# Modine Manufacturing Co: Form 10-Q for the period ended Sep 30, 2013

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2013-10-31
- Accepted by EDGAR: Oct 31, 2013, 14:36 ET
- Period: 2013-09-30
- Accession: 0001140361-13-040083
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036113040083/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036113040083/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-07-01 to 2013-09-30 | $364.2m | us-gaap:Revenues |
| Revenue | 6 months, 2013-04-01 to 2013-09-30 | $740.0m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2013-07-01 to 2013-09-30 | $307.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2013-04-01 to 2013-09-30 | $620.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2013-07-01 to 2013-09-30 | $57.2m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2013-04-01 to 2013-09-30 | $119.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2013-07-01 to 2013-09-30 | $46.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2013-04-01 to 2013-09-30 | $88.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2013-07-01 to 2013-09-30 | $10.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2013-04-01 to 2013-09-30 | $29.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2013-07-01 to 2013-09-30 | $3.2m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2013-04-01 to 2013-09-30 | $6.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2013-07-01 to 2013-09-30 | $2.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2013-04-01 to 2013-09-30 | $7.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-07-01 to 2013-09-30 | $4.6m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2013-04-01 to 2013-09-30 | $14.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-07-01 to 2013-09-30 | $0.10 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2013-04-01 to 2013-09-30 | $0.31 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-07-01 to 2013-09-30 | $0.10 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2013-04-01 to 2013-09-30 | $0.31 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-07-01 to 2013-09-30 | 47,600,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2013-04-01 to 2013-09-30 | 47,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2013-04-01 to 2013-09-30 | $49.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2013-04-01 to 2013-09-30 | $21.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2013-09-30 | $59.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-09-30 | $474.1m | us-gaap:AssetsCurrent |
| Total assets | at 2013-09-30 | $897.4m | us-gaap:Assets |
| Current liabilities | at 2013-09-30 | $327.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-09-30 | $603.5m | us-gaap:Liabilities |
| Current portion of debt | at 2013-09-30 | $1.1m | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2013-09-30 | $36.9m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2013-09-30 | $290.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 35,125 characters.

When we use the terms “Modine,” “we,” “us,” the “Company,” or “our” in this report, 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, 2013 is the second quarter of fiscal 2014.

*Second Quarter Highlights:* Net sales in the second quarter of fiscal 2014 increased $24.3 million from the second quarter of fiscal 2013 as sales increased in all segments, except South America, which was unfavorably impacted by foreign currency exchange rate changes. Gross profit and gross margin each increased due to sales volume improvements and favorable material costs. Selling, general and administrative (“SG&A”) expenses increased in the second quarter of fiscal 2014 compared to the same period in the prior year primarily due to higher compensation-related expenses in the current year and the reversal of an acquisition-related liability, which reduced SG&A expenses in the prior year. No asset impairments occurred in the second quarter of fiscal 2014, compared to $16.7 million of asset impairment charges in the second quarter of fiscal 2013. Earnings from continuing operations were $5.0 million during the second quarter of fiscal 2014 compared to a loss from continuing operations of $11.9 million in the prior year.

*Year-To-Date Highlights:* Net sales in the first six months of fiscal 2014 increased $49.7 million from the first six months of fiscal 2013, primarily due to increased sales volume within the automotive and commercial vehicle markets. Gross profit and gross margin each increased due to sales volume improvements and favorable material costs year over year. SG&A expenses increased in fiscal 2014, yet decreased as a percentage of sales. The first six months of fiscal 2014 benefited from lower employee severance costs associated with our Europe restructuring program and no asset impairment charges. Earnings from continuing operations of $15.6 million represented a significant improvement compared to a loss from continuing operations of $12.9 million during the prior year.

