Modine Reports Third Quarter Results of Fiscal 2006, Year-to-Date Cash Flow Growth Continues, Full-Year Earnings Per Share Outlook Lowered
RACINE, Wis.--Jan. 18, 2006--Modine Manufacturing Company , a global leader in designing and developing heating and cooling solutions for diversified markets, announced today earnings from continuing operations of $13.1 million, or $0.38 per fully diluted share, in the third quarter of fiscal 2006 ended December 26, 2005. Modine reported earnings from continuing operations of $21.3 million, or $0.62 per fully diluted share in the prior year. The company's current year and prior year third quarter results were both impacted by a number of factors, including rapidly accelerating commodity prices, warranty adjustments, foreign currency exchange rates, currency gains on intra-company loans, and effective tax rates.Fiscal 2006 third quarter earnings from continuing operations were impacted by the repatriation in December of $84.8 million in cash from Europe to support Modine's growing businesses in North America and utilize a lower tax rate available under the Jobs Creation Act. The repatriation generated taxes of approximately $2.0 million, or $0.06 per fully diluted share, which are reflected in the continuing operations results. The resulting effective income tax rate for continuing operations was 43.3% compared to 37.7% in the prior year. The tax on repatriation increased Modine's effective tax rate by approximately 8.6 percentage points. The current quarter was also impacted by the ongoing increases in commodity prices, primarily copper, aluminum, steel, resins, and natural gas. Modine estimates that commodity prices had a negative impact of $4.2 million, reflecting the lag in passing through certain of these costs under contractual arrangements with its customers. In addition, fiscal 2005 third quarter pretax earnings from continuing operations benefited by approximately $3.7 million from currency translation on Modine's intra-company Korea loan and a favorable $1.2 million warranty accrual adjustment.
Fiscal 2006 third quarter revenues from continuing operations increased nearly 10% to $411.0 million from $375.0 million, the 14th consecutive quarter of year-over-year sales growth. Modine's revenue growth was driven by the acquisitions of Transpro's heavy-duty OE business and Airedale International Air Conditioning, plus the new engine-related business in Europe. Excluding acquisitions, the year-over-year revenue was approximately flat.
"While we were able to continue generating revenue growth, this was offset by ongoing weakness in the Electronics business and lower automotive build rates," said David Rayburn, Modine's President and Chief Executive Officer. "Additionally, earnings were impacted by a strengthening in the U.S. dollar, employee benefit expenses, rising raw material costs and the impact of the cash repatriation from Europe."
For the third quarter of fiscal 2006, operating cash flow was $47.6 million. For the first nine months of fiscal 2006, operating cash flow was $97.5 million, a 10.0% increase over the same period one year ago. The return from continuing operations on average capital employed (ROACE)(3) for the twelve month period ending December 26, 2005 increased to 9.8% from 9.2% in fiscal 2005. The improvement in Modine's asset turnover was partially offset by a decline in margins. Modine's stated ROACE target is 11-12% through a cycle.
"We continue to operate in a very difficult economic environment, but we are pleased with the overall accretive impact of our recent acquisitions of Airedale International Air Conditioning and Transpro's heavy-duty OE business," Rayburn said. "They have contributed from both a financial and strategic standpoint. Our acquisition in Korea has been challenging in the short-term, but we remain confident in the long-term prospects given recent new business awarded in their non-traditional powertrain and engine cooling segments."
Year-to-date fiscal 2006 sales from continuing operations rose nearly 25% to $1,212.0 million compared with $973.0 million last year. Excluding acquisitions, the year-over-year revenue increase was approximately 6.9%. Net earnings from continuing operations of $48.1 million, or $1.39 per fully diluted share, was comparable in amount to $47.8 million, or $1.39 per fully diluted share, reported last year. Including discontinued operations, the year-to-date net loss was $(5.1) million, or $(0.15) per fully diluted share, compared to net earnings of $46.8 million, or $1.36 per fully diluted share, in the prior year period. These results include a non-cash charge to discontinued operations 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.
