Modine Manufacturing Company — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2013, the second quarter of fiscal 2014; six-month results are also compared with the six months ended September 30, 2012. Amounts are in millions except per-share data. Modine manufactures thermal management products and reports North America, Europe, South America, Asia, and Commercial Products segments.
Financial performance
| Metric | Quarter ended September 30 | Six months ended September 30 |
|---|---|---|
| Net sales | $364.2, up 7.1% from $339.9 | $740.0, up 7.2% from $690.3 |
| Gross profit / margin | $57.2 / 15.7%, versus $52.5 / 15.5% | $119.1 / 16.1%, versus $104.2 / 15.1% |
| Operating income (loss) | $10.6, versus $(6.8) | $29.6, versus $(2.9) |
| Continuing-operations earnings (loss) | $5.0; $0.10 per diluted share | $15.6; $0.31 per diluted share |
| Net earnings attributable to Modine | $4.6, versus $(12.2) | $14.6, versus $(13.4) |
| Operating cash flow | Not presented separately for the quarter | $49.0, versus $26.8 |
Gross-margin improvement reflected higher sales volume and lower material costs, partly offset by accelerated depreciation in Germany. Quarter SG&A rose to $46.0 from $41.3; for the six months it was $88.4 versus $84.5. Interest expense was $3.2 for the quarter and $6.2 for the six months.
Balance sheet, debt, and liquidity
- At September 30, cash and equivalents were $59.9, compared with $23.8 at March 31, 2013. Current assets were $474.1 and current liabilities $327.9.
- Debt totaled $169.4: $36.9 short-term debt, $1.1 current long-term debt, and $131.4 long-term debt. The company had no borrowings under its revolving facilities.
- Available credit lines totaled $215.0, including $167.0 available under the U.S. facility. The new $175.0 multi-currency credit agreement expires in August 2018.
- Capital expenditures were $21.4 for the first six months. Cash flow from operations increased year over year, primarily due to improved operating income and Airedale-fire insurance recoveries.
- Modine reported compliance with debt covenants. Its four-quarter leverage ratio was 1.4 against a maximum of 3.25; interest coverage was 9.6 against a minimum of 3.0.
Material changes and segment trends
- Sales growth was led by Europe, up $20.1 in the quarter and $40.9 year to date, mainly on higher commercial-vehicle and automotive volumes. Europe’s gross margin declined to 10.6% in the quarter and 11.9% year to date, affected by prior-year customer pricing benefits, German accelerated depreciation, and higher scrap costs.
- North America operating income improved to $11.7 for the quarter and $26.0 year to date, supported by stronger gross margins. Off-highway demand remained weak.
- South America quarter sales fell $2.4, with currency movements offsetting volume and pricing improvements; operating income declined to $2.5.
- Asia sales rose, and operating losses narrowed, but the segment remained loss-making: $(1.1) for the quarter and $(1.4) year to date.
- Commercial Products quarter operating income fell to $1.2, partly due to higher SG&A and fire-related costs at Airedale.
- The prior-year periods included $16.7 of impairment charges and higher Europe restructuring costs. Their absence or reduction materially contributed to the year-over-year operating-income improvement.
Outlook, unusual items, and risks
- Management forecast flat to moderate growth by geographic region for the remainder of fiscal 2014, with continued weakness in global off-highway markets. It projected consolidated year-over-year sales growth of 3%–8% and diluted EPS of $0.50–$0.60, excluding Europe restructuring costs and certain Airedale-fire losses.
- A September 6 fire significantly damaged the Airedale facility in the United Kingdom, temporarily suspending production and some administrative operations. Modine secured temporary production capacity and began planning reconstruction. The lease requires rebuilding, estimated to cost approximately $50.0; the company recorded a $50.0 insurance receivable and corresponding liability, based on expected reimbursement.
- Insurance recoveries for business interruption and lost profits will be recorded when realized; fiscal 2014 recoveries may not be recognized until fiscal 2015. Management said expected recovery timing was not anticipated to significantly harm liquidity.
- During the quarter, the company recorded a $0.6 pre-tax customer-pricing adjustment relating to prior years. Management said it was not material to prior periods, the current interim statements, or projected fiscal 2014 results.
- Modine continued Europe restructuring and said it was evaluating additional actions. Environmental remediation accruals were $5.1. The company also maintained a full valuation allowance on deferred tax assets in the U.S. and certain foreign jurisdictions; realization of tax benefits remains uncertain.
- Management announced a proposed acquisition of U.K. air-handling-unit manufacturer Barkell, expected to close in fiscal Q4 2014 subject to due diligence and customary conditions, using cash on hand.
- Key risks include disruption or delays from the Airedale fire and reconstruction, execution of Europe restructuring, weak markets and customer demand, pricing pressure, currency and commodity-price changes, warranty or supplier issues, environmental matters, and the ability to realize tax assets.
Important facts for investors to verify
- Whether Airedale temporary production, reconstruction, and insurance proceeds—including business-interruption recoveries—proceed on the expected schedule and fully cover costs.
- Whether the 3%–8% sales and $0.50–$0.60 adjusted EPS outlook is achieved; the filing does not provide a GAAP EPS reconciliation in the cited outlook text.
- Whether sales growth converts into sustained margins, especially in Europe, and whether off-highway weakness persists.
- Whether Europe restructuring delivers expected savings and whether further restructuring charges are incurred.
- Whether Modine remains within debt covenants and how the Barkell acquisition affects cash and liquidity if completed.