Meritor Inc. has reported financial results for its third fiscal quarter ended June 30, 2015.
Third-Quarter Highlights
- Sales were $909 million, down $70 million, or 7%, from the same period last year.
- Net income attributable to Meritor on a GAAP basis was $13 million, compared with $234 million in the same period last year. Net income a year ago included $209 million from the antitrust settlement with Eaton Corporation.
- Net income from continuing operations was $15 million, or $0.15 per diluted share, compared with $237 million, or $2.34 per diluted share, in the prior year.
- Adjusted net income from continuing operations was $41 million, or adjusted diluted earnings per share of $0.41, compared with $29 million, or $0.29, in the prior year.
- Adjusted EBITDA was $87 million, compared with $82 million in the prior year.
- Adjusted EBITDA margin was 9.6%, compared with 8.4% in the third quarter of fiscal year 2014.
- Free cash flow was $71 million, flat relative to the same period last year.
- Meritor repurchased $18 million of equity and equity-linked notes in the third quarter as part of its $210 million repurchase program.
Third-Quarter Results
For the third quarter of fiscal year 2015, Meritor posted sales of $909 million, down $70 million, or 7%, from the same period last year. This decrease was due to currency exchange rate declines in Europe and Brazil against the U.S. dollar. When adjusted for the impact of foreign currency, sales for the period increased 1% from a year ago.
Net income from continuing operations on a GAAP basis was $15 million, or $0.15 per diluted share, compared with $237 million, or $2.34 per diluted share, in the prior year.
Adjusted net income from continuing operations in the third quarter was $41 million, or adjusted per diluted earnings per share of $0.41, compared with $29 million, or adjusted per diluted earnings per share of $0.29, in the prior year.
Adjusted EBITDA was $87 million, compared with $82 million in the third quarter of fiscal year 2014. Adjusted EBITDA margin for the third quarter of fiscal year 2015 was 9.6%, compared with 8.4% in the same period last year. The improvements in Adjusted EBITDA and Adjusted EBITDA margin were driven primarily by material, labor and burden performance and pricing actions, which more than offset the impact of lower revenue.
Free cash flow from operating activities in the third quarter of fiscal year 2015 was $71 million, flat relative to the same period last year.
Third-Quarter Segment Results
Commercial Truck & Industrial sales were $705 million, down $56 million, or 7% compared with the same period last year. Revenue was unfavorably impacted by the strengthening U.S. dollar against most currencies – especially the euro and the Brazilian real. Higher truck production in North America, driven by a strong Class 8 market, offset lower production in South America and China.
Segment EBITDA for the Commercial Truck & Industrial segment was $58 million for the quarter, up $3 million from the third quarter of fiscal year 2014. Segment EBITDA margin was 8.2%, up 1 percentage point from the same period last year. Strong material and operational performance and pricing actions more than offset the impact of lower revenue.
The Aftermarket & Trailer segment posted sales of $233 million, down 8% from the same period last year. The unfavorable impact of the strengthening U.S. dollar against the euro drove lower revenue in the company's Aftermarket business in Europe. Segment EBITDA for Aftermarket & Trailer was $31 million, compared with $28 million in the third quarter of fiscal year 2014. Segment EBITDA margin was 13.3%, up 2.2 percentage points from the same period last year. The increases in Segment EBITDA and Segment EBITDA margin were attributable to net material, labor and burden performance and pricing actions that were executed during the last year.
Balance Sheet Actions
Meritor enhanced its financial flexibility with capital market transactions completed in the third quarter of fiscal year 2015. The company issued an additional $225 million of its existing 6.25% notes due 2024. Net proceeds financed the repurchase of $85 million aggregate principal amount at maturity of its 7.875% convertible notes due 2026. As a result of this transaction, the dilution impact of these convertible notes has been reduced. The company also expects to use proceeds from the offering to fund the purchase of an annuity in the fourth quarter to satisfy its obligations under German pension plans for its employees.
In the quarter, Meritor repurchased 1.1 million common shares using $14 million of cash and also repurchased $4 million of its 4% convertible notes due 2027. As of June 30, the company has repurchased $49 million of equity and equity-linked notes and is on track to complete the program by the end of fiscal 2016.
New Business Win with PACCAR
Meritor announced that it has secured standard product positioning with PACCAR for front axles in North America. In January 2015, the company announced an agreement with PACCAR for preferred positioning on rear axles in North America and Australia.
"We are excited to continue building our relationship with PACCAR in such a significant way," says Jay Craig, CEO and President of Meritor. "The Meritor team remains fully committed to delivering industry-leading products to support PACCAR in building great trucks."
Outlook for Fiscal Year 2015
The company's guidance for fiscal year 2015 is as follows:
- Revenue will be in the range of $3.50 billion to $3.55 billion, unchanged from prior guidance.
- Adjusted EBITDA margin of approximately 9.3%, as compared with prior guidance of 9.0 to 9.2%.
- Adjusted diluted earnings per share from continuing operations will range from $1.40 to $1.50, as compared with prior guidance of $1.30 to $1.40.
- Effective income tax rate of approximately 15% remains unchanged from the prior estimate.
- Free cash flow to be approximately $110 million, up from previous guidance of approximately $100 million, excluding the potential impact of the company's planned buyout of its German pension liability.
Meritor anticipates the following assumptions for the entire company:
- Capital expenditures of approximately $80 million, compared with the prior estimated range of $80 million to $90 million.
- Interest expense in the range of $80 million to $85 million remains unchanged, excluding the loss on debt extinguishment from the capital market transactions executed during the third quarter.
- Cash interest in the range of $65 million to $70 million remains unchanged.
"We believe our performance in fiscal year 2015 demonstrates our commitment to meet or exceed our financial objectives," Craig says. "We're confident that execution of our M2016 strategy positions us well to continue generating enhanced shareholder value."
