Modine Reports Higher Sales and Earnings
RACINE, Wis.--Oct. 19, 2005--Modine Manufacturing Company , a global leader in thermal management solutions, today reported earnings from continuing operations of $14.3 million, or $0.41 per fully diluted share, in the second quarter of fiscal 2006 ended September 26, 2005, which was up slightly from the prior year's earnings of $13.9 million, or $0.40 per fully diluted share. This was the 8th consecutive quarter of year-over-year earnings per share growth.Fiscal 2006 second quarter revenues from continuing operations increased 32% to $404.2 million from $306.7 million, the 13th consecutive quarter of year-over-year sales growth. Excluding the impact of acquisitions, the year-over-year revenue increase was 9%.
"We were particularly encouraged by strong volumes in our North American Truck and European Heavy-Duty markets and the overall accretive impact of acquisitions in our second quarter results," said David Rayburn, Modine President and Chief Executive Officer. "However, these positive factors were offset by certain litigation and corporate severance expenses, as well as an unfavorable product mix in our European Automotive business. All in all, we remain optimistic on the Company's outlook and reconfirm our full-year expectations announced in July."
Beginning with the second quarter of fiscal 2006 on an unaudited, pro forma historical basis, Modine presents results from continuing operations, which excludes its former Aftermarket business. Modine spun off its Aftermarket business on July 22, 2005 and merged it with Transpro, Inc., to form Proliance International, Inc. Modine has classified its former Aftermarket business as a discontinued operation, given the spin-off and the impact of the Aftermarket business on the Company due to its relative sales level. As a result, on October 19, 2005, the Company issued unaudited, pro forma historical earnings statements for the first quarter of fiscal 2006, by quarter for fiscal 2005 and annually for fiscal years 2004 and 2003.
Including discontinued operations, net losses in the quarter were $(36.1) million, or $(1.04) per fully diluted share, versus $14.1 million, or $0.41 per fully diluted share, last year. These results include a non-cash charge to discontinued operations of $50.8 million, or $(1.46) per fully diluted share, in line with prior guidance, to reflect the difference between the value that Modine shareholders received in Proliance International, Inc., a function of the price of Transpro, Inc. at the time of the closing and the asset carrying value of Modine's Aftermarket business.
For the second quarter of fiscal 2006, operating cash flow was $27.7 million. For the first half of fiscal 2006, operating cash flow jumped 58% to $50.0 million. The return from continuing operations on average capital employed (ROACE)(3) for the four quarters ended September 26, 2005 improved significantly to 11.1%, reaching Modine's stated ROACE target of 11-12% through a cycle.
The effective tax rate for continuing operations in the second quarter was 34.6% compared to 37.4% a year earlier primarily from the favorable mix of U.S. and foreign income and lower state taxes in the current year.
"While there were a number of positives to point to in the second quarter," said Brad Richardson, Modine Vice President, Finance and Chief Financial Officer, "our results were negatively impacted by a labor contract settlement at our South Korean operations, higher litigation expenses connected to previously disclosed items, and corporate-related severance costs."
Fiscal 2006 first half sales from continuing operations rose 34% to $801.0 million compared with $597.9 million last year. Net earnings from continuing operations of $35.0 million, or $1.01 per fully diluted share, increased sharply from $26.4 million, or $0.77 per fully diluted share, in last year's first six months. Including discontinued operations, the first half net loss was $(15.3) million, or $(0.44) per fully diluted share, compared to net earnings of $27.9 million, or $0.81 cents per fully diluted share, in the prior-year period.
Segment Data and Performance
Effective with the second quarter of fiscal 2006 and as announced earlier today, Modine has introduced expanded operating segment reporting to include five segments, instead of three, as a result of acquisition and divestiture activities and management structure changes in fiscal 2005 and the first half of fiscal 2006. Modine believes the expanded reporting segment structure reinforces the benefits of market, customer and geographic diversification and product breadth around its core business and technology platform in thermal management.
Original Equipment - Americas (North American Automotive, Truck and Heavy-Duty)
Second quarter sales for the Original Equipment - Americas segment increased 21% to $172.6 million from $142.9 million one year ago, driven by stronger truck volumes and the addition of the Transpro heavy-duty OE business acquired in March 2005. Operating income grew 17% to $22.9 million versus $19.7 million a year ago. The North American Truck and Automotive businesses both reported significant improvements in income from operations, while the Heavy Duty & Industrial business posted a modest operating income decline due to a product mix shift and a normal lag in the pass-through of higher raw material costs, primarily copper.
