# Modine Manufacturing Co: Form 10-Q for the period ended Sep 30, 2014

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2014-10-30
- Accepted by EDGAR: Oct 30, 2014, 12:23 ET
- Period: 2014-09-30
- Accession: 0001140361-14-039489
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036114039489/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036114039489/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-07-01 to 2014-09-30 | $377.3m | us-gaap:Revenues |
| Revenue | 6 months, 2014-04-01 to 2014-09-30 | $769.8m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2014-07-01 to 2014-09-30 | $320.6m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2014-04-01 to 2014-09-30 | $645.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2014-07-01 to 2014-09-30 | $56.7m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2014-04-01 to 2014-09-30 | $124.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2014-07-01 to 2014-09-30 | $47.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2014-04-01 to 2014-09-30 | $90.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2014-07-01 to 2014-09-30 | $7.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2014-04-01 to 2014-09-30 | $32.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2014-07-01 to 2014-09-30 | $3.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2014-04-01 to 2014-09-30 | $6.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2014-07-01 to 2014-09-30 | $3.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2014-04-01 to 2014-09-30 | $10.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-07-01 to 2014-09-30 | $1.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2014-04-01 to 2014-09-30 | $15.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-07-01 to 2014-09-30 | $0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2014-04-01 to 2014-09-30 | $0.32 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-07-01 to 2014-09-30 | $0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2014-04-01 to 2014-09-30 | $0.32 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-07-01 to 2014-09-30 | 47,700,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2014-04-01 to 2014-09-30 | 47,700,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2014-04-01 to 2014-09-30 | $23.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2014-04-01 to 2014-09-30 | $29.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2014-09-30 | $71.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-09-30 | $502.3m | us-gaap:AssetsCurrent |
| Total assets | at 2014-09-30 | $1.01bn | us-gaap:Assets |
| Current liabilities | at 2014-09-30 | $353.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-09-30 | $585.5m | us-gaap:Liabilities |
| Short-term borrowings | at 2014-09-30 | $28.8m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2014-09-30 | $422.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 29,001 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, 2014 was the second quarter of fiscal 2015.

*Second Quarter Highlights:* Sales in the second quarter of fiscal 2015 increased $13.1 million, or 4 percent, from the second quarter of fiscal 2014, primarily due to sales increases in our Building HVAC, Europe, and Asia segments, partially offset by a sales decrease in our South America segment as economic conditions remained weak in Brazil. Gross margin decreased 70 basis points, primarily due to unfavorable sales mix and production inefficiencies. Selling, general and administrative (“SG&A”) expenses increased slightly as a percentage of sales. During the second quarter of fiscal 2015, our net earnings were $2.0 million, compared with $5.0 million in the prior year.

*Year-to-Date Highlights:* Sales in the first six months of fiscal 2015 increased $29.8 million, or 4 percent, from the same period last year, primarily due to sales increases in each of our business segments, except in our South America segment, in which sales were negatively impacted by continued weak economic conditions in Brazil, and an $8.4 million favorable impact of foreign currency exchange rate changes. Gross profit and gross margin each increased, primarily due to sales volume improvements. SG&A expenses decreased slightly as a percentage of sales and included a benefit of $2.6 million related to an insurance recovery. During the first six months of fiscal 2015, our net earnings were $16.1 million, compared with $15.6 million in 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, 2014 and 2013:

