PART I. FINANCIAL INFORMATION
CONSOLIDATED RESULTS OF OPERATIONS
The following table presents our consolidated financial results on a comparative basis for the three and six months ended September 30, 2019 and 2018:
|
|
Three months ended September 30,
|
|
|
Six months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
(in millions)
|
|
$'s
|
|
|
% of sales
|
|
|
$'s
|
|
|
% of sales
|
|
|
$'s
|
|
|
% of sales
|
|
|
$'s
|
|
|
% of sales
|
|
Net sales
|
|
$
|
500.2
|
|
|
|
100.0
|
%
|
|
$
|
548.9
|
|
|
|
100.0
|
%
|
|
$
|
1,029.2
|
|
|
|
100.0
|
%
|
|
$
|
1,115.0
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
424.5
|
|
|
|
84.9
|
%
|
|
|
461.0
|
|
|
|
84.0
|
%
|
|
|
870.1
|
|
|
|
84.5
|
%
|
|
|
932.8
|
|
|
|
83.7
|
%
|
Gross profit
|
|
|
75.7
|
|
|
|
15.1
|
%
|
|
|
87.9
|
|
|
|
16.0
|
%
|
|
|
159.1
|
|
|
|
15.5
|
%
|
|
|
182.2
|
|
|
|
16.3
|
%
|
Selling, general and administrative expenses
|
|
|
67.4
|
|
|
|
13.5
|
%
|
|
|
63.4
|
|
|
|
11.5
|
%
|
|
|
130.9
|
|
|
|
12.7
|
%
|
|
|
122.7
|
|
|
|
11.0
|
%
|
Restructuring expenses
|
|
|
2.3
|
|
|
|
0.4
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
4.1
|
|
|
|
0.4
|
%
|
|
|
0.2
|
|
|
|
-
|
|
Loss on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
1.7
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
1.7
|
|
|
|
0.1
|
%
|
Operating income
|
|
|
6.0
|
|
|
|
1.2
|
%
|
|
|
22.8
|
|
|
|
4.2
|
%
|
|
|
24.1
|
|
|
|
2.3
|
%
|
|
|
57.6
|
|
|
|
5.2
|
%
|
Interest expense
|
|
|
(5.8
|
)
|
|
|
-1.1
|
%
|
|
|
(6.5
|
)
|
|
|
-1.2
|
%
|
|
|
(11.7
|
)
|
|
|
-1.1
|
%
|
|
|
(12.7
|
)
|
|
|
-1.1
|
%
|
Other expense – net
|
|
|
(1.3
|
)
|
|
|
-0.3
|
%
|
|
|
(0.5
|
)
|
|
|
-0.1
|
%
|
|
|
(2.4
|
)
|
|
|
-0.2
|
%
|
|
|
(1.6
|
)
|
|
|
-0.1
|
%
|
(Loss) earnings before income taxes
|
|
|
(1.1
|
)
|
|
|
-0.2
|
%
|
|
|
15.8
|
|
|
|
2.9
|
%
|
|
|
10.0
|
|
|
|
1.0
|
%
|
|
|
43.3
|
|
|
|
3.9
|
%
|
(Provision) benefit for income taxes
|
|
|
(3.7
|
)
|
|
|
-0.7
|
%
|
|
|
22.9
|
|
|
|
4.2
|
%
|
|
|
(6.6
|
)
|
|
|
-0.6
|
%
|
|
|
17.9
|
|
|
|
1.6
|
%
|
Net (loss) earnings
|
|
$
|
(4.8
|
)
|
|
|
-1.0
|
%
|
|
$
|
38.7
|
|
|
|
7.1
|
%
|
|
$
|
3.4
|
|
|
|
0.3
|
%
|
|
$
|
61.2
|
|
|
|
5.5
|
%
|
Comparison of Three Months Ended September 30, 2019 and 2018
Second quarter net sales of $500.2 million were $48.7 million, or 9 percent, lower than the second quarter of the prior year, primarily due to lower sales in our VTS and CIS segments and a $10.9 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in our BHVAC segment. Sales decreased $36.3 million and $21.5 million in our VTS and CIS segments, respectively. Sales increased $5.3 million in our BHVAC segment.