Segment Data & Performance
Effective with the second quarter of fiscal 2006, Modine has introduced expanded operating segments resulting in five reportable segments, instead of three, as a result of acquisition and divestiture activities and management structure changes in fiscal 2005 and the first nine months 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 (Automotive, Truck and Heavy-Duty)
Third quarter sales for the Original Equipment - Americas segment increased 10% to $161.6 million from $146.4 million one year ago, driven by the addition of Transpro's heavy-duty OE business acquired in March 2005. Operating income declined 20.2% to $16.2 million versus $20.3 million one year ago. The North American Automotive and Heavy Duty & Industrial businesses both reported significant declines in income from operations. The Automotive business attributed the results to lower production volumes by its OE customers. The Heavy Duty & Industrial business was impacted by the continued increase in copper prices and launch issues on its new line of aluminum radiators.
Original Equipment - Asia
Third quarter sales for the Original Equipment - Asia segment were $47.9 million versus $52.4 million a year ago. The business reported a $0.8 million operating profit versus $1.8 million in the prior year. Foreign currency exchanges rates had a positive $2.9 million impact on revenue. This was offset by lower commercial vehicle build rates in Korea.
Original Equipment - Europe (Automotive and Heavy-Duty)
Sales for the Original Equipment - Europe segment in the third quarter increased 5.2% to $140.9 million from $133.9 million one year ago, driven by the ongoing strength in the Heavy-Duty business. Foreign currency exchange rates negatively impacted revenue by $6.0 million. Operating income declined 4.7% to $20.0 million versus $21.0 million last year. The Automotive business' operating income declined due to a change in product mix to lower margin business. This was partially offset by new engine cooling programs in the Heavy-Duty business.
Commercial HVAC&R (Heating, Ventilating, Air-Conditioning and Refrigeration)
Sales for the Commercial HVAC&R segment jumped 65.5% to $52.8 million in the third quarter and operating income rose 29.3% to $6.7 million. The results are predominately due to the acquisition of Airedale International Air Conditioning in April 2005 as well as stronger coil sales.
Other (Electronics Cooling and Fuel Cells)
Third quarter revenues from the Other segment of $9.4 million declined 10.9% versus $10.6 million one year ago. The Electronics Cooling and Fuel Cells businesses both reported lower sales and operating income during the quarter. Operating income declined by $(1.1) million to a loss of $(2.4) million versus a $(1.4) million loss in the prior year. The Electronics Cooling business has been hindered by lower sales volumes and production problems at its facility in Taiwan. Modine's senior management team is currently engaged in a strategic review of the electronics market segment and has made a number of internal management changes during the quarter.
Balance Sheet and Cash Flow
Modine's balance sheet continues to remain strong with excellent liquidity. Total debt-to-capital (total debt plus shareholders' equity) increased to 22.0% at the end of the third quarter versus 16.6% one year ago, primarily due to the Company's share repurchase program that started in May 2005 and borrowing for the Airedale acquisition. The cash balance as of December 26, 2005 was $33.1 million compared to $50.0 million one year ago and $66.5 million at the close of the prior quarter. Cash was reduced as the company paid down a net $17.3 million of debt and purchased $36.9 million in stock during the third quarter.
Through January 13, 2006, Modine had repurchased, on a cumulative basis, 2,020,600 shares of common stock for cancellation at an average price of $33.94, or a total of approximately $68.6 million. In May 20, 200605, Modine announced a 5% Share Repurchase Program, 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 at the end of the third quarter was $144.0 million versus $105.6 million at the end of the prior fiscal year. Compared to $161.1 million at the end of the second quarter, total debt declined $17.1 million during the third quarter of fiscal 2006.
"Despite our cost challenges in the quarter, we were able to produce good results regarding return on capital employed and sustained the strength of our balance sheet," said Brad Richardson, Modine Executive Vice President, Finance and Chief Financial Officer. "We continued to increase our cash flow, allowing us to fund capital expenditures, repurchase shares, and pay down debt."
Fiscal 2006 Outlook
Modine's CEO noted in the Company's second quarter press release that challenging business conditions persist, particularly in the areas of OE price-down pressures, aggressive competitors, excess industry capacity, lower North American automotive build rates, a challenging electronics industry, and increasing raw material and energy costs.
"Unfortunately, many of these factors continue to persist," said Rayburn. "In addition, several other factors have deteriorated further than our previous expectations, including lower North American automotive build rates and rapidly accelerating raw material and energy costs."
"Given the current outlook for industry volumes and cost challenges we are taking a more cautious position on our fiscal 2006 earnings," Rayburn said. "We now expect that earnings per share from continuing operations will be flat to slightly down compared with $1.79 from continuing operations reported in fiscal 2005."
