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 April 2, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
X
 
Accelerated filer
 
Non-accelerated filer
 
(Do not check if a smaller reporting company)
Smaller reporting company
 
Emerging growth company
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
No
X
 
88,570,671 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on May 2, 2017 .


INDEX
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

MERITOR, INC.

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
Sales
$
806

 
$
821

 
$
1,505

 
$
1,630

Cost of sales
(685
)
 
(700
)
 
(1,295
)
 
(1,405
)
GROSS MARGIN
121

 
121

 
210

 
225

Selling, general and administrative
(66
)
 
(60
)
 
(119
)
 
(116
)
Restructuring costs
(4
)
 
(2
)
 
(4
)
 
(3
)
Other operating expense, net
(2
)
 
(3
)
 
(5
)
 
(3
)
OPERATING INCOME
49

 
56

 
82

 
103

Other expense, net
—

 
(2
)
 
—

 
(1
)
Equity in earnings of affiliates
8

 
7

 
18

 
17

Interest expense, net
(21
)
 
(21
)
 
(42
)
 
(43
)
INCOME BEFORE INCOME TAXES
36

 
40

 
58

 
76

Provision for income taxes
(13
)
 
(7
)
 
(19
)
 
(14
)
INCOME FROM CONTINUING OPERATIONS
23

 
33

 
39

 
62

LOSS FROM DISCONTINUED OPERATIONS, net of tax
—

 
(1
)
 
—

 
(3
)
NET INCOME
23

 
32

 
39

 
59

Less: Net income attributable to noncontrolling interests
(1
)
 
—

 
(2
)
 
(1
)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.
$
22

 
$
32

 
$
37

 
$
58

NET INCOME ATTRIBUTABLE TO MERITOR, INC.
 
 
 
 
 
 
 
Net income from continuing operations
$
22

 
$
33

 
$
37

 
$
61

Loss from discontinued operations
—

 
(1
)
 
—

 
(3
)
       Net income
$
22

 
$
32

 
$
37

 
$
58

BASIC EARNINGS (LOSS) PER SHARE
 
 
 
 
 
 
 
Continuing operations
$
0.25

 
$
0.36

 
$
0.42

 
$
0.66

Discontinued operations
—

 
(0.01
)
 
—

 
(0.03
)
       Basic earnings per share
$
0.25

 
$
0.35

 
$
0.42

 
$
0.63

DILUTED EARNINGS (LOSS) PER SHARE
 
 
 
 
 
 
 
Continuing operations
$
0.24

 
$
0.36

 
$
0.41

 
$
0.65

Discontinued operations
—

 
(0.01
)
 
—

 
(0.03
)
       Diluted earnings per share
$
0.24

 
$
0.35

 
$
0.41

 
$
0.62

 
 
 
 
 
 
 
 
Basic average common shares outstanding
88.2

 
91.3

 
87.7

 
91.9

Diluted average common shares outstanding
92.0

 
92.5

 
90.2

 
93.5


See notes to condensed 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,
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
Net income
$
23

 
$
32

 
$
39

 
$
59

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
     Attributable to Meritor, Inc.
19

 
10

 
(9
)
 
4

     Attributable to noncontrolling interest
1

 
—

 
(1
)
 
—

Pension and other postretirement benefit related adjustments
11

 
9

 
22

 
18

Unrealized gain (loss) on investments and foreign exchange contracts
1

 
(1
)
 
2

 
2

Other comprehensive income, net of tax
32

 
18

 
14

 
24

Total comprehensive income
55

 
50

 
53

 
83

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

 
(1
)
 
(1
)
Comprehensive income attributable to Meritor, Inc.
$
53

 
$
50

 
$
52

 
$
82


See notes to condensed consolidated financial statements.


4

MERITOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)

 
March 31,
2017
 
September 30,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents (1)
$
138

 
$
160

Receivables, trade and other, net  (1)
442

 
396

Inventories (1)
338

 
316

Other current assets
42

 
33

TOTAL CURRENT ASSETS
960

 
905

NET PROPERTY (1)
430

 
439

GOODWILL (1)
385

 
390

OTHER ASSETS
761

 
760

TOTAL ASSETS
$
2,536

 
$
2,494

LIABILITIES, MEZZANINE EQUITY AND EQUITY (DEFICIT)
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term debt
$
132

 
$
14

       Accounts and notes payable (1)
528

 
475

Other current liabilities
245

 
268

TOTAL CURRENT LIABILITIES
905

 
757

LONG-TERM DEBT
857

 
982

RETIREMENT BENEFITS
680

 
703

OTHER LIABILITIES
219

 
238

TOTAL LIABILITIES
2,661

 
2,680

COMMITMENTS AND CONTINGENCIES (See Note 21)

 

MEZZANINE EQUITY:
 
 
 
Convertible debt with cash settlement
13

 
—

EQUITY (DEFICIT):
 
 
 
Common stock (March 31, 2017 and September 30, 2016, 101.3 and 99.6 shares issued and 88.5 and 86.8 shares outstanding, respectively)
101

 
99

Additional paid-in capital
870

 
876

Accumulated deficit
(204
)
 
(241
)
Treasury stock, at cost (at both March 31, 2017 and September 30, 2016, 12.8 shares)
(136
)
 
(136
)
Accumulated other comprehensive loss
(794
)
 
(809
)
Total deficit attributable to Meritor, Inc.
(163
)
 
(211
)
Noncontrolling interests (1)
25

 
25

TOTAL DEFICIT
(138
)
 
(186
)
TOTAL LIABILITIES, MEZZANINE EQUITY AND DEFICIT
$
2,536

 
$
2,494

(1) As of March 31, 2017, Assets and Liabilities held for sale were: (i) $1 million Cash and cash equivalents; (ii) $8 million Receivables, trade and other, net; (iii) $1 million Inventories; (iv) $1 million Goodwill; (v) $6 million Accounts and notes payable; and (vi) $2 million Noncontrolling interests. As of September 30, 2016, Assets and Liabilities held for sale were: (i) $1 million Cash and cash equivalents; (ii) $8 million Receivables, trade and other, net; (iii) $1 million Inventories; (iv) $3 million Net property; (v) $5 million Accounts and notes payable; and (vi) $3 million Noncontrolling interests.
See notes to condensed consolidated financial statements.

5

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)

 
Six Months Ended March 31,
 
2017
 
2016
 
(Unaudited)
OPERATING ACTIVITIES
 
 
 
CASH PROVIDED BY OPERATING ACTIVITIES (See Note 10)
$
30

 
$
39

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(40
)
 
(47
)
Other investing activities
—

 
3

Net investing cash flows provided by discontinued operations
2

 
4

CASH USED FOR INVESTING ACTIVITIES
(38
)
 
(40
)
FINANCING ACTIVITIES
 
 
 
Repayment of notes
—

 
(55
)
Debt issuance costs
(4
)
 
—

Other financing activities
(11
)
 
(2
)
Net change in debt
(15
)
 
(57
)
Repurchase of common stock
—

 
(43
)
CASH USED FOR FINANCING ACTIVITIES
(15
)
 
(100
)
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES ON CASH AND CASH EQUIVALENTS
1

 
2

CHANGE IN CASH AND CASH EQUIVALENTS
(22
)
 
(99
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
160

 
193

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
138

 
$
94


See notes to condensed consolidated financial statements.



6

MERITOR, INC.

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


 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total Deficit
Attributable to
Meritor, Inc.
 
Noncontrolling
Interests
 
Total
Beginning balance at September 30, 2016
$
99

 
$
876

 
$
(241
)
 
$
(136
)
 
$
(809
)
 
$
(211
)
 
$
25

 
$
(186
)
Comprehensive income
—

 
—

 
37

 
—

 
15

 
52

 
1

 
53

Equity based compensation expense
—

 
7

 
—

 
—

 
—

 
7

 
—

 
7

Vesting of equity based awards
2

 
(2
)
 
—

 
—

 
—

 
—

 
—

 
—

Stock option exercises
—

 
2

 
—

 
—

 
—

 
2

 
—

 
2

Convertible debt with cash settlement
—

 
(13
)
 
—

 
—

 
—

 
(13
)
 
—

 
(13
)
Noncontrolling interest dividend
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Ending Balance at March 31, 2017
$
101

 
$
870

 
$
(204
)

$
(136
)
 
$
(794
)
 
$
(163
)
 
$
25

 
$
(138
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance at September 30, 2015
$
99

 
$
865

 
$
(814
)
 
$
(55
)
 
$
(766
)
 
$
(671
)
 
$
25

 
$
(646
)
Comprehensive income
—

 
—

 
58

 
—

 
24

 
82

 
1

 
83

Equity based compensation expense
—

 
6

 
—

 
—

 
—

 
6

 
—

 
6

Repurchase of common stock
—

 
—

 
—

 
(43
)
 
—

 
(43
)
 
—

 
(43
)
Noncontrolling interest dividends
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Ending Balance at March 31, 2016
$
99

 
$
871

 
$
(756
)

$
(98
)
 
$
(742
)
 
$
(626
)
 
$
25

 
$
(601
)

See notes to condensed consolidated financial statements.

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



1. Basis of Presentation
Meritor, Inc. (the “company” or “Meritor”), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers (“OEMs”) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, military, bus and coach, construction and other industrial OEMs and certain aftermarkets. The condensed consolidated financial statements are those of the company and its consolidated subsidiaries.
Certain businesses are reported in discontinued operations in the condensed consolidated statement of operations, condensed consolidated 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 condensed consolidated financial statements contain all adjustments, consisting solely of adjustments of a normal, recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These statements should be read in conjunction with the company’s audited consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2016 , as amended. The condensed consolidated balance sheet data as of September 30, 2016 was derived from audited financial statements but does not include all annual disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the three and six months ended March 31, 2017 are not necessarily indicative of the results for the full year.
The company’s fiscal year ends on the Sunday nearest September 30, and its fiscal quarters generally end on the Sundays nearest December 31, March 31, and June 30. The second quarter of fiscal years 2017 and 2016 ended on April 2, 2017 and April 3, 2016 , 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 fiscal quarter end, respectively.
2. Earnings per Share
Basic earnings (loss) per share is calculated using the weighted average number of shares outstanding during each period. The diluted earnings (loss) per share calculation includes the impact of dilutive common stock options, restricted shares, restricted share units, performance share unit awards, and convertible securities, if applicable.
A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
Basic average common shares outstanding
88.2

 
91.3

 
87.7

 
91.9

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

 
1.2

 
1.2

 
1.6

Impact of convertible notes
2.7

 
—

 
1.3

 
—

Diluted average common shares outstanding
92.0


92.5


90.2


93.5


In November 2016, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $12.77 , which was the company’s share price on the grant date of December 1, 2016. The Board of Directors also approved a grant of 0.5 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $12.77 , which was the company's share price on the grant date of December 1, 2016.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established M2019 goals for the three -year performance period of October 1, 2016 to September 30, 2019, measured at the end of the

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


performance period. The number of performance share units will depend on meeting the established M2019 goals at the following weights: 50% associated with achieving an Adjusted diluted earnings per share from continuing operations target, 25% associated with achieving revenue growth above market, and 25% associated with achieving a Net debt to Adjusted EBITDA target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.6 million performance share units.
In November 2015, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $10.51 , which was the company’s share price on the grant date of December 1, 2015. The Board of Directors also approved a grant of 0.5 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $10.51 , which was the company's share price on the grant date of December 1, 2015.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three -year performance period of October 1, 2015 to September 30, 2018, measured at the end of the performance period. The number of performance share units that vest will depend on Adjusted EBITDA margin and Adjusted diluted earnings per share from continuing operations at the following weights: 50% associated with achieving an Adjusted EBITDA margin target and 50% associated with achieving an Adjusted diluted earnings per share from continuing operations target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.7 million performance share units.
In November 2014, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $13.74 , which was the company’s share price on the grant date of December 1, 2014. The Board of Directors also approved a grant of 0.4 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $13.74 , which was the company’s share price on the grant date of December 1, 2014.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three -year performance period of October 1, 2014 to September 30, 2017, measured at the end of the performance period. The number of performance share units that vest will depend on Adjusted EBITDA margin and Adjusted diluted earnings per share from continuing operations at the following weights: 75% associated with achieving an Adjusted EBITDA margin target and 25% associated with achieving an Adjusted diluted earnings per share from continuing operations target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.6 million performance share units.
In November 2013, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represented the right to receive one share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $7.97 , which was the company’s share price on the grant date of December 1, 2013.
The actual number of performance share units that vested on December 1, 2016 depended 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, which was measured after the end of the performance period. The company's performance resulted in the vesting of the performance share units at 112% of the grant date amounts. There were 0.2 million and 0.6 million shares related to these performance share units included in the diluted earnings per share calculation for the three and six months ended March 31, 2017 , respectively, as certain payout thresholds were achieved relative to the established M2016 goals. There were 1.1 million and 1.0 million shares related to these performance share units included in the diluted earnings per share calculation for the three and six months ended March 31, 2016 , respectively, as certain payout thresholds were achieved relative to the established M2016 goals.
For the three months ended March 31, 2017 , the dilutive impact of previously issued restricted shares, restricted share units, and performance share units was 1.1 million shares, compared to 1.2 million shares for the same period in the prior fiscal year. For the six months ended March 31, 2017 , the dilutive impact of previously issued restricted shares, restricted share units, and performance share units was 1.2 million shares, compared to 1.6 million shares for the same period in the prior fiscal year. For the three and six months ended March 31, 2017 , compensation cost related to restricted shares, restricted share units, performance

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


share units and stock options was $4 million and $7 million , respectively. For the three and six months ended March 31, 2016 , compensation cost related to restricted shares, restricted share units, performance share units and stock options was $3 million and $6 million respectively.
For each of the three and six months ended March 31, 2016 , options to purchase 0.7 million and 0.3 million shares of common stock, respectively, were excluded in the computation of diluted earnings per share because their exercise price exceeded the average market price for the periods and thus their inclusion would be anti-dilutive.
For the three and six months ended March 31, 2017 , 2.7 million and 1.3 million shares, respectively, were included in the computation of diluted earnings per share, as the company's average stock price during this period exceeded the conversion price for the 7.875 percent convertible notes due 2026. For the three and six months ended March 31, 2016 , the company’s 7.875 percent convertible notes due 2026 were excluded from the computation of diluted earnings per share, as the company’s average stock price during this period was less than the conversion price for the notes.
3. New Accounting Standards
Accounting standards to be implemented
In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 affects entities who own investments in callable debt securities and aligns the amortization period of premiums on callable debt securities to expectations incorporated in market pricing on the underlying securities. This standard is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effective adjustment directly to retained earnings at the beginning of the adoption period. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new guidance requires entities to only include the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, are to be included in a separate line item(s) outside of any sub-total of operating income. ASU 2017-07 also provides guidance that only the service cost component of net benefit cost is eligible for capitalization. This standard is effective for public business entities for interim and annual periods beginning after December 15, 2017. The revisions in this amendment are to be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 provides guidance which defines an “in substance nonfinancial asset”; unifies guidance related to partial sales of nonfinancial assets; eliminates rules specifically addressing sales of real estate; removes exceptions to the financial asset derecognition model; and clarifies the accounting for contributions of nonfinancial assets to joint ventures. The effective date and the transition requirements for the amendments in ASU 2017-05 are the same as the effective date and transition requirements in Topic 606, described below. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance eliminates the need to determine the fair value of individual assets and liabilities of a reporting unit to measure a goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. The revised guidance will be applied prospectively, and is effective for calendar year-end SEC filers in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. The new guidance is not expected to have a material impact on the company's consolidated financial statements.


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


In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU provides clarification on the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. To be considered a business under the new guidance, it must include an input and a substantive process that together significantly contribute to the ability to create output. The amendment removes the evaluation of whether a market participant could replace missing elements. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and will be applied prospectively. The potential impact of this new guidance will be assessed for future acquisitions or dispositions, but it is not expected to have a material impact on the company's consolidated financial statements.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests held through Related Parties that are under Common Control, which alters how a decision maker needs to consider indirect interests in a variable interest entity (VIE) held through an entity under common control. Under the ASU, if a decision maker is required to evaluate whether it is the primary beneficiary of a VIE, it will need to consider only its proportionate indirect interest in the VIE held through a common control party. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements but does not expect a material impact upon adoption.

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU was issued to remove the prohibition in FASB ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The amendments in this update are effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted; however, the guidance can only be adopted in the first interim period of a fiscal year. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The ASU was issued to reduce differences in practice with respect to how specific transactions are classified in the statement of cash flows. The update provides guidance on the following eight types of transactions: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investments, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The amendments in this update are effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.
  
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including accounts receivable. The ASU also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The amendments in this update are required to be adopted by public business entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The company is currently evaluating the potential impact of this new guidance on its on its accounting policies and its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The ASU clarifies the assessment of the likelihood that revenue will be collected from a contract, the guidance for presenting sales taxes and similar taxes, and the timing for measuring customer payments that are not in cash. The ASU also establishes a practical expedient for contract modifications at the transition. The amendments in this update affect the guidance in ASU 2014-09, which is not effective yet. The effective date and the transition requirements for the amendments in ASU 2016-12 are the same as the effective date and transition requirements in ASU 2014-09 as described below. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 in connection with its planned implementation of ASU 2014-09 and is currently evaluating the potential impact of this new guidance on its accounting policies and its consolidated financial statements.


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


In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update). The ASU was issued to remove from the Codification certain SEC staff guidance that the SEC staff stated would be rescinded: Revenue and Expense Recognition for Freight Services in Process; Accounting for Shipping and Handling Fees and Costs; and Accounting for Consideration Given by a Vendor to a Customer (including a Reseller of the Vendor’s Products). The amendments in this update affect the guidance in ASU 2014-09, which is not effective yet. The effective date and the transition requirements for the amendments in ASU 2016-11 are the same as the effective date and transition requirements in ASU 2014-09 as described below. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 in connection with its planned implementation of ASU 2014-09 and is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In April, 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing. The ASU provides guidance regarding the identification of performance and licensing obligations. The amendments in this update affect the guidance in ASU 2014-09, which is not effective yet. The effective date and the transition requirements for the amendments in ASU 2016-10 are the same as the effective date and transition requirements in ASU 2014-09 as described below. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 in connection with its planned implementation of ASU 2014-09 and is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. The ASU intends to simplify how share-based payments are accounted for, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The company is assessing the potential impact of this new guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) to clarify certain aspects of the principal-versus-agent guidance in its new revenue recognition standard. The amendments in this update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in ASU 2016-08 are the same as the effective date and transition requirements of ASU 2014-09. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 in connection with its planned implementation of ASU 2014-09. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting. The ASU will eliminate the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815), Contingent Put and Call Options in Debt Instruments. The ASU clarifies that an exercise contingency itself does not need to be evaluated to determine whether it is in an embedded derivative, just the underlying option. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815), Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The update clarifies that a change in a counterparty to a derivative instrument designated as a hedging instrument would not require the entity to dedesignate the hedging relationship and discontinue the application of hedge accounting. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2016, including interim years within those fiscal periods. Early adoption is permitted. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.


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


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update will require lessees to recognize a right-of-use asset and lease liability for substantially all leases. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2019 and is currently assessing the potential impact of this new guidance on its on its accounting policies and its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires entities that measure inventory using first-in, first-out (FIFO) or average cost to measure inventory at the lower of cost and net realizable value. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), which provides guidance about management's responsibility in evaluating whether there is substantial doubt relating to an entity’s ability to continue as a going concern and to provide related footnote disclosures as applicable. ASU 2014-15 is effective for the annual period ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires companies to recognize revenue when a customer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service and requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 was originally effective for fiscal periods beginning after December 15, 2016, including interim periods within those fiscal periods. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year making it effective for fiscal periods beginning after December 15, 2017, including interim periods within those fiscal periods, while also providing for early adoption but not before the original effective date. The company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 and is currently evaluating the potential impact of this new guidance on its on its accounting policies and its consolidated financial statements.
Accounting standards implemented during fiscal year 2017
In January 2017, the FASB issued ASU 2017-03 which amended Accounting Changes and Error Corrections (Topic 250) to state that registrants should consider additional qualitative disclosures if the impact of an issued but not yet adopted ASU is unknown or cannot be reasonably estimated and to include a description of the effect of the accounting policies that the registrant expects to apply, if determined. Transition guidance included in certain issued but not yet adopted ASUs was also updated to reflect this amendment.

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved After the Requisite Service Period. This guidance requires that an award with a performance target that affects vesting and that could be achieved after the requisite service period, such as when an employee retires, but may still vest if and when the performance target is achieved, be treated as an award with performance conditions that affect vesting and the company apply existing guidance under ASC Topic 718, Compensation - Stock Compensation. The guidance is effective for fiscal periods beginning after December 15, 2015, including interim periods within those fiscal periods and may be applied either prospectively or retrospectively. The company adopted this standard prospectively in the first quarter of fiscal year 2017. This guidance did not have a material impact on its consolidated financial statements.

13
Index
MERITOR, INC.
NOTES TO CONDENSED 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,
 
2017
 
2016
 
2017
 
2016
Sales
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Loss before income taxes
$
—

 
$
(1
)
 
$
—

 
$
(4
)
Benefit from income taxes
—

 
—

 
—

 
1

Loss from discontinued operations attributable to Meritor, Inc.
$
—


$
(1
)
 
$
—

 
$
(3
)
Loss from discontinued operations attributable to the company for the three and six months ended March 31, 2016 was primarily related to changes in estimates related to legal costs incurred in connection with a previously divested business.
Total discontinued operations assets as of March 31, 2017 and September 30, 2016 were $2 million and $1 million , respectively, and total discontinued operations liabilities as of March 31, 2017 and September 30, 2016 were $5 million and $6 million , respectively.
5. Assets and Liabilities Held for Sale
During the first quarter of 2017, management approved a plan to sell a business within the Commercial Truck & Industrial reporting segment. The company expects to sell the business within one year from management's approval of the plan. The business and its associated assets and liabilities met the criteria for presentation as held for sale as of December 31, 2016 and March 31, 2017.
Assets and liabilities held for sale are measured at the lower of the carrying value or fair value less costs to sell. Upon meeting the held for sale criteria, the company determined the carrying value of the business exceeded the fair value less costs to sell. As a result, an impairment charge of $3 million was recorded within other operating expense, net in the company’s condensed consolidated statement of operations during the first quarter of 2017.
6. 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 are 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
Goodwill
$
245

 
$
160

 
$
405

Accumulated impairment losses
(15
)
 
—

 
(15
)
Beginning balance at September 30, 2016
230

 
160

 
390

Foreign currency translation
(3
)
 
(2
)
 
(5
)
Balance at March 31, 2017
$
227

 
$
158

 
$
385


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


7. Restructuring Costs
Restructuring reserves, primarily related to unpaid employee termination benefits, were $ 12 million at March 31, 2017 and $16 million at September 30, 2016 . The changes in restructuring reserves for the six months ended March 31, 2017 and 2016 are as follows (in millions):
 
Employee
Termination
Benefits
 
Plant
Shutdown
& Other
 
Total
Beginning balance at September 30, 2016
$
15

 
$
1

 
$
16

Activity during the period:
 
 
 
 

Charges to continuing operations
4

 
—

 
4

Cash payments – continuing operations
(7
)
 
—

 
(7
)
Other
(1
)
 
—

 
(1
)
Total restructuring reserves at March 31, 2017
11

 
1

 
12

Less: non-current restructuring reserves
(1
)
 
—

 
(1
)
Restructuring reserves – current, at March 31, 2017
$
10

 
$
1

 
$
11

 
 
 
 
 
 
Balance at September 30, 2015
$
10

 
$
—

 
$
10

Activity during the period:
 
 
 
 
 
Charges to continuing operations
2

 
1

 
3

Cash payments – continuing operations
(4
)
 
—

 
(4
)
Total restructuring reserves at March 31, 2016
8

 
1

 
9

Less: non-current restructuring reserves
(3
)
 
—

 
(3
)
Restructuring reserves – current, at March 31, 2016
$
5

 
$
1

 
$
6


Restructuring Costs: During the first six months of fiscal year 2017, the company recorded restructuring costs of $4 million primarily associated with a labor reduction program in the European aftermarket business and the North America Commercial Truck & Industrial segment. During the first six months of fiscal year 2016, the company recorded restructuring costs of $3 million primarily associated with a labor reduction program in China in the Commercial Truck & Industrial and Aftermarket and Trailer segments.
8. 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 among 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.

In prior years, the company established valuation allowances against its U.S. net deferred tax assets and the net deferred tax assets of its 100-percent-owned subsidiaries in France, the United Kingdom, Brazil, and certain other countries. In evaluating its ability to recover these net deferred tax assets, the company utilizes a consistent approach which considers its historical operating results, including an assessment of the degree to which any gains or losses are driven by items that are unusual in nature, and tax planning strategies. In addition, the company reviews changes in near-term market conditions and other factors that impact future

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


operating results. Continued improvement in the company’s operating results could lead to reversal of some or all of these valuation allowances in the future.

During the fourth quarter of fiscal year 2016, as a result of sustained profitability in the U.S. evidenced by a strong earnings history, future forecasted earnings, and additional positive evidence, the company determined it was more likely than not that it would be able to realize deferred tax assets in the U.S. Accordingly, the company reversed a portion of the valuation allowance in the U.S. Also in the fourth quarter of fiscal year 2016, due to a three-year cumulative loss and future economic uncertainty, the company established a tax valuation allowance in Brazil because the company determined it was not more likely than not that it would realize its deferred tax assets in Brazil.

The company continues to maintain valuation allowances in France, the United Kingdom, Brazil, and certain other jurisdictions, as the company believes the negative evidence that it will be able to recover these net deferred tax assets continues to outweigh the positive evidence.

For the three months ended March 31, 2017, the company had approximately $2 million of net pre-tax loss compared to $17 million of net pre-tax income in the same period in fiscal year 2016 in tax jurisdictions in which tax expense (benefit) is not recorded.

For the six months ended March 31, 2017, the company had approximately $3 million of net pre-tax loss compared to $28 million of net pre-tax income in the same period in fiscal year 2016 in tax jurisdictions in which tax expense (benefit) is not recorded.
9. Accounts Receivable Factoring and 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. On March 22, 2017, Meritor entered into a new Receivables Purchase Agreement with Nordea Bank, replacing a similar agreement which was due to expire March 31, 2017. Under this new arrangement, which expires in March 2020, the company can sell up to, at any point in time, €155 million ( $166 million ) of eligible trade receivables. The amount of eligible receivables sold may exceed Nordea Bank's commitment at Nordea Bank's discretion. The receivables under this program are sold at face value and are excluded from the condensed consolidated balance sheet. The company had utilized €145 million ( $155 million ) and €121 million ( $135 million ) of this accounts receivable factoring facility as of March 31, 2017 and September 30, 2016 , respectively.
The above facility is backed by a 364 -day liquidity commitment from Nordea Bank which extends through December 18, 2017. The commitment is subject to standard terms and conditions for this type of arrangement.
U.S. Factoring Facility: The company has an arrangement to sell trade receivables due from AB Volvo and its U.S. subsidiaries through one of its U.S. subsidiaries. Under this arrangement with Nordea Bank, which expires in February 2019, the company can sell up to, at any point in time, €80 million ( $85 million ) of eligible trade receivables. The amount of eligible receivables sold may exceed Nordea Bank’s commitment at Nordea Bank’s discretion. The receivables under this program are sold at face value and are excluded from the condensed consolidated balance sheet. The company had utilized €31 million ( $33 million ) and €39 million ( $44 million ) of this accounts receivable factoring facility as of March 31, 2017 and September 30, 2016 , respectively.
United Kingdom Factoring Facility: The company has an arrangement to sell trade receivables due from AB Volvo and its European subsidiaries through one of its United Kingdom subsidiaries. Under this arrangement with Nordea Bank, which expires in February 2018, the company can sell up to, at any point in time, €25 million ( $27 million ) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the condensed consolidated balance sheet. The company had utilized €7 million ( $7 million ) and €6 million ( $6 million ) of this accounts receivable factoring facility as of March 31, 2017 and September 30, 2016 , 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.

