Meritor, Inc.
10-K on 11/17/2021   Download
SEC Document
SEC Filing
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549 
FORM 10-K
(Mark One)
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended October 3, 2021
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-15983
______________________________
MERITOR, INC.
(Exact name of registrant as specified in its charter)
Indiana38-3354643
(State or other jurisdiction of incorporation
or organization)
(I.R.S. Employer
Identification No.)
2135 West Maple Road
Troy, Michigan48084-7186
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (248) 435-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $1 Par ValueMTORNew York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ]       No [  ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [  ]       No [ ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     Yes [ ]      No [  ]
     Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding twelve months (or for such shorter period that the registrant was required to submit such files).
     Yes [ ]       No [  ]
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Act. [ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]       No [ ]
     The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant on March 31, 2021 (the last business day of the registrant's most recently completed second fiscal quarter) was approximately $2,088,013,296
70,076,049 shares of the registrant’s Common Stock, par value $1 per share, were outstanding on November 16, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
     Certain information contained in the definitive Proxy Statement for the Annual Meeting of Shareholders of the registrant to be held on January 27, 2022 is incorporated by reference into Part III.



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Item 16.
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ii


PART I
Item 1. Business.
 
Overview
 
Meritor, Inc., headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers ("OEMs") and the aftermarket for the commercial vehicle, transportation and industrial sectors. We serve commercial truck, trailer, military, bus and coach, construction, and other industrial OEMs and certain aftermarkets. Our principal products are axles, drivelines, brakes, and suspension systems. As used in this Annual Report on Form 10-K, the terms "company," "Meritor," "we," "us" and "our" include Meritor, its consolidated subsidiaries and its predecessors unless the context indicates otherwise.
 
Meritor serves a broad range of customers worldwide, including medium- and heavy-duty truck OEMs, specialty vehicle manufacturers, certain aftermarkets, and trailer producers. Our total sales from continuing operations in fiscal year 2021 were approximately $4 billion. Our ten largest customers accounted for approximately 75 percent of fiscal year 2021 sales from continuing operations. Sales from operations outside North America accounted for approximately 40 percent of total sales from continuing operations in fiscal year 2021. Our continuing operations also participated in four unconsolidated joint ventures, which we accounted for under the equity method of accounting and that generated revenues of approximately $1 billion in fiscal year 2021.
 
Our fiscal year ends on the Sunday nearest to September 30. Fiscal year 2021 ended on October 3, 2021, fiscal year 2020 ended on September 27, 2020, and fiscal year 2019 ended on September 29, 2019. All year and quarter references relate to our fiscal year and fiscal quarters unless otherwise stated. For ease of presentation, September 30 is utilized consistently throughout this report to represent the fiscal year end.
 
Whenever an item in this Annual Report on Form 10-K refers to information under specific captions in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations or Item 8. Financial Statements and Supplementary Data, the information is incorporated in that item by reference.
 
References in this Annual Report on Form 10-K to our belief that we are a leading supplier or the world's leading supplier, and other similar statements as to our relative market position are based principally on calculations we have made. These calculations are based on information we have collected, including company and industry sales data obtained from internal and available external sources as well as our estimates. In addition to such quantitative data, our statements are based on other competitive factors such as our technological capabilities, engineering, research and development efforts, innovative solutions and the quality of our products and services, in each case relative to that of our competitors in the markets we address.

Our Business
 
Our reporting segments are as follows:
The Commercial Truck segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks and other applications in North America, South America, Europe and Asia Pacific. It also supplies a variety of undercarriage products and systems for trailer applications in North America. This segment includes our aftermarket businesses in Asia Pacific and South America.
The Aftermarket & Industrial segment supplies axles, brakes, drivelines, suspension parts and other replacement parts to commercial vehicle and industrial aftermarket customers, primarily in North America and Europe. In addition, this segment supplies drivetrain systems and certain components, including axles, drivelines, brakes and suspension systems for military, construction, bus and coach, fire and emergency and other applications in North America and Europe.

Business Strategies
 
We are currently a premier global supplier of a broad range of integrated systems, modules and components to OEMs and the aftermarket for the commercial vehicle, transportation and industrial sectors, and we believe we have market-leading positions in many of the markets we serve. We are working to enhance our leadership positions and capitalize on our existing customer, product and geographic strengths.    For additional market related discussion, see the Trends and Uncertainties section in Item 7.

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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 market 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).

Our specific business strategies are influenced by these industry factors and global trends and are focused on leveraging our resources to develop and produce competitive product offerings. We believe the following strategies will allow us to maintain a balanced portfolio of commercial truck, industrial and aftermarket businesses covering key global markets. See Item 1A. Risk Factors below for information on certain risks that could have an impact on our business, financial condition or results of operations in the future.


2


M2022 Plan

With fiscal year 2021 complete, we have one year remaining in our M2022 Plan that began in fiscal year 2020. The financial targets we established for that plan are the following:
+$300 million in new business
12.5 percent adjusted EBITDA margin
$4.00 adjusted diluted earnings per share
75 percent free cash flow conversion (free cash flow / adjusted income from continuing operations)
(see Non-GAAP Financial Measures in Item 7)
To achieve these aggressive targets, we are focused on four main areas:
Drive Innovation
Protect and Grow
Exceed Customer Expectations
Enable the Business

Drive Innovation

For 110 years, our products have evolved to meet the changing needs of our customers in major regions of the world. As technology has advanced, we have designed products that are more fuel efficient, lighter weight, safer, more durable and more reliable. During the M2022 cycle, we targeted the introduction of several new advanced technology products. Our introduction of the Blue Horizon technology brand formalized our portfolio of advanced solutions for medium and heavy commercial vehicles. With our long history of technical innovation, the product pipeline we expect to bring to market has the potential to transform the value we deliver to customers. Our Blue Horizon brand represents a product portfolio that offers advanced efficiency, connectivity and electric solutions for our customers. It leverages our legacy as a proven partner, yet opens up new possibilities as we evolve.

As the demand for efficiency accelerates, we have developed, or are in the process of developing, several new products including:

Dis-engageable tandem drive axle that provides the efficiency of a 6x2 with traction of 6x4
Air disc brake positive pad retraction and frame centering that eliminates drag for increased fuel economy and pad life
High efficiency axles with high efficiency hypoid gearing, faster axle ratios and lower oil churning losses
We also believe connectivity offers many benefits to end users, vehicle manufacturers and Tier 1 suppliers like us. Similar to the increase in demand for smart home devices, our engineers are finding more areas where we can transform our offerings into smart products. The two main areas we are exploring include:

Real time information to monitor and record product performance of axles, brakes and wheel-ends for various duty cycles
Intelligent prognostics that give advanced warning when maintenance is needed
We are developing an electronic lube level monitoring device that eliminates the need for certain maintenance procedures saving time and money. For tire inflation, we are using sensors and related electronics that increase safety and improve efficiency via optimized tire pressure. And as manufacturers explore platooning, pairing and autonomous driving, knowing what is happening within the vehicle’s braking system is especially critical. The systems we are developing build upon our current pad wear sensor system and will monitor overall brake health, allowing strategic maintenance decisions as well as safer overall operation.

