Modine Manufacturing Company, a diversified global leader in thermal management technology and solutions, has reported financial results for the quarter ended September 30, 2018.
Second Quarter Highlights:
- Net sales of $548.9 million increased 8% from the prior year, 10% on a constant-currency basis
- Operating income of $22.8 million was down 3% from the prior year and adjusted operating income of $26.5 million was down 1% from the prior year
- Earnings per share of $0.75 more than doubled from the prior year due to favorable income tax benefits and adjusted earnings per share of $0.35 decreased $0.01 from the prior year
- Confirmed guidance for revenue and adjusted earnings per share, lowered guidance range 3-4% for adjusted operating earnings
“Our business achieved double-digit revenue growth on a constant currency basis, driven by continued global expansion and new product launches across all three of our business segments,” says Modine President and Chief Executive Officer, Thomas A. Burke. “Our commercial and industrial segment had an exceptional quarter, further validating our diversification strategy. The earnings conversion in our vehicular business was lower than expected due to several factors that impacted our operating performance. Many of these factors are temporary in nature, largely driven by the multiple new program launches, and we are taking actions to improve performance in the second half of the year.”
Net sales increased 8% in the second quarter to $548.9 million, compared with $508.3 million in the prior year. On a constant-currency basis, net sales increased 10% from the prior year. This increase was a result of sales growth across all business segments.
Gross profit increased 2% in the second quarter to $87.9 million, compared with $86.1 million in the prior year. Gross margin decreased 100 basis points to 16.0%, primarily due to the negative impact of higher raw material and labor costs and operating inefficiencies at certain high-volume manufacturing facilities.
Selling, general and administrative (SG&A) expense was $63.4 million in the second quarter, $1.2 million higher than the prior year. This increase was largely due to higher compensation-related expenses and environmental charges as compared to the prior year, partially offset by lower integration costs associated with the acquisition of Luvata HTS.
Operating income decreased 3% in the second quarter to $22.8 million, compared with $23.5 million in the prior year. An increase in operating income for the CIS segment was more than offset by decreases in the VTS and Building HVAC segments. During the second quarter of fiscal 2019 and 2018, acquisition and integration costs, restructuring expenses, and certain other items totaled $3.7 million and $3.3 million, respectively. Excluding these items, adjusted operating income decreased 1% to $26.5 million, compared with $26.8 million in the prior year.
Earnings per share increased 142% in the second quarter to $0.75, compared with $0.31 in the prior year. This increase was primarily due to favorable income tax benefits resulting from certain elections made related to tax reform and further benefits from the recognition of foreign tax credits. Adjusted earnings per share decreased $0.01 to $0.35, compared to the prior year. This decrease was primarily due to lower operating income.
Second Quarter Segment Review
- VTS segment sales were $335.6 million, compared with $310.6 million 1 year ago, an increase of 8%. On a constant-currency basis, sales were up 10%, driven primarily by higher sales to off-highway and automotive customers in North America and Asia. The segment reported operating income of $14.1 million, a decrease of $4.8 million, or 25%, from the prior year, primarily due to higher material costs, continued operating inefficiencies resulting from the many new programs at certain high-volume manufacturing locations, and higher environmental charges related to previously-owned manufacturing facilities in the U.S.
- CIS segment sales were $178.2 million, compared with $163.8 million one year ago, an increase of 9%. On a constant-currency basis, sales were up 10%, driven primarily by higher sales to data center and commercial HVAC customers. The segment reported operating income of $12.9 million, an increase of $3.9 million, or 43%, from the prior year, primarily due to higher sales volume and favorable sales mix.
- Building HVAC Systems segment sales were $50.7 million, compared with $48.8 million 1 year ago, an increase of 4%, driven primarily by higher sales of heating products in North America and parts and controls in the UK. The segment reported operating income of $4.8 million, a decrease of $1.5 million, or 24%, from the prior year, primarily due to a $1.7 million loss on the sale of the South Africa business.
Balance Sheet & Liquidity
Total debt was $479.9 million as of September 30, 2018. Cash and cash equivalents at the end of the second quarter were $35.8 million. Net debt was $444.1 million as of September 30, 2018, an increase of $4.0 million from the end of fiscal 2018.
Net cash provided by operating activities for the 6 months ended September 30, 2018 was $36.7 million compared with $72.8 million 1 year ago. Free cash flow for the 6 months ended September 30, 2018 was negative $1.2 million, which was $37.2 million lower than the prior year. This decrease was primarily due to unfavorable net changes in working capital versus the prior year as a result of higher sales growth, and higher incentive compensation and other employee benefit payments.
Outlook
“Our end markets remain strong, our commercial teams are executing well, and we are achieving our expected level of sales growth,” comments Burke. “However, we continue to face higher material costs and tariffs imposed on our purchased materials. In addition, we are working to address manufacturing inefficiencies that have negatively impacted our VTS margins in the first half of the year. These continued cost pressures have caused us to reevaluate and lower our adjusted operating earnings range by $5 million, while confirming both our sales and adjusted earnings per share guidance. We still expect to deliver another record year for sales and earnings, with an adjusted operating earnings improvement of 8-16%.”
Based on current exchange rates, market outlook and business forecast, Modine provides the following guidance ranges for fiscal 2019:
- Full fiscal year-over-year sales up 3 to 8 percent;
- Adjusted operating income of $130 million to $140 million; and
- Adjusted earnings per share of $1.50 to $1.65.