*(in millions)*

|  | Three months ended September 30, 2014 $'s | % of sales | 2013 $'s | % of sales | Six months ended September 30, 2014 $'s | % of sales | 2013 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $377.3 | 100.0% | $364.2 | 100.0% | $769.8 | 100.0% | $740.0 | 100.0% |
| Cost of sales | 320.6 | 85.0% | 307.0 | 84.3% | 645.4 | 83.8% | 620.9 | 83.9% |
| Gross profit | 56.7 | 15.0% | 57.2 | 15.7% | 124.4 | 16.2% | 119.1 | 16.1% |
| Selling, general and administrative expenses | 47.8 | 12.7% | 46.0 | 12.6% | 90.6 | 11.8% | 88.4 | 11.9% |
| Restructuring expenses | 1.0 | 0.2% | 0.6 | 0.2% | 1.8 | 0.2% | 1.1 | 0.2% |
| Operating income | 7.9 | 2.1% | 10.6 | 2.9% | 32.0 | 4.2% | 29.6 | 4.0% |
| Interest expense | (3.0) | -0.8% | (3.2) | -0.9% | (6.1) | -0.8% | (6.2) | -0.8% |
| Other income (expense) – net | 0.5 | 0.1% | - | - | 0.3 | - | (0.5) | -0.1% |
| Earnings before income taxes | 5.4 | 1.4% | 7.4 | 2.0% | 26.2 | 3.4% | 22.9 | 3.1% |
| Provision for income taxes | (3.4) | -0.9% | (2.4) | -0.6% | (10.1) | -1.3% | (7.3) | -1.0% |
| Net earnings | $2.0 | 0.5% | $5.0 | 1.4% | $16.1 | 2.1% | $15.6 | 2.1% |

#### Comparison of Three Months Ended September 30, 2014 and 2013

Second quarter sales of $377.3 million were $13.1 million, or 4 percent, higher than the second quarter of the prior year, primarily due to sales increases in our Building HVAC, Europe, and Asia segments and a $1.6 million favorable impact of foreign currency exchange rate changes, partially offset by a sales decrease in our South America segment as economic conditions remained weak in Brazil.

Second quarter gross profit decreased $0.5 million from the second quarter of fiscal 2014. Gross margin decreased 70 basis points to 15.0 percent in the second quarter of fiscal 2015, primarily due to unfavorable sales mix, driven by a higher mix of lower margin product, and production inefficiencies, including overtime, scrap and expedited freight, partially offset by $2.1 million of accelerated depreciation recorded in the prior year.

SG&A expenses increased $1.8 million from the second quarter of fiscal 2014 to the second quarter of fiscal 2015, yet remained relatively consistent as a percentage of sales. The increase was primarily due to higher compensation-related expenses in the current year.

Restructuring expenses increased $0.4 million in the second quarter of fiscal 2015 compared with the prior year, primarily due to plant consolidation and equipment transfer costs in our Europe and North America segments.

Operating income of $7.9 million in the second quarter of fiscal 2015 represented a $2.7 million decline from $10.6 million in the second quarter of fiscal 2014, primarily due to decreased gross profit and higher SG&A expenses.

The provision for income taxes was $3.4 million and $2.4 million in the second quarter of fiscal 2015 and 2014, respectively. The $1.0 million increase was primarily due to higher income tax expense due to the reversal of a significant portion of the Company’s U.S. income tax valuation allowances during the fourth quarter of fiscal 2014.

#### Comparison of Six Months Ended September 30, 2014 and 2013

Fiscal 2015 year-to-date sales of $769.8 million were $29.8 million, or 4 percent, higher than the same period last year, primarily due to improved sales in each of our business segments, except in our South America segment, in which sales were negatively impacted by continued weak economic conditions in Brazil, and an $8.4 million favorable impact of foreign currency exchange rate changes.

Fiscal 2015 year-to-date gross profit of $124.4 million increased $5.3 million from the same period last year and gross margin increased slightly to 16.2 percent, primarily due to sales volume improvements, $4.3 million of accelerated depreciation recorded in the prior year due to manufacturing process changes at a facility in Germany and a $1.6 million favorable impact of foreign currency exchange rate changes, partially offset by unfavorable sales mix.

Fiscal 2015 year-to-date SG&A expenses increased $2.2 million from the same period last year, yet decreased slightly as a percentage of sales to 11.8 percent. The increase was primarily due to higher compensation-related expenses in the current year, partially offset by a $2.6 million gain from business interruption insurance in the first quarter of fiscal 2015 related to the Airedale fire.

Restructuring expenses increased $0.7 million from the first six months of fiscal 2014, primarily due to plant consolidation and equipment transfer costs in our Europe and North America segments.

