# Modine Manufacturing Co: Form 10-Q for the period ended Dec 31, 2012

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2013-02-01
- Accepted by EDGAR: Feb 1, 2013, 17:03 ET
- Period: 2012-12-31
- Accession: 0001140361-13-004099
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036113004099/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036113004099/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-10-01 to 2012-12-31 | $326.1m | us-gaap:Revenues |
| Revenue | 9 months, 2012-04-01 to 2012-12-31 | $1.02bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2012-10-01 to 2012-12-31 | $277.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2012-04-01 to 2012-12-31 | $863.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2012-10-01 to 2012-12-31 | $48.2m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2012-04-01 to 2012-12-31 | $152.5m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2012-10-01 to 2012-12-31 | $42.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2012-04-01 to 2012-12-31 | $126.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-10-01 to 2012-12-31 | −$3.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2012-04-01 to 2012-12-31 | −$6.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-10-01 to 2012-12-31 | $2.8m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2012-04-01 to 2012-12-31 | $9.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2012-10-01 to 2012-12-31 | $1.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2012-04-01 to 2012-12-31 | $5.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-10-01 to 2012-12-31 | −$8.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2012-04-01 to 2012-12-31 | −$22.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-10-01 to 2012-12-31 | −$0.19 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2012-04-01 to 2012-12-31 | −$0.47 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-10-01 to 2012-12-31 | −$0.19 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2012-04-01 to 2012-12-31 | −$0.47 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-10-01 to 2012-12-31 | 46,700,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2012-04-01 to 2012-12-31 | 46,600,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2012-04-01 to 2012-12-31 | $41.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2012-04-01 to 2012-12-31 | $33.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-12-31 | $32.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-12-31 | $375.4m | us-gaap:AssetsCurrent |
| Total assets | at 2012-12-31 | $799.6m | us-gaap:Assets |
| Current liabilities | at 2012-12-31 | $241.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-12-31 | $496.8m | us-gaap:Liabilities |
| Long-term debt | at 2012-12-31 | $137.6m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2012-12-31 | $900.0k | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2012-12-31 | $26.2m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2012-12-31 | $300.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 39,022 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 December 31, 2012 is the third quarter of fiscal 2013.

*Third Quarter Highlights:* Net sales in the third quarter of fiscal 2013 decreased from the third quarter of fiscal 2012 due to an overall decrease in sales volume within the commercial vehicle and off-highway markets, triggered primarily by the continued weakness in those markets, and the planned wind down of the non-strategic automotive module business in Europe. Gross profit and gross margin decreased due to reduced sales volume. Selling, general and administrative (SG&A) expenses increased $1.6 million in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 primarily due to the reversal of a trade compliance reserve in the prior year. Impairment charges of $8.3 million were recorded within the Europe segment primarily to reduce the carrying value of a facility held for sale to its estimated fair value less cost to sell. In addition, restructuring and repositioning charges of $1.4 million relate to our restructuring program for the Europe segment. Our loss from continuing operations was $8.4 million during the third quarter of fiscal 2013 as compared to income from continuing operations of $8.8 million in the prior year.

*Year-To-Date Highlights:* Net sales in the first nine months of fiscal 2013 decreased 14 percent compared with the first nine months of fiscal 2012 due to an overall reduction in sales volume across all of our business segments, primarily due to market weakness. Gross profit decreased as a result of the decreased sales volume. SG&A expenses decreased year over year primarily due to a focus on cost containment. Impairment charges of $25.1 million were recorded largely to reduce the carrying value of facilities held for sale to their estimated fair value less cost to sell within the Europe and North America segments. Restructuring and repositioning charges in Europe totaled $7.3 million during the first nine months of fiscal 2013. Our Europe restructuring program 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 Europe restructuring program, we expect to record additional restructuring and repositioning expenses in the fourth quarter of fiscal 2013 and beyond. We expect to begin to see the positive impact of this program in fiscal 2014. Loss from continuing operations was $21.2 million during the first nine months of fiscal 2013 compared with income from continuing operations of $22.3 million in the prior year.