3


Meritor’s expanding range of next-generation technologies includes comprehensive solutions for standard axles, remote- mount configurations and fully electric powertrain systems which furthers our goal of becoming the electric drivetrain supplier of choice. Our 14Xe™ ePowertrain is based on the proven 14X axle design which maintains existing axle mounting hardware for ease of OEM integration. The modular system enables the interchangeability of key components, including electric motors, transmissions, gearing, brakes, wheel ends and housings. The 14Xe™ is designed for scalability and can be adapted to fit various powertrain needs based on the vehicle application and duty cycle. We announced the expansion of our electric drivetrain solutions by introducing the 12Xe™ powertrain for Class 4, 5, 6 and 7 applications and the 17Xe™ powertrain for heavy-duty 4x2 and 6x2 trucks.

The 14Xe™ ePowertrain has already received acclaims in the industry. We were recognized as a PACEpilot Honoree by Automotive News for our solutions to power Class 4 through 8 trucks and buses with electric powertrains instead of diesel-based systems, in addition to Diesel Progress’ Achievement of the Year and Electric Application of the Year awards in 2020.

To help us achieve our objectives in this important area, in fiscal year 2020 we acquired all outstanding common shares of Transportation Power, Inc. ("TransPower"), a California-based company that supplies integrated drive systems, full electric truck solutions and energy-storage subsystems to major manufacturers of trucks, school buses, refuse vehicles and terminal tractors. TransPower has focused exclusively on developing electric drive solutions since its inception in 2010. With this acquisition, we are advancing our M2022 plan priorities through increased investment in next-generation technologies.

Representing the first Class 8 production contract for electric drivetrains in the industry, we secured an agreement with PACCAR to be its non-exclusive supplier of ePowertrains for its Kenworth T680 and Peterbilt 579 and 520 battery-electric vehicles. We will be the initial launch partner and primary supplier for the integration of functional battery-electric systems on these refuse and heavy-duty chassis. Production is targeted to begin in calendar year 2021. We believe we will be the first supplier to begin production of electric powertrains for Class 8 electric vehicles, and we anticipate additional production contracts in the future.

With the industry recognition we have already received for this product, and our growing number of contracts and collaboration agreements, we are highly confident that Meritor’s electric powertrain represents game-changing technology for commercial vehicles. The new contracts shown below reflect the application flexibility we have designed into our electric powertrain portfolio and the growing demand for Meritor’s solution.

Five-year agreement to supply Meritor’s 14Xe™ electric powertrain for Autocar’s refuse vehicles
Three-year agreement to supply our heavy-duty tandem electric powertrain for Lion Electric’s 8-ton tractor
Meritor’s 14Xe™ will be equipped on the Volta Zero, a full-electric, 16-ton commercial vehicle designed for inner city parcel and freight distribution
Hexagon Purus Systems will integrate Meritor’s 14Xe™ into its Class 6, Class 7 box and Class 8 (6x4) vehicles starting in 2021
Five-year relationship with Hyliion in which Meritor will be the preferred powertrain supplier for Hyliion’s Hypertruck ERX platform
Hino Motors will evaluate Meritor’s ePowertrain for its development path to zero emission vehicles
An equity investment in SEA Electric in which we will be working together on electric-powered chassis opportunities for India and North America markets in the near term

With market adoption growing for our 14Xe™, we are designing and developing the 17Xe™ electric powertrain in Europe. This year, we were a grant recipient from the Advanced Propulsion Centre in the United Kingdom. This grant will partially fund the development of Meritor’s 17Xe™. After a months-long nomination and consideration process, we were selected – along with our consortium partners Danfoss Editron and Electra Commercial Vehicles. The grant, totaling almost 16 million pounds sterling, will rapidly accelerate development of this product that is designed for multiple vehicle platforms and extends our ability to offer Meritor’s ePowertrain solution for European vehicles. We believe demand for this product will grow because of EU 2025 CO2 reduction targets. Stricter targets will start applying in 2030, and by 2040 all new trucks sold in Europe will need to be fossil free to reach carbon-neutrality by 2050.


4


Protect and Grow

We know that despite changes and volatility in global market conditions, it is important that we generate profitable top-line growth. We designed the M2022 plan to enable us to achieve the growth we are targeting while operating in a cyclical industry that can be greatly impacted by economic factors. We are increasing our market share with key customers, renewing long-term contracts and winning new business in all of our end markets around the globe across both of our reportable segments.

We expect to broaden our relationships with our global strategic customers, earn the business of new customers, increase aftermarket share in core product areas, expand our gear manufacturing, and enter near adjacent markets that we believe will be a good match with our core competencies.

We achieved major milestones in fiscal year 2021 related to next-generation technologies engineered to fit multiple vehicle applications for customers’ needs now and in the future. Through new business awards with global manufacturers and evolution of our Blue Horizon™ powertrain solutions, we are establishing Meritor as a leader in transformative technologies for the commercial vehicle industry.

In fiscal 2021, we earned additional axle contracts with Ashok Leyland and Daimler India for medium and heavy-duty vehicles. We also now have standard position with Terex for front and rear drive axles and brakes on concrete mixers. We will supply an existing customer with independent front suspensions for recreational vehicles, and we entered a new three-year agreement with John Deere for 100 percent of its applicator axles. We also extended our agreement with Navistar through 2026 that provides opportunity for future growth in Meritor’s axles, brakes and drivelines product categories. In Europe, we completed a new agreement with Iveco through 2024 that includes the supply of single reduction axles. With Navistar and Iveco complete, most of our long-term agreements with major customers have been renewed well past the 2022 timeframe.

As industry trends continue to drive the need for equipment that complies with environmental and safety-related regulatory provisions, OEMs select suppliers based not only on the cost and quality of their products, but also on their ability to meet stringent environmental and safety requirements and to service and support the customer after the sale. We use our technological and market expertise to develop and engineer products that address mobility, safety, regulatory and environmental concerns. We last published our annual sustainability report in March 2021 to share the work we have done in the areas of advanced technologies; environment, health and safety; manufacturing initiatives; human capital, social responsibility and corporate governance.

