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

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2012-11-06
- Accepted by EDGAR: Nov 6, 2012, 19:39 ET
- Period: 2012-09-30
- Accession: 0001140361-12-045768
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036112045768/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036112045768/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-07-01 to 2012-09-30 | $339.9m | us-gaap:Revenues |
| Revenue | 6 months, 2012-04-01 to 2012-09-30 | $690.3m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2012-07-01 to 2012-09-30 | $287.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2012-04-01 to 2012-09-30 | $586.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2012-07-01 to 2012-09-30 | $52.6m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2012-04-01 to 2012-09-30 | $104.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2012-07-01 to 2012-09-30 | $41.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2012-04-01 to 2012-09-30 | $84.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-07-01 to 2012-09-30 | −$6.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2012-04-01 to 2012-09-30 | −$2.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-07-01 to 2012-09-30 | $3.4m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2012-04-01 to 2012-09-30 | $6.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2012-07-01 to 2012-09-30 | $1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2012-04-01 to 2012-09-30 | $3.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-07-01 to 2012-09-30 | −$12.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2012-04-01 to 2012-09-30 | −$13.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-07-01 to 2012-09-30 | −$0.26 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2012-04-01 to 2012-09-30 | −$0.29 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-07-01 to 2012-09-30 | −$0.26 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2012-04-01 to 2012-09-30 | −$0.29 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-07-01 to 2012-09-30 | 46,584,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2012-04-01 to 2012-09-30 | 46,565,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2012-04-01 to 2012-09-30 | $26.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2012-04-01 to 2012-09-30 | $20.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-09-30 | $29.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-09-30 | $400.5m | us-gaap:AssetsCurrent |
| Total assets | at 2012-09-30 | $832.5m | us-gaap:Assets |
| Current liabilities | at 2012-09-30 | $265.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-09-30 | $528.0m | us-gaap:Liabilities |
| Long-term debt | at 2012-09-30 | $142.6m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2012-09-30 | $737.0k | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2012-09-30 | $19.8m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2012-09-30 | $302.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 37,699 characters.

When we use the terms “Modine,” “we,” “us,” the “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 September 30, 2012 refers to the second quarter of fiscal 2013.

*Second Quarter Highlights:* Net sales in the second quarter of fiscal 2013 decreased from the second quarter of fiscal 2012 across all of our business segments, driven by weakening end market demand and unfavorable foreign currency exchange rate changes. Gross margin declined slightly due to reduced sales volume partially offset by better pricing, favorable product mix and lower material costs year over year. Selling, general and administrative (SG&A) expenses decreased from the second quarter of fiscal 2012 to the second quarter of fiscal 2013 primarily due to lower compensation-related expense, the reversal of an acquisition-related liability in South America and the favorable impact of foreign currency exchange rate changes year over year. Asset impairment charges of $16.7 million were recorded during the quarter within the Europe and North America segments to reduce the carrying value of assets held for sale to their estimated fair value. During the second quarter of fiscal 2013, we recorded a loss from continuing operations of $11.8 million, as compared to earnings from continuing operations of $1.0 million in the prior year.

*Year-To-Date Highlights:* Net sales in the first six months of fiscal 2013 decreased from the first six months of fiscal 2012 across all of our business segments particularly within the automotive and commercial vehicle markets. Gross margin decreased due to the lower sales volume. SG&A expenses decreased year over year, yet remained the same as a percentage of sales. Asset impairment charges of $16.7 million were recorded during the second quarter within the Europe and North America segments to reduce the carrying value of assets held for sale to their estimated fair value. European restructuring and repositioning expense of $5.9 million negatively impacted results for the first six months of fiscal 2013. The European restructuring plan is designed to align the cost structure of the segment with our strategic focus on the commercial vehicle, off-highway, and engine product markets. As we continue our European restructuring plan, we expect to record additional impairment, restructuring and repositioning expenses in the second half of fiscal 2013 and beyond. The loss from continuing operations of $12.9 million represents a significant decrease from the earnings from continuing operations of $13.6 million during the prior year.