#### CONSOLIDATED RESULTS OF OPERATIONS

The results for the three and nine months ended December 31, 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 nine months ended December 31, 2012 include an out-of-period adjustment in the first quarter related to certain commodity hedges. See Note 1 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 nine months ended December 31, 2012 and 2011:

#### Index

*(in millions)*

|  | Three months ended December 31, 2012 $'s | % of sales | 2011 $'s | % of sales | Nine months ended December 31, 2012 $'s | % of sales | 2011 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **326.1** | **100.0%** | 373.3 | 100.0% | **1,016.4** | **100.0%** | 1,188.4 | 100.0% |
| Cost of sales | **277.9** | **85.2%** | 313.2 | 83.9% | **863.9** | **85.0%** | 996.1 | 83.8% |
| Gross profit | **48.2** | **14.8%** | 60.1 | 16.1% | **152.5** | **15.0%** | 192.3 | 16.2% |
| Selling, general and administrative expenses | **42.3** | **13.0%** | 40.7 | 10.9% | **126.8** | **12.5%** | 140.4 | 11.8% |
| Impairment charges | **8.3** | **2.5%** | 2.2 | 0.6% | **25.1** | **2.5%** | 2.2 | 0.2% |
| Restructuring and repositioning expenses | **1.4** | **0.4%** | - | - | **7.3** | **0.7%** | - | - |
| Operating (loss) income | **(3.8)** | **-1.2%** | 17.2 | 4.6% | **(6.7)** | **-0.7%** | 49.7 | 4.2% |
| Interest expense | **(2.8)** | **-0.9%** | (2.9) | -0.8% | **(9.2)** | **-0.9%** | (9.2) | -0.8% |
| Other expense – net | **(0.3)** | **-0.1%** | (1.6) | -0.4% | **-** | **-** | (7.6) | -0.6% |
| (Loss) earnings from continuing operations before income taxes | **(6.9)** | **-2.1%** | 12.7 | 3.4% | **(15.9)** | **-1.6%** | 32.9 | 2.8% |
| Provision for income taxes | **(1.5)** | **-0.5%** | (3.9) | -1.0% | **(5.3)** | **-0.5%** | (10.6) | -0.9% |
| (Loss) earnings from continuing operations | **(8.4)** | **-2.6%** | 8.8 | 2.4% | **(21.2)** | **-2.1%** | 22.3 | 1.9% |

#### Comparison of Three Months Ended December 31, 2012 and 2011

Third quarter net sales of $326.1 million were 12.6 percent lower than the $373.3 million in the third quarter of last year, driven by decreases in overall sales volume due to weak end market demand, the planned wind down of the non-strategic automotive module business in Europe and a $9.0 million unfavorable impact of foreign currency exchange rate changes. Automotive market sales declined 17 percent compared to the third 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 19 percent, respectively, compared to the third quarter of fiscal 2012 as a result of weakened end market conditions.

During the third quarter of fiscal 2013, gross profit decreased $11.9 million from the third quarter of fiscal 2012 due to decreased sales volume and a $1.3 million unfavorable impact of foreign currency exchange rate changes. Gross margin declined 130 basis points from 16.1 percent in the third quarter of fiscal 2012 to 14.8 percent during the third quarter of fiscal 2013 primarily due to reduced sales volume, partially offset by lower material costs year over year.

SG&A expenses increased $1.6 million from the third quarter of fiscal 2012 to the third quarter of fiscal 2013, and increased as a percentage of sales to 13.0 percent. The increase in SG&A expenses was primarily due to the reversal of a $2.3 million trade compliance liability in the third quarter of fiscal 2012, offset by a $0.8 million favorable impact of foreign currency exchange rate changes year over year.

During the third quarter of fiscal 2013, we recorded impairment charges of $8.3 million primarily to reduce the carrying value of a facility held for sale to its estimated fair value less cost to sell within the Europe segment. During the third quarter of fiscal 2012, we recorded a loss on disposal of assets of $2.2 million within the Europe segment.

We recorded restructuring and repositioning expenses of $1.4 million during the third quarter of fiscal 2013 due to headcount reductions and equipment transfer costs under our restructuring program in the Europe segment.

Operating loss of $3.8 million in the third quarter of fiscal 2013 represents a $21.0 million decline from operating income of $17.2 million in the third quarter of fiscal 2012. This decrease was due to lower sales volume, $8.3 million of impairment charges and $1.4 million of restructuring and repositioning expenses during the quarter.

Other expense improved $1.3 million from $1.6 million in the third quarter of fiscal 2012 to $0.3 million in the third quarter of fiscal 2013 primarily due to foreign currency losses on inter-company loans during the third quarter of fiscal 2012.

