Modine Reports Record Third Quarter Results as Net Earnings Increase 54% and Sales Improve 35%
RACINE, Wis.--Jan. 1, 20059, 2005--Modine Manufacturing Company , a global leader in thermal management, today reported record results for the third quarter of fiscal 2005 ended December 26, 2004. Net earnings increased 54% to $18.9 million, or $0.55 per fully diluted share, compared with $12.3 million, or $0.36 per fully diluted share, one year ago. The significant earnings increase was driven by a 35% improvement in revenues to $418.4 million, the fifth consecutive quarter of record sales, versus $310.8 million in the same period last year.Strong operating cash flow in the quarter enabled the Company to pay down debt by $22.5 million and substantially increase its cash balance. The annualized return on average capital employed (ROACE)(b) at December 26, 2004 improved to 9.1% compared with 6.2% for the same period in 2003, moving Modine closer to its stated target of 11-12% through a cycle.
"These record third quarter results continue our growth momentum that started a year ago," said David Rayburn, Modine President and Chief Executive Officer, "and give us confidence that we will meet prior guidance to deliver a stronger fiscal 2005 second half than the 81 cents per share Modine earned in the first half."
Net favorable currency exchange rates, primarily the stronger Euro and the Korean Won, added approximately $11.9 million and $3.9 million to third quarter sales and pre-tax earnings, respectively.
Income from operations in the third quarter improved 76% to $25.1 million from $14.3 million one year ago, generating higher operating margins of 6.0% versus 4.6% in 2003. Selling, general and administrative (S,G&A) expenses as a percentage of sales fell to 16.8% from 18.7% in the prior-year period.
"As evidenced by the leverage throughout our income statement, Modine's strong performance benefited again from our book of new automotive, truck and heavy-duty business programs, the steady recovery in general industrial and agricultural markets, operating improvements and cost reductions, and results from our recent acquisitions, Modine Asia," said Rayburn. "Similar to the second quarter, we saw excellent numbers from our North American and European Truck and Heavy-Duty businesses, as well as our European Automotive segment. Our improved results were partially impacted by a weaker performance from our Aftermarket business; the lag impact of the pass-through of rising raw material costs to our original equipment manufacturer (OEM) customers; and a higher effective tax rate of 37.2% versus 32.2% last year."
On a reported basis, the Asian acquisitions are on track to add a previously forecasted 7 to 11 cents per fully diluted share to Modine's fiscal 2005 results, due to higher-than-expected favorable currency exchange rates despite a lower-than-anticipated operating performance from softer Korean and Chinese markets.
Fiscal 2005 nine-month sales rose 28.5% to $1,129.4 million compared with $878.8 million last year. Net earnings of $46.8 million, or $1.36 per fully diluted share, increased 67.7% from $27.9 million, or $0.82 per fully diluted share, in last year's first nine months. Net favorable currency exchange rates added approximately $31.6 million and $4.2 million to nine-month sales and pre-tax earnings, respectively. Income from operations of $66.6 million more than doubled from $32.8 million in the first nine months of fiscal 2004. Included in this year's results are $2.1 million of restructuring and other charges associated with the closure of the Electronics Cooling Division plant in Mexico.
Segment Data and Performance
Third quarter sales for the Original Equipment segment increased 63% to $200.6 million from $123.0 million one year ago, while operating income improved 40.1% to $23.0 million versus $16.4 million. These results include essentially the first full quarter of operations from Modine Asia, or the Korean and Chinese assets of WiniaMando's Automotive Climate Control (ACC) business. The Truck and the Heavy-Duty & Industrial businesses both reported double-digit revenue improvements, while operating income registered triple-digit and double-digit increases, respectively. Partially offsetting this strong performance was the North American Automotive business, which had lower sales and a double-digit decline in operating income due to reduced volumes for certain vehicle platforms and continued pricing pressure.
Sales for the Distributed Products segment in the third quarter decreased 1.9% to $86.4 million from $88.0 million one year ago, with lower Aftermarket volumes more than offsetting a stronger performance in the commercial HVAC&R (heating, ventilating, air conditioning, and refrigeration) business. The operating loss of $0.6 million in the quarter was reduced from a loss of $1.0 million a year ago. A smaller operating loss in the Electronics Cooling business due to increased business in Taiwan and cost-control initiatives, coupled with slightly improved HVAC&R profits, more than offset lower Aftermarket results.
Sales for the European Operations segment in the third quarter increased 26% to $134.8 million from $106.9 million one year ago. Growth in the European Heavy-Duty and Automotive businesses and the positive impact of the stronger Euro generated the increase. Operating income jumped 68% to $20.3 million from $12.1 million last year. A triple-digit increase in income from operations for the Heavy-Duty business, coupled with a double-digit improvement in the Automotive component and the benefit of currency exchange rates, more than offset higher S,G&A expenses for accelerating new business programs.
