Cummins Inc. (CMI) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Meritor Earnings Conference Call. My name is Jeff, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Christy Daehnert, Director, Investor Relations. And you have the floor, ma'am.

Thank you, Jeff. Good morning, everyone, and welcome to Meritor's Third Quarter Fiscal Year 2012 Earnings Call. On the call today we have Chip McClure, our Chairman, CEO and President; and Jay Craig, our CFO. The slides accompanying today's call are available at www.meritor.com. We'll refer to the slides in our discussion this morning. The content of this conference call, which we're recording, is the property of Meritor, Inc. It's protected by U.S. and international copyright law and may not be rebroadcast without the expressed written consent of Meritor. We consider your continued participation to be your consent to our recording. Our discussion may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Let me now refer you to Slide 2 for a more complete disclosure of the risks that could affect our results. To the extent we refer to any non-GAAP measures in our call, you'll find a reconciliation to GAAP in the slides on our website. Now I'll turn the call over to Chip.

Thank you, Christy, and good morning, everyone. Let's turn to Slide 3 for detail on Meritor's quarter-over-quarter performance. Revenue was $1.1 billion in the third quarter, a 4% decrease from the second quarter of fiscal year 2012. This decline was primarily due to unfavorable currency exchange of approximately $30 million and significant deterioration in China and India, and we'll provide more detail later on the call on that. Adjusted EBITDA decreased from $95 million to $92 million quarter-over-quarter. EBITDA margin, however, increased from 8.2 % to 8.3%, despite the revenue decline. The execution actions we highlighted in prior quarters are providing the sustained financial improvement we anticipated. Adjusted income from continuing operations increased from $32 million to $37 million, or 16% from the second quarter. Adjusted earnings per share from continuing operations increased $0.05 per share to $0.38, as we continue to experience a more normalized tax rate. Free cash flow increased $115 million in the third quarter, from negative $69 million in the second quarter to positive $46 million in the third quarter. This increase resulted primarily from improvements in working capital. Before we move to an analysis of the global markets, let me highlight that given the current global economic climate and the challenges inherent in projecting industry production volumes, we'll use internal Meritor industry forecast this quarter. These volume assumptions underlie our revenue guidance for fiscal year 2012 that Jay will detail later in the call. Now let's turn to Slide 4 for a discussion on Meritor's Commercial Truck segment in North and South America and Europe and the industry dynamics that affected the business in the third quarter. The charts at the top of the page reflect our geographic revenue allocation in the first 9 months of both fiscal year 2011 and 2012. We've experienced a considerable mix shift in regional sales between North America, where we've seen good growth, and South America, where we've seen significant contraction in the second and third quarter of the fiscal year. We've shared with you in the past that South America represents our highest-margin region of the world for the Commercial Truck segment. The long-term improvements we executed this year in the form of pricing and manufacturing footprint rationalization have helped us to offset the impacts of the economic slowdowns in South America and Europe. This regional shift would have been significantly more impactful prior to the implementation of these actions. The table in the bottom right indicates the status of our forecast for changes in Commercial Truck production volumes. At this time, Commercial Truck volumes in North America and Europe remain in line with our prior guidance. We do see some downside risk in North America, with modest upside potential in Europe. While North America remains stable, lower order intake may affect the remainder of fiscal year 2012 into 2013. We are maintaining our forecast for an increase of approximately 25% in truck volumes in North America and a decrease of 10% for Europe. Our volume forecast in South America has further declined from our forecast last quarter. We now believe that truck production in South America will decrease more than 20% year-over-year. As I mentioned earlier, the anticipated recovery in Brazil in the second half has not occurred, which drove our forecast for the year down from what we expected last quarter. Let's turn to Slide 5 to discuss more specifically our industry outlook for North America and Western Europe for fiscal year 2012. We expect Class 8 volumes to be 291,000 units for the fiscal year, up nearly 30% year-over-year. However, we continue to closely monitor market conditions. In Class 5-7, we anticipate industry production to be at 172,000 units, up approximately 8% from fiscal year 2011. Longer-term forecast continued to show growth, but at a slightly slower rate. Current data indicate downward pressure on the build rate of Class 5-7. In Western Europe, we continue to expect the truck market to be down year-over-year due to the ongoing economic conditions in that region. We are forecasting industry truck volumes in Europe at 365,000 units in fiscal year 2012. Truck orders in the region have stabilized and are in line with expectations. Meritor's largest customer has publicly reaffirmed their market outlook on a calendar year, down 5% from 2011. The normal summer shutdown period in this region will drive a weaker fourth fiscal quarter. Looking forward, certain major European truck manufacturers have launched their Euro 6 solution. We anticipate a possible pre-buy, starting in the first quarter of fiscal year 2013 due to the price the increase associated with Euro 6-compliant trucks. As I noted earlier, the recovering South America has not occurred to the level we expected. If you turn to Slide 6, we'll provide further detail. Meritor is now forecasting industry truck volumes of 153,000 to 163,000 units in South America for fiscal year 2012, a decline of more than 20% year-over-year. Medium- and heavy-duty production declined in the second quarter of the calendar year from the prior year. This decline in production is outpacing the decline in sales, thus, reducing inventory. While Europe 3 inventories are being depleted, unfortunately, they're still higher than initially believed when we spoke to you last quarter. And Euro 5 acceptance has been slower than originally expected due to higher truck prices and the difficulty in obtaining S50 diesel fuel and urea-based diesel exhaust fluid, both required for Euro 5 engines. It does not appear that the NAMI [ph] incentives we referenced in our second quarter call have had a significant impact yet. We do, however, continue to believe that South America will return as a strong market as early as fiscal year 2013. We anticipate economic growth to be driven by governmental actions promoting production and consumption, stabilized inventory levels and greater availability and distribution of Euro 5 diesel. Let's turn to Slide 7. Our industrial forecast for fiscal year 2012 is mixed. In North America, our expectations for defense are stable and have not changed materially since our second quarter call. The outlook for China and India, however, is weaker than we previously thought. Both countries are experiencing a slowdown due to the impact of domestic economic issues, as well as effects of the European debt crisis. Last quarter, we believed industry production in China would be down for the year, approximately 10%. We've revised that to a closer to a 15% decline year-over-year. While many dynamics are at play, infrastructure projects have slowed, which is driving much of the off-highway decline. Our production