During the third quarter of fiscal 2013 and fiscal 2012, income tax provisions were $1.5 million and $3.9 million, respectively. The income tax provisions in the third quarters of fiscal 2013 and fiscal 2012 were the result of earnings in certain foreign jurisdictions. The Company continued to record a full valuation allowance against its net deferred tax assets 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. The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions until the need for a valuation allowance is eliminated. The need for a valuation allowance will be eliminated when the Company determines it is more likely than not that the deferred tax assets will be realized. It is possible that during calendar 2013, 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 in each jurisdiction.

During the third quarter of fiscal 2013, loss from continuing operations was $8.4 million compared to earnings from continuing operations of $8.8 million in the third quarter of the prior year. Diluted loss per share of $0.19 represents a decrease of $0.38 from diluted earnings per share of $0.19 in the prior year. The losses in the third quarter of fiscal 2013 include $8.3 million of impairment charges and $1.4 million of restructuring and repositioning expenses.

#### Comparison of Nine Months Ended December 31, 2012 and 2011

Fiscal 2013 year-to-date net sales of $1,016.4 million were $172.0 million, or 14.5 percent, lower than $1,188.4 million of net sales in the same period last year, driven by decreased overall sales volume and a $56.9 million unfavorable impact of foreign currency exchange rate changes. Automotive and commercial vehicle sales decreased 26 percent and 16 percent, respectively, compared to the first nine months of fiscal 2012.

Fiscal 2013 year-to-date gross profit of $152.5 million decreased $39.8 million from the same period last year. The gross profit decrease was driven by reduced sales volume and a $7.1 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased 120 basis points from 16.2 percent in the first nine months of fiscal 2012 to 15.0 percent in the first nine months of fiscal 2013.

Fiscal 2013 year-to-date SG&A expenses decreased $13.6 million from the same period last year primarily due to lower compensation-related expense and a $6.9 million favorable impact of foreign currency exchange rate changes. During the first nine months of fiscal 2013 compared to fiscal 2012, SG&A expenses increased 70 basis points as a percentage of net sales as sales declined at a faster rate than SG&A expenses.

Fiscal 2013 year-to-date impairment charges of $25.1 million were recorded primarily to reduce the carrying values of facilities held for sale to their estimated fair value less cost to sell within the Europe and North America segments. During the third quarter of fiscal 2012, we recorded a loss on disposal of assets of $2.2 million within the Europe segment.

We recorded restructuring and repositioning expenses of $7.3 million during the first nine months of fiscal 2013 primarily due to headcount reductions at our regional headquarters in Germany and equipment transfer costs under our restructuring program in the Europe segment.

Operating loss of $6.7 million during the first nine months of fiscal 2013 represents a $56.4 million decline from operating income of $49.7 million during the first nine months of fiscal 2012. This decrease was primarily due to lower sales volume, $25.1 million of impairment charges and $7.3 million of restructuring and repositioning expenses during the first nine months of fiscal 2013.

Other expense of $7.6 million during the first nine months of fiscal 2012 primarily relates to foreign currency exchange losses on the re-measurement or settlement of foreign currency denominated assets and liabilities, including inter-company loans denominated in a foreign currency.

During the first nine months of fiscal 2013 and fiscal 2012, income tax provisions were $5.3 million and $10.6 million, respectively. The year-to-date income tax provisions were the result of earnings in various foreign jurisdictions and the full valuation allowances against net deferred tax assets in the U.S., Germany and certain other foreign jurisdictions.

Loss from continuing operations of $21.2 million for the first nine months of fiscal 2013 represented a $43.5 million decrease from the prior year earnings from continuing operations of $22.3 million. Diluted loss per share from continuing operations was $0.47 for the first nine months of fiscal 2013 as compared to diluted earnings per share from continuing operations of $0.49 for the first nine months of fiscal 2012. The losses in fiscal 2013 include $25.1 million of impairment charges and $7.3 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 nine months ended December 31, 2012 and 2011:

