MTOR Meritor, Inc. - 10-K

Item 1A. Risk Factors.

Our business, financial condition and results of operations can be impacted by a number of risks, including those described below and elsewhere in this Annual Report on Form 10-K, any one of which could cause our actual results to vary materially from recent results or from anticipated future results. Any of these individual risks could materially and adversely affect our business, financial condition and results of operations. This effect could be compounded if multiple risks were to occur.

Industry and Operational Risks

The ongoing coronavirus pandemic is having, and is expected to continue to have, an adverse effect on our business.

The COVID-19 pandemic is adversely affecting, and is expected to continue adversely affecting public health, the global economy and financial markets, as well as our industry, customers, operations, workforce, supply chains, distribution systems and the availability of manufacturing inputs, potentially throughout 2022. We have experienced, and expect to continue to experience, unpredictable reductions in demand for certain of our products, as well as the potential for restrictions on our ability to operate. In response to the COVID-19 pandemic, government health officials recommended and mandated at times precautions to mitigate the spread of the virus, including shelter-in-place orders, prohibitions on public gatherings, travel restrictions and other similar measures. As a result, we and certain of our customers and suppliers temporarily closed select manufacturing locations during the second half of fiscal year 2020. It is currently unclear if further closures may be necessary in the future. Our results will be adversely impacted by any such closures and may be adversely impacted by other actions taken to contain the spread or mitigate the impact of the COVID-19 pandemic. There are numerous uncertainties that have risen from the COVID-19 pandemic, including the severity of the disease, the duration of the outbreak, the likelihood of resurgences of the outbreak, including due to the emergence and spread of variants, actions that may be taken by governmental authorities in response to the disease, the timing, distribution, efficacy and public acceptance of vaccines, and unintended consequences of the foregoing. As a result, the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time. The situation continues to evolve and additional impacts, which we are unable to predict or plan for, including expenses related to subsequent commercial or employment related litigation, may arise.

On November 4, 2021, the United States Occupational Safety and Health Administration ("OSHA") filed an Emergency Temporary Standard ("ETS") with the Office of the Federal Registrar mandating that employers with more than 100 employees must ensure that their employees are either fully vaccinated or subject to weekly COVID-19 testing and mask wearing by January 4, 2022. It is currently not possible to predict with certainty the enforceability of the OSHA ETS or the impact it will have on our workforce. Additional vaccine mandates may be announced in jurisdictions in which our business operates. Our implementation of these requirements may result in attrition, including attrition of critically skilled labor, and difficulty securing future labor needs, which could have a material adverse effect on our business, financial condition, and results of operations.

We may not be able to execute our M2022 Plan.

In the first quarter of fiscal 2019, we announced our M2022 plan, a multi-year plan to drive growth, expand margins, expand earnings per share, and generate cash and value. In connection with the plan, we established certain financial goals relating to securing new revenue, profit improvement and cash flow generation. The M2022 plan is based on our current planning assumptions, and achievement of the plan is subject to a number of risks. Our plan includes assumptions that we are able to successfully launch new products, secure new business wins, expand our current customer relationships, reduce costs, and that demand for our products is not further affected by the COVID-19 pandemic and any price increases in raw materials or other manufacturing costs are substantially offset by customer recovery mechanisms. If our assumptions are incorrect, if management is not able to execute the plan or if our business suffers from any number of additional risks set forth herein, we may not be able to achieve the financial goals we have announced for the M2022 plan.

We depend on large OEM customers, and loss of sales to these customers or failure to negotiate acceptable terms in contract renewal negotiations, or to obtain new customers, could have an adverse impact on our business.

We are dependent upon large OEM customers with substantial bargaining power with respect to price and other commercial terms. In addition, we have long-term contracts with certain of these customers that are subject to renegotiation and renewal from time to time. Loss of all or a substantial portion of sales to any of our large volume customers for whatever reason (including, but not limited to, loss of contracts or failure to negotiate acceptable terms in contract renewal negotiations, loss of market share by these customers, insolvency of such customers, reduced or delayed customer requirements, plant shutdowns, strikes or other work stoppages affecting production by such customers), continued reduction of prices to these customers, or a

failure to obtain new customers, could have a significant adverse effect on our financial results. There can be no assurance that we will not lose all or a portion of sales to our large volume customers, or that we will be able to offset any reduction of prices to these customers with reductions in our costs or by obtaining new customers.

During fiscal year 2021, sales to customers that accounted for 10 percent or more of our total sales included AB Volvo, Daimler AG and PACCAR, which represented approximately 24 percent, 16 percent and 13 percent, respectively. No other customer accounted for 10 percent or more of our total sales in fiscal year 2021.

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

Our ability to manage rapidly changing production and sales volume in the commercial vehicle market may adversely affect our results of operations.

Production and sales in the commercial vehicle market have historically been volatile. Our business may experience difficulty in adapting to rapidly changing production and sales volumes. In an upturn of the cycle, when demand increases for production, we may have difficulty in meeting such extreme or rapidly increasing demand. This difficulty may include not having sufficient manpower or working capital to meet the needs of our customers or relying on other suppliers who may not be able to respond quickly to a changed environment when demand increases rapidly. In addition, certain volume requirements can necessitate premium freight and the associated costs to support the customer demand. In contrast, in the downturn of the cycle, we may have difficulty sustaining profitability given fixed costs (as further discussed below).

A downturn in the global economy could have a material adverse effect on our results of operations, financial condition and cash flows.

The COVID-19 pandemic led to a significant downturn in the global economy, which adversely affected our results of operations, financial condition and cash flows during fiscal year 2021. Although there have been signs of a recovery, there is still uncertainty around the duration and breadth of the COVID-19 pandemic, and as a result the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time. In addition, past recessions have had a significant adverse impact on our business, customers and suppliers. Our cash and liquidity needs are impacted by the level, variability and timing of our customers' worldwide vehicle production and other factors outside of our control. If the global economy experiences another significant decline in the future, our results of operations, financial condition and cash flow would be materially adversely affected.

Our levels of fixed costs can make it difficult to adjust our cost base to the extent necessary, or to make such adjustments on a timely basis, and continued volume declines can result in non-cash impairment charges as the value of certain long-lived assets is reduced. As a result, our financial condition and results of operations have been and would be expected to continue to be adversely affected during periods of prolonged declining production and sales volumes in the commercial vehicle markets.

The negative impact on our financial condition and results of operations from continued volume declines could also have negative effects on our liquidity. If cash flows are not available from our operations, we may be required to rely on the banking and credit markets to meet our financial commitments and short-term liquidity needs; however, we cannot predict whether that funding will be available at all or on commercially reasonable terms. In addition, in the event of reduced sales, levels of receivables would decline, which would lead to a decline in funding available under our U.S. receivables facilities or under our European factoring arrangements.

Our working capital requirements may negatively affect our liquidity and capital resources.

Our working capital requirements can vary significantly, depending in part on the level, variability and timing of our customers' worldwide vehicle production and payment terms with our customers and suppliers. As production volumes

increase, our working capital requirements to support the higher volumes generally increase. If our working capital needs exceed our cash flows from operations, we would look to our cash balances and for borrowings under our borrowing arrangements to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms or in adequate amounts.

In addition, since many of our accounts receivable factoring programs support our working capital requirements in Europe, any dissolution of the European monetary union, if it were to occur, or any other termination of our European factoring agreements could have a material adverse effect on our liquidity if we were unable to renegotiate such agreements or find alternative sources of liquidity.

One of our consolidated joint ventures in China participates in bills of exchange programs to settle accounts receivable from its customers and obligations to its trade suppliers. These programs are common in China and generally require the participation of local banks. Any disruption in these programs, could have an adverse effect on our liquidity if we were unable to find alternative sources of liquidity.

We operate in an industry that is cyclical and that has periodically experienced significant year-to-year fluctuations in demand for vehicles; we also experience seasonal variations in demand for our products.

The industries in which we operate have been characterized historically by significant periodic fluctuations in overall demand for medium- and heavy-duty trucks and other vehicles for which we supply products, resulting in corresponding fluctuations in demand for our products. The length and timing of any cycle in the vehicle industry cannot be predicted with certainty.

Production and sales of the vehicles for which we supply products generally depend on economic conditions and a variety of other factors that are outside our control, including freight tonnage, customer spending and preferences, vehicle age, labor relations and regulatory requirements. In particular, demand for our Commercial Truck segment products can be affected by a pre-buy before the effective date of new regulatory requirements, such as changes in emissions standards. Historically, implementation of new, more stringent, emissions standards has increased heavy-duty truck demand prior to the effective date of the new standards, and correspondingly decreased this demand after the new standards are implemented. In addition, any expected increase in the heavy-duty truck demand prior to the effective date of new emissions standards may be offset by instability in the financial markets and resulting economic contraction in the U.S. and worldwide markets.

Sales from the aftermarket portion of our Aftermarket and Industrial segment depend on overall levels of truck ton miles and gross domestic product (GDP), among other things, and may be influenced by times of slower economic growth or economic contraction based on the average age of commercial truck fleets.

We may also experience seasonal variations in the demand for our products to the extent that vehicle production fluctuates. Historically, for most of our business, demand has been somewhat lower in the quarters ended September 30 and December 31, when OEM plants may close during model changeovers and vacation and holiday periods or when there are fewer selling days during the quarter. In addition, our aftermarket business and our operations in India generally experience seasonally higher demand in the quarter ending March 31.

