# Modine Manufacturing Co: Form 10-Q for the period ended Jun 30, 2011

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2011-08-02
- Accepted by EDGAR: Aug 2, 2011, 20:22 ET
- Period: 2011-06-30
- Accession: 0001140361-11-039031
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036111039031/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036111039031/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2011-04-01 to 2011-06-30 | $348.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2011-04-01 to 2011-06-30 | $69.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2011-04-01 to 2011-06-30 | $49.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2011-04-01 to 2011-06-30 | $20.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2011-04-01 to 2011-06-30 | $3.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2011-04-01 to 2011-06-30 | $4.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-04-01 to 2011-06-30 | $13.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-04-01 to 2011-06-30 | $0.28 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-04-01 to 2011-06-30 | $0.28 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 3 months, 2011-04-01 to 2011-06-30 | −$14.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2011-04-01 to 2011-06-30 | $12.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2011-06-30 | $48.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-06-30 | $466.7m | us-gaap:AssetsCurrent |
| Total assets | at 2011-06-30 | $960.6m | us-gaap:Assets |
| Current liabilities | at 2011-06-30 | $302.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-06-30 | $575.3m | us-gaap:Liabilities |
| Long-term debt | at 2011-06-30 | $178.2m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2011-06-30 | $202.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2011-06-30 | $384.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 26,400 characters.

When we use the terms “Modine,” “we,” “us,” “Company,” or “our” in this report, unless the context otherwise requires, 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, 2011 is the first quarter of fiscal 2012.

*First Quarter Highlights:* Net sales in the first quarter of fiscal 2012 improved significantly from the first quarter of fiscal 2011 across all of our business segments, particularly within the commercial vehicle and off-highway markets and within the European automotive market. Foreign currency exchange changes favorably impacted the quarter. Gross margin decreased due to a postretirement curtailment gain recorded during the first quarter of fiscal 2011 and increased commodity costs year-over-year. Selling, general and administrative (SG&A) expenses increased from the first quarter of fiscal 2011 to the first quarter of fiscal 2012, as anticipated, yet decreased as a percentage of sales. During the first quarter fiscal 2012, we recorded earnings from continuing operations of approximately $13 million, which improved significantly over the prior year.

#### CONSOLIDATED RESULTS OF OPERATIONS – CONTINUING OPERATIONS

The results for the three months ended June 30, 2010 have been revised to reflect the correction of errors relating to this period. See Note 2 to the Notes to Condensed Consolidated Financial Statements for further discussion. The following table presents consolidated results from continuing operations on a comparative basis for the three months ended June 30, 2011 and 2010:

*(dollars in millions)*

| For the three months ended June 30 | 2011 $'s | % of sales | 2010 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **417.9** | **100.0%** | 345.5 | 100.0% |
| Cost of sales | **348.4** | **83.4%** | 286.6 | 82.9% |
| Gross profit | **69.4** | **16.6%** | 59.0 | 17.1% |
| Selling, general and administrative expenses | **49.4** | **11.8%** | 42.2 | 12.2% |
| Income from operations | **20.0** | **4.8%** | 16.8 | 4.9% |
| Interest expense | **3.0** | **0.7%** | 4.1 | 1.2% |
| Other (income) expense - net | **(0.1)** | **0.0%** | 3.6 | 1.0% |
| Earnings from continuing operations before income taxes | **17.1** | **4.1%** | 9.1 | 2.6% |
| Provision for income taxes | **4.0** | **1.0%** | 4.0 | 1.2% |
| Earnings from continuing operations | **13.1** | **3.1%** | 5.0 | 1.5% |

First quarter net sales of $417.9 million were 20.9 percent higher than the $345.5 million reported in the first quarter of last year driven by increases in overall sales volumes, along with a $27.6 million favorable impact of foreign currency exchange rate changes. Commercial vehicle and automotive sales improved 34.8 percent and 26.2 percent, respectively, compared to the first quarter of fiscal 2011.

During the first quarter of fiscal 2012, gross profit increased $10.4 million from the first quarter of fiscal 2011 on the increased sales volumes and a $4.5 million favorable impact of foreign currency exchange rate changes. Gross margin decreased 50 basis points from 17.1 percent in the first quarter of fiscal 2011 to 16.6 percent in the first quarter of fiscal 2012 partially due to increased commodity costs year-over-year. In addition, the first quarter of fiscal 2011 included a postretirement curtailment gain of $1.7 million related to the closure of our Harrodsburg, Kentucky manufacturing facility.