is expected to be down more than that, given the mix of products we supply in that market. We also expected India to be relatively flat. We are now revising that forecast to indicate more than a 5% decline year-over-year. Reduced growth and inflation is driving lower forecasts. On the bottom half of this slide, we reiterate our forecast for FMTV production, which has returned to peak volumes, as expected. If you turn to Slide 8, we'll provide more detail in the industry production outlook and market dynamics for China and India, both of which have now become a first half, second half story in terms of the effects on Meritor's end markets. In China, the typical spring seasonal peak for the off-highway segment did not occur in our third fiscal quarter. Meritor's end markets related to infrastructure activity are down. The reduction of infrastructure projects in the region is negatively affecting crane production and loader and excavator volumes are down with the slowing of the housing sector. These declines are being partially offset by the mining segment, which is stabilizing, and the bus and coach segment, which is improving. Our sales in China are expected to be roughly 30% lower in the second half of fiscal year 2012, as compared to the first half of the year. If you look at the bottom half of the slide, you'll see we expect the India truck production to be in the range of 305,000 to 320,000 units. India's GDP growth in the second quarter of this fiscal year was at a 9-year low. Inflation is below last year's level, but still a concern in the market. Several factors are contributing to the economic issues in India, including weak exports, overstocked inventory and declines in investment, driving lower production volumes. Our sales in India, including the effects of currency, are now expected to be about 40% lower in the second half compared to the first half of fiscal year 2012. The Indian government, however, has recently indicated that a major investment in the country's infrastructure is being considered and could play a significant role in reviving the sluggish economy. Let's turn to Slide 9. As we look at the Aftermarket & Trailer segment, our outlook for aftermarket North America and Europe has weakened from our previous expectations, driven by the mild winter, slight economic softness in North America and weaker currency translation. Truck ton miles are down slightly from last quarter's forecast to 2.7 trillion miles. As you'll recall, this is one market indicator we use to forecast revenue in our North American aftermarket business. Year-over-year, the U.S. truck ton miles growth rate has slowed, with June increasing at the slowest pace in 3 months. While the aftermarket business experienced year-over-year growth in the first 2 quarters of this fiscal year, we had an unexpected year-over-year decline in the third quarter, primarily driven by Europe and South America. In Europe, customers are de-stocking and moving to lower price points due to the economic conditions in the region. In North America, the third fiscal quarter's typically a revenue peak, driven by seasonal maintenance. This maintenance, however, was pulled ahead to the second quarter due to the mild winter temperatures. Also, fleet utilization declined year-to-date in the second quarter of 2012 calendar year from the same period last year. If we look at fleet utilization at truck ton miles, we believe fleets may be putting more miles on fewer trucks, thus requiring slightly less maintenance overall. In Asia-Pacific, however, footprint and product line expansion are offsetting the impact of the current economic climate. Our forecast for the trailer business is basically unchanged from the previous quarter. For North American trailer production, we're forecasting 237,000 units in fiscal year 2012, a 22% increase from fiscal year 2011 and just slightly below our forecast last quarter. However, the market appears stable and order boards have leveled with a low number of cancellations. For our fourth fiscal quarter, we are expecting a typical slow period. Overall, we expect sales for the Aftermarket & Trailer segment to be roughly flat year-over-year. Looking at Slide 10, we've highlighted for you new business in each of our segments. In spite of the temporary market weaknesses we outlined, we continue to be encouraged by significant new wins around the world. In Commercial Truck, we were awarded the rear axle for the new VW 10-ton truck being launched this quarter. And we were named the dual-source supplier to Iveco for inter-axle drivelines in Brazil. In North America, major fleets, such as Waste Management, Air Products and Canadian Cartage, are specifying Meritor disc brake technology. As a result, the brake is being made available as an optional feature with the major North American OEMs. Our joint venture MeritorWABCO was recently awarded standard position for its anti-lock braking system at Navistar. International ProStar and Lonestar Class 8 trucks featuring MeritorWABCO ABS with optional electronics stability control and on-guard safety systems. In our Industrial segment, we're working closely with our customers to engineer and bring products to market that are customized by application and offer benefits in terms of efficiency gains, weight savings and extended durability. In India, we launched our 2-speed green axle with Tata Motors and the Ashok Leyland through our automated axles joint venture. This axle is customized for local operating conditions with extreme great capability and delivers up to 10% fuel savings. We also introduced off-highway axles with 2 new customers. Also in India, we recently shipped a new military 6X6 axle prototype to one of our customers. In China, we introduced 3 new axle models for the mining truck market. We have more than 50% market penetration with the 4 largest OEMs in this segment, and we plan to launch heavier axle capacities in fiscal year 2013. And in North America, we are aligned with 3 prime contractors on the JLTV-funded U.S. military program, as we've noted in past quarters. Two of those 3 were included in the tech demo phase, which we believe positions them well heading into the down select in late August. In the Aftermarket & Trailer segment, our MTA trailer suspension has been specified by Bynum Transport, a specialized tank truck transportation company, and we're seeing increasing strength in orders for our RideSentry trailer air suspension, which is a revelation in trailer undercarriage departure. This year, we opened a new aftermarket warehouse in Singapore that will supply Southeast Asia. This facility will provide commercial vehicle axle, brake, driveline and suspension parts to distributor's in the region, along with thousands of truck operators. And we opened a new aftermarket facility in South America, complete with offices, a training center, warehouse and operations. Meritor was also awarded business for private label brake shoes from a major distributor in North America and was awarded a contract to remanufacture trailer axles for the intermodal market. We're working on to expand our reach by offering market-leading technology and products that benefit our long-standing and new customers whether commercial vehicle OEM, fleet, owner-operator or aftermarket customer. Let's now turn to Slide 11. In spite of our focus and execution, we are pleased to say we are winning new business based on market-leading products for our customer. We have executed operational improvements and increased productivity and significantly reduced premium cost. And despite recent declines in revenue, we have enhanced our EBITDA margin to levels not previously sustained by the business. We've restructured the business where appropriate to fit current market conditions, and we are generating positive cash flow despite revenue declines and are maintaining an adequate level of liquidity to manage all cycles. Now I'll turn the call over to Jay, as he provides you with a more detailed financial review.