Rayburn noted that the current guidance includes the negative impact of $0.06 per fully diluted share in connection with the cash repatriation. Modine expects to see continued improvement in the Company's cash flow and return on capital employed objective. In addition, Modine expects to end the year with a very strong balance sheet, allowing ample liquidity and flexibility for the new fiscal year.
"I continue to be pleased with the Company's underlying performance in the areas that it can control," said Rayburn. "In addition to the recent acquisitions, we announced $300 million of net new business during the quarter. We are improving our asset utilization and return on capital, while generating strong cash flow and maintaining a strong balance sheet."
Modine Manufacturing Company
Consolidated statements of earnings (unaudited)(1)
(In thousands, except per-share amounts)
----------------------------------------------------------------------
Three months ended Nine months ended
December 26, December 26,
2005 2004 2005 2004
----------------------------------------------------
Net sales $411,030 $375,032 $1,212,020 $972,978
Cost of sales 330,818 294,051 971,750 765,851
----------------------------------------------------
Gross profit 80,212 80,981 240,270 207,127
Selling, general,
& administrative
expenses 57,498 49,561 164,702 131,467
Restructuring - 109 - 1,031
----------------------------------------------------
Income from
operations 22,714 31,311 75,568 74,629
Interest (expense) (2,049) (1,634) (5,430) (4,398)
Other income - net 2,412 4,592 5,690 7,123
----------------------------------------------------
Earnings from
continuing
operations
before income
taxes 23,077 34,269 75,828 77,354
Provision for
income taxes 10,002 12,926 27,733 29,579
----------------------------------------------------
Earnings from
continuing
operations 13,075 21,343 48,095 47,775
(Loss)/earnings from
discontinued
operations (net
of income taxes) - (2,397) 457 (968)
Gain/(loss) on spin
off of discontinued
operations 443 - (53,625) -
----------------------------------------------------
Net earnings/
(loss) $13,518 $18,946 ($5,073) $46,807
----------------------------------------------------
Earnings from
continuing
operations as a
percent of net
sales 3.2% 5.7% 4.0% 4.9%
Earnings per share from
continuing operations:
Basic $0.39 $0.63 $1.41 $1.40
Diluted $0.38 $0.62 $1.39 $1.39
Net
earnings/(loss)
per share:
Basic $0.40 $0.55 ($0.15) $1.38
Diluted $0.40 $0.55 ($0.15) $1.36
Weighted average
shares
outstanding:
Basic 33,656 34,142 34,057 34,031
Diluted 34,140 34,550 34,517 34,410
Net cash provided
by operating
activities $47,556 $56,967 $97,548 $88,643
Dividends paid per
share $0.1750 $0.1625 $0.5250 $0.4675
Comprehensive (loss)/earnings, which represent 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 December 26, 2005 and 2004, respectively, were ($122)
and $42,346 for 3 months, and ($35,009) and $66,059 for 9 months.
----------------------------------------------------------------------
Consolidated condensed balance sheets (unaudited)
(In thousands)
Dec. 26, March 31,
2005 2005
--------------------------------------------
Assets
------
Cash and cash
equivalents $33,137 $55,091
Trade receivables
- net 227,987 251,734
Inventories 90,703 149,781
Other current
assets 38,513 52,724
------------ ------------
Total current
assets 390,340 509,330
------------ ------------
Property, plant,
and equipment -
net 454,573 496,180
Other noncurrent
assets 170,179 146,645
------------ ------------
Total assets $1,015,092 $1,152,155
------------ ------------
Liabilities
-----------
Debt due within
one year $113 $64,912
Accounts payable 152,946 159,876
Other current
liabilities 107,277 120,306
------------ ------------
Total current
liabilities 260,336 345,094
------------ ------------
Long-term debt 143,933 40,724
Deferred income
taxes 42,328 44,072
Other noncurrent
liabilities 58,501 62,485
------------ ------------
Total
liabilities 505,098 492,375
------------ ------------
Shareholders'
equity 509,994 659,780
------------- ------------ ------------
Total
liabilities
& shareholders'
equity $1,015,092 $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)
----------------------------------------------------------------------
Nine months ended December 26, 2005 2004
----------------------------------------------------------------------
Net (loss) / earnings ($5,073) $46,804
Adjustments to reconcile net (loss)/earnings
with cash provided by operating activities:
Depreciation and amortization 53,153 50,160
Loss on spin-off of aftermarket business 53,168 -