#### CONSOLIDATED RESULTS OF OPERATIONS

The following table presents consolidated financial results on a comparative basis for the three and six months ended September 30, 2013 and 2012:

*(in millions)*

|  | Three months ended September 30, 2013 $'s | % of sales | 2012 $'s | % of sales | Six months ended September 30, 2013 $'s | % of sales | 2012 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $364.2 | 100.0% | $339.9 | 100.0% | $740.0 | 100.0% | $690.3 | 100.0% |
| Cost of sales | 307.0 | 84.3% | 287.4 | 84.5% | 620.9 | 83.9% | 586.1 | 84.9% |
| Gross profit | 57.2 | 15.7% | 52.5 | 15.5% | 119.1 | 16.1% | 104.2 | 15.1% |
| Selling, general and administrative expenses | 46.0 | 12.6% | 41.3 | 12.2% | 88.4 | 11.9% | 84.5 | 12.2% |
| Restructuring expenses | 0.6 | 0.2% | 1.3 | 0.4% | 1.1 | 0.2% | 5.9 | 0.9% |
| Impairment charges | - | - | 16.7 | 4.9% | - | - | 16.7 | 2.4% |
| Operating income (loss) | 10.6 | 2.9% | (6.8) | -2.0% | 29.6 | 4.0% | (2.9) | -0.4% |
| Interest expense | (3.2) | -0.9% | (3.4) | -1.0% | (6.2) | -0.8% | (6.4) | -0.9% |
| Other income (expense) – net | - | - | 0.2 | - | (0.5) | -0.1% | 0.3 | - |
| Earnings (loss) from continuing operations before income taxes | 7.4 | 2.0% | (10.0) | -3.0% | 22.9 | 3.1% | (9.0) | -1.3% |
| Provision for income taxes | (2.4) | -0.6% | (1.9) | -0.5% | (7.3) | -1.0% | (3.9) | -0.6% |
| Earnings (loss) from continuing operations | $5.0 | 1.4% | $(11.9) | -3.5% | $15.6 | 2.1% | $(12.9) | -1.9% |

The Company’s financial results for the second quarter of fiscal 2014 include a $0.6 million ($0.5 million after-tax) out-of-period adjustment related to a customer pricing error. In addition, the prior year financial results include a $0.5 million out-of-period adjustment related to certain commodity hedges recorded during the first quarter of fiscal 2013. See Note 1 to the Notes to Condensed Consolidated Financial Statements for further discussion.

#### Comparison of Three Months Ended September 30, 2013 and 2012

Second quarter net sales of $364.2 million were $24.3 million, or 7.1 percent, higher than the second quarter of last year, primarily driven by a $20.1 million sales increase in our Europe segment. In addition, net sales in our North America, Asia, and Commercial Products segments increased as compared to the prior year, while South America segment sales decreased as compared to the prior year.

Second quarter gross profit increased $4.7 million from the second quarter of fiscal 2013 to the second quarter of fiscal 2014. Gross margin increased 20 basis points from 15.5 percent in the second quarter of fiscal 2013 to 15.7 percent in the second quarter of fiscal 2014, primarily due to sales volume improvements and lower material costs, partially offset by $2.1 million of accelerated depreciation for production equipment that will no longer be used because of manufacturing process changes at a facility in Germany.

SG&A expenses increased $4.7 million from the second quarter of fiscal 2013 to the second quarter of fiscal 2014 and increased 40 basis points as a percentage of sales to 12.6 percent. The increase was driven primarily by higher compensation-related expenses in the current year, the reversal of a $2.0 million acquisition-related liability, which reduced SG&A expenses in the prior year, and $0.5 million of costs directly related to the Airedale fire.

Restructuring expenses and impairment charges decreased $0.7 million and $16.7 million, respectively, from the second quarter of fiscal 2013 to the second quarter of fiscal 2014. During the second quarter of fiscal 2013, we recorded $16.7 million of impairment charges related to facilities held for sale in our Europe and North America segments. Restructuring expenses in the second quarters of fiscal 2014 and fiscal 2013 were primarily due to employee severance costs related to our Europe restructuring program.

Operating income of $10.6 million in the second quarter of fiscal 2014 represented a $17.4 million improvement from the operating loss of $6.8 million in the second quarter of fiscal 2013. This improvement was primarily due to the absence of impairment charges in the second quarter of fiscal 2014 and higher gross profit on increased sales volume, partially offset by higher SG&A expenses.

