Modine Manufacturing Company — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2019, the first quarter of fiscal 2020 (not calendar-year 2019 Q1). Unless otherwise noted, amounts are in millions of dollars.
Business context and results
Modine manufactures thermal management products and reports three segments: Vehicular Thermal Solutions (VTS), Commercial and Industrial Solutions (CIS), and Building HVAC Systems (BHVAC). Consolidated sales declined, with lower sales in VTS and CIS partly offset by growth in BHVAC.
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $529.0 | $566.1 |
| Gross profit / margin | $83.4 / 15.8% | $94.3 / 16.7% |
| Operating income / margin | $18.1 / 3.4% | $34.8 / 6.1% |
| Earnings before income taxes | $11.1 | $27.5 |
| Net earnings attributable to Modine | $8.0 | $22.0 |
| Diluted earnings per share | $0.16 | $0.43 |
| Operating cash flow | $0.5 | $(4.1) |
| Capital expenditures | $20.3 | $22.6 |
Material changes and segment performance
- Sales fell $37.1 million, or 7%; foreign exchange reduced sales by $17.8 million. Gross margin declined 90 basis points, primarily from lower volume, higher labor costs, and tariffs, partly offset by lower raw-material costs. Foreign exchange reduced gross profit by $2.6 million.
- SG&A rose $4.2 million to $63.5 million, mainly reflecting $8.4 million of costs for the strategic review of VTS automotive. Restructuring expense increased to $1.8 million from $0.2 million.
- VTS sales were $326.5 million, down 7%; operating income was $17.3 million versus $25.5 million. CIS sales were $168.8 million, down 8%; operating income was $9.0 million versus $13.2 million. BHVAC sales rose 9% to $49.0 million and operating income increased to $5.3 million from $3.2 million.
Liquidity, debt, and balance sheet
At June 30, cash and cash equivalents were $29.1 million ($29.6 million including restricted cash), compared with $41.7 million ($42.2 million including restricted cash) at March 31. Current assets were $651.9 million and current liabilities $558.2 million. Inventory increased to $216.2 million from $200.7 million. Total debt, including short-term debt and current maturities, was approximately $457.2 million; the filing reported $449.7 million at March 31. Available revolver capacity was $143.1 million.
In June, Modine amended and extended its multi-currency $250 million revolving facility to June 2024 and refinanced term loans, which totaled $200.5 million at quarter-end. The reported leverage and interest-coverage ratios were 2.2 and 8.7, respectively; the company said it was in covenant compliance and expected to remain compliant. Operating cash flow improved by $4.6 million year over year, primarily from working-capital changes, but was below capital expenditures. The company repurchased $2.4 million of stock during the quarter.
Outlook, risks, and notable items
- No specific revenue or earnings guidance is provided in the filing. Management said first-quarter results are not necessarily indicative of full-year results.
- Modine was conducting a formal sales process for its VTS automotive business while continuing to evaluate strategic alternatives. The stated objectives were to improve VTS profitability and reprioritize capital investment.
- New lease accounting adopted April 1, 2019 added $61.3 million of operating lease right-of-use assets and corresponding liabilities at adoption; comparative prior-year periods were not adjusted. The adoption had no material impact on operating results or cash flows.
- Key disclosed risks include economic and customer-market conditions, tariffs and raw-material prices, foreign exchange, variable interest rates, supply and operational disruptions, customer pricing pressure, restructuring execution, and the outcome of the automotive-business review.
- Environmental investigation and remediation accruals were $18.9 million. Management did not expect these matters to materially affect financial position based on available information, but noted uncertainty and the possibility of unfavorable outcomes. Other litigation was not expected by management to have a material adverse effect.
Important facts for investors to verify
- Progress, timing, proceeds, and costs associated with the potential sale or other strategic outcome for the VTS automotive business.
- Whether lower VTS and CIS volumes, weaker margins, tariffs, and foreign-exchange effects persist, and whether restructuring offsets these pressures.
- Debt levels, variable-rate exposure, covenant headroom, and available revolver capacity as operating cash flow and investment needs evolve.
- Cash conversion and working-capital trends, especially inventory growth relative to sales.
- Potential changes to environmental accruals, tax valuation allowances, and other contingencies.