Modine Manufacturing Company — FY2019 Form 10-K
Reporting period: Fiscal year ended March 31, 2019. Although the request metadata references “2018 Q4,” this filing is an annual report for FY2019; it also reports quarterly results, including the quarter ended March 31, 2019. Amounts are U.S. dollars unless stated otherwise.
Business context and reporting period
Modine supplies thermal-management systems and components for vehicle OEMs and commercial, industrial, and building HVAC&R markets. Its three segments are Vehicular Thermal Solutions (VTS), Commercial and Industrial Solutions (CIS), and Building HVAC Systems (BHVAC). FY2019 reporting reflects a reorganization effective April 1, 2018; prior-year segment results were recast for comparison.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $2,212.7 million | $2,103.1 million |
| Gross profit / margin | $365.5 million / 16.5% | $356.5 million / 17.0% |
| Operating income / margin | $109.7 million / 5.0% | $92.2 million / 4.4% |
| Net earnings attributable to Modine | $84.8 million | $22.2 million |
| Diluted EPS | $1.65 | $0.43 |
| Cash from operating activities | $103.3 million | $124.2 million |
| Capital expenditures | $73.9 million | $71.0 million |
- Sales rose 5%, with higher sales in each segment, partly offset by a $28 million adverse currency impact. Gross margin declined 50 basis points, chiefly from material costs, tariffs, and temporary inefficiencies associated with higher volumes and program launches.
- Net earnings improved substantially, but the comparison was strongly affected by taxes: FY2019 recorded a $5.1 million tax benefit, versus a $39.5 million tax provision in FY2018. FY2018 included $38 million of provisional Tax Act charges; FY2019 included Tax Act-related benefits and recognition of foreign tax credits.
- Segment sales and operating income: VTS $1,351.7 million and $64.8 million; CIS $707.6 million and $53.4 million; BHVAC $212.4 million and $26.9 million. VTS operating income fell from $84.2 million; CIS and BHVAC operating income increased from $28.5 million and $20.3 million, respectively.
- Cash from operations declined $20.9 million, primarily due to working-capital movements, including higher inventory and employee-benefit payments. Cash from operations less capital expenditures was approximately $29.4 million, a derived measure.
- At year-end, cash and cash equivalents were $41.7 million; available revolving-credit capacity was $123.6 million. Total debt was approximately $450 million, down $30 million year over year. The reported leverage and interest-coverage ratios were 2.1 and 9.0; Modine reported covenant compliance.
- Current assets were $646.8 million and current liabilities $517.1 million (current ratio approximately 1.25, calculated). Total assets were $1,538.0 million. The domestic pension plans had an unfunded liability of approximately $67 million; expected FY2020 U.S. pension contributions were $3 million.
March-quarter results: FY2019 fourth-quarter sales were $556.7 million, gross profit $91.6 million, net earnings attributable to Modine $6.3 million, and diluted EPS $0.12. The comparable FY2018 quarter reported sales of $566.6 million, gross profit of $96.5 million, attributable earnings of $17.6 million, and diluted EPS of $0.34.
Outlook, commentary, risks, and unusual items
- Management provided market-based expectations for FY2020, but no consolidated numerical sales or earnings guidance. It expected relatively flat global automotive markets; declines in commercial-vehicle markets in North America, Europe, and Asia, with growth in South America; modest growth in most off-highway markets; and continued growth in CIS and BHVAC markets.
- Modine was evaluating strategic alternatives for its automotive business and said a sale was the most likely path, while noting no transaction was assured. It expected to complete its evaluation in FY2020 and remained committed to commercial-vehicle and off-highway businesses.
- FY2019 included $9.6 million of restructuring expense, $7 million of costs related to the automotive strategic review, and a $1.7 million loss on the sale of its South African BHVAC business. It also recorded a $0.4 million impairment charge related to a closed Austrian facility.
- Key exposures include customer concentration and pricing pressure, tariffs and commodity-cost increases, supplier constraints, foreign-exchange movements, variable-rate debt and LIBOR transition, market cyclicality, program-launch execution, environmental obligations, and the outcome of the automotive review. The ten largest customers generated 50% of sales; two customers each accounted for at least 10%.
- Environmental investigation and remediation accruals were $18.9 million at year-end. Management said currently known matters were not expected to have a material adverse effect, while acknowledging uncertainty and possible unfavorable outcomes.
- Modine expected adoption of the new lease standard in FY2020 to add approximately $60–$70 million of right-of-use assets and corresponding lease liabilities, without a material effect on earnings or cash flows.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Progress, timing, and financial implications of the automotive-business strategic review, including whether a sale is completed and how proceeds or retained costs are handled.
- Whether VTS can restore margins after tariff costs, program-launch inefficiencies, and planned commercial-vehicle program wind-downs.
- Whether CIS and BHVAC growth and profitability can continue to offset VTS pressure, particularly given customer concentration and variable demand from a large CIS technology customer.
- Debt maturities, floating-rate exposure, covenant headroom, and the effect of any interest-rate or reference-rate changes; the filing estimates a 100-basis-point rate increase would add about $3 million in annual interest expense.
- Cash conversion and working-capital trends, capital commitments of $23.6 million, and the availability and cost of refinancing upcoming debt maturities.
- Tax-benefit sustainability and realization of deferred tax assets, tax credits, and carryforwards; FY2019 earnings were materially influenced by tax items.
- Reconcile reported sales: the consolidated statements and segment summary report FY2019 sales of $2,212.7 million, while the revenue-disaggregation table in the supplied filing text shows segment totals of $2,271.7 million. The text does not explain this inconsistency.