Second quarter cost of sales decreased $36.5 million, or 8 percent, primarily due to lower sales volume and a $9.4 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 90 basis points to 84.9 percent and was negatively impacted by approximately 90 basis points due to higher labor and inflationary costs and, to a lesser extent, by unfavorable customer pricing and sales mix. These negative impacts were partially offset by favorable material costs, which impacted costs of sales by approximately 50 basis points.
As a result of lower sales and higher cost of sales as a percentage of sales, second quarter gross profit decreased $12.2 million and gross margin declined 90 basis points to 15.1 percent.
Second quarter SG&A expenses increased $4.0 million. The increase in SG&A expenses was primarily due to $11.9 million of costs recorded at Corporate associated with our review of strategic alternatives for the VTS segment’s automotive business, which primarily related to third-party professional services and included costs incurred in the process of preparing for a potential sale of the automotive business assets. This increase was partially offset by lower compensation-related expenses, which decreased approximately $3.0 million, lower environmental charges related to a previously-owned manufacturing facility in the U.S, which decreased approximately $2.0 million, and a $1.0 million favorable impact from foreign currency exchange rate changes.
Restructuring expenses totaled $2.3 million in the second quarter of fiscal 2020 and primarily consisted of severance expenses in the VTS segment.
Operating income of $6.0 million in the second quarter of fiscal 2020 decreased $16.8 million compared with the second quarter of fiscal 2019. This decrease was primarily due to $11.9 million of costs associated with our review of strategic alternatives for our automotive business and lower earnings in our VTS and CIS segments, which decreased $6.7 million and $4.4 million, respectively, partially offset by higher earnings in our BHVAC segment, which increased $4.0 million.
The provision for income taxes was $3.7 million in the second quarter of fiscal 2020, compared with a benefit for income taxes of $22.9 million during the same period in the prior year. The $26.6 million change was primarily due to income tax benefits totaling $24.4 million recorded during the prior year resulting from our accounting for the Tax Cuts and Jobs Act (the “Tax Act”) and the recognition of tax assets for foreign tax credits.
Comparison of Six Months Ended September 30, 2019 and 2018
Fiscal 2020 year-to-date net sales of $1,029.2 million were $85.8 million, or 8 percent, lower than the same period last year, primarily due to lower sales in our VTS and CIS segments and a $28.7 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in our BHVAC segment. Sales decreased $62.6 million and $36.6 million in our VTS and CIS segments, respectively. Sales increased $9.3 million in our BHVAC segment.
Fiscal 2020 year-to-date cost of sales of $870.1 million decreased $62.7 million, or 7 percent, primarily due to lower sales volume and a $24.5 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 80 basis points to 84.5 percent and was negatively impacted by approximately 90 basis points due to higher labor and inflationary costs and, to a lesser extent, by unfavorable customer pricing and sales mix. These negative impacts were partially offset by favorable material costs, which impacted costs of sales by approximately 30 basis points. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.
As a result of lower sales and higher cost of sales as a percentage of sales, fiscal 2020 year-to-date gross profit decreased $23.1 million and gross margin declined 80 basis points to 15.5 percent.
Fiscal 2020 year-to-date SG&A expenses increased $8.2 million. The increase in SG&A expenses was primarily due to $20.2 million of costs associated with our review of strategic alternatives for our automotive business, which primarily related to third-party professional services and included costs incurred in the process of preparing for a potential sale of the automotive business assets. This increase was partially offset by lower compensation-related expenses, which decreased approximately $6.0 million, lower environmental charges related to a previously-owned manufacturing facility in the U.S, which decreased approximately $3.0 million, and a $2.6 million favorable impact from foreign currency exchange rate changes.
Restructuring expenses of $4.1 million during the first six months of fiscal 2020 increased $3.9 million compared with the same period last year, primarily due to higher severance expenses in our VTS segment.
Operating income of $24.1 million during the first six months of fiscal 2020, decreased $33.5 million compared with the same period last year. This decrease was primarily due to the $20.2 million of costs associated with our review of strategic alternatives for our automotive business and lower earnings in our VTS and CIS segments, which decreased $14.9 million and $8.6 million, respectively, partially offset by higher earnings in our BHVAC segment, which increased $6.1 million.