Other - net 1,687 1,689
-------------------------
102,935 98,653
-------------------------
Net changes in operating assets and
liabilities (5,387) (10,010)
-------------------------
Cash flows provided by operating activities 97,548 88,643
-------------------------
Cash flows from investing activities:
Expenditures for plant, property, &
equipment (49,604) (44,085)
Acquisitions, net of cash (38,162) (85,512)
Spin-off of aftermarket business (cash
transferred) (6,300) -
Proceeds for dispositions of assets 40 1,231
Other- net 379 (1,620)
-------------------------
Net cash (used for) investing activities (93,647) (129,986)
-------------------------
Cash flows from financing activities:
Net increase in debt 42,700 29,705
Settlement of derivative contract (1,794) -
Cash proceeds from exercise of stock
options 11,788 7,173
Repurchase of common stock, treasury &
retirement (61,314) (1,015)
Cash dividends paid (18,082) (16,005)
Other - net 5,486 133
-------------------------
Net cash provided by financing activities (21,216) 19,991
-------------------------
Effect of exchange rate changes on cash (4,639) 1,586
-------------------------
Net (decrease) in cash and cash equivalents (21,954) (19,766)
-------------------------
Cash and cash equivalents at beginning of the
period 55,091 69,758
-------------------------
Cash and cash equivalents at end of the
period $33,137 $49,992
-------------------------
----------------------------------------------------------------------
Condensed segment operating results (unaudited)(2)
(In thousands)
----------------------------------------------------------------------
Three months ended Nine months ended
December 26, December 26,
------------------------- -------------------------
2005 2004 2005 2004
------------------------- -------------------------
Sales:
Original
Equipment -
Americas $161,568 $146,412 $499,105 $430,790
Original
Equipment -
Asia 47,902 52,405 155,451 66,620
Original
Equipment -
Europe 140,866 133,918 409,599 372,551
Commercial
HVAC&R 52,807 31,904 127,356 75,401
Other 9,399 10,551 24,388 26,983
------------------------- -------------------------
Segment sales 412,542 375,190 1,215,899 972,345
------------------------- -------------------------
Corporate and
Administrative 819 738 2,386 3,162
Eliminations (2,331) (896) (6,265) (2,529)
------------------------- -------------------------
Net sales $411,030 $375,032 $1,212,020 $972,978
------------------------- -------------------------
Operating
earnings/(loss):
Original
Equipment -
Americas $16,240 $20,339 $60,085 $61,305
Original
Equipment -
Asia 752 1,778 2,626 2,404
Original
Equipment -
Europe 19,995 20,990 57,964 49,086
Commercial
HVAC&R 6,709 5,187 13,139 9,932
Other (2,445) (1,370) (9,729) (9,001)
------------------------- -------------------------
Segment
earnings 41,251 46,924 124,085 113,726
------------------------- -------------------------
Corporate and
Administrative
Expenses (18,592) (15,654) (48,629) (39,176)
Eliminations 55 43 112 79
Other Items Not
Allocated to a
Segment 363 2,956 260 2,725
------------------------- -------------------------
Earnings
from
continuing
operations
before income
taxes $23,077 $34,269 $75,828 $77,354
------------------------- -------------------------
(2) Prior year segment results have been reclassified to conform to
the current year presentation. In the current year, nine months of the
Korean and Chinese acquisitions results are included in Original
Equipment - Asia segment and nine months of the Jackson, Mississippi
acquisition results are included in the Original Equipment - Americas
segment, while seven months of the Airedale acquisition results are
included in the Commercial HVAC&R segment. The Korean and Chinese
acquisitions were included for four and three months in the prior
year, respectively, while the 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 December 26, 2005
----------------------------------------------------------------------
Earnings from continuing operations $62,010
Plus interest expense from continuing operations net of
tax benefit at total company effective tax rate 4,733
--------------
Net return $66,743
Divided by:
Average capital (debt + equity, last five quarter ends /
divided by 5) $678,462
Return from continuing operations on average capital
employed 9.8%
----------------------------------------------------------------------
Interest expense from continuing operations $7,361
Total company effective tax rate 35.7%
Tax benefit 2,628
--------------
Interest expense, net of tax benefit $4,733
----------------------------------------------------------------------