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| MTOR > SEC Filings for MTOR > Form 10-Q on 4-May-2012 | All Recent SEC Filings |
4-May-2012
Quarterly Report
OVERVIEW
Meritor, Inc. (the "company" or "Meritor"), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers ("OEMs") and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, off-highway, military, bus and coach and other industrial OEMs and certain aftermarkets. Meritor common stock is traded on the New York Stock Exchange under the ticker symbol MTOR.
On January 2, 2012, we completed the sale of our Commercial Truck manufacturing facility located in St. Priest, France to Renault Trucks SAS, an affiliate of AB Volvo. This transaction is not expected to have a significant impact on our sales as production was absorbed by our remaining manufacturing facilities in Europe. During the first quarter of fiscal year 2012, we recognized non-cash charges of $19 million, including an asset impairment charge of $17 million for the disposal group, in connection with the then anticipated sale. In addition, other restructuring charges of approximately $5 million associated with employee headcount reduction and plant rationalization costs were recorded during the first six months of fiscal year 2012.
Our results from continuing operations for the quarter ended March 31, 2012 were significantly improved compared to the same quarter in the prior year. Income from continuing operations in the second quarter of fiscal year 2012 was $29 million, or $0.30 per diluted share, compared to income of $6 million, or $0.06 per diluted share, in the prior year. Net income for the second quarter of fiscal year 2012 was $20 million compared to net income of $17 million in the prior year.
Sales were $1,160 million for the second quarter of fiscal year 2012, down slightly compared to $1,176 million in the prior year. Adjusted EBITDA (see Non-GAAP Financial Measures below) for the second quarter of fiscal year 2012 was $95 million compared to $82 million in the second quarter of fiscal year 2011. Our Adjusted EBITDA margin in the second quarter of fiscal year 2012 was 8.2 percent compared to 7.0 percent in the same period a year ago. The improved Adjusted EBITDA performance is primarily due to the key initiatives executed by the company during fiscal year 2012 including improved pricing and the sale of our St. Priest, France manufacturing facility. In addition, improved military sales mix in our Industrial business segment compared to the prior year favorably impacted Adjusted EBITDA. This improved mix was partially offset by unfavorable geographic sales mix in our Commercial Truck segment due to lower sales in South America in the second quarter of fiscal year 2012 compared to the same period a year ago.
Cash flows used for operating activities were $51 million in the second quarter of fiscal year 2012 compared to cash provided by operating activities of $5 million in the second quarter of the prior fiscal year. The decrease in cash flows from operations was a result of smaller increases in sale of receivables under our accounts receivable factoring programs and higher pension and retiree medical contributions, partially offset by lower utilization of cash flows by discontinued operations.
Trends and Uncertainties
Production Volumes
The following table reflects estimated commercial vehicle production volumes
for selected original equipment (OE) markets for the three months ended March
31, 2012 and 2011 based on available sources and management's estimates.
Three Months Ended March 31, Percent
2012 2011 Change
Commercial Vehicles (in thousands)
North America, Heavy-Duty Trucks 76 51 49 %
North America, Medium-Duty Trucks 45 40 13 %
United States, Trailers 57 44 30 %
Western Europe, Heavy- and Medium-Duty Trucks 88 96 (8 )%
South America, Heavy- and Medium-Duty Trucks 39 44 (11 )%
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We expect production volumes in North America to continue to remain at levels experienced since the second half of fiscal year 2011 (which were higher than they were during the first half of fiscal year 2011) and production volumes in Europe to weaken in fiscal year 2012 compared to fiscal year 2011 levels. In the second quarter of fiscal year 2012, production volumes in South America declined significantly as the industry transitioned to tighter emission standard requirements for commercial vehicles. These volumes have since been recovering, and we expect them to increase through our fourth fiscal quarter, although it is unclear whether they will return to previous historic levels during fiscal year 2012.
Our business continues to address a number of other challenging industry-wide issues including the following:
º Continued strong demand for commercial truck production in North America and the impact on the ability to support customer demand;
º Uncertainty around the market outlook in Europe, China and South America;
º Volatility in price and availability of steel, components and other commodities;
º Disruptions in the financial markets and their impact on the availability and cost of credit;
º Higher energy and transportation costs;
º Consolidation and globalization of OEMs and their suppliers; and
º Significant pension and retiree medical health care costs.