The provision for income taxes was $6.6 million during the first six months of fiscal 2020, compared with a benefit for income taxes of $17.9 million during the same period in the prior year. The $24.5 million change was primarily due to income tax benefits totaling $24.4 million recorded during the prior year resulting from our accounting for the Tax Act and the recognition of tax assets for foreign tax credits.
SEGMENT RESULTS OF OPERATIONS
The following is a discussion of our segment results of operations for the three and six months ended September 30, 2019 and 2018:
Vehicular Thermal Solutions
|
|
Three months ended September 30,
|
|
|
Six months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
(in millions)
|
|
$'s
|
|
|
% of sales
|
|
|
$'s
|
|
|
% of sales
|
|
|
$'s
|
|
|
% of sales
|
|
|
$'s
|
|
|
% of sales
|
|
Net sales
|
|
$
|
299.3
|
|
|
|
100.0
|
%
|
|
$
|
335.6
|
|
|
|
100.0
|
%
|
|
$
|
625.8
|
|
|
|
100.0
|
%
|
|
$
|
688.4
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
264.0
|
|
|
|
88.2
|
%
|
|
|
291.0
|
|
|
|
86.7
|
%
|
|
|
545.5
|
|
|
|
87.2
|
%
|
|
|
589.8
|
|
|
|
85.7
|
%
|
Gross profit
|
|
|
35.3
|
|
|
|
11.8
|
%
|
|
|
44.6
|
|
|
|
13.3
|
%
|
|
|
80.3
|
|
|
|
12.8
|
%
|
|
|
98.6
|
|
|
|
14.3
|
%
|
Selling, general and administrative expenses
|
|
|
26.0
|
|
|
|
8.7
|
%
|
|
|
30.5
|
|
|
|
9.1
|
%
|
|
|
52.1
|
|
|
|
8.3
|
%
|
|
|
58.9
|
|
|
|
8.5
|
%
|
Restructuring expenses
|
|
|
1.9
|
|
|
|
0.6
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
3.5
|
|
|
|
0.6
|
%
|
|
|
0.1
|
|
|
|
-
|
|
Operating income
|
|
$
|
7.4
|
|
|
|
2.5
|
%
|
|
$
|
14.1
|
|
|
|
4.2
|
%
|
|
$
|
24.7
|
|
|
|
3.9
|
%
|
|
$
|
39.6
|
|
|
|
5.8
|
%
|
Comparison of Three Months Ended September 30, 2019 and 2018
VTS net sales decreased $36.3 million, or 11 percent, from the second quarter of fiscal 2019 to the second quarter of fiscal 2020, primarily due to lower sales volume, a $6.6 million unfavorable impact of foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales to global off-highway and commercial vehicle customers decreased $17.3 million and $14.0 million, respectively.
VTS cost of sales decreased $27.0 million, or 9 percent, from the second quarter of fiscal 2019 to the second quarter of fiscal 2020, primarily due to lower sales volume and a $5.8 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 150 basis points to 88.2 percent. Beyond the unfavorable impact of the lower sales volume, higher labor and inflationary costs and unfavorable customer pricing negatively impacted cost of sales by approximately 100 basis points and 70 basis points, respectively. Higher depreciation costs, primarily resulting from recent manufacturing capacity expansion in China and Hungary, also negatively impacted cost of sales to a lesser extent. These negative impacts were partially offset by favorable material costs, which impacted cost of sales by approximately 90 basis points, and improved operating efficiencies. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $9.3 million and gross margin declined 150 basis points to 11.8 percent.
SG&A expenses decreased $4.5 million, or 40 basis points as a percentage of sales, primarily due to lower compensation-related expenses, which decreased approximately $2.0 million, lower environmental charges related to a previously-owned manufacturing facility in the U.S, which decreased approximately $2.0 million, and a $0.5 million favorable impact of foreign currency exchange rate changes.
Restructuring expenses during the second quarter of fiscal 2020 totaled $1.9 million and primarily consisted of severance expenses resulting from targeted headcount reductions in Europe and in the Americas.
Operating income decreased $6.7 million to $7.4 million during the second quarter, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Comparison of Six Months Ended September 30, 2019 and 2018
VTS year-to-date net sales decreased $62.6 million, or 9 percent, from the same period last year, primarily due to lower sales volume, an $18.7 million unfavorable impact of foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales to customers in Europe decreased $38.6 million and sales to off-highway customers in Asia and North America decreased $14.5 million and $7.2 million, respectively.