SG&A expenses increased $7.2 million from the first quarter of fiscal 2011 to the first quarter of fiscal 2012, yet decreased as a percentage of sales to 11.8 percent. The increase in SG&A expenses is primarily the result of higher employee benefits such as salary increases and increased headcount. During the first quarter of fiscal 2011, SG&A expenses included a $1.0 million gain on the sale of facilities held for sale.

Income from operations improved $3.2 million from $16.8 million in the first quarter of fiscal 2011 to $20.0 million in the first quarter of fiscal 2012. The higher sales volumes and the favorable impact of foreign currency exchange rate changes were the primary factors contributing to this improvement in results from operations.

Interest expense decreased $1.1 million over the comparable quarter, due to the lower interest rates as a result of the debt refinancing completed during the second quarter of fiscal 2011.

Other income of $0.1 million in the first quarter of fiscal 2012 represents a $3.7 million change from other expense of $3.6 million reported during the first quarter of fiscal 2011. Other expense in the first quarter of fiscal 2011 consisted primarily of foreign currency exchange losses on inter-company loans denominated in a foreign currency.

During the first quarter of fiscal 2012, we recorded a $4.0 million provision for income taxes, which represents an effective tax rate of 23.5 percent. This compares to a provision for income taxes of $4.0 million recorded during the first quarter of fiscal 2011, which represented a 44.6 percent effective tax rate. This decrease in the effective income tax rate is primarily a result of improved operating results within the U.S. coupled with consistent overall profitability within our foreign jurisdictions. During the first quarter of fiscal 2012, the Company continued to record a full valuation allowance against its net deferred tax assets located in the U.S. and certain foreign jurisdictions as it is more likely than not that these assets will not be realized based on historical performance.

Earnings from continuing operations of $13.1 million for the first quarter of fiscal 2012 represent an $8.1 million improvement from the $5.0 million recorded for the first quarter of fiscal 2011. In addition, diluted earnings per share from continuing operations of $0.28 increased $0.17 from diluted earnings per share from continuing operations of $0.11 for this same period last year. The increase in sales volumes was the primary driver of this increase.

SEGMENT RESULTS OF OPERATIONS

*(dollars in millions)*

| Original Equipment - Asia For the three months ended June 30 | 2011 $'s | % of sales | 2010 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **21.3** | **100.0%** | 12.0 | 100.0% |
| Cost of sales | **18.2** | **85.4%** | 10.9 | 90.8% |
| Gross profit | **3.1** | **14.5%** | 1.1 | 9.5% |
| Selling, general and administrative expenses | **2.3** | **10.8%** | 1.5 | 12.5% |
| Income (loss) from continuing operations | **0.8** | **3.8%** | (0.4) | -3.3% |

The Original Equipment – Asia segment is still in the expansion phase and is currently launching numerous programs. Net sales increased $9.3 million from the first quarter of fiscal 2011 to the first quarter of fiscal 2012 due to new program launches in the off-highway construction markets in China and Korea and the commercial vehicle market in India. Gross margin improved from 9.5 percent during the first quarter of fiscal 2011 to 14.5 percent during the first quarter of fiscal 2012 due to sales volume increases and improved fixed cost absorption. Income from continuing operations of $0.8 million for the first quarter of fiscal 2012 represents a $1.2 million improvement from the loss from operations of $0.4 million for the first quarter of fiscal 2011 due to the increased sales volumes and gross margin improvement.

#### Index

*(dollars in millions)*

| Original Equipment - Europe For the three months ended June 30 | 2011 $'s | % of sales | 2010 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **166.8** | **100.0%** | 132.2 | 100.0% |
| Cost of sales | **141.8** | **85.0%** | 110.7 | 83.7% |
| Gross profit | **25.0** | **15.0%** | 21.5 | 16.3% |
| Selling, general and administrative expenses | **13.7** | **8.2%** | 10.5 | 7.9% |
| Income from continuing operations | **11.3** | **6.8%** | 11.0 | 8.3% |

Original Equipment – Europe net sales increased $34.6 million from the first quarter of fiscal 2011 to the first quarter of fiscal 2012, driven by a $15.1 million increase in underlying commercial vehicle and premium automotive sales volumes and a $19.5 million favorable impact of foreign currency exchange rate changes. Gross profit increased $3.5 million from the first quarter of fiscal 2011 to the first quarter of fiscal 2012 including a $2.9 million favorable impact of foreign currency exchange rate changes, yet gross margin decreased 130 basis points to 15.0 percent from 16.3 percent over this same period. The decline in gross margin is primarily attributable to new program launches currently at low volumes and increased commodity costs. SG&A expenses increased $3.4 million to $13.7 million from the first quarter of fiscal 2011 to the first quarter of fiscal 2012 primarily due to higher personnel costs. Income from operations increased $0.3 million. Excluding a $1.4 million favorable impact of foreign currency exchange rate changes, income from operations decreased $1.1 million due to the decreased gross margin and increased SG&A expenses.