Operating income of $32.0 million during the first six months of fiscal 2015 represented a $2.4 million improvement from the same period last year, primarily due to increased gross profit, partially offset by higher SG&A and restructuring expenses.

The provision for income taxes was $10.1 million and $7.3 million during the first six months of fiscal 2015 and 2014, respectively. The $2.8 million increase was primarily due to higher income tax expense due to the reversal of a significant portion of the Company’s U.S. income tax valuation allowances during the fourth quarter of fiscal 2014.

#### SEGMENT RESULTS OF OPERATIONS

During the first quarter of fiscal 2015, we changed the name of our Commercial Products segment to Building HVAC in order to better reflect the nature of the segment’s product lines. There were no changes to the operations or reported financial results of the segment as a result.

The following is a discussion of our segment results of operations for the three and six months ended September 30, 2014 and 2013:

*(in millions)*

| North America | Three months ended September 30, 2014 $'s | % of sales | 2013 $'s | % of sales | Six months ended September 30, 2014 $'s | % of sales | 2013 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $143.8 | 100.0% | $146.0 | 100.0% | $295.5 | 100.0% | $294.7 | 100.0% |
| Cost of sales | 122.9 | 85.5% | 121.0 | 82.9% | 246.5 | 83.4% | 244.2 | 82.9% |
| Gross profit | 20.9 | 14.5% | 25.0 | 17.1% | 49.0 | 16.6% | 50.5 | 17.1% |
| Selling, general and administrative expenses | 12.8 | 8.9% | 13.3 | 9.1% | 24.8 | 8.4% | 24.5 | 8.3% |
| Restructuring expenses | 0.2 | 0.1% | - | - | 0.2 | 0.1% | - | - |
| Operating income | $7.9 | 5.5% | $11.7 | 8.0% | $24.0 | 8.1% | $26.0 | 8.8% |

#### Comparison of Three Months Ended September 30, 2014 and 2013

North America sales decreased $2.2 million, or 2 percent, from the second quarter of fiscal 2014 to the second quarter of fiscal 2015, primarily due to lower sales volume to off-highway customers and lower tooling sales, partially offset by increased sales volume to commercial vehicle customers. Gross margin decreased 260 basis points to 14.5 percent, primarily due to unfavorable sales mix, higher warranty costs, and production inefficiencies caused by increased volume at certain manufacturing facilities and plant consolidation activities. SG&A expenses decreased $0.5 million, primarily due to lower engineering and development costs. Restructuring expenses in the second quarter of fiscal 2015 consisted primarily of equipment transfer costs as a result of the planned closure of our McHenry, Illinois manufacturing facility. Operating income decreased $3.8 million to $7.9 million during the second quarter of fiscal 2015, primarily due to decreased gross profit, partially offset by lower SG&A expenses.

North America year-to-date sales increased $0.8 million, or less than 1 percent, from the same period last year, primarily due to higher sales volume to commercial vehicle customers, partially offset by decreased sales volume to off-highway customers and lower tooling sales. Gross margin decreased 50 basis points to 16.6 percent, primarily due to unfavorable sales mix and production inefficiencies. SG&A expenses increased $0.3 million and were relatively consistent as a percentage of sales. Operating income decreased $2.0 million to $24.0 million, primarily due to decreased gross profit.

*(in millions)*

| Europe | Three months ended September 30, 2014 $'s | % of sales | 2013 $'s | % of sales | Six months ended September 30, 2014 $'s | % of sales | 2013 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $146.4 | 100.0% | $138.9 | 100.0% | $305.0 | 100.0% | $285.1 | 100.0% |
| Cost of sales | 129.7 | 88.6% | 124.2 | 89.4% | 266.1 | 87.2% | 251.1 | 88.1% |
| Gross profit | 16.7 | 11.4% | 14.7 | 10.6% | 38.9 | 12.8% | 34.0 | 11.9% |
| Selling, general and administrative expenses | 11.3 | 7.8% | 10.8 | 7.8% | 22.8 | 7.5% | 21.6 | 7.6% |
| Restructuring expenses | 0.8 | 0.5% | 0.6 | 0.4% | 1.1 | 0.3% | 1.1 | 0.4% |
| Operating income | $4.6 | 3.1% | $3.3 | 2.4% | $15.0 | 4.9% | $11.3 | 4.0% |

