# Modine Manufacturing Co: Form 10-Q for the period ended Jun 30, 2012

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2012-08-07
- Accepted by EDGAR: Aug 7, 2012, 19:02 ET
- Period: 2012-06-30
- Accession: 0001140361-12-035447
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036112035447/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036112035447/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-04-01 to 2012-06-30 | $350.4m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2012-04-01 to 2012-06-30 | $298.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2012-04-01 to 2012-06-30 | $51.6m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2012-04-01 to 2012-06-30 | $43.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-04-01 to 2012-06-30 | $3.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-04-01 to 2012-06-30 | $3.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2012-04-01 to 2012-06-30 | $2.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-04-01 to 2012-06-30 | −$1.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-04-01 to 2012-06-30 | −$0.03 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-04-01 to 2012-06-30 | −$0.03 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-04-01 to 2012-06-30 | 46,546 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2012-04-01 to 2012-06-30 | $4.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2012-04-01 to 2012-06-30 | $11.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-06-30 | $43.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-06-30 | $422.3m | us-gaap:AssetsCurrent |
| Total assets | at 2012-06-30 | $868.5m | us-gaap:Assets |
| Current liabilities | at 2012-06-30 | $275.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-06-30 | $559.7m | us-gaap:Liabilities |
| Long-term debt | at 2012-06-30 | $161.6m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2012-06-30 | $558.0k | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2012-06-30 | $21.5m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2012-06-30 | $307.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 27,706 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, 2012 is the first quarter of fiscal 2013.

*First Quarter Highlights:* Net sales in the first quarter of fiscal 2013 decreased from the first quarter of fiscal 2012, as anticipated, driven by weakening end market demand and unfavorable foreign currency exchange rate changes. Gross margin decreased mostly due to the overall sales volume declines. Selling, general and administrative (SG&A) expenses decreased from the first quarter of fiscal 2012 to the first quarter of fiscal 2013, primarily due to lower compensation-related expense and favorable foreign currency exchange rate changes. European restructuring expense of $4.5 million negatively impacted the first quarter of fiscal 2013 results. The European restructuring plan is aimed at aligning the cost structure of the segment with the strategic focus on the commercial vehicle market, while improving gross margin and return on average capital employed. During the first quarter of fiscal 2013, we recorded a loss from continuing operations of approximately $1 million.

#### CONSOLIDATED RESULTS OF OPERATIONS – CONTINUING OPERATIONS

The results for the three months ended June 30, 2011 have been revised to reflect the correction of errors relating to that period. In addition, the first quarter of fiscal 2013 results include an out-of-period adjustment related to certain commodity hedges. 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, 2012 and 2011:

*(dollars in millions)*

| For the three months ended June 30 | 2012 $'s | % of sales | 2011 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **350.4** | **100.0%** | 417.9 | 100.0% |
| Cost of sales | **298.8** | **85.3%** | 348.1 | 83.3% |
| Gross profit | **51.6** | **14.7%** | 69.8 | 16.7% |
| Selling, general and administrative expenses | **43.2** | **12.3%** | 49.6 | 11.9% |
| Restructuring expense (income) | **4.5** | **1.3%** | (0.1) | 0.0% |
| Income from operations | **3.9** | **1.1%** | 20.3 | 4.8% |
| Interest expense | **3.0** | **0.9%** | 3.0 | 0.7% |
| Other income - net | **(0.1)** | **0.0%** | (0.3) | -0.1% |
| Earnings from continuing operations before income taxes | **1.0** | **0.3%** | 17.6 | 4.2% |
| Provision for income taxes | **2.1** | **0.6%** | 5.0 | 1.2% |
| (Loss) earnings from continuing operations | **(1.1)** | **-0.3%** | 12.6 | 3.0% |

First quarter net sales of $350.4 million were 16.2 percent lower than the $417.9 million reported in the first quarter of last year driven by decreases in overall sales volumes, along with a $23.5 million unfavorable impact of foreign currency exchange rate changes. Automotive market sales declined 32.1 percent compared to the first quarter of fiscal 2012, as we continue the strategic exit of the automotive module business.

During the first quarter of fiscal 2013, gross profit decreased $18.2 million from the first quarter of fiscal 2012 on the decreased sales volumes and a $2.9 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased 200 basis points from 16.7 percent in the first quarter of fiscal 2012 to 14.7 percent in the first quarter of fiscal 2013 largely due to lower sales volume.

SG&A expenses decreased $6.4 million from the first quarter of fiscal 2012 to the first quarter of fiscal 2013, yet increased as a percentage of sales to 12.3 percent. The decrease in SG&A expenses is primarily the result of lower compensation-related expense and favorable foreign currency exchange rate changes.