VTS year-to-date cost of sales decreased $44.3 million, or 8 percent, primarily due to lower sales volume and a $16.1 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 150 basis points to 87.2 percent. Beyond the unfavorable impact of the lower sales volume, higher labor and inflationary costs and unfavorable customer pricing negatively impacted cost of sales by approximately 100 basis points and 70 basis points, respectively. These negative impacts were partially offset by favorable material costs, which impacted cost of sales by approximately 50 basis points, and improved operating efficiencies. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $18.3 million and gross margin declined 150 basis points to 12.8 percent.
VTS year-to-date SG&A expenses decreased $6.8 million, or 20 basis points as a percentage of sales, primarily due to lower compensation-related expenses, which decreased approximately $4.0 million, lower environmental charges related to a previously-owned manufacturing facility in the U.S, which decreased approximately $3.0 million, and a $1.5 million favorable impact of foreign currency exchange rate changes.
Restructuring expenses increased $3.4 million, primarily due to higher severance expenses resulting from targeted headcount reductions in Europe and in the Americas during the current year.
Operating income decreased $14.9 million to $24.7 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Commercial and Industrial Solutions
|
|
Three months ended September 30,
|
|
|
Six months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
(in millions)
|
|
$'s
|
|
|
% of sales
|
|
|
$'s
|
|
|
% of sales
|
|
|
$'s
|
|
|
% of sales
|
|
|
$'s
|
|
|
% of sales
|
|
Net sales
|
|
$
|
156.7
|
|
|
|
100.0
|
%
|
|
$
|
178.2
|
|
|
|
100.0
|
%
|
|
$
|
325.5
|
|
|
|
100.0
|
%
|
|
$
|
362.1
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
133.8
|
|
|
|
85.4
|
%
|
|
|
149.9
|
|
|
|
84.1
|
%
|
|
|
278.3
|
|
|
|
85.5
|
%
|
|
|
305.2
|
|
|
|
84.3
|
%
|
Gross profit
|
|
|
22.9
|
|
|
|
14.6
|
%
|
|
|
28.3
|
|
|
|
15.9
|
%
|
|
|
47.2
|
|
|
|
14.5
|
%
|
|
|
56.9
|
|
|
|
15.7
|
%
|
Selling, general and administrative expenses
|
|
|
14.0
|
|
|
|
9.0
|
%
|
|
|
15.4
|
|
|
|
8.7
|
%
|
|
|
29.1
|
|
|
|
8.9
|
%
|
|
|
30.7
|
|
|
|
8.5
|
%
|
Restructuring expenses
|
|
|
0.4
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
0.6
|
|
|
|
0.2
|
%
|
|
|
0.1
|
|
|
|
-
|
|
Operating income
|
|
$
|
8.5
|
|
|
|
5.4
|
%
|
|
$
|
12.9
|
|
|
|
7.2
|
%
|
|
$
|
17.5
|
|
|
|
5.4
|
%
|
|
$
|
26.1
|
|
|
|
7.2
|
%
|
Comparison of Three Months Ended September 30, 2019 and 2018
CIS net sales decreased $21.5 million, or 12 percent, from the second quarter of fiscal 2019 to the second quarter of fiscal 2020, primarily due to lower sales volume and a $3.3 million unfavorable impact of foreign currency exchange rate changes. Sales to commercial HVAC&R and data center cooling customers decreased $11.7 million and $9.3 million, respectively.
CIS cost of sales decreased $16.1 million, or 11 percent from the second quarter of fiscal 2019 to the second quarter of fiscal 2020, primarily due to lower sales volume and a $2.8 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 130 basis points to 85.4 percent, primarily due to the unfavorable impact of lower sales volume and unfavorable sales mix.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $5.4 million and gross margin declined 130 basis points to 14.6 percent.
SG&A expenses decreased $1.4 million compared with the prior year yet increased 30 basis points as a percentage of sales. The decrease in SG&A was primarily due to lower compensation-related expenses, which decreased approximately $1.0 million, and cost-control initiatives.
