Modine Manufacturing Company (NYSE: MOD), a diversified global leader in thermal management technology and solutions, today reported its financial results for the second quarter ended September 30, 2012. Highlights include:
- Sales of $339.9 million;
- GAAP basis loss per share of $0.26;
- Impairment and restructuring charges of $18.1 million; and
- Earnings per share excluding impairment and restructuring charges increased to $0.13.
“Our revenue was impacted by weakness in our end markets, but we remain focused on operational improvements,” said Modine President and Chief Executive Officer, Thomas A. Burke. “During the quarter, we made further progress on our restructuring efforts in Europe, negotiated some favorable commercial agreements, and generated significant year-over-year cost reductions.”
Second Quarter Financial Results
Net sales in the second quarter of fiscal 2013 decreased $57.4 million, or 14.4 percent, from the second quarter of fiscal 2012. On a constant currency basis, net sales decreased 8.3 percent from the prior year. Sales in Europe were impacted by the continued wind down of the non-strategic automotive module business, while sales in all regions were impacted by weakening end market demand. Gross profit decreased 15.7 percent, or $9.8 million, resulting in a gross margin of 15.5 percent, down 20 basis points from the prior year. The margin decrease was largely due to lower sales volume offset by improved pricing and product mix, and lower material costs. Selling, general and administrative (SG&A) expense decreased $8.9 million or 17.7 percent, primarily due to lower compensation-related expense and foreign currency translation. The company recorded $18.1 million of impairment and restructuring charges, consisting of $17.1 million in Europe and $1.0 million in North America. Operating income decreased $19.0 million to a loss of $6.8 million, as a result of lower gross profit, and the $18.1 million of impairment and restructuring charges, partially offset by lower SG&A expense. The net loss attributable to Modine of $12.2 million represents a $13.5 million decrease from net earnings of $1.3 million for the same period last year. This represents a loss per share of $0.26 on a GAAP basis. Earnings per share excluding impairment and restructuring charges was $0.13, which represents a $0.10 per share improvement compared to earnings per share of $0.03 in the second quarter of last year.
Net debt was $133 million at September 30, 2012, an increase of less than $1 million from the end of fiscal 2012. Cash on hand at the end of the quarter was $30 million.
Second Quarter Segment Results
North America segment sales decreased 3.7 percent to $143.4 million, compared to $148.8 million one year ago. The decrease was driven primarily by lower sales to commercial vehicle customers as a result of the weakened economy and the continued wind down of a military program. Gross margin decreased 120 basis points to 12.9 percent, due to lower sales volume and higher warranty costs, partially offset by improved mix and lower material costs. Operating income decreased $4.1 million or 37.2 percent to $6.8 million compared to the prior year, due to lower gross profit on the lower sales, slightly higher SG&A expense and $1.0 million of asset impairment charges. SG&A expense was higher mainly due to lower prototype and testing cost recoveries. The asset impairment charges relate to idle manufacturing facilities that were previously closed in conjunction with the now completed North American restructuring program.
Europe segment sales decreased 21.9 percent to $118.8 million, compared to $152.0 million in the prior year. On a constant currency basis, sales decreased 12.0 percent from the prior year primarily due to the continued wind down of the automotive module business. In addition, the continued slowdown in demand in the European commercial vehicle market has caused a decrease in sales volume and delays in new program launches. Gross margin improved by 170 basis points due primarily to lower material costs and improved pricing, including the favorable impact of a customer pricing settlement during the quarter. The segment posted a $9.9 million operating loss during the quarter compared to $8.3 million of operating income in the prior year. The decrease was due to $17.1 million of restructuring and impairment charges, including $15.8 million in non-cash asset impairment charges and $1.3 million of cash restructuring costs.
South America segment sales decreased 28.8 percent to $34.2 million, compared to $48.1 million one year ago. On a constant currency basis, sales decreased 11.3 percent from the prior year. The decrease in sales was due to the continued weakness in the commercial vehicle market following the pre-buy ahead of the January 1, 2012 change in emissions standards in Brazil, along with lower sales in the aftermarket business due to local market conditions. Operating income of $4.3 million was higher than the prior year by $1.6 million, due to lower SG&A expense, partially offset by lower gross profit on lower sales volume. The lower SG&A expense in the current quarter was primarily due to the reversal of an acquisition-related liability of $2.0 million, along with lower outbound freight expense and lower environmental remediation costs.
Asia segment sales decreased 30.9 percent to $13.8 million, compared to $20.0 million one year ago. This reflects an expected decrease in non-strategic vehicular HVAC and automotive module sales along with lower sales to off-highway customers as market demand in the construction equipment market in China continues to be weak. The operating loss in the region increased by $1.5 million to $2.3 million compared to a loss of $0.8 million in the prior year, as a result of lower gross profit on the lower sales volume and costs associated with the conversion of the Shanghai manufacturing plant to a high volume oil cooler production facility.
Commercial Products segment sales decreased 3.6 percent to $33.8 million compared to $35.1 million one year ago. This was due to a decrease in sales in the UK, as sales in North America were flat versus the prior year. The decrease in sales in the UK was due to continued weak economic conditions and the impact of a stronger currency versus competitors in mainland Europe. Gross margin improved by 60 basis points to 29.9 percent, due to sales mix and the impact of manufacturing cost savings initiatives. Operating income decreased $0.3 million from the prior year to $2.6 million due to lower gross profit on the lower sales volume and slightly higher SG&A expense due to the integration of the Geofinity business.
Outlook
“As we stated previously, our full year forecast was based on our expectations for a stronger second half, including a modest recovery in certain of our key end markets,” Burke commented. “Unfortunately, our markets have continued to soften. As a result, we are lowering our full year guidance.”
The company has the following revised expectations for fiscal 2013, excluding impairment and restructuring charges:
- Year-over-year sales down 10 to 12 percent, including approximately $80 million of planned program reductions;
- Operating income margin in the range of 2.75 to 3.25 percent; and
- Earnings per diluted share of $0.40 to $0.50.
“There is a tremendous amount of economic and political uncertainty in our end markets, and we are focused on the areas of our business that we can control,” Burke commented. “We are aggressively controlling our costs, successfully implementing our restructuring program in Europe, and effectively serving our customers around the world. We are maintaining a balanced focus on the short-term market challenges while remaining well-positioned for long-term growth when our markets recover.”