Income from operations declined $16.4 million from $20.3 million in the first quarter of fiscal 2012 to $3.9 million in the first quarter of fiscal 2013. The lower sales volumes, unfavorable impact of foreign currency exchange rate changes and $4.5 million of restructuring expense related to the Original Equipment – Europe segment were the primary factors contributing to this decline in results from operations.

Restructuring expense increased $4.6 million from the first quarter of fiscal 2012 to the first quarter of fiscal 2013 due to the initiation of the European restructuring plan in the first quarter of fiscal 2013. The restructuring expense was for severance costs related to reductions in headcount within the Original Equipment – Europe segment.

During the first quarter of fiscal 2013, we recorded a $2.1 million provision for income taxes, which represents an effective tax rate of 205.8 percent. This compares to a provision for income taxes of $5.0 million recorded during the first quarter of fiscal 2012, which represented a 28.6 percent effective tax rate. This increase in the effective income tax rate is primarily due to changes in the valuation allowance for certain foreign losses for which no benefit is recognized. During the first quarter of fiscal 2013, 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. It is possible that by the end of fiscal 2013, the U.S. taxing jurisdiction will no longer be in a cumulative three year loss position thereby removing significant negative evidence concerning valuation allowance. Throughout the remainder of fiscal 2013, all positive and negative evidence will be further analyzed in order to determine the propriety of the valuation allowance against the net deferred tax assets of this jurisdiction.

Loss from continuing operations of $1.1 million for the first quarter of fiscal 2013 represents a $13.7 million decline from the earnings from continuing operations of $12.6 million recorded for the first quarter of fiscal 2012. In addition, diluted loss per share from continuing operations of $0.03 decreased $0.30 from diluted earnings per share from continuing operations of $0.27 for this same period last year. The decrease in sales volumes and the European restructuring expense were the primary drivers of this decrease.

SEGMENT RESULTS OF OPERATIONS

### Original Equipment – Asia

*(dollars in millions)*

| For the three months ended June 30 | 2012 $'s | % of sales | 2011 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **15.8** | **100.0%** | 21.3 | 100.0% |
| Cost of sales | **15.4** | **97.5%** | 18.2 | 85.4% |
| Gross profit | **0.4** | **2.6%** | 3.1 | 14.5% |
| Selling, general and administrative expenses | **2.7** | **17.1%** | 2.3 | 10.8% |
| (Loss) income from continuing operations | **(2.3)** | **-14.6%** | 0.8 | 3.8% |

The Original Equipment – Asia segment is still in a growth phase and is currently launching numerous programs. Net sales decreased $5.5 million from the first quarter of fiscal 2012 to the first quarter of fiscal 2013 due to an expected decrease in automotive sales as we continue the strategic exit of the automotive module business and a decline in the off-highway vehicular market due to weak economic conditions in China. Gross margin declined from 14.5 percent during the first quarter of fiscal 2012 to 2.6 percent during the first quarter of fiscal 2013 due to the sales volume decrease. Loss from continuing operations of $2.3 million for the first quarter of fiscal 2013 represents a $3.1 million decline from the income from operations of $0.8 million for the first quarter of fiscal 2012 due to the decrease in gross profit from the lower sales volumes.

### Original Equipment – Europe

*(dollars in millions)*

| For the three months ended June 30 | 2012 $'s | % of sales | 2011 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **125.4** | **100.0%** | 166.8 | 100.0% |
| Cost of sales | **110.7** | **88.3%** | 141.4 | 84.8% |
| Gross profit | **14.7** | **11.7%** | 25.4 | 15.2% |
| Selling, general and administrative expenses | **10.4** | **8.3%** | 13.8 | 8.3% |
| Restructuring expense | **4.5** | **3.6%** | 0.0 | 0.0% |
| (Loss) income from continuing operations | **(0.2)** | **-0.2%** | 11.6 | 7.0% |