Other significant factors that could affect our results and liquidity in fiscal year 2012 include:
º Ability to work with our commercial truck customers to manage rapidly changing production volumes;
º Ability to recover and timing of recovery of steel price and other cost increases from our customers;
º Any unplanned extended shutdowns or production interruptions by us, our customers or our suppliers;
º A significant deterioration or slowdown in economic activity in the key markets in which we operate;
º Higher than planned price reductions to our customers;
º Potential price increases from our suppliers;
º Additional restructuring actions and the timing and recognition of restructuring charges;
º Higher than planned warranty expenses, including the outcome of known or potential recall campaigns;
º Our ability to implement planned productivity, cost reduction, and other margin improvement initiatives;
º Significant contract awards or losses of existing contracts;
º Impact of currency exchange rate volatility in the markets in which we operate;
º Restrictive government actions by foreign countries (such as restrictions on transfer of funds and trade protection measures, including export duties and quotas and customs duties and tariffs).
NON-GAAP FINANCIAL MEASURES
In addition to the results reported in accordance with accounting principles
generally accepted in the United States (GAAP), we have provided information
regarding non-GAAP financial measures. These non-GAAP financial measures include
Adjusted income (loss) from continuing operations and Adjusted diluted earnings
(loss) per share from continuing operations, Adjusted EBITDA, Free cash flow and
Free cash flow from continuing operations before restructuring payments.
Adjusted income (loss) from continuing operations and Adjusted diluted earnings (loss) per share from continuing operations are defined as reported income or loss from continuing operations and reported diluted earnings or loss per share from continuing operations before restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA is defined as income (loss) from continuing operations before interest, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by consolidated sales. Free cash flow is defined as cash flows provided by (used for) operating activities less capital expenditures.
Management believes Adjusted EBITDA and Adjusted income (loss) from continuing operations are meaningful measures of performance as they are commonly utilized by management and investors to analyze ongoing operating performance and entity valuation. Management, the investment community and banking institutions routinely use Adjusted EBITDA, together with other measures, to measure operating performance in our industry. Further, management uses Adjusted EBITDA for planning and forecasting future periods. In addition, we use Segment EBITDA as the primary basis to evaluate the performance of each of our reportable segments. Management believes that Free cash flow is useful in analyzing our ability to service and repay debt.
Adjusted income (loss) from continuing operations and Adjusted diluted earnings (loss) per share from continuing operations and Adjusted EBITDA should not be considered a substitute for the reported results prepared in accordance with GAAP and should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. Free cash flow should not be considered a substitute for cash provided by (used for) operating activities, or other cash flow statement data prepared in accordance with GAAP, or as a measure of financial position or liquidity. In addition, these non-GAAP cash flow measures do not reflect cash used to service debt or cash received from the divestitures of businesses or sales of other assets and thus do not reflect funds available for investment or other discretionary uses. These non-GAAP financial measures, as determined and presented by the company, may not be comparable to related or similarly titled measures reported by other companies. Set forth below are reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP.
MERITOR, INC.
Adjusted income from continuing operations and Adjusted diluted earnings per
share are reconciled to income from continuing operations and diluted earnings
per share below (in millions, except per share amounts).
Three Months Ended Six Months Ended
March 31, March 31,
2012 2011 2012 2011
Adjusted income from continuing operations $ 32 $ 13 $ 43 $ 10
Restructuring costs (3 ) (5 ) (27 ) (8 )
Other loss related to LVS divestitures - (2 ) - (2 )
Income from continuing operations $ 29 $ 6 $ 16 $ -
Adjusted diluted earnings per share from
continuing operations $ 0.33 $ 0.13 $ 0.45 $ 0.10
Impact of adjustments on diluted earnings per
share (0.03 ) (0.07 ) (0.28 ) (0.10 )
Diluted earnings per share from continuing
operations $ 0.30 $ 0.06 $ 0.17 $ -
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Free cash flow and Free cash flow from continuing operations before restructuring payments are reconciled to cash flows provided by (used for) operating activities below (in millions).
Three Months Ended Six Months Ended
March 31, March 31,
2012 2011 2012 2011
Cash provided by (used for) operating activities
- continuing operations $ (46 ) $ 12 $ (38 ) $ (7 )
Capital expenditures - continuing operations (18 ) (23 ) (43 ) (42 )
Free cash flow - continuing operations (64 ) (11 ) (81 ) (49 )
Cash used for operating activities - discontinued
operations (5 ) (7 ) (8 ) (37 )
Capital expenditures - discontinued operations - - - (6 )
Free cash flow - discontinued operations (5 ) (7 ) (8 ) (43 )
Free cash flow - total company $ (69 ) $ (18 ) $ (89 ) $ (92 )
Free cash flow - continuing operations $ (64 ) $ (11 ) $ (81 ) $ (49 )
Restructuring payments - continuing operations 3 3 10 7
Free cash flow from continuing operations
before restructuring payments $ (61 ) $ (8 ) $ (71 ) $ (42 )
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Adjusted EBITDA is reconciled to net income attributable to Meritor, Inc. in "Results of Operations" below.