Rising prices for raw materials, as well as labor and transportation costs, are adversely affecting, and are expected to continue adversely affecting, our business and financial results.

Prices of raw materials, primarily steel, for our manufacturing needs and costs of labor and transportation have risen sharply over the past year. These steel price increases, along with increasing labor and transportation costs, are creating pressure on profit margins, and they are expected to continue unfavorably impacting our financial results going forward. While we have had steel pricing adjustment programs in place with most major OEMs, the price adjustment programs typically lag the increase in steel costs and have generally not contemplated all non-index-related increases in steel costs. Raw material price fluctuation, together with the volatility of the commodity markets, which can be impacted by a variety of factors, including changes in trade laws and tariffs, will continue to pose risks to our financial results. We are also experiencing ongoing labor shortages in the certain geographies and increased competition for qualified candidates. These shortages could adversely affect our ability to meet customer demand and are increasing labor costs, which reduce our profitability. If we are unable to pass price increases on to our customer base or otherwise mitigate the costs, our operating income could be adversely affected.

Escalating price pressures from customers may adversely affect our business.

To a certain extent, pricing pressure by OEMs is a characteristic of the commercial vehicle industry. Virtually all OEMs have price reduction initiatives and objectives each year with their suppliers, and such actions are expected to continue in the future. Accordingly, we must be able to reduce our operating costs in order to maintain our current margins. Price reductions have impacted our margins and may do so in the future. There can be no assurance that we will be able to avoid future customer price reductions or offset future customer price reductions through improved operating efficiencies, new manufacturing processes, sourcing alternatives or other cost reduction initiatives.

We operate in a highly competitive industry.

Each of Meritor's businesses operates in a highly competitive environment. We compete worldwide with a number of North American and international providers of components and systems, some of which are owned by or associated with some of our customers. Certain OEMs manufacture products for their own use that compete with the types of products we supply, and any future increase in this activity could displace Meritor's sales. In addition, cost reduction strategies in our industry have led to an increase in the consolidation and globalization of OEMs and their suppliers, which could increase the amount of competition or displacement we face from OEMs that manufacture products similar to ours for their own use or from suppliers that are affiliated with or otherwise supported by OEMs.

Technological changes in our industry could materially reduce the demand for our products and services.

The commercial vehicle market is experiencing a period of significant technological change as a result of the trends toward electrified drivetrains and the integration of advanced electronics into traditional products. These trends have led to an increase in the significance of technology to our current and future products and the amount of capital we need to invest to develop these new technologies, as well as an increase in the amount of competition we face from technology focused new market entrants. We are investing in the development of new products and technologies, but the future market acceptance and investment returns for these products are uncertain. If we misjudge the amount of capital to invest or are otherwise unable to continue providing products that meet our customers’ needs in this environment of rapid technological change, our market competitiveness could be adversely affected as demand for our current products and services is reduced.

A disruption in supply of raw materials or parts could impact our production and increase our costs.

Some of our significant suppliers have experienced weak financial conditions in the past. In addition, some of our significant suppliers are located in developing countries. We are dependent upon the ability of our suppliers to meet performance and quality specifications and delivery schedules. The inability of a supplier to meet these requirements, the loss of a significant supplier, or any labor issues or work stoppages at a significant supplier could disrupt the supply of raw materials and parts to our facilities and could have an adverse effect on us.

Work stoppages or similar difficulties could significantly disrupt our operations.

A work stoppage at one or more of our manufacturing facilities could have a material adverse effect on our business. In addition, if a significant customer were to experience a work stoppage, that customer could halt or limit purchases of our products, which could result in shutting down the related manufacturing facilities. Also, a significant disruption in the supply of a key component due to a work stoppage at one of our suppliers could result in shutting down manufacturing facilities, which could have a material adverse effect on our business.

Our international operations are subject to a number of risks.

We have a significant number of facilities and operations outside the United States, including investments and joint ventures in developing countries. During fiscal year 2021, approximately 46 percent of our sales from continuing operations were generated outside of the United States. Our strategy to grow in emerging markets may put us at risk due to the risks inherent in operating in such markets. Our international operations are subject to a number of risks inherent in operating abroad, including, but not limited to:

• Risks with respect to currency exchange rate fluctuations (as more fully discussed above);

• Risks to our liquidity if the European monetary union were to dissolve and we were unable to renegotiate European factoring agreements or find alternative sources of liquidity;

• Risks arising in the event one or more countries exit the European monetary union;

• Local economic and political conditions;

• Disruptions of capital and trading markets;

• Possible terrorist attacks or acts of aggression that could affect vehicle production or the availability of raw materials or supplies;

• Restrictive governmental actions (such as restrictions on transfer of funds and trade protection measures, including import and export duties, quotas and customs duties and tariffs);

• Changes in legal or regulatory requirements;

• Import or export licensing requirements;

• Limitations on the repatriation of funds;

• Difficulty in obtaining distribution and support;

• Nationalization;

• The laws and policies of the United States and foreign governments affecting trade, foreign investment and loans;

• The ability to attract and retain qualified personnel;

• Tax laws; and

• Labor disruptions.

There can be no assurance that these risks will not have a material adverse impact on our ability to increase or maintain our foreign sales or on our financial condition or results of operations.

Certain of our operations are conducted through joint ventures, which have unique risks.

We conduct certain of our operations through joint ventures, many of which act as our suppliers, pursuant to the terms of the agreements that we entered into with our partners. We may share management responsibilities and information with one or more partners that may not share our goals and objectives. Additionally, one or more partners may fail to satisfy contractual obligations, conflicts may arise between us and any of our partners, the ownership of one of our partners may change or our ability to control decision making or compliance with applicable rules and regulations may be limited. Additionally, our ability to sell our interest in a joint venture may be subject to contractual and other limitations. Accordingly, any of the foregoing could adversely affect our results of operations, financial condition and cash flow.

Our strategic initiatives may be unsuccessful, may take longer than anticipated, or may result in unanticipated costs.

The success and timing of any future divestitures and acquisitions will depend on a variety of factors, many of which are not within our control. If we engage in acquisitions, we may finance these transactions by borrowing or issuing additional debt or equity securities. The additional debt from any such acquisitions, if consummated, could increase our debt to capitalization ratio. In addition, the ultimate benefit of any acquisition would depend on our ability to successfully integrate the acquired entity or assets into our existing business and to achieve any projected synergies. There is also no assurance that the total costs associated with any current or future restructuring will not exceed our estimates, or that we will be able to achieve the intended benefits of these restructurings.

Shifting trade policies, including the imposition of tariffs and the resulting consequences, could adversely affect our results of operations.

In recent years, the U.S. government has attempted to renegotiate or terminate certain existing bilateral or multi-lateral trade agreements. It also imposed tariffs on certain foreign goods, including steel and certain commercial vehicle parts, which

resulted in increased costs for goods imported into the U.S. In response to these tariffs, a number of U.S. trading partners imposed retaliatory tariffs on a wide range of U.S. products, making it more costly for us to export our products to those countries. If we are unable to pass price increases on to our customer base or otherwise mitigate the costs, or if demand for our exported products decreases due to the higher cost, our results of operations could be materially adversely affected. In addition, further tariffs or other trade restrictions could be implemented on a broader range of products or raw materials. Any resulting environment of retaliatory trade or other practices could have a material adverse effect on our business, results of operations, customers, suppliers and the global economy.

Financial Risks

Our liquidity, including our access to capital markets and financing, could be constrained by limitations in the overall credit market, our credit ratings, our ability to comply with financial covenants in our debt instruments, and our suppliers suspending normal trade credit terms on our purchases, or by other factors beyond our control.

Our current senior secured revolving credit facility matures in June 2024. Upon expiration of this facility, we will require a new or renegotiated facility (which may be smaller and have less favorable terms than our current facility) or other financing arrangements. 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, and there is no guarantee that we will be able to access additional capital.

On November 15, 2021, our Standard & Poor’s corporate credit rating and senior unsecured credit rating were BB and BB-, respectively, and our Moody’s Investors Service corporate credit rating and senior unsecured credit rating were Ba3 and B1, respectively. Any lowering of our credit ratings could increase our cost of future borrowings, reduce our access to capital markets and result in lower trading prices for our securities.

Our liquidity could also be adversely impacted if our suppliers were to suspend normal trade credit terms and require more accelerated payment terms, including payment in advance or payment on delivery of purchases. If this were to occur, we would be dependent on other sources of financing to bridge the additional period between payment of our suppliers and receipt of payments from our customers.

Disruptions in the financial markets could impact the availability and cost of credit which could negatively affect our business.

Disruptions in the financial markets, including the bankruptcy, insolvency or restructuring of certain financial institutions, and the lack of liquidity generally could impact the availability and cost of incremental credit for many companies and may adversely affect the availability of credit already arranged. Such disruptions could adversely affect the U.S. and world economy, further negatively impacting consumer spending patterns in the transportation and industrial sectors. In addition, as our customers and suppliers respond to rapidly changing consumer preferences, they may require access to additional capital. If that capital is not available or its cost is prohibitively high, their businesses would be negatively impacted, which could result in further restructuring, insolvency or even reorganization under bankruptcy laws. Any such negative impact, in turn, could negatively affect our business either through loss of sales to any of our customers so affected or through inability to meet our commitments (or inability to meet them without excess expense) because of loss of supplies from any of our suppliers so affected. There are no assurances that government responses to these disruptions would restore consumer confidence or improve the liquidity of the financial markets.