#### Comparison of Three Months Ended September 30, 2014 and 2013

Europe sales increased $7.5 million, or 5 percent, from the second quarter of fiscal 2014 to the second quarter of fiscal 2015, primarily due to increased sales volume to commercial vehicle and automotive customers, partially offset by lower tooling sales. Gross profit increased $2.0 million and gross margin increased 80 basis points to 11.4 percent, primarily due to higher sales volume and the absence of $2.1 million of accelerated depreciation recorded in the prior year for production equipment that is no longer used due to manufacturing process changes, partially offset by unfavorable sales mix and production inefficiencies caused by increased volume at certain manufacturing facilities and plant consolidation activities. SG&A expenses increased $0.5 million in the second quarter of fiscal 2015, primarily due to higher engineering and development costs. Operating income improved $1.3 million to $4.6 million during the second quarter of fiscal 2015, primarily due to increased gross profit, partially offset by higher SG&A expenses.

Europe year-to-date sales increased $19.9 million, or 7 percent, from the same period last year, primarily due to increased sales volume to commercial vehicle and automotive customers and a $7.3 million favorable impact of foreign currency exchange rate changes, partially offset by lower tooling sales. Gross profit increased $4.9 million and gross margin increased 90 basis points to 12.8 percent, primarily due to higher sales volume, the absence of $4.3 million of accelerated depreciation recorded in the prior year and a $1.1 million favorable impact of foreign currency exchange rate changes, partially offset by unfavorable sales mix and production inefficiencies. SG&A expenses increased $1.2 million, primarily due to higher engineering and development costs and a $0.5 million unfavorable impact of foreign currency exchange rate changes. Operating income increased $3.7 million to $15.0 million, primarily due to increased gross profit, partially offset by higher SG&A expenses.

*(in millions)*

| South America | Three months ended September 30, 2014 $'s | % of sales | 2013 $'s | % of sales | Six months ended September 30, 2014 $'s | % of sales | 2013 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $27.2 | 100.0% | $31.8 | 100.0% | $52.4 | 100.0% | $66.2 | 100.0% |
| Cost of sales | 23.6 | 86.6% | 26.0 | 81.8% | 45.3 | 86.4% | 54.3 | 82.0% |
| Gross profit | 3.6 | 13.4% | 5.8 | 18.2% | 7.1 | 13.6% | 11.9 | 18.0% |
| Selling, general and administrative expenses | 3.3 | 12.3% | 3.3 | 10.4% | 6.5 | 12.5% | 6.8 | 10.3% |
| Restructuring expenses | - | 0.2% | - | - | 0.5 | 1.0% | - | - |
| Operating income | $0.3 | 0.9% | $2.5 | 7.8% | $0.1 | 0.1% | $5.1 | 7.7% |

#### Comparison of Three Months Ended September 30, 2014 and 2013

South America sales decreased $4.6 million, or 14 percent, from the second quarter of fiscal 2014 to the second quarter of fiscal 2015, primarily due to lower sales volume to commercial vehicle, off-highway and automotive customers, as weak economic conditions in Brazil continue. Gross profit decreased $2.2 million and gross margin decreased to 13.4 percent, primarily due to lower sales volume. SG&A expenses of $3.3 million were consistent with the prior year. Operating income decreased $2.2 million to $0.3 million during the second quarter of fiscal 2015, primarily due to lower gross profit.

South America year-to-date sales decreased $13.8 million, or 21 percent, from the same period last year, primarily due to lower sales volume to commercial vehicle, off-highway and automotive customers, as weak economic conditions in Brazil continue, and a $1.9 million unfavorable impact of foreign currency exchange rate changes. Gross profit decreased $4.8 million and gross margin decreased to 13.6 percent, primarily due to lower sales volume. SG&A expenses decreased $0.3 million, primarily due to cost reduction efforts, reflecting our focus on maintaining profitability in the segment despite the lower sales volume. We recorded restructuring expenses of $0.5 million for employee severance costs to reduce headcount and better align our cost structure with the current market conditions in Brazil. Operating income decreased $5.0 million to $0.1 million, primarily due to lower gross profit.