Results of Operations
The following is a summary of our financial results (in millions, except per
share amounts):
Three Months Ended Six Months Ended
March 31, March 31,
2012 2011 2012 2011
SALES:
Commercial Truck $ 693 $ 693 $ 1,444 $ 1,268
Industrial 289 306 537 536
Aftermarket & Trailer 263 257 498 468
Intersegment Sales (85 ) (80 ) (160 ) (139 )
SALES $ 1,160 $ 1,176 $ 2,319 $ 2,133
SEGMENT EBITDA:
Commercial Truck $ 49 $ 40 $ 96 $ 73
Industrial 22 18 33 35
Aftermarket & Trailer 28 29 48 45
SEGMENT EBITDA 99 87 177 153
Unallocated legacy and corporate costs (1) (4 ) (5 ) (3 ) (6 )
ADJUSTED EBITDA (2) 95 82 174 147
Interest expense, net (23 ) (24 ) (47 ) (51 )
Provision for income taxes (17 ) (21 ) (37 ) (41 )
Depreciation and amortization (16 ) (17 ) (33 ) (33 )
Restructuring costs (3 ) (5 ) (27 ) (8 )
Loss on sale of receivables (3 ) (2 ) (6 ) (3 )
Other loss - (2 ) - (2 )
Noncontrolling interests (4 ) (5 ) (8 ) (9 )
INCOME FROM CONTINUING OPERATIONS,
attributable to Meritor, Inc. $ 29 $ 6 $ 16 $ -
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, net of tax, attributable to
Meritor, Inc. (9 ) 11 (18 ) 15
NET INCOME (LOSS) attributable to Meritor, Inc. $ 20 $ 17 $ (2 ) $ 15
DILUTED EARNINGS (LOSS) PER SHARE
Attributable to Meritor, Inc.
Continuing operations $ 0.30 $ 0.06 $ 0.17 $ -
Discontinued operations (0.09 ) 0.12 (0.19 ) 0.15
Diluted earnings (loss) per share $ 0.21 $ 0.18 $ (0.02 ) $ 0.15
DILUTED AVERAGE COMMON SHARES
OUTSTANDING 97.2 96.9 97.2 96.9
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(1) Unallocated legacy and corporate costs represent items that are not directly related to our business segments and include pension and retiree medical costs associated with sold businesses and other legacy costs for environmental and product liability matters.
(2) Adjusted EBITDA margin is defined as Adjusted EBITDA, as calculated above, divided by consolidated sales.
MERITOR, INC.
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
Sales
The following table reflects total company and business segment sales for the
three months ended March 31, 2012 and 2011. The reconciliation is intended to
reflect the trend in business segment sales and to illustrate the impact that
changes in foreign currency exchange rates, volumes and other factors had on
sales. Business segment sales include intersegment sales (in millions).
Dollar Change Due To
March 31, Dollar % Volume /
2012 2011 Change Change Currency Other
Sales:
Commercial Truck $ 693 $ 693 $ - - % $ (16 ) $ 16
Industrial 289 306 (17 ) (6 )% (2 ) (15 )
Aftermarket & Trailer 263 257 6 2 % (3 ) 9
Intersegment Sales (85 ) (80 ) (5 ) (6 )% 3 (8 )
TOTAL SALES $ 1,160 $ 1,176 $ (16 ) (1 )% $ (18 ) $ 2
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Commercial Truck sales were $693 million in the second quarter of fiscal year 2012, flat compared to the second quarter of fiscal year 2011. North American industry-wide production volumes for heavy- and medium-duty trucks increased 33 percent in the second quarter of fiscal year 2012 as compared to the same period a year ago. However, the increase in sales in North America associated with the higher production volumes was largely offset by lower sales in South America and Europe as industry-wide production volumes in these regions were down 11 percent and 8 percent, respectively. In South America the industry transitioned to tighter emission standard requirements for commercial vehicles resulting in lower production volumes in our second fiscal quarter of 2012. We expect production volumes to recover and increase through our fourth fiscal quarter, although it is unclear whether they will return during fiscal year 2012 to recently experienced peak levels. The effects of foreign currency exchange rates decreased sales by $16 million compared to the same period a year ago.
Industrial sales were $289 million in the second quarter of fiscal year 2012, a decrease of $17 million compared to the second quarter of fiscal year 2011. The decrease in sales is primarily due to lower sales from Caiman and other non-FMTV defense orders as well as our Asia-Pacific region, although these declines were partially offset by an increase in FMTV sales.
Aftermarket & Trailer sales were $263 million in the second quarter of fiscal year 2012, slightly up from $257 million in the second quarter of fiscal year 2011. The increase in sales is due to higher sales of our core aftermarket replacement products, primarily in North America.