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


Italy Factoring Facility: The company has an arrangement to sell trade receivables due from AB Volvo and its European subsidiaries through one of its Italian subsidiaries. Under this arrangement with Nordea Bank, which expires in June 2017, the company can sell up to, at any point in time, €30 million ( $32 million ) of eligible trade receivables. The company is working to extend this agreement before its maturity date. The receivables under this program are sold at face value and are excluded from the condensed consolidated balance sheet. The company had utilized €26 million ( $27 million ) and €22 million ( $24 million ) of this accounts receivable factoring facility as of March 31, 2017 and September 30, 2016 , 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 to the above facilities, a number 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 condensed consolidated balance sheet. The amount of factored receivables excluded from accounts receivable under these arrangements was $12 million and $10 million at March 31, 2017 and September 30, 2016 , respectively.
Total costs associated with all of the off-balance sheet arrangements described above were $1 million and $2 million in the three months ended March 31, 2017 and 2016 , respectively, and $2 million and $4 million in the six months ended March 31, 2017 and 2016 , respectively, and are included in selling, general and administrative expenses in the condensed consolidated statements of operations.
On-balance sheet arrangements
The company has a $100 million U.S. accounts receivables securitization facility, which expires December 2019. The maximum permitted priority-debt-to-EBITDA ratio as of the last day of each fiscal quarter under the facility is 2.25 to 1.00 . This program is provided by PNC Bank, National Association, 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. accounts receivable 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 condensed consolidated balance sheet. At March 31, 2017 and September 30, 2016 , no amounts, including letters of credit, were outstanding under this program. This securitization program contains a cross default to the revolving credit facility. At certain times during any given month, the company may sell eligible accounts receivable under this program to fund intra-month working capital needs. In such months, the company would then typically utilize the cash received from customers throughout the month to repay the borrowings under the program. Accordingly, during any given month, the company may borrow under this program amounts exceeding the amounts shown as outstanding at fiscal quarter ends.

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


10. Operating Cash Flow
The reconciliation of net income to cash flows provided by operating activities is as follows (in millions):
 
Six Months Ended March 31,
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
39

 
$
59

Less: Loss from discontinued operations, net of tax
—

 
(3
)
Income from continuing operations
39

 
62

Adjustments to income from continuing operations to arrive at cash provided by operating activities:
 
 
 
Depreciation and amortization
37

 
31

Restructuring costs
4

 
3

Asset impairment charges
3

 
—

Gain on sale of property
—

 
(2
)
Equity in earnings of affiliates
(18
)
 
(17
)
Pension and retiree medical expense
7

 
10

Other adjustments to income from continuing operations
20

 
4

Dividends received from equity method investments
13

 
19

Pension and retiree medical contributions
(19
)
 
(22
)
Restructuring payments
(7
)
 
(4
)
Changes in off-balance sheet accounts receivable factoring
19

 
(51
)
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, foreign currency adjustments and discontinued operations
(68
)
 
7

Operating cash flows provided by continuing operations
30

 
40

Operating cash flows used for discontinued operations
—

 
(1
)
CASH PROVIDED BY OPERATING ACTIVITIES
$
30

 
$
39

11. 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,
2017
 
September 30,
2016
Finished goods
$
130

 
$
125

Work in process
30

 
26

Raw materials, parts and supplies
178

 
165

Total
$
338

 
$
316

12. Other Current Assets
     Other current assets are summarized as follows (in millions):
 
March 31,
2017
 
September 30,
2016
Asbestos-related recoveries (see Note 21)
$
10

 
$
10

Prepaid and other
32

 
23

Other current assets
$
42

 
$
33


18
Index



13. Net Property
     Net property is summarized as follows (in millions):
 
March 31,
2017
 
September 30,
2016
Property at cost:
 
 
 
Land and land improvements
$
29

 
$
30

Buildings
230

 
231

Machinery and equipment
846

 
839

Company-owned tooling
118

 
113

Construction in progress
43

 
56

Total
1,266

 
1,269

Less: accumulated depreciation
(836
)
 
(830
)
Net property
$
430

 
$
439

14. Other Assets
     Other assets are summarized as follows (in millions):
 
March 31,
2017
 
September 30,
2016
Investments in non-consolidated joint ventures
$
106

 
$
100

Asbestos-related recoveries (see Note 21)
46

 
49

Unamortized revolver debt issuance costs
9

 
7

Capitalized software costs, net
28

 
29

Non-current deferred income tax assets, net
401

 
413

Assets for uncertain tax positions
36

 
35

Prepaid pension costs
129

 
123

Other
6

 
4

Other assets
$
761

 
$
760

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.
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, 2017 and September 30, 2016 , the company’s investment in the joint venture was $48 million and $45 million , respectively.
15. Unconsolidated Significant Subsidiary
Rule 10-01(b)(1) of Regulation S-X requires separate interim period summarized income statement information for each 50-percent-or-less-owned subsidiary not consolidated that would have been a significant subsidiary for annual periods in accordance with Rule 3-09 of Regulation S-X. In accordance with this requirement, the company’s non-consolidated joint venture Meritor WABCO Vehicle Control Systems’ summarized income statement information is as follows (in millions):

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


 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
Sales
$
71

 
$
83

 
$
143

 
$
168

Gross margin
$
18

 
$
21

 
$
38

 
$
43

Income from continuing operations
$
11

 
$
13

 
$
23

 
$
29

Net income
$
11

 
$
13

 
$
23

 
$
29

16. Other Current Liabilities
     Other current liabilities are summarized as follows (in millions):
 
March 31,
2017
 
September 30,
2016
Compensation and benefits
$
95

 
$
115

Income taxes
3

 
8

Taxes other than income taxes
21

 
21

Accrued interest
14

 
14

Product warranties
16

 
18

Environmental reserves (see Note 21)
7

 
7

Restructuring (see Note 7)
11

 
14

Asbestos-related liabilities (see Note 21)
18

 
18

Indemnity obligations (see Note 21)
2

 
2

Other
58

 
51

Other current liabilities
$
245

 
$
268

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,
 
2017
 
2016
Total product warranties – beginning of period
$
44

 
$
48

Accruals for product warranties
6

 
7

Payments
(7
)
 
(9
)
Change in estimates and other
(3
)
 
1

Total product warranties – end of period
40

 
47

Less: Non-current product warranties
(24
)
 
(28
)
Product warranties – current
$
16

 
$
19


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


17. Other Liabilities
Other liabilities are summarized as follows (in millions):
 
March 31,
2017
 
September 30,
2016
Asbestos-related liabilities (see Note 21)
$
125

 
$
136

Restructuring (see Note 7)
1

 
2

Non-current deferred income tax liabilities
13

 
12

Liabilities for uncertain tax positions
14

 
16

Product warranties (see Note 16)
24

 
26

Environmental (see Note 21)
5

 
6

Indemnity obligations (see Note 21)
11

 
11

Other
26

 
29

Other liabilities
$
219

 
$
238

18. Long-Term Debt
     Long-Term Debt, net of discounts where applicable, is summarized as follows (in millions):
 
March 31,
2017
 
September 30,
2016
4.0 percent convertible notes due 2027 (1)(3)
$
142

 
$
142

7.875 percent convertible notes due 2026 (1)(4)
130

 
129

6.75 percent notes due 2021 (2)(5)
271

 
271

6.25 percent notes due 2024 (2)(6)
443

 
442

Capital lease obligation
14

 
16

Export financing arrangements and other
—

 
10

Unamortized discount on convertible notes (7)
(11
)
 
(14
)
Subtotal
989

 
996

Less: current maturities
(132
)
 
(14
)
Long-term debt
$
857

 
$
982

(1) The 4.0 percent convertible notes due 2027 and 7.875 percent convertible notes due 2026 contain a put and call feature, which allows for earlier redemption beginning in 2019 and 2020, respectively.
(2) The 6.75 percent notes and 6.25 percent notes contain a call option, which allows for early redemption.
(3) The 4.0 percent convertible notes due 2027 are presented net of $1 million unamortized issuance costs as of March 31, 2017 and September 30, 2016.
(4) The 7.875 percent convertible notes due 2026 are presented net of $2 million unamortized issuance costs as of March 31, 2017 and September 30, 2016 , and $8 million and $9 million original issuance discount as of March 31, 2017 and September 30, 2016 , respectively.
(5) The 6.75 percent notes due 2021 are presented net of $4 million unamortized issuance costs as of March 31, 2017 and September 30, 2016 .
(6) The 6.25 percent notes due 2024 are presented net of $7 million and $8 million unamortized issuance costs as of March 31, 2017 and September 30, 2016 , respectively.
(7) The carrying amount of the equity component related to convertible debt.

Convertible Notes Due 2026
The 7.875 percent convertible notes due 2026 (the “2026 Notes”) were classified as current as of March 31, 2017 and noncurrent as of September 30, 2016 as the holders of the company's 2026 Notes are entitled to convert all or a portion of their 2026 Notes at any time beginning April 1, 2017 and prior to the close of business on June 30, 2017 at a rate of 83.3333 shares of common stock per $1,000 principal amount at maturity of the 2026 Notes (representing a conversion price of approximately $12.00 per share). The 2026 Notes are convertible as the closing price of shares of the company's common stock for at least 20 trading days

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


during the 30 consecutive trading-day period ending on March 31, 2017 was greater than 120% of the $12.00 conversion price associated with the 2026 Notes.
The 2026 Notes surrendered for conversion, if any, would be settled in cash up to the principal amount at maturity of the 2026 Notes and cash, stock or a combination of cash and stock, at the company’s election, for the remainder of the conversion value of the 2026 Notes in excess of the principal amount at maturity and cash in lieu of any fractional shares, subject to and in accordance with the provisions of the indenture that governs the 2026 Notes.
As a result of the 2026 Notes becoming currently convertible for cash up to the principal amount of $140 million at the holder's option, $13 million of permanent equity was reclassified as mezzanine equity.
Revolving Credit Facility
On March 31, 2017, the company amended and restated its revolving credit facility. Pursuant to the revolving credit agreement as amended, the company has a $525 million revolving credit facility that matures in March 2022. Additionally, $4 million was capitalized as deferred issuance costs and will be amortized over the term of the agreement. The availability under this facility is dependent upon various factors, including performance against certain financial covenants as highlighted below.
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 or less as of the last day of each fiscal quarter throughout the term of the agreement.
The 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, 2017 , the revolving credit facility was collateralized by approximately $732 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. At March 31, 2017 , the margin over LIBOR rate was 300 basis points , and the commitment fee was 45 basis points . Overnight revolving credit loans are at the prime rate plus a margin of 200 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 publicly held notes outstanding under the company’s indentures (see Note 24 ).
No borrowings were outstanding under the revolving credit facility at March 31, 2017 and September 30, 2016. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. At March 31, 2017 and September 30, 2016, there were no letters of credit outstanding under the revolving credit facility.

Debt Securities
In December 2014, the company filed a shelf registration statement with the Securities and Exchange Commission, registering an unlimited amount of debt and/or equity securities that the company may offer in one or more offerings on terms to be determined at the time of sale. The December 2014 shelf registration statement superseded and replaced the shelf registration statement filed in February 2012, as amended.

Repurchase of Debt Securities
On March 1, 2016 , substantially all of the $55 million principal amount of 4.625 percent convertible notes were repurchased at 100 percent of their face value. On April 15, 2016, the remaining 4.625 percent convertible notes were redeemed at 100 percent of their face value. As of September 30, 2016, none of the 4.625 percent convertible notes were outstanding.
The repurchases were made under the company's equity and equity linked repurchase authorizations (see Note 22 ). The repurchase program under these authorizations was complete as of September 30, 2016.

Capital Leases

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


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 Wells Fargo Equipment Finance (“Wells Fargo”) for progress payments for equipment under construction, not to exceed $10 million at any 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 Wells Fargo 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 . The company had $4 million and $7 million outstanding under this capital lease arrangement as of March 31, 2017 and September 30, 2016, respectively. In addition, the company had another $10 million and $9 million outstanding through other capital lease arrangements at March 31, 2017 and September 30, 2016, respectively.

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, which expires in March 2019, the company has the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $25 million . This facility contains covenants and events of default generally similar to those existing in the company’s public debt indentures. There were $22 million and $23 million of letters of credit outstanding under this facility at March 31, 2017 and September 30, 2016, respectively. The company had another $5 million of letters of credit outstanding through other letter of credit facilities at March 31, 2017 and September 30, 2016 .

Export Financing Arrangements
The company entered into a number of export financing arrangements through its Brazilian subsidiary during fiscal year 2014.  The export financing arrangements were issued under an incentive program of the Brazilian government to fund working capital for Brazilian companies in exportation programs. The arrangements bore interest at 5.5 percent and had maturity dates in 2017. These financing arrangements were paid off as of March 31, 2017. There was $9 million outstanding under these arrangements at September 30, 2016.

Other
One of the company's 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, the company's 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 exceeds $35 million per bank. As of March 31, 2017 and September 30, 2016, the company had $ 9 million and $10 million , respectively, outstanding under this program at more than one bank.
19. Financial Instruments
Fair values of financial instruments are summarized as follows (in millions):
 
March 31, 2017
 
September 30, 2016
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Cash and cash equivalents
$
138

 
$
138

 
$
160

 
$
160

Short-term debt
132

 
249

 
14

 
14

Long-term debt
857

 
899

 
982

 
1,051

Foreign exchange forward contracts (other assets)
1

 
1

 
1

 
1

Foreign exchange forward contracts (other liabilities)
—

 
—

 
2

 
2

Short-term foreign currency option contracts (other assets)
3

 
3

 
—

 
—

Long-term foreign currency option contracts (other asset)
2

 
2

 
2

 
2



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


The following table reflects the offsetting of derivative assets and liabilities (in millions):
 
March 31, 2017
 
September 30, 2016
 
Gross
Amounts Recognized
 
Gross Amounts
Offset
 
Net Amounts
Reported
 
Gross
Amounts Recognized
 
Gross Amounts
Offset
 
Net Amounts
Reported
Derivative Asset
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contract
2

 
1

 
1

 
1

 
—

 
1

Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contract
1

 
1

 
—

 
2

 
—

 
2

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.
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 priority 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, 2017 is as follows (in millions):
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
$
138

 
$
—

 
$
—

Short-term debt
—

 
244

 
5

Long-term debt
—

 
889

 
10

Foreign exchange forward contracts (asset)
—

 
1

 
—

Foreign exchange forward contracts (liability)
—

 
—

 
—

Short-term foreign currency option contracts (asset)
—

 
—

 
3

Long-term foreign currency option contracts (asset)
—

 
—

 
2

Fair value of financial instruments by the valuation hierarchy at September 30, 2016 is as follows (in millions):
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
$
160

 
$
—

 
$
—

Short-term debt
—

 
—

 
14

Long-term debt
—

 
1,040

 
11

Foreign exchange forward contracts (asset)
—

 
1

 
—

Foreign exchange forward contracts (liability)
—

 
2

 
—

Short-term foreign currency option contracts (asset)
—

 
—

 
—

Long-term foreign currency option contracts (asset)
—

 
—

 
2


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


The tables below provide a reconciliation of changes in fair value of the Level 3 financial assets and liabilities measured at fair value in the condensed consolidated balance sheet for the three and six months ended March 31, 2017 and 2016 , respectively. No transfers of assets between any of the Levels occurred during these periods.
Three months ended March 31, 2017 (in millions)
 
Short-term foreign currency option contracts (asset)
 
Long-term foreign currency option contracts (asset)
 
Total
Fair Value as of December 31, 2016
 
$
1

 
$
2

 
$
3

Total unrealized gains (losses):
 
 
 
 
 


Included in other income
 
—

 
—

 
—

Included in cost of sales
 
1

 
1

 
2

Total realized gains (losses):
 
 
 
 
 


Included in other income
 
—

 
—

 
—

Included in cost of sales
 
—

 
—

 
—

Purchases, issuances, sales and settlements:
 
 
 
 
 


Purchases
 
—

 
—

 
—

Settlements
 
—

 
—

 
—

Transfer in and / or out of Level 3 (1)
 
—

 
—

 
—

Reclass between short-term and long-term
 
1

 
(1
)
 
—

Fair Value as of March 31, 2017
 
$
3

 
$
2

 
$
5

Three months ended March 31, 2016 (in millions)
 
Short-term foreign currency option contracts (asset)
 
Long-term foreign currency option contracts (asset)
 
Total
Fair Value as of December 31, 2015
 
$
2

 
$
—

 
$
2

Total unrealized gains (losses):
 
 
 
 
 
 
Included in other income
 
(2
)
 
—

 
(2
)
Included in cost of sales
 
—

 
—

 
—

Total realized gains (losses):
 
 
 
 
 
 
Included in other income
 
—

 
—

 
—

Included in cost of sales
 
—

 
—

 
—

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
Purchases
 
—

 
—

 
—

Settlements
 
—

 
—

 
—

Transfer in and / or out of Level 3 (1)
 
—

 
—

 
—

Reclass between short-term and long-term
 
—

 
—

 
—

Fair Value as of March 31, 2016
 
$
—

 
$
—

 
$
—



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


Six months ended March 31, 2017 (in millions)
 
Short-term foreign currency option contracts (asset)
 
Long-term foreign currency option contracts (asset)
 
Total
Fair Value as of September 30, 2016
 
$
—

 
$
2

 
$
2

Total unrealized gains (losses):
 
 
 
 
 
 
Included in other income
 
—

 
—

 
—

Included in cost of sales
 
1

 
2

 
3

Total realized gains (losses):
 
 
 
 
 
 
Included in other income
 
—

 
—

 
—

Included in cost of sales
 
—

 
—

 
—

Purchases, issuances, sales and settlements:
 
 
 
 
 


Purchases
 
—

 
—

 
—

Settlements
 
—

 
—

 
—

Transfer in and / or out of Level 3 (1)
 
—

 
—

 
—

Reclass between short-term and long-term
 
2

 
(2
)
 
—

Fair Value as of March 31, 2017
 
$
3

 
$
2

 
$
5

Six months ended March 31, 2016 (in millions)
 
Short-term foreign currency option contracts (asset)
 
Long-term foreign currency option contracts (asset)
 
Total
Fair Value as of September 30, 2015
 
$
1

 
$
1

 
$
2

Total unrealized gains (losses):
 
 
 
 
 
 
Included in other income
 
(2
)
 
—

 
(2
)
Included in cost of sales
 
—

 
(1
)
 
(1
)
Total realized gains (losses):
 
 
 
 
 
 
Included in other income
 
—

 
—

 
—

Included in cost of sales
 
—

 
—

 
—

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
Purchases
 
1

 
—

 
1

Settlements
 
—

 
—

 
—

Transfer in and / or out of Level 3 (1)
 
—

 
—

 
—

Reclass between short-term and long-term
 
—

 
—

 
—

Fair Value as of March 31, 2016
 
$
—

 
$
—

 
$
—

(1) Transfers as of the last day of the reporting period.
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, 2017 or September 30, 2016 .
     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. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive Loss in the statement of shareholders’ equity and is recognized in operating income when the underlying forecasted transaction impacts earnings.

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


Foreign currency option contracts — The company uses option contracts to mitigate foreign currency exposure on expected future Indian rupee denominated purchases. In the second quarter of fiscal year 2015, the company entered into a new series of foreign currency option contracts with effective dates from the start of the third quarter of fiscal year 2015 through the end of fiscal year 2017. In the fourth quarter of fiscal year 2016, the company entered into a new series of foreign currency option contracts with effective dates from the start of the first quarter of fiscal year 2017 through the end of fiscal year 2018. At March 31, 2017 , the notional amount of the company's Indian rupee foreign exchange contracts outstanding was $127 million . The fair value of the foreign currency option contracts is based on a third-party proprietary model, which incorporates inputs at varying unobservable weights of quoted spot rates, market volatility, forward rates, and time utilizing market instruments with similar quality and maturity characteristics. The company did not elect hedge accounting for these derivatives. Changes in fair value associated with these contracts are recorded in cost of sales in the consolidated statement of operations.
Also, in fiscal year 2015, the company entered into a series of foreign currency contracts with total notional amounts of $30 million and $27 million to mitigate the risk of volatility in the translation of Swedish krona and euro earnings to U.S. dollars, respectively. During the first quarter of fiscal year 2016, the company entered into additional foreign currency contracts with total notional amounts of $19 million and $21 million to mitigate the risk of volatility in the translation of Swedish krona and euro earnings to U.S. dollars, respectively. These foreign currency option contracts did not qualify for a hedge accounting election. As of March 31, 2017 and September 30, 2016 , there were no Swedish krona and euro foreign currency option contracts outstanding. Changes in fair value associated with these contracts were recorded in other income, net, in the consolidated statement of operations.

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


20. Retirement Benefit Liabilities
Retirement benefit liabilities consisted of the following (in millions):
 
March 31,
2017
 
September 30,
2016
Retiree medical liability
$
438

 
$
447

Pension liability
267

 
283

Other
14

 
13

Subtotal
719

 
743

Less: current portion (included in compensation and benefits, Note 16)
(39
)
 
(40
)
Retirement benefits
$
680

 
$
703

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):
 
2017
 
2016
 
Pension
 
Retiree Medical
 
Pension
 
Retiree Medical
Interest cost
$
13

 
$
3

 
$
27

 
$
5

Assumed return on plan assets
(24
)
 
—

 
(25
)
 
—

Amortization of prior service costs
—

 
—

 
—

 
—

Recognized actuarial loss
8

 
3

 
6

 
3

Total expense (income)
$
(3
)
 
$
6

 
$
8

 
$
8


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):
 
2017
 
2016
 
Pension
 
Retiree Medical
 
Pension
 
Retiree Medical
Interest cost
$
26

 
$
7

 
$
33

 
$
9

Assumed return on plan assets
(47
)
 
—

 
(50
)
 
—

Amortization of prior service costs
—

 
(1
)
 
—

 
—

Recognized actuarial loss
15

 
7

 
12

 
6

Total expense (income)
$
(6
)
 
$
13

 
$
(5
)
 
$
15


In fiscal years 2002 and 2004, the company approved amendments to certain retiree medical plans, including health benefits for retirees (and their surviving spouses) who were formerly United Auto Workers (“UAW”) members at ten former Rockwell International (“Rockwell”) plants. Certain of these plan amendments were challenged in lawsuits that were filed in the United States District Court for the Eastern District of Michigan (“District Court”) alleging the changes breached the terms of various collective bargaining agreements (“CBAs”) entered into by Rockwell and the UAW for facilities that have either been closed or sold and alleging a companion claim under the Employee Retirement Income Security Act of 1974 (“ERISA”). The two class actions lawsuits that were filed in 2004 ( Cole v. ArvinMeritor, et al. and Faust v. ArvinMeritor, et al. ) by the UAW and retirees and surviving spouses claimed that the health benefits were vested for life through the negotiated CBAs. These actions were subsequently consolidated. 
 
On December 22, 2005, the District Court issued a preliminary injunction enjoining the company from implementing changes to retiree health benefits and ordered the company to reinstate and resume paying the full cost of health benefits for the UAW retirees at the levels existing prior to the changes made in 2002 and 2004. In 2006, the District Court granted a motion by the UAW for summary judgment and granted the UAW’s request to make the terms of the preliminary injunction permanent (the “injunction”). The company accounted for the injunction as a rescission of the 2002 and 2004 plan amendments and began recording

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


the impact of the injunction in March 2006. In addition, the injunction ordered the defendants to reimburse the plaintiffs for out-of-pocket expenses incurred since the date of the earlier benefit modifications. The company has recorded a $2 million reserve at March 31, 2017 and September 30, 2016 , as the best estimate of its liability for these retroactive benefits. In 2007, the company appealed the District Court’s order to the U.S. Court of Appeals for the Sixth Circuit. The Sixth Circuit ruled to affirm the District Court’s ruling and the company moved for an en banc rehearing. This motion was held in abeyance while the parties attempted to settle the case.  In July, 2016 the company moved for re-hearing based on a January 2015 U.S. Supreme Court decision on the subject matter and a subsequent Sixth Circuit ruling in a separate case on the same subject matter.  The court granted the re-hearing and in April 2017, the Sixth Circuit issued its decision, reversing the District Court’s decision and finding that the retiree medical benefits were not vested for life through the CBAs. The company expects the plaintiffs to appeal for either a re-hearing en banc with the Sixth Circuit or the Supreme Court, or both.   
21. 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, 2017 to be approximately $8 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.
     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, 2017 to be approximately $31 million , of which $10 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 1.0 to 3.00 percent and is approximately $7 million at March 31, 2017 . The undiscounted estimate of these costs is approximately $7 million .
     The 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, 2016
$
2

 
$
11

 
$
13

Payments and other
—

 
(3
)
 
(3
)
Accruals
—

 
2

 
2

Balance at March 31, 2017
$
2

 
$
10

 
$
12

Environmental reserves are included in Other Current Liabilities (see Note 16 ) and Other Liabilities (see Note 17 ) in the condensed consolidated balance sheet.

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


     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.
In April 2016, the company was served with several complaints filed against the company and other defendants in the United States District Court for the Northern District of Mississippi. The complaints were amended in July 2016.  These complaints allege damages, including diminution of property value, concealment/fraud and emotional distress resulting from alleged environmental pollution in and around a neighborhood in Grenada, Mississippi. Rockwell owned and operated a facility near the neighborhood from 1965 to 1985. The company filed answers to the complaints in July 2016. In May 2017, the company was served with a complaint filed against the company and other defendants by the Mississippi Attorney General in the Chancery Court of Grenada County, Mississippi.  The complaint alleges that operations at the above-referenced Grenada facility caused contamination of off-site groundwater and surface waters. The company intends to defend itself vigorously against these claims. The company believes at this time that liabilities associated with this case, while possible, are not probable and estimable, and therefore has not recorded any accrual for them as of March 31, 2017 . Further, a reasonably possible range of loss cannot be estimated at this time.
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 5,800 pending asbestos-related claims at March 31, 2017 and September 30, 2016 . 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, 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, the total number of claims filed is not necessarily the most meaningful factor in determining Maremont's asbestos-related liability.
     Maremont’s asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
 
March 31,
2017
 
September 30,
2016
Pending and future claims
$
70

 
$
70

Billed but unpaid claims
3

 
2

Asbestos-related liabilities
$
73

 
$
72

Asbestos-related insurance recoveries
$
29

 
$
32

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 Note 12 , Note 14 , Note 16 and Note 17 ).
         Pending and Future Claims: Maremont engaged 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. 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.

