# Modine Manufacturing Co: Form 10-Q for the period ended Dec 31, 2013

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2014-01-31
- Accepted by EDGAR: Jan 31, 2014, 11:52 ET
- Period: 2013-12-31
- Accession: 0001140361-14-003972
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036114003972/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036114003972/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-10-01 to 2013-12-31 | $347.0m | us-gaap:Revenues |
| Revenue | 9 months, 2013-04-01 to 2013-12-31 | $1.09bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2013-10-01 to 2013-12-31 | $290.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2013-04-01 to 2013-12-31 | $911.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2013-10-01 to 2013-12-31 | $56.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2013-04-01 to 2013-12-31 | $175.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2013-10-01 to 2013-12-31 | $44.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2013-04-01 to 2013-12-31 | $132.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2013-10-01 to 2013-12-31 | $900.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2013-04-01 to 2013-12-31 | $30.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2013-10-01 to 2013-12-31 | $3.2m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2013-04-01 to 2013-12-31 | $9.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2013-10-01 to 2013-12-31 | $800.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2013-04-01 to 2013-12-31 | $8.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-10-01 to 2013-12-31 | −$3.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2013-04-01 to 2013-12-31 | $11.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-10-01 to 2013-12-31 | −$0.08 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2013-04-01 to 2013-12-31 | $0.23 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-10-01 to 2013-12-31 | −$0.08 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2013-04-01 to 2013-12-31 | $0.23 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-10-01 to 2013-12-31 | 46,900,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2013-04-01 to 2013-12-31 | 47,500,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2013-04-01 to 2013-12-31 | $86.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2013-04-01 to 2013-12-31 | $36.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2013-12-31 | $86.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-12-31 | $464.5m | us-gaap:AssetsCurrent |
| Total assets | at 2013-12-31 | $889.5m | us-gaap:Assets |
| Current liabilities | at 2013-12-31 | $326.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-12-31 | $595.0m | us-gaap:Liabilities |
| Short-term borrowings | at 2013-12-31 | $35.9m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2013-12-31 | $290.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,808 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 December 31, 2013 was the third quarter of fiscal 2014.

*Third Quarter Highlights:* Net sales in the third quarter of fiscal 2014 increased $20.9 million, or 6 percent, from the third quarter of fiscal 2013, primarily due to new program launches and increased sales volume within the automotive and commercial vehicle markets in our Europe segment. Gross profit and gross margin each increased due to sales volume improvements and favorable material costs. Selling, general and administrative (“SG&A”) expenses decreased slightly as a percentage of sales in the third quarter of fiscal 2014 compared to the same period in the prior year. Restructuring and impairment charges totaling $11.4 million in the third quarter of fiscal 2014 were primarily due to employee severance costs and the planned closure of a manufacturing facility in Germany, as we enter the final stages of our Europe restructuring program. During the third quarter of fiscal 2014, our net loss was $3.4 million, compared to a net loss of $8.4 million in the prior year.

*Year-To-Date Highlights:* Net sales in the first nine months of fiscal 2014 increased $70.6 million, or 7 percent, from the first nine months of fiscal 2013, primarily due to increased sales volume within the commercial vehicle and automotive markets in our Europe segment. 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. Restructuring and impairment charges totaled $12.5 million and $32.4 million in the first nine months of fiscal 2014 and 2013, respectively. Net earnings were $12.2 million in the first nine months of fiscal 2014 compared to a net loss of $21.2 million during the prior year.

#### CONSOLIDATED RESULTS OF OPERATIONS

The following table presents consolidated financial results on a comparative basis for the three and nine months ended December 31, 2013 and 2012:

*(in millions)*

|  | Three months ended December 31, 2013 $'s | % of sales | 2012 $'s | % of sales | Nine months ended December 31, 2013 $'s | % of sales | 2012 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $347.0 | 100.0% | $326.1 | 100.0% | $1,087.0 | 100.0% | $1,016.4 | 100.0% |
| Cost of sales | 290.2 | 83.6% | 277.9 | 85.2% | 911.1 | 83.8% | 863.9 | 85.0% |
| Gross profit | 56.8 | 16.4% | 48.2 | 14.8% | 175.9 | 16.2% | 152.5 | 15.0% |
| Selling, general and administrative expenses | 44.5 | 12.8% | 42.3 | 13.0% | 132.9 | 12.2% | 126.8 | 12.5% |
| Restructuring expenses | 9.4 | 2.7% | 1.4 | 0.4% | 10.5 | 1.0% | 7.3 | 0.7% |
| Impairment charges | 2.0 | 0.6% | 8.3 | 2.5% | 2.0 | 0.2% | 25.1 | 2.5% |
| Operating income (loss) | 0.9 | 0.3% | (3.8) | -1.2% | 30.5 | 2.8% | (6.7) | -0.7% |
| Interest expense | (3.2) | -1.0% | (2.8) | -0.9% | (9.4) | -0.8% | (9.2) | -0.9% |
| Other expense – net | (0.3) | -0.1% | (0.3) | -0.1% | (0.8) | -0.1% | - | - |
| Earnings (loss) before income taxes | (2.6) | -0.8% | (6.9) | -2.1% | 20.3 | 1.9% | (15.9) | -1.6% |
| Provision for income taxes | (0.8) | -0.2% | (1.5) | -0.5% | (8.1) | -0.8% | (5.3) | -0.5% |
| Net earnings (loss) | $(3.4) | -1.0% | $(8.4) | -2.6% | $12.2 | 1.1% | $(21.2) | -2.1% |

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 December 31, 2013 and 2012

Third quarter net sales of $347.0 million were $20.9 million, or 6 percent, higher than the third quarter of the prior year, primarily driven by a $24.8 million sales increase in our Europe segment. In addition, net sales in our Asia and North America segments increased compared to the same period in the prior year. Our Commercial Products and South America segments were negatively impacted by the Airedale facility fire and unfavorable foreign currency exchange rate changes, respectively, contributing to decreases in net sales compared to the same period in fiscal 2013.

Third quarter gross profit increased $8.6 million from the third quarter of fiscal 2013. Gross margin increased 160 basis points from 14.8 percent in the third quarter of fiscal 2013 to 16.4 percent in the third quarter of fiscal 2014, primarily due to sales volume improvements and lower material costs.

SG&A expenses increased $2.2 million from the third quarter of fiscal 2013 to the third quarter of fiscal 2014, yet improved 20 basis points as a percentage of sales to 12.8 percent. The $2.2 million increase was driven primarily by higher compensation-related expenses in the current year.

Restructuring expenses increased $8.0 million in the third quarter of fiscal 2014 compared to the third quarter of the prior year, primarily due to higher employee severance costs related to our Europe restructuring program as we begin to combine two manufacturing facilities in Germany into one, more competitive manufacturing operation. In addition, we recorded asset impairment charges of $2.0 million during the third quarter of fiscal 2014, primarily related to the planned closure of a facility in Germany. In the third quarter of fiscal 2013, we recorded $8.3 million of impairment charges, primarily related to a facility held for sale.

Operating income of $0.9 million in the third quarter of fiscal 2014 represented a $4.7 million improvement from the operating loss of $3.8 million in the third quarter of fiscal 2013.

The provision for income taxes was $0.8 million and $1.5 million in the third quarter of fiscal 2014 and 2013, respectively. The $0.7 million decrease was primarily due to a $2.5 million benefit from a foreign tax law change, partially offset by the impact of increased earnings in certain foreign jurisdictions.

#### Comparison of Nine Months Ended December 31, 2013 and 2012

Fiscal 2014 year-to-date net sales of $1,087.0 million were $70.6 million, or 7 percent, higher than the same period last year, primarily driven by a $65.7 million sales increase in our Europe segment.

Fiscal 2014 year-to-date gross profit of $175.9 million increased $23.4 million from the same period last year. Gross margin increased 120 basis points to 16.2 percent in the first nine months of fiscal 2014 from 15.0 percent in the first nine 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 is no longer being used because of manufacturing process changes at a facility in Germany.