Cost of sales primarily represents materials, labor and overhead production costs associated with the company's products and production facilities. Cost of sales for the three months ended March 31, 2012 was $1,026 million compared to $1,058 million in the prior year, representing a decrease of 3 percent. The decrease in costs of sales is primarily due to the lower fixed costs resulting from the rationalization of our European manufacturing footprint as well as improvements in our operations. Total cost of sales was approximately 88 percent and 90 percent of sales for the three month periods ended March 31, 2012 and 2011, respectively.
The following table summarizes significant factors contributing to the changes in costs of sales during second quarter of fiscal year 2012 compared to the prior quarter (in millions):
Cost of Sales
Quarter ended March 31, 2011 $ 1,058
Volumes and mix 15
Foreign exchange (17 )
Other, net (30 )
Quarter ended March 31, 2012 $ 1,026
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MERITOR, INC.
Changes in the components of cost of sales year over year are summarized as
follows (in millions):
Lower material costs $ (15 )
Lower labor and overhead costs (13 )
Other costs (4 )
Total decrease in costs of sales $ (32 )
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Material costs represent the majority of our cost of sales and include raw materials, composed primarily of steel and purchased components. Material costs for the three months ended March 31, 2012 decreased by approximately $15 million compared to the same period last year. Global steel prices were relatively stable in the second quarter of fiscal year 2012 as compared to the second quarter of fiscal year 2011.
Labor and overhead costs decreased by $13 million compared to the same period in the prior year. The decrease was primarily savings associated with the rationalization of our European manufacturing operations including the sale of the St. Priest, France facility as well as continuous improvement initiatives.
Gross profit for the three months ended March 31, 2012 was $134 million compared to $118 million in the same period last year. Gross margins increased to 12 percent in the second quarter of fiscal year 2012 compared to 10 percent in the second quarter of prior year due to improvements in Commercial Truck pricing and rationalization of the European manufacturing footprint.
Other Income Statement Items
Selling, general and administrative expenses for the three months ended March
31, 2012 and 2011 are summarized as follows (in millions):
Three Months Ended Three Months Ended
March 31, 2012 March 31, 2011 Increase (Decrease)
SG&A Amount % of sales Amount % of sales
Loss on sale of receivables $ (3 ) (0.3 )% $ (2 ) (0.2 )% $ 1 0.1pts
Short- and long-term variable
compensation (4 ) (0.3 )% (7 ) (0.6 )% (3 ) (0.3)pts
Charge for legal contingency (5 ) (0.4 )% - - 5 0.4
All other SG&A (60 ) (5.2 )% (61 ) (5.2 )% (1 ) -pts
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The increase is selling, general and administrative expenses is primarily due to a $5 million charge for a legal contingency recognized in our second fiscal quarter of 2012 (see Note 20 of the Notes to Consolidated Financial Statements under Item 1. Financial Statements). All other SG&A represents normal selling, general and administrative expense and was relatively flat in total as well as a percentage of sales compared to the second quarter of fiscal year 2011.
Restructuring costs of $3 million were recorded during the quarter ended March 31, 2012 compared to $5 million a year ago. During the second quarter of fiscal year 2012, we approved a European headcount reduction plan in response to ongoing economic weakness and uncertainty in the European region and recognized approximately $1 million of restructuring costs. Remaining anticipated costs under this plan are approximately $5 million and are expected to be incurred during the second half of fiscal year 2012. The remaining restructuring costs incurred during the second quarter of fiscal year 2012 were primarily related to residual costs associated with the sale of the St. Priest, France manufacturing facility.
Operating income for the second quarter of fiscal year 2012 was $58 million, compared to $41 million in the prior year. Key items impacting operating income are discussed above.
Equity in earnings of affiliates was $14 million in the second quarter of fiscal year 2012, compared to $17 million in the same period in the prior year. The decrease is due to lower earnings from our affiliates in South America due to the impact of commercial vehicle industry transitioning to tighter emission standard requirements, partially offset by higher earnings from our affiliates in Mexico and India.
Interest expense, net for the second quarter of fiscal year 2012 was $23 million, compared to $24 million in the prior year.
Provision for income taxes was $17 million in the second quarter of fiscal year 2012 compared to $21 million in the second quarter of fiscal year 2011. In the second quarter of fiscal year 2012, our effective tax rate was 34 percent compared to 66 percent in the prior year. Favorably impacting our effective tax rate in the three months ended March 31, 2012 were lower losses in jurisdictions where no tax expense in recognized. We expect our effective tax rate to continue to be at more normalized levels through the remainder of fiscal year 2012.
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