# Modine Manufacturing Co: Form 10-Q for the period ended Jun 30, 2019

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2019-08-01
- Accepted by EDGAR: Aug 1, 2019, 10:56 ET
- Period: 2019-06-30
- Accession: 0001140361-19-013948
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036119013948/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036119013948/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-04-01 to 2019-06-30 | $529.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-04-01 to 2019-06-30 | $445.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-04-01 to 2019-06-30 | $83.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-04-01 to 2019-06-30 | $63.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-04-01 to 2019-06-30 | $18.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-04-01 to 2019-06-30 | $5.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-04-01 to 2019-06-30 | $2.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-04-01 to 2019-06-30 | $8.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-04-01 to 2019-06-30 | $0.16 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-04-01 to 2019-06-30 | $0.16 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-04-01 to 2019-06-30 | 51,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2019-04-01 to 2019-06-30 | $500.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2019-04-01 to 2019-06-30 | $20.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2019-04-01 to 2019-06-30 | $2.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-06-30 | $29.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-06-30 | $651.9m | us-gaap:AssetsCurrent |
| Total assets | at 2019-06-30 | $1.60bn | us-gaap:Assets |
| Current liabilities | at 2019-06-30 | $558.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-06-30 | $1.05bn | us-gaap:Liabilities |
| Short-term borrowings | at 2019-06-30 | $121.5m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2019-06-30 | $540.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 20,177 characters.

When we use the terms “Modine,” “we,” “us,” the “Company,” or “our” in this report, we are referring to Modine Manufacturing Company. Our fiscal year ends on March 31 and, accordingly, all references to quarters refer to our fiscal quarters. The quarter ended June 30, 2019 was the first quarter of fiscal 2020.

#### First Quarter Highlights

Net sales in the first quarter of fiscal 2020 decreased $37.1 million, or 7 percent, from the first quarter of fiscal 2019, primarily due to lower sales in our Vehicular Thermal Solutions (“VTS”) and Commercial and Industrial Solutions (“CIS”) operating segments, partially offset by higher sales in our Building HVAC Systems (“BHVAC”) segment. Gross profit decreased $10.9 million and gross margin declined 90 basis points to 15.8 percent, primarily due to lower sales volume. Selling, general and administrative (“SG&A”) expenses increased $4.2 million, primarily due to $8.4 million of costs associated with our review of strategic alternatives for the VTS segment’s automotive business. Operating income during the first quarter of fiscal 2020 decreased $16.7 million to $18.1 million, primarily due to lower gross profit and higher SG&A expenses, and our net earnings decreased $14.3 million.

We previously announced that we are evaluating strategic alternatives for the automotive business within our VTS segment. Our primary objectives include optimizing the VTS segment’s profitability and reprioritizing capital investments across all of our businesses. We are currently engaged in a formal sales process with potential buyers; however, we will continue to evaluate all strategic alternatives for the automotive business in order to maximize shareholder value.

#### CONSOLIDATED RESULTS OF OPERATIONS

The following table presents our consolidated financial results on a comparative basis for the three months ended June 30, 2019 and 2018:

*(in millions)*

|  | Three months ended June 30, 2019 $’s | % of sales | 2018 $’s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $529.0 | 100.0% | $566.1 | 100.0% |
| Cost of sales | 445.6 | 84.2% | 471.8 | 83.3% |
| Gross profit | 83.4 | 15.8% | 94.3 | 16.7% |
| Selling, general and administrative expenses | 63.5 | 12.0% | 59.3 | 10.5% |
| Restructuring expenses | 1.8 | 0.3% | 0.2 | - |
| Operating income | 18.1 | 3.4% | 34.8 | 6.1% |
| Interest expense | (5.9) | -1.1% | (6.2) | -1.1% |
| Other expense – net | (1.1) | -0.2% | (1.1) | -0.2% |
| Earnings before income taxes | 11.1 | 2.1% | 27.5 | 4.9% |
| Provision for income taxes | (2.9) | -0.6% | (5.0) | -0.9% |
| Net earnings | $8.2 | 1.5% | $22.5 | 4.0% |

First quarter net sales of $529.0 million were $37.1 million, or 7 percent, lower than the first quarter of the prior year, primarily due to lower sales in our VTS and CIS segments and a $17.8 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in our BHVAC segment.

First quarter gross profit decreased $10.9 million and gross margin declined 90 basis points to 15.8 percent, primarily due to lower sales volume, higher labor costs, and higher tariff-related expenses, partially offset by favorable raw material costs. In addition, gross profit was unfavorably impacted by $2.6 million from foreign currency exchange rate changes.

