Modine Manufacturing Company — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2014, ended December 31, 2013. Comparisons are with the quarter and first nine months ended December 31, 2012, unless noted. Amounts are in millions except per-share data.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales | $347.0 | $326.1 | $1,087.0 | $1,016.4 |
| Gross profit | $56.8 | $48.2 | $175.9 | $152.5 |
| Gross margin | 16.4% | 14.8% | 16.2% | 15.0% |
| Operating income (loss) | $0.9 | $(3.8) | $30.5 | $(6.7) |
| Net earnings (loss) | $(3.4) | $(8.4) | $12.2 | $(21.2) |
| Net earnings (loss) attributable to Modine | $(3.6) | $(8.7) | $11.0 | $(22.1) |
| EPS attributable to Modine | $(0.08) | $(0.19) | $0.23 | $(0.47) |
- Quarterly sales rose 6%, driven mainly by Europe; year-to-date sales rose 7%. Gross-margin improvement reflected higher volumes and lower material costs, with year-to-date Europe also affected by $4.3 million of accelerated depreciation.
- Quarterly SG&A was $44.5 million, or 12.8% of sales, versus $42.3 million, or 13.0%. Nine-month SG&A was $132.9 million, or 12.2%, versus $126.8 million, or 12.5%.
- Quarterly restructuring expense was $9.4 million and impairment charges were $2.0 million. For nine months, those reported statement-of-operations amounts were $10.5 million and $2.0 million, respectively; an additional $4.3 million of restructuring-related accelerated depreciation was recorded in cost of sales.
- Operating cash flow for nine months was $86.7 million, up from $41.4 million. Capital expenditures were $36.0 million, compared with $33.6 million. Cash increased to $86.3 million from $23.8 million at March 31, 2013.
- At December 31, 2013, short-term debt was $35.9 million, current long-term debt $1.0 million, and long-term debt $131.4 million; total debt was $168.3 million. The company had $213.0 million of total available credit lines, including $167.0 million available under the domestic revolver, and reported compliance with debt covenants.
- Current assets were $464.5 million and current liabilities $326.6 million. The company reported $125.0 million of 6.8% Senior Notes and no borrowings under its revolving credit facility.
Material changes and business developments
- Europe revenue increased 21% in the quarter and 18% year to date, primarily on commercial-vehicle volume, new program launches and tooling sales. Europe recorded a quarterly operating loss of $5.3 million, but nine-month operating income improved to $6.0 million from a $22.6 million loss.
- North America’s quarterly sales were broadly flat; lower material costs improved margins. Asia sales increased, while its operating loss narrowed. South America sales and operating income declined amid weaker volumes and adverse currency effects. Commercial Products revenue was affected by the Airedale fire.
- The September 2013 fire substantially damaged the leased Airedale facility in the U.K. Operations moved to temporary facilities while reconstruction was planned. The company estimated rebuilding costs at approximately $50.0 million, recorded a corresponding liability, and reported a $40.0 million insurance receivable at December 31. It expected substantially all directly related losses and costs to be reimbursed; some business-interruption proceeds related to fiscal 2014 were expected in fiscal 2015.
- The Europe restructuring program continued, including severance, facility consolidation and a planned German facility closure. Since the program began, the company had recorded $26.1 million of impairment charges, $24.7 million of severance costs and $7.1 million of repositioning expenses.
Outlook, risks and unusual items
- Management expected full-year sales growth of 5% to 8% and diluted EPS of $0.65 to $0.70, excluding Europe restructuring and impairment charges and certain losses directly related to the Airedale fire.
- The company announced a planned acquisition of U.K. air-handling-unit manufacturer Barkell Limited, expected to close in fiscal Q4 subject to due diligence and customary conditions, funded with cash on hand.
- Key risks include execution and savings from the Europe restructuring; Airedale recovery, customer service and timing of insurance collections; customer and market conditions; launch and manufacturing challenges; foreign-exchange and commodity-price exposure; environmental matters; and the ability to realize tax benefits.
- Modine maintained full valuation allowances against net deferred tax assets of $138.7 million in the U.S. and $40.8 million in certain foreign jurisdictions. Management noted that the U.S. could leave a cumulative three-year loss position in Q4 FY2014 or FY2015, potentially changing the evidence considered in assessing the allowance.
- Other notable items included a $2.5 million benefit from a foreign tax-law change and a $1.6 million year-to-date reduction in estimated European VAT obligations. The filing also disclosed prior-period out-of-period adjustments that management considered immaterial.
Important facts for investors to verify
- Whether the company achieved the stated full-year sales and EPS outlook, and how much restructuring, impairment and fire-related costs were excluded.
- Progress on Airedale reconstruction, remaining insurance receivables, business-interruption recoveries and any unreimbursed costs or delays.
- Completion and realized savings from the Europe restructuring, including facility consolidation, severance payments and the German closure.
- Cash conversion and capital spending, and whether liquidity and covenant headroom remained adequate after the planned Barkell acquisition.
- Developments in deferred-tax-asset realizability, environmental contingencies and foreign-exchange or commodity exposures.