Business context and reporting period
Modine Manufacturing Company filed this unaudited Form 10-Q for the quarter ended September 30, 2016, the second quarter of fiscal 2017. The company operates in the Americas, Europe, Asia, and Building HVAC segments. Results are presented against the comparable quarter and six-month period ended September 30, 2015.
Financial results and liquidity
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net sales | $317.7 million, down 5% from $334.0 million | $664.9 million, down 2% from $680.1 million |
| Gross profit / margin | $47.7 million / 15.0%; prior year $45.7 million / 13.7% | $109.7 million / 16.5%; prior year $102.7 million / 15.1% |
| Operating income (loss) | $(1.9) million; prior year $(32.1) million | $13.2 million; prior year $(20.5) million |
| Net earnings (loss) attributable to Modine / diluted EPS | $(4.1) million / $(0.09); prior year $(22.5) million / $(0.47) | $4.5 million / $0.09; prior year $(17.4) million / $(0.37) |
| Operating cash flow | Not separately presented for the quarter | $13.6 million, versus $29.8 million |
Six-month capital expenditures were $32.0 million. Cash and cash equivalents were $63.0 million at September 30, 2016, versus $68.9 million at March 31, 2016; approximately $60.0 million was held by non-U.S. subsidiaries and would be subject to U.S. tax if repatriated. Total debt was $171.0 million ($37.3 million short-term debt, $16.5 million current long-term debt, and $117.2 million long-term debt), compared with $162.6 million at March 31. Available lines of credit totaled $201.0 million. The company reported compliance with debt covenants.
Material changes and operating performance
- Sales declines were driven mainly by lower commercial-vehicle and off-highway volumes, partly offset by higher automotive sales. Currency effects reduced sales by $2.6 million in the quarter and $4.2 million year to date.
- Year-to-date Americas sales fell 12% and operating income declined to $7.9 million from $17.1 million, reflecting weaker volumes and production inefficiencies. Europe operating income rose to $21.7 million from $10.7 million, and Asia moved to $2.3 million income from a $0.8 million loss. Building HVAC operating income fell to $3.6 million from $6.0 million.
- Comparisons benefited substantially from the prior year’s $39.2 million non-cash pension settlement loss ($8.3 million in cost of sales and $30.9 million in SG&A). The absence of that charge was a primary reason for improved gross profit and operating results; it does not represent an equivalent improvement in underlying demand.
- Current-period results included $4.4 million of acquisition-related costs year to date, including $3.0 million in the quarter; a $1.6 million charge for a Brazil antitrust matter; $4.4 million of restructuring costs year to date; and a $1.2 million gain on a Europe facility sale.
Outlook, risks, and contingencies
No specific full-year revenue or earnings guidance is provided in the filing. Modine expected to complete its approximately $420 million Luvata Heat Transfer Solutions acquisition in the third quarter of fiscal 2017, subject to customary closing conditions. Consideration includes 2.2 million Modine shares; the company planned to finance the cash portion with new long-term debt, cash, and revolving-credit borrowings. Management expected to remain in covenant compliance, while noting the leverage covenant could be temporarily raised after the acquisition and identifying a goal of returning leverage to its 1.5–2.5x target range.
Key risks include acquisition closing and integration, customer and market weakness—particularly in Brazil—foreign-exchange and commodity-price movements, pricing pressure, production and product-launch inefficiencies, and execution of restructuring and cost-saving initiatives. The company increased its estimated Brazil antitrust-related accrual to $4.7 million and said the matter’s outcome remains uncertain. Recorded environmental accruals were $4.3 million; management did not expect currently known environmental matters to have a material adverse effect, but noted inherent uncertainty and possible unfavorable outcomes. Modine also maintained deferred-tax valuation allowances of $44.3 million in certain foreign jurisdictions and $5.4 million against certain U.S. deferred tax assets; approximately $6.0 million could potentially be released in the second half of fiscal 2017 or fiscal 2018 if realization becomes more likely than not.
Important facts for investors to verify
- Whether the Luvata HTS acquisition closed on schedule, its final financing and share issuance, and its effect on leverage, liquidity, and earnings.
- Whether lower commercial-vehicle and off-highway demand, plant-consolidation inefficiencies, and margin trends—especially in Americas and Building HVAC—persist.
- Developments in the Brazil antitrust investigation and any change to the $4.7 million accrual, as well as environmental and other litigation exposures.
- Whether operating cash generation improves and the company remains within debt covenants after the planned acquisition.
- Whether any foreign deferred-tax valuation allowance is released, and whether the related tax benefit is realized.