Meritor Inc. has reported financial results for its fourth quarter and full fiscal year ending Sept. 30, 2018.
Fourth-Quarter Highlights
- Sales were $1,080 million
- Net income attributable to Meritor and net income from continuing operations attributable to Meritor were each $32 million
- Diluted earnings per share from continuing operations were $0.36
- Adjusted income from continuing operations attributable to Meritor was $73 million, or $0.82 of adjusted diluted earnings per share
- Adjusted EBITDA was $118 million
- Adjusted EBITDA margin was 10.9 percent
- Meritor's Board of Directors approved a new $200 million share repurchase authorization
Fourth-Quarter Results
For the fourth quarter of fiscal year 2018, Meritor posted sales of $1,080 million, up $158 million or approximately 17%, from the same period last year. This increase in sales was driven primarily by higher production in all of the company's major markets, as well as market share increases and new business wins.
Net income attributable to Meritor and net income from continuing operations attributable to Meritor were $32 million or $0.36 per diluted share, compared to net income attributable to Meritor and net income from continuing operations attributable to Meritor of $239 million or $2.63 per diluted share in the prior year. The decrease in net income from continuing operations attributable to Meritor was due primarily to a $243 million one-time gain on the sale of an equity method investment in the fourth quarter of fiscal year 2017, and higher tax expense as a result of the enactment of the Tax Cuts and Jobs Act (U.S. tax reform) of $12 million. The decrease was partially offset by conversion on increased revenue and decreased interest expense driven primarily by a reduction in fixed-rate debt as a result of capital market transactions completed in the fourth quarter of fiscal year 2017 and the first quarter of fiscal year 2018.
Adjusted income from continuing operations attributable to the company in the fourth quarter was $73 million, or $0.82 of adjusted diluted earnings per share, compared with $56 million, or $0.62 of adjusted diluted earnings per share, in the prior year. Adjusted income was up year over year primarily due to higher revenue.
Adjusted EBITDA was $118 million, compared to $98 million in the fourth quarter of fiscal year 2017. Adjusted EBITDA margin for the fourth quarter of fiscal year 2018 was 10.9%, compared with 10.6% in the same period last year. The adjusted EBITDA margin improvement was driven primarily by conversion on higher revenue and the favorable impact of changes to retiree medical benefits, partially offset by lower affiliate earnings following the sale of the company's interest in the Meritor WABCO joint venture in the prior year and higher material and freight costs.
Cash flow provided by operating activities in the fourth quarter of fiscal year 2018 was $60 million, compared to $40 million in the same period last year. Free cash flow for the fourth quarter of fiscal year 2018 was $8 million, compared to free cash flow of negative $3 million in the same period last year. Higher earnings helped drive cash flow performance in the fourth quarter of fiscal year 2018.
Fourth-Quarter Segment Results
Commercial Truck & Trailer sales were $854 million in the fourth quarter of fiscal year 2018, up 18% compared to the fourth quarter of fiscal year 2017. The increase in sales was driven primarily by higher production in all of the company's major markets, increased market share and new business wins.
Commercial Truck & Trailer segment adjusted EBITDA was $77 million in the fourth quarter of fiscal year 2018, up $6 million from the prior fiscal year. Segment adjusted EBITDA margin decreased to 9.0% from 9.8% in the same period in the prior fiscal year. The increase in segment adjusted EBITDA was driven primarily by higher revenue and the favorable impact of changes to retiree medical benefits partially offset by lower affiliate earnings and higher material and freight costs. The decrease in segment adjusted EBITDA margin was driven by higher material and freight costs and lower affiliate earnings, which more than offset the conversion on the higher revenue.
Aftermarket & Industrial sales were $266 million in the fourth quarter of fiscal year 2018, up 10% compared to the fourth quarter of fiscal year 2017. The increase in sales was driven by higher volumes in the company's Industrial business, as well as the business the company acquired in September 2017.
Aftermarket & Industrial segment adjusted EBITDA was $39 million in the fourth quarter of fiscal year 2018, up $9 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin increased to 14.7% compared to 12.4% in the fourth quarter of fiscal year 2017. The increases in both segment adjusted EBITDA and segment adjusted EBITDA margin were driven primarily by the favorable impact of changes to retiree medical benefits and conversion on higher sales.