#### CONSOLIDATED RESULTS OF OPERATIONS – CONTINUING OPERATIONS

The results for the three and six months ended September 30, 2011 have been revised to reflect the correction of errors that were identified and corrected in the fourth quarter of fiscal 2012. In addition, the results for the six months ended September 30, 2012 include an out-of-period adjustment in the first quarter 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 and six months ended September 30, 2012 and 2011:

#### Index

*(in millions)*

|  | Three months ended September 30 2012 $% of sales |  | 2011 $% of sales |  | Six months ended September 30 2012 $% of sales |  | 2011 $% of sales |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **339.9** | **100.0%** | 397.3 | 100.0% | **690.3** | **100.0%** | 815.2 | 100.0% |
| Cost of sales | **287.3** | **84.5%** | 334.9 | 84.3% | **586.1** | **84.9%** | 683.0 | 83.8% |
| Gross profit | **52.6** | **15.5%** | 62.4 | 15.7% | **104.2** | **15.1%** | 132.2 | 16.2% |
| Selling, general and administrative expenses | **41.3** | **12.2%** | 50.2 | 12.6% | **84.5** | **12.2%** | 99.7 | 12.2% |
| Impairment charges | **16.7** | **4.9%** | - | - | **16.7** | **2.4%** | - | - |
| Restructuring and repositioning expenses | **1.3** | **0.4%** | - | - | **5.9** | **0.9%** | - | - |
| (Loss) income from operations | **(6.8)** | **-2.0%** | 12.2 | 3.1% | **(2.9)** | **-0.4%** | 32.5 | 4.0% |
| Interest expense | **3.4** | **1.0%** | 3.3 | 0.8% | **6.4** | **0.9%** | 6.3 | 0.8% |
| Other (income) expense – net | **(0.1)** | **0.0%** | 6.2 | 1.6% | **(0.3)** | **0.0%** | 5.9 | 0.7% |
| (Loss) earnings from continuing operations before income taxes | **(10.0)** | **-3.0%** | 2.7 | 0.7% | **(9.0)** | **-1.3%** | 20.3 | 2.5% |
| Provision for income taxes | **1.8** | **0.5%** | 1.7 | 0.4% | **3.9** | **0.6%** | 6.7 | 0.8% |
| (Loss) earnings from continuing operations | **(11.8)** | **-3.5%** | 1.0 | 0.3% | **(12.9)** | **-1.9%** | 13.6 | 1.7% |

#### Comparison of Three Months Ended September 30, 2012 and 2011

Second quarter net sales of $339.9 million were 14.4 percent lower than the $397.3 million in the second quarter of last year, driven by decreases in overall sales volume due to weakening end market demand, the continued wind down of the non-strategic automotive module business in Europe, along with a $24.3 million unfavorable impact of foreign currency exchange rate changes year over year. Automotive market sales declined 28 percent compared to the second quarter of fiscal 2012, as we continue the strategic exit of the automotive module business. Commercial vehicle and off-highway sales decreased 18 percent and 14 percent, respectively, compared to the second quarter of fiscal 2012 as a result of weakened end market conditions.

During the second quarter of fiscal 2013, gross profit decreased $9.8 million from the second quarter of fiscal 2012 due to decreased sales volume and a $2.9 million unfavorable impact of foreign currency exchange rate changes. Gross margin declined 20 basis points from 15.7 percent in the second quarter of fiscal 2012 to 15.5 percent in the second quarter of fiscal 2013 primarily due to reduced sales volume, partially offset by improved pricing, favorable product mix and lower material costs year over year.

