Modine Manufacturing Company — Form 10-Q Summary
Reporting period: Three months ended June 30, 2013, the first quarter of fiscal 2014. The filing compares results with the quarter ended June 30, 2012, and is unaudited. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $375.8 | $350.4 |
| Gross profit / margin | $61.9 / 16.5% | $51.7 / 14.7% |
| Operating income / margin | $19.0 / 5.1% | $3.9 / 1.1% |
| Continuing-operations earnings (loss) | $10.6 | $(1.0) |
| Net earnings (loss) attributable to Modine | $10.0 | $(1.2) |
| Diluted EPS attributable to Modine | $0.21 | $(0.03) |
| Cash from operating activities | $15.9 | $4.8 |
| Capital expenditures | $10.2 | $11.7 |
Sales increased 7.2%, primarily on higher automotive and commercial-vehicle volumes. Gross margin expanded 180 basis points, mainly from volume gains and lower material costs, partly offset by $2.2 million of accelerated depreciation in Europe. SG&A declined $0.8 million to $42.4 million; restructuring expense fell $4.1 million to $0.5 million. The improvement in operating income reflected higher gross profit and lower restructuring expense.
Operating cash flow less capital expenditures was approximately $5.7 million, calculated from reported figures. Cash and cash equivalents were $30.9 million at June 30, up from $23.8 million at March 31, 2013.
Balance sheet and liquidity
- At June 30, cash was $30.9 million; current assets were $412.1 million and current liabilities were $279.7 million.
- Total debt was $166.7 million: $33.2 million of short-term debt, $1.1 million of current long-term debt, and $132.4 million of long-term debt.
- The company reported $190.0 million of total available credit lines, including $138.0 million available under its domestic revolver and $52.0 million in unused foreign lines. The $145.0 million domestic revolver expires in August 2014 and had no borrowings outstanding.
- Modine reported compliance with debt covenants. Its four-quarter interest coverage ratio was 8.45 against a 3.00 minimum; leverage was 1.69 against a 3.25 maximum.
- Pension liabilities were $106.0 million; the company contributed $1.6 million to U.S. pension plans during the quarter.
Segments and notable changes
Europe drove the largest sales increase: sales rose to $146.2 million from $125.4 million, and operating income improved to $8.0 million from a $2.5 million loss. North America sales declined to $148.7 million from $153.6 million, although operating income increased to $14.3 million. South America and Asia sales rose to $34.4 million and $18.3 million, respectively; Asia’s operating loss narrowed to $0.3 million. Commercial Products sales increased to $32.4 million while operating income remained $1.0 million.
The Europe restructuring, begun in fiscal 2013, includes product-line exits, cost reductions, headcount actions, and asset disposals. Since its start, the company had recorded $24.1 million in asset impairment charges, $15.1 million in severance, and $4.6 million in repositioning expenses. It reported $11.4 million of accrued severance at June 30. Management expected approximately $2.0 million of additional accelerated depreciation by the end of Q2 FY2014 as a German manufacturing-process change was completed.
Outlook, risks, and unusual items
- For the remainder of fiscal 2014, management forecast year-over-year sales growth of 3%–8% and diluted EPS of $0.50–$0.60, excluding Europe restructuring costs. Management cautioned about North American commercial-vehicle and off-highway markets and European commercial-vehicle and automotive markets.
- Risks highlighted include execution of the Europe restructuring, customer and market weakness, program-launch and product-transfer disruptions, pricing pressure, commodity and foreign-exchange movements, environmental remediation, supplier performance, litigation, and the ability to realize tax benefits.
- The company continued full valuation allowances against net deferred tax assets in the U.S. and certain foreign jurisdictions. It noted that a change in the U.S. three-year cumulative-loss position might occur in late fiscal 2014 or fiscal 2015. German tax examinations covered fiscal 2006–2010 and Austrian examinations fiscal 2009–2011; unrecognized tax benefits could decrease by up to $6.9 million over the next twelve months.
- Environmental remediation accruals were $5.1 million. The company described several EPA-designated sites and other environmental matters, and stated that currently estimated outcomes were not expected to materially affect its financial position, while acknowledging uncertainty and possible unfavorable outcomes.
- The filing disclosed a prior-period out-of-period adjustment: a commodity-hedge error overstated Q1 FY2013 pretax earnings by $0.5 million; management deemed it immaterial to that quarter. Foreign-currency translation reduced other comprehensive income by $4.3 million in Q1 FY2014.
Investor verification checklist
- Confirm whether sales growth, EPS guidance, and market assumptions held through the balance of fiscal 2014, including the exclusion of restructuring costs from EPS guidance.
- Track Europe restructuring execution, remaining severance accruals, expected accelerated depreciation, and any further restructuring actions.
- Review cash conversion, capital spending, working-capital movements, and the availability and renewal of credit facilities, particularly the August 2014 revolver expiration.
- Monitor covenant headroom, pension funding, and the potential effects of tax valuation allowances and ongoing tax examinations.
- Assess developments in environmental matters, warranty accruals, commodity exposure, foreign exchange, and the disclosed customer, supplier, and market risks.