Modine Reports Fourth Quarter and Full Year Fiscal 2019 Results

A strong fourth quarter in Modine's industrial businesses resulted in another year of record revenue and earnings.

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Modine Manufacturing Company, a diversified global leader in thermal management technology and solutions, reports financial results for the quarter and fiscal year ended March 31, 2019. 

Fourth Quarter Highlights: 

  • Net sales of $556.7 million decreased 2% from the prior year, but increased 3% on a constant-currency basis
  • Operating income of $18.5 million was down 32% versus the prior year and adjusted operating income of $34.6 million was relatively flat compared to $34.7 million in the prior year
  • Earnings per share of $0.12 decreased $0.22 from the prior year and adjusted earnings per share of $0.40 decreased $0.04 from the prior year
  • Made significant progress in the exploration of strategic alternatives for the automotive business in our VTS segment

Full Year Highlights:

  • Net sales of $2,212.7 million increased 5% from the prior year and 7% on a constant-currency basis
  • Operating income of $109.7 million increased 19% compared to the prior year and adjusted operating income of $131.9 million increased 10% from the prior year
  • Earnings per share of $1.65 increased $1.22 from the prior year and adjusted earnings per share of $1.57 increased $0.03 from the prior year

"I am pleased that we were able to end our fiscal year with another strong quarter in our industrial businesses, and were able to deliver our second consecutive year of record sales and earnings," says Modine President and Chief Executive Officer, Thomas A. Burke. "Despite the headwinds created by tariffs in our vehicular markets, we achieved these results in large part due to the strategic decisions we made over the past several years. Since announcing our Strengthen, Diversify and Grow strategy in 2015, we have driven revenue up by nearly 60 percent and doubled our earnings. These decisions have made Modine stronger and better positioned to grow and drive shareholder value as we look toward the future. We will continue to strive to improve our business as we make significant progress in our exploration of strategic alternatives for our automotive business."

Net sales decreased 2% in the fourth quarter to $556.7 million, compared with $566.6 million in the prior year. On a constant-currency basis, net sales increased 3% from the prior year. This increase was primarily driven by higher sales in the Building HVAC and CIS segments.

Gross profit decreased 5% in the fourth quarter to $91.6 million, driven by a decline in the VTS segment. Gross profit in the CIS and Building HVAC segments increased by 10% and 14%, respectively. Gross margin decreased 60 basis points to 16.4%, primarily due to lower margins in the VTS segment as a result of the direct and indirect impact of tariffs on raw material costs, higher labor costs and higher warranty expenses. This was partially offset by higher margins in the CIS segment, due primarily to favorable sales mix.  

Selling, general and administrative (SG&A) expenses were $64.2 million in the fourth quarter, $0.6 million higher than the prior year. This increase was largely due to a $6 million increase in strategy consulting fees and environmental charges, partially offset by lower incentive compensation expense.

Operating income decreased 32% in the fourth quarter to $18.5 million, compared with $27.2 million in the prior year, driven primarily by a $4.4 million increase in restructuring expenses, a $5.0 million increase in strategy consulting fees and lower gross profit in our VTS segment, as compared to the prior year. During the fourth quarter of fiscal 2019, Modine recorded $8.9 million of restructuring expenses, primarily related to severance costs at a European manufacturing location, $5.9 million of strategy consulting fees related to its strategic review of its automotive business and $1.3 million of environmental charges. In the prior year, restructuring expenses, impairment charges, and certain other items totaled $7.5 million. Excluding these items, adjusted operating income of $34.6 million was fairly flat compared with $34.7 million in the prior year.  

Earnings per share was $0.12, compared with $0.34 in the prior year. This decrease was primarily due to higher restructuring expenses, consulting fees, environmental charges and income tax expense from the prior year. Adjusted earnings per share decreased $0.04 in the fourth quarter to $0.40, compared with $0.44 in the prior year. This decrease was primarily due to higher income tax expense as compared to the prior year.