Our commitment to designing and manufacturing braking solutions for the commercial vehicle market has resulted in more commercial vehicles in North America having Meritor brakes than those made by other brake manufacturers. We believe our EX+ air disc brakes are among the highest performing brakes in the marketplace. We previously announced the launch of our lightweight, single-piston EX+™ LS air disc brake, a next-generation braking solution designed and engineered for linehaul and trailer applications. This brake, which was recognized by Heavy Duty Trucking magazine as a Top 20 Product, launched in fiscal year 2021. With this brake, we are in standard position on Daimler’s Freightliner Cascadia through 2025.

We designed the EX+ LS air disc brake to meet fleet expectations for efficiency, safety and weight reduction. Built with exceptional taper wear control, the new air disc brake is designed and validated to perform like a twin-piston brake. Approximately 9 million of our air disc brakes are in operation globally.

We believe the quality of our core product lines, our ability to service our products through our aftermarket capabilities, and our sales and service support teams give us a competitive advantage. An important element of being a preferred supplier is the ability to deliver service through the entire lifecycle of the product. Also, as our industry becomes more international, our manufacturing footprint around the world and our ability to supply customers with regionally-tailored product solutions are competencies of increasing importance.

Exceed Customer Expectations

In addition to technology and product collaboration, we also meet regularly with our customers to review our performance in a number of other areas including quality, delivery and cost.

In our M2022 plan, we set an overall quality target of less than 20 parts per million ("PPM"). In fiscal year 2021, Meritor achieved a quality score of 23 PPM. Also this fiscal year, four of our facilities and three of our joint ventures received the Daimler Master of Quality Award. In 2020, during an unprecedented year of supply constraints and severe workforce challenges, six of our facilities received the PACCAR 10 PPM award. We believe this level of quality further differentiates us in the commercial vehicle industry.
5


In fiscal year 2021, we also continued our excellent OE delivery performance this year at 96 percent. Despite the impact of the COVID-19 pandemic globally and the challenges it created for the entire supply chain, we maintained a high delivery rate. Our customers rely on us for this level of delivery performance and it differentiates us from our peers.

We will maintain our focus on driving down operating costs through material cost-reduction and labor and burden improvements with a target achievement of 2 percent improvement per year. We drive material performance with three different approaches: commercial negotiations, best-cost-country sourcing and technical innovation. And, we are improving in labor and burden by addressing several areas simultaneously, including better equipment utilization, reduced changeover time, elimination of waste, improved shift and asset utilization, investing in equipment to improve cycle time and flexibility and employee involvement.

We believe we effectively manage complexity for low volumes and support our customers’ needs during periods of peak volumes. The quality, durability and on-time delivery of our products has earned us strong positions in the markets we support. As we seek to extend and expand our business with existing customers and establish relationships with new ones, our objective is to ensure we are getting a fair value for the recognized benefits of our products and services and the strong brand equity we hold in the marketplace.

Enable the Business

COVID-19 Pandemic

The global impact of the COVID-19 pandemic has been significant. Since the pandemic began, we took every action possible to protect our employees while still serving our role as an important part of the supply chain in maintaining the flow of commercial vehicle original equipment and aftermarket products, as well as products required for the manufacturing of specialty and defense vehicles.

We developed a Safe Start plan to protect our employees. It outlined specific policies that were audited at each of our sites including preventative measures in entry and common areas, heat mapping to identify areas that required modifications, personal protective equipment (PPE), wellness checks, visual indicators and the addition of social distance coaches. Safety is our first priority and we will take all necessary precautions to safeguard our employees – in each of our manufacturing plants, labs, distribution centers and offices. To ensure that we followed best practices across the industry, our general auditor assumed the additional role of Chief Safety Compliance Officer.

Every day, the safety of our employees is our top priority. Total case rate is a measure of recordable workplace injuries normalized per 100 employees per year. Our target under the M2022 plan is to achieve a case rate of less than 0.55. In fiscal year 2021, we achieved an overall total recordable case rate of 0.61 injuries per 200,000 hours worked, compared to 0.57 in the prior year. Fifty percent of our facilities reported no recordable workplace injuries during fiscal year 2021.

We believe that our strength to compete in the global market is dependent upon the engagement of every Meritor employee and that a high-performing team is critical to the level of performance we want to achieve. We have a strong and experienced leadership group and a committed team, both of which are focused on sustaining the strong foundation we built under the M2016 and M2019 plans. We will also continue to focus on strengthening the diversity and inclusiveness of our workforce because we recognize the value of different opinions and backgrounds in a company as global as Meritor.

We have established various development and training programs to help our employees grow as we grow. For managers, we offer Management Essentials & Leadership Fundamentals cohort development programs and eLearning modules that address important areas for advancement including accountability, delegation, and providing and receiving feedback.

For director-level employees, we offer a leadership development program through our eLearning platform that includes leadership learning modules, live instructor-led leader camps and live key-note speaker events, that align with our Meritor Code Leadership Model. For certain director-level employees, we offer Leadership Edge - a program whose objective is to develop advanced leadership skills, prepare high-potential leaders for senior level positions and strengthen business acumen.

And for certain senior-level leaders, we offer the Summit leadership development program, which provides executive coaching, the opportunity to attend executive training sessions tailored to each individual’s background and career goals, participation in a MBA-level finance course, if needed, and engagement in mentorship opportunities with a member of Meritor’s Board of Directors. To ensure we provide a rich experience for our employees, we will continue to measure employee engagement to build on the competencies that are important to our future.

6


To enhance our commitment to inclusiveness, we have partnered with the Center of Automotive Diversity, Inclusion, & Advancement (CADIA) to provide professional development, tools, networks, insights and practical advice to create avenues for success with driving a diverse and inclusive culture. Several of our HR professionals have received Diversity, Equity, & Inclusion certifications. Team members are given the opportunity to gain awareness about DEI through the CADIA Academy. CADIA is conducting workshops for all people leaders to define why Diversity, Equity, and Inclusion are important to them personally and to the organization. They will explore the priorities and measures required to set themselves and the organization up for transformation and sustainable success. Inclusive culture training is being rolled out in all U.S. plants and a diverse mentoring program has been launched. Longer term, we will explore fast-track programs for employees to ensure that we are retaining diverse talent and providing aggressive career tracks.

Products
 
Meritor designs, develops, manufactures, markets, distributes, sells, services and supports a broad range of products for use in the transportation and industrial sectors. In addition to sales of original equipment systems and components, we provide our original equipment, aftermarket and remanufactured products to vehicle OEMs, their dealers (who in turn sell to motor carriers and commercial vehicle users of all sizes), independent distributors, and other end-users in certain aftermarkets.

