Modine Reports Third Quarter Fiscal 2020 Results
RACINE, Wis., Feb. 4, 2020 /PRNewswire/ -- Modine Manufacturing Company (NYSE: MOD), a diversified global leader in thermal management technology and solutions, today reported financial results for the third quarter ended December 31, 2019.
Third Quarter Highlights:
-- Net sales of $473.4 million decreased 12 percent from the prior year
-- Operating income declined to $8.2 million and adjusted operating income
to $24.0 million
-- Earnings per share of $0.02 and adjusted earnings per share of $0.37
-- Raised adjusted EPS guidance range for fiscal 2020 due to lower expected
tax rate, confirmed sales and adjusted operating income guidance
-- Progressed automotive separation and exit strategy, plan to report
automotive segment in fiscal 2021
"As we anticipated, the sharp declines in key end markets resulted in lower vehicular sales and sales volume declined to our refrigeration and data center customers," said Modine President and Chief Executive Officer, Thomas A. Burke. "We quickly responded to these market conditions by implementing comprehensive cost savings initiatives across the organization. We exceeded our earnings expectations for the quarter, in part due to the benefit from these actions."
Financial Results
Net sales decreased 12 percent in the third quarter to $473.4 million, compared with $541.0 million in the prior year period. The decrease was primarily driven by market-related volume declines in all global markets in the Vehicular Thermal Solutions ("VTS") segment and lower data center and refrigeration sales in the Commercial and Industrial Solutions ("CIS") segment. This was partially offset by slightly higher sales in the Building HVAC Systems ("BHVAC") segment.
Gross profit decreased 20 percent in the third quarter to $73.5 million, primarily driven by volume declines in the VTS and CIS segments. This was partially offset by higher gross profit in the BHVAC segment, which increased 5 percent on higher sales volumes. Overall gross margin decreased 140 basis points during the quarter to 15.5 percent, primarily due to lower margins in the VTS and CIS segments as a result of lower sales volume.
Selling, general and administrative ("SG&A") expenses were $63.5 million in the third quarter, $6.3 million higher than the prior year. This increase was primarily due to an increase of $11.4 million of costs associated with the separation of the VTS segment's automotive business, which consisted primarily of accounting, legal and IT professional services and other costs incurred to prepare the business for sale. During the fiscal year, the Company made the necessary investments to separate the automotive business with the majority of this work completed during the quarter. The net decrease in other SG&A expenses was $5.1 million, due primarily to lower compensation-related expenses, including incentive compensation. This significant decrease also included the initial benefits from cost savings initiatives across the organization.
Operating income was $8.2 million in the third quarter, compared to $33.6 million in the prior year. This decrease was driven primarily by lower gross profit and higher SG&A expenses, as compared to the prior year. During the third quarter of fiscal 2020, the Company recorded $14.0 million of costs related to the separation and potential sale of the automotive business and $2.6 million of restructuring expenses primarily related to employee severance expenses and equipment transfer and plant consolidation costs. The Company also sold a previously-closed manufacturing facility during the third quarter of fiscal 2020 and, as a result, recorded a gain of $0.8 million. In the prior year, strategy and restructuring expenses and certain other items totaled $1.2 million. Excluding these items, adjusted operating income of $24.0 million was down 31 percent compared with $34.8 million in the prior year.
Earnings per share was $0.02, compared with $0.35 in the prior year. This decrease was primarily due to lower operating income compared to the prior year, including the impact of lower sales volume and higher strategy costs, and a higher effective tax rate. Adjusted earnings per share decreased $0.05 in the third quarter to $0.37, compared with $0.42 in the prior year. This decrease was primarily due to lower adjusted operating income compared to the prior year.