*(in millions)*

| North America | Three months ended December 31, 2012 $'s | % of sales | 2011 $'s | % of sales | Nine months ended December 31, 2012 $'s | % of sales | 2011 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **128.2** | **100.0%** | 139.2 | 100.0% | **425.2** | **100.0%** | 444.7 | 100.0% |
| Cost of sales | **110.9** | **86.5%** | 120.1 | 86.3% | **365.8** | **86.0%** | 382.0 | 85.9% |
| Gross profit | **17.3** | **13.5%** | 19.1 | 13.7% | **59.4** | **14.0%** | 62.7 | 14.1% |
| Selling, general and administrative expenses | **9.1** | **7.1%** | 8.5 | 6.1% | **29.5** | **6.9%** | 30.3 | 6.8% |
| Impairment charges | **-** | **-** | - | - | **1.0** | **0.2%** | - | - |
| Operating income | **8.2** | **6.4%** | 10.6 | 7.6% | **28.9** | **6.8%** | 32.4 | 7.3% |

#### Comparison of Three Months Ended December 31, 2012 and 2011

North America net sales decreased $11.0 million from the third quarter of fiscal 2012 to the third quarter of fiscal 2013 primarily driven by lower sales to off-highway customers as orders slowed during the quarter and the continued wind down of a military program. Gross margin decreased 20 basis points due to lower sales volume, offset by favorable changes in product mix. SG&A expenses increased $0.6 million year over year primarily due to a $2.3 million reversal of a trade compliance liability successfully resolved in the third quarter of fiscal 2012, partially offset by the favorable impact of cost reduction initiatives. Operating income decreased $2.4 million to $8.2 million during the third quarter of fiscal 2013 primarily due to reduced gross profit on lower sales volume.

#### Comparison of Nine Months Ended December 31, 2012 and 2011

North America year-to-date net sales decreased $19.5 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 14.0 percent during the first nine months of fiscal 2013 primarily due to decreased sales volume, partially offset by lower material costs and favorable changes in product mix. SG&A expenses decreased $0.8 million due to the favorable impact of cost reduction initiatives and lower pension expenses, partially offset by a $2.3 million reversal of a trade compliance liability in the prior year. 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 nine months of fiscal 2013, operating income of $28.9 million declined $3.5 million from $32.4 million in the first nine months of fiscal 2012. The operating income decline was primarily due to lower gross profit from lower sales volume.

#### Index

*(in millions)*

| Europe | Three months ended December 31, 2012 $'s | % of sales | 2011 $'s | % of sales | Nine months ended December 31, 2012 $'s | % of sales | 2011 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **115.7** | **100.0%** | 139.9 | 100.0% | **359.9** | **100.0%** | 458.7 | 100.0% |
| Cost of sales | **103.6** | **89.6%** | 121.2 | 86.6% | **315.2** | **87.6%** | 394.3 | 86.0% |
| Gross profit | **12.1** | **10.4%** | 18.7 | 13.4% | **44.7** | **12.4%** | 64.4 | 14.0% |
| Selling, general and administrative expenses | **8.1** | **7.0%** | 9.7 | 6.9% | **29.1** | **8.1%** | 35.4 | 7.7% |
| Impairment charges | **8.3** | **7.2%** | 2.2 | 1.6% | **24.1** | **6.7%** | 2.2 | 0.5% |
| Restructuring and repositioning expenses | **1.4** | **1.2%** | - | - | **7.3** | **2.0%** | - | - |
| Operating (loss) income | **(5.7)** | **-4.9%** | 6.8 | 4.9% | **(15.8)** | **-4.4%** | 26.8 | 5.8% |

#### Comparison of Three Months Ended December 31, 2012 and 2011

Europe net sales decreased $24.2 million from the third quarter of fiscal 2012 to the third quarter of fiscal 2013, driven by the planned wind down of the automotive module business, lower sales to commercial vehicle and off-highway customers, primarily due to weakened end market demand, and a $4.9 million unfavorable impact of foreign currency. Gross margin decreased 300 basis points to 10.4 percent during the third quarter of fiscal 2013 from 13.4 percent during the third quarter of fiscal 2012 primarily driven by lower sales volume and costs associated with new program launches. SG&A expenses decreased $1.6 million from the third quarter of fiscal 2012 to the third quarter of fiscal 2013 primarily due to lower compensation expense from headcount reductions as part of the Europe restructuring program. In addition, we recorded asset impairment charges of $8.3 million during third quarter of fiscal 2013 primarily related to a facility held for sale. We also recorded a $2.2 million loss on disposal of assets during the third quarter of fiscal 2012. Operating income of $6.8 million in the third quarter of fiscal 2012 decreased $12.5 million compared to the operating loss of $5.7 million for the third quarter of fiscal 2013 primarily due to the incremental asset impairment charges and decreased gross profit on lower sales volume.

