# Modine Manufacturing Co: Form 10-Q for the period ended Dec 31, 2015

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2016-02-03
- Accepted by EDGAR: Feb 3, 2016, 10:30 ET
- Period: 2015-12-31
- Accession: 0001140361-16-049943
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036116049943/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036116049943/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-10-01 to 2015-12-31 | $328.7m | us-gaap:Revenues |
| Revenue | 9 months, 2015-04-01 to 2015-12-31 | $1.01bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2015-10-01 to 2015-12-31 | $270.1m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2015-04-01 to 2015-12-31 | $847.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2015-10-01 to 2015-12-31 | $58.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2015-04-01 to 2015-12-31 | $161.3m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2015-10-01 to 2015-12-31 | $43.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2015-04-01 to 2015-12-31 | $162.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2015-10-01 to 2015-12-31 | $13.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2015-04-01 to 2015-12-31 | −$6.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2015-10-01 to 2015-12-31 | $2.7m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2015-04-01 to 2015-12-31 | $8.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2015-10-01 to 2015-12-31 | $2.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2015-04-01 to 2015-12-31 | −$6.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-10-01 to 2015-12-31 | $8.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2015-04-01 to 2015-12-31 | −$9.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-10-01 to 2015-12-31 | $0.17 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2015-04-01 to 2015-12-31 | −$0.19 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-10-01 to 2015-12-31 | $0.17 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2015-04-01 to 2015-12-31 | −$0.19 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-10-01 to 2015-12-31 | 47,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2015-04-01 to 2015-12-31 | 47,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2015-04-01 to 2015-12-31 | $65.4m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2015-04-01 to 2015-12-31 | $42.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2015-04-01 to 2015-12-31 | $2.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2015-12-31 | $81.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-12-31 | $441.9m | us-gaap:AssetsCurrent |
| Total assets | at 2015-12-31 | $921.8m | us-gaap:Assets |
| Current liabilities | at 2015-12-31 | $294.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2015-12-31 | $552.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2015-12-31 | $365.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 30,788 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, 2015 was the third quarter of fiscal 2016.

*Third Quarter Highlights:* Net sales in the third quarter of fiscal 2016 decreased $34.9 million, or 10 percent, from the third quarter of fiscal 2015, primarily due to a $25.9 million unfavorable impact of foreign currency exchange rate changes associated with the strengthening of the U.S. dollar, and lower sales volume to off-highway and building heating, ventilating and air conditioning (“HVAC”) customers, partially offset by higher sales volume to automotive customers. Gross margin increased 140 basis points to 17.8 percent, primarily due to lower material costs and continued cost-control initiatives. Selling, general and administrative (“SG&A”) expenses decreased $1.9 million. During the third quarter of fiscal 2016, our earnings from continuing operations were $8.2 million, compared with $9.1 million in the prior year, which included a $3.2 million gain from the sale of a wind tunnel.

During October 2015, we announced our new Strengthen, Diversify and Grow strategic transformational framework. Guided by this framework, we have commenced initiatives to, among other things, achieve global procurement savings and efficiencies, optimize our manufacturing footprint, implement a new global organizational structure, and execute a voluntary early retirement program in the U.S. In January 2016, we also formed and assumed the controlling share of a joint venture, Modine Puxin Thermal System (Jiangsu) Co., Ltd., in China with Jiangsu Puxin Heat Exchange Co., Ltd. This joint venture will, among other benefits, expedite our introduction of stainless steel heat exchangers for commercial vehicle markets in China.

*Year-to-Date Highlights:* Net sales in the first nine months of fiscal 2016 decreased $124.6 million, or 11 percent, from the same period last year, primarily due to a $100.5 million unfavorable impact of foreign currency exchange rate changes associated with the strengthening of the U.S. dollar and lower sales volume to off-highway customers, partially offset by higher sales volume to automotive customers. During fiscal 2016, we completed a voluntary lump-sum payout program offered to certain eligible former employees participating in our U.S. pension plans (see Note 4 of the Notes to Condensed Consolidated Financial Statements for additional information). As a result of this program, we recorded $40.3 million of non-cash pension settlement losses to cost of sales ($8.5 million) and SG&A expenses ($31.8 million). Gross profit decreased compared with the prior year, primarily due to the pension settlement losses and an unfavorable impact from changes in foreign currency exchange rates. SG&A expenses increased compared with the prior year, primarily due to the pension settlement losses. During the first nine months of fiscal 2016, our net loss from continuing operations was $8.8 million, compared with net earnings of $25.2 million in the prior year.