The following chart sets forth, for each of the fiscal years 2021, 2020 and 2019, information about product sales comprising more than 10% of consolidated revenue in any of those years. A narrative description of our principal products follows the chart.
 
Product Sales:
Year Ended September 30,
202120202019
Axles, Suspension Systems and Drivelines73 %70 %73 %
Brakes and Brake-Related Components21 %25 %25 %
Other%%%
Total100 %100 %100 %

Axles, Suspension Systems & Drivelines
 
We believe we are one of the world's leading independent suppliers of axles for medium- and heavy-duty commercial vehicles, with the leading market position in axle manufacturing in North America, South America and Europe, and are one of the major axle manufacturers in the Asia-Pacific region. Our extensive truck axle product line includes a wide range of front steer axles and rear drive axles. Our front steer and rear drive axles can be equipped with our cam, wedge or air disc brakes, automatic slack adjusters, and complete wheel-end equipment such as hubs, rotors and drums.

We supply heavy-duty axles in certain global regions for use in numerous off-highway vehicle applications, including construction, material handling, and mining. We also supply axles for use in military tactical wheeled vehicles, principally in North America and Europe. These products are designed to tolerate high tonnage and operate under extreme conditions. We also supply axles for use in buses, coaches and recreational vehicles, fire trucks and other specialty vehicles in North America, Asia Pacific and Europe, and we believe we are a leading supplier of bus and coach axles in North America.
 
We are one of the major manufacturers of heavy-duty trailer axles in North America. Our trailer axles are available in more than 40 models in capacities from 20,000 to 30,000 pounds for virtually all heavy trailer applications and are available with our broad range of suspension modules and brake products, including drum brakes and disc brakes.
 
We supply universal joints and driveline components, including our Permalube™ universal joint and RPL Permalube™ driveline, which are maintenance free, permanently lubricated designs used often in the high mileage on-highway market. We supply drivelines in North America for use in numerous on-highway vehicle applications. We also supply transfer cases for use in specialty vehicles in North America, Turkey and Europe. In addition, we supply trailer air suspension systems and products with an increasing market presence in North America. We supply transfer cases and drivelines for use in military tactical wheeled vehicles, principally in North America and Europe. In addition, we also supply advanced suspension modules for use in light-, medium- and heavy-duty military tactical wheeled vehicles, principally in North America, Turkey and Europe.


7


Brakes and Brake-Related Components
 
We believe we are one of the leading independent suppliers of air brakes to medium- and heavy-duty commercial vehicle manufacturers in North America and Europe. In Brazil, we believe that Master Sistemas Automotivos Limitada, our 49%-owned joint venture with Randon S. A. Implementos e Participações, is a leading supplier of brakes and brake-related products.

Through manufacturing facilities located in North America, Asia Pacific and Europe, we manufacture a broad range of foundation air brakes, as well as automatic slack adjusters for brake systems. Our foundation air brake products include cam drum brakes, which offer improved lining life and tractor/trailer interchangeability; wedge drum brakes, which are lightweight and provide automatic internal wear adjustment; air disc brakes, which provide enhanced stopping distance and improved fade resistance for demanding applications; and wheel-end components such as hubs, drums and rotors.
 
Our brakes and brake system components are used in military tactical wheeled vehicles, principally in North America, Turkey and Europe. We supply brakes for use in buses, coaches and recreational vehicles, fire trucks and other specialty vehicles in North America and Europe, and we believe we are the leading supplier of bus and coach brakes in North America. We also supply brakes for commercial vehicles, buses and coaches in Asia Pacific and air and hydraulic brakes for off-highway vehicles in North America and Europe.

Electric Vehicle and Other Products
 
We supply electric drive systems that include an electric motor and inverter, power electronics, battery pack, electrified accessories, and all associated software and controls for terminal tractors and medium and heavy-duty trucks and buses.

In addition to the products discussed above, we sell other complementary products, including third-party and private label items, through our aftermarket distribution channels. These products are generally sold under master distribution or similar agreements with outside vendors and include brake shoes and friction materials; automatic slack adjusters; yokes and shafts; wheel-end hubs and drums; ABS and stability control systems; shock absorbers and air springs; and air brakes.

Customers: Sales and Marketing
 
We have numerous customers worldwide and have developed long-standing business relationships with many of these customers. Our ten largest customers accounted for approximately 75 percent of our total sales in fiscal year 2021. Sales to customers that accounted for 10 percent or more of our total sales in fiscal year 2021 included AB Volvo, Daimler AG and PACCAR, representing 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.

Original Equipment Manufacturers (OEMs)
 
In North America, we design, engineer, market and sell products principally to OEMs, dealers and distributors. While our North American sales are typically direct to OEMs, our ultimate commercial truck customers include trucking and transportation fleets. Fleet customers may specify our components and integrated systems for installation in the vehicles they purchase from OEMs. We employ what we refer to as a "push-pull" marketing strategy. We "push" for being the standard product at the OEM. At the same time, our district field managers then call on fleets and OEM dealers to "pull-through" our components on specific truck purchases. For all other markets, we specifically design, engineer, market and sell products principally to OEMs for their market-specific needs or product specifications.
 
For certain large OEM customers, our supply arrangements are negotiated on a long-term contract basis for a multi-year period that may require us to provide annual cost reductions through price reductions or other cost benefits for the OEMs. If we are unable to generate sufficient cost savings in the future to offset such price reductions, our gross margins will be adversely affected. Sales to other OEMs are typically made through open order releases or purchase orders at market-based prices that do not require the purchase of a minimum number of products. The customer typically has the right to cancel or delay these orders on reasonable notice. We typically compete to either retain business or try to win new business from OEMs when long-term contracts expire.
 
We have established leading positions in many of the markets we serve as a global supplier of a broad range of drivetrain systems, brakes and components. Based on available industry data and internal company estimates, our market-leading positions include independent truck drive axles (i.e., those manufactured by an independent, non-captive supplier) in North America, Europe, South America and India through a joint venture; truck drivelines in North America; truck air brakes in North
8


America and South America (through a joint venture); and military wheeled vehicle drivetrains, suspensions and brakes in North America.
 
Our global customer portfolio includes AB Volvo, Daimler AG, PACCAR, Navistar International Corporation, Oshkosh, Traton Group, CNH Industrial, Ashok Leyland, XCMG, Wabash National, and Gillig.
 
Aftermarket
 
We market and sell truck, trailer, off-highway and other products principally to, and service such products principally for, OEMs, their parts marketing operations, their dealers and other independent distributors and service garages within the aftermarket industry. Our product sales are generated through long-term agreements with certain of our OEM customers and distribution agreements and sales to independent dealers and distributors. Sales to other OEMs are typically made through open order releases or purchase orders at market-based prices, which do not require the purchase of a minimum number of products. The customer typically has the right to cancel or delay these orders on reasonable notice.
 
