Modine Manufacturing Company — Form 10-Q Summary
Reporting period: The quarter ended June 30, 2020, which Modine identifies as the first quarter of fiscal 2021. The filing is unaudited and compares the quarter with the three months ended June 30, 2019.
Financial performance
| Metric | Quarter ended June 30, 2020 | Prior-year quarter |
|---|---|---|
| Net sales | $347.8 million | $529.0 million |
| Gross profit / margin | $46.1 million / 13.3% | $83.4 million / 15.8% |
| Operating income (loss) | ($3.2) million | $18.1 million |
| Net earnings (loss) attributable to Modine | ($8.6) million; diluted EPS ($0.17) | $8.0 million; diluted EPS $0.16 |
| Cash from operations | $12.3 million | $0.5 million |
| Capital expenditures | $9.1 million | $20.3 million |
Sales fell 34%, primarily from COVID-19-related demand declines and temporary facility closures. Gross margin declined 250 basis points as lower volume weighed on absorption, despite cost-reduction efforts. SG&A decreased $18.8 million to $44.7 million; restructuring expense rose to $4.6 million from $1.8 million. Interest expense was $5.4 million. The tax benefit was $0.2 million versus a $2.9 million provision; the effective tax rate was 2.3% versus 26.1%.
Segments and material changes
- Commercial and Industrial Solutions (CIS): Sales fell 27% to $122.5 million; operating income was zero versus $9.0 million.
- Building HVAC Systems (BHVAC): Sales declined 3% to $47.6 million, while operating income increased to $7.1 million from $5.3 million and gross margin improved to 30.5%.
- Heavy Duty Equipment (HDE): Sales fell 43% to $123.5 million; the segment recorded an operating loss of $2.5 million versus income of $17.3 million.
- Automotive: Sales fell 45% to $62.1 million; operating loss was $3.8 million versus approximately break-even. Modine resumed its strategic-alternatives process and stated its intent to exit the automotive business.
- Effective April 1, 2020, Modine separated Automotive from the former Vehicular Thermal Solutions segment and reported HDE and Automotive separately; prior-year segment figures were recast.
Cash, debt and liquidity
At June 30, 2020, cash and cash equivalents were $77.2 million, up from $70.9 million at March 31, 2020. Current assets were $616.8 million and current liabilities $357.0 million. Debt comprised $25.2 million of short-term debt, $13.4 million of current long-term debt and $448.1 million of long-term debt. Revolver borrowings were $125.9 million, with $118.4 million available. Operating cash flow benefited from working-capital changes and lower separation and strategic-review payments; cash from operations exceeded capital expenditures by $3.2 million.
In May 2020, Modine amended its U.S. credit agreements, temporarily increasing leverage covenant limits for fiscal 2021 and 2022. It reported compliance at quarter-end, with a leverage ratio of 2.9 and interest coverage ratio of 7.0, and said it expected to remain compliant. Management stated that available liquidity was expected to meet obligations for the next twelve months and beyond, while noting pandemic-related uncertainty.
Outlook, risks and notable items
- COVID-19 significantly disrupted operations: facilities temporarily closed in March and April, and about half were operating at reduced production levels based on customer demand. Management cited staffing adjustments, furloughs, shorter work weeks, temporary salary reductions, expense controls and reduced or deferred capital spending.
- No specific revenue or earnings guidance was provided. Management’s liquidity outlook is subject to the duration and severity of the pandemic and possible further shutdowns or supply-chain and customer disruptions.
- Environmental investigation and remediation accruals were $18.1 million. Management did not expect the ultimate outcome, based on available information, to materially affect financial position, but noted uncertainty and the possibility of unfavorable outcomes.
- Deferred tax asset valuation allowances totaled $34.1 million in certain foreign jurisdictions and $15.3 million in the U.S.; further allowances could be required if financial outlooks or taxable income worsen.
- On August 4, 2020, CEO Thomas A. Burke stepped down and CFO Michael B. Lucareli became interim CEO. Modine expected approximately $5.0 million of severance expense in fiscal Q2, payable over three years.
- Modine expected to contribute approximately $20.0 million to U.S. pension plans during fiscal 2021; no contributions had been made in the reported quarter.
Important facts for investors to verify
- How quickly customer demand and production recover, especially in HDE and Automotive, and whether cost actions offset continued volume pressure.
- Progress, timing, costs and expected proceeds or other consequences of the planned Automotive exit.
- Liquidity, covenant headroom and debt access if pandemic effects persist; confirm covenant terms and borrowing availability as conditions change.
- Potential impairment or valuation impacts on goodwill and deferred tax assets, and developments in environmental matters.
- Actual CEO transition and severance costs, pension funding, and any subsequent changes to management’s outlook.