Fiscal 2014 year-to-date SG&A expenses increased $6.1 million from the same period last year, primarily due to higher compensation-related expenses, 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, partially offset by lower professional service expenses. As a percentage of sales, SG&A expenses improved 30 basis points to 12.2 percent in the first nine months of fiscal 2014.

Restructuring expenses increased $3.2 million in the first nine months of fiscal 2014, primarily due to higher employee severance costs related to our Europe restructuring program. In addition, we recorded impairment charges during the first nine months of fiscal 2014 and 2013 of $2.0 million and $25.1 million, respectively, primarily related to our Europe restructuring actions.

Operating income of $30.5 million during the first nine months of fiscal 2014 represented a $37.2 million improvement from the same period last year. This improvement was primarily due to higher gross profit on increased sales volume and lower impairment charges, partially offset by higher SG&A and restructuring expenses.

The provision for income taxes was $8.1 million and $5.3 million during the first nine months of fiscal 2014 and 2013, respectively. The $2.8 million increase was primarily due to increased earnings in certain foreign jurisdictions, partially offset by a $2.5 million benefit from a foreign tax law change during the third quarter of fiscal 2014.

#### 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 nine months ended December 31, 2012, the impact was $2.2 million and $6.8 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 nine months ended December 31, 2013 and 2012:

*(in millions)*

| North America | Three months ended December 31, 2013 $'s | % of sales | 2012 $'s | % of sales | Nine months ended December 31, 2013 $'s | % of sales | 2012 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $128.9 | 100.0% | $128.2 | 100.0% | $423.6 | 100.0% | $425.2 | 100.0% |
| Cost of sales | 108.9 | 84.5% | 110.9 | 86.5% | 353.1 | 83.4% | 365.8 | 86.0% |
| Gross profit | 20.0 | 15.5% | 17.3 | 13.5% | 70.5 | 16.6% | 59.4 | 14.0% |
| Selling, general and administrative expenses | 11.3 | 8.7% | 9.1 | 7.1% | 35.8 | 8.4% | 29.5 | 6.9% |
| Impairment charges | - | - | - | - | - | - | 1.0 | 0.2% |
| Operating income | $8.7 | 6.8% | $8.2 | 6.4% | $34.7 | 8.2% | $28.9 | 6.8% |

#### Comparison of Three Months Ended December 31, 2013 and 2012

North America net sales increased $0.7 million, or 1 percent, from the third quarter of fiscal 2013 to the third quarter of fiscal 2014, primarily due to higher sales to automotive and commercial vehicle customers, partially offset by decreased sales to off-highway customers as economic conditions in that market remained relatively weak. Gross margin increased 200 basis points to 15.5 percent, primarily due to lower material costs. SG&A expenses increased $2.2 million, primarily due to higher compensation-related expenses and lower recovery of development costs. Operating income increased $0.5 million to $8.7 million during the third quarter of fiscal 2014, primarily due to increased gross profit, partially offset by higher SG&A expenses.

#### Comparison of Nine Months Ended December 31, 2013 and 2012

North America year-to-date net sales decreased $1.6 million, or less than 1 percent, from the same period last year, primarily due to lower sales to off-highway customers as economic conditions in that market remained relatively weak, partially offset by increased sales to automotive and commercial vehicle customers. Gross margin increased 260 basis points to 16.6 percent during the first nine months of fiscal 2014, primarily due to lower material costs. SG&A expenses increased $6.3 million, primarily due to higher compensation-related expenses and lower recovery of development costs. In the second quarter of fiscal 2013, we recorded asset impairment charges totaling $1.0 million related to two idle facilities. Operating income increased $5.8 million to $34.7 million, primarily due to increased gross profit, partially offset by higher SG&A expenses.