Operating income decreased $4.4 million to $8.5 million during the second quarter, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Comparison of Six Months Ended September 30, 2019 and 2018
CIS year-to-date net sales decreased $36.6 million, or 10 percent, from the same period last year, primarily due to lower sales volume and a $7.9 million unfavorable impact of foreign currency exchange rate changes. Sales to data center cooling and commercial HVAC&R customers decreased $19.2 million and $16.1 million, respectively.
CIS year-to-date cost of sales decreased $26.9 million, or 9 percent, primarily due to lower sales volume and a $6.8 million favorable foreign currency exchange rate impact. As a percentage of sales, cost of sales increased 120 basis points to 85.5 percent, primarily due to the unfavorable impact of lower sales volume and unfavorable sales mix.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $9.7 million and gross margin declined 120 basis points to 14.5 percent.
CIS year-to-date SG&A expenses decreased $1.6 million compared with the prior year yet increased 40 basis points as a percentage of sales. The decrease in SG&A was primarily due to a $0.7 million favorable impact of foreign currency exchange rate changes, cost-control initiatives, and lower compensation-related expenses.
Operating income decreased $8.6 million to $17.5 million, primarily due to lower gross profit.
Building HVAC Systems
|
|
Three months ended September 30,
|
|
|
Six months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
(in millions)
|
|
$'s
|
|
|
% of sales
|
|
|
$'s
|
|
|
% of sales
|
|
|
$'s
|
|
|
% of sales
|
|
|
$'s
|
|
|
% of sales
|
|
Net sales
|
|
$
|
56.0
|
|
|
|
100.0
|
%
|
|
$
|
50.7
|
|
|
|
100.0
|
%
|
|
$
|
105.0
|
|
|
|
100.0
|
%
|
|
$
|
95.7
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
38.3
|
|
|
|
68.3
|
%
|
|
|
35.7
|
|
|
|
70.5
|
%
|
|
|
73.6
|
|
|
|
70.1
|
%
|
|
|
69.1
|
|
|
|
72.2
|
%
|
Gross profit
|
|
|
17.7
|
|
|
|
31.7
|
%
|
|
|
15.0
|
|
|
|
29.5
|
%
|
|
|
31.4
|
|
|
|
29.9
|
%
|
|
|
26.6
|
|
|
|
27.8
|
%
|
Selling, general and administrative expenses
|
|
|
8.9
|
|
|
|
15.9
|
%
|
|
|
8.5
|
|
|
|
16.7
|
%
|
|
|
17.3
|
|
|
|
16.5
|
%
|
|
|
16.9
|
|
|
|
17.7
|
%
|
Loss on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
1.7
|
|
|
|
3.4
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
1.7
|
|
|
|
1.8
|
%
|
Operating income
|
|
$
|
8.8
|
|
|
|
15.8
|
%
|
|
$
|
4.8
|
|
|
|
9.4
|
%
|
|
$
|
14.1
|
|
|
|
13.4
|
%
|
|
$
|
8.0
|
|
|
|
8.3
|
%
|
Comparison of Three Months Ended September 30, 2019 and 2018
BHVAC net sales increased $5.3 million, or 10 percent, from the second quarter of fiscal 2019 to the second quarter of fiscal 2020, primarily due to higher sales volume, partially offset by a $1.0 million unfavorable impact of foreign currency exchange rate changes. Sales of ventilation and heating products in North America increased $3.6 million and $2.8 million, respectively.
BHVAC cost of sales increased $2.6 million, or 7 percent from the second quarter of fiscal 2019 to the second quarter of fiscal 2020, primarily due to higher sales volume, partially offset by a $0.9 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 220 basis points to 68.3 percent and was positively impacted by favorable sales mix and customer pricing.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $2.7 million and gross margin improved 220 basis points to 31.7 percent.
SG&A expenses increased $0.4 million from the prior year, yet decreased 80 basis points as a percentage of sales.
During the second quarter of fiscal 2019, we sold our business in South Africa and, as a result, recorded a loss of $1.7 million.
Operating income of $8.8 million increased $4.0 million, primarily due to higher gross profit and the loss on sale of the South African business in the prior year.