Provision for income taxes increased $0.5 million from the second quarter of fiscal 2013 to the second quarter of fiscal 2014, primarily due to increased pre-tax earnings in certain foreign jurisdictions.

Fiscal 2014 year-to-date net sales of $740.0 million were $49.7 million, or 7.2 percent, higher than $690.3 million of net sales in the same period last year, primarily driven by a $40.9 million sales increase in our Europe segment.

Fiscal 2014 year-to-date gross profit of $119.1 million increased $14.9 million from the same period last year. Gross margin increased 100 basis points to 16.1 percent in the first six months of fiscal 2014 from 15.1 percent in the first six months of fiscal 2013. The increases in gross profit and gross margin were primarily due to sales volume improvements and lower material costs, partially offset by $4.3 million of accelerated depreciation for production equipment that will no longer be used because of manufacturing process changes at a facility in Germany.

Fiscal 2014 year-to-date SG&A expenses increased $3.9 million from the same period last year. The increase in SG&A expenses was primarily due to higher compensation-related expenses in the first six months of the current year, the reversal of a $2.0 million acquisition-related liability, which reduced SG&A expenses in the prior year, and $0.5 million of costs directly related to the Airedale fire. As a percentage of sales, SG&A expenses decreased 30 basis points to 11.9 percent in the first six months of fiscal 2014.

Restructuring expenses decreased $4.8 million from the first six months of fiscal 2013 to the first six months of fiscal 2014, primarily due to lower employee severance costs related to our Europe restructuring program.

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.

Operating income of $29.6 million during the first six months of fiscal 2014 represented a $32.5 million improvement from the same period last year. This improvement was primarily due to lower restructuring and impairment charges and higher gross profit on increased sales volume, partially offset by higher SG&A expenses.

Provision for income taxes increased $3.4 million from the first six months of fiscal 2013 to the first six months of fiscal 2014, primarily due to increased pre-tax earnings in certain foreign jurisdictions.

#### SEGMENT RESULTS OF OPERATIONS

Segment financial results for fiscal 2013 have been recast to conform to the fiscal 2014 presentation. The Company has modified its internal financial reporting of intercompany charges for research and development and intercompany royalties between Corporate and the Europe segment. For the three and six months ended September 30, 2012, the impact was $2.3 million and $4.6 million, respectively. There was no impact on the total Company financial results.

The following is a discussion of our segment results of operations for the three and six months ended September 30, 2013 and 2012:

*(in millions)*

| North America | Three months ended September 30, 2013 $'s | % of sales | 2012 $'s | % of sales | Six months ended September 30, 2013 $'s | % of sales | 2012 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $146.0 | 100.0% | $143.4 | 100.0% | $294.7 | 100.0% | $297.0 | 100.0% |
| Cost of sales | 121.0 | 82.9% | 124.9 | 87.1% | 244.2 | 82.9% | 254.9 | 85.8% |
| Gross profit | 25.0 | 17.1% | 18.5 | 12.9% | 50.5 | 17.1% | 42.1 | 14.2% |
| Selling, general and administrative expenses | 13.3 | 9.1% | 10.6 | 7.5% | 24.5 | 8.3% | 20.4 | 6.9% |
| Impairment charges | - | - | 1.0 | 0.7% | - | - | 1.0 | 0.3% |
| Operating income | $11.7 | 8.0% | $6.9 | 4.7% | $26.0 | 8.8% | $20.7 | 7.0% |

22

#### Comparison of Three Months Ended September 30, 2013 and 2012

North America net sales increased $2.6 million from the second quarter of fiscal 2013 to the second quarter of fiscal 2014, primarily due to higher sales to automotive, specialty vehicle, and commercial vehicle customers and higher tooling sales, partially offset by decreased sales to off-highway customers as economic conditions in this market remained relatively weak. Gross margin increased 420 basis points to 17.1 percent, primarily as a result of lower material and warranty costs. SG&A expenses increased $2.7 million, primarily due to higher compensation-related expenses and lower prototype and testing recoveries. In the second quarter of fiscal 2013, we recorded asset impairment charges totaling $1.0 million related to two idle facilities. Operating income increased $4.8 million to $11.7 million during the second quarter of fiscal 2014, primarily due to increased gross profit, partially offset by higher SG&A expenses.

