and future claims over the next ten years. The ultimate cost of resolving pending and future claims is estimated based on the history of claims and expenses for plaintiffs represented by law firms in jurisdictions with an established history with Maremont. Historically, Maremont has recognized incremental insurance receivables associated with recoveries expected for asbestos-related liabilities as the estimate of asbestos-related liabilities for pending and future claim changes. Maremont currently expects to exhaust the limits of its settled insurance coverage prior to the end of the ten-year forecasted liability period. Maremont believes it has additional insurance coverage; however, certain carriers have disputed coverage under policies they issued (see "Recoveries" below). Because no insurance receivable is currently recognized for these policies in dispute, Maremont recognized a $9 million charge in the fourth quarter of fiscal year 2013 associated with its annual valuation of asbestos-related liabilities. If Maremont is unable to recognize recoveries from disputed policies, it is reasonably possible that the annual valuation could result in a charge to be recognized in the fourth quarter of fiscal year 2014.
      Assumptions : The following assumptions were made by Maremont after consultation with Bates White and are included in their study:
•
Pending and future claims were estimated for a ten-year period ending in fiscal year 2023. The ten -year assumption is considered appropriate as Maremont has reached certain longer-term agreements with key plaintiff law firms, and filings of mesothelioma claims have been relatively stable over the last few years;
•
Maremont believes that the litigation environment may change significantly beyond ten years and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims will likely decline for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain;
•
Defense and processing costs for pending and future claims will be at the level consistent with Maremont’s prior experience;
•
Potential payments made to claimants from other sources, including other defendants and 524(g) trusts favorably impact the company's estimated liability in the future; and
•
The ultimate indemnity cost of resolving nonmalignant claims with plaintiffs’ law firms in jurisdictions without an established history with Maremont cannot be reasonably estimated.

25
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Recoveries : Maremont has insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The insurance receivable related to asbestos-related liabilities is $58 million as of March 31, 2014 and September 30, 2013 . The receivable at March 31, 2014 is for coverage provided by two insurance carriers based on coverage in place agreements. Maremont currently expects to exhaust the remaining limits provided by this coverage sometime in the next ten years. Maremont maintained insurance coverage with other insurance carriers that management believes covers indemnity and defense costs. Maremont has incurred liabilities allocable to these policies but has not yet billed these insurance carriers, and no receivable has been recorded for disputed policies. During fiscal year 2013, Maremont reinitiated a lawsuit against these carriers, seeking a declaration of its rights to insurance for asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. The difference between the estimated liability and insurance receivable is primarily related to proceeds received from settled insurance policies and claims for which coverage under Maremont's insurance policies is in dispute with the insurer. Certain insurance policies have been settled in cash prior to the ultimate settlement of the related asbestos liabilities. Amounts received from insurance settlements generally reduce recorded insurance receivables.
     The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities and recoveries for asbestos-related claims are subject to considerable uncertainty because such liabilities and recoveries are influenced by variables that are difficult to predict. The future litigation environment for Maremont could change significantly from its past experience, due, for example, to changes in the mix of claims filed against Maremont in terms of plaintiffs’ law firm, jurisdiction and disease; legislative or regulatory developments; Maremont’s approach to defending claims; or payments to plaintiffs from other defendants. Estimated recoveries are influenced by coverage issues among insurers and the continuing solvency of various insurance companies. If the assumptions with respect to the estimation period, nature of pending and future claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Maremont’s asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial condition and results of operations.
     Rockwell International (Rockwell) — ArvinMeritor, Inc. (AM), a subsidiary of Meritor, along with many other companies, has also been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos used in certain components of Rockwell products many years ago. Liability for these claims was transferred at the time of the spin-off of the automotive business from Rockwell in 1997. At March 31, 2014 and September 30, 2013 , there were approximately 2,800 and 2,600 , respectively, pending active asbestos claims in lawsuits that name AM, together with many other companies, as defendants. A significant portion of the claims do not identify any of Rockwell’s products or specify which of the claimants, if any, were exposed to asbestos attributable to Rockwell’s products, and past experience has shown that the vast majority of the claimants will likely never identify any of Rockwell’s products. Historically, AM has been dismissed from the vast majority of similar claims filed in the past with no payment to claimants. For those claimants who do show that they worked with Rockwell’s products, management nevertheless believes it has meritorious defenses, in substantial part due to the integrity of the products involved and the lack of any impairing medical condition on the part of many claimants. For these reasons, the company does not consider the number of claims filed or the damages alleged to be a meaningful factor in determining asbestos-related liabilities.
     The Rockwell legacy asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Pending and future claims
$
40

 
$
40

Asbestos-related insurance recoveries
13

 
13

The company engages Bates White to assist with determining whether it would be possible to estimate the cost of resolving pending and future Rockwell legacy asbestos-related claims that have been, and could reasonably be expected to be, filed against the company. As of September 30, 2013 , Bates White provided an estimate that consisted of a range of equally likely possibilities of Rockwell’s obligation for asbestos personal injury claims over the next ten years of $40 million to $45 million . Management recognized a liability of $40 million as of March 31, 2014 and September 30, 2013 , as the most likely and probable liability for pending and future claims over the next ten years. The company is experiencing higher-than-expected defense costs in the first six months of fiscal year 2014. Therefore, the next annual valuation at September 30, 2014, may result in an increased obligation estimate. The ultimate cost of resolving pending and future claims is estimated based on the history of claims and expenses for plaintiffs represented by law firms in jurisdictions with an established history with Rockwell.


26
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following assumptions were made by the company after consultation with Bates White and are included in their study:
•
Pending and future claims were estimated for a ten-year period ending in fiscal year 2023. The ten-year assumption is considered appropriate as Rockwell has reached certain longer-term agreements with key plaintiff law firms, and filings of mesothelioma claims have been relatively stable over the last few years;
•
The company believes that the litigation environment may change significantly beyond ten years, and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims will likely decline for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain;
•
Defense and processing costs for pending and future claims will be at the level consistent with the company's longer-term experience and will not have the significant volatility experienced in the recent years;
•
Potential payments made to claimants from other sources, including other defendants and 524(g) trusts favorably impact the company's estimated liability in the future; and
•
The ultimate indemnity cost of resolving nonmalignant claims with plaintiff’s law firms in jurisdictions without an established history with Rockwell cannot be reasonably estimated.
The insurance receivable related to asbestos-related liabilities is $13 million at March 31, 2014 and September 30, 2013 . Included in these amounts are insurance receivables of $9 million at March 31, 2014 and September 30, 2013 that are associated with policies in dispute. Rockwell maintained insurance coverage that management believes covers indemnity and defense costs, over and above self-insurance retentions, for most of these claims. The company shares these policies with two other nonrelated companies. The three companies have collectively initiated claims against certain of these carriers to enforce the insurance policies, which are in various stages of the litigation process. Rockwell expects to recover some portion of defense and indemnity costs it has incurred to date, over and above self-insured retentions, and some portion of the costs for defending asbestos claims going forward. The amounts recognized for policies in dispute are based on consultation with advisors, status of settlement negotiations with certain insurers, expected rights of the nonrelated companies, and underlying analysis performed by management. The remaining un-disputed receivable recognized is related to coverage provided by one carrier based on an insurance agreement in place. If the assumptions with respect to the estimation period, nature of pending claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Rockwell asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial condition and results of operations.     
Indemnifications
In December 2005, the company guaranteed a third party’s obligation to reimburse another party for payment of health and prescription drug benefits to a group of retired employees. The retirees were former employees of a wholly-owned subsidiary of the company prior to it being acquired by the company. The wholly-owned subsidiary, which was part of the company’s light vehicle aftermarket business, was sold by the company in fiscal year 2006. Prior to May 2009, except as set forth hereinafter, the third party met its obligations to reimburse the other party. In May 2009, the third party filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code requiring the company to recognize its obligations under the guarantee. The company recorded a $28 million liability in fiscal year 2009 for this matter. At March 31, 2014 and September 30, 2013 , the remaining estimated liability for this matter was approximately $15 million and $17 million , respectively.
     The company has provided indemnifications in conjunction with certain transactions, primarily divestitures. These indemnities address a variety of matters, which may include environmental, tax, asbestos and employment-related matters, and the periods of indemnification vary in duration.
On January 3, 2011, the company completed the sale of its Body Systems business. The sale agreement contains certain customary representations, warranties and covenants of the seller and the purchaser. The agreement also includes provisions governing post-closing indemnities between the seller and the purchaser for losses arising from specified events. At March 31, 2014 and September 30, 2013 the company has recognized estimates for such indemnities, primarily related to income tax matters, of $2 million and $3 million , respectively. This amount is included in other liabilities in the accompanying condensed consolidated balance sheet.
In connection with the sale of its interest in Meritor Suspension Systems Company in October 2009, the company provided certain indemnifications to the buyer for its share of potential obligations related to pension funding shortfall, environmental and other contingencies, and valuation of certain accounts receivable and inventories. The company's estimated exposure under these indemnities at March 31, 2014 and September 30, 2013 is approximately $8 million and $11 million , respectively, and is included in other current liabilities and other liabilities in the condensed consolidated balance sheet.

27
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The company is not aware of any other claims or other information that would give rise to material payments under such indemnifications.
Other
As a result of performing ongoing product conformance testing in the ordinary course of business, the company identified a non-safety related, potential product performance issue arising from a defective supplier component. During fiscal year 2013, the company notified all major customers and initiated a campaign. Management estimated the total reasonably possible costs the company could incur to be in the range of $12 million to $20 million , of which $12 million was considered probable and recorded as a specific warranty contingency reserve (see Note 14). No field failures have been identified in the early stages of testing, and the program has shifted to collecting defective components from higher mileage and severe duty applications to facilitate a reliability and survivability test. In the fourth quarter of fiscal 2013, the company received $5 million of non-cash cost recovery from the component supplier.
The company is evaluating certain sale transactions to determine if value added tax was required to be remitted to certain tax jurisdictions for the tax years 2007 through 2012. The company's estimated reasonably possible exposure for this matter is $6 million to $9 million . The company recorded approximately $6 million as its estimate of the probable liability at March 31, 2014 and September 30, 2013 .
In the fourth quarter of fiscal year 2013, the company identified additional sales transactions for which value added tax was required to be remitted. The company recorded a $5 million liability primarily associated with tax years 2009 through 2013.
In addition, various lawsuits, claims and proceedings, other than those specifically disclosed in the consolidated financial statements, have been or may be instituted or asserted against the company, relating to the conduct of the company’s business, including those pertaining to product liability, warranty or recall claims, intellectual property, safety and health, contract and employment matters. Although the outcome of other litigation cannot be predicted with certainty, and some lawsuits, claims or proceedings may be disposed of unfavorably to the company, management believes the disposition of matters that are pending will not have a material effect on the company’s business, financial condition, results of operations or cash flows. 
20. Accumulated Other Comprehensive Loss (AOCL)
     AOCL and the changes in AOCL by components, net of tax are as follows (in millions):
 
Foreign Currency Translation
 
Employee Benefit Related Adjustments
 
Unrealized Loss, net of tax
 
Total
Balance at September 30, 2013
$
61

 
$
(792
)
 
$
(3
)
 
$
(734
)
Other comprehensive income before reclassification
—

 
2

 
2

 
4

Amounts reclassified from accumulated other comprehensive loss - net of tax
—

 
18

 
—

 
18

Net current-period other comprehensive income
$
—

 
$
20

 
$
2

 
$
22

Balance at March 31, 2014
$
61

 
$
(772
)
 
$
(1
)
 
$
(712
)


28
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item in the Consolidated Statement of Operations
 
Employee Benefit Related Adjustment
 
 
 
 
 
Prior service costs
 
$
(4
)
 
(a)  
 
Acturial losses
 
23

 
(a)  
 
 
 
19

 
Total before tax
 
 
 
(1
)
 
Tax benefit
 
 
 
18

 
Net of tax
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
18

 
Net of tax
 
 
 
 
 
 
 
(a)  These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Note 18 for additional details).
 

21. Business Segment Information
The company defines its operating segments as components of its business where separate financial information is available and is evaluated regularly by the chief operating decision maker (CODM) in deciding how to allocate resources and in assessing performance. The company’s CODM is the Chief Executive Officer.
      The company has two reportable segments at March 31, 2014, as follows:
•
The Commercial Truck & Industrial segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks, military, construction, bus and coach, fire and emergency and other applications in North America, South America, Europe and Asia Pacific. This segment also includes the company's aftermarket businesses in Asia Pacific and South America; and
•
The Aftermarket & Trailer segment supplies axles, brakes, drivelines, suspension parts and other replacement and remanufactured parts, including transmissions, to commercial vehicle aftermarket customers. This segment also supplies a wide variety of undercarriage products and systems for trailer applications in North America.

     Segment EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring costs and asset impairment charges. The company uses Segment EBITDA as the primary basis for the CODM to evaluate the performance of each of its reportable segments.
     The accounting policies of the segments are the same as those applied in the Consolidated Financial Statements, except for the use of Segment EBITDA. The company may allocate certain common costs, primarily corporate functions, between the segments differently than the company would for stand alone financial information prepared in accordance with GAAP. These allocated costs include expenses for shared services such as information technology, finance, communications, legal and human resources. The company does not allocate interest expense and certain legacy and other corporate costs not directly associated with the Segments’ EBITDA.

29
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


     Segment information is summarized as follows (in millions):
 
Commercial Truck
& Industrial
 
Aftermarket
& Trailer
 
Eliminations
 
Total
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
External Sales
$
736

 
$
226

 
$
—

 
$
962

Intersegment Sales
27

 
6

 
(33
)
 
—

Total Sales
$
763

 
232

 
$
(33
)
 
$
962

Three Months Ended March 31, 2013
 
 
 
 
 
 
 
External Sales
$
689

 
$
219

 
$
—

 
$
908

Intersegment Sales
23

 
5

 
(28
)
 
—

Total Sales
$
712

 
224

 
$
(28
)
 
$
908

 
Commercial
 Truck
 
Aftermarket &
 Trailer
 
Eliminations
 
Total
Six Months Ended March 31, 2014
 
 
 
 
 
 
 
External Sales
$
1,439

 
$
430

 
$
—

 
$
1,869

Intersegment Sales
51

 
10

 
(61
)
 
—

Total Sales
$
1,490

 
$
440

 
$
(61
)
 
$
1,869

Six Months Ended March 31, 2013
 
 
 
 
 
 
 
External Sales
$
1,383

 
$
416

 
$
—

 
$
1,799

Intersegment Sales
44

 
11

 
(55
)
 
—

Total Sales
$
1,427

 
$
427

 
$
(55
)
 
$
1,799


 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Segment EBITDA:
 
 
 
 
 
 
 
Commercial Truck & Industrial
$
57

 
$
37

 
$
110

 
$
71

Aftermarket & Trailer
22

 
22

 
41

 
35

Segment EBITDA
79


59


151

 
106

Unallocated legacy and corporate costs, net (1)
(1
)
 
(1
)
 
(3
)
 
(2
)
Interest expense, net
(48
)
 
(25
)
 
(75
)
 
(54
)
Provision for income taxes
(9
)
 
(7
)
 
(19
)
 
(17
)
Depreciation and amortization
(17
)
 
(17
)
 
(33
)
 
(33
)
Noncontrolling interests
(2
)
 
—

 
(4
)
 
—

Loss on sale of receivables
(2
)
 
(2
)
 
(5
)
 
(3
)
Restructuring costs
(2
)
 
(11
)
 
(3
)
 
(17
)
Income (loss) from continuing operations attributable to Meritor, Inc.
$
(2
)

$
(4
)

$
9

 
$
(20
)

(1)
Unallocated legacy and corporate costs, net represents items that are not directly related to our business segments and primarily include pension and medical costs associated with sold business and other legacy costs for environmental and product liability.

30
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Segment Assets:
March 31,
2014
 
September 30,
2013
Commercial Truck & Industrial
$
1,882

 
$
1,822

Aftermarket & Trailer
498

 
485

Total segment assets
2,380

 
2,307

Corporate (1)
473

 
568

Less: Accounts receivable sold under off-balance sheet factoring programs (2)
(322
)
 
(305
)
Total assets
$
2,531

 
$
2,570


(1)  
Corporate assets consist primarily of cash, deferred income taxes and prepaid pension costs.
(2)  
At March 31, 2014 and September 30, 2013 segment assets include $322 million and $305 million , respectively, of accounts receivable sold under off-balance sheet accounts receivable factoring programs (See Note 8). These sold receivables are included in segment assets as the CODM reviews segment assets inclusive of these balances.

31
Index
MERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


22. Supplemental Guarantor Condensed Consolidating Financial Statements
Article 3-10 of Regulation S-X (S-X Rule 3-10) requires that separate financial information for issuers and guarantors of registered securities be filed in certain circumstances. Certain of the company's 100% owned subsidiaries, as defined in the credit agreement (the Guarantors), irrevocably and unconditionally guarantee amounts outstanding under the senior secured revolving credit facility. Similar subsidiary guarantees were provided for the benefit of the holders of the notes outstanding under the company's indentures (see Note 16).
Article 5-04 of Regulation S-X (S-X Rule 5-04) requires that condensed financial information of the registrant (parent) be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.
In lieu of providing separate audited financial statements for the parent and guarantors, the company has included the accompanying condensed consolidating financial statements as permitted by S-X Rules 3-10 and 5-04. These condensed consolidating financial statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the parent's share of the subsidiary's cumulative results of operations, capital contributions and distribution and other equity changes. The Guarantors are combined in the condensed consolidated financial statements. Certain subsidiaries in China and India are restricted by law from transfer of cash by dividends, loans or advances to parent. As of March 31, 2014 the company’s proportionate share of net assets restricted from transfer by law was $41 million .

32
Index                         
MERITOR, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)


 
Three Months Ended March 31, 2014
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
External
$
—

 
$
354

 
$
608

 
$
—

 
$
962

Subsidiaries
—

 
33

 
16

 
(49
)
 
—

Total sales
—

 
387

 
624

 
(49
)
 
962

Cost of sales
(13
)
 
(331
)
 
(551
)
 
49

 
(846
)
GROSS MARGIN
(13
)
 
56

 
73

 
—

 
116

Selling, general and administrative
(23
)
 
(22
)
 
(21
)
 
—

 
(66
)
Restructuring costs
(1
)
 
—

 
(1
)
 
—

 
(2
)
OPERATING INCOME (LOSS)
(37
)
 
34

 
51

 
—

 
48

Other income (loss), net
39

 
(8
)
 
(31
)
 
—

 
—

Equity in earnings of affiliates
—

 
6

 
3

 
—

 
9

Interest income (expense), net
(54
)
 
8

 
(2
)
 
—

 
(48
)
INCOME (LOSS) BEFORE INCOME TAXES
(52
)
 
40

 
21

 
—

 
9

Provision for income taxes
—

 
—

 
(9
)
 
—

 
(9
)
Equity income from continuing operations of subsidiaries
50

 
7

 
—

 
(57
)
 
—

INCOME (LOSS) FROM CONTINUING OPERATIONS
(2
)
 
47

 
12

 
(57
)
 
—

INCOME FROM DISCONTINUED OPERATIONS, net of tax
3

 
3

 
3

 
(6
)
 
3

NET INCOME
1

 
50

 
15

 
(63
)
 
3

Less: Net income attributable to noncontrolling interests
—

 
—

 
(2
)
 
—

 
(2
)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.
$
1

 
$
50

 
$
13

 
$
(63
)
 
$
1



33

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)


 
Three Months Ended March 31, 2014
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Net income
$
1

 
$
50

 
$
15

 
$
(63
)
 
$
3

Other comprehensive income
22

 
5

 
11

 
(16
)
 
22

Total comprehensive income
23

 
55

 
26

 
(79
)
 
25

Less: Comprehensive income attributable to
noncontrolling interests
—

 
—

 
(2
)
 
—

 
(2
)
Comprehensive income attributable to Meritor, Inc.
$
23

 
$
55

 
$
24

 
$
(79
)
 
$
23




34
Index                         
MERITOR, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)


 
Three Months Ended March 31, 2013
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
External
$
—

 
$
355

 
$
553

 
$
—

 
$
908

Subsidiaries
—

 
33

 
20

 
(53
)
 
—

Total sales
—

 
388

 
573

 
(53
)
 
908

Cost of sales
(14
)
 
(335
)
 
(517
)
 
53

 
(813
)
GROSS MARGIN
(14
)
 
53

 
56

 
—

 
95

Selling, general and administrative
(23
)
 
(21
)
 
(21
)
 
—

 
(65
)
Restructuring costs
(3
)
 
(3
)
 
(5
)
 
—

 
(11
)
Other operating expense
(1
)
 
—

 
—

 
—

 
(1
)
OPERATING INCOME (LOSS)
(41
)
 
29

 
30

 
—

 
18

       Other income (loss), net
39

 
(13
)
 
(26
)
 
—

 
—

Equity in earnings of affiliates
—

 
5

 
5

 
—

 
10

Interest income (expense), net
(32
)
 
8

 
(1
)
 
—

 
(25
)
INCOME (LOSS) BEFORE INCOME TAXES
(34
)
 
29

 
8

 
—

 
3

Provision for income taxes
—

 
(1
)
 
(6
)
 
—

 
(7
)
Equity income (loss) from continuing operations of subsidiaries
30

 
(4
)
 
—

 
(26
)
 
—

INCOME (LOSS) FROM CONTINUING OPERATIONS
(4
)
 
24

 
2

 
(26
)
 
(4
)
INCOME FROM DISCONTINUED OPERATIONS, net of tax
—

 
—

 
—

 
—

 
—

NET INCOME (LOSS)
(4
)
 
24

 
2

 
(26
)
 
(4
)
Less: Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
$
(4
)
 
$
24

 
$
2

 
$
(26
)
 
$
(4
)


35

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)


 
Three Months Ended March 31, 2013
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Net income (loss)
$
(4
)
 
$
24

 
$
2

 
$
(26
)
 
$
(4
)
Other comprehensive income (loss)
3

 
(16
)
 
15

 
—

 
2

Total comprehensive income (loss)
(1
)
 
8

 
17

 
(26
)
 
(2
)
Less: Comprehensive income attributable to
noncontrolling interests
—

 
—

 
—

 
—

 
—

Comprehensive income (loss) attributable to Meritor, Inc.
$
(1
)
 
$
8

 
$
17

 
$
(26
)
 
$
(2
)


36
Index                         
MERITOR, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)


 
Six Months Ended March 31, 2014
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
External
$
—

 
$
666

 
$
1,203

 
$
—

 
$
1,869

Subsidiaries
—

 
67

 
30

 
(97
)
 
—

Total sales
—

 
733

 
1,233

 
(97
)
 
1,869

Cost of sales
(26
)
 
(632
)
 
(1,089
)
 
97

 
(1,650
)
GROSS MARGIN
(26
)
 
101

 
144

 
—

 
219

Selling, general and administrative
(40
)
 
(45
)
 
(40
)
 
—

 
(125
)
Restructuring costs
(1
)
 
—

 
(2
)
 
—

 
(3
)
Other operating expense
—

 
(1
)
 
—

 
—

 
(1
)
OPERATING INCOME (LOSS)
(67
)
 
55

 
102

 
—

 
90

Other income (loss), net
39

 
(8
)
 
(31
)
 
—

 
—

Equity in earnings of affiliates
—

 
12

 
5

 
—

 
17

Interest income (expense), net
(88
)
 
17

 
(4
)
 
—

 
(75
)
INCOME (LOSS) BEFORE INCOME TAXES
(116
)
 
76

 
72

 
—

 
32

Provision for income taxes
—

 
(2
)
 
(17
)
 
—

 
(19
)
Equity income from continuing operations of subsidiaries
125

 
44

 
—

 
(169
)
 
—

INCOME FROM CONTINUING OPERATIONS
9

 
118

 
55

 
(169
)
 
13

INCOME FROM DISCONTINUED OPERATIONS, net of tax
3

 
3

 
3

 
(6
)
 
3

NET INCOME
12

 
121

 
58

 
(175
)
 
16

Less: Net income attributable to noncontrolling interests
—

 
—

 
(4
)
 
—

 
(4
)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.
$
12

 
$
121

 
$
54

 
$
(175
)
 
$
12



37

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)


 
Six Months Ended March 31, 2014
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Net income
$
12

 
$
121

 
$
58

 
$
(175
)
 
$
16

Other comprehensive income
22

 
10

 
—

 
(10
)
 
22

Total comprehensive income
34

 
131

 
58

 
(185
)
 
38

Less: Comprehensive income attributable to
noncontrolling interests
—

 
—

 
(4
)
 
—

 
(4
)
Comprehensive income attributable to Meritor, Inc.
$
34

 
$
131

 
$
54

 
$
(185
)
 
$
34



38
Index                         
MERITOR, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)


 
Six Months Ended March 31, 2013
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
External
$
—

 
$
709

 
$
1,090

 
$
—

 
$
1,799

Subsidiaries
—

 
67

 
37

 
(104
)
 
—

Total sales
—

 
776

 
1,127

 
(104
)
 