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


     As of September 30, 2016 , Bates White provided a reasonable and probable estimate that consisted of a range of equally likely possibilities of Maremont’s obligation for asbestos personal injury claims over the next ten years of $70 million to $83 million . After consultation with Bates White, management recognized a liability of $70 million as of each of March 31, 2017 and September 30, 2016 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. 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 claims changes.
      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 2026;
•
Maremont believes that the litigation environment could change significantly beyond ten years and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims will decline for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain;
•
On a per claim basis, 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 Maremont’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.
Recoveries : Maremont has historically had insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The insurance receivable related to asbestos-related liabilities was $29 million and $32 million as of March 31, 2017 and September 30, 2016 , respectively. The receivable is for coverage provided by one insurance carrier based on a coverage-in-place agreement. Maremont currently expects to exhaust the remaining limits provided by this coverage sometime in the next ten years. The difference between the estimated liability and insurance receivable is primarily related to exhaustion of settled insurance coverage within the forecasted period.
Maremont maintained insurance coverage with other insurance carriers that management believes also covers indemnity and defense costs. During fiscal year 2013, Maremont re-initiated lawsuits against these carriers, seeking a declaration of its rights to coverage for asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. During the first quarter of fiscal year 2016, the dispute related to these insurance policies was settled. As a part of this settlement, on December 12, 2015, Maremont received $17 million in cash, of which $5 million was recognized as a reduction in asbestos expense and $12 million was recorded as a liability to the insurance carrier as it is required to be returned to the carrier if additional asbestos liability is not incurred. During the fourth quarter of fiscal year 2016, Maremont recognized an additional $9 million of the cash settlement proceeds as a reduction in asbestos expense. During the first quarter of fiscal year 2017, the company recognized the remaining $3 million of the cash settlement proceeds as a reduction in asbestos expense. The settlement also provides additional recovery for Maremont if certain future defense and indemnity spending thresholds are met.
     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 firms, jurisdictions and diseases; 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, the 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.

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


     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. Rockwell had approximately 2,600 and 3,200 pending active asbestos claims in lawsuits that name AM, together with many other companies, as defendants at March 31, 2017 and September 30, 2016 , respectively.
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.
     The Rockwell legacy asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
 
March 31,
2017
 
September 30,
2016
Pending and future claims
$
60

 
$
60

Billed but unpaid claims
6

 
1

Asbestos-related liabilities
$
66

 
$
61

Asbestos-related insurance recoveries
$
27

 
$
27

Pending and Future Claims: The company engaged 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, 2016 , Bates White provided a reasonable and probable 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 $60 million to $75 million . After consultation with Bates White, management recognized a liability for the pending and future claims over the next ten years of $60 million as of each of March 31, 2017 and September 30, 2016 . 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.
   Assumptions : 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 2026;
•
The company believes that the litigation environment could change significantly beyond ten years and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims will decline for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain;
•
On a per claim basis, defense and processing costs for pending and future claims will be at the level consistent with the company’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 plaintiff’s law firms in jurisdictions without an established history with Rockwell cannot be reasonably estimated.

32
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Recoveries : Rockwell has insurance coverage that management believes covers indemnity and defense costs, over and above self-insurance retentions, for a significant portion of these claims. In 2004, the company initiated litigation against certain of these carriers to enforce the insurance policies. During the fourth quarter of fiscal year 2016, the company executed settlement agreements with two of these carriers, thereby resolving the litigation against those particular carriers. Pursuant to the terms of one of those settlement agreements, in the fourth quarter of fiscal year 2016 the company received $32 million in cash from an insurer, of which $10 million was recognized as a reduction in asbestos expense, and $22 million was recorded as a liability to the insurance carrier as it is required to be returned to the carrier if additional asbestos liability is not ultimately incurred. During the first six months of fiscal year 2017, Rockwell recognized an additional $8 million of the cash settlement proceeds as a reduction in asbestos expense. Pursuant to the terms of a second settlement agreement, in the fourth quarter of fiscal year 2016 the company recorded a $12 million receivable to reflect expected reimbursement of future defense and indemnity payments under a coverage-in-place arrangement with that insurer. In addition to the coverage provided from the settlement agreements executed during the fourth quarter of fiscal year 2016, the company continues to maintain a receivable of $6 million related to a previously executed coverage-in-place arrangement with other insurers.The insurance receivable for Rockwell's asbestos-related liabilities totaled $27 million as of each of March 31, 2017 and September 30, 2016 . Included in these amounts are insurance receivables of $9 million as of each of March 31, 2017 and September 30, 2016 , which are associated with policies in dispute and have been fully reserved.
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 Rockwell could change significantly from its past experience, due, for example, to changes in the mix of claims filed against Rockwell in terms of plaintiffs’ law firms, jurisdictions and diseases; legislative or regulatory developments; Rockwell’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, the 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
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.
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 each of March 31, 2017 and September 30, 2016 , the remaining estimated liability for this matter was approximately $11 million .
   In connection with the sale of its interest in MSSC in October 2009, the company provided certain indemnities 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. At March 31, 2017 and September 30, 2016 , the company's remaining exposure was approximately $1 million , which is included in other liabilities in the condensed consolidated balance sheet.
The company is not aware of any other claims or other information that would give rise to material payments under such indemnifications.
Other
The company identified certain sales transactions for which value-added tax was potentially required to be remitted to certain tax jurisdictions for tax years 2009 through 2016. At March 31, 2017 and September 30, 2016 , the company’s estimate of the probable liability was $10 million .

On July 10, 2014, Sistemas Automotrices de Mexico, S.A. de C.V. (“Sisamex”), a Mexican joint venture between our subsidiary Meritor Heavy Vehicle Systems, LLC (“Meritor HVS”) and Quimmco, S.A. de C.V. ("Quimmco"), filed a lawsuit against Meritor

33
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


HVS in the Northern District of Illinois, seeking, among other relief, a declaration of Sisamex’s exclusive right to manufacture certain products and the components thereof for sale in Mexico. On July 13, 2014, Meritor HVS filed a lawsuit against Sisamex and Quimmco in the Northern District of Illinois, seeking, among other relief, a declaration that Sisamex may not manufacture without Meritor HVS's consent the components at issue in Sisamex's lawsuit and that Sisamex must instead purchase those components from Meritor HVS. On July 23, 2014, the parties to the two actions filed a joint motion seeking an order that the two actions are related and that both actions be heard before the same judge. The motion was granted. Shortly after the cases were filed, both parties filed cross motions to dismiss the other party’s complaint. The Court heard oral arguments on the motions on November 24, 2014 and on January 28, 2015 denied both parties' motions. Discovery was completed in February 2016. Sisamex then filed a motion for summary judgment on July 15, 2016, and the court heard the motion on October 14, 2016. The Court granted Sisamex’s motion for summary judgment on the issue of whether Sisamex is entitled to decide which Meritor products and components can be produced by Sisamex for sale to OEM customers in Mexico, but stated that the issues of damages and Sisamex’s rights with respect to third party sourcing would need to be decided at trial. The various proceedings before the Court have been stayed in order to give the parties an opportunity to explore the possibility of settling the litigation. Meritor has recorded a reserve of $10 million as of March 31, 2017 , which is our estimate of the probable loss contingency. If the parties are unable to reach a settlement, the matter will proceed to trial in 2017.

In addition, various lawsuits, claims and proceedings, other than those specifically disclosed in the condensed 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. 
22. Shareholders' Equity
Common Stock and Debt Repurchase Authorizations
   On July 21, 2016, the Board of Directors authorized the repurchase of up to $100 million of the company’s common stock and up to $150 million aggregate principal amount of any of the company’s debt securities (including convertible debt securities), in each case from time to time through open market purchases, privately negotiated transactions or otherwise, until September 30, 2019, subject to compliance with legal and regulatory requirements and the company's debt covenants. No repurchases had been made under these authorizations as of March 31, 2017 .
Accumulated Other Comprehensive Loss ( “ AOCL ” )
The components of AOCL and the changes in AOCL by components, net of tax, for three months ended March 31, 2017 and 2016 are as follows (in millions):
 
Foreign Currency Translation
 
Employee Benefit Related Adjustments
 
Unrealized Loss, net of tax
 
Total
Balance at December 31, 2016
$
(94
)
 
$
(729
)
 
$
(2
)
 
$
(825
)
Other comprehensive income (loss) before reclassification
19

 
—

 
1

 
20

Amounts reclassified from accumulated other comprehensive loss
—

 
11

 
—

 
11

Net current-period other comprehensive income (loss)
$
19

 
$
11

 
$
1

 
$
31

Balance at March 31, 2017
$
(75
)
 
$
(718
)
 
$
(1
)
 
$
(794
)

34
Index
MERITOR, INC.
NOTES TO CONDENSED 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
 
 
 
 
 
Actuarial losses
 
$
11

 
(a)  
 
 
 
11

 
Total before tax
 
 
 
(7
)
 
Tax benefit
 
Total reclassifications for the period
 
$
4

 
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 20 for additional details), which is recorded in cost of sales and selling, general and administrative expenses.
 
 
Foreign Currency Translation
 
Employee Benefit Related Adjustments
 
Unrealized Loss, net of tax
 
Total
Balance at December 31, 2015
$
(60
)
 
$
(696
)
 
$
(4
)
 
$
(760
)
Other comprehensive income (loss) before reclassification
10

 
—

 
(1
)
 
9

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

 
9

 
—

 
9

Net current-period other comprehensive income (loss)
$
10

 
$
9

 
$
(1
)
 
$
18

Balance at March 31, 2016
$
(50
)
 
$
(687
)
 
$
(5
)
 
$
(742
)
 
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
 
 
 
 
 
Actuarial losses
 
$
9

 
(b)  
 
 
 
9

 
Total before tax
 
 
 
—

 
Tax expense
 
Total reclassifications for the period
 
$
9

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
(b)  These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Note 20 for additional details).
 
The components of AOCL and the changes in AOCL by components, net of tax, for six months ended March 31, 2017 and 2016 are as follows (in millions):
 
Foreign Currency Translation
 
Employee Benefit Related Adjustments
 
Unrealized Loss, net of tax
 
Total
Balance at September 30, 2016
$
(66
)
 
$
(740
)
 
$
(3
)
 
$
(809
)
Other comprehensive income (loss) before reclassification
(9
)
 
1

 
2

 
(6
)
Amounts reclassified from accumulated other comprehensive loss
—

 
21

 
—

 
21

Net current-period other comprehensive income (loss)
$
(9
)
 
$
22

 
$
2

 
$
15

Balance at March 31, 2017
$
(75
)
 
$
(718
)
 
$
(1
)
 
$
(794
)

35
MERITOR, INC.
NOTES TO CONDENSED 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
 
$
(1
)
 
(a)  
 
Actuarial losses
 
22

 
(a)  
 
 
 
21

 
Total before tax
 
 
 
(7
)
 
Tax benefit
 
Total reclassifications for the period
 
$
14

 
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 20 for additional details), which is recorded in cost of sales and selling, general and administrative expenses.
 
 
Foreign Currency Translation
 
Employee Benefit Related Adjustments
 
Unrealized Loss, net of tax
 
Total
Balance at September 30, 2015
$
(54
)
 
$
(705
)
 
$
(7
)
 
$
(766
)
Other comprehensive income before reclassification
4

 
—

 
2

 
6

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

 
18

 
—

 
18

Net current-period other comprehensive income
$
4

 
$
18

 
$
2

 
$
24

Balance at March 31, 2016
$
(50
)
 
$
(687
)
 
$
(5
)
 
$
(742
)
 
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
 
 
 
 
 
Actuarial losses
 
$
18

 
(b)  
 
 
 
18

 
Total before tax
 
 
 
—

 
Tax expense
 
Total reclassifications for the period
 
$
18

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
(b)  These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Note 20 for additional details).
 

23. 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 in deciding how to allocate resources and in assessing performance. The company’s Chief Operating Decision Maker (“CODM”) is the Chief Executive Officer.
      The company has two reportable segments at March 31, 2017 , 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 parts to commercial vehicle and industrial aftermarket customers, primarily in North America and Europe. This segment also supplies a wide variety of undercarriage products and systems for trailer applications in North America.


36
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


     Segment adjusted 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 expense, asset impairment charges and other special items as determined by management. Segment adjusted EBITDA excludes unallocated legacy and corporate income (expense), net. The company uses Segment adjusted 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 condensed consolidated financial statements, except for the use of Segment adjusted 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 segment.
     Segment information is summarized as follows (in millions):
 
Commercial Truck
& Industrial
 
Aftermarket
& Trailer
 
Eliminations
 
Total
Three Months Ended March 31, 2017
 
 
 
 
 
 
 
External Sales
$
601

 
$
205

 
$
—

 
$
806

Intersegment Sales
19

 
10

 
(29
)
 
—

Total Sales
$
620

 
$
215

 
$
(29
)
 
$
806

Three Months Ended March 31, 2016
 
 
 
 
 
 
 
External Sales
$
610

 
$
211

 
$
—

 
$
821

Intersegment Sales
21

 
7

 
(28
)
 
—

Total Sales
$
631

 
$
218

 
$
(28
)
 
$
821

 
 
 
 
 
 
 
 
 
Commercial Truck
& Industrial
 
Aftermarket
& Trailer
 
Eliminations
 
Total
Six Months Ended March 31, 2017
 
 
 
 
 
 
 
External Sales
$
1,122

 
$
383

 
$
—

 
$
1,505

Intersegment Sales
37

 
16

 
(53
)
 
—

Total Sales
$
1,159

 
$
399

 
$
(53
)
 
$
1,505

Six Months Ended March 31, 2016
 
 
 
 
 
 
 
External Sales
$
1,223

 
$
407

 
$
—

 
$
1,630

Intersegment Sales
41

 
14

 
(55
)
 
—

Total Sales
$
1,264

 
$
421

 
$
(55
)
 
$
1,630



37
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2017

2016
 
2017
 
2016
Segment adjusted EBITDA:
 
 
 
 
 
 
 
Commercial Truck & Industrial
$
54

 
$
56

 
$
96

 
$
108

Aftermarket & Trailer
30

 
28

 
52

 
48

Segment adjusted EBITDA
84


84

 
148

 
156

Unallocated legacy and corporate income (expense), net (1)
(2
)
 
(3
)
 
(2
)
 
1

Interest expense, net
(21
)
 
(21
)
 
(42
)
 
(43
)
Provision for income taxes
(13
)
 
(7
)
 
(19
)
 
(14
)
Depreciation and amortization
(20
)
 
(16
)
 
(37
)
 
(31
)
Noncontrolling interests
(1
)
 
—

 
(2
)
 
(1
)
Loss on sale of receivables
(1
)
 
(2
)
 
(2
)
 
(4
)
Asset impairment charges
—

 
—

 
(3
)
 
—

Restructuring costs
(4
)
 
(2
)
 
(4
)
 
(3
)
Income from continuing operations attributable to Meritor, Inc.
$
22


$
33

 
$
37

 
$
61

(1)
Unallocated legacy and corporate income (expense), net represents items that are not directly related to the company's business segments. These items primarily include asbestos-related charges and settlements, pension and retiree medical costs associated with sold businesses, and other legacy costs for environmental and product liability.
 
March 31,
2017
 
September 30,
2016
Segment Assets:
 
 
 
Commercial Truck & Industrial
$
1,506

 
$
1,433

Aftermarket & Trailer
440

 
436

Total segment assets
1,946

 
1,869

Corporate (1)
825

 
845

Less: Accounts receivable sold under off-balance sheet factoring programs (2)  
(235
)
 
(220
)
Total assets
$
2,536

 
$
2,494

(1)  
Corporate assets consist primarily of cash, deferred income taxes and prepaid pension costs.
(2)  
At March 31, 2017 and September 30, 2016 , segment assets include $235 million and $220 million , respectively, of accounts receivable sold under off-balance sheet accounts receivable factoring programs (see Note 9 ). These sold receivables are included in segment assets as the CODM reviews segment assets inclusive of these balances.
24. Supplemental Guarantor Condensed Consolidating Financial Statements
Rule 3-10 of Regulation S-X requires that separate financial information for issuers and guarantors of registered securities be filed in certain circumstances. Certain of the company's 100 -percent-owned subsidiaries, as defined in the credit agreement (the “Guarantors”), irrevocably and unconditionally guarantee amounts outstanding under the senior secured revolving credit facility on a joint and several basis. Similar subsidiary guarantees were provided for the benefit of the holders of the notes outstanding under the company's indentures (see Note 18 ).
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 Regulation S-X Rules 3-10. 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 consolidating financial statements.

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



 
Three Months Ended March 31, 2017
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
External
$
—

 
$
391

 
$
415

 
$
—

 
$
806

Subsidiaries
—

 
30

 
14

 
(44
)
 
—

Total sales
—

 
421

 
429

 
(44
)
 
806

Cost of sales
(15
)
 
(345
)
 
(369
)
 
44

 
(685
)
GROSS MARGIN
(15
)
 
76

 
60

 
—

 
121

Selling, general and administrative
(20
)
 
(35
)
 
(11
)
 
—

 
(66
)
Restructuring costs
—

 
(2
)
 
(2
)
 
—

 
(4
)
Other operating expense, net
(2
)
 
—

 
—

 
—

 
(2
)
OPERATING INCOME (LOSS)
(37
)
 
39

 
47

 
—

 
49

Other income (expense), net
25

 
(5
)
 
(20
)
 
—

 
—

Equity in earnings of affiliates
—

 
6

 
2

 
—

 
8

Interest income (expense), net
(34
)
 
9

 
4

 
—

 
(21
)
INCOME (LOSS) BEFORE INCOME TAXES
(46
)
 
49

 
33

 
—

 
36

Provision for income taxes
15

 
(15
)
 
(13
)
 
—

 
(13
)
Equity income (loss) from continuing operations of subsidiaries
53

 
13

 
—

 
(66
)
 
—

INCOME (LOSS) FROM CONTINUING OPERATIONS
22

 
47

 
20

 
(66
)
 
23

LOSS FROM DISCONTINUED OPERATIONS, net of tax
—

 
—

 
—

 
—

 
—

NET INCOME (LOSS)
22

 
47

 
20

 
(66
)
 
23

Less: Net income attributable to noncontrolling interests
—

 
—

 
(1
)
 
—

 
(1
)
NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
$
22

 
$
47

 
$
19

 
$
(66
)
 
$
22





39

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


 
Three Months Ended March 31, 2017
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Net income (loss)
$
22

 
$
47

 
$
20

 
$
(66
)
 
$
23

Other comprehensive income (loss)
30

 
—

 
21

 
(19
)
 
32

Total comprehensive income (loss)
52

 
47

 
41

 
(85
)
 
55

Less: Comprehensive income attributable to
noncontrolling interests
—

 
—

 
(2
)
 
—

 
(2
)
Comprehensive income (loss) attributable to Meritor, Inc.
$
52

 
$
47

 
$
39

 
$
(85
)
 
$
53




40
Index                         
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)



 
Three Months Ended March 31, 2016
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
External
$
—

 
$
420

 
$
401

 
$
—

 
$
821

Subsidiaries
—

 
28

 
16

 
(44
)
 
—

Total sales
—

 
448

 
417

 
(44
)
 
821

Cost of sales
(12
)
 
(369
)
 
(363
)
 
44

 
(700
)
GROSS MARGIN
(12
)
 
79

 
54

 
—

 
121

Selling, general and administrative
(19
)
 
(21
)
 
(20
)
 
—

 
(60
)
Restructuring costs
—

 
(1
)
 
(1
)
 
—

 
(2
)
Other operating expense, net
(3
)
 
—

 
—

 
—

 
(3
)
OPERATING INCOME (LOSS)
(34
)
 
57

 
33

 
—

 
56

Other income (expense), net
35

 
(9
)
 
(28
)
 
—

 
(2
)
Equity in earnings of affiliates
—

 
7

 
—

 
—

 
7

Interest income (expense), net
(28
)
 
7

 
—

 
—

 
(21
)
INCOME (LOSS) BEFORE INCOME TAXES
(27
)
 
62

 
5

 
—

 
40

Provision for income taxes
—

 
—

 
(7
)
 
—

 
(7
)
Equity income (loss) from continuing operations of subsidiaries
60

 
(6
)
 
—

 
(54
)
 
—

INCOME (LOSS) FROM CONTINUING OPERATIONS
33

 
56

 
(2
)
 
(54
)
 
33

LOSS FROM DISCONTINUED OPERATIONS, net of tax
(1
)
 
(2
)
 
(1
)
 
3

 
(1
)
NET INCOME (LOSS)
32

 
54

 
(3
)
 
(51
)
 
32

Less: Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
$
32

 
$
54

 
$
(3
)
 
$
(51
)
 
$
32



41

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


 
Three Months Ended March 31, 2016
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Net income (loss)
$
32

 
$
54

 
$
(3
)
 
$
(51
)
 
$
32

Other comprehensive income (loss)
18

 
23

 
(10
)
 
(13
)
 
18

Total comprehensive income (loss)
50

 
77

 
(13
)
 
(64
)
 
50

Less: Comprehensive income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

Comprehensive income (loss) attributable to Meritor, Inc.
$
50

 
$
77

 
$
(13
)
 
$
(64
)
 
$
50



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



 
Six Months Ended March 31, 2017
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
External
$
—

 
$
716

 
$
789

 
$
—

 
$
1,505

Subsidiaries
—

 
56

 
26

 
(82
)
 
—

Total sales
—

 
772

 
815

 
(82
)
 
1,505

Cost of sales
(29
)
 
(642
)
 
(706
)
 
82

 
(1,295
)
GROSS MARGIN
(29
)
 
130

 
109

 
—

 
210

Selling, general and administrative
(43
)
 
(53
)
 
(23
)
 
—

 
(119
)
Restructuring costs
2

 
(2
)
 
(4
)
 
—

 
(4
)
Other operating expense, net
(2
)
 
—

 
(3
)
 
—

 
(5
)
OPERATING INCOME (LOSS)
(72
)
 
75

 
79

 
—

 
82

Other income (expense), net
24

 
(5
)
 
(19
)
 
—

 
—

Equity in earnings of affiliates
—

 
15

 
3

 
—

 
18

Interest income (expense), net
(67
)
 
19

 
6

 
—

 
(42
)
INCOME (LOSS) BEFORE INCOME TAXES
(115
)
 
104

 
69

 
—

 
58

Provision for income taxes
35

 
(35
)
 
(19
)
 
—

 
(19
)
Equity income (loss) from continuing operations of subsidiaries
117

 
41

 
—

 
(158
)
 
—

INCOME (LOSS) FROM CONTINUING OPERATIONS
37

 
110

 
50

 
(158
)
 
39

LOSS FROM DISCONTINUED OPERATIONS, net of tax
—

 
—

 
—

 
—

 
—

NET INCOME (LOSS)
37

 
110

 
50

 
(158
)
 
39

Less: Net income attributable to noncontrolling interests
—

 
—

 
(2
)
 
—

 
(2
)
NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
$
37

 
$
110

 
$
48

 
$
(158
)
 
$
37



43

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


 
Six Months Ended March 31, 2017
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Net income (loss)
$
37

 
$
110

 
$
50

 
$
(158
)
 
$
39

Other comprehensive income (loss)
14

 
2

 
(6
)
 
4

 
14

Total comprehensive income (loss)
51

 
112

 
44

 
(154
)
 
53

Less: Comprehensive income attributable to
noncontrolling interests
—

 
—

 
(1
)
 
—

 
(1
)
Comprehensive income (loss) attributable to Meritor, Inc.
$
51

 
$
112

 
$
43

 
$
(154
)
 
$
52



44
Index                         
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)



 
Six Months Ended March 31, 2016
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
External
$
—

 
$
837

 
$
793

 
$
—

 
$
1,630

Subsidiaries
—

 
55

 
32

 
(87
)
 
—

Total sales
—

 
892

 
825

 
(87
)
 
1,630

Cost of sales
(26
)
 
(746
)
 
(720
)
 
87

 
(1,405
)
GROSS MARGIN
(26
)
 
146

 
105

 
—

 
225

Selling, general and administrative
(39
)
 
(42
)
 
(35
)
 
—

 
(116
)
Restructuring costs
—

 
(1
)
 
(2
)
 
—

 
(3
)
Other operating expense, net
(3
)
 
—

 
—

 
—

 
(3
)
OPERATING INCOME (LOSS)
(68
)
 
103

 
68

 
—

 
103

Other income (loss), net
34

 
(9
)
 
(26
)
 
—

 
(1
)
Equity in earnings of affiliates
—

 
16

 
1

 
—

 
17

Interest income (expense), net
(59
)
 
15

 
1

 
—

 
(43
)
INCOME (LOSS) BEFORE INCOME TAXES
(93
)
 
125

 
44

 
—

 
76

Provision for income taxes
—

 
—

 
(14
)
 
—

 
(14
)
Equity income from continuing operations of subsidiaries
154

 
21

 
—

 
(175
)
 
—

INCOME FROM CONTINUING OPERATIONS
61

 
146

 
30

 
(175
)
 
62

LOSS FROM DISCONTINUED OPERATIONS, net of tax
(3
)
 
(5
)
 
(4
)
 
9

 
(3
)
NET INCOME
58

 
141

 
26

 
(166
)
 
59

Less: Net income attributable to noncontrolling interests
—

 
—

 
(1
)
 
—

 
(1
)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.
$
58

 
$
141

 
$
25

 
$
(166
)
 
$
58



45

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


 
Six Months Ended March 31, 2016
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Net income
$
58

 
$
141

 
$
26

 
$
(166
)
 
$
59

Other comprehensive income (loss)
24

 
12

 
(2
)
 
(10
)
 
24

Total comprehensive income
82

 
153

 
24

 
(176
)
 
83

Less: Comprehensive income attributable to
noncontrolling interests
—

 
—

 
(1
)
 
—

 
(1
)
Comprehensive income attributable to Meritor, Inc.
$
82

 
$
153

 
$
23

 
$
(176
)
 
$
82



46
Index
MERITOR, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
(Unaudited)


 
March 31, 2017
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
67

 
$
4

 
$
67

 
$
—

 
$
138

Receivables trade and other, net (1)
1

 
57

 
384

 
—

 
442

Inventories (1)
—

 
151

 
187

 
—

 
338

Other current assets
7

 
14

 
21

 
—

 
42

TOTAL CURRENT ASSETS
75

 
226

 
659

 
—

 
960

NET PROPERTY
22

 
202

 
206

 
—

 
430

GOODWILL (1)
—

 
219

 
166

 
—

 
385

OTHER ASSETS
443

 
130

 
188

 
—

 
761

INVESTMENTS IN SUBSIDIARIES
2,728

 
714

 
—

 
(3,442
)
 
—

TOTAL ASSETS
$
3,268

 
$
1,491

 
$
1,219

 
$
(3,442
)
 
$
2,536

CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Short-term debt
$
128

 
$
3

 
$
1

 
$
—

 
$
132

Accounts and notes payable (1)
40

 
198

 
290

 
—

 
528

Other current liabilities
85

 
73

 
87

 
—

 
245

TOTAL CURRENT LIABILITIES
253

 
274

 
378

 
—

 
905

LONG-TERM DEBT
848

 
1

 
8

 
—

 
857

RETIREMENT BENEFITS
659

 
—

 
21

 
—

 
680

INTERCOMPANY PAYABLE (RECEIVABLE)
1,629

 
(1,859
)
 
230

 
—

 
—

OTHER LIABILITIES
29

 
149

 
41

 
—

 
219

MEZZANINE EQUITY
13

 
—

 
—

 
—

 
13

EQUITY (DEFICIT) ATTRIBUTABLE TO
       MERITOR, INC.
(163
)
 
2,926

 
516

 
(3,442
)
 
(163
)
NONCONTROLLING INTERESTS (1)
—

 
—

 
25

 
—

 
25

TOTAL LIABILITIES AND EQUITY (DEFICIT)
$
3,268

 
$
1,491

 
$
1,219

 
$
(3,442
)
 
$
2,536


(1) As of March 31, 2017, Assets and Liabilities held for sale were: (i) $1 million Cash and cash equivalents; (ii) $8 million Receivables, trade and other, net; (iii) $1 million Inventories; (iv) $1 million Goodwill; (v) $6 million Accounts and notes payable; and (vi) $2 million Noncontrolling interests. These assets and liabilities held for sale are included in the Non-Guarantors column.