*(in millions)*

| Asia | Three months ended September 30, 2014 $'s | % of sales | 2013 $'s | % of sales | Six months ended September 30, 2014 $'s | % of sales | 2013 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $19.0 | 100.0% | $16.2 | 100.0% | $39.8 | 100.0% | $34.5 | 100.0% |
| Cost of sales | 16.9 | 88.9% | 14.4 | 89.3% | 34.1 | 85.7% | 30.4 | 88.2% |
| Gross profit | 2.1 | 11.1% | 1.8 | 10.7% | 5.7 | 14.3% | 4.1 | 11.8% |
| Selling, general and administrative expenses | 2.8 | 14.8% | 2.9 | 17.6% | 5.5 | 13.9% | 5.5 | 15.9% |
| Operating (loss) income | $(0.7) | -3.7% | $(1.1) | -6.9% | $0.2 | 0.4% | $(1.4) | -4.1% |

#### Comparison of Three Months Ended September 30, 2014 and 2013

Asia sales increased $2.8 million, or 17 percent, from the second quarter of fiscal 2014 to the second quarter of fiscal 2015, primarily due to new program launches and a $0.5 million favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume within the off-highway markets in China and Korea. Gross profit increased $0.3 million and gross margin increased to 11.1 percent, primarily due to higher sales volume. SG&A expenses were relatively consistent with the prior year and decreased as a percentage of sales. The operating loss decreased $0.4 million to $0.7 million during the second quarter of fiscal 2015, primarily due to higher gross profit.

Asia year-to-date sales increased $5.3 million, or 15 percent, from the same period last year, primarily due to new program launches, higher sales volume to automotive customers, and a $0.7 million favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume within the off-highway markets in China and Korea. Gross profit increased $1.6 million and gross margin increased to 14.3 percent, primarily due to higher sales volume. SG&A expenses were consistent with the prior year, yet decreased as a percentage of sales. Operating income of $0.2 million improved $1.6 million from an operating loss of $1.4 million in the prior year, primarily due to higher gross profit.

*(in millions)*

| Building HVAC | Three months ended September 30, 2014 $'s | % of sales | 2013 $'s | % of sales | Six months ended September 30, 2014 $'s | % of sales | 2013 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $45.5 | 100.0% | $34.8 | 100.0% | $86.2 | 100.0% | $67.2 | 100.0% |
| Cost of sales | 32.3 | 70.8% | 25.0 | 71.9% | 63.1 | 73.1% | 48.9 | 72.8% |
| Gross profit | 13.2 | 29.2% | 9.8 | 28.1% | 23.1 | 26.9% | 18.3 | 27.2% |
| Selling, general and administrative expenses | 10.0 | 22.1% | 8.6 | 24.6% | 16.7 | 19.4% | 16.1 | 23.9% |
| Operating income | $3.2 | 7.0% | $1.2 | 3.5% | $6.4 | 7.4% | $2.2 | 3.3% |

