Modine Manufacturing Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2020. This is Modine’s third quarter of fiscal 2021; comparisons are with the corresponding prior-year periods. Amounts are in U.S. dollars, millions except per-share data.
Business context
Modine manufactures thermal-management products and reports four segments: Commercial and Industrial Solutions (CIS), Building HVAC Systems (BHVAC), Heavy Duty Equipment (HDE), and Automotive. The company realigned its segment reporting in fiscal 2021, separating Automotive from the former Vehicular Thermal Solutions segment; prior-year segment data was recast.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Net sales | $484.3 | $473.4 | $1,293.5 | $1,502.6 |
| Gross profit / margin | $82.7 / 17.1% | $73.5 / 15.5% | $209.6 / 16.2% | $232.6 / 15.5% |
| Operating income (loss) | $(108.7) | $8.2 | $(83.4) | $32.3 |
| Net income (loss) attributable to Modine | $(195.7) | $1.2 | $(195.7) | $4.5 |
| Basic and diluted EPS | $(3.81) | $0.02 | $(3.82) | $0.09 |
| Operating cash flow | Not stated for the quarter | Not stated for the quarter | $146.5 | $45.9 |
| Capital expenditures | Not stated for the quarter | Not stated for the quarter | $23.7 | $58.2 |
Quarterly sales rose 2%, helped by HDE and BHVAC volume and favorable currency, partly offset by lower CIS sales. Gross margin improved 160 basis points. Nine-month sales fell 14%, while gross margin improved 70 basis points; reduced volume in HDE, CIS, and Automotive drove the revenue decline.
The quarter and nine-month losses included $134.4 million of impairment charges, primarily from the pending sale of the liquid-cooled automotive business. The nine-month tax provision was $95.3 million, including substantial valuation-allowance charges on deferred tax assets. The filing reports $116.5 million of valuation-allowance charges in the quarter, partly offset by $37.7 million of tax benefits related to the impairment charges. These items materially affected reported earnings.
Balance sheet, debt, and liquidity
At December 31, 2020, cash and cash equivalents were $72.9 million; total current assets were $629.4 million and current liabilities $421.0 million. Long-term debt was $342.0 million, with $22.0 million classified as its current portion. The company also reported $0.6 million of short-term debt; additional debt of the held-for-sale business was classified separately. Long-term debt declined from $452.0 million at March 31, 2020. Revolver borrowings were $30.7 million, with $213.6 million of stated availability after letters of credit.
Nine-month operating cash flow was $146.5 million, compared with $45.9 million a year earlier; management attributed the improvement chiefly to working-capital changes and lower separation and project-cost payments. Capital spending declined to $23.7 million from $58.2 million. Management said available cash, operating cash flow, and credit access should be sufficient to meet obligations for at least the next twelve months. The company was in compliance with debt covenants at quarter-end, reporting a 1.9 leverage ratio and 8.7 interest-coverage ratio.
Material developments, outlook, and risks
- Automotive disposition: Modine agreed to sell its liquid-cooled automotive business to Dana Incorporated for a stated selling price of $1, subject to adjustments for cash, debt, and working capital. Closing was expected in the first quarter of fiscal 2022, subject to approvals and customary conditions. The company does not expect significant net cash proceeds and estimated an additional $15 million to $25 million loss on sale at closing; the final amount could differ materially. Modine is also evaluating strategic alternatives for its other Automotive businesses and said it is committed to exiting them.
- COVID-19: The pandemic caused early-fiscal-year plant closures and market declines. Facilities had reopened and production had generally returned toward normal, though employee absences and further disruptions remained risks. Cost reductions, furloughs, shortened work weeks, and salary reductions were scaled back as activity recovered; management continued to focus on expense and capital control.
- Taxes: Modine established a full valuation allowance on U.S. deferred tax assets and valuation allowances in certain foreign jurisdictions after concluding those assets were more likely than not unrealizable. Future taxable income and outlook changes could affect these allowances.
- Debt and liquidity: Amended U.S. credit agreements temporarily raised leverage-covenant limits, which step down during fiscal 2022 before returning to 3.25-to-1 in its fourth quarter. The company expected covenant compliance but identified compliance and access to financing as risks.
- Other items: A new two-year, $50 million share-repurchase program was authorized in November 2020; no shares had been repurchased under it by the filing date. CEO Neil Brinker was appointed effective December 1, 2020; the company recorded $5.9 million of CEO transition and search costs for the nine months. Environmental accruals were $18.4 million. Management stated that other litigation was not expected to have a material adverse effect.
- Key operating exposures: Risks include COVID-19 and end-market uncertainty, customer concentration in CIS (including lower sales to one significant data-center customer), foreign exchange, input-cost inflation, supplier and production disruptions, and execution of restructuring and automotive-exit plans.
Important facts for investors to verify
- Whether the Dana transaction receives required approvals and closes on the expected timeline, and the final net proceeds and loss on sale.
- Whether Modine can sustain covenant compliance as leverage limits tighten, and whether revolver availability and cash generation remain adequate.
- How sales, margins, and customer concentration—particularly in CIS and data-center cooling—develop as markets recover.
- Whether future taxable income supports any release of valuation allowances, or instead requires additional tax charges.
- Whether the remaining Automotive businesses are exited on acceptable terms and whether the $50 million repurchase program is implemented.