47
Index
MERITOR, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
(Unaudited)


 
September 30, 2016
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
90

 
$
4

 
$
66

 
$
—

 
$
160

Receivables trade and other, net (1)
1

 
39

 
356

 
—

 
396

Inventories (1)
—

 
143

 
173

 
—

 
316

Other current assets
5

 
12

 
16

 
—

 
33

TOTAL CURRENT ASSETS
96

 
198

 
611

 
—

 
905

NET PROPERTY (1)
22

 
198

 
219

 
—

 
439

GOODWILL
—

 
219

 
171

 
—

 
390

OTHER ASSETS
447

 
132

 
181

 
—

 
760

INVESTMENTS IN SUBSIDIARIES
2,575

 
679

 
—

 
(3,254
)
 
—

TOTAL ASSETS
$
3,140

 
$
1,426

 
$
1,182

 
$
(3,254
)
 
$
2,494

CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Short-term debt
$
1

 
$
4

 
$
9

 
$
—

 
$
14

Accounts and notes payable (1)
42

 
172

 
261

 
—

 
475

Other current liabilities
90

 
74

 
104

 
—

 
268

TOTAL CURRENT LIABILITIES
133

 
250

 
374

 
—

 
757

LONG-TERM DEBT
971

 
3

 
8

 
—

 
982

RETIREMENT BENEFITS
680

 
—

 
23

 
—

 
703

INTERCOMPANY PAYABLE (RECEIVABLE)
1,534

 
(1,768
)
 
234

 
—

 
—

OTHER LIABILITIES
34

 
162

 
42

 
—

 
238

EQUITY (DEFICIT) ATTRIBUTABLE TO
       MERITOR, INC.
(212
)
 
2,779

 
476

 
(3,254
)
 
(211
)
NONCONTROLLING INTERESTS (1)
—

 
—

 
25

 
—

 
25

TOTAL LIABILITIES AND EQUITY (DEFICIT)
$
3,140

 
$
1,426

 
$
1,182

 
$
(3,254
)
 
$
2,494


(1) As of September 30, 2016, Assets and Liabilities held for sale were: (i) $1 million Cash and cash equivalents; (ii) $8 million Receivables, trade and other, net; (iii) $1 million Inventories; (iv) $3 million Net property; (v) $5 million Accounts and notes payable; and (vi) $3 million Noncontrolling interests.These assets and liabilities held for sale are included in the Non-Guarantors column.


48
Index
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)


 
Six Months Ended March 31, 2017
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES
$
(51
)
 
$
21

 
$
60

 
$
—

 
$
30

INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
Capital expenditures
(6
)
 
(21
)
 
(13
)
 
—

 
(40
)
Net investing cash flows provided by discontinued operations
—

 
2

 
—

 
—

 
2

CASH USED FOR INVESTING ACTIVITIES
(6
)
 
(19
)
 
(13
)
 
—

 
(38
)
FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
 
Debt issuance costs
(4
)
 
—

 
—

 
—

 
(4
)
Intercompany advances
38

 
—

 
(38
)
 
—

 
—

Other financing activities
—

 
(2
)
 
(9
)
 
—

 
(11
)
CASH USED FOR FINANCING ACTIVITIES
34

 
(2
)
 
(47
)
 
—

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

 
—

 
1

 
—

 
1

CHANGE IN CASH AND CASH EQUIVALENTS
(23
)
 
—

 
1

 
—

 
(22
)
CASH AND CASH EQUIVALENTS AT BEGINNING
       OF PERIOD
90

 
4

 
66

 
—

 
160

CASH AND CASH EQUIVALENTS AT END OF
       PERIOD
$
67

 
$
4

 
$
67

 
$
—

 
$
138


49
Index
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)


 
Six Months Ended March 31, 2016
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
CASH FLOWS PROVIDED BY (USED FOR)
       OPERATING ACTIVITIES
$
(20
)
 
$
18

 
$
41

 
$
—

 
$
39

INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
Capital expenditures
(12
)
 
(22
)
 
(13
)
 
—

 
(47
)
Other investing activities
—

 
4

 
(1
)
 
—

 
3

Net investing cash flows provided by discontinued operations
—

 
1

 
3

 
—

 
4

CASH USED FOR INVESTING ACTIVITIES
(12
)
 
(17
)
 
(11
)
 
—

 
(40
)
FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
 
Repayment of notes
(55
)
 
—

 
—

 
—

 
(55
)
Repurchase of common stock
(43
)
 
—

 
—

 
—

 
(43
)
Intercompany advances
81

 
—

 
(81
)
 
—

 
—

Other financing activities
—

 
(2
)
 
—

 
—

 
(2
)
CASH USED FOR FINANCING ACTIVITIES
(17
)
 
(2
)
 
(81
)
 
—

 
(100
)
EFFECT OF CHANGES IN FOREIGN CURRENCY
       EXCHANGE RATES ON CASH AND CASH
       EQUIVALENTS
—

 
—

 
2

 
—

 
2

CHANGE IN CASH AND CASH EQUIVALENTS
(49
)
 
(1
)
 
(49
)
 
—

 
(99
)
CASH AND CASH EQUIVALENTS AT BEGINNING
       OF PERIOD
73

 
6

 
114

 
—

 
193

CASH AND CASH EQUIVALENTS AT END OF
       PERIOD
$
24

 
$
5

 
$
65

 
$
—

 
$
94


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, 2017 and September 30, 2016 , Parent-only obligations included $ 686 million and $708 million of pension and retiree medical benefits, respectively (see Note 20). All debt is debt of the Parent other than $ 13 million and $24 million at March 31, 2017 and September 30, 2016 , respectively (see Note 18), and is primarily related to capital lease obligations and lines of credit. There were $ 1 million and $17 million cash dividends paid to the Parent by subsidiaries and investments accounted for by the equity method for the six months ended March 31, 2017 and March 31, 2016 , respectively.

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 2017 Results
Our sales for the second quarter of fiscal year 2017 were $806 million , a decrease compared to $821 million in the same period in the prior fiscal year. The decrease in sales was primarily driven by lower commercial truck volume in North America, as Class

50

MERITOR, INC.

8 truck production was down 20 percent year over year. This was largely offset by increased production in Europe, India and China, in addition to new business wins.
Net income attributable to Meritor for the second quarter of fiscal year 2017 was $22 million compared to $32 million in the same period in the prior fiscal year. Lower net income year over year was driven primarily by higher income tax expense recognized in the current year.
Adjusted EBITDA (see Non-GAAP Financial Measures below) for the second quarter of fiscal year 2017 was $82 million compared to $81 million in the same period in the prior fiscal year. Our Adjusted EBITDA margin (see Non-GAAP Financial Measures below) in the second quarter of fiscal year 2017 was 10.2 percent compared to 9.9 percent in the same period a year ago. Included in the second quarter of fiscal year 2017 was a $10 million charge for a legal contingency related to a dispute with a joint venture (see Note 21 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report) . Despite this charge, Adjusted EBITDA and EBITDA margin increased year over year primarily driven by continued material, labor and burden performance, foreign exchange and favorable mix.
Net income from continuing operations attributable to the company for the second quarter of fiscal year 2017 was $22 million compared to $33 million in the same period in the prior fiscal year. Adjusted income from continuing operations attributable to the company (see Non-GAAP Financial Measures below) for the second quarter of fiscal year 2017 was $32 million compared to $38 million in the same period in the prior fiscal year.
Cash flow provided by operating activities was $44 million in the second quarter of fiscal years 2017 and 2016.
Trends and Uncertainties
      Industry Production Volumes
     The following table reflects estimated on-highway commercial truck production volumes for selected original equipment (OE) markets for the three and six months ended March 31, 2017 and 2016 based on available sources and management’s estimates.
 
Three Months Ended March 31,
 
Percent
Six Months Ended March 31,
 
Percent
 
2017
 
2016
 
Change
2017
 
2016
 
Change
Estimated Commercial Truck production (in thousands):
 
 
 
 
 
North America, Heavy-Duty Trucks
51

 
64

 
(20
)%
99

 
136

 
(27
)%
North America, Medium-Duty Trucks
64

 
64

 
—
 %
118

 
124

 
(5
)%
North America, Trailers
61

 
68

 
(10
)%
131

 
145

 
(10
)%
Western Europe, Heavy- and Medium-Duty Trucks
111

 
107

 
4
 %
234

 
222

 
5
 %
South America, Heavy- and Medium-Duty Trucks
16

 
15

 
7
 %
30

 
30

 
—
 %
India, Heavy- and Medium-Duty Trucks
101

 
96

 
5
 %
178

 
170

 
5
 %
     
North America:
We expect Class 8 production volumes in North America to return to more normalized levels by historical standards in the second half of fiscal year 2017, which would represent an increase compared to production volumes experienced in the first half of fiscal year 2017.

Western Europe:
During fiscal year 2017, we expect production volumes to increase slightly compared to the levels experienced in fiscal year 2016.

South America:
During fiscal year 2017, we expect production volumes in South America to increase slightly compared to the levels experienced in fiscal year 2016.

China:
During fiscal year 2017, we expect production volumes in China to increase slightly from the levels experienced in fiscal year 2016 due to improvements in the construction market.

India:

51

MERITOR, INC.

During fiscal year 2017, we expect production volumes in India to increase slightly from the levels experienced in fiscal year 2016.

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;
•
Volatile 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 include:
•
Significant contract awards or losses of existing contracts or failure to negotiate acceptable terms in contract renewals;
•
Ability to successfully launch a significant number of new products, including potential product quality issues, and obtain new business;
•
Ability to manage possible adverse effects on our European operations, or financing arrangements related thereto, following the United Kingdom's decision to exit the European Union, or in the event one or more other countries exit the European monetary union;
•
Ability to further implement planned productivity, cost reduction, and other margin improvement initiatives;
•
Ability to successfully execute strategic initiatives;
•
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;
•
Competitively driven price reductions to our customers;
•
Potential price increases from our suppliers;
•
Additional restructuring actions and the timing and recognition of restructuring charges, including any actions associated with the prolonged softness in markets in which we operate;
•
Higher-than-planned warranty expenses, including the outcome of known or potential recall campaigns;
•
Uncertainties of asbestos claim and other litigation, including the outcome of litigation with insurance companies regarding scope of asbestos coverage, and the long-term solvency of our insurance carriers; and
•
Restrictive government actions (such as restrictions on transfer of funds and trade protection measures, including import and export duties, quotas and customs duties and tariffs).

NON-GAAP FINANCIAL MEASURES
In addition to the results reported in accordance with accounting principles generally accepted in the United States (“GAAP”), we have provided information regarding non-GAAP financial measures. These non-GAAP financial measures include Adjusted

52

MERITOR, INC.

income (loss) from continuing operations attributable to the company, Adjusted diluted earnings (loss) per share from continuing operations, Adjusted EBITDA, Adjusted EBITDA margin, Segment adjusted EBITDA, Segment adjusted EBITDA margin, Free cash flow and Net debt.
     Adjusted income (loss) from continuing operations attributable to the company and Adjusted diluted earnings (loss) per share from continuing operations are defined as reported income (loss) from continuing operations and reported diluted earnings (loss) per share from continuing operations before restructuring expenses, asset impairment charges, non-cash tax expense related to the use of deferred tax assets in jurisdictions with net operating loss carry forwards, and other special items as determined by management. Adjusted EBITDA is defined as income (loss) from continuing operations before interest, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by consolidated sales from continuing operations. Segment adjusted EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, noncontrolling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense, asset impairment charges and other special items as determined by management. Segment adjusted EBITDA excludes unallocated legacy and corporate expense (income), net. Segment adjusted EBITDA margin is defined as Segment adjusted EBITDA divided by consolidated sales from continuing operations, either in the aggregate or by segment as applicable. Free cash flow is defined as cash flows provided by (used for) operating activities less capital expenditures. Net debt is defined as total debt less cash and cash equivalents.
     Management believes these non-GAAP financial measures are useful to both management and investors in their analysis of the company's financial position and results of operations. In particular, Adjusted EBITDA, Adjusted EBITDA margin, Segment adjusted EBITDA, Segment adjusted EBITDA margin, Adjusted income (loss) from continuing operations attributable to the company and Adjusted diluted earnings (loss) per share from continuing operations are meaningful measures of performance to investors as they are commonly utilized to analyze financial performance in our industry, perform analytical comparisons, benchmark performance between periods and measure our performance against externally communicated targets.
Free cash flow is used by investors and management to analyze our ability to service and repay debt and return value directly to shareholders. Net debt over Adjusted EBITDA is a specific financial measure in our current M2019 plan used to measure the company’s leverage in order to assist management in its assessment of appropriate allocation of capital.
Management uses the aforementioned non-GAAP financial measures for planning and forecasting purposes, and Segment adjusted EBITDA is also used as the primary basis for the CODM to evaluate the performance of each of our reportable segments.
Our Board of Directors uses Adjusted EBITDA margin, Free cash flow, Adjusted diluted earnings (loss) per share from continuing operations and Net debt over Adjusted EBITDA as key metrics to determine management’s performance under our performance-based compensation plans.
     Adjusted income (loss) from continuing operations attributable to the company, Adjusted diluted earnings (loss) per share from continuing operations, Adjusted EBITDA, Adjusted EBITDA margin, Segment adjusted EBITDA and Segment adjusted EBITDA margin 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 financial performance. 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, this non-GAAP cash flow measure does not reflect cash used to repay debt or cash received from the divestitures of businesses or sales of other assets and thus do not reflect funds available for investment or other discretionary uses. Net debt should not be considered a substitute for total debt as reported on the balance sheet. 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.

53

MERITOR, INC.

Adjusted income from continuing operations attributable to the company and Adjusted diluted earnings per share from continuing operations are reconciled to Income from continuing operations attributable to the company and Diluted earnings per share from continuing operations below (in millions, except per share amounts).
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2017

2016
 
2017
 
2016
Income from continuing operations attributable to the company
$
22

 
$
33

 
$
37

 
$
61

Restructuring costs
4

 
2

 
4

 
3

Asset impairment charges, net of noncontrolling interests
—

 
—

 
2

 
—

Non-cash tax expense (1)
6

 
3

 
11

 
5

Adjusted income from continuing operations attributable to the company
$
32

 
$
38

 
$
54

 
$
69

 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
$
0.24

 
$
0.36

 
$
0.41

 
$
0.65

Impact of adjustments on diluted earnings per share
0.11

 
0.05

 
0.19

 
0.09

Adjusted diluted earnings per share from continuing operations
$
0.35

 
$
0.41

 
$
0.60

 
$
0.74

(1) Represents tax expense related to the use of deferred tax assets in jurisdictions with net operating loss carry forwards.

Free cash flow is reconciled to cash flows provided by operating activities below (in millions).
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
Cash provided by operating activities
$
44

 
$
44

 
$
30

 
$
39

Capital expenditures
(23
)
 
(25
)
 
(40
)
 
(47
)
Free cash flow
$
21

 
$
19

 
$
(10
)
 
$
(8
)


















54

MERITOR, INC.

Adjusted EBITDA and Segment adjusted EBITDA are reconciled to net income attributable to Meritor, Inc. below (dollars in millions).
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
Net income attributable to Meritor, Inc.
$
22

 
$
32

 
$
37

 
$
58

Loss from discontinued operations, net of tax, attributable to Meritor, Inc.
—

 
1

 
—

 
3

Income from continuing operations, net of tax, attributable to Meritor, Inc.
$
22

 
$
33

 
$
37

 
$
61

 

 

 

 

Interest expense, net
21

 
21

 
42

 
43

Provision for income taxes
13

 
7

 
19

 
14

Depreciation and amortization
20

 
16

 
37

 
31

Noncontrolling interests
1

 
—

 
2

 
1

Loss on sale of receivables
1

 
2

 
2

 
4

Asset impairment charges
—

 
—

 
3

 
—

Restructuring costs
4

 
2

 
4

 
3

Adjusted EBITDA
$
82

 
$
81

 
$
146

 
$
157

 
 
 
 
 
 
 
 
Adjusted EBITDA margin (1)
10.2
%
 
9.9
%
 
9.7
%
 
9.6
%
 
 
 
 
 
 
 
 
Unallocated legacy and corporate expense (income), net (2)
2

 
3

 
2

 
(1
)
Segment adjusted EBITDA
$
84

 
$
84

 
$
148

 
$
156

 
 
 
 
 
 
 
 
Commercial Truck & Industrial
 
 
 
 
 
 
 
Segment adjusted EBITDA
$
54

 
$
56

 
$
96

 
$
108

Segment adjusted EBITDA margin (3)
8.7
%
 
8.9
%
 
8.3
%
 
8.5
%
 
 
 
 
 
 
 
 
Aftermarket & Trailer
 
 
 
 
 
 
 
Segment adjusted EBITDA
$
30

 
$
28

 
$
52

 
$
48

Segment adjusted EBITDA margin  (3)
14.0
%
 
12.8
%
 
13.0
%
 
11.4
%
(1) Adjusted EBITDA margin equals Adjusted EBITDA divided by consolidated sales from continuing operations.
(2) Unallocated legacy and corporate expense (income), net represents items that are not directly related to the company's business segments. These items primarily include asbestos-related charges and settlements, pension and retiree medical costs associated with sold businesses, and other legacy costs for environmental and product liability.
(3) Segment adjusted EBITDA margin equals Segment adjusted EBITDA divided by total segment sales.

55

MERITOR, INC.


Net debt is reconciled to total debt and Adjusted EBITDA is reconciled to net income attributable to Meritor, Inc. below (dollars in millions).
 
March 31,
2017
 
September 30,
2016
Short-term debt
$
132

 
$
14

Long-term debt
857

 
982

Total debt
989

 
996

Less: Cash and cash equivalents
(138
)
 
(160
)
Net debt
$
851

 
$
836


 
Twelve Months Ended (1)
 
Twelve Months Ended
 
March 31, 2017
 
September 30, 2016
Net income attributable to Meritor, Inc.
$
552

 
$
573

Loss from discontinued operations, net of tax, attributable to Meritor, Inc.
1

 
4

Income from continuing operations, net of tax, attributable to Meritor, Inc.
$
553

 
$
577

 
 
 
 
Interest expense, net
83

 
84

Benefit for income taxes
(419
)
 
(424
)
Depreciation and amortization
73

 
67

Noncontrolling interests
3

 
2

Loss on sale of receivables
3

 
5

Asset impairment charges
3

 
—

Restructuring costs
17

 
16

Adjusted EBITDA
$
316

 
$
327

 
 
 
 
Net debt over Adjusted EBITDA
2.7

 
2.6

(1) Trailing-twelve-month period ended March 31, 2017 is used to measure the company's leverage in order to assist management in its assessment of appropriate allocation of capital as part of our current M2019 plan and is also used to assess management's performance under one of our performance-based compensation plans.

56

MERITOR, INC.

Results of Operations

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
   Sales
The following table reflects total company and business segment sales for the three months ended March 31, 2017 and 2016 (dollars in millions). The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales. Business segment sales include intersegment sales.
 
Three Months Ended March 31,
 
 
 
 
 
Dollar Change Due To
 
2017
 
2016
 
Dollar
Change
 
%
Change
 
Currency
 
Volume/ Other
Sales:
 
 
 
 
 
 
 
 
 
 
 
Commercial Truck & Industrial
 
 
 
 
 
 
 
 
 
 
 
            North America
$
306

 
$
357

 
$
(51
)
 
(14
)%
 
$
—

 
$
(51
)
            Europe
156

 
140

 
16

 
11
 %
 
(10
)
 
26

            South America
37

 
32

 
5

 
16
 %
 
7

 
(2
)
     China
28

 
18

 
10

 
56
 %
 
(1
)
 
11

     India
53

 
42

 
11

 
26
 %
 
—

 
11

     Other
21

 
21

 
—

 
—
 %
 
—

 
—

          Total External Sales
$
601

 
$
610

 
$
(9
)
 
(1
)%
 
$
(4
)
 
$
(5
)
            Intersegment Sales
19

 
21

 
(2
)
 
(10
)%
 
(2
)
 
—

          Total Sales
$
620

 
$
631

 
$
(11
)
 
(2
)%
 
$
(6
)
 
$
(5
)
 
 
 
 
 
 
 
 
 
 
 
 
Aftermarket & Trailer
 
 
 
 
 
 
 
 
 
 
 
            North America
$
180

 
$
181

 
$
(1
)
 
(1
)%
 
$
—

 
$
(1
)
            Europe
25

 
30

 
(5
)
 
(17
)%
 
(1
)
 
(4
)
          Total External Sales
$
205

 
$
211

 
$
(6
)
 
(3
)%
 
$
(1
)
 
$
(5
)
            Intersegment Sales
10

 
7

 
3

 
43
 %
 
(1
)
 
4

          Total Sales
$
215

 
$
218

 
$
(3
)
 
(1
)%
 
$
(2
)
 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
Total External Sales
$
806


$
821

 
$
(15
)
 
(2
)%
 
$
(5
)
 
$
(10
)
Commercial Truck & Industrial sales were $620 million in the second quarter of fiscal year 2017, down 2 percent compared to the second quarter of fiscal year 2016 . The decrease in sales was driven by lower Class 8 truck production in North America, largely offset by increased volumes in Europe, India, and China.
Aftermarket & Trailer sales were $215 million in the second quarter of fiscal year 2017, down 1 percent compared to the second quarter of fiscal year 2016 . The decrease in sales was primarily due to lower trailer production, which was partially offset by higher aftermarket revenue.
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, 2017 was $685 million compared to $700 million in the same period in the prior fiscal year, representing a decrease of 2 percent . Total cost of sales was 85.0 and 85.3 percent of sales for the three-month periods ended March 31, 2017 and 2016, respectively.
     The following table summarizes significant factors contributing to the changes in costs of sales during the second quarter of fiscal year 2017 compared to the same quarter in the prior year (in millions):

57

MERITOR, INC.

 
Cost of Sales
Three Months Ended March 31, 2016
$
700

Volume, mix and other, net
(9
)
Foreign exchange
(6
)
Three Months Ended March 31, 2017
$
685

     Changes in the components of cost of sales year over year are summarized as follows (in millions):
 
Change in Cost of Sales
Lower material costs
$
(18
)
Higher labor and overhead costs
5

Other, net
(2
)
Total change in costs of sales
$
(15
)
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, 2017 decreased $18 million compared to the same period in the prior fiscal year primarily due to lower volumes and material performance programs, which were partially offset by higher year-over-year steel prices.
Labor and overhead costs increased $5 million compared to the same period in the prior fiscal year.
Gross margin was $121 million for the three-month periods ended March 31, 2017 and 2016. Gross margin, as a percentage of sales, was 15.0 and 14.7 percent for the three-month periods ended March 31, 2017 and 2016, respectively. Gross margin as a percentage of sales increased as lower material costs more than offset the impact of lower sales.
Other Income Statement Items
     Selling, general and administrative expenses (“SG&A ” ) for the three months ended March 31, 2017 and 2016 are summarized as follows (dollars in millions):
 
Three Months Ended
 
 
 
 
 
March 31, 2017
 
March 31, 2016
 
Increase (Decrease)
SG&A
Amount
 
% of sales
 
Amount
 
% of sales
 
Amount
 
% of sales
Loss on sale of receivables
$
(1
)
 
(0.1
)%
 
$
(2
)
 
(0.2
)%
 
$
(1
)
 
(0.1) pts
Short and long-term variable
     compensation
(9
)
 
(1.1
)%
 
(7
)
 
(0.9
)%
 
2

 
0.2 pts
Asbestos-related expense, net of asbestos-related insurance recoveries
(2
)
 
(0.2
)%
 
(5
)
 
(0.6
)%
 
(3
)
 
(0.4) pts
Legal contingency charge
(10
)
 
(1.2
)%
 
—

 
—
 %
 
10

 
1.2 pts
All other SG&A
(44
)
 
(5.6
)%
 
(46
)
 
(5.6
)%
 
(2
)
 
0.0 pts
Total SG&A
$
(66
)
 
(8.2
)%
 
$
(60
)
 
(7.3
)%
 
$
6

 
0.9 pts
We recognized a $10 million charge for a legal contingency related to a dispute with a joint venture in the second quarter of fiscal year 2017 (see Note 21 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report ). We also recognized $5 million related to previous cash settlements with an insurance company for recovery of defense and indemnity costs associated with asbestos liabilities in the second quarter of fiscal year 2017, which is included above in Asbestos-related expense, net of asbestos-related insurance recoveries (see Note 21 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report ).
All other SG&A, which represents normal selling, general and administrative expense, remained flat year-over-year as a percentage of sales.

58

MERITOR, INC.

Restructuring costs increased by $2 million from $2 million in the second quarter of fiscal year 2016 to $4 million in the same period in fiscal year 2017. During the three months ended March 31, 2017, these costs primarily related to employee severance costs recognized by our Aftermarket and Trailer segment. During the three months ended March 31, 2016, these costs primarily related to employee severance costs recognized by our Commercial Truck and Industrial segment.
Operating income decreased by $7 million from $56 million in the second quarter of fiscal year 2016 to $49 million in the same period in fiscal year 2017 . Key items affecting operating income are discussed above.
Equity in earnings of affiliates increased by $1 million from $7 million in the second quarter of fiscal year 2016 to $8 million in the same period in fiscal year 2017.
Interest expense, net was $21 million in the second quarter of fiscal years 2017 and 2016 .
Provision for income taxes was $13 million in the second quarter of fiscal year 2017 compared to $7 million in the same period in the prior fiscal year on relatively flat pre-tax income. In the second quarter of fiscal year 2017, our effective tax rate was 36 percent compared to 18 percent in the prior year. The increase in tax expense was primarily driven by stronger earnings in certain foreign jurisdictions, which do not have a tax valuation allowance.
Income from continuing operations (before noncontrolling interests) decreased by $10 million from $33 million in the second quarter of fiscal year 2016 to $23 million in the same period in fiscal year 2017 . The reasons for the decrease are discussed above.
Loss from discontinued operations, net of tax was insignificant in the second quarter of fiscal year 2017 and $1 million in the second quarter of fiscal year 2016.
Net income attributable to Meritor, Inc. decreased by $10 million from $32 million in the second quarter of fiscal year 2016 to $ 22 million in the same period in fiscal year 2017 . The various factors affecting net income are discussed above.

