Modine Manufacturing Company (NYSE: MOD), a diversified global leader in thermal management technology and solutions, today reported financial results for the quarter ended September 30, 2019.
Second Quarter Highlights:
- Net sales of $500.2 million decreased 9 percent from the prior year
- Operating income declined to $6.0 million and adjusted operating income to $20.2 million
- Loss per share of $0.09 and adjusted earnings per share of $0.13
- Company adjusts outlook to reflect further weakening of market conditions
“Our second quarter results were well below our expectations as market conditions deteriorated more significantly than we expected,” said Modine President and Chief Executive Officer, Thomas A. Burke. “While we did see double-digit top-line growth in our BHVAC business, our VTS and CIS segments both experienced larger than expected declines in customer orders that will negatively impact our revenues and earnings in the second half of the year. In response to this challenging environment, we are focusing on things that we can control. We are implementing a comprehensive cost reduction plan including immediate operational and SG&A expense reductions that we expect to yield between $25 million to $30 million in annual savings over the next 18 months. In addition, we expect that the recent changes made to our CIS business leadership structure will have a positive impact on that segment, and we continue to invest in growth in our BHVAC segment, particularly with regard to expanding our data center market offerings.”
Net sales decreased 9 percent in the second quarter to $500.2 million, compared with $548.9 million in the prior year. This decrease was primarily driven by lower sales in the VTS and CIS segments, and unfavorable currency impacts, partially offset by higher sales in the Building HVAC segment.
Gross profit decreased 14 percent in the second quarter to $75.7 million, primarily driven by volume declines in the VTS and CIS segments. This was partially offset by higher gross profit in the Building HVAC segment, which increased 18 percent on higher sales volumes. Overall gross margin decreased 90 basis points during the quarter to 15.1 percent, primarily due to lower margins in the VTS and CIS segments as a result of lower sales volumes, higher labor costs and unfavorable sales mix, partially offset by lower commodity metal costs.
Selling, general and administrative (“SG&A”) expenses were $67.4 million in the second quarter, $4.0 million higher than the prior year. This increase was primarily due to $11.9 million of costs associated with the potential sale of the VTS segment’s automotive business, which consisted primarily of third-party professional services and costs incurred to prepare the business for sale. The net decrease in other SG&A expenses was $7.9 million, due primarily to lower compensation-related expenses and environmental charges.
Operating income was $6.0 million in the second quarter, compared to $22.8 million in the prior year, a decrease of 74 percent. This decrease was driven primarily by lower gross profit and higher SG&A expenses, as compared to the prior year. During the second quarter of fiscal 2020, the Company recorded $11.9 million of costs related to the potential sale of the automotive business and $2.3 million of restructuring expenses primarily related to employee severance expenses. In the prior year, environmental expenses and certain other items totaled $3.7 million. Excluding these items, adjusted operating income of $20.2 million was down 24 percent compared with $26.5 million in the prior year.
Loss per share was $0.09, compared with earnings per share of $0.75 in the prior year. This decrease was primarily due to lower operating income compared to the prior year, including the impact of lower sales volume and higher strategy costs and a $0.47 income tax benefit in the prior year related to the accounting for U.S. tax reform. Adjusted earnings per share decreased $0.22 in the second quarter to $0.13, compared with $0.35 in the prior year. This decrease was primarily due to lower adjusted operating income and higher income taxes as compared to the prior year.
Second Quarter Segment Review
- VTS segment sales were $299.3 million, compared with $335.6 million one year ago, a decrease of 11 percent. This decrease was driven by lower sales to global off-highway and commercial vehicle customers and unfavorable currency impacts. The segment reported gross margin of 11.8 percent, down 150 basis points from the prior year. This decrease was primarily due to lower sales volume and higher labor costs, partially offset by lower commodity metal costs. Operating income of $7.4 million decreased $6.7 million compared to the prior year. This decrease was due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expense as compared to the prior year.
- CIS segment sales were $156.7 million, compared with $178.2 million one year ago, a decrease of 12 percent. This decrease was driven by lower sales to commercial HVAC&R and data center customers and unfavorable currency impacts. The segment reported gross margin of 14.6 percent, down 130 basis points compared with the prior year, primarily due to lower sales volumes and unfavorable sales mix. Operating income of $8.5 million was down $4.4 million, primarily due to lower gross profit, partially offset by lower SG&A expense as compared to the prior year.
- Building HVAC segment sales were $56.0 million, compared with $50.7 million one year ago, an increase of 10 percent. This increase was driven primarily by higher sales of ventilation and heating products in the U.S. The segment reported gross margin of 31.7 percent, 220 basis points higher than the prior year. This improvement was primarily due to higher sales volume and favorable sales mix. The segment reported operating income of $8.8 million, an increase of $4.0 million, primarily due to higher gross profit on higher sales volume compared with the prior year.
Balance Sheet & Liquidity
Total debt was $465.2 million as of September 30, 2019. Cash and cash equivalents at the end of the second quarter were $32.3 million. Net debt was $432.9 million as of September 30, 2019, an increase of $24.9 million from the end of fiscal 2019.
Net cash provided by operating activities for the six months ended September 30, 2019 was $17.5 million, compared with $36.7 million one year ago. Free cash flow for the six month period was a use of $23.9 million. Free cash flow was negatively impacted by $19.6 million of cash payments related to the potential sale of the automotive business and for restructuring activities. In addition, the Company maintained higher inventory levels as of September 30, 2019, as compared with the prior year end, primarily resulting from the need to increase stock of raw materials prior to resourcing purchases from overseas and in advance of the potential sale of Modine’s automotive business.
Outlook
“Although we are lowering our revenue and earnings guidance to reflect the current weak market conditions, we are taking aggressive actions to improve our profitability and cash flows,” commented Burke. “In addition, while the process has taken longer than anticipated due to the challenging economic environment, we are continuing to work diligently towards the divestiture of our automotive business. We remain committed to our strategy of becoming a more diversified industrial company, as we believe it will maximize value for our shareholders, both now and in the future.”
Modine provides the following updated guidance ranges for fiscal 2020, which are based on our current outlook and forecast and are inclusive of the automotive business in our VTS segment:
- Full year year-over-year sales down 7 to 12 percent;
- Adjusted operation income of $85 million to $95 million; and
- Adjusted earnings per share of $0.75 to $0.90.
Conference Call and Webcast
Modine will conduct a conference call and live webcast, with a slide presentation, on Friday, November 8, 2019 at 8:00 a.m. Central Time (9:00 a.m. Eastern Time) to discuss its second quarter fiscal 2020 financial results. The webcast and accompanying slides will be available on the Investor Relations section of the Modine website at www.modine.com. Participants are encouraged to log on to the webcast and conference call about ten minutes prior to the start of the event. A replay of the audio and slides will be available on the Investor Relations section of the Modine website at www.modine.com on or after November 8, 2019. A call-in replay will be available through midnight on November 12, 2019, at 800-585-8367, (international replay 416-621-4642); Conference ID# 6072147. The company will post a transcript of the call it on its website, on November 12, 2019.
SOURCE: Modine
