Business context and reporting period
Modine Manufacturing Company filed this unaudited Form 10-Q for the three months ended June 30, 2015, the first quarter of fiscal 2016 (fiscal year ends March 31). The company manufactures thermal management products and reports four segments: Americas, Europe, Asia, and Building HVAC. Unless stated otherwise, amounts are in millions of dollars.
Key financial results
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $346.1 | $392.5 |
| Gross profit / margin | $57.0 / 16.5% | $67.7 / 17.2% |
| Operating income / margin | $11.6 / 3.4% | $24.1 / 6.1% |
| Net earnings | $5.5 | $14.1 |
| Net earnings attributable to Modine | $5.1 | $13.7 |
| Diluted EPS | $0.11 | $0.28 |
| Operating cash flow | $(0.1) | $2.5 |
Interest expense was $2.8 versus $3.1; the effective tax rate was 37.5% versus 32.2%. SG&A was $42.8 in both periods. Restructuring expense rose to $2.6 from $0.8.
At June 30, cash and equivalents were $60.7, current assets $469.0, and current liabilities $313.3. Debt totaled approximately $151.5, comprising $21.1 short-term debt, $0.5 current long-term debt, and $129.9 long-term debt. The company reported $210.0 of total available credit lines, including an undrawn $175.0 domestic revolver, and was in compliance with debt covenants. Capital expenditures were $16.0. Cash declined $9.8 during the quarter to $60.7.
Material changes and segment performance
Sales fell $46.4, or 12%, primarily from a $40.2 unfavorable foreign-exchange impact and lower off-highway customer volume; higher automotive volume partly offset the declines. Gross profit fell $10.7 and gross margin contracted 70 basis points, reflecting currency effects and higher material costs. Operating income declined $12.5, mainly due to lower gross profit and higher restructuring costs. Prior-year SG&A included a $2.6 Airedale fire business-interruption insurance recovery, which did not recur.
- Americas: sales $159.1 versus $176.8; operating income $9.3 versus $15.9. Weak Brazil conditions and lower off-highway and commercial-vehicle volume weighed on results.
- Europe: sales $131.2 versus $158.6; operating income $5.7 versus $10.4. Currency translation and lower off-highway volume were significant factors; gross margin fell to 11.5% from 14.0%.
- Asia: sales $19.3 versus $20.8; operating income $0.4 versus $0.9. Lower off-highway and tooling sales were partly offset by automotive and India growth.
- Building HVAC: sales $41.3 versus $40.7; operating income $2.1 versus $3.2. Gross margin improved to 27.7% from 24.3%, but the absence of the prior-year insurance recovery increased SG&A.
Effective April 1, 2015, Modine combined its North America and South America reporting segments into Americas; prior-period segment figures were recast.
Outlook, risks, contingencies, and unusual items
No specific revenue or earnings guidance for the full year is provided. Management said it expected to remain covenant-compliant and did not expect the Airedale fire to significantly harm liquidity, assuming insurance recoveries arrive as expected. Reconstruction was expected to be completed, with operations returning to the Rawdon site, in late fiscal 2016. The company had received $78.0 of cumulative fire-insurance proceeds; at June 30 it recorded a $3.6 insurance receivable and a $50.4 estimated reconstruction liability.
In May 2015, Modine approved a voluntary lump-sum pension payout offer to certain eligible former U.S. employees. It expected a $20–$30 settlement loss in Q2 FY2016, dependent on participation and actuarial assumptions. Payments would come from plan assets and were not expected to affect operating cash flow.
Other notable items include a planned Washington, Iowa facility closure and the ongoing transfer of McHenry, Illinois production, alongside restructuring in Brazil and Europe. The company cited foreign-exchange movements, weak Brazilian conditions, commodity costs, customer pricing pressure, restructuring execution, product launches and transfers, and the Airedale rebuild as risks. It had accrued $3.2 for a Brazilian antitrust investigation; environmental accruals were $3.9. Management said environmental matters and other litigation were not expected to have a material adverse effect, while noting inherent uncertainty. Certain foreign and U.S. deferred tax assets remained subject to valuation allowances.
Important facts for investors to verify
- Whether sales, margins, and operating earnings stabilize as foreign-exchange effects, customer volumes, and material costs change.
- Progress and total cost of the Airedale reconstruction, timing of insurance reimbursements, and completion of the return to Rawdon.
- Execution and realized savings from the Washington, McHenry, Brazil, and Europe restructuring plans.
- Actual participation and the final pension settlement charge versus the estimated $20–$30 range.
- Developments in the Brazilian antitrust investigation, environmental matters, and the company’s covenant and liquidity position.