Meritor Inc. (MTOR) has disappointed its investors by lowering guidance for the third quarter of its fiscal year without citing any reason. The company now expects revenues for the period to go up 7%–8% from the second quarter to $1.28 billion–$1.29 billion, down from the earlier guidance of $1.3 billion–$1.375 billion provided in May.
The company also expects adjusted earnings to lie between $100 million and $104 million in contrast to its earlier outlook of as high as $110 million. It predicted free cash flow to be breakeven compared with the earlier projection of a slightly positive due to investments in inventory.
Meritor 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, exceeding 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 company had an operating cash outflow of $16 million in the first half of fiscal 2011 compared with an inflow of $67 million in the same period last year, 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.
Meritor has a high customer concentration. The company’s ten largest customers contributed 66% of sales in fiscal 2010. The company’s three largest customers were Volvo AB (VOLVY), Navistar International Corporation (NAV) and Daimler AG (DDAIF). Moreover, the company has a highly leveraged balance sheet.
The company will release its third quarter results on August 2, 2011. It currently retains a Zacks #3 Rank on its stock, which translates to a short-term rating of “Hold”.
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