Modine Manufacturing Company — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended June 30, 2018, Modine’s first quarter of fiscal 2019; comparisons are with the three months ended June 30, 2017. Modine makes thermal-management products for vehicle, commercial and industrial, and building HVAC markets. Effective April 1, 2018, it reorganized reporting into Vehicular Thermal Solutions (VTS), Commercial and Industrial Solutions (CIS), and Building HVAC Systems (BHVAC); prior-year segment figures were recast.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $566.1 million | $515.5 million |
| Gross profit / margin | $94.3 million / 16.7% | $88.5 million / 17.2% |
| Operating income / margin | $34.8 million / 6.1% | $27.6 million / 5.4% |
| Net earnings | $22.5 million | $17.4 million |
| Net earnings attributable to Modine | $22.0 million | $17.0 million |
| Diluted earnings per share | $0.43 | $0.34 |
| Operating cash flow | $(4.1) million | $20.6 million |
| Capital expenditures | $22.6 million | $21.6 million |
Sales rose 10%, with an $18.4 million favorable foreign-exchange impact and higher sales across all segments. Operating income increased 26%; SG&A was nearly flat at $59.3 million, while restructuring expense fell to $0.2 million from $1.7 million. Gross margin declined 50 basis points as unfavorable material costs and temporary production inefficiencies outweighed volume benefits. The effective tax rate was 18.2%, versus 13.4%, primarily reflecting a prior-year Hungarian tax-credit benefit, partly offset by a current-quarter foreign valuation-allowance reversal.
By segment, sales and operating income were: VTS, $352.8 million and $25.5 million; CIS, $183.9 million and $13.2 million; BHVAC, $45.0 million and $3.2 million. VTS and CIS sales benefited in part from foreign exchange; VTS gross margin declined, while CIS and BHVAC gross margins were unchanged.
Liquidity, debt and balance sheet
At June 30, 2018, cash and cash equivalents were $41.4 million, total debt was approximately $506.3 million, and total available credit lines were $109.8 million. Current assets were $661.3 million and current liabilities were $537.8 million. Debt included $93.2 million of short-term debt, $41.2 million of current long-term debt, and $371.9 million of long-term debt.
Operating cash flow fell by $24.7 million year over year, primarily from less favorable working-capital changes associated with higher sales, including inventory and employee-related payments. The company reported a 2.5 leverage ratio and 8.6 interest-coverage ratio and was in compliance with its debt covenants. Approximately $40.0 million of cash was held by non-U.S. subsidiaries and could be subject to withholding taxes if repatriated.
Material changes, outlook and risks
- Revenue-recognition guidance adopted April 1, 2018 increased opening retained earnings by $0.7 million. Its reported Q1 impact was a $1.2 million reduction in sales and a $0.3 million reduction in Modine-attributable earnings; the filing’s EPS impact is affected by rounding.
- Adoption of guidance on intra-entity asset transfers reduced opening retained earnings by $8.3 million. The company had not completed its accounting for certain Tax Act provisions; it was evaluating the transition tax, tax attributes, state-tax effects, and other provisions. If it does not use deferred tax attributes against the transition tax, it expected to pay an estimated $19.0 million over eight years, beginning with approximately $1.5 million in fiscal 2019.
- No specific financial guidance or quantified full-year outlook is provided in this filing. Management said first-quarter results are not necessarily indicative of full-year results and expected to remain in covenant compliance.
- Material risk areas include commodity costs and the timing or ability to pass price increases to customers; foreign exchange, tariffs and trade-policy uncertainty; customer pricing and program changes; production, supplier and launch disruptions; variable-rate debt and liquidity; and tax-reform uncertainty. Environmental remediation accruals were $17.1 million; management did not expect the matters to materially adversely affect financial position, but noted uncertain outcomes could include significant damages.
- Foreign-currency translation reduced Q1 other comprehensive income by $25.1 million, contributing to a $1.3 million comprehensive loss attributable to Modine despite positive net earnings.
Important facts for investors to verify
- Whether gross-margin pressure from materials and production inefficiencies persists or reverses.
- Whether working-capital needs continue to weigh on operating cash flow and affect debt levels.
- Current borrowing capacity, covenant headroom, and sensitivity to interest-rate changes.
- Progress on Tax Act accounting and the potential cash-tax and deferred-tax effects.
- Updates to environmental remediation estimates and any material litigation developments.
- How much reported sales and earnings growth reflects underlying demand versus foreign-exchange effects and accounting changes.