Modine Reports Third Quarter Fiscal 2019 Results

Third quarter sales increased 6%, driven by growth across all three segments; significant increase in operating income reported from prior year.

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Modine Manufacturing Company, a diversified global leader in thermal management technology and solutions, has reported financial results for the quarter ended December 31, 2018. 

Third Quarter Highlights: 

  • Net sales of $541.0 million increased 6% from the prior year, 8% on a constant-currency basis
  • Operating income of $33.6 million was more than double the prior year and adjusted operating income of $34.8 million was up 29% from the prior year
  • Earnings per share of $0.35 increased $0.92 from the prior year primarily due to improved operating earnings and lower income tax expense, and adjusted earnings per share of $0.42 increased $0.07 from the prior year
  • Adjusted guidance ranges for revenue and earnings

"Top line growth in all three business segments contributed to a significant earnings improvement this quarter," says Modine President and Chief Executive Officer, Thomas A. Burke. "The CIS and Building HVAC segments delivered strong performances with significant market share gains and earnings growth. However, cost pressures in the VTS segment continued to drive lower operating margins, due primarily to tariff-related costs and temporary operating inefficiencies. The operating inefficiencies are a function of new program launches, but we have made leadership changes in the affected areas and are seeing improvements."

Net sales increased 6% in the third quarter to $541.0 million, compared with $512.7 million in the prior year. On a constant-currency basis, net sales increased 8% from the prior year. This increase was a result of sales growth across all business segments, with the Building HVAC segment showing the greatest percentage increase.

Gross profit increased 7% in the third quarter to $91.7 million, compared with $85.4 million in the prior year. Gross margin increased 20 basis points to 16.9%, primarily due to conversion on higher sales in the CIS and Building HVAC segments. This was partially offset by the direct and indirect impact of tariffs on raw material costs and operating inefficiencies in the VTS segment.  

Selling, general and administrative (SG&A) expenses were $57.2 million in the third quarter, $3.6 million lower than the prior year. This decrease was largely due to a $1.1 million environmental recovery in the VTS segment and lower compensation-related expenses as compared to the prior year, along with lower integration costs associated with our November 2016 acquisition of Luvata HTS.

Operating income increased 142% in the third quarter to $33.6 million, compared with $13.9 million in the prior year, driven primarily by higher gross profit and lower restructuring expenses as compared to the prior year. During the third quarter of fiscal 2019 and 2018, restructuring expenses, impairment charges, and certain other items totaled $1.2 million and $13.1 million, respectively. Excluding these items, adjusted operating income increased 29 percent to $34.8 million, compared with $27.0 million in the prior year.

Earnings per share improved $0.92 in the third quarter to $0.35, compared with a $0.57 loss per share in the prior year. This increase was primarily due to higher operating income in the current year and significant income tax charges recorded in the prior year related to U.S. tax reform legislation. Adjusted earnings per share increased 20 percent in the third quarter to $0.42, compared with $0.35 in the prior year. This increase was primarily due to higher operating income as compared to the prior year.

Third Quarter Segment Review

VTS segment sales were $323.3 million, compared with $313.0 million 1 year ago, an increase of 3%. On a constant-currency basis, sales were up 6%, driven primarily by higher sales to automotive and commercial vehicle customers in North America and higher off-highway sales in North America and Asia. The segment reported gross margin of 12.8%, down 210 basis points from the prior year. This decrease was primarily due to higher material costs and continued operating inefficiencies resulting from the many new programs at certain high-volume manufacturing locations, partially offset by the positive impact from higher sales volume and procurement savings. Operating income of $15.5 million decreased $3.2 million, or 17%, from the prior year. This decrease was due to lower gross profit, partially offset by lower SG&A expenses.

CIS segment sales were $167.0 million, compared with $159.0 million 1 year ago, an increase of 5%. On a constant-currency basis, sales were up 7%, driven primarily by higher sales to data center and commercial refrigeration customers. The segment reported gross margin of 16.9%, up 430 basis points compared with the prior year. This increase was primarily due to favorable sales volume and mix from the prior year, along with ongoing operational improvements. Operating income of $13.1 million improved $17.0 million from the prior year, primarily due to higher gross profit and lower restructuring expenses than in the prior year.

Building HVAC Systems segment sales were $64.2 million, compared with $56.1 million 1 year ago, an increase of 14%. On a constant-currency basis, sales were up 16%, driven primarily by higher sales of heating products in North America and air conditioning products in the U.K. The segment reported gross margin of 34.3%, up 50 basis points from the prior year. This increase was primarily due to increased sales volume and improved pricing from the prior year. The segment reported operating income of $13.0 million, an increase of $3.8 million, or 41%, from the prior year, primarily due to higher gross profit and lower SG&A expenses than in the prior year.

Balance Sheet & Liquidity

Total debt was $467.4 million as of December 31, 2018. Cash and cash equivalents at the end of the third quarter were $30.7 million. Net debt was $436.7 million as of December 31, 2018, a decrease of $3.4 million from the end of fiscal 2018.  

Net cash provided by operating activities for the nine months ended December 31, 2018 was $67.4 million compared with $106.0 million 1 year ago. Free cash flow for the nine months ended December 31, 2018 was $8.7 million, which was $42.3 million lower than the prior year. This decrease was primarily due to higher inventory levels and higher incentive compensation payments compared with the prior year.

Outlook

"Our CIS and Building HVAC segments are both performing well and continue to drive earnings improvement," comments Burke. "However, our VTS segment is still experiencing cost increases related to the direct and indirect impact of tariffs on our raw material purchases. Although we are diligently working to recover these costs, the rate of recovery may be lower than originally planned."

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 7 percent;
  • Adjusted operating income of $128 million to $134 million; and
  • Adjusted earnings per share of $1.50 to $1.60.
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