*(dollars in millions)*

| Original Equipment - North America For the three months ended June 30 | 2011 $'s | % of sales | 2010 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **156.6** | **100.0%** | 141.7 | 100.0% |
| Cost of sales | **134.0** | **85.6%** | 120.8 | 85.3% |
| Gross profit | **22.6** | **14.4%** | 20.9 | 14.7% |
| Selling, general and administrative expenses | **11.8** | **7.5%** | 10.4 | 7.3% |
| Income from continuing operations | **10.8** | **6.9%** | 10.5 | 7.4% |

Original Equipment – North America net sales increased $14.9 million from the first quarter of fiscal 2011 to the first quarter of fiscal 2012, primarily driven by improvements in the commercial vehicle and off-highway markets. Gross margin decreased 30 basis points to 14.4 percent during the first quarter of fiscal 2012 from 14.7 percent during the first quarter of fiscal 2011 due to higher year-over-year commodity costs and the absence of a $1.7 million postretirement curtailment gain related to the closure of the Harrodsburg, Kentucky manufacturing facility recorded in the first quarter of fiscal 2011. SG&A expenses increased $1.4 million primarily due to a $1.0 million gain on the sale of two manufacturing facilities recorded during the first quarter of fiscal 2011 and the timing of customer reimbursements on engineering and development costs. Income from continuing operations increased $0.3 million from the first quarter of fiscal 2011 to the first quarter of fiscal 2012, primarily due to the increased sales volumes.

#### Index

*(dollars in millions)*

| South America For the three months ended June 30 | 2011 $'s | % of sales | 2010 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **47.9** | **100.0%** | 36.8 | 100.0% |
| Cost of sales | **38.9** | **81.2%** | 29.4 | 79.9% |
| Gross profit | **9.0** | **18.8%** | 7.4 | 20.1% |
| Selling, general and administrative expenses | **5.8** | **12.1%** | 3.6 | 9.8% |
| Income from continuing operations | **3.2** | **6.7%** | 3.8 | 10.3% |

South America net sales increased $11.1 million from the first quarter of fiscal 2011 to the first quarter of fiscal 2012, due to increased sales volumes within their commercial vehicle market and a favorable impact of foreign currency exchange rate changes of $5.3 million. Gross margin decreased from 20.1 percent during the first quarter of fiscal 2011 to 18.8 percent in the first quarter of fiscal 2012, due to year-over-year increased materials pricing which more than offset improved operating leverage on higher sales volume. SG&A expenses increased $2.2 million largely due to unusual personnel related matters and freight costs. Income from continuing operations decreased $0.6 million, based on the decreased gross margin and increased SG&A expenses.

*(dollars in millions)*

| Commercial Products For the three months ended June 30 | 2011 $'s | % of sales | 2010 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **34.1** | **100.0%** | 27.7 | 100.0% |
| Cost of sales | **24.6** | **72.1%** | 20.1 | 72.6% |
| Gross profit | **9.5** | **27.9%** | 7.6 | 27.3% |
| Selling, general and administrative expenses | **6.1** | **17.9%** | 6.1 | 22.0% |
| Income from continuing operations | **3.4** | **10.0%** | 1.5 | 5.4% |

Commercial Products net sales increased $6.4 million from the first quarter of fiscal 2011 to the first quarter of fiscal 2012, due to increased sales volumes of cooling products and a $1.5 million favorable impact of foreign currency exchange rate changes. Gross margin increased 60 basis points to 27.9 percent during the first quarter of fiscal 2012 from 27.3 percent during the first quarter of fiscal 2011, with the increased sales volumes and performance improvements. SG&A expenses remained consistent and decreased 410 basis points as a percentage of sales. Income from continuing operations improved $1.9 million to $3.4 million in the first quarter of fiscal 2012 from $1.5 million in the first quarter of fiscal 2011 due to the increased sales volumes and gross margin improvement.

#### Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities and borrowings under lines of credit provided by banks in the United States and abroad. See Note 13 of the Notes to the Condensed Consolidated Financial Statements for further information regarding our debt agreements.

#### Debt Covenants

Our debt agreements require us to maintain compliance with various covenants. The Company is subject to an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to interest expense (interest expense coverage ratio) covenant and a debt to adjusted EBITDA (leverage ratio) covenant. Adjusted EBITDA is defined as earnings from continuing operations before interest expense and provision for income taxes, adjusted to exclude unusual, non-recurring or extraordinary non-cash charges and up to $40.0 million of cash restructuring and repositioning charges, not to exceed $20.0 million in any fiscal year, and further adjusted to add back depreciation and amortization. Adjusted EBITDA does not represent, and should not be considered, an alternative to earnings from continuing operations as determined by generally accepted accounting principles (GAAP), and our calculation may not be comparable to similarly titled measures reported by other companies.

The Company is required to maintain the interest expense coverage ratio and leverage ratio covenants based on the following ratios:

|  |  |  |
| --- | --- | --- |
|  | Interest Expense Coverage Ratio Covenant (Not Permitted to Be Less Than): | Leverage Ratio Covenant (Not Permitted to Be Greater Than): |
| Fiscal quarter ending on or before August 12, 2014 | 3.00 to 1.0 | 3.25 to 1.0 |
| All fiscal quarters ending thereafter | 3.00 to 1.0 | 3.00 to 1.0 |

Our adjusted EBITDA for the four consecutive quarters ended June 30, 2011 was $110.5 million. The following table presents a calculation of adjusted EBITDA:

(dollars in thousands)

|  | Quarter Ended September 30, 2010 | Quarter Ended December 31, 2010 | Quarter Ended March 31, 2011 | Quarter Ended June 30, 2011 | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| (Loss) earnings from continuing operations | $(13,690) | $5,585 | $12,306 | $13,116 | $17,317 |
| Net loss attributable to noncontrolling interest | - | - | - | 9 | 9 |
| Consolidated interest expense | 23,529 | 2,602 | 3,484 | 2,990 | 32,605 |
| Provision for (benefit from) income taxes | 4,822 | 1,134 | (6,532) | 4,029 | 3,453 |
| Depreciation and amortization expense (a) | 13,628 | 14,032 | 14,365 | 14,952 | 56,977 |
| Non-cash (income) charges (b) | (4,062) | 1,819 | 1,051 | (686) | (1,878) |
| Restructuring and repositioning charges (c) | 1,319 | 537 | 82 | 78 | 2,016 |
| Adjusted EBITDA | $25,546 | $25,709 | $24,756 | $34,488 | $110,499 |

(a) Depreciation and amortization expense represents total depreciation and amortization from continuing operations less accelerated depreciation which has been included in non-cash charges described in footnote (b) below.

(b) Non-cash charges are comprised of long-lived asset impairments, non-cash restructuring and repositioning charges, exchange gains or losses on inter-company loans and non-cash charges which are unusual, non-recurring or extraordinary, as follows:

(dollars in thousands)

|  | Quarter Ended September 30, 2010 | Quarter Ended December 31, 2010 | Quarter Ended March 31, 2011 | Quarter Ended June 30, 2011 | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Long-lived asset impairments | $1,226 | $1,274 | $1,048 | $- | $3,548 |
| Non-cash restructuring and repositioning (income) charges | (348) | - | 1,616 | - | 1,268 |
| Exchange (gains) losses on inter-company loans | (4,940) | 545 | (1,613) | (686) | (6,694) |
| Non-cash charges | $(4,062) | $1,819 | $1,051 | $(686) | $(1,878) |

(c) Restructuring and repositioning charges (income) represent cash restructuring and repositioning costs incurred in conjunction with the restructuring activities announced on or after January 31, 2008. See Note 11 of the Notes to Condensed Consolidated Financial Statements for further discussion on these activities.

Our interest expense coverage ratio for the four fiscal quarters ended June 30, 2011 was 6.79, which exceeded the minimum requirement of 3.00. The following table presents a calculation of our interest expense coverage ratio:

|  | Four Quarters Ended June 30, 2011 |
| --- | ---: |
| Consolidated interest expense | $32,605 |
| Less: Prepayment penalty classified as interest | (16,570) |
| Plus: Other items (a) | 229 |
| Total consolidated interest expense | $16,264 |
| Adjusted EBITDA | $110,499 |
| Interest expense coverage ratio | 6.79 |

(a) Other items include line of credit fees and costs associated with the sale of receivables.