Segment adjusted EBITDA and Segment adjusted EBITDA margins
Segment adjusted EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, noncontrolling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense, asset impairment charges and other special items as determined by management. Segment adjusted EBITDA excludes unallocated legacy and corporate expense (income), net. We use Segment adjusted EBITDA as the primary basis for the CODM to evaluate the performance of each of our reportable segments. Segment adjusted EBITDA margin is defined as Segment adjusted EBITDA divided by consolidated sales from continuing operations, either in the aggregate or by segment as applicable. Segment adjusted EBITDA and Segment adjusted EBITDA margin are non-GAAP measures (see Non-GAAP Financial Measures above).
     The following table reflects Segment adjusted EBITDA and Segment adjusted EBITDA margins for the three months ended March 31, 2017 and 2016 (in millions).
 
Segment adjusted EBITDA
 
Segment adjusted EBITDA margins
 
Three Months Ended March 31,
 
 
 
Three Months Ended March 31,
 
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Commercial Truck & Industrial
$
54

 
$
56

 
$
(2
)
 
8.7
%
 
8.9
%
 
(0.2) pts
Aftermarket & Trailer
30

 
28

 
2

 
14.0
%
 
12.8
%
 
1.2 pts
Segment adjusted EBITDA
$
84

 
$
84

 
$
—

 
10.4
%
 
10.2
%
 
0.2 pts

59

MERITOR, INC.

     Significant items impacting year-over-year Segment adjusted EBITDA include the following (in millions):
 
Commercial
Truck & Industrial
 
Aftermarket
& Trailer
 
TOTAL
Segment adjusted EBITDA– Quarter ended March 31, 2016
$
56

 
$
28

 
$
84

Higher earnings from unconsolidated affiliates
1

 
—

 
1

Impact of foreign currency exchange rates
5

 
—

 
5

Allocated asbestos-related expense, net of allocated asbestos-related insurance recoveries
3

 
1

 
4

Legal contingency charge
(10
)
 
—

 
(10
)
Volume, mix, pricing and other
(1
)
 
1

 
—

Segment adjusted EBITDA – Quarter ended March 31, 2017
$
54

 
$
30

 
$
84


Commercial Truck & Industrial Segment adjusted EBITDA was $54 million in the second quarter of fiscal year 2017 , down $2 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin decreased to 8.7 percent compared to 8.9 percent in the same period in the prior fiscal year. The decrease in Segment adjusted EBITDA margin was driven primarily by a legal contingency charge (see Note 21 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report ) and higher steel prices partially offset by strong operational performance, foreign exchange and favorable mix .
      Aftermarket & Trailer Segment adjusted EBITDA was $30 million in the second quarter of fiscal year 2017, up $2 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin increased to 14.0 percent compared to 12.8 percent in the second quarter of fiscal year 2016. The increase in Segment adjusted EBITDA margin was driven by labor and burden performance.


60

MERITOR, INC.

Six Months Ended March 31, 2017 Compared to Six Months Ended March 31, 2016
   Sales
The following table reflects total company and business segment sales for the six months ended March 31, 2017 and 2016 (dollars in millions). The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales. Business segment sales include intersegment sales.
 
Six Months Ended March 31,
 
 
 
 
 
Dollar Change Due To
 
2017
 
2016
 
Dollar
Change
 
%
Change
 
Currency
 
Volume/ Other
Sales:
 
 
 
 
 
 
 
 
 
 
 
Commercial Truck & Industrial
 
 
 
 
 
 
 
 
 
 
 
            North America
$
576

 
$
722

 
$
(146
)
 
(20
)%
 
$
—

 
$
(146
)
            Europe
289

 
286

 
3

 
1
 %
 
(14
)
 
17

            South America
67

 
56

 
11

 
20
 %
 
11

 
—

     China
52

 
39

 
13

 
33
 %
 
(3
)
 
16

     India
95

 
78

 
17

 
22
 %
 
(1
)
 
18

     Other
43

 
42

 
1

 
2
 %
 
1

 
—

          Total External Sales
$
1,122

 
$
1,223

 
$
(101
)
 
(8
)%
 
$
(6
)
 
$
(95
)
            Intersegment Sales
37

 
41

 
(4
)
 
(10
)%
 
(3
)
 
(1
)
          Total Sales
$
1,159

 
$
1,264

 
$
(105
)
 
(8
)%
 
$
(9
)
 
$
(96
)
 
 
 
 
 
 
 
 
 
 
 
 
Aftermarket & Trailer
 
 
 
 
 
 
 
 
 
 
 
            North America
$
336

 
$
350

 
$
(14
)
 
(4
)%
 
$
(1
)
 
$
(13
)
            Europe
47

 
57

 
(10
)
 
(18
)%
 
(1
)
 
(9
)
          Total External Sales
$
383

 
$
407

 
$
(24
)
 
(6
)%
 
$
(2
)
 
$
(22
)
            Intersegment Sales
16

 
14

 
2

 
14
 %
 
(1
)
 
3

          Total Sales
$
399

 
$
421

 
$
(22
)
 
(5
)%
 
$
(3
)
 
$
(19
)
 
 
 
 
 
 
 
 
 
 
 
 
Total External Sales
$
1,505

 
$
1,630

 
$
(125
)
 
(8
)%
 
$
(8
)
 
$
(117
)
Commercial Truck & Industrial sales were $1,159 million in the first six months of fiscal year 2017, down 8 percent compared to the first six months of fiscal year 2016 . The decrease in sales was driven primarily by lower Class 8 truck production in North America, partially offset by increased volumes in Europe, India and China.
Aftermarket & Trailer sales were $399 million in the first six months of fiscal year 2017, down 5 percent compared to the first six months of fiscal year 2016 . The decrease in sales was primarily driven by lower volumes across the segment.
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, 2017 was $1,295 million compared to $1,405 million in the same period in the prior fiscal year, representing a decrease of 8 percent . Total cost of sales was 86.0 and 86.2 percent of sales for the six-month periods ended March 31, 2017 and 2016, respectively.
     The following table summarizes significant factors contributing to the changes in costs of sales during the first six months of fiscal year 2017 compared to the same period in the prior year (in millions):

61

MERITOR, INC.

 
Cost of Sales
Six Months Ended March 31, 2016
$
1,405

Volume, mix and other, net
(98
)
Foreign exchange
(12
)
Six Months Ended March 31, 2017
$
1,295

     Changes in the components of cost of sales year over year are summarized as follows (in millions):
 
Change in Cost of Sales
Lower material costs
$
(93
)
Lower labor and overhead costs
(13
)
Other, net
(4
)
Total change in costs of sales
$
(110
)
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, 2017 decreased $93 million compared to the same period in the prior fiscal year primarily due to lower volumes and material performance programs, which were partially offset by higher year-over-year steel prices.
Labor and overhead costs decreased $13 million compared to the same period in the prior fiscal year primarily due to lower volumes and savings associated with labor and burden cost reduction programs.
Gross margin for the six-month periods ended March 31, 2017 and 2016 was $210 million and $225 million , respectively. Gross margin, as a percentage of sales, was 14.0 and 13.8 percent for the six-month periods ended March 31, 2017 and 2016, respectively. Gross margin as a percentage of sales increased slightly as lower material, labor and burden costs more than offset the impact of lower sales.
Other Income Statement Items
     Selling, general and administrative expenses for the six months ended March 31, 2017 and 2016 are summarized as follows (dollars in millions):
 
Six Months Ended
 
 
 
 
 
March 31, 2017
 
March 31, 2016
 
Increase (Decrease)
SG&A
Amount
 
% of sales
 
Amount
 
% of sales
 
Amount
 
% of sales
Loss on sale of receivables
$
(2
)
 
(0.1
)%
 
$
(4
)
 
(0.2
)%
 
$
(2
)
 
(0.1) pts
Short and long-term variable
     compensation
(17
)
 
(1.1
)%
 
(15
)
 
(0.9
)%
 
2

 
0.2 pts
Asbestos-related expense, net of asbestos-related insurance recoveries
(1
)
 
(0.1
)%
 
(6
)
 
(0.4
)%
 
(5
)
 
(0.3) pts
Legal contingency charge
(10
)
 
(0.7
)%
 
—

 
—
 %
 
10

 
0.7 pts
All other SG&A
(89
)
 
(5.9
)%
 
(91
)
 
(5.6
)%
 
(2
)
 
0.3 pts
Total SG&A
$
(119
)
 
(7.9
)%
 
$
(116
)
 
(7.1
)%
 
$
3

 
 0.8 pts
We recognized a $10 million charge for a legal contingency related to a dispute with a joint venture in the second quarter of fiscal year 2017 (see Note 21 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report ). We also recognized $11 million and $5 million related to previous cash settlements with insurance companies for recoveries of defense and indemnity costs associated with asbestos liabilities in the six months ended March 31, 2017 and 2016, respectively, which are included above in Asbestos-related expense, net of asbestos-related insurance recoveries (see Note 21 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report ).
All other SG&A, which represents normal selling, general and administrative expense, increased as a percentage of sales primarily due to lower sales in the first half of fiscal year 2017.

62

MERITOR, INC.

Restructuring costs increased by $1 million from $3 million in the first six months of fiscal year 2016 to $4 million in the same period in fiscal year 2017. During the six months ended March 31, 2017, these costs primarily related to employee severance costs recognized by our Aftermarket and Trailer segment. During the six months ended March 31, 2016, these costs primarily related to employee severance costs split between our Commercial Truck & Industrial segment and Aftermarket & Trailer segment.
Other operating expense, net increased by $2 million from $3 million in the first six months of fiscal year 2016 to $5 million in the first six months of 2017 primarily because of an impairment charge as the result of the carrying value of a business, classified as held for sale, exceeding its fair value less costs to sell in the first six months of 2017.
Operating income decreased by $21 million from $103 million in the first six months of fiscal year 2016 to $82 million in the same period in fiscal year 2017. Key items affecting operating income are discussed above.
Equity in earnings of affiliates increased by $1 million from $17 million in the first six months of fiscal year 2016 to $18 million in the same period in fiscal year 2017.
Interest expense, net decreased by $1 million from $43 million in the first six months of fiscal year 2016 to $42 million in the same period in fiscal year 2017.
Provision for income taxes was $19 million in the first six months of fiscal year 2017 compared to $14 million in the same period in the prior fiscal year. In the first six months of fiscal year 2017, our effective tax rate was 33 percent compared to 18 percent in the prior year. This increase in tax expense was primarily driven by stronger earnings in certain foreign jurisdictions, which do not have a tax valuation allowance.
Income from continuing operations (before noncontrolling interests) decreased by $23 million from $62 million in the first six months of fiscal year 2016 to $39 million in the same period in fiscal year 2017. The reasons for the decrease are discussed above.
Loss from discontinued operations, net of tax was insignificant in the first six months of fiscal year 2017 and $3 million in the first six months of fiscal year 2016. In the first six months of fiscal year 2016, loss from discontinued operations, net of tax, was primarily attributable to changes in estimates related to legal costs incurred in connection with previously divested businesses.
Net income attributable to Meritor, Inc. decreased by $21 million from $58 million in the first six months of fiscal year 2016 to $37 million in the same period in fiscal year 2017. The various factors affecting net income are discussed above.

Segment adjusted EBITDA and Segment adjusted EBITDA margins
     The following table reflects Segment adjusted EBITDA and Segment adjusted EBITDA margins for the six months ended March 31, 2017 and 2016 (in millions).
 
Segment adjusted EBITDA
 
Segment adjusted EBITDA margins
 
Six Months Ended March 31,
 
 
 
Six Months Ended March 31,
 
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Commercial Truck & Industrial
$
96

 
$
108

 
$
(12
)
 
8.3
%
 
8.5
%
 
(0.2) pts
Aftermarket & Trailer
52

 
48

 
4

 
13.0
%
 
11.4
%
 
1.6 pts
Segment adjusted EBITDA
$
148

 
$
156

 
$
(8
)
 
9.8
%
 
9.6
%
 
0.2 pts

63

MERITOR, INC.

     Significant items impacting year-over-year Segment adjusted EBITDA include the following (in millions):
 
Commercial
Truck & Industrial
 
Aftermarket
& Trailer
 
TOTAL
Segment adjusted EBITDA– Six months ended March 31, 2016
$
108

 
$
48

 
$
156

Higher earnings from unconsolidated affiliates
1

 
—

 
1

Impact of foreign currency exchange rates
7

 
1

 
8

Allocated asbestos-related expense, net of allocated asbestos-related insurance recoveries
6

 
2

 
8

Legal contingency charge
(10
)
 
—

 
(10
)
Volume, mix, pricing and other
(16
)
 
1

 
(15
)
Segment adjusted EBITDA – Six months ended March 31, 2017
$
96

 
$
52

 
$
148


Commercial Truck & Industrial Segment adjusted EBITDA was $96 million in the first six months of fiscal year 2017, down $12 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin was 8.3 percent compared to 8.5 percent in the first six months of fiscal 2016. The decrease in Segment adjusted EBITDA was driven by lower revenue, a legal contingency charge (see Note 21 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report ) and higher steel prices which were partially offset by strong material, labor and burden performance.
      Aftermarket & Trailer Segment adjusted EBITDA was $52 million for the first six months of fiscal year 2017, up $4 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin was 13.0 percent, up 1.6 percentage points from 11.4 percent in the first six months of fiscal year 2016. Segment adjusted EBITDA and Segment adjusted EBITDA margin increased as material, labor and burden performance more than offset lower volumes.
Financial Condition
Cash Flows (in millions)
 
Six Months Ended March 31,
 
2017
 
2016
OPERATING CASH FLOWS
 
 
 
Income from continuing operations
$
39

 
$
62

Depreciation and amortization
37

 
31

Restructuring costs
4

 
3

Asset impairment charges
3

 
—

Equity in earnings of affiliates
(18
)
 
(17
)
Pension and retiree medical expense
7

 
10

Dividends received from equity method investments
13

 
19

Pension and retiree medical contributions
(19
)
 
(22
)
Restructuring payments
(7
)
 
(4
)
Increase in working capital
(30
)
 
13

Changes in off-balance sheet accounts receivable factoring
19

 
(51
)
Other, net
(18
)
 
(4
)
Cash flows provided by continuing operations
30

 
40

Cash flows used for discontinued operations
—

 
(1
)
CASH PROVIDED BY OPERATING ACTIVITIES
$
30

 
$
39

     Cash provided by operating activities in the first six months of fiscal year 2017 was $30 million compared to $39 million in the same period of fiscal year 2016 . The decrease in cash provided is due in part to $17 million received related to an insurance settlement in the first six months of fiscal year 2016 for recoveries for defense and indemnity costs associated with Maremont asbestos liabilities that did not repeat in the first six months of fiscal year 2017 ( s ee Note 21 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report ).

64

MERITOR, INC.

 
Six Months Ended March 31,
 
2017
 
2016
INVESTING CASH FLOWS
 
 
 
Capital expenditures
$
(40
)
 
$
(47
)
Other investing activities
—

 
3

Net investing cash flows provided by discontinued operations
2

 
4

CASH USED FOR INVESTING ACTIVITIES
$
(38
)
 
$
(40
)
     Cash used for investing activities was $38 million in the first six months of fiscal year 2017 compared to $40 million in the same period in fiscal year 2016 .
 
Six Months Ended March 31,
 
2017
 
2016
FINANCING CASH FLOWS
 
 
 
Repayment of notes
$
—

 
$
(55
)
Debt issuance costs
(4
)
 
—

Other financing activities
(11
)
 
(2
)
Net change in debt
(15
)
 
(57
)
Repurchase of common stock
—

 
(43
)
CASH USED FOR FINANCING ACTIVITIES
$
(15
)
 
$
(100
)
     Cash used for financing activities was $15 million in the first six months of fiscal year 2017 compared to $100 million in the same period of fiscal year 2016 . The decrease in cash used for financing activities is primarily related to the repurchase of substantially all of the $55 million of principal amount 4.625 percent convertible notes and the $43 million (including commission costs) cash used to repurchase 3.9 million shares of our common stock in the first six months of fiscal year 2016.
Liquidity
Our outstanding debt, net of discounts and unamortized debt issuance costs where applicable, is summarized as follows (in millions).
 
March 31,
 
September 30,
 
2017
 
2016
Fixed-rate debt securities
$
714

 
$
713

Fixed-rate convertible notes
272

 
271

Unamortized discount on convertible notes
(11
)
 
(14
)
Other borrowings
14

 
26

Total debt
$
989

 
$
996

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 2017 capital expenditures for our business segments to be approximately $90 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 or common equity, issue new equity or debt securities or enter into new lending arrangements if conditions warrant.
In December 2014, we filed a shelf registration statement with the Securities and Exchange Commission, registering an unlimited amount of debt and/or equity securities that we may offer in one or more offerings on terms to be determined at the time of sale. 

65

MERITOR, INC.

     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 March 2022.
     Sources of liquidity as of March 31, 2017 , in addition to cash on hand, are as follows (in millions):
 
Total Facility
Size
 
Utilized as of
3/31/17
 
Readily Available as of
3/31/17
 
Current Expiration
On-balance sheet arrangements:
 
 
 
 
 
 
 
Revolving credit facility (1)
$
525

 
$
—

 
$
525

 
March 2022  (1)
Committed U.S. accounts receivable securitization (2)
100

 
—

 
76

 
December 2019
Total on-balance sheet arrangements
$
625


$
—

 
$
601

 
 
Off-balance sheet arrangements: (2)
 
 
 
 
 
 
 
Committed Swedish factoring facility
$
166

 
$
155

 
$
—

 
March 2020
Committed U.S. factoring facility
85

 
33

 
—

 
February 2019
Uncommitted U.K. factoring facility
27

 
7

 
—

 
February 2018
Uncommitted Italy factoring facility
32

 
27

 
—

 
June 2017
Other uncommitted factoring facilities
21

 
12

 
—

 
None
Letter of credit facility
25

 
22

 
3

 
March 2019
Total off-balance sheet arrangements
356

 
256

 
3

 
 
Total available sources
$
981


$
256

 
$
604

 
 
(1) The availability under the revolving credit facility is subject to a collateral test and a priority debt-to-EBITDA ratio covenant.
(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, 2017 , we had $138 million in cash and cash equivalents.
At March 31, 2017 , we had approximately $17 million of our cash and cash equivalents held in jurisdictions outside of the U.S. that, if repatriated, could result in withholding taxes. It is our intent to reinvest those cash balances in our foreign operations, and we will continue to meet our liquidity needs in the U.S. through ongoing cash flows from operations in the U.S., external borrowings or both.
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 credit agreement, which may limit our borrowings under such agreement as of each quarter end. As long as we are in compliance with those covenants as of the quarter end, we have full availability (up to the amount of collateral under the collateral test) 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, access to other borrowing arrangements such as factoring or securitization facilities, vehicle production schedules and customer demand. Even taking into account these and other factors, management expects to have sufficient liquidity to fund our operating requirements through the term of our revolving credit facility. At March 31, 2017 , we were in compliance with all covenants under our credit agreement.
Common Stock Repurchase Authorization – On July 21, 2016, our Board of Directors authorized the repurchase of up to $100 million of our common stock from time to time through open market purchases, privately negotiated transactions or otherwise, until September 30, 2019, subject to compliance with legal and regulatory requirements and our debt covenants. No repurchases had been made under this authorization as of March 31, 2017 .

Debt Repurchase Authorization – On July 21, 2016, our Board of Directors authorized the repurchase of up to $150 million aggregate principal amount of any of our debt securities (including convertible debt securities) from time to time through open market purchases, privately negotiated transactions or otherwise, until September 30, 2019, subject to compliance with legal and regulatory requirements and our debt covenants. No repurchases had been made under this authorization as of March 31, 2017 .

66

MERITOR, INC.

Repurchase of 2026 Notes – On March 1, 2016 , substantially all of the $55 million principal amount of 4.625 percent convertible notes due 2026 were repurchased at 100 percent of their face value. On April 15, 2016, the remaining 4.625 percent convertible notes due 2026 were redeemed at 100 percent of their face value. As of September 30, 2016, none of the 4.625 percent convertible notes due 2026 were outstanding.
Revolving Credit Facility – On March 31, 2017, we amended and restated our revolving credit facility. Pursuant to the revolving credit agreement as amended, we have a $525 million revolving credit facility that matures in March 2022. Additionally, $4 million was capitalized as deferred issuance costs and will be amortized over the term of the agreement. The availability under this facility is dependent upon various factors, including performance against certain financial covenants as highlighted below.
 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 or less as of the last day of each fiscal quarter throughout the term of the agreement. At March 31, 2017 , we were in compliance with all covenants under the revolving credit facility with a ratio of approximately 0.16 x for the priority debt-to-EBITDA ratio covenant.
     The 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, 2017 , the revolving credit facility was collateralized by approximately $732 million of our assets, primarily consisting of eligible domestic U.S. accounts receivable, inventory, plant, property and equipment, intellectual property and our 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. At March 31, 2017 , the margin over LIBOR rate was 300 basis points, and the commitment fee was 45 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 200 basis points.
Certain of our 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 our indentures (see Note 24 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report ).
No borrowings were outstanding under the revolving credit facility at March 31, 2017 and September 30, 2016. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. At March 31, 2017 and September 30, 2016, there were no letters of credit outstanding under the revolving credit facility.
U.S. Securitization Program – We have a $100 million U.S. accounts receivables securitization facility. On December 5, 2016, the company entered into an amendment which extends the facility expiration date to December 2019. The maximum permitted priority-debt-to-EBITDA ratio as of the last day of each fiscal quarter under the facility is 2.25 to 1.00 . This program is provided by PNC Bank, National Association, 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. accounts receivable 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 condensed consolidated balance sheet. At March 31, 2017 and September 30, 2016, no amounts, including letters of credit, were outstanding under this program. This securitization program contains a cross default to our revolving credit facility. At March 31, 2017 , we were in compliance with all covenants under our credit agreement (see Note 18 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report ). 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 received 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.

67

MERITOR, INC.

Capital Leases – On March 20, 2012, we entered into an arrangement to finance equipment acquisitions for various U.S. locations. Under this arrangement, we can request financing from Wells Fargo Equipment Finance ("Wells Fargo") for progress payments for equipment under construction, not to exceed $10 million at any 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 Wells Fargo 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 . We had $4 million and $7 million outstanding under this capital lease arrangement as of March 31, 2017 and September 30, 2016 , respectively. In addition, we had another $10 million and $9 million outstanding through other capital lease arrangements at March 31, 2017 and September 30, 2016 , respectively.
Export financing arrangements – Our export financing arrangements were entered into through our Brazilian subsidiary pursuant to an incentive program of the Brazilian government to fund working capital for Brazilian companies in exportation programs. The arrangements bore interest at 5.5 percent and had maturity dates in 2017. These financing arrangements were paid off as of March 31, 2017. There was $9 million outstanding under these arrangements at September 30, 2016.
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 our revolving credit facility if the defaulted amount exceeds $35 million per bank. As of March 31, 2017 and September 30, 2016, we had $ 9 million and $10 million , respectively, outstanding under this program at more than one bank.
Credit Ratings – At March 31, 2017 , our Standard & Poor’s corporate credit rating, senior secured credit rating, and senior unsecured credit rating were B+, BB and B, respectively. Our Moody’s Investors Service corporate credit rating, senior secured credit rating, and senior unsecured credit rating were B1, Ba1 and B2, 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 a total amount utilized at March 31, 2017 of $234 million , of which $188 million was attributable to committed factoring facilities involving the sale of AB Volvo accounts receivables. The remaining amount of $ 46 million was related to factoring by certain of our European subsidiaries under uncommitted factoring facilities with financial institutions. The receivables under all of these programs are sold at face value and are excluded from the consolidated balance sheet. Total facility size, utilized amounts, readily available amounts and expiration dates for each of these programs are shown in the table above under Liquidity .
The Swedish facility is backed by a 364 -day liquidity commitment from Nordea Bank which was renewed through December 18, 2017. 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. and Italy commitments, a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the respective programs).
     Letter of Credit Facilities – On February 21, 2014, we amended and restated our 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, which expires in March 2019, we have the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $25 million . This facility contains covenants and events of default generally similar to those existing in our public debt indentures. We had $22 million and $23 million of letters of credit outstanding under this facility at March 31, 2017 and September 30, 2016 , respectively. In addition, we had another $5 million of letters of credit outstanding through other letter of credit facilities at March 31, 2017 and September 30, 2016 .
Contingencies
Contingencies related to environmental, asbestos and other matters are discussed in Note 21 of the Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report.
Critical Accounting Policies
Our significant accounting policies are consistent with those described in Note 2 to our consolidated financial statements in Item 8 of our 2016 Form 10-K. Our critical accounting estimates are consistent with those described in Item 7 of our 2016 Form 10-K.

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MERITOR, INC.

New Accounting Pronouncements
New Accounting Pronouncements are discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements .
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.
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 shareholder's equity and is recognized in operating income when the underlying forecasted transaction impacts earnings. The contracts generally mature within 12 months.
We use foreign currency option contracts to mitigate foreign currency exposure on expected future Indian rupee-denominated purchases. In the second quarter of fiscal year 2015, we monetized our outstanding foreign currency option contracts and entered into a new series of foreign currency option contracts with effective dates from the start of the third quarter of fiscal year 2015 through the end of fiscal year 2017. In the fourth quarter of fiscal year 2016, we entered into a new series of foreign currency option contracts with effective dates from the start of the first quarter of fiscal year 2017 through the end of fiscal year 2018. Changes in fair value associated with these contracts are recorded in cost of sales in the consolidated statements of operations.
In the fourth quarter of fiscal year 2015 and first quarter of fiscal year 2016, due to the risk of volatility of the Swedish krona and euro as compared to the U.S. dollar, we entered into a series of foreign currency option contracts that do not qualify for hedge accounting but were expected to mitigate foreign currency translation exposure of Swedish krona and euro earnings to U.S. dollars. As of March 31, 2017 and September 30, 2016, there were no Swedish krona or euro foreign currency option contracts outstanding.
Interest rate risk relates to the gain/increase or loss/decrease we could incur on our debt balances and interest expense associated with changes in interest rates. 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.
Included below is a sensitivity analysis to measure the potential gain (loss) in the fair value of financial instruments with exposure to market risk (in millions). The model assumes a 10% 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)
$
1.4

 
$
(1.4
)
 
Fair Value
Forward contracts in Euro (1)
(3.5
)
 
3.5

 
Fair Value
Foreign currency denominated debt (2)
0.8

 
(0.8
)
 
Fair Value
Foreign currency option contracts in USD
(1.6
)
 
4.1

 
Fair Value
Foreign currency option contracts in Euro
(2.7
)
 
6.7

 
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 (3)
$
(32.0
)
 
$
33.2

 
Fair Value
Debt – variable rate
—

 
—

 
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.

(2)
At March 31, 2017 , the fair value of outstanding foreign currency denominated debt was $8 million . A 10% decrease in quoted currency exchange rates would result in a decrease of $ 1 million in foreign currency denominated debt. At March 31, 2017 , a 10% increase in quoted currency exchange rates would result in an increase of $1 million in foreign currency denominated debt.

