Modine Reports Record Fiscal 2007 First Quarter Sales of $430.4 Million and Net Earnings from Continuing Operations of $0.51 per Share
RACINE, Wis.--July 19, 2006--Modine Manufacturing Company , a diversified global leader in thermal management technology and solutions, today reported net earnings of $0.51 per fully diluted share from continuing operations, for its fiscal 2007 first quarter ended June 26, 2006, compared with $0.60 per fully diluted share, in the first quarter of fiscal 2006. The company continues to benefit from strong volumes that have continued to improve sequentially over the past three years, especially in the truck and heavy-duty markets, partially offset by incrementally high commodity prices and continuing customer pricing pressures."We experienced a tough year over year comparison this quarter. Last year's first quarter results were the strongest in the history of the company," said David Rayburn, Modine President and Chief Executive Officer. "Despite continued high commodities pricing and some challenging market pricing conditions, we continue to report strong organic volumes, as we have over the past three years. We're also now hedging approximately 30 percent of our aluminum needs. I'm convinced we've got the right strategy in place to recover from our margin challenges and grow this company for the long term. This is a transition year as we work to lower our selling, general and administrative costs, pass on commodity costs where we can, develop better sourcing from low cost countries, and work to reposition our global manufacturing footprint. Actions related to the repositioning of our manufacturing footprint will be announced as we finalize our plans."
First Quarter Highlights
-- Earnings before interest, taxes, depreciation and amortization
(EBITDA)(1) were $39.1 million in the fiscal first quarter, down
19 percent, from $48.3 million in the first quarter of fiscal
2006.
-- The costs associated with the company's ongoing global
repositioning efforts resulted in an approximate $2.1 million
pre-tax charge in the quarter.
-- Modine reiterated its $300 million net new business trend,
supported by several new business wins announced in the
quarter.
-- A $45 million, 3 year, contract to supply exhaust gas
recirculation (EGR) coolers to Volvo.
-- A $15 million, 3 year, program to supply EGR coolers to
the MAN group.
-- A $35 million per year, 3 year, program to supply engine
components to International Truck and Engine Corporation.
-- The company made solid progress with actions supporting its
two to three year global competitiveness program intended to
reduce costs, accelerate technology development, and
accelerate market and geographic expansion, to stimulate
growth and profits. It:
-- Completed the acquisition of the 50 percent of Radiadores
Visconde Ltda. the company did not already own for $13.0
million, net of cash acquired and a note payable incurred,
plus additional amounts subject to the achievement of
performance goals. This is an $80 million business and the
acquisition was accretive immediately. As a result of this
acquisition, the company benefited from the use of net
operating losses that were previously unavailable,
resulting in a reduction of income tax expense totaling
$3.6 million;
-- Announced the formation of a product-focused group to
support the heating, ventilating, and air conditioning
(HVAC) equipment needs of the truck and off-highway
markets, and in conjunction with that change we announced
the closure of our technology center in Harrodsburg,
Kentucky ($0.1 million of expense recorded this quarter -
total anticipated for fiscal 2007 of $1.1 million);
-- Announced an early retirement program for certain U.S.
salaried employees ($0.4 million of expense recorded in
the quarter - anticipate a range $1.0 million to $2.0
million for fiscal 2007) - incremental to the early
retirement program offered to and accepted by employees at
Modine's Asan City, South Korean facility in late fiscal
2006 ; and,
-- Announced the closure of its Taiwan facility that
manufactures heat pipes for the personal computer and
laptop markets ($1.6 million of expense in the quarter -
total of $2.5 million - $3.0 million for fiscal 2007).
First quarter sales from continuing operations reached a record $430.4 million, an 8.5 percent improvement from the $396.8 million in fiscal 2006. Excluding the impact of acquisitions and foreign currency exchange rate changes, underlying sales grew by $19.0 million, or 4.8 percent. Sales volumes were positively impacted by strength in the truck and heavy-duty and industrial markets, as well as acquired revenues from the company's May 2005 acquisition of Airedale and the May 2006 acquisition of the remaining 50 percent of Radiadores Visconde it did not already own. Net earnings from continuing operations of $16.3 million declined from $20.7 million last year, primarily driven by a decrease in gross margins related to higher copper, aluminum, steel, resin and natural gas prices, and price pressure from customers, as well as an approximate $1.3 million after-tax global repositioning charge in the quarter.