1,799

Cost of sales
(26
)
 
(680
)
 
(1,019
)
 
104

 
(1,621
)
GROSS MARGIN
(26
)
 
96

 
108

 
—

 
178

Selling, general and administrative
(44
)
 
(41
)
 
(42
)
 
—

 
(127
)
Restructuring costs
(3
)
 
(6
)
 
(8
)
 
—

 
(17
)
Other operating expense
(2
)
 
—

 
—

 
—

 
(2
)
OPERATING INCOME (LOSS)
(75
)
 
49

 
58

 
—

 
32

Other income (loss), net
35

 
(13
)
 
(22
)
 
—

 
—

Equity in earnings of affiliates
—

 
10

 
9

 
—

 
19

Interest income (expense), net
(69
)
 
16

 
(1
)
 
—

 
(54
)
INCOME (LOSS) BEFORE INCOME TAXES
(109
)
 
62

 
44

 
—

 
(3
)
Provision for income taxes
—

 
(3
)
 
(14
)
 
—

 
(17
)
Equity income from continuing operations of subsidiaries
89

 
19

 
—

 
(108
)
 
—

INCOME (LOSS) FROM CONTINUING OPERATIONS
(20
)
 
78

 
30

 
(108
)
 
(20
)
LOSS FROM DISCONTINUED OPERATIONS, net of tax
(5
)
 
(4
)
 
(4
)
 
8

 
(5
)
NET INCOME (LOSS)
(25
)
 
74

 
26

 
(100
)
 
(25
)
Less: Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
$
(25
)
 
$
74

 
$
26

 
$
(100
)
 
$
(25
)


39

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)




 
Six Months Ended March 31, 2013
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Net income (loss)
$
(25
)
 
$
74

 
$
26

 
$
(100
)
 
$
(25
)
Other comprehensive income (loss)
1

 
(1
)
 
(3
)
 
—

 
(3
)
Total comprehensive income (loss)
(24
)
 
73

 
23

 
(100
)
 
(28
)
Less: Comprehensive income attributable to
noncontrolling interests
—

 
—

 
(1
)
 
—

 
(1
)
Comprehensive income (loss) attributable to Meritor, Inc.
$
(24
)
 
$
73

 
$
22

 
$
(100
)
 
$
(29
)


40
Index
MERITOR, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
(Unaudited)


 
March 31, 2014
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
112

 
$
3

 
$
118

 
$
—

 
$
233

Receivables trade and other, net
1

 
22

 
595

 
—

 
618

Inventories
—

 
167

 
269

 
—

 
436

Other current assets
8

 
15

 
35

 
—

 
58

TOTAL CURRENT ASSETS
121

 
207

 
1,017

 
—

 
1,345

NET PROPERTY
12

 
144

 
254

 
—

 
410

GOODWILL
—

 
277

 
160

 
—

 
437

OTHER ASSETS
84

 
138

 
117

 
—

 
339

INVESTMENTS IN SUBSIDIARIES
1,859

 
172

 
—

 
(2,031
)
 
—

TOTAL ASSETS
$
2,076

 
$
938

 
$
1,548

 
$
(2,031
)
 
$
2,531

CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Short-term debt
$
—

 
$
5

 
$
1

 
$
—

 
$
6

Accounts and notes payable
45

 
202

 
449

 
—

 
696

Other current liabilities
109

 
71

 
165

 
—

 
345

TOTAL CURRENT LIABILITIES
154

 
278

 
615

 
—

 
1,047

LONG-TERM DEBT
1,030

 
10

 
42

 
—

 
1,082

RETIREMENT BENEFITS
757

 
—

 
111

 
—

 
868

INTERCOMPANY PAYABLE (RECEIVABLE)
874

 
(1,476
)
 
602

 
—

 
—

OTHER LIABILITIES
74

 
197

 
45

 
—

 
316

EQUITY (DEFICIT) ATTRIBUTABLE TO
       MERITOR, INC.
(813
)
 
1,929

 
102

 
(2,031
)
 
(813
)
NONCONTROLLING INTERESTS
—

 
—

 
31

 
—

 
31

TOTAL LIABILITIES AND EQUITY (DEFICIT)
$
2,076

 
$
938

 
$
1,548

 
$
(2,031
)
 
$
2,531


41
Index
MERITOR, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
(Unaudited)


 
September 30, 2013
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
144

 
$
6

 
$
168

 
$
—

 
$
318

Receivables trade and other, net
1

 
24

 
571

 
—

 
596

Inventories
—

 
164

 
250

 
—

 
414

Other current assets
4

 
17

 
35

 
—

 
56

TOTAL CURRENT ASSETS
149

 
211

 
1,024

 
—

 
1,384

NET PROPERTY
10

 
145

 
262

 
—

 
417

GOODWILL
—

 
277

 
157

 
—

 
434

OTHER ASSETS
77

 
134

 
124

 
—

 
335

INVESTMENTS IN SUBSIDIARIES
1,718

 
109

 
—

 
(1,827
)
 
—

TOTAL ASSETS
$
1,954

 
$
876

 
$
1,567

 
$
(1,827
)
 
$
2,570

CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Short-term debt
$
5

 
$
7

 
$
1

 
$
—

 
$
13

Accounts and notes payable
51

 
199

 
444

 
—

 
694

Other current liabilities
95

 
76

 
168

 
—

 
339

TOTAL CURRENT LIABILITIES
151

 
282

 
613

 
—

 
1,046

LONG-TERM DEBT
1,088

 
8

 
29

 
—

 
1,125

RETIREMENT BENEFITS
775

 
—

 
111

 
—

 
886

INTERCOMPANY PAYABLE (RECEIVABLE)
723

 
(1,412
)
 
689

 
—

 
—

OTHER LIABILITIES
67

 
204

 
64

 
—

 
335

EQUITY (DEFICIT) ATTRIBUTABLE TO
       MERITOR, INC.
(850
)
 
1,794

 
33

 
(1,827
)
 
(850
)
NONCONTROLLING INTERESTS
—

 
—

 
28

 
—

 
28

TOTAL LIABILITIES AND EQUITY (DEFICIT)
$
1,954

 
$
876

 
$
1,567

 
$
(1,827
)
 
$
2,570


42
Index
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)


 
Six Months Ended March 31, 2014
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
CASH FLOWS PROVIDED BY (USED FOR)
       OPERATING ACTIVITIES
$
(30
)
 
$
8

 
$
40

 
$
—

 
$
18

INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
Capital expenditures
(2
)
 
(11
)
 
(12
)
 
—

 
(25
)
Net investing cash flows provided by discontinued operations
—

 
—

 
3

 
—

 
3

CASH USED FOR INVESTING ACTIVITIES
(2
)
 
(11
)
 
(9
)
 
—

 
(22
)
FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
 
Repayment of notes and term loan
(308
)
 
—

 
—

 
—

 
(308
)
Proceeds from debt issuance
225

 
—

 
—

 
—

 
225

Debt issuance costs
(9
)
 
—

 
—

 
—

 
(9
)
Intercompany advances
92

 
—

 
(92
)
 
—

 
—

Other financing activities
—

 
—

 
13

 
—

 
13

CASH USED FOR FINANCING ACTIVITIES
—

 
—

 
(79
)
 
—

 
(79
)
EFFECT OF CHANGES IN FOREIGN CURRENCY
       EXCHANGE RATES ON CASH AND CASH
       EQUIVALENTS
—

 
—

 
(2
)
 
—

 
(2
)
CHANGE IN CASH AND CASH EQUIVALENTS
(32
)
 
(3
)
 
(50
)
 
—

 
(85
)
CASH AND CASH EQUIVALENTS AT BEGINNING
       OF PERIOD
144

 
6

 
168

 
—

 
318

CASH AND CASH EQUIVALENTS AT END OF
       PERIOD
$
112

 
$
3

 
$
118

 
$
—

 
$
233


43
Index
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)


 
Six Months Ended March 31, 2013
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
CASH FLOWS PROVIDED BY (USED FOR)
       OPERATING ACTIVITIES
$
(36
)
 
$
4

 
$
(77
)
 
$
—

 
$
(109
)
INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
Capital expenditures
(2
)
 
(8
)
 
(13
)
 
—

 
(23
)
Net investing cash flows provided by discontinued operations
—

 
3

 
3

 
—

 
6

CASH USED FOR INVESTING ACTIVITIES
(2
)
 
(5
)
 
(10
)
 
—

 
(17
)
FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
 
Repayments of notes
(236
)
 
—

 
—

 
—

 
(236
)
Proceeds from debt issuance
225

 
—

 
—

 
—

 
225

Debt issuance costs
(6
)
 
—

 
—

 
—

 
(6
)
Intercompany advances
9

 
—

 
(9
)
 
—

 
—

Other financing activities
—

 
1

 
1

 
—

 
2

CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
(8
)
 
1

 
(8
)
 
—

 
(15
)
EFFECT OF CHANGES IN FOREIGN CURRENCY
       EXCHANGE RATES ON CASH AND CASH
       EQUIVALENTS
—

 
—

 
1

 
—

 
1

CHANGE IN CASH AND CASH EQUIVALENTS
(46
)
 
—

 
(94
)
 
—

 
(140
)
CASH AND CASH EQUIVALENTS AT BEGINNING
       OF PERIOD
91

 
3

 
163

 
—

 
257

CASH AND CASH EQUIVALENTS AT END OF
       PERIOD
$
45

 
$
3

 
$
69

 
$
—

 
$
117


Basis of Presentation

Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. As of March 31, 2014 and September 30, 2013 respectively, parent only obligations included $786 million and $805 million of pension and retiree medical benefits (see Note 18). All debt is debt of the parent other than $58 million and $45 million at March 31, 2014 and September 30, 2013 respectively (see Note 16) and is primarily related to capital lease obligations and lines of credit. Cash dividends paid to the parent by subsidiaries and investments accounted for by the equity method were $5 million and $54 million for six months ended March 31, 2014 and 2013, respectively.


44

MERITOR, INC.

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations
OVERVIEW
Meritor, Inc. (the "company", "our", "we" or "Meritor"), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers (“OEMs”) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, military, bus and coach, construction, and other industrial OEMs and certain aftermarkets. Meritor common stock is traded on the New York Stock Exchange under the ticker symbol MTOR.
2nd Quarter Fiscal Year 2014 results
Our sales for the second quarter of fiscal year 2014 were $962 million , an increase compared to $908 million in the prior year. We experienced higher sales primarily in our Commercial Truck & Industrial segment primarily driven by higher production volumes in North America and Europe, partially offset by the anticipated step down in our Family of Medium Tactical Vehicles (FMTV) program. In addition, revenue was slightly higher in our Aftermarket & Trailer segment. Loss from continuing operations attributable to the company in the second quarter of fiscal year 2014 was $2 million, or $0.02 per diluted share, compared to loss from continuing operations of $4 million , or $0.04 per diluted share, in the prior year. Net income for the second quarter of fiscal year 2014 was $ 1 million compared to net loss of $4 million in the prior year. In the 2nd quarter of fiscal year 2014 we recognized a $21 million loss on debt extinguishment primarily relating to the repurchase of our 10.625 percent notes due in 2018. See Capital Market Transactions below.
Adjusted EBITDA (see Non-GAAP Financial Measures below) for the second quarter of fiscal year 2014 was $78 million compared to $58 million in the prior year. Our Adjusted EBITDA margin in the second quarter of fiscal year 2014 was 8.1 percent compared to 6.4 percent in the same period a year ago. Total Adjusted EBITDA and Adjusted EBITDA margin increased compared to the prior year primarily as a result of reductions in material, labor, burden and other structural costs and higher sales in the second quarter of fiscal year 2014.
Cash flows provided by operating activities were $22 million in the second quarter of fiscal year 2014 compared to cash flows used by operating activities of $18 million in the second quarter of the prior fiscal year. This improvement is primarily due to less cash used for pension contributions and working capital.
Capital Market Transactions
We completed capital market transactions in the second quarter of fiscal year 2014. We issued $225 million of 6.25 percent notes due in 2024. Net proceeds and balance sheet cash were used to complete the redemption of our $250 million 10.625 percent notes due in 2018 and we repaid our remaining $41 million term loan balance. As a result of these actions, we expect to reduce our annual cash interest by approximately $14 million.

We also amended our revolving credit agreement in February. The maturity date was extended to February 2019 and the facility size was increased to $499 million through April 2017. The facility size then becomes $410 million through February 2019. This amendment also reduces drawn pricing by 75 basis points and increases the leverage ratio covenant from 2.0x to 2.25x through maturity.
     Trends and Uncertainties
     Production Volumes
     The following table reflects estimated commercial truck production volumes for selected original equipment markets for the three months ended March 31, 2014 and 2013 based on available sources and management’s estimates.
 
Three Months Ended March 31,
 
Percent
 
2014
 
2013
 
Change
Estimated Commercial Truck production (in thousands)
 
 
 
 
 
North America, Heavy-Duty Trucks
67

 
56

 
20
%
North America, Medium-Duty Trucks
45

 
45

 
—
%
Western Europe, Heavy- and Medium-Duty Trucks
86

 
81

 
6
%
South America, Heavy- and Medium-Duty Trucks
42

 
38

 
11
%


45

MERITOR, INC.

During fiscal year 2014, we expect an increase in production volumes in North America compared to the levels experienced  in fiscal year 2013. We also expect production volumes in North America to increase in the second half of fiscal year 2014 compared to the first half. We anticipate production volumes in South America to decrease in the second half of fiscal year 2014 on a year-over-year basis resulting from continued economic uncertainty during fiscal year 2014. In line with our expectations, in the first quarter of fiscal year 2014, production volumes in Europe ramped up in advance of the new commercial truck emission standard requirements. Although we expect volumes to be up slightly year-over-year, we anticipate a decline in production for the remainder of the year on a year-over-year basis. Production volumes in China are expected to increase slightly during fiscal year 2014 compared to low levels experienced in fiscal year 2013. We expect the market in India to be down another 5% - 10% in fiscal year 2014 given the current economic climate. There is no certainty as to if and when these volumes in the Asia-Pacific region will return to the levels previously experienced.

Sales for our primary military program were at their peak during the third quarter of fiscal year 2012 and began to wind down beginning in fiscal year 2013. The program is scheduled to terminate in 2015. We are working to secure our participation  in new military programs with various OEMs. However, failure to secure new military contracts could have a longer-term negative impact on our Commercial Truck and Industrial Segment. In addition, even if sales of our military programs do return to historical levels, the profitability on these sales could be lower than what we have recognized in recent periods.
Industry-Wide Issues
Our business continues to address a number of other challenging industry-wide issues including the following:
•
Uncertainty around the global market outlook;
•
Volatility in price and availability of steel, components and other commodities;
•
Disruptions in the financial markets and their impact on the availability and cost of credit;
•
Higher energy and transportation costs;
•
Impact of currency exchange rate volatility;
•
Consolidation and globalization of OEMs and their suppliers; and
•
Significant pension and retiree medical health care costs.
Other
Other significant factors that could affect our results and liquidity in fiscal year 2014 and beyond include:
•
Significant contract awards or losses of existing contracts or failure to negotiate acceptable terms in contract renewals (including, without limitation, negotiations with our largest customer, Volvo, which are ongoing regarding our contract with Volvo covering axle supply in Europe, South America and Australia, which is scheduled to expire in October 2014);
•
Failure to obtain new business;
•
Failure to secure new military contracts as our primary military program winds down;
•
Ability to manage possible adverse effects on our European operations, or financing arrangements related thereto, in the event one or more countries exit the European monetary union;
•
Ability to work with our customers to manage rapidly changing production volumes;
•
Ability to recover and timing of recovery of steel price and other cost increases from our customers;
•
Any unplanned extended shutdowns or production interruptions by us, our customers or our suppliers;
•
A significant deterioration or slowdown in economic activity in the key markets in which we operate;
•
Higher-than-planned price reductions to our customers;
•
Potential price increases from our suppliers;
•
Additional restructuring actions and the timing and recognition of restructuring charges;
•
Higher-than-planned warranty expenses, including the outcome of known or potential recall campaigns;

46

MERITOR, INC.

•
Our ability to implement planned productivity, cost reduction, and other margin improvement initiatives;
•
Uncertainties of asbestos claim litigation and the outcome of litigation with insurance companies regarding the scope of coverage and the long-term solvency of our insurance carriers; and
•
Restrictive government actions by foreign countries (such as restrictions on transfer of funds and trade protection measures, including export duties and quotas and customs duties and tariffs).
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, Adjusted diluted earnings (loss) per share from continuing operations, Adjusted EBITDA, Adjusted EBITDA margin, and Free cash flow.
     Adjusted income (loss) from continuing operations and Adjusted diluted earnings (loss) per share from continuing operations are defined as reported income or loss from continuing operations and reported diluted earnings or 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. Free cash flow is defined as cash flows provided by (used for) operating activities less capital expenditures.
     Management believes Adjusted EBITDA and Adjusted income (loss) from continuing operations are meaningful measures of performance as they are commonly utilized by management and investors to analyze ongoing operating performance and entity valuation. Management, the investment community and banking institutions routinely use Adjusted EBITDA and Adjusted EBITDA margin, together with other measures, to measure operating performance in our industry. Further, management uses Adjusted EBITDA for planning and forecasting future periods. In addition, we use Segment EBITDA as the primary basis to evaluate the performance of each of our reportable segments. Management believes that Free cash flow is useful in analyzing our ability to service and repay debt.
     Adjusted income (loss) from continuing operations and Adjusted diluted earnings (loss) per share from continuing operations and Adjusted EBITDA 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 as an indicator of our operating performance or to cash flows as a measure of liquidity. Free cash flow 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 service 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.
Adjusted income (loss) from continuing operations and Adjusted diluted earnings (loss) per share are reconciled to income (loss) from continuing operations and diluted earnings (loss) per share below (in millions, except per share amounts).
 
Three Months Ended
March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Adjusted income (loss) from continuing operations
$
21

 
$
6

 
$
33

 
$
(5
)
Loss on debt extinguishment
(21
)
 
—

 
(21
)
 
—

Restructuring costs, net of tax
(2
)
 
(10
)
 
(3
)
 
(15
)
Income (loss) from continuing operations
$
(2
)
 
$
(4
)
 
$
9

 
$
(20
)
 
 
 
 
 
 
 
 
Adjusted diluted earnings (loss) per share from continuing operations
$
0.22

 
$
0.06

 
$
0.33

 
$
(0.05
)
Impact of adjustments on diluted earnings (loss) per share
(0.24
)
 
(0.10
)
 
(0.24
)
 
(0.15
)
Diluted earnings (loss) per share from continuing operations
$
(0.02
)
 
$
(0.04
)
 
$
0.09

 
$
(0.20
)

47

MERITOR, INC.

Free cash flow is reconciled to cash flows used for operating activities below (in millions).
 
Three Months Ended
March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Cash provided by (used) for operating activities
$
22

 
$
(18
)
 
$
18

 
$
(109
)
Capital expenditures
(13
)
 
(8
)
 
(25
)
 
(23
)
Free cash flow
9

 
(26
)
 
(7
)
 
(132
)
   Adjusted EBITDA is reconciled to net income attributable to Meritor, Inc. in “Results of Operations” below.
Results of Operations
The following is a summary of our financial results is (in millions, except per share amounts):
 
Three Months Ended
March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
SALES:
 
 
 
 
 
 
 
Commercial Truck & Industrial
$
763

 
$
712

 
$
1,490

 
$
1,427

Aftermarket & Trailer
232

 
224

 
440

 
427

Intersegment Sales
(33
)
 
(28
)
 
(61
)
 
(55
)
SALES
$
962

 
$
908

 
$
1,869

 
$
1,799

SEGMENT EBITDA:
 
 
 
 
 
 
 
Commercial Truck & Industrial
$
57

 
$
37

 
$
110

 
$
71

Aftermarket & Trailer
22

 
22

 
41

 
35

SEGMENT EBITDA
79

 
59

 
151

 
106

Unallocated legacy and corporate costs, net (1)
(1
)
 
(1
)
 
(3
)
 
(2
)
ADJUSTED EBITDA
78

 
58

 
148

 
104

Interest expense, net
(48
)
 
(25
)
 
(75
)
 
(54
)
Provision for income taxes
(9
)
 
(7
)
 
(19
)
 
(17
)
Depreciation and amortization
(17
)
 
(17
)
 
(33
)
 
(33
)
Noncontrolling interests
(2
)
 
—

 
(4
)
 
—

Loss on sale of receivables
(2
)
 
(2
)
 
(5
)
 
(3
)
Restructuring costs
(2
)
 
(11
)
 
(3
)
 
(17
)
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM CONTINUING OPERATIONS, attributable to Meritor, Inc.
$
(2
)
 
$
(4
)
 
$
9

 
$
(20
)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax, attributable to Meritor, Inc.
3

 
—

 
3

 
(5
)
NET INCOME (LOSS) attributable to Meritor, Inc.
$
1

 
$
(4
)
 
$
12

 
$
(25
)
DILUTED EARNINGS (LOSS) PER SHARE attributable to Meritor, Inc.
 
 
 
 
 
 
 
Continuing operations
$
(0.02
)
 
$
(0.04
)
 
$
0.09

 
$
(0.20
)
Discontinued operations
0.03

 
—

 
0.03

 
(0.05
)
Diluted earnings (loss) per share
$
0.01

 
$
(0.04
)
 
$
0.12

 
$
(0.25
)
DILUTED AVERAGE COMMON SHARES OUTSTANDING
97.6

 
97.2

 
99.2

 
96.9

(1)  
Unallocated legacy and corporate costs, net represent items that are not directly related to our business segments. These costs primarily include pension and retiree medical costs associated with recently sold businesses and other legacy costs for environmental and product liability.

48

MERITOR, INC.


Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
   Sales
The following table reflects total company and business segment sales for the three months ended March 31, 2014 and 2013. 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 (in millions).
 
Three months Ended
 
 
 
 
 
Dollar Change Due To
 
March 31,
 
Dollar
 
%
 
 
 
Volume /
 
2014
 
2013
 
Change
 
Change
 
Currency
 
Other
Sales:
 
 
 
 
 
 
 
 
 
 
 
Commercial Truck & Industrial
$
763

 
$
712

 
$
51

 
7
 %
 
$
(26
)
 
$
77

Aftermarket & Trailer
232

 
224

 
8

 
4
 %
 
—

 
8

Intersegment Sales
(33
)
 
(28
)
 
(5
)
 
(18
)%
 
(2
)
 
(3
)
TOTAL SALES
$
962

 
$
908

 
$
54

 
6
 %
 
$
(28
)
 
$
82

     Commercial Truck & Industrial sales were $763 million in the second quarter of fiscal year 2014, up 7 percent compared to the second quarter of fiscal year 2013. The increase was primarily due to higher commercial truck production in North America and to a lesser extent Europe. These increases were partially offset by a sales decrease associated with the expected step down in volumes for the FMTV program. The deterioration year over year of the Brazilian Reais unfavorably impacted revenues in South America.
     Aftermarket & Trailer sales were $232 million in the second quarter of fiscal year 2014, up 4 percent compared to the second quarter of fiscal year 2013. The slight increase was primarily due to higher European sales and North American pricing initiatives executed over the past year.
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 March 31, 2014 was $846 million compared to $813 million in the prior year, representing an increase of 4 percent. Total cost of sales was approximately 88 percent and 90 percent of sales for the three month periods ended March 31, 2014 and 2013, respectively.
     The following table summarizes significant factors contributing to the changes in costs of sales during the second quarter of fiscal year 2014 compared to the same quarter in the prior year (in millions):
 
Cost of Sales
Three months ended March 31, 2013
$
813

Volume, mix and other, net
55

Foreign exchange
(22
)
Three months ended March 31, 2014
$
846

     Changes in the components of cost of sales year over year are summarized as follows (in millions):
 
Change in Cost of Sales
Higher material costs
$
30

Higher labor and overhead costs
7

Other, net
(4
)
Total change in costs of sales
$
33


49

MERITOR, INC.

