Modine Manufacturing Company — Form 10-Q
Reporting period: Quarter ended December 31, 2018, the third quarter of fiscal 2019. Financial amounts are in millions of dollars unless stated otherwise. Modine supplies thermal-management products through Vehicular Thermal Solutions (VTS), Commercial and Industrial Solutions (CIS), and Building HVAC Systems (BHVAC).
Financial performance
| Metric | Quarter ended Dec. 31, 2018 | Prior-year quarter | Nine months ended Dec. 31, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $541.0 | $512.7 | $1,656.0 | $1,536.5 |
| Gross profit / margin | $91.7 / 16.9% | $85.4 / 16.7% | $273.9 / 16.5% | $260.0 / 16.9% |
| Operating income | $33.6 | $13.9 | $91.2 | $65.0 |
| Net earnings (loss) | $18.3 | $(27.9) | $79.5 | $5.8 |
| Net earnings (loss) attributable to Modine | $18.0 | $(28.3) | $78.5 | $4.6 |
| Diluted EPS attributable to Modine | $0.35 | $(0.57) | $1.53 | $0.09 |
- Quarterly sales increased 6%; year-to-date sales increased 8%, with growth across all operating segments. Quarterly operating income rose $19.7; nine-month operating income rose $26.2.
- Quarterly gross margin improved 20 basis points, while the nine-month margin declined 40 basis points. Management cited unfavorable material costs, including tariff effects, and temporary inefficiencies tied to higher volumes and new program launches.
- Quarterly SG&A fell $3.6 to $57.2; nine-month SG&A fell $2.3 to $179.9. Restructuring costs were also substantially lower year over year, largely because the prior period included costs for closing an Austrian facility.
- Segment results were mixed: quarterly VTS operating income declined to $15.5 from $18.7; CIS improved to $13.1 from a $3.9 loss; and BHVAC increased to $13.0 from $9.2. For nine months, VTS operating income decreased to $55.1, while CIS rose to $39.2 and BHVAC to $21.0.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $67.4, down from $106.0. Management attributed the decline principally to working-capital movements, including higher inventories, lower accounts payable and higher incentive-compensation and employee-benefit payments.
- Capital expenditures were $58.7, compared with $55.0. Operating cash flow less capital expenditures was approximately $8.7 (calculated from reported figures).
- At December 31, cash and cash equivalents were $30.7; total cash, cash equivalents and restricted cash were $31.4. Available credit lines totaled $127.9. The company reported that approximately $23.0 of cash was held by non-U.S. subsidiaries and could be subject to withholding tax if repatriated.
- Debt on the balance sheet comprised $67.5 short-term debt, $45.7 current long-term debt and $354.2 long-term debt. Total reported debt across these categories was $467.4. The company was in compliance with debt covenants; its reported leverage and interest-coverage ratios were 2.2 and 9.0, respectively, against covenant limits of no more than 3.25 and at least 3.0.
- Cash declined $8.6 from March 31, 2018, while total assets fell to $1,512.7 from $1,573.4. Inventories rose to $211.0 from $191.3.
Material changes, outlook and risks
- Tax effects: The prior-year quarter and nine-month results included substantial Tax Act-related charges. The current nine-month period included a $9.3 income-tax benefit, versus a $37.4 provision in the prior-year period; current-year Tax Act accounting adjustments produced a $7.7 benefit for the nine months. These unusual tax effects materially influence year-over-year net earnings comparisons.
- Strategic review: On January 29, 2019, Modine announced it was evaluating strategic alternatives for its VTS automotive business, aiming to improve VTS’s future profitability profile and prioritize investment in other businesses. The review was expected to continue over the next several quarters; no outcome was stated.
- Other unusual items: Modine sold its South African BHVAC business during the second quarter for $0.5 and recorded a $1.7 loss, including a $0.8 write-off of accumulated foreign-currency translation losses. It also recorded a $0.4 impairment charge related to the previously closed Austrian facility in the quarter.
- Contingencies: Environmental investigation and remediation accruals were $18.1, up from $16.7 at March 31, 2018. Management did not expect these matters or ordinary-course litigation to materially harm financial position, but noted environmental outcomes are inherently uncertain and could involve significant damages.
- Key risks: Management identified exposure to tariffs and raw-material costs, foreign-exchange movements, customer pricing pressure and program changes, manufacturing and launch inefficiencies, supplier constraints, environmental obligations, and the execution and outcome of the automotive strategic review. It expected to remain covenant-compliant and reported no specific full-year financial guidance in the provided filing text.
- Capital allocation: The board authorized a two-year, $50.0 share-repurchase program in October 2018. Modine repurchased $0.6 of shares during the quarter. The company also maintained an effective shelf registration permitting up to $200.0 of securities offerings.
- Accounting and reporting: Modine adopted new revenue-recognition guidance using the modified-retrospective method. Adoption increased opening retained earnings by $0.7; reported quarterly sales were $5.6 higher and nine-month sales $5.2 higher than they would have been without adoption. Fiscal 2018 segment data was recast for a reorganization effective April 1, 2018.
Important facts for investors to verify
- How the automotive-business strategic review progresses, and whether any resulting transaction or restructuring affects earnings, cash flow or capital allocation.
- Whether VTS material-cost pressures and launch-related inefficiencies ease, given its lower year-to-date gross margin and operating income.
- Whether working-capital investment and capital expenditures continue to constrain cash generation.
- The sustainability of earnings apart from unusual tax benefits and prior-year Tax Act charges; also monitor realization of deferred tax assets and foreign tax credits.
- Available borrowing capacity, debt-covenant headroom and the ability to manage tariffs, foreign-exchange exposure and environmental remediation costs.