Meritor anticipates softness in commercial truck demand in India for H2 2014

Meritor Reports Second-Quarter Fiscal Year 2014 Results. Achieves Year-Over-Year Adjusted EBITDA Margin Expansion of 170 Basis Points Meritor, Inc. (NYSE: MTOR) today reported financial results for its second fiscal quarter ended March 31, 2014.

Meritor

  • Sales were¬†$962 million, up¬†$54 million¬†or 6 percent, from the same period last year.
  • Net income on a GAAP basis was¬†$1 million, compared to a net loss of¬†$4 million¬†in the same period last year.
  • Net loss from continuing operations was¬†$2 million¬†or¬†$0.02¬†per diluted share, compared to a loss of¬†$4 million¬†or¬†$0.04¬†per diluted share in the prior year. Adjusted income from continuing operations was¬†$21 million, or¬†$0.22¬†per diluted share, compared to¬†$6 million, or¬†$0.06¬†per diluted share, a year ago.
  • Adjusted EBITDA was¬†$78 million, compared with¬†$58 million¬†in the prior year.
  • Adjusted EBITDA margin was 8.1 percent, compared to 6.4 percent in the same period last year.
  • Free cash flow was¬†$9 million, compared to negative¬†$26 million¬†in the same quarter of last year.
  • Issued¬†$225 million¬†of new 6.25 percent notes due in 2024; proceeds plus cash used to redeem$250 million¬†of outstanding 10.625 percent notes due in 2018 and to repay term loan balance in full.

Second-Quarter Results

For the second quarter of fiscal year 2014, Meritor posted sales of¬†$962 million, up 6 percent from the same period last year. The increase was primarily due to higher commercial truck production in¬†North America¬†and¬†Europe, partially offset by the anticipated step down in the company’s revenue from the Family of Medium Tactical Vehicles (FMTV) program.

Net loss from continuing operations, on a GAAP basis, was $2 million or $0.02 per diluted share, compared to a loss from continuing operations of $4 million or $0.04 per diluted share in the prior year.

Adjusted income from continuing operations in the second quarter of fiscal year 2014 was¬†$21 million, or$0.22¬†per diluted share, compared to¬†$6 million, or¬†$0.06¬†per diluted share, a year ago. Adjusted income from continuing operations excludes the impact of a¬†$21 million¬†loss on debt extinguishment primarily associated with the redemption of the company’s¬†$250 million¬†outstanding 10.625 percent notes due in 2018.

Adjusted EBITDA was $78 million, compared to $58 million in the second quarter of fiscal year 2013. Adjusted EBITDA margin for the second quarter of fiscal year 2014 was 8.1 percent, compared to 6.4 percent in the same period last year. Year-over-year reductions in material and other costs and the favorable impact of higher revenue were the primary drivers of increased adjusted EBITDA and adjusted EBITDA margin.

Cash flow provided by operating activities in the second quarter of fiscal year 2014 was $22 million, compared to negative $18 million in the same period last year. Free cash flow for the second quarter of fiscal year 2014 was $9 million, compared to negative $26 million in the prior year. The improvement in both cash flow metrics is primarily due to lower pension contributions and lower cash interest payments.

Second-Quarter Segment Results

Commercial Truck & Industrial sales were¬†$763 million, up¬†$51 million¬†compared with the same period last year. The increase was primarily due to higher commercial truck production in¬†North America¬†and Europe, partially offset by lower defense revenue. Segment EBITDA for the Commercial Truck & Industrial segment was¬†$57 million¬†for the quarter, up¬†$20 million¬†or 54 percent from the second quarter of fiscal year 2013. Segment EBITDA margin increased to 7.5 percent, up from 5.2 percent in the same period last year. Year-over-year reductions in material and other costs and the favourable impact of higher revenue more than offset the impact of the expected step down in the company’s FMTV revenue.

The Aftermarket & Trailer segment posted sales of¬†$232 million, up¬†$8 million¬†from the same period last year. Segment EBITDA for Aftermarket & Trailer was¬†$22 million, flat from the second quarter of fiscal year 2013. Segment EBITDA margin was down slightly at 9.5 percent from 9.8 percent in the same period last year. The loss of earnings associated with the company’s ownership interest in Suspensys, which was sold in the fourth quarter of fiscal year 2013, as well as certain inventory reserves recorded in the quarter, offset the benefit of slightly higher revenue.

Capital Market Transactions

Meritor enhanced its financial flexibility with capital market transactions completed in the second quarter of fiscal year 2014. The company issued $225 million of 6.25 percent notes due in 2024. Net proceeds and balance sheet cash were used to complete the redemption of $250 million of 10.625 percent notes due in 2018 and pay off the remaining $41 million term loan balance. As a result of these actions, Meritor expects to reduce its annual cash interest by approximately $14 million.

The company also amended its revolving credit agreement in February. The maturity date was extended to February 2019 and the facility size was increased to $499 million through April 2017. The facility size then becomes $410 million through February 2019. This amendment also reduces drawn pricing by 75 basis points and increases the leverage ratio covenant from 2.0x to 2.25x through maturity.

Outlook for Fiscal Year 2014

The company is raising its revenue and earnings guidance as follows:

  • Revenue in the range of¬†$3.75 billion to $3.8 billion¬†(increased from approximately¬†$3.7 billion), assuming constant currency.
  • Adjusted EBITDA margin to be approximately 7.7 percent (increased from approximately 7.5 percent).
  • Adjusted earnings per share from continuing operations in the range of¬†$0.50 to $0.60(increased from the range of¬†$0.30 to $0.40).

Meritor is reaffirming its total free cash flow guidance at breakeven to $25 million.

The company anticipates the following:

  • Capital expenditures in the range of¬†$75 million to $85 million¬†(reduced from the range of¬†$80 million to $90 million).
  • Interest expense in the range of¬†$95 million to $105 million¬†(reduced from the range of¬†$105 million to $115 million), excluding the¬†$21 million¬†loss on debt extinguishment.
  • Cash interest in the range of¬†$80 million to $90 million¬†(reduced from the range of¬†$85 million to $95 million).
  • Cash income taxes in the range of¬†$40 million to $50 million¬†(reduced from the range of¬†$45 million to $55 million).

“With our strong execution in the first half of the fiscal year and the anticipated strength in the North American market for Class 8 trucks, we’ve raised our full-year guidance for revenue, adjusted EBITDA margin and adjusted earnings per share,” said Chairman, CEO and President¬†Ike Evans. “Our optimism for the second half is slightly tempered as markets in¬†South America,¬†Europe¬†and¬†India¬†indicate softness in commercial truck demand in these regions.”