Operating cash flow for the first quarter of fiscal 2007 was $8.3 million. The return on average capital employed (ROACE)(2) for the four quarters ended June 26, 2006 was 9.0 percent compared with 9.7 percent for the same period in fiscal 2006 and 9.7 percent at the end of fiscal 2006. Modine's stated ROACE target is 11.0-12.0 percent through a cycle.
First quarter fiscal 2007 selling, general and administrative (SG&A) expenses increased $4.5 million from fiscal 2006, but remained consistent as a percentage of sales. The increase in SG&A expenses is primarily related to an increase in expenditures necessary to support growing business volumes, including the recent acquisitions of Airedale and Radiadores Visconde, incremental stock-based compensation expense recognized under recently adopted accounting standards, and increases in professional fees and health care costs. The company has developed plans to reduce SG&A costs, without impacting its long term strategy, with a goal of reducing expenses by $20.0 million, or 10.0 percent on an annualized basis.
First Quarter Segment Data and Performance
First quarter sales for the Original Equipment - Americas segment increased $15.2 million, or 9.2 percent, to $180.1 million from $164.9 million one year ago, while operating income was $19.5 million versus $20.9 million. The truck and the heavy-duty and industrial businesses both reported solid revenue improvements, partially offset by a slight decline in North American automotive sales. Sales attributable to Radiadores Visconde also had an $8.0 million positive impact on quarterly sales results. Operating income in the truck business and the North American automotive business was down, due to continued pricing pressure, as well as the effect of higher raw material costs - in particular, copper -- on the heavy-duty and industrial business.
First quarter sales for the Original Equipment - Europe segment increased 5.1 percent to $147.2 million from $140.0 million one year ago, while operating income was $19.2 million versus $21.0 million last year. The heavy-duty business reported double-digit revenue and income improvements driven by strong volumes throughout Europe from the launch of new products. The automotive business showed strong sales growth that was more than offset by customer pricing pressures, higher commodity prices and the changing mix of products.
Sales for the Original Equipment - Asia segment in the first quarter decreased 3.3 percent to $55.9 million from $57.8 million one year ago, with an operating income of $1.0 million versus $2.6 million in 2006. The company is encouraged by potential new business programs despite short-term profitability challenges caused by soft domestic commercial vehicle build rates in Korea.
Sales for the Commercial Heating, Ventilating, Air Conditioning and Refrigeration (Commercial HVAC&R) segment in the first quarter increased 38.3 percent to $39.4 million from $28.5 million one year ago due primarily to the acquisition of Airedale in May of 2005. Operating income was $1.8 million versus $2.2 million in 2006, with the decrease driven by softer North American heating products sales (energy price related) that carry relatively higher margins and the fact that the Airedale product line generally has lower margins than our traditional heating products.
Sales for the Other segment in the first quarter were $9.4 million up from $6.8 million one year ago, with an operating loss of $5.0 million versus an operating loss of $4.1 million in 2006. The increase in the operating loss is primarily attributable to the approximately $1.6 million of closure costs recorded in the first quarter of 2006 related to the upcoming closure of the company's Taiwan operation.
Balance Sheet and Cash Flow
Modine ended its fiscal 2007 first quarter with a solid balance sheet and significant liquidity. Operating cash flow was $8.3 million versus $22.3 million in the first quarter of fiscal 2006 due to increased working capital needs. During the quarter, we completed the acquisition of Radiadores Visconde for $13.0 million, net of cash acquired and a note payable incurred, funded capital expenditures of $18.1 million and paid a per-share dividend in the total amount of approximately $5.7 million. Total debt at the end of fiscal 2007 first quarter was up to $185.5 million compared with $157.8 million at the end of fiscal 2006. The total debt to capital (total debt plus shareholders' equity) ratio increased to 26.3 percent compared with 23.8 percent at March 31, 2006. This increase in debt is due to the company's acquisition of the remaining 50 percent of Radiadores Visconde it did not already own, and $8.7 million of share repurchases made during the quarter. Modine's cash balance at the end of June 2006 was $14.3 million compared to $30.8 million at the end of the 2006 fiscal year as the company continues to manage its on-hand cash balances by investing in the business and providing returns to its shareholders.
