Modine Manufacturing Company, a diversified global leader in thermal management technology and solutions, has reported financial results for the fourth quarter of fiscal year 2016.
Highlights:
- Adjusted operating income was $23.7 million, up 38% from prior year, and $63.2 million for the fiscal year
- Gross margin improved 80 basis points to 18.1%
- Net sales declined 2.6% on a constant currency basis
- Adjusted earnings per share were $0.36 for the quarter, up $0.24 from the prior year, and $0.76 for the fiscal year
- Repurchased $4.8 million of common stock in the quarter and $6.9 million during fiscal 2016
"We are pleased that we were able to deliver significant earnings improvement in the fourth quarter despite the headwinds across many of our end markets that continue to challenge the top-line. Our strong operating performance was driven by continued cost-control during the quarter, and resulted in year-over-year improvements in gross margin and adjusted operating income," says Modine President and Chief Executive Officer, Thomas A. Burke. "These efforts allowed us to achieve our full-year adjusted operating income and adjusted earnings per share targets. We remain confident that the execution of our Strengthen, Diversify and Grow strategic framework will be a catalyst for long-term profitable growth."
Net sales for the fourth quarter were $343.7 million, compared with $363.0 million in the fourth quarter of the prior year, a decrease of 5.3%. On a constant currency basis, net sales declined by 2.6% year-over-year which was in line with the company's end markets. The decrease was primarily related to weakness in the global off-highway market, the Americas segment commercial vehicle market, and the Building HVAC segment heating market. The decrease was partially offset by the strong commercial vehicle market in Europe and strong automotive sales in the Americas and Asia segments due to product launches.
Gross profit decreased $0.5 million during the fourth quarter on the lower sales volume; however, gross margin improved by 80 basis points to 18.1% due to favorable material costs, improved plant operating performance and savings related to procurement initiatives. Selling, general and administrative (SG&A) expenses decreased $7.1 million due to cost-control efforts and a prior-year $3.2 million legal charge in Brazil.
As part of the Strengthen, Diversify and Grow initiative, the company recorded $11.4 million of restructuring expenses during the fourth quarter, primarily related to employee severance, equipment transfer and plant consolidation costs. In addition, the company recorded a $9.9 million impairment charge related to a manufacturing facility in Germany.
The fourth quarter operating loss was $0.7 million and net earnings per share were $0.16. Excluding restructuring expenses and certain other items, the company reported adjusted operating income of $23.7 million, up $6.5 million from the prior year. Adjusted operating income was positively impacted by strong operating performance, ongoing cost-saving initiatives and favorable material costs. Adjusted earnings per share of $0.36 were up $0.24 from the fourth quarter of the prior year.
Fourth Quarter Segment Review
- Americas segment sales were $145.1 million compared with $166.1 million one year ago, a decrease of 12.6%. On a constant currency basis, sales decreased 9.7% year-over-year, primarily related to ongoing weakness in the off-highway and commercial vehicle markets, partially offset by higher sales to automotive and coils customers. Operating income of $11.4 million increased $7.7 million compared with the prior year, primarily due to $11.0 million of prior-year charges related to the write-off of goodwill and a legal reserve in Brazil, favorable material costs, and savings related to ongoing cost-reduction efforts, partially offset by lower sales volume and environmental expenses related to a manufacturing facility the company closed in 2012. The company recorded $3.8 million of restructuring charges during the quarter related to early retirement and equipment transfer costs in the Americas segment.
- Europe segment sales were $139.1 million compared with $136.0 million one year ago, an increase of 2.2%. On a constant currency basis, sales increased 4.0% compared with the prior year, driven by higher sales to commercial vehicle customers. The fourth quarter operating loss of $5.0 million was higher than the prior-year, primarily due to a $9.9 million fixed asset impairment charge related to a German manufacturing facility and $6.3 million of restructuring expenses primarily related to severance costs, partially offset by favorable material costs and improved operating performance.
- Asia segment sales were $22.9 million compared with $21.2 million one year ago, an increase of 7.7%. On a constant currency basis, sales increased 14.7% compared with the prior year. The increase was primarily related to higher sales to automotive customers as launch volumes continue to increase, partially offset by lower sales to off-highway customers in China and Korea. Operating income of $1.7 million increased $1.3 million from the prior year, resulting from higher sales volumes and lower SG&A expenses due to cost reductions.
- Building HVAC segment sales decreased 7.6% to $40.4 million, compared with $43.8 million one year ago. On a constant currency basis, sales declined 4.9% as compared with the prior year, due to lower sales of heating products in North America resulting from the mild winter, partially offset by increased chiller sales in the U.K. Operating income of $1.2 million was down $1.7 million, primarily due to lower sales volume, manufacturing inefficiencies in the U.K., and $0.9 million of restructuring charges related to early retirement and severance costs, partially offset by lower SG&A expenses.
Full Year Fiscal 2016 Overview
In fiscal 2016, net sales decreased 9.6% to $1,352.5 million. On a constant currency basis, sales were down 2.2% compared with the prior year. Gross margin was flat at 16.5%, as the impact of lower sales volume was offset by favorable material costs, savings related to cost-reduction initiatives and improved operating performance. Excluding the impact of the pension lump-sum payments, full year gross margin improved 70 basis points. The full-year operating loss of $7.5 million compares with operating income of $52.7 million in the prior year. Excluding pension settlement charges, restructuring expenses and certain other items, adjusted operating income of $63.2 million was down $2.0 million year-over-year. Adjusted earnings per share in fiscal 2016 were $0.76, compared with $0.63 in fiscal 2015.
Balance Sheet & Liquidity
Net debt was $93.7 million at March 31, 2016, an increase of $15.5 million from the end of fiscal 2015, which included the benefit of $13.1 million of insurance advances related to the reconstruction of Airedale's facility in the U.K. Cash and cash equivalents at the end of the fourth quarter were $68.9 million.
Free cash flow for the full year was $22.4 million, an increase of $6.4 million from the prior year. The increase was primarily driven by favorable working capital as compared to the prior year.
In October 2015, the company announced a $50 million share repurchase program. During the fourth quarter of fiscal 2016, Modine repurchased $4.8 million, or 534,000 shares, of its common stock under this program at an average price of $8.95. During fiscal 2016, Modine repurchased $6.9 million, or 764,000 shares of its common stock at an average price of $8.98.
Outlook
Based on current exchange rates, market outlook and business forecast, Modine provides the following guidance for fiscal 2017:
- Full fiscal year-over-year sales down 1% to up 3%;
- Adjusted operating income of $65 million to $71 million; and
- Adjusted earnings per share of $0.77 to $0.87.
Burke concludes, "We anticipate that challenging markets will continue to put pressure on our top line. However, we are confident that continued execution of our Strengthen, Diversify and Grow strategy will allow us to improve our earnings and continue to diversify through inorganic and organic growth opportunities."