*(in millions)*

| Europe | Three months ended December 31, 2013 $'s | % of sales | 2012 $'s | % of sales | Nine months ended December 31, 2013 $'s | % of sales | 2012 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $140.5 | 100.0% | $115.7 | 100.0% | $425.6 | 100.0% | $359.9 | 100.0% |
| Cost of sales | 123.3 | 87.8% | 103.6 | 89.6% | 374.4 | 88.0% | 315.2 | 87.6% |
| Gross profit | 17.2 | 12.2% | 12.1 | 10.4% | 51.2 | 12.0% | 44.7 | 12.4% |
| Selling, general and administrative expenses | 11.1 | 7.9% | 10.3 | 8.8% | 32.7 | 7.7% | 35.9 | 10.0% |
| Restructuring expenses | 9.4 | 6.7% | 1.4 | 1.2% | 10.5 | 2.4% | 7.3 | 2.0% |
| Impairment charges | 2.0 | 1.4% | 8.3 | 7.2% | 2.0 | 0.5% | 24.1 | 6.7% |
| Operating income (loss) | $(5.3) | -3.8% | $(7.9) | -6.8% | $6.0 | 1.4% | $(22.6) | -6.3% |

#### Comparison of Three Months Ended December 31, 2013 and 2012

Europe net sales increased $24.8 million, or 21 percent, from the third quarter of fiscal 2013 to the third quarter of fiscal 2014, primarily due to new program launches, increased sales volume to commercial vehicle customers, higher tooling sales, and a $6.6 million favorable impact of foreign currency exchange rate changes. Gross profit increased $5.1 million and gross margin increased 180 basis points to 12.2 percent, primarily due to higher sales volume, improved product mix, and lower material costs, partially offset by production inefficiencies related to new program launches. SG&A expenses increased $0.8 million in the third quarter of fiscal 2014, primarily due to lower recovery of development costs, higher compensation-related expenses, and a $0.5 million unfavorable impact of foreign currency exchange rate changes, partially offset by a $1.1 million accrual reversal related to value added taxes. Restructuring expenses increased $8.0 million in the third quarter of fiscal 2014, primarily due to higher employee severance costs as we enter the final stages of our Europe restructuring plan and begin to combine two manufacturing facilities in Germany into one, more competitive manufacturing operation. In addition, we recorded asset impairment charges of $2.0 million during the third quarter of fiscal 2014, primarily related to the planned closure of a facility in Germany. We also recorded $8.3 million of impairment charges during the third quarter of fiscal 2013, primarily related to a facility held for sale. Operating loss of $5.3 million in the third quarter of fiscal 2014 improved $2.6 million compared to the third quarter of fiscal 2013, primarily due to the reduction in asset impairment charges and increased gross profit, partially offset by higher restructuring expenses.

#### Comparison of Nine Months Ended December 31, 2013 and 2012

Europe year-to-date net sales increased $65.7 million, or 18 percent, from the same period in the prior year, primarily due to increased sales volume to commercial vehicle customers, higher tooling sales, and a $16.8 million favorable impact of foreign currency exchange rate changes. Gross profit increased $6.5 million, while gross margin decreased to 12.0 percent compared to 12.4 percent in the prior year. The 40 basis point 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 is no longer used because of manufacturing process changes, and production inefficiencies related to new program launches, partially offset by higher sales volume, improved product mix, and lower material costs. SG&A expenses decreased $3.2 million, primarily due to the favorable impact of restructuring actions completed to date, increased prototype and testing recoveries, and a $1.6 million accrual reversal related to value added taxes, partially offset by higher compensation-related expenses and a $1.3 million unfavorable impact of foreign currency exchange rate changes. Restructuring expenses increased $3.2 million in the first nine months of fiscal 2014, primarily due to higher employee severance costs related to our Europe restructuring program. Operating income of $6.0 million in the first nine months of fiscal 2014 improved $28.6 million compared to the operating loss of $22.6 million in the first nine months of fiscal 2013, primarily due to lower asset impairment charges related to several assets held for sale and increased gross profit.