Fourth Quarter Segment Review

  • VTS segment sales were $340.0 million, compared with $356.8 million one year ago, a decrease of 5%. On a constant-currency basis, sales were slightly up, driven primarily by higher sales to commercial vehicle customers in the Americas and higher off-highway and automotive sales in Asia, partially offset by lower automotive sales in the Americas and lower sales to all end markets in Europe. The segment reported gross margin of 13.8%, down 210 basis points from the prior year. This decrease was primarily due to tariff-related material cost increases, higher labor costs in certain locations and higher warranty expenses. Operating income of $9.7 million decreased $14.7 million from the prior year. This decrease was due to lower gross profit and higher restructuring and environmental charges than in the prior year.
  • CIS segment sales were $178.5 million, compared with $181.5 million one year ago, a decrease of 2%. On a constant-currency basis, sales were up 2%, driven primarily by higher sales to data center and commercial refrigeration customers. The segment reported gross margin of 16.7%, up 180 basis points compared with the prior year. This increase was primarily due to favorable sales mix compared to the prior year. Operating income of $14.2 million improved $2.2 million from the prior year, primarily due to higher gross profit than in the prior year.
  • Building HVAC segment sales were $52.5 million, compared with $43.3 million one year ago, an increase of 21%. On a constant-currency basis, sales were up 25%, driven primarily by higher sales of air conditioning and ventilation products in the U.K. The segment reported gross margin of 28.2%, down 180 basis points from the prior year. This decrease was primarily due to unfavorable sales mix and higher freight costs from the prior year. The segment reported operating income of $5.9 million, an increase of $4.2 million, primarily due to higher sales volume, lower restructuring and impairment charges and lower SG&A expenses compared with the prior year.

Full-Year Fiscal 2019 Overview

In fiscal 2019, net sales increased 5% to $2,212.7 million. On a constant-currency basis, sales were up 7% compared with the prior year. Gross margin decreased 50 basis points to 16.5%, primarily due to the direct and indirect impact of tariffs on our raw material costs and operating inefficiencies at certain manufacturing facilities resulting from high volume program launches.

Operating income of $109.7 million increased $17.5 million, or 19% in fiscal 2019. During fiscal 2019 and 2018, restructuring expenses, acquisition and integration costs, impairment charges and certain other items totaled $22.2 million and $27.9 million, respectively. Excluding these items, adjusted operating income of $131.9 million increased $11.8 million or 10 percent compared with the prior year. Earnings per share in fiscal 2019 were $1.65, compared with $0.43 in fiscal 2018, and adjusted earnings per share in fiscal 2019 were $1.57, compared with $1.54 in fiscal 2018, an increase of $0.03, or 2%.

Balance Sheet & Liquidity

Total debt was $449.7 million as of March 31, 2019. Cash and cash equivalents at the end of the fourth quarter were $41.7 million. Net debt was $408.0 million as of March 31, 2019, a decrease of $32.1 million from the end of fiscal 2018.  

Net cash provided by operating activities for the fiscal year ended March 31, 2019 was $103.3 million compared with $124.2 million one year ago. Free cash flow for the year ended March 31, 2019 was $29.4 million. Free cash flow was negatively impacted by unfavorable changes in working capital, including higher incentive compensation and other employee benefit payments and higher inventory levels.

Outlook

"The record setting sales of our CIS and Building HVAC segments contributed to our earnings growth this year as we continued to build on our market leading positions in these businesses," comments Burke. "It is clear that our strategy is working, as we make strides towards our goal of being a leading diversified, industrial thermal management company. As we look forward to the completion of the strategic review of our automotive business, we are focused on the best outcome for customers, employees and other stakeholders. In making these important decisions, we are focused on unlocking the value in our industrial segments, improving overall return and providing a strong future for Modine."

Modine provides the following guidance ranges for fiscal 2020, which are based on its current outlook and forecast and are inclusive of the automotive business:

  • Full fiscal year-over-year sales flat to up 5%;
  • Adjusted operating income of $135 million to $145 million; and
  • Adjusted earnings per share of $1.55 to $1.70
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