Modine Manufacturing Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2021, the third quarter and first nine months of fiscal 2022. Unless stated otherwise, amounts are in millions of dollars. Modine supplies thermal management products through Building HVAC Systems (BHVAC), Commercial and Industrial Solutions (CIS), Heavy Duty Equipment (HDE), and Automotive segments.
Financial performance
| Metric | Three months ended Dec. 31, 2021 | Prior-year quarter | Nine months ended Dec. 31, 2021 | Prior-year period |
|---|---|---|---|---|
| Net sales | $502.2 | $484.3 | $1,475.7 | $1,293.5 |
| Gross profit / margin | $74.6 / 14.9% | $82.7 / 17.1% | $214.1 / 14.5% | $209.6 / 16.2% |
| Operating income (loss) | $79.4 | $(108.7) | $98.6 | $(83.4) |
| Net earnings (loss) attributable to Modine | $74.1 | $(195.7) | $76.8 | $(195.7) |
| Diluted earnings (loss) per share | $1.41 | $(3.81) | $1.46 | $(3.82) |
Reported operating income and earnings were heavily affected by the liquid-cooled automotive business impairment accounting: the company reversed $57.2 million of prior impairment charges in the quarter, versus $134.4 million of impairment charges in the prior-year quarter. The nine-month reversal was $55.7 million net. The quarter’s $74.1 million attributable earnings therefore should not be viewed as a measure of underlying operating performance without considering this item and tax effects.
- Sales and margins: Quarterly sales rose 4%, while gross margin fell 220 basis points to 14.9%. Nine-month sales increased 14%, while gross margin declined 170 basis points to 14.5%. Management attributed margin pressure principally to higher raw-material, freight, fabrication, and packaging costs and timing lags in customer price increases.
- Segment trends: Quarterly sales increased in CIS, BHVAC, and HDE, but fell 36% in Automotive. Automotive was affected by the air-cooled business sale and semiconductor-related production constraints. For the nine months, HDE, CIS, and BHVAC sales increased, while Automotive sales declined 22%.
- Cash flow: Nine-month operating cash flow was $7.4 million, down from $146.5 million. The company cited working-capital use, including inventory growth and higher incentive compensation and employee-benefit payments. Capital expenditures were $30.7 million, implying cash flow after capital expenditures of approximately negative $23.3 million.
- Liquidity and debt: At December 31, cash and cash equivalents were $61.1 million; current assets were $701.6 million and current liabilities $434.1 million. Debt was $21.8 million current and $368.8 million long-term on the balance sheet. Revolver borrowings were $81.2 million, with $163.1 million available. The company reported covenant compliance, a leverage ratio of 2.5 against a 3.25 maximum, and interest coverage of 10.0 against a 3.0 minimum.
Material changes and unusual items
- Modine and Dana terminated their agreement to sell the liquid-cooled automotive business after an extended German regulatory review. The business returned to held-and-used classification; assets were remeasured, the impairment reversal recorded, and depreciation resumed.
- Modine sold its air-cooled automotive business on April 30, 2021, recording a $6.6 million loss. It also paid the buyer $2.4 million in the third quarter for a finalized purchase-price adjustment. A €4.0 million loan facility was provided to the buyer; the company disbursed $4.7 million under it.
- Effective July 1, 2021, data-center businesses moved from CIS to BHVAC. Prior-period segment information was recast; the change did not affect consolidated results.
- Quarterly SG&A declined $5.8 million year over year, while nine-month SG&A rose $10.0 million, reflecting differing prior-year cost actions and compensation costs. Nine-month restructuring expense was $3.0 million.
- Tax rates and comparisons were unusually affected by deferred-tax valuation allowances and the automotive impairment accounting. The company recorded $11.4 million of net tax benefits from foreign valuation-allowance changes during the first nine months; U.S. and certain foreign valuation allowances remained in place.
Outlook, risks, and contingencies
The filing does not provide specific revenue or earnings guidance. Management expects supply-chain pressures and temporary production disruptions from employee absences to continue in the near term, and said it cannot reasonably estimate their full future impact. Risks include labor shortages, inflation and commodity costs, component delays, and semiconductor shortages affecting Automotive. The company has raised selling prices and is working with suppliers, but customer price adjustments may lag cost increases.
After quarter-end, Modine committed to restructuring intended to reduce SG&A and operating costs, particularly in Automotive. It targets approximately $20 million of annual consolidated savings and expects $20 million to $25 million of restructuring charges in the fourth quarter of fiscal 2022 or early fiscal 2023, mostly severance; specific actions and timing were not yet determined.
Other items to monitor include $18.7 million of environmental accruals, including a $3.4 million increase for a former U.S. facility, and litigation that management did not expect to have a material adverse effect. The Coils and Coolers reporting unit had $63.0 million of goodwill and estimated fair value only about 8% above carrying value, creating heightened risk of a future impairment if forecasts or market assumptions weaken.
Most important facts for investors to verify
- How much of reported earnings reflects recurring operations versus the $57.2 million impairment reversal and related tax effects.
- Whether pricing actions can catch up with raw-material and logistics inflation, and whether gross margins stabilize.
- Whether working-capital demands, particularly inventory, continue to constrain operating cash flow and liquidity.
- Progress toward the stated $20 million annual savings target, including the timing and actual cost of the planned restructuring.
- Developments in semiconductor availability, supply-chain conditions, the Automotive business, and the Coils and Coolers goodwill impairment cushion.