Thanks, Chip. Good morning. On today's call, I will provide a detailed review of our third quarter results, as well as our guidance for fiscal year 2012. On Slide 12, you will see our third quarter income statement from continuing operations. Overall, we delivered solid financial results despite the decline in sales. For our third fiscal quarter of 2012, we are on $0.38 per share of adjusted income from continuing operations, compared to $0.30 in the same period last year. Sales were down $159 million year-over-year or 13% due to the lower production in Brazil, Europe, China and India, as well as weaker currency translation. The decreases we saw in the European commercial truck market were in line with our internal forecasts, but the sales reductions in Brazil, China and India were far worse than expected. Gross margin was down just slightly year-over-year. But more importantly, gross margin as a percent of sales improved to 130 basis points in spite of the sales decline. We are pleased with this increase, as it is a reflection of the financial benefit of the execution items completed at the beginning of our second fiscal quarter. SG&A was $4 million lower year-over-year and has again been maintained at a consistent level of approximately 6% of sales. Restructuring costs were $3 million in the third fiscal quarter of 2012, primarily associated with the European salary headcount reduction program we announced last quarter. The remaining anticipated costs under this plan are approximately $2 million and are expected to be incurred in our fourth fiscal quarter of 2012. Next, we recognized a gain on sale of property of $16 million during the third quarter. This gain is associated with the sale of excess land at our commercial truck facility in Wales. The property gain and restructuring charges are both excluded from adjusted EBITDA. Other income was down $4 million from the prior year. Last year, we recognized a $5 million nonoperating gain on the collection of a note receivable related to a previously divested business. Earnings in our minority-owned affiliates were down over 40%, or $9 million year-over-year. This decrease was primarily driven by lower earnings from our affiliates and South America to the recent emissions change, softening economic conditions in this region and the impact of foreign currency translation. Interest expense increased $3 million year-over-year, due to amortization of incremental fees associated with the renewal of a revolving credit facility during the quarter and the write-off of previously deferred fees, in connection with the termination of our existing U.S. securitization program. In June, we entered into a new $100 million U.S. securitization facility, with more efficient pricing, and terminated the existing facility, allowing us to extend the maturity to June 2015. Our effective tax rate was 19% for the quarter, which is lower than what we consider to be a more normalized rate. I will provide a more detailed update on the effective tax rate later in the presentation. On the next few slides, I will discuss the quarterly results for each of our 3 business segments. Slide 13 shows third quarter sales and segment EBITDA for Commercial Truck. North American production volumes for heavy- and medium-duty trucks increased 15% in the third quarter of fiscal year 2012 as compared to the same period a year ago. However, the increase in sales in North America was more than offset by lower sales in South America and Europe, as production volumes in these regions were down 18% and 13%, respectively. In South America, the industry transitioned to tighter emissions standard requirements for commercial vehicles, resulting in lower production volumes beginning in our second fiscal quarter of 2012. The recovery has been slower than previously expected and we do not see production returning to 2011 levels during fiscal year 2012. I'd like to emphasize the point Chip made earlier regarding our geographic sales mix in this business unit. In the past, the significant change in sales mix, with South America becoming a smaller portion of the segment, would have deteriorated our EBITDA margins, as South America is the most profitable region in this segment. Now with the actions we've executed, the impact of reduced sales in South America has been more than offset, and we are very pleased with the results. The effects of foreign currency exchange rates decreased sales by $47 million compared to the same period a year ago, as the Brazilian reais and the euro weakened against the U.S. dollar. Segment EBITDA margin increased to 7%, compared to 6.4% in the prior year despite lower sales. The increase in margin reflects the benefit of profit improvement actions completed in the second fiscal quarter, which was only partially offset by the South America headwinds previously discussed. Now let's turn to Slide 14 to review the Industrial segment results. Third quarter sales were $242 million, a decrease of $66 million, or 21% year-over-year. The decrease is primarily due to lower sales in China and India. Despite the lower sales, the Industrial segment EBITDA margin increased to 150 basis points, to 8.3% in the third quarter of fiscal year 2012. The impact of lower sales in the Asia-Pacific region was more than offset by higher FMTV sales and higher pricing on other North American products within the segment. Next, on Slide 15, we summarize the Aftermarket & Trailer segment financial results, comparing the third fiscal quarter of 2012 to the same period in 2011. Sales were down $13 million year-over-year, to $265 million. The decrease in sales is primarily due to the impact of foreign currency translation, which decreased sales by $10 million compared to the prior year. In addition, sales of our core aftermarket replacement products were lower, partially offset by higher sales of products for trailer applications in North America. Segment EBITDA decreased $11 million, and EBITDA margin decreased to 9.4%. The decrease was primarily driven by higher material costs, lower affiliated earnings from our trailer joint venture in Brazil and weaker foreign currency translation. With the pricing actions we just implemented on July 1 in North American aftermarket, we expect to begin recovering some of the incremental material costs seen in this segment. Slide 16 shows the sequential adjusted EBITDA walk from our second fiscal quarter of 2012 to the third. The first line item shows that EBITDA improved $4 million due to the impact of higher pricing on both our North American military and commercial truck products and favorable mix in our North American Commercial Truck business. This good news was only partially offset by the lost EBITDA from lower total company sales. Next, we identified a $4 million increase in EBITDA versus the second quarter, which relates to a charge for a legal contingency incurred in the second quarter that did not repeat to the same extent in the third. The depreciation of the Brazilian real and the euro was a significant headwind in the third quarter, resulting in weaker translation of earnings, as the reais and the euro depreciated against the dollar by almost 14% and 6%, respectively, from the second fiscal quarter to the third. That was the primary driver of the $6 million decrease quarter-over-quarter due to foreign exchange. The next item on the walk summarizes the quarter-over-quarter impact associated with the reduction in earnings of our unconsolidated joint ventures, primarily in India and Brazil. We then had an all other decrease in EBITDA when compared to the prior quarter to the current of $3 million. That yields an adjusted EBITDA of $92 million in our third fiscal quarter, or 8.3%. We are very pleased with this performance, given that we are able to improve our EBITDA margin through outstanding operational execution, despite the revenue and currency headwinds. Slide 17 summarizes our income tax expense for the third fiscal quarter of 2012. As I stated earlier on the call, our effective tax rate was 19%. If you exclude the gain on the sale of land I highlighted earlier, our effective tax rate was 25%. Favorably impacting that rate was the fact that we generated earnings in certain jurisdictions where no tax expense is recognized. We expect our effective tax rate to be at a more normalized level through the remainder of fiscal year 2012. Now let's turn to Slide 18. For the third quarter free cash flow from continuing operations before restructuring was $56 million, $35 million higher than the same period last year. Improved earnings and working capital performance, more than offset higher pension and retiree medical contributions made this year. We had about $15 million of mandatory catch-up pension contributions made to our U.S. pension plan during the third quarter, which will not recur next quarter. In addition, we did elect to pull forward a portion of other required pension contributions originally planned for the fourth fiscal quarter of 2012 to the third. Those are both reasons why you see such a step up year-over-year in that line item. Total company free cash flow was $46 million, $47 million higher than the third quarter of the prior year, primarily due to the reasons just mentioned, along with less cash required for our discontinued operations. Moving on to Slide 19, I'd now like to shift your focus to a review of our fiscal year 2012 revenue. Last quarter, we had reaffirmed our guidance at approximately $4.8 billion. There were several assumptions included in that guidance that have unfortunately deteriorated sharply since our last earnings call. Starting with foreign currency, we assumed exchange rates would stay relatively flat to the ending rates as of March 31. Instead, exchange rates weakened significantly in the last 90 days, most notably, the Brazilian reais and the euro, as I discussed earlier in the presentation. Next, and the most significant overall, is the weaker Brazilian commercial truck market. When we've reaffirmed guidance on our last earnings call, we thought the low point for truck part production would occur in our second fiscal quarter, with a meaningful recovery in the third and fourth quarters. That recovery did not occur in the third quarter to the extents expected, and we are no longer anticipating any meaningful recovery in the fourth quarter. The changes we've seen in the India market are the most surprising, as we, along with many in our space, were expecting India to remain fairly stable. In fact, we had cited that region to have production upside opportunity to our fiscal 2012 revenue guidance. Just a few months ago, we were expecting the Indian market to grow in the second half of the year. But given the changes we've seen over the past 90 days, we now expect revenue to be down approximately 35%, excluding the impact of currency in the second half of our fiscal year versus the first half. Turning to the aftermarket, we expected to see continued levels of demand for our products in North America, with the typical spring-selling seasonal uptick in our third fiscal quarter and some carryover effect into the fourth quarter. However, due to the reasons Chip's discussed previously in the call, third quarter sales actually came in lower than the second quarter, which, as you know, is quite than usual. We expect that softness to continue through the balance of the fiscal year, especially with the slowdown in the overall U.S. economy. Finally, in our China off-highway business, we anticipated continued levels of demand for our products, with an expected uptick in the spring, consistent with traditional seasonality. Like aftermarket, that uptick did not occur, and sales were actually lower sequentially in the third quarter. We expect sales to remain at that lower level in the fourth, as OEMs continue to reduce their inventory. Our guidance now contemplates China off-highway sales being approximately 30% lower in the second half of the year versus the first half, which is significantly worse than what we expected previously. Putting together the impact of all those factors, we are now adjusting our full year revenue guidance from $4.8 billion to a range of $4.4 billion to $4.5 billion. And we have noted on the bottom of the slide that approximately 25% of that change in guidance is associated with currency headwinds, while the remainder is due to weaker end markets. Now let's turn to Slide 20, where I will review our revised fiscal year 2012 outlook. Based on the items I just summarized, we are forecasting fiscal year 2012 sales to range from $4.4 billion to $4.5 billion, assuming that we see stabilization in global currency markets. Next, given the changes in our revenue outlook, we are lowering our fiscal year 2012 adjusted EBITDA margin to a range of 7.6% to 8%. Our prior year guidance range from 8.2% to 8.6%. Last quarter, I mentioned that even if the Brazilian markets took longer to recover, we thought we'd still be able to achieve results in the original EBITDA margin guidance range. However, the unanticipated revenue and currency headwinds globally I discussed on the prior slide were too significant for us to hold the bottom end of the original range of 8.2%. Adjusted income from continuing operations is now expected to range to be $85 million to $110 million. Previously, this range was $105 million to $135 million. Our range for adjusted earnings per share from continuing operations has been reduced to $0.90 to $1.15, from $1.08 to $1.39. Our guidance for free cash flow from continuing operations before restructuring remains unchanged, at $0 to $50 million. And we are reaffirming our effective tax rate for fiscal year 2012 to be approximately 40%. Now let's move to Slide 21, which summarizes our revised planning assumptions for fiscal year 2012. We have lowered our range for capital expenditures to $90 million to $100 million based upon reduced spending in Brazil and China, in response to slowdowns in those markets. Previously, we expected this investment to range from $100 million to $110 million. We have refined our interest expense guidance and now expect total fiscal year 2012 interest expense to be approximately $95 million. Previously, we had disclosed a range of $85 million to $95 million, which included the impact of retiring the $84 million debt maturity in March 2012 and the new $100 million term loan added in April 2012. Cash interest payments are expected to be approximately $85 million, while previous guidance ranged from $75 million to $85 million. We've reduced the range of cash income taxes we expect to pay from $65 million to $80 million, down from $55 million to $65 million in fiscal year 2012, primarily due to the lower volumes we are now expecting in Brazil and China. And finally, we are still forecasting restructuring cash payments of approximately $20 million. Now we will turn the call back over to Chip, where he will wrap up with a summary of our 2012 priorities.