*(in millions)*

| South America | Three months ended December 31, 2013 $'s | % of sales | 2012 $'s | % of sales | Nine months ended December 31, 2013 $'s | % of sales | 2012 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $27.4 | 100.0% | $31.7 | 100.0% | $93.6 | 100.0% | $97.1 | 100.0% |
| Cost of sales | 22.9 | 83.7% | 26.1 | 82.5% | 77.2 | 82.5% | 81.0 | 83.5% |
| Gross profit | 4.5 | 16.3% | 5.6 | 17.5% | 16.4 | 17.5% | 16.1 | 16.5% |
| Selling, general and administrative expenses | 3.4 | 12.2% | 3.0 | 9.5% | 10.2 | 10.9% | 8.5 | 8.8% |
| Operating income | $1.1 | 4.1% | $2.6 | 8.2% | $6.2 | 6.6% | $7.6 | 7.8% |

#### Comparison of Three Months Ended December 31, 2013 and 2012

South America net sales decreased $4.3 million, or 14 percent, from the third quarter of fiscal 2013 to the third quarter of fiscal 2014, primarily due to a $2.8 million unfavorable impact of foreign currency exchange rate changes and decreased sales volume to the commercial vehicle, automotive, and power generation markets as some of our key customers took extended shutdowns to reduce inventory. Gross profit decreased $1.1 million and gross margin decreased to 16.3 percent, primarily due to lower sales volume and a $0.4 million unfavorable impact of foreign currency exchange rate changes. SG&A expenses increased $0.4 million, primarily due to higher compensation-related expenses. Operating income decreased $1.5 million during the third quarter of fiscal 2014, primarily due to lower gross profit and higher SG&A expenses.

#### Comparison of Nine Months Ended December 31, 2013 and 2012

South America year-to-date net sales decreased $3.5 million, or 4 percent, from the same period last year, primarily due to an $8.8 million unfavorable impact of foreign currency exchange rate changes, partially offset by increased sales volume to commercial vehicle customers. Gross margin increased 100 basis points to 17.5 percent, primarily due to improved aftermarket pricing. SG&A expenses increased $1.7 million, primarily due to the reversal of a $2.0 million acquisition-related liability in the prior year and higher compensation-related expenses in the current year, partially offset by a $1.0 million favorable impact of foreign currency exchange rate changes. Operating income decreased $1.4 million during the first nine months of fiscal 2014 compared to the prior year, primarily due to higher SG&A expenses.

*(in millions)*

| Asia | Three months ended December 31, 2013 $'s | % of sales | 2012 $'s | % of sales | Nine months ended December 31, 2013 $'s | % of sales | 2012 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $17.1 | 100.0% | $13.2 | 100.0% | $51.6 | 100.0% | $42.8 | 100.0% |
| Cost of sales | 15.1 | 88.3% | 13.2 | 99.8% | 45.5 | 88.2% | 42.3 | 98.9% |
| Gross profit | 2.0 | 11.7% | - | 0.2% | 6.1 | 11.8% | 0.5 | 1.1% |
| Selling, general and administrative expenses | 2.6 | 14.9% | 2.5 | 18.9% | 8.1 | 15.6% | 7.6 | 17.8% |
| Operating loss | $(0.6) | -3.2% | $(2.5) | -18.9% | $(2.0) | -3.8% | $(7.1) | -16.6% |

#### Comparison of Three Months Ended December 31, 2013 and 2012

Asia net sales increased $3.9 million, or 30 percent, from the third quarter of fiscal 2013 to the third quarter of fiscal 2014, primarily due to new program launches, higher export sales from India to automotive customers in Europe, higher sales to off-highway customers in China, and higher tooling sales. Gross profit increased $2.0 million and gross margin increased to 11.7 percent, primarily due to higher sales volume and ongoing cost control measures. SG&A expenses increased slightly, yet decreased as a percentage of sales. The operating loss improved $1.9 million, primarily due to higher gross profit.

#### Comparison of Nine Months Ended December 31, 2013 and 2012

Asia year-to-date net sales increased $8.8 million, or 21 percent, from the same period last year, primarily due to higher sales volume in the automotive and off-highway markets. Gross profit increased $5.6 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 $5.1 million to $2.0 million in the first nine months of fiscal 2014, primarily due to higher gross profit.