(3)
At March 31, 2017 , the fair value of outstanding debt was $1,147 million . A 50 basis points decrease in quoted interest rates would result in an increase of $33 million in the fair value of fixed rate debt. A 50 basis points increase in quoted interest rates would result in a decrease of $32 million in the fair value of fixed rate debt.


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MERITOR, INC.

Item 4. Controls and Procedures
Evaluation of Internal Controls over Financial Reporting
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, 2017. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2017 as a result of material weaknesses that exist in our internal control over financial reporting (ICFR) as previously described in our Annual Report on Form 10-K for the year ended September 30, 2016, as amended.
Previously Identified Material Weakness
As of September 30, 2016, our management concluded that our internal control over financial reporting was not effective due to material weaknesses identified with respect to the design and operating effectiveness of our controls over the assessment of uncertain tax positions (UTPs) and our deferred tax asset valuation allowance in accordance with ASC 740, Income Taxes. These material weaknesses allowed errors to occur that were not detected in a timely manner therefore requiring a correction of certain disclosures in the Income Taxes footnote in our consolidated financial statements for fiscal years 2015 and 2014. The material weaknesses had no impact on our financial position, results of operations or cash flows as of and for the years ended September 30, 2015 and 2014.
Management’s Remediation Plan
The principal factors contributing to the material weaknesses were the design and operating effectiveness over the assessment of UTPs and the deferred tax asset valuation allowance. The following plans are being implemented:
Process Level Control Remediation: The company has begun improving the precision of existing controls or implementing new preventive and detective controls associated with the tax accounting of UTPs and deferred tax asset valuation allowance. Such controls include:
•
ensuring completeness and accuracy of the global list of UTPs
•
enhanced communication through formal periodic meetings attended by accounting, tax, finance, business and strategy leaders
•
updates to control design to incorporate detailed steps related to the preparation, detailed review, and overriding review of UTPs and income tax calculations, including inputs and assumptions

Enhanced Tax and Accounting Policies and Procedures: The company intends to review and update its tax policies and procedures. Trainings will be developed to ensure full understanding and compliance with the policies and procedures.
We believe the measures described above will remediate the material weaknesses we have identified and strengthen our overall internal control over financial reporting.  We are currently in the process of completing our remediation efforts and will begin to test the operating effectiveness of the actions discussed above.  The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will continue to monitor the effectiveness of these and other processes, procedures and controls and will make any further changes that management determines are appropriate.  The identified material weaknesses will not be considered remediated until the controls are in operation for a sufficient period of time for management to conclude that the control environment is operating effectively.

Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended March 31, 2017 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


71

MERITOR, INC.

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Except as set forth in Note 20 and Note 21 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q, 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, 2016 , as amended.
Item 1A. Risk Factors
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, 2016 , as amended.
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. There were no shares withheld in the second quarter of fiscal 2017 to satisfy tax obligations for exercise of options. 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 2017 to satisfy tax obligations upon the vesting of restricted shares. The company does not believe such purchases or transactions described above are issuer repurchases for the purposes of this Item 2 of Part II of this Quarterly Report on Form 10-Q and there were no other share repurchases during the second quarter of fiscal year 2017.

72

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 reliance on major 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 manage demand expectations 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 following the United Kingdom's decision to exit the European Union or, in the event one or more other countries exit the European monetary union; risks inherent in operating abroad (including foreign currency exchange rates, restrictive government actions regarding trade, implications of foreign regulations relating to pensions and potential disruption of production and supply due to terrorist attacks or acts of aggression); risks related to our joint ventures; rising costs of pension and other postemployment benefits; the ability to achieve the expected benefits of strategic initiatives and 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 and launch 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, asbestos-related, or other matters; possible changes in accounting rules; ineffective internal controls; and 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, 2016, as amended: 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.

73

MERITOR, INC.

Item 6. Exhibits
3-a
Amended and Restated Articles of Incorporation of Meritor, filed as Exhibit 3-a to Meritor’s Annual Report on Form 10-K for the fiscal year ended September 27, 2015, is incorporated herein by reference.
3-b
Amended and Restated By-laws of Meritor, filed as Exhibit 3-b to Meritor’s Annual Report on Form 10-K for the fiscal year ended October 2, 2016, is incorporated herein by reference.
10-a
Third Amendment and Restatement Agreement relating to Third Amended and Restated Credit Agreement, dated as of March 31, 2017, among Meritor, ArvinMeritor Finance Ireland Unlimited Company, the financial institutions party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, filed as Exhibit 10-a to Meritor’s Current Report on Form 8-K filed on April 4, 2017, is incorporated herein by reference.
  10-b**
Third Amended and Restated Pledge and Security Agreement, dated as of March 31, 2017, by and among Meritor, the subsidiaries named therein and JPMorgan Chase Bank, N.A., as Administrative Agent.
  10-c**
Receivables Purchase Agreement dated as of March 22, 2017, by and among Meritor HVS AB, as seller, and Viking Asset Purchaser No 7 IC, as purchaser.
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

** Filed herewith.


74

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 4, 2017
By:       
/s/
April Miller Boise
 
 
 
 
April Miller Boise
 
 
 
 
Senior Vice President, General Counsel and Corporate Secretary
 
 
 
 
(For the registrant)
 
 
 
 
 
Date:
May 4, 2017
By:
/s/
Paul D. Bialy
 
 
 
 
Paul D. Bialy
 
 
 
 
Vice President, Controller and Principal Accounting Officer
 
 
 
 
 
 
 
 
 
 
Date:
May 4, 2017
By:
/s/
Kevin A. Nowlan
 
 
 
 
Kevin A. Nowlan
 
 
 
 
Senior Vice President and Chief Financial Officer

75
Exhibit 10-b
EXECUTION COPY



THIRD AMENDED AND RESTATED
PLEDGE AND SECURITY AGREEMENT

THIS THIRD AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT (this “ Security Agreement ”) is entered into as of March 31, 2017 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 Third Amendment and Restatement Agreement of even date herewith, the Company, ArvinMeritor Finance Ireland Unlimited Company (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 Third 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 Second Amended and Restated Pledge and Security Agreement, dated as of February 13, 2014 (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:
ARTICLE I
DEFINITIONS

2


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.
“ 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.
“ 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

3


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.

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“ 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.
“ 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.

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“ 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.
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

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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 and other Exclusions . Notwithstanding anything to the contrary in this Article II , the Collateral shall not include
(i)
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), except to the extent such restrictions are ineffective under Section 9-406, 9-407, 9-408 or 9-409 of the Uniform Commercial Code of any relevant jurisdiction or any other applicable law; provided that, immediately upon the ineffectiveness, lapse or termination of such prohibition or the granting of any required third-party consent or waiver, as applicable, such assets shall automatically constitute Collateral;
(ii)
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, except to the extent such violation or any consequence thereof is ineffective under Section 9-406, 9-407, 9-408 or 9-409 of the Uniform Commercial Code of any relevant jurisdiction or any other applicable law; provided that any such asset shall become Collateral at such time as the condition causing such violation or consequence no longer exists (whether by ineffectiveness, lapse, termination or consent) and, to the extent severable, the security interest granted hereunder shall attach immediately to any portion of such right that does not result in any violation or consequences specified in this clause (ii);
(iii)
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, other than to the extent that such prohibition would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408, 9-409 or other applicable provisions of the Uniform Commercial Code of any relevant jurisdiction or any other applicable law; provided that, immediately upon the ineffectiveness, lapse or termination of such prohibition or the granting of governmental or third-party consent, approval, license or authorization, as applicable, such assets shall automatically constitute Collateral; and
(iv)
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, and solely during the period during which, applicable law or regulation prohibits the creation of a security interest or would otherwise result in

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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.
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 and 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

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$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 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 .

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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.
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

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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,

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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.
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,

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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 (or any lesser period of prior notice agreed to by the Administrative Agent) 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.
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.

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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

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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.
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.

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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.
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

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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.      Aircraft . Each Grantor will, upon the Administrative Agent’s request, execute and deliver to the Administrative Agent such documents, agreements and instruments, and will take such further actions (including, without limitation, the filing of a mortgage filed with the Federal Aviation Administration), which the Administrative Agent may, from time to time, reasonably request, to ensure perfection and priority of the Liens hereunder in respect of Collateral comprised of aircraft or aircraft engines, all at the expense of the Borrower.
ARTICLE V     

DEFAULT
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:
5.2.1      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.
5.2.2      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

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the exercise of a bank’s right of setoff or bankers’ lien) when a debtor is in default under a security agreement.
5.2.3      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.
5.2.4      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.
5.2.5      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.
5.2.6      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.
5.2.7      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.
5.2.8      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

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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 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,

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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
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

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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

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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 .
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

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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 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

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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

27


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.
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.

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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 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

29


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

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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 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 ]
    
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 A. Nowlan            
Name: Kevin A. Nowlan
Title: Senior Vice President and Chief Financial Officer


MERITOR MANAGEMENT CORP.
MERITOR INTERNATIONAL HOLDINGS, LLC
ARVIN TECHNOLOGIES, INC.
ARVINMERITOR BRAKE HOLDINGS, 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.
MERITOR TECHNOLOGY, LLC

In each case:

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



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



ANNEX I TO PLEDGE AND SECURITY AGREEMENT
Reference is hereby made to the Third Amended and Restated Pledge and Security Agreement (as amended, restated, supplemented or otherwise modified from time to time, the “ Security Agreement ”), dated as of March 31, 2017 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:_________________________



31

Exhibit 10-c

CAPTURE.JPG
CAPTURE2.JPG
 
EXECUTION VERSION
 
 
DATED 22 MARCH 2017 BETWEEN
CAPTURE3.JPG
 
RECEIVABLES PURCHASE AGREEMENT
 





CONTENTS
Clause
Page
1.
Definitions and Construction
2
2.
Purchase and Sale
11
3.
Conditions Precedent to Initial Purchase
12
4.
Payments to the Purchaser, etc
14
5.
Representations, Warranties and Undertakings
14
6.
Remedies for Untrue Representation, etc
17
7.
Further Assurance; Security Interest
18
8.
Notices
19
9.
Assignment and Supplements
20
10.
Amendments and Modifications
20
11.
Rights Cumulative, Waivers
20
12.
Apportionment
20
13.
Partial Invalidity
21
14.
Confidentiality
21
15.
No Liability and No Petition
22
16.
Limited Recourse
23
17.
Governing Law and Jurisdiction
23
18.
Termination
23
19.
Integration
23
20.
Binding Effect
23
21.
Counterparts
24
Schedule 1 Eligibility Criteria
25
Schedule 2 Conclusion of Purchase - Offer and Acceptance, Purchase Price and Perfection
27
Part 1 Conclusion of Purchase - Offer and Acceptance
27
Part 2 Purchase Price
28
Part 3 Perfection
29
Schedule 3 Representations, Warranties and Undertakings
33
Part 1 Representations and Warranties relating to the Seller
33
Part 2 Representations and Warranties relating to the Purchased Receivables
36
Part 3 Representations and Warranties relating to the Purchaser
37
Schedule 4 Form of Solvency Certificate
38


RECEIVABLES PURCHASE AGREEMENT
This RECEIVABLES PURCHASE AGREEMENT, dated 22 MARCH 2017 is made between MERITOR HVS AB , a Swedish limited liability company (the " Seller "), and VIKING ASSET PURCHASER No. 7 IC (registration no. 92607), an incorporated cell of VIKING GLOBAL FINANCE ICC , an incorporated cell company incorporated under the laws of Jersey, having its registered office at 44 Esplanade St Helier, Jersey JE4 9WG (the " Purchaser ").
RECITAL:
The Seller is prepared to make Offers of Receivables to the Purchaser. The Purchaser will issue Acceptances to the Seller, in each case on the terms and subject to the conditions set forth herein.
Accordingly, parties agree as follows:
1.
DEFINITIONS AND CONSTRUCTION
1.1
Definitions
In this Agreement the following terms have the following meanings:
" Acceptance " means an acceptance issued by the Purchaser to the Seller through the PrimeRevenue System or in any other form acceptable to the Purchaser in response to an Offer.
" Accounts " means bank accounts number ####### with #######, and all such other accounts as may from time to time be in addition thereto or substituted therefore.
" Accounts Administrator " means Structured Finance Servicer A/S acting through its office at Copenhagen and any person appointed as accounts administrator in respect of inter alia the Transaction for the Purchaser.
" Accounts Pledge Agreement " means the pledge agreement(s) over the Accounts dated 12 June 2006 entered into by or on behalf of the Purchaser and the Programme Trustee.
" Adverse Claim " means any lien, security interest or other charge or encumbrance, or other right or claim in, of or on any asset or property of a Person in favor of another Person.
" Affiliate " means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such first Person.
" Aggregate Euro Outstanding Amount " means, at any time, the aggregate of the Euro Outstanding Amount of all of the Purchased Receivables at that time.
" Aggregate Outstanding Amount " means, at any time, the aggregate of the Outstanding Amount of all the Purchased Receivables at that time.
" Anti-Corruption Laws " means all laws, rules and regulations from time to time, as amended, concerning or relating to bribery or corruption, including but not limited to

 
2
 


the U.S. Foreign Corrupt Practices Act of 1977, the UK Bribery Act 2010 and all other applicable anti-bribery and corruption laws.
" Belgian Legal Opinion " means the legal opinion dated on or about the date hereof issued by Clifford Chance LLP and addressed to Nordea Bank AB (publ) and the Purchaser as to certain matters of Belgian law.
" Business Day " means a day on which banks are open in Copenhagen, Stockholm, Jersey, London and Oslo for the transaction of business of the nature required by the Transaction Documents.
" Calculation Date " means a Purchase Date provided that if such day is not a Business Day it shall be the next Business Day following such day.
" CMSAs " means the Customer Managed Service Agreement with each of Volvo Bussar AB, Volvo Group Belgium NV, Volvo Lastvagnar AB and Volvo Logistics AB and any other Customer Managed Service Agreement entered into between a Permitted Obligor and PrimeRevenue, and " CMSA " means any of them.
" Collections " means the aggregate of all amounts paid by the relevant obligors in respect of any and all Purchased Receivables relating to the Purchaser plus any amounts payable to the Purchaser by the Seller but not yet paid to the Purchaser following settlement of the final amount of any claim under any of the warranties, covenants and indemnities contained in this Agreement.
" CP Programme " means the EUR 2,000,000,000 multi-currency asset-backed commercial paper programme for the issue of commercial paper notes established by the Issuer.
" Defaulted Receivable " means a Purchased Receivable in respect of which there is a Permitted Obligor Default.
" Delinquent Receivable " means, at any time, a Receivable in respect of which all or any part of the Outstanding Amount is not paid on its due date.
" Economic Sanctions Law " means any economic or financial sanctions administered, enacted or enforced by OFAC, the US Department of State, any other agency of the US government, the United Nations, the European Union or any member state thereof, or any other national economic sanctions authority. Notwithstanding the foregoing, Economic Sanctions Law shall not include any economic or financial sanctions administered by the Russian Federation or any authority of the Russian Federation;
" Eligibility Criteria " means the eligibility criteria in respect of the Purchased Receivables set out in Schedule 1 of this Agreement.
" EEA Member Country " means any member state of the European Union, Iceland, Liechtenstein and Norway.

 
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" euro " or " EUR " means the single currency of any member state of the European Union that adopts or has adopted the euro as its lawful currency in accordance with legislation of the European Community relating to Economic and Monetary Union.
" Euro Outstanding Amount " means, in relation to any Purchased Receivable, the Outstanding Amount of such Purchased Receivable converted into euro at the Foreign Exchange Rate in respect of such Purchased Receivable.
" EURIBOR " means: (a) the euro interbank offered rate for the relevant period which is displayed on page EURIBOR01 on the Reuters Screen or any successor thereto; (b) if no such rate appears, the arithmetic mean (rounded upward to four decimal places) of the rates quoted by the Reference Banks to leading banks in the European interbank market, as determined by the Accounts Administrator, at or about 11.00 a.m. Copenhagen time on the Business Day immediately prior to the applicable Calculation Date for the offering of euro deposits for the relevant period; or (c) if there are not sufficient quotations pursuant to (b), the interest rate which according to the Accounts Administrator best reflects the interest rate for deposits in euro offered in the European interbank market for the relevant period. In the event that the EURIBOR01 page is replaced or service ceases to be available, the Purchaser may specify another page or service displaying the appropriate rate.
" Face Amount " means the face amount in respect of the Receivables.
" Fee Letter " means the fee letter entered into between the Purchaser and the Sellers on or about the date hereof.
" FI Agreement " means the financial institution agreement dated 12 June 2006 and entered into between the Purchaser and PrimeRevenue.
" Financial Indebtedness " means (i) moneys borrowed, (ii) finance or capital leases, (iii) receivables sold or discounted (other than on a non-recourse basis), (iv) other transactions having the commercial effect of a borrowing, (v) the marked to market value of derivative transactions entered into in connection with protection against or benefit from fluctuation in any rate or price, (vi) counter-indemnity obligations in respect of guarantees or other instruments issued by a bank or financial institution, and (vii) liabilities under guarantees or indemnities for any of the obligations referred to in items (i) to (vi).
" Foreign Exchange Rate " means for any Purchased Receivable, the rate at which SEK are to be exchanged into euro pursuant to any foreign exchange agreement entered into in respect of such Purchased Receivable on or about the Purchase Date in respect of such Purchased Receivable.
" Issuer " means Viking Asset Securitisation Limited, a company incorporated in Jersey with limited liability, having its registered office at 44 Esplanade, St Helier, Jersey JE4 9WG.
" Margin " shall be as set out in the Fee Letter.

 
4
 


" Master Security Trust Deed " means the security trust deed dated 12 June, 2006 between the Purchaser and the Programme Trustee inter alia in relation to the Transaction, as supplemented by a supplemental security trust deed.
" Moody's " means Moody's Investors Service Limited and includes any successor to its rating business.
" Offer " means, as to the Seller, an irrevocable offer from the Seller to the Purchaser for the sale of Receivables and given by the Seller to the Purchaser through the PrimeRevenue System or in any other form acceptable to the Purchaser and " to Offer " and " Offered " shall have the corresponding meaning.
" Outstanding Amount " means at any time in respect of any Receivable or Purchased Receivable, the total amount due and owing by the relevant Permitted Obligor at that time in respect of the relevant Receivable or Purchased Receivable. For the avoidance of doubt, the Outstanding Amount for any Purchased Receivable shall not be reduced by virtue of any set off or counterclaim which reduces the amount recoverable in respect of that Purchased Receivable.
" Permitted Currency " means SEK and EUR.
" Permitted Obligors " means Volvo Bussar AB, Volvo Group Belgium NV, Volvo Lastvagnar AB and Volvo Logistics AB and any other company within the Volvo group that has entered into a Customer Managed Service Agreement (in all material respects corresponding to the CMSAs) with PrimeRevenue and that has been approved in writing by the Purchaser and the Seller.
" Permitted Obligor Default " means, at any time, when a Permitted Obligor is unable to pay its debts as they fall due or otherwise acknowledges its insolvency or by or against whom any administration, insolvency, bankruptcy, receivership, arrangement, liquidation or similar procedures have been instituted or for whom a receiver, liquidator or similar person has been appointed in respect of all or a substantial part of its assets.
" Person " means any natural person, partnership, joint venture, corporation, trust, unincorporated association, limited liability company, or other organization.
" PrimeRevenue " means PrimeRevenue, Inc. a company incorporated under the laws of the state of Delaware having its registered office at 1349 West Peachtree St., Suite 900, Atlanta, GA, USA.
" PrimeRevenue System " means the system for the sale and transfer of receivables as described in the CMSAs, each Supplier Agreement and the FI Agreement.
" Programme Trustee " means CitiCorp Trustee Company Limited or such other person so designated in accordance with the Master Security Trust Deed.
" Purchase Date " means each date upon which a sale and purchase of Receivables is concluded pursuant to Clause 2.2 of this Agreement.

 
5
 


" Purchase Price " means the aggregate Receivables Purchase Price paid or to be paid by the Purchaser to the Seller in respect of all Purchased Receivables with respect to a particular Settlement Date.
" Purchased Receivables " means all Receivables which are the subject to any sale and purchase (or any purported sale and purchase) pursuant to Clause 2.2 of this Agreement and any other Receivables in respect of which the Receivables Purchase Price has been paid or will be paid by the Purchaser to the Seller.
" Receivable " means any account or receivable owed to the Seller in the ordinary course of business by any Permitted Obligor including all Related Security and all other rights of the Seller pertaining to such Receivable (evidenced as a "Payment Obligation", as defined in the respective CMSA) in accordance with the respective CMSA, including but not limited to all of the Seller's rights under Section 18(f) of the respective CMSA.
" Receivables Purchase Price " shall be calculated as to each Purchased Receivable as follows: CA - (CA x IR / (360/DM)); where
DM = actual number of days to and including the relevant maturity date of such Purchased Receivables
CA = the Certified Amount (as defined in and within the meaning of the relevant Supplier Agreement) of such Purchased Receivable
IR = means the interest rate, which shall be three (3) months STIBOR or, in respect of Purchased Receivables denominated in EUR, three (3) months EURIBOR, plus the Margin
" Records " means: (a) all files, correspondence, notes of dealing and other documents, books, books of account, registers, records and other information; and (b) all computer tapes, discs, computer programmes, data processing software and related property rights, owned by or under the control and disposition of the Seller, in each case only to the extent relating to the Purchased Receivables.
" Reference Banks " means a minimum of four of the banks (including, in each case, Nordea Bank AB (publ)) as selected by the Accounts Administrator which quote rates for the offering of deposits in SEK or EUR to leading banks in the relevant interbank market for the relevant period immediately prior to the time set out in the definition of STIBOR and EURIBOR on the applicable Calculation Date.
" Related Security " means, with respect to any Receivable, (a) all present and future accounts, instruments, documents, chattel paper and general intangibles relating to the Receivable and (b) all proceeds of any of the foregoing.
" Sanctioned Territory " means, as of any date of determination, any country or other territory subject to a general export, import, financial or investment embargo under Economic Sanctions Law, which territories, as of the date of this Agreement, include Crimea, Cuba, Iran, Sudan and Syria;

 
6
 


" S&P " or " Standard & Poor's " means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., and any successor company of such rating business.
" Security Interest " means any mortgage, charge, floating charge, assignment or assignation by way of security, lien, pledge, hypothecation, right of set-off (or analogous right), retention of title, flawed asset or blocked-deposit arrangement or any other encumbrance or security interest or security arrangement whatsoever created or arising under any relevant law or any agreement or arrangement having the effect of or performing the economic function of conferring security howsoever created or arising.
" SEK " means the lawful currency of the Kingdom of Sweden.
" Seller " means Meritor HVS AB, registration number 556550-0237 in its capacity as a seller under this Agreement and not in any other capacity.
" Seller Potential Suspension Event " means any event which, with the giving of notice and/or lapse of time and/or making of any determination and/or any certification, would constitute a Seller Suspension Event or a Termination Event under paragraph [(c)] or [(d)] of that definition.
" Seller Suspension Event " means any of the following events:
(a)
Failure to pay : the Seller fails to pay any amount due and payable under this Agreement or the relevant Supplier Agreement within three (3) Business Days of the due date or a demand in writing.
(b)
Failure to perform other obligations : the Seller fails to observe or perform any of its other material obligations under this Agreement or the relevant Supplier Agreement or under any undertaking or arrangement entered into in connection therewith and, in the case of a failure capable of being remedied, within ten (10) days after receipt by the Seller of a request in writing from the Purchaser, that the same be remedied, it has not been remedied to the Purchaser's reasonable satisfaction.
(c)
Representations, warranties or statements proving to be incorrect : Any representation, warranty or statement which is made (or deemed or acknowledged to have been made) by the Seller under this Agreement or the relevant Supplier Agreement or which is contained in any certificate, statement or notice provided by the Seller under or in connection with this Agreement or the relevant Supplier Agreement proves to be incorrect to an extent which, in the reasonable opinion of the Purchaser, is likely to affect the ability of the Seller to perform its obligations under any of the Transaction Documents to which it is a party in a manner which is material and adverse in the context of the Transaction or which is likely materially and adversely to affect the collectability of the Purchased Receivables or any of them.
(d)
Provisions becoming unenforceable : Any provision of any of the Transaction Documents to which the Seller is a party is or becomes, for any reason, invalid or unenforceable and for so long as such provision remains invalid and

 
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unenforceable to an extent which, in the reasonable opinion of the Purchaser, is likely materially and adversely to affect the ability of any Seller (acting in any capacity under any of the Transaction Documents to which it is a party) to perform its obligations under any of the Transaction Documents to which it is a party in a manner which is material and adverse in the context of the Transaction or which is likely to materially and adversely affect the collectability of the Purchased Receivables or any of them.
(e)
Suspension or expropriation of business operations : the Seller changes, suspends or threatens to suspend a substantial part of the present business operations which it now conducts directly or indirectly, or any governmental authority expropriates all or a substantial part of its assets and the result of any of the foregoing is, in the reasonable opinion of the Purchaser, likely to affect the ability of any Seller to observe or perform its obligations under any of the Transaction Documents to which it is a party in a manner which is material and adverse in the context of the Transaction or which is likely to materially and adversely affect the collectability of the Purchased Receivables or any of them.
(f)
Enforcement by creditors : Any form of execution or arrest is levied or enforced upon or sued out against all and any assets of the Seller and is not discharged within twenty (20) days of being levied, or any Security Interest which may for the time being affect any material part of its assets becomes enforceable and steps are lawfully taken by the creditor to enforce the same. No Seller Suspension Event will occur under this paragraph (f) if the aggregate amount of the claim enforced is less than EUR 35,000,000 or the equivalent in any other currency.
(g)
Arrangement with Creditors : the Seller proposes or makes any arrangement or composition with, or any assignment or trust for the benefit of, its creditors generally involving (not necessarily exclusively) indebtedness which the Seller, as the case may be, would not otherwise be able to repay or service in accordance with the terms thereof.
(h)
Winding-up : A petition is presented (unless contested in good faith and discharged or stayed within twenty (20) days) or a meeting is convened for the purpose of considering a resolution or other steps are taken for the winding up of the Seller (other than for the purposes of and followed by a solvent reconstruction previously approved in writing by the Purchaser (such approval not to be unreasonably withheld or delayed), unless during or following such reconstruction the Seller, as the case may be, becomes or is declared to be insolvent).
" Settlement Date " means, in respect of a Purchased Receivable, the first (1st) Business Day after the relevant Calculation Date.
" STIBOR " means (a) the Stockholm interbank offered rate for the relevant period which is displayed on NASDAQ OMX Stockholm's website or any successor thereto or (b) if no such rate appears, the arithmetic mean (rounded upward to four decimal places) of the rates quoted by the Reference Banks to leading banks in the Stockholm interbank market, as determined by the Accounts Administrator, at or about 11.00 Stockholm time