In addition, disruptions in the capital and credit markets could adversely affect our ability to draw on our senior secured revolving credit facility or our U.S. accounts receivable securitization facility. Our access to funds under the facilities is dependent on the ability of the banks that are parties to the facilities to meet their funding commitments. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from Meritor and other borrowers within a short period of time. Longer-term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged.

A violation of the financial covenants in our senior secured revolving credit facility could result in a default thereunder and could lead to an acceleration of our obligations under this facility and, potentially, other indebtedness.

Our ability to borrow under our existing financing arrangements depends on our compliance with covenants in the related agreements, including covenants in our senior secured revolving credit facility that require compliance with certain financial ratios as of the end of each fiscal quarter. To the extent that we are unable to maintain compliance with these requirements or the financial ratio covenants due to one or more of the various risk factors discussed herein or otherwise, our ability to borrow, and our liquidity, would be adversely impacted.

Availability under the senior secured revolving credit facility is subject to a financial covenant based on the ratio of our priority debt (consisting principally of amounts outstanding under the senior secured revolving credit facility, U.S. accounts receivable securitization and factoring programs, and third-party non-working capital foreign debt) to EBITDA. We are required to maintain a total priority-debt-to-EBITDA ratio, as defined in the agreement, of not more than 2.25 to 1.00 as of the last day of each fiscal quarter through maturity.

If an amendment or waiver is needed (in the event we do not comply with one of these covenants) and not obtained, we would be in violation of that covenant, and the lenders would have the right to accelerate the obligations upon the vote of the lenders holding more than 50% of outstanding loans thereunder. A default under the senior secured revolving credit facility could also constitute a default under our outstanding convertible notes, as well as our U.S. receivables facility, and could result in the acceleration of these obligations. In addition, a default under our senior secured revolving credit facility could result in a cross-default or the acceleration of our payment obligations under other financing agreements. If our obligations under our senior secured revolving credit facility and other financing arrangements are accelerated as described above, our assets and cash flow may be insufficient to fully repay these obligations, and the lenders under our senior secured revolving credit facility could institute foreclosure proceedings against our assets.

Exchange rate fluctuations could adversely affect our financial condition and results of operations.

As a result of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, including risks in connection with our transactions that are denominated in foreign currencies. While we employ financial instruments to hedge certain of our foreign currency exchange risks relating to these transactions, our efforts to manage these risks may not be successful. In addition, we translate sales and other results denominated in foreign currencies into U.S. dollars for purposes of our consolidated financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies generally will have a negative impact on our reported revenues and operating income, while depreciation of the U.S. dollar against these foreign currencies will generally have a positive effect on reported revenues and operating income. For fiscal years 2019 and 2020, our reported financial results were adversely affected by appreciation of the U.S. dollar against foreign currencies. For fiscal year 2021, our reported financial results were positively affected by depreciation of the U.S. dollar against foreign currencies.

Environmental, Tax, Asbestos and Other Regulatory Risks

We are exposed to environmental, health and safety and product liabilities.

Our business is subject to liabilities with respect to environmental, health and safety matters. In addition, we are required to comply with federal, state, local and foreign laws and regulations governing the protection of the environment and health and safety, and we could be held liable for damages arising out of exposure to hazardous substances or other environmental or natural resource damages. Environmental, health and safety laws and regulations are complex, change frequently and tend to be increasingly stringent. As a result, our future costs to comply with such laws and regulations may increase significantly. There is also an inherent risk of exposure to warranty and product liability claims, as well as product recalls, in the commercial vehicle industry if our products fail to perform to specifications or are alleged to cause property damage, injury or death.

With respect to environmental liabilities, we have been designated as a potentially responsible party at ten Superfund sites (excluding sites as to which our records disclose no involvement or as to which our liability has been finally determined). In addition to the Superfund sites, various other lawsuits, claims and proceedings have been asserted against us alleging violations of U.S. and foreign federal, state and local environmental protection requirements or seeking remediation of alleged environmental impairments. We establish reserves for these liabilities when we determine that the company has a probable obligation and we can reasonably estimate it, but the process of estimating environmental liabilities is complex and dependent on evolving physical and scientific data at the site, uncertainties as to remedies and technologies to be used, and the outcome of discussions with regulatory agencies. The actual amount of costs or damages for which we may be held responsible could materially exceed our current estimates because of these and other uncertainties which make it difficult to predict actual costs

accurately. In future periods, new laws and regulations, changes in remediation plans, advances in technology and additional information about the ultimate clean-up remedy could significantly change our estimates and have a material impact on our financial position and results of operations. Management cannot assess the possible effect of compliance with future requirements.

Impairment in the carrying value of long-lived assets and goodwill could negatively affect our operating results and financial condition.

We have a significant amount of long-lived assets and goodwill on our Consolidated Balance Sheet. Under U.S. generally accepted accounting principles, long-lived assets, excluding goodwill, are required to be reviewed for impairment whenever adverse events or changes in circumstances indicate a possible impairment. If business conditions or other factors cause our operating results and cash flows to decline, we may be required to record non-cash impairment charges. Goodwill must be evaluated for impairment at least annually. If the carrying value of our reporting units exceeds their current fair value, the goodwill is considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and conditions that could result in impairment in the value of our long-lived assets and goodwill include changes impacting the industries in which we operate, particularly the impact of any downturn in the global economy, as well as competition and advances in technology, adverse changes in the regulatory environment, or other factors leading to reduction in expected long-term sales or operating results. If the value of long-lived assets or goodwill is impaired, our earnings and financial condition could be adversely affected.

The value of our deferred tax assets could become impaired, which could materially and adversely affect our results of operations and financial condition.

In accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 "Income Taxes," each quarter we determine the probability of the realization of deferred tax assets using significant judgments and estimates with respect to, among other things, historical operating results, expectations of future earnings and tax planning strategies. If we determine in the future that there is not sufficient positive evidence to support the valuation of these assets, due to the risk factors described herein or other factors, we may be required to adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in material non-cash expenses in the period in which the valuation allowance is adjusted and could have a material adverse effect on our results of operations and financial condition. In addition, future changes in laws or regulations could have a material impact on the company's overall tax position.

Our overall effective tax rate is equal to our total tax expense as a percentage of our total earnings before tax. However, tax expenses and benefits are determined separately for each tax paying component (an individual entity) or group of entities that is consolidated for tax purposes in each jurisdiction. Losses in certain jurisdictions that have valuation allowances against their deferred tax assets provide no current financial statement tax benefit unless required under the intra-period allocation requirements of FASB ASC Topic 740, "Income Taxes" ("ASC Topic 740"). As a result, changes in the mix of projected earnings between jurisdictions, among other factors, could have a significant impact on our overall effective tax rate.

Our unrecognized tax benefits recorded in accordance with ASC Topic 740 could significantly change.

ASC Topic 740 defines the confidence level that a tax position must meet in order to be recognized in the financial statements. This topic requires that the tax effects of a position be recognized only if it is "more-likely-than-not" to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more likely than not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. In the event that the more-likely-than-not threshold is not met, we would be required to change the relevant tax position, which could have an adverse effect on our results of operations and financial condition.

We may be restricted on the use of tax attributes from a tax law "ownership change."

Sections 382 and 383 of the U.S. Internal Revenue Code of 1986, as amended, limit the ability of a corporation that undergoes an "ownership change" to use its tax attributes, such as net operating losses and tax credits. In general, an "ownership change" occurs if shareholders owning five percent or more (applying certain look-through rules) of an issuer's outstanding common stock, collectively, increase their ownership percentage by more than fifty percentage points within any three-year period over such shareholders' lowest percentage ownership during this period. If we were to issue new shares of stock, such new shares could contribute to such an "ownership change" under U.S. tax law. Moreover, not every event that could contribute

to such an "ownership change" is within our control. If an "ownership change" under Sections 382 or 383 were to occur, our ability to utilize tax attributes in the future may be limited.

We are exposed to asbestos litigation liability.

We, along with many other companies, have been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos used in certain components of products of Rockwell International Corporation ("Rockwell"). Liability for these claims was transferred to us at the time of the spin-off of Rockwell's automotive business to Meritor in 1997.

The uncertainties of asbestos claims and other litigation, including the outcome of litigation with insurance companies regarding the scope of asbestos coverage and the long-term solvency of our insurance carriers, make it difficult to predict accurately the ultimate resolution of asbestos claims. The possibility of adverse rulings or new legislation affecting asbestos claim litigation or the settlement process increases that uncertainty. Although we have established reserves to address asbestos liability and corresponding receivables for recoveries from our insurance carriers, if our assumptions with respect to 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 asbestos-related claims, and the effect on us, could differ materially from our current estimates and, therefore, could have a material impact on our financial position and results of operations.

Intellectual Property, Information Security and Pension Risks

Assertions against us or our customers relating to intellectual property rights could materially impact our business.

Our industry is characterized by companies that hold large numbers of patents and other intellectual property rights and that vigorously pursue, protect and enforce intellectual property rights. From time to time, third parties may assert against us and our customers and distributors their patents and other intellectual property rights to technologies that are important to our business.