Thanks, Jay. Let's turn to Slide 22. We remain committed to the priorities we established early in the year. We executed actions in the second quarter this fiscal year that are driving sustainable improvements. Despite the revenue impact this quarter from deterioration in the global markets, we are pleased that we're able to expand our adjusted EBITDA margin to 8.3%. Last year, we told you we were taking pricing actions with our customers. Upon a detailed review of the Meritor value proposition, we work with our customers to adjust pricing appropriately. We've carefully evaluated the need for strategic investments in advanced manufacturing. We're make investments in several regions of the world, and they're paying off. We work with our customers and suppliers daily to manage demand and capacity at a more detailed level than ever before. And we continue to drive the development of products for our customers to improve their overall competitiveness. We've launched products across all business segments in North and South America, Europe and Asia-Pacific that are driving the business wins I highlighted earlier in this call. The Meritor brand represents market-leading OE and aftermarket drivetrain solutions that are fuel-efficient, durable, reliable, lightweight and supported by customer service and aftermarket support that is second to none in the industry. Finally, we maintain our commitment to delevering the company as we look to degenerate sustainable positive free cash flow. The extended maturity of our revolver and U.S. securitization facility and debt repayment features on our amended credit facility provide us with the financial flexibility to support the company's needs over the next several years. We're seeing results to the actions we implemented this year on our financial performance, but continue to identify actions that will provide further performance improvement opportunities. While managing appropriately to the changing-demand conditions taking place in our end markets around the world, we will maintain our diligence around these priorities. Now let's take your questions. Operator?