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 March 31, 2014 increased $30 million compared to the same period in the prior year primarily as a result of higher volume.
Labor and overhead costs increased $7 million compared to the same period in the prior year primarily as a result of higher volume.
Gross margin for the three months ended March 31, 2014 was $116 million compared to $95 million in the same period last year. Gross margin, as a percentage of sales, was 12.1 percent and 10.5 percent for the three months ended March 31, 2014 and 2013, respectively. This improvement in gross margin percentage was primarily driven by net material, labor and burden performance.
Other Income Statement Items
     Selling, general and administrative expenses for the three months ended March 31, 2014 and 2013 are summarized as follows (in millions):
 
Three Months Ended
 
Three Months Ended
 
 
 
 
 
March 31, 2014
 
March 31, 2013
 
Increase (Decrease)
SG&A
Amount
 
% of sales
 
Amount
 
% of sales
 
 
 
 
Loss on sale of receivables
$
(2
)
 
(0.2
)%
 
$
(2
)
 
(0.2
)%
 
$
—

 
0 pts
Short- and long-term variable
 
 
 
 
 
 
 
 
 
 
 
compensation
(7
)
 
(0.7
)%
 
(6
)
 
(0.7
)%
 
1

 
0 pts
All other SG&A
(57
)
 
(5.9
)%
 
(57
)
 
(6.3
)%
 
—

 
(0.4) pts
Total SG&A
$
(66
)
 
(6.8
)%
 
$
(65
)
 
(7.2
)%
 
$
1

 
(0.4) pts
    All other SG&A represents normal selling, general and administrative expense.
Restructuring costs of $2 million were recorded during the three months ended March 31, 2014 compared to $11 million a year ago. During the second quarter of fiscal year 2014, $1 million of restructuring costs were recognized by our Commercial Truck & Industrial segment and $1 million by our corporate locations primarily related to employee severance costs. During the second quarter of fiscal year 2013, $7 million of restructuring costs were recognized by our Commercial Truck & Industrial segment, $1 million by our Aftermarket & Trailer segment, and $3 million at our corporate locations primarily related to employee severance costs related to our segment reorganization.
     Operating income for the second quarter of fiscal year 2014 was $48 million , compared to $18 million in the prior year. Key items affecting operating income are discussed above.
     Equity in earnings of affiliates was $9 million in the second quarter of fiscal year 2014, compared to $10 million in the same period in the prior year. The decrease is primarily due to the sale of our ownership interest in the Suspensys joint venture in the fourth quarter of fiscal year 2013, partially offset by higher earnings in our North America joint ventures reflecting higher volumes in this region.
     Interest expense, net for the second quarter of fiscal year 2014 was $48 million , compared to $25 million in the prior year. During the second quarter ended March 31, 2014, we exercised a call option and redeemed our $250 million 10.625% notes due 2018 at a premium of 5.313 percent of the principal amount. We recognized a $19 million loss on debt extinguishment associated with the redemption, which consist of $6 million of unamortized discount and deferred issuance costs and $13 million of premium. We also repaid the outstanding term loan balance of $41 million during the same period and recognized a $2 million loss on the repayment, primarily related to unamortized debt issuance costs.
     Provision for income taxes was $9 million in the second quarter of fiscal year 2014 compared to $7 million in the same period in the prior year. The increase to tax expense for the three months ended March 31, 2014 was primarily attributable to higher earnings in jurisdictions in which we recognize tax expense.
Income from continuing operations (before noncontrolling interests) for the second quarter of fiscal year 2014 was break even compared to a loss of $4 million in the prior year. The increase in operating income was substantially offset by loss on debt extinguishment and higher tax expense.
      Income from discontinued operations, net of tax was $3 million for the three months ended March 31, 2014 primarily related to tax benefits for previously divested businesses.

50

MERITOR, INC.

     Net income attributable to Meritor, Inc. was $ 1 million for the second quarter of fiscal year 2014 compared to a loss of $4 million in the second quarter of fiscal year 2013. The various factors affecting net income are discussed above.
 
Segment EBITDA and EBITDA Margins
Segment 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 and asset impairment charges. We use Segment EBITDA as the primary basis for the CODM to evaluate the performance of each of our reportable segments.
     The following table reflects Segment EBITDA and Segment EBITDA margins for the three months ended March 31, 2014 and 2013 (dollars in millions).
 
Segment EBITDA
 
Segment EBITDA Margins
 
March 31,
 
 
 
March 31,
 
 
 
2014
 
2013
 
$ Change
 
2014
 
2013
 
Change
Commercial Truck & Industrial
$
57

 
$
37

 
$
20

 
7.5
%
 
5.2
%
 
2.3 pts
Aftermarket & Trailer
22

 
22

 
—

 
9.5
%
 
9.8
%
 
(0.3) pts
Segment EBITDA
$
79

 
$
59

 
$
20

 
8.2
%
 
6.5
%
 
 1.7 pts

     Significant items impacting year-over-year Segment EBITDA include the following:
 
Commercial
Truck & Industrial
 
Aftermarket
& Trailer
 
TOTAL
Segment EBITDA– Quarter ended March 31, 2013
$
37

 
$
22

 
$
59

Lower earnings from unconsolidated affiliates
1

 
(2
)
 
(1
)
Lower pension and retiree medical costs
2

 
—

 
2

Foreign exchange - transaction and translation
(5
)
 
—

 
(5
)
Volume, mix, pricing and other, net
22

 
2

 
24

Segment EBITDA – Quarter ended March 31, 2014
$
57

 
$
22

 
$
79


Commercial Truck & Industrial Segment EBITDA was $57 million in the second quarter of fiscal year 2014, up $20 million compared to the same period in the prior year. Segment EBITDA margin increased to 7.5 percent compared to 5.2 percent in the prior year. Year-over-year reductions in material and other costs and the favorable impact of higher revenue in North America and Europe more than offset the unfavorable impact of the anticipated step down in our defense revenue.
      Aftermarket & Trailer Segment EBITDA was $22 million in the second quarter of fiscal year 2014 and fiscal year 2013. Segment EBITDA margin decreased to 9.5 percent compared to 9.8 percent in the prior year. The EBITDA benefit of higher revenue was offset by the loss of earnings year-over-year from our previously divested Suspensys joint venture, which was sold in the fourth quarter of fiscal year 2013, as well as certain inventory reserves recognized in the quarter.

51

MERITOR, INC.

Six Months Ended March 31, 2014 Compared to Six Months Ended March 31, 2013
   Sales
The following table reflects total company and business segment sales for the six months ended March 31, 2014 and 2013. 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 (in millions).
 
Six Months Ended
 
 
 
 
 
Dollar Change Due To
 
March 31,
 
Dollar
 
%
 
 
 
Volume /
 
2014
 
2013
 
Change
 
Change
 
Currency
 
Other
Sales:
 
 
 
 
 
 
 
 
 
 
 
Commercial Truck & Industrial
$
1,490

 
$
1,427

 
$
63

 
4
 %
 
$
(36
)
 
$
99

Aftermarket & Trailer
440

 
427

 
13

 
3
 %
 
2

 
11

Intersegment Sales
(61
)
 
(55
)
 
(6
)
 
(11
)%
 
(4
)
 
(2
)
TOTAL SALES
$
1,869

 
$
1,799

 
$
70

 
4
 %
 
$
(38
)
 
$
108

     Commercial Truck & Industrial sales were $1,490 million in the first six months of fiscal year 2014, up 4 percent compared to the first six months of fiscal year 2013, reflecting higher commercial truck production in all markets except India. North American industry-wide production volumes for heavy-duty trucks increased 20 percent in the second quarter of fiscal year 2014 as compared to the same period a year ago. In addition, we experienced higher sales in South America and Europe as industry-wide production volumes in these regions were up 11 percent and 6 percent, respectively. Although production volumes increased in the second quarter of the fiscal year in South America and Europe, we expect a decrease in the second half of the fiscal year resulting from continued economic uncertainty in South America and the anticipated decline subsequent to Europe's implementation of the new commercial truck emission standard. Furthermore, the effects of foreign currency exchange rates, primarily the Brazilian Reais, decreased sales by $38 million compared to the same period a year ago as the U.S. dollar strengthened against other currencies compared to the prior year.
     Aftermarket & Trailer sales were $440 million in the first six months of fiscal year 2014, up 3 percent compared to the first six months of fiscal year 2013. The increase is primarily due to slightly higher sales and increased pricing of core aftermarket replacement products, primarily in North America.
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 six months ended March 31, 2014 was $1,650 million compared to $1,621 million in the prior year, representing an increase of 2 percent. The increase in costs of sales is primarily due to higher sales volumes which is discussed above. Total cost of sales was approximately 88 percent and 90 percent of sales for the six month periods ended March 31, 2014 and 2013, respectively.
     The following table summarizes significant factors contributing to the changes in costs of sales during the first six months of fiscal year 2014 compared to the same period in the prior year (in millions):
 
Cost of Sales
Six months ended March 31, 2013
$
1,621

Volume, mix and other, net
57

Foreign exchange
(28
)
Six months ended March 31, 2014
$
1,650



52

MERITOR, INC.

     Changes in the components of cost of sales year over year are summarized as follows (in millions):
 
Change in Cost of Sales
Higher material costs
$
19

Higher labor and overhead costs
16

Other, net
(6
)
Total change in costs of sales
$
29

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 six months ended March 31, 2014 increased $19 million compared to the same period in the prior year primarily as a result of higher sales.
     Labor and overhead costs increased by $16 million compared to the same period in the prior year primarily as a result of higher sales in the first six months of fiscal year 2014.
      Gross margin for the six months ended March 31, 2014 was $219 million compared to $178 million in the same period last year. Gross margin, as a percentage of sales, was 11.7 percent and 9.9 percent for the six months ended March 31, 2014 and 2013, respectively. This improvement in gross margin percentage was primarily driven by net material, labor and burden performance.
Other Income Statement Items
     Selling, general and administrative expenses for the six months ended March 31, 2014 and 2013 are summarized as follows (in millions):
 
Six Months Ended
 
Six Months Ended
 
 
 
 
 
March 31, 2014
 
March 31, 2013
 
Increase (Decrease)
SG&A
Amount
 
% of sales
 
Amount
 
% of sales
 
 
 
 
Loss on sale of receivables
$
(5
)
 
(0.3
)%
 
$
(3
)
 
(0.2
)%
 
$
2

 
0.1 pts
Short- and long-term variable
 
 


 
 
 
 
 
 
 
 
compensation
(13
)
 
(0.7
)%
 
(11
)
 
(0.6
)%
 
2

 
0.1 pts
Long-term liability reduction
5

 
0.3
 %
 
—

 
—
 %
 
(5
)
 
(0.3) pts
All other SG&A
(112
)
 
(6.0
)%
 
(113
)
 
(6.3
)%
 
(1
)
 
(0.3) pts
Total SG&A
$
(125
)
 
(6.7
)%
 
$
(127
)
 
(7.1
)%
 
$
(2
)
 
(0.4) pts
        In the first quarter of fiscal year 2014, we executed a change to our long-term disability benefit plan reducing the duration for which we provide medical and dental benefits to individuals on long-term disability to be more consistent with market practices. This resulted in a $5 million reduction in the liability associated with these benefits. All other SG&A represents normal selling, general and administrative expense.
     Restructuring costs of $3 million were recorded during the six months ended March 31, 2014 compared to $17 million a year ago. Our Commercial Truck & Industrial segment recognized the majority of the restructuring costs in the first six months of fiscal year 2014 primarily related to employee severance costs. Our Commercial Truck & Industrial segment recognized $9 million of restructuring costs in the first six months of fiscal year 2013 primarily related to employee severance costs associated with segment reorganization. Our Aftermarket & Trailer segment recognized $5 million of restructuring costs during the first six months of fiscal year 2013 primarily related to the remanufacturing consolidation program. In addition, we recognized $3 million of restructuring costs at our corporate location associated with our segment reorganization in 2013.
     Operating income for the first six months of fiscal year 2014 was $90 million , compared to $32 million in the prior year. Key items impacting operating income are discussed above.
     Equity in earnings of affiliates was $17 million in the first six months of fiscal year 2014, compared to $19 million in the same period in the prior year. The decrease is primarily due to the sale of our ownership in the Suspensys joint venture in the fourth quarter of fiscal year 2013.

53

MERITOR, INC.

     Interest expense, net for the first six months of fiscal year 2014 was $75 million , compared to $54 million in the prior year. During the second quarter ended March 31, 2014, we exercised a call option to redeem $250 million of our 10.625% notes due 2018 at a premium of 5.313 percent of the principal amount. We recognized a $19 million loss on extinguishment associated with the redemption which consist of $6 million of unamortized discount and deferred issuance costs and $13 million of premium. We also repaid the outstanding term loan balance of $41 million during the same period and recognized a $2 million loss on the repayment associated with unamortized debt issuance costs. During the first quarter ended December 31, 2012, we repurchased approximately $245 million of $300 million principal amount of our 4.625% notes due 2026. We recognized a $5 million loss on debt extinguishment associated with the repurchase. Excluding the impact of debt extinguishment, interest expense increased, due to additional interest costs associated with the debt securities issued during fiscal year 2013.
     Provision for income taxes was $19 million in the first six months of fiscal year 2014 compared to $17 million in the first six months of fiscal year 2013. The increase to tax expense for the six months ended March 31, 2014 was primarily attributable to higher earnings in jurisdictions in which we recognize tax expense.
Income from continuing operations (before noncontrolling interests) for the first six months of fiscal year 2014 was $ 13 million compared to a loss of $20 million, in the prior year. The reasons for the improvement are discussed above.
      Income from discontinued operations was $3 million in the first six months of fiscal year 2014, compared to a loss of $5 million in the same period in the prior year. Income from discontinued operations for the six months ended March 31, 2014 primarily related to tax benefits for previously divested businesses. Loss from discontinued operations for the six months ended March 31, 2013 primarily related to changes in estimates and adjustments related to certain assets and liabilities retained from previously divested businesses and indemnities provided at the time of sale.
     Net income attributable to Meritor, Inc. was $ 12 million for the first six months of fiscal year 2014 compared to a loss of $25 million in the first six months of fiscal year 2013. Various factors impacting net income are previously discussed.
 
Segment EBITDA and EBITDA Margins
     The following table reflects Segment EBITDA and Segment EBITDA margins for the six months ended March 31, 2014 and 2013 (dollars in millions).
 
Segment EBITDA
 
Segment EBITDA Margins
 
March 31,
 
 
 
March 31,
 
 
 
2014
 
2013
 
$ Change
 
2014
 
2013
 
Change
Commercial Truck & Industrial
$
110

 
$
71

 
$
39

 
7.4
%
 
5.0
%
 
 2.4 pts
Aftermarket & Trailer
41

 
35

 
6

 
9.3
%
 
8.2
%
 
1.1 pts
Segment EBITDA
$
151

 
$
106

 
$
45

 
8.1
%
 
5.9
%
 
2.2 pts

     Significant items impacting year-over-year Segment EBITDA include the following:
 
Commercial
Truck & Industrial
 
Aftermarket
& Trailer
 
TOTAL
Segment EBITDA– Six months ended March 31, 2013
$
71

 
$
35

 
$
106

Higher (lower) earnings from unconsolidated affiliates
1

 
(3
)
 
(2
)
Lower pension and retiree medical costs
2

 
—

 
2

Foreign exchange - transaction and translation
(10
)
 
2

 
(8
)
Volume, mix, pricing and other, net
46

 
7

 
53

Segment EBITDA – Six months ended March 31, 2014
$
110

 
$
41

 
$
151


Commercial Truck & Industrial Segment EBITDA was $110 million in the first six months of fiscal year 2014, up $39 million compared to the same period in the prior year. Segment EBITDA margin increased to 7.4 percent compared to 5.0 percent in the prior year. The increase in Segment EBITDA margin reflects higher commercial vehicle sales in Europe and North America and reductions in material and other costs more than offset the impact of the expected step down in our defense business revenue.

54

MERITOR, INC.

      Aftermarket & Trailer Segment EBITDA was $41 million in the first six months of fiscal year 2014, up $6 million compared to the same period in the prior year. Segment EBITDA margin increased to 9.3 percent compared to 8.2 percent in the prior year. The increase in Segment EBITDA margin was primarily due to higher sales of our core aftermarket products, pricing actions, and lower material and other costs.
Financial Condition
Cash Flows (in millions)
 
Six Months Ended March 31,
 
2014
 
2013
OPERATING CASH FLOWS
 
 
 
Income (loss) from continuing operations
$
13

 
$
(20
)
Depreciation and amortization
33

 
33

Restructuring costs
3

 
17

Loss on debt extinguishment
21

 
5

Equity in earnings of affiliates
(17
)
 
(19
)
Pension and retiree medical expense
20

 
22

Dividends received from equity method investments
11

 
7

Pension and retiree medical contributions
(19
)
 
(48
)
Restructuring payments
(4
)
 
(12
)
Increase in working capital
(58
)
 
(32
)
Changes in off-balance sheet accounts receivable factoring
17

 
(44
)
Other, net
3

 
(5
)
Cash flows provided by (used for) continuing operations
23

 
(96
)
Cash flows used for discontinued operations
(5
)
 
(13
)
CASH PROVIDED BY(USED FOR) OPERATING ACTIVITIES
$
18

 
$
(109
)
     Cash provided by operating activities for the first six months of fiscal year 2014 was $18 million compared to cash used by operating activities of $109 million in the same period of fiscal year 2013. The improvement is primarily due to less cash used for working capital and pension contributions and higher income from continuing operations.
 
Six Months Ended March 31,
 
2014
 
2013
INVESTING CASH FLOWS
 
 
 
Capital expenditures
$
(25
)
 
$
(23
)
Net investing cash flows provided by discontinued operations
3

 
6

CASH USED FOR INVESTING ACTIVITIES
$
(22
)
 
$
(17
)
     Cash used for investing activities was $22 million in the first six months of fiscal year 2014 compared to $17 million in the same period a year ago.
 
Six Months Ended March 31,
 
2014
 
2013
FINANCING CASH FLOWS
 
 
 
Repayment of notes and term loan
(308
)
 
(236
)
Proceeds from debt issuance
225

 
225

Debt issuance costs
(9
)
 
(6
)
Other financing activities
13

 
2

CASH USED BY FINANCING ACTIVITIES
$
(79
)
 
$
(15
)

55

MERITOR, INC.

     Cash used for financing activities was $79 million for the first six months of fiscal year 2014 compared to $15 million for the same period a year ago. In the second quarter of fiscal year 2014, we issued $225 million of 6.25 percent senior unsecured notes due in 2024. Net proceeds from the issuance of these notes were used along with available cash to retire the $250 million 10.625 percent notes due in 2018 at a premium of $13 million. The outstanding term loan balance of $45 million was paid in the first six months of fiscal year 2014.
In December 2012, we issued $250 million of 7.875 percent convertible senior notes due 2026, net of original issuance discount of $25 million. Net proceeds from the issuance of these notes were used along with available cash to retire a portion of our outstanding 4.625 percent convertible senior notes due 2026.

Liquidity
Our outstanding debt, net of discounts where applicable, is summarized as follows (in millions).
 
March 31,
 
September 30,
 
2014
 
2013
Fixed-rate debt securities
$
584

 
$
606

Fixed-rate convertible notes
483

 
482

Term loan
—

 
45

Lines of credit and other
59

 
46

Unamortized gain on interest rate swap termination
2

 
2

Unamortized discount on convertible notes
(40
)
 
(43
)
Total debt
$
1,088

 
$
1,138

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, restructuring and product development programs. We expect fiscal year 2014 capital expenditures for our business segments to be in the range of $75 million to $85 million.
     We generally fund our operating and capital needs with cash on hand, cash flow 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, issue new equity or debt securities or enter into new lending arrangements if conditions warrant.
     In February 2012, we filed a shelf registration statement with the Securities and Exchange Commission, which was amended in November 2012, registering up to $750 million of debt and/or equity securities that may be offered in one or more series on terms to be determined at the time of sale. The amount remaining at March 31, 2014 is $250 million.
     We believe our current financing arrangements provide us with the financial flexibility required to maintain our operations 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 February 2019.
 

56

MERITOR, INC.

     Sources of liquidity as of March 31, 2014, in addition to cash on hand, are as follows:
 
Total Facility
Size
 
Unused as of
03/31/14
 
Current Expiration
On-balance sheet arrangements:
 
 
 
 
 
Revolving credit facility (1)
$
499

 
$
499

 
February 2019 (1)
Committed U.S. accounts receivable securitization (2)
100

 
100

 
June 2016
Total on-balance sheet arrangements
599

 
599

 
 
 
 
 
 
 
 
Swedish Factoring Facility
206

 
21

 
June 2014
U.S. Factoring Facility
89

 
19

 
October 2014
U.K. Factoring Facility
35

 
27

 
February 2018
Italy Factoring Facility
41

 
27

 
June 2017
Other uncommitted factoring facilities
72

 
27

 
Various
Letter of credit facility
30

 
4

 
March 2019
Total off-balance sheet arrangements
473

 
125

 
 
Total available sources
$
1,072

 
$
724

 
 

(1)
The availability under the revolving credit facility is subject to a collateral test as discussed under “Revolving Credit Facility” below. On February 13, 2014, we entered into an agreement to amend and extend the revolving credit facility through February 2019. See further discussion below under “Revolving Credit Facility”.
(2)
Availability subject to adequate eligible accounts receivable available for sale.
Cash and Liquidity Needs – Our cash and liquidity needs have been affected by the level, variability and timing of our customers’ worldwide vehicle production and other factors outside of our control. At March 31, 2014 , we had $233 million in cash and cash equivalents.
     Our availability under the revolving credit facility is subject to a collateral test and a priority debt to EBITDA ratio covenant, as defined in the agreement, which may limit our borrowings under the 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 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 revolving credit facility, vehicle production schedules and customer demand and access to other borrowing arrangements such as factoring or securitization facilities. Even taking into account these and other factors, management expects to have sufficient liquidity to fund our operating requirements through the term of our revolving credit facility. At March 31, 2014 , the company was in compliance with all covenants under its credit agreement (see Note 16).
Debt Repurchase Program - On January 23, 2014, the Offering Committee of our Board of Directors approved a repurchase program for up to $100 million of any of our public debt securities (including without limitation convertible debt securities) from time to time through open market purchases or privately negotiated transactions or otherwise, until December 15, 2014.


57

MERITOR, INC.

Issuance of 2024 Notes - On February 13, 2014, we completed a public offering of debt securities consisting of the issuance of $225 million 10-year, 6.25 percent notes due February 15, 2024 (the "2024 Notes"). The 2024 Notes were offered and sold pursuant to our shelf registration statement. The proceeds from the sale of the 2024 Notes, net of fees, were $221 million and, together with cash on hand, were used to repurchase $250 million of the company's outstanding 10.625 percent notes due 2018. The 2024 Notes constitute senior unsecured obligations of the company and rank equally in right of payment with its existing and future senior unsecured indebtedness, and effectively junior to existing and future secured indebtedness to the extent of the security therefor. They are guaranteed on a senior unsecured basis by each of the company's subsidiaries from time to time guaranteeing the senior secured credit facility. Prior to February 15, 2017, the company may redeem up to 35 percent of the aggregate principal amount of the 2024 Notes issued on the initial issue date with the net cash proceeds of certain public sales of common stock at a redemption price equal to 106.25 percent of the principal amount of the 2024 Notes to be redeemed, plus accrued and unpaid interest, if any, on the 2024 Notes to be redeemed so long as at least 65 percent of the aggregate principal amount of 2024 Notes originally issued remains outstanding after each such redemption and notice of any such redemption is mailed within 90 days of any such sale of common stock. Prior to February 15, 2019, the company may redeem up to 100 percent of the aggregate principal amount of the 2024 Notes issued on the initial issue date at a redemption price equal to the sum of (i) 100% of principal amount of the 2024 Notes to be redeemed, plus the applicable premium as of the redemption date on the 2024 Notes to be redeemed, plus accrued and unpaid interest, if any. On or after February 15, 2019, 2020, 2021, and 2022 the company has the option to redeem the 2024 Notes, in whole or in part, at the redemption price of 103.125 percent, 102.083 percent, 101.042 percent, and 100.000 percent, respectively.
  If a Change of Control (as defined in the indenture under which the 2024 Notes were issued) occurs, unless the company has exercised its right to redeem the securities, each holder of the 2024 Notes may require the company to repurchase some or all of such holder's securities at a purchase price equal to 101 percent of the principal amount, plus accrued and unpaid interest.
Redemption of 2018 Notes - On March 15, 2014, we exercised a call option on our 10.625 percent notes due March 15, 2018. These notes were redeemed at a premium of 5.313 percent of their principal amount. The repurchase of our $250 million 10.625 percent notes was accounted for as an extinguishment of debt and, accordingly, we recognized a net loss on debt extinguishment of $19 million, which consist of $6 million of unamortized discount and deferred issuance costs, and $13 million of premium. The net loss on debt extinguishment is included in interest expense, net in the consolidated statement of operations.
Revolving Credit Facility – On February 13, 2014, we amended and restated our revolving credit facility. Pursuant to the revolving credit agreement as amended, we have a $499 million revolving credit facility, $89 million of which matures in April 2017 for banks not electing to extend their commitments under the revolving credit facility existing at December 31, 2013 and the remaining $410 million of which matures in February 2019. The availability under this facility is dependent upon various factors, including principally performance against certain financial covenants.
No borrowings were outstanding under the revolving credit facility at March 31, 2014 and September 30, 2013. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. No letters of credit were outstanding on March 31, 2014 and September 30, 2013. At certain times during any given month, we could draw on our revolving credit facility to fund intra-month working capital needs. In such months, we would then typically utilize the cash we receive from our customers throughout the month to repay borrowing under the facility. Accordingly, during any given month, we may draw down on this facility in amounts exceeding the amounts shown as outstanding at fiscal quarter ends.
  The availability under the revolving credit facility is subject to certain financial covenants based on (i) the ratio of our priority debt (consisting principally of amounts outstanding under the revolving credit facility, U.S. accounts receivable securitization and factoring programs, and third-party non-working capital foreign debt) to EBITDA and (ii) the amount of annual capital expenditures. We are required to maintain a total priority-debt-to-EBITDA ratio, as defined in the agreement, of 2.25 to 1.00 throughout the term of the agreement. At March 31, 2014 , we were in compliance with all covenants under the revolving credit facility with a ratio of approximately 0.34 x for the priority debt-to-EBITDA covenant.
     Availability under the revolving credit facility is also subject to a collateral test, pursuant to which borrowings on the revolving credit facility cannot exceed 1.0x the collateral test value. The collateral test is performed on a quarterly basis. At March 31, 2014, the revolving credit facility was collateralized by approximately $604 million of the company's assets, primarily consisting of eligible domestic U.S. accounts receivable, inventory, plant, property and equipment, intellectual property and the company's investment in all or a portion of certain of its wholly-owned subsidiaries.
Borrowings under the revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin, and a commitment fee on undrawn amounts, both of which are based upon our current corporate credit rating for the senior secured facilities. At March 31, 2014, the margin over LIBOR rate was 350 basis points, and the commitment fee was 50 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 250 basis points.