Claims that our products or technology infringe third-party intellectual property rights, regardless of their merit or resolution, are frequently costly to defend or settle, and divert the efforts and attention of our management and technical personnel. In addition, many of our supply agreements require us to indemnify our customers and distributors from third-party infringement claims, which have in the past and may in the future require that we defend those claims and might require that we pay damages in the case of adverse rulings. Claims of this sort also could harm our relationships with our customers and might deter future customers from doing business with us. We do not know whether we will prevail in these proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If any pending or future proceedings result in an adverse outcome, we could be required to:

• Cease the manufacture, use or sale of the infringing products or technology;

• Pay substantial damages for infringement;

• Expend significant resources to develop non-infringing products or technology;

• License technology from the third-party claiming infringement, which license may not be available on commercially reasonable terms, or at all;

• Enter into cross-licenses with our competitors, which could weaken our overall intellectual property portfolio; or

• Pay substantial damages to our customers or end users to discontinue use or replace infringing technology with non-infringing technology.

Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations.

We utilize a significant amount of intellectual property in our business. If we are unable to protect our intellectual property, our business could be adversely affected.

Our success depends in part upon our ability to protect our intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, copyrights, trademarks and trade secrets, as well as customary contractual protections with our customers, distributors, employees and consultants, and security measures to protect our trade secrets. We cannot guarantee that:

• Any of our present or future patents will not lapse or be invalidated, circumvented, challenged, abandoned or, in the case of third-party patents licensed or sub-licensed to us, be licensed to others;

• Any of our pending or future patent applications will be issued or have the coverage originally sought;

• Our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; or

• Any of the trademarks, trade secrets or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged, abandoned or licensed to others.

In addition, we may not receive competitive advantages from the rights granted under our patents and other intellectual property rights. Our competitors may develop technologies that are similar or superior to our proprietary technologies, duplicate our proprietary technologies, or design around the patents we own or license. Our existing and future patents may be circumvented, blocked, licensed to others, or challenged as to inventorship, ownership, scope, validity or enforceability. Effective intellectual property protection may be unavailable or more limited in one or more relevant jurisdictions relative to those protections available in the U.S., or may not be applied for in one or more relevant jurisdictions. If we pursue litigation to assert our intellectual property rights, an adverse decision in any of these legal actions could limit our ability to assert our intellectual property rights, limit the value of our technology or otherwise negatively impact our business, financial condition and results of operations.

We are a party to a number of patent and intellectual property license agreements. Some of these license agreements require us to make one-time or periodic payments. We may need to obtain additional licenses or renew existing license agreements in the future. We are unable to predict whether these license agreements can be obtained or renewed on acceptable terms.

A breach or failure of our information technology infrastructure could adversely impact our business and operations.

We recognize the increasing volume of cyber-attacks and employ commercially practical efforts to provide reasonable assurance such attacks are appropriately mitigated. Each year, we evaluate the threat profile of our industry to stay abreast of trends and to provide reasonable assurance our existing countermeasures will address any new threats identified. Despite our implementation of security measures, our IT systems and those of our service providers are vulnerable to circumstances beyond our reasonable control, including acts of malfeasance, acts of terror, acts of government, natural disasters, civil unrest, and denial of service attacks, any of which may lead to the theft of our intellectual property and trade secrets or business disruption. To the extent that any disruption or security breach results in a loss or damage to our data or inappropriate disclosure of confidential information, it could cause significant damage to our reputation, affect our relationships with our customers, suppliers and employees, lead to claims against us and ultimately harm our business. Additionally, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

We are exposed to the rising cost of pension benefits.

The commercial vehicle industry, like other industries, continues to be impacted by the cost of pension benefits. In estimating our expected obligations under our pension plans, we make certain assumptions as to economic and demographic factors, such as discount rates and investment returns. If actual experience with these factors is worse than our assumptions, our obligations could be larger than estimated which could in turn increase the amount of mandatory contributions to these plans in the coming years. Our pension plans were overfunded by $51 million as of September 30, 2021.

Item 7. Management’s Discussion and Analysis of Financial Condition 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 products, systems, modules and components to original equipment manufacturers ("OEMs") and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, military, bus and coach, construction, and other industrial OEMs and certain aftermarkets. Meritor common stock is traded on the New York Stock Exchange under the ticker symbol MTOR.

COVID-19 Pandemic Update

The COVID-19 pandemic adversely affected our financial performance throughout most of fiscal year 2020 and the beginning of fiscal year 2021, however the direct adverse impacts of the pandemic on our operations and financial performance started to dissipate over the course of the third fiscal quarter of fiscal year 2021. All of our facilities have been fully operational since the end of fiscal year 2020 and our salaried employees have begun returning to work in person, in each case under enhanced safety guidelines. Although we are optimistic that the worst of the pandemic is behind us, the progression of the pandemic, and its direct and indirect impacts on our markets, customers, operations and financial performance, have been unpredictable. As a result of this continued uncertainty, there may still be impacts on our industry, customers, operations, workforce, supply chains, distribution systems and availability of manufacturing inputs in the future which cannot be reasonably estimated at this time.

Change in Non-GAAP Measures

Beginning in the second quarter of fiscal year 2021, we revised our presentation of two non-GAAP measures, adjusted income (loss) from continuing operations attributable to the company and adjusted diluted earnings (loss) per share from continuing operations, to better align with the SEC’s guidance. An adjustment for non-cash tax expense related to the use of deferred tax assets in jurisdictions with net operating loss carryforwards or tax credits will no longer be included in these two non-GAAP measures; however the underlying availability and the benefits of the tax attributes to offset future taxable income has not changed. For comparability, references to prior period non-GAAP measures have been updated to show the effect of omitting this adjustment from adjusted income (loss) from continuing operations attributable to the company and adjusted diluted earnings (loss) per share from continuing operations.

Fiscal Year 2021 Results

Our sales for fiscal year 2021 were $3,833 million, an increase from $3,044 million in the prior year. The increase in sales was driven primarily by higher global truck production in all markets.

Net income attributable to Meritor for fiscal years 2021 and 2020 wa s $199 million and $245 million, resp ectively. The decrease in net income year over year was driven primarily by income, net of tax, associated with the termination of the company's distribution arrangement with WABCO Holdings, Inc. ("WABCO") in fiscal 2020 and higher freight, steel and electrification costs in fiscal year 2021, partially offset by conversion on higher revenue.

Net income from continuing operations attributable to the company for fiscal years 2021 and 2020 was $200 million and $244 million, respectively. Adjusted income from continuing operations attributable to the company for fiscal years 2021 and 2020 was $195 million and $73 million, respectively (see Non-GAAP Financial Measures below).

Adjusted EBITDA (see Non-GAAP Financial Measures below) for fiscal year 2021 was $411 million compared to $272 million in fiscal year 2020. Our adjusted EBITDA margin (see Non-GAAP Financial Measures below) in fiscal year 2021 was 10.7 percent compared to 8.9 percent in the same period a year ago. The increase in adjusted EBITDA and adjusted EBITDA

margin year over year were driven primarily by higher sales volumes, partially offset by higher freight, steel and electrification costs.

Cash flows provided by operating activities were $197 million in fiscal year 2021 compared to $265 million in the prior fiscal year. The decrease in cash provided by operating activities was driven primarily by $265 million of cash received in fiscal year 2020 from the termination of the distribution arrangement with WABCO and an increase in fiscal year 2021 working capital requirements.

Capital Markets Transactions

During the first quarter of fiscal year 2021, we issued $275 million of 4.50 percent notes due 2028 (the "4.50 Percent Notes"). Net proceeds from the offering of the 4.50 Percent Notes, as well as cash on hand, were used to repay $275 million of the outstanding $450 million aggregate principal amount of our 6.25 percent notes due 2024 (the "6.25 Percent Notes due 2024"). The redemption price was equal to 102.083% of the principal amount of the 6.25 Percent Notes due 2024 redeemed, plus accrued and unpaid interest. These redemptions were accounted for as an extinguishment of debt, and we recognized a loss on debt extinguishment of $8 million.

During the first quarter of fiscal year 2021, we issued a notice of redemption for all of the outstanding $23 million aggregate principal amount of our 7.875 percent convertible notes due 2026 (the "7.875 Percent Convertible Notes"). All remaining outstanding 7.875 Percent Convertible Notes were surrendered in November 2020 for conversion and were settled in cash up to the accreted principal amount and the remainder of the conversion obligation. The conversion of the 7.875 Percent Convertible Notes was settled for $53 million, of which $23 million represented principal repayment and $30 million represented the payment of conversion in excess of the accreted principal. There was no loss on extinguishment. As of December 31, 2020, the 7.875 Percent Convertible Notes were fully redeemed.

During the third quarter of fiscal year 2021, we redeemed all of the outstanding $175 million aggregate principal amount of our 6.25 Percent Notes due 2024 using cash on hand. The redemption price was equal to 101.042% of the principal amount of the 6.25 Percent Notes due 2024 redeemed, plus accrued and unpaid interest. This redemption was accounted for as an extinguishment of debt, and we recognized a loss on debt extinguishment of $3 million. As of June 30, 2021, the 6.25 Percent Notes due 2024 were fully redeemed.

Equity Repurchase Authorization

During fiscal year 2021, we repurchased 2.4 million shares of common stock for $59 million pursuant to the November 2019 equity repurchase authorization described in the Liquidity section below, completing the existing equity repurchase authorization.

On July 28, 2021, the Board of Directors authorized the repurchase of an additional $250 million of the company’s common stock. Repurchases can be made from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and the company’s debt covenants. As of September 30, 2021, the amount remaining available for repurchases under this common stock repurchase authorization was $250 million.

