Meritor Misses, Profits Rise 27%

Meritor Inc. (MTOR - Analyst Report) posted a 27% rise in earnings to 38 cents per share in the third quarter of its fiscal year ending June 30, 2012 from 30 cents in the year-ago quarter, missing the Zacks Consensus Estimate by a penny. Net income increased 28% to $37 million from $29 million in the year ago quarter.

Reported earnings were $50 million or 51 cents per share compared with $27 million or 28 cents in the third quarter of fiscal 2011. The earnings growth was attributable to lower effective tax rate leading to a decrease in income tax expenses.

Total revenues in the quarter went down 12.5% to $1.11 billion, missing the Zacks Consensus Estimate of $1.24 billion. Lower sales volume in Brazil, Europe, China and India along with weak currency translation had adverse effects on revenues.

Adjusted EBITDA was $92 million compared with $103 million in the third quarter of fiscal 2011. However, adjusted EBITDA margin increased marginally to 8.3% from 8.1% in the same quarter last year. The growth in EBITDA margin was driven by favorable pricing in North America and completion of rationalization in Europe.

Segments Results

Revenues from the Commercial Truck segment fell 10% to $690 million in the reported quarter. A dip in Brazilian and European sales volume and weak currency translation offset the favorable impacts from higher sales volumes in North America. Segment EBITDA decreased $1 million to $48 million in the quarter. However, EBITDA margin increased marginally to 7% from 6.4%.

Revenues from the Industrial segment went down 21% to $242 million due to low volume sales in both China and India. Segment EBITDA was $20 million compared to $21 million in the year-ago quarter. However, EBITDA margin improved to 8.3% from 6.8% recorded a year ago.

Revenues from the Aftermarket & Trailer segment decreased 5% to $265 million, driven by a decline in European aftermarket volumes and weak currency translation. Segment EBITDA slid 31% to $25 million from $36 million in the third quarter of fiscal 2011. EBITDA margin declined to 9.4% from 12.9% due to a hike in material costs and negative impact of foreign exchange.

Financial Position

Meritor’s cash and cash equivalents rose to $226 million as of June 30, 2012 compared with $217 million as of September 30, 2011. Total debt increased to $1.06 billion from $1.03 billion as of September 30, 2011.

In the first nine months of fiscal 2012, the company had cash inflow from operating activities of $22 million compared to a cash outflow of $19 million in the year-ago period. Capital expenditure declined to $65 million from $68 million in the year ago. Free cash flow from continuing operations was $46 million compared to a free cash outflow of $1 million in the third quarter of fiscal 2011.

Outlook

For fiscal 2012, the company expects revenues in the range of $4.4 billion to $4.5 billion, which is lower than the previous estimate of $4.8 billion. Adjusted EBITDA is expected in the range of 7.6% to 8.0%, down from the previous estimate of 8.2% to 8.6%.

The company has also lowered its adjusted income guidance to $85 million–$110 million from the previous estimate of $105 million–$135 million. Adjusted earnings per share are expected between $0.90 and $1.15 for the year.

In addition, the company expects capital expenditures between $90 million and $100 million for the fiscal year. Free cash flow before restructuring payments is expected to go up to $50 million.

Our Take

Headquartered in Troy, Michigan, Meritor is a global automotive parts manufacturer and supplier to various customers in North America, Europe and other parts of the world. The company operates manufacturing facilities in countries across North America, South America, Europe and Asia-Pacific.

Some of its big customers include Volvo AB (VOLVY), Navistar International Corporation (NAV - Analyst Report) and Daimler AG (DDAIF). Currently, it retains a Zacks #5 Rank, which translates into a short-term (1 to 3 months) Strong Sell rating.