Original Equipment - Asia
Second quarter sales for the Original Equipment - Asia segment were $49.7 million versus $14.2 million a year ago when only one month of results from the July 31, 2004 acquisition of WiniaMando's Automotive Climate Control division in South Korea were recorded. An operating loss of $(0.7) million in the second quarter compared with operating income of $0.6 million one year ago due to lower Korean commercial vehicle build rates and the impact of a labor contract settlement at the Company's Asan City location. The labor settlement was due primarily to events surrounding annual contract negotiations. These negotiations concluded with an agreement consistent with the Korean manufacturing industry.
Original Equipment - Europe (Automotive and Heavy-Duty)
Sales for the Original Equipment - Europe segment in the second quarter increased 10% to $128.7 million from $116.8 million one year ago, driven by strength in the Heavy-Duty business and new program launches, particularly with BMW. Operating income improved 22% to $17.0 million versus $13.9 million last year, primarily due to growth in the Heavy-Duty business, which was partially offset by unfavorable product mix in the Automotive business.
Commercial HVAC&R (Heating, ventilating, air conditioning and refrigeration)
Sales for the Commercial HVAC&R segment jumped 88% to $46.1 million in the second quarter and operating income rose 50% to $4.2 million, predominantly due to the acquisition of Airedale International Air Conditioning in April 2005 as well as stronger coil volumes.
Other (Electronics Cooling and Fuel Cells)
Second quarter revenues for the Other segment of $8.2 million improved 3% versus $8.0 million one year ago on higher sales in the Electronics Cooling business, partially offset by lower revenues from the Fuel Cell market. The segment's operating loss was $3.2 million, essentially unchanged from the prior year.
Balance Sheet and Cash Flow
Modine's balance sheet remains strong with excellent liquidity. Total debt to capital (total debt plus shareholders' equity) increased to 22.7% at the end of the second quarter versus 19.0% one year ago, primarily due to the Company's share repurchase program started in May 2005 and borrowings for the Airedale acquisition. The cash balance at September 26, 2005 was $66.5 million compared with $39.3 million one year ago and $55.1 million at the close of the prior fiscal year.
As of October 14, Modine had repurchased 876,700 shares of common stock for cancellation at an average price of $34.57, or a total of approximately $30.3 million. Modine has completed slightly more than half of the 5% share buyback, or about 1.7 million shares, authorized in mid-May 20, 200505, which also included an anti-dilution repurchase provision designed to offset the potential impact of the Company's stock-based incentive compensation plans.
Total debt, net of operating cash, at the end of the second quarter increased to $94.6 million versus $77.8 million at the end of the first quarter and $50.5 million at the end of the last fiscal year, primarily due to borrowings of $40 million for the Airedale acquisition and, to a lesser degree, for share repurchase. Working capital of $182.3 million at the close of the second quarter increased $18.1 million from the end of fiscal 2005 principally due to the reclassification of debt to non-current, partially offset by the effects of the Aftermarket business spin-off.
"We continue our strong focus on working capital management to drive our return on invested capital and create greater economic profit," Richardson said. "We are pleased that our inventory turns increased in the second quarter to 14.0 from 13.1 in the prior-year period. Days sales outstanding were essentially unchanged at 54 days.
"As announced, we completed a private placement of $75 million of senior unsecured notes after the close of the second quarter," he added. "Our strong balance sheet and strategic and operating focus allowed us to obtain a competitive rate."
Richardson reiterated that fiscal 2006 capital spending should approximate depreciation, in the vicinity of approximately $75 million, including the impacts of acquisitions in fiscal 2005.
Fiscal 2006 Outlook
"For fiscal 2006, we continue to expect earnings per share growth from continuing operations in the high single-digit to more likely the low double-digit range compared with $1.79 from continuing operations reported in fiscal 2005, along with higher returns and increasing operating cash flow," said Rayburn. "Given the $1.01 per share earned in the first half, this would suggest a second half that is roughly comparable."
Rayburn noted that the fiscal 2006 earnings per share guidance includes a potential negative impact of as much as 10 cents per fully diluted share in connection with the possible repatriation of unremitted European earnings related to the American Jobs Creation Act of 2004.
Rayburn stressed that a number of economic, market and operating factors will continue to impact the Company's performance for the balance of fiscal 2006. Positive factors include new business programs, continued strong unit demand in the truck and heavy-duty markets in North America and Europe, accretive acquisitions such as Airedale and Transpro's heavy-duty OE business, and an aggressive share repurchase program, along with the absence of the former underperforming Aftermarket business.
However, challenging business conditions persist, Rayburn noted, in the areas of OE price-down pressures along with aggressive competitors and excess capacity, lower North American automotive build rates, a slow electronics industry recovery, and raw material and energy costs.
