Modine Manufacturing Company reports results for the second quarter of fiscal year 2016.
- Net sales declined 2.3% on a constant currency basis
- Adjusted operating income was $8.1 million and adjusted earnings per share were $0.04
- Results reflect a non-cash charge of $39.2 million related to a voluntary pension lump sum payout
- Reiterates full year earnings guidance
- Announces new Strengthen, Diversify & Grow strategic transformation
- Board of Directors authorizes $50 million share repurchase plan
"As expected, second quarter results were impacted by seasonally slow sales and challenging market conditions. We continue to anticipate a much stronger second half of the fiscal year due to volume increases related to new program launches and increased heating season sales, positive results from our past restructuring actions and continued cost control efforts. While our results continue to be impacted by unfavorable exchange rates and economic conditions in certain markets, we remain on track with our full year outlook," says Modine President and Chief Executive Officer Thomas A. Burke. "We are also excited about our new Strengthen, Diversify & Grow strategic transformation, which we announced in a separate press release. We expect this to guide the company for the foreseeable future. In addition, our board has authorized a new $50 million share repurchase program. We believe that with our strong competitive position, solid balance sheet and outlook, we can provide a return to our shareholders and make significant investments to grow and diversify our business for long-term shareholder value."
Net sales for the second quarter were $334.0 million, compared to $377.3 million in the second quarter of the prior year, a decrease of 11.5%. On a constant currency basis, net sales declined by 2.3% year-over-year with decreases in the Americas segment more than offsetting increases in all other segments.
Gross profit decreased $11.0 million during the second quarter, and gross margin declined 130 basis points to 13.7%, primarily due to $8.3 million of expenses related to the recent pension lump sum payments and $1.3 million of consulting charges related to a global procurement project. Excluding the impact of the pension lump sum payments, second quarter gross margin increased 120 basis points year-over-year to 16.2 percent, primarily due to favorable material cost and strong performance in the Americas and Building HVAC segments.
Selling, general and administrative (SG&A) expenses increased $29.0 million. SG&A expense includes $30.9 million of the non-cash charge associated with the pension lump sum payments. Excluding the non-cash charge and $3.1 million of favorable currency impact, SG&A was up 2.5% from the prior year.
During the second quarter, the company recorded $1.0 million of restructuring expenses, primarily related to plant consolidation costs in the Americas segment. In addition, the company recorded a non-cash charge of $39.2 million related to the pension lump sum payments. The company offered this lump sum program to eligible former employees in an effort to reduce the size, risk, volatility and cost associated with the U.S. pension plans and succeeded in reducing the company's projected benefit obligation by $69.2 million.
Operating loss was $32.1 million and net loss per share was $0.47 in the quarter. Of this amount, $0.50 per share related to the pension lump sum program. Excluding the restructuring expenses and the non-cash charge, the company reported adjusted operating income of $8.1 million, down $0.8 million from the prior year, primarily related to $1.2 million of unfavorable foreign exchange impacts and $1.3 million of global procurement project consulting costs, partially offset by cost reduction savings and performance. Adjusted earnings per share of $0.04 were down $0.01 from the second quarter of the prior year.
Second Quarter Segment Review
- Americas segment sales were $144.2 million compared with $170.8 million one year ago, a decrease of 15.6%. On a constant currency basis, sales decreased 11.0% compared with the prior year, with lower sales in both North America and Brazil. Sales in Brazil were down $12.7 million, with $7.8 million related to currency exchange and the remaining due to continued weak conditions in all end markets. North America sales were down 9.7%, primarily related to continued weakness in the off-highway markets and lower sales to commercial vehicle customers. Operating income decreased $0.4 million to $7.8 million compared with the prior year, due primarily to higher restructuring expenses versus the prior year, partially offset by favorable material costs, improved operating performance and savings from the closure of the McHenry facility. The company recorded $0.9 million of restructuring charges during the quarter relating to ongoing restructuring activities in the Americas segment.
- Europe segment sales were $127.7 million compared with $146.4 million one year ago, a decrease of 12.8%. On a constant currency basis, sales increased 3.7% compared with the prior year. Increases in sales to automotive and commercial vehicle customers were partially offset by lower sales to off-highway customers. Operating income of $5.0 million was higher than the prior year by $0.4 million. Positive impacts from higher sales and lower material and restructuring costs were partially offset by an unfavorable exchange rate impact and volume-related manufacturing inefficiencies.
- Asia segment sales were $18.1 million compared with $19.0 million one year ago, a decrease of 5.0%. On a constant currency basis, sales increased 1.1% compared with the prior year. Increased sales to automotive customers were offset by lower sales to off-highway customers. Operating loss of $1.2 million increased $0.5 million from the prior year. This increase was primarily the result of higher SG&A expenses related to compensation-related costs.
- Building HVAC segment sales increased 7.5% to $48.8 million compared with $45.5 million one year ago. On a constant currency basis, sales grew 11.2% as compared with the prior year. This increase was primarily due to higher sales of heating and ventilation products in North America, where the market continues to be strong. Operating income of $3.9 million was up $0.7 million on higher sales volume and favorable sales mix.
Balance Sheet & Liquidity
Net debt was $85.8 million at September 30, 2015, an increase of $7.6 million from the end of fiscal 2015. Cash and cash equivalents at the end of the second quarter were $64.9 million. Free cash flow was $18.5 million for the quarter. The $12.8 million increase over the prior year was primarily related to working capital improvements.
Based on current exchange rates and market outlook, Modine updates the following guidance for fiscal 2016:
- Full fiscal year-over-year sales down 2 to 7%, or flat to up 5% on a constant currency basis;
- Adjusted operating income of $65 million to $70 million, including approximately $4 million of negative year-over-year currency impacts; and
- Adjusted earnings per share of $0.75 to $0.82.