#### CONSOLIDATED RESULTS OF OPERATIONS

The following table presents our consolidated financial results on a comparative basis for the three and nine months ended December 31, 2015 and 2014:

*(in millions)*

|  | Three months ended December 31, 2015 $'s | % of sales | 2014 $'s | % of sales | Nine months ended December 31, 2015 $'s | % of sales | 2014 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $328.7 | 100.0% | $363.6 | 100.0% | $1,008.8 | 100.0% | $1,133.4 | 100.0% |
| Cost of sales | 270.1 | 82.2% | 304.2 | 83.6% | 847.5 | 84.0% | 949.6 | 83.8% |
| Gross profit | 58.6 | 17.8% | 59.4 | 16.4% | 161.3 | 16.0% | 183.8 | 16.2% |
| Selling, general and administrative expenses | 43.3 | 13.2% | 45.2 | 12.5% | 162.9 | 16.2% | 135.8 | 12.0% |
| Restructuring expenses | 1.6 | 0.5% | 1.9 | 0.5% | 5.2 | 0.5% | 3.7 | 0.3% |
| Gain on sale of wind tunnel | - | - | (3.2) | -0.9% | - | - | (3.2) | -0.3% |
| Operating income (loss) | 13.7 | 4.2% | 15.5 | 4.3% | (6.8) | -0.7% | 47.5 | 4.2% |
| Interest expense | (2.7) | -0.8% | (2.8) | -0.8% | (8.2) | -0.8% | (8.9) | -0.8% |
| Other expense – net | (0.4) | -0.1% | (0.6) | -0.2% | (0.5) | - | (0.3) | - |
| Earnings (loss) from continuing operations before income taxes | 10.6 | 3.2% | 12.1 | 3.3% | (15.5) | -1.5% | 38.3 | 3.4% |
| (Provision) benefit for income taxes | (2.4) | -0.7% | (3.0) | -0.8% | 6.7 | 0.7% | (13.1) | -1.2% |
| Earnings (loss) from continuing operations | $8.2 | 2.5% | $9.1 | 2.5% | $(8.8) | -0.9% | $25.2 | 2.2% |

#### Comparison of Three Months Ended December 31, 2015 and 2014

Third quarter net sales of $328.7 million were $34.9 million, or 10 percent, lower than the third quarter of the prior year, primarily due to lower sales in our Europe segment, where increases in sales volume were more than offset by a $17.9 million unfavorable impact of foreign currency exchange rate changes, and lower sales in the Americas and Building HVAC segments.

Third quarter gross profit decreased $0.8 million from the third quarter of the prior year, yet gross margin increased 140 basis points to 17.8 percent. Gross profit for the third quarter was negatively impacted by $3.4 million from foreign currency exchange rate changes. The 140 basis-point improvement in gross margin was primarily due to lower material costs and improved production efficiencies.

Third quarter SG&A expenses decreased $1.9 million from the third quarter of the prior year, primarily due to a $2.0 million favorable impact of foreign currency exchange rate changes and ongoing cost-control initiatives, partially offset by the absence of a $2.0 million recovery from business interruption insurance recognized within the Building HVAC segment during the third quarter of fiscal 2015, and a $0.9 million pension settlement loss.

Restructuring expenses of $1.6 million in the third quarter of fiscal 2016 primarily consisted of severance expenses associated with a voluntary retirement program in the U.S. and equipment transfer costs related to plant consolidation activities in the Americas segment.

Operating income of $13.7 million in the third quarter of fiscal 2016 decreased $1.8 million from the third quarter of the prior year, primarily due to the absence of a $3.2 million gain on the sale of a wind tunnel in the prior year and a $1.2 million unfavorable impact of foreign currency exchange rate changes, partially offset by lower SG&A expenses.

The provision for income taxes was $2.4 million and $3.0 million in the third quarter of fiscal 2016 and 2015, respectively. The $0.6 million decrease was primarily related to the decrease in earnings from continuing operations before income taxes.

Earnings from discontinued operations, net of income taxes, of $0.6 million in the third quarter of fiscal 2015 related to a gain associated with the final collection of proceeds from the fiscal 2009 sale of our Electronic Cooling business.

Fiscal 2016 year-to-date net sales of $1,008.8 million were $124.6 million, or 11 percent, lower than the same period last year, primarily due to lower sales in our Europe segment, where increases in sales volume were more than offset by a $73.3 million unfavorable impact of foreign currency exchange rate changes, and lower sales in the Americas segment.

