Meritor’s (MTOR) Q2 Earnings Beat Estimates, Shares Rise

Zacks

Meritor, Inc.’s MTOR shares gained 4% on Apr 29 after the company reported strong earnings for the second quarter of fiscal 2015 (ended Mar 31, 2015). The company recorded adjusted income of 41 cents per share in the quarter, which surpassed the Zacks Consensus Estimate of 32 cents. Earnings increased significantly from 24 cents recorded in the year-ago quarter. Adjusted net income jumped to $42 million in the reported quarter from $24 million in the second quarter of fiscal 2014.

On a reported basis, Meritor posted net income from continuing operations of $43 million or 38 cents per share in the second quarter of fiscal 2015, compared with $1 million or 1 cent per share in the corresponding quarter last year. The increase in net income from continuing operations came on the back of higher adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and lower interest expense.

Revenues decreased 9.4% year over year to $864 million, missing the Zacks Consensus Estimate of $939 million. The year-over-year decline is attributable to lower commercial truck production in South America and China, lower revenues in the Defense business, and unfavorable exchange rates in Europe and Brazil. However, this was partially offset by higher sales in North America due to the strengthening of the Class 8 truck market.

Adjusted EBITDA of Meritor increased to $87 million from $80 million in the second quarter of fiscal 2014. Meanwhile, adjusted EBITDA margin stood at 10.1%, compared with 8.4% in the year-ago quarter. The increase was driven by incremental pricing and improved material, labor and burden performance, along with gains from foreign exchange currency hedges.

Segment Results

Revenues from the Commercial Truck & Industrial segment went down 10.8% to $681 million in the reported quarter. The decline resulted from lower commercial truck production in South America and China, lower revenues in the Defense business, and unfavorable exchange rates in Europe and Brazil. This was partially offset by better sales in North America due to the strength of the Class 8 truck market.

Segment EBITDA was $57 million, in line with the year-ago quarter figure. EBITDA margin increased to 8.4% from 7.5% in the prior-year quarter, driven by incremental pricing; enhanced material, labor and burden performance; and gains from foreign exchange currency hedges, partially offset by lower revenue and unfavorable mix.

Revenues from the Aftermarket & Trailer segment declined 5.8% to $212 million due to unfavorable currency exchange rates in Europe. Segment EBITDA improved 25% to $30 million from $24 million in the year-ago quarter. EBITDA margin was 14.2% compared with 10.7% in the second quarter of fiscal 2014.

Financial Position

Meritor’s cash and cash equivalents were $207 million as of Mar 31, 2015 versus $247 million as of Sep 30, 2014. Total debt amounted to $950 million as of Mar 31, 2015, compared with $972 million as of Sep 30, 2014.

In the first half of fiscal 2015, Meritor’s cash flow from operating activities was $29 million, compared with $18 million in the same period a year ago. Capital expenditures decreased to $23 million from $25 million. Free cash flow stood at $6 million compared with cash outflow of $7 million in the first half of fiscal 2014.

Outlook

For fiscal 2015, Meritor expects its revenues to be $3.5–$3.55 billion, down from $3.7 billion predicted earlier. Adjusted EBITDA margin is likely to be 9%–9.2%, higher than the previous projection of 9%. Adjusted earnings from continuing operations are expected between $1.30 and $1.40 per share, up from $1.20–$1.30 guided earlier.

In addition, Meritor expects capital expenditures in the range of $80–$90 million for the fiscal. Interest expense is projected to be in the range of $80–$85 million. Further, Meritor expects free cash flow to be $100 million.

Meritor is focused on its three-year plan, M2016, which aims at achieving margin, debt reduction and revenue growth through operational efficiency, enhancement of customer value and reduction of product costs.

Investors interested in the automobile sector can also consider stocks like American Axle & Manufacturing Holdings Inc. AXL, Allison Transmission Holdings, Inc. ALSN and General Motors Company GM.

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