Modine Manufacturing Company, a diversified global leader in thermal management technology and solutions, has reported financial results for the third quarter of fiscal year 2016.
- Net sales declined 2.5% on a constant currency basis
- Gross margin improved 140 basis points to 17.8%
- Adjusted operating income was $17.2 million, up 21% from prior year (or 30% on a constant currency basis), and adjusted earnings per share were $0.22
- Repurchased over $2 million of common stock
- Company adjusts fiscal 2016 outlook to reflect global economic environment
"As expected, our previously announced restructuring and cost-control actions positively impacted results. Based on these actions and lower materials costs, our team delivered significant year-over-year earnings improvement, despite lower sales volume due to continued weakness in several of our key end markets," says Modine President and Chief Executive Officer Thomas A. Burke. "We will continue to execute against the cost control components of our Strengthen, Diversify and Grow strategic framework as we close out fiscal 2016. Our more competitive cost structure and market-proven product offerings are leading to significant program wins in support of our long-term growth objectives."
Net sales for the third quarter were $328.7 million, compared to $363.6 million in the third quarter of the prior year, a decrease of 9.6%. On a constant currency basis, net sales declined by 2.5% year-over-year with decreases in the Americas, Building HVAC and Asia segments more than offsetting increases in the Europe segment.
Gross profit decreased $0.8 million during the third quarter on lower sales volume. Gross margin improved 140 basis points to 17.8% due to favorable material costs and continued cost-control measures. Additionally, savings from the closure of the McHenry, IL, manufacturing facility and transfer of production to other Modine facilities positively impacted gross margin in the third quarter. Selling, general and administrative (SG&A) expenses decreased $1.9 million due to cost-control efforts and favorable foreign currency exchange rate impacts; however, excluding certain unusual items, including pension settlement losses and due diligence costs, SG&A would have declined over $3.0 million.
During the third quarter, the company recorded $1.6 million of restructuring expenses, primarily related to plant consolidation costs, and employee severance costs related to a voluntary, early retirement program offered to certain U.S. employees.
Operating income was $13.7 million and net income per share was $0.17 in the quarter. Excluding the restructuring expenses and other unusual items, the company reported adjusted operating income of $17.2 million, up $3.0 million from the prior year. Adjusted operating income was positively impacted by ongoing cost-saving initiatives, strong underlying operating performance and favorable material costs. Adjusted earnings per share of $0.22 were up $0.07 from the third quarter of the prior year.
Third Quarter Segment Review
Americas segment sales were $137.1 million compared with $153.2 million one year ago, a decrease of 10.5%. On a constant currency basis, sales decreased 6.4% year-over-year. Sales in Brazil were down $9.2 million, with $6.3 million related to foreign currency exchange rate impacts and the remainder due to continued weak conditions in all end markets. North America sales were down 5.2%, primarily related to continued weakness in the off-highway markets and lower sales to commercial vehicle customers. Operating income increased $2.1 million to $7.7 million compared with the prior year, due primarily to lower SG&A expenses related to ongoing cost-reduction efforts, favorable material costs and savings from the closure of the McHenry facility. These factors more than offset the impact from lower sales volume experienced in the third quarter. The company recorded $1.4 million of restructuring charges during the quarter relating to restructuring activities in the Americas segment.
Europe segment sales were $126.1 million compared with $137.2 million one year ago, a decrease of 8.1%. On a constant currency basis, sales increased 5.0% compared with the prior year, driven by higher sales to commercial vehicle and automotive customers. Operating income of $7.6 million was higher than the prior year by $1.7 million, due to higher sales volume, favorable material costs and improved operating performance more than offsetting the prior-year $3.2 million gain on sale of a wind tunnel and $1.1 million of unfavorable foreign currency exchange rate impacts.
Asia segment sales were $18.7 million compared with $20.2 million one year ago, a decrease of 7.3%. On a constant currency basis, sales decreased 2.6% compared with the prior year. The decrease was primarily related to continued weakness in the off-highway market and lower tooling sales, partially offset by higher sales to automotive customers as launch volumes continue to increase. Operating loss of $0.1 million decreased $0.2 million from the prior year, largely the result of lower SG&A expenses.
Building HVAC segment sales decreased 9.8% to $50.9 million, compared with $56.3 million one year ago. On a constant currency basis, sales declined 8.1% as compared with the prior year. This decrease was primarily due to lower sales in the U.K. as unfavorable currency conditions caused increased competition from other mainland European suppliers and lower sales of heating products in North America, which experienced a relatively warm early-winter season. Operating income of $6.7 million was down $3.1 million primarily due to lower sales volume and prior-year business interruption insurance recovery of $2.0 million.
Balance Sheet & Liquidity
Net debt was $72.3 million at December 31, 2015, a decrease of $5.9 million from the end of fiscal 2015. Cash and cash equivalents at the end of the third quarter were $81.5 million. Free cash flow was $25.6 million for the quarter. The $15.6 million increase in free cash flow over the prior year was primarily related to working capital improvements.
In October 2015, the company announced a new $50 million share repurchase program. During the third quarter of fiscal 2016, Modine repurchased approximately $2.1 million, or 230,000 shares, of its common stock at an average price of $9.04.
Based on current exchange rates, market outlook and business forecast, Modine updates the following guidance for fiscal 2016:
- Full fiscal year-over-year sales down 8-10%, or flat to down 2% on a constant currency basis;
- Adjusted operating income of $62 million to $66 million, including approximately $4 million of negative year-over-year foreign currency exchange rate impacts; and
- Adjusted earnings per share of $0.70 to $0.76.