[Operator Instructions] Our first question comes from the line of David Leiker with Baird. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Chip, on Slide 10, I was wondering if we could dig through that a little bit, if there's any way you can characterize a couple of things. How much of this new business here is new business to Meritor versus replacing existing contracts? If you can give us any idea of an aggregate, the revenue impact of that, and then the timing? And I think, at some of those, you talked about whether you're in production now or not. But the timing of when you -- when that hits the revenue line.

Well, a fair amount of this is actually new incremental business in different markets. If you look just kind of quickly down the MeritorWABCO anti-lock braking system now being standard is one that's been an ongoing project that -- with Navistar that way. If I look at the green axles, and India's another example, we're really kind of bringing some of our latest technologies to India that way. We'd certainly be -- 2 new ones out in those arenas. And the Aftermarket & Trailer one, I think the important thing, as you look at that, is just the fact that we've really taken our aftermarket footprint that has been very successful here in North America, transferred that to Europe. And what we're highlighting in the bottom couple of bullet points there is doing the same thing in Singapore and South America. So that truly is new business and new market opportunities as we look at it that way. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: And could you put any revenue number on that? I mean, you've been focused all along on getting the business and the footprint right. This is really the first time there's organic revenue that we're talking about, and if you could characterize that in any fashion would be great.

Yes. I don't know if I can really characterize it in detail. Obviously, the disc brake is new business that way. The JLTV is one that, obviously, is in the future that way. But, Dave, I think it'll be difficult to go much beyond that at this point. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then one other item. As we look at the FMTV now that we're back on the volumes that we were before, and it's been a long 2 years getting there. Can you give us any sense on what that revenue impact is for you today versus 2 years ago when it went out? And then what the margin profile of that looks like today versus what it was 2 years ago when it went out?

I don't -- we do not disclose, David, separately the revenue of our military business within the Industrial segment. We have stated that the FMTV is one of our highest-margin products. And I can -- think you can see that, as you look at the margin comparison year-over-year with higher FMTV volumes and their impact on Industrial segment margins from last year. But we do not break that out separately, and actually, have been requested by some of our customers to be a little more opaque on some of what we're disclosing. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Yes, I appreciate that. I guess, I'm trying to get the context of what the revenue is now versus 2 years. Just -- is it higher or lower? What are the margins...

Oh, I'm sorry, David. It is meaningfully higher than it was. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: And is the profit margin on that better than it went out for BAE or...

No, we mentioned that when we transitioned from BAE, we actually saw pricing declines on when we moved to providing content for Oshkosh. And if you compare it to a couple of years ago, actually, David, it's relatively flat. So I -- if you compare it to last year, it's significantly increased from the prior year.

Our next question comes from the line of Robert Kosowsky with Sidoti & Company. Robert A. Kosowsky - Sidoti & Company, LLC: I was just wondering on the -- Jay, you mentioned you pulled forward some of the pension contributions of the quarter. I was wondering what some of the rationale behind it is, what we should be able to -- for the fourth quarter and kind of any comment on the new pension contribution legislation that was passed.

Sure. For the rational for the fourth quarter -- is we've been quite pleased with the investment performance of our advisors, so we saw cash flow coming in strong this quarter. And we elected to pull forward some required contributions from the fourth quarter. As far as the impact to the legislation, we think it will measurably reduce our required contributions. And as we -- when we reach the end of next quarter and provide the guidance for fiscal 2013, we'll be able to mention the impact that we're working on right now with our actuaries of that. Robert A. Kosowsky - Sidoti & Company, LLC: Okay. Would you be thinking about voluntarily contributing, if it does go down significantly, just to kind of continue to true-up that or delever, I guess, that line item?