Our leverage ratio for the four fiscal quarters ended June 30, 2011 was 1.92, which was below the maximum ratio of 3.25 allowed in our debt agreements. The following table presents a calculation of our leverage ratio:

|  | Four Quarters Ended June 30, 2011 |
| --- | ---: |
| Debt per balance sheet | $187,399 |
| Plus: Net commodity derivative liabilities | 1,835 |
| Indebtedness attributed to sales of accounts receivable | 20,027 |
| Standby letters of credit | 2,454 |
| Total consolidated debt | $211,715 |
| Adjusted EBITDA | $110,499 |
| Leverage ratio | 1.92 |

We expect to remain in compliance with the interest expense coverage ratio and leverage ratio covenants through the remainder of fiscal 2012 and beyond.

Cash used for operating activities was $14.0 million for the three months ended June 30, 2011 as compared to $21.4 million for the three months ended June 30, 2010. This decrease in cash used is due to improved operating results year-over-year. In addition, the Company made a $5.1 million contribution to our U.S. pension plan during the first quarter of fiscal 2012 versus a $10.5 million contribution made during the first quarter of fiscal 2011.

At June 30, 2011, we had capital expenditure commitments of $30.3 million. Significant commitments include tooling and equipment expenditures for new and renewal platforms with new and current customers in Europe and North America as well as new program launches in Asia.

#### Off-Balance Sheet Arrangements

None.

#### New Accounting Pronouncements

In October 2009, the FASB issued updated guidance on revenue arrangements with multiple deliverables, which addresses the unit of accounting for multiple-deliverable arrangements and revises the method by which consideration is allocated among the units of accounting. The overall consideration is allocated to each deliverable by establishing a selling price for individual deliverables based on a hierarchy of evidence, including vendor-specific objective evidence, other third party evidence of the selling price, or the reporting entity’s best estimate of the selling price of individual deliverables in the arrangement. This guidance is effective for us on a prospective basis on April 1, 2011. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In June 2011, the FASB issued an amendment to the accounting guidance for the presentation on comprehensive income. This amendment removes one of the three presentation options for presenting the components of other comprehensive income as part of the statement of changes in shareholders’ equity and requires either a single continuous statement of net income and other comprehensive or a two consecutive statement approach. In addition, this amendment requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. This amendment shall be applied retrospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. We are currently evaluating the impact of this amendment.

#### Contractual Obligations

There have been no material changes to our contractual obligations outside the ordinary course of business from those disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011. We are currently unable to determine the impact on our contractual obligations from the ultimate timing of settlement of the gross liability for uncertain tax positions, which was $5.8 million as of June 30, 2011.

#### Outlook

Our expectations for fiscal 2012 include a 12 to 16 percent increase in net sales compared to our fiscal 2011 results. Specifically, we expect continued recovery in the commercial vehicle markets in North America and slight improvement in agriculture and construction markets, growth in the off-highway markets in Asia as we launch new programs, improvement in the commercial vehicle and off-highway markets in Europe, modest improvements in our commercial products markets and improvements in commercial vehicles and construction markets in South America. We expect that the positive impact of the sales volume improvements on our results from operations will result in operating income in a range of 4.1 to 4.7 percent of sales. Further, we expect diluted earnings per share to be in the range of $0.95 to $1.05 and capital spending in the range of $70 to $75 million.

#### Forward-Looking Statements

This report 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, 2011. Other risks and uncertainties include, but are not limited to, the following:

#### Operational Risks:

- The efficient deployment of resources to meet increasing demand for the Company’s products;
- The impact of operational inefficiencies as a result of program launches and product transfers;
- Modine’s ability to maintain current programs and compete effectively for new business, including its ability to offset or otherwise address increasing pricing pressures from its competitors and price reduction pressures from its customers;
- Costs and other effects of the remediation of environmental contamination;
- Modine’s ability to obtain profitable business at its facilities in the low cost countries of China, Hungary, Mexico and India and to meet quality standards with products produced at these facilities;
- Unanticipated problems with suppliers meeting Modine’s time, quality and price demands;
- Modine’s ability to successfully implement restructuring plans and drive cost reductions and increased gross margins as a result;
- Unanticipated delays or modifications initiated by major customers with respect to product applications or requirements;
- Unanticipated product or manufacturing difficulties, including unanticipated launch challenges and warranty claims;
- Work stoppages or interference at Modine’s facilities or those of its major customers and/or suppliers;
- The possibility that other or more significant issues may be identified in connection with reviews by government agencies related to trade compliance matters at the Company’s Laredo, Texas warehouse and Nuevo Laredo, Mexico facility; and
- Costs and other effects of unanticipated litigation or claims, and the increasing pressures associated with rising healthcare and insurance costs.