Our product offerings allow us to service all stages of our customers’ vehicle ownership lifecycle. In North America, we stock and distribute thousands of parts from top national brands to our customers or what we refer to as our "all makes" strategy. Our district field managers call on our OEM's, OEM dealers, fleet customers and independent customers to market our full product line capabilities on a regular basis to seek to ensure that we satisfy our customers’ needs. Our aftermarket business sells products under the following brand names: Meritor, Euclid, Trucktechnic, US Gear, AxleTech and Mach.
 
Based on available industry data and internal company estimates, we believe our North America aftermarket business has the overall market leadership position for the portfolio of products that we offer. 

Competition
 
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. The principal competitive factors are price, quality, service, product performance, design and engineering capabilities, new product innovation and timely delivery. Certain OEMs manufacture their own components that compete with the types of products we supply.
 
Our major competitors for axles are Dana Incorporated and, in certain markets, OEMs that manufacture axles for use in their own products. Emerging competitors for axles include DTNA’s Detroit Axle, Allison, ZF Friedrichshafen in Europe, and Hande, Fuwa and Ankai in China. Our major competitors for brakes are Bendix/Knorr Bremse, ZF and, in certain markets, OEMs that manufacture brakes for use in their own products. Our major competitors for industrial applications are MAN, Oshkosh, AM General, Marmon-Herrington, Dana Incorporated, Knorr Bremse, Kessler & Co., Carraro, NAF, Sisu and, in certain markets, OEMs that manufacture industrial products for use in their own vehicles. Our major competitors for trailer applications are Fuwa, Hendrickson and SAF-Holland.

Raw Materials and Suppliers
 
Our purchases of raw materials and parts are concentrated over a limited number of suppliers. We are dependent upon our suppliers’ ability to meet cost performance targets, quality specifications and delivery schedules. The inability of a supplier to meet these requirements, the loss of a significant supplier, or work stoppages could have an adverse effect on our ability to meet our customers’ delivery requirements.

The cost of our core products is susceptible to changes in overall steel commodity prices, including ingredients used for various grades of steel. We have generally structured our major steel supplier and customer contracts to absorb and pass on normal index-related market fluctuations in steel prices. While we have had steel pricing adjustment programs in place with most major OEMs, the price adjustment programs tend to lag behind the movement in steel costs and have generally not contemplated non-steel index related increases.

Significant future volatility in the commodity markets or a deterioration in product demand may require us to pursue customer price increases through surcharges or other pricing arrangements. In addition, if suppliers are inadequate for our needs, or if prices remain at current levels or increase and we are unable to either pass these prices to our customer base or otherwise mitigate the costs, our operating results could be further adversely affected.

We continuously work to address these competitive challenges by reducing costs and, as needed, restructuring operations. We manage supplier risk by conducting periodic assessments for all major suppliers and more frequent rigorous assessments of
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high-risk suppliers. On an ongoing basis, we monitor third-party financial statements, conduct surveys through supplier questionnaires, and conduct site visits. We have developed a supplier improvement process where we identify and develop actions to address ongoing financial, quality and delivery issues to further mitigate potential risk. We are proactive in managing our supplier relationships to avoid supply disruption. Our process employs dual sourcing and resourcing trigger points that cause us to take aggressive actions and then monitor the progress closely.

Acquisitions, Divestitures and Restructuring
 
As described above, our business strategies are focused on enhancing our market position by continuously evaluating the competitive differentiation of our product portfolio, focusing on our strengths and core competencies, and growing the businesses that offer the most attractive returns. Implementing these strategies involves various types of strategic initiatives.

Acquisitions and divestitures are discussed in Note 3 of the Notes to the Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data.

Restructuring actions are discussed in Note 7 of the Notes to the Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data.

Joint Ventures
 
As the industries in which we operate have become more globalized, joint ventures and other cooperative arrangements have become an important element of our business strategies. These strategic alliances provide for sales, product design, development and manufacturing in certain product and geographic areas. As of September 30, 2021, our continuing operations participated in the following non-consolidated joint ventures:
 Key ProductsCountry
Master Sistemas Automotivos LimitadaBraking systems Brazil
Sistemas Automotrices de Mexico S.A. de C.V.Axles, drivelines and brakes Mexico
Ege Fren Sanayii ve Ticaret A.S.Braking systems Turkey
Automotive Axles LimitedRear drive axle assemblies and braking systems India

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.
 
In accordance with accounting principles generally accepted in the United States, our Consolidated Financial Statements include the financial position and operating results of those joint ventures in which we have control. For additional information on our unconsolidated joint ventures and percentage ownership thereof see Note 12 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below. 

Research and Development
 
We have significant research, development, engineering and product design capabilities. We spent $76 million in fiscal year 2021, $74 million in fiscal year 2020 and $75 million in fiscal year 2019 on company-sponsored research, development and engineering. We employ professional engineers and scientists globally and have additional engineering capabilities through contract arrangements in low-cost countries. We also have advanced technical centers in North America, South America, Europe and India.

Patents and Trademarks
 
We own or license many United States and foreign patents and patent applications in our engineering and manufacturing operations and other activities. While in the aggregate these patents and licenses are considered important to the operation of our businesses, management does not believe that the loss or termination of any one of them would materially affect a business segment or Meritor as a whole.
 
Our registered trademarks for Meritor® and the Bull design are important to our business. Other significant trademarks owned by us include Euclid® and Trucktechnic® for aftermarket products.
 
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Substantially all of our U.S. held intellectual property rights are subject to a first-priority perfected security interest securing our obligations to the lenders under our credit facility. See Note 15 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below. 

Employees
 
At September 30, 2021, we had approximately 9,600 employees composed of approximately 7,900 hourly and salaried employees, 750 employees from our joint ventures, and 950 other employees. At September 30, 2021, 47 employees in the United States were covered by collective bargaining agreements. Most of our facilities outside of the United States and Canada are unionized. We strive to foster and maintain positive relationships with our employees. 

We believe that our ability to compete in the global market depends on the engagement of every one of our employees, and that a high-performing team is critical to the level of performance we want to achieve. By maintaining relationships with leading universities, we are able to identify and recruit top talent. In order to attract the best candidates, we offer market competitive compensation and benefits around the globe, annual incentive programs for salaried and hourly employees, long-term incentive programs for executives and health and wellness benefits. To retain top talent, we encourage professional development through internal and external training opportunities, in addition to a leadership fundamentals program for managers, the Leadership Edge program for high potential leaders and the Summit for senior level leaders.