Original Equipment – Europe net sales decreased $41.4 million from the first quarter of fiscal 2012 to the first quarter of fiscal 2013, driven by a $28.6 million decrease in premium automotive sales volumes as we continue to wind down the automotive module business, a delay in launches of commercial vehicle programs due to the slowdown in demand in the European commercial vehicle market, and a $15.3 million unfavorable impact of foreign currency exchange rate changes. Gross profit decreased $10.7 million from the first quarter of fiscal 2012 to the first quarter of fiscal 2013 including a $1.8 million unfavorable impact of foreign currency exchange rate changes, and gross margin decreased 350 basis points to 11.7 percent from 15.2 percent over this same period. The decline in gross margin is primarily attributable to the lower sales volumes. SG&A expenses decreased $3.4 million to $10.4 million from the first quarter of fiscal 2012 to the first quarter of fiscal 2013 due to lower compensation-related expenses and a $1.8 million favorable impact of foreign currency exchange rate changes. Loss from continuing operations of $0.2 million during the first quarter of fiscal 2013 represents a decline of $11.8 million from income from continuing operations of $11.6 million during the first quarter of fiscal 2012. The (loss) income from continuing operations decline is a result of lower gross profit on lower sales volume and $4.5 million of restructuring expense recorded in the first quarter of fiscal 2013.

During the first quarter of fiscal 2013, we began implementing a restructuring plan in the Original Equipment – Europe segment. This plan includes exiting certain non-core product lines, reducing manufacturing costs, implementing headcount reductions, and disposing of or selling certain fixed assets. We recorded restructuring expense of $4.5 million in the quarter due to headcount reductions under this plan. The restructuring plan is designed to align the cost structure of the segment with the strategic focus on the commercial vehicle market. The long-term objectives of the restructuring plan for this segment are to achieve a gross margin in a range of 15 percent to 17 percent, annual SG&A savings of approximately $6.0 million to $9.0 million, operating margin in a range of 8 percent to 10 percent, and return on average capital employed of 15 percent.

### Original Equipment - North America

*(dollars in millions)*

| For the three months ended June 30 | 2012 $'s | % of sales | 2011 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **153.6** | **100.0%** | 156.6 | 100.0% |
| Cost of sales | **130.0** | **84.6%** | 134.0 | 85.6% |
| Gross profit | **23.6** | **15.4%** | 22.6 | 14.4% |
| Selling, general and administrative expenses | **9.8** | **6.4%** | 11.9 | 7.6% |
| Restructuring income | **0.0** | **0.0%** | (0.1) | -0.1% |
| Income from continuing operations | **13.8** | **9.0%** | 10.8 | 6.9% |

Original Equipment – North America net sales decreased $3.0 million from the first quarter of fiscal 2012 to the first quarter of fiscal 2013, primarily driven by the wind down of automotive programs, partially offset by increases in commercial vehicle and off highway sales. Gross margin increased 100 basis points to 15.4 percent during the first quarter of fiscal 2013 from 14.4 percent during the first quarter of fiscal 2012 driven primarily by lower material costs and improved plant performance. SG&A expenses decreased $2.1 million primarily due to lower pension and warranty costs and higher prototype and testing recoveries. Income from continuing operations increased $3.0 million from the first quarter of fiscal 2012 to the first quarter of fiscal 2013, due to higher gross profit and lower SG&A expenses.

### South America

*(dollars in millions)*

| For the three months ended June 30 | 2012 $'s | % of sales | 2011 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **31.2** | **100.0%** | 47.9 | 100.0% |
| Cost of sales | **26.5** | **84.9%** | 38.9 | 81.2% |
| Gross profit | **4.7** | **15.2%** | 9.0 | 18.8% |
| Selling, general and administrative expenses | **4.0** | **12.8%** | 5.8 | 12.1% |
| Income from continuing operations | **0.7** | **2.2%** | 3.2 | 6.7% |

South America net sales decreased $16.7 million from the first quarter of fiscal 2012 to the first quarter of fiscal 2013, due to the continued weakness in the commercial vehicle market following the pre-buy ahead of the January 1, 2012 change in emission standards, aftermarket sales declines due to local economic conditions and an unfavorable impact of foreign currency exchange rate changes of $7.1 million. Gross margin decreased from 18.8 percent during the first quarter of fiscal 2012 to 15.2 percent in the first quarter of fiscal 2013, due to the lower sales volume. SG&A expenses decreased $1.8 million from the first quarter of fiscal 2012 to the first quarter of fiscal 2013, partially due to a favorable impact of foreign currency exchange rate changes of $0.9 million. Income from continuing operations decreased $2.5 million, based on the lower gross profit from lower sales volume, partially offset by the decrease in SG&A expenses.