SG&A expenses decreased $8.9 million from the second quarter of fiscal 2012 to the second quarter of fiscal 2013, and decreased as a percentage of sales to 12.2 percent. The decrease in SG&A expenses was due to lower compensation-related expense, the reversal of an acquisition-related liability of $2.0 million in South America and a $3.2 million favorable impact of foreign currency exchange rate changes year over year.

During the second quarter of fiscal 2013, impairment charges of $16.7 million were recorded to reduce the carrying value of assets held for sale to their estimated fair value with $15.7 million recorded within the Europe segment and $1.0 million recorded within the North America segment.

Restructuring and repositioning expenses of $1.3 million were recorded during the second quarter of fiscal 2013 primarily due to headcount reductions under our restructuring plan in the Europe segment.

Loss from operations of $6.8 million in the second quarter of fiscal 2013 represents a $19.0 million decline from income from operations of $12.2 million in the second quarter of fiscal 2012. This decrease was due to lower sales volume, $16.7 million of impairment charges and $1.3 million of restructuring and repositioning expenses during the quarter.

Other expense improved $6.3 million from $6.2 million in the second quarter of fiscal 2012 to other income of $0.1 million in the second quarter of fiscal 2013. Second quarter fiscal 2012 included $6.4 million of foreign currency losses on inter-company loans and other transactions denominated in foreign currencies.

During the second quarter of fiscal 2013 and fiscal 2012, the provision for income taxes was $1.8 million and $1.7 million, respectively. The provision for income taxes in the second quarter of fiscal 2013 was the result of earnings in certain foreign jurisdictions. The Company continued to record a full valuation allowance against its net deferred tax assets located in the U.S., Germany and certain other 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 or in fiscal 2014, the U.S. taxing jurisdiction will no longer be in a cumulative three year loss position thereby removing significant negative evidence concerning the valuation allowance. The Company will continue to evaluate all positive and negative evidence to determine the propriety of the valuation allowance against the net deferred tax assets of this jurisdiction.

During the second quarter of fiscal 2013, loss from continuing operations was $11.8 million compared to earnings from continuing operations of $1.0 million in the second quarter of the prior year. Diluted loss per share of $0.26 represents a decrease of $0.29 from the diluted earnings per share of $0.03 in the prior year. The losses in the second quarter include $16.7 million of impairment charges and $1.3 million of restructuring and repositioning expenses.

#### Comparison of Six Months Ended September 30, 2012 and 2011

Fiscal 2013 year-to-date net sales of $690.3 million decreased $124.9 million from the $815.2 million in the same period last year, driven by decreases in overall sales volume, along with a $47.9 million unfavorable impact of foreign currency exchange rate changes year over year. Automotive and commercial vehicle sales decreased 30 percent and 15 percent, respectively, compared to the first six months of fiscal 2012.

Fiscal 2013 year-to-date gross profit of $104.2 million decreased $28.0 million from the $132.2 million in the same period of fiscal 2012. Gross margin decreased 110 basis points to 15.1 percent from 16.2 percent in the same period of fiscal 2012. The decline in gross profit was driven by a decrease in overall sales volume, along with a $5.8 million unfavorable impact of foreign currency exchange rate changes year over year.

Fiscal 2013 year-to-date SG&A expenses decreased $15.2 million from the same period last year yet remained the same as a percentage of sales. The decrease in SG&A expenses was due to lower compensation-related expense, the reversal of an acquisition related liability and a $6.0 million favorable impact of foreign currency exchange rate changes year over year.

During the second quarter of fiscal 2013, impairment charges of $16.7 million were recorded to reduce the carrying value of assets held for sale to their estimated fair value in the Europe and North America segments.

Restructuring and repositioning expenses of $5.9 million were recorded during the second quarter of fiscal 2013 primarily due to headcount reductions at our regional headquarters in Germany under the restructuring plan in the Europe segment.

Fiscal 2013 year-to-date loss from operations of $2.9 million decreased $35.4 million from the same period last year. This decrease was largely due to the lower sales volume, $16.7 million of impairment charges and $5.9 million of restructuring and repositioning expenses.

