Modine Manufacturing Company — Form 10-Q Summary
Business context and reporting period
For the quarter ended December 31, 2012, the third quarter of fiscal 2013; fiscal year ends March 31. Modine makes thermal management products across North America, Europe, South America, Asia, and Commercial Products. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $326.1 | $373.3 | $1,016.4 | $1,188.4 |
| Gross profit / margin | $48.2 / 14.8% | $60.1 / 16.1% | $152.5 / 15.0% | $192.3 / 16.2% |
| Operating income (loss) | $(3.8) | $17.2 | $(6.7) | $49.7 |
| Continuing-operations income (loss) | $(8.4) | $8.8 | $(21.2) | $22.3 |
| Net income (loss) attributable to Modine | $(8.7) | $9.0 | $(22.1) | $22.9 |
| Diluted EPS | $(0.19) | $0.19 | $(0.47) | $0.49 |
Q3 sales fell 12.6%; nine-month sales fell 14.5%. The nine-month gross margin declined 120 basis points. Results included impairment charges of $8.3 in Q3 and $25.1 year to date, plus Europe restructuring and repositioning expenses of $1.4 and $7.3, respectively. Nine-month SG&A declined $13.6, but rose as a share of sales as revenue contracted faster.
Nine-month operating cash flow was $41.4, versus $18.3 a year earlier. Capital expenditures were $33.6, compared with $45.3; operating cash flow less capital expenditures was approximately $7.8. Cash at December 31 was $32.9. Balance-sheet debt was $164.7, comprising $26.2 short-term debt, $0.9 current long-term debt, and $137.6 long-term debt. Current assets were $375.4 and current liabilities $241.5. Total available credit lines were $191.0; the company reported compliance with debt covenants.
Material changes and management commentary
- Sales weakness reflected lower commercial-vehicle and off-highway demand, planned wind-downs of automotive-module business and certain programs, and foreign-exchange effects. Q3 sales were also affected by a $9.0 unfavorable currency impact; the nine-month impact was $56.9.
- Europe recorded a Q3 operating loss of $5.7 versus income of $6.8 a year earlier; nine-month operating loss was $15.8 versus income of $26.8. Management attributed the deterioration to reduced volume, impairments, restructuring, and launch costs. Asia also remained loss-making, with nine-month operating loss of $7.1.
- Management expects additional Europe restructuring and repositioning expenses in Q4 FY2013 and beyond, with positive program effects expected to begin in fiscal 2014. The program targets cost alignment and a strategic focus on commercial-vehicle, off-highway, and engine markets.
- FY2013 outlook: net sales down 10%–12% versus FY2012; operating margin of 2.75%–3.25%; diluted EPS of $0.40–$0.45. The margin and EPS outlook excludes impairment and Europe restructuring charges. Management cited weak conditions in Europe, South America, and Asia, approximately $80 of planned program reductions, and unfavorable currency effects.
- Available covenant headroom was reported: four-quarter interest coverage was 7.76 against a 3.00 minimum, and leverage was 1.84 against a maximum of 3.25. Management expected continued covenant compliance.
Risks, contingencies, and unusual items
- A material weakness in internal control over financial reporting related to Europe VAT application had not been fully remediated. Management concluded disclosure controls were ineffective at December 31, 2012 and described remediation measures.
- The company had accrued approximately $5.0 for Europe VAT exposures, including interest and penalties, after recording $10.7 in fiscal 2012 and beginning payments. Environmental accruals were $5.7. Management did not expect environmental matters or other litigation to have a material adverse effect, while noting outcomes remain uncertain.
- Management maintained full valuation allowances against net deferred tax assets in the U.S. and certain foreign jurisdictions. It noted that the U.S. could cease to be in a cumulative three-year loss position during calendar 2013, which could affect the assessment.
- Prior-year comparative figures were revised for previously identified errors. A separate commodity-hedge error shifted $0.5 of pretax earnings from Q4 FY2012 into Q1 FY2013; management said it was not material to either period.
- Risks include persistent market weakness, execution of restructuring and program launches, customer and supplier pressures, currency and commodity-price volatility, VAT and environmental exposures, and realization of tax benefits.
Important facts for investors to verify
- Whether sales volumes and margins stabilize, particularly in Europe and Asia, and whether the program wind-downs match the stated assumptions.
- Progress, remaining costs, and timing of benefits from Europe restructuring; the outlook excludes related charges.
- Cash generation, working-capital trends, available credit, and covenant compliance if operating conditions weaken.
- Remediation of the VAT-related material weakness and the status or eventual resolution of VAT and tax matters.
- Whether FY2013 sales, operating-margin, and EPS guidance is achieved, including the impact of currency movements and excluded charges.