Modine Reports Third Quarter Fiscal 2017 Results

Modine's third quarter sales increased 6.4% from the previous year, aided in part by the inclusion of revenue from the Luvata HTS acquisition.

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Modine Manufacturing Company, a diversified global leader in thermal management technology and solutions, has reported financial results for the third quarter of fiscal year 2017.

Highlights:

  • Sales of $349.8 million, up 6.4% from the prior year, including one month of revenue from the Luvata HTS acquisition 
  • Operating income of $6.0 million compared with operating income of $13.7 million in the prior year 
  • Adjusted operating income of $17.7 million, up 3% from the prior year 
  • Earnings per share of $0.04 and adjusted earnings per share of $0.21 
  • Updated guidance for full-year revenue, operating income and earnings per share 
  • Completed acquisition of Luvata HTS in November 2016; now operating as Modine's Commercial and Industrial Solutions (CIS) business

"Over 15 months ago, we announced a strategic plan to transform Modine into a stronger, more diversified company. With the completion of the acquisition of Luvata HTS during the fiscal third quarter, we remain on target to deliver on all elements of our Strengthen, Diversify and Grow strategic initiative," says Modine President and Chief Executive Officer, Thomas A. Burke. "While we are experiencing some additional headwinds with market volumes and metals, I am pleased that we have already corrected a majority of the operational issues identified during the second quarter and continue to drive significant improvements during the fourth quarter."

Net sales for the third quarter were $349.8 million, including $34.7 million of sales from the new CIS segment, up 6.4% from the prior year. On a constant currency basis, sales of the non-CIS (base) business decreased $9.5 million or 3%. The decrease in base business sales was primarily related to lower sales in the Americas and Europe segments, partially offset by strong sales growth in the Asia segment.

Gross profit increased $0.1 million year-over-year during the third quarter, and gross margin decreased 100 basis points to 16.8%, including a negative 80 basis point impact of inventory step-up adjustments due to the acquisition. Gross profit of the base business decreased $1.4 million and the base business gross margin increased 30 basis points over the prior year, to 18.1%. This increase in base business gross margin was due to savings from procurement initiatives, partially offset by unfavorable material costs driven by higher metals prices.    

Selling, general and administrative (SG&A) expenses increased $7.8 million during the quarter, including $4.7 million from the new CIS segment and $7.2 million of acquisition and integration costs. SG&A of the base business was down $4.1 million from the prior year, primarily resulting from cost-saving initiatives taken in conjunction with the company's Strengthen, Diversify and Grow (SDG) strategic plan.

The company recorded $1.6 million of restructuring expenses during the third quarter, primarily related to equipment transfer and plant consolidation costs in the America segment.  

Third quarter operating income was $6.0 million compared with $13.7 million in the third quarter of the prior year. Excluding the impact of restructuring, acquisition and integration costs, and certain other items, adjusted operating income was $17.7 million, up 3% from the prior year. This improvement was primarily due to the impact of SDG cost-savings initiatives.  

Earnings per share were $0.04, a decrease of $0.13 compared with the prior year. Adjusted earnings per share were $0.21 as compared with adjusted earnings per share of $0.22 in the third quarter of the prior year, with the slight decrease driven largely by the increased interest expense from the acquisition debt.  

Third Quarter Segment Review

  • Americas segment sales were $123.4 million compared with $137.1 million one year ago, a decrease of 10.0%. On a constant-currency basis, sales decreased 11.5% year-over-year, primarily due to ongoing weakness in the commercial vehicle and off-highway markets in both North and South America. The segment reported operating income of $5.4 million compared with operating income of $7.7 million in the prior year, primarily due to the lower sales volume and operating inefficiencies largely caused by product launches and production transfers. This was partially offset by cost savings related to procurement initiatives, and lower SG&A. The segment recorded $1.4 million of restructuring charges during the quarter, primarily due to equipment transfer and plant consolidation activities. 
  • Europe segment sales were $119.8 million compared with $126.1 million one year ago, a decrease of 5.0%. On a constant-currency basis, sales decreased 3.7% compared with the prior year, driven primarily by lower sales to commercial vehicle and off-highway customers. The third quarter operating income of $8.3 million was $0.7 million higher than the prior year, primarily due to savings related to procurement initiatives, positive sales mix and plant operating performance, partially offset by unfavorable material costs.
  • Asia segment sales were $28.6 million compared with $18.7 million 1 year ago, an increase of 52.9%. On a constant-currency basis, sales increased 59.9% 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 the company's recently-formed joint venture in China. Operating income of $2.6 million improved $2.7 million from the prior year due to higher sales volumes. 
  • Building HVAC segment sales were $47.2 million compared with $50.9 million 1 year ago, a decrease of 7.2%. On a constant-currency basis, sales were down 0.6% as compared with the prior year. This small decrease was primarily due to lower sales of heating and ventilation products in North America partially offset by higher sales of air conditioning products in the U.K. Operating income of $6.7 million was flat compared to the prior year, as the impact of unfavorable sales mix in the U.K. was offset by lower SG&A expenses. 
  • Commercial and Industrial Solutions segment sales were $34.7 million for the month of December. The segment reported an operating loss of $0.3 million, in what is one of its seasonally slowest months of the year. In addition, the segment results include $1.0 million in intangible asset amortization expense and fixed asset step-up depreciation expense related to purchase accounting for the acquisition. 

Balance Sheet & Liquidity

Net debt was $463.8 million at December 31, 2016, an increase of $370.1 million from the end of fiscal 2016. Total debt was $513.8 million at December 30, 2016. Cash and cash equivalents at the end of the third quarter were $50.0 million. The increase in net debt was due to the acquisition of the CIS business on November 30, 2016.  

Adjusted free cash flow for the nine months ended December 31, 2016 was $10.8 million compared with $31.1 million one year ago. Net cash provided by operating activities for the 9-month period was $35.0 million compared with $65.4 million one year ago, driven largely by unfavorable net changes in working capital, including cash payments for restructuring and acquisition-related activities.  

Outlook

"We continue to expect the newly-acquired CIS business to be accretive to Modine's operating income, for fiscal 2017 and beyond," comments Burke. "However, we are adjusting our full-year forecast to account for lower volumes in the Americas and Building HVAC segments, along with the temporary impact of higher metals and exchange rates. As a result, we are holding our range for adjusted operating earnings. We are also lowering the range for adjusted earnings per share, due to the incremental interest expense from the acquisition debt."

Based on current exchange rates, market outlook and business forecast, Modine updates the following guidance for fiscal 2017:

  • Full fiscal year-over-year sales up 9-11%, including a reduction of 1-3% in the base business and approximately $160 million of revenue contributed by the CIS business; 
  • Adjusted operating income of $65 million to $71 million, with $61 million to $66 million contributed by the base business and $4-$5 million contributed by the CIS business; and 
  • Adjusted earnings per share of $0.74 to $0.80, reflecting incremental interest expense from the acquisition debt.
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