 
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on the Business Day immediately prior to the applicable Calculation Date for the offering of SEK deposits for the relevant period; or (c) if there are not sufficient quotations pursuant to (b), the interest rate which according to the Accounts Administrator best reflects the interest rate for deposits in SEK offered in the Stockholm interbank market for the relevant period. In the event that the NASDAQ OMX Stockholm website is replaced for purposes of displaying the relevant rate or such service ceases to be available, the Purchaser may specify another page or service displaying the appropriate rate.
" Supplier Agreement " means the supplier agreement entered or to be entered into between the Seller and PrimeRevenue, pursuant to which each of the Permitted Obligors is defined as a Customer.
" Swedish Legal Opinion " means the legal opinion dated on or about the date hereof issued by Advokatfirman Vinge KB and addressed to Nordea Bank AB (publ) and the Purchaser as to certain matters of Swedish law.
" Tax " or " tax " includes all forms of tax, duty or charge on gross or net income, profits or gains, distributions, receipts, sales, use, occupation, franchise, value added, personal property and instruments, and any levy, impost, duty, charge or withholding of any nature whatsoever chargeable by any authority, whether in Sweden, the United States, Jersey or elsewhere, together with all penalties, charges and interest relating to any of the foregoing.
" Termination Date " means the earliest date on which a Termination Event occurs.
" Termination Event " means the occurrence of any of the following:
(a)
three (3) years having elapsed from the date of the execution of this Agreement;
(b)
a failure by the Seller to perform any of its material obligations within ten (10) Business Days after notification in writing of such failure to perform;
(c)
in relation to the Seller, any corporate or other company action being taken or becoming pending, any other steps being taken or any legal proceedings being commenced or threatened or becoming pending for (i) the insolvency, bankruptcy, liquidation, dissolution, administration or reorganisation of the Seller, as the case may be (other than for the purposes of and followed by a solvent reconstruction previously approved in writing by the Purchaser (such approval not to be unreasonably withheld or delayed) unless during or following such reconstruction the Seller, as the case may be, becomes or is declared to be insolvent), (ii) the Seller to enter into any composition or arrangement with its creditors generally, or (iii) the appointment of a receiver, administrative receiver, trustee or similar officer in respect of the Seller or substantially all of its property, undertaking or assets, which appointment, action, step or proceeding is not being contested in good faith by the Seller, as the case may be, and, if so contested, is not dismissed or withdrawn within thirty (30) days;
(d)
any CMSA or any Supplier Agreement being amended to the detriment of the Purchaser or if any CMSA, the FI Agreement or any Supplier Agreement is terminated for whatever reason or if any third party right in any CMSA or any

 
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Supplier Agreement in relation to which the Purchaser is a beneficiary becomes invalid or unenforceable;
(e)
a Seller Suspension Event has occurred and is continuing for a period of sixty (60) days or longer, subject to written notice being given by the Purchaser; and
(f)
(i) any Financial Indebtedness of the Seller is not paid when due nor within any originally applicable grace period, or is declared to be or otherwise becomes due and payable prior to its specified maturity as a result of an event of default (however described); (ii) any commitment for any Financial Indebtedness of the Seller is cancelled or suspended by a creditor as a result of an event of default (however described); or (iii) any creditor of the Seller becomes entitled to declare any Financial Indebtedness of any Affiliate of the Seller due and payable prior to its specified maturity as a result of an event of default (however described); provided, however no Termination Event will occur under this paragraph (f) if the aggregate amount of Financial Indebtedness or commitment for Financial Indebtedness falling within paragraphs (i) to (iii) above is less than EUR 35,000,000 or the equivalent in any other currency.
" Total Commitment " means EUR 155,000,000, as such amount may be reduced as provided in this definition. The Total Commitment also will be reduced (A) at the request of all of the Sellers or (B) if the Purchaser in connection with an annual review (such annual review to be made at each anniversary of this Agreement) determines that the twelve (12) months rolling average of the Aggregate Outstanding Amount (" Outstanding Average ") is less than seventy (70) per cent of the Total Commitment, at which time the Total Commitment will be reduced by an amount equal to fifty (50) per cent of the difference between the Outstanding Average and the Total Commitment. The Total Commitment may be increased as agreed in writing between the Sellers and the Purchaser from time to time.
" Transaction " means the transactions relating to this Agreement envisaged by the Transaction Documents whereby any or all of the Sellers may sell certain Receivables to the Purchaser and the Purchaser may purchase such Receivables.
" Transaction Documents " means the documents relating to the Transaction, including this Agreement, the FI Agreement, the CMSAs and the Supplier Agreements and any agreement or document executed pursuant to or in connection with any of these documents.
" UCC " means the Uniform Commercial Code, as the same may be in effect from time to time in the State of New York, provided that if, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of the Purchaser's security interest in any Receivables is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term " UCC " shall mean the Uniform Commercial Code in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection or priority and for purposes of definitions related to such provisions.
" United States " means the United States of America.

 
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" VAT " means:
(a)
any tax imposed in compliance with the Council Directive of 28 November 2006 on the common system of value added tax (EC Directive 2006/112); and
(b)
any other tax of a similar nature, whether imposed in a member state of the European Union in substitution for, or levied in addition to, such tax referred to in paragraph (a) above, or imposed elsewhere.
1.2
Construction
1.2.1
References in this Agreement to any person shall include references to his successors, transferees and assignees and any person deriving title under or through him.
1.2.2
References in this Agreement to any statutory provision shall be deemed also to refer to any statutory modification or re-enactment thereof or any statutory instrument, order or regulation made thereunder or under any such re-enactment.
1.2.3
References in this Agreement to any agreement or other document shall be deemed also to refer to such agreement or document as amended, varied, supplemented, replaced or novated from time to time.
1.3
No exclusivity
Nothing in this agreement restricts the Purchaser from acquiring, from persons other than the Sellers, accounts or receivables owed by Permitted Obligors.
2.
PURCHASE AND SALE
2.1
Purchase of Receivables
Subject to the terms and conditions of this Agreement, and within the limits of the Total Commitment, the Purchaser agrees that it will purchase Receivables from the Seller on a continuous basis from the date hereof until the Termination Date, it being understood and agreed that the limits of the Total Commitment shall apply to the Seller and that the Purchaser shall have no obligation to purchase Receivables that are the subject of any Offer of the Seller to the extent that, immediately after giving effect to such proposed purchase, the Aggregate Euro Outstanding Amount of all Purchased Receivables of the Sellers would exceed the Total Commitment. If an Offer of Receivables of the Seller would result in the Aggregate Euro Outstanding Amount of all Purchased Receivables of the Seller exceeding the Total Commitment, then at the option of the Purchaser acting in its sole discretion, (i) the Offer may be modified such that only certain Receivables, in an aggregate amount such that the Total Commitment will not be exceeded, will be purchased, such that no partial Receivable shall be the subject of an Offer or purchased hereunder, or (ii) the Purchaser may decide to accept the Offer and purchase such Receivables, but for the avoidance of doubt shall have no obligation to do so.
2.2
Conclusion of purchase - offer and acceptance

 
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The sale and purchase of Receivables shall in each case be concluded as set out in Part 1 of Schedule 2.
2.3
Purchase Price
The Purchase Price for Purchased Receivables shall be paid and calculated as set out in Part 2 of Schedule 2.
2.4
VAT
Any VAT refund collected from the VAT authorities by the Seller following credit losses on a Purchased Receivable shall be for the benefit of the Purchaser and be paid by the Seller to the Purchaser. The Seller undertakes to take any action permissible, and required by the Purchaser, to assist in collecting any such VAT refund for the benefit of the Purchaser, including but not limited to acquiring the Purchased Receivable at a price equal to any VAT refund available for collection and any amounts recoverable from the Permitted Obligor (if any) and to pay such purchase price upon and to the extent of receipt of the VAT refund and any amounts recovered from the Permitted Obligor.
2.5
Perfection and Notice
Each sale and purchase of Receivables pursuant to this Clause 2 shall be perfected through the actions described in Part 3 of Schedule 2.
2.6
Seller's receipt of payment in respect of Purchased Receivables
In the event that, notwithstanding the notification referred to in Clause 2.4, the Seller receives from the Permitted Obligors any payment in respect of Purchased Receivables, the Seller shall pay to the Purchaser promptly following such a receipt, all such Collections received by it in respect of the Purchased Receivables to the account as notified by the Purchaser pursuant to Clause 4.2.
3.
CONDITIONS PRECEDENT TO INITIAL PURCHASE
3.1
The effectiveness of this Agreement is subject to the satisfaction (as determined in the reasonable opinion of the Purchaser) of the following conditions precedent:
3.1.1
The Purchaser has received evidence that the Seller have validly executed and delivered all of the Transaction Documents to which it is a party;
3.1.2
The Purchaser has received certified copies of the resolutions of the board of directors of the Seller approving the Transaction Documents to which it is a party and certified copies of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to the Transaction Documents to which it is a party;
3.1.3
The Purchaser has received a certificate of a director of the Seller and certifying the names and true signatures of its officers authorised to sign the Transaction Documents to which it is a party;

 
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3.1.4
The Purchaser has received a copy of the articles of incorporation (or any other applicable organisational document) of the Seller, certified as of a recent date by a director of the Seller.
3.1.5
The Purchaser has received a solvency certificate from the Seller, substantially in the form of Schedule 4;
3.1.6
The Purchaser has received the Swedish Legal Opinion and the Belgian Legal Opinion; and
3.1.7
The Purchaser has received such other approvals, such other legal opinions of reputable law firm(s) as to the laws of the jurisdiction(s) each of them deem relevant, and such other documents as the Purchaser may request.
3.2
The Purchaser's obligation to purchase Receivables pursuant to this Agreement on any Purchase Date is subject to the satisfaction (as determined in the reasonable opinion of the Purchaser) of the following conditions precedent:
3.2.1
The Seller has made an Offer and the Purchaser has given an Acceptance with respect to the related Receivables;
3.2.2
All actions that are required to be completed pursuant to Part 3 of Schedule 2 prior to any purchase of the related Receivables have been completed;
3.2.3
The representations and warranties of the Seller in, or incorporated or referenced in, Clause 5 of this Agreement are correct on and as of the Purchase Date as though made on and as of such date;
3.2.4
No Termination Event shall have occurred, nor shall the Termination Date have occurred; and
3.2.5
No law, regulation, directive, communication or action shall have been imposed or taken by any court, governmental authority or administrative body which (i) may render any of the terms and conditions of the Transaction Documents illegal or unenforceable, (ii) prohibit or prevent the purchase of Receivables hereunder or (iii) otherwise restrain, prevent or impose materially adverse conditions upon the Transaction.
Notwithstanding the foregoing, unless otherwise specified by the Purchaser in a written notice to the Seller, each sale or other transfer shall occur automatically at all times prior to the occurrence of a Termination Event or the Termination Date, with the result that the title to all Receivables shall vest in the Purchaser automatically on the related Purchase Date without any further action of any kind by the Seller or the Purchaser, whether or not the conditions precedent to such sale or other transfer were in fact satisfied on such date and notwithstanding any delay in making payment of the Purchase Price for such Receivables (but without impairing the Purchaser's obligation to pay such Purchase Price in accordance with the terms hereof).


 
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4.
PAYMENTS TO THE PURCHASER, ETC.
4.1
All amounts to be paid to the Purchaser under this Agreement shall be paid when due to the relevant account and at the times specified below.
4.2
Any amounts payable to the Purchaser under this Agreement shall be remitted to the accounts notified in writing to the Seller by the Accounts Administrator no later than the time indicated in such notice.
4.3
All payments made by the Seller under this Agreement shall be made without set-off, counterclaim or withholding. If the Seller is compelled by law or otherwise to make any deduction, the Seller shall pay any additional amount as will result in the net amount received by the Purchaser being equal to the full amount which would have been received had there been no deduction or withholding.
5.
REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS
5.1
Warranties relating to the Seller
As at each Purchase Date, the Seller shall make the representations and warranties to the Purchaser in the terms set out in Part 1 of Schedule 3 in relation to itself and with reference to the facts and circumstances subsisting on such Purchase Date.
5.2
Warranties relating to Purchased Receivables
As at each Purchase Date, the Seller shall make the representations and warranties to the Purchaser in the terms set out in Part 2 of Schedule 3 with respect to the Receivables to be sold by it and purchased by the Purchaser on such Purchase Date with reference to the facts and circumstances subsisting on such Purchase Date.
5.3
Obligation to notify in case of incorrect representations, etc.
The Seller shall forthwith notify the Purchaser if any of the representations and warranties referred to in this Clause 5 were incorrect when made promptly upon becoming aware thereof.
5.4
Covenants and undertakings
The Seller covenants and undertakes with and to the Purchaser as follows:
5.4.1
Indemnity against claims : the Purchaser shall have no obligation or liability with respect to any Purchased Receivables nor will the Purchaser be required to perform any of the obligations of the Seller (or any of its agents) under any such contracts save, in each case, as specifically provided in this Agreement. The Seller will on demand indemnify and keep indemnified the Purchaser and the Accounts Administrator against any cost, claim, loss, expense, liability or damages (including legal costs and out-of-pocket expenses) (except to the extent that such cost, claim, loss, expense, liability or damage shall have arisen as a consequence of any breach of this Agreement by, or as a result of the wilful misconduct or negligence of the Purchaser) reasonably and properly incurred or

 
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suffered by the Purchaser as a consequence of any claim or counterclaim or action of whatsoever nature made or taken by a Permitted Obligor or any third party arising out of or in connection with any Purchased Receivables or any services which are the subject of such Purchased Receivables, other than a claim or counterclaim arising as a result of the insolvency of such Permitted Obligor;
5.4.2
Indemnity against breach : the Seller will on demand indemnify and keep indemnified the Purchaser and the Accounts Administrator against any cost, claim, loss, expense, liability or damages (including legal costs and out-of-pocket expenses) reasonably and properly incurred or suffered by the Purchaser as a consequence of any breach by the Seller of this Agreement or any other Transaction Document (to which the Seller is a party) (except to the extent that such cost, claim, loss, expense, liability or damages shall not have arisen as a consequence of any breach of this Agreement by, or as a result of the willful misconduct or negligence of the Purchaser);
5.4.3
No set-off : the Seller shall not take any action which would cause any set-off, counterclaim, credit, discount, allowance, right of retention or compensation, right to make any deduction, equity or any other justification for the non-payment of any of the amounts payable under any Purchased Receivable (whether by the relevant Permitted Obligor or otherwise) without the prior written consent of the Purchaser (acting through the Accounts Administrator);
5.4.4
Authorisations, approvals, licences, consents etc. : the Seller shall obtain, comply with the terms of, and maintain in full force and effect, all authorisations, approvals, licences and consents required in or by the laws and regulations of Sweden and any other applicable law to enable it to perform its obligations under this Agreement;
5.4.5
No other dealing : the Seller will not dispose, sell, transfer or assign, create any interest in (including Security Interest), or deal with any of the Purchased Receivables in any manner whatsoever or purport to do so except as permitted by this Agreement;
5.4.6
No other action : the Seller will not knowingly take any action which may prejudice the validity or recoverability of any Purchased Receivable or which may otherwise adversely affect the benefit which the Purchaser may derive from such Purchased Receivable pursuant to this Agreement;
5.4.7
Tax payments : the Seller will pay or procure the payment (as required by law) of all federal, state, local, and foreign sales, use, excise, utility, gross receipts, VAT or other taxes imposed by any authority in relation to the Purchased Receivables, the FI Agreements or this Agreement and shall make all relevant returns in respect of VAT in relation to the Purchased Receivables;
5.4.8
Notice of default : the Seller shall promptly upon becoming aware of the same inform the Purchaser and the Accounts Administrator of any Termination Event or any other occurrence which might adversely affect its ability to perform its obligations under this Agreement and from time to time, if so requested, confirm

 
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to the Purchaser and the Accounts Administrator in writing that, save as otherwise stated in such confirmation, no such occurrence has occurred and is continuing;
5.4.9
Notice of Seller Suspension Event etc : the Seller shall promptly upon becoming aware of the same inform the Purchaser and the Accounts Administrator of the occurrence of any Seller Suspension Event or Seller Potential Suspension Event under this Agreement and from time to time, if so requested, confirm to the Purchaser and the Accounts Administrator in writing that, no such event has occurred and is continuing;
5.4.10
Delivery of reports : the Seller shall deliver to the Purchaser and the Accounts Administrator, sufficient copies of each of the following documents, in each case at the time of issue thereof:
(a)
every report, circular, notice or like document issued by the Seller to its creditors generally; and
(b)
(if the Purchaser or the Accounts Administrator so requires) a certificate from its CFO stating that the Seller as at the date of its latest consolidated audited accounts was in compliance with the covenants and undertakings in this Agreement (or if it was not in compliance indicating the extent of the breach).
5.4.11
Provision of further information : subject to applicable legislation, the Seller shall provide the Purchaser and the Accounts Administrator with such financial and other information concerning the Seller and its affairs as the Purchaser or the Accounts Administrator may from time to time reasonably require and which is available to the Seller.
5.4.12
Notice of misrepresentation : the Seller shall promptly upon becoming aware of the same notify the Purchaser and the Accounts Administrator of any misrepresentation by the Seller under or in connection with any Transaction Document to which it is a party.
5.4.13
Sanctions : the Seller shall not:
(a)
directly or indirectly use any proceeds of the sale of Purchased Receivables, or lend, contribute or otherwise make available such proceeds to any other person, entity, joint venture or organisation (a) to fund, finance or facilitate any agreement, transaction, dealing or relationship with or involving, or for the benefit of, any Sanctioned Person (or involving any property thereof), or involving any Sanctioned Territory, or (b) in any manner that would result in a violation of Economic Sanctions Law or Anti-Corruption Law by any person, including the Purchaser, whether as creditor, advisor or otherwise; or
(b)
engage in any transaction, activity or conduct that violates any Economic Sanctions Law or Anti-Corruption Law.

 
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5.4.14
Centre of main interests : the Seller shall ensure that its centre of main interests for the purposes of Council Regulation (EC) No 1346/2000 remains in Sweden and shall not maintain an establishment for the purposes of Council Regulation (EC) No 1346/2000 in any jurisdiction other than Sweden.
5.5
Representations and Warranties relating to the Purchaser
5.5.1
As at each Purchase Date and each Calculation Date, the Purchaser shall make the representations and warranties to the Seller in the terms set out in Part 3 of Schedule 3 with reference to the facts and circumstances subsisting on each such Purchase Date and Calculation Date.
5.5.2
The Seller shall have the option to terminate this Agreement upon any material breach of the representations and warranties referred to in this Clause 5.5 by the Purchaser, provided such material breach has a material adverse effect on the Seller.
5.6
Commitment Fee
The Seller shall pay to the Purchaser a commitment fee computed at a per annum rate equal to 40% of the then current FI Fee (as such term is defined in the Fee Letter), applied to the excess of the Total Commitment over the Aggregate Euro Outstanding Amount. Such commitment fee shall accrue from day to day and be calculated daily on the basis of actual days elapsed over a 360-day year and be payable monthly in arrears on the third Business Day of each month, beginning on the date of this Agreement, to such account as the Purchaser may designate in writing.
5.7
Upfront Fee
The Seller shall pay to the Purchaser an upfront fee at the time and in the amount set out in the Fee Letter.
6.
REMEDIES FOR UNTRUE REPRESENTATION, ETC.
6.1
If at any time after the Settlement Date in respect of any Purchased Receivable it shall become apparent that any of the representations and warranties set out in Part 2 of Schedule 3 relating to or otherwise affecting such Purchased Receivable was untrue or incorrect when made by reference to the facts and circumstances subsisting at the date on which such representations and warranties were given, the Seller shall, within five (5) Business Days of receipt of written notice thereof from the Purchaser (or the Accounts Administrator on its behalf), remedy or procure the remedy of the matter giving rise thereto if such matter is capable of remedy and, if such matter is not capable of remedy or is not remedied within the said period of five (5) Business Days, then following due date of such Purchased Receivable the Seller shall pay to the Purchaser an amount equal to the difference (if any) between (i) the amount due for payment in respect of such Purchased Receivable on such due date and (ii) the amount of Collections received in respect of such Purchased Receivable on or before such due date, to the extent such difference was caused by, or has any connection with, the breach of the relevant representation and warranty. If the Seller shall otherwise become aware of such untrue or incorrect representation and warranty other than by written notification from the

 
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Purchaser (or the Accounts Administrator on its behalf), it shall immediately notify the Purchaser of such untrue or incorrect representation and warranty. In the event the Transaction is terminated prior to the date on which an amount under this Clause 6 would have been payable by the Seller, the Seller shall pay such amount following receipt of the said written notice from the Purchaser (or the Accounts Administrator on its behalf) on or before the date the Transaction is terminated or promptly thereafter.
6.2
Notwithstanding Clause 6.1, if at any time after the Purchase Date but prior to collection of payments in full in relation to any Purchased Receivables it shall become apparent that the representation and warranty set out in paragraph 4 of Part 2 of Schedule 3 relating to or otherwise affecting such Purchased Receivable was untrue or incorrect when made by reference to the facts and circumstances subsisting at the date on which such representations and warranties were given, then the Seller shall repurchase such Purchased Receivable for a price equal to (a) the Face Amount in respect of such Purchased Receivable less (b) any Collections received by the Purchaser in respect thereof, and see to it that notice of such repurchase is given to the relevant Permitted Obligor. Any Collections received by the Purchaser in respect of such repurchased Purchased Receivables after the Seller has paid the price for such repurchase shall be paid to the Seller promptly upon receipt.
7.
FURTHER ASSURANCE; SECURITY INTEREST
7.1
The Seller hereby undertakes not to take any steps or cause any steps to be taken in respect of the Purchased Receivables or the services supplied thereunder that could or will result in:
7.1.1
any termination, waiver, amendment or variation in relation to any Purchased Receivables;
7.1.2
any assignment or sale of any Purchased Receivables; or
7.1.3
any disposal of its right, title, interest, benefit or power in any Purchased Receivables.
7.2
In addition to any records or information available through the PrimeRevenue System, the Seller undertakes at the request of the Purchaser or the Accounts Administrator to produce and deliver Records concerning the Purchased Receivables as the Purchaser or the Accounts Administrator may reasonably request for enforcement or accounting purposes.
7.3
In the event that such Records as referred to in Clause 7.2 are not produced reasonably promptly, the Seller shall permit any persons nominated by the Purchaser or the Accounts Administrator at any time during normal business hours upon five (5) Business Days written notice to enter any premises owned or occupied by it or its agents where the Records and other information concerning Purchased Receivables are kept to have access (subject to appropriate supervision provided by the Seller and provided that the Seller shall not unreasonably delay the provision of such supervision) to, examine and make copies of all Records relating to the Purchased Receivables and the performance by the Seller of its obligations hereunder. Such access shall include the right to have access to and use (subject to appropriate supervision provided by the Seller and provided that the

 
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Seller shall not unreasonably delay the provision of such supervision) all computer passwords necessary to gain access to the relevant computer records.
7.4
It is the intention of the parties hereto that each sale or other transfer of Purchased Receivables made hereunder shall constitute a true sale of such Purchased Receivables and not as a grant of security interest, which sale is absolute and irrevocable and provides the Purchaser with the full benefits of ownership of the Purchased Receivables. In view of the intention of the parties hereto that each sale or other transfer of Purchased Receivables made hereunder shall constitute a sale of such Purchased Receivables rather than loans secured thereby, the Seller hereby agrees to note in its financial statements that the Purchased Receivables have been sold to the Purchaser.
8.
NOTICES
Any notices to be given pursuant to this Agreement to any of the parties hereto shall be sufficiently served or given if delivered by hand or sent by prepaid first-class post or by facsimile transmission or email and shall be deemed to be given (in case of notice delivered by hand or post) when delivered or (in the case of any notice by facsimile transmission or email) upon receipt in legible form and shall be delivered or sent:
The Purchaser:
Viking Asset Purchaser No. 7 IC
 
44 Esplanade, St Helier
 
Jersey JE4 9WG
 
 
with a copy to the Accounts Administrator:
Structured Finance Servicer A/S
 
Christiansbro, 3 Strandgade,
 
DK-1401 Copenhagen K,
 
Denmark
 
 
 
 
The Seller:
Meritor HVS AB
 
Ishockeygatan 3,
 
711 34
 
Lindesberg
 
Sweden
 
 
 
 
with a copy to:
Meritor, Inc.
 
2135 W. Maple Rd.
 
Troy, MI 48084
 
United States
 
 
 
 

or to such other address or facsimile number or email address or for the attention of such other person as may from time to time be notified by any party to each of the other parties by written notice in accordance with the provisions of this Clause 8.

