Modine Manufacturing Company, a diversified global leader in thermal management technology and solutions, has reported financial results for the second quarter of fiscal year 2017.
Highlights:
- Sales of $317.7 million, down 4.9% from the prior year
- Operating loss of $1.9 million compared with an operating loss of $32.1 million in the prior year; adjusted operating income of $3.6 million, down $4.5 million from the prior year
- Loss per share of $0.09 and adjusted loss per share of $0.01
- Full-year guidance confirmed
- Recently announced acquisition of Luvata HTS on track to close by the end of calendar 2016
"Revenue was lower than anticipated in our Americas and Building HVAC segments, mostly due to weaker than anticipated market conditions," says Modine President and Chief Executive Officer, Thomas A. Burke. "Despite these end-market headwinds, our teams have continued to strengthen our business through structured cost-reduction initiatives that we expect will position the company to deliver strong second-half performance. As a result of these proactive efforts, we remain on pace to meet our full-year guidance. Importantly, we expect to close the Luvata HTS transaction by the end of calendar 2016 and are heavily focused on integration planning to ensure a successful acquisition."
Net sales for the second quarter were $317.7 million, compared with $334.0 million in the prior year. On a constant-currency basis, net sales decreased 4.1% year-over-year. The decrease was primarily related to lower sales to commercial vehicle and off-highway customers in the Americas segment, where markets continue to be weak. This was partially offset by higher sales in the Asia segment.
Gross profit increased $2.0 million year-over-year during the second quarter, and gross margin increased 130 basis points to 15.0%, primarily due to an $8.3 million non-cash settlement loss related to pension lump sum payments during the second quarter of last year. Excluding this settlement loss, gross profit decreased $6.3 million and gross margin decreased by 120 basis points, primarily due to the lower sales volume and temporary operating inefficiencies during the quarter, partially offset by cost savings related to procurement initiatives.
Selling, general and administrative (SG&A) expenses decreased $28.1 million during the quarter, primarily due to a $30.9 million non-cash settlement loss associated with the pension lump sum payments during the second quarter of last year. Excluding this amount, SG&A expenses increased $2.8 million, primarily due to expenses related to the Luvata HTS acquisition and an increase in a legal reserve in Brazil, which were partially offset by lower salary and benefit expenses resulting from cost-saving initiatives.
The company recorded $2.1 million of restructuring expenses during the second quarter, primarily related to equipment transfer and plant consolidation costs and employee severance expenses. The company also recorded a $1.2 million gain on the sale of a facility in the Europe segment.
Second quarter operating loss was $1.9 million compared with $32.1 million in the second quarter of fiscal 2016. This improvement was primarily due to a $39.2 million settlement loss related to pension lump sum payments in the second quarter of last year. Excluding this and certain other items, adjusted operating income was $3.6 million, down $4.5 million from the prior year. This reduction was primarily due to the impact of the lower gross profit on the lower sales volume.
Net loss per share was $0.09, a decrease of $0.38 compared with the prior year. Excluding the impact of the pension settlement loss and certain other items, the company reported an adjusted loss per share of $0.01 as compared with adjusted earnings per share of $0.04 in the second quarter of the prior year.
Second Quarter Segment Review
Americas segment sales were $126.0 million compared with $144.2 million one year ago, a decrease of 12.6%. On a constant-currency basis, sales decreased 13.4% year-over-year, primarily due to ongoing weakness in the commercial vehicle and off-highway markets, partially offset by higher sales to automotive customers. The segment reported an operating loss of $1.4 million compared with operating income of $7.8 million in the prior year, primarily due to the lower sales volume, temporary operating inefficiencies largely caused by production transfers and product launches and a $1.6 million increase in a legal reserve in Brazil. This was partially offset by favorable material costs and cost savings related to procurement initiatives. The segment recorded $1.6 million of restructuring charges during the quarter, primarily due to equipment transfer, plant consolidation and employee severance costs.
Europe segment sales were $123.9 million compared with $127.7 million one year ago, a decrease of 2.9%. On a constant-currency basis, sales decreased 3.2% compared with the prior year, driven primarily by lower sales to off-highway customers and the impact of the wind-down of certain automotive programs. The second quarter operating income of $6.7 million was $1.7 million higher than the prior year, primarily due to a $1.2 million gain on the sale of a facility and positive sales mix, as production continues to wind down on lower-margin commercial vehicle programs.
Asia segment sales were $24.7 million compared with $18.1 million one year ago, an increase of 37.0%. On a constant-currency basis, sales increased 41.2% compared with the prior year. The increase was primarily related to higher sales to automotive and off-highway customers in China, and incremental sales related to a recently-formed joint venture. Operating income of $0.8 million improved $2.0 million from the prior year, resulting from higher sales volumes and lower SG&A expenses.
Building HVAC segment sales were $45.7 million compared with $48.8 million one year ago, a decrease of 6.3%. On a constant-currency basis, sales were up 0.7% as compared with the prior year. This increase was primarily due to higher sales of air conditioning and ventilation products in the U.K., partially offset by lower sales of ventilation products and weaker than expected preseason stocking sales of heating products in North America. Operating income of $2.7 million was down $1.2 million, primarily due to unfavorable sales mix and operating inefficiencies in the U.K., partially offset by lower SG&A expenses.
Balance Sheet & Liquidity
Net debt was $108.0 million at September 30, 2016, an increase of $14.3 million from the end of fiscal 2016. Total debt was $171.0 million at September 30, 2016. Cash and cash equivalents at the end of the second quarter were $63.0 million.
Second quarter adjusted free cash flow was $0.8 million compared with $18.5 million one year ago. Net cash provided by operating activities during the second quarter was $12.0 million compared with $29.9 million one year ago, driven largely by unfavorable net changes in working capital and lower operating earnings, including cash payments for restructuring and acquisition-related activities.
Outlook
Based on current exchange rates, market outlook and business forecast, Modine confirms 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, "Second quarter is normally our weakest quarter due to our customers' summer production schedules. This quarter was weaker than expected due to challenging conditions in some of our end markets and temporary manufacturing inefficiencies largely related to production transfers and launches. We are addressing the production issues and expect volumes to improve as we enter the second half of fiscal 2017. We remain confident in our ability to deliver earnings growth on a year-over-year basis and expect to have a much stronger second half. As a result, we are maintaining our full-year earnings guidance. We expect to provide updated guidance for fiscal 2017, including the effect of the Luvata HTS transaction, in connection with our third quarter earnings release."