Third Quarter Segment Review
-- VTS segment sales were $271.9 million, compared with $323.3 million one
year ago, a decrease of 16 percent. This decrease was driven by lower
sales to all vehicular end markets and included the planned wind-down of
certain commercial vehicle programs. The segment reported gross margin
of 10.6 percent, down 220 basis points from the prior year. This
decrease was primarily due to lower sales volume. Operating income of
$4.3 million decreased $11.2 million compared to the prior year. This
decrease was due to lower gross profit on the lower sales volume,
partially offset by lower SG&A expenses as compared to the prior year
resulting from cost saving initiatives.
-- CIS segment sales were $147.5 million, compared with $167.0 million one
year ago, a decrease of 12 percent. This decrease was driven by lower
sales to a large data center customer and to commercial HVAC and
refrigeration customers. The segment reported gross margin of 15.4
percent, down 150 basis points compared with the prior year, primarily
due to lower sales volumes and unfavorable sales mix. Operating income
of $8.3 million was down $4.8 million, primarily due to lower gross
profit, partially offset by lower SG&A expenses as compared to the prior
year resulting from cost saving initiatives.
-- BHVAC segment sales were $64.9 million, compared with $64.2 million one
year ago, an increase of 1 percent. This increase was driven primarily
by higher sales of heating and ventilation products in the U.S.,
partially offset by lower sales of air conditioning and ventilation
products in the U.K. The segment reported gross margin of 35.5 percent,
which was 120 basis points higher than the prior year. This improvement
was primarily due to slightly higher sales volume and favorable sales
mix. The segment reported operating income of $13.5 million, an increase
of $0.5 million, primarily due to higher gross profit, partially offset
by higher SG&A expenses.
Balance Sheet & Liquidity
Total debt was $447.7 million as of December 31, 2019. Cash and cash equivalents at the end of the third quarter were $36.2 million. Net debt was $411.5 million as of December 31, 2019, an increase of $3.5 million from the end of fiscal 2019. In connection with its issuance of $100.0 million of 5.85 percent Senior Notes in January 2020, the Company reclassified $100.0 million of debt from "Debt due within one year" to "Long-term debt" on its December 31, 2019 balance sheet.
Net cash provided by operating activities for the nine months ended December 31, 2019 was $45.9 million, compared with $67.4 million one year ago. Free cash flow for the nine month period was a use of $12.3 million. Year-to-date fiscal 2020 free cash flow was negatively impacted by cash payments related to the potential sale of the automotive business and restructuring activities, which totaled $34.0 million. In addition, the Company maintained higher inventory levels as of December 31, 2019, as compared with the prior year end, largely resulting from increased stock associated with resourcing raw material purchases from overseas and program and equipment transfers in preparation of the potential sale of Modine's automotive business.
Outlook
"We are raising our guidance range for adjusted earnings per share due to a lower projected tax rate for the year and are confirming guidance for sales and adjusted operating income," commented Burke. "We are making progress on our automotive exit strategy, including the plan to manage and report the automotive business as a separate segment beginning in fiscal 2021. This will provide greater visibility through the exit process while allowing us to separately report our remaining heavy duty VTS business."
Modine provides its updated forecasted outlook for fiscal 2020, which remains inclusive of the automotive business in its VTS segment:
-- Full year year-over-year sales down 7 to 12 percent;
-- Adjusted operating income of $85 million to $95 million; and
-- Adjusted earnings per share of $0.85 to $1.00.
Conference Call and Webcast
Modine will conduct a conference call and live webcast, with a slide presentation, on Wednesday, February 5, 2020 at 8:00 a.m. Central Time (9:00 a.m. Eastern Time) to discuss its third quarter fiscal 2020 financial results. The webcast and accompanying slides will be available on the Investor Relations section of the Modine website at www.modine.com. Participants are encouraged to log on to the webcast and conference call about ten minutes prior to the start of the event. A replay of the audio and slides will be available on the Investor Relations section of the Modine website at www.modine.com on or after February 5, 2020. A call-in replay will be available through midnight on February 7, 2020, at 800-585-8367, (international replay 416-621-4642); Conference ID# 1199539. The company will post a transcript of the call on its website, on February 7, 2020.
