Meritor's EPS Beats but Profits Fall

Meritor Inc. (MTOR - Analyst Report) reported adjusted earnings per share of 32 cents in the fourth quarter of 2012, down 28.9% from 45 cents in the year-ago quarter. However, quarterly earnings outpaced the Zacks Consensus Estimate by 14 cents per share. Net income decreased 27.9% to $31.0 million from $43.0 million in the fourth quarter of 2011.

Meanwhile, on a reported basis, net income deteriorated significantly to $4.0 million or 4 cents per share in the fourth quarter of 2012 from $38.0 million or 40 cents in the corresponding quarter last year. The year-over-year fall in earnings was attributable to lower earnings from unconsolidated affiliates resulting from a decline in sales volume in the respective markets.

Revenues went down 19% to $986.0 million in the reported quarter, missing the Zacks Consensus Estimate of $1.0 billion. The decline in revenues was due to lower sales volumes in global markets and adverse impacts of currency translation.

Adjusted EBITDA was $79.0 million compared with $97.0 million in the fourth quarter of fiscal 2011. Meanwhile, adjusted EBITDA margin was flat year over year at 8.0%. EBITDA margin was positively affected by favorable pricing in North America, rationalization in Europe and improved military mix, which offset the adverse impact of lower sales volume.

Segment Results

Revenues from the Commercial Truck segment fell 24.1% to $583.0 million in the reported quarter, due to lower sales volume. Segment EBITDA decreased 6.1% to $46.0 million in the quarter. However, EBITDA margin increased to 7.9% from 6.4% in the prior-year quarter, which was attributable to favorable pricing in North America, rationalization in Europe and improved net material performance; partially offset by lower sales volumes and poor earnings from the unconsolidated Brakes affiliate in Brazil.

Revenues from the Industrial segment declined 17.5% to $222.0 million due to lower sales volume in both China and India. Segment EBITDA was $15.0 million compared with $18.0 million in the year-ago quarter. However, EBITDA margin improved marginally to 6.8% from 6.7% a year ago. Margins were impacted positively by improved military mix, which was offset by adverse impact of lower sales volume in China.

Revenues from the Aftermarket & Trailer segment decreased 9.5% to $248.0 million, due to lower aftermarket volumes and adverse impacts of currency translation. Segment EBITDA plummeted 37.5% to $20.0 million from $32.0 million in the fourth quarter of fiscal 2011. EBITDA margin declined to 8.1% from 11.7%, due to lower sales volume in European and North American markets.

Fiscal 2012 Performance

Meritor posted a 34.1% rise in earnings to $1.14 per share in fiscal 2012 from 85 cents per share in fiscal 2011. Profits went up 35.4% to $111.0 million from $82.0 million in the year-ago period.

Revenues declined 4.4% year over year to $4.4 billion, due to lower sales volumes in global markets and adverse impacts of currency translation.

Financial Position

Meritor’s cash and cash equivalents rose to $257.0 million as of September 30, 2012 from $217.0 million as of September 30, 2011. Total debt increased to $1.06 billion from $1.03 billion as of September 30, 2011.

In fiscal 2012, the company generated cash flow from operating activities of $77.0 million, up from $41.0 million in the year-ago period. The year-over-year growth in cash flow was driven by lower working capital and a decrease in cash used for discontinued operations. Capital expenditures declined to $89.0 million from $105.0 million a year ago. The company had lower free cash outflow from continuing operations of $12.0 million for the year compared with $70.0 million last year.

Outlook

For fiscal 2013, the company expects revenues to be $4.0 billion and adjusted EBITDA margin of 7.0%. The company also anticipates adjusted earnings per share between 25 cents and 35 cents for the year.

In addition, the company expects capital expenditures between $65.0 million and $75.0 million for the fiscal year. Tax rate is estimated to be 50% and interest expense is projected in the range of $90.0 million to $100.0 million for the year.

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 North America, South America, Europe and Asia-Pacific.

Some of its big customers include AB Volvo (VOLVY), Navistar International Corporation (NAV - Analyst Report) and Daimler AG (DDAIF). Currently, it retains a Zacks #4 Rank, which translates into a short-term (1 to 3 months) Sell rating.