#### Comparison of Nine Months Ended December 31, 2012 and 2011

Europe year-to-date net sales decreased $98.8 million from the same period last year, driven by the planned wind down of the automotive module business, a slowdown in demand in the commercial vehicle market and a $35.1 million unfavorable impact of foreign currency exchange rate changes. Gross profit decreased $19.7 million during the first nine months of fiscal 2013 to $44.7 million from the prior year due to sales volume decreases, costs associated with new program launches and a $4.5 million unfavorable impact of foreign currency exchange rate changes, partially offset by improved customer pricing and lower material costs. SG&A expenses decreased $6.3 million primarily due to a $4.9 million favorable impact of foreign currency exchange rate changes and lower compensation expense. We recorded asset impairment charges of $24.1 million during the first nine months of fiscal 2013 primarily related to several facilities held for sale. In addition, we recorded $7.3 million of restructuring and repositioning expenses during the first nine months of fiscal 2013 primarily due to headcount reductions. The Europe restructuring program is designed to align the cost structure of the segment with our strategic focus on the commercial vehicle, off-highway and engine products markets. As we continue our Europe restructuring program, we expect to record additional restructuring and repositioning expenses in the fourth quarter of fiscal 2013 and beyond. Operating loss of $15.8 million for the first nine months of fiscal 2013 represents a $42.6 million decrease from operating income for the first nine months of fiscal 2012 primarily due to $24.1 million of asset impairment charges, $7.3 million of restructuring and repositioning expenses and lower gross profit on lower sales volume.

#### Index

*(in millions)*

| South America | Three months ended December 31, 2012 $'s | % of sales | 2011 $'s | % of sales | Nine months ended December 31, 2012 $'s | % of sales | 2011 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **31.7** | **100.0%** | 42.2 | 100.0% | **97.1** | **100.0%** | 138.2 | 100.0% |
| Cost of sales | **26.1** | **82.5%** | 34.4 | 81.4% | **81.0** | **83.5%** | 112.5 | 81.4% |
| Gross profit | **5.6** | **17.5%** | 7.8 | 18.6% | **16.1** | **16.5%** | 25.7 | 18.6% |
| Selling, general and administrative expenses | **3.0** | **9.5%** | 3.8 | 9.0% | **8.5** | **8.8%** | 15.9 | 11.5% |
| Operating income | **2.6** | **8.2%** | 4.0 | 9.5% | **7.6** | **7.8%** | 9.8 | 7.1% |

#### Comparison of Three Months Ended December 31, 2012 and 2011

South America net sales decreased $10.5 million from the third quarter of fiscal 2012 to the third quarter of fiscal 2013 primarily due to the pre-buy of commercial vehicles in the prior year ahead of the January 1, 2012 change in emission standards and an unfavorable impact of foreign currency exchange rate changes of $4.6 million. Gross profit decreased $2.2 million during the third quarter of fiscal 2013 to $5.6 million from the prior year due to sales volume decreases and a $0.8 million unfavorable impact of foreign currency exchange rate changes. SG&A expenses, which decreased $0.8 million in the third quarter of fiscal 2013 when compared to the third quarter of fiscal 2012, were favorably impacted by foreign currency exchange rate changes of $0.4 million. Operating income decreased $1.4 million to $2.6 million in the third quarter of fiscal 2013 due to lower gross profit on lower sales volume, partially offset by lower SG&A expenses.

#### Comparison of Nine Months Ended December 31, 2012 and 2011

South America year-to-date net sales decreased $41.1 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 $20.1 million. Gross profit decreased $9.6 million during the first nine months of fiscal 2013 to $16.1 million from the prior year due to sales volume decreases and a $3.3 million unfavorable impact of foreign currency exchange rate changes. SG&A expenses decreased $7.4 million primarily due to the reversal of a $2.0 million acquisition-related liability, lower outbound freight costs and a $1.9 million favorable impact of foreign currency exchange rate changes. Operating income decreased $2.2 million from the first nine months of fiscal 2012 to $7.6 million for the first nine months of fiscal 2013 due to lower gross profit on reduced sales volume, partially offset by lower SG&A expenses.