58

MERITOR, INC.

Certain of the company's subsidiaries, as defined in the revolving credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the revolving credit facility. Similar subsidiary guarantees are provided for the benefit of the holders of the publicly-held notes outstanding under the company's indentures (see Note 16 to the consolidated financial statements).
Term Loan – On February 13, 2014 we also repaid the outstanding balance on the term loan of $41 million and recognized a $2 million loss on the repayment associated with unamortized debt issuance cost.
Convertible Securities – In December 2012, we issued $250 million of 7.875 percent convertible senior notes due 2026 (the “2013 Convertible Notes”) and used the proceeds thereof primarily to repurchase outstanding convertible notes. The 2013 Convertible Notes were sold by us to qualified institutional buyers in a private placement exempt from the registration requirements of the Securities Act of 1933. The 2013 Convertible Notes have an initial principal amount of $900 per note and will accrete to $1,000 per note on December 1, 2020. Net proceeds received, after issuance costs and discounts, were approximately $220 million.
We pay 7.875 percent cash interest on the principal amount at maturity of the 2013 Convertible Notes semi-annually in arrears on June 1 and December 1 of each year to holders of record at the close of business on the preceding May 15 and November 15, respectively, and at maturity to the holders that present the 2013 Convertible Notes for payment. Interest accrues on the principal amount at maturity thereof from and including the date the 2013 Convertible Notes are issued or from, and including, the last date in respect of which interest has been paid or provided for, as the case may be, to, but excluding, the next interest payment date.
The 2013 Convertible Notes are fully and unconditionally guaranteed on a senior unsecured basis by certain of our subsidiaries. The 2013 Convertible Notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future senior unsecured indebtedness and junior to any of our existing and future secured indebtedness.
The 2013 Convertible Notes will be convertible in certain circumstances into cash up to the principal amount at maturity of the 2013 Convertible Note surrendered for conversion and, if applicable, shares of the company's common stock (subject to a conversion share cap as described below), based on an initial conversion rate, subject to adjustment, equivalent to 83.3333 shares per $1,000 principal amount at maturity of 2013 Convertible Notes (which represents an initial conversion price of $12.00 per share), only under the following circumstances:
(1) Prior to June 1, 2025, during any calendar quarter after the calendar quarter ending December 31, 2012, if the closing sale price of the company's common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120 percent of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter;
(2) Prior to June 1, 2025, during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount at maturity of 2013 Convertible Notes was equal to or less than 97 percent of the conversion value of the 2013 Convertible Notes on each trading day during such five consecutive trading day period;
(3) Prior to June 1, 2025, if the company has called the 2013 Convertible Notes for redemption;
(4) Prior to June 1, 2025, upon the occurrence of specified corporate transactions; or
(5) At any time on or after June 1, 2025.
On or after December 1, 2020, the company may redeem the 2013 Convertible Notes at its option, in whole or in part, at a redemption price in cash equal to 100 percent of the principal amount at maturity of the 2013 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Further, holders may require the company to purchase all or a portion of their 2013 Convertible Notes at a purchase price in cash equal to 100 percent of the principal amount at maturity of the 2013 Convertible Notes to be purchased, plus accrued and unpaid interest, on December 1, 2020 or upon certain fundamental changes.

59

MERITOR, INC.

U.S. Securitization Program – We have a $100 million U.S. accounts receivables securitization facility. On June 21, 2013 the company entered into a one-year extension of the facility expiration date to June 18, 2016. On October 11, 2013, the company entered into an amendment whereby Market Street Funding, LLC assigned its purchase commitment to PNC Bank, National Association (PNC). This program is provided by PNC, as Administrator and Purchaser, and the other Purchasers and Purchaser Agents from time to time (participating lenders), which are party to the agreement. Under this program, we have the ability to sell an undivided percentage ownership interest in substantially all of our trade receivables (excluding the receivables due from AB Volvo and subsidiaries eligible for sale under the U.S. Factoring Facility) of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings from participating lenders under a loan agreement. This program also includes a letter of credit facility pursuant to which ARC may request the issuance of letters of credit issued for our U.S. subsidiaries (originators) or their designees, which when issued will constitute a utilization of the facility for the amount of letters of credit issued. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the consolidated balance sheet. At both March 31, 2014 and September 30, 2013, no amounts, including letters of credit, were outstanding under this program. This program contains a financial covenant related to our priority-debt-to-EBITDA ratio, which is 2.00 to 1.00 as of the last day of the fiscal quarter throughout the remaining term of the agreement. In addition, this securitization program contains a cross default to our revolving credit facility. At certain times during any given month, we may sell eligible accounts receivable under this program to fund intra-month working capital needs. In such months, we would then typically utilize the cash we receive from our customers throughout the month to repay the borrowings under the program. Accordingly, during any given month, we may borrow under this program in amounts exceeding the amounts shown as outstanding at fiscal quarter ends.
Capital Leases – On March 20, 2012, we entered into an arrangement to finance equipment acquisitions at our various U.S. locations. Under this arrangement, we can request financing from GE Capital Commercial, Inc. (GE Capital) for progress payments for equipment under construction, not to exceed $10 million at any point in time. The financing rate is equal to the 30-day LIBOR plus 475 basis points per annum. Under this arrangement, we can also enter into lease arrangements with GE Capital for completed equipment. The lease term is 60 months and the lease interest rate is equal to the 5-year Swap Rate published by the Federal Reserve Board plus 564 basis points. As of March 31, 2014 and September 30, 2013, we had $28 million outstanding under these and other capital lease arrangements.
Other – One of our consolidated joint ventures in China participates in a bills of exchange program to settle its obligations with its trade suppliers. These programs are common in China and generally require the participation of local banks. Under these programs, our joint venture issues notes payable through the participating banks to its trade suppliers. If the issued notes payable remain unpaid on their respective due dates, this could constitute an event of default under the company’s revolving credit facility if the defaulted amount were to exceed $35 million. As of March 31, 2014 and September 30, 2013, we had $ 23 million and $16 million , respectively, outstanding under this program.
Credit Ratings – At March 31, 2014 , Standard & Poor’s corporate credit rating, senior secured credit rating, and senior unsecured credit rating for our company are B, BB- and B-, respectively. Moody’s Investors Service corporate credit rating, senior secured credit rating, and senior unsecured credit rating for our company are B2, Ba2 and B3, 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.
Off-Balance Sheet Arrangements
     Accounts Receivable Factoring Arrangements – We participate in accounts receivable factoring programs with total amounts utilized at March 31, 2014 , of approximately $322 million , of which $255 million was attributable to committed factoring facilities involving the sale of AB Volvo accounts receivables. The remaining amount of $67 million was related to factoring by certain of our European and Brazilian subsidiaries under uncommitted factoring facilities with financial institutions. The receivables under these programs are sold at face value and are excluded from the consolidated balance sheet. Total facility size, unused amounts and expiration dates for each of these programs are shown in the table above under "Overview."
The Swedish and U.S. factoring facilities are backed by 364 -day liquidity commitments from Nordea Bank which were renewed through October 2014. Commitments under all of our factoring facilities are subject to standard terms and conditions for these types of arrangements (including, in case of the U.K., Italy, and Brazil agreements, 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).

60

MERITOR, INC.

     Letter of Credit Facilities – On February 21, 2014 we amended and restated our credit facility with Citicorp USA, Inc., as administrative agent and issuing bank, and the other lenders party thereto. Under the terms of this amended credit agreement, we have the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $30 million through December 19, 2015. From December 20, 2015 through March 19, 2019 the aggregate availability is $25 million. This facility contains covenants and events of default generally similar to those existing in our public debt indentures. At March 31, 2014 and September 30, 2013, we had $26 million and $27 million , respectively, of letters of credit outstanding under this facility. In addition, we had another $10 million and $9 million of letters of credit outstanding through other letter of credit facilities at March 31, 2014 and September 30, 2013, respectively.
Contingencies
Contingencies related to environmental, asbestos and other matters are discussed in Note 19 of the Notes to Condensed Consolidated Financial Statements.
New Accounting Pronouncements
Accounting standards implemented during fiscal year 2014
In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. We adopted this guidance at the beginning of our first quarter of fiscal year 2014 within Note 17.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires that reclassification adjustments for items that are reclassified from accumulated other comprehensive income to net income be presented on the financial statements or in a note to the financial statements. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. We adopted this guidance at the beginning of our first quarter of fiscal year 2014 within Note 20.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 eliminates the option of presenting unrecognized tax benefits as a liability or as a reduction of a deferred tax asset for a net operating loss or tax credit carryforward. An unrecognized tax benefit, or portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 with early adoption permitted. We adopted this guidance at the beginning of our first quarter of fiscal year 2014. The adoption of ASU 2013-11 did not affect our consolidated statement of financial position, results of operations, or cash flows.
Accounting standards to be implemented
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. A strategic shift could include a disposal of: (1) a major geographical area of operations; (2) a major line of business; and (3) a major equity method investment. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. We are currently evaluating the potential impact of this new guidance on our consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk
     We are exposed to certain global market risks, including foreign currency exchange risk and interest rate risk associated with our debt.
     As a result of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, including in connection with our transactions that are denominated in foreign currencies. In addition, we translate sales and financial results denominated in foreign currencies into U.S. dollars for purposes of our consolidated financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies generally will have a negative impact on our reported revenues and operating income while depreciation of the U.S. dollar against these foreign currencies will generally have a positive effect on reported revenues and operating income. For the second quarters of fiscal year 2014 and 2013, our reported financial results have been adversely affected by the appreciation of the U.S. dollar against the change in foreign currencies throughout the period.
     We use foreign currency forward contracts to minimize the earnings exposures arising from foreign currency exchange risk on foreign currency purchases and sales. Gains and losses on the underlying foreign currency exposures are partially offset with gains and losses on the foreign currency forward contracts. Under this cash flow hedging program, we designate the foreign currency contracts (the contracts) as cash flow hedges of underlying foreign currency forecasted purchases and sales. The effective portion of changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive Loss (AOCL) in the statement of shareowners’ equity and is recognized in operating income when the underlying forecasted transaction impacts earnings. The contracts generally mature within 12 months.
Due to in creasing foreign currency exchange risk associated with purchasing economics limited to the Indian Rupee, we are entering into foreign currency option contracts on expected future purchases tied to the Indian Rupee. The contracts were entered into during April 2014 with effective dates beginning at the start of fiscal year 2015 and mature at the end of fiscal year 2016. Changes in fair value associated with these contracts will be recorded in cost of sales.
     We generally have not hedged against our foreign currency exposure related to translations to U.S. dollars of our financial results denominated in foreign currencies. However, in the fourth quarter of fiscal years 2011 and 2010, due to the volatility of the Brazilian real as compared to the U.S. dollar, we entered into foreign currency option contracts to reduce volatility in the translation of Brazilian real earnings to U.S. dollars. Gains and losses on these option contracts were recorded in other income (expense), net, in the consolidated statement of operations, generally reducing the exposure to translation volatility during a full-year period. There were no option contracts outstanding at March 31, 2014 .
Interest rate risk relates to the gain/increase or loss/decrease we could incur in our debt balances and interest expense. To manage this risk, we enter into interest rate swaps from time to time to economically convert portions of our fixed-rate debt into floating rate exposure, ensuring that the sensitivity of the economic value of debt falls within our corporate risk tolerances. It is our policy not to enter into derivative instruments for speculative purposes, and therefore, we hold no derivative instruments for trading purposes. In the fourth quarter of fiscal year 2012, we entered into a four-year interest rate swap arrangement whereby we convert the variable interest rate on our term-loan expressed as LIBOR-rate into a variable interest rate based on U.S. federal funds rate. In February 2014, we repaid the outstanding balance on the term loan and then subsequently terminated the interest rate swap arrangement.
Included below is a sensitivity analysis to measure the potential gain (loss) in the fair value of financial instruments with exposure to market risk. The model assumes a 10 percent hypothetical change (increase or decrease) in exchange rates and instantaneous, parallel shifts of 50 basis points in interest rates.

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MERITOR, INC.

Market Risk
 
Assuming a
10% Increase
in Rates
 
Assuming a
10% Decrease
in Rates
 
Increase (Decrease) in
Foreign Currency Sensitivity:
 
 
 
 
 
Forward contracts in USD (1)
$
(1.0
)
 
$
1.0

 
Fair Value
Forward contracts in Euro (1)
(1.8
)
 
1.8

 
Fair Value
Foreign currency denominated debt
4.2

 
(4.2
)
 
Fair Value
 
Assuming a 50
BPS Increase
in Rates
 
Assuming a 50
 BPS Decrease
in Rates
 
Increase (Decrease) in
Interest Rate Sensitivity:
 
 
 
 
 
Debt - fixed rate
$
(45.8
)
 
$
48.2

 
Fair Value
Debt – variable rate (2)
—

 
—

 
Cash flow
Interest rate swaps
—

 
—

 
Fair Value

(1)
Includes only the risk related to the derivative instruments and does not include the risk related to the underlying exposure. The analysis assumes overall derivative instruments and debt levels remain unchanged for each hypothetical scenario.
At March 31, 2014 , a 10% decrease in quoted currency exchange rates would result in a potential loss of approximately $4.2 million in foreign currency denominated debt.
At March 31, 2014 , the fair value of outstanding debt was approximately $1,318 million. A 50 basis points decrease in quoted interest rates would result in an increase in the fair value of fixed rate debt by approximately $48 million.
(2)
Includes domestic and foreign debt.

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MERITOR, INC.

Item 4. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), management, with the participation of the chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2014 . Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of March 31, 2014 , our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
     There have been no changes in the company’s internal control over financial reporting that occurred during the quarter ended March 31, 2014 that materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.
     In connection with the rule, the company continues to review and document its disclosure controls and procedures, including the company’s internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and ensuring that the company’s systems evolve with the business.

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MERITOR, INC.

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Except as set forth below and as set forth in this Quarterly Report under Note 19 “Contingencies,” there have been no material developments in legal proceedings involving the company or its subsidiaries since those reported in the company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013.
On October 5, 2006, Meritor Transmission Corporation and ZF Meritor LLC, a joint venture between a Meritor, Inc. subsidiary and ZF Friedrichshafen AG, filed a lawsuit against Eaton Corporation in the United States District Court for the District of Delaware, alleging that Eaton had engaged in exclusionary, anticompetitive conduct in the markets for heavy-duty truck transmissions, in violation of the U.S. antitrust laws, and seeking an injunction prohibiting Eaton from engaging in such anticompetitive conduct and monetary damages. On October 8, 2009, the jury found that Eaton engaged in conduct that violated the Sherman and Clayton antitrust acts in the sale and marketing of heavy-duty truck transmissions. The jury did not address the amount of damages. The district court denied Eaton’s motion to overturn the jury verdict on March 10, 2011, awarded ZF Meritor zero dollars in damages on August 4, 2011, and issued a limited injunction, stayed pending appeal, against Eaton on August 19, 2011. The jury verdict, the district court’s October 20, 2009 entry of judgment on the verdict, and other district court orders became the subject of consolidated appeals before the Third Circuit Court of Appeals. On June 26, 2012, the Third Circuit heard oral argument on the appeals. On September 28, 2012, the Third Circuit issued an opinion affirming that sufficient evidence supported the jury’s finding that Eaton had engaged in anticompetitive conduct that injured Meritor and ZF Meritor. Further, the Circuit Court reversed the district court’s order denying Meritor and ZF Meritor the opportunity to present certain evidence concerning damages, and remanded the case to the district court for further proceedings on damages. On October 26, 2012, the Third Circuit denied an Eaton petition for rehearing on the appeals. On February 25, 2013, Eaton petitioned the United States Supreme Court for a writ of certiorari seeking review of the Third Circuit’s judgment. The Supreme Court denied Eaton’s petition on April 29, 2013. After remand to the district court, the parties filed additional pretrial motions.  The Court denied Eaton’s renewed motion to exclude ZF Meritor and Meritor’s damages expert and set a trial date for the damages phase of trial for June 23, 2014 in Wilmington, Delaware.  On April 22, 2014, Eaton filed a motion for partial summary judgment regarding Plaintiffs’ damages calculations.  That motion is pending.
    

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MERITOR, INC.

Item 1A. Risk Factors
     Except for the following, there have been no material changes in risk factors involving the company or its subsidiaries from those previously disclosed in the company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013.
We depend on large OEM customers, and loss of sales to these customers or failure to negotiate acceptable terms in contract renewal negotiations or to obtain new customers could have an adverse impact on our business.
     
We are dependent upon large OEM customers with substantial bargaining power with respect to price and other commercial terms. In addition, we have long-term contracts with certain of these customers that are subject to renegotiation and renewal from time to time (including, without limitation, negotiations with our largest customer, AB Volvo, which are ongoing regarding our contract covering axle supply in Europe, South America and Australia, which is scheduled to expire in October 2014)    Include any material update to Volvo negotiations.. Loss of all or a substantial portion of sales to any of our large volume customers for whatever reason (including, but not limited to, loss of contracts or failure to negotiate acceptable terms in contract renewal negotiations, loss of market share by these customers, insolvency of such customers, reduced or delayed customer requirements, plant shutdowns, strikes or other work stoppages affecting production by such customers), continued reduction of prices to these customers, or a failure to obtain new customers could have a significant adverse effect on our financial results. There can be no assurance that we will not lose all or a portion of sales to our large volume customers, or that we will be able to offset continued reduction of prices to these customers with reductions in our costs or obtain new customers.

During fiscal year 2013, sales to our three largest customers, AB Volvo, Daimler AG and Navistar International Corporation, represented approximately 24 percent, 15 percent and 10 percent, respectively, of our sales from continuing operations. No other customer accounted for 10% or more of our total sales from continuing operations in fiscal year 2013.

The level of our sales to large OEM customers, including the realization of future sales from awarded business or achieving new business or customers, is inherently subject to a number of risks and uncertainties, including the number of vehicles that these OEM customers actually produce and sell. Several of our significant customers have major union contracts that expire periodically and are subject to renegotiation. Any strikes or other actions that affect our customers’ production during this process would also affect our sales. Further, to the extent that the financial condition, including bankruptcy or market share of any of our largest customers, deteriorates or their sales otherwise continue to decline, our financial position and results of operations could be adversely affected. In addition, our customers generally have the right to replace us with another supplier under certain circumstances. Accordingly, we may not in fact realize all of the future sales represented by our awarded business. Any failure to realize these sales could have a material adverse effect on our financial condition and results of operations.

In December 2012, the SEC brought administrative proceedings against five accounting firms, including the Chinese affiliate of our independent registered public accounting firm, alleging that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation by the SEC for potential accounting fraud. On January 22, 2014, an initial administrative law decision was issued, censuring these Chinese accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until the decision has been reviewed and affirmed by the SEC Commissioners. The Chinese accounting firms have the ability to appeal and the four firms which are subject to the six month suspension from practicing before the SEC have indicated that they will appeal. The sanction will not become effective until after a full appeal process is concluded and a final decision is issued by the SEC Commissioners. The Chinese accounting firms can also further appeal the final decision of the SEC through the federal appellate courts. Our independent registered public accounting firm is not involved in the proceedings brought by the SEC against the Chinese accounting firms. However, our independent registered public accounting firm utilizes the work of its Chinese affiliate in auditing our Chinese operations. If the decision is affirmed on appeal, we may therefore be adversely affected by the outcome of the proceedings, along with other U.S. multinational corporations with Chinese operations whose independent registered public accounting firms utilize the work of their Chinese affiliates who are subject to the SEC enforcement action. For example, if we (like other U.S. multinational companies similarly situated) were not able to timely file our periodic reports with the SEC because our independent registered public accounting firm concludes that a scope limitation exists with respect to the audit our annual financial statements or the review of our quarterly financial statements, this could adversely impact our ability to raise capital in the U.S. public markets.

 

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MERITOR, INC.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer repurchases
     The independent trustee of our 401(k) plans purchases shares in the open market to fund investments by employees in our common stock, one of the investment options available under such plans, and any matching contributions in company stock we provide under certain of such plans. In addition, our stock incentive plans permit payment of an option exercise price by means of cashless exercise through a broker and permit the satisfaction of the minimum statutory tax obligations upon exercise of options and the vesting of restricted stock units through stock withholding. However, the company does not believe such purchases or transactions are issuer repurchases for the purposes of this Item 2 of Part II of this Report on Form 10-Q. In addition, our stock incentive plans also permit the satisfaction of tax obligations upon the vesting of restricted stock through stock withholding. There were no shares withheld in the second quarter of fiscal 2014.

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MERITOR, INC.

Item 5. Other Information
Cautionary Statement
This Quarterly Report on Form 10-Q contains statements relating to future results of the company (including certain projections and business trends) that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “estimate,” “should,” “are likely to be,” “will” and similar expressions. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to reduced production for certain military programs and our ability to secure new military programs as our primary military programs wind down by design through 2015; reliance on major original equipment manufacturer (“OEM”) customers and possible negative outcomes from contract negotiations with our major customers, including failure to negotiate acceptable terms in contract renewal negotiations and our ability to obtain new customers; the outcome of actual and potential product liability, warranty and recall claims; our ability to successfully manage rapidly changing volumes in the commercial truck markets and work with our customers to adjust their demands in view of rapid changes in production levels; global economic and market cycles and conditions; availability and sharply rising costs of raw materials, including steel, and our ability to manage or recover such costs; our ability to manage possible adverse effects on our European operations, or financing arrangements related thereto, in the event one or more countries exit the European monetary union; risks inherent in operating abroad (including foreign currency exchange rates, implications of foreign regulations relating to pensions and potential disruption of production and supply due to terrorist attacks or acts of aggression); rising costs of pension and other postretirement benefits; the ability to achieve the expected benefits of restructuring actions; the demand for commercial and specialty vehicles for which we supply products; whether our liquidity will be affected by declining vehicle productions in the future; OEM program delays; demand for and market acceptance of new and existing products; successful development of new products; labor relations of our company, our suppliers and customers, including potential disruptions in supply of parts to our facilities or demand for our products due to work stoppages; the financial condition of our suppliers and customers, including potential bankruptcies; possible adverse effects of any future suspension of normal trade credit terms by our suppliers; potential difficulties competing with companies that have avoided their existing contracts in bankruptcy and reorganization proceedings; potential impairment of long-lived assets, including goodwill; potential adjustment of the value of deferred tax assets; competitive product and pricing pressures; the amount of our debt; our ability to continue to comply with covenants in our financing agreements; our ability to access capital markets; credit ratings of our debt; the outcome of existing and any future legal proceedings, including any litigation with respect to environmental or asbestos-related matters; and possible changes in accounting rules; as well as other substantial costs, risks and uncertainties, including but not limited to those detailed herein and from time to time in other filings of the company with the SEC. See also the following portions of our Annual Report on Form 10-K for the year ended September 30, 2013: Item 1. Business, “Customers; Sales and Marketing”; “Competition”; “Raw Materials and Supplies”; “Employees”; “Environmental Matters”; “International Operations”; and “Seasonality; Cyclicality”; Item 1A. Risk Factors; Item 3. Legal Proceedings; and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.


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MERITOR, INC.