Trends and Uncertainties

Industry Production Volumes

The following table reflects estimated on-highway commercial truck production volumes for selected original equipment (OE) markets based on available sources and management's estimates.

Year Ended September 30,

Estimated Commercial Truck production (in thousands):

North America, Heavy-Duty Trucks

North America, Medium-Duty Trucks

Western Europe, Heavy- and Medium-Duty Trucks

South America, Heavy- and Medium-Duty Trucks

India, Heavy- and Medium-Duty Trucks

Across most regions, we are expecting production build to increase in fiscal year 2022, as discussed below.

North America:

Production volumes in fiscal year 2021 increased from the production levels experienced in fiscal year 2020. We expect fiscal 2022 Heavy-Duty Truck production volumes to increase compared with the levels experienced in fiscal year 2021.

Western Europe:

During fiscal year 2021, production volumes in Western Europe significantly increased from the production levels experienced in fiscal year 2020. We expect fiscal year 2022 production volumes to remain consistent with the levels experienced in fiscal year 2021.

South America:

During fiscal year 2021, production volumes in South America significantly increased from the levels experienced in fiscal year 2020. We expect fiscal year 2022 production volumes to remain consistent with the levels experienced in fiscal year 2021.

China:

During fiscal year 2021, production volumes in China remained consistent with the levels experienced in fiscal year 2020. We expect fiscal year 2022 production volumes in China to remain consistent with the levels experienced in fiscal year 2021.

India:

During fiscal year 2021, production volumes in India significantly increased from the levels experienced in fiscal year 2020. We expect fiscal year 2022 production volumes in India to increase from the levels experienced in fiscal year 2021.

Industry-Wide and Other Significant Issues

Our business continues to address a number of challenging industry-wide issues including the following:

• Uncertainty regarding the duration and severity of the COVID-19 pandemic and its effects on public health, the global economy, financial markets, and our operations and customers, including additional expense related to enhancing safety measures for our employees;

• Uncertainty around the global economic outlook;

• Volatility in price and availability of steel, components, labor, transportation costs and other commodities, including energy;

• Potential for disruptions in the financial markets and their impact on the availability and cost of credit;

• Technological changes in our industry as a result of the trends toward electrified drivetrains and the integration of advanced electronics and their impact on the demand for our products and services;

• Impact of currency exchange rate volatility; and

• Consolidation and globalization of OEMs and their suppliers.

Other significant factors that could affect our results and liquidity include:

• Significant contract awards or losses of existing contracts or failure to negotiate acceptable terms in contract renewals;

• Ability to successfully execute and implement strategic initiatives, including the ability to launch a significant number of new products, potential product quality issues, and obtain new business;

• Ability to manage possible adverse effects on European markets or our European operations, or financing arrangements related thereto, or in the event one or more countries exit the European monetary union;

• Ability to further implement planned productivity, cost reduction and other margin improvement initiatives;

• Ability to work with our customers to manage rapidly changing production volumes, including in the event of production interruptions affecting us, our customers or our suppliers;

• Competitively driven price reductions to our customers or potential price increases from our suppliers;

• Additional restructuring actions and the timing and recognition of restructuring charges, including any actions associated with prolonged softness in markets in which we operate;

• Higher-than-planned warranty expenses, including the outcome of known or potential recall campaigns;

• Uncertainties of asbestos claim, environmental and other legal proceedings, the long-term solvency of our insurance carriers and the potential for higher-than-anticipated costs resulting from environmental liabilities, including those related to site remediation;

• Significant pension costs; and

• Restrictive government actions (such as restrictions on transfer of funds and trade protection measures, including import and export duties, quotas and customs duties and tariffs).

NON-GAAP FINANCIAL MEASURES

In addition to the results reported in accordance with accounting principles generally accepted in the United States ("GAAP"), we have provided information regarding non-GAAP financial measures. These non-GAAP financial measures include adjusted income (loss) from continuing operations attributable to the company, adjusted diluted earnings (loss) per share from continuing operations, adjusted EBITDA, adjusted EBITDA margin, segment adjusted EBITDA, segment adjusted EBITDA margin, free cash flow and free cash flow conversion.

Adjusted income (loss) from continuing operations attributable to the company and adjusted diluted earnings (loss) per share from continuing operations are defined as reported income (loss) from continuing operations and reported diluted earnings (loss) per share from continuing operations before restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA is defined as income (loss) from continuing operations before interest, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA margin is defined as adjusted EBITDA divided by consolidated sales from continuing operations. Segment adjusted EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, noncontrolling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense, asset impairment charges and other special items as determined by management. Segment adjusted EBITDA excludes unallocated legacy and corporate expense (income), net. Segment adjusted EBITDA margin is defined as segment adjusted EBITDA divided by consolidated sales from continuing operations, either in the aggregate or by segment as applicable. Free cash flow is defined as cash flows provided by (used for) operating activities less capital expenditures. Free cash flow conversion is defined as free cash flow over adjusted income from continuing operations attributable to the company. Beginning in the second quarter of

fiscal year 2021, the company no longer includes an adjustment for non-cash tax expense related to the use of deferred tax assets in jurisdictions with net operating loss carryforwards or tax credits in adjusted income (loss) from continuing operations attributable to the company and adjusted diluted earnings (loss) per share from continuing operations.

Management believes these non-GAAP financial measures are useful to both management and investors in their analysis of the company's financial position and results of operations. In particular, adjusted EBITDA, adjusted EBITDA margin, segment adjusted EBITDA, segment adjusted EBITDA margin, adjusted income (loss) from continuing operations attributable to the company, adjusted diluted earnings (loss) per share from continuing operations and free cash flow conversion are meaningful measures of performance to investors as they are commonly utilized to analyze financial performance in our industry, perform analytical comparisons, measure value creation, benchmark performance between periods and measure our performance against externally communicated targets.

Free cash flow is used by investors and management to analyze our ability to service and repay debt and return value directly to shareholders. Free cash flow conversion is a specific financial measure of our M2022 plan used to measure the company's ability to convert earnings to free cash flow and provides useful information about our ability to achieve strategic goals.

Management uses the aforementioned non-GAAP financial measures for planning and forecasting purposes, and segment adjusted EBITDA is also used as the primary basis for the Chief Operating Decision Maker ("CODM") to evaluate the performance of each of our reportable segments.

Our Board of Directors uses adjusted EBITDA margin, free cash flow, adjusted diluted earnings (loss) per share from continuing operations and free cash flow conversion as key metrics to determine management’s performance under our performance-based compensation plans, provided that, solely for this purpose, adjusted diluted earnings (loss) per share from continuing operations also includes an adjustment for the use of deferred tax assets in jurisdictions with net operating loss carryforwards or tax credits.

Adjusted income (loss) from continuing operations attributable to the company, adjusted diluted earnings (loss) per share from continuing operations, adjusted EBITDA, adjusted EBITDA margin, segment adjusted EBITDA, segment adjusted EBITDA margin and free cash flow conversion should not be considered a substitute for the reported results prepared in accordance with GAAP and should not be considered as an alternative to net income or cash flow conversion calculations as an indicator of our financial performance. Free cash flow and free cash flow conversion should not be considered a substitute for cash provided by (used for) operating activities, or other cash flow statement data prepared in accordance with GAAP, or as a measure of financial position or liquidity. In addition, these non-GAAP cash flow measures do not reflect cash used to repay debt or cash received from the divestitures of businesses or sales of other assets and thus do not reflect funds available for investment or other discretionary uses. These non-GAAP financial measures, as determined and presented by the company, may not be comparable to related or similarly titled measures reported by other companies. Set forth below are reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP.

Adjusted income (loss) from continuing operations attributable to the company and adjusted diluted earnings (loss) per share from continuing operations are reconciled to income (loss) from continuing operations attributable to the company and diluted earnings (loss) per share from continuing operations below (in millions, except per share amounts).

Year Ended September 30,

Income from continuing operations attributable to the company

Restructuring costs

Loss on debt extinguishment

Asset impairment charges

U.S. tax reform impacts (1)

Tax valuation allowance reversal, net and other (2)

Transaction costs (3)

Income from WABCO distribution termination

Brazilian VAT credit

Asbestos related items (4)

Tax initiatives

Income tax expense (5)

Adjusted income from continuing operations attributable to the company

Diluted earnings per share from continuing operations

Impact of adjustments on diluted earnings per share

Adjusted diluted earnings per share from continuing operations

(1) The year ended September 30, 2019 includes a one time net charge of $9 million recorded for an election made that will allow for future tax-free repatriation of cash to the United States and $12 million of non-cash tax benefit related to the one time deemed repatriation of accumulated foreign earnings.

(2) The year ended September 30, 2019 includes a $3 million decrease in valuation allowances for certain U.S. state jurisdictions.

(3) Represents acquisition transaction fees and inventory step-up amortization.

(4) The year ended September 30, 2019 includes $31 million related to the remeasurement of the Maremont net asbestos liability based on the Maremont plan of reorganization (see Note 22 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data).

(5) The year ended September 30, 2021 includes $7 million of income tax expense related to the Brazilian VAT Credit, $2 million of income tax benefits related to restructuring and $2 million of income tax benefits for the loss on debt extinguishment. The year ended September 30, 2020 includes $62 million of income tax expense related to the WABCO distribution arrangement termination, $6 million of income tax benefits related to restructuring, $1 million of income tax benefits related to transaction costs and $1 million of income tax benefits related to asset impairment charges. The year ended September 30, 2019 includes $2 million of income tax benefits related to restructuring, $2 million of income tax benefits related to asset impairment and $6 million income tax expense related to asbestos related items.