Fiscal 2013 year-to-date other income of $0.3 million represents a $6.2 million increase from other expense of $5.9 million during the same period last year. The first six months of fiscal 2012 included $5.9 million of foreign currency exchange losses on inter-company loans and other transactions denominated in foreign currencies.

During the first six months of fiscal 2013 and fiscal 2012, the provision for income taxes was $3.9 million and $6.7 million, respectively. The year-to-date provision for income taxes was the result of earnings in various foreign jurisdictions and the full valuation allowance against net deferred tax assets in the U.S., Germany and certain other foreign jurisdictions.

Loss from continuing operations of $12.9 million for the first six months of fiscal 2013 was down $26.5 million from earnings from continuing operations of $13.6 million during the first six months of fiscal 2012. In addition, diluted earnings (loss) per decreased from $0.30 diluted earnings per share in the prior year to $0.29 diluted loss per share in the current year. The losses in fiscal 2013 include $16.7 million of impairment charges and $5.9 million of restructuring and repositioning expenses.

#### SEGMENT RESULTS OF OPERATIONS

The following is a discussion of our segment results of operations for the three and six months ended September 30, 2012 and 2011:

### North America

*(in millions)*

|  | Three months ended September 30 2012 $% of sales |  | 2011 $% of sales |  | Six months ended September 30 2012 $% of sales |  | 2011 $% of sales |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **143.4** | **100.0%** | 148.8 | 100.0% | **297.0** | **100.0%** | 305.5 | 100.0% |
| Cost of sales | **124.9** | **87.1%** | 127.8 | 85.9% | **254.9** | **85.8%** | 261.9 | 85.7% |
| Gross profit | **18.5** | **12.9%** | 21.0 | 14.1% | **42.1** | **14.2%** | 43.6 | 14.3% |
| Selling, general and administrative expenses | **10.7** | **7.5%** | 10.1 | 6.7% | **20.4** | **6.9%** | 21.9 | 7.2% |
| Impairment charges | **1.0** | **0.7%** | - | - | **1.0** | **0.3%** | - | - |
| Income from continuing operations | **6.8** | **4.7%** | 10.9 | 7.4% | **20.7** | **7.0%** | 21.7 | 7.1% |

#### Comparison of Three Months Ended September 30, 2012 and 2011

North America net sales decreased $5.4 million from the second quarter of fiscal 2012 to the second quarter of fiscal 2013, primarily driven by lower sales to commercial vehicle markets and the continued wind down of a military program, partially offset by increased sales to off-highway customers. Gross margin declined 120 basis points due to lower sales volume and higher warranty costs, partially offset by improved mix and lower material costs. SG&A expenses increased $0.6 million year over year, primarily due to lower recovery of prototype and testing costs, partially offset by lower pension expense. During the second quarter of fiscal 2013, we recorded $1.0 million of asset impairment charges related to two idle facilities. Income from continuing operations decreased $4.1 million to $6.8 million during the second quarter of fiscal 2013 primarily due to the impairment charges and reduced gross profit on lower sales volume.

North America year-to-date net sales decreased $8.5 million from the same period last year primarily driven by the wind down of certain automotive and military programs, partially offset by increased sales to off-highway customers. Gross margin declined 10 basis points to 14.2 percent during the first half of fiscal 2013 primarily due to lower sales volume, partially offset by lower material costs. SG&A expense decreased $1.5 million primarily due to lower pension expense. During the second quarter of fiscal 2013, the Company recorded $1.0 million of asset impairment charges related to two idle facilities. During the first half of fiscal 2013, income from continuing operations of $20.7 million declined $1.0 million from $21.7 million in the first six months of fiscal 2012.

