Modine Manufacturing Company — Form 10-Q Summary
Business context and period. This filing covers the quarter and six months ended September 30, 2012—the second quarter and first half of Modine’s fiscal 2013. Modine supplies thermal-management products to markets including commercial vehicles, off-highway, automotive, and commercial HVAC. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Financial performance and condition
| Metric | Three months ended Sept. 30, 2012 | Six months ended Sept. 30, 2012 |
|---|---|---|
| Net sales | $339.9; down 14.4% year over year | $690.3; down $124.9 year over year |
| Gross profit / margin | $52.6 / 15.5%, versus $62.4 / 15.7% | $104.2 / 15.1%, versus $132.2 / 16.2% |
| Operating income (loss) | $(6.8), versus $12.2 | $(2.9), versus $32.5 |
| Continuing operations income (loss) | $(11.8), versus $1.0 | $(12.9), versus $13.6 |
| Net income (loss) attributable to Modine | $(12.2), versus $1.3 | $(13.4), versus $13.9 |
| Diluted earnings (loss) per share | $(0.26), versus $0.03 | $(0.29), versus $0.30 |
Cash flow and investment. First-half operating cash flow was $26.8, up from $3.2 a year earlier, mainly reflecting favorable working-capital changes. Capital expenditures were $20.7, compared with $32.5; the Geofinity acquisition used $4.9. Cash declined $1.8 during the half to $29.6.
Liquidity and debt. At September 30, cash was $29.6 and total available credit lines were $187.0. Balance-sheet debt was approximately $163.1, comprising short-term debt, current maturities, and long-term debt. The company reported compliance with debt covenants; its four-quarter interest coverage ratio was 8.83 against a 3.00 minimum, and leverage was 1.64 against a 3.25 maximum. Current assets were $400.5 and current liabilities $265.3.
Other metrics. Total assets were $832.5, down from $893.5 at March 31, 2012. Pension liabilities were $87.4. The company continued a full valuation allowance against certain U.S., German, and other foreign deferred tax assets.
Material changes versus the prior comparable period
- Lower demand across all segments and unfavorable currency movements drove sales declines. Automotive sales fell 28% in the quarter; commercial vehicle and off-highway sales fell 18% and 14%, respectively. For the first half, automotive and commercial vehicle sales declined 30% and 15%.
- Quarterly gross margin edged down 20 basis points; first-half gross margin fell 110 basis points. Reduced volume and currency effects were partly offset by pricing, product mix, and lower material costs.
- Europe’s first-half sales fell $74.6 and segment operating results shifted from $19.9 income to a $10.1 loss, reflecting lower volume, $15.8 of impairments, and $5.9 of restructuring and repositioning expenses. Asia also weakened, with first-half operating results moving from $0.1 income to a $4.6 loss.
- Reported operating results included $16.7 of asset impairment charges in the quarter and $5.9 of first-half restructuring and repositioning costs. Lower SG&A partly offset the deterioration; the quarter included a $2.0 reversal of an acquisition-related liability in South America.
- Other income improved versus the prior year, when foreign-currency transaction losses were $6.4 for the quarter and $5.9 for the half.
Outlook, commentary, risks, and unusual items
- Fiscal 2013 outlook: Management expected net sales to decline 10%–12% from fiscal 2012, operating margin of 2.75%–3.25%, and diluted EPS of $0.40–$0.50. Margin and EPS guidance exclude impairment and European restructuring charges.
- Management cited weak conditions in Europe, South America, and Asia; approximately $80 million of planned program reductions for the full fiscal year; and unfavorable foreign exchange. Program reductions include the BMW business wind-down in Europe and Asia and certain North American automotive and military programs.
- The European restructuring targets a strategic focus on commercial vehicle, off-highway, and engine markets. Management anticipated about $10.0 of additional restructuring and repositioning costs, mostly through fiscal 2014, and approximately $15.0 of future cash expenditures related to the plan. Further charges were expected in the second half of fiscal 2013 and beyond.
- The company acquired Geofinity Manufacturing on July 25, 2012, for $4.9 net of cash acquired, adding geothermal heat-pump products to Commercial Products.
- A $10.7 estimated European VAT liability remained recorded for unpaid VAT, interest, and penalties. The matter was being reported to tax authorities, and the ultimate resolution was uncertain. A German tax audit covering fiscal years 2006–2010 had begun.
- Environmental remediation reserves were $5.9. Modine was also a potentially responsible party at six U.S. sites and was voluntarily participating in care of a landfill; management said the ultimate outcome of identified environmental matters was not expected to materially affect results, while acknowledging uncertainty.
- Management concluded disclosure controls were ineffective at September 30, 2012 because of a previously identified material weakness related to VAT compliance. Remediation efforts were underway. The filing also describes prior-period revisions for identified errors and a nonmaterial $0.5 out-of-period commodity-hedge adjustment in first-quarter fiscal 2013.
- Key risks include execution of restructuring and cost reductions, continued market weakness and currency volatility, pricing and commodity pressures, customer program changes, warranty and launch issues, environmental matters, VAT exposure, and the ability to realize tax benefits. Management stated it expected to remain in covenant compliance.
Important facts for investors to verify
- Whether demand, currency movements, and announced program reductions track management’s fiscal 2013 sales, margin, and EPS outlook.
- Progress, total costs, cash requirements, asset disposals, and expected savings from the European restructuring; monitor for further impairment charges.
- Resolution and potential additional exposure from the European VAT matter, and progress in remediating the control weakness.
- Operating cash generation and working-capital trends, available borrowing capacity, and continued covenant compliance if earnings weaken.
- Whether the reported prior-period revisions and commodity-hedge adjustment have any further implications for reported results or controls.