*(in millions)*

| Commercial Products | Three months ended December 31, 2013 $'s | % of sales | 2012 $'s | % of sales | Nine months ended December 31, 2013 $'s | % of sales | 2012 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $37.0 | 100.0% | $41.3 | 100.0% | $104.2 | 100.0% | $105.3 | 100.0% |
| Cost of sales | 23.9 | 64.5% | 28.2 | 68.4% | 72.8 | 69.9% | 74.2 | 70.5% |
| Gross profit | 13.1 | 35.5% | 13.1 | 31.6% | 31.4 | 30.1% | 31.1 | 29.5% |
| Selling, general and administrative expenses | 7.8 | 21.2% | 8.4 | 20.3% | 23.9 | 22.9% | 22.8 | 21.7% |
| Operating income | $5.3 | 14.3% | $4.7 | 11.4% | $7.5 | 7.2% | $8.3 | 7.9% |

#### Comparison of Three Months Ended December 31, 2013 and 2012

Commercial Products net sales decreased $4.3 million, or 10 percent, from the third quarter of fiscal 2013 to the third quarter of fiscal 2014, primarily due to a $7.4 million decrease in sales in the United Kingdom as production was temporarily halted as a result of the Airedale facility fire described below, partially offset by increased heating product sales in North America. Despite the decrease in net sales, gross margin increased 390 basis points to 35.5 percent, primarily due to favorable product mix. SG&A expenses decreased $0.6 million from the third quarter of fiscal 2013, yet increased 90 basis points as a percentage of sales to 21.2 percent, primarily due to lower sales volume. Operating income increased by $0.6 million during the third quarter of fiscal 2014, primarily due to lower SG&A expenses.

#### Comparison of Nine Months Ended December 31, 2013 and 2012

Commercial Products year-to-date net sales decreased $1.1 million, or 1 percent, from the same period last year, primarily due to decreased sales in the United Kingdom as production was temporarily halted as a result of the Airedale fire, partially offset by increased heating product sales in North America. Gross profit increased $0.3 million, primarily due to favorable product mix, which resulted in an increase in gross margin of 60 basis points to 30.1 percent. SG&A expenses increased $1.1 million, primarily due to higher compensation-related expenses and $0.5 million of non-recoverable costs incurred directly related to the Airedale fire. Operating income decreased $0.8 million to $7.5 million in the first nine 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 planning for the reconstruction of the facility and have resumed administrative and production operations at temporary facilities.

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 $0.5 million of charges in the second quarter of fiscal 2014, 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, we expect a portion of the insurance reimbursements of lost profits related to fiscal 2014 will 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 December 31, 2013 of $86.3 million and an available borrowing capacity of $213.0 million under lines of credit provided by banks in the United States and abroad. Because of the timing of insurance proceeds related to the Airedale fire, our cash and cash equivalents at December 31, 2013 include approximately $10.0 million of advances from our insurance provider that remain to be spent for recovery and reconstruction costs.

Net cash provided by operating activities for the nine months ended December 31, 2013 was $86.7 million, which was a $45.3 million increase from $41.4 million for the nine months ended December 31, 2012. This increase in operating cash flows was primarily due to increased operating income, favorable net changes in working capital, and the timing of insurance proceeds related to the Airedale fire. Capital expenditures during the first nine months of fiscal 2014 were $36.0 million compared to $33.6 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 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 the fire will have a significant adverse effect on our liquidity.

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 December 31, 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.

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 handling 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 our primary debt agreements in the U.S., we are subject to a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a certain portion of our cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBIDTA”). We are also subject to an interest expense coverage ratio, which requires us to maintain Adjusted EBIDTA of at least three times consolidated interest expense. We were in compliance with our debt covenants as of December 31, 2013 and expect to remain in compliance through the remainder of fiscal 2014 and beyond.

#### Outlook

We anticipate our consolidated full fiscal year-over-year sales to increase 5 to 8 percent and diluted earnings per share to be in the range of $0.65 to $0.70, excluding Europe restructuring and impairment charges 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 temporary locations for an extended period of time and to realize insurance proceeds effectively to replace machinery and equipment and rebuild the facility with minimal financial impact from the business interruption;
- The overall health of our customers and suppliers 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 or suppliers;
- 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 unexpected disruption in or 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, 1,109 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 December 31, 2013.

#### Changes in Internal Control Over Financial Reporting

During the third 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 Jan 31, 2014.
Source: SEC EDGAR, the filing index for accession 0001140361-14-003972. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.