Modine Manufacturing Company — FY2016 Form 10-K
Reporting period: Fiscal year ended March 31, 2016. Although the request identifies “2015 Q4,” this filing reports the full fiscal year; it also presents quarterly results, including the quarter ended March 31, 2016. Amounts are in U.S. dollars.
Business context and reporting period
Modine develops and manufactures thermal-management products for vehicle OEMs and building, industrial, and refrigeration markets. Its reporting segments were Americas, Europe, Asia, and Building HVAC. In FY2016, the company began its “Strengthen, Diversify and Grow” transformation, combining its North America and South America segments into Americas and focusing on cost reductions, diversification, and growth opportunities.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $1,352.5 million | $1,496.4 million |
| Gross profit / margin | $223.5 million / 16.5% | $246.5 million / 16.5% |
| Operating income (loss) | $(7.5) million / (0.6%) | $52.7 million / 3.6% |
| Net income (loss) attributable to Modine | $(1.6) million | $21.8 million |
| Diluted EPS attributable to Modine | $(0.03) | $0.45 |
| Cash from operating activities | $72.4 million | $63.5 million |
| Capital expenditures | $62.8 million | $58.3 million |
- Sales fell about 10%, chiefly from a $110 million unfavorable currency-translation impact and lower off-highway volumes. Automotive volume partly offset the decline.
- Gross margin was unchanged despite lower gross profit. SG&A rose to $204.5 million from $184.5 million; restructuring expense increased to $16.6 million from $4.7 million.
- Cash and cash equivalents were $68.9 million at year-end. Current assets were $412.5 million and current liabilities $273.6 million. The filing reports $207 million of total available credit lines.
- Total debt was approximately $162.6 million, including $28.6 million of short-term debt and $134.0 million of long-term debt before current maturities. The company reported covenant leverage of 1.2 against a 3.25 maximum and interest coverage of 10.5 against a 3.0 minimum; it was in compliance.
- ROACE, a non-GAAP measure, was 8.4%, up from 7.8%; the company’s long-term goal is 15%.
Material changes versus the prior period
- Operating results moved from $52.7 million of income to a $7.5 million loss. The principal unusual charge was $42.1 million of non-cash pension settlement losses following lump-sum payouts to about 2,000 former employees; $65.3 million was paid from plan assets.
- FY2016 also included $16.6 million of restructuring expense and a $9.9 million impairment of a German manufacturing facility. A $9.5 million insurance-settlement gain related to the prior Airedale facility fire partly offset costs in other income.
- Operating cash flow increased $8.9 million, primarily due to working-capital timing and lower incentive-compensation payments. Investing cash outflow was $77.8 million, including capital spending and Airedale reconstruction costs.
- FY2015 included an $8 million goodwill impairment in Brazil, a $3.2 million gain on sale of a German wind tunnel, and $4.6 million of Airedale business-interruption insurance recoveries in SG&A. FY2014 earnings also benefited from a substantial deferred-tax valuation-allowance reversal.
Outlook, commentary, risks, and contingencies
- Management provided qualitative, not quantified, FY2017 expectations. It anticipated weaker North American commercial-vehicle demand, continued weakness in South America and off-highway markets, and growth in automotive and several Building HVAC markets; outlook varied by region and product.
- Plans included completing the Washington, Iowa production transfer by the end of FY2017, continuing European restructuring, and pursuing industrial-market acquisitions and organic growth. The company did not provide numerical sales or earnings guidance.
- Key risks include OEM pricing pressure and customer concentration (top ten customers were 63% of sales; Daimler and Volkswagen each represented at least 10%), market cyclicality, foreign-exchange exposure, execution of restructuring and product launches, supplier constraints and commodity costs, and international operations. Currency movements reduced reported sales by $110 million in FY2016, while the reported operating-income impact was $4 million unfavorable.
- Pension obligations were significant: the balance-sheet pension liability was $118.6 million, and management expected about $8.1 million of U.S. pension contributions in FY2017. Environmental accruals were $5.1 million. The company had accrued $2.8 million for a Brazilian antitrust investigation; its outcome remained uncertain.
- Contractual obligations totaled $241.9 million, including debt, interest, leases, and $20.5 million of capital commitments. Pension, postretirement, and uncertain-tax-position liabilities were excluded from that table because payment timing could not be determined.
- No dividends were paid in FY2016 or FY2015, and the company did not intend to pay one in FY2017. It repurchased $6.9 million of shares under a $50 million authorization during FY2016.
Important facts for investors to verify
- Whether ongoing operating performance improves after separating recurring results from pension settlements, restructuring, impairment, and insurance-related items.
- Whether cost savings and the Washington, Iowa transfer and European restructuring are completed as planned, without disrupting customer launches or service.
- Whether market weakness, foreign exchange, and customer concentration continue to pressure sales and margins.
- Cash generation and funding needs relative to capital spending, debt maturities, pension contributions, and the remaining share-repurchase authorization.
- Developments in the Brazilian antitrust investigation and environmental matters, and whether their estimated costs change.
The independent auditor reported that the consolidated financial statements were fairly presented under U.S. GAAP and that internal control over financial reporting was effective as of March 31, 2016.