"We are focused on increasing business with existing customers while attracting new customers in multiple global markets with quality products, exceptional service, and new technology offerings," Rayburn said. "Our goal remains to pursue diversification across markets, geographies and customers. We are also working hard to leverage our cost base across the growth we are seeing in the top line."
Modine Manufacturing Company
Consolidated statements of earnings (unaudited)(1)
(In thousands, except per-share amounts)
----------------------------------------------------------------------
Three months ended Six months ended
September 26, September 26,
2005 2004 2005 2004
---------------------------------------------
Net sales $404,152 $306,717 $800,990 $597,946
Cost of sales 324,366 242,924 640,932 471,800
---------------------------------------------
Gross profit 79,786 63,793 160,058 126,146
Selling, general, &
administrative expenses 57,041 42,206 107,594 81,906
Restructuring - (600) - 922
---------------------------------------------
Income from
operations 22,745 22,187 52,464 43,318
Interest (expense) (1,837) (1,498) (3,381) (2,764)
Other income - net 997 1,558 3,668 2,531
---------------------------------------------
Earnings from
continuing
operations
before income
taxes 21,905 22,247 52,751 43,085
Provision for income
taxes 7,583 8,327 17,731 16,653
---------------------------------------------
Earnings from
continuing
operations 14,322 13,920 35,020 26,432
Earnings from
discontinued operations
(net of income taxes) 404 132 457 1,429
Loss on spin off of
discontinued operations (50,815) - (50,815) -
---------------------------------------------
Net
(loss)/earnings ($36,089) $14,052 ($15,338) $27,861
---------------------------------------------
Earnings from continuing
operations as a percent
of net sales 3.5% 4.5% 4.4% 4.4%
Earnings per share from
continuing operations:
Basic $0.42 $0.41 $1.02 $0.78
Diluted $0.41 $0.40 $1.01 $0.77
Net (loss)/earnings per
share:
Basic ($1.06) $0.41 ($0.45) $0.82
Diluted ($1.04) $0.41 ($0.44) $0.81
Weighted average shares
outstanding:
Basic 34,185 34,018 34,257 33,975
Diluted 34,779 34,415 34,705 34,339
Net cash provided by
operating activities $27,739 $28,976 $49,992 $31,676
Dividends paid per share $0.1750 $0.1525 $0.3500 $0.3050
Comprehensive earnings from continuing operations, which represents
net earnings adjusted by the change in foreign-currency translation,
minimum pension liability, and a cashflow hedge of a benchmark
interest rate for a forecasted debt borrowing, recorded in
shareholders' equity, for the periods ended September 26, 2005 and
2004, respectively, were $13,228 and $15,498 for 3 months, and $17,943
and $22,979 for 6 months.
----------------------------------------------------------------------
Consolidated condensed balance sheets (unaudited)
(In thousands)
Sept. 26, 2005 March 31, 2005
----------------------------------------------------------
Assets
------
Cash and cash equivalents $66,464 $55,091
Trade receivables - net 240,570 251,734
Inventories 91,900 149,781
Other current assets 45,984 52,724
----------- -----------
Total current
assets 444,918 509,330
----------- -----------
Property, plant, and
equipment - net 460,208 496,180
Other noncurrent assets 170,914 146,645
----------- -----------
Total assets $1,076,040 $1,152,155
----------- -----------
Liabilities
-----------
Debt due within one year $108 $64,912
Accounts payable 148,670 159,876
Other current liabilities 113,889 120,306
----------- -----------
Total current
liabilities 262,667 345,094
----------- -----------
Long-term debt 160,961 40,724
Deferred income taxes 42,593 44,072
Other noncurrent
liabilities 61,156 62,485
----------- -----------
Total liabilities 527,377 492,375
----------- -----------
Shareholders' equity 548,663 659,780
-------------------- ----------- -----------
Total liabilities
& shareholders'
equity $1,076,040 $1,152,155
----------- -----------
(1) Certain prior-year amounts have been reclassified in the
consolidated financial statements to conform with the current year
presentation. These include a reclassification of certain other
income & expense items to sales, S.G.&A. and manufacturing
overhead, along with additional allocations of certain centralized
services expenses from corporate and administrative expenses to
the attributable individual segments and their divisions in order
to more accurately reflect their operating results.
