MODINE MANUFACTURING CO - Quarter Report: 2023 June (Form 10-Q)

UNITED STATES

The table below presents revenue for each of the Company’s operating segments.  Each segment’s revenue is disaggregated by product group, by geographic location and based upon the timing of revenue recognition.

 

The carrying values of cash, cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments.  The fair value of the Company’s long-term debt is disclosed in Note 16.

During the first quarter of fiscal 2024, the Company granted performance-based stock awards and restricted stock awards.  The performance metrics for the performance-based stock awards are based upon a target three-year average cash flow return on invested capital and a target three-year average growth in consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”) at the end of the performance period ending March 31, 2026.

The fair value of stock-based compensation awards granted during the three months ended June 30, 2023 and 2022 were as follows:

		Three months ended June 30,
		2023								2022
		Shares				Fair Value Per Award				Shares				Fair Value Per Award
Performance stock awards			0.3			$	27.29				-				-
Restricted stock awards			0.1			$	27.29				0.2			$	12.28
Stock options			-				-				0.2			$	6.92

As of June 30, 2023, unrecognized compensation expense related to non-vested stock-based compensation awards, which will be recognized as expense over the remaining service periods, was as follows:

During the first quarter of fiscal 2023, restructuring and repositioning expenses primarily consisted of severance expenses related to targeted headcount reductions in Europe within the Performance Technologies segment.

Long-term debt consisted of the following:

Long-term debt, including the current portion of long-term debt, matures as follows:

The Company maintains a credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and U.S. dollar- and euro-denominated term loan facilities maturing in October 2027.  In addition, the credit agreement provides for shorter-duration swingline loans.  Borrowings under the revolving credit, swingline and term loan facilities bear interest at a variable rate, based upon the applicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below.  At June 30, 2023, the weighted-average interest rates for revolving credit facility borrowings and the term loans were 6.3 and 6.4 percent, respectively.  Based upon the terms of the credit agreement, the Company classifies borrowings under its revolving credit and swingline facilities as long-term and short-term debt, respectively, on its consolidated balance sheets.

The Company also maintains credit agreements for its foreign subsidiaries.  The outstanding short-term borrowings related to these foreign credit agreements totaled $3.7 million at March 31, 2023.  There were no short-term borrowings related to these agreements at June 30, 2023.

The following is a summary of net sales, gross profit and operating income by segment:

The following is a summary of segment assets, comprised entirely of trade accounts receivable and inventories, and other assets:

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

		Three months ended June 30,
		2023								2022
(in millions)		$’s				% of sales				$’s				% of sales
Net sales		$	622.4				100.0	%		$	541.0				100.0	%
Cost of sales			494.5				79.4	%			457.6				84.6	%
Gross profit			127.9				20.6	%			83.4				15.4	%
Selling, general and administrative expenses			61.4				9.9	%			56.3				10.4	%
Restructuring expenses			-				-				1.5				0.3	%
Operating income			66.5				10.7	%			25.6				4.7	%
Interest expense			(5.9	)			-1.0	%			(4.1	)			-0.8	%
Other expense – net			(0.6	)			-0.1	%			(2.3	)			-0.4	%
Earnings before income taxes			60.0				9.6	%			19.2				3.5	%
Provision for income taxes			(14.7	)			-2.4	%			(4.9	)			-0.9	%
Net earnings		$	45.3				7.3	%		$	14.3				2.6	%

		Three months ended June 30,
		2023								2022
(in millions)		$’s				% of sales				$’s				% of sales
Net sales		$	271.8				100.0	%		$	244.4				100.0	%
Cost of sales			202.8				74.6	%			194.0				79.4	%
Gross profit			69.0				25.4	%			50.4				20.6	%
Selling, general and administrative expenses			24.7				9.1	%			23.4				9.6	%
Operating income		$	44.3				16.3	%		$	27.0				11.0	%