I think we'll be choosing between that option and other delevering options. We have quite a bit of flexibility under our new revolver for pulling forward some of the bond purchases and getting some of our on-balance-sheet debt reduced. So we'll be choosing between those options and what we view to be most efficient. But certainly, if cash flow continues to come in strong, as it did this quarter, we will be taking advantage of one of those options or more. Robert A. Kosowsky - Sidoti & Company, LLC: Okay, that's helpful. And then maybe for Chip, you mentioned in the last sentence that you're looking for margin preservation actions, so are you thinking about cutting more costs? I know you had a restructuring -- a little restructuring in Europe, but kind of any other kind of contingency plans you guys are thinking about, and how much you've implemented them?

Yes, we clearly continue to do that and I think you did just hit on one of them when you talk about the action we did take place in Europe earlier this year, recognizing the softness we're seeing in Europe. And yes, we will continue to do that. On the materials side, we continue to look at our direct material optimization programs to try and address that. We look at all factors of our cost. It's certainly not our position today to kind of give any specific numbers, but that is something we continue to do. I think a real credit to the team as we did see the softness in the markets and have been able to respond nicely. So I really do credit the organization for being aligned in doing that quickly. So suffice it to say, we'll continue to do that to make sure we respond accordingly to the market dynamics out there.

Our next question comes from Tim Denoyer with Wolfe Trahan. Timothy J. Denoyer - Wolfe Trahan & Co.: Chip, in the past, you said that you can have the flexibility to export some parts up from Brazil or vice versa depending on market needs. Are you doing anything -- are you accelerating anything in that respect, exporting from Brazil, given the weakness of the currency at this point?

Well, actually, what we are able to do is -- yes, we have talked about that the last couple of years. As we made the investment on the manufacturing side, we want to make sure the manufacturer was much more flexible. I'll use the Americas as an example. And yes, we have the ability both ways, in a lot of ways when we have the strong market in South America, we were actually taking some of the capacity we had here in North America to provide there, and we continue to do it both ways. So what it's doing is -- if I look at it right now is, specifically, as we're seeing the softness in South America, it's actually truing up capacity in North America for us to support the strength in North America. So it's -- we do have the flexibility to do that. In this specific case you're bringing up, Tim, it actually has freed up some of the capacity we've had here in North America that allows us to do that, to support the actual manufacturer up here. Then on the brake side, clearly, we are taking advantage of that from Brazil. So it was a combination of both, but at the end of the day, the flexible manufacturing footprint we have allows us to do that now. Timothy J. Denoyer - Wolfe Trahan & Co.: Okay. And then a follow-up going back to the slide on new content. On disc brakes, specifically in North America, can you give any -- just rough sense of what you would expect take rates to be just -- is it 5%, or 10%? I mean, I think it's pretty clear that it's still a pretty drum-brake heavy market. Is that fair to say?

That is very fair to say. If you look at it. Clearly, in Europe, disc brakes are very strong there. Here in North America, a lot of it is still drum brake. With the latest legislation, FMVSS last year of the stopping distance, our drum brakes were able to perform even with the reduced stopping distance. And part of what you have here, in particular, is the fleet's really -- if they can keep the current products and service and parts inventory, which lean toward drum brakes, they will certainly do that. But I think, overall, as you look at it, at least in the short, medium term, there'll still be a low percentage. But having said that, you are starting to see more of a global perspective on the brake side, which I think will drive over time to more disc brakes. But as you've said, Tim, I think you're right, as it'll still be a lower percentage here in North America. Timothy J. Denoyer - Wolfe Trahan & Co.: Okay. And then if I could just sneak one more in for Jay. In terms of -- you talked about South America as the highest-margin region. Is that still true in the current quarter? I mean -- or are we getting towards parity, given the weakness in South America and the pricing [indiscernible].

We certainly have grown much closer to parity with -- for 2 reasons. One, the South America profits do include the profits we've rolled up from our unconsolidated JVs, so we've seen declines there that have really geometrically affected the margins coming out of South America. But on the positive side, the improvements we've made to the profitability of our European and North American truck businesses over the last 6, 9 months have really markedly increased the margins of those businesses to close that gap. Timothy J. Denoyer - Wolfe Trahan & Co.: Okay. Is it roughly similar in the current quarter?

In the current quarter, roughly similar. Year-to-date, it's roughly equal.

Our next question comes from the line of Ravi Shanker with Morgan Stanley.

Jay, if I can ask, the lower CapEx for 2012, what's driving that? Is that just being more efficient, or are you moving something to 2013?

We've actually moved some projects, particularly some expansion projects we had for both China and Brazil. We've pushed those out to await just the evaluation of how long those market downturns will last. So we are not investing as quickly as we had planned in some of the expansion opportunities we saw in those markets. Those would be the 2 most significant changes we've made in CapEx planning.

Got it. And Chip, staying on the topic of 2013, I know you're few months out from your December Analyst Day, but if you can talk about what you're seeing, just going forward, in the next year -- right now, just apart from what's going on in the macro, do you feel pretty good about where you guys are with execution, your targets? And in a normal macro, should you get back up to your margin targets for next year?

The answer is yes, I feel very good about the actions we've taken and the alignment that way and the response we've even done in the more recent softening of the market, so I feel very good about that. And kind of as we talked and you kind of look at the different market dynamics kind of around the world, but from a operating perspective, I feel very comfortable with it. As I kind of indicated, the question is what happens in North America, the balance of the year with the order intake. I do think that as you look at Brazil and China, in particular, it's not a matter of if, but when they come back. Europe, I think, is a longer question that way. And I think India, as I indicated, will continue to make investments in infrastructure and other things to address that. So as I look going into 2013, I feel, from an internal operating point of view -- I feel very good and comfortable with the actions that have been taken to do that. And clearly, the results of this quarter and last quarter have kind of indicated, even with soft markets, we've been able to do that. And essentially, what we're doing is, as you look at that, even as we look at our planning, we're actually developing other plans for not a significant rebound, some of these markets early in '13 anyway. So I think we are positioned well for that.