### Commercial Products

*(dollars in millions)*

| For the three months ended June 30 | 2012 $'s | % of sales | 2011 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **30.1** | **100.0%** | 34.1 | 100.0% |
| Cost of sales | **22.2** | **73.8%** | 24.6 | 72.1% |
| Gross profit | **7.9** | **26.2%** | 9.5 | 27.9% |
| Selling, general and administrative expenses | **6.9** | **22.9%** | 6.1 | 17.9% |
| Income from continuing operations | **1.0** | **3.3%** | 3.4 | 10.0% |

Commercial Products net sales decreased $4.0 million from the first quarter of fiscal 2012 to the first quarter of fiscal 2013, primarily due to weak overall economic conditions in the United Kingdom, a slowdown in construction activity ahead of the Olympics in London and a $0.4 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased 170 basis points to 26.2 percent during the first quarter of fiscal 2013 from 27.9 percent during the first quarter of fiscal 2012, from the lower sales volume. SG&A expenses increased $0.8 million due to investment in new products and future growth. Income from continuing operations declined $2.4 million to $1.0 million in the first quarter of fiscal 2013 from $3.4 million in the first quarter of fiscal 2012, due to the lower gross profit on the lower sales volume.

#### 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 12 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. Under its primary U.S.-based debt agreements 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 | Leverage Ratio |
|  | Ratio Covenant (Not | Covenant (Not Permitted |
|  | Permitted to Be Less Than): | 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 |

25

Our adjusted EBITDA for the four consecutive quarters ended June 30, 2012 was $112.7 million. The following table presents a calculation of adjusted EBITDA:

(dollars in thousands)

|  | Quarter Ended September 30, 2011 | Quarter Ended December 31, 2011 | Quarter Ended March 31, 2012 | Quarter Ended June 30, 2012 | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Earnings (loss) from continuing operations | $1,000 | $8,768 | $15,646 | $(1,055) | $24,359 |
| Net earnings attributable to noncontrolling interest | (38) | (110) | (204) | (301) | (653) |
| Consolidated interest expense | 3,297 | 2,893 | 3,303 | 3,039 | 12,532 |
| Provision for (benefit from) income taxes | 1,677 | 3,923 | (711) | 2,053 | 6,942 |
| Depreciation and amortization expense | 14,202 | 14,214 | 14,322 | 14,049 | 56,787 |
| Non-cash charges (income) (a) | 3,134 | 3,478 | (86) | 299 | 6,825 |
| Restructuring and repositioning (income) charges (b) | (52) | 499 | 671 | 4,761 | 5,879 |
| Adjusted EBITDA | $23,220 | $33,665 | $32,941 | $22,845 | $112,671 |

(a) 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 that are unusual, non-recurring or extraordinary, as follows:

(dollars in thousands)

|  | Quarter Ended September 30, 2011 | Quarter Ended December 31, 2011 | Quarter Ended March 31, 2012 | Quarter Ended June 30, 2012 | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Long-lived asset impairments | $- | $- | $330 | $- | $330 |
| Loss on disposal of assets | - | 2,161 | - | - | 2,161 |
| Non-cash restructuring and repositioning income | - | - | (304) | - | (304) |
| Exchange losses (gains) on inter-company loans | 3,134 | 1,317 | (112) | 299 | 4,638 |
| Non-cash charges | $3,134 | $3,478 | $(86) | $299 | $6,825 |

(b) Restructuring and repositioning (income) charges represent cash restructuring and repositioning costs incurred in conjunction with the restructuring activities announced on or after January 31, 2008. See Note 10 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, 2012 was 8.77, 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, 2012 |
| --- | ---: |
| Consolidated interest expense | $12,532 |
| Plus: Other items (a) | 321 |
| Total consolidated interest expense | $12,853 |
| Adjusted EBITDA | $112,671 |
| Interest expense coverage ratio | 8.77 |

(a) Other items include costs associated with the sale of receivables.

Our leverage ratio for the four fiscal quarters ended June 30, 2012 was 1.87, which was below the maximum ratio of 3.25 allowed in our primary debt agreements. The following table presents a calculation of our leverage ratio:

|  | Four Quarters Ended June 30, 2012 |
| --- | ---: |
| Debt per balance sheet | $183,656 |
| Plus: Indebtedness attributed to sales of accounts receivable | 22,530 |
| Net derivative liabilities | 3,802 |
| Standby letters of credit | 835 |
| Total consolidated debt | $210,823 |
| Adjusted EBITDA | $112,671 |
| Leverage ratio | 1.87 |

We expect to remain in compliance with the interest expense coverage ratio and leverage ratio covenants through the remainder of fiscal 2013 and beyond.

#### Off-Balance Sheet Arrangements

None.

#### New Accounting Pronouncements

In June 2011, the FASB issued an amendment to the accounting guidance for the presentation of 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 income or a two consecutive statement approach. This amendment shall be applied retrospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. This amendment was adopted for the first quarter of fiscal 2013 in the separate condensed consolidated statements of comprehensive income (two consecutive statement approach).