Modine Manufacturing Company
Condensed consolidated statements of cash flows (unaudited)(1)
(In thousands)
----------------------------------------------------------------------
Six months ended September 26, 2005 2004
----------------------------------------------------------------------
Net (loss) / earnings ($15,338) $27,861
Adjustments to reconcile net earnings with
cash provided by operating activities:
Depreciation and amortization 36,145 32,857
Loss on spin-off of aftermarket business 50,358 -
Other - net 1,521 628
------------------------
72,686 61,346
------------------------
Net changes in operating assets and
liabilities (22,694) (29,670)
------------------------
Cash flows provided by operating activities 49,992 31,676
------------------------
Cash flows from investing activities:
Expenditures for plant, property, &
equipment (30,136) (29,770)
Acquisitions, net of cash (37,491) (82,605)
Return of capital - -
Spin-off of aftermarket business (cash
transferred) (3,725) -
Proceeds for dispositions of assets - 1,125
Other- net 198 (546)
------------------------
Net cash (used for) investing activities (71,154) (111,796)
------------------------
Cash flows from financing activities:
Net increase/(decrease) in debt 60,000 52,166
Derivative forward contract - interest rate
lock (1,794) -
Issuance of common stock, including treasury
stock 8,597 3,816
Repurchase of common stock, treasury &
retirement (24,261) (483)
Cash dividends paid (12,140) (10,424)
Other - net 4,526 5,165
------------------------
Net cash provided by financing activities 34,928 50,240
------------------------
Effect of exchange rate changes on cash (2,393) (596)
------------------------
Net increase / (decrease) in cash and cash
equivalents 11,373 (30,476)
------------------------
Cash and cash equivalents at beginning of the
period 55,091 69,758
------------------------
Cash and cash equivalents at end of the period $66,464 $39,282
------------------------
Condensed segment operating results (unaudited)(2)
(In thousands)
----------------------------------------------------------------------
Three months ended Six months ended
September 26, September 26,
--------------------------------------------
2005 2004 2005 2004
--------------------------------------------
Sales:
Original Equipment -
Americas $172,607 $142,855 $337,537 $284,378
Original Equipment -
Asia 49,722 14,215 107,549 14,215
Original Equipment -
Europe 128,740 116,783 268,733 238,633
Commercial HVAC&R 46,093 24,498 74,549 43,497
Other 8,201 8,030 14,989 16,432
--------------------- ---------------------
Segment sales 405,363 306,381 803,357 597,155
--------------------- ---------------------
Corporate and
Administrative 774 1,271 1,567 2,424
Eliminations (1,985) (935) (3,934) (1,633)
--------------------- ---------------------
Net sales 404,152 306,717 800,990 597,946
--------------------- ---------------------
Operating income/(loss):
Original Equipment -
Americas $22,919 $19,672 $43,845 $40,966
Original Equipment -
Asia (687) 626 1,874 626
Original Equipment -
Europe 16,954 13,920 37,969 28,096
Commercial HVAC&R 4,207 2,808 6,430 4,745
Other (3,232) (3,104) (7,284) (7,631)
--------------------- ---------------------
Segment income 40,161 33,922 82,834 66,802
--------------------- ---------------------
Corporate and
Administrative Expenses (17,443) (11,771) (30,427) (23,522)
Eliminations 27 39 57 36
Other Items Not
Allocated to a Segment (840) 57 287 (231)
--------------------- ---------------------
Income from
continuing
operations 21,905 22,247 52,751 43,085
--------------------- ---------------------
(2) Prior year segment results have been reclassified to conform to
the current year presentation.
In the current year, six months of the Korean and Chinese
acquisitions results are included in Original Equipment - Asia
segment and six months of the Jackson, Mississippi acquisition
results are included in the Original Equipment - Americas segment,
while four months of the Airedale acquisition results are included
in the Commercial HVAC&R segment. The Korean acquisition was
included for one month in the prior year while the Chinese,
Jackson, and Airedale acquisitions were not included in the prior
periods as they were acquired later in fiscal 2005 and fiscal
2006.
(3) Definition - Return from continuing operations on average capital
employed (ROACE)
---------------------------------------------------------------------
The sum of, earnings from continuing operations 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 from continuing operations on average capital employed
----------------------------------------------------------------------
Return from continuing operations 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 from
continuing operations 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 not be
consistent with similar measures presented by other companies.
Modine Manufacturing Company
Return from continuing operations on average capital employed
(unaudited)
(In thousands)
----------------------------------------------------------------------
Trailing four quarters ended September 26, 2005
----------------------------------------------------------------------
Earnings from continuing operations $70,276
Plus interest expense from continuing operations net of
tax benefit at total company effective tax rate 4,536
----------
Net return $74,812
Divided by:
Average capital (debt + equity, last five quarter ends /
divided by 5) $675,736
Return from continuing operations on average capital
employed 11.1%
----------------------------------------------------------------------
Interest expense from continuing operations $6,946
Total company effective tax rate 34.7%
Tax benefit 2,410
----------
Interest expense, net of tax benefit $4,536
----------------------------------------------------------------------