To ensure we provide a rich experience for our employees, we measure organizational culture and engagement to build on the competencies that are important for our future success. We routinely engage independent third parties to conduct cultural and employee engagement surveys. These include corporate culture assessments, as well as real-time feedback on employee engagement and a holistic approach survey on employee well-being focused on physical, emotional, social and financial health.

In addition, we aim to diversify our workforce because we recognize the value of engaging different opinions and backgrounds in a global company. We are committed to recruiting, developing and retaining a high-performing and diverse workforce. We have recently initiated a mentoring program for diverse employees, implemented various recruitment initiatives, refreshed mandatory unconscious bias training, and are targeting efforts to attract qualified women and underrepresented minorities for positions at all levels of the company and employee led resource groups, including the African American Resource Group, the Women’s Employee Resource Group and the LGBT Resource Group.

Environmental Matters
 
Environmental matters are discussed in Note 22 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data.

The process of estimating environmental liabilities is complex and dependent on 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 uncertainties, including the financial condition of other potentially responsible parties, the success of the remediation and other factors that make it difficult to predict actual costs accurately. However, based on management's assessment, after consulting with Meritor's Interim Chief Legal Officer and with outside advisors who specialize in environmental matters, and subject to the difficulties inherent in estimating these future costs, we believe that our expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on our business, financial condition or results of operations. In addition, in future periods, new laws and regulations, changes in remediation plans, advances in technology and additional information about the ultimate clean-up remedy could significantly change our estimates. Management cannot assess the possible impact of compliance with future requirements.

Seasonality; Cyclicality
 
We may experience seasonal variations in the demand for our products, to the extent OEM vehicle production fluctuates. Historically, for most of our operations, demand has been somewhat lower in the quarters ended September 30 and December 31, when OEM plants may close for summer shutdowns and holiday periods or when there are fewer selling days during the quarter. Our aftermarket business and our operations in India generally experience seasonally higher demand in the quarter ending March 31.
 
In addition, the industries in which we operate have been characterized historically by periodic fluctuations in overall demand for trucks, trailers and other specialty vehicles for which we supply products, resulting in corresponding fluctuations in
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demand for our products. 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 of our control, including freight tonnage, customer spending and preferences, vehicle age, labor relations and regulatory requirements. See Item 1A. Risk Factors below. Cycles in the major vehicle industry markets of North America and Europe are not necessarily concurrent or related but do tend to be correlated to general economic trends.

See Trends and Uncertainties in Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations for estimated commercial truck production volumes for selected original equipment markets based on available sources and management's estimates. 

Available Information
 
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings we make with the Securities and Exchange Commission ("SEC") are available free of charge on our website (www.Meritor.com), as soon as reasonably practicable after they are filed. The information contained on our company’s website is not included in, or incorporated by reference into, this Annual Report on Form 10-K. 

Cautionary Statement

This Annual Report on Form 10-K contains statements relating to future results of the company (including certain outlooks, projections and business trends) that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "estimate," "should," "are likely to be," "will" and similar expressions. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to the duration and severity of the COVID-19 pandemic and its effects on public health, the global economy, and financial markets, as well as our industry, customers, operations, workforce, supply chains, distribution systems and demand for our products; reliance on major OEM customers and possible negative outcomes from contract negotiations with our major customers, including failure to negotiate acceptable terms in contract renewal negotiations and our ability to obtain new customers; the outcome of actual and potential product liability, warranty and recall claims; our ability to successfully manage rapidly changing volumes in the commercial truck markets and work with our customers to manage demand expectations in view of rapid changes in production levels; global economic and market cycles and conditions; availability and sharply rising costs of raw materials, including steel, transportation and labor, and our ability to manage or recover such costs; 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; our ability to manage possible adverse effects on European markets or our European operations, or financing arrangements related thereto in the event one or more countries exit the European monetary union; risks inherent in operating abroad (including foreign currency exchange rates, restrictive government actions regarding trade, implications of foreign regulations relating to pensions and potential disruption of production and supply due to terrorist attacks or acts of aggression); risks related to our joint ventures; the ability to achieve the expected benefits of strategic initiatives and restructuring actions; our ability to successfully integrate the products and technologies of Fabco Holdings, Inc., AxleTech and Transportation Power, Inc. and future results of such acquisitions, including their generation of revenue and their being accretive; the demand for commercial and specialty vehicles for which we supply products; whether our liquidity will be affected by declining vehicle production in the future; OEM program delays; demand for and market acceptance of new and existing products; successful development and launch of new products; labor relations of our company, our suppliers and customers, including potential disruptions in supply of parts to our facilities or demand for our products due to work stoppages; the financial condition of our suppliers and customers, including potential bankruptcies; possible adverse effects of any future suspension of normal trade credit terms by our suppliers; potential impairment of long-lived assets, including goodwill; potential adjustment of the value of deferred tax assets; competitive product and pricing pressures; the amount of our debt; our ability to continue to comply with covenants in our financing agreements; our ability to access capital markets; credit ratings of our debt; the outcome of existing and any future legal proceedings, including any proceedings or related liabilities with respect to environmental, asbestos-related, or other matters; rising costs of pension benefits; possible changes in accounting rules; and other substantial costs, risks and uncertainties, including but not limited to those detailed herein and from time to time in other filings of the company with the SEC. These forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.

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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
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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
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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.


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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;
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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
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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.
 

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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
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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
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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.

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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 1B. Unresolved Staff Comments.
 
None.

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Item 2. Properties.

At September 30, 2021, our operating segments, including all consolidated joint ventures, had the following facilities in the United States, Europe, South America, Canada, Mexico and the Asia-Pacific region. For purposes of these numbers, multiple facilities in one geographic location are counted as one facility.
Manufacturing and Distribution FacilitiesEngineering Facilities, Sales
Offices, Warehouses and
Service Centers
Commercial Truck229
Aftermarket & Industrial106
Other4
Total3219

Substantially all of our owned domestic plants and equipment are subject to liens securing our obligations under our revolving credit facility with a group of banks (see Note 15 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data). In the opinion of management, our properties have been well maintained, are in sound operating condition and contain all equipment and facilities necessary to operate at present levels.

Item 3. Legal Proceedings.

See Note 22 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data for information with respect to litigation related to asbestos and product liability and environmental proceedings, which is incorporated herein by reference.

Various other lawsuits, claims and proceedings have been or may be instituted or asserted against the company or its subsidiaries relating to the conduct of our business, including those pertaining to product liability, tax, warranty or recall claims; intellectual property; safety and health; commercial and employment matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to Meritor, management believes, after consulting with Meritor's Interim Chief Legal Officer, that the disposition of matters that are pending will not have a material effect on our business, financial condition or results of operations.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 4A. Information About Our Executive Officers.

