Business context and reporting period
Modine Manufacturing Company (NYSE: MOD) designs and manufactures thermal-management products for building and commercial HVAC&R, data centers, industrial applications, and on- and off-highway vehicles. The supplied filing is a Form 10-K for the fiscal year ended March 31, 2021—not a report for calendar 2020 Q4, as the request metadata suggests. Fiscal 2020 is the prior comparable year.
Modine reorganized its vehicular operations into Heavy Duty Equipment (HDE) and Automotive segments effective April 1, 2020; comparative segment results were recast. It is pursuing an exit from Automotive and implementing an “80/20” strategy to prioritize higher-growth, higher-return products and markets.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $1,808.4 million | $1,975.5 million |
| Gross profit / margin | $293.4 million / 16.2% | $307.5 million / 15.6% |
| Operating income (loss) | $(97.7) million | $37.9 million |
| Net income (loss) attributable to Modine | $(210.7) million | $(2.2) million |
| Diluted EPS | $(4.11) | $(0.04) |
| Cash from operations | $149.8 million | $57.9 million |
| Capital expenditures | $32.7 million | $71.3 million |
Sales fell 8% (approximately $167 million), mainly from lower volume in CIS, HDE and Automotive amid COVID-19 disruption; BHVAC sales increased. Gross margin improved 60 basis points as procurement and cost-reduction benefits more than offset lower volume and higher material costs. The operating loss primarily reflects $166.8 million of impairment charges, mostly on automotive businesses held for sale. A $90.2 million tax provision, including $116.5 million of valuation-allowance charges on deferred tax assets, contributed to the net loss.
Cash from operations rose by $91.9 million, largely due to working-capital timing and lower incentive-compensation, benefit and payroll-tax payments. Capital spending was reduced during the pandemic. Cash and cash equivalents were $37.8 million at year-end; total debt was approximately $340 million, down $143 million year over year. The company reported $238.1 million of available revolver capacity and stated it expected to meet short- and long-term funding needs. Debt covenant ratios at March 31, 2021 were 1.9 leverage and 9.3 interest coverage; the company reported compliance. Its current ratio, based on reported current assets and liabilities, was approximately 1.37.
Segment operating results: BHVAC sales were $240.6 million and operating income $47.2 million; CIS sales were $532.0 million and operating income $8.2 million; HDE sales were $682.1 million and operating income $36.8 million; Automotive sales were $398.3 million and operating loss $150.9 million. The filing’s segment revenue tables include intersegment sales, so segment totals exceed consolidated sales.
Material changes, outlook and risks
- Automotive disposals: The air-cooled business sale to Schmid Metall closed April 30, 2021; management estimated an approximately $6 million sale loss in FY2022 Q1. The liquid-cooled business sale to Dana remained subject to approvals and other closing conditions; management estimated a $20–$30 million sale loss at closing and said timing and final impact were uncertain. The company also continued evaluating exit options for other Automotive operations.
- FY2022 outlook: Management expected market recovery and growth across the HVAC markets it serves, stronger second-half recovery in CIS, and increased HDE sales from recovery and new business wins. It anticipated higher BHVAC sales, particularly from data centers, and planned to increase capital investment versus FY2021. No consolidated numerical revenue or earnings guidance is provided in the supplied text.
- Strategy and unusual items: Neil D. Brinker became CEO effective December 1, 2020. The company began using data analytics to focus resources on higher-return markets, including data-center cooling and ventilation, and is developing alternative-powertrain thermal solutions. Pandemic responses included furloughs, staffing adjustments, shorter work weeks, temporary salary reductions and reduced capital spending; most cost-saving measures were withdrawn in Q3. CEO transition costs were approximately $6.7 million.
- Principal risks: COVID-19 uncertainty; semiconductor and other supplier constraints, including resin delays; raw-material inflation and lagged customer price adjustments; customer and market concentration; foreign-exchange and variable-rate debt exposure; covenant and refinancing risk; execution of the Automotive exits; and potential impairment or further tax valuation allowances. Environmental remediation accruals were $16 million. The company reported $77.3 million of pension underfunding and expected approximately $13 million of U.S. pension contributions in FY2022.
- Other: No common dividends were paid in FY2021 or FY2020, and management did not intend to pay one in FY2022. The auditor issued an unqualified opinion on the financial statements and internal control; management also concluded internal control was effective.
Investor verification points
- Confirm progress, approvals, closing dates, proceeds and final sale losses for the Dana and Schmid transactions, and the plan for remaining Automotive operations.
- Assess whether the FY2021 cash-flow improvement is sustainable, given management’s emphasis on working-capital timing and deferred payroll taxes.
- Review the $116.5 million deferred-tax valuation-allowance charge, the basis for future realizability and sensitivity to taxable-income forecasts.
- Track recovery in CIS and vehicular end markets, BHVAC/data-center growth, and whether expected FY2022 investment produces returns under the 80/20 strategy.
- Monitor debt, variable-rate exposure, covenant headroom, pension funding needs, supplier availability and raw-material cost recovery.