 
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9.
ASSIGNMENT AND SUPPLEMENTS
This Agreement may not be assigned by either party hereto without the prior written consent of the other party. The Purchaser may assign its rights, title and interest in any Purchased Receivables without the consent of the Seller.
10.
AMENDMENTS AND MODIFICATIONS
No amendment, modification, variation or waiver of this Agreement shall be effective unless it is in writing and signed by (or by some person duly authorised by) each of the parties hereto.
11.
RIGHTS CUMULATIVE, WAIVERS
The respective rights of each party under or pursuant to this Agreement are cumulative, and are in addition to their respective rights under the general law. The respective rights of each party under or pursuant to this Agreement shall not be capable of being waived or varied otherwise than by an express waiver or variation in writing; and, in particular, any failure to exercise or any delay in exercising any of such rights shall not operate as a waiver or variation of that or any other such right.
12.
APPORTIONMENT
The parties agree that if a Permitted Obligor, owing a payment obligation which is due in respect of one or more Purchased Receivables, submits an incomplete or inaccurate information regarding the Receivable to the PrimeRevenue System or otherwise makes a general payment to the Purchaser (or any Seller) and makes no apportionment between them as to which Purchased Receivables such payment relates, then such payment shall be treated as though the Permitted Obligor had appropriated the same as payment of Purchased Receivables in relation to the Purchaser in order of maturity (starting with the Purchased Receivables having the earliest maturity date).
13.
PARTIAL INVALIDITY
If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect in any jurisdiction, such invalidity, illegality or unenforceability in such jurisdiction shall not render invalid, illegal or unenforceable such provisions in any other jurisdiction or affect the remaining provisions of this Agreement. Such invalid, illegal or unenforceable provision shall be replaced by the parties with a provision which comes as close as reasonably possible to the commercial intentions of the invalid, illegal or unenforceable provision.
14.
CONFIDENTIALITY
None of the parties shall disclose to any person, firm or company whatsoever, or make use of (other than in accordance with the Transaction Documents) any information relating to the business, finances or other matters of a confidential nature of any other party to this Agreement of which it may in the course of its duties under this Agreement or otherwise have become possessed (including, without limitation and without prejudice to the generality of the foregoing any information concerning the identity or

 
20
 


creditworthiness of any Permitted Obligor (all and any of the foregoing being " Confidential Information ")) and all the parties shall use all reasonable endeavors to prevent any such disclosure or use provided however that the provisions of this Clause 14 shall not apply:
14.1.1
Permitted parties : to the disclosure of any information to any person who is a party to any of the Transaction Documents (to the extent such Transaction Documents relates to the Transaction as contemplated by this Agreement);
14.1.2
Known information : to the disclosure of any information already known to the recipient otherwise than as a result of entering into any of the Transaction Documents (to the extent such Transaction Documents relates to the Transaction as contemplated by this Agreement);
14.1.3
Public knowledge : to the disclosure of any information which is or becomes public knowledge otherwise than as a result of the conduct of the recipient;
14.1.4
Legal requirement : to the extent that the recipient is required to disclose the same pursuant to any law or order of any court of competent jurisdiction or pursuant to any direction or requirement (whether or not having the force of law) of any central bank or any governmental or other regulatory or taxation authority in any part of the world (including, without limitation, any official bank examiners or regulators);
14.1.5
Rights and duties : to the extent that the recipient needs to disclose the same for the exercise, protection or enforcement of any of its rights under any of the Transaction Documents or, for the purpose of discharging, in such manner as it reasonably thinks fit, its duties or obligations under or in connection with the Transaction Documents in each case to such persons as require to be informed of such information for such purposes (including for these purposes, without limitation, disclosure to any rating agency);
14.1.6
Professional advisers : to the disclosure of any information to professional advisers, legal advisors or auditors of the relevant party in relation to, and for the purpose of, advising such party or complying with their duties as auditors;
14.1.7
Financial institutions : to the disclosure in general terms of any information to financial institutions servicing the relevant party in relation to finances, insurance, pension schemes and other financial services;
14.1.8
Written consent : to the disclosure of any information with the written consent of all of the parties hereto;
14.1.9
Rating Agencies : to the disclosure of any information which either of the Rating Agencies may require to be disclosed to it;
14.1.10
Group companies : to the disclosure of information to companies belonging to the same group of companies as the Seller or the Purchaser;

 
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14.1.11
The Issuer, Viking Global Finance ICC and Viking Asset Securitisation Holdings Limited: to the disclosure of information to the Issuer, Viking Global Finance ICC and Viking Asset Securitisation Holding Limited (or to anyone acting on behalf of such a person) or to any person providing finance to the Purchaser, the Issuer, Viking Global Finance ICC and/or Viking Asset Securitisation Holding Limited (or to anyone acting on behalf of such a person);
14.1.12
Permitted Obligors : to the disclosure of information to Permitted Obligors necessary for the performance of the Sellers' obligations hereunder, or reasonably incidental thereto; and
14.1.13
Future purchasers : to the disclosure of any information to any purchaser or potential purchaser of Receivables from the Purchaser.
15.
NO LIABILITY AND NO PETITION
15.1
No recourse under any obligation, covenant, or agreement of any party contained in this Agreement shall be had against any shareholder, officer or director of the relevant party as such, by the enforcement of any assessment or by any proceeding, by virtue of any statute or otherwise, it being expressly agreed and understood that this Agreement is a corporate obligation of the relevant party and no personal liability shall attach to or be incurred by the shareholders, officers, agents or directors of the relevant party as such, or any of them, under or by reason of any of the obligations, covenants or agreements of such relevant party contained in this Agreement, or implied therefrom, and that any and all personal liability for breaches by such party of any of such obligations, covenants or agreements, either at law or by statute or constitution, of every shareholder, officer, agent or director is hereby expressly waived by the other parties as a condition of and consideration for the execution of this Agreement.
15.2
The Seller hereby agrees that it shall not, until the expiry of one (1) year and one (1) day after the payment of all sums outstanding and owing under the latest maturing note issued under the CP Programme take any corporate action or other steps or legal proceedings for the winding-up, dissolution or re-organisation or for the appointment of a receiver, administrator, administrative receiver, trustee, liquidator, sequestrator or similar officer of the Issuer or the Purchaser or of any or all of the Issuer's or the Purchaser's revenues and assets.
16.
LIMITED RECOURSE
In the event that the security created by the Master Security Trust Deed (as supplemented by the Purchaser Supplemental Agreement (as defined in the Master Definitions Schedule)) and the Accounts Pledge Agreement is enforced and the proceeds of such enforcement are insufficient, after payment of all other claims ranking in priority to the claims hereunder or thereunder, to repay in full all principal or pay in full all interest and other amounts whatsoever hereunder or thereunder, then until such amounts have been paid in full the Seller shall have no further claim against the Purchaser in respect of any such unpaid amounts and any resultant claim shall have expired.
17.
GOVERNING LAW AND JURISDICTION

 
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17.1
This Agreement is governed by and shall be construed in accordance with Swedish law.
17.2
The courts of Sweden shall have non-exclusive jurisdiction over matters arising out of or in connection with this Agreement. The City Court of Stockholm shall be court of first instance.
18.
TERMINATION
This Agreement shall remain in full force and effect until the Termination Date, provided, however, that the rights and remedies of a party with respect to any breach of any warranty made by another party in or pursuant to this Agreement, the provisions of Clause 14, Clause 15 and Clause 16 and the indemnification and payment provisions of this Agreement shall be continuing and shall survive any termination of this Agreement.
19.
INTEGRATION
This Agreement and each other Transaction Document contain the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof superseding all prior oral or written understandings.
20.
BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns (including any trustee in bankruptcy).
21.
COUNTERPARTS
This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement.

[Signature page follows]
This Agreement has been entered into on the date stated at the beginning of this Agreement.


 
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For and on behalf of
MERITOR HVS AB

By:     /s/ Carl D. Anderson, II    
Name: Carl D. Anderson, II
Title: Authorized Signatory

For and on behalf of
VIKING ASSET PURCHASER NO. 7 IC

By:     /s/ Martin Sabey    
Name: Martin Sabey
Title: Director

 
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Schedule 1     
ELIGIBILITY CRITERIA
The Seller represents and warrants that each Receivable that is the subject of an Offer by the Seller and Acceptance satisfies the following Eligibility Criteria on the relevant Purchase Date:
1.
The terms of the Receivable provide for payment in full by the Permitted Obligor not later than 120 days after the date of creation of such Receivable or as otherwise approved by the Purchaser (or the Accounts Administrator on its behalf).
2.
The Receivable is neither a Defaulted Receivable nor a Delinquent Receivable.
3.
The Receivable is denominated and payable in a Permitted Currency and is fully identified as such in the PrimeRevenue System and in the records of the Seller.
4.
An invoice relating to the Receivable has been issued and has been approved by the relevant Permitted Obligor.
5.
The Receivable is segregated and identifiable and can be validly transferred without the consent of the Permitted Obligor by the Seller to the Purchaser.
6.
The Receivable is not subject to set-off, counterclaim (other than Credit Memo Amounts as such term is defined in the respective CMSA) or withholding taxes other than as generally provided for under Swedish law and is a legally enforceable obligation of the Permitted Obligor.
7.
The Receivable is owed by a Permitted Obligor who as at the Purchase Date to the knowledge of the Seller is not bankrupt or in liquidation, has not filed for a suspension of payments or petitioned for the opening of procedures for a compulsory composition of debts or is subject to similar or analogous proceedings or as otherwise approved by the Purchaser (or the Accounts Administrator on its behalf).
8.
The governing law of the Receivable is Swedish law.
9.
The Receivable is a non-interest bearing (other than default or penalty interest) trade receivable arising in the ordinary course of the Seller's business, the Outstanding Amount of which remains as debt.
10.
The delivery of the goods and/or services giving rise to the Receivable has been made and invoiced, has not been cancelled or rejected by the Permitted Obligor and the invoice provides for full payment by the Permitted Obligor.
11.
The Receivable has been created in accordance with all applicable laws and all consents, approvals and authorisations required of or to be maintained by the Seller have been obtained and are in full force and effect and are not subject to any restriction that would be material to the origination, enforceability or assignability of such Receivable.
12.
The Receivable has not been, in whole or in part, pledged, mortgaged, charged, assigned, discounted, subrogated or attached or transferred in any way (except to the extent

 
25
 


released, revoked or rescinded as of the relevant Purchase Date) and is otherwise free and clear of any Adverse Claims exercisable against the Seller by any party.
13.
The Receivable constitutes the legal, valid, binding and enforceable obligation of the Permitted Obligor to pay on the due date the Outstanding Amount of the Receivable as at the Purchase Date and is not subject to any defense, dispute, lien, right of rescission, set-off or counterclaim (other than Credit Memo Amounts as such term is defined in the respective CMSA) or enforcement order.
14.
The Receivable has been owned exclusively by the Seller since its origination and until the relevant Purchase Date.
15.
Collections in respect of the Receivable can be identified as being attributable to the Receivable as soon as practically possible following their receipt and in any event not later than three (3) Business Days following their receipt.
16.
The Receivable is a debt the rights in which can be transferred by the operation of the sale mechanics in Schedule 2 Part 1.
17.
The Receivable arises from the supply of services or goods by the Seller and which is generated in the ordinary course of the Seller's business and at arm's length.
18.
The Receivable is evidenced by a legally valid, binding and enforceable contract or agreement accepted by the relevant Permitted Obligor and entered into in accordance with all applicable laws and regulations, which can be freely transferred and in respect of which all relevant licenses and authorisations have been obtained.
19.
The assignment of the Receivable and of the associated rights does not violate any law and does not require the consent of any person or the satisfaction of any condition (or where the same is required, such consent has been obtained or such conditions has been satisfied) and would not cause any amount in respect of tax to be payable.

 
26
 


Schedule 2     
CONCLUSION OF PURCHASE – OFFER AND ACCEPTANCE, PURCHASE PRICE AND PERFECTION

 
27
 


PART 1     
CONCLUSION OF PURCHASE – OFFER AND ACCEPTANCE
1.
The Seller may from time to time make an Offer to the Purchaser and the Purchaser will, subject to the satisfaction of the conditions precedent set forth in Sections 3.1 and 3.2 and this Part 1, accept such Offer by an Acceptance.
2.
Any Acceptance by the Purchaser shall always be subject to all of the following conditions being satisfied (as determined in the reasonable opinion of the Purchaser) or waived by the Purchaser:
(a)
any Acceptance must be made before the Termination Date and no Acceptance which is communicated or generated on or after the Termination Date shall be valid;
(b)
no Seller Potential Suspension Event or Seller Suspension Event having occurred and being continuing;
(c)
immediately following such purchase, the Total Commitment shall be equal to or greater than the Aggregate Euro Outstanding Amount; and
(d)
the relevant Receivable shall meet all of the Eligibility Criteria.
3.
Notwithstanding anything to the contrary in this Agreement, if the Purchaser pays the Purchase Price for a Receivable and it is subsequently determined that any of the conditions set out above or in Sections 3.1 and 3.2 was not satisfied, the parties hereto agree that the transfer of such Receivable from the Seller to the Purchaser will be valid. The Purchaser acknowledges that the Receivables can be repurchased in accordance with Section 6.2.

 
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PART 2     
PURCHASE PRICE
1.
The Purchase Price shall be paid in cash by or on behalf of the Purchaser to the Seller on the relevant Settlement Date. Payment shall be made (subject to deductions, including for the settlement of fees, as agreed by the Seller in any Transaction Document) to the bank account number set out below or as otherwise agreed from time to time between the Purchaser, and the Seller and notified to PrimeRevenue.
For SEK Payments:

For EUR Payments:

2.
Each Receivables Purchase Price shall be calculated by the PrimeRevenue System on behalf of the Purchaser on the Calculation Date and PrimeRevenue shall inform the Seller and each Purchaser of the Receivables Purchase Price through the PrimeRevenue System on such Calculation Date.

 
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PART 3     
PERFECTION
1.
Prior to the transfer and acquisition of any Receivables, the Purchaser and the Seller shall send a notice letter to (each of) the Permitted Obligor(s) that is/are the debtor(s) of the relevant Receivables, with the following content:
NOTICE
Date: ________________, 2017
To: [ SPECIFY NAME OF PERMITTED OBLIGOR ]
Re: NOTICE OF SALES AND TRANSFERS OF RECEIVABLES AND RIGHTS UNDER A CUSTOMER MANAGED SERVICES AGREEMENT
A.
Pursuant to a Receivables Purchase Agreement (the " RPA ") between Meritor HVS AB (the " Seller ") and Viking Asset Purchaser No. 7 IC (an incorporated cell of Viking Global Finance ICC), as purchaser (the " Purchaser "), dated as of ____________________, 2017, the Seller has agreed to sell and the Purchaser has agreed to purchase receivables (the " Receivables ") owed by [ specify name of Permitted Obligor ] (the " Obligor ") to the Seller (in its capacity as supplier to Obligor).
B.
Offer and acceptance of sales and purchases of Receivable(s) will be made from time to time through a system (the " System ") provided by PrimeRevenue, Inc (" PrimeRevenue "). The Obligor has on [●], 20[●] entered into a Customer Managed Services Agreement (the " CMSA ") with PrimeRevenue regarding the use of the System. Through the CMSA (Section 18(f)) the Obligor has made certain undertakings, covenants, representations and warranties to the Sellers (the " Seller CMSA Rights ") as regards inter alia the Receivables and the use of the System.
C.
In connection with a sale of Receivable(s) under the RPA through the System, the System will generate a notice of transfer (the " Transfer Notice ") that will be sent to the Obligor. A specimen of such Transfer Notice is attached hereto as Appendix 1.
D.
In accordance with and without limiting, expanding or otherwise amending the terms and conditions of the CMSA, this is to notify the Obligor that each Transfer Notice shall have the following meanings:
(i)
the Receivable(s) defined therein (as clarified in Appendix 1) (the " Purchased Receivables ") has/have been sold and transferred to the Purchaser identified in the Transfer Notice (see Appendix 1);
(ii)
consequently, all payments attributable to the Purchased Receivables shall be made to the Purchaser in its capacity as owner of such receivables (as set forth in the CMSA and in particular Section 2(b) thereof);

 
30
 


(iii)
all payments to the Purchaser referred to in this notice shall (until otherwise instructed) be made in SEK to the bank account numbers set out below with Nordea Bank AB (publ):
Bank:    
Address:    
Account No.:    
Swift:    
(iv)
all payments to the Purchaser referred to in this notice shall (until otherwise instructed) be made in EUR to the bank account numbers set out below with Nordea Bank AB (publ):
Bank:    
Address:    
Account No. (IBAN):    
Swift:    
(v)
all Seller CMSA Rights attributable to the Purchased Receivables are pursuant to the RPA included in and an integral part of the Purchased Receivables and thus also sold and transferred to the Purchaser (the " Transferred Seller CMSA Rights ").
Place/date:    _____________; ___________, 2017

MERITOR HVS AB

By:        
Name:
Title:

VIKING ASSET PURCHASER NO. 7 IC.

By:        
Name:
Title:

 
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We hereby confirm;
(i)    receipt of the above notice;
(ii)    that we will act in accordance therewith;
(iii)    our agreement as regards the meaning of the Transfer Notice; and
(iv)
our obligations vis-à-vis the Purchaser as regards each of the Transferred Seller CMSA Rights.

Place/date:    _____________; ___________, 2017
[ SPECIFY NAME OF PERMITTED OBLIGOR ]

By:        
Name:
Title:
and the Sellers shall procure that each such Permitted Obligor acknowledge and countersign the notice letter as anticipated therein.
2.
The Seller shall procure that simultaneously (or as soon thereafter as is technically possible) with the issuance of an Acceptance, a Transfer Notice (as defined in the above notice) shall be issued by the PrimeRevenue System to the relevant Permitted Obligor.
3.
The Seller shall procure that at such time(s) as the Purchaser determines all other actions the Purchaser in its reasonable opinion deems necessary or desirable in order for the transfer and acquisition of the Receivables to be perfected in all respects is/are taken.




 
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Schedule 3     
REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS

 
33
 


PART 1     
REPRESENTATIONS AND WARRANTIES RELATING TO THE SELLER
The following representations and warranties are given by the Seller:
1.
Status : the Seller is a limited liability company duly formed, validly existing and in good standing under the laws of the jurisdiction of its organisation.
2.
Powers and authorisations : the Seller has the requisite power and authority under its certificate of formation, limited liability company agreement and otherwise, and all necessary company authority has been obtained and action taken, for it to sign and deliver, and perform the transactions contemplated in this Agreement.
3.
Legal validity : The obligations of the Seller under this Agreement constitute, or when executed by it will (subject to any reservations of law expressed in the Swedish Legal Opinion) constitute, the legal, valid and binding obligations of the Seller and are enforceable against it.
4.
Non-violation : The execution, signing and delivery of this Agreement and the performance of any of the transactions contemplated herein do not and will not contravene or breach or constitute a default under or conflict or be inconsistent with or cause to be exceeded any limitation on it or the powers of its officers imposed by or contained in:
(a)
any law, statute or regulation to which it or any of its assets or revenues is subject or any order, judgment, injunction, decree, resolution, or award of any court or any administrative authority or organisation which applies to it or any of its assets or revenues; or
(b)
any agreement or any other document or obligation to which it is a party or by which any of its assets or revenues is bound or affected if this may have a material adverse effect on the rights of the Purchaser or the Accounts Administrator; or
(c)
any document which contains or establishes or regulates its activities, including its certificate of formation and limited liability company agreement.
5.
Adverse Claim . The execution and delivery of this Agreement and the performance of any of the transactions contemplated herein do not and will not result in the creation or imposition of any Adverse Claim (except as created pursuant to the Transaction Documents) upon any property or assets, whether now owned or hereafter acquired, of the Seller.
6.
Consents : the Seller has duly obtained, made or taken each authorisation, approval, consent, registration, recording, filing, deliveries or notarisation which it is required to obtain (or make) in connection with the entry into, or performance of the transactions contemplated in, the Transaction Documents to which it is a party.
7.
Litigation : No litigation, arbitration or administrative proceeding or claim of or before any court, tribunal or governmental body which, if adversely determined, would materially and adversely affect the ability of the Seller to observe or perform its

 
34
 


obligations under the Transaction Documents to which it is a party, is presently in progress or pending.
8.
Accounts : The latest audited financial statements of the Seller then available have been prepared on a basis consistently applied in accordance with accounting principles generally accepted in Sweden and give a true and fair view of the results of its operations for that year and the state of its affairs at that date.
9.
Solvency : The Seller is able to pay its debts as they fall due and it will not be unable to pay its debts as they fall due in consequence of any obligation or transaction contemplated in this Agreement.
10.
Material adverse change to the Seller : There has been no change in the financial condition or operations of the Seller since the date of its latest audited financial statements, so as to have a material and adverse effect on the ability of the Seller to perform its obligations under the Transaction Documents to which it is a party.
11.
No misleading information : Any factual information in writing provided by the Seller in connection with the entry into any of the transactions envisaged by the Transaction Documents was true and accurate in all material respects as at the date it was provided or as at the date (if any) at which it was stated.
12.
Insolvency and other procedures : No action has been taken or is pending, no other steps have been taken and no legal proceedings have been commenced (in each case by the Seller or, so far as the Seller is aware, by any other person) for (i) the insolvency, bankruptcy, liquidation, administration or reorganisation of the Seller, or (ii) the Seller to enter into any composition or arrangement with its creditors generally, or (iii) the appointment of a receiver, supervisor, trustee or similar officer in respect of the Seller or substantially all of its property, undertaking or assets.
13.
Pari passu ranking : Each of the payment obligations of the Seller under this Agreement will rank at least pari passu with its unsecured payment obligations to all its other unsecured creditors save those whose claims are preferred solely by any bankruptcy, insolvency or similar laws of general application.
14.
No default: No event has occurred which constitutes, or which with the giving of notice and/or the lapse of time and/or a relevant determination would constitute, a contravention of, or default under, any such law, statute, decree, rule, regulation, order, judgment, injunction, resolution, determination or award or any agreement, document or instrument by which the Seller or any of its assets is bound, being a contravention or default which would have a material adverse effect on the business, assets or condition (financial or other) of the Purchaser or materially and adversely affect its ability to observe or perform its obligations under this Agreement.
15.
Use of Proceeds . No portion of any Purchase Price payment hereunder will be used (i) for a purpose that violates, or would be inconsistent with, any law, rule or regulation applicable to the Seller or (ii) to acquire any security in any transaction which is subject to Section 12, 13 or 14 of the Securities Exchange Act of 1934, as amended.

 
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16.
Not a Holding Company or an Investment Company . The Seller is not a "holding company" or a "subsidiary holding company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended, or any successor statute. The Seller is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or any successor statute.
17.
Sanctions . The Seller is not, and to the knowledge of its executive officers, none of its Affiliates are, listed on the " Specially Designated Nationals and Blocked Persons " list maintained by the Office of Foreign Assets Control of the United States Department of the Treasury (" OFAC "), or on the Consolidated List of Financial Sanctions Targets maintained by the UK Treasury, or on any list of targeted persons issued under the Economic Sanctions Law of any other country or is domiciled in a Sanctioned Territory, nor are any of (a) the goods and services sold by the Seller to the Permitted Obligors in connection with any Receivables subject to this Agreement or (b) the Permitted Obligors from jurisdictions or targeted countries with respect to which sanctions programs restricting the sale, purchase or financing of goods are maintained by OFAC or pursuant to any Economic Sanctions Law, or located within or operating from a Sanctioned Territory or otherwise targeted under any Economic Sanctions Law.
18.
Anti-corruption Laws . Neither the Seller nor, to the knowledge of its executive officers, any of its directors, officers, employees, agents or other representatives when acting on its behalf, is in violation of any applicable Anti-Corruption Laws.
19.
Centre of main interests : The Seller's centre of main interests for the purposes of Council Regulation (EC) 1346/2000 (the " Regulation ") is in Sweden and it has no "establishment" (as that term is used in Article 2(h) of the Regulation) in any other jurisdiction.

 
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PART 2     
REPRESENTATIONS AND WARRANTIES RELATING TO THE PURCHASED RECEIVABLES
The following representations and warranties are given by the Seller:
1.
Particulars correct : The particulars of the Purchased Receivables set out in the Offers of the Seller and in the PrimeRevenue System (to the extent submitted by the Seller) are true and accurate in all material respects, as of the date thereof.
2.
No default : the Seller is not aware of any default, breach or violation in respect of any Purchased Receivable (other than any default relating to lateness in payment) or of any event, which with the giving of notice and/or the expiration of any applicable grace period, would constitute such a default, breach or violation, such default, breach or violation being of a nature that (i) is material and (ii) affects the value of the Purchased Receivable or its collectability.
3.
Obligation performed : The Seller has performed all its obligations under or in connection with the Purchased Receivables unless any such obligation is not material and does not affect the value of any Purchased Receivable or its collectability.
4.
Compliance with Eligibility Criteria : Each Purchased Receivable complies, as at the relevant Purchase Date, in all respects with the Eligibility Criteria.
5.
Maintenance of records : In addition to any records relating to the Purchased Receivables maintained in the PrimeRevenue System, the Seller has maintained records relating to each Purchased Receivable which are accurate and complete in all material respects, are sufficient to enable such Purchased Receivables to be identified and enforced against the relevant Permitted Obligor and such records are held by or to the order of the Seller.
6.
Accounting : In addition to any records relating to the Purchased Receivables maintained in the PrimeRevenue System, the Seller shall maintain an accounting system which separates the Purchased Receivables and accounting for collections related thereto from other receivables or assets of the Seller so that the Purchaser at any time can verify the Outstanding Amount of the Purchased Receivables and the Seller's compliance with this Agreement.
7.
No waiver : The Seller has not waived any of its rights in relation to the Purchased Receivables.
8.
Perfection : The Seller has performed all its actions as set out in Clause 2.4 of this Agreement as of the Purchase Date.

 
37
 


PART 3     
REPRESENTATIONS AND WARRANTIES RELATING TO THE PURCHASER
The following representations and warranties are given by the Purchaser:
1.
Status : The Purchaser is a company duly incorporated and validly existing under the laws of its jurisdiction of incorporation.
2.
Powers and authorisations : The Purchaser has the requisite power and authority and all necessary corporate and constitutional authority has been obtained and action taken, for it to sign and deliver, and perform the transactions contemplated in, this Agreement.
3.
Legal validity : The obligations of the Purchaser under this Agreement constitute, or when executed by it will constitute, the legal, valid and binding obligations of the Purchaser and, subject to any laws or other procedures affecting generally the enforcement of creditors' rights and principles of equity are enforceable against it.

 
38
 


Schedule 4     
FORM OF SOLVENCY CERTIFICATE
To: Viking Asset Purchaser No. 7 IC (" VAP7 ")
Date:                          ,2017

From:
Meritor HVS AB (" Meritor ")

Dear Sirs
Reference is made to the Receivables Purchase Agreement dated as of __________________, 2017, entered into between Meritor and VAP7 (the " Receivables Purchase Agreement ")
The undersigned hereby certifies that it is able to pay its debts as they fall due and it will not be unable to pay its debts as they fall due in consequence of any obligation or transaction contemplated in the Receivables Purchase Agreement.
Very truly yours
MERITOR HVS AB

By:        
Name:
Title:


 
39
 

Exhibit 12


Meritor, Inc.
Computation of Ratio of Earnings to Fixed Charges
Six Months Ended March 31, 2017
(Amounts in millions, except the ratio)


 
Earnings Available for Fixed Charges (A):
 
 
 
 
 
 
 
 
 
Pre-tax income from continuing operations
 
$
58

 
 
 
 
 
 
Add:
 
 
 
 
Distributed income of affiliates
 
 
13

 
 
 
 
 
 
Less:
 
 
 
 
Equity in earnings of affiliates
 
 
(18
)
 
 
 
 
53

 
Add: fixed charges included in earnings:
 
 
 
 
Interest expense
 
 
44

 
Interest element of rentals
 
 
3

 
Total
 
 
47

 
 
 
 
 
 
Total earnings available for fixed charges:
 
$
100

 
 
 
 
 
 
Fixed Charges (B):
 
 
 
 
Fixed charges included in earnings
 
$
47

 
Capitalized interest
 
 
—

 
Total fixed charges
 
$
47

 
 
 
 
 
 
Ratio of Earnings to Fixed Charges
 
 
2.13

 

(A) “Earnings” are defined as pre-tax income from continuing operations, adjusted for minority earnings and share of income from equity investees 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 or incorporated by reference in Note 21 of the Notes to Condensed Consolidated Financial Statements in the Quarterly Report on Form 10-Q of Meritor, Inc. (“Meritor”) for the fiscal quarter ended April 2, 2017 and to the incorporation by reference of such reference into the following Registration Statements of Meritor:
Form
Registrations No.
Purpose
S-3
333-200858
Registration of common stock, preferred stock, warrants, debt securities and guarantees
S-8
333-215874
Amended and Restated 2010 Long-Term Incentive Plan
S-8
333-192458
Amended and Restated 2010 Long-Term Incentive Plan
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-8
333-42012
Employee Stock Benefit Plan, 1988 Stock Benefit Plan and 1998 Employee Stock Benefit Plan

 
BATES WHITE LLC
 
 
 
 
 
 
 
By:
/s/ Charles E. Bates
 
 
 
Charles E. Bates, Ph.D.
 
 
 
Chairman
Date: May 4, 2017



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

I, Jeffrey A. Craig, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Meritor, Inc. for the quarterly period ended April 2, 2017;
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 4, 2017
 
/s/ Jeffrey A. Craig
 
Jeffrey A. Craig
 
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 April 2, 2017;
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 4, 2017
 
/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, Jeffrey A. Craig, hereby certify that:
1.
The Quarterly Report of Meritor, Inc. on Form 10-Q for the quarterly period ended April 2, 2017 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/ Jeffrey A. Craig
Jeffrey A. Craig
Chief Executive Officer and
President

Date: May 4, 2017



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 April 2, 2017 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 4, 2017