Meritor, Inc. reports financial results for its third fiscal quarter ended June 30, 2019.
Third-Quarter Highlights
- Sales of $1,166 million
- Net income attributable to the company of $86 million and net income from continuing operations attributable to the company of $85 million
- Diluted earnings per share from continuing operations of $0.99
- Adjusted income from continuing operations attributable to the company of $103 million, or $1.20 of adjusted diluted earnings per share
- Adjusted EBITDA of $146 million and adjusted EBITDA margin of 12.5%
- Operating cash flow of $143 million
- Free cash flow of $124 million
Third-Quarter Results
For the third quarter of fiscal year 2019, Meritor posted sales of $1,166 million, up $37 million or approximately 3% from the same period last year. The increase in sales was driven by higher truck production, primarily in North America, partially offset by the strengthening of the U.S. dollar against most currencies.
Net income attributable to the company was $86 million or $1.00 per diluted share, compared to $64 million or $0.71 per diluted share, in the same period last year. Net income from continuing operations attributable to the company was $85 million or $0.99 per diluted share, compared to $66 million or $0.73 per diluted share, in the same quarter last year. Higher net income year over year is primarily attributable to conversion on increased revenue and lower income tax expense.
Adjusted income from continuing operations attributable to the company in the third quarter of fiscal year 2019 was $103 million or $1.20 of adjusted diluted earnings per share, compared to $80 million or $0.89 of adjusted diluted earnings per share, in the same period last year.
Adjusted EBITDA was $146 million compared to $135 million in the same period last year. Adjusted EBITDA margin for the third quarter of fiscal year 2019 was 12.5%, compared to 12.0% in the same period last year.
The increase in adjusted EBITDA and adjusted EBITDA margin year over year was driven primarily by conversion on higher revenue and the impact of the company's Aftermarket pricing actions implemented earlier this year, partially offset by higher material costs.
Cash provided by operating activities was $143 million in the third quarter of fiscal year 2019 compared to $119 million in the third quarter of fiscal year 2018. Higher earnings contributed to cash flow performance in the third quarter of fiscal year 2019.
Third-Quarter Segment Results
Commercial Truck sales were $869 million in the third quarter of fiscal year 2019, up 2% compared to the third quarter of fiscal year 2018. The increase in sales was driven primarily by increased production in North America, partially offset by the strengthening of the U.S. dollar against most currencies.
Commercial Truck segment adjusted EBITDA was $93 million in the third quarter of fiscal year 2019, down $7 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin decreased to 10.7% from 11.7% in the same period in the prior fiscal year.
The decrease in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by higher material costs, partially offset by the conversion on higher revenue. Segment adjusted EBITDA was also impacted unfavorably by the strengthening of the U.S. dollar against most currencies.
Aftermarket, Industrial and Trailer sales were $340 million in the third quarter of fiscal year 2019, up 7% compared to the third quarter of fiscal year 2018. Higher revenue was driven by increased industrial volumes and pricing actions within the company's Aftermarket business.
The Aftermarket, Industrial and Trailer segment adjusted EBITDA was $54 million in the third quarter of fiscal year 2019, up $16 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin increased to 15.9% compared to 11.9% in the third quarter of fiscal year 2018. The increase in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by pricing actions within the company's Aftermarket business.
Capital Return and New Share Repurchase Authorization
In the third quarter of fiscal year 2019, the company repurchased 1.0 million shares of common stock for $20 million. Year to date, Meritor has repurchased 4.0 million shares of common stock for $71 million (including commission costs).
On July 26, 2019, the Board of Directors authorized the repurchase of up to $250 million of the company's common stock from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and the company's debt covenants. This authorization supersedes the remaining authority under the prior November 2018 equity repurchase authorization.
Acquisition of AxleTech Completed
On July 29, 2019, the company announced that it successfully completed its acquisition of AxleTech. This acquisition enhances Meritor's growth platform with the addition of a complementary product portfolio that includes a full line of independent suspensions, axles, braking solutions and drivetrain components across the off-highway, defense, specialty and aftermarket segments. AxleTech will operate within Meritor's Aftermarket, Industrial and Trailer segment.
Outlook for Fiscal Year 2019
The company's guidance for fiscal year 2019 has been revised from the prior quarter and reflects Meritor's acquisition of AxleTech as follows:
- Revenue to be approximately $4.4 billion.
- Net income attributable to the company and net income from continuing operations attributable to the company to be approximately $290 million.
- Diluted earnings per share from continuing operations to be approximately $3.35.
- Adjusted EBITDA margin to be approximately 11.8%.
- Adjusted diluted earnings per share from continuing operations to be approximately $3.70.
Guidance for both operating cash flow and free cash flow has been updated to reflect the $48 million cash contribution made in July for the newly formed asbestos trust as part of the bankruptcy reorganization for the non-operating entity, Maremont.
- Operating cash flow to be in the range of $235 million to $245 million.
- Free cash flow to be in the range of $130 million to $140 million.
"The company's continued excellent performance was reflected in this quarter's results," says Jay Craig, CEO and President. "We are pleased to raise our outlook for the full year and are proud of the shareholder value we have driven during our M2019 three-year business plan which concludes in the fourth quarter."