North America year-to-date net sales decreased $2.3 million from the same period last year, primarily due to lower sales to off-highway customers as economic conditions in this market remained relatively weak, partially offset by increased sales to automotive and specialty vehicle customers. Gross margin increased 290 basis points to 17.1 percent during the first six months of fiscal 2014, primarily due to lower material costs. SG&A expenses increased $4.1 million, primarily due to higher compensation-related expenses and lower prototype and testing recoveries. Operating income increased $5.3 million to $26.0 million, primarily due to increased gross profit, partially offset by higher SG&A expenses.

*(in millions)*

| Europe | Three months ended September 30, 2013 $'s | % of sales | 2012 $'s | % of sales | Six months ended September 30, 2013 $'s | % of sales | 2012 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $138.9 | 100.0% | $118.8 | 100.0% | $285.1 | 100.0% | $244.2 | 100.0% |
| Cost of sales | 124.2 | 89.4% | 101.0 | 85.0% | 251.1 | 88.1% | 211.7 | 86.7% |
| Gross profit | 14.7 | 10.6% | 17.8 | 15.0% | 34.0 | 11.9% | 32.5 | 13.3% |
| Selling, general and administrative expenses | 10.8 | 7.8% | 13.0 | 10.9% | 21.6 | 7.6% | 25.6 | 10.4% |
| Restructuring expenses | 0.6 | 0.4% | 1.3 | 1.1% | 1.1 | 0.4% | 5.9 | 2.4% |
| Impairment charges | - | - | 15.7 | 13.3% | - | - | 15.7 | 6.5% |
| Operating income (loss) | $3.3 | 2.4% | $(12.2) | -10.3% | $11.3 | 4.0% | $(14.7) | -6.0% |

#### Comparison of Three Months Ended September 30, 2013 and 2012

Europe net sales increased $20.1 million from the second quarter of fiscal 2013 to the second quarter of fiscal 2014, primarily as a result of higher sales volume to commercial vehicle and automotive customers, higher tooling sales, and a $7.6 million favorable impact of foreign currency exchange rate changes. Gross profit decreased $3.1 million and gross margin declined to 10.6 percent, primarily due to a $5.0 million favorable customer pricing settlement in the prior year, $2.1 million of accelerated depreciation for production equipment that will no longer be used because of manufacturing process changes at a facility in Germany and higher scrap costs, partially offset by higher sales volume and improved customer mix. No additional accelerated depreciation is expected for the remainder of fiscal 2014. SG&A expenses decreased $2.2 million in the second quarter of fiscal 2014, primarily due to the favorable impact of restructuring actions completed to date and increased prototype and testing recoveries, partially offset by a $0.6 million unfavorable impact of foreign currency exchange rate changes. Restructuring expenses decreased $0.7 million in the second quarter of fiscal 2014 compared to the second quarter of the prior year, primarily due to lower employee severance costs related to our Europe restructuring program. Operating income of $3.3 million in the second quarter of fiscal 2014 improved $15.5 million compared to the operating loss of $12.2 million in the second quarter of fiscal 2013, primarily due to the absence of asset impairment charges in fiscal 2014 related to facilities held for sale.

