Meritor Inc. (MTOR) posted an increase in profit to $14 million or 14 cents per share in the second quarter of its fiscal year from $6 million or 8 cents per share in the same quarter of prior fiscal year due to higher sales. The profit exceeded the Zacks Consensus Estimate by 6 cents per share.
Sales in the quarter soared 37% to $1.19 billion, driven by stronger truck demand in the Americas and Europe.
Adjusted EBITDA was $81 million versus $61 million in the second quarter of fiscal 2010. The adjusted EBITDA margin was 6.8% compared with 7.0% in the same period last year. Higher sales volumes favorably affected adjusted EBITDA, offset partially by rising steel costs and launch costs for the Caiman defense program.
The adjusted profit and sales was in line with the company’s own guidance. However, adjusted EBITDA was lower than the company’s outlook of $85 million–$95 million.
Segment Results
In the Commercial Truck segment, sales shot up 51% to $693 million driven by higher sales in North America, continued strength in Europe and record high volumes in South America. Adjusted EBITDA jumped 167% to $40 million from $15 million in the second quarter of fiscal 2010.
In the Industrial segment, sales went up 23% to $306 million. Adjusted EBITDA dipped 42% to $18 million from $31 million a year ago on higher sales in Asia Pacific, which was more than offset by greater than anticipated launch costs associated with the Caiman defense program and the impact of lower sales of the Family of Medium Tactical Vehicles (FMTV) as production shifts to a new prime contractor.
In the Aftermarket & Trailer segment, sales inched up 14% to $272 million. Adjusted EBITDA was $28 million, up 65% from $17 million a year ago, driven by the favorable impact of higher sales for the company's core aftermarket replacement and trailer products, offset partially by lower sales of Meritor's military service parts.
Divestiture of Light Vehicle Systems
Meritor announced that it has completed the sale of Light Vehicle Systems business by concluding the sale of Body Systems business on January 3, 2011. Following this, the company can focus entirely on its three core global business segments.
Financial Position
Meritor had cash and cash equivalents of $195 million as of March 31, 2011, down from $343 million as of September 30, 2010. Long-term debt decreased by $81 million to $948 million from $1.03 billion as of September 30, 2010. The company had a shareholder deficit of $1.05 billion in the period under study, which was flat compared with the figure as of September 30, 2010.
In the first half of fiscal 2011, Meritor had an operating cash outflow of $16 million compared with an inflow of $67 million, due to unfavorable changes in assets and liabilities. Free cash flow was negative $18 million compared with $45 million in the comparable period a year ago due to additional working capital requirements and higher capital expenditures as global commercial vehicle and industrial markets continue to strengthen.
Capital expenditures increased to $42 million from $24 million in the prior fiscal year. For fiscal 2011, the company revised its guidance upwards to $90 million–$105 million, up from the previous outlook of $75 million–$90 million.
Guidance
For the third quarter of fiscal 2011, Meritor anticipates revenues in the range of $1.30 billion–$1.37 billion, adjusted EBITDA in the range of $100 million–$110 million, adjusted profit in the range of $20 million–$30 million and free cash flow to be slightly positive.
Peer Performance
Meritor’s competitor, Dana Holding Corporation (DAN), reported a robust increase in profit to 34 cents per share in the first quarter of 2011 from 6 cents per share in the prior-year period driven by positive impact from new labor union agreements, restructuring of balance sheet, investment in key markets. The company has beaten the Zacks Consensus Estimate by 6 cents per share. Sales in the quarter grew 20% to $1.8 billion, up from the Zacks Consensus Estimate of $1.69 billion.
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, based on the company’s lower guidance and higher customer concentration the company retains a Zacks #3 Rank (Hold) on its stock for the short term (1–3 months). Consequently, we reiterated our ‘Neutral’ recommendation on the stock for the long term (more than 6 months).
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