About Modine
Modine, with fiscal 2019 revenues of $2.2 billion, specializes in thermal management systems and components, bringing highly engineered heating and cooling components, original equipment products, and systems to diversified global markets through its three complementary segments: VTS; CIS; and BHVAC. Modine is a global company headquartered in Racine, Wisconsin (USA), with operations in North America, South America, Europe and Asia. For more information about Modine, visit www.modine.com.
Forward-Looking Statements
This press release contains statements, including information about future financial performance and market conditions, accompanied by phrases such as "believes," "estimates," "expects," "plans," "anticipates," "intends," and other similar "forward-looking" statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine's actual results, performance or achievements may differ materially from those expressed or implied in these statements because of certain risks and uncertainties, including, but not limited to those described under "Risk Factors" in Item 1A of Part I of the Company's Annual Report on Form 10-K for the year ended March 31, 2019 and under Forward-Looking Statements in Item 7 of Part II of that same report, and in the Company's Quarterly Report on Form 10-Q for the quarters ended June 30, 2019 and September 30, 2019. Other risks and uncertainties include, but are not limited to, the following: the overall health and price-down focus of Modine's customers; our ability to successfully execute our strategic and operational plans, including our ability to successfully separate and sell our automotive business within the VTS segment; our ability to effectively and efficiently reduce our cost structure in response to sales volume declines and complete restructuring activities and realize benefits thereon; operational inefficiencies as a result of program launches, unexpected volume increases and product transfers; economic, social and political conditions, changes and challenges in the markets where Modine operates and competes, including foreign currency exchange rate fluctuations, tariffs (and potential trade war impacts resulting from tariffs or retaliatory actions), inflation, changes in interest rates, recession, restrictions associated with importing and exporting and foreign ownership, public health crises, such as pandemics and epidemics, and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, that have been or may be implemented in the U.S. or by its trade partners, and continuing uncertainty regarding "Brexit"; the impact on Modine of any significant increases in commodity prices, particularly aluminum, copper, steel and stainless steel (nickel) and other purchased component inventory, and our ability to adjust product pricing in response to any such increases; the nature of and Modine's significant exposure to the vehicular industry and the dependence of this industry on the health of the economy; the concentration of sales within our CIS segment attributed to one customer; Modine's ability to recruit and maintain talent in managerial, leadership, and administrative functions; Modine's ability to protect its proprietary information and intellectual property from theft or attack; the impact of any substantial disruption or material breach of our information technology systems; costs and other effects of environmental investigation, remediation or litigation; and other risks and uncertainties identified by the Company in public filings with the U.S. Securities and Exchange Commission. Forward-looking statements are as of the date of this release, and the Company does not assume any obligation to update any forward-looking statements.
Non-GAAP Financial Disclosures
Adjusted operating income, adjusted earnings per share, net debt, and free cash flow (which are defined below) as used in this press release are not measures that are defined in generally accepted accounting principles (GAAP). These non-GAAP measures are used by management as performance measures to evaluate the company's overall financial performance and liquidity. We believe these measures provide a more consistent view of performance than the closest GAAP equivalent for management and investors. Management compensates for this by using these measures in combination with the GAAP measures. However, these measures are not, and should not be viewed, as substitutes for the applicable GAAP measures, and may be different from similarly-titled measures used by other companies.
Definition - Adjusted operating income and earnings per share
Operating income or diluted earnings per share plus impairment charges, restructuring expenses, and acquisition and integration costs, and excluding certain other gains or charges. These are measures of overall performance not including non-cash impairment charges, costs associated with restructuring and acquisitions, and certain other gains or charges.
Definition - Net debt
The sum of debt due within one year and long-term debt, less cash and cash equivalents. This is an indicator of the company's debt position after considering on-hand cash balances.
Definition - Free cash flow
Free cash flow represents net cash provided by operating activities less expenditures for property, plant and equipment. This measure presents cash generated from operations during the period that is available for strategic capital decisions.