#### Comparison of Three Months Ended September 30, 2014 and 2013

Building HVAC sales increased $10.7 million, or 31 percent, from the second quarter of fiscal 2014 to the second quarter of fiscal 2015, primarily due to a $6.4 million increase in sales at our Airedale business in the U.K. and increased heating product sales in North America as distributors restocked inventory after the strong fiscal 2014 heating season. The sales increase at Airedale was primarily due to $3.8 million of sales at our recently-acquired Barkell Limited (“Barkell”) business, higher sales in the second quarter of fiscal 2015 because of a fire at our Airedale facility in the U.K. that temporarily halted production in the prior year, and a $1.2 million favorable impact of foreign currency exchange rate changes. Gross profit increased $3.4 million and gross margin increased 110 basis points to 29.2 percent, primarily due to higher sales volume and favorable materials costs. SG&A expenses increased $1.4 million, primarily due to the addition of Barkell costs and higher compensation-related expenses. Operating income increased $2.0 million to $3.2 million during the second quarter of fiscal 2015, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Building HVAC sales increased $19.0 million, or 28 percent, from the same period last year, primarily due to an $11.0 million increase in sales at our Airedale business and increased heating product sales in North America as distributors restocked inventory after the strong fiscal 2014 heating season. The sales increase at Airedale was primarily due to $7.5 million of sales at our recently-acquired Barkell business, higher sales in September 2014 because the Airedale fire temporarily halted production in the prior year, and a $2.7 million favorable impact of foreign currency exchange rate changes. Gross profit increased $4.8 million, primarily due to higher sales volume. Gross margin decreased 30 basis points to 26.9 percent, primarily due to the Barkell acquisition, for which purchase accounting negatively impacted gross margin on products shipped in the quarter immediately following the acquisition, and inefficiencies caused by temporary facilities and processes at our Airedale business during the fire recovery. SG&A expenses increased $0.6 million, primarily due to the addition of Barkell costs and higher compensation-related expenses, partially offset by a $2.6 million gain, recognized during the first quarter of fiscal 2015, from business interruption insurance related to fiscal 2014 lost profits caused by the Airedale fire. Operating income of $6.4 million increased $4.2 million compared with the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses.

#### Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at September 30, 2014 of $71.3 million and an available borrowing capacity of $207.0 million under lines of credit provided by banks in the United States and abroad. Due to the timing of insurance proceeds related to the Airedale fire, our cash and cash equivalents at September 30, 2014 included approximately $15.0 million of advances from our insurance provider that will be spent for recovery and reconstruction costs.

Net cash provided by operating activities for the six months ended September 30, 2014 was $23.6 million, which was a $25.4 million decrease from the prior year. This decrease in operating cash flows was primarily due to unfavorable net changes in working capital, including higher incentive compensation payments during fiscal 2015 related to fiscal 2014 performance. Capital expenditures during the first six months of fiscal 2015 were $29.2 million compared with $21.4 million during the same period in fiscal 2014.

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 substantially all 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.

#### Debt Covenants

Our 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 September 30, 2014 and expect to remain in compliance through the remainder of fiscal 2015 and beyond.

#### Outlook

For the full year fiscal 2015, we anticipate a consolidated year-over-year sales increase of 3 to 6 percent, operating income of $65.0 million to $73.0 million and diluted earnings per share in the range of $0.63 to $0.73, excluding restructuring charges.

#### Forward-Looking Statements

This report, including, but not limited to, the discussion under management’s “Outlook” provided 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, 2014. Other risks and uncertainties include, but are not limited to, the following:

#### Operational Risks:

- The overall health and increasing price-down focus of our original equipment manufacturer customers in light of some remaining 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;
- Our ability to complete our Europe restructuring plans and realize expected cost reductions and increased profitability and return on assets as a result;
- Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims;
- Complexities and inefficiencies introduced by the September 2013 fire at our Airedale facility in the U.K., including our ability to continue to meet customer demands at temporary locations for an extended period of time and to timely realize and effectively deploy insurance proceeds to replace machinery and equipment and rebuild the facility with minimal financial impact from the business interruption;
- 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 problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, particularly in light of some continuing economic challenges in areas of the world in which we and our suppliers operate;
- Our ability to complete the transition of our McHenry, Illinois production to other facilities efficiently and effectively;
- Costs and other effects of the remediation of environmental contamination;
- 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;
- 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, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, 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 and recovery therefrom, restrictions associated with importing and exporting and foreign ownership, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China, Europe and North America, and the deterioration in the Brazilian economy in general;
- The impact of potential 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, particularly those in our Asia business segment, 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, 302 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, 2014. The Company’s market risks have not materially changed since the fiscal 2014 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, 2014.

#### Changes in Internal Control Over Financial Reporting

During the second quarter of fiscal 2015, 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 30, 2014.
Source: SEC EDGAR, the filing index for accession 0001140361-14-039489. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.