### Europe

*(in millions)*

|  | Three months ended September 30 2012 $% of sales |  | 2011 $% of sales |  | Six months ended September 30 2012 $% of sales |  | 2011 $% of sales |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **118.8** | **100.0%** | 152.0 | 100.0% | **244.2** | **100.0%** | 318.8 | 100.0% |
| Cost of sales | **101.0** | **85.0%** | 131.7 | 86.6% | **211.7** | **86.7%** | 273.1 | 85.7% |
| Gross profit | **17.8** | **15.0%** | 20.3 | 13.4% | **32.5** | **13.3%** | 45.7 | 14.3% |
| Selling, general and administrative expenses | **10.6** | **9.0%** | 12.0 | 7.9% | **20.9** | **8.6%** | 25.8 | 8.0% |
| Impairment charges | **15.8** | **13.3%** | - | - | **15.8** | **6.5%** | - | - |
| Restructuring and repositioning expense | **1.3** | **1.1%** | - | - | **5.9** | **2.4%** | - | - |
| (Loss) income from continuing operations | **(9.9)** | **-8.4%** | 8.3 | 5.5% | **(10.1)** | **-4.1%** | 19.9 | 6.3% |

#### Comparison of Three Months Ended September 30, 2012 and 2011

Europe net sales decreased $33.2 million from the second quarter of fiscal 2012 to the second quarter of fiscal 2013, driven by the continued wind down of the automotive module business, a slowdown in demand in the commercial vehicle market, which caused delays in new program launches, and a $14.9 million unfavorable impact of foreign currency exchange rate changes. Gross margin increased 160 basis points to 15.0 percent during the second quarter of fiscal 2013 from 13.4 percent during the second quarter of fiscal 2012 primarily driven by lower material costs and improved customer pricing, including the favorable impact of a $5.0 million customer pricing settlement. SG&A expenses decreased $1.4 million from the second quarter of fiscal 2012 to the second quarter of fiscal 2013 primarily due to favorable foreign currency exchange rate changes. In addition, asset impairment charges of $15.8 million were recorded during the second quarter of fiscal 2013 related to several facilities held for sale. Income from continuing operations decreased $18.2 million over the periods presented mainly due to impairment charges and decreased gross profit on lower sales volume.

Europe year-to-date net sales decreased $74.6 million from the same period last year, driven by the continued wind down of the automotive module business, a slowdown in demand in the commercial vehicle market, which caused delays in new program launches, and a $30.2 million unfavorable impact of foreign currency exchange rate changes. Gross profit decreased $13.2 million during the first six months of fiscal 2013 to $32.5 million from the prior year due to sales volume decreases and a $3.9 million unfavorable impact of foreign currency exchange rate changes, partially offset by improved customer pricing and lower material costs. SG&A expenses decreased $4.9 million primarily due to a $4.4 million favorable impact of foreign currency exchange rate changes. In addition, asset impairment charges of $15.8 million were recorded during the second quarter of fiscal 2013 related to several facilities held for sale. During the first six months of fiscal 2013, we recorded restructuring and repositioning expenses of $5.9 million primarily due to headcount reductions. The European restructuring plan is designed to align the cost structure of the segment with the strategic focus on the commercial vehicle market. As we continue our European restructuring plan, we expect to record additional impairment, restructuring and repositioning expenses in the second half of fiscal 2013 and beyond. Income from continuing operations decreased $30.0 million from the first six months of fiscal 2012 to the first six months of fiscal 2013 mainly due to $15.8 million of impairment charges, $5.9 million of restructuring and repositioning expenses and lower gross profit on lower sales volume.