Free cash flow is reconciled to cash flows provided by operating activities below (in millions).

Year Ended September 30,

Cash provided by operating activities

Capital expenditures

Free cash flow (1)

Free cash flow / Net income from continuing operations attributable to the company

Free cash flow conversion (Free cash flow / Adjusted income from continuing operations attributable to the company)

(1) The year ended September 30, 2020 includes $265 million of cash received from termination of the WABCO distribution arrangement. The year ended September 30, 2019 includes a $48 million contribution of cash to fund the Maremont 524(g) trust, as well as $2 million of Maremont cash.

Adjusted EBITDA and segment adjusted EBITDA are reconciled to net income attributable to Meritor, Inc. below (dollars in millions).

Year Ended September 30,

Net income attributable to Meritor, Inc.

Less: Income (loss) from discontinued operations, net of tax, attributable to Meritor, Inc.

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

Interest expense, net

Provision for income taxes

Depreciation and amortization

Restructuring costs

Asbestos related items

Transaction costs

Loss on sale of receivables

Asset impairment charges

Income from WABCO distribution termination

Brazilian VAT credit

Noncontrolling interests

Adjusted EBITDA

Adjusted EBITDA margin (1)

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

Segment adjusted EBITDA

Commercial Truck

Segment adjusted EBITDA

Segment adjusted EBITDA margin (3)

Aftermarket & Industrial

Segment adjusted EBITDA

Segment adjusted EBITDA margin (3)

(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 consolidated sales from continuing operations, either in the aggregate or by segment as applicable.

Non-Consolidated Joint Ventures

At September 30, 2021, our continuing operations included investments in joint ventures that are not majority owned or controlled and are accounted for under the equity method of accounting. Our investments in non-consolidated joint ventures totaled $132 million and $107 million at September 30, 2021 and 2020, respectively.

These strategic alliances provide for sales, product design, development and/or manufacturing in certain product and geographic areas. Aggregate sales of our non-consolidated joint ventures were $1,011 million, $696 million and $1,231 million in fiscal years 2021, 2020 and 2019, respectively.

Our equity in the earnings of affiliates was $34 million, $14 million and $31 million in fiscal years 2021, 2020 and 2019, respectively. The increase in equity in earnings of affiliates for fiscal year 2021 compared to fiscal year 2020 was primarily attributable to higher production volumes at our joint ventures. We received cash dividends from our affiliates of $7 million, $10 million and $23 million in fiscal years 2021, 2020 and 2019, respectively.

For more information about our non-consolidated joint ventures, see Note 12 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data .

Results of Operations

Fiscal Year 2021 Compared to Fiscal Year 2020

A detailed comparison of the Company’s fiscal year 2020 operating results to its fiscal year 2019 operating results can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s fiscal year 2020 Annual Report on Form 10-K filed November 12, 2020.

Sales

The following table reflects total company and business segment sales for fiscal years 2021 and 2020 (dollars in millions). The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales. Business segment sales include intersegment sales.

Dollar Change Due To

Dollar

Change

Change

Currency

Volume/ Other

Sales:

Commercial Truck

North America

Europe

South America

China

India

Other

Total External Sales

Intersegment Sales

Total Sales

Aftermarket & Industrial

North America

Europe

Other

Total External Sales

Intersegment Sales

Total Sales

Total External Sales

Commercial Truck sales were $3,008 million in fiscal year 2021, up 37 percent from fiscal year 2020. Higher sales were driven by higher global truck production in all markets.

Aftermarket & Industrial sales were $989 million in fiscal year 2021, up 1 percent from fiscal year 2020. Consistent year over year sales were primarily driven by higher volumes across the segment, partially offset by the termination of the WABCO distribution arrangement.

Year Ended September 30,

Increase (Decrease)

Change

Sales

Cost of sales

GROSS PROFIT

Selling, general and administrative

Income from WABCO distribution termination

Other operating expense, net

OPERATING INCOME

Other income, net

Equity in earnings of affiliates

Interest expense, net

INCOME BEFORE INCOME TAXES

Provision for income taxes

INCOME FROM CONTINUING OPERATIONS

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax

NET INCOME

Less: Net income attributable to noncontrolling interests

NET INCOME ATTRIBUTABLE TO MERITOR, INC.

Cost of Sales and Gross Profit

Cost of sales primarily represents material, labor and overhead production costs associated with the company’s products and production facilities. Cost of sales for fiscal year 2021 was $3,328 million, compared to $2,716 million in the prior year, representing a 23 percent increase, primarily driven by increased market volumes. Total cost of sales was approximately 87 percent of sales for fiscal year 2021, compared to approximately 89 percent for the prior fiscal year.

The following table summarizes significant factors contributing to the changes in costs of sales during fiscal year 2021 compared to the prior fiscal year (in millions):

Cost of Sales

Fiscal year ended September 30, 2020

Volumes, mix and other, net

Foreign exchange

Fiscal year ended September 30, 2021

Changes in the components of cost of sales year over year are summarized as follows (in millions):

Change in

Cost of Sales

Higher material costs

Higher labor and overhead costs

Other, net

Total change in cost of sales

Material costs represent the majority of our cost of sales and include raw materials, composed primarily of steel and purchased components. Material costs increased by $499 million compared to the prior fiscal year primarily due to increased volumes and higher freight and steel costs.

Labor and overhead costs increased by $120 million compared to the prior fiscal year primarily due to higher volumes in our markets.

Gross profit for fiscal year 2021 was $505 million, compared to $328 million in fiscal year 2020. Gross margin, as a percentage of sales, was 13.2 percent and 10.8 percent for fiscal years 2021 and 2020, respectively.

Other Income Statement Items

Selling, general and administrative expenses ("SG&A") were $270 million in fiscal year 2021, compared to $221 million in fiscal year 2020, an increase of $49 million. The increase was primarily due to higher incentive compensation costs and electrification costs, partly offset by headcount reductions and reduced travel expenditures.

Other operating expense, net for fiscal year 2021 was $17 million, compared to $40 million in fiscal year 2020. The decrease in other operating expense was primarily driven primarily by lower restructuring expense.

Other income, net for fiscal year 2021 was $61 million, compared to $46 million in fiscal year 2020. The increase was primarily driven by the recognition of $10 million of other income related to VAT credits in our wholly-owned Brazilian subsidiary during the second quarter of fiscal year 2021. During fiscal year 2021, the company recognized a $22 million pre-tax loss recovery, net of legal expenses, on the overpayment of value added taxes in Brazil. Of the amount recognized, $15 million was recognized in Sales consistent with the company’s VAT policy, $10 million in Other income, net and $3 million as expense in Selling, general and administrative.

Equity in earnings of affiliates was $34 million in fiscal year 2021, compared to $14 million in the prior year. The increase was primarily attributable to improved earnings at our joint ventures and the recognition of a VAT credit of $6 million at our joint venture in Brazil during the first quarter of fiscal year 2021.

Interest expense, net was $79 million in fiscal year 2021, compared to $66 million in fiscal year 2020. The increase in interest expense was primarily attributable to higher interest costs year over year as well as $11 million of debt extinguishment costs incurred in fiscal year 2021.

Provision for income taxes was $24 million in fiscal year 2021, compared to $78 million in fiscal year 2020. The decrease in tax expense was primarily related to the tax effect of the proceeds received from the termination of the WABCO distribution arrangement during the second quarter of fiscal year 2020, partially offset by increased earnings in jurisdictions which do not have a tax valuation allowance.

Income from continuing operations (before noncontrolling interests) was $210 million for fiscal year 2021, compared to $248 million for fiscal year 2020. The reasons for the decrease are discussed above.

Net income attributable to Meritor, Inc. was $199 million for fiscal year 2021, compared to $245 million for fiscal year 2020. Various factors that contributed to the decrease in 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 fiscal years 2021 and 2020 (dollars in millions).

Segment adjusted EBITDA

Segment adjusted EBITDA Margins

Change

Change

Commercial Truck

pts

Aftermarket & Industrial

pts

Segment adjusted EBITDA

pts

Significant items impacting year-over-year segment adjusted EBITDA include the following (in millions):

Commercial Truck

Aftermarket & Industrial

Total

Segment adjusted EBITDA - Year Ended September 30, 2020

Volume, mix, performance and other

Higher earnings from unconsolidated affiliates

Higher short- and long-term variable compensation

Impact of foreign currency exchange rates

Segment adjusted EBITDA - Year Ended September 30, 2021

Commercial Truck Segment adjusted EBITDA was $259 million in fiscal year 2021, compared to $116 million in the prior fiscal year. Segment adjusted EBITDA margin increased to 8.6 percent in fiscal year 2021 from 5.3 percent in the prior fiscal year. The increase in segment adjusted EBITDA and segment adjusted EBITDA margin was primarily driven by conversion on higher revenue, partially offset by higher steel and freight costs, incentive compensation, and electrification costs in fiscal year 2021.

Aftermarket & Industrial Segment adjusted EBITDA was $139 million in fiscal year 2021, compared to $150 million in the prior fiscal year. Segment adjusted EBITDA margin decreased to 14.1 percent in fiscal year 2021 from 15.3 percent in fiscal year 2020. The decrease in segment adjusted EBITDA and segment adjusted EBITDA margin was primarily driven by the impact from higher freight and incentive compensation costs, partially offset by cost reduction actions.