Item 6. Exhibits
3-a
Restated Articles of Incorporation of Meritor, filed as Exhibit 4.01 to Meritor’s Registration Statement on Form S-4, as amended (Registration Statement No. 333-36448) ("Form S-4"), is incorporated by reference.
3-a-1
Articles of Amendment of Restated Articles of Incorporation of Meritor filed as exhibit 3-a-1 to Meritor’s Quarterly Report on Form 10-Q for the quarterly period ended April 3, 2011, is incorporated by reference.
3-b
By-laws of Meritor, filed as Exhibit 3 to Meritor's Quarterly Report on Form 10-Q for the quarterly period ended June 29, 2003 (File No. 1-15983), is incorporated by reference.
4.1
Seventh Supplemental Indenture, dated as of February 13, 2014, to the Indenture, dated as of April 1, 1998, between Meritor and The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Midwest Trust Company as successor to the Chase Manhattan Bank), as trustee, filed as Exhibit 4.1 to Meritor’s Current Report on Form 8-K filed on February 18, 2014, is incorporated herein by reference.
4.2
Form of certificate for Meritor’s 6-1/4% Notes due 2024, filed as Exhibit 4.2 to Meritor’s Current Report on Form 8-K filed on February 18, 2014, is incorporated herein by reference.
10.1
Second Amendment and Restatement Agreement relating to Second Amended and Restated Credit Agreement, dated as of February 13, 2014, among Meritor, ArvinMeritor Finance Ireland, the financial institutions party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, filed as Exhibit 10 to Meritor’s Current Report on Form 8-K filed on February 18, 2014, is incorporated herein by reference.
10.2
Second Amended and Restated Pledge and Security Agreement, dated as of February 13, 2014, by and among Meritor, the subsidiaries named therein and JPMorgan Chase Bank, N.A., as Administrative Agent.**
*10-e-10
Form of Restricted Stock Unit Agreement for grants to Directors on or after January 23, 2014 under the Amended and Restated 2010 Long-Term Incentive Plan.**
*10-e-11
Form of Restricted Stock Agreement for grants to Directors on or after January 23, 2014 under the Amended and Restated 2010 Long-Term Incentive Plan.**
12
Computation of ratio of earnings to fixed charges**
23
Consent of Bates White LLC**
31-a
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act**
31-b
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act**
32-a
Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350**
32-b
Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350**
101.INS
XBRL INSTANCE DOCUMENT
101.SCH
XBRL TAXONOMY EXTENSION SCHEMA
101.PRE
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
101.LAB
XBRL TAXONOMY EXTENSION LABEL LINKBASE
101.CAL 
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF 
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE

* Management contract or compensatory plan or arrangement.
** Filed herewith.



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MERITOR, INC.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 
MERITOR, INC.
 
 
 
 
 
Date:
May 2, 2014
By:       
/s/
Sandra J. Quick
 
 
 
 
Sandra J. Quick
 
 
 
 
Senior Vice President, General Counsel, and Secretary
 
 
 
 
(For the registrant)
 
 
 
 
 
 
 
 
 
 
Date:
May 2, 2014
By:
/s/
Kevin A. Nowlan
 
 
 
 
Kevin A. Nowlan
 
 
 
 
Senior Vice President and Chief Financial Officer

70
Exhibit 10.2
EXECUTION COPY


SECOND AMENDED AND RESTATED
PLEDGE AND SECURITY AGREEMENT

THIS SECOND AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT (this “ Security Agreement ”) is entered into as of February 13, 2014 by and among MERITOR, INC., an Indiana corporation (formerly known as ArvinMeritor, Inc.) (the “ Company ”), the Subsidiaries of the Company identified on the signature pages hereto (together with the Company, the “ Initial Grantors ”), and any additional Subsidiaries of the Company, whether now existing or hereafter formed which become parties to this Security Agreement by executing a Security Agreement Supplement hereto in substantially the form of Annex I (such additional Subsidiaries, together with the Initial Grantors, the “ Grantors ”), in favor of JPMORGAN CHASE BANK, N.A., as Administrative Agent (the “ Administrative Agent ”), for the benefit of the Holders of Secured Obligations (as defined in the Credit Agreement referred to below).

PRELIMINARY STATEMENT
WHEREAS, pursuant to that certain Second Amendment and Restatement Agreement of even date herewith, the Company, ArvinMeritor Finance Ireland (the “ Subsidiary Borrower ” and, collectively with the Company, the “ Borrowers ”), the financial institutions party thereto and the Administrative Agent have agreed to enter into that certain Second Amended and Restated Credit Agreement dated of even date herewith among the Borrowers, the financial institutions party thereto (the “ Lenders ”) and the Administrative Agent (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), which Credit Agreement, among other things, (i) amends and restates in its entirety the Existing Credit Agreement (as defined in the Credit Agreement); (ii) re-evidences outstanding obligations of the Borrowers party to the Existing Credit Agreement and (iii) provides, subject to the terms and conditions thereof, for future extensions from time to time of credit and other financial accommodations to be made by the Lenders to or for the benefit of the Borrowers and their respective Subsidiaries;
WHEREAS, in connection with the Existing Credit Agreement, each of the Grantors (including as successors by merger or otherwise) (collectively, the “ Existing Grantors ”) and the Administrative Agent have entered into that certain Amended and Restated Pledge and Security Agreement, dated as of April 23, 2012 (as amended, restated, supplemented or otherwise modified prior to the date hereof, the “ Existing Security Agreement ”), and pursuant to which each Existing Grantor granted a security interest in all or substantially all of its personal property and pledged and, to the extent applicable, reaffirmed its prior pledge of, its capital stock, membership interests or partnership interests in certain of its Subsidiaries to the Agent;
WHEREAS, the parties hereto wish to amend and restate the Existing Security Agreement in its entirety;
WHEREAS, each Grantor has agreed to grant, and in the case of any Initial Grantor, reaffirm its prior grant of, a security interest in all or substantially all of its personal property and to pledge, and in the case of any Initial Grantor, reaffirm its prior pledge of, its capital stock, membership interests or partnership interests in certain of its Subsidiaries to the Administrative Agent for the benefit of the Holders of Secured Obligations, as security for the Secured Obligations as set forth herein;
WHEREAS, it is the intention of the parties hereto that this Security Agreement be merely an amendment and restatement of the Existing Security Agreement and not constitute a novation of the grants of security or the obligations thereunder; and

WHEREAS, the Administrative Agent and the Lenders have required, as a condition, among others, to the effectiveness of the Credit Agreement and the other Loan Documents, that each Grantor execute and deliver this Security Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
        

CH1 9055408v.6


ARTICLE 1

DEFINITIONS

1.1.     Terms Defined in Credit Agreement . All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Credit Agreement.
1.2.     Terms Defined in New York UCC . Terms defined in the New York UCC which are not otherwise defined in this Security Agreement are used herein as defined in the New York UCC.
1.3.     Definitions of Certain Terms Used Herein . As used in this Security Agreement, in addition to the terms defined in the Preliminary Statement, the following terms shall have the following meanings:
“ 1998 Restricted Subsidiary ” means, as of any date of determination, each Person constituting a “Restricted Subsidiary” under (and as defined in) either the 1998 Senior Note Indenture or the 2006 Senior Note Indenture as of such date.
“ 1998 Restricted Grantor ” means, as of any date of determination, the Company and each Grantor constituting a 1998 Restricted Subsidiary.
“ 1998 Restricted Collateral ” means, as of any date determination, (i) any real property (including buildings and other improvements) of any 1998 Restricted Grantor constituting a “Principal Property” under (and as defined in) the 1998 Senior Note Indenture as of such date, (ii) the Capital Stock of any 1998 Restricted Subsidiary held by any 1998 Restricted Grantor and (iii) any indebtedness of any 1998 Restricted Subsidiary held by any 1998 Restricted Grantor.
“ Accounts ” shall have the meaning set forth in Article 9 of the New York UCC.
“ Article ” means a numbered article of this Security Agreement, unless another document is specifically referenced.
“ Chattel Paper ” shall have the meaning set forth in Article 9 of the New York UCC.
“ Collateral ” means all Accounts, Chattel Paper, Commercial Tort Claims, Copyrights, Deposit Accounts, Documents, Equipment, Fixtures, General Intangibles, Goods, Instruments, Inventory, Investment Property, letters of credit, Letter-of-Credit Rights, Licenses, Patents, Pledged Deposits, Supporting Obligations, Trademarks, Pledged Equity and Other Collateral, wherever located, in which any Grantor now has or hereafter acquires any right or interest, and the proceeds (including Stock Rights), insurance proceeds and products thereof, together with all books and records, customer lists, credit files, computer files, programs, printouts and other computer materials and records related thereto. Notwithstanding anything to the contrary contained in this definition, Collateral shall not include (i) contractual rights to the extent and for so long as the grant of a security interest herein would violate the terms of the agreement under which such contractual rights arise or exist to the extent such prohibition is enforceable under applicable law, (ii) rights under governmental licenses and authorizations to the extent and for so long as the grant of a security interest therein is prohibited by law and (iii) any intent-to-use trademark or service mark application prior to the filing of a statement of use or amendment to allege use, or any other intellectual property, to the extent that applicable law or regulation prohibits the creation of a security interest or would otherwise result in the loss of rights from the creation of such security interest or from the assignment of such rights upon the occurrence and continuance of a Default.
“ Commercial Tort Claims ” means the commercial tort claims, as defined in the New York UCC, of any Grantor, including each commercial tort claim specifically described in Exhibit E .
“ Control ” shall have the meaning set forth in Article 8 or, if applicable, in Section 9-104, 9-105, 9-106 or 9-107 of Article 9 of the New York UCC.

2



“ Copyrights ” means, with respect to any Person, all of such Person’s right, title, and interest in and to the following: (a) all copyrights, rights and interests in copyrights, works protectable by copyright, copyright registrations, and copyright applications; (b) all renewals of any of the foregoing; (c) all income, royalties, damages, and payments now or hereafter due and/or payable under any of the foregoing, including, without limitation, damages or payments for past or future infringements for any of the foregoing; (d) the right to sue for past, present, and future infringements of any of the foregoing; and (e) all rights corresponding to any of the foregoing throughout the world.
“ Default ” means an event described in Section 5.1 hereof.
“ Deposit Accounts ” shall have the meaning set forth in Article 9 of the New York UCC.
“ Documents ” shall have the meaning set forth in Article 9 of the New York UCC.
“ Equipment ” shall have the meaning set forth in Article 9 of the New York UCC.
“ Exhibit ” refers to a specific exhibit to this Security Agreement, unless another document is specifically referenced.
“ Fixtures ” shall have the meaning set forth in Article 9 of the New York UCC.
“ General Intangibles ” shall have the meaning set forth in Article 9 of the New York UCC and, in any event, includes payment intangibles, contract rights, rights to payment, rights arising under common law, statutes, or regulations, choses or things in action, goodwill (including the goodwill associated with any Trademark), Patents, Trademarks, Copyrights, URLs and domain names, industrial designs, other industrial or intellectual property or rights therein or applications therefor, whether under license or otherwise, programs, programming materials, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, including Licenses, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, pension plan refunds, pension plan refund claims, insurance premium rebates, tax refunds, and tax refund claims, interests in a partnership or limited liability company which do not constitute a security under Article 8 of the Code, and any other personal property other than Commercial Tort Claims, money, Accounts, Chattel Paper, Deposit Accounts, Goods, Investment Property, negotiable Collateral, and oil, gas, or other minerals before extraction.
“ Goods ” shall have the meaning set forth in Article 9 of the New York UCC.
“ Instruments ” shall have the meaning set forth in Article 9 of the New York UCC.
“ Intellectual Property ” means (i) United States of America and foreign trademark registrations, and applications for trademark registration, (ii) United States of America and foreign patents and patents applications, together with all reissuances, continuations, continuations in part, revisions, extensions, and reexaminations thereof and (iii) United States of America and foreign copyright registrations and applications for registration.
“ Inventory ” shall have the meaning set forth in Article 9 of the New York UCC.
“ Investment Property ” shall have the meaning set forth in Article 9 of the New York UCC.
“ Letter of Credit Rights ” shall have the meaning set forth in Article 9 of the New York UCC.“ Licenses ” means, with respect to any Person, all of such Person’s right, title, and interest in and to (a) any and all licensing agreements or similar arrangements in and to its Patents, Copyrights, or Trademarks, (b) all income, royalties, damages, claims, and payments now or hereafter due or payable under and with respect thereto, including, without limitation, damages and payments for past and future breaches thereof, and (c) all rights to sue for past, present, and future breaches thereof.

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“ New York UCC ” means the New York Uniform Commercial Code as in effect from time to time .
“ Other Collateral ” means any property of the Grantors, not included within the defined terms Accounts, Chattel Paper, Commercial Tort Claims, Copyrights, Deposit Accounts, Documents, Equipment, Fixtures, General Intangibles, Goods, Instruments, Inventory, Investment Property, Letter-of-Credit Rights, Licenses, Patents, Pledged Deposits, Supporting Obligations, Trademarks and Pledged Equity, including, without limitation, all cash on hand, letters of credit, Stock Rights or any other deposits (general or special, time or demand, provisional or final) with any bank or other financial institution, it being intended that the Collateral include all personal property of the Grantors, subject to the limitations contained in Article II of this Security Agreement.
“ Patents ” means, with respect to any Person, all of such Person’s right, title, and interest in and to: (a) any and all patents and patent applications; (b) all inventions and improvements described and claimed therein; (c) all reissues, divisions, continuations, renewals, extensions, and continuations-in-part thereof; (d) all licenses of the foregoing whether as licensee or licensor; (e) all income, royalties, damages, claims, and payments now or hereafter due or payable under and with respect thereto, including, without limitation, damages and payments for past and future infringements thereof; (f) all rights to sue for past, present, and future infringements thereof; and (g) all rights corresponding to any of the foregoing throughout the world.
“ Pledged Deposits ” means all time deposits of money (other than Deposit Accounts and Instruments), whether or not evidenced by certificates, which a Grantor may from time to time designate as pledged to the Administrative Agent or to any Holder of Secured Obligations as security for any Guaranteed Obligation, and all rights to receive interest on said deposits.
“ Pledged Equity ” means, with respect to any Grantor, the shares of Capital Stock of each issuer identified in Exhibit C under the name of such Grantor and all other shares of Capital Stock of whatever class of each such issuer, now or hereafter owned by such Grantor, and all certificates or Instruments evidencing the same, and shall include, without limitation, the Applicable Pledge Percentage of the Capital Stock of each Pledge Subsidiary of such Grantor.
“ Receivables ” means the Accounts, Chattel Paper, Documents, Investment Property, Instruments or Pledged Deposits, and any other rights or claims to receive money which are General Intangibles or which are otherwise included as Collateral.
“ Section ” means a numbered section of this Security Agreement, unless another document is specifically referenced.
“ Security ” has the meaning set forth in Article 8 of the New York UCC.
“ Stock Rights ” means any securities, dividends, Instruments or other distributions and any other right or property which any Grantor shall receive or shall become entitled to receive for any reason whatsoever with respect to, in substitution for or in exchange for any securities or other ownership interests in a corporation, partnership, joint venture or limited liability company constituting Collateral and any securities, any right to receive securities and any right to receive earnings, in which any Grantor now has or hereafter acquires any right, issued by an issuer of such securities.
“ Supporting Obligation ” shall have the meaning set forth in Article 9 of the New York UCC.
“ Trademarks ” means, with respect to any Person, all of such Person’s right, title, and interest in and to the following: (a) all trademarks (including service marks), trade names, trade dress, and trade styles and the registrations and applications for registration thereof and the goodwill of the business symbolized by the foregoing; (b) all licenses of the foregoing, whether as licensee or licensor; (c) all renewals of the foregoing; (d) all income, royalties, damages, and payments now or hereafter due or payable with respect thereto, including, without limitation, damages, claims, and payments for past and future infringements thereof; (e) all rights to sue for past, present, and future infringements of the foregoing, including the right to settle suits involving claims and demands for royalties owing; and (f) all rights corresponding to any of the foregoing throughout the world.

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The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms.
ARTICLE II

GRANT OF SECURITY INTEREST
2.1.     Grantor Pledge; Reaffirmation of Pledge . Each of the Grantors hereby pledges, assigns and grants to the Administrative Agent, for the ratable benefit of the Holders of Secured Obligations, a security interest in all of such Grantor’s right, title and interest, whether now owned or hereafter acquired, in and to the Collateral to secure the prompt and complete payment and performance of the Secured Obligations. Without limiting the foregoing, each Initial Grantor reaffirms the assignments, pledges and grants of any and all security interests made under the Existing Security Agreement and agrees that such assignments, pledges and security interests (including, without limitation, any filings made in connection therewith) remain in full force and effect and are hereby ratified, reaffirmed and confirmed in order to secure the prompt and complete payment and performance of the Secured Obligations, with the same force, effect and priority in effect both immediately prior to and after entering into this Agreement. Each Grantor acknowledges and agrees with the Administrative Agent that the Existing Security Agreement is hereby amended and restated in its entirety pursuant to the terms hereof; provided , that this Security Agreement is in no way intended to constitute a novation of any obligations owed by the Grantors to the Administrative Agent or any other Holders of Secured Obligations under the Existing Security Agreement, all of which are hereby reaffirmed, ratified and confirmed.
2.2.     Limitations .
2.2.1     Applicable Pledge Percentage . Notwithstanding anything to the contrary in this Article II , the Collateral shall not include the Capital Stock of any Subsidiary exceeding the Applicable Pledge Percentage with respect thereto.
2.2.2     Joint Ventures . Notwithstanding anything to the contrary in this Article II , the Collateral shall not include the Capital Stock of any Joint Venture to the extent the organizational documents of such Joint Venture do not permit the applicable Grantor to pledge the Capital Stock of such Joint Venture as security for the Secured Obligations (or require the consent of another Venturer therefor).
2.2.3     1998 Senior Note Indenture .
(i)    Notwithstanding anything to the contrary in this Article II , the aggregate principal amount of the Secured Obligations secured by Liens on 1998 Restricted Collateral granted pursuant to this Security Agreement and the other Loan Documents shall not exceed 15% of Consolidated Net Tangible Assets under (and as defined in) the 1998 Senior Note Indenture at any time or, if greater, the maximum principal amount of Secured Obligations that may be secured by Liens on 1998 Restricted Collateral under the terms of all Senior Note Indentures then in effect (it being understood that the principal amount of the Secured Obligations secured by Liens on Collateral other than the 1998 Restricted Collateral granted pursuant to this Security Agreement and the other Loan Documents shall not be limited by this Section 2.2.3 ).
(ii)    It is further understood and agreed that the limitation on the amount of the Secured Obligations secured by Liens on 1998 Restricted Collateral set forth in the foregoing paragraph (i) applies to all Liens granted pursuant to this Security Agreement and each of the other Loan Documents in such a manner that at no time shall the Administrative Agent be entitled to realize proceeds of such Liens in excess of such amount, but that the Administrative Agent shall be entitled to enforce such security interests pursuant to this Security Agreement and the other Loan Documents on any an all “Collateral” (as defined in the Credit Agreement) in any manner or order of its choosing.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

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Each Grantor represents and warrants, and each Grantor that becomes a party to this Security Agreement pursuant to the execution of a Security Agreement Supplement in substantially the form of Annex I represents and warrants (after giving effect to supplements to each of the Exhibits hereto with respect to such subsequent Grantor as attached to such Security Agreement Supplement), that:
3.1.     Title, Authorization, Validity and Enforceability . Each such Grantor has good and valid rights in or the power to transfer (and with respect to intellectual property rights, grant a security interest in) the Collateral owned by it and title to the Collateral with respect to which it has purported to grant a security interest hereunder, free and clear of all Liens except for Liens permitted under Section 4.1.6 hereof, and has full corporate, limited liability company or partnership, as applicable, power and authority to grant to the Administrative Agent the security interest in such Collateral pursuant hereto. The execution and delivery by each such Grantor of this Security Agreement has been duly authorized by proper corporate, limited liability company or partnership, as applicable, proceedings, and this Security Agreement constitutes a legal, valid and binding obligation of each such Grantor and creates a security interest which is enforceable against each such Grantor in all Collateral it now owns or hereafter acquires, except as enforceability may be limited by (i) bankruptcy, insolvency, fraudulent conveyance, reorganization or similar laws relating to or affecting the enforcement of creditors’ rights generally, (ii) general equitable principles (whether considered in a proceeding in equity or at law), and (iii) requirements of reasonableness, good faith and fair dealing. When financing statements have been filed in the appropriate offices against each Grantor in the locations listed on Exhibit D , and filings made in the appropriate filing offices for intellectual property, the Administrative Agent will have a fully perfected first priority security interest in the Collateral owned by such Grantor in which a security interest may be perfected by filing, subject only to Liens permitted under Section 4.1.6 hereof.
3.2.     Conflicting Laws and Contracts . Neither the execution and delivery by each Grantor of this Security Agreement, the creation and perfection of the security interest in the Collateral granted hereunder, nor compliance with the terms and provisions hereof will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on such Grantor, or (ii) such Grantor’s charter, by-laws or other organizational or constitutional documents, or (iii) the provisions of any indenture, instrument or agreement to which such Grantor is a party or is subject, or by which it, or its property may be bound or affected, or conflict with or constitute a default thereunder, or result in or require the creation or imposition of any Lien in, of or on the property of such Grantor pursuant to the terms of any such indenture, instrument or agreement (other than any Lien permitted under Section 7.3(F) of the Credit Agreement), except for any such violation as would not reasonably be expected to have a Material Adverse Effect.
3.3.     Principal Location . Each Grantor’s mailing address and the location of its place of business (if it has only one) or its chief executive office (if it has more than one place of business), is disclosed in Exhibit A ; such Grantor has no other places of business except those set forth in Exhibit A .
3.4.     Property Locations . The Inventory, Equipment and Fixtures of each Grantor are located solely at the locations of such Grantor described in Exhibit A or are in transit to or from such locations (except Inventory having an aggregate value for all Grantors not exceeding $15,000,000), which locations are owned by such Grantor except for locations (i) which are leased by such Grantor as lessee and designated in Part B of Exhibit A or (ii) at which Inventory is held in a public warehouse or is otherwise held by a bailee or on consignment by such Grantor as designated in Part C of Exhibit A .
3.5.     No Other Names . Within the five-year period ending as of the date such Person becomes a Grantor hereunder, such Grantor has not conducted business under any name, changed its jurisdiction of formation, merged with or into or consolidated with any other Person, except as disclosed in Exhibit “A” ; provided that with respect to any Grantor party to this Security Agreement as of the Restatement Effective Date, such period shall be a five-year period ending on the Restatement Effective Date. The name in which such Grantor has executed this Security Agreement is the exact name as it appears in such Grantor’s organizational documents, as amended, as filed with such Grantor’s jurisdiction of organization as of the date such Person becomes a Grantor hereunder.
3.6.     Accounts and Chattel Paper . The names of the obligors, amounts owing, due dates and other information with respect to the Accounts and Chattel Paper owned by each Grantor are and will be correctly stated in all material respects in all records of such Grantor relating thereto and in all invoices and reports with respect thereto

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furnished to the Administrative Agent by such Grantor from time to time. As of the time when each Account or each item of Chattel Paper arises, such Grantor shall be deemed to have represented and warranted that, to the best of such Grantor’s knowledge, such Account or Chattel Paper, as the case may be, and all records relating thereto, are genuine and in all respects what they purport to be.
3.7.     Filing Requirements . None of the Equipment owned by such Grantor is covered by any certificate of title required to be delivered pursuant to Section 4.3.3 , except for the vehicles described in Part A of Exhibit B . None of the Collateral owned by such Grantor is of a type for which security interests or liens may be perfected by filing under any federal statute except (i) aircraft and any aircraft/engines, ships, railcars and other vehicles governed by federal statute described in Part B of Exhibit B and (ii) the patents, trademarks and copyrights held by such Grantor and described in Part C of Exhibit B .
3.8.     No Financing Statements, Security Agreements . No financing statement or security agreement describing all or any portion of the Collateral which has not lapsed or been terminated naming any Grantor as debtor has been filed in any jurisdiction except financing statements (i) naming the Administrative Agent on behalf of the Holders of Secured Obligations as the secured party, and (ii) in respect of Liens permitted by Section 7.3(F) of the Credit Agreement; provided , that nothing herein shall be deemed to constitute an agreement to subordinate any of the Liens of the Administrative Agent under the Loan Documents to any Liens otherwise permitted under Section 7.3(F) of the Credit Agreement.
3.9.     Federal Employer Identification Number; Jurisdiction of Organization Number; Jurisdiction of Organization . Each Grantor’s federal employer identification number is, and if such Grantor is a registered organization, such Grantor’s jurisdiction of organization, type of organization and jurisdiction of organization identification number is listed on Exhibit A .
3.10.     Pledged Securities and Other Investment Property . Exhibit C sets forth a complete and accurate list of the Pledged Equity, and to the extent the same has a value in excess of $5,000,000 in the aggregate, Instruments, Securities and other Investment Property (to the extent the same do not constitute Cash Equivalent Investments) delivered to the Administrative Agent. Each Grantor is the direct and beneficial owner of each Instrument, Security and other type of Investment Property listed on Exhibit C as being owned by it, free and clear of any Liens, except for the security interest granted to the Administrative Agent for the benefit of the Holders of Secured Obligations hereunder or as permitted by Section 7.3(F) of the Credit Agreement. Each Grantor further represents and warrants that (i) all Pledged Equity which are shares of stock in a corporation or ownership interests in a partnership or limited liability company have been (to the extent such concepts are relevant with respect to such Pledged Equity) duly and validly issued, are fully paid and non-assessable and constitute the percentage of the issued and outstanding shares of stock (or other equity interests) of the respective issuers thereof indicated on Exhibit C hereto and (ii) with respect to any certificates delivered to the Administrative Agent representing an Equity Interest, either such certificates are Securities as defined in Article 8 of the UCC of the applicable jurisdiction as a result of actions by the issuer or otherwise, or, if such certificates are not Securities, such Grantor has so informed the Administrative Agent so that the Administrative Agent may take steps to perfect its security interest therein as a General Intangible.
3.11.     Commercial Tort Claims . Exhibit E sets forth a complete and accurate list of all Commercial Torts Claims of the Grantors.
3.12.     Intellectual Property .
3.12.1     Exhibit B contains a complete and accurate listing as of the Restatement Effective Date of the following: (i) Intellectual Property, (ii) foreign industrial design registrations and industrial design applications, and (iii) the names of any Person who has been granted rights in respect thereof outside of the ordinary course of business.
3.12.2    Such intellectual property is valid, subsisting, unexpired (where registered) and enforceable and has not been abandoned or adjudged invalid or unenforceable, in whole or in part, except as could not be reasonably expected to result in a Material Adverse Effect.

