Meritor's (MTOR) Q2 Earnings In Line; '16 Guidance Lowered

Share price of Meritor, Inc. (NYSE:MTOR) decreased 3.7% to $7.54 on May 4 after the company reported adjusted income of 41 cents per share for the second quarter of fiscal 2016 (ended Mar 31, 2016) that was in line with the Zacks Consensus Estimate. Earnings also declined from 42 cents recorded a year ago. Adjusted net income dropped to $38 million from $43 million in the second quarter of fiscal 2015.

On a reported basis, Meritor posted net income of $33 million or 36 cents per share in the second quarter of fiscal 2016, compared to $39 million or 38 cents per share in the prior-year quarter.

Revenues fell 5% year over year to $821 million, well short of the Zacks Consensus Estimate of $840 million. The year-over-year decline is attributable to lower truck production in North and South America, and adverse currency impact in Brazil.

Meritor’s adjusted EBITDA declined to $81 million from $87 million recorded in the year-ago quarter. Meanwhile, adjusted EBITDA margin was 9.9%, compared with 10.1% in the year-ago quarter. The decline in margin stemmed from lower production in North and South America, and a non-recurring foreign currency hedge gain in the prior-year quarter, partially offset by lower material, labor and burden costs.

Segment Results

Revenues from the Commercial Truck & Industrial segment went down 8.6% to $631 million in the reported quarter. The decline was owing to lower truck production in North and South America, and adverse currency impact in Brazil.

Segment EBITDA was $56 million compared with $57 million in the year-ago quarter. EBITDA margin increased to 8.9% from 8.4% in the prior-year quarter. The increase in margin resulted from lower material, labor and burden costs.

Revenues from the Aftermarket & Trailer segment increased 2.8% to $218 million on the back of higher trailer production in North America. Segment EBITDA declined to $28 million from $30 million in the year-ago quarter. EBITDA margin was 12.8% compared with 14.2% in the second quarter of fiscal 2015.

Financial Position

Meritor’s cash and cash equivalents totaled $94 million as of Mar 31, 2016, versus $193 million as of Sep 30, 2015. Total debt amounted to $1 billion as of Mar 31, 2016, compared with $1.05 billion as of Sep 30, 2015.

In the first half of fiscal 2016, Meritor’s cash flow from operating activities was $39 million compared with $29 million in the prior-year period. Capital expenditures increased to $47 million from $23 million a year ago. Free cash outflow was $8 million compared with free cash flow of $6 million in the year-ago quarter.

Outlook

For fiscal 2016, Meritor expects revenues to be $3.28 billion, down from the previous expectation of $3.4 billion. Adjusted EBITDA margin is likely to be 10%. Adjusted earnings from continuing operations are expected in the range of $1.55–$1.65 per share compared to the prior estimate of $1.65–$1.75.

In addition, Meritor plans capital expenditures of $90 million for fiscal 2016. Interest expenses are projected in the band of $80–$90 million. Further, Meritor expects free cash flow of $90 million, down from the earlier expectation of $110 million.

Meanwhile, Meritor is focused on its three-year plan, M2016, which aims at achieving margin, debt reduction and revenue growth through operational efficiency, enhancement of customer value and reduction of product costs.

Zacks Rank

Meritor currently carries a Zacks Rank #3 (Hold). Some better-ranked automobile stocks include Lear Corp. (NYSE:LEA) , Superior Industries International, Inc. (NYSE:SUP) and Oshkosh Corporation (NYSE:OSK) . All the three stocks sport a Zacks Rank #1 (Strong Buy).

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