Balance Sheet and Cash Flow
Modine continues to maintain a strong balance sheet and excellent liquidity. The total debt to capital (total debt plus shareholders' equity) ratio fell to 16.6% at the end of the third quarter, compared with 19.0% at the close of the second quarter. The cash balance at December 26, 2004 was $43.4 million compared with $27.6 million at the end of the second quarter and $63.3 million at the close of the prior fiscal year. Operating cash flow for the third quarter was $57.0 million versus $40.9 million one year ago and nearly double the $29.0 million for this year's second quarter.
Total debt at the close of the third quarter, which decreased to $127.9 million from $141.7 million at the end of the second quarter, compared to $87.9 million at the end of the prior fiscal year predominantly because of borrowings of $49 million to finance the ACC acquisition. As previously mentioned, the Company used its strong cash flow to pay off $22.5 million of debt in the third quarter.
Due to the reclassification of approximately $68 million of debt ahead of the planned refinancing of a September 2005 note, working capital at the close of the third quarter fell sharply to $169.8 million from $229.7 million at the end of the second quarter and $229.1 million at fiscal 2004 year-end.
"Inventory turns improved in the third quarter to 8.7 from 7.3 at the end of fiscal 2004 and 7.6 in the prior-year period," said Brad Richardson, Modine Vice President, Finance and Chief Financial Officer, "while days sales outstanding increased to 56 days compared with 51 days one year ago and 49 at the end of fiscal 2004. Both increases were essentially driven by the addition of the customer base from the ACC acquisition.
"We continue to project that fiscal 2005 capital spending will approximate depreciation, in the general range of about $70 million, including the post-acquisition impact of our new Asian businesses," Richardson said.
Outlook
"We are confident that we will significantly exceed our original fiscal 2005 sales and earnings per share guidance provided at the start of the year," Rayburn said. "Fourth quarter results, though, may be only in-line or slightly below last year's level of 37 cents given the absence of a gain from plant sales in 2004, as well as softening in certain economies such as Asia and the market challenges our Aftermarket business continues to face ahead of its proposed spin out and merger with Transpro.
"While we will provide a more comprehensive outlook for fiscal 2006 in our year-end earnings release and conference call in early May, we do see encouraging prospects for continued growth in earnings per share, cash flow and underlying revenues next year," Rayburn noted. "Among the factors that give us confidence at this early juncture are a strong line-up of new business programs and a continuation of solid demand in several of our North American and European markets."
Modine Manufacturing Company
Consolidated statements of earnings (unaudited)(a)
(In thousands, except per-share amounts)
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Three months Nine months
Ended December 26, Ended December 26,
2004 2003 2004 2003
----------------------- ------------------------
Net sales $418,398 $310,799 $1,129,380 $878,756
Cost of sales 322,713 238,321 868,403 672,518
----------------------- ------------------------
Gross profit 95,685 72,478 260,977 206,238
Selling, general, &
administrative
expenses 70,427 58,200 193,364 173,540
Restructuring 109 (21) (1,031) (68)
----------------------- ------------------------
Income from
operations 25,149 14,299 66,582 32,766
Interest (expense) (1,641) (1,316) (4,424) (4,009)
Other income - net 6,651 5,180 13,990 12,999
----------------------- ------------------------
Earnings before
income taxes 30,159 18,163 76,148 41,756
Provision for income
taxes 11,213 5,845 29,341 13,847
----------------------- ------------------------
Net earnings $18,946 $12,318 $46,807 $27,909
----------------------- ------------------------
Net earnings as a
percent of net sales 4.5% 4.0% 4.1% 3.2%
Net earnings - basic $0.56 $0.36 $1.38 $0.82
Net earnings -
diluted $0.55 $0.36 $1.36 $0.82
Weighted average
shares outstanding:
Basic 34,142 33,924 34,031 33,888
Diluted 34,550 34,137 34,410 34,011
Net cash provided by
operating activities $56,968 $40,940 $88,644 $88,081
Dividends paid per
share $0.1625 $0.1375 $0.4675 $0.4125
Comprehensive earnings, which represents net earnings adjusted by the
change in foreign-currency translation and minimum pension liability
recorded in shareholders' equity, for the periods ended December 26,
2004 and 2003, respectively, were $42,346 and $27,757 for 3 months,
and $66,059 and $44,236 for 9 months.