Forward-looking non-GAAP financial measures
Our fiscal 2020 guidance includes adjusted operating income and adjusted earnings per share. These are non-GAAP measures, which exclude certain cash and non-cash expenses or gains. These expenses and gains may be significant and include items such as restructuring expenses (including severance costs and plant consolidation and relocation expenses), costs associated with the review of strategic alternatives for and separation and potential sale of the automotive business in our VTS segment, acquisition and integration costs, impairment charges and certain other items. These expenses or gains for the first nine months of fiscal 2020 are presented on page 7. Beyond approximately $4.0 million of severance expenses in the VTS segment that we expect to record for additional headcount reductions approved in January 2020, estimates of these expenses and gains for the remainder of fiscal 2020 are not available due to the low visibility and unpredictability of these items.
Modine Manufacturing Company
Consolidated statements of operations (unaudited)
(In millions, except per share amounts)
Three months ended December 31, Nine months ended December 31,
2019 2018 2019 2018
---
Net sales $473.4 $541.0 $1,502.6 $1,656.0
Cost of sales 399.9 449.3 1,270.0 1,382.1
---
Gross profit 73.5 91.7 232.6 273.9
Selling, general & administrative expenses 63.5 57.2 194.4 179.9
Restructuring expenses 2.6 0.5 6.7 0.7
Impairment charge 0.4 0.4
(Gain) loss on sale of assets (0.8) (0.8) 1.7
Operating income 8.2 33.6 32.3 91.2
Interest expense (5.6) (6.2) (17.3) (18.9)
Other income (expense) - net 0.1 (0.5) (2.3) (2.1)
---
Earnings before income taxes 2.7 26.9 12.7 70.2
(Provision) benefit for income taxes (1.7) (8.6) (8.3) 9.3
---
Net earnings 1.0 18.3 4.4 79.5
Net loss (earnings) attributable to noncontrolling interest 0.2 (0.3) 0.1 (1.0)
---
Net earnings attributable to Modine $1.2 $18.0 $4.5 $78.5
Net earnings per share attributable to Modine shareholders - diluted: $0.02 $0.35 $0.09 $1.53
Weighted-average shares outstanding - diluted: 51.1 51.2 51.1 51.2
Condensed consolidated balance sheets (unaudited)
(In millions)
December 31, 2019
March 31, 2019
Assets
---
Cash and cash equivalents $36.2 $41.7
Trade receivables 283.7 338.6
Inventories 223.9 200.7
Other current assets 67.5 65.8
Total current assets 611.3 646.8
Property, plant and equipment - net 467.4 484.7
Intangible assets - net 109.5 116.2
Goodwill 168.4 168.5
Deferred income taxes 96.1 97.1
Other noncurrent assets 82.5 24.7
Total assets $1,535.2 $1,538.0
Liabilities and shareholders' equity
---
Debt due within one year $117.4 $114.6
Accounts payable 236.9 280.9
Other current liabilities 119.9 121.6
Total current liabilities 474.2 517.1
Long-term debt 330.3 335.1
Other noncurrent liabilities 187.7 144.7
Total liabilities 992.2 996.9
Total equity 543.0 541.1
Total liabilities & equity $1,535.2 $1,538.0
