Business context and reporting period
Modine Manufacturing Company manufactures thermal management products and reports results across the Americas, Europe, Asia, and Building HVAC segments. This Form 10-Q covers the quarter ended December 31, 2015, the third quarter of fiscal 2016, and the nine months then ended. Comparisons are with the corresponding periods ended December 31, 2014. Dollar amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $328.7, down 10% from $363.6 | $1,008.8, down 11% from $1,133.4 |
| Gross profit and margin | $58.6; 17.8%, versus $59.4 and 16.4% | $161.3; 16.0%, versus $183.8 and 16.2% |
| Operating income (loss) | $13.7, versus $15.5 | $(6.8), versus $47.5 |
| Continuing-operations earnings (loss) | $8.2; diluted EPS $0.17 | $(8.8); diluted loss per share $(0.19) |
| Net earnings (loss) attributable to Modine | $8.2, versus $9.6 | $(9.2), versus $25.0 |
| Operating cash flow | Not presented separately for the quarter | $65.4, versus $44.1 |
| Capital expenditures | Not presented separately for the quarter | $42.3, versus $41.9 |
Quarterly gross margin improved 140 basis points, primarily on lower material costs and improved production efficiencies, despite lower sales. Nine-month gross profit and operating results were heavily affected by $40.3 of non-cash pension settlement losses. The nine-month tax benefit was $6.7, including $15.7 of discrete tax benefits related to those losses.
At December 31, 2015, cash and cash equivalents were $81.5, compared with $70.5 at March 31, 2015. Total debt was $153.8, including $21.8 of short-term debt, $4.4 of current long-term debt, and $127.6 of long-term debt. The company had $209.0 of total available credit lines, no borrowings on its $175.0 domestic revolver, and was in compliance with debt covenants. Current assets were $441.9 and current liabilities $294.3.
Material changes and management commentary
- Sales fell mainly because of the stronger U.S. dollar: unfavorable currency effects were $25.9 in the quarter and $100.5 year to date. Lower off-highway and HVAC demand also weighed on sales; higher automotive volumes provided some offset.
- Quarterly operating income declined partly because the prior-year quarter included a $3.2 gain on a wind-tunnel sale. The current quarter also lacked a $2.0 Building HVAC insurance recovery recorded in the prior-year quarter.
- For the first nine months, the $40.3 pension settlement loss comprised $31.8 in SG&A and $8.5 in cost of sales. About 2,000 former employees accepted lump-sum settlements totaling $62.4, paid from pension plan assets; the program reduced the pension obligation by the same amount.
- Segment trends were mixed. In the quarter, Americas operating income rose to $7.7 and Europe to $7.6; Building HVAC operating income fell to $6.7, and Asia recorded a $0.1 operating loss. Year-to-date operating income declined in Americas, Europe, and Building HVAC; Asia’s operating loss widened to $0.9.
- The company launched its “Strengthen, Diversify and Grow” transformation, including procurement savings, footprint optimization, organizational changes, and a U.S. voluntary retirement program. It announced closure of its Washington, Iowa facility and completed production transfers from McHenry, Illinois.
Outlook, risks, and contingencies
- The filing provides no specific consolidated revenue or earnings guidance. Management expected to complete Airedale facility reconstruction and relocation in the fourth quarter of fiscal 2016; most operations had returned to the Rawdon site during the quarter.
- Management expected approximately $2.0 of additional severance expense in fiscal 2016’s fourth quarter from the U.S. voluntary retirement program. It expected to remain in compliance with debt covenants.
- Management said a release of approximately $3.0 of foreign deferred-tax valuation allowance might be possible in late fiscal 2016 or fiscal 2017; realization is uncertain. Valuation allowances included $43.8 for certain foreign deferred tax assets and $5.8 for certain U.S. deferred tax assets.
- Liquidity includes significant cash held by non-U.S. subsidiaries. The company repurchased $2.1 of shares during the quarter under a Board-approved 12-month, $50.0 repurchase program.
- Key disclosed risks include foreign-exchange volatility, weak Brazilian economic conditions, commodity-price exposure, customer pricing pressure and demand, execution of restructuring and strategic initiatives, supplier and product-launch issues, and completing the Airedale rebuild while meeting customer needs.
- Environmental remediation accruals totaled $4.2. The company also accrued $2.5 for a Brazil antitrust investigation and stated its outcome could not yet be assured. Management did not expect these matters or other ordinary-course litigation to have a material adverse effect, but noted inherent uncertainty.
Important facts for investors to verify
- Whether sales volumes and margins improve as currency headwinds, weaker off-highway demand, and Brazil’s economic weakness evolve.
- The underlying earnings trend excluding the $40.3 pension settlement loss and prior-period wind-tunnel gain and Airedale insurance recoveries.
- Completion, cost, and insurance recovery status of the Airedale reconstruction, and delivery of expected restructuring savings.
- Cash generation, capital spending, debt levels, covenant headroom, and the impact of share repurchases on liquidity.
- Developments in tax-asset recoverability, the Brazil antitrust investigation, and environmental matters.