Europe year-to-date net sales increased $40.9 million from the same period in the prior year, primarily due to higher sales volume to commercial vehicle and automotive customers, higher tooling sales, and a $10.2 million favorable impact of foreign currency exchange rate changes. Gross profit increased $1.5 million, while gross margin decreased to 11.9 percent compared to the prior year. The decline in gross margin was primarily due to a $5.0 million favorable customer pricing settlement in the prior year, $4.3 million of accelerated depreciation for production equipment that will no longer be used because of manufacturing process changes at a facility in Germany, and higher scrap costs, partially offset by higher sales volume and improved customer mix. No additional accelerated depreciation is expected for the remainder of fiscal 2014. SG&A expenses decreased $4.0 million, primarily due to the favorable impact of restructuring actions completed to date and increased prototype and testing recoveries, partially offset by an $0.8 million unfavorable impact of foreign currency exchange rate changes. Restructuring expenses decreased $4.8 million in the first six months of fiscal 2014, primarily due to lower employee severance costs related to our Europe restructuring program. Operating income of $11.3 million in the first six months of fiscal 2014 improved $26.0 million compared to the operating loss of $14.7 million in the first six months of fiscal 2013, primarily due to the absence of asset impairment charges related to several assets held for sale and lower restructuring and SG&A expenses.

*(in millions)*

| South America | Three months ended September 30, 2013 $'s | % of sales | 2012 $'s | % of sales | Six months ended September 30, 2013 $'s | % of sales | 2012 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $31.8 | 100.0% | $34.2 | 100.0% | $66.2 | 100.0% | $65.4 | 100.0% |
| Cost of sales | 26.0 | 81.8% | 28.4 | 83.1% | 54.3 | 82.0% | 54.9 | 83.9% |
| Gross profit | 5.8 | 18.2% | 5.8 | 16.9% | 11.9 | 18.0% | 10.5 | 16.1% |
| Selling, general and administrative expenses | 3.3 | 10.4% | 1.5 | 4.3% | 6.8 | 10.3% | 5.5 | 8.5% |
| Operating income | $2.5 | 7.8% | $4.3 | 12.6% | $5.1 | 7.7% | $5.0 | 7.6% |

#### Comparison of Three Months Ended September 30, 2013 and 2012

South America net sales decreased $2.4 million from the second quarter of fiscal 2013 to the second quarter of fiscal 2014. The South America segment experienced improvement in both sales volume to commercial vehicle customers and pricing; however, these improvements were more than offset by a $4.1 million unfavorable impact of foreign currency exchange rate changes. Gross margin increased 130 basis points to 18.2 percent, primarily due to improved aftermarket pricing. SG&A expenses increased $1.8 million, primarily due to the reversal of a $2.0 million acquisition-related liability, which reduced SG&A expenses in the prior year. Operating income decreased $1.8 million during the second quarter of fiscal 2014, primarily due to higher SG&A expenses.

South America year-to-date net sales increased $0.8 million from the same period last year, primarily due to increased sales volume to commercial vehicle customers, partially offset by a $6.0 million unfavorable impact of foreign currency exchange rate changes. Gross margin increased 190 basis points to 18.0 percent, primarily due to improved aftermarket pricing. SG&A expenses increased $1.3 million, primarily due to the reversal of a $2.0 million acquisition-related liability in the prior year, partially offset by a $0.6 million favorable impact of foreign currency exchange rate changes. Operating income improved $0.1 million during the first six months of fiscal 2014 compared to the prior year.

*(in millions)*

| Asia | Three months ended September 30, 2013 $'s | % of sales | 2012 $'s | % of sales | Six months ended September 30, 2013 $'s | % of sales | 2012 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $16.2 | 100.0% | $13.8 | 100.0% | $34.5 | 100.0% | $29.6 | 100.0% |
| Cost of sales | 14.4 | 89.3% | 13.8 | 99.8% | 30.4 | 88.2% | 29.2 | 98.5% |
| Gross profit | 1.8 | 10.7% | - | 0.2% | 4.1 | 11.8% | 0.4 | 1.5% |
| Selling, general and administrative expenses | 2.9 | 17.6% | 2.3 | 16.8% | 5.5 | 15.9% | 5.0 | 17.0% |
| Operating loss | $(1.1) | -6.9% | $(2.3) | -16.6% | $(1.4) | -4.1% | $(4.6) | -15.5% |

#### Comparison of Three Months Ended September 30, 2013 and 2012

Asia net sales increased $2.4 million from the second quarter of fiscal 2013 to the second quarter of fiscal 2014, primarily due to higher sales volume, which was largely driven by new program launches to both off-highway and automotive customers. Gross profit increased $1.8 million and gross margin increased to 10.7 percent, primarily due to higher sales volume and ongoing cost control measures. SG&A expenses increased $0.6 million, primarily due to a $0.3 million increase in compensation-related expenses. The operating loss improved $1.2 million to $1.1 million in the second quarter of fiscal 2014 compared to the second quarter of the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses.