#### Market Risks:

- Economic, social and political conditions, changes and challenges in the markets where Modine operates and competes (including currency exchange rate fluctuations (particularly the value of the euro relative to the U.S. dollar), tariffs, inflation, changes in interest rates, recession, and restrictions associated with importing and exporting and foreign ownership);
- The impact on Modine of increases in commodity prices, particularly Modine’s exposure to the changing prices of aluminum, copper, steel and stainless steel (nickel);
- Modine’s ability or inability to pass increasing commodity prices on to customers as well as the inherent lag in timing of such pass-through pricing; and
- The impact of environmental laws and regulations on Modine’s business and the business of Modine’s customers, including Modine’s ability to take advantage of opportunities to supply alternative new technologies to meet environmental emissions standards.

#### Financial Risks:

- Modine’s ability to fund its liquidity requirements and meet its long-term commitments in the event of any renewed disruption in the credit markets; and
- Modine’s ability to realize future tax benefits.

In addition to the risks set forth above, Modine is subject to other risks and uncertainties identified by the Company in public filings with the U.S. Securities and Exchange Commission. Modine does not assume any obligation to update any forward-looking statements.

## Market risk

As filed, 305 characters.

The Company’s market risk disclosures have not materially changed since the 2011 Form 10-K was filed. 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, 2011.

## Controls and procedures

As filed, 3,879 characters.

#### Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, the Company carried out an evaluation, at the direction of the General Counsel and under the supervision of the Company’s President and Chief Executive Officer and Vice President, Finance, Chief Financial Officer and Treasurer, of the effectiveness of the Company’s disclosure controls and procedures as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), with the participation of the Company’s management. Based upon that evaluation and the identification of material weaknesses in the Company’s internal control over financial reporting as described in the fiscal 2011 Form 10-K, the President and Chief Executive Officer and Vice President, Finance, Chief Financial Officer and Treasurer concluded that the design and operation of the Company’s disclosure controls and procedures are not effective as of June 30, 2011.

As more fully set forth in Item 9A, “Controls and Procedures,” of the fiscal 2011 Form 10-K, management concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2011 because of the existence at that date of material weaknesses in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements would not be prevented or detected on a timely basis.

The Company has taken the following steps during the first quarter of fiscal 2012 to begin to remediate the material weaknesses noted in Item 9A. of the Annual Report on Form 10-K for the fiscal year ended March 31, 2011:

*Interim inventory management deficiencies that aggregate to a material weakness in the Original Equipment – North America segment (including the Nuevo Laredo, Mexico facility previously included in the Commercial Products segment).*

- All Company-owned inventories held at off-site locations were confirmed at quarter end;
- Monthly inventory analytical reviews were performed for each facility, at which fluctuations in inventory balances by product, aging of inventory parts and all material inventory adjustments were assessed;
- Cycle counting procedures and physical inventory counts were performed at certain manufacturing facilities during the quarter; and
- Quarterly inventory variance analyses were performed which included a review of inventory levels by category and product details.

Additional remediation steps as noted in Item 9A. of the fiscal 2011 Form 10-K will continue to be implemented in fiscal 2012.

*Trade compliance deficiency at the Nuevo Laredo, Mexico and Laredo, Texas facilities (previously included in the Commercial Products segment).*

- The Company is obtaining certificates of origin for all new products that are qualified under the North American Free Trade Agreement (NAFTA) in accordance with regulatory requirements;
- The Company is in the process of drafting an export compliance manual for its Laredo, Texas warehouse, as well as an import compliance manual and export compliance manual for its Nuevo Laredo, Mexico facility; and
- The Company held training on U.S. customs requirements for management at its global headquarters in Racine, Wisconsin. Training will be held at the Nuevo Laredo, Mexico manufacturing facility and the Laredo, Texas warehouse during the second quarter of fiscal 2012.

Additional remediation steps as noted in Item 9A. of the fiscal 2011 Form 10-K will continue to be implemented in fiscal 2012.

#### Changes In Internal Control Over Financial Reporting

During the first quarter of fiscal 2012 there was no change in the Company’s internal control over financial reporting that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Aug 2, 2011.
Source: SEC EDGAR, the filing index for accession 0001140361-11-039031. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.