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Meritor Inc. (MTOR - Free Report) showed a profit of $25 million or 26 cents per share in the third quarter of its fiscal year ended June 30, 2011, falling behind the Zacks Consensus Estimate of 29 cents per share.

However, earnings improved from a loss of $6 million or 6 cents per share in the same quarter of last year. The quarterly profit excluded $7 million of restructuring costs and a $5 million non-operating gain on the collection of a note receivable.

Sales in the quarter soared 33% to $1.29 billion, which is at the upper end of the guidance provided by the company at the end of last month. The improvement in sales was primarily driven by continued strength in truck demand globally.

Adjusted EBITDA was $102 million versus $66 million in the third quarter of fiscal year 2010. The adjusted EBITDA margin was 7.9% compared with 6.8% in the previous year quarter

Segment Performance

Commercial truck sales surged 48% to $770 million, mainly driven by increased sales in North America, Europe and South America. Segment EBITDA went up 96% to $49 million from $25 million in the third quarter of fiscal 2010, primarily driven by higher sales as well as higher earnings from the company’s unconsolidated joint ventures.

Industrial segment sales went up 20% to $308 million. Segment EBITDA went down $4 million to $21 million in the quarter. It was favorably affected by increased sales in Asia Pacific, more than offset by the impact of lower sales of the Family of Medium Tactical Vehicles as production shifted to a new prime contractor.

The Aftermarket & Trailer segment rose 14% to $293 million. Segment EBITDA was $35 million, up 75% from $20 million in the third quarter of fiscal 2010. It was favorably affected by higher sales for the company’s core aftermarket replacement and trailer products.

Financial Position

Meritor had cash and cash equivalents of $201 million as of June 30, 2011, a decline from $343 million as of September 30, 2010. Long-term debt decreased to $950 as of June 30, 2011 from $1.03 billion as of September 30, 2010. The company had a shareholder deficit of $1.01 billion during the period-end under study.

In the first nine months of fiscal year 2011, Meritor’s operating cash flow fell substantially to $18 million from $118 million, primarily driven by unfavorable changes in assets and liabilities.

Capital expenditures increased to $68 million from $33 million in the year-ago period. Consequently, free cash flow was $50 million during the period under study compared with $85 million a year ago. For full fiscal year, the company expects capital expenditures in the range of $90 million to $105 million.

Revenue and Earnings Guidance

In the fourth quarter of fiscal 2011, Meritor expects to generate revenue in the range of $1.18 billion to $1.28 billion and earn income from continuing operations (adjusted) in the range of $15 million to $25 million and EBITDA (adjusted) in the range of $90 million to $100 million. It also anticipates free cash flow to be slightly negative.

Our Take

We are optimistic about Meritor’s focus on cost savings program and its reliance on OEMs in low cost countries across Asia and South America to generate revenues. However, the company has higher customer concentration.

The company’s ten largest customers contributed 66% of sales in fiscal 2010.The company’s three largest customers were Volvo AB , Navistar International Corporation (NAV - Free Report) and Daimler AG (DDAIF - Free Report) . Moreover, the company has a highly leveraged balance sheet.

As a result, the company retains a Zacks #4 Rank, which translates to a short-term (1 to 3 months) rating of “Sell”.

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