Modine Manufacturing Company — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018, the company’s second quarter of fiscal 2019; comparative figures are for the quarter ended September 30, 2017. Six-month figures cover the periods ended September 30. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $548.9, up 8% from $508.3 | $1,115.0, up 9% from $1,023.8 |
| Gross profit / margin | $87.9 / 16.0%; prior 17.0% | $182.2 / 16.3%; prior 17.1% |
| Operating income | $22.8, down from $23.5 | $57.6, up from $51.1 |
| Net earnings attributable to Modine | $38.5; diluted EPS $0.75 | $60.5; diluted EPS $1.18 |
| Operating cash flow | Not separately reported for the quarter | $36.7, down from $72.8 |
| Capital expenditures | Not separately reported for the quarter | $37.9, versus $36.8 |
| Cash and cash equivalents | $35.8 at September 30, versus $39.3 at March 31 | |
| Debt | $479.9 total carrying amounts, including short-term debt and current portion, versus $479.4 at March 31 |
Quarterly gross margin declined 100 basis points, principally from higher material costs and temporary production inefficiencies associated with increased volumes and new program launches. Operating income fell 3% despite sales growth. Six-month operating income improved, but gross margin also narrowed. Six-month operating cash flow declined by $36.1, mainly because of working-capital needs; inventory and receivables used cash. Capital spending exceeded operating cash flow by $1.2.
Segments and material changes
- Vehicular Thermal Solutions (VTS): Quarterly sales rose 8% to $335.6, while operating income declined to $14.1 from $18.9; gross margin fell to 13.3% from 15.2%. New program launches, production inefficiencies, material costs and environmental charges weighed on results.
- Commercial and Industrial Solutions (CIS): Quarterly sales rose 9% to $178.2 and operating income increased to $12.9 from $9.0, supported by data center and commercial HVAC demand, volume and mix.
- Building HVAC Systems (BHVAC): Quarterly sales increased 4% to $50.7, while operating income fell to $4.8 from $6.3, including a $1.7 loss on sale of the South African business.
- Effective April 1, 2018, Modine reorganized its segments, combining regional vehicular operations into VTS and moving its Americas coils business into CIS; prior-year segment figures were recast.
Outlook, liquidity, risks and unusual items
- The $38.7 quarterly net earnings figure was substantially boosted by a $22.9 income tax benefit. Modine recorded $24.4 of tax benefits in the quarter from adjustments to provisional Tax Act accounting and recognition of foreign tax credits. Six-month net earnings also benefited materially from these items; the increase in earnings should not be read as equivalent operating improvement.
- Modine had $127.1 of available credit lines at September 30, including $125.9 under its U.S. revolver. Approximately $34.0 of cash was held by non-U.S. subsidiaries and could be subject to withholding taxes if repatriated. Management said it did not expect difficulty meeting global liquidity needs.
- The company was in compliance with debt covenants; reported leverage and interest coverage ratios were 2.4 and 8.7, respectively. Management expected continued covenant compliance through fiscal 2019 and beyond.
- Environmental investigation and remediation accruals were $18.7, up from $16.7 at March 31. Management did not expect a material adverse financial-position impact based on available information, while noting uncertainty and possible unfavorable outcomes.
- Modine completed the sale of its South African business for $0.5 and recorded a $1.7 loss, including a $0.8 write-off of accumulated currency translation losses. The business had annual sales below $2.0.
- Management cited material-cost inflation, tariffs and foreign-exchange changes, production and program-launch challenges, customer and supplier risks, environmental obligations, and uncertainty around U.S. tax reform among relevant risks. No specific financial guidance was provided in the supplied filing text.
- After quarter-end, on October 30, 2018, the board authorized a two-year share repurchase program of up to $50.0. The filing does not state that repurchases had begun under this new program.
Key facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus the $24.4 tax benefit, and how the company’s tax accounting estimates develop.
- Whether VTS can recover margins as material costs and launch-related inefficiencies ease, and whether CIS growth and margins persist.
- Whether working capital normalizes and operating cash flow improves relative to capital expenditures.
- Debt covenant headroom, available borrowing capacity and the effect of interest rates and foreign-exchange movements.
- Changes in environmental remediation estimates and the execution, timing and funding of the newly approved repurchase program.