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3.12.3    Except as set forth on Exhibit B , no Person other than the respective Grantor has any right or interest of any kind or nature in or to the Intellectual Property, including any right to sell, license, lease, transfer, distribute, use or otherwise exploit the Intellectual Property or any portion thereof outside of the ordinary course of the respective Grantor’s business. Except as set forth on Exhibit B , each Grantor has good, marketable and exclusive title to, and the valid and enforceable power and right to sell, license, transfer, distribute, use and otherwise exploit, its Intellectual Property.
3.12.4    Each Grantor has taken or caused to be taken steps so that none of its intellectual property, the value of which to the Grantors are contingent upon maintenance of the confidentiality thereof, have been disclosed by such Grantor to any Person other than employees, contractors, customers, representatives and agents of the Grantors who are parties to customary confidentiality and nondisclosure agreements with the Grantors.
3.12.5    To each Grantor’s knowledge, no Person has violated, infringed upon or breached, or is currently violating, infringing upon or breaching, any of the rights of the Grantors to the intellectual property or has breached or is breaching any duty or obligation owed to the Grantors in respect of the intellectual property except where those breaches, individually or in the aggregate, could not be reasonably expected to result in a Material Adverse Effect.
3.12.6    No settlement or consents, covenants not to sue, nonassertion assurances, or releases have been entered into by any Grantor or to which any Grantor is bound that adversely affects its rights to own or use any intellectual property except as could not be reasonably expected to result in a Material Adverse Effect, in each case individually or in the aggregate.
3.12.7    No Grantor has received any written notice that remains outstanding challenging the validity, enforceability, or ownership of any intellectual property except where those challenges could not reasonably be expected to result in a Material Adverse Effect, and to such Grantor’s knowledge at the date hereof there are no facts upon which such a challenge could be made.
3.12.8    To each Grantor’s knowledge, such Grantor owns directly or is entitled to use, by license or otherwise, all intellectual property necessary for the conduct of such Grantor’s business.
3.12.9    Each Grantor uses adequate standards of quality in the manufacture, distribution, and sale of all products sold and in the provision of all services rendered under or in connection with all trademarks and has taken all commercially reasonable action necessary to insure that all licensees of the trademarks owned or licensed by such Grantor use such adequate standards of quality, except where the failure to use adequate standards of quality could not reasonably be expected to result in a Material Adverse Effect.
3.13.    The consummation of the transactions contemplated by the Loan Documents will not result in the termination or material impairment of any of the Intellectual Property.

ARTICLE IV

COVENANTS

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From the date of this Security Agreement and thereafter until this Security Agreement is terminated pursuant to the terms hereof, each Grantor party hereto as of the date hereof agrees, and from and after the effective date of any Security Agreement Supplement in substantially the form of Annex I applicable to any Grantor (and after giving effect to supplements to each of the Exhibits hereto with respect to such subsequent Grantor as attached to such Security Agreement Supplement) and thereafter until this Security Agreement is terminated pursuant to the terms hereof, each such subsequent Grantor agrees that:
4.1.     General .
4.1.1     Inspection . Each Grantor will permit the Administrative Agent or any Lender, by its representatives and agents, upon reasonable prior notice (i) to inspect its respective Collateral, (ii) to examine and make copies of the records of such Grantor relating to its respective Collateral and (iii) to discuss such Grantor’s respective Collateral and the related records of such Grantor with, and to be advised as to the same by, such Grantor’s officers and employees (and, in the case of any Receivable, after the occurrence and during the continuance of a Default, with any person or entity which is or may be obligated thereon), all at such reasonable times and intervals as the Administrative Agent or such Lender may determine; provided , that the Grantors shall pay all reasonable costs and expenses of one such inspection per year by the Administrative Agent and its representatives and agents (and any representatives and agents of the Lenders participating in such inspection); provided , further , that if a Default has occurred and is continuing, the Grantors shall pay all reasonable costs and expenses of all such inspections.
4.1.2     Taxes . Each Grantor will pay when due all taxes, assessments and governmental charges and levies upon the Collateral owned by such Grantor, as applicable, except (i) those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside in accordance with GAAP and with respect to which no Lien exists, and (ii) those as to which the failure to pay when due could not reasonably be expected to have a Material Adverse Effect.
4.1.3     Records and Reports; Notification . Each Grantor shall keep and maintain materially complete, accurate and proper books and records with respect to the Collateral owned by such Grantor and furnish to the Administrative Agent, with sufficient copies for each of the Lenders, such reports relating to its respective Collateral as the Administrative Agent shall from time to time reasonably request. Each Grantor will give prompt notice in writing to the Administrative Agent and the Lenders of any development, financial or otherwise, which might materially and adversely affect a material portion of its respective Collateral.
4.1.4     Financing Statements and Other Actions; Defense of Title . Each Grantor hereby authorizes the Administrative Agent to file, and if requested by the Administrative Agent will execute and deliver to the Administrative Agent, all financing statements describing the Collateral owned by such Grantor and other documents and take such other actions as may from time to time reasonably be requested by the Administrative Agent in order to maintain a first priority perfected security interest in and, if applicable, Control of, the Collateral owned by such Grantor, subject to Liens permitted under Section 7.3(F) of the Credit Agreement; provided that nothing herein shall be deemed to constitute an agreement to subordinate any of the Liens of the Administrative Agent under the Loan Documents to any Liens otherwise permitted under Section 7.3(F) of the Credit Agreement. Such financing statements may describe the Collateral in the same manner as described herein or may contain an indication or description of collateral that describes such property in any other manner as the Administrative Agent may determine, in its sole discretion, is necessary, advisable or prudent to ensure that the perfection of the security interest in the Collateral granted to the Administrative Agent herein, including, without limitation, describing, with respect to any Grantor’s financing statement, such property as “all assets” or “all assets of the Debtor, whether now owned or hereafter acquired or arising, wheresoever located, together with all proceeds thereof.” Each Grantor will take any and all actions reasonably necessary to defend title to the Collateral owned by such Grantor against all Persons and to defend the security interest of the Administrative Agent in such Collateral and the priority thereof against any Lien not expressly permitted hereunder or by the Credit Agreement.

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4.1.5     Disposition of Collateral . No Grantor will sell, lease or otherwise dispose of the Collateral owned by such Grantor except dispositions specifically permitted pursuant to Section 7.3(C) of the Credit Agreement.
4.1.6     Liens . No Grantor will create, incur, or suffer to exist any Lien on the Collateral owned by such Grantor except Liens permitted pursuant to Section 7.3(F) of the Credit Agreement; provided , that nothing herein shall be deemed to constitute an agreement to subordinate any of the Liens of the Administrative Agent under the Loan Documents to any Liens otherwise permitted under Section 7.3(F) of the Credit Agreement.
4.1.7     Change in Corporate Existence, Type or Jurisdiction of Organization, Location, Name . Each Grantor will:
(i)
except as otherwise permitted by Section 7.3(B) of the Credit Agreement, preserve its existence and corporate structure as in effect on the Restatement Effective Date, or, with respect to Grantors that become subject hereto pursuant to an Annex I hereto, the date of such Annex I hereto;
(ii)
not change its jurisdiction of organization;
(iii)
not maintain its place of business (if it has only one) or its chief executive office (if it has more than one place of business) at a location other than a location specified on Exhibit A ; and
(iv)
not (i) have any Inventory, Equipment or Fixtures or proceeds or products thereof having an aggregate value for all Grantors in excess of $15,000,000 (unless in transit) at a location other than a location specified in Exhibit A , (ii) change its name or taxpayer identification number or (iii) change its mailing address,
unless, in each such case, such Grantor shall have given the Administrative Agent not less than fifteen (15) days’ prior written notice of such event or occurrence and the Administrative Agent shall have either (x) determined that such event or occurrence will not adversely affect the validity, perfection or priority of the Administrative Agent’s security interest in the Collateral, or (y) taken such steps (with the cooperation of such Grantor to the extent necessary or advisable) as are reasonably necessary or advisable to properly maintain the validity, perfection and priority of the Administrative Agent’s security interest in the Collateral owned by such Grantor (including compliance with Section 4.3.2 ).
4.1.8     Other Financing Statements . No Grantor will suffer to exist or authorize the filing of any financing statement naming it as debtor covering all or any portion of the Collateral owned by such Grantor, except any financing statement authorized under Section 4.1.4 hereof or filed to perfect a Lien permitted under Section 7.3(F) of the Credit Agreement. Each Grantor acknowledges that it is not authorized to file any financing statement or amendment or termination statement with respect to any financing statement filed in connection herewith without the prior written consent of the Administrative Agent, subject to such Grantor’s rights under Section 9-509(d)(2) of the New York UCC.
4.2.     Receivables .
4.2.1     Collection of Receivables . Except as otherwise provided in this Security Agreement, each Grantor will collect and enforce, at such Grantor’s sole expense, all amounts due or hereafter due to such Grantor under the Receivables owned by such Grantor in accordance with its present policies and in the ordinary course of business and as otherwise permitted under the Credit Agreement.
4.2.2     Delivery of Invoices . Each Grantor will deliver to the Administrative Agent immediately upon its request after the occurrence and during the continuance of a Default duplicate invoices with respect to each Account owned by such Grantor bearing such language of assignment as the Administrative Agent shall specify.

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4.2.3     Disclosure of Receivables . Upon the reasonable request of the Administrative Agent, each Grantor shall deliver to the Administrative Agent copies of any periodic reports prepared with respect to Receivables in connection with any Permitted Receivables Financing.
4.3.     Inventory and Equipment .
4.3.1     Maintenance of Goods . Each Grantor will do all things reasonably necessary to maintain, preserve, protect and keep the Inventory and the Equipment owned by such Grantor in good repair, working order and saleable condition (ordinary wear and tear excepted) and make all reasonably necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.
4.3.2     Bailment Agreements . With respect to any location of Inventory (other than locations holding Inventory having an aggregate value for all Grantors of less than $15,000,000) that is leased by such Grantor or at which Inventory is held in a public warehouse or is otherwise held by a bailee or on consignment, such Grantor, at the Administrative Agent’s reasonable request, shall deliver landlord waivers, bailment agreements, warehouse receipts, financing statements or other documents reasonably satisfactory to the Administrative Agent to protect the Administrative Agent’s and the Holders of Secured Obligations’ security interest in such Inventory and provide the Administrative Agent with access to such Collateral upon the occurrence of a Default.
4.3.3     Titled Vehicles . Each Grantor will give the Administrative Agent notice of its ownership or acquisition of any vehicle covered by a certificate of title the book value of which, when taken together with all other vehicles covered by a certificate of title owned by any Grantor, exceeds $2,500,000 in the aggregate, and deliver to the Administrative Agent, upon reasonable request, the original of any vehicle title certificate and do all things necessary to have the security interest of the Administrative Agent noted on any such certificate to eliminate such excess.
4.4.     Instruments, Securities, Chattel Paper, Documents and Pledged Deposits . Each Grantor will (i) deliver to the Administrative Agent immediately upon execution of this Security Agreement the originals of all Pledged Equity, and, to the extent the same has a value in excess of $5,000,000 in the aggregate, originals of all Chattel Paper, Securities and Instruments constituting Collateral (if any then exist and other than those constituting Cash Equivalent Investments), (ii) hold in trust for the Administrative Agent upon receipt and immediately thereafter deliver to the Administrative Agent any Pledged Equity, and, to the extent the same has a value in excess of $5,000,000 in the aggregate, originals of Chattel Paper, Securities and Instruments constituting Collateral (other than those constituting Cash Equivalent Investments), (iii) upon the designation of any Pledged Deposits (as set forth in the definition thereof) in excess of $5,000,000 in the aggregate, deliver to the Administrative Agent such Pledged Deposits which are evidenced by certificates included in the Collateral endorsed in blank, marked with such legends and assigned as the Administrative Agent shall specify, and (iv) upon the Administrative Agent’s request, after the occurrence and during the continuance of a Default, deliver to the Administrative Agent (and thereafter hold in trust for the Administrative Agent upon receipt and immediately deliver to the Administrative Agent) any Document evidencing or constituting Collateral.
4.5.     Uncertificated Securities and Certain Other Investment Property . Each Grantor will permit the Administrative Agent from time to time, after the occurrence and during the continuance of a Default, to cause the appropriate issuers (and, if held with a securities intermediary, such securities intermediary) of uncertificated securities or other types of Investment Property not represented by certificates which are Collateral owned by such Grantor to mark their books and records with the numbers and face amounts of all such uncertificated securities or other types of Investment Property not represented by certificates and all rollovers and replacements therefor to reflect the Lien of the Administrative Agent granted pursuant to this Security Agreement. Each Grantor will use all commercially reasonable efforts, upon the request of the Administrative Agent upon the occurrence and during the continuance of a Default, with respect to Investment Property constituting Collateral owned by such Grantor held with a financial intermediary, to cause such financial intermediary to enter into a control agreement with the Administrative Agent in form and substance satisfactory to the Administrative Agent.

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4.6.     Stock and Other Ownership Interests .
4.6.1     Changes in Capital Structure of Issuers . Except as permitted in the Credit Agreement, no Grantor will (i) permit or suffer any issuer of Pledged Equity owned by such Grantor to dissolve, liquidate, retire any of its Capital Stock, reduce its capital or merge or consolidate with any other entity, or (ii) vote any of the Pledged Equity in favor of any of the foregoing, except to the extent permitted under the Credit Agreement.
4.6.2     Issuance of Additional Securities . No Grantor will permit or suffer (i) any issuer of Pledged Equity that is a Wholly-Owned Subsidiary of such Grantor to issue any such securities or other ownership interests, any right to receive the same or any right to receive earnings, except to such Grantor or (ii) any issuer of Pledged Equity that is not a Wholly-Owned Subsidiary of such Grantor to issue any such securities or other ownership interests, any right to receive the same or any right to receive earnings unless such issuance is made or offered to each holder of such securities based on their proportionate holdings thereof.
4.6.3     Registration of Pledged Securities and other Investment Property . Each Grantor will permit any registerable Collateral owned by such Grantor to be registered in the name of the Administrative Agent or its nominee at any time at the option of the Required Lenders following the occurrence and during the continuance of a Default and without any further consent of such Grantor.
4.6.4     Exercise of Rights in Pledged Securities and other Investment Property . Each Grantor will permit the Administrative Agent or its nominee at any time after the occurrence and continuance of a Default, without notice, to exercise or refrain from exercising any and all voting and other consensual rights pertaining to the Collateral owned by such Grantor or any part thereof, and to receive all dividends and interest in respect of such Collateral. Unless and until a Default shall have occurred and be continuing, (i) each Grantor shall be entitled to exercise all voting and other consensual rights pertaining to the Collateral for any purpose that does not violate the terms of this Agreement, the Credit Agreement and the other Loan Documents; provided , however , that no Grantor will be entitled to exercise any such right if the result thereof could materially and adversely affect the rights and remedies of the Administrative Agent or Holders of Secured Obligations under this Agreement or the Credit Agreement or any other Loan Document or the ability to exercise the same, and (ii) each Grantor shall be entitled to receive and retain all dividends or interest in respect of such Collateral to the extent and only to the extent that such dividends or interest are not prohibited by the terms and conditions of the Credit Agreement, the other Loan Documents and applicable laws, other than any dividends or interest resulting from a subdivision, combination or reclassification or received in exchange for Collateral, or in redemption thereof, or as a result of any merger, consolidation, acquisition or other exchange of assets.
4.6.5     Interests in Limited Liability Companies and Limited Partnerships . Each Grantor agrees that no ownership interests in a limited liability company or a limited partnership which are included within the Collateral owned by such Grantor shall at any time constitute a Security under Article 8 of the UCC of the applicable jurisdiction.
4.7.     Deposit Accounts . Each Grantor will, after the occurrence and during the continuance of a Default and upon the Administrative Agent’s request, cause each bank or other financial institution in which it maintains (a) a Deposit Account to enter into a control agreement with the Administrative Agent, in form and substance reasonably satisfactory to the Administrative Agent in order to give the Administrative Agent Control of the Deposit Account to the extent it does not already possess such Control or to further evidence such Control, or (b) other deposits (general or special, time or demand, provisional or final) to be notified of the security interest granted to the Administrative Agent hereunder and cause each such bank or other financial institution to acknowledge such notification in writing.
4.8.     Letter-of-Credit Rights . Each Grantor will, upon the Administrative Agent’s request, cause each issuer of a letter of credit to such Grantor that constitutes Collateral having a face value in excess of $5,000,000, to consent to the assignment of proceeds of the letter of credit in order to give the Administrative Agent Control of the letter-of-credit rights to such letter of credit.

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4.9.     Intellectual Property . If, after the date hereof, any Grantor obtains rights to, or applies for or seeks registration of, any new patent, trademark or copyright in addition to the patents, trademarks and copyrights described in Part C of Exhibit B , which are all of such Grantor’s patents, trademarks and copyrights as of the Restatement Effective Date, then such Grantor shall give the Administrative Agent notice of such newly acquired or registered patent, trademark or copyright, as part of each compliance certificate provided to the Administrative Agent pursuant to the Credit Agreement. Each Grantor agrees promptly upon request by the Administrative Agent to execute and deliver to the Administrative Agent any supplement to this Security Agreement or any other document reasonably requested by the Administrative Agent to evidence a security interest in such intellectual property in a form appropriate for recording in the applicable federal office. Each Grantor also hereby authorizes the Administrative Agent to modify this Security Agreement unilaterally (i) by amending Part C of Exhibit B to include any future patents, trademarks and/or copyrights of which the Administrative Agent receives notification from such Grantor pursuant hereto and (ii) by recording, in addition to and not in substitution for this Security Agreement, a duplicate original of this Security Agreement containing in Part C of Exhibit B a description of such future patents, trademarks and/or copyrights..
4.10.     Commercial Tort Claims . If, after the date hereof, any Grantor identifies the existence of a commercial tort claim belonging to such Grantor having, individually or together with all other such Commercial Tort Claims, in such Grantor’s reasonable business judgment, a value in excess of $10,000,000, that has arisen in the course of such Grantor’s business in addition to the Commercial Tort Claims described in Exhibit E , which are all of such Grantor’s Commercial Tort Claims as of the Restatement Effective Date, then such Grantor shall give the Administrative Agent notice thereof not less frequently than quarterly. Each Grantor agrees promptly upon written request by the Administrative Agent to execute and deliver to the Administrative Agent any supplement to this Security Agreement or any other document reasonably requested by the Administrative Agent to evidence the grant of a security interest therein in favor of the Administrative Agent.
4.11.     Federal, State or Municipal Claims . After the occurrence and during the continuance of a Default, upon the Administrative Agent’s request, each Grantor will notify the Administrative Agent of any Collateral owned by such Grantor which constitutes a claim against the United States government or any state or local government or any instrumentality or agency thereof, the assignment of which claim is restricted by federal, state or municipal law. Furthermore, each Grantor will execute and deliver to the Administrative Agent such documents, agreements and instruments, and will take such further actions (including, without limitation, the taking of necessary actions under the Federal Assignment of Claims Act of 1940, as amended (31 U.S.C. § 3727 et seq. and 41 U.S.C. § 15 et seq.)), which the Administrative Agent may, from time to time, reasonably request, to ensure perfection and priority of the Liens hereunder in respect of Accounts and General Intangibles owing by any government or instrumentality or agency thereof, all at the expense of the Borrower.
4.12.     No Interference . Each Grantor agrees that it will not interfere with any right, power and remedy of the Administrative Agent provided for in this Security Agreement or now or hereafter existing at law or in equity or by statute or otherwise, or the exercise or beginning of the exercise by the Administrative Agent of any one or more of such rights, powers or remedies.
4.13.     Insurance . In the event any Collateral is located in any area that has been designated by the Federal Emergency Management Agency as a “Special Flood Hazard Area”, each Grantor shall purchase and maintain flood insurance on such Collateral (including any personal property which is located on any real property leased by such Grantor within a “Special Flood Hazard Area”). The amount of flood insurance required by this Section shall at a minimum comply with applicable law, including the Flood Disaster Protection Act of 1973, as amended.

ARTICLE V

DEFAULT

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5.1.     Default . The occurrence of any “Default” under the Credit Agreement shall constitute a Default hereunder.
5.2.     Acceleration and Remedies . Upon the occurrence and during the continuance of a Default, the Administrative Agent may, with the concurrence or at the direction of the Required Lenders (or, if required pursuant to the terms of the Credit Agreement, with the concurrence or at the direction of each of the Lenders), exercise any or all of the following rights and remedies:
5.2.4    Those rights and remedies provided in this Security Agreement, the Credit Agreement, or any other Loan Document; provided that this Section 5.2.1 shall not be understood to limit any rights or remedies available to the Administrative Agent and the Holders of Secured Obligations prior to a Default.
5.2.5    Those rights and remedies available to a secured party under the New York UCC or under any other applicable law (including, without limitation, any law governing the exercise of a bank’s right of setoff or bankers’ lien) when a debtor is in default under a security agreement.
5.2.6    Give notice of sole control or any other instruction under any deposit account control agreement or other control agreement with any securities intermediary (if any) and take any action therein with respect to such Collateral.
5.2.7    Without notice (except as specifically provided in Section 8.1 hereof or elsewhere herein), demand or advertisement of any kind to any Grantor or any other Person, enter the premises of any Grantor where any Collateral is located (through self-help and without judicial process) to collect, receive, assemble, process, appropriate, sell, lease, assign, grant an option or options to purchase or otherwise dispose of, deliver, or realize upon, the Collateral or any part thereof in one or more parcels at public or private sale or sales (which sales may be adjourned or continued from time to time with or without notice and may take place at any Grantor’s premises of elsewhere), for cash, on credit or for future delivery without assumption of any credit risk, and upon such other terms as the Administrative Agent may deem commercially reasonable.
5.2.8    Concurrently with written notice to the applicable Grantor, transfer and register in its name or in the name of its nominee the whole or any part of the Pledged Equity, to exchange certificates or instruments representing or evidencing Pledged Equity for certificates or instruments of smaller or larger denominations, to exercise the voting and all other rights as a holder with respect thereto, to collect and receive all cash dividends, interest, principal and other distributions made thereon and to otherwise act with respect to the Pledged Equity as though the Administrative Agent was the outright owner thereof.
5.2.9    The Administrative Agent shall have the right upon any such public sale or sales and, to the extent permitted by law, upon any such private sale or sales, to purchase for the benefit of the Administrative Agent and the other Secured Parties, the whole or any part of the Collateral so sold, free of any right of equity redemption, which equity redemption the Grantor hereby expressly releases.
5.2.10    Until the Administrative Agent is able to effect a sale, lease, or other disposition of Collateral, the Administrative Agent shall have the right to hold or use Collateral, or any part thereof, to the extent that it deems appropriate for the purpose of preserving Collateral or its value or for any other purpose deemed appropriate by the Administrative Agent. The Administrative Agent may, if it so elects, seek the appointment of a receiver or keeper to take possession of Collateral and to enforce any of the Administrative Agent’s remedies (for the benefit of the Administrative Agent and other Secured Parties), with respect to such appointment without prior notice or hearing as to such appointment.
5.2.11    Each Grantor recognizes that the Administrative Agent may be unable to effect a public sale of any or all the Pledged Equity and may be compelled to resort to one or more private sales thereof in accordance with Section 5.2.1 above. Each Grantor also acknowledges that any private sale may result in prices and other terms less favorable to the seller than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall not be deemed to have been made in a commercially

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unreasonable manner solely by virtue of such sale being private. The Administrative Agent shall be under no obligation to delay a sale of any of the Pledged Equity for the period of time necessary to permit any Grantor or the issuer of the Pledged Equity to register such securities for public sale under the Securities Act of 1933, as amended, or under applicable state securities laws, even if the applicable Grantor and the issuer would agree to do so.
The Administrative Agent, on behalf of the Holders of Secured Obligations, may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral, and such compliance will not be considered to adversely affect the commercial reasonableness of any sale of the Collateral. Notwithstanding the foregoing, neither the Administrative Agent nor the Holders of Secured Obligations shall be required to (i) make any demand upon, or pursue or exhaust any of their rights or remedies against, any Grantor, any other obligor, guarantor, pledgor or any other Person with respect to the payment of the Secured Obligations or to pursue or exhaust any of their rights or remedies with respect to any Collateral therefor or any direct or indirect guarantee thereof, (ii) marshal the Collateral or any guarantee of the Secured Obligations or to resort to the Collateral or any such guarantee in any particular order or (iii) effect a public sale of any of the Collateral.
5.3.     Grantors’ Obligations Upon Default . Upon the request of the Administrative Agent after the occurrence and during the continuance of a Default, each Grantor will:
5.3.1     Assembly of Collateral . Assemble and make available to the Administrative Agent its respective Collateral and all records relating thereto at any place or places specified by the Administrative Agent.
5.3.2     Administrative Agent Access . Permit the Administrative Agent, by the Administrative Agent’s representatives and agents, to enter, occupy and use any premises where all or any part of its respective Collateral, or the books and records relating thereto, or both, are located, to take possession of all or any part of the Collateral and to remove all or any part of the Collateral, or the books and records relating thereto, or both, and to conduct sales of the Collateral, without any obligation to pay the Grantor for such use and occupancy.
5.3.3    Take, or cause an issuer of Pledged Equity to take, any and all actions necessary to register or qualify the Pledged Equity to enable the Administrative Agent to consummate a public sale or other disposition of the Pledged Equity.
5.4.     License . The Administrative Agent is hereby granted a license or other right to use, exercisable only following the occurrence and during the continuance of a Default, without charge, each Grantor’s labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, customer lists and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral, and, following the occurrence and during the continuance of a Default, such Grantor’s rights under all licenses and all franchise agreements shall inure to the Administrative Agent’s benefit. In addition, each Grantor hereby irrevocably agrees that the Administrative Agent may, following the occurrence and during the continuance of a Default, sell any of such Grantor’s Inventory directly to any person, including without limitation persons who have previously purchased such Grantor’s Inventory from such Grantor and in connection with any such sale or other enforcement of the Administrative Agent’s rights under this Security Agreement, may sell Inventory which bears any trademark owned by or licensed to such Grantor and any Inventory that is covered by any copyright owned by or licensed to such Grantor and the Administrative Agent may (but shall have no obligation to) finish any work in process and affix any trademark owned by or licensed to such Grantor and sell such Inventory as provided herein.