Fiscal Year 2018 Results
For fiscal year 2018, Meritor posted sales of $4.2 billion, up $831 million or approximately 25% from the prior year driven primarily by higher production in all of the company's major markets. Sales for the year were also favorably impacted by revenue outperformance, primarily through increased market share and new business wins, as well as the business the company acquired in the fourth quarter of fiscal year 2017.
Net income attributable to Meritor was $117 million, or $1.28 per diluted share (net income of $120 million or $1.31 per diluted share from continuing operations), compared to $324 million or $3.59 per diluted share (net income of $325 million or $3.60 per diluted share from continuing operations), in the same period last year. The decrease in net income attributable to Meritor was due primarily to a $243 million one-time gain on the sale of an equity method investment in fiscal year 2017 and higher tax expense as a result of the U.S tax reform of $89 million in fiscal year 2018. The decrease was partially offset by conversion on increased revenue and lower interest expense.
Adjusted income from continuing operations in fiscal year 2018 was $276 million, or $3.03 of adjusted diluted earnings per share, compared to $170 million, or $1.88 of adjusted diluted earnings per share, in the prior year.
Adjusted EBITDA was $474 million in fiscal year 2018, compared with $347 million in fiscal year 2017. Adjusted EBITDA margin was 11.3% in fiscal year 2018, up 90 basis points compared with the prior fiscal year. This margin increase was driven primarily by conversion on higher revenue, lower pension and retiree medical benefits expense and a one-time legal charge related to a dispute with a joint venture in the prior year, partially offset by incremental environmental reserves principally related to a legacy site and lower affiliate earnings following the sale of the company's interest in the Meritor WABCO joint venture in the prior year.
Cash flow from operating activities in the fiscal year was $251 million, compared to $176 million in fiscal year 2017. Free cash flow for the full fiscal year was $147 million, as compared to $81 million in fiscal year 2017. Higher earnings, combined with lower retiree medical benefit payments and reduced cash interest, helped drive cash flow performance in fiscal year 2018.
Fiscal Year 2018 Highlights
Capital Return and New Share Repurchase Authorization
In fiscal year 2018, the company repurchased 4.5 million shares of common stock for $100 million, representing 68% of Meritor's free cash flow for the period. With these repurchases, Meritor completed its previous repurchase program of $100 million 1 year early.
In November 2018, Meritor's Board of Directors authorized a new $200 million share repurchase program as the company remains committed to returning excess free cash flow directly to shareholders.
New Business Wins and Electrification
In fiscal year 2018, the company delivered strong operational execution, won new business and increased market share with key customers in major markets. Meritor was awarded important new contracts with customers globally including front and rear axles for MAN's new delivery truck; axle business with Mercedes Benz and Iveco for school buses in South America; axle and suspension business with Tata, Kenworth and Ashok Leyland in Asia Pacific; and new wins for its hub reduction axle in Europe for customers including BMC.
In the electric vehicle space, Meritor currently has 22 active programs across the globe on applications including school buses, yard tractors, medium-duty trucks, urban buses and refuse trucks. In addition to supporting these programs with core Meritor content, including front and rear suspensions, wheel-ends, drum and disc brakes and gearboxes, Meritor is also offering its proprietary eAxle and other products as a result of the company's strategic partnership with TransPower. The company is collaborating with customers including Daimler Trucks North America (DTNA), Thomas Built Buses, Ashok Leyland, Kalmar and Peterbilt. For Peterbilt, Meritor will supply all-electric drivetrain systems for two vehicle platforms that will include 12 all-electric Class 8 day cab tractors and three refuse trucks.
Outlook for Fiscal Year 2019
Meritor expects the following from continuing operations in fiscal year 2019:
- Revenue to be approximately $4.25 billion
- Net income attributable to Meritor and net income from continuing operations attributable to Meritor to be approximately $230 million (diluted earnings per share from continuing operations of $2.60)
- Adjusted diluted earnings per share from continuing operations to be approximately $3.10
- Adjusted EBITDA margin of approximately 11.5 percent
- Operating cash flow to be in the range of $290 million to $300 million
- Free cash flow to be in the range of $175 million to $185 million
"Fiscal 2018 was another excellent year for Meritor," says Jay Craig, CEO & President. "New business wins, strong operational execution and conversion on higher revenue drove this strong performance. We are pleased to have achieved two M2019 objectives one year earlier than anticipated and we remain confident in our ability to drive shareholder value and build on this momentum in 2019 and beyond."
