ArvinMeritor Misses, Loss Widens - Analyst Blog

ArvinMeritor Inc. (ARM) depicted a wider loss of $6 million or 7 cents per share (adjusted) in the first quarter of its fiscal year compared with $4 million or 6 cents per share (adjusted) in the same quarter of prior fiscal year. With this, the auto parts maker missed the Zacks Consensus Estimate of breakeven results during the quarter.

The wider loss was attributable to an effective tax rate of approximately 133% on the back of strong earnings in emerging markets as well as the ongoing impact of valuation allowances against the company's income tax loss carry forwards in the U.S. and Europe.

Sales in the quarter went up 21% to $971 million, driven by stronger truck demand in all regions. It was in line with the Zacks Consensus Estimate. Adjusted EBITDA was $62 million versus $51 million in the first quarter of fiscal year 2010. However, adjusted EBITDA margin was flat at 6.4% compared with the same period last year.

Segment Details

In the Commercial Truck segment, revenues soared 33% $575 million. Adjusted EBITDA rose by $20 million to $33 million due to higher sales and recovery in the markets.

In the Industrial segment, revenues inched up 1.8% to $230 million. Adjusted EBITDA went down $7 million to $17 million, as favorable impact of increased sales in the Asia Pacific region was more than offset by the negative impact of lower defense sales as production of the Family of Medium Tactical Vehicles (FMTV) has shifted to a new prime contractor.

In the Aftermarket & Trailer segment, revenues rose marginally by 1.4% to $225 million. Adjusted EBITDA dipped $4 million to $13 million, as favorable impact of higher on-highway aftermarket and trailer sales was more than offset by a decline in defense aftermarket sales, primarily in Mine Resistant Ambush Protection (MRAP) service parts.

Financial Position

ArvinMeritor had cash and cash equivalents of $276 million as of December 31, 2010, down from $343 million as of September 30, 2009. Long-term debt increased by $2 million to $1.03 billion as of the above date from the same period. The company had a shareholder deficit of $990 million in the period under study, an improvement from $1.02 billion as of September 30, 2009.

In the quarter, ArvinMeritor's operating cash flow deteriorated to an outflow of $49 million compared with an inflow of $27 million, due to wider loss and deeper impact from unfavorable adjustments in assets and liabilities. Free cash flow was negative $74 million compared with $2 million in the comparable quarter a year ago.

Capital expenditures increased to $19 million from $13 million in the prior fiscal year. For fiscal 2011, the company reiterated its guidance to record capital expenditures in the range of $75 million to $90 million, indicating an organic expansion.

Guidance

For second quarter of fiscal 2011, ArvinMeritor anticipates revenues in the range of $1.13 billion–$1.18 billion, adjusted EBITDA in the range of $85 million–$95 million, adjusted profit in the range of $5 million–$15 million and free cash flow to be almost breakeven.

Our Take

We are optimistic about ArvinMeritor's focus on cost savings program and its reliance on OEMs in low cost countries across Asia and South America to generate revenues. However, based on the company's lower guidance and higher customer concentration the company retains a Zacks #3 Rank (Hold) on its stock for the short term (1–3 months). Consequently, we reiterated our ‘Neutral' recommendation on the stock for the long term (more than 6 months).