Fiscal 2016 year-to-date gross profit of $161.3 million decreased $22.5 million from the same period last year and gross margin declined 20 basis points to 16.0 percent. These decreases were primarily due to $8.5 million of pension settlement losses and lower sales volume in the Americas segment in the current year, partially offset by lower material costs. In addition, gross profit was negatively impacted by $12.4 million from foreign currency exchange rate changes.

Fiscal 2016 year-to-date SG&A expenses increased $27.1 million from the same period last year. The increase was primarily due to $31.8 million of pension settlement losses in the current year and the absence of $4.6 million of recoveries from business interruption insurance for the Airedale fire received in the prior year, partially offset by an $8.7 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses increased $1.5 million from the same period last year, primarily due to equipment transfer costs related to plant consolidation activities and severance expenses in the Americas segment.

The operating loss of $6.8 million during the first nine months of fiscal 2016 represents a $54.3 million decline from $47.5 million of operating income in the same period last year. This decline was primarily due to $40.3 million of pension settlement losses, lower gross profit, a $3.4 million unfavorable impact of foreign currency exchange rate changes in the current year, and the absence of a $3.2 million gain on the sale of a wind tunnel in the prior year.

Fiscal 2016 year-to-date interest expense decreased $0.7 million, or 8 percent, from the same period last year, primarily due to lower outstanding short-term debt.

The benefit for income taxes was $6.7 million during the first nine months of fiscal 2016, compared with a provision for income taxes of $13.1 million in the prior year. The $19.8 million change was primarily due to $15.7 million of income tax benefits related to pension settlement losses in the current year and a decrease in operating earnings. We believe it is possible that approximately $3.0 million of the valuation allowance against our deferred tax assets in a foreign jurisdiction could be released in late fiscal 2016 or in fiscal 2017. See Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information.

Earnings from discontinued operations, net of income taxes, of $0.6 million in fiscal 2015 related to a gain associated with the final collection of proceeds from the fiscal 2009 sale of our Electronic Cooling business.

#### SEGMENT RESULTS OF OPERATIONS

Effective April 1, 2015, we combined our North America and South America segments into the Americas segment to streamline operations, gain synergies and improve our cost structure. As a result, we recast the prior period segment financial information to conform to the current period presentation. There was no impact to our consolidated financial statements as a result.

The following is a discussion of our segment results of operations for the three and nine months ended December 31, 2015 and 2014:

*(in millions)*

| Americas | Three months ended December 31, 2015 $'s | % of sales | 2014 $'s | % of sales | Nine months ended December 31, 2015 $'s | % of sales | 2014 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $137.1 | 100.0% | $153.2 | 100.0% | $440.4 | 100.0% | $500.8 | 100.0% |
| Cost of sales | 114.4 | 83.5% | 130.8 | 85.4% | 367.6 | 83.5% | 422.3 | 84.3% |
| Gross profit | 22.7 | 16.5% | 22.4 | 14.6% | 72.8 | 16.5% | 78.5 | 15.7% |
| Selling, general and administrative expenses | 13.6 | 9.9% | 15.5 | 10.1% | 43.0 | 9.8% | 46.8 | 9.4% |
| Restructuring expenses | 1.4 | 1.0% | 1.3 | 0.8% | 5.0 | 1.1% | 2.0 | 0.4% |
| Operating income | $7.7 | 5.6% | $5.6 | 3.7% | $24.8 | 5.6% | $29.7 | 5.9% |

#### Comparison of Three Months Ended December 31, 2015 and 2014

Americas net sales decreased $16.1 million, or 11 percent, from the third quarter of fiscal 2015 to the third quarter of fiscal 2016. Sales were lower in both North America and Brazil, including a $6.3 million unfavorable impact of foreign currency exchange rate changes. Sales in North America decreased $6.9 million, primarily due to lower sales volume to off-highway and commercial vehicle customers. Sales volume to all markets in Brazil also declined during the third quarter of fiscal 2016 as economic conditions in Brazil remained weak. Gross margin increased 190 basis points to 16.5 percent, primarily due to lower material costs and cost savings from the McHenry, Illinois manufacturing facility closure. SG&A expenses decreased $1.9 million, primarily due to ongoing cost-control initiatives and a $0.5 million favorable impact of foreign currency exchange rate changes. Restructuring expenses in the third quarter of fiscal 2016 of $1.4 million consisted primarily of equipment transfer costs related to plant consolidation activities in North America and severance expenses associated with a voluntary retirement program in the U.S. Under this program, we expect to incur additional severance-related expenses of approximately $2.0 million during the fourth quarter of fiscal 2016. Operating income increased $2.1 million to $7.7 million during the third quarter of fiscal 2016, primarily due to lower SG&A expenses and slightly higher gross profit.