### South America

*(in millions)*

|  | Three months ended September 30 2012 $% of sales |  | 2011 $% of sales |  | Six months ended September 30 2012 $% of sales |  | 2011 $% of sales |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **34.2** | **100.0%** | 48.1 | 100.0% | **65.4** | **100.0%** | 96.0 | 100.0% |
| Cost of sales | **28.4** | **83.1%** | 39.2 | 81.6% | **54.9** | **83.9%** | 78.2 | 81.4% |
| Gross profit | **5.8** | **16.9%** | 8.9 | 18.4% | **10.5** | **16.1%** | 17.8 | 18.6% |
| Selling, general and administrative expenses | **1.5** | **4.3%** | 6.2 | 12.8% | **5.5** | **8.5%** | 11.9 | 12.4% |
| Income from continuing operations | **4.3** | **12.6%** | 2.7 | 5.6% | **5.0** | **7.6%** | 5.9 | 6.2% |

#### Comparison of Three Months Ended September 30, 2012 and 2011

South America net sales decreased $13.9 million from the second quarter of fiscal 2012 to the second 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 $8.4 million. Gross profit decreased $3.1 million during the second quarter of fiscal 2013 to $5.8 million from the prior year due to sales volume decreases and a $1.4 million unfavorable impact of foreign currency exchange rate changes. SG&A expense decreased $4.7 million from the second quarter of fiscal 2012 to second quarter of fiscal 2013, due to the reversal of a $2.0 million acquisition-related liability and lower environmental remediation and outbound freight costs. Income from continuing operations increased $1.6 million over the periods presented due to lower SG&A expenses, partially offset by lower gross profit on reduced sales volume.

South America year-to-date net sales decreased $30.6 million from the same period last year 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 $15.5 million. Gross profit decreased $7.3 million during the first six months of fiscal 2013 to $10.5 million from the prior year due to sales volume decreases and a $2.5 million unfavorable impact of foreign currency exchange rate changes. SG&A expenses decreased $6.4 million due to the reversal of a $2.0 million acquisition-related liability, lower outbound freight costs and a $1.5 million favorable impact of foreign currency exchange rate changes. Income from continuing operations decreased $0.9 million from the first six months of fiscal 2012 to the first six months of fiscal 2013 due to lower gross profit on reduced sales volume, partially offset by lower SG&A expenses.

### Asia

*(in millions)*

|  | Three months ended September 30 2012 $% of sales |  | 2011 $% of sales |  | Six months ended September 30 2012 $% of sales |  | 2011 $% of sales |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **13.8** | **100.0%** | 20.0 | 100.0% | **29.6** | **100.0%** | 41.3 | 100.0% |
| Cost of sales | **13.8** | **99.8%** | 18.2 | 90.9% | **29.2** | **98.5%** | 36.4 | 88.1% |
| Gross profit | **-** | **0.2%** | 1.8 | 9.1% | **0.4** | **1.5%** | 4.9 | 11.9% |
| Selling, general and administrative expenses | **2.3** | **16.8%** | 2.6 | 13.0% | **5.0** | **17.0%** | 4.8 | 11.8% |
| (Loss) income from continuing operations | **(2.3)** | **-16.6%** | (0.8) | -3.9% | **(4.6)** | **-15.5%** | 0.1 | 0.1% |

26

#### Comparison of Three Months Ended September 30, 2012 and 2011

Asia net sales decreased $6.2 million from the second quarter of fiscal 2012 to the second quarter of fiscal 2013 due to a decrease in non-strategic vehicular heating, ventilating and air conditioning (HVAC) sales, lower automotive module sales and a decline in the off-highway vehicular market due to the slowing economic conditions in China. Gross margin decreased to 0.2 percent during the second quarter of fiscal 2013 from a gross margin of 9.1 percent one year ago due primarily to lower sales volume and costs associated with converting the Shanghai manufacturing facility to a high volume oil cooler production facility. The loss from continuing operations increased $1.5 million to $2.3 million in the second quarter of fiscal 2013 versus the prior year due to the lower gross profit.