First quarter SG&A expenses increased $4.2 million. The increase in SG&A expenses was primarily due to $8.4 million of costs recorded at Corporate associated with our review of strategic alternatives for the VTS segment’s automotive business, which primarily related to third-party professional services and included costs to prepare for a potential sale of the automotive business. This increase was partially offset by lower compensation-related expenses and a $1.6 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $1.8 million in the first quarter of fiscal 2020 increased $1.6 million compared with the prior year, primarily due to higher severance expenses in the VTS segment.

Operating income of $18.1 million in the first quarter of fiscal 2020 decreased $16.7 million compared with the first quarter of fiscal 2019, primarily due to the automotive business strategic process costs and lower earnings in the VTS and CIS segments, partially offset by higher earnings in the BHVAC segment.

The provision for income taxes was $2.9 million and $5.0 million in the first quarter of fiscal 2020 and 2019, respectively. The $2.1 million decrease was primarily due to lower operating earnings in the current year, partially offset by the absence of a $2.0 million income tax benefit recorded in the prior year resulting from the reversal of a tax valuation allowance in a foreign jurisdiction.

#### SEGMENT RESULTS OF OPERATIONS

The following is a discussion of our segment results of operations for the three months ended June 30, 2019 and 2018:

### Vehicular Thermal Solutions

*(in millions)*

|  | Three months ended June 30, 2019 $’s | % of sales | 2018 $’s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $326.5 | 100.0% | $352.8 | 100.0% |
| Cost of sales | 281.5 | 86.2% | 298.8 | 84.7% |
| Gross profit | 45.0 | 13.8% | 54.0 | 15.3% |
| Selling, general and administrative expenses | 26.1 | 8.0% | 28.4 | 8.1% |
| Restructuring expenses | 1.6 | 0.5% | 0.1 | - |
| Operating income | $17.3 | 5.3% | $25.5 | 7.2% |

VTS net sales decreased $26.3 million, or 7 percent, from the first quarter of fiscal 2019 to the first quarter of fiscal 2020, primarily due to lower sales volume to customers in Europe and to off-highway customers in Asia, partially offset by higher sales volume to commercial vehicle customers in North America. Foreign currency exchange rate changes had an unfavorable $12.1 million impact on first quarter sales. Gross profit decreased $9.0 million and gross margin declined 150 basis points to 13.8 percent, primarily due to lower sales volume, higher labor costs, and higher tariff-related expenses, partially offset by favorable raw material costs. In addition, foreign currency exchange rate changes had an unfavorable $1.8 million impact on gross profit. SG&A expenses decreased $2.3 million, or 10 basis points as a percentage of sales, primarily due to lower compensation-related expenses, lower environmental charges related to a previously-owned manufacturing facility in the U.S., and a $1.0 million favorable impact of foreign currency exchange rate changes. Restructuring expenses increased $1.5 million, primarily due to higher severance expenses resulting from targeted headcount reductions in Europe and in the Americas during the current year. Operating income decreased $8.2 million to $17.3 million during the first quarter, primarily due to lower gross profit.

### Commercial and Industrial Solutions

*(in millions)*

|  | Three months ended June 30, 2019 $’s | % of sales | 2018 $’s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $168.8 | 100.0% | $183.9 | 100.0% |
| Cost of sales | 144.5 | 85.6% | 155.3 | 84.4% |
| Gross profit | 24.3 | 14.4% | 28.6 | 15.6% |
| Selling, general and administrative expenses | 15.1 | 9.0% | 15.3 | 8.3% |
| Restructuring expenses | 0.2 | 0.1% | 0.1 | 0.1% |
| Operating income | $9.0 | 5.3% | $13.2 | 7.2% |

CIS net sales decreased $15.1 million, or 8 percent, from the first quarter of fiscal 2019 to the first quarter of fiscal 2020, primarily due to lower sales volume to data center and commercial HVAC&R customers and a $4.6 million unfavorable impact of foreign currency exchange rate changes. Gross profit decreased $4.3 million and gross margin declined 120 basis points to 14.4 percent, primarily due to lower sales volume and unfavorable sales mix. In addition, foreign currency exchange rate changes had an unfavorable $0.6 million impact on gross profit. SG&A expenses decreased $0.2 million compared with the prior year, yet increased 70 basis points as a percentage of sales. Operating income decreased $4.2 million to $9.0 million during the first quarter, primarily due to lower gross profit.

