Meritor plants idled and salaries cut in half temporarily

Component supplier to the truck original equipment manufacturers (OEMs) Meritor, Inc. (NYSE: MTOR) announced that it was idling production, laying off hourly staff and cutting salaried employee pay by half. These were a few of several moves the company announced as part of its plan to stem the negative financial impact from the coronavirus outbreak.

In a March 25 press release, the company announced that it was temporarily closing most of its commercial truck facilities in North America, South America, India and Europe and laying off a “significant portion” of its hourly manufacturing workforce.

“The COVID-19 pandemic has resulted in unprecedented uncertainty in the global commercial vehicle industry and economies around the world. In light of rapidly evolving market conditions, and in accordance with the guidance of global health professionals, we made the difficult but necessary decision, along with many of our customers, to suspend production at most of our global commercial truck manufacturing facilities,” said Meritor CEO Jay Craig.

The provider of drivetrain, mobility, braking and aftermarket parts “will evaluate operating conditions and consider reopening the facilities once it is safe to do so, and based on information and guidance from local government and health authorities.”

The company’s current “planning assumptions” expect fiscal third quarter, ending June 30, production to resume on a staggered basis after two to six weeks of downtime. However, the company cautioned that “production will come back on-line at a lower run-rate than before the shutdown.”

Heading into what was already expected to be a thin production year for commercial vehicles, the spread of the coronavirus has many OEMs scrambling to preserve their balance sheets in 2020.

Class 8 Truck Orders – SONAR: ORDERS.CL8

In recent days, truck OEMs, like Cummins (NYSE: CMI), Navistar (NYSE: NAV) and PACCAR (NASDAQ: PCAR) have announced plans to halt or limit manufacturing production and many have pulled their earnings guidance for the year given uncertainty around future demand. Further, the OEMs have provided intra-quarter liquidity updates, including cash positions and available debt under revolving credit facilities, a rarity suggesting that the potential for prolonged factory downtime will drain financial resources posing financial risks.

In the press release, Meritor announced that its trailer, industrial and aftermarket businesses will remain in operation given continued demand.  

“Meritor’s Industrial customers are producing vehicles for the defense, bus and coach, terminal tractor, fire and rescue and off-highway end markets which are deemed critical in the response to the current healthcare crisis.”

Actions taken to save cash/liquidity

Meritor also announced temporary salary reductions. Base salaries will be reduced by 40% to 50% for salaried employees in the U.S. and Canada and by 50% to 60% for the company’s executives.

“All salaries will be reinstated as conditions allow,” according to the release.

Meritor believes the “aggressive” cost reductions will allow it to appropriately manage its cash flow during the outbreak. The company expects cash flow from operations to be negative $25 million to break-even, excluding a one-time cash use of $150 million to sure up its receivable factoring programs, during its fiscal third quarter.

The company’s second fiscal quarter ends March 31 with a fiscal year ending date of September 30.

Meritor reported total liquidity of $791 million, $470 million in cash and approximately $321 million available on its revolving credit facility, as of March 24. The press release stated that the company is in full compliance with its financial covenants and expects to remain in compliance with those guidelines for the remainder of its fiscal year, even in the face of “significantly lower production volumes.”

The company also temporarily suspended its share repurchase plan, which has a remaining allotment of $100 million to repurchase the company’s common stock. Through the end of January, Meritor had repurchased 8 million shares for $200 million so far in its fiscal 2020.

Lastly, Meritor withdrew its fiscal year 2020 guidance calling for adjusted earnings per share of $2.75 citing a “highly uncertain operating environment.”

“Meritor is well-capitalized, and I am confident that our financial strength, the continued execution of our M2022 plan and our commitment to serving our customers will enable us to successfully navigate this challenging period,” concluded Craig.

Shares of MTOR are up 1% on the day compared to a 4% gain for the S&P 500.