Modine Manufacturing Company — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2020, ended December 31, 2019; year-to-date figures cover the nine months ended December 31, 2019. Amounts are in millions except per-share data. Comparisons are with the corresponding fiscal 2019 periods.
Financial performance and liquidity
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $473.4, down 12% | $1,502.6, down 9% |
| Gross profit / margin | $73.5 / 15.5% (prior: $91.7 / 16.9%) | $232.6 / 15.5% (prior: $273.9 / 16.5%) |
| Operating income | $8.2 (prior: $33.6) | $32.3 (prior: $91.2) |
| Net earnings attributable to Modine | $1.2; diluted EPS $0.02 | $4.5; diluted EPS $0.09 |
| Operating cash flow | Not separately reported for the quarter | $45.9 (prior: $67.4) |
| Capital expenditures | Not separately reported for the quarter | $58.2 |
- Quarterly SG&A was $63.5, up $6.3; restructuring expense was $2.6. Nine-month SG&A was $194.4, up $14.5; restructuring expense was $6.7.
- At December 31, cash and cash equivalents were $36.2; current assets were $611.3 and current liabilities $474.2. The company reported $135.4 of available capacity under its revolving credit facility.
- Balance-sheet debt consisted of $101.2 short-term debt, $16.2 current long-term debt, and $330.3 long-term debt. Debt covenants were met; reported leverage and interest coverage ratios were 2.3 and 8.4, respectively.
Material changes and drivers
- Lower sales in Vehicular Thermal Solutions (VTS) and Commercial and Industrial Solutions (CIS), weak end markets, and unfavorable currency effects drove the decline. Currency reduced sales by $7.1 in the quarter and $35.8 year to date.
- VTS sales fell 16% in the quarter and 11% year to date; CIS sales fell 12% and 11%, respectively. Building HVAC Systems (BHVAC) sales were nearly flat in the quarter and rose 6% year to date; year-to-date segment operating income increased to $27.6 from $21.0.
- Consolidated gross margin declined 140 basis points in the quarter and 100 basis points year to date. Management cited lower volume, labor and inflationary costs, and sales mix; lower material costs partly offset these pressures year to date.
- Operating income fell substantially, mainly reflecting weaker VTS and CIS earnings and increased costs for the strategic review and separation of VTS’s automotive business. Those separation and project costs increased approximately $13.0 in the quarter and $32.0 year to date versus prior periods.
- Year-to-date operating cash flow declined $21.5, primarily due to lower earnings and automotive-business separation costs, partly offset by favorable working-capital changes. Capital spending exceeded operating cash flow by $12.3.
Outlook, management commentary, and risks
- Modine was evaluating strategic alternatives for its VTS automotive business and stated it was committed to exiting it. Alternatives could include a sale, winding down or closing portions, or a combination; no completed exit was reported.
- In January 2020, the company approved additional VTS headcount reductions in Europe and North America and expected about $4.0 of severance expense in fiscal Q4. No broader financial guidance is provided in the filing text.
- On January 31, 2020, after quarter-end, Modine issued $100.0 of 5.9% notes due 2029, using proceeds to repay $73.0 of 6.8% notes and $27.0 of revolver borrowings.
- Fiscal 2020 tax results included a $2.7 charge from legal-entity restructuring related to the potential automotive-business sale and a $3.0 valuation allowance on certain U.S. deferred tax assets. The nine-month effective tax rate was 65.4%, versus a 13.2% benefit rate in the prior-year period.
- Environmental remediation accruals were $18.7. Management did not expect currently known environmental or other litigation matters to materially affect financial position, while noting that unfavorable environmental outcomes remain possible.
- Principal risks identified include market weakness, customer pricing pressure, inflation and tariffs, foreign-exchange and variable-rate debt exposure, execution of restructuring and the automotive-business exit, environmental liabilities, and supply, operational, and IT disruptions.
Important facts for investors to verify
- Progress, costs, timing, and proceeds—or potential wind-down liabilities—associated with the VTS automotive-business exit.
- Whether sales and margins in VTS and CIS stabilize, and whether BHVAC’s growth and improved margins continue.
- Cash conversion, working-capital needs, capital spending, and the company’s ability to service debt while funding operations and restructuring.
- Compliance with debt covenants and the effects of the January 2020 refinancing, including interest expense and scheduled repayments.
- Further tax valuation allowances, environmental accrual changes, and additional severance or separation costs.