Cash Flows (in millions)

Year Ended September 30,

OPERATING CASH FLOWS

Income from continuing operations

Depreciation and amortization

Loss on debt extinguishment, net

Deferred income tax expense (income)

Pension and retiree medical income

Asset impairment charges

Equity in earnings of affiliates

Stock compensation expense

Restructuring costs

Dividends received from equity method investments

Pension and retiree medical contributions

Asbestos related liability remeasurement

Contribution to Maremont trust

Restructuring payments

Decrease (increase) in working capital

Changes in off-balance sheet receivable securitization and factoring programs

Other, net

Operating cash flows provided by continuing operations

Operating cash flows used for discontinued operations

CASH PROVIDED BY OPERATING ACTIVITIES

Cash provided by operating activities for fiscal year 2021 was $197 million, compared to $265 million in fiscal year 2020 and $256 million in fiscal year 2019. The decrease in cash flow provided by operating activities in fiscal year 2021 was driven primarily by $265 million of cash received in fiscal year 2020 from the termination of the distribution arrangement with WABCO and an increase in fiscal year 2021 working capital requirements. The increase in cash flows provided by operating activities in fiscal year 2020 compared to fiscal year 2019 was driven primarily by $265 million of cash received from the termination of the distribution arrangement with WABCO in fiscal year 2020, largely offset by 2020 lower revenues as a result of significantly lower market volumes due to the impact of the COVID-19 pandemic.

Year Ended September 30,

INVESTING CASH FLOWS

Capital expenditures

Cash paid for business acquisitions, net of cash received

Cash paid for investment in Transportation Power, Inc.

Other investing activities

CASH USED FOR INVESTING ACTIVITIES

Cash used for investing activities was $98 million in fiscal year 2021, compared to cash used for investing activities of $89 million in fiscal year 2020 and cash used for investing activities of $271 million in fiscal year 2019. The increase in cash used for investing activities in the fiscal year 2021 was primarily driven by higher capital expenditure activity in fiscal year 2021 as compared to fiscal year 2020. The decrease in cash used for investing activities in fiscal year 2020 compared to fiscal year 2019 was primarily driven by acquisition activity in fiscal year 2019 as compared to fiscal year 2020. Capital expenditures were $90 million in fiscal year 2021, compared to $85 million in fiscal year 2020 and $103 million in fiscal year 2019.

Year Ended September 30,

FINANCING CASH FLOWS

Term loan payments

Securitization

Borrowings against revolving line of credit

Repayments of revolving line of credit

Term loan borrowings

Proceeds from debt issuances

Repurchase of convertible notes

Redemption of notes

Debt issuance costs

Other financing activities

Net change in debt

Repurchase of common stock

CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES

Cash used for financing activities was $314 million in fiscal year 2021, compared to cash provided by financing activities of $36 million in fiscal year 2020 and cash provided by financing activities of $11 million in fiscal year 2019. The increase in cash used for financing activities in fiscal year 2021 compared to fiscal year 2020 was primarily related to the redemption of our 6.25 Percent Notes due 2024 and our 7.875 Percent Convertible Notes (see Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data ), partially offset by the proceeds from the issuance of our 4.50 Percent Notes (see Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data ). The increase in cash provided by financing activities in fiscal year 2020 compared to fiscal year 2019 was primarily related to the proceeds from the issuance of the $300 million principal amount of our 6.25 percent notes due 2025, partially offset by the repurchase of 10.4 million shares of our common stock for $241 million.

Contractual Obligations

As of September 30, 2021, we are contractually obligated to make payments as follows (in millions):

Total

Thereafter (3)(4)

Total debt (1)

Operating leases

Interest payments on long-term debt

Total

( 1) Total debt excludes unamortized discount on convertible notes of $23 million and unamortized issuance costs of $13 million.

(2) Includes the 6.25 percent senior notes due 2025, which contain a call feature that allows for early redemption (refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data ).

(3) Includes the 3.25 percent convertible notes due 2037, which contain a put and call feature that allows for early redemption beginning in 2025 (refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data ).

(4) Includes the 4.50 percent senior notes due 2028, which contain a call feature that allows for early redemption (refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data ).

We also sponsor defined benefit pension plans that cover certain of our U.S. employees and certain non-U.S. employees. Our funding practice provides that annual contributions to the pension trusts will be at least equal to the minimum amounts required by ERISA in the U.S. and the actuarial recommendations or statutory requirements in other countries. Management expects funding for our retirement pension plans of approximately $5 million in fiscal year 2022.

We also sponsor retirement medical plans that cover certain of our U.S. and non-U.S. employees and retirees, including certain employees of divested businesses, and provide for medical payments to eligible employees and dependents upon retirement. Management expects gross retiree medical plan benefit payments of approximately $5 million, $5 million, $4 million, $3 million and $3 million in fiscal years 2022, 2023, 2024, 2025 and 2026, respectively, before consideration of any Part D reimbursement from the U.S. government.

Contractual obligations identified in the table above do not include liabilities associated with uncertain tax positions of $52 million due to the high degree of uncertainty regarding the future cash outflows associated with these amounts. For additional discussion of uncertain tax positions, refer to Note 21 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data .

Liquidity

Our outstanding debt, net of discounts and unamortized debt issuance costs where applicable, is summarized below (in millions). For a detailed discussion of terms and conditions related to this debt, see Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data .

September 30,

Fixed-rate debt securities

Fixed-rate convertible notes

Term loan

Unamortized discount on convertible notes

Other borrowings

Total debt

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 2022 capital expenditures to be approximately $100 million - $120 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 financing arrangements if conditions warrant.

In November 2020, we filed a shelf registration statement with the Securities and Exchange Commission, registering an indeterminate 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.

We believe our current financing arrangements provide us with the financial flexibility required to maintain our operations during the uncertain times of the COVID-19 pandemic and fund future growth, including actions required to improve our market share and support continued internal investments, through the term of our revolving credit facility, which matures in June 2024.

Sources of liquidity as of September 30, 2021, in addition to cash on hand, are as follows (in millions):

Total Facility

Size

Utilized as of 9/30/21

Readily Available as of

Current Expiration

On-balance sheet arrangements:

Senior secured revolving credit facility (1)

June 2024

Committed U.S. accounts receivable securitization (2)

March 2024

Total on-balance sheet arrangements

Off-balance sheet arrangements: (2)

Committed Swedish Factoring Facility (3)(4)

March 2024

Committed U.S. Factoring Facility (3)

February 2023

Uncommitted U.K. Factoring Facility

February 2022

Uncommitted Italy Factoring Facility

June 2022

Other uncommitted factoring facilities (5)

None

Total off-balance sheet arrangements

Total available sources

(1) The availability under the senior secured revolving credit facility is subject to a priority debt-to-EBITDA ratio covenant, as measured on the last day of the quarter based on trailing twelve month EBITDA as defined in the credit agreement. Availability was constrained on the last day of the fourth quarter of fiscal year 2021 due primarily to lower EBITDA in the first quarter of fiscal year 2021, which was impacted by the COVID-19 pandemic. The company has full availability until the next measurement point at the end of the first quarter of fiscal year 2022.

(2) Availability subject to adequate eligible accounts receivable available for sale.

(3) Actual amounts may exceed bank's commitment at bank's discretion.

(4) The facility is backed by a 364-day liquidity commitment from Nordea Bank which extends through June 22, 2022.

(5) There is no explicit facility size under the factoring agreement, but the counterparty approves the purchase of receivable tranches at its discretion.

Cash and Liquidity Needs – At September 30, 2021, we had $101 million in cash and cash equivalents. We plan to repatriate approximately $50 million of cash held by subsidiaries outside of the United States, with respect to which no withholding taxes are expected to be owed. $23 million of cash and cash equivalents is held in jurisdictions where the cash is not freely transferable to the U.S. without intervention by the foreign jurisdiction or minority joint venture partner. We plan to utilize ongoing cash flow from domestic operations and external borrowings, to meet our liquidity needs in the U.S.

On March 31, 2021, the U.S. accounts receivable securitization facility with PNC bank was increased from $95 million to $110 million.

Our availability under the senior secured revolving credit facility is subject to a priority debt-to-EBITDA ratio covenant, as defined in the credit agreement, which may limit our borrowings under such agreement as of each quarter end. As long as we are in compliance with this covenant as of the quarter end, we have full availability under the senior secured revolving credit facility every other day during the quarter. Our future liquidity is subject to a number of factors, including access to adequate funding under our senior secured revolving credit facility, access to other borrowing arrangements such as factoring or securitization facilities, vehicle production schedules and customer demand. Even taking into account these and other factors, management expects to have sufficient liquidity to fund our operating requirements through the term of our senior secured revolving credit facility. At September 30, 2021, we were in compliance with the priority debt to EBITDA ratio covenant with a ratio of approximately 0.54x.

Equity and Debt Repurchase Authorization – Refer to Note 17 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

Redemption of 7.875 Percent Convertible Notes due 2026, Redemption of 6.25 Percent Notes due 2024, Senior Secured Revolving Credit Facility, and Issuance of 4.50 Percent Notes due 2028 – Refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

U.S. Securitization Program – Refer to Note 8 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

Finance Leases – We had $10 million and $6 million of outstanding finance lease arrangements as of September 30, 2021 and 2020, respectively.