Working capital of $149.7 million at the end of the fiscal 2007 first quarter was higher than the March 31, 2006 balance of $117.2 million, primarily due to assets capitalized in conjunction with the company's acquisition of Radiadores Visconde and increased working capital needs.
Fiscal 2007 Outlook
"Fiscal 2007 has some challenges and many opportunities," Mr. Rayburn said. "Sales volumes continue to be very strong, consistent with the trend over the past two years. We are encouraged that the year will have positive influences from new business wins and new technology platforms, and the accretive acquisition of Radiadores Visconde. We'll also benefit from closing our Taiwan operation which has historically operated in a loss position. Our challenges include ongoing high raw material, energy and health care costs, and continued pressure from our original equipment customers for price-downs on our products. We remain focused on our strategies of developing new products and technologies, expanding into new markets and geographies and reducing our costs through the repositioning of our manufacturing footprint and SG&A cost reductions. These strategies and the actions we have planned will make us a more cost competitive, innovative and efficient technology provider to our customers and help build a larger backlog of business."
Conference Call and Webcast
Modine will conduct a conference call on Thursday, July 20 at 11:00 a.m. EDT (10:00 a.m. CDT) to discuss additional details regarding the company's performance for the fiscal 2007 first quarter. President and Chief Executive Officer, Dave Rayburn and Executive Vice President, Finance and Chief Financial Officer, Brad Richardson will host the call. Participants should call 800.662.5508 from the U.S. and Canada or 913.981.5568 Internationally to gain access to the conference call. A replay of the conference call will be available through August 3, 2006 by calling 719.457.0820 or 888.203.1112. Use confirmation code 4072819.
Additionally, an audio Webcast of the conference call, both live and as a replay, is accessible through the "Investor Relations" section of Modine's Web site at www.modine.com. Listeners are encouraged to log on to the Webcast about 10 minutes before the start of the conference call.
Modine, with fiscal 2006 revenues of $1.6 billion, specializes in thermal management systems and components, bringing highly engineered heating and cooling technology and solutions to diversified global markets. Modine products are used in light, medium and heavy-duty vehicles, HVAC equipment, industrial equipment, refrigeration systems, fuel cells, and electronics. The company employs approximately 8,000 people at 34 facilities worldwide. For more information about Modine, visit www.modine.com.
Forward-Looking Statements
Statements made in this press release regarding future matters are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, including those regarding a positive impact from new business programs, accretive acquisitions, acceleration of technology, achievement of cost reductions, expansion into niche markets, refocus in global manufacturing footprint, increased cash flow and continued strong financial returns are based on Modine's current expectations. Modine's actual results, performance or achievements may differ materially from those expressed or implied in these statements because of certain risks and uncertainties, including international economic changes and challenges; market acceptance and demand for new products and technologies; the ability of Modine to integrate the acquired operations and employees in a timely and cost-effective manner; the ability of Modine, its customers and suppliers to achieve projected sales and production levels; unanticipated product or manufacturing difficulties; and other factors affecting the company's business prospects discussed in filings made by the company, from time to time, with the SEC including the factors discussed in the "Cautionary Factors" section in Item 7 of the company's most recent Annual Report on Form 10-K and its periodic reports on Form 10-Q. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.
Modine's financial results, as reported herein, are preliminary and subject to possible adjustments. Modine does not assume any obligation to update any of these forward-looking statements.
(1) Management discussion concerning the use of the financial measures - Return on average capital employed and EBITDA
Return on average capital employed (ROACE) and earnings before interest, taxes, depreciation and amortization (EBITDA) are not measures 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 these measures provide 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. These measures may not be consistent with similar measures presented by other companies.
(2) 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.