Americas year-to-date net sales decreased $60.4 million, or 12 percent, from the same period last year. Sales were lower in both North America and Brazil, including a $20.2 million unfavorable impact of foreign currency exchange rate changes. Sales in North America decreased $29.3 million, primarily due to lower sales volume to off-highway and commercial vehicle customers, partially offset by higher sales volume to automotive customers. Sales volume to all markets in Brazil also declined during fiscal 2016, as economic conditions in Brazil remained weak. Gross profit decreased $5.7 million, yet gross margin increased 80 basis points to 16.5 percent. The decrease in gross profit was primarily due to lower sales volume and a $2.2 million unfavorable impact of foreign currency exchange rate changes, partially offset by lower material costs, cost savings from the McHenry, Illinois manufacturing facility closure, and improved production efficiencies. SG&A expenses decreased $3.8 million, primarily due to a $2.1 million favorable impact of foreign currency exchange rate changes and cost savings from restructuring actions in Brazil. Restructuring expenses of $5.0 million in fiscal 2016 consisted primarily of severance expenses and equipment transfer costs related to restructuring activities in North America. Operating income decreased $4.9 million to $24.8 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.

*(in millions)*

| Europe | Three months ended December 31, 2015 $'s | % of sales | 2014 $'s | % of sales | Nine months ended December 31, 2015 $'s | % of sales | 2014 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $126.1 | 100.0% | $137.2 | 100.0% | $385.0 | 100.0% | $442.2 | 100.0% |
| Cost of sales | 108.9 | 86.3% | 123.1 | 89.7% | 338.0 | 87.8% | 389.2 | 88.0% |
| Gross profit | 17.2 | 13.7% | 14.1 | 10.3% | 47.0 | 12.2% | 53.0 | 12.0% |
| Selling, general and administrative expenses | 9.7 | 7.7% | 10.8 | 7.9% | 28.8 | 7.5% | 33.6 | 7.6% |
| Restructuring (income) expenses | (0.1) | - | 0.6 | 0.4% | (0.1) | - | 1.7 | 0.4% |
| Gain on sale of wind tunnel | - | - | (3.2) | -2.3% | - | - | (3.2) | -0.7% |
| Operating income | $7.6 | 6.0% | $5.9 | 4.3% | $18.3 | 4.8% | $20.9 | 4.7% |

#### Comparison of Three Months Ended December 31, 2015 and 2014

Europe net sales decreased $11.1 million, or 8 percent, from the third quarter of fiscal 2015 to the third quarter of fiscal 2016, primarily due to a $17.9 million unfavorable impact of foreign currency exchange rate changes, partially offset by increased sales volume to commercial vehicle and automotive customers. Gross profit increased $3.1 million and gross margin increased 340 basis points to 13.7 percent. The increase in gross profit was primarily due to lower material costs, higher sales volume and improved production efficiencies, partially offset by a $2.5 million unfavorable impact of foreign currency exchange rate changes. SG&A expenses decreased $1.1 million, primarily due to a $1.4 million favorable impact of foreign currency exchange rate changes. Operating income increased $1.7 million to $7.6 million during the third quarter of fiscal 2016, primarily due to higher gross profit and lower SG&A expenses, partially offset by a $3.2 million gain in the third quarter of fiscal 2015 related to the sale of a wind tunnel.

Europe year-to-date net sales decreased $57.2 million, or 13 percent, from the same period last year, primarily due to a $73.3 million unfavorable impact of foreign currency exchange rate changes and lower sales volume to off-highway customers, partially offset by increased sales volume to automotive and commercial vehicle customers. Gross profit decreased $6.0 million, yet gross margin increased 20 basis points to 12.2 percent. The decrease in gross profit was primarily due to an $8.8 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales volume and lower material costs. SG&A expenses decreased $4.8 million, primarily due to a $5.5 million favorable impact of foreign currency exchange rate changes. Operating income decreased $2.6 million to $18.3 million, primarily due to lower gross profit and the absence of a $3.2 million gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&A and restructuring expenses.

