Modine Manufacturing Company — Form 10-Q Summary
Business context and period: This filing covers the quarter and nine months ended December 31, 2022, Modine’s third quarter and first nine months of fiscal 2023 (fiscal year ending March 31, 2023). Modine reports two segments: Climate Solutions, including HVAC, refrigeration and data-center cooling; and Performance Technologies, including thermal products for vehicle, stationary-power and industrial applications. Dollar amounts are in millions unless noted.
Key financial results
| Metric | Quarter ended Dec. 31, 2022 | Prior-year quarter | Nine months ended Dec. 31, 2022 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $560.0 | $502.2 | $1,679.8 | $1,475.7 |
| Gross profit / margin | $97.6 / 17.4% | $74.6 / 14.9% | $277.2 / 16.5% | $214.1 / 14.5% |
| Operating income | $39.5 | $79.4 | $101.9 | $98.6 |
| Net earnings attributable to Modine | $24.5 | $74.1 | $63.2 | $76.8 |
| Diluted earnings per share | $0.46 | $1.41 | $1.20 | $1.46 |
| Operating cash flow | Not presented by quarter | $67.9 | $7.4 |
- Growth and margins: Quarterly sales rose 12%; nine-month sales rose 14%. Gross margin improved 250 basis points in the quarter and 200 basis points year to date, reflecting higher volume and pricing, partly offset by labor and inflationary costs.
- Segment performance: Quarterly Climate Solutions sales were $248.6 and operating income was $30.2, versus $227.3 and $16.8 a year earlier. Performance Technologies sales were $317.8 and operating income was $17.4, versus $282.0 and $66.1; the prior-year result included a substantial impairment reversal. For nine months, segment sales were $748.9 for Climate Solutions and $952.1 for Performance Technologies.
- Cash flow and investment: Nine-month operating cash flow increased to $67.9, principally due to higher earnings and favorable working-capital changes. Capital expenditures were $35.2, including investment to expand the data-center business. Inventories rose $32.4 from March 31, 2022, as the company supported higher production.
- Liquidity and debt: Cash and cash equivalents were $82.2 at December 31, 2022; available revolver capacity was $236.2. Carrying debt, including short-term debt and current maturities, was approximately $389.8. The company reported leverage and interest-coverage ratios of 1.6 and 12.4, respectively, and compliance with its covenants.
Material changes and unusual items
- Quarterly operating income fell $39.9 year over year, mainly because the prior-year quarter included a $57.2 impairment reversal related to the liquid-cooled automotive business. Nine-month operating income increased $3.3 despite the absence of a prior-year $55.7 net impairment reversal and a prior-year $6.6 loss on sale of the Austrian air-cooled automotive business.
- Quarterly and nine-month net earnings were also affected by higher interest expense and taxes. The prior-year periods benefited from foreign deferred-tax valuation-allowance releases, including $8.2 in the quarter and $11.4 net for the nine months. The current-period effective tax rates were 25.6% and 23.8%, respectively.
- Foreign exchange reduced sales by $30.2 in the quarter and $93.1 year to date, while providing favorable offsets to costs. Year-to-date raw-material costs increased approximately $42.0.
- In October 2022, Modine amended and extended its credit facilities: the agreement includes a $275.0 multi-currency revolver and term loans maturing in October 2027, replacing facilities due in June 2024. The company recorded $0.7 of amendment costs as interest expense in the quarter.
- Modine repurchased $4.7 of stock during the first nine months and had $47.9 of authorization remaining at December 31, 2022. A new $50.0 program, approved in November 2022, expires in November 2024.
Outlook, risks and contingencies
- The filing provides no specific sales, earnings or margin guidance. Management said available cash, operating cash flow and borrowing capacity should meet short- and long-term funding needs, and expected continued covenant compliance.
- Management cited ongoing supply-chain disruption, labor shortages, inflation in materials, energy, logistics and interest costs, and the Russia-Ukraine conflict. It said it has raised prices on many products and is working with suppliers, but cannot reasonably estimate the full future effects on results or cash flows.
- Modine carries $18.6 of environmental accruals. Management believes currently known environmental matters and other litigation are not expected to have a material adverse effect, while noting that outcomes remain uncertain and remediation costs could exceed accruals.
- The company maintained a full valuation allowance on U.S. deferred tax assets. It said a significant release could be possible in fiscal 2023’s fourth quarter or fiscal 2024, potentially reducing tax expense by up to $65.0; timing and amount are uncertain.
- Variable-rate debt exposes the company to interest-rate increases. Other disclosed risks include currency movements, customer and supplier disruptions, inflation, warranty or manufacturing issues, environmental obligations, and the ability to realize deferred tax assets.
Investor verification priorities
- Assess operating performance excluding the prior-year automotive impairment reversal and tax benefits; compare underlying segment margins and earnings.
- Track whether pricing and volume continue to offset material, labor and other inflation, and how foreign exchange affects reported sales and costs.
- Verify conversion of earnings to cash, inventory levels, capital spending and liquidity, including revolver availability and debt maturities.
- Monitor variable-rate borrowing costs, covenant headroom and the uncertain timing and size of any U.S. deferred-tax valuation-allowance release.
- Review developments in supply-chain conditions, environmental remediation and customer or supplier risks.