Modine Manufacturing Company
Consolidated statements of earnings (unaudited)
(In thousands, except per-share amounts)
----------------------------------------------------------------------
Three months ended June 26,
2006 2005
--------------------------
Net sales $430,393 $396,838
Cost of sales 354,297 316,566
--------------------------
Gross profit 76,096 80,272
Selling, general, & administrative
expenses 55,062 50,553
Restructuring 850 -
---------------------------
Income from operations 20,184 29,719
Interest expense (2,010) (1,544)
Other income - net 1,509 2,671
--------------------------
Earnings from continuing operations
before income taxes 19,683 30,846
Provision for income taxes 3,386 10,148
--------------------------
Earnings from continuing operations 16,297 20,698
Earnings from discontinued operations (net
of income taxes) - 53
Cumulative effect of accounting change
(net of income taxes) 70 -
--------------------------
Net earnings $16,367 $20,751
==========================
Earnings from continuing operations as a
percent of net sales 3.8% 5.2%
Earnings per share of common stock -basic:
Continuing operations $0.51 $0.60
Earnings from discontinued operations - -
Cumulative effect of accounting change - -
--------------------------
Net earnings -basic $0.51 $0.60
==========================
Earnings per share of common stock
-diluted:
Continuing operations $0.51 $0.60
Earnings from discontinued operations - -
Cumulative effect of accounting change - -
--------------------------
Net earnings -diluted $0.51 $0.60
==========================
Weighted average shares outstanding:
Basic 32,213 34,329
Diluted 32,346 34,631
Net cash provided by operating activities $8,264 $22,253
Dividends paid per share $0.1750 $0.1750
Comprehensive earnings, which represents net earnings adjusted by the
post-tax change in foreign-currency translation, minimum pension
liability and the effective portion of cash flow hedges recorded in
shareholders' equity, for the 3 month period ended June 26, 2006 and
2005, were $28,546 and $2,326, respectively.
---------------------------------------------------------------------
Condensed consolidated balance sheets (unaudited)
(In thousands)
----------------------------------------------------------------------
June 26, 2006 March 31, 2006
----------------------------------------------------------------------
Assets
-----------
Cash and cash equivalents $14,278 $30,798
Short term investments 2,295 -
Trade receivables - net 282,012 254,681
Inventories 120,206 90,227
Other current assets 44,228 36,489
------------- ------------
Total current assets 463,019 412,195
------------- ------------
Property, plant, and equipment - net 501,701 467,600
Other noncurrent assets 160,022 172,300
------------- ------------
Total assets $1,124,742 $1,052,095
------------- ------------
Liabilities and shareholders' equity
-------------------------------------------
Debt due within one year $6,349 $6,108
Accounts payable 187,872 187,048
Other current liabilities 119,064 101,793
------------- ------------
Total current liabilities 313,285 294,949
------------- ------------
Long-term debt 179,125 151,706
Deferred income taxes 39,797 38,424
Other noncurrent liabilities 72,150 61,591
------------- ------------
Total liabilities 604,357 546,670
------------- ------------
Shareholders' equity 520,385 505,425
------------- ------------
Total liabilities & shareholders'
equity $1,124,742 $1,052,095
------------- ------------
Modine Manufacturing Company
Condensed consolidated statements of cash flows
(unaudited)
(In thousands)
---------------------------------------------------------------------
Three months ended June 26, 2006 2005
---------------------------------------------------------------------
Net earnings $16,367 $20,751
Adjustments to reconcile net earnings with
cash provided
by operating activities:
Depreciation and amortization 17,285 17,033
Other - net 56 3,020
--------------------
33,708 40,804
--------------------
Net changes in operating assets and liabilities (25,444) (18,551)
--------------------
Cash flows provided by operating activities 8,264 22,253
--------------------
Cash flows from investing activities:
Expenditures for plant, property, & equipment (18,081) (11,656)
Acquisitions, net of cash (12,950) (37,193)
Investment in affiliates - -
Proceeds for dispositions of assets 18 21
Other- net 2 432
--------------------
Net cash used for investing activities (31,011) (48,396)
--------------------
Cash flows from financing activities:
Net increase in debt 22,753 42,000
Issuance of common stock, including treasury
