QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 001-01373
MODINE MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
Wisconsin
39-0482000
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1500 DeKoven Avenue, Racine, Wisconsin
53403
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (262) 636-1200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.625 par value
MOD
New York Stock Exchange LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer☑
Accelerated Filer ☐
Non-accelerated Filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The number of shares outstanding of the registrant’s common stock, $0.625 par value, was 50,746,949 at July 26, 2019.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 1: General
The accompanying condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States applied on a basis consistent with those principles used in the preparation of the annual consolidated financial statements of Modine Manufacturing Company (“Modine” or the “Company”) for the fiscal year ended March 31, 2019, except in regard to the new accounting guidance adopted, as described below. The financial statements include all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods. Results for the first three months of fiscal 2020 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and related notes in Modine's Annual Report on Form 10-K for the year ended March 31, 2019.
New Accounting Guidance Adopted in Fiscal 2020
Leases
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance and requires balance sheet recognition for most leases. The Company adopted this guidance effective April 1, 2019 using a modified-retrospective transition method, under which it elected not to adjust comparative periods. The Company elected the package of practical expedients permitted under the new guidance, and, as a result, the Company did not reassess the classification of existing leases or initial direct costs thereof, or whether existing contracts contain leases. In addition, the Company elected accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components. The Company did not elect the hindsight practical expedient.
The Company assessed its global lease portfolio and implemented a new lease accounting software solution and new processes and controls to account for leases in accordance with the new guidance. The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. The Company also leases certain manufacturing and IT equipment and vehicles. Upon adoption of this new guidance on April 1, 2019, the Company recognized right-of-use assets for operating leases totaling $61.3 million and corresponding current and noncurrent operating lease liabilities of $12.4 million and $48.9 million, respectively. In addition, the Company assessed two existing build-to-suit arrangements, for which it had recorded property, plant and equipment and long-term debt on its consolidated balance sheet as of March 31, 2019. The Company determined these arrangements represent operating leases under the new accounting guidance. As a result, the Company derecognized the previously-recorded balances and recorded $5.2 million of operating lease right-of-use assets and corresponding lease liabilities. As a result of adopting the new guidance, there was not a significant impact on the Company’s accounting for its previously-recorded capital leases, which are now classified as finance leases under the new guidance. In addition, there was no impact to retained earnings. Also, the adoption did not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows. See Note 15 for additional information regarding the Company’s leases.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued new guidance related to the accounting for certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from tax reform legislation that was enacted in the U.S. in December 2017. This guidance provided companies the option to reclassify stranded income tax effects to retained earnings. The Company adopted this guidance as of April 1, 2019 and chose not to reclassify stranded income tax effects; therefore, the adoption of this guidance did not impact the Company’s consolidated financial statements.
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this new guidance as of April 1, 2018, and, as a result, recorded an increase of $0.7 million to retained earnings.
Income Taxes: Intra-Entity Transfers of Assets Other than Inventory
In October 2016, the FASB issued new guidance related to income tax accounting for intercompany asset transfers. This new guidance requires companies to recognize the income tax effects of intercompany asset transfers other than inventory at the transaction date. The income tax effects of these transfers were previously deferred. The Company adopted this new guidance as of April 1, 2018, and, as a result, recorded a decrease to retained earnings of $8.3 million.
Note 2: Revenue Recognition
Disaggregation of Revenue
The table below presents revenue for each of the Company’s business segments, Vehicular Thermal Solutions (“VTS”), Commercial and Industrial Solutions (“CIS”) and Building HVAC Systems (“BHVAC”). Each segment’s revenue is disaggregated by primary end market, by geographic location and based upon the timing of revenue recognition.
Contract assets and contract liabilities from contracts with customers were as follows:
June 30, 2019
March 31, 2019
Contract assets
$
24.2
$
22.6
Contract liabilities
4.9
4.0
Contract assets, included within other current assets in the consolidated balance sheets, primarily consist of capitalized costs related to customer-owned tooling contracts, wherein the customer has guaranteed reimbursement, and assets recorded for revenue recognized over time, which represent the Company’s rights to consideration for work completed but not yet billed. The $1.6 million increase in contract assets during the first three months of fiscal 2020 primarily resulted from an increase in contract assets for revenue recognized over time and customer-owned tooling contracts, under which more costs were capitalized than reimbursed.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $0.9 million increase in contract liabilities during the first three months of fiscal 2020 was primarily related to customer contracts for which payment had been received in advance of the Company’s satisfaction of performance obligations.
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
•
Level 1 – Quoted prices for identical instruments in active markets.
•
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
•
Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
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 Company holds trading securities in deferred compensation trusts to fund obligations under certain non-qualified deferred compensation plans. The securities’ fair values, which are recorded as other noncurrent assets, are determined based upon quoted prices from active markets and classified within Level 1 of the valuation hierarchy. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. The fair values of the Company’s trading securities and deferred compensation obligations each totaled $6.2 million and $6.0 million as of June 30, 2019 and March 31, 2019, respectively. The fair value of the Company’s long-term debt is disclosed in Note 16.
Note 4: Pensions
Pension cost included the following components:
Three months ended
June 30,
2019
2018
Service cost
$
0.1
$
0.1
Interest cost
2.3
2.4
Expected return on plan assets
(3.0
)
(3.0
)
Amortization of unrecognized net loss
1.5
1.4
Net periodic benefit cost
$
0.9
$
0.9
During the three months ended June 30, 2019 and 2018, the Company contributed $0.9 million and $1.9 million, respectively, to its U.S. pension plans.