The name, age, positions and offices held with Meritor and principal occupations and employment during the past five years of each of our executive officers as of November 17, 2021, are as follows:
 
Jeffrey A. Craig, 61 (Caucasian/White Male) - Executive Chairman of the Board since March 2021. In November 2021, the Company announced that Mr. Craig will retire as Executive Chairman of the Board effective December 31, 2021. Prior to serving as Executive Chairman of the Board, he was Chief Executive Officer and President from April 2015 until March 2021; Director of Meritor since April 2015; President and Chief Operating Officer from June 2014 until April 2015; Senior Vice President and President of Commercial Truck & Industrial from February 2013 until May 2014; Senior Vice President and Chief Financial Officer from May 2008 until January 2013; Acting Controller from May 2008 to January 2009; Senior Vice President and Controller from May 2007 until May 2008; Vice President and Controller from May 2006 until April 2007. Prior to joining Meritor, Craig was President and Chief Executive Officer of General Motors Acceptance Corporation ("GMAC") Commercial Finance (commercial lending service) from 2001 to May 2006 and President and Chief Executive Officer of GMAC’s Business Credit division from 1999 to 2001. He joined GMAC as general auditor in 1997 from Deloitte & Touche, where he served as an audit partner.

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Chris Villavarayan, 51 (Indian/South Asian Male) - Chief Executive Officer and President since March 2021. Prior to serving as CEO, he was Executive Vice President and Chief Operating Officer with oversight of the company's global operations for both business segments - Commercial Truck and Aftermarket & Industrial from January 2020 to March 2021; Senior Vice President and President of Global Truck from January 2018 to January 2020; Senior Vice President and President for Americas from February 2014 until January 2018; Vice President of Global Manufacturing and Supply Chain Management from June 2012 until February 2014; Managing Director of Meritor India and CEO of MHVSIL and Automotive Axles Ltd. (joint venture between Meritor and Kalyani Group of India) from December 2009 until June 2012; General Manager of European Operations and Worldwide Manufacturing Planning and Strategy from June 2007 until December 2009; Director of Manufacturing Performance Plus from November 2006 until June 2007; Regional Manager of Continuous Improvement from July 2005 until November 2006; Industrialization Project Manager from September 2001 until July 2005; and Site Manager of the Meritor St. Thomas, Ontario, facility from June 2000 until September 2001.

Carl D. Anderson II, 52 (Caucasian/White Male) - Senior Vice President and Chief Financial Officer since March 2019. Prior to serving as Senior Vice President and Chief Financial Officer, he was Group Vice President of Finance from March 2018 until March 2019; Vice President and Treasurer from February 2012 until March 2018; Assistant Treasurer from August 2009 until February 2012; Director of Capital Markets from September 2006 until August 2009. Prior to joining Meritor, Anderson held progressive leadership positions with GMAC and First Chicago NBD.

Timothy Bowes, 58 (Caucasian/White Male) - Senior Vice President and President of Electrification, Industrial and North America Aftermarket since March 2021. Prior to serving as Senior Vice President and President of Electrification, Industrial and North America Aftermarket, he was Group Vice President and President of Industrial and North America Aftermarket from March 2020 until March 2021. Prior to rejoining Meritor, Bowes was Senior Vice President, Executive Officer and President of American Axle’s casting business from 2015 until 2020. Prior to that, he was CEO and president of Transtar Corporation from 2012 until 2014. Bowes was previously with Meritor from 2005-2013, during which time he was responsible for Defense, Specialty, Off-Highway and the Asia Pacific region. In 2011, he assumed responsibility for the Commercial Truck business as Executive Officer and President. Before that, he held senior executive positions in sales and marketing at Hilite International and Wescast Industries, as well as positions with Intermet Corporation and ITT Automotive.

Ken Hogan, 52 (Caucasian/White Male) - Senior Vice President and President of Truck, Europe and Asia Pacific since March 2021. Prior to serving as Senior Vice President and President of Truck, Europe and Asia Pacific, he was Vice President of Europe, China and Japan from February 2020 until March 2021; Vice President of China, Japan and the ASEAN Region, based out of Shanghai, China, from January 2018 until January 2020; Vice President of Rear Drivetrain from October 2015 until December 2018; General Manager of North America Axles from January 2013 until October 2015; General Manager of Front Axles and Drivelines from July 2011 until December 2012; Director of Corporate Development from September 2009 until July 2011. Before joining Meritor, Hogan held progressive leadership positions with Booz Allen Hamilton, Deloitte, Falding Capital Group and Detroit Diesel.

John Nelligan, 56 (Caucasian/White Male) - Senior Vice President and President of Truck, Americas since March 2021. Prior to serving as Senior Vice President and President of Truck, Americas, he was Group Vice President and President of North America Truck from March 2020 until March 2021; Vice President of Global Sales and Service from January 2018 until March 2020; Vice President of Original Equipment Manufacturer (OEM) Sales and National Accounts from July 2011 until March 2020; Director of Field Sales and Service for Meritor’s Canadian region from February 2010 until June 2011. Prior to joining Meritor, Nelligan was Dealer Principal and General Manager of Harper Truck Centres, Inc. from September 2005 until October 2009. He also held positions with increasing responsibility at Daimler Trucks North America, including Vice President and General Manager of the Canadian region’s Sterling Trucks and Western Star brands, and General Manager of Canadian Sales and Marketing and Fleet Sales Manager with Western Star Trucks Inc. from November 1997 until September 2005.

There are no family relationships, as defined in Item 401 of Regulation S-K, between any of the above executive officers and any director, executive officer or person nominated to become a director or executive officer. No officer of Meritor was selected pursuant to any arrangement or understanding between him or her and any person other than Meritor. All executive officers are elected annually.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Meritor's common stock, par value $1 per share ("Common Stock"), is listed on the New York Stock Exchange and trades under the symbol "MTOR." On November 16, 2021, there were 8,878 shareholders of record of Meritor's Common Stock.

Our senior secured revolving credit facility permits us to pay up to $65 million towards dividends and the repurchase of common stock shares in any fiscal year provided that at the date of declaration or payment no default or unmatured default has occurred and is continuing and the total leverage ratio would not exceed 2.65 to 1.00, in each case as defined in the senior secured revolving credit facility. The company may exceed the $65 million limit in any fiscal year provided that the amount does not exceed a contractual limitation of $535 million during the term of the senior revolving credit facility. The current amount available under this provision as of September 30, 2021 is estimated at $359 million.