*(in millions)*

| Asia | Three months ended December 31, 2012 $'s | % of sales | 2011 $'s | % of sales | Nine months ended December 31, 2012 $'s | % of sales | 2011 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **13.2** | **100.0%** | 20.9 | 100.0% | **42.8** | **100.0%** | 62.1 | 100.0% |
| Cost of sales | **13.2** | **99.8%** | 19.6 | 93.8% | **42.3** | **98.9%** | 55.9 | 90.0% |
| Gross profit | **-** | **0.2%** | 1.3 | 6.2% | **0.5** | **1.1%** | 6.2 | 10.0% |
| Selling, general and administrative expenses | **2.5** | **18.9%** | 2.8 | 13.4% | **7.6** | **17.8%** | 7.6 | 12.2% |
| Operating loss | **(2.5)** | **-18.9%** | (1.5) | -7.2% | **(7.1)** | **-16.6%** | (1.4) | -2.3% |

#### Comparison of Three Months Ended December 31, 2012 and 2011

Asia net sales decreased $7.7 million from the third quarter of fiscal 2012 to the third quarter of fiscal 2013 driven by lower sales to off-highway customers as production schedules have been reduced in response to low market demand and high field inventory levels. Gross margin decreased to 0.2 percent during the third quarter of fiscal 2013 compared to 6.2 percent one year ago primarily due to lower sales volume. The operating loss increased $1.0 million to $2.5 million in the third quarter of fiscal 2013 versus the prior year due to lower gross profit on lower sales volume.

#### Comparison of Nine Months Ended December 31, 2012 and 2011

Asia year-to-date net sales decreased $19.3 million from the same period last year due to a decrease in automotive module sales as we continue the strategic exit of this business and a decline in the off-highway vehicular market due to the weakened economic conditions in China. Gross profit decreased $5.7 million to $0.5 million for the first nine months of fiscal 2013 from a gross profit of $6.2 million during the first nine months of fiscal 2012 due to lower sales volume and costs associated with converting our Shanghai manufacturing facility to a high volume oil cooler production facility. The year-to-date operating loss of $7.1 million represents a $5.7 million decline from the prior year operating loss of $1.4 million primarily due to lower gross profit on lower sales volume.

*(in millions)*

| Commercial Products | Three months ended December 31, 2012 $'s | % of sales | 2011 $'s | % of sales | Nine months ended December 31, 2012 $'s | % of sales | 2011 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | **41.3** | **100.0%** | 39.3 | 100.0% | **105.3** | **100.0%** | 108.5 | 100.0% |
| Cost of sales | **28.2** | **68.4%** | 26.3 | 67.0% | **74.2** | **70.5%** | 75.8 | 69.8% |
| Gross profit | **13.1** | **31.6%** | 13.0 | 33.0% | **31.1** | **29.5%** | 32.7 | 30.2% |
| Selling, general and administrative expenses | **8.4** | **20.3%** | 7.2 | 18.3% | **22.8** | **21.7%** | 20.6 | 19.0% |
| Operating income | **4.7** | **11.4%** | 5.8 | 14.8% | **8.3** | **7.9%** | 12.1 | 11.2% |

#### Comparison of Three Months Ended December 31, 2012 and 2011

Commercial Products net sales increased $2.0 million from the third quarter of fiscal 2012 to the third quarter of fiscal 2013 due to increased chiller sales in the United Kingdom, partially offset by a decrease in heating and cooling product sales in North America. Gross margin decreased 140 basis points from 33.0 percent during the third quarter of fiscal 2012 to 31.6 percent during the third quarter of fiscal 2013 primarily due to changes in product mix. SG&A expenses increased $1.2 million from the prior year due to increased expenses associated with the integration of the Geofinity Manufacturing (“Geofinity”) business, which we acquired in July 2012. Operating income decreased $1.1 million to $4.7 million in the third quarter of fiscal 2013 primarily due to higher SG&A expenses.

#### Comparison of Nine Months Ended December 31, 2012 and 2011

Commercial Products year-to-date net sales decreased $3.2 million from the same period last year primarily due to decreased sales volume in the United Kingdom as a result of weak economic conditions in the first half of fiscal 2013 and the impact of a stronger currency versus competitors in mainland Europe. Gross margin decreased 70 basis points from 30.2 percent during the first nine months of fiscal 2012 to 29.5 percent during the first nine months of fiscal 2013 primarily due to lower sales volume and an unfavorable change in product mix. SG&A expenses increased $2.2 million from the first nine months of fiscal 2012 to the first nine months of fiscal 2013 primarily due to expenses associated with new products and the acquisition of 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. Operating income decreased $3.8 million to $8.3 million in the first nine 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 December 31, 2012 of $32.9 million and available borrowings of $191.0 million under lines of credit provided by banks in the United States and abroad. See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information regarding our debt agreements.

