Meritor Reports Third Quarter Fiscal 2016 Results

For its third quarter fiscal 2016, Meritor sales were down approximately 7% driven partially by lower production in the North American Class 8 truck market.

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Meritor Inc. reports financial results for its third fiscal quarter ended June 30, 2016.

Third-Quarter Highlights

  • Sales of $841 million
  • Net income attributable to Meritor of $41 million
  • Diluted earnings per share from continuing operations of $0.46
  • Adjusted diluted earnings per share of $0.57
  • Adjusted EBITDA of $96 million, adjusted EBITDA margin at 11.4%
  • Repurchased $38 million of common stock; $210 million repurchase program now complete
  • Board of Directors approves new authorizations for up to $150 million debt and $100 million equity repurchases

Third-Quarter Results

For the third quarter of fiscal year 2016, Meritor posted sales of $841 million, down $68 million, or approximately 7%, from the same period last year. The decrease in sales was driven by lower production in the North America Class 8 truck market partially offset by new business wins.

Net income attributable to Meritor was $41 million, or $0.45 per diluted share (net income of $42 million and $0.46per diluted share from continuing operations), compared to $13 million, or $0.13 per diluted share (net income of$15 million and $0.15 per diluted share from continuing operations), in the same period last year.

Adjusted income from continuing operations attributable to the company in the third quarter of fiscal year 2016 was $52 million, or adjusted diluted earnings per share from continuing operations of $0.57, compared to $42 million, or adjusted diluted earnings per share of $0.42, in the same period a year ago.

Adjusted EBITDA was $96 million, compared to $87 million in the third quarter of fiscal year 2015. Adjusted EBITDA margin for the third quarter of fiscal year 2016 was 11.4%, compared to 9.6% in the same period last year.

The increases in net income attributable to Meritor and income from continuing operations were primarily driven by a $19 million loss on debt extinguishment recognized in the prior year. Improvements in Adjusted EBITDA and adjusted income from continuing operations attributable to the company were driven primarily by lower material, labor and burden costs and a supplier recovery and an insurance settlement in the current period, partially offset by lower sales in North America.

Cash flow from operating activities in the third quarter of fiscal year 2016 was $105 million, compared to $93 million in the same period last year. Free cash flow for the third quarter of fiscal year 2016 was $86 million, compared to $71 million in the same period last year.

Third-Quarter Segment Results

Commercial Truck & Industrial sales for the third quarter of fiscal year 2016 were $640 million, down $65 million, or 9%, compared to the same period last year. The decrease in sales was due to lower production in the North America Class 8 truck market and was partially offset by new business wins.

Segment EBITDA for the Commercial Truck & Industrial segment was $61 million for the quarter, up $3 million from the third quarter of fiscal year 2015. Segment EBITDA margin increased to 9.5%, up from 8.2% in the same period last year. The increase in segment EBITDA and segment EBITDA margin was driven primarily by lower material, labor and burden costs, which more than offset the unfavorable impact of lower revenue.

The Aftermarket & Trailer segment posted sales of $227 million, down $6 million from the same period a year ago. The decrease in sales was primarily driven by lower sales in North America Aftermarket.

Segment EBITDA for Aftermarket & Trailer was $38 million for the quarter, up $7 million from the third quarter of fiscal year 2015. Segment EBITDA margin was 16.7%, up 3.4 percentage points from 13.3% in the third quarter of fiscal year 2015. The increase in Segment EBITDA and Segment EBITDA margin was primarily driven by a supplier recovery and lower material costs.

Equity and Debt Repurchases

In the third quarter, Meritor repurchased 4.7 million common shares using $38 million of cash. Overall, the company repurchased 12.8 million common shares under its $210 million repurchase program that has now been completed a quarter early. In addition, Meritor bought back a total of $74 million in convertible debt during the program, which lowered interest expense, improved the company's debt maturity profile and mitigated long-term equity dilution risk.

On July 21, 2016, Meritor's Board of Directors authorized the repurchase of up to $150 million aggregate principal amount of any of our public debt securities and up to $100 million of our common stock until Sept. 30, 2019.

Meritor Board of Directors

The Board of Directors has elected Jan Bertsch to the Meritor Board of Directors, effective September 29, 2016, as a Class III director with a term expiring at the 2018 annual meeting of shareholders.

Bertsch has served as senior vice president and chief financial officer of Owens-Illinois, Inc. since November 2015. From 2012 to 2015 she served as executive vice president, chief financial officer of Sigma-Aldrich Corporation.

Before joining Sigma-Aldrich Corporation, she served in various capacities as vice president and treasurer and subsequently vice president, controller and principal accounting officer at BorgWarner, Inc. from 2009 to 2012. Prior to that, she served in various capacities for Chrysler Group LLC, ultimately serving as senior vice president, chief information officer and treasurer of Chrysler LLC. 

Bertsch earned a Bachelor of Arts degree in finance from Wayne State University and a Master of Business Administration from Eastern Michigan University.

Outlook for Fiscal Year 2016

The company is revising its guidance for fiscal year 2016 as follows:

  • Revenue to be approximately $3.225 billion, as compared to the prior outlook of approximately $3.275 billion.
  • Net income attributable to Meritor to be approximately $115 million (approximately $1.25 diluted earnings per share).
  • Net income from continuing operations attributable to Meritor to be approximately $120 million(approximately $1.30 diluted earnings per share from continuing operations).
  • Adjusted EBITDA margin to be approximately 10.0 percent, unchanged from prior expectations.
  • Adjusted diluted earnings per share from continuing operations will be approximately $1.60, compared to prior outlook of $1.55 to $1.65.
  • Operating cash flow to be approximately $180 million.
  • Free cash flow to be approximately $90 million, unchanged from prior outlook.

"Upon completion of another strong performance quarter, Meritor is on track to meet the commitments presented in our M2016 plan," says Jay Craig, CEO and President of Meritor. "M2016 established the foundation for sustainable growth. We are now ready to accelerate the execution of our growth initiatives as we launch M2019."

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