Additionally, our indentures permit us to pay dividends under the following primary conditions:

If a default on the notes, as defined in the indentures, has not occurred and is not continuing or shall not occur as a consequence of the payment;
If the interest coverage ratio, as defined in the indentures, is greater than 2.00 to 1.00 after giving effect to the dividend;
If the cumulative amount of the dividends paid does not exceed certain cumulative cash and earnings measurements;

If the dividends are less than $120 million per fiscal year (with a carryover to the next fiscal year of up to $120 million if unused in the current fiscal year); and
If after giving effect to the dividend, the total leverage ratio, as defined in the indentures, would not exceed 4.00 to 1.00.

See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for information on securities authorized for issuance under equity compensation plans.
 
Issuer repurchases

The table below sets forth information with respect to purchases made by or on behalf of us of shares of our Common Stock during the three months ended September 30, 2021:
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1- 31, 20211,467,867 $23.14 1,467,867 $— 
August 1- 31, 2021— — — — 
September 1- 30, 2021— — — — 
Total1,467,867 1,467,867 
(1) On November 7, 2019, the Board of Directors authorized the repurchase of up to $325 million of our Common Stock 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. This authorization was completed in fiscal year 2021.

 The independent trustee of our 401(k) plans purchases shares in the open market to fund investments by employees in our Common Stock, one of the investment options available under such plans, and any matching contributions in company stock we provide under certain of such plans. In addition, our stock incentive plans permit payment of an option exercise price by means of cashless exercise through a broker and permit the satisfaction of the minimum statutory tax obligations upon exercise of options and the vesting of restricted stock units through stock withholding. However, the company does not believe such purchases or transactions are issuer repurchases for the purposes of this Item 5 of this Annual Report on Form 10-K. In addition, our stock incentive plans also permit the satisfaction of tax obligations upon the vesting of restricted stock through stock withholding. There were no shares withheld in fiscal year 2021.
 
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Shareholder Return Performance Presentation

The line graph below compares the cumulative total shareholder return of the S&P 500, the S&P Smallcap 600, Meritor, Inc. and the peer group of companies for the period from September 30, 2016 to September 30, 2021, assuming a fixed investment of $100 at the respective closing prices on the last day of each fiscal year and reinvestment of cash dividends.

mtor-20211003_g1.jpg
9/169/179/189/199/209/21
Meritor, Inc.100.00 233.69 173.94 166.22 188.14 191.46 
S&P 500100.00 118.61 139.85 145.80 167.89 218.27 
S&P Smallcap 600100.00 121.05 144.14 130.67 119.84 188.92 
Peer Group 2020 (1)
100.00 138.39 121.05 130.67 163.23 187.00 
Peer Group 2021 (2)
100.00 137.63 129.86 137.06 163.80 184.69 
(1)The 2020 peer group consists of representative commercial vehicle suppliers of approximately comparable products to Meritor. The peer group consists of Commercial Vehicle Group, Inc., Cummins Inc., Dana Incorporated, Haldex AB, Modine Manufacturing Company, SAF-Holland SA and Stoneridge, Inc.
(2)The 2021 peer group consists of representative commercial vehicle suppliers of approximately comparable products to Meritor. The peer group consists of Commercial Vehicle Group, Inc., Cummins Inc., Dana Incorporated, Haldex AB, Allison Transmission Holdings Inc. and SAF-Holland SA.
 

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The information included under the heading "Shareholder Return Performance Presentation" is not to be treated as "soliciting material" or as "filed" with the SEC, and is not incorporated by reference into any filing by the company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that is made on, before or after the date of filing of this Annual Report on Form 10-K.

Item 6. [Reserved]


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 was $199 million and $245 million, respectively. 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
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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.


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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,
20212020201920182017
Estimated Commercial Truck production (in thousands):     
North America, Heavy-Duty Trucks262 218 359 307 237 
North America, Medium-Duty Trucks235 222 287 264 246 
Western Europe, Heavy- and Medium-Duty Trucks409 337 485 484 469 
South America, Heavy- and Medium-Duty Trucks151 98 109 102 73 
India, Heavy- and Medium-Duty Trucks281 131 376 464 315 
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;
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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
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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.

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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,
202120202019
Income from continuing operations attributable to the company$200 $244 $290 
Restructuring costs13 27 
Loss on debt extinguishment11 — — 
Asset impairment charges— 10 
U.S. tax reform impacts(1)
— — (3)
Tax valuation allowance reversal, net and other(2)
— — (3)
Transaction costs(3)
— 
Income from WABCO distribution termination— (265)— 
Brazilian VAT credit(22)— — 
Asbestos related items(4)
— — (31)
Tax initiatives(10)— — 
Income tax expense(5)
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Adjusted income from continuing operations attributable to the company$195 $73 $279 
Diluted earnings per share from continuing operations$2.74 $3.23 $3.36 
Impact of adjustments on diluted earnings per share(0.06)(2.26)(0.13)
Adjusted diluted earnings per share from continuing operations$2.68 $0.97 $3.23 
(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.

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Free cash flow is reconciled to cash flows provided by operating activities below (in millions).
 Year Ended September 30,
 202120202019
Cash provided by operating activities$197 $265 $256 
Capital expenditures(90)(85)(103)
Free cash flow (1)
$107 $180 $153 
Free cash flow / Net income from continuing operations attributable to the company54 %74 %53 %
Free cash flow conversion (Free cash flow / Adjusted income from continuing operations attributable to the company)55 %247 %55 %
(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.



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Adjusted EBITDA and segment adjusted EBITDA are reconciled to net income attributable to Meritor, Inc. below (dollars in millions).
 Year Ended September 30,
 202120202019
Net income attributable to Meritor, Inc.$199 $245 $291 
Less: Income (loss) from discontinued operations, net of tax, attributable to Meritor, Inc.(1)(1)
Income from continuing operations, net of tax, attributable to Meritor, Inc.$200 $244 $290 
Interest expense, net79 66 57 
Provision for income taxes24 78 82 
Depreciation and amortization103 101 87 
Restructuring costs13 27 
Asbestos related items— — (31)
Transaction costs— 
Loss on sale of receivables
Asset impairment charges— 10 
Income from WABCO distribution termination— (265)— 
Brazilian VAT credit(22)— — 
Noncontrolling interests10 
Adjusted EBITDA$411 $272 $520 
Adjusted EBITDA margin(1)
10.7 %8.9 %11.9 %
Unallocated legacy and corporate expense (income), net(2)
(13)(6)(3)
Segment adjusted EBITDA$398 $266 $517 
Commercial Truck
Segment adjusted EBITDA$259 $116 $342 
Segment adjusted EBITDA margin(3)
8.6 %5.3 %9.9 %
Aftermarket & Industrial
Segment adjusted EBITDA$139 $150 $175 
Segment adjusted EBITDA margin(3)
14.1 %15.3 %15.9 %
(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.
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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.