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 September 30, 2021 and 2020, we had $25 million and $16 million, respectively, outstanding under this program at more than one bank.

Credit Ratings – At November 15, 2021, our Standard & Poor’s corporate credit rating and senior unsecured credit rating were BB and BB-, respectively, and our Moody’s Investors Service corporate credit rating and senior unsecured credit rating were Ba3 and B1, respectively. Any lowering of our credit ratings could increase our cost of future borrowings and could reduce our access to capital markets and result in lower trading prices for our securities.

Subsidiary Guarantees of Debt – Certain of the company's 100% owned subsidiaries, as defined in the credit agreement for the senior secured revolving credit facility (collectively, the "Guarantors") irrevocably and unconditionally guarantee amounts outstanding under the senior secured revolving credit facility on a joint and several basis. Similar subsidiary guarantees are provided for the benefit of the holders of the notes outstanding under the company's indentures. The notes are guaranteed on a senior unsecured basis by each of the company’s subsidiaries from time to time guaranteeing its senior secured revolving credit facility, as it may be amended, extended, replaced or refinanced, or any subsequent credit facility. The guarantees remain in effect until the earlier to occur of payment in full of the notes or termination or release of the applicable corresponding guarantee under the company’s senior secured revolving credit facility, as it may be amended, extended, replaced or refinanced, or any subsequent credit facility. The guarantees rank equally with existing and future senior unsecured indebtedness of the Guarantors and are effectively subordinated to all of the existing and future secured indebtedness of the Guarantors, to the extent of the value of the assets securing such indebtedness.

The following represents summarized financial information, in millions, of Meritor, Inc. ("Parent") and the Guarantors (collectively, the "Combined Entities"). The information has been prepared on a combined basis and excludes any investments of the Parent or Guarantors in non-guarantor subsidiaries. Intercompany transactions and amounts between the Combined Entities have been eliminated. Equity income from continuing operations of subsidiaries has been eliminated.

Statement of Operations Information

Year Ended

September 30, 2021

Year Ended

September 30, 2020

Net Sales

Gross profit

Net income from continuing operations

Net income

Net income attributable to Meritor, Inc.

Balance Sheet Information

September 30, 2021

September 30, 2020

Current Assets

Non-current Assets

Current Liabilities

Non-current Liabilities

Redeemable Preferred Stock

Noncontrolling Interest

At September 30, 2021 and 2020, amounts owed by the Combined Entities to non-guarantor entities totaled approximately $52 million and $100 million, respectively, and amounts owed to the Combined Entities from non-guarantor entities totaled approximately $87 million and $156 million, respectively. For the years ended September 30, 2021 and 2020, intercompany sales from the Combined Entities to non-guarantor subsidiaries were $102 million and $79 million, respectively. For the years ended September 30, 2021 and 2020, intercompany sales from non-guarantor subsidiaries to the Combined Entities were $161 million and $102 million, respectively.

Off-Balance Sheet Arrangements

Accounts Receivable Factoring Arrangements – We participate in accounts receivable factoring programs with total amounts utilized at September 30, 2021 of $173 million, of which $137 million was attributable to committed factoring facilities involving the sale of AB Volvo accounts receivables. The remaining amount of $36 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 .

Our Swedish factoring facility, which is backed by a 364-day liquidity commitment from Nordea Bank, was renewed through June 22, 2022. Commitments under all of our factoring facilities are subject to standard terms and conditions for these types of arrangements (including, in 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 – - Refer to Note 15 of the Notes to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. There were $11 million and $8 million of off-balance sheet letters of credit outstanding through letter of credit facilities as of September 30, 2021 and 2020, respectively.

Contingencies

Contingencies related to environmental, asbestos and other matters are discussed in Note 22 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data .

Critical Accounting Policies

Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations. These policies require management’s most difficult, subjective or complex judgments in the preparation of the

financial statements and accompanying notes. Management makes estimates and assumptions about the effect of matters that are inherently uncertain, relating to the reporting of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Our most critical accounting policies are discussed below.

Pensions — Our defined benefit pension plans and retirement medical plans are accounted for on an actuarial basis, which requires the selection of various assumptions, including the mortality of participants. Our pension obligations are determined annually and were measured as of September 30, 2021 and 2020 .

The mortality assumptions for participants in our U.S. plans incorporates future mortality improvements from tables published by the Society of Actuaries ("SOA"). We periodically review the mortality experience of our U.S. plans’ participants against these assumptions. We reviewed the new SOA mortality and mortality improvement tables and utilized our actuary to conduct a study based on our plan participants.

The U.S. plans include a qualified and non-qualified pension plan. In fiscal years 2021 and 2020, the only significant non-U.S. plan is a pension plan located in the U.K. The following are the significant assumptions used in the measurement of the projected benefit obligation ("PBO") and net periodic pension expense:

Assumptions as of September 30:

Discount rate

Assumed return on plan assets (beginning of the year) (1)

(1) The assumed return on plan assets for fiscal year 2022 is 7.75 percent for the U.S. plan and 5.00 percent for the U.K. plan.

The discount rate is used to calculate the present value of the PBO at the balance sheet date and net periodic pension expense for the subsequent fiscal year. The rate used reflects a rate of return on high-quality fixed income investments that match the duration of expected benefit payments. Generally we use a portfolio of long-term corporate AA/Aa bonds that match the duration of the expected benefit payments, except for our U.K. pension plan which uses an annualized yield curve to establish the discount rate for this assumption.

The assumed return on plan assets is used to determine net periodic pension expense. The rate of return assumptions are based on projected long-term market returns for the various asset classes in which the plans are invested, weighted by the target asset allocations. An incremental amount for diversification, rebalancing and active management, where appropriate, is included in the rate of return assumption. The return assumptions are reviewed annually.

These assumptions reflect our historical experience and our best judgments regarding future expectations. The effects of the indicated increase and decrease in selected assumptions, assuming no changes in benefit levels and no amortization of gains or losses for the plans in 2021, are shown below (in millions):

Effect on All Plans - September 30, 2021

Percentage

Point Change

Increase (Decrease)

in PBO

Increase (Decrease) in

Pension Expense

Assumption:

Discount rate

-0.5 pts

+0.5 pts

Assumed return on plan assets

-1.0 pts

+1.0 pts

(1) Not Applicable

Accounting guidance applicable to pensions does not require immediate recognition of the effects of a deviation between actual and assumed experience and the revision of an estimate. This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted and disclosed as an unrecognized gain or loss in Accumulated other comprehensive loss. Based on the September 30, 2021 and 2020 measurement dates, we had an unrecognized loss of $708 million and $676 million, respectively. A portion of this loss is amortized into earnings each fiscal year. Unrecognized losses for the U.S. and U.K. plans are being amortized into net periodic pension expense over the average life expectancy of the inactive participants of approximately 15 years and 25 years, respectively.

In recognition of the long-term nature of the liabilities of the pension plans, we have targeted an asset allocation strategy designed to promote asset growth while maintaining an acceptable level of risk over the long term. Asset-liability studies are performed periodically to validate the continued appropriateness of these asset allocation targets. The asset allocation ranges for the U.S. plans are 20–50 percent equity investments, 30–60 percent fixed income investments and 10–30 percent alternative investments. Alternative investments include private equity, real estate, hedge funds and partnership interests. The target asset allocation ranges for the non-U.S. plans are 15–35 percent equity investments, 30–40 percent fixed income investments, 0–15 percent real estate and 15–35 percent alternative investments. The asset class mix and the percentage of securities in any asset class or market may vary as the risk/return characteristics of either individual market or asset classes vary over time.

The investment strategies for the pension plans are designed to achieve an appropriate diversification of investments as well as safety and security of the principal invested. Assets invested are allocated to certain global sub-asset categories within prescribed ranges in order to promote international diversification across security type, issuer type, investment style, industry group, and economic sector. Assets of the plans are both actively and passively managed. Policy limits are placed on the percentage of plan assets that can be invested in a security of any single issuer and minimum credit quality standards are established for debt securities. Meritor securities did not comprise any of the value of our worldwide pension assets as of September 30, 2021.

Based on current assumptions, the fiscal year 2022 net pension income is estimated to be $32 million.

Product Warranties — Our business segments record estimated product warranty costs at the time of shipment of products to customers. Liabilities for product recall campaigns are recorded at the time our obligation is known 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.

Significant factors and information used by management when estimating product warranty liabilities include:

• Past claims experience;

• Sales history;

• Product manufacturing and industry developments; and

• Recoveries from third parties, where applicable.

Asbestos — Contingencies for asbestos related matters are discussed in Note 22 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data . 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 could change significantly from its past experience, due, for example, to changes in the mix of claims filed in terms of plaintiffs’ law firm, jurisdiction and disease; legislative or regulatory developments; the company’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 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.

Income Taxes — Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If it is more likely than not that the deferred tax asset will be realized, no valuation allowance is recorded. Management's judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against the net deferred tax assets. The valuation allowance would need to be adjusted in the event future taxable income is materially different than amounts estimated. Significant judgments, estimates and factors considered by management in its determination of the probability of the realization of deferred tax assets include:

• Historical operating results;

• Expectations of future earnings;

• Tax planning strategies; and

• The extended period of time over which retirement medical and pension liabilities will be paid.

Refer to Note 21 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data , for additional information on income tax related matters.

New Accounting Pronouncements — New Accounting Pronouncements are discussed in Note 2 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data .