Modine Manufacturing Company — FY2018 Form 10-K
Reporting period: Fiscal year ended March 31, 2018, with FY2017 as the principal comparison. Although the request metadata says “2017 Q4,” this filing is an annual report for FY2018; it also reports quarterly results, including a fiscal fourth-quarter net profit. Modine supplies thermal-management products to vehicle, commercial, industrial and building HVAC&R markets.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $2,103.1 million | $1,503.0 million |
| Gross profit / margin | $356.5 million / 17.0% | $254.4 million / 16.9% |
| Operating income / margin | $92.2 million / 4.4% | $42.3 million / 2.8% |
| Net earnings attributable to Modine | $22.2 million | $14.2 million |
| Diluted earnings per share | $0.43 | $0.29 |
| Cash from operating activities | $123.8 million | $41.6 million |
| Capital expenditures | $71.0 million | $64.4 million |
- Sales rose 40%, driven principally by $442 million of additional CIS sales because Modine owned Luvata HTS for only four months in FY2017, as well as growth in other segments and a $55 million favorable currency effect. CIS generated $620 million of FY2018 sales and $25.8 million of operating income.
- Gross margin improved 10 basis points. Operating income increased $49.9 million; improvement reflected CIS and higher earnings in Americas, Asia and Building HVAC.
- Net earnings increased despite higher interest and a $38 million provisional tax charge related to the U.S. Tax Cuts and Jobs Act. The reported income-tax provision was $39.5 million, or a 62.4% effective tax rate.
- Operating cash flow increased by $82.2 million, attributed to stronger operating earnings, lower acquisition-integration and restructuring payments, and favorable working-capital changes.
Debt and liquidity
- Total outstanding debt was $479 million at March 31, 2018, down $32 million year over year. Cash and cash equivalents were $39.3 million; available lines of credit totaled $170.3 million.
- Debt covenants were met. The reported leverage ratio was 2.4 and interest coverage ratio 8.3; covenant thresholds included maximum leverage of 3.25 times and minimum interest coverage of 3 times.
- Most term-loan and revolving-credit borrowings carry variable rates. Management estimated a 100-basis-point rate increase would raise FY2019 interest expense by approximately $3 million.
- Long-term debt maturities totaled $431.6 million before unamortized issuance costs and the current portion. No common dividends were paid; the company said it did not intend to pay one in FY2019.
Material changes, outlook and risks
- Modine completed integration of its Luvata HTS acquisition, made for $415.6 million of consideration ($388.2 million net of acquired cash). Management said it was on track to exceed its targeted $15 million of cost synergies; realization remains execution-dependent.
- FY2018 included $16.0 million of restructuring expense and $2.5 million of impairment charges. Actions included an Austrian CIS plant closure, headcount reductions, plant consolidation and transfers of production to Hungary. A BHVAC geothermal product line was discontinued.
- Effective April 1, 2018, Americas, Europe and Asia were combined into a new Vehicular Thermal Solutions segment; Americas coils moved to CIS. Management forecast continued growth in most served markets during FY2019, but gave no consolidated numerical sales or earnings guidance in the provided filing text.
- Management cited expected opportunities in vehicle electrification, emissions and energy-efficiency requirements, Asian growth, HVAC&R and data-center cooling. Risks include vehicle-market cyclicality, customer price-down demands and concentration, competition, launch and integration execution, commodity-price and supplier exposure, foreign exchange, tariffs and trade restrictions, variable interest rates, and changing tax rules.
- The Tax Act accounting remained provisional. The $38 million charge comprised $19 million from remeasuring U.S. deferred tax assets and $19 million of estimated transition tax; the company was still assessing other provisions and potential effects. A further decrease of approximately $8 million in retained earnings was expected upon adoption of new intercompany asset-transfer tax guidance in FY2019.
- Environmental investigation and remediation accruals were $16.7 million. Management did not expect the outcome of disclosed environmental matters or other litigation to materially affect financial position, while acknowledging inherent uncertainty. The Brazil antitrust matter was settled with a $4.7 million payment in FY2018.
- Quarterly results were uneven: fiscal Q3 recorded a $27.9 million net loss, largely reflecting $35.7 million of Tax Act charges; Q4 net earnings were $18.0 million.
Most important facts for investors to verify
- Whether CIS integration delivers the stated synergies and improves operating performance after acquisition-related costs.
- Whether earnings and cash generation can sustain improvement while restructuring, capital spending and debt service continue.
- Final Tax Act calculations, including transition-tax elections, GILTI and other provisions, and any resulting tax or cash-payment changes.
- Debt reduction, variable-rate exposure, covenant headroom and liquidity, including the availability and location of cash.
- Customer and end-market concentration, especially major automotive customers and the CIS segment’s large technology customer.
- Progress and costs of restructuring, plant transfers, product launches, environmental remediation and the reported pension obligations.
The independent auditor issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of March 31, 2018.