Modine Manufacturing Company — Form 10-Q Summary
Business context and reporting period. This filing covers the quarter and six months ended September 30, 2019, the second quarter and first half of fiscal 2020. Modine operates through Vehicular Thermal Solutions (VTS), Commercial and Industrial Solutions (CIS), and Building HVAC Systems (BHVAC). All amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Quarter ended Sept. 30, 2019 | Prior-year quarter | Six months ended Sept. 30, 2019 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $500.2 | $548.9 | $1,029.2 | $1,115.0 |
| Gross profit / margin | $75.7 / 15.1% | $87.9 / 16.0% | $159.1 / 15.5% | $182.2 / 16.3% |
| Operating income / margin | $6.0 / 1.2% | $22.8 / 4.2% | $24.1 / 2.3% | $57.6 / 5.2% |
| Net income attributable to Modine | $(4.7) | $38.5 | $3.3 | $60.5 |
| Diluted EPS | $(0.09) | $0.75 | $0.06 | $1.18 |
- Revenue and segment trends: Quarterly sales fell 9%; first-half sales fell 8%. For the quarter, VTS sales decreased $36.3 (11%) and CIS decreased $21.5 (12%), while BHVAC increased $5.3 (10%). The first-half pattern was similar: VTS down $62.6, CIS down $36.6, and BHVAC up $9.3.
- Margins and earnings: Gross margin declined 90 basis points in the quarter and 80 basis points year to date. Higher labor and inflationary costs, lower volume, customer price reductions, and sales mix pressured results; lower material costs partly offset these effects. Operating income also reflected $11.9 of quarterly and $20.2 of first-half costs for the VTS automotive strategic review.
- Cash flow and investment: First-half operating cash flow was $17.5, down from $36.7. Capital expenditures were $41.4, up from $37.9; operating cash flow less capital expenditures was therefore negative $23.9. Cash, cash equivalents and restricted cash totaled $38.7 at period end, versus $42.2 at March 31, 2019.
- Liquidity and debt: Cash and cash equivalents were $32.3; the company reported $133.0 of available revolving-credit capacity. Balance-sheet debt carrying amounts totaled $465.2, including short-term debt of $139.4, current long-term debt of $93.6, and long-term debt of $232.2. The company reported leverage and interest-coverage ratios of 2.3 and 8.7, respectively, and compliance with debt covenants.
- Other balance-sheet items: Current assets were $642.4 and current liabilities $617.8. Inventory rose to $222.6 from $200.7 at March 31. Shareholders’ equity was $525.6, down from $541.1.
Material changes, outlook and risks
- Management said the automotive-business sale process was taking longer than anticipated because of challenging economic conditions, but the company remained committed to pursuing a sale. The filing provides no specific completion date or sale price guidance.
- Management expected to remain in compliance with debt covenants through the balance of fiscal 2020 and beyond; the filing provides no full-year revenue or earnings guidance.
- The prior-year comparison benefited from $24.4 of income-tax benefits related to U.S. tax reform and foreign tax credits. In the current quarter, Modine recorded a $3.7 tax provision despite a pretax loss; the reported effective tax rate was unusually high and negative.
- Restructuring expenses were $2.3 for the quarter and $4.1 for the first half, mainly for targeted headcount reductions and plant/product-line consolidation. Environmental accruals were $18.6; the company said current estimates did not indicate a material adverse effect, while noting uncertainty and possible significant damages.
- Modine adopted lease accounting guidance on April 1, 2019, recognizing operating-lease right-of-use assets of $61.3 and corresponding liabilities. Management said adoption did not materially affect the statements of operations or cash flows.
- Key disclosed risks include weaker economic and end-market conditions, foreign-exchange movements, tariffs and inflation, customer pricing pressure, supply and operating disruptions, environmental matters, variable-rate debt exposure, and the ability to complete the automotive-business sale and realize its value.
Important facts for investors to verify
- Progress, terms, timing and costs of the proposed VTS automotive-business sale; strategic-review costs totaled $20.2 in the first half.
- Whether sales and margins stabilize in VTS and CIS, and whether BHVAC growth and margin improvement continue.
- Cash conversion and funding needs: first-half operating cash flow of $17.5 was below capital expenditures of $41.4.
- Debt balances, variable interest rates, covenant headroom, and the distinction between cash and restricted cash.
- Tax-rate drivers and realization of deferred tax assets; valuation allowances included $37.6 for certain foreign deferred tax assets and $7.4 for certain U.S. assets.