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Consolidated condensed balance sheets (unaudited)(a)
(In thousands)
---------------------------------------------
December 26, March 31,
2004 2004
----------------------------------------------
Assets
------
Cash and cash
equivalents $43,367 $63,265
Trade receivables -
net 268,092 180,163
Inventories 147,747 136,441
Other current assets 57,568 53,331
----------- -----------
Total current
assets 516,774 433,200
----------- -----------
Property, plant, and
equipment - net 481,276 397,697
Other noncurrent
assets 147,435 139,133
----------- -----------
Total assets $1,145,485 $970,030
----------- -----------
Liabilities
--------------
Debt due within one
year $76,847 $3,024
Accounts payable 129,064 99,258
Other current
liabilities 141,021 101,774
----------- -----------
Total current
liabilities 346,932 204,056
----------- -----------
Long-term debt 51,080 84,885
Deferred income taxes 44,349 42,774
Other noncurrent
liabilities 58,364 51,774
----------- -----------
Total
liabilities 500,725 383,489
----------- -----------
Shareholders' equity 644,760 586,541
--------------------------------- -----------
Total liabilities
& shareholders'
equity $1,145,485 $970,030
----------- -----------
Modine Manufacturing Company
Condensed consolidated statements of cash flows (unaudited)(a)
(In thousands)
----------------------------------------------------------------------
Nine months ended December 26, 2004 2003
----------------------------------------------------------------------
Net earnings $46,807 $27,909
Adjustments to reconcile net earnings with
cash provided by operating activities:
Depreciation and amortization 50,160 44,917
Other - net 1,687 (2,080)
-------------------------
98,654 70,746
-------------------------
Net changes in operating assets and
liabilities (10,010) 17,335
-------------------------
Cash flows provided by operating activities 88,644 88,081
-------------------------
Cash flows from investing activities:
Expenditures for plant, property, &
equipment (44,085) (51,686)
Acquisitions, net of cash (85,512) -
Proceeds for dispositions of assets 1,231 2,019
Other- net (1,620) 116
-------------------------
Net cash (used for) by investing activities (129,986) (49,551)
-------------------------
Cash flows from financing activities:
Net increase/(decrease) in debt 29,705 (19,152)
Issuance of common stock, including
treasury stock 7,173 2,007
Purchase of treasury stock (1,015) (25)
Cash dividends paid (16,005) (13,985)
-------------------------
Net cash provided by/(used for) financing
activities 19,858 (31,155)
-------------------------
Effect of exchange rate changes on cash 1,586 4,642
-------------------------
Net (decrease)/increase in cash and cash
equivalents (19,898) 12,017
-------------------------
Cash and cash equivalents at beginning of the
period 63,265 66,116
-------------------------
Cash and cash equivalents at end of the
period $43,367 $78,133
-------------------------
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Condensed segment operating results (unaudited)(a)
(In thousands)
----------------------------------------------------------------------
Three months ended Nine months ended
December 26, December 26,
----------------------- ------------------------
2004 2003 2004 2003
----------- ----------- ----------- ------------
Sales:
Original Equipment $200,560 $123,038 $503,634 $339,788
Distributed Products 86,388 88,024 261,978 271,110
European Operations 134,844 106,948 376,235 291,504
----------------------- ------------------------
Segment sales 421,792 318,010 1,141,847 902,402
----------------------- ------------------------
Eliminations (3,394) (7,211) (12,467) (23,646)
----------------------- ------------------------
Total net sales $418,398 $310,799 $1,129,380 $878,756
----------------------- ------------------------
Operating
Income/(Loss):
Original Equipment $22,974 $16,397 $65,947 $42,675
Distributed Products (604) (990) (1,097) (118)
European Operations 20,306 12,101 46,754 32,123
----------------------- ------------------------
Segment operating
income $42,676 $27,508 $111,604 $74,680
----------------------- ------------------------
(a) Certain prior-year amounts have been reclassified in the
consolidated financial statements to conform with the current year
presentation.
Segment results conform to the current year classification which
include moving the Emporia, Kansas facility from the Original
Equipment segment to the Distributed Products segment for which it
manufactures product and allocating certain centralized services
expenses attributable to a segment from corporate and administrative
expenses to the individual segments in order to more accurately
reflect their operating results. Cash and accounts payable balances
conform to the current classification which reflect reductions for
checks that have been written but not yet presented for payment.
(b) Definition - Return on average capital employed (ROACE)
-----------------------------------------------------------
The sum of, net earnings and adding back after-tax interest (interest
expense less the tax benefit at the total company effective tax rate),
divided by the average, total debt plus shareholders' equity: this is
a financial measure of the profit generated on the total capital
invested in the company before any interest expenses payable to
lenders, net of any tax effect.
Management discussion concerning the use of the financial measure -
Return on average capital employed
-------------------------------------------------------------------
Return on average capital employed is not a measure derived under
generally accepted accounting principles (GAAP) and should not be
considered as a substitute for any measure derived in accordance with
GAAP. Management believes that return on capital employed provides
investors with helpful supplemental information about the Company's
performance, ability to provide an acceptable return on all the
capital utilized by the Company, and ability to fund growth. This
measure may also be inconsistent with similar measures presented by
other companies.
Modine Manufacturing Company
Return on average capital employed (unaudited)
(Dollars in thousands)
----------------------------------------------------------------------
Nine months ended December 26, 2004 2003
----------------------------------------------------------------------
Net earnings $46,807 $27,909
Plus interest expense net of tax benefit at
total company effective tax rate 2,721 2,678
------------------------
Net return $49,528 $30,587
Divided by:
Average capital (beginning total debt +
beginning shareholders equity + $723,569 $653,959
ending total debt + ending shareholders'
equity divided by 2)
Nine-month return on average capital employed,
multiplied by 1.3334 to arrive at an annualized
(12 month) return 9.1% 6.2%
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Interest expense $4,424 $4,009
Total company effective tax rate 38.5% 33.2%
Tax benefit 1,703 1,331
------------------------
Interest expense, net of tax benefit $2,721 $2,678
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