Modine Manufacturing Company
Condensed consolidated statements of cash flows (unaudited)
(In millions)
Nine months ended December 31,
2019 2018
Cash flows from operating activities:
Net earnings $4.4 $79.5
Adjustments to reconcile net earnings to net cash
provided by
operating activities:
Depreciation and
amortization 57.8 57.6
(Gain) loss on sale of
assets (0.8) 1.7
Impairment charge 0.4
Stock-based
compensation expense 5.2 6.8
Deferred income taxes 0.2 (2.9)
Other - net 3.5 2.4
Changes in operating assets and liabilities:
Trade accounts
receivable 52.6 23.8
Inventories (23.6) (31.2)
Accounts payable (32.4) (11.8)
Other assets and
liabilities (21.0) (58.9)
Net cash provided by
operating activities 45.9 67.4
Cash flows from investing activities:
Expenditures for
property, plant and
equipment (58.2) (58.7)
Proceeds from
disposition of assets 6.5 0.2
Other - net 4.6 0.8
Net cash used for
investing activities (47.1) (57.7)
Cash flows from financing activities:
Net increase
(decrease) in debt 3.8 (10.1)
Other - net (7.7) (6.2)
Net cash used for
financing activities (3.9) (16.3)
Effect of exchange
rate changes on cash (0.5) (2.3)
Net decrease in cash,
cash equivalents and
restricted cash (5.6) (8.9)
Cash, cash equivalents
and restricted cash -
beginning of period 42.2 40.3
Cash, cash equivalents
and restricted cash -
end of period $36.6 $31.4
Segment operating results (unaudited)
(In millions)
Three months ended December 31, Nine months ended December 31,
2019 2018 2019 2018
---
Net sales:
Vehicular Thermal
Solutions $271.9 $323.3 $897.7 $1,011.7
Commercial and
Industrial Solutions 147.5 167.0 473.0 529.1
Building HVAC Systems 64.9 64.2 169.9 159.9
Segment total 484.3 554.5 1,540.6 1,700.7
Corporate and
eliminations (10.9) (13.5) (38.0) (44.7)
---
Net sales $473.4 $541.0 $1,502.6 $1,656.0
Three months ended December 31,
Nine months ended December 31,
2019 2018 2019 2018
Gross profit:
$'s
% of sales
$'s
% of sales
$'s
% of sales
$'s
% of sales
Vehicular Thermal
Solutions $28.9 10.6% $41.4 12.8% $109.2 12.2% $140.0 13.8%
Commercial and
Industrial
Solutions 22.7 15.4% 28.2 16.9% 69.9 14.8% 85.1 16.1%
Building HVAC
Systems 23.1 35.5% 22.0 34.3% 54.5 32.1% 48.6 30.4%
Segment total 74.7 15.4% 91.6 16.5% 233.6 15.2% 273.7 16.1%
Corporate and
eliminations (1.2) 0.1 (1.0) 0.2
Gross profit $73.5 15.5% $91.7 16.9% $232.6 15.5% $273.9 16.5%
Three months ended December 31, Nine months ended December 31,
2019 2018 2019 2018
---
Operating income:
Vehicular Thermal
Solutions $4.3 $15.5 $29.0 $55.1
Commercial and
Industrial
Solutions 8.3 13.1 25.8 39.2
Building HVAC
Systems 13.5 13.0 27.6 21.0
Segment total 26.1 41.6 82.4 115.3
Corporate and
eliminations (17.9) (8.0) (50.1) (24.1)
---
Operating income (a) $8.2 $33.6 $32.3 $91.2
===
(a) See the adjusted operating income reconciliation on the next page for information on restructuring expenses and other adjustments.
