RACINE, Wis. — Modine Manufacturing Co. has reported its financial results for the first quarter of fiscal 2010.
Sales volumes declined 42 percent from a year ago as a result of the weakened economy, instability in the global financial markets, and a corresponding downturn in the company’s vehicular markets, yet were relatively flat compared to the fourth quarter of fiscal 2009. Gross margin of 14.1 percent declined 250 basis points from the first quarter of fiscal 2009 based on lower sales volumes and the corresponding underabsorption of fixed costs in the company’s manufacturing facilities.
On a sequential basis, however, the company said gross margin rose 480 basis points from the fourth quarter of fiscal 2009 and reached its highest level in four quarters, reflecting a reduction in direct and indirect costs in the company’s manufacturing facilities and lower material costs. Selling, general & administrative expenses decreased $20 million, or 34.1 percent, from the first quarter of fiscal 2009, reflecting the company’s intense focus on lowering its cost structure commensurate with the decline in sales.
The company completed the sale of its joint venture in China for $4.9 million and recognized a gain on sale of $1.5 million as part of its continuing portfolio rationalization strategy.
Adjusted EBITDA of $16.8 million during the first quarter of fiscal 2010 exceeded the company’s expectations and contributed to the cumulative excess adjusted EBITDA of $40.5 million over the company’s minimum required adjusted EBITDA loan covenant for the two quarters ended June 30.
“Given the continued global recessionary pressures on our business, we are pleased with the sequential improvement in Modine’s performance during the first quarter of fiscal 2010,” said Thomas Burke, Modine president and chief executive officer. “Although sales declined 42 percent versus a year ago, sales levels have stabilized versus the fourth quarter of fiscal 2009 and we are seeing the benefits of our focus on SG&A cost reduction, as well as the impact from our repositioning actions taken throughout fiscal 2009. During the first quarter, we were able to reduce our total SG&A costs by $20 million, while the gross margin improved for the first time in four quarters, rising 480 basis points from the fourth quarter of fiscal 2009. Adjusted EBITDA of $16.8 million was at its highest level since the second quarter of last year. Although we anticipate the next several quarters will remain challenging, we are encouraged by the performance trends in the business and believe Modine is well positioned for profitable growth as market volumes recover. We remain encouraged with the rate of new order intake, including a significant new truck module order utilizing our advanced Origami technology. The fundamental growth drivers of the business – emissions reduction, energy efficiency and infrastructure investment – remain intact."
“Given the overall market conditions, we are very pleased with our underlying operational improvements which enabled us to generate cash flow and provide additional cushion against our adjusted EBITDA loan covenant,” said Bradley Richardson, executive vice president – corporate strategy and chief financial officer. “We believe we have sufficient liquidity to manage our business and remain in compliance with our loan covenants. This is based on the company’s available borrowing capacity, the more than $40 million in cumulative cushion built at the end of the first quarter with respect to our adjusted EBITDA covenant, as well as our anticipated fiscal 2010 results and further actions we have at our discretion.”
Operating cash flows were $8 million in the first quarter of fiscal 2010, compared with $15.1 million in the comparable period of fiscal 2009. The decrease in operating cash flows year over year was primarily driven by the larger reported net loss during the period, partially offset by the positive impact of the company’s working capital management initiatives. The company’s net debt (debt less cash on hand) at June 30 was $228.9 million, compared to $205.7 million at March 31. The company’s net debt level has risen primarily as a result of the company’s decision to invest during the first quarter in previously committed new program launches and the previously announced construction of facilities in support of future growth. Inclusive of this investment, planned capital spending is expected to remain at or below $65 million in fiscal 2010. As of June 30, the company had available borrowing capacity of approximately $97 million, subject to its ability to comply with ongoing debt covenants.
The global recession continues to have an adverse impact on the company’s sales volumes. This trend is expected to continue to adversely affect the company during fiscal 2010. The company’s expectations for fiscal 2010 include:
• Revenues up slightly from the first quarter 2010 run rate resulting from approximately $100 million in incremental sales volume from several new program launches globally;
• Favorable impact of significant cost reductions implemented in late fiscal 2009;
• Annual SG&A run rate of approximately $160 million; and
• Continued strong emphasis on preserving cash and liquidity.
“As we move forward in fiscal 2010, we are driving the fundamentals of our Four Point Plan,” concluded Burke. “We are beginning to see the benefits of the aggressive actions we have taken to improve profitability and lower our cost structure and are prepared to undertake further actions should they become necessary. Meanwhile, as the sequential performance improvement in the first quarter indicates, we are building momentum through a more focused product portfolio, significant cost reductions, continued strong emphasis on preserving cash and liquidity, and delivering on our customer commitments.”
