Modine Manufacturing Company — FY2013 Form 10-K
Reporting period: Fiscal year ended March 31, 2013. The filing is an annual report, not a calendar-year 2012 quarterly filing. The fourth quarter ended March 31, 2013 is summarized separately below. Unless otherwise stated, amounts are U.S. dollars.
Business context
Modine develops and manufactures thermal-management products, including heat exchangers, cooling modules, EGR coolers and commercial HVAC equipment. Its five segments are North America, Europe, South America, Asia and Commercial Products. Sales fell amid weak demand across end markets, particularly commercial vehicles and off-highway equipment, and the planned wind-down of certain automotive programs. The company acquired geothermal heat-pump maker Geofinity for $4.9 million net of cash acquired.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $1,376.0 million | $1,577.2 million |
| Gross profit / margin | $208.6 million / 15.2% | $256.6 million / 16.3% |
| Operating income (loss) | $(0.6) million | $67.5 million |
| Continuing-operations income (loss) | $(22.8) million; $(0.52) diluted EPS | $38.0 million; $0.80 diluted EPS |
| Net cash provided by operating activities | $48.8 million | $45.8 million |
| Capital expenditures | $49.8 million | $64.4 million |
| Cash and cash equivalents at year-end | $23.8 million | $31.4 million |
| Total debt at year-end | $163.6 million | Approximately $164 million |
Fiscal 2013 sales declined 13%; management attributed approximately $61 million of the decrease to unfavorable foreign-currency translation. Gross profit fell 19%, and gross margin contracted 110 basis points, primarily because lower volumes weakened fixed-cost absorption. SG&A declined by about $20 million to $166.3 million. The company recorded $25.9 million of impairment charges and $17.0 million of restructuring expenses, primarily related to Europe.
At March 31, 2013, Modine reported $30.6 million of short-term debt and $132.5 million of long-term debt. It had no borrowings under its domestic revolving facility and reported $191 million of total available credit lines. Adjusted EBITDA, a non-GAAP measure as defined in its debt agreements, was $98.2 million; the leverage ratio was 1.85 and interest-coverage ratio was 7.55, within covenant limits. The company said it expected to remain in compliance.
Current assets were $399.0 million and current liabilities $280.1 million. The domestic defined-benefit pension plans had a reported funded deficit of $109.0 million; Modine anticipated contributing approximately $8 million to domestic plans in fiscal 2014. Reported gross liabilities for pensions, postretirement benefits and uncertain tax positions totaled $126 million, with ultimate timing not determinable.
Fourth-quarter snapshot: Net sales were $359.6 million, gross profit $56.1 million, continuing-operations loss $1.6 million and diluted loss per share $0.04.
Material changes versus the prior comparable period
- Revenue fell $201 million year over year. Automotive sales declined 21% and commercial-vehicle sales 14%.
- Europe sales declined 17% to $498 million, reflecting the automotive program wind-down, weaker demand and $34 million of unfavorable currency effects. The segment reported a $16.1 million operating loss versus $37.3 million of operating income in FY2012, including impairment and restructuring charges.
- South America sales declined to $133.8 million, mainly following the commercial-vehicle pre-buy ahead of Brazil’s emissions-standard change and $25 million of unfavorable currency effects. Asia sales declined to $59.5 million and its operating loss widened to $8.8 million.
- North America operating income decreased to $39.2 million from $47.9 million. Commercial Products operating income decreased to $10.0 million from $14.3 million.
- Cash from operations increased modestly, while capital expenditures declined. Cash fell $7.6 million during the year. Long-term debt decreased, but short-term borrowings increased by $9.3 million, primarily in Asia.
Outlook, commentary and risks
For fiscal 2014, management expected consolidated sales to be flat to 5% higher year over year and diluted EPS of $0.45–$0.55, excluding cash and non-cash restructuring costs. It expected South American growth, stabilization in China’s off-highway market, and sequential improvement in North American commercial vehicles, weighted to the second half. It anticipated further declines in European commercial-vehicle and automotive markets, with slight off-highway growth.
The Europe restructuring is intended to refocus the segment on commercial vehicles, off-highway and engine products, reduce costs, and improve gross margin and returns. Management targeted annual savings of $7–$9 million over the next couple of years and expected additional restructuring expense in FY2014. Execution, product transfers, facility sales and achievement of savings remain uncertain.
Principal risks include economic and end-market weakness; customer pricing pressure and concentration (the ten largest customers generated 59% of sales, and Daimler was at least 10%); competition and successful product launches; foreign-exchange and commodity-price volatility; supply constraints; pension funding needs; and environmental, tax and product-liability exposures. Environmental remediation accruals were $5.2 million, and the estimated European VAT exposure accrual was $4.4 million. Other environmental proceedings and litigation were disclosed; management did not expect them to materially affect consolidated results, while noting inherent uncertainty.
Unusual items and controls: a $2.0 million South America SG&A benefit followed resolution of a seller note from an earlier acquisition. A commodity-hedge accounting error shifted $0.5 million of pretax earnings between FY2012 Q4 and FY2013 Q1; the company deemed it immaterial to both years. A previously identified material weakness in European cross-border VAT controls was reported as remediated by March 31, 2013. The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether fiscal 2014 sales and EPS guidance was achieved, and how much restructuring expense was excluded from the EPS range.
- Progress on Europe restructuring: actual savings, remaining charges, facility disposals and segment profitability.
- Cash conversion and investment needs, including the impact of receivables sales ($99.1 million during FY2013) and capital spending.
- Debt covenant headroom, available credit, pension contributions and the effect of any further deterioration in demand.
- Resolution and potential changes in VAT, environmental and tax exposures, including the recoverability of deferred tax assets.