Modine Manufacturing Company — Q1 FY2022 Form 10-Q
Reporting period: Three months ended June 30, 2021; the comparable period is the three months ended June 30, 2020 (Q1 FY2021). Modine operates in Building HVAC Systems (BHVAC), Commercial and Industrial Solutions (CIS), Heavy Duty Equipment (HDE), and Automotive. Unless otherwise noted, amounts are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $494.6 | $347.8 |
| Gross profit / margin | $73.2 / 14.8% | $46.1 / 13.3% |
| Operating income (loss) / margin | $8.7 / 1.8% | $(3.2) / (0.9)% |
| Net earnings (loss) attributable to Modine | $2.3 | $(8.6) |
| Diluted earnings (loss) per share | $0.04 | $(0.17) |
| Cash from operating activities | $(10.1) | $12.3 |
| Capital expenditures | $11.4 | $9.1 |
- Sales increased 42%, primarily on higher volume across all segments as markets recovered from pandemic impacts in the prior-year quarter; favorable foreign exchange contributed $23.5.
- Gross margin improved 150 basis points. Higher volume and lower Automotive depreciation helped, partly offset by approximately $13.0 of adverse material costs. SG&A rose $14.7, including higher compensation and other corporate costs.
- Cash and cash equivalents were $49.0 at June 30, versus $37.8 at March 31. The cash-flow statement reports $60.3 of cash, cash equivalents, restricted cash, and cash held for sale combined. Operating cash use reflected unfavorable working capital, particularly inventory and employee-related payments.
- At June 30, total current assets were $691.0 and current liabilities were $468.0. Long-term debt was $348.6, with $21.9 current maturities and $0.6 short-term debt on the balance sheet; an additional $10.1 of short-term debt was classified as held for sale. Revolver borrowings were $44.9, with $199.4 available capacity.
- Debt covenant leverage and interest-coverage ratios were 2.0 and 10.8, respectively, versus limits of no more than 3.25 and at least 3. Management reported covenant compliance and expects to remain compliant.
Material changes and segment results
- All segments reported higher sales year over year: BHVAC $59.9 (+26%), CIS $159.2 (+30%), HDE $201.8 (+63%), and Automotive $86.2 (+39%). Growth primarily reflected higher volume against pandemic-affected prior-year results.
- HDE operating income improved to $8.9 from a $2.5 loss; CIS improved to $6.4 from break-even; Automotive improved to $4.2 from a $3.8 loss. BHVAC operating income declined to $6.8 from $7.1, as higher sales were offset by margin pressure and increased expenses.
- On April 30, 2021, Modine sold its air-cooled automotive business and recorded a $6.6 loss. Final purchase-price adjustments remain pending and could increase the loss.
- The proposed sale of the liquid-cooled automotive business to Dana was modified, with certain operations removed from the sale perimeter. Modine is revising the sale agreement and resubmitted a modified plan for German regulatory approval. The company estimates a $30–$50 loss on completion; the final amount could differ materially. It recorded a $5.3 impairment charge and reversed $7.4 of prior impairment during the quarter.
- Beginning in Q2 FY2022, Modine plans to report its Guadalajara, Spain business in BHVAC rather than CIS, aligning data-center operations under BHVAC leadership.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance is provided. Management said available liquidity should cover short- and long-term funding needs and expects covenant compliance through FY2022 and beyond.
- The $4.8 tax benefit from releasing a foreign-jurisdiction valuation allowance affected the quarter; the reported income-tax provision was $1.9. The effective tax rate was 40.4%.
- Environmental accruals totaled $19.3 at June 30, including a $3.4 increase for remediation at a former U.S. facility. Management does not expect the ultimate outcome to materially affect financial position based on current information, but notes uncertainty and possible costs above accruals.
- Key risks include COVID-19 effects on employees, suppliers, customers, and operations; raw-material, freight, and tariff inflation; supply and labor constraints; foreign exchange; and the timing, approvals, and terms of the pending automotive-business sale. Management said higher material costs already affected results.
- Modine reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, regulatory approvals, final sale perimeter, cash contribution requirements, and eventual loss on the Dana transaction.
- Final working-capital and other purchase-price adjustments for the completed air-cooled automotive sale.
- Whether margin gains persist as material, tariff, freight, and labor costs evolve; distinguish recovery-driven growth from sustainable demand.
- Working-capital and operating-cash-flow trends, especially inventory growth, alongside debt, revolver availability, and covenant headroom.
- Environmental remediation estimates and the assumptions supporting the foreign deferred-tax-asset valuation-allowance release.