Business context and reporting period
Modine Manufacturing Company filed this Form 10-Q for the quarter ended September 30, 2020, the second quarter of fiscal 2021 (fiscal year ends March 31). Its businesses are reported in Commercial and Industrial Solutions (CIS), Building HVAC Systems (BHVAC), Heavy Duty Equipment (HDE), and Automotive. The company separated Automotive from its former Vehicular Thermal Solutions segment as it pursues an exit from automotive operations; prior-year segment results were recast.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data.
| Metric | Three months ended Sep. 30, 2020 | Prior-year quarter | Six months ended Sep. 30, 2020 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $461.4 | $500.2 | $809.2 | $1,029.2 |
| Gross profit / margin | $80.8 / 17.5% | $75.7 / 15.1% | $126.9 / 15.7% | $159.1 / 15.5% |
| Operating income / margin | $28.5 / 6.2% | $6.0 / 1.2% | $25.3 / 3.1% | $24.1 / 2.3% |
| Net earnings (loss), consolidated | $8.9 | $(4.8) | $0.5 | $3.4 |
| Net earnings attributable to Modine / diluted EPS | $8.6 / $0.17 | $(4.7) / $(0.09) | $0.0 / — | $3.3 / $0.06 |
- Quarterly sales fell 8%; gross margin expanded 240 basis points, while operating income rose $22.5 million. SG&A declined $16.6 million, partly reflecting lower strategic-review and compensation costs, offset in part by $5.5 million in CEO-transition and search expenses.
- Six-month sales declined 21%, and gross profit fell $32.2 million despite a 20-basis-point margin improvement. Operating income increased $1.2 million, chiefly due to lower corporate SG&A and stronger BHVAC and Automotive results.
- For the quarter, BHVAC sales increased 11%; CIS, HDE, and Automotive sales declined 14%, 12%, and 5%, respectively. For the six months, HDE sales fell 28%, CIS 21%, and Automotive 25%; BHVAC sales rose 4%.
- Operating cash flow was $87.3 million for the six months, versus $17.5 million a year earlier, largely due to favorable working-capital movements and lower separation and project-cost payments. Investing used $13.3 million; capital expenditures were $14.6 million, down $26.8 million year over year. Cash, cash equivalents, and restricted cash ended at $62.7 million, down $8.6 million from the period start.
- At September 30, cash and cash equivalents were $62.5 million; $42.0 million was held by non-U.S. subsidiaries and may incur withholding taxes if repatriated. Available revolver capacity was $191.4 million.
- Debt totaled approximately $404.4 million, including short-term debt, current maturities, and long-term debt, compared with approximately $482.4 million at March 31, 2020. Revolver and term-loan weighted-average rates were each 2.8%. The company reported covenant compliance, a 2.2 leverage ratio, and 8.0 interest-coverage ratio.
Material changes, outlook, risks, and unusual items
- COVID-19: Temporary facility closures in March and April disrupted production and demand, particularly in the first quarter. All temporarily closed facilities had reopened and were trending toward normal production. Cost controls, furloughs, shorter work weeks, salary reductions, and lower discretionary spending supported the second-quarter results. Management expected to reduce furloughs and other temporary measures, making cost-saving benefits—especially in SG&A—less significant in the second half. No numerical earnings or revenue guidance is provided.
- Automotive sale: On November 2, 2020, Modine announced a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated, subject to approvals and customary conditions, with closing expected in the first half of calendar 2021. The business generated approximately $130.0 million of sales in the first six months of fiscal 2021 and had approximately $140.0 million of net assets at September 30. Modine does not expect significant net cash proceeds. It preliminarily expects a non-cash impairment charge of $120–$130 million in the third quarter and an additional sale loss at closing; the latter was not estimable, and the impairment estimate could change materially. Modine is also evaluating strategic alternatives for its other automotive businesses.
- Leadership and restructuring: Thomas A. Burke stepped down as President and CEO in August; CFO Michael B. Lucareli became interim CEO. Six-month restructuring expense was $6.1 million, including plant consolidation and targeted headcount reductions. Production transfers in China and to Mexico were under way.
- Taxes: The second-quarter tax provision included a $6.6 million charge to increase the U.S. deferred-tax-asset valuation allowance. Valuation allowances totaled $30.9 million in certain foreign jurisdictions and $22.0 million in the U.S. Management cautioned that lower taxable income or a weaker outlook could require further allowances.
- Liquidity and commitments: The company expected liquidity sources to cover obligations for the next 12 months, while noting continued uncertainty from the pandemic. It deferred U.S. payroll taxes under the CARES Act and planned to resume payment in the fourth quarter. It expected to contribute approximately $20.0 million to U.S. pension plans in the second half of fiscal 2021.
- May 2020 credit-agreement amendments temporarily raised leverage covenant limits; the limits tighten in fiscal 2022 and return to 3.25-to-1 for its fourth quarter. Failure to comply could trigger default and accelerated repayment. The company also announced a two-year, $50.0 million share-repurchase program on November 5; purchases depend on business conditions, cash priorities, and share price.
- Environmental investigation and remediation accruals were $18.3 million. Management did not expect environmental matters or other litigation to materially affect financial position, while acknowledging uncertain outcomes and possible adverse results.
Important facts for investors to verify
- Whether the Dana transaction closes on the expected timetable and how the impairment charge, final sale loss, and working-capital adjustments compare with preliminary estimates.
- Whether end-market demand, production levels, and margins continue to recover, and how reduced temporary cost actions affect second-half results.
- Cash conversion and liquidity after working-capital benefits, payroll-tax deferrals, planned pension funding, and capital spending.
- Compliance with tightening debt covenants and the company’s ability to manage variable-rate debt and refinancing needs.
- Whether deferred-tax valuation allowances increase and how the announced share-repurchase program is implemented.