Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

 

Overview

 

Meritor, Inc. (the "company" or "Meritor"), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers (“OEMs”) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, off-highway, military, bus and coach and other industrial OEMs and certain aftermarkets. Meritor common stock is traded on the New York Stock Exchange under the ticker symbol MTOR.

On November 12, 2012, we announced a revised management reporting structure resulting in two business segments: (1) Commercial Truck & Industrial and (2) Aftermarket & Trailer. We revised our reporting structure to drive efficiencies across the corporation. Prior period segment financial information has been recast to reflect the revised reporting structure.

Our sales for fiscal year 2013 were $3,701 million , down compared to $4,418 million in the prior year. We experienced lower sales driven primarily by lower production volumes in most regions in which we operate. Loss from continuing operations in fiscal year 2013 was $20 million , or $0.20 per diluted share, compared to income from continuing operations of $70 million , or $0.72 per diluted share, in the prior year. Net loss for the year ended September 30, 2013 was $22 million compared to net income of $52 million in the prior year. The decrease in net income is primarily due to lower sales. Also impacting fiscal 2013 net loss are non-cash pension settlement losses of $109 million ($100 million, after-tax) and a gain of $125 million pre-tax ($92 million, after-tax) associated with the sale of our ownership interest in an unconsolidated joint venture.

Adjusted EBITDA (see Non-GAAP Financial Measures below) for the fiscal year ended September 30, 2013 was $261 million compared to $345 million in fiscal year 2012 . Our Adjusted EBITDA margin in fiscal year 2013 was 7.1 percent compared to 7.8 percent in the same period a year ago. Adjusted EBITDA and Adjusted EBITDA margin decreased compared to the prior year primarily as a result of lower sales, lower earnings from our unconsolidated joint ventures, and unfavorable impact of foreign currency movements in fiscal year 2013 partially offset by lower material and structural costs and certain pricing actions.

Cash flows used for operating activities were $96 million in fiscal year 2013 compared to cash flows provided by operating activities of $77 million in the prior fiscal year. The cash outflow in operating activities in fiscal year 2013 was primarily due to an increase in working capital, higher pension contributions and lower earnings.

Offering of New Convertible Notes and Repurchase

On December 4, 2012, we completed an offering of $250 million aggregate principal amount at maturity of 7.875 percent convertible senior notes due 2026. We used the net proceeds of approximately $220 million from the offering and additional cash to acquire a portion of our outstanding 4.625 percent convertible senior notes due 2026 in a transaction that settled concurrently with the closing of the 7.875 percent note offering. Approximately $245 million of $300 million principal amount of the 4.625 percent notes were acquired for an aggregate purchase price of approximately $236 million (including accrued interest). These transactions resulted in a net loss of $5 million.

Debt Offering of New Notes and Repurchase

On May 31, 2013, we completed an offer of $275 million aggregate principal at maturity of 6.75 percent senior notes due June 15, 2021. We used the proceeds of the 6.75 percent senior notes offering primarily to complete a cash tender offer for the repurchase of $167 million of our $250 million 8.125 percent notes due in 2015. The balance of the proceeds were used for general corporate purposes, including repayment of other debt, and pension funding. The issuance and cash purchase transactions resulted in a net loss of $19 million.

Canadian Pension Settlement and U.S. Plan Lump-sum Actions

During the third quarter of fiscal year 2013, we settled five of our Canadian pension plans via lump-sum payments out of plan assets to participants and annuity contract purchases with an insurance company. We recognized a pre-tax settlement loss of approximately $36 million associated with the annuity purchase and lump-sum actions. In accordance with settlement accounting, $68 million of benefit obligations and $72 million of pension plan assets associated with the actions were derecognized during the quarter ended June 30, 2013.

In June 2013, we announced a special election window to offer voluntary lump-sum pension payouts to eligible terminated vested participants with an accrued benefit in the U.S. Retirement Plan that, if accepted, would settle our obligation to them. The program provided participants with a one-time choice of electing to receive a lump-sum settlement of their remaining pension benefit. Lump-sum distributions under this election window were paid in September 2013. We recognized a $73 million non-cash settlement loss during the fourth quarter of fiscal year 2013 associated with these payouts. In addition, pension plan assets and pension benefit obligations of $157 million and $178 million, respectively, were derecognized as a result of the U.S. lump-sum settlements.

Sale of Ownership Interest in Suspensys Sistemas Automotivos LTDA

On July 30, 2013, subsidiaries of Meritor completed the sale of our overall 50 percent ownership equity interest in Suspensys Sistemas Automotivos LTDA (the “Suspensys JV”) to our joint venture partner, Randon S.A. Implementos E Participações (“Randon”). The Suspensys JV was formed in 2002 and is primarily engaged in the manufacture and sale of air and mechanical suspension systems for trucks, buses and trailers, trailer axles, third axles, hubs and drums for trucks, buses and trailers. The purchase price for the sale was $195 million, which was composed of $190 million in cash (approximately $4 million of which was in the form of a pre-closing cash dividend) and $5 million in lease abatements for a facility in Brazil leased to the company from the Suspensys JV. The sale was completed pursuant to a Purchase and Sale Agreement dated as of April 29, 2013. We recognized a $125 million pre-tax ($92 million, after-tax) gain associated with this sale.

Restructuring Actions:

In fiscal year 2013, we executed multiple restructuring actions in our business.

We recognized restructuring costs of $26 million in fiscal year 2013 related to the above restructuring actions.