Very good. And finally, Jay, a housekeeping question here on the litigation charge. Any outlook on that? I mean, is that something that's going to continue in the coming quarters, or is that just a...

We had minor true up this quarter. We're working on settlements of that case. And like many of these large cases, they tend to get settled in pieces. So as we reach final settlements with some of the plaintiffs, I think we may see some additional minor true-ups, but I, obviously, we're not expecting anything in the magnitude we saw in the second fiscal quarter when we recorded $5 million.

Our next question comes from the line of Colin Langan with UBS.

Can you give any color -- and it seems -- why the broad range of guidance, given that there's only 2 months left in the year? I mean, is it -- I mean, what is driving that high level of uncertainty?

I'm sorry, could you just repeat the first part of the question? I broke up a bit on the guidance.

Why -- it seems like a fairly wide range, given that's there's just 2 months left. I mean, what markets are sort of driving that?

I have to admit, the magnitude of the declines we saw, particularly in China and India, over the last 30, 60 and 90 days, we are not certain if those markets have found their floor. I think we're feeling more confident that the Brazilian market has found its floor. In the last few months we've seen our production and sales numbers flattened out and uptick ever so slightly. But in China and India, the slowdown has been so rapid and so significant, we're just trying to make sure we know where the floor that market is before when we get all the inventory cleaned out. And then we have put in those numbers some risk indication in case North America softens towards the end of our fourth fiscal quarter. As I'm sure all of you are aware, the recent order activity has been weaker than what we believe is required to sustain current production levels. And if those orders continue weak, we think towards the back end of our fourth quarter, we may have some risks in the North American truck revenue.

And can you remind me what percent of your sales are in China and India?

If we go back to the Analyst Day presentation we gave last year, in the China and India, some portion of the Industrial segment is about 50% of the total Industrial segment. And then, if you take our Industrial segment, is roughly about 20% of the total company. I think you're talking about 10% to 15% of sales that come out of China and India for the entire corporation. And I want to go back and check all that math. That's just something that's going on off the top of my head, but it's around that order of magnitude.

Okay. And in terms of -- I think, your original second half EBITDA margin guidance was for 9%. What do you need to do to get back to that level? Is that a function of the markets? Or are there actual additional restructuring actions that you could take to get there if those margins don't recover?

I think the main thing we needed was, as we've stated all year long, we needed the recovery in the back half of the emerging markets. We needed China to stay stable, which it did not, and see the spring selling season, and we needed the recovery of the Brazilian market. So basically, it was a volume issue. And you can see from the margin walk, we're getting all the execution required, and that we anticipated, we're just not getting the volume we expected. And as Chip mentioned in his portion of the call, I think as we come into fiscal '13, and looking forward when we provide guidance on that at our Analyst Day, we'll, actually, at this point in time, we're looking -- we'll probably present a scenario of what if volume stays flat for another year or so on all these markets and how will we continue our margin expansion walk that we've moved so significantly recently. So we're looking at the markets and saying, "Okay, maybe we won't get the help from the volume. And what should we be doing about it to make sure we continue on the margin expansion path?" And so we'll be presenting more of those details as we look at these markets over the next few months.

Okay. And just one last question. I mean, how much visibility do you get on orders, particularly in China and India? I mean, do you have a sense of what they're going to be over the next few weeks or...

In China, we get a very good insight, because our main business, the off-highway business, is a joint venture with our primary customers, so we're in continuous contact there. We did see concerning inventory buildup of the last couple of quarters that we've mentioned. So I think we get a very good view on that. In India, somewhat less so. And you didn't ask, but in North America, we have the typical 8-, 10-, 12-week order board that were continuously reviewing with our customers.

Our next question comes from the line of Itay Michaeli with Citigroup.

Just want to go back to Ravi's question on fiscal '13, and make sure I understood it -- the answer correctly. So kind of based on what you're doing internally on margin initiatives that you've talked about in your preliminary view of the global markets, and then, particularly, hopefully recovering South America, should we be expecting directionally fiscal '13 EBITDA and EPS to be up from fiscal '12? Is that sort of what the message is?

For the full year, on a run rate basis, without further actions, it could be relatively flat. On a full year, because a lot of our margin expansion actions occurred in the second quarter, it has the potential on flat revenue to be higher, obviously, depending somewhat on mix. But it should be higher. What we talked about on the last question is, I think, what we believe is it's prudent for us to look at, what if the, if our global economic -- the markets we participate in look to be staying flat for another 12 -- or in excess of that time period, 12 months or more, what should we be working on to continue to expand margin? And we're looking at those plans now and we'll be talking more about that in our guidance in the Analyst Day.

Great. And then it seems like the implied decremental margin from the prior to current revenue outlook is actually a bit lower than what you've had in the past. You've been able to obtain margins somewhat better. Is it fair to sort of assume that maybe you can get that 10% margin goal maybe on slightly lower revenue than what you thought previously? Or is that not accurate?

Well, I think what we've stated before is about $5.2 billion of revenue is required to hit -- annually, to hit that 10%. And that's what I've been to speaking to into the last few moments. I think it's incumbent on us to look at what if that revenue level is not able to be achieved in the near future, what can we do to continue to march above the 8%, 8.5% margin level and get closer to that 10%? I think it's a little premature for us to talk about in specificity, can we do that and how? But we think, as a management team, we are required to look at that. But I -- to go back to your first comment, we're very pleased with the negative conversion number being so low on lower volume. And that's really a function of all the actions the business has executed.

Great. And then 2 follow-ups. One, could you quantify the higher material costs that hit you in the Aftermarket & Trailer segment? And I think you may have mentioned it earlier, but I may have missed it, what your minimum pension requirements are now for fiscal '13, given the new laws and some of the step ups you talked about in the past?

