Business context and reporting period
Modine Manufacturing Company filed this Form 10-Q for the quarter ended September 30, 2022, the second quarter of fiscal 2023. The company supplies thermal-management products and solutions through Climate Solutions and Performance Technologies, its new operating segments effective April 1, 2022. Comparative segment data was recast; the change did not affect consolidated results.
Financial performance
Unless noted otherwise, amounts are in millions of dollars. Quarter and six-month comparisons are against the periods ended September 30, 2021.
- Second quarter: Sales were $578.8, up 21%; gross profit was $96.2, with a 16.6% gross margin versus 13.8%; operating income was $36.8 versus $10.5; and net earnings attributable to Modine were $24.4 versus $0.4. Diluted EPS was $0.46 versus $0.01.
- First six months: Sales were $1,119.8, up 15%; gross profit was $179.6, with a 16.0% margin versus 14.3%; operating income was $62.4 versus $19.2; and net earnings attributable to Modine were $38.7 versus $2.7. Diluted EPS was $0.74 versus $0.05.
- Cash flow and investment: Six-month operating cash flow was $56.1, compared with cash used of $19.0 in the prior-year period. Capital expenditures were $23.0 versus $20.4. Inventory increased $12.5 from March 31, 2022.
- Liquidity and debt: At September 30, cash and cash equivalents were $70.1; short-term debt was $14.9, current long-term debt $21.3, and long-term debt $334.4. The company reported $178.0 of available capacity under its then-current revolver. In October, it amended its credit agreement to provide a $275.0 million revolver and term loans maturing in October 2027, extending the previous June 2024 maturities.
- Other metrics: The company reported leverage and interest-coverage covenant ratios of 1.7 and 12.7, respectively, and compliance with debt covenants. The effective tax rate was 20.8% for the quarter and 22.6% year to date. Foreign-currency translation losses were $23.9 for the quarter and $47.8 year to date, contributing to a six-month comprehensive loss attributable to Modine of $7.1.
Material changes versus prior periods
- Quarterly sales growth reflected higher volume and favorable pricing in both segments, partly offset by a $36.3 unfavorable currency impact. Year-to-date, currency reduced sales by $62.9.
- Quarterly gross margin improved 280 basis points; year-to-date margin improved 170 basis points. Pricing, volume and, in Climate Solutions, operating efficiencies helped offset higher labor, materials and other inflationary costs.
- Climate Solutions quarterly sales rose 18% to $255.9 and operating income increased to $32.7 from $13.9. Performance Technologies sales rose 22% to $330.0 and operating income increased to $16.3 from $2.1. Year-to-date Performance Technologies gross margin declined to 11.4% from 12.3%, despite higher sales.
- Quarterly interest expense rose $0.9, primarily due to interest-rate changes. Year-to-date SG&A increased $3.8, mainly from compensation-related costs.
- Prior-year comparisons included $3.3 of impairment charges in the quarter and a $6.6 loss on the Austrian air-cooled automotive business sale in the six-month period; neither item recurred in the current comparable periods. The prior-year six-month tax provision also benefited from a net $3.2 deferred-tax valuation-allowance adjustment.
Outlook, risks and unusual items
- The filing provides no specific numerical sales or earnings guidance. Management said liquidity sources should cover short- and long-term funding needs and expected covenant compliance to continue.
- Management cited supply-chain disruption, labor shortages, inflation in raw materials, energy and logistics, and Russia-Ukraine-related market effects. Selling-price increases and supplier engagement are among mitigation measures, but the company said it could not reasonably estimate the full future impact.
- The company had a full valuation allowance on U.S. deferred tax assets. It said a significant release, potentially reducing tax expense by up to $70.0, might become supportable in late fiscal 2023 or fiscal 2024; timing and amount are uncertain.
- Environmental remediation accruals were $18.3 at September 30. Modine said ultimate costs could exceed accruals, though currently available information did not indicate a material adverse effect on financial position. It also disclosed ordinary-course litigation and other contingencies.
- Six-month restructuring expense was $2.1, primarily severance from targeted European headcount reductions and facility/equipment-related costs. The company repurchased $2.6 of shares during the first six months and authorized a new repurchase program of up to $50.0, effective November 5, 2022.
Important facts for investors to verify
- Whether pricing and volume gains can continue to offset inflation, labor costs and supply constraints, and whether the margin recovery is sustainable, particularly in Performance Technologies.
- The impact of foreign-exchange movements: currency reduced second-quarter sales by $36.3 and year-to-date sales by $62.9, while translation losses materially reduced equity and comprehensive income.
- Debt costs and liquidity after the October credit-agreement amendment, including variable-rate exposure, facility availability and covenant headroom.
- Inventory conversion into sales and cash, given the $12.5 increase since fiscal year-end and management’s stated production needs.
- The timing and likelihood of any U.S. deferred-tax valuation-allowance release, and changes in environmental remediation estimates or other contingencies.