#### Comparison of Six Months Ended September 30, 2013 and 2012

Asia year-to-date net sales increased $4.9 million from the same period last year, primarily due to higher sales volume to off-highway and automotive customers. Gross profit increased $3.7 million and gross margin increased to 11.8 percent, primarily due to higher sales volume and ongoing cost control measures. SG&A expenses increased $0.5 million, primarily due to higher compensation-related expenses. The year-to-date operating loss improved $3.2 million to $1.4 million in the first six months of fiscal 2014, primarily due to higher gross profit.

*(in millions)*

| Commercial Products | Three months ended September 30, 2013 $'s | % of sales | 2012 $'s | % of sales | Six months ended September 30, 2013 $'s | % of sales | 2012 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $34.8 | 100.0% | $33.9 | 100.0% | $67.2 | 100.0% | $64.0 | 100.0% |
| Cost of sales | 25.0 | 71.9% | 23.8 | 70.1% | 48.9 | 72.8% | 46.0 | 71.8% |
| Gross profit | 9.8 | 28.1% | 10.1 | 29.9% | 18.3 | 27.2% | 18.0 | 28.2% |
| Selling, general and administrative expenses | 8.6 | 24.6% | 7.5 | 22.1% | 16.1 | 23.9% | 14.4 | 22.6% |
| Operating income | $1.2 | 3.5% | $2.6 | 7.8% | $2.2 | 3.3% | $3.6 | 5.6% |

#### Comparison of Three Months Ended September 30, 2013 and 2012

Commercial Products net sales increased $0.9 million from the second quarter of fiscal 2013 to the second quarter of fiscal 2014, primarily due to increased sales in the United Kingdom, despite the fire that halted production at our Airedale manufacturing facility on September 6, 2013. Gross profit decreased $0.3 million and gross margin decreased 180 basis points to 28.1 percent, primarily due to unfavorable product mix. SG&A expenses increased $1.1 million to $8.6 million, primarily due to $0.5 million of costs directly related to the Airedale fire and higher compensation-related expenses. Operating income decreased $1.4 million during the second quarter of fiscal 2014, primarily due to higher SG&A expenses.

Commercial Products year-to-date net sales increased $3.2 million from the same period last year, primarily due to increased chiller sales volume as economic conditions in the United Kingdom have improved compared to the prior year. Sales in the first half of fiscal 2014 were negatively impacted by the fire that halted production at our Airedale manufacturing facility. Gross profit increased $0.3 million, primarily due to higher sales volume, partially offset by unfavorable product mix which resulted in a decrease in gross margin of 100 basis points to 27.2 percent. SG&A expenses increased $1.7 million to $16.1 million, primarily due to $0.5 million of costs directly related to the Airedale fire and higher compensation-related expenses. Operating income decreased $1.4 million to $2.2 million in the first six months of fiscal 2014, primarily due to higher SG&A expenses.

#### Airedale Facility Fire

On September 6, 2013, a fire caused significant destruction to our Airedale manufacturing facility and offices in Rawdon (Leeds), United Kingdom. There were no injuries caused by the fire. The Rawdon facility was used to manufacture cooling products and solutions for a variety of applications, including data centers, clean rooms, retail, leisure and process cooling. The fire caused the temporary suspension of manufacturing and certain administrative operations at the Rawdon site; however, we are currently in the initial stages of planning for the reconstruction of the facility and have secured a temporary production facility.