ARTICLE VI

WAIVERS, AMENDMENTS AND REMEDIES

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No delay or omission of the Administrative Agent or any Holder of Secured Obligations to exercise any right or remedy granted under this Security Agreement shall impair such right or remedy or be construed to be a waiver of any Default or an acquiescence therein, and any single or partial exercise of any such right or remedy shall not preclude any other or further exercise thereof or the exercise of any other right or remedy. No waiver, amendment or other variation of the terms, conditions or provisions of this Security Agreement whatsoever shall be valid unless in writing signed by the Administrative Agent with the concurrence or at the direction of (a) the Required Lenders (or, if required pursuant to the terms of the Credit Agreement, with the concurrence or at the direction of Required Revolving Lenders or all of the Lenders) and (b) each Grantor, and then only to the extent in such writing specifically set forth; provided that the addition of any Subsidiary of the Company as a Grantor hereunder by execution of a Security Agreement Supplement in the form of Annex I (with such modifications as shall be acceptable to the Administrative Agent) shall not require receipt of any consent from or execution of any documentation by any other Grantor party hereto. All rights and remedies contained in this Security Agreement or by law afforded shall be cumulative and all shall be available to the Administrative Agent and the Holders of Secured Obligations until the Secured Obligations have been paid in full.
ARTICLE VII

PROCEEDS; COLLECTION OF RECEIVABLES
7.1.     Lockboxes and Account Control Agreements . Upon request of the Administrative Agent, after the occurrence and during the continuance of a Default, each Grantor shall execute and deliver to the Administrative Agent irrevocable lockbox and account control agreements in the form provided by or otherwise acceptable to the Administrative Agent, which agreements shall be accompanied by an acknowledgment by the bank where the lockbox and applicable deposit account is located of the Lien of the Administrative Agent granted hereunder and of irrevocable instructions to wire all amounts collected therein to a special collateral account at the Administrative Agent.
7.2.     Collection of Receivables . The Administrative Agent may at any time after the occurrence and during the continuance of a Default, by giving each Grantor written notice, elect to require that the Receivables that constitute Collateral be paid directly to the Administrative Agent for the benefit of the Holders of Secured Obligations. In such event, each Grantor shall, and shall permit the Administrative Agent to, promptly notify the account debtors or obligors under the Receivables owned by such Grantor of the Administrative Agent’s interest therein and direct such account debtors or obligors to make payment of all amounts then or thereafter due under such Receivables directly to the Administrative Agent. Upon receipt of any such notice from the Administrative Agent, each Grantor shall thereafter hold in trust for the Administrative Agent, on behalf of the Holders of Secured Obligations, all amounts and proceeds received by it with respect to the Receivables and Other Collateral and immediately and at all times thereafter deliver to the Administrative Agent all such amounts and proceeds in the same form as so received, whether by cash, check, draft or otherwise, with any necessary endorsements. The Administrative Agent shall hold and apply funds so received as provided by the terms of Sections 7.3 and 7.4 hereof.
7.3.     Special Collateral Account . The Administrative Agent may require, after the occurrence and during the continuance of a Default, all cash proceeds of such Grantor’s Collateral to be deposited in a special non-interest bearing cash collateral account with the Administrative Agent and held there as security for the Secured Obligations. No Grantor shall have any control whatsoever over said cash collateral account. If no Default has occurred or is continuing, the Administrative Agent shall from time to time deposit the collected balances in said cash collateral account into the applicable Grantor’s general operating account with the Administrative Agent. If any Default has occurred and is continuing, the Administrative Agent may (and shall, at the direction of the Required Lenders), from time to time, apply the collected balances in said cash collateral account to the payment of the Secured Obligations whether or not the Secured Obligations shall then be due.
7.4.     Application of Proceeds . The proceeds of the Collateral shall be applied by the Administrative Agent to payment of the Secured Obligations in accordance with Section 12.4 of the Credit Agreement.
ARTICLE VIII

GENERAL PROVISIONS

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8.1.     Notice of Disposition of Collateral; Condition of Collateral . Each Grantor hereby waives notice of the time and place of any public sale or the time after which any private sale or other disposition of all or any part of the Collateral may be made. To the extent such notice may not be waived under applicable law, any notice made shall be deemed reasonable if sent to the Company, as designee for the other Grantors, addressed as set forth in Article IX , at least ten (10) days prior to (i) the date of any such public sale or (ii) the time after which any such private sale or other disposition may be made. The Administrative Agent shall have no obligation to clean-up or otherwise prepare the Collateral for sale. To the maximum extent permitted by applicable law, each Grantor waives all claims, damages, and demands against the Administrative Agent or any other Holder of Secured Obligations arising out of the repossession, retention or sale of the Collateral, except such as arise solely out of the gross negligence or willful misconduct of the Administrative Agent or such other Holder of Secured Obligations as finally determined by a court of competent jurisdiction. To the extent it may lawfully do so, each Grantor absolutely and irrevocably waives and relinquishes the benefit and advantage of, and covenants not to assert against the Administrative Agent or any other Holder of Secured Obligations, any valuation, stay, appraisal, extension, moratorium, redemption or similar laws and any and all rights or defenses it may have as a surety now or hereafter existing which, but for this provision, might be applicable to the sale of any Collateral made under the judgment, order or decree of any court, or privately under the power of sale conferred by this Security Agreement, or otherwise. Except as otherwise specifically provided herein, each Grantor hereby waives presentment, demand, protest or any notice (to the maximum extent permitted by applicable law) of any kind in connection with this Security Agreement or any Collateral.
8.2.     Limitation on Administrative Agent’s and other Holders of Secured Obligations' Duty with Respect to the Collateral . The Administrative Agent shall have no obligation to clean-up or otherwise prepare the Collateral for sale. The Administrative Agent and each other Holder of Secured Obligations shall use reasonable care with respect to the Collateral in its possession or under its control. Neither the Administrative Agent nor any other Holder of Secured Obligations shall have any other duty as to any Collateral in its possession or control or in the possession or control of any agent or nominee of the Administrative Agent or such other Holder of Secured Obligations, or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto. To the extent that applicable law imposes duties on the Administrative Agent to exercise remedies in a commercially reasonable manner, each Grantor acknowledges and agrees that it is commercially reasonable for the Administrative Agent (i) to fail to incur expenses deemed significant by the Administrative Agent to prepare Collateral for disposition or otherwise to transform raw material or work in process into finished goods or other finished products for disposition, (ii) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (iii) to fail to exercise collection remedies against account debtors or other Persons obligated on Collateral or to remove Liens on or any adverse claims against Collateral, (iv) to exercise collection remedies against account debtors and other Persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (v) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (vi) to contact other Persons, whether or not in the same business as such Grantor, for expressions of interest in acquiring all or any portion of such Collateral, (vii) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the Collateral is of a specialized nature, (viii) to dispose of Collateral by utilizing internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capacity of doing so, or that match buyers and sellers of assets, (ix) to dispose of assets in wholesale rather than retail markets, (x) to disclaim disposition warranties, such as title, possession or quiet enjoyment, (xi) to purchase insurance or credit enhancements to insure the Administrative Agent against risks of loss, collection or disposition of Collateral or to provide to the Administrative Agent a guaranteed return from the collection or disposition of Collateral, or (xii) to the extent deemed appropriate by the Administrative Agent, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Administrative Agent in the collection or disposition of any of the Collateral. Each Grantor acknowledges that the purpose of this Section 8.2 is to provide non-exhaustive indications of what actions or omissions by the Administrative Agent would be commercially reasonable in the Administrative Agent’s exercise of remedies against the Collateral and that other actions or omissions by the Administrative Agent shall not be deemed commercially unreasonable solely on account of not being indicated in this Section 8.2 . Without limitation upon the foregoing, nothing contained in this Section 8.2 shall be construed to grant any rights to any Grantor or to impose any duties on the Administrative Agent that would not have been granted or imposed by this Security Agreement or by applicable law in the absence of this Section 8.2 .

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8.3.     Compromises and Collection of Collateral . Each Grantor and the Administrative Agent recognize that setoffs, counterclaims, defenses and other claims may be asserted by obligors with respect to certain of the Receivables, that certain of the Receivables may be or become uncollectible in whole or in part and that the expense and probability of success in litigating a disputed Receivable may exceed the amount that reasonably may be expected to be recovered with respect to a Receivable. In view of the foregoing, each Grantor agrees that the Administrative Agent may at any time and from time to time, if a Default has occurred and is continuing, compromise with the obligor on any Receivable, accept in full payment of any Receivable such amount as the Administrative Agent in its sole discretion shall determine or abandon any Receivable, and any such action by the Administrative Agent shall be commercially reasonable so long as the Administrative Agent acts in good faith based on information known to it at the time it takes any such action.
8.4.     Administrative Agent Performance of Grantors’ Obligations . Without having any obligation to do so, the Administrative Agent may perform or pay any obligation which any Grantor has agreed to perform or pay in this Security Agreement and such Grantor shall reimburse the Administrative Agent for any reasonable amounts paid by the Administrative Agent pursuant to this Section 8.3 . Each Grantor’s obligation to reimburse the Administrative Agent pursuant to the preceding sentence shall be a Secured Obligation payable within ten (10) days after demand.
8.5.     Authorization for Administrative Agent to Take Certain Action; Proxy .
8.5.1    Each Grantor irrevocably authorizes the Administrative Agent at any time and from time to time in the sole discretion of the Administrative Agent and appoints the Administrative Agent as its attorney in fact (i) to execute on behalf of such Grantor as debtor and to file financing statements necessary or desirable in the Administrative Agent’s sole discretion to perfect and to maintain the perfection and priority of the Administrative Agent’s security interest in the Collateral, (ii) to endorse and collect any cash proceeds of the Collateral, (iii) to file a carbon, photographic or other reproduction of this Security Agreement or any financing statement with respect to the Collateral as a financing statement and to file any other financing statement or amendment of a financing statement (which does not add new collateral or add a debtor) in such offices as the Administrative Agent in its sole discretion deems reasonably necessary or desirable to perfect and to maintain the perfection and priority of the Administrative Agent’s security interest in the Collateral, (iv) to contact and enter into one or more agreements with the issuers of uncertificated securities which are Collateral owned by such Grantor and which are Securities or, after the occurrence and during the continuance of a Default, with financial intermediaries holding other Investment Property as may be necessary or advisable to give the Administrative Agent Control over such Securities or other Investment Property, (v) to enforce payment of the Instruments, Accounts and Receivables in the name of the Administrative Agent or such Grantor, (vi) to apply the proceeds of any Collateral received by the Administrative Agent to the Secured Obligations as provided in Article VII and (vii) to discharge past due taxes, assessments, charges, fees or Liens on the Collateral (except for such Liens as are specifically permitted hereunder or under any other Loan Document), and each Grantor agrees to reimburse the Administrative Agent on demand for any reasonable payment made or any reasonable expense incurred by the Administrative Agent in connection therewith; provided that this authorization shall not relieve any Grantor of any of its obligations under this Security Agreement or under the Credit Agreement. The Administrative Agent agrees not to exercise the powers of attorney granted pursuant to the foregoing clauses (iv) and (v) unless a Default has occurred and is continuing.
8.5.2    EACH GRANTOR HEREBY IRREVOCABLY CONSTITUTES AND APPOINTS THE ADMINISTRATIVE AGENT AS THE PROXY AND ATTORNEY IN FACT OF SUCH GRANTOR WITH RESPECT TO THE COLLATERAL OWNED BY SUCH GRANTOR, INCLUDING THE RIGHT TO VOTE ANY INSTRUMENTS, SECURITIES OR OTHER INVESTMENT PROPERTY CONSTITUTING COLLATERAL IN ACCORDANCE WITH THE TERMS HEREOF, WITH FULL POWER OF SUBSTITUTION TO DO SO. IN ADDITION TO THE RIGHT TO VOTE ANY SUCH COLLATERAL AFTER A DEFAULT, THE APPOINTMENT OF THE ADMINISTRATIVE AGENT AS PROXY AND ATTORNEY-IN-FACT SHALL INCLUDE THE RIGHT TO EXERCISE ALL OTHER RIGHTS, POWERS, PRIVILEGES AND REMEDIES TO WHICH A HOLDER OF SUCH COLLATERAL WOULD BE ENTITLED (INCLUDING GIVING OR WITHHOLDING WRITTEN CONSENTS OF SHAREHOLDERS, CALLING SPECIAL MEETINGS OF SHAREHOLDERS AND VOTING AT SUCH MEETINGS). SUCH

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PROXY SHALL BE EFFECTIVE, AUTOMATICALLY AND WITHOUT THE NECESSITY OF ANY ACTION (INCLUDING ANY TRANSFER OF ANY SUCH COLLATERAL ON THE RECORD BOOKS OF THE ISSUER THEREOF) BY ANY PERSON (INCLUDING THE ISSUER OF SUCH COLLATERAL OR ANY OFFICER OR THE ADMINISTRATIVE AGENT THEREOF), UPON THE OCCURRENCE OF A DEFAULT. THE APPOINTMENT OF THE ADMINISTRATIVE AGENT AS PROXY AND ATTORNEY-IN-FACT IN THIS SECURITY AGREEMENT IS COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE UNTIL THE DATE ON WHICH THIS SECURITY AGREEMENT IS TERMINATED IN ACCORDANCE WITH SECTION 8.12. THE ADMINISTRATIVE AGENT AGREES NOT TO EXERCISE THE POWER OF ATTORNEY GRANTED PURSUANT TO THIS SECTION 8.5.2 UNLESS A DEFAULT HAS OCCURRED AND IS CONTINUING.
8.6.     Specific Performance of Certain Covenants . Each Grantor acknowledges and agrees that a breach of any of the covenants contained in Sections 4.1.5 , 4.1.6 , 4.4 or 5.3 or in Article VII hereof will cause irreparable injury to the Administrative Agent and the Holders of Secured Obligations, that the Administrative Agent and Holders of Secured Obligations have no adequate remedy at law in respect of such breaches and therefore agrees, without limiting the right of the Administrative Agent or the Holders of Secured Obligations to seek and obtain specific performance of other obligations of the Grantors contained in this Security Agreement, that the covenants of the Grantors contained in the Sections referred to in this Section 8.6 shall be specifically enforceable against the Grantors.
8.7.     Use and Possession of Certain Premises . Upon the occurrence and during the continuance of a Default, the Administrative Agent shall be entitled to occupy and use any premises owned or leased by any Grantor where any of such Grantor’s Collateral or any records relating to such Grantor’s Collateral are located until the Secured Obligations are paid or such Grantor’s Collateral is removed therefrom, whichever first occurs, without any obligation to pay any Grantor for such use and occupancy.
8.8.     Dispositions Not Authorized . No Grantor is authorized to sell or otherwise dispose of its respective Collateral except as set forth in Section 4.1.5 hereof and notwithstanding any course of dealing between such Grantor and the Administrative Agent or other conduct of the Administrative Agent, no authorization to sell or otherwise dispose of such Grantor’s Collateral (except as set forth in Section 4.1.5 hereof) shall be binding upon the Administrative Agent or the Holders of Secured Obligations unless such authorization is in writing signed by the Administrative Agent with the consent or at the direction of the Required Lenders (or, if required pursuant to the terms of the Credit Agreement, with the consent or at the direction of each of the Lenders).
8.9.     Reinstatement . This Security Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against any Grantor for liquidation or reorganization, should any Grantor become insolvent or make an assignment for the benefit of any creditor or creditors or should a receiver or trustee be appointed for all or any significant part of any Grantor’s assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Secured Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Secured Obligations, whether as a “voidable preference,” “fraudulent conveyance,” or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Secured Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.
8.10.     Benefit of Agreement . The terms and provisions of this Security Agreement shall be binding upon and inure to the benefit of the Grantors, the Administrative Agent and the Holders of Secured Obligations and their respective successors and assigns (including all persons who become bound as a debtor to this Security Agreement), except that no Grantor shall have the right to assign its rights or delegate its obligations under this Security Agreement or any interest herein, without the prior written consent of the Administrative Agent. No sales of participations, assignments, transfers, or other dispositions of any agreement governing the Secured Obligations or any portion thereof or interest therein shall in any manner impair the Lien granted to the Administrative Agent, for the benefit of the Administrative Agent and the other Holders of Secured Obligations hereunder.

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8.11.     Survival of Representations . All representations and warranties of the Grantors contained in this Security Agreement shall survive the execution and delivery of this Security Agreement.
8.12.     Taxes and Expenses . Any taxes (including income taxes) payable or ruled payable by Federal or State authority in respect of this Security Agreement shall be paid by the Grantors, together with interest and penalties, if any. Each Grantor shall reimburse the Administrative Agent for any and all reasonable, documented out-of-pocket expenses and internal charges (including reasonable attorneys’, auditors’ and accountants’ fees) paid or incurred by the Administrative Agent in connection with the preparation, execution, delivery, administration, collection and enforcement of this Security Agreement and in the audit, analysis, administration, collection, preservation or sale of the Collateral (including the expenses and charges associated with any periodic or special audit of the Collateral). Any and all out-of-pocket costs and expenses incurred by the Grantors in the performance of actions required pursuant to the terms hereof shall be borne solely by the Grantors.
8.13.     Headings . The title of and section headings in this Security Agreement are for convenience of reference only, and shall not govern the interpretation of any of the terms and provisions of this Security Agreement.
8.14.     Termination . This Security Agreement shall continue in effect (notwithstanding the fact that from time to time there may be no Secured Obligations outstanding) until (i) the Credit Agreement has terminated pursuant to its express terms and (ii) all of the Secured Obligations have been indefeasibly paid in cash and performed in full (or with respect to any outstanding Letters of Credit, collateralized in an amount and manner satisfactory to the Administrative Agent) (except for contingent indemnity obligations) and no commitments of the Administrative Agent or the Holders of Secured Obligations which would give rise to any Obligations are outstanding.
8.15.     Entire Agreement . This Security Agreement embodies the entire agreement and understanding between the Grantors and the Administrative Agent relating to the Collateral and supersedes all prior agreements and understandings among the Grantors and the Administrative Agent relating to the Collateral.
8.16.     Governing Law; Jurisdiction; Waiver of Jury Trial .
8.16.1     THIS SECURITY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
8.16.2    Each Grantor hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County, Borough of Manhattan, and of the United States District Court for the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Security Agreement or any other Loan Document, or for recognition or enforcement of any judgment, and each Grantor hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each Grantor agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Security Agreement or any other Loan Document shall affect any right that the Administrative Agent, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Security Agreement or any other Loan Document against any Grantor or its properties in the courts of any jurisdiction.
8.16.3    Each Grantor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Security Agreement or any other Loan Document in any court referred to in Section 8.14.2 . Each Grantor hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
8.16.4    Each party to this Security Agreement irrevocably consents to service of process in the manner provided for notices in Article IX of this Security Agreement, and each of the Grantors hereby appoints

20



the Company as its agent for service of process. Nothing in this Security Agreement or any other Loan Document will affect the right of any party to this Security Agreement to serve process in any other manner permitted by law.
8.16.5     WAIVER OF JURY TRIAL . EACH GRANTOR HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH GRANTOR (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER GRANTOR HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER GRANTOR WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER GRANTORS HAVE BEEN INDUCED TO ENTER INTO THIS SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
8.17.     Indemnity . Each Grantor hereby agrees, jointly with the other Grantors and severally, to indemnify the Administrative Agent and the Holders of Secured Obligations, and their respective successors, assigns, agents and employees, from and against any and all liabilities, damages, penalties, suits, costs, and expenses of any kind and nature (including, without limitation, all expenses of litigation or preparation therefor whether or not the Administrative Agent or any Holder of Secured Obligations is a party thereto) imposed on, incurred by or asserted against the Administrative Agent or the Holders of Secured Obligations, or their respective successors, assigns, agents and employees, in any way relating to or arising out of this Security Agreement or any other Loan Document, or the manufacture, purchase, acceptance, rejection, ownership, delivery, lease, possession, use, operation, condition, sale, return or other disposition of any Collateral (including, without limitation, latent and other defects, whether or not discoverable by the Administrative Agent or the Holders of Secured Obligations or any Grantor, and any claim for patent, trademark or copyright infringement) other than to the extent such liabilities, damages, penalties, suits, costs, and expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of any such indemnified party.
8.18.     Severability . Any provision in this Security Agreement that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of this Security Agreement are declared to be severable.
8.19.     Counterparts . This Security Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Security Agreement by telecopy, e-mailed .pdf or any other electronic means that reproduces an image of the actual executed signature page shall be effective as delivery of a manually executed counterpart of this Security Agreement. The words “execution,” “signed,” “signature,” “delivery,” and words of like import in or relating to any document to be signed in connection with this Security Agreement and the transactions contemplated hereby shall be deemed to include Electronic Signatures, deliveries or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature, physical delivery thereof or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.
ARTICLE IX

NOTICES
All notices, requests and other communications to any party hereunder shall be given in the manner prescribed in Section 14.1 of the Credit Agreement with respect to the Administrative Agent at its notice address therein and, with

21



respect to any Grantor, in the care of the Company at the address of the Company set forth in the Credit Agreement, or such other address or telecopy number as such party may hereafter specify for such purpose in accordance with the provisions of Section 14.1 of the Credit Agreement.
ARTICLE X

THE ADMINISTRATIVE AGENT
JPMorgan Chase Bank, N.A. has been appointed Administrative Agent for the Holders of Secured Obligations hereunder pursuant to Article XI of the Credit Agreement. It is expressly understood and agreed by the parties to this Security Agreement that any authority conferred upon the Administrative Agent hereunder is subject to the terms of the delegation of authority made by the Holders of Secured Obligations to the Administrative Agent pursuant to the Credit Agreement, and that the Administrative Agent has agreed to act (and any successor Administrative Agent shall act) as such hereunder only on the express conditions contained in such Article XI . Any successor Administrative Agent appointed pursuant to Article XI of the Credit Agreement shall be entitled to all the rights, interests and benefits of the Administrative Agent hereunder.
  
[ SIGNATURE PAGES TO FOLLOW ]
    

22



IN WITNESS WHEREOF, each Grantor and the Administrative Agent have executed this Security Agreement as of the date first above written.


MERITOR, INC.

