Modine Manufacturing Company — FY2020 Form 10-K
Reporting period: Fiscal year ended March 31, 2020, with fourth-quarter results for the three months ended March 31, 2020. The filing was signed May 29, 2020. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
Modine develops thermal-management systems and components for vehicle OEMs and commercial, industrial, and building HVAC&R markets. Its fiscal 2020 segments were Vehicular Thermal Solutions (VTS), Commercial and Industrial Solutions (CIS), and Building HVAC Systems (BHVAC). Management’s strategy is to strengthen, diversify, and grow the business, with an emphasis on industrial markets and a planned exit from automotive.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,975.5 | $2,212.7 |
| Gross profit / margin | $307.5 / 15.6% | $365.5 / 16.5% |
| Operating income / margin | $37.9 / 1.9% | $109.7 / 5.0% |
| Net earnings (loss) attributable to Modine | $(2.2) | $84.8 |
| Diluted earnings (loss) per share | $(0.04) | $1.65 |
| Cash provided by operating activities | $57.9 | $103.3 |
| Capital expenditures | $71.3 | $73.9 |
At March 31, 2020, cash and cash equivalents were $70.9; current assets were $633.3 and current liabilities $372.0. Total debt was approximately $482.4, including short-term debt and current maturities; long-term debt excluding its current portion was $452.0. The company reported $117.5 of available capacity under its revolving credit facility. It was compliant with its debt covenants at year-end, with a 2.4 leverage ratio and 8.1 interest-coverage ratio under the credit-agreement definitions.
Fourth-quarter FY2020 net sales were $472.9, gross profit was $74.9, net loss was $6.4, and net loss attributable to Modine was $6.7, or $(0.13) per share. The comparable FY2019 quarter had sales of $556.7, gross profit of $91.6, and net earnings of $6.4.
Material changes versus the prior comparable period
- Annual sales fell 11%, primarily from lower VTS and CIS sales; unfavorable foreign-exchange movements reduced sales by $46.
- Operating income declined $71.8. Lower gross profit and higher SG&A weighed on results; automotive strategic-review and separation costs totaled $39.2, versus $7.1 in FY2019.
- VTS sales declined 13% to $1,177.2 and operating income fell to $27.6 from $64.8. CIS sales declined 12% to $623.9 and operating income fell to $32.9 from $53.4. BHVAC sales increased 4% to $221.1 and operating income rose to $36.4 from $26.9.
- Cash from operations fell $45.4 to $57.9, mainly due to lower operating earnings and strategic-review payments, partly offset by favorable working-capital changes. Debt increased about $33 from the prior year.
- FY2020 included $12.2 of restructuring expense and $8.6 of impairment charges. The company also recorded a $0.5 goodwill impairment in VTS; its remaining VTS goodwill was written off.
Outlook, commentary, risks, and unusual items
- Management expected global automotive, commercial-vehicle, off-highway, and CIS markets to decline in FY2021. It said COVID-19’s duration and severity, and its effects on demand, operations, supply chains, and cash flows, were uncertain. No quantified company-wide FY2021 revenue or earnings guidance is provided.
- COVID-19 led to facility shutdowns and reduced production across multiple countries. Beginning largely in April 2020, the company implemented furloughs, staffing and work-week reductions, temporary salary reductions, expense controls, and capital-spending delays.
- The planned strategic process for the automotive business was paused amid market weakness and COVID-19. Management remained committed to exiting the business, potentially through a sale, wind-down, or a combination; completion and value realization are uncertain. Automotive became a separate segment beginning April 1, 2020, with results to be reported separately in FY2021.
- In May 2020, the company amended its primary credit agreements to temporarily loosen leverage-covenant limits for the next two fiscal years. Management said it expected to remain compliant, but covenant failure could trigger accelerated repayment. Most borrowings carry variable rates; a 100-basis-point rate increase was estimated to raise FY2021 annual interest expense by about $3.
- Other notable exposures include major-customer and end-market concentration, raw-material and supplier risks, foreign-exchange movements, goodwill and deferred-tax-asset recoverability, and pension funding. Environmental remediation accruals were $18.2; management said currently available information did not indicate a material adverse effect, while noting outcomes remain uncertain. The company expected $20 of U.S. pension contributions in FY2021.
- The company did not pay common dividends in FY2020 or FY2019 and said it did not intend to pay a dividend in FY2021. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; a critical audit matter addressed goodwill valuation for CIS reporting units.
Important facts for investors to verify
- Whether COVID-19 demand, facility utilization, and cash-flow effects differ materially from management’s assumptions, and how much liquidity remains available.
- Progress and potential proceeds or costs from the automotive-business exit, including the risk of a wind-down rather than a sale.
- Debt levels, variable-rate exposure, covenant headroom under the amended agreements, and the ability to refinance or repay maturities.
- Whether CIS and VTS margins recover, and whether BHVAC growth—especially in data-center cooling—can offset weakness elsewhere.
- Assumptions supporting CIS goodwill and deferred tax assets, as well as pension funding needs and environmental-remediation estimates.