We maintain insurance coverage for damage to the leased facility, equipment, inventory and other assets, business interruption and lost profits, and recovery related expenses caused by the fire. We believe that reimbursement from our insurance provider is probable for substantially all losses and expenses that are directly attributable to the fire, other than the $0.5 million of charges in the second quarter of fiscal 2014 which primarily related to the write-off of certain assets (leasehold improvements) that were not covered by insurance. We expect to record insurance reimbursements related to lost profits (business interruption) during the recovery period in the quarter in which such reimbursements are realized; however, the timing of these reimbursements is difficult to forecast. As a result, it is possible that insurance reimbursements for lost profits for fiscal 2014 may not be recognized in our financial statements until fiscal 2015. See Note 2 of the Notes to the Condensed Consolidated Financial Statements for further information.

#### Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at September 30, 2013 of $59.9 million and an available borrowing capacity of $215.0 million under lines of credit provided by banks in the United States and abroad.

In August 2013, we entered into a $175.0 million Amended and Restated Credit Agreement with a syndicate of banks. The multi-currency credit agreement, which expires in August 2018, replaced our then-existing $145.0 million revolving credit facility which would have expired in August 2014. Borrowings under the credit agreement bear interest at a variable rate based on LIBOR plus 125 to 225 basis points depending upon our leverage ratio. At September 30, 2013, no borrowings were outstanding under our revolving credit facility. See Note 15 of the Notes to the Condensed Consolidated Financial Statements for further information regarding our debt agreements.

Net cash provided by operating activities for the six months ended September 30, 2013 was $49.0 million, which was a $22.2 million increase from $26.8 million for the six months ended September 30, 2012. This increase in operating cash flows was primarily due to increased operating income and the receipt of insurance recoveries from the Airedale fire. Capital expenditures during the first six months of fiscal 2014 were $21.4 million compared to $20.7 million during the same period in fiscal 2013.

We expect to be reimbursed by our insurance provider for substantially all losses and expenses that are directly related to the recent fire at our Airedale manufacturing facility, including costs to reconstruct the facility. The expected timing of cash recoveries from our insurance provider is such that we do not expect that this fire will have a significant adverse effect on our liquidity.

In September 2013, we announced our intention to acquire Barkell Limited, a privately-held manufacturer of custom built air handling units in the United Kingdom. This acquisition is expected to provide us with an expanded product offering into the air handing segment, further extending our overall business offering to the HVAC markets. We expect that this transaction will close during the fourth quarter of fiscal 2014, subject to the successful completion of due diligence and customary closing conditions. We intend to fund this acquisition using cash on hand.

#### Debt Covenants

Our current debt agreements require us to maintain compliance with various covenants. Under the Company’s primary debt agreements in the U.S., we are subject to an interest expense ratio of at least 3.0 to 1.0 and a leverage ratio of less than 3.25 to 1.0. The definitions of these ratios are included within Note 15 of the Notes to the Condensed Consolidated Financial Statements.

Our Adjusted EBITDA, consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments, for the four consecutive quarters ended September 30, 2013 was $114.7 million. The following table presents a calculation of Adjusted EBITDA:

*(in millions)*

|  | Quarter Ended December 31, 2012 | Quarter Ended March 31, 2013 | Quarter Ended June 30, 2013 | Quarter Ended September 30, 2013 | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Earnings (loss) from continuing operations | $(8.4) | $(1.6) | $10.6 | $5.0 | $5.6 |
| Net earnings attributable to noncontrolling interest | (0.3) | (0.5) | (0.6) | (0.4) | (1.8) |
| Interest expense | 2.8 | 3.4 | 3.0 | 3.2 | 12.4 |
| Provision for income taxes | 1.5 | 4.5 | 4.9 | 2.4 | 13.3 |
| Depreciation and amortization | 13.6 | 14.0 | 16.1 | 15.6 | 59.3 |
| Non-cash items | 9.8 | 2.1 | 1.0 | 1.2 | 14.1 |
| Restructuring expenses | 1.4 | 9.3 | 0.5 | 0.6 | 11.8 |
| Adjusted EBITDA | $20.4 | $31.2 | $35.5 | $27.6 | $114.7 |

27

Our interest expense coverage ratio for the four fiscal quarters ended September 30, 2013 was 9.6, which exceeded the minimum requirement of 3.0. The following table presents a calculation of our interest expense coverage ratio:

*(in millions)*

|  | Four Quarters Ended September 30, 2013 |
| --- | ---: |
| Interest expense | $12.4 |
| Plus: Costs to sell receivables | 0.4 |
| Less: Amortization of financing fees | (0.8) |
| Total interest expense | $12.0 |
| Adjusted EBITDA | $114.7 |
| Interest expense coverage ratio | 9.6 |

Our leverage ratio for the four fiscal quarters ended September 30, 2013 was 1.4, which was below the maximum ratio of 3.25. The following table presents a calculation of our leverage ratio:

*(in millions)*

|  | Four Quarters Ended September 30, 2013 |
| --- | ---: |
| Debt per balance sheet | $169.4 |
| Plus: Derivative financial instruments | 0.4 |
| Letters of credit as defined by the debt agreement | 2.6 |
| Indebtedness attributed to sales of receivables | 13.8 |
| Less: Excess cash as defined by the debt agreement | (23.6) |
| Total debt | $162.6 |
| Adjusted EBITDA | $114.7 |
| Leverage ratio | 1.4 |

We expect to remain in compliance with our debt covenants through the remainder of fiscal 2014 and beyond.

#### Outlook

For the remainder of fiscal 2014, we anticipate flat to moderate growth in each of our geographic regions, with continued weakness in the global off highway markets. We anticipate consolidated year-over-year sales to increase 3 to 8 percent and diluted earnings per share to be in the range of $0.50 to $0.60, excluding Europe restructuring costs and certain losses directly related to the Airedale facility fire.

#### Forward-Looking Statements

This report, including, but not limited to, the discussion under “Outlook” under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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, 2013. Other risks and uncertainties include, but are not limited to, the following:

#### Operational Risks:

- Our ability to complete our Europe restructuring plans and realize expected cost reductions and increased profitability and return on assets as a result;
- Complexities and inefficiencies introduced by the recent fire at our Airedale facility in the U.K., including our ability to meet customer demands at a temporary location for an extended period of time, to utilize insurance proceeds efficiently to replace machinery and equipment destroyed by the fire, and to rebuild the facility with minimal financial impact from the business interruption.
- The overall health of our customers in light of continuing broad economic and market-specific challenges and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
- Our ability to maintain current programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction pressures from customers;
- Costs and other effects of the remediation of environmental contamination;
- Our ability to obtain and retain profitable business in our Asia segment, 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 or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims;
- Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
- Unanticipated problems with suppliers meeting our time, quantity, quality and price demands;
- Work stoppages or interference at our facilities or those of our 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 we and our customers operate and compete, including foreign currency exchange rate fluctuations (particularly the value of the euro, Brazilian real, and Indian rupee 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 recovery of certain markets in China, Brazil and the United Kingdom and the remaining economic uncertainties in the European Union;
- The impact of increases in commodity prices, particularly our exposure to the changing prices of aluminum, copper, steel and stainless steel (nickel);
- Our ability to successfully hedge 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 our business and the business of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental emissions standards.

#### Financial Risks:

- Our ability to fund our global liquidity requirements efficiently and meet our long-term commitments in the event of any renewed disruption in or unexpected tightening of the credit markets or extended recessionary conditions in the global economy; and
- Our ability to realize future tax benefits in various jurisdictions in which we operate.

#### Strategic Risks:

- Our ability to identify and implement appropriate growth and diversification strategies that position us for long-term success.

In addition to the risks set forth above, we are subject to other risks and uncertainties as identified in our public filings with the U.S. Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.

## Market risk

As filed, 301 characters.

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, 2013. The Company’s market risks have not materially changed since the fiscal 2013 Form 10-K was filed.

## Controls and procedures

As filed, 1,111 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, 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 effective as of September 30, 2013.

#### Changes in Internal Control Over Financial Reporting

During the second quarter of fiscal 2014, 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 Oct 31, 2013.
Source: SEC EDGAR, the filing index for accession 0001140361-13-040083. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.