Comparison of Six Months Ended September 30, 2019 and 2018
BHVAC year-to-date net sales increased $9.3 million, or 10 percent from the same period last year, primarily due to higher sales volume, partially offset by a $2.1 million unfavorable impact of foreign currency exchange rate changes. Sales of ventilation and heating products in North America increased $6.9 million and $3.8 million, respectively.
BHVAC year-to-date cost of sales increased $4.5 million, or 7 percent from the same period last year, primarily due to higher sales volume, partially offset by a $1.8 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 210 basis points to 70.1 percent, primarily due to favorable sales mix and customer pricing.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8 million and gross margin improved 210 basis points to 29.9 percent.
BHVAC year-to-date SG&A expenses increased $0.4 million from the prior year yet decreased 120 basis points as a percentage of sales.
Operating income of $14.1 million increased $6.1 million, primarily due to higher gross profit and the loss on sale of our South African business in the prior year.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of September 30, 2019 of $32.3 million, and an available borrowing capacity of $133.0 million under our revolving credit facility. Given our extensive international operations, approximately $29.0 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.
Net cash provided by operating activities for the six months ended September 30, 2019 was $17.5 million, which represents a $19.2 million decrease compared with $36.7 million of net cash provided by operating activities during the same period in the prior year. This decrease in operating cash flow was primarily due to lower operating earnings in the current year and payments associated with our strategic review of alternatives for the VTS segment’s automotive business, partially offset by favorable net changes in working capital. The favorable changes in working capital during the first six months of fiscal 2020, compared with the same period in the prior year, included lower employee benefit and incentive compensation payments. Capital expenditures of $41.4 million during the first six months of fiscal 2020 increased $3.5 million compared with the same period in the prior year, primarily due to capital investments associated with preparing for the potential sale of our automotive business.
Debt
Our debt agreements require us to maintain compliance with various covenants. As specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, under our primary debt agreements in the U.S., we are subject to a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense. As of September 30, 2019, our leverage ratio and interest coverage ratio were 2.3 and 8.7, respectively. We were in compliance with our debt covenants as of September 30, 2019 and expect to remain in compliance during the balance of fiscal 2020 and beyond.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. 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, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2019. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
|
•
|
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs (and potential trade war impacts resulting from tariffs or retaliatory actions), inflation, changes in interest rates, recession and recovery therefrom, restrictions and uncertainty associated with cross-border trade, and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, that have been or may be implemented in the United States or by its trade partners, as well as continuing uncertainty regarding the timing and the short- and long-term implications of “Brexit”;
|
|
•
|
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums or fabrication costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs and the behavior of our suppliers. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
|
|
•
|
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
|
Operational Risks:
|
•
|
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
|
|
•
|
Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
|
|
•
|
Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;
|
|
•
|
Unanticipated product or manufacturing difficulties or operating inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims;
|
|
•
|
Unanticipated delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
|
|
•
|
Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;
|
|
•
|
Our ability to effectively and efficiently reduce our cost structure in response to sales volume declines and to complete restructuring activities and realize the anticipated benefits of those activities;
|
|
•
|
Costs and other effects of the investigation and remediation of environmental contamination; particularly when related to the actions or inactions of others and/or facilities over which we have no control;
|
|
•
|
Our ability to recruit and maintain talent, including personnel in managerial, leadership and administrative functions, in light of tight global labor markets;
|
|
•
|
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
|
|
•
|
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
|
|
•
|
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
|
|
•
|
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
|
|
•
|
The constant and increasing pressures associated with healthcare and associated insurance costs; and
|
|
•
|
Costs and other effects of unanticipated litigation, claims, or other obligations.
|
Strategic Risks:
|
•
|
Our ability to successfully realize anticipated benefits from our increased “industrial” market presence, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our VTS business;
|
|
•
|
Our ability to successfully separate and sell our automotive business within our VTS segment at a price that is sufficient to maximize the value of the business, and in order to optimize the segment’s future financial performance;
|
|
•
|
Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and
|
|
•
|
The potential impacts from unanticipated actions by activist shareholders, including disruption of our business and related costs.
|
Financial Risks:
|
•
|
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of an unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
|
|
•
|
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;
|
|
•
|
Our ability to maintain our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) in our target range of 1.5 to 2.5 in an efficient manner;
|
|
•
|
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
|
|
•
|
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
|
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.