Modine Manufacturing Company — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2014, the first quarter of fiscal 2015. Comparisons are with the three months ended June 30, 2013, unless otherwise noted. Amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $392.5 | $375.8 |
| Gross profit / margin | $67.7 / 17.2% | $61.9 / 16.5% |
| Operating income / margin | $24.1 / 6.1% | $19.0 / 5.1% |
| Net earnings | $14.1 | $10.6 |
| Net earnings attributable to Modine | $13.7 | $10.0 |
| Diluted EPS attributable to Modine | $0.28 | $0.21 |
| Operating cash flow | $2.5 | $15.9 |
| Capital expenditures | $12.4 | $10.2 |
Sales rose 4%, primarily from higher commercial vehicle and building HVAC activity, plus a $6.8 favorable foreign-exchange impact. Gross margin improved 70 basis points, reflecting volume and material-cost benefits and the absence of $2.2 of prior-year accelerated depreciation. SG&A was $42.8, or 10.9% of sales, and included a $2.6 insurance gain related to Airedale lost profits. The effective tax rate was 32.2%, compared with 31.6%.
Segments and material changes
- North America: Sales $151.7, up 2%; operating income $16.1 versus $14.3. Improved commercial vehicle sales and lower material and warranty costs supported results.
- Europe: Sales $158.6, up 9%; operating income $10.4 versus $8.0. Higher commercial vehicle volume and favorable currency contributed.
- South America: Sales $25.2, down 27%; operating loss $0.2 versus income of $2.6. Weak Brazilian conditions and lower vehicle, agricultural equipment, and power-generation volumes weighed on results; the company recorded $0.5 of severance restructuring expense.
- Asia: Sales $20.8, up 14%; operating income $0.9 versus a $0.3 loss, reflecting new program launches and higher automotive volume.
- Building HVAC: Sales $40.7, up 26%; operating income $3.2 versus $1.0. Growth included $3.7 from the Barkell acquisition, distributor restocking, and favorable currency. Margin declined to 24.3% from 26.2%, partly due to Barkell purchase accounting and product mix, and temporary Airedale operations.
The former Commercial Products segment was renamed Building HVAC; reported operations and results did not change. Operating cash flow declined $13.4, primarily due to unfavorable working-capital changes, including higher incentive-compensation payments.
Financial position, liquidity, and debt
At June 30, 2014, cash and cash equivalents were $74.0, down from $87.2 at March 31, 2014. Current assets were $519.5 and current liabilities $361.0. Total debt was approximately $162.3, comprising $30.6 of short-term debt, $0.6 of current long-term debt, and $131.1 of long-term debt. The company had no borrowings on its $175.0 domestic revolver, with $166.0 available after letters of credit; foreign unused lines were $48.0. Total available credit lines were $214.0. Modine reported compliance with debt covenants and expected to remain compliant.
Cash decreased $13.2 during the quarter: operating activities provided $2.5, investing activities used $14.0, and financing activities used $2.0. Cash included approximately $14.0 of Airedale insurance advances designated for recovery and reconstruction costs.
Outlook, risks, and unusual items
For fiscal 2015, management expected sales growth of 3% to 8%, operating income of $65.0 to $73.0, and diluted EPS of $0.63 to $0.73, excluding restructuring charges. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
- Airedale fire: The September 2013 fire disrupted the U.K. facility; production continued at temporary sites and rebuilding was planned. Estimated reconstruction cost increased to $59.0, primarily due to foundation estimates. At quarter-end, the rebuild liability was $59.0 and the insurance receivable was $43.3; the company expected reimbursement for substantially all covered losses and costs and did not expect a significant liquidity impact. Temporary operations, reconstruction timing, cost estimates, and insurance recovery remain execution risks.
- Market and operating risks: Management cited weak Brazilian conditions, customer pricing pressure, competition, customer and supplier health, product-launch and manufacturing challenges, Europe restructuring execution, foreign-exchange volatility, and commodity-price exposure.
- Contingencies: Environmental accruals were $5.1. The company described environmental proceedings and other litigation, but did not expect them to have a material adverse effect based on information then available; outcomes remain uncertain.
- Taxes: Valuation allowances remained against certain foreign and U.S. deferred tax assets, including $46.3 and $15.3, respectively. Realization of future tax benefits is uncertain.
Most important facts for investors to verify
- Whether sales and margin improvements persist, and how much results depend on foreign exchange, lower material costs, and the prior-year depreciation comparison.
- Whether South America stabilizes and the company can restore segment profitability amid weak Brazilian demand.
- Whether the Airedale rebuild stays within the $59.0 estimate and insurance proceeds cover eligible costs on schedule.
- Whether operating cash flow improves after working-capital use and capital spending.
- Whether fiscal 2015 guidance is achieved, particularly given restructuring, market, currency, and execution risks.