### Building HVAC Systems

*(in millions)*

|  | Three months ended June 30, 2019 $’s | % of sales | 2018 $’s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $49.0 | 100.0% | $45.0 | 100.0% |
| Cost of sales | 35.3 | 72.1% | 33.4 | 74.1% |
| Gross profit | 13.7 | 27.9% | 11.6 | 25.9% |
| Selling, general and administrative expenses | 8.4 | 17.2% | 8.4 | 18.8% |
| Operating income | $5.3 | 10.7% | $3.2 | 7.1% |

BHVAC net sales increased $4.0 million, or 9 percent, from the first quarter of fiscal 2019 to the first quarter of fiscal 2020, primarily due to higher ventilation and heating product sales in North America, partially offset by a $1.1 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $2.1 million and gross margin improved 200 basis points to 27.9 percent, primarily due to higher sales volume and favorable sales mix. SG&A expenses remained consistent with the prior year and decreased 160 basis points as a percentage of sales. Operating income of $5.3 million increased $2.1 million, primarily due to higher gross profit.

#### Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of June 30, 2019 of $29.1 million, and an available borrowing capacity of $143.1 million under our revolving credit facility. Given our extensive international operations, approximately $27.0 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.

Net cash provided by operating activities for the three months ended June 30, 2019 was $0.5 million, which represents a $4.6 million increase compared with $4.1 million of net cash used for operating activities during the same period in the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital, partially offset by the unfavorable impact of lower earnings and payments associated with our strategic review of alternatives for the VTS segment’s automotive business. The favorable changes in working capital during the first three months of fiscal 2020, compared with the same period in the prior year, included lower employee benefit and incentive compensation payments. Capital expenditures of $20.3 million during the first three months of fiscal 2020 decreased $2.3 million compared with the same period in the prior year.

#### Debt

In June 2019, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $250.0 million revolving credit facility expiring in June 2024, which replaced our then-existing revolver that would have expired in November 2021. In addition, this credit agreement provides for both U.S. dollar- and euro-denominated term loan facilities.

Our debt agreements require us to maintain compliance with various covenants. As specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, under our primary debt agreements in the U.S., we are subject to a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense. As of June 30, 2019, our leverage ratio and interest coverage ratio were 2.2 and 8.7, respectively. We were in compliance with our debt covenants as of June 30, 2019 and expect to remain in compliance during the balance of fiscal 2020 and beyond.

#### Share Repurchase Program

During fiscal 2019, our Board of Directors approved a $50.0 million share repurchase program, which expires in October 2020. During the first quarter of fiscal 2020, we repurchased $2.4 million of common stock under this program and as of June 30, 2019, we had approximately $47.0 million of the repurchase authorization remaining. Our decision whether and to what extent to repurchase additional shares under this program will depend on a number of factors, including business conditions, other cash priorities, and stock price.

#### Forward-Looking Statements

This report, including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2019. Other risks and uncertainties include, but are not limited to, the following:

#### Market Risks:

- Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs (and potential trade war impacts resulting from tariffs or retaliatory actions), inflation, changes in interest rates, recession and recovery therefrom, restrictions and uncertainty associated with cross-border trade, and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, that have been or may be implemented in the United States or by its trade partners, as well as continuing uncertainty regarding the timing and the short- and long-term implications of “Brexit”;
- The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums or fabrication costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs and the behavior of our suppliers. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
- The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.

#### Operational Risks:

- The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
- Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
- Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;
- Unanticipated product or manufacturing difficulties or operating inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims;
- Unanticipated delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
- Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;
- Our ability to effectively and efficiently complete restructuring activities and realize the anticipated benefits of those activities;
- Costs and other effects of the investigation and remediation of environmental contamination; particularly when related to the actions or inactions of others and/or facilities over which we have no control;
- Our ability to recruit and maintain talent, including personnel in managerial, leadership and administrative functions, in light of tightening global labor markets;
- Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
- The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
- Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
- Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
- The constant and increasing pressures associated with healthcare and associated insurance costs; and
- Costs and other effects of unanticipated litigation, claims, or other obligations.

#### Strategic Risks:

- Our ability to successfully take advantage of our increased presence in the “industrial” markets, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our VTS business;
- The success of our evaluation of strategic alternatives for our automotive business within our VTS segment in optimizing the segment’s future profitability;
- Our ability to identify and execute additional growth and diversification opportunities in order to position us for long-term success; and
- The potential expense, disruption or other impacts that could result from unanticipated actions by activist shareholders.

#### Financial Risks:

- Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of an unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
- The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;
- Our ability to maintain our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) in our target range of 1.5 to 2.5 in an efficient manner;
- The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
- Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

## Market risk

As filed, 302 characters.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2019. The Company’s market risks have not materially changed since the fiscal 2019 Form 10-K was filed.

## Controls and procedures

As filed, 1,149 characters.

#### Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of June 30, 2019.

#### Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the first quarter of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Aug 1, 2019.
Source: SEC EDGAR, the filing index for accession 0001140361-19-013948. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.