Modine Manufacturing Company — Form 10-Q Summary
Reporting period: Three months ended June 30, 2011, the first quarter of fiscal 2012. Financial statements are unaudited; amounts below are in U.S. dollars unless stated otherwise. Management cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $417.9 million | $345.5 million |
| Gross profit / margin | $69.4 million / 16.6% | $59.0 million / 17.1% |
| Operating income / margin | $20.0 million / 4.8% | $16.8 million / 4.9% |
| Continuing-operations earnings | $13.1 million | $5.0 million |
| Net earnings attributable to Modine | $13.1 million | $5.0 million |
| Diluted EPS | $0.28 | $0.11 |
| Effective tax rate | 23.5% | 44.6% |
Sales increased 20.9%, reflecting higher volumes across segments and a $27.6 million favorable foreign-exchange impact. Commercial vehicle sales rose 34.8% and automotive sales 26.2%. Gross margin declined 50 basis points, with higher commodity costs and the absence of a $1.7 million prior-year postretirement curtailment gain contributing. SG&A rose $7.2 million but fell as a share of sales to 11.8% from 12.2%. Lower interest expense and a $3.7 million year-over-year swing in other income/expense—primarily foreign-currency loan effects—also supported earnings growth.
Segments and material period comparisons
- Sales increased in every segment. Original Equipment—Asia improved to $21.3 million from $12.0 million and returned to operating profit; new program launches and improved fixed-cost absorption contributed.
- Original Equipment—Europe sales rose to $166.8 million from $132.2 million, including $19.5 million from favorable currency. Margin fell to 15.0% from 16.3%, reflecting launch costs at low volumes and commodity inflation.
- Original Equipment—North America sales rose to $156.6 million from $141.7 million; margin eased to 14.4% from 14.7%.
- South America sales rose to $47.9 million from $36.8 million, but margin and operating income declined amid higher materials costs and SG&A.
- Commercial Products sales increased to $34.1 million from $27.7 million; margin improved to 27.9% from 27.3%.
The June 2010 comparative quarter was revised for previously identified errors: sales increased $0.363 million, while continuing-operations earnings decreased $0.378 million and diluted EPS decreased $0.01. Segment comparisons were also retrospectively adjusted for a management-reporting realignment of the Nuevo Laredo facility.
Cash flow, liquidity and debt
- Operating cash flow was negative $14.0 million, versus negative $21.4 million; management attributed the improvement mainly to stronger operating results and a lower U.S. pension contribution ($5.1 million versus $10.5 million).
- Investing cash flow was negative $11.4 million, including $12.6 million of capital expenditures. Financing cash flow was positive $40.3 million, including $75.0 million of long-term borrowings and $35.6 million of repayments. Cash rose $15.4 million to $48.3 million.
- At June 30, balance-sheet debt was $187.4 million, including $8.97 million short-term debt, $0.20 million current long-term debt and $178.2 million long-term debt. The company had $125 million of 6.83% Senior Notes and $42 million drawn on its $145 million domestic revolver.
- Available credit lines totaled $151.9 million, including $103 million under the domestic revolver. The company reported compliance with debt covenants. For the four quarters ended June 30, adjusted EBITDA was $110.5 million, interest coverage was 6.79x versus a 3.00x minimum, and leverage was 1.92x versus a 3.25x maximum.
- Current assets were $466.7 million and current liabilities $302.4 million at June 30. Capital-expenditure commitments were $30.3 million.
Outlook, risks and unusual items
For fiscal 2012, management expects sales growth of 12%–16% versus fiscal 2011, operating income of 4.1%–4.7% of sales, diluted EPS of $0.95–$1.05 and capital spending of $70–$75 million. The outlook assumes continued recovery in North American commercial vehicles, growth in Asian off-highway markets and improvement in several European and South American markets. Management expects to remain within debt covenants.
- Controls: Management concluded disclosure controls were not effective at June 30 due to material weaknesses in internal control identified in fiscal 2011, including inventory-management and trade-compliance deficiencies. Remediation work is underway.
- Trade compliance: The company disclosed import/export issues involving its Laredo, Texas warehouse and Nuevo Laredo, Mexico plant. After a $2.09 million payment to U.S. Customs, $2.438 million remained accrued. The ultimate outcome is uncertain, and additional duties or fines could be material.
- Environmental matters: The company recorded a $2.462 million reserve for groundwater contamination at its Brazil facility; preliminary estimated remediation costs were $1.7–$5.5 million. Other environmental reserves totaled $4.848 million. Outcomes remain uncertain.
- Other risks: Commodity-price increases and delays in passing costs to customers, foreign-exchange movements, customer and supplier risks, program-launch execution, warranty claims, market downturns and realization of tax benefits. The company maintained full valuation allowances against certain deferred tax assets.
- Unregistered plan transactions: The company reported that approximately 2.8 million shares purchased in employee plans over prior periods were not fully covered by timely registration statements. It said the omission created no additional shareholder dilution and did not believe potential liability was material, but civil or other penalties or claims are possible.
- Restructuring and repositioning costs were $0.078 million in the quarter; approximately $1.2 million of additional costs and $2.3 million of cash expenditures were anticipated through fiscal 2012 for previously announced closures.
Key facts for investors to verify
- Whether sales growth and the full-year guidance are sustained, and how much growth depends on foreign exchange and recovering end markets.
- Whether commodity-cost pressures, new-program launch costs and pricing pass-throughs affect margins.
- Progress in remediating inventory and trade-compliance control weaknesses and whether controls become effective.
- Final duties, penalties or other outcomes from the trade-compliance investigation, and the adequacy of the recorded reserve.
- Cash generation, capital spending and covenant headroom as debt and program investments evolve.
- Developments in Brazil remediation costs, related litigation and other environmental contingencies.
- The effect of the prior-period financial-statement revisions when assessing year-over-year comparisons.