It really -- the material cost hit us for early in Q1 and then continued in aftermarket and continued into Q2. We haven't really disclosed what the magnitude of that was. We do pricing in the aftermarket group in January and July. And so we think we recapture a significant portion of that right now with the additional pricing we put in place in July. So we think we're starting to claw that back to a significant degree right now. As far as the pension contributions, what we've stated previously was that we saw the higher levels of contributions we had in 2012 continuing on for a couple more years. And in fact, we thought it might be slightly higher in fiscal '13. The effect of the new legislation, along with, if we choose to make some advanced contributions at the end of the year, may change that relationship for fiscal '13 and beyond. So we'll be disclosing that towards the end of the year. And sorry to be somewhat circumspect, but it really depends on how our free cash flow comes in next year and how we choose to use that cash flow to delever.

Your final question comes from the line of Ryan Brinkman with JPMorgan. Ryan Brinkman - JP Morgan Chase & Co, Research Division: Even if you would not like to guide to a fiscal or quarter 2013 end market performance, could you at least perhaps talk qualitatively about the commercial and specialty vehicle markets in Brazil, India and China, as we go into next year? What are the puts and takes there beyond easier comps? And when should some of the pressures impacting these markets begin to pass?

Yes, Ryan, this is Chip. Let me go and start with that, and let me start with South America. As I said earlier, if you look at it, there are several dynamics that I think are taking place, it's a -- it's not a matter of if, but when these markets come back. And as you look at it, I'll do it on several levels. The government clearly stepped in, and as I said in my comments, they've done some things in the past, either with tax policy and/or interest policies to try and encourage purchase of vehicles. That has -- that literally got started mid-spring, has not taken effect yet, but I think the government's willingness to do that shows a willingness to try and kind of spur that economy that way. I think the second thing that people talk about, which is really kind of the short-term kind of thing, the World Cup in '14 and the Olympics in '16, I think will have some impact. I think a bigger, long-term impact is the fact that there's been large amounts of oil discovered off the coast, and more recently, shale gas in country that I think will really position the country long-term. So if you look at that in Brazil, whether it's from the -- and, I guess, the third thing is when we just look at the age of the fleets there, there's no question on that. And a lot of our OEM customers are putting additional capacity in there. So when you look at it in Brazil, I think those are the dynamics and really does become a matter of when, not if these markets come back that will drive it that way. I will -- just one last thing on Brazil too is, it is impacted by -- because its -- one of its largest trading partners now is China. So I'll then move to China and say, that obviously, what's occurring in China more recently has had some impact on Brazil. And if I then move to China, and as Jay said, in our case, the large portion of our business in China is in the off-highway. It is in a joint venture with our partner, who is actually our major customer, so we have pretty clear visibility that way. If you go back to 2009, huge investment in infrastructure there, which I think really helped to pilot the country out of the global recession. Until recently, there wasn't as much of that investment. That investment is now starting to be put back in place by the government to try and stimulate that having a GDP that was a little lower than they wanted. I think it was a concern. I think on the flipside, they're trying to balance inflation. So when you look at it, I think a couple of things in China. One is the markets we're in, the off-highway, is driven a lot by infrastructure build; secondly, by just housing starts or building starts to a lesser extent. And then thirdly, in the mining areas I've indicated. So as you look at that, those will come back over time. It's being driven by the government. And what we're seeing more recently is increased investment in that stimulus. I think the other thing, when you look at China is also a new leadership coming in later this year, I think may drive some of the dynamics both before and after that. So again, in that market we do expect to come back. It's just -- it's a matter of when, not if. I'm just trying to figure out when that is. In India, a little bit of a different dynamic. And as we said, this has been more recent. I think even the most recent news, with the infrastructure, vis-à-vis, the grid issues they've had, I think, is highlighting the electrical grid, when I talk about it that way. And then you move to the infrastructure. I think what you will start seeing there in India is the government starting to invest more in infrastructure, both hard infrastructure vis-à-vis road and rail, which in -- for us, in India, it's more on-highway than off-highway. So I think that will help us, but that's probably a little bit of a longer road that way. And then more recently, with what's happening with the electronic -- in the electric grid, the need to strengthen that infrastructure. So I think as you look at -- in all 3 of those regions, I think government will have some influence on it, to a less extent in Brazil than in China and India. And then other dynamics, as I indicated, whether it's needing to upgrade the grid in India, expand the grid in country in China, or, as I indicated, in Brazil with the -- more with gas and oil being the driver long-term. So as you look at that long-term growth, it really just becomes a matter of, as Jay indicated, looking at short-term, what's going to happen from a global perspective. Ryan Brinkman - JP Morgan Chase & Co, Research Division: That was really very helpful. Just last question, quick then. I know you cited truck ton miles and then earlier pull ahead of demand. But I'm curious as to any additional thoughts you may have on the weakness on the North American aftermarket. Just -- and it seems a little surprising, given the oft-cited age of fleet issues there. Could you speculate on those pressures? And when do you think they might abate? Or if not when, at least what would it take for those pressures to abate?

Well, first of all, I think, some of it was a timing issue, as I said, with the mild winter, so there's a pull ahead on the maintenance side that way. I think it's just kind of a reflection of the uncertainty in the economy in general. So I think it was more of a timing issue there. You're right, as you look at it, you look at it -- you look at Class 8 markets, the age of the fleet, it's still old. The large fleets are still buying. The large fleets still have access to capital, so all those dynamics are taking place. And really, when I talk about it, I'm talking about '12, '13, '14 as far as the time frame, of which aftermarket will follow very closely with that. So it's more 2 things: One, the timing issue would be mild winter. And then secondly, just probably a little bit of concern or uncertainty with what's happening with the economy, which, to me, as a short term is kind of going to wait and see for a short period of time.

Ladies and gentlemen, this will conclude the time we have for questions. I'd now like to turn the call over to Ms. Daehnert for closing remarks.

Thank you, once again, for your time and attention on today's call. If you have any follow-up questions, please contact me directly. And that concludes today's call.

Ladies and gentlemen, that concludes the conference. Thank you for your participation, you may now disconnect. Have a wonderful day.