Modine Manufacturing Company — Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2012, ended December 31, 2011. The statements are unaudited; comparative 2010 results were revised for previously identified errors. Unless noted otherwise, financial amounts below are in millions of U.S. dollars.
Business context and results
Modine supplies thermal-management products to commercial vehicle, off-highway, automotive, and commercial heating and air-conditioning markets. Management attributed growth primarily to higher commercial vehicle and off-highway volumes. Fiscal 2012 is the year ending March 31, 2012.
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Nine months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Net sales | $373.3 | $360.0 | $1,188.4 | $1,051.5 |
| Gross profit / margin | $59.7 / 16.0% | $56.5 / 15.7% | $191.2 / 16.1% | $171.3 / 16.3% |
| Operating income / margin | $16.2 / 4.3% | $9.1 / 2.5% | $48.2 / 4.1% | $35.0 / 3.3% |
| Continuing-operations earnings (loss) | $8.0 | $5.6 | $21.8 | $(3.1) |
| Net earnings (loss) attributable to Modine | $8.3 | $5.6 | $22.4 | $(6.1) |
| Diluted EPS from continuing operations | $0.17 | $0.12 | $0.46 | $(0.07) |
Financial position, cash flow and liquidity
- Cash: $26.1 at December 31, 2011, down from $32.9 at March 31, 2011.
- Cash flow, nine months: Operating activities provided $18.3, compared with $1.4 used in the prior-year period. Investing activities used $45.1, including $45.3 of capital expenditures; financing activities provided $21.3. Cash decreased by $6.8.
- Debt: Balance-sheet debt totaled $165.5, comprising $15.9 short-term debt, $0.1 current long-term debt and $149.6 long-term debt. This compares with approximately $147.7 at March 31, 2011. The company had $133.0 available under its domestic revolver and $46.6 in unused foreign credit lines.
- Covenants: The company reported compliance. Four-quarter adjusted EBITDA was $115.0; interest coverage was 8.83 against a 3.00 minimum, and leverage was 1.70 against a 3.25 maximum.
- Other balance-sheet measures: Current assets were $397.9 and current liabilities $260.3. Total assets were $847.8, down from $916.9 at March 31, 2011. Pension liabilities were $51.6.
Material changes and management commentary
- Third-quarter sales rose 3.7% year over year; nine-month sales rose 13.0%. The nine-month increase included a $41.5 favorable foreign-exchange effect; third-quarter sales faced a $3.6 unfavorable currency effect.
- Third-quarter operating income increased $7.1, aided by volume, improved fixed-cost absorption and lower SG&A. Nine-month operating income improved $13.2. Nine-month gross margin declined 20 basis points, while third-quarter margin improved 30 basis points.
- Nine-month continuing-operations earnings improved by $24.9 from the prior-year loss. Lower refinancing-related interest expense contributed: the prior-year period included about $20.0 of refinancing costs.
- Other expense was $7.6 for the nine months, versus other income of $2.1 a year earlier, primarily reflecting foreign-currency losses on intercompany loans and other transactions. Third-quarter currency losses were $2.1.
- Segment trends were mixed: North America and Europe improved nine-month continuing-operations earnings; South America earnings edged down despite sales growth; Commercial Products earnings increased modestly. Asia sales grew but the segment remained loss-making and management cited growth investment and launch activity.
Outlook, risks and unusual items
- Fiscal 2012 outlook: Management expected sales growth of 8%–10% versus fiscal 2011, operating income of 4.1%–4.5% of sales, diluted EPS of $0.70–$0.75, and capital spending of $70–$75. These are forward-looking expectations, not results achieved in this quarter.
- Management anticipated continued North American commercial-vehicle recovery, slower improvement in Europe, flattening Asia sales amid a slowing Chinese off-highway market, and softer South American sales after vehicle purchases were brought forward ahead of Brazil’s 2012 emissions-standard change.
- Unusual items included a $2.3 SG&A reserve reversal after a trade-compliance matter was closed, a $2.2 loss on disposal of European assets, and $0.7 of discontinued-operations income from reducing a Netherlands environmental reserve. The prior-year comparison included a $2.2 facility-sale gain and environmental and asset-impairment charges.
- Trade-compliance matters: the company paid $2.1 to one agency, another closed its review without payment, and $0.1 remained reserved. Environmental reserves were $6.9; the filing states outcomes remain uncertain, though management did not expect a material adverse effect based on information then available. A Brazilian subsidiary was defending an environmental-related suit.
- Other disclosed risks include market and customer demand, China and European economic conditions, foreign exchange, commodity-price increases and pass-through timing, supplier and program-launch execution, environmental matters, and the ability to realize tax benefits. Ten largest customers accounted for about 45% of trade receivables.
- Controls: Management concluded disclosure controls were not effective at December 31, 2011 because of previously identified material weaknesses involving inventory management and trade compliance. Remediation was underway; the filing reported no third-quarter change in internal control that materially affected, or was reasonably likely to materially affect, it.
- Fiscal 2011 comparative quarterly figures were revised for errors. For the nine months ended December 31, 2010, the revisions reduced continuing-operations earnings by $2.7 and diluted EPS by $0.06.
Key facts for investors to verify
- Whether sales growth and the 4.1%–4.5% operating-margin and $0.70–$0.75 EPS outlook were achieved in the full fiscal year.
- Whether the inventory and trade-compliance control weaknesses were fully remediated and controls subsequently deemed effective.
- Cash conversion, working-capital needs, capital spending and debt levels, particularly given operating cash flow of $18.3 versus capital expenditures of $45.3 for the nine-month period.
- Exposure to currency and commodity movements, including unhedged foreign-currency intercompany loans and the effect of Brazilian emissions-related vehicle pre-buying.
- Developments in environmental reserves and litigation, tax contingencies, and the company’s ability to realize deferred tax assets.