By:     /s/ Kevin Nowlan        
Name: Kevin Nowlan
Title: Senior Vice President and
Chief Financial Officer


Signature Page to
Second Amended and Restated Pledge and Security Agreement



MERITOR MANAGEMENT CORP.
MERITOR INTERNATIONAL HOLDINGS, LLC
ARVIN TECHNOLOGIES, INC.
ARVINMERITOR BRAKE HOLDINGS, LLC
ARVINMERITOR FILTERS HOLDING CO., LLC
ARVINMERITOR FILTERS OPERATING CO., LLC
MERITOR HOLDINGS, LLC
ARVINMERITOR OE, LLC
ARVINMERITOR TECHNOLOGY, LLC
ARVINMERITOR, INC.
AVM, INC.
MAREMONT CORPORATION
MAREMONT EXHAUST PRODUCTS, INC.
MERITOR AFTERMARKET USA, LLC
MERITOR HEAVY VEHICLE BRAKING SYSTEMS (U.S.A.), LLC
MERITOR HEAVY VEHICLE SYSTEMS (SINGAPORE) PTE., LTD.
MERITOR HEAVY VEHICLE SYSTEMS (VENEZUELA), INC.
MERITOR HEAVY VEHICLE SYSTEMS, LLC
MERITOR, INC., a Nevada Corporation
MERITOR TECHNOLOGY, LLC
MERITOR TRANSMISSION CORPORATION

In each case:

By:     /s/ Carl D. Anderson, II        
Name: Carl D. Anderson, II
Title: Vice President and Treasurer




Signature Page to
Second Amended and Restated Pledge and Security Agreement


Acknowledged and Agreed to as of the date first written above:

JPMORGAN CHASE BANK, N.A.,
as the Administrative Agent


By:     /s/ Robert P. Kellas        
Name: Robert P. Kellas
Title: Executive Director



Signature Page to
Second Amended and Restated Pledge and Security Agreement


ANNEX I TO PLEDGE AND SECURITY AGREEMENT
Reference is hereby made to the Second Amended and Restated Pledge and Security Agreement (as amended, restated, supplemented or otherwise modified from time to time, the “ Security Agreement ”), dated as of February 13, 2014 by and among Meritor, Inc. (formerly known as ArvinMeritor, Inc.) (the “ Company ”), and certain Subsidiaries of the Company which become parties to the Security Agreement from time to time, including, without limitation, those that become party thereto by executing a Security Agreement Supplement in substantially the form hereof (such Subsidiaries, including the undersigned, together with the Company, the “ Grantors ”), in favor of JPMorgan Chase Bank, N.A., as Administrative Agent (the “ Administrative Agent ”), for the benefit of the Holders of Secured Obligations under the Credit Agreement. Each capitalized terms used herein and not defined herein shall have the meanings given to it in the Security Agreement.
By its execution below, the undersigned, [ NAME OF NEW GRANTOR ] , a [ __________________________ ] [ corporation ] [ partnership ] [ limited liability company ] (the “ New Grantor ”) agrees to become, and does hereby become, a Grantor under the Security Agreement and agrees to be bound by such Security Agreement as if originally a party thereto. The New Grantor hereby collaterally assigns and pledges to the Administrative Agent for the benefit of the Holders of Secured Obligations, and grants to the Administrative Agent for the benefit of the Holder of Secured Obligations, a security interest in all of the New Grantor’s right, title and interest in and to the Collateral, whether now owned or hereafter acquired, to secure the prompt and complete payment and performance of the Secured Obligations, subject to the limitations set forth in Section 2.2 of the Security Agreement. For the avoidance of doubt, the grant of a security interest herein shall not be deemed to be an assignment of intellectual property rights owned by the New Grantor.
By its execution below, the New Grantor represents and warrants as to itself that all of the representations and warranties contained in the Security Agreement are true and correct in all respects as of the date hereof. The New Grantor represents and warrants that the supplements to the Exhibits to the Security Agreement attached hereto are true and correct in all respects and such supplements set forth all information required to be scheduled under the Security Agreement. The New Grantor shall take all steps necessary to perfect, in favor of the Administrative Agent, a first-priority security interest in and lien against the New Grantor’s Collateral, including, without limitation, delivering all certificated Pledged Equity to the Administrative Agent (and other Collateral required to be delivered under the Security Agreement), and taking all steps necessary to properly perfect the Administrative Agent’s interest in any uncertificated Pledged Equity.
IN WITNESS WHEREOF, [ NAME OF NEW GRANTOR ] , a [ __________________ ] [ corporation ] [ partnership ] [ limited liability company ] has executed and delivered this Annex I counterpart to the Security Agreement as of this ___________ day of ____________, ____.
[ NAME OF NEW GRANTOR ]


By:__________________________
Title:_________________________



ANNEX I
Exhibit 10-e-10


[Director Name]
Grant Date: [DATE]
Units Granted: [NUMBER OF UNITS]
Vesting: 100% after 3 Years
Director


MERITOR, INC.
2010 LONG-TERM INCENTIVE PLAN
RESTRICTED SHARE UNIT AGREEMENT
In accordance with Section 11 of the 2010 Long-Term Incentive Plan, as amended and restated (the “Plan”), of Meritor, Inc. (the “Company”), and your election pursuant thereto, the number of restricted share units specified above have been granted to you as of the date listed above (“Grant Date”) as restricted share units (“Restricted Share Units”). By accepting such award (the “Award”), you agree to the terms and conditions of this restricted share unit agreement (this “Agreement”). Each Restricted Share Unit represents a right to receive one share of common stock, par value $1.00 per share, of the Company (the "Common Stock") or its cash equivalent in the future. All capitalized terms used herein and not otherwise defined will have the meanings set forth in the Plan.
1.
Vesting of Restricted Share Units
(a)    Except as otherwise provided in this Agreement, the Restricted Share Units will vest on the third anniversary of the Grant Date provided that you continue to serve as a member of the Board for the period from the Grant Date through third anniversary of the Grant Date (the “Vesting Period”).
(b)    If your membership on the Board terminates prior to the last day of the Vesting Period due to your Disability or death or due to a Qualifying Termination within the two (2) year period immediately following a Change of Control, then the Restricted Share Units will vest on the date of such termination of membership on the Board and will be payable within thirty (30) days of the date of such termination of membership on the Board in the form specified in Section 2.
(c)    If you resign from the Board or cease to be a member of the Board by reason of the antitrust laws, compliance with the Company’s conflict of interest policies, or other circumstances that the Board determines not to be adverse to the best interests of the Company prior to the third anniversary of the Grant Date, the Board may, upon resolution, determine that the Restricted Share Units will vest, in which case such Restricted Share Units will be payable within thirty (30) days of the date of such termination of membership on the Board.
(d)    If your membership on the Board terminates for any reason that is not described in Section 1(b) above, or if your membership on the Board terminates for any reason described in Section 1(c) above and the Board does not determine that the Restricted Share Units will vest upon such termination, in either case prior to the last day of the Vesting Period, then your Award under this Agreement will be immediately cancelled and forfeited and you will have no further rights to the Restricted Share Units granted pursuant to this Agreement.
2.
Payment of Restricted Share Units
Except as otherwise provided in Section 1(b) or (c) of this Agreement and subject to Section 8(b) below, within the last calendar month of the calendar year in which the Vesting Period ends, the Company will deliver to you (or in the event of your death, to your estate or any person who acquires your interest in

CPAM: 6174066.1


the Restricted Share Units by bequest or inheritance) upon satisfaction of any required tax withholding obligations one share of Common Stock in respect of each Restricted Share Unit or its cash equivalent in a single sum payment in cash, as the Committee in its sole discretion shall determine. For the avoidance of doubt, the Committee may pay an award of Restricted Shares Units wholly in Shares or cash or partly in Shares or cash, as the Committee in its sole discretion may determine. Any cash amounts payable pursuant to this Section 2 will be calculated based on the fair market value of Common Stock on the vesting date (or such other date as the Committee shall determine in its sole discretion). No shares of Common Stock will be issued to you and no cash equivalent will be paid to you at the time the Award is made, and you will not have any rights as a shareowner with respect to the Restricted Share Units unless and until the shares of Common Stock have been delivered to you.
3.     Forfeiture of Unearned Restricted Share Units
Notwithstanding any other provision of this Agreement, if at any time it becomes impossible for you to earn any of the Restricted Share Units in accordance with this Agreement, then all the Restricted Share Units will be forfeited and you will have no further rights of any kind or nature with respect thereto.
4.     Transferability

This grant is not transferable by you otherwise than by will or by the laws of descent and distribution, and the Restricted Share Units will be deliverable, during your lifetime, only to you.

5.     Interpretations and Determinations
All interpretations, determinations and other actions by the Committee not revoked or modified by the Board will be final, conclusive and binding upon all parties.

6.     Withholding and Sale of Shares for Taxes
The Company shall have the right, in connection with the delivery of shares of Common Stock in respect of the Restricted Share Units subject to this Agreement, [ (i) to deduct from any payment otherwise due by the Company to you or any other person receiving delivery of the shares of Common Stock an amount equal to any taxes required to be withheld by law with respect to such delivery, (ii) to require you or any other person receiving such delivery to pay to it an amount sufficient to provide for any such taxes so required to be withheld or (iii) to sell such number of shares of Common Stock as may be necessary so that the net proceeds of such sale shall be an amount sufficient to provide for any such taxes so required to be withheld.
1.
No Acquired Rights
You acknowledge, agree and consent that: (a) the Plan is discretionary and the Company may amend, cancel or terminate the Plan at any time; (b) the grant of the Restricted Share Units is a one-time benefit offered to you and does not create any contractual or other right for you to receive any grant of restricted share units or benefits under the Plan in the future; (c) future grants, if any, will be at the sole discretion of the Company, including, but not limited to, the timing of any grant, the number of shares and forfeiture provisions; and (d) your participation in the Plan is voluntary.
The value of your Restricted Share Units is an extraordinary item of compensation outside the scope of your service contract, if any. As such, your Restricted Share Units are not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end-of-service payments, bonuses, long-service awards, pension or retirement benefits or similar payments.
1.
Section 409A

2
CPAM: 6174066.1


(a) This Agreement is intended to be exempt from Section 409A of the Code and the regulations and other guidance related thereto (“Section 409A”) and, to the maximum extent permitted, this Agreement will be interpreted in accordance with such intention. Notwithstanding any other provision of this Agreement to the contrary, the Company makes no representation that the Plan or any amounts payable under this Agreement will be exempt from or comply with Section 409A and makes no undertaking to preclude Section 409A from applying to this Agreement.
(b) To the extent that any amount payable under this Agreement constitutes an amount payable or benefit to be provided under a "nonqualified deferred compensation plan" (as defined in Section 409A) that is not exempt from Section 409A, and such amount is payable as a result of a Separation from Service and you are a "specified employee" (as defined and determined under Section 409A and any relevant procedures that the Company may establish) at the time of your Separation from Service, then, notwithstanding any other provision in this Agreement to the contrary, such payment or delivery of shares will not be made to you until the day after the date that is six (6) months following your Separation from Service, at which time all payments that otherwise would have been paid to you under this Agreement during that six-month period, but were not paid because of this paragraph, will be paid in a single lump sum. This six-month delay will cease to be applicable in the event of your death.
(c) For purposes of this Agreement, “Separation from Service” will have the meaning set forth in Section 409A and all references to termination of membership on the Board and similar references will be deemed to be references to “Separation from Service” within the meaning of Section 409A.
9.     Applicable Law
This Agreement and the Company’s obligation to deliver shares of Common Stock or their cash equivalent upon payment or settlement of Restricted Share Units hereunder will be governed by and construed and enforced in accordance with the laws of Indiana and the federal laws of the United States.
10.     Entire Agreement
This Agreement and the Plan embody the entire agreement and understanding between the Company and you with respect to the Restricted Share Units, and there are no representations, promises, covenants, agreements or understandings with respect to the Restricted Share Units other than those expressly set forth in this Agreement and the Plan. In the event of any conflict between this Agreement and the Plan, the terms of the Plan will govern.

3
CPAM: 6174066.1


This Agreement is effective as of the Grant Date, and is executed as of the respective dates set forth below.
MERITOR, INC.


By:______________________________
Vernon G. Baker, II
Senior Vice President, General Counsel and Secretary


Executed as of _____________ ___, 2014

Agreed to this __ day of __________, 2014


_______________________________
[Name of Director]


Address:


Social Security Number:

4
CPAM: 6174066.1
Exhibit 10-e-11

[Director Name]
Grant Date: [DATE]
Restricted Shares Granted: [NUMBER OF SHARES]
Vesting: 100% after 3 Years
Director


MERITOR, INC.
2010 LONG-TERM INCENTIVE PLAN
RESTRICTED STOCK AGREEMENT
In accordance with Section 11 of the 2010 Long-Term Incentive Plan, as amended and restated (the “Plan”), of Meritor, Inc. (the “Company”), and your election pursuant thereto, the number of shares of Common Stock of the Company specified above have been granted to you as of the date listed above (“Grant Date”) as restricted shares (“Restricted Shares”). By accepting such award (the “Award”), you agree to the terms and conditions of this restricted stock agreement (this “Agreement”). All capitalized terms used herein and not otherwise defined will have the meanings set forth in the Plan.
1.
Earning of Restricted Shares
(a)    Except as otherwise provided in this Agreement, you will be deemed to have earned the Restricted Shares on the earlier of (1) the third anniversary of the Grant Date provided that you continue to serve as a member of the Board for the period from the Grant Date through third anniversary of the Grant Date (the “Vesting Period”), and (2) the date of your death, Disability or Qualifying Termination.
(b)    If you resign from the Board or cease to be a member of the Board by reason of the antitrust laws, compliance with the Company’s conflict of interest policies, or other circumstances that the Board determines not to be adverse to the best interests of the Company prior to the third anniversary of the Grant Date, the Board may, upon resolution, determine that the Restricted Shares will be deemed earned on the date of such termination of membership on the Board.
(c)    If your membership on the Board terminates for any reason that is not described in Section 1(a) above, or for any reason described in Section 1(b) above and the Board does not determine that the Restricted Shares will be deemed fully earned upon such termination, in either case prior to the last day of the Vesting Period, then your Restricted Shares under this Agreement will be immediately cancelled and forfeited and you will have no further rights to the Restricted Shares granted pursuant to this Agreement.
2.
Retention of Certificates for Restricted Shares
Certificates for the Restricted Shares and any dividends or distributions thereon or in respect thereof that may be paid in additional shares of Common Stock, other securities of the Company or securities of another entity (“Stock Dividends”), will be delivered to and held by the Company, or such Restricted Shares or Stock Dividends will be registered in book entry form, subject to the Company’s instructions, until you have earned the Restricted Shares in accordance with the provisions of Section 1. To facilitate implementation of the provisions of this Agreement, you undertake to sign and deposit with the Company’s Office of the Secretary a Stock Transfer Power in the form of Attachment 1 hereto with respect to the Restricted Shares and any Stock Dividends thereon.
3.
Dividends and Voting Rights

CPAM: 6174070.1


Notwithstanding the retention by the Company of certificates (or the right to give instructions with respect to shares held in book entry form) for the Restricted Shares and any Stock Dividends, you will be entitled to receive any dividends that may be paid in cash on, and to vote, the Restricted Shares and any Stock Dividends held by the Company (or subject to its instructions) in accordance with Section 2, unless and until such shares have been forfeited in accordance with Section 5.
4.
Delivery of Earned Restricted Shares
As promptly as practicable after you will have been deemed to have earned the Restricted Shares in accordance with Section 1, the Company will deliver to you (or in the event of your death, to your estate or any person who acquires your interest in the Restricted Shares by bequest or inheritance) the Restricted Shares, together with any Stock Dividends then held by the Company (or subject to its instructions).
5.
Forfeiture of Unearned Restricted Shares
Notwithstanding any other provision of this Agreement, if at any time it becomes impossible for you to earn any of the Restricted Shares in accordance with this Agreement, then all the Restricted Shares, together with any Stock Dividends, then being held by the Company (or subject to its instructions) in accordance with Section 2 will be forfeited, and you will have no further rights of any kind or nature with respect thereto. Upon any such forfeiture, the Restricted Shares, together with any Stock Dividends, will be transferred to the Company.
6.
Transferability
This grant is not transferable by you otherwise than by will or by the laws of descent and distribution, and the Restricted Shares and any Stock Dividends will be deliverable, during your lifetime, only to you.
7.
Interpretations and Determinations
All interpretations, determinations and other actions by the Committee not revoked or modified by the Board will be final, conclusive and binding upon all parties.

8.
Withholding and Sale of Shares for Taxes
The Company shall have the right, in connection with the delivery of the Restricted Shares and any Stock Dividends subject to this agreement, (i) to deduct from any payment otherwise due by the Company to you or any other person receiving delivery of the Restricted Shares and any Stock Dividends an amount equal to any taxes required to be withheld by law with respect to such delivery, (ii) to require you or any other person receiving such delivery to pay to it an amount sufficient to provide for any such taxes so required to be withheld or (iii) to sell such number of the Restricted Shares and any Stock Dividends as may be necessary so that the net proceeds of such sale shall be an amount sufficient to provide for any such taxes so required to be withheld.
9.
No Acquired Rights
You acknowledge, agree and consent that: (a) the Plan is discretionary and the Company may amend, cancel or terminate the Plan at any time; (b) the grant of the Restricted Shares is a one-time benefit offered to you and does not create any contractual or other right for you to receive any grant of restricted share units or benefits under the Plan in the future; (c) future grants, if any, will be at the sole discretion of the Company, including, but not limited to, the timing of any grant, the number of shares and forfeiture provisions; and (d) your participation in the Plan is voluntary.

2
CPAM: 6174070.1


The value of your Restricted Shares is an extraordinary item of compensation outside the scope of your service contract, if any. As such, your Restricted Shares are not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end-of-service payments, bonuses, long-service awards, pension or retirement benefits or similar payments.
10.
Section 409A
(a) This Agreement is intended to be exempt from Section 409A of the Code and the regulations and other guidance related thereto (“Section 409A”) and, to the maximum extent permitted, this Agreement will be interpreted in accordance with such intention. Notwithstanding any other provision of this Agreement to the contrary, the Company makes no representation that the Plan or any amounts payable under this Agreement will be exempt from or comply with Section 409A and makes no undertaking to preclude Section 409A from applying to this Agreement.
(b) To the extent that any amount payable under this Agreement constitutes an amount payable or benefit to be provided under a "nonqualified deferred compensation plan" (as defined in Section 409A) that is not exempt from Section 409A, and such amount is payable as a result of a Separation from Service and you are a "specified employee" (as defined and determined under Section 409A and any relevant procedures that the Company may establish) at the time of your Separation from Service, then, notwithstanding any other provision in this Agreement to the contrary, such payment or delivery of shares will not be made to you until the day after the date that is six (6) months following your Separation from Service, at which time all payments that otherwise would have been paid to you under this Agreement during that six-month period, but were not paid because of this paragraph, will be paid in a single lump sum. This six-month delay will cease to be applicable in the event of your death.
(c) For purposes of this Agreement, “Separation from Service” will have the meaning set forth in Section 409A and all references to termination of membership on the Board and similar references will be deemed to be references to “Separation from Service” within the meaning of Section 409A.
11.     Applicable Law
This Agreement and the Company’s obligation to deliver shares of Restricted Shares and any Stock Dividends hereunder will be governed by and construed and enforced in accordance with the laws of Indiana and the federal laws of the United States.
12.     Entire Agreement
This Agreement and the Plan embody the entire agreement and understanding between the Company and you with respect to the Restricted Shares, and there are no representations, promises, covenants, agreements or understandings with respect to the Restricted Shares other than those expressly set forth in this Agreement and the Plan. In the event of any conflict between this Agreement and the Plan, the terms of the Plan will govern.

3
CPAM: 6174070.1


This Agreement is effective as of the Grant Date, and is executed as of the respective dates set forth below.
MERITOR, INC.


By:______________________________
Vernon G. Baker, II
Senior Vice President, General Counsel and Secretary


Attachment 1 - Stock Transfer Power


Executed as of _____________ ___, 2014

Agreed to this __ day of __________, 2014


_______________________________
[Name of Director]


Address:


Social Security Number:


4
CPAM: 6174070.1


Attachment 1

STOCK TRANSFER POWER SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED, I, _________, hereby sell, assign and transfer unto Meritor, Inc. (the “Company”) (i) the [NUMBER] shares of the Common Stock of the Company standing in my name on the books of the Company evidenced by certificates or by book entry, granted to me on [DATE] as Restricted Shares pursuant to the Company’s 2010 Long-Term Incentive Plan, as amended and restated; and (ii) any additional shares of the Company’s Common Stock, other securities issued by the Company or securities of another entity (“Stock Dividends”) distributed, paid or payable on or in respect of the Shares and Stock Dividends during the period the Shares are held by the Company pursuant to a certain Restricted Stock Agreement effective as of [DATE] and executed as of the dates set forth thereon with respect to the Shares; and I do hereby irrevocably constitute and appoint _______________________________________ attorney with full power of substitution in the premises to transfer the Shares on the books of the Company.

Dated:                



____________________________
(Signature)



5
CPAM: 6174070.1

Exhibit 12


Meritor, Inc.
Computation of Ratio of Earnings to Fixed Charges
Six Months Ended March 31, 2014
(Amounts in millions, except the ratio)


 
Earnings Available for Fixed Charges (A):
 
 
 
 
 
 
 
 
 
Pre-tax income from continuing operations
 
$
32

 
 
 
 
 
 
Less:
 
 
 
 
Equity in earnings of affiliates, net of dividends
 
 
(5
)
 
 
 
 
27

 
Add: fixed charges included in earnings:
 
 
 
 
Interest expense
 
 
51

 
Interest element of rentals
 
 
2

 
Total
 
 
53

 
 
 
 
 
 
Total earnings available for fixed charges:
 
$
80

 
 
 
 
 
 
Fixed Charges (B):
 
 
 
 
Fixed charges included in earnings
 
$
53

 
Capitalized interest
 
 
—

 
Total fixed charges
 
$
53

 
 
 
 
 
 
Ratio of Earnings to Fixed Charges
 
 
1.51

 

(A) “Earnings” are defined as pre-tax income from continuing operations, adjusted for undistributed earnings of less than majority owned subsidiaries and fixed charges excluding capitalized interest.

(B) “Fixed charges” are defined as interest on borrowings (whether expensed or capitalized), the portion of rental expense applicable to interest, and amortization of debt issuance costs.






Exhibit 23


CONSENT OF EXPERT

We consent to the references to our firm and to our reports with respect to estimation of the liability for pending and reasonably estimable unasserted future asbestos-related claims, which are included in Note 19 of the Notes to Consolidated Financial Statements in the Quarterly Report on Form 10-Q of Meritor, Inc. (“Meritor”) for the fiscal quarter ended March 30, 2014 and to the incorporation by reference of such reference into the following Registration Statements of Meritor:
Form
Registrations No.
Purpose
S-3
333-179405
Registration of common stock, preferred stock, warrants and guarantees of debt securities
S-8
333-171713
Amended 2010 Long-Term Incentive Plan
S-8
333-164333
2010 Long-Term Incentive Plan
S-8
333-141186
2007 Long-Term Incentive Plan
S-8
333-107913
Meritor, Inc. Savings Plan
S-8
333-123103
Meritor, Inc. Hourly Employees Savings Plan
S-8
333-49610
1997 Long-Term Incentives Plan
S-3
333-43118
Meritor, Inc. 1988 Stock Benefit Plan
S-3
333-43116
Meritor, Inc. 1998 Stock Benefit Plan
S-3
333-43112
Meritor, Inc. Employee Stock Benefit Plan
S-8
333-42012
Employee Stock Benefit Plan, 1988 Stock Benefit Plan and 1998 Employee Stock Benefit Plan
S-8
333-192458
Amended and Restated 2010 Long-Term Incentive Plan

 
BATES WHITE LLC
 
 
 
 
 
By:
/s/ Charles E. Bates
 
 
 
Charles E. Bates, Ph.D.

 
 
 
Chairman
Date: May 2, 2014



Exhibit 31-a
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO
RULE 13a-14(a) UNDER THE EXCHANGE ACT

I, Ike Evans, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Meritor, Inc. for the quarterly period ended March 30, 2014;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 2, 2014
 
/s/ Ike Evans
 
Ike Evans, Chairman of the Board,
 
Chief Executive Officer and President




Exhibit 31-b
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13a-14(a) UNDER THE EXCHANGE ACT

I, Kevin A. Nowlan, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Meritor, Inc. for the quarterly period ended March 30, 2014;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 2, 2014
 
/s/ Kevin A. Nowlan
 
Kevin A. Nowlan
 
Senior Vice President and Chief Financial Officer





Exhibit 32-a
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE
13a-14(b) UNDER THE EXCHANGE ACT AND 18 U.S.C. SECTION 1350
(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
     As required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, I, Ike Evans, hereby certify that:
1.
The Quarterly Report of Meritor, Inc. on Form 10-Q for the quarterly period ended March 30, 2014 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and
2.
The information contained in that report fairly presents, in all material respects, the financial condition and results of operations of Meritor, Inc.

                                    
/s/ Ike Evans
Ike Evans
Chairman of the Board,
Chief Executive Officer and President

Date: May 2, 2014



Exhibit 32-b
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13a-14(b) UNDER THE EXCHANGE ACT AND 18 U.S.C. SECTION 1350
(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
     As required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, I, Kevin A. Nowlan, hereby certify that:
1.
The Quarterly Report of Meritor, Inc. on Form 10-Q for the quarterly period ended March 30, 2014 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and
2.
The information contained in that report fairly presents, in all material respects, the financial condition and results of operations of Meritor, Inc.

 
/s/ Kevin A. Nowlan
 
Kevin A. Nowlan
 
Senior Vice President and
 
Chief Financial Officer

Date: May 2, 2014