		Three months ended June 30,
		2023								2022
(in millions)		$’s				% of sales				$’s				% of sales
Net sales		$	358.9				100.0	%		$	304.3				100.0	%
Cost of sales			300.3				83.7	%			271.3				89.2	%
Gross profit			58.6				16.3	%			33.0				10.8	%
Selling, general and administrative expenses			26.6				7.4	%			24.1				7.9	%
Restructuring expenses			-				-				1.5				0.5	%
Operating income		$	32.0				8.9	%		$	7.4				2.4	%

•

The impact of potential adverse developments or disruptions in the global economy and financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the military conflict between Russia and Ukraine;

•

The impact of other 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 foreign currency exchange rate fluctuations; increases in interest rates; recession and recovery therefrom; 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 U.S. or abroad;

•

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, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, including through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions;

•

Our ability to mitigate increased labor costs and labor shortages;

•

The impact of public health threats, such as COVID-19, on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; and

•

The impact of legislation, regulations, and government incentive programs, including those addressing climate change, on demand for our products and the markets we serve, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.

•

The impact of problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

•

The overall health of and price-reduction pressure from our 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;

•

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to achieve profit margins acceptable to us by offsetting or otherwise addressing any cost increases associated with supply chain challenges and inflationary market conditions;

•

The impact of product or manufacturing difficulties or operating inefficiencies, including any product or program launches, product transfer challenges and warranty claims;

•

The impact of delays or modifications initiated by major customers with respect to product or 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 manage our operations in response to sales volume changes, including maintaining adequate production capacity to meet demand in our growing businesses while also completing restructuring activities and realizing the anticipated benefits thereof;

•

Costs and other effects of the investigation and remediation of environmental contamination; including 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, operational and administrative functions;

•

Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;

•

The impact of a 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;

•

Increasing emphasis by customers, investors, and employees on environmental, social and corporate governance matters may impose additional costs on us, adversely affect our reputation or expose us to new risks;

•

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 litigation, claims, or other obligations.

•

Our ability to successfully realize anticipated benefits, including improved profit margins and cash flow, from strategic initiatives and our continued application of 80/20 principles across our businesses;

•

Our ability to accelerate growth by identifying and executing on organic growth opportunities and acquisitions, and to efficiently and successfully integrate acquired businesses;

•

The potential impacts from actions by activist shareholders, including disruption of our business and related costs.

•

Our ability to fund our global liquidity requirements efficiently for our current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

•

The impact of increases in interest rates in relation to our variable-rate debt obligations;

•

The impact of changes in federal, state or local taxes that could have the effect of increasing our income tax expense;

•

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

•

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.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Item 4.

Controls and Procedures.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Period	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (a)
April 1 – April 30, 2023	_______	_______	_______	$45,372,391
May 1 – May 31, 2023	16,633 (b)	$26.32	_______	$45,372,391
June 1 – June 30, 2023	26,166 (b)	$30.69	_______	$45,372,391
Total	42,799	$28.99

(a)	Effective November 5, 2022, the Company’s Board of Directors authorized the Company to repurchase up to $50.0 million of Modine common stock at such times and prices that it deems to be appropriate.  This authorization expires in November 2024.

(b)

Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

Item 5.

Other Information.

Item 6.

Exhibits.

Exhibit No.	Description	Incorporated Herein By Reference To	Filed Herewith
10.1	Form of Fiscal 2024 Performance Stock Award Agreement.		X
10.2	Form of Fiscal 2024 Restricted Stock Unit Award Agreement.		X
10.3	Form of Fiscal 2024 Modine Non-Employee Director Restricted Stock Unit Award Agreement with Deferral.		X
10.4	Form of Fiscal 2024 Modine Non-Employee Director Restricted Stock Unit Award Agreement without Deferral.		X
31.1	Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.		X
31.2	Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer.		X
32.1	Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.		X
32.2	Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer.		X
101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).		X
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104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).		X