Modine Manufacturing Company — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017, the second quarter of Modine’s fiscal 2018; year-to-date figures cover the six months ended September 30. Unless noted otherwise, amounts are in millions of dollars. The filing is unaudited.
Business context and results
Modine manufactures thermal-management products across its Americas, Europe, Asia, Commercial and Industrial Solutions (CIS), and Building HVAC segments. The prior-year comparison excludes CIS, acquired through the November 2016 purchase of Luvata Heat Transfer Solutions (Luvata HTS). Accordingly, reported growth reflects both the acquisition and changes in the legacy businesses.
| Metric | Quarter 2017 | Quarter 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $508.3 | $317.7 | $1,023.8 | $664.9 |
| Gross profit / margin | $86.1 / 17.0% | $48.0 / 15.1% | $174.6 / 17.1% | $110.3 / 16.6% |
| Operating income (loss) | $23.5 | $(1.1) | $51.1 | $14.7 |
| Net earnings (loss) | $16.3 | $(4.0) | $33.7 | $4.9 |
| Net earnings (loss) attributable to Modine | $15.9 | $(4.1) | $32.9 | $4.5 |
| Diluted earnings (loss) per share attributable to Modine | $0.31 | $(0.09) | $0.65 | $0.09 |
- Quarterly sales rose 60% year over year; CIS contributed $149.2 of sales. Higher sales in the other operating segments and favorable currency effects also contributed.
- For the six months, sales rose 54%, including $306.7 from CIS. Gross margin improved year over year in both periods, primarily on greater volume and improved production efficiencies; higher material costs and acquisition-related depreciation and amortization partly offset the benefit.
- Quarterly operating income improved by $24.6, with contributions from CIS and higher gross profit in other segments. Six-month operating income improved by $36.4.
- Interest expense increased to $6.6 for the quarter and $13.2 year to date, mainly due to acquisition financing. The quarterly tax benefit included a $2.2 Hungary development tax credit and a $1.8 reduction in unrecognized tax benefits; the six-month tax provision was $2.2.
Cash, debt, and liquidity
- Six-month operating cash flow was $71.1, versus $13.6 a year earlier. Modine cited higher operating earnings and favorable working-capital changes, including higher accounts payable from payment timing.
- Capital expenditures were $36.8, compared with $32.0. Cash increased to $50.5 at September 30 from $34.2 at March 31.
- At September 30, current assets were $603.4 and current liabilities $481.1. Debt comprised $67.6 short-term debt, $36.0 current long-term debt, and $401.9 long-term debt, or approximately $505.5 in total carrying amounts.
- Available credit lines totaled $154.2. The company reported leverage and interest-coverage ratios of 2.6 and 7.7, respectively, and compliance with debt covenants. It expected to remain in compliance. Approximately $46.0 of cash was held by non-U.S. subsidiaries and could be subject to U.S. tax if repatriated.
- The company’s $200.0 shelf registration statement allows possible future offerings of common stock and certain other equity or debt securities; the filing does not report an offering under it.
Segments and material changes
- Americas: Quarter sales increased 13% to $141.9 and operating income was $7.8 versus a loss of $1.1. Higher volume and production efficiencies helped; lower restructuring costs and the absence of a prior-year Brazil legal charge also aided comparisons.
- Europe: Quarter sales rose 9% to $134.5 and operating income increased to $8.6. For the six months, operating income declined to $16.5 from $22.3, primarily due to lower gross profit and higher SG&A and restructuring costs; certain commercial-vehicle programs were being wound down.
- Asia: Quarter sales rose 60% to $39.5 and operating income increased to $4.2, primarily on higher volume. Six-month operating income was $7.5 versus $2.3.
- CIS: The acquired business generated quarter sales of $149.2 and operating income of $8.1; six-month sales were $306.7 and operating income $18.9. Purchase-price allocation remained preliminary, pending further information, primarily on trade-compliance matters.
- Building HVAC: Quarter sales rose 7% to $48.8 and operating income increased to $6.3. Higher volume, mix, and production efficiencies supported improved margins.
Outlook, risks, contingencies, and unusual items
- The filing provides no overall full-year sales or earnings guidance. Management expected the Hungary development tax credit to total approximately $10.0 for fiscal 2018 and said its impact was not expected to be significant in fiscal 2019. A foreign-jurisdiction tax valuation allowance of approximately $3.0 might be released in late fiscal 2018 or fiscal 2019.
- Management said customer material-price pass-through provisions, which operate with a lag, helped alleviate higher metals costs and expected that trend to continue through fiscal 2018. Unfavorable material costs remained a partial offset to margin gains.
- Key stated risks include integrating Luvata HTS and realizing expected synergies, customer and supplier pressures, commodity-price increases and pass-through timing, foreign-exchange and interest-rate movements, market and trade uncertainty, and environmental, warranty, litigation, and operational exposures.
- Environmental accruals were $17.1 at September 30. Management did not expect the identified environmental matters to have a material adverse effect based on currently available information, while noting uncertainty and the possibility of unfavorable outcomes. A $4.7 Brazil antitrust accrual was paid to settle the matter during the first quarter.
- The 2016 comparison included a $1.2 gain on sale of a Europe facility; no corresponding gain was recorded in 2017. A retrospective pension-cost presentation change moved certain non-service pension costs to other income and expense.
- Disclosure controls were reported effective. The company said Luvata integration work materially affected, or could reasonably be expected to materially affect, internal control over financial reporting during the quarter. No material change in market-risk disclosures was reported.
Important facts for investors to verify
- How much reported sales and earnings growth is attributable to Luvata HTS versus organic growth, and whether integration benefits and synergies materialize.
- Whether higher metals costs, lagged customer pass-throughs, and production efficiencies sustain or weaken margins.
- Debt reduction, cash conversion, covenant headroom, and exposure to variable interest rates following acquisition financing.
- The final Luvata purchase-price allocation and any resulting changes to goodwill, acquired liabilities, or amortization.
- Tax-credit sustainability, valuation allowances, environmental and warranty obligations, and the effect of foreign-exchange movements.