Meritor Acquisition and 2022 Financial Results
Table of Contents
ITEM 1A. Risk Factors
Set forth below and elsewhere in this Annual Report on Form 10-K are some of the principal risks and uncertainties that could cause our actual business results to differ
materially from any forward-looking statements contained in this Report and could individually, or in combination, have a material adverse effect on our results of operations,
financial position and cash flows. These risk factors should be considered in addition to our cautionary comments concerning forward-looking statements in this Report,
including statements related to markets for our products and trends in our business that involve a number of risks and uncertainties. Our separate section above,
"CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION," should be considered in addition to the following statements.
GOVERNMENT REGULATION
We are conducting a formal internal review of our emission certification process and compliance with emission standards with respect to our pick-up truck applications and
are working with the EPA and CARB to address their questions about these applications. Due to the continuing nature of our formal internal review and on-going
discussions with the EPA and CARB, we cannot predict the final results of this formal review and these regulatory processes, nor whether, or the extent to which, they
could have a material adverse impact on our results of operations and cash flows.
We previously announced that we are conducting a formal internal review of our emissions certification process and compliance with emission standards with respect to all of
our pick-up truck applications, following conversations with the EPA and CARB regarding certification of our engines for model year 2019 RAM 2500 and 3500 trucks. During
conversations with the EPA and CARB about the effectiveness of our pick-up truck applications, the regulators raised concerns that certain aspects of our emissions systems
may reduce the effectiveness of our emissions control systems and thereby act as defeat devices. As a result, our internal review focuses, in part, on the regulators' concerns. We
are working closely with the regulators to enhance our emissions systems to improve the effectiveness of all of our pick-up truck applications and to fully address the regulators'
requirements. Based on discussions with the regulators, we have developed a new calibration for the engines in model year 2019 RAM 2500 and 3500 trucks that has been
included in all engines shipped since September 2019. During our ongoing discussions, the regulators turned their attention to other model years and other engines, most
notably our pick-up truck applications for RAM 2500 and 3500 trucks for model years 2013 through 2018 and Titan trucks for model years 2016 through 2019. We have also
been in communication with Environmental and Climate Change Canada regarding similar issues relating to some of these very same platforms. In connection with these and
other ongoing discussions with the EPA and CARB, we are developing a new software calibration and will recall model years 2013 through 2018 RAM 2500 and 3500 trucks.
We accrued $30 million for the RAM recall during the first quarter of 2022, an amount that reflected our current estimate of the cost of that recall. We are also developing a
new software calibration and hardware fix and will recall model years 2016 through 2019 Titan trucks. We accrued $29 million for the Titan recall during the third quarter of
2022, an amount that reflected our current estimate of the cost of that recall.
We will continue to work together closely with the relevant regulators to develop and implement recommendations for improvement and seek to reach further resolutions as part
of our ongoing commitment to compliance. Due to the presence of many unknown facts and circumstances, we are not yet able to estimate any further financial impact of these
matters. It is possible that the consequences resulting from our formal review and these regulatory processes could have a material adverse impact on our results of operations
and cash flows.
Our products are subject to extensive statutory and regulatory requirements that can significantly increase our costs and, along with increased scrutiny from regulatory
agencies and unpredictability in the adoption, implementation and enforcement of increasingly stringent and fragmented emission standards by multiple jurisdictions
around the world, could have a material adverse impact on our results of operations, financial condition and cash flows.
Our engines are subject to extensive statutory and regulatory requirements governing emissions and noise, including standards imposed by the EPA, the EU, state regulatory
agencies (such as the CARB) and other regulatory agencies around the world. Regulatory agencies are making certification and compliance with emissions and noise standards
more stringent and subjecting diesel engine products to an increasing level of scrutiny. The discovery of noncompliance issues could have a material adverse impact on our
results of operations, financial condition and cash flows.
Developing engines and components to meet more stringent and changing regulatory requirements, with different implementation timelines and emission requirements, makes
developing engines efficiently for multiple markets complicated and could result in substantial additional costs that may be difficult to recover in certain markets. While we
have met previous deadlines, our ability to comply with existing and future regulatory standards will be essential for us to maintain our competitive position in the engine
applications and industries we serve. The successful development and introduction of new and enhanced products in order to comply with new regulatory requirements are
subject to other risks, such as delays in product development, cost over-runs and unanticipated technical and manufacturing difficulties.
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