Modine Manufacturing Company, a diversified global leader in thermal management technology and solutions, has reported its financial results for the fourth quarter ended March 31, 2015. Highlights and year-over-year comparisons include:
- Sales down 7% for the quarter, up 2% on a constant currency basis;
- Fourth quarter operating income of $5.2 million and a loss per share of $0.07;
- Adjusted operating income of $17.2 million for the quarter, up 27%, and $65.2 million for the fiscal year, up 6%;
- Adjusted earnings per share of $0.12 for the quarter and $0.63 for the fiscal year.
"This was a solid quarter with year-over-year improvements in gross margin and adjusted operating income," says Modine President and Chief Executive Officer Thomas A. Burke. "We achieved these results in the face of significant market and currency headwinds."
Fourth Quarter Financial Results
Sales in the fourth quarter of fiscal 2015 were down $27.6 million, or 7%, from the fourth quarter of fiscal 2014. The decrease was primarily due to the strengthening of the U.S. dollar, which negatively impacted sales by $36 million as compared to the prior year. On a constant currency basis, sales were up 2%. Gross profit increased $0.4 million, and gross margin improved 140 basis points to 17.3% led by improvements in the North America and Building HVAC segments. Selling, general and administrative (SG&A) expenses remained flat from the prior year, as favorable currency impacts were offset by a $3.2 million reserve recorded by the South America segment related to a legal matter in Brazil. During the fourth quarter, the company recorded a $7.8 million impairment charge related to goodwill in South America and $1.0 million of restructuring expenses in North America, Europe and South America. Excluding the impairment charge, restructuring expenses, and the Brazil legal reserve, the company reported adjusted operating income of $17.2 million, up $3.7 million from the prior year. Adjusted earnings per share of $0.12 were down $0.03 from the fourth quarter of the prior year due to higher income tax expense in the current year. The income tax expense increased this year due to the reversal of U.S. tax valuation allowances in the fourth quarter of the prior year.
Free cash flow in the quarter was $7.8 million. Net debt was $78.2 million at March 31, 2015, an increase of $1.0 million from the end of fiscal 2014. Cash and cash equivalents at the end of the fourth quarter were $70.5 million.
Fourth Quarter Segment Results
North America segment sales increased 1% to $146.2 million compared with $145.1 million one year ago. The increase was driven primarily by higher sales to commercial vehicle and automotive customers, partially offset by lower sales to off-highway customers. Operating income increased $7.6 million to $15.0 million compared with the prior year, due primarily to lower warranty, compensation-related, restructuring and impairment expenses. The company recorded $0.4 million of restructuring charges during the quarter relating to the closure of the McHenry, IL, manufacturing facility as compared with $2.4 million of restructuring and impairment charges in the prior year.
Europe segment sales decreased 14% to $136.0 million compared with $158.8 million in the prior year, driven primarily by a $29.9 million negative currency impact during the quarter. On a constant currency basis, sales grew 5% as compared with the prior year. This growth was primarily due to higher sales to automotive and commercial vehicle customers, partially offset by lower sales to off-highway customers and lower tooling sales. Operating income improved $1.2 million compared with the fourth quarter of the prior year, primarily due to a $4.1 million decrease in restructuring expenses. Positive impacts from higher sales volume and lower warranty costs were more than offset by higher material costs, unfavorable sales mix and lower profits on tooling sales.
South America segment sales decreased 31% to $20.0 million compared with $29.1 million one year ago. On a constant currency basis, sales decreased 17%, due primarily to lower sales to off-highway, commercial vehicle and aftermarket customers as economic conditions in Brazil continue to be weak. The segment reported an $11.1 million operating loss, which included a $7.8 million charge for the write off of goodwill, a $3.2 million reserve related to a legal matter in Brazil, and $0.3 million of restructuring expenses.
Asia segment sales increased 7% to $21.2 million compared with $19.9 million one year ago as higher sales to automotive customers in China and higher sales across all end markets in India were partially offset by lower sales to off-highway customers in China and Korea. The segment reported operating income of $0.4 million, a $1.7 million improvement from the prior year. This improvement was primarily the result of the higher sales volume and lower SG&A expenses.
Building HVAC segment sales increased 4% to $43.8 million compared with $42.3 million one year ago. On a constant currency basis, sales grew 7% as compared with the prior year. This increase was primarily due to continued strength in the North American heating and ventilation markets. Operating income of $2.9 million was up $1.0 million from the prior year on the higher sales volume.
Full Year Fiscal 2015 Overview
"I am pleased with our fiscal year results," Burke comments. "Despite challenging markets and negative currency impacts, we improved our gross margin, generated earnings growth and delivered earnings within the guidance provided at this time last year. We continue to focus on improving our cost structure and operating scale production facilities around the world."
In fiscal 2015, sales increased 1% to $1,496.4 million. On a constant currency basis, sales were up 4% as compared with the prior year. Gross margin increased 40 basis points to 16.5%, primarily due to the impact of the higher sales volume and the favorable impact of lower warranty costs. The company recorded a $7.8 million goodwill impairment charge, $4.7 million of restructuring expenses and a $3.2 million gain on the sale of a wind tunnel during the fiscal year. The higher sales and gross margin resulted in adjusted operating income of $65.2 million, an increase of $3.9 million, or 6%, as compared with fiscal 2014. Adjusted earnings per share in fiscal 2015 were $0.63, compared with $0.73 in fiscal 2014. The decrease was primarily driven by higher income tax expense in the current year resulting from the reversal of U.S. tax valuation allowances in the prior year.
Free cash flow in fiscal 2015 was $16.0 million, a decrease of $44.3 million from the prior year. This was primarily driven by higher working capital as compared to the prior year, including the timing of incentive compensation payments and customer-owned tooling reimbursements.
"We anticipate that fiscal 2016 will be a challenging year for revenue growth with the current economic conditions in Brazil and China, along with limited growth in many of our larger end markets," Burke comments. "However, our restructuring actions are generating savings that we expect will result in an increase in adjusted operating income and adjusted earnings per share."
Based on current exchange rates and market outlook, Modine provides the following guidance for fiscal 2016:
- Full fiscal year-over-year sales flat to down 5%, or up 1 to 6% on a constant currency basis;
- Adjusted operating income of $65 million to $70 million, including approximately $3 million of negative year-over-year currency impacts; and
- Adjusted earnings per share of $0.75 to $0.82.