Modine Manufacturing Company — Form 10-Q Summary
Business context and reporting period. Modine manufactures thermal-management products and reports results across North America, Europe, South America, Asia, and Building HVAC. This filing covers the third quarter and first nine months of fiscal 2015, ended December 31, 2014; comparisons are with the corresponding fiscal 2014 periods. Amounts are in millions except per-share data.
Financial performance
| Metric | Quarter ended Dec. 31, 2014 | Prior-year quarter | Nine months ended Dec. 31, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $363.6 | $347.0 | $1,133.4 | $1,087.0 |
| Gross profit / margin | $59.4 / 16.4% | $56.8 / 16.4% | $183.8 / 16.2% | $175.9 / 16.2% |
| Operating income | $15.5 | $0.9 | $47.5 | $30.5 |
| Continuing-operations earnings (loss) | $9.1 | $(3.4) | $25.2 | $12.2 |
| Net earnings attributable to Modine | $9.6 | $(3.6) | $25.0 | $11.0 |
| Diluted EPS attributable to Modine | $0.20 | $(0.08) | $0.52 | $0.23 |
Quarterly sales rose 5%; nine-month sales rose 4%. Operating income improved substantially in both periods, while gross margin was unchanged. SG&A was 12.5% of quarterly sales and 12.0% of nine-month sales, slightly lower as a share of sales than in the respective prior periods.
Cash, liquidity, and debt
- Nine-month operating cash flow was $44.1, down from $86.7, primarily because of unfavorable working-capital changes, including higher incentive-compensation payments. Capital expenditures were $41.9, versus $36.0.
- Cash was $79.9 at December 31, 2014, compared with $87.2 at March 31, 2014. The cash balance included approximately $22.0 of insurance advances expected to fund Airedale recovery and reconstruction.
- Debt included $23.0 of short-term foreign borrowings, $0.5 of current long-term debt, and $130.1 of long-term debt. There were no borrowings on the $175.0 U.S. revolving facility; total available credit lines were $218.0. The company reported compliance with debt covenants and expected to remain compliant.
- Current assets were $474.8 and current liabilities were $318.3 at December 31, 2014. Shareholders’ equity was $418.4. Foreign-currency translation reduced other comprehensive income by $38.0 for the nine-month period.
Material changes and segment performance
- Building HVAC: Sales increased 52% for the quarter and 37% year to date; operating income was $9.8 and $16.2, respectively. Growth reflected the Airedale recovery from the prior-year fire disruption, acquired Barkell sales, and stronger heating-product sales.
- Europe: Quarterly sales fell 2%, including a $12.1 unfavorable currency impact; gross margin declined to 10.3%. Operating income improved to $5.9 from a loss of $5.3, aided by lower restructuring and impairment charges and a wind-tunnel sale. Nine-month operating income was $20.9 versus $6.0.
- South America: Quarterly sales fell 22% and nine-month sales fell 21%, amid continued weak Brazilian conditions and adverse currency effects. The segment posted operating losses of $1.3 for the quarter and $1.2 year to date, versus profits in the comparable periods.
- North America: Sales increased 2% for the quarter and 1% year to date, but operating income declined to $6.9 and $30.9, respectively, reflecting higher SG&A and restructuring costs and weaker year-to-date gross profit.
- Asia: Sales increased 18% for the quarter and 16% year to date; operating losses narrowed to $0.3 and $0.1, respectively.
Outlook, unusual items, and risks
- For fiscal 2015, management forecast sales growth of 1%–3%, operating income of $65–$70, and diluted EPS of $0.63–$0.70, excluding restructuring charges and the wind-tunnel sale gain.
- Quarterly results included a $3.2 gain on the sale of a Europe-segment wind tunnel. The prior-year quarter included $9.4 of restructuring expense and $2.0 of impairment charges. Restructuring costs were lower as the European program neared completion; North American plant consolidation and South American severance costs continued.
- Fiscal 2015 results included $4.6 of Airedale business-interruption insurance recoveries in SG&A, including $2.0 recorded in the quarter. The company estimated Airedale reconstruction costs and the related liability at $56.9, with a $25.9 insurance receivable at December 31, 2014; it said expected insurance recoveries should prevent a significant liquidity impact.
- The quarter included a $0.6 after-tax gain from final collection of promissory notes related to the 2009 sale of the Electronics Cooling business.
- Management cited ongoing weakness in Brazil, foreign-exchange volatility, customer pricing pressure, material costs, execution of restructuring and facility transfers, and Airedale reconstruction and operating continuity as important risks. Environmental remediation accruals were $4.2; management did not expect the disclosed matters to materially harm financial position, while noting uncertainty. The company also maintained valuation allowances against certain foreign and U.S. deferred tax assets.
Important facts for investors to verify
- Whether fiscal 2015 sales, operating-income, and EPS guidance was achieved, and how reported results compare after restructuring costs and the wind-tunnel gain.
- Underlying profitability and cash conversion excluding insurance recoveries and other unusual items, especially given the year-over-year decline in operating cash flow.
- Progress, final cost, and insurance reimbursement timing for Airedale reconstruction, including the recorded liability and receivable.
- Whether weak Brazilian demand and currency movements continued to pressure South America and Europe, and whether margin trends improved in those segments.
- Debt-covenant headroom, access to credit facilities, and changes in deferred-tax valuation allowances and environmental contingencies.