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and other executives that consists of stock awards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors.
The Company calculates compensation expense based upon the fair value of the instruments at the time of grant and subsequently recognizes expense ratably over the respective vesting periods of the stock-based awards. The Company recognized stock-based compensation expense of $1.7 million and $2.0 million for the three months ended June 30, 2019 and 2018, respectively. The performance component of awards granted under the Company’s long-term incentive plan during the first quarter of fiscal 2020 is based upon both a target three-year average cash flow return on invested capital and a target three-year average revenue growth at the end of the three-year performance period.
The fair value of stock-based compensation awards granted during the three months ended June 30, 2019 and 2018 were as follows:
Three months ended June 30,
2019
2018
Shares
Fair Value
Per Award
Shares
Fair Value
Per Award
Stock options
0.3
$
5.56
0.2
$
7.81
Restricted stock awards
0.3
$
13.26
0.2
$
17.90
Performance stock awards
0.3
$
13.26
0.2
$
17.90
The Company used the following assumptions in determining fair value for stock options:
Three months ended June 30,
2019
2018
Expected life of awards in years
6.3
6.3
Risk-free interest rate
2.2
%
2.8
%
Expected volatility of the Company’s stock
39.2
%
39.7
%
Expected dividend yield on the Company’s stock
0.0
%
0.0
%
As of June 30, 2019, unrecognized compensation expense related to non-vested stock-based compensation awards, which will be amortized over the remaining service periods, was as follows:
The Company’s restructuring actions during the first quarter of fiscal 2020 and 2019 consisted primarily of targeted headcount reductions in Europe and the Americas within the VTS segment and plant consolidation activities. The headcount reductions support the Company’s objective to reduce operational and selling, general and administrative (“SG&A”) cost structures at certain locations. In addition, the Company is in process of transferring product lines associated with the merger of its North American coils business into the CIS segment in order to accelerate operational improvements and organizational efficiencies.
Restructuring and repositioning expenses were as follows:
Three months ended June 30,
2019
2018
Employee severance and related benefits
$
1.5
$
0.1
Other restructuring and repositioning expenses
0.3
0.1
Total
$
1.8
$
0.2
Other restructuring and repositioning expenses primarily consist of equipment transfers and plant consolidation costs.
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
Other income and expense consisted of the following:
Three months ended
June 30,
2019
2018
Equity in earnings of non-consolidated affiliate
$
0.1
$
0.2
Interest income
0.1
0.2
Foreign currency transactions (a)
(0.6
)
(0.8
)
Net periodic benefit cost (b)
(0.7
)
(0.7
)
Total other expense - net
$
(1.1
)
$
(1.1
)
(a)
Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on certain foreign currency exchange contracts.
(b)
Represents net periodic benefit cost, exclusive of service cost, for the Company's pension and postretirement plans.
Note 8: Income Taxes
The Company’s effective tax rate for the three months ended June 30,2019 and 2018 was 26.1 percent and 18.2 percent, respectively. The effective tax rate for the first quarter of fiscal 2020 is higher than the first quarter of the prior year, primarily due to the absence of a $2.0 million reversal of a valuation allowance on deferred tax assets in a foreign jurisdiction recorded during the first quarter of fiscal 2019 and changes in the mix and amount of foreign and domestic earnings.
As of June 30,2019, valuation allowances against deferred tax assets in certain foreign jurisdictions totaled $38.1 million and valuation allowances against certain U.S. deferred tax assets totaled $6.8 million, as it is more likely than not these assets will not be realized based upon historical financial results. The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized.
Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with its estimated annual effective tax rate. Under this methodology, the Company applies its estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter. The Company records the tax impacts of certain significant, unusual or infrequently occurring items in the period in which they occur. The Company excluded the impact of its operations in certain foreign locations from the overall effective tax rate methodology and recorded them discretely based upon year-to-date results because the Company anticipates net operating losses for the full fiscal year in these jurisdictions.
The Company estimates that reductions to unrecognized tax benefits for the remainder of fiscal 2020 will total $2.8 million, primarily due to lapses in statutes of limitations, which, if recognized, would have a $2.2 million favorable impact on its effective tax rate.
The components of basic and diluted earnings per share were as follows:
Three months ended
June 30,
2019
2018
Net earnings attributable to Modine
$
8.0
$
22.0
Less: Undistributed earnings attributable to unvested shares
-
(0.1
)
Net earnings available to Modine shareholders
$
8.0
$
21.9
Weighted-average shares outstanding - basic
50.7
50.3
Effect of dilutive securities
0.4
0.9
Weighted-average shares outstanding - diluted
51.1
51.2
Earnings per share:
Net earnings per share - basic
$
0.16
$
0.43
Net earnings per share - diluted
$
0.16
$
0.43
For the three months ended June 30, 2019 and 2018, the calculation of diluted earnings per share excluded 0.8 million and 0.4 million stock options, respectively, because they were anti-dilutive.
Note 10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
June 30, 2019
March 31, 2019
Cash and cash equivalents
$
29.1
$
41.7
Restricted cash
0.5
0.5
Total cash, cash equivalents and restricted cash
$
29.6
$
42.2
Restricted cash, which is reported within other noncurrent assets in the consolidated balance sheets, consists primarily of deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.