Asia year-to-date net sales decreased $11.7 million from the same period last year due to a decrease in automotive module sales as we continue the strategic exit of the automotive module business and a decline in the off-highway vehicular market as demand in the construction equipment market in China continues to be weak. Gross profit decreased to $0.4 million for the first six months of fiscal 2013 from a gross profit of $4.9 million during the first six months of fiscal 2012 due to lower sales volume and costs associated with converting the Shanghai manufacturing facility to a high volume oil cooler production facility. The year-to-date loss from continuing operations of $4.6 million represents a $4.7 million decline from the prior year income from continuing operations of $0.1 million primarily due to lower gross profit on lower sales volume.

### Commercial Products

*(in millions)*

|  | Three months ended September 30 2012 $% of sales |  | 2011 $% of sales |  | Six months ended September 30 2012 $% of sales |  | 2011 $% of sales |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **33.8** | **100.0%** | 35.1 | 100.0% | **64.0** | **100.0%** | 69.2 | 100.0% |
| Cost of sales | **23.7** | **70.1%** | 24.8 | 70.7% | **46.0** | **71.8%** | 49.4 | 71.4% |
| Gross profit | **10.1** | **29.9%** | 10.3 | 29.3% | **18.0** | **28.2%** | 19.8 | 28.6% |
| Selling, general and administrative expenses | **7.5** | **22.1%** | 7.4 | 21.1% | **14.4** | **22.6%** | 13.5 | 19.5% |
| Income from continuing operations | **2.6** | **7.8%** | 2.9 | 8.2% | **3.6** | **5.6%** | 6.3 | 9.1% |

#### Comparison of Three Months Ended September 30, 2012 and 2011

Commercial Products net sales decreased $1.3 million from the second quarter of fiscal 2012 to the second quarter of fiscal 2013 primarily due to decreased sales in the United Kingdom as a result of continued weak economic conditions. Gross margin improved 60 basis points from 29.3 percent during the second quarter of fiscal 2012 to 29.9 percent during the second quarter of fiscal 2013 primarily due to product mix and the impact of manufacturing cost savings initiatives. SG&A expenses increased slightly from the prior year due to the acquisition of Geofinity Manufacturing (“Geofinity”) during the second quarter of fiscal 2013. This acquisition provides Modine with a full line of innovative geothermal heat pumps in both water-to-water and water-to-air models. Income from continuing operations decreased $0.3 million over the periods presented primarily due to the lower gross profit.

Commercial Products year-to-date net sales decreased $5.2 million from the same period last year due to decreased sales volumes in the United Kingdom as a result of continued weak economic conditions, the impact of a stronger currency versus competitors in mainland Europe and a $0.6 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased from 28.6 percent during the first six months of fiscal 2012 to 28.2 percent during the first six months of fiscal 2013 primarily due to lower sales volume. SG&A expenses increased $0.9 million from the first six months of fiscal 2012 to the first six months of fiscal 2013 due to expenses associated with new products and the acquisition of Geofinity during the second quarter. Income from continuing operations decreased $2.7 million to $3.6 million in the first six months of fiscal 2013 primarily due to decreased gross profit on lower sales volume and increased SG&A expenses.

#### Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operating activities, our cash and cash equivalents at September 30, 2012 of $29.6 million and available borrowings of $187.0 million 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.

Cash provided by operating activities for the six months ended September 30, 2012 was $26.8 million, which was a $23.6 million increase from $3.2 million for the six months ended September 30, 2011. This increase in operating cash flows was primarily due to favorable reductions in net working capital. Capital expenditures during the first six months of fiscal 2013 were $20.7 million compared to $32.5 million during the same period in fiscal 2012. This decrease in capital expenditures was primarily due to the timing of expenditures for new program launches. In the second quarter of fiscal 2013, we paid $4.9 million in cash for the Geofinity acquisition.