stock - 1,387
Repurchase of common stock, treasury &
retirement (8,703) (5,618)
Cash dividends
paid (5,687) (6,081)
Other - net (1,707) 7,370
--------------------
Net cash provided by financing activities 6,656 39,058
--------------------
Effect of exchange rate changes on cash (429) (2,508)
--------------------
Net (decrease) / increase in cash and cash
equivalents (16,520) 10,407
--------------------
Cash and cash equivalents at beginning of the
period 30,798 55,091
--------------------
Cash and cash equivalents at end of the period $14,278 $65,498
--------------------
----------------------------------------------------------------------
Condensed segment operating results (unaudited)(3)
(In thousands)
----------------------------------------------------------------------
Three months ended
June 26,
---------------------
2006 2005
---------------------
Sales:
Original Equipment-Americas $180,136 $164,930
Original Equipment-Asia 55,933 57,827
Original Equipment-Europe 147,186 139,993
Commercial HVAC&R 39,359 28,456
Other 9,392 6,788
---------------------
Segment
sales 432,006 397,994
---------------------
Corporate and Administrative 1,053 793
Eliminations (2,666) (1,949)
---------------------
Total net
sales $430,393 $396,838
---------------------
Operating income/(loss):
Original Equipment-Americas $19,548 $20,926
Original Equipment-Asia 1,007 2,561
Original Equipment-Europe 19,188 21,015
Commercial HVAC&R 1,750 2,223
Other (5,017) (4,053)
---------------------
Segment operating income $36,476 $42,672
---------------------
(3) In the current year, one month of the Brazilian acquisition
results are included in the Original Equipment-Americas segment.
In the prior year, one month of the Airedale acquisition results
are included in Commercial HVAC&R segment.
(3) 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 not be consistent with similar measures presented by other
companies.
Modine Manufacturing Company
Return on average capital employed
(unaudited)
(Dollars in thousands)
----------------------------------------------------------------------
Trailing four quarters ended
June 26, 2006 2005
---------------------------------------------------------------------
Net earnings $56,421 $68,604
Plus interest expense net of tax benefit at total
company effective tax rate 5,476 4,362
------------------
Net return $61,897 $72,966
Divided by:
Average capital (debt + equity, last five quarter
ends / divided by 5) $686,257 $751,458
Return on average capital
employed 9.0% 9.7%
---------------------------------------------------------------------
Interest expense $7,713 $6,639
Total company effective tax
rate 29.0% 34.3%
Tax benefit 2,237 2,277
------------------
Interest expense, net of tax
benefit $5,476 $4,362
---------------------------------------------------------------------
(4) Definition - Earnings before interest, taxes, depreciation and
amortization (EBITDA)
----------------------------------------------------------------------
The sum of, net earnings and adding back provision for income taxes,
interest expense, discontiued operations, depreciation and
amortization: this is a financial measure of the profit generated
excluding the above mentioned items.
Management discussion concerning the use of the financial measure -
Earnings before interest, taxes, depreciation and amortization
----------------------------------------------------------------------
Earnings before interest, taxes, depreciation and amortization 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 EBITDA
provides investors with helpful supplemental information about the
Company's performance. This measure may not be consistent with similar
measures presented by other companies.
Modine Manufacturing Company
Earnings before interest, taxes, depreciation and
amortization (EBITDA) (unaudited)
(Dollars in thousands)
----------------------------------------------------------------------
Three months ended
June 26,
2006 2005
------------------
Net earnings $16,367 $20,751
Provision for income taxes (a) 3,431 10,148
Interest expense 2,010 1,544
Discontiued operations (b) - (53)
Depreciation and amortization (c) 17,285 15,928
------------------
EBITDA $39,093 $48,318
---------------------------------------------------------------------
(a) Provision for income taxes includes $45 of taxes related to the
cumulative effect of accounting change in the current year
(b) The calculation of EBITDA excludes the results of discontinued
operations for the periods presented
(c) Depreciation and amortization of $1,105 related to discontinued
operations was excluded from the prior year