Cash provided by operating activities for the nine months ended December 31, 2012 was $41.4 million, which was a $23.1 million increase from $18.3 million for the nine months ended December 31, 2011. This increase in operating cash flows was primarily due to favorable reductions in net working capital, including trade accounts receivable and accounts payable. Capital expenditures during the first nine months of fiscal 2013 were $33.6 million compared to $45.3 million during the same period in fiscal 2013. This decrease in capital expenditures was primarily due to the timing of expenditures for new program launches. In addition, 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 is a non-GAAP metric that is not defined by generally accepted accounting principles (GAAP) and should not be considered an alternative to earnings from continuing operations. Our calculation of adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

We are required to maintain the interest expense coverage ratio and leverage ratio covenants based on the following:

|  |  |  |
| --- | --- | --- |
|  | 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 |

Our adjusted EBITDA for the four consecutive quarters ended December 31, 2012 was $100.1 million. The following table presents a calculation of adjusted EBITDA:

(in millions)

|  | Quarter Ended March 31, 2012 | Quarter Ended June 30, 2012 | Quarter Ended September 30, 2012 | Quarter Ended December 31, 2012 | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Earnings (loss) from continuing operations | $15.6 | $(1.1) | $(11.8) | $(8.4) | $(5.7) |
| Net earnings attributable to noncontrolling interest | (0.2) | (0.3) | (0.3) | (0.3) | (1.1) |
| Consolidated interest expense | 3.3 | 3.0 | 3.4 | 2.8 | 12.5 |
| (Benefit from) provision for income taxes | (0.7) | 2.1 | 1.8 | 1.5 | 4.7 |
| Depreciation and amortization expense | 14.3 | 14.0 | 14.1 | 13.6 | 56.0 |
| Non-cash items (a) | (0.1) | 0.3 | 16.8 | 8.3 | 25.3 |
| Restructuring and repositioning expenses | 0.7 | 4.8 | 1.5 | 1.4 | 8.4 |
| Adjusted EBITDA | $32.9 | $22.8 | $25.5 | $18.9 | $100.1 |

(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 December 31, 2012 was 7.76, which exceeded the minimum requirement of 3.00. The following table presents a calculation of our interest expense coverage ratio:

|  | Four Quarters Ended December 31, 2012 |
| --- | ---: |
| Consolidated interest expense | $12.5 |
| Plus: Costs to sell receivables | 0.4 |
| Total consolidated interest expense | $12.9 |
| Adjusted EBITDA | $100.1 |
| Interest expense coverage ratio | 7.76 |

Our leverage ratio for the four fiscal quarters ended December 31, 2012 was 1.84, which was below the maximum permitted ratio of 3.25. The following table presents a calculation of our leverage ratio:

|  | Four Quarters Ended December 31, 2012 |
| --- | ---: |
| Debt per balance sheet | $164.7 |
| Plus: Derivative financial instruments | 1.1 |
| Letters of credit as defined by the debt agreement | 1.5 |
| Indebtedness attributed to sales of receivables | 17.1 |
| Total debt | $184.4 |
| Adjusted EBITDA | $100.1 |
| Leverage ratio | 1.84 |

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 to continue in several of our 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 expectations for fiscal 2013 are a 10 to 12 percent decrease in net sales compared with fiscal 2012. We also expect fiscal 2013 operating income margin in a range of 2.75 to 3.25 percent of net sales, excluding the impact of impairment and Europe restructuring charges. 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 fiscal 2013 diluted earnings per share to be in the range of $0.40 to $0.45, excluding the impact of impairment and Europe 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 overall health of Modine’s customers in light of broad economic and specific market challenges and the potential impact on the Company of any deterioration in the stability or performance of any of Modine’s customers;
- 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 and retain profitable business at its facilities in the Company’s Asia region and in particular in China;
- 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 and the costs associated with compliance therewith;
- 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 continuing slow recovery 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, 3,588 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, which has not yet been fully remediated, 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 December 31, 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 misapplication of value added tax (VAT) deficiency in the Europe segment. These remediation efforts, outlined below, are intended both to address the identified material weakness and to enhance the overall financial control environment:

- 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 third 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 Feb 1, 2013.
Source: SEC EDGAR, the filing index for accession 0001140361-13-004099. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.