#### Debt Covenants

Our debt agreements require us to maintain compliance with various covenants. Under our primary U.S. based debt agreements, we are 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 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:

|  |  |  |
| --- | --- | --- |
|  | Interest Expense Coverage | Leverage Ratio |
|  | Ratio (Not Permitted | (Not Permitted to |
|  | to Be Less Than): | 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 September 30, 2012 was $115.0 million. The following table presents a calculation of adjusted EBITDA:

(dollars in thousands)

|  | Quarter Ended December 31, 2011 | Quarter Ended March 31, 2012 | Quarter Ended June 30, 2012 | Quarter Ended September 30, 2012 | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Earnings (loss) from continuing operations | $8,768 | $15,646 | $(1,055) | $(11,848) | $11,511 |
| Net earnings attributable to noncontrolling interest | (110) | (204) | (301) | (267) | (882) |
| Consolidated interest expense | 2,893 | 3,303 | 3,039 | 3,370 | 12,605 |
| Provision for (benefit from) income taxes | 3,923 | (711) | 2,053 | 1,830 | 7,095 |
| Depreciation and amortization expense | 14,214 | 14,322 | 14,049 | 14,140 | 56,725 |
| Non-cash items (a) | 3,478 | (86) | 299 | 16,809 | 20,500 |
| Restructuring and repositioning expenses | 499 | 671 | 4,761 | 1,479 | 7,410 |
| Adjusted EBITDA | $33,665 | $32,941 | $22,845 | $25,513 | $114,964 |

(a) Non-cash items are comprised of asset impairment charges, 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.

Our interest expense coverage ratio for the four fiscal quarters ended September 30, 2012 was 8.83, which exceeded the minimum requirement of 3.00. The following table presents a calculation of our interest expense coverage ratio:

|  | Four Quarters Ended September 30, 2012 |
| --- | ---: |
| Consolidated interest expense | $12,605 |
| Plus: Costs to sell receivables | 414 |
| Total consolidated interest expense | $13,019 |
| Adjusted EBITDA | $114,964 |
| Interest expense coverage ratio | 8.83 |

Our leverage ratio for the four fiscal quarters ended September 30, 2012 was 1.64, which was below the maximum ratio of 3.25. The following table presents a calculation of our leverage ratio:

|  | Four Quarters Ended September 30, 2012 |
| --- | ---: |
| Debt per balance sheet | $163,053 |
| Plus: Net derivative liabilities and letters of credit | 2,860 |
| Indebtedness attributed to sales of receivables | 22,602 |
| Total debt | $188,515 |
| Adjusted EBITDA | $114,964 |
| Leverage ratio | 1.64 |

We expect to remain in compliance with our debt covenants through the remainder of fiscal 2013 and beyond.

#### Outlook

For the remainder of fiscal 2013, we expect weak economic conditions in several key geographic markets, including Europe, South America, and Asia. Also, for the full fiscal year, we expect approximately $80 million of planned program reductions due to the wind down of our BMW business in Europe and Asia and certain automotive and military programs in North America. Due to these factors, as well as unfavorable foreign exchange impacts, our current expectations for fiscal 2013 are a 10 to 12 percent decrease in net sales compared with our fiscal 2012 results. We also expect operating income margin in a range of 2.75 to 3.25 percent of net sales, excluding the impact of impairment and European restructuring charges, for fiscal 2013. As noted previously, we are implementing a restructuring program designed to align our cost structure and manufacturing base in Europe with a strategic focus on the commercial vehicle, off-highway and engine product markets. Finally, we expect diluted earnings per share to be in the range of $0.40 to $0.50, excluding the impact of impairment and European restructuring charges.

#### 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:

- Modine’s ability to successfully implement restructuring plans and drive cost reductions and increased profitability and return on assets as a result;
- 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 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 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 and its customers operate and compete, 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 or extended recessionary conditions in the global economy; 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, 312 characters.

The Company’s market risk disclosures have not materially changed since the fiscal 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, 3,668 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 September 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 has developed and is implementing a plan, including additional and improved 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 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 second 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 Nov 6, 2012.
Source: SEC EDGAR, the filing index for accession 0001140361-12-045768. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.