In September 2011, the FASB issued an amendment to the accounting guidance for testing goodwill for impairment. The amendment provides an option for companies to first use a qualitative approach to test goodwill for impairment if certain conditions are met. If it is determined to be more likely than not that the fair value of the reporting unit is less than its carrying amount, entities must perform the quantitative analysis of the goodwill impairment test. The amendments are effective for goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We are assessing this new guidance and currently do not anticipate any impact on the consolidated financial statements from the adoption 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, 2012. 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 $3.2 million as of June 30, 2012.

#### Outlook

For the remainder of fiscal 2013, we expect weak economic conditions in several key geographic markets, including Europe, South America, and Asia. Also, we expect approximately $80 million of planned program reductions due to the wind down of our BMW business in Europe and Asia, and of certain automotive and military programs in North America. These factors, as well as unfavorable foreign exchange impacts, result in an outlook of a 5 to 10 percent year-over-year decrease in net sales compared with our fiscal 2012 results. We began to implement a restructuring program designed to align the cost structure and manufacturing base in Europe with a strategic focus on the commercial vehicle market. We expect the impact of the sales volume declines in fiscal 2013 will result in operating income in a range of 3.5 to 4.0 percent of sales, excluding the impact of the European restructuring. Further, we expect diluted earnings per share to be in the range of $0.60 to $0.70, excluding the impact of the European restructuring. This outlook is unchanged from that reported at the end of fiscal 2012.

#### 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, 2012. 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;
- Modine’s ability to successfully implement restructuring plans and drive cost reductions and increased profitability and return on assets as a result;
- Unanticipated delays or modifications initiated by major customers with respect to product launches, product applications or requirements;
- Unanticipated product or manufacturing difficulties, including unanticipated launch challenges and warranty claims;
- The possibility that other or more significant issues may be identified in connection with the Company’s remediation of its value added tax (VAT) application errors in the Original Equipment – Europe segment;
- Increasingly complex and restrictive government regulations in various jurisdictions in which we operate;
- Unanticipated problems with suppliers meeting Modine’s time, quality and price demands;
- Work stoppages or interference at Modine’s facilities or those of its major customers and/or suppliers; 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 and Brazilian real relative to the U.S. dollar), tariffs, inflation, changes in interest rates, recession, restrictions associated with importing and exporting and foreign ownership, and, in particular, the recent slowing of certain markets in China and Brazil and the economic uncertainties in the European Union;
- 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 successfully hedge its commodity risk and/or 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 2012 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, 2012.

## Controls and procedures

As filed, 3,667 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 and Chief Financial Officer, 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 a material weakness in the Company’s internal control over financial reporting as described in Part II, Item 9A of the Company’s fiscal 2012 Form 10-K, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer concluded that the design and operation of the Company’s disclosure controls and procedures are not effective as of June 30, 2012.

As more fully set forth in Part II, Item 9A, “Controls and Procedures,” of the fiscal 2012 Form 10-K, management concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2012 because of the existence at that date of a material weakness 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 is developing and implementing a plan, including additional control procedures, to remediate the material weakness. These remediation efforts, outlined below, are intended both to address the identified material weakness and to enhance the overall financial control environment:

*Misapplication of value added tax (VAT) deficiency in the Original Equipment – Europe segment.* The following remediation plans are being implemented to address the value added tax deficiency:

- Appoint a global process owner who is responsible for overseeing the Company’s compliance with VAT regulations, including directing the establishment of internal VAT policies and procedures;
- Develop policies and procedures necessary to properly comply with the VAT regulations, with specific focus on cross-border transactions that could impact multiple taxing jurisdictions;
- Develop a training module and train a cross-functional team of personnel in finance, sales, purchasing, and other applicable Company departments on the newly developed VAT policies;
- Improve existing internal controls over VAT to include specific consideration of tooling sales and fixed asset transfers prior to invoice issuance in accordance with applicable VAT regulations;
- Implement monitoring controls to evaluate compliance with the internal policies and applicable VAT regulations;
- Engage additional resources (both internal and external) with technical expertise in VAT regulations, who will assist with the development of related internal policies and procedures, execute the transactions in accordance with internal policies and VAT regulations, and/or monitor compliance with internal policies and VAT regulations; and
- Implement system changes that will identify the country of origin for all transactions to aid in the application of VAT for the appropriate taxing jurisdiction.

#### Changes In Internal Control Over Financial Reporting

During the first quarter of fiscal 2013 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 7, 2012.
Source: SEC EDGAR, the filing index for accession 0001140361-12-035447. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.