Modine Manufacturing Company — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2022, the three months ended September 30, 2021; fiscal year-to-date results cover the six months ended September 30, 2021. Comparisons are with the corresponding periods of fiscal 2021. Unless noted, dollar amounts are in millions. The filing is unaudited.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $478.9 | $461.4 | $973.5 | $809.2 |
| Gross profit / margin | $66.3 / 13.8% | $80.8 / 17.5% | $139.5 / 14.3% | $126.9 / 15.7% |
| Operating income | $10.5 | $28.5 | $19.2 | $25.3 |
| Net earnings | $0.6 | $8.9 | $3.4 | $0.5 |
| Net earnings attributable to Modine | $0.4 | $8.6 | $2.7 | $0.0 |
| Diluted EPS | $0.01 | $0.17 | $0.05 | $0.00 |
Second-quarter sales rose 4%, but gross margin fell 370 basis points and operating income declined $18.0 million year over year. Management attributed margin pressure chiefly to higher raw-material costs and related premiums, fabrication, freight, tariff and packaging costs; pricing adjustments often lag cost increases. Six-month sales rose 20%, while gross profit increased $12.6 million but gross margin fell 140 basis points. Six-month operating income decreased $6.1 million, reflecting the air-cooled automotive business sale loss and lower Automotive and BHVAC earnings, partly offset by CIS and HDE improvement.
Q2 segment sales increased in BHVAC ($77.5 million, up 13%), CIS ($153.5 million, up 20%) and HDE ($195.8 million, up 18%); Automotive sales fell to $65.4 million, down 40%. Q2 operating income was $10.0 million for BHVAC, $5.8 million for CIS, $5.8 million for HDE and a $5.6 million loss for Automotive. Segment presentation was recast after data-center businesses moved from CIS to BHVAC effective July 1, 2021.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was negative $19.0 million, versus positive $87.3 million a year earlier. The deterioration primarily reflected working-capital movements, including a $54.8 million inventory cash use, and higher incentive-compensation and employee-benefit payments. Management said inventory also reflected higher raw-material prices and strategic safety-stock builds amid supply constraints.
- Investing cash use was $29.0 million, including $20.4 million of capital expenditures. Financing provided $63.7 million, including $199.9 million of borrowings and $145.6 million of debt repayments.
- At September 30, cash and cash equivalents were $56.0 million, compared with $37.8 million at March 31, 2021. Total current assets were $696.7 million and current liabilities $454.0 million. Inventory increased to $248.9 million from $195.6 million.
- Total debt, including current maturities but excluding short-term debt, was $388.7 million; short-term debt was $0.2 million. Revolver borrowings were $67.2 million, with $177.1 million available after letters of credit. The revolver and term-loan weighted-average interest rates were each 1.6%.
- Debt covenant leverage and interest-coverage ratios were 2.5 and 10.1, respectively; Modine reported compliance and expected continued compliance during fiscal 2022 and beyond. Management said cash, operating cash flow and available borrowing capacity should be sufficient for short- and long-term needs. Approximately $54.0 million of cash was held by non-U.S. subsidiaries and could incur withholding taxes if repatriated.
Material developments, outlook and risks
- Dana transaction terminated after quarter-end: On October 25, 2021, Modine and Dana agreed to terminate the proposed sale of the liquid-cooled automotive business after an extended German regulatory review. At September 30, the business remained classified as held for sale. Modine expected it to revert to held-and-used classification in Q3 FY2022 and said it could not yet quantify any resulting asset-value adjustment. Cumulative impairment charges on the held-for-sale assets were $119.6 million; fiscal 2022 included $8.6 million of impairment charges and a $7.4 million reversal for operations removed from the sale perimeter.
- Air-cooled automotive sale: The business was sold April 30, 2021, with a $6.6 million loss recognized in Q1 FY2022. Purchase-price adjustments remained pending; Modine did not expect a material adjustment but said the loss could increase.
- Costs and taxes: The six-month period included $3.6 million of environmental charges and $1.3 million of higher Corporate costs related to the Automotive strategic-alternatives review. The Q2 effective tax rate was 90.0%, including a $1.6 million foreign deferred-tax valuation-allowance charge; the six-month rate was 68.2% and included a net $3.2 million benefit from foreign valuation-allowance adjustments.
- Impairment sensitivity: The CIS Coils and Coolers reporting unit had $61.0 million of goodwill and estimated fair value only about 8% above carrying value. Management said an approximately 100-basis-point increase in the discount rate or 150-basis-point decrease in terminal growth could trigger impairment.
- Contingencies: Environmental remediation accruals were $18.9 million, up from $16.0 million at March 31, including a $3.4 million increase for a former U.S. facility. Management said currently known environmental matters and other litigation were not expected to have a material adverse effect, while acknowledging uncertain outcomes and possible costs above accruals.
- Operating risks: Management cited COVID-19, global supply-chain constraints, semiconductor shortages affecting automotive demand, inflation and raw-material costs, pricing pass-through delays, labor availability, foreign exchange, and customer and supplier disruptions. No quantified full-year financial guidance is provided in the supplied filing text.
Important facts for investors to verify
- How the Dana termination affects held-for-sale classification, asset valuations and future Automotive results.
- Whether pricing actions catch up with material, freight and other input-cost increases, and whether margins recover.
- Inventory growth, supply constraints and the company’s ability to convert working capital into operating cash flow.
- Automotive segment demand and profitability amid the semiconductor shortage and divestiture changes.
- Coils and Coolers goodwill impairment sensitivity and developments in environmental remediation estimates.
- Debt levels, revolver availability and covenant headroom as borrowing needs and earnings evolve.