Modine Manufacturing Company
Adjusted financial results (unaudited)
(In millions, except per share amounts)
Three months ended December 31, Nine months ended December 31,
2019 2018 2019 2018
---
Operating income $8.2 $33.6 $32.3 $91.2
Automotive
separation and
strategy costs(a) 14.0 1.2 34.3 1.2
Restructuring
expenses (b) 2.6 0.5 6.7 0.7
(Gain) loss on sale
of assets(c) (0.8) (0.8) 1.7
Environmental
charges (d) (0.9) 0.1 1.9
Impairment charge
(e) 0.4 0.4
Acquisition
integration costs
(f) 0.2
Adjusted operating
income $24.0 $34.8 $72.6 $97.3
===
Net earnings per
share attributable
to Modine
shareholders -
diluted $0.02 $0.35 $0.09 $1.53
Automotive
separation and
strategy costs(a) 0.21 0.02 0.51 0.02
Restructuring
expenses (b) 0.04 0.01 0.11 0.01
(Gain) loss on sale
of assets(c) (0.01) (0.01) 0.03
Environmental
charges (d) (0.01) 0.03
Impairment charge
(e) 0.01 0.01
Tax valuation
allowances (g) 0.06 0.06 (0.02)
Tax from legal
entity
restructuring (h) 0.05 0.05 -
U.S. tax reform(i) 0.04 (0.43)
Adjusted earnings
per share $0.37 $0.42 $0.81 $1.18
===
(a) During the first nine months of fiscal 2020 and 2019, the
Company recorded $34.3 million and $1.2 million, respectively,
of costs at Corporate directly associated with its review of
strategic alternatives for the Vehicular Thermal Solutions
("VTS") segment's automotive business, including costs to
separate and prepare the business for a potential sale. With
the exception of $1.5 million of costs in fiscal 2020
associated with program and equipment transfers recorded as
costs of sales, these costs were recorded as SG&A expenses and
primarily related to accounting, legal, and IT professional
services. The tax benefit related to these costs during the
(b) Restructuring expenses primarily relate to employee
severance expenses, largely resulting from targeted headcount
reductions, and equipment transfer and plant consolidation
costs. The tax benefit related to these costs during the first
nine months of fiscal 2020 was $1.0 million.
(c) During fiscal 2020, the VTS segment sold a previously-
closed manufacturing facility in Germany and, as a result,
recorded a gain of $0.8 million. During fiscal 2019, the
Building HVAC Systems segment sold its operations in South
Africa and, as a result, recorded a loss of $1.7 million.
Annual sales for this disposed business were less than $2.0
million. There were no tax impacts associated with these
transactions.
(d) Environmental charges, including related legal costs, are
recorded as SG&A expenses and relate to previously-owned U.S.
manufacturing facilities in the VTS segment. During the third
quarter in fiscal 2019, the Company recovered $1.1 million of
environmental investigation costs from a prior owner of one of
these facilities and recorded the recovery within SG&A
expenses.
(e) During fiscal 2019, the Company recorded a $0.4 million
impairment charge related to a previously-closed Austrian
manufacturing facility within the CIS segment.
(f) These costs related to the Company's acquisition and
integration of the Luvata Heat Transfer Solutions business.
(g) During fiscal 2020, the Company adjusted its valuation
allowances on deferred tax assets in the U.S. As a result,
the Company recorded a $3.0 million income tax charge in the
third quarter of fiscal 2020. During fiscal 2019, the Company
adjusted its valuation allowances on deferred tax assets
related to two separate subsidiaries in China. As a result,
the Company recorded a $2.0 million income tax benefit in the
first quarter of fiscal 2019 and an income tax charge of $1.0
million in the second quarter of fiscal 2019.
(h) During fiscal 2020, the Company recorded a net income tax
charge totaling $2.7 million as a result of legal entity
restructuring completed in preparation of a potential sale of
the automotive business.
(i) During the first nine months of fiscal 2019, the Company
recorded income tax benefits totaling $22.2 million, which
were primarily related to transition tax obligations
associated with tax reform legislation in the U.S. that was
enacted in December 2017 and the recognition of tax assets for
foreign tax credits.
Modine Manufacturing Company
Net debt (unaudited)
(In millions)
December 31, 2019
March 31, 2019
Debt due within
one year $117.4 $114.6
Long-term debt 330.3 335.1
Total debt 447.7 449.7
Less: cash and
cash equivalents 36.2 41.7
Net debt $411.5 $408.0
Free cash flow (unaudited)
(In millions)
Three months ended December 31, Nine months ended December 31,
2019 2018 2019 2018
Net cash provided
by operating
activities $28.4 $30.7 $45.9 $67.4
Expenditures for
property, plant
and equipment (16.8) (20.8) (58.2) (58.7)
Free cash flow $11.6 $9.9 $(12.3) $8.7
===
Kathleen Powers
(262) 636-1687
Kathleen.T.Powers@modine.com
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