Modine Manufacturing Company — Form 10-Q Summary
Reporting period: Three months ended June 30, 2017, the first quarter of fiscal 2018. The prior-year comparison is the three months ended June 30, 2016. Amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $515.5 | $347.2 |
| Gross profit / margin | $88.5 / 17.2% | $62.3 / 17.9% |
| Operating income / margin | $27.6 / 5.4% | $15.8 / 4.5% |
| Interest expense | $6.6 | $3.0 |
| Net earnings | $17.4 | $8.9 |
| Net earnings attributable to Modine | $17.0 | $8.6 |
| Diluted EPS | $0.34 | $0.18 |
| Operating cash flow | $18.7 | $1.6 |
| Capital expenditures | $21.6 | $14.5 |
Cash and cash equivalents were $41.5 at June 30, 2017, versus $34.2 at March 31. Balance-sheet debt comprised $90.6 of short-term debt, $34.0 of current long-term debt and $406.0 of long-term debt. Total available credit lines were $135.6. The company reported a 3.0 leverage ratio against a temporarily raised maximum of 3.75, and interest coverage of 7.0 against a 3.0 minimum; it was compliant with covenants.
Business context and material changes
Sales rose $168.3, or 48%, primarily because of $157.5 in sales from Commercial and Industrial Solutions (CIS), acquired with Luvata HTS in November 2016. The acquired segment contributed $10.8 of operating income. As CIS was not included in the prior-year results, reported growth is not a like-for-like comparison.
Excluding the acquisition contribution, sales rose in Americas, Asia and Building HVAC, while Europe declined. Europe operating income fell to $7.9 from $15.3, mainly on lower volume, unfavorable material costs and higher SG&A. Americas operating income increased to $12.1 from $9.6; Asia to $3.3 from $1.5; and Building HVAC to $3.1 from $0.9.
Consolidated gross margin declined 70 basis points to 17.2%, as higher volume was more than offset by unfavorable material costs and acquisition-related depreciation and amortization. Operating income improved despite higher SG&A, which primarily reflected the acquired CIS business. Interest expense rose $3.6, mainly due to debt incurred to finance the acquisition. The effective tax rate was 13.4%, compared with 25.2%; the current quarter included a $3.5 Hungary development-tax-credit benefit.
Liquidity, outlook, risks and unusual items
- Operating cash flow improved year over year, reflecting higher operating earnings and favorable working-capital changes, partly offset by the $4.7 payment settling a Brazil antitrust matter. Investing cash outflow was $22.4; financing cash inflow was $9.6.
- Management expects customer material pass-through provisions, which adjust pricing with a lag, to help mitigate higher metals costs during fiscal 2018. The company expects the Hungary tax credit benefit to total approximately $10.0 for fiscal 2018 and does not expect it to be significant in fiscal 2019. No specific revenue or earnings guidance is provided in the filing.
- Management said it expected to remain in compliance with debt covenants and reported no difficulty meeting global liquidity needs. Approximately $39.0 of cash was held by non-U.S. subsidiaries and could be subject to U.S. tax if repatriated. A shelf registration effective June 26 permits offerings of up to $200.0 in aggregate.
- Luvata HTS purchase-price allocation remained preliminary; further evaluation, expected in the second or third quarter of fiscal 2018, included tax reserves and contingent trade-compliance, environmental, legal and warranty matters. Measurement-period adjustments increased goodwill by $1.3.
- Environmental accruals were $16.5 at June 30. The company noted uncertainty and the possibility of unfavorable outcomes, including significant damages, while stating currently available information did not indicate a material adverse effect on its financial position. The Brazil antitrust matter was settled for $4.7 during the quarter.
- Key stated risks include acquisition integration and realizing synergies, commodity-price increases and lagged pass-throughs, foreign-exchange and interest-rate exposure, customer and supplier conditions, product or launch issues, environmental matters, and the ability to reduce leverage toward its target range of 1.5–2.5.
- Management concluded disclosure controls were effective at quarter-end. Luvata integration activities materially affected, or were reasonably likely to materially affect, internal control over financial reporting.
Important facts for investors to verify
- How much future growth and margin performance depends on CIS, and whether integration and expected synergies are on track.
- Whether higher material costs are recovered through customer pricing, and how Europe’s weaker operating results develop.
- Debt reduction, covenant headroom and progress toward the stated leverage target, especially as temporary covenant limits tighten.
- Final Luvata HTS purchase accounting and any changes to tax, environmental, legal, warranty or other contingent liabilities.
- The realization of tax benefits, including the Hungary credit and deferred-tax assets subject to valuation allowances.