*(in millions)*

| Asia | Three months ended December 31, 2015 $'s | % of sales | 2014 $'s | % of sales | Nine months ended December 31, 2015 $'s | % of sales | 2014 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $18.7 | 100.0% | $20.2 | 100.0% | $56.1 | 100.0% | $60.0 | 100.0% |
| Cost of sales | 16.1 | 86.1% | 17.5 | 86.4% | 47.9 | 85.3% | 51.6 | 85.9% |
| Gross profit | 2.6 | 13.9% | 2.7 | 13.6% | 8.2 | 14.7% | 8.4 | 14.1% |
| Selling, general and administrative expenses | 2.7 | 14.2% | 3.0 | 14.8% | 9.1 | 16.3% | 8.5 | 14.2% |
| Operating loss | $(0.1) | -0.3% | $(0.3) | -1.2% | $(0.9) | -1.6% | $(0.1) | -0.1% |

22

#### Comparison of Three Months Ended December 31, 2015 and 2014

Asia net sales decreased $1.5 million, or 7 percent, from the third quarter of fiscal 2015 to the third quarter of fiscal 2016, primarily due to lower sales volume to off-highway customers, lower tooling sales, and a $1.0 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales volume to automotive customers in China and India. Gross margin increased 30 basis points to 13.9 percent, primarily due to favorable sales mix. SG&A expenses decreased $0.3 million, primarily due to cost-control initiatives, partially offset by acquisition-related costs associated with a joint venture that we formed in January 2016. The operating loss decreased $0.2 million to $0.1 million during the third quarter of fiscal 2016, primarily due to lower SG&A expenses.

Asia year-to-date net sales decreased $3.9 million, or 7 percent, from the same period last year, primarily due to lower sales volume to off-highway customers in China and Korea and a $2.9 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales volume to automotive customers in China and increased overall sales in India. Gross margin increased 60 basis points to 14.7 percent, primarily due to favorable sales mix. SG&A expenses increased $0.6 million, primarily due to higher compensation-related expenses and costs related to the joint venture in China. The operating loss of $0.9 million increased $0.8 million from the prior year, primarily due to higher SG&A expenses and lower gross profit.

*(in millions)*

| Building HVAC | Three months ended December 31, 2015 $'s | % of sales | 2014 $'s | % of sales | Nine months ended December 31, 2015 $'s | % of sales | 2014 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $50.9 | 100.0% | $56.3 | 100.0% | $141.0 | 100.0% | $142.5 | 100.0% |
| Cost of sales | 33.6 | 66.0% | 36.7 | 65.3% | 97.7 | 69.2% | 99.8 | 70.0% |
| Gross profit | 17.3 | 34.0% | 19.6 | 34.7% | 43.3 | 30.8% | 42.7 | 30.0% |
| Selling, general and administrative expenses | 10.4 | 20.5% | 9.8 | 17.3% | 30.4 | 21.6% | 26.5 | 18.6% |
| Restructuring expenses | 0.2 | 0.4% | - | - | 0.2 | 0.2% | - | - |
| Operating income | $6.7 | 13.1% | $9.8 | 17.4% | $12.7 | 9.0% | $16.2 | 11.4% |

#### Comparison of Three Months Ended December 31, 2015 and 2014

Building HVAC net sales decreased $5.4 million, or 10 percent, from the third quarter of fiscal 2015 to the third quarter of fiscal 2016, primarily due to lower sales at our businesses in the U.K., as unfavorable currency conditions resulted in increased competition from other mainland European suppliers, lower heating product sales in North America due to relatively warm weather conditions, and a $1.0 million unfavorable impact of foreign currency exchange rate changes. Gross profit decreased $2.3 million and gross margin decreased 70 basis points to 34.0 percent, primarily due to lower sales volume and unfavorable sales mix. SG&A expenses increased $0.6 million, primarily due to the absence of a $2.0 million business interruption insurance recovery associated with the Airedale fire, which we recognized in the third quarter of fiscal 2015, partially offset by decreased expenses associated with lower sales levels. Restructuring expenses in the third quarter of fiscal 2016 of $0.2 million consisted primarily of employee severance expenses. Operating income decreased $3.1 million to $6.7 million during the third quarter of fiscal 2016, primarily due to lower gross profit and higher SG&A expenses.

Building HVAC year-to-date net sales decreased $1.5 million, or 1 percent, from the same period last year, primarily due to a $4.6 million unfavorable impact of foreign currency exchange rate changes and decreased sales at our U.K. businesses, partially offset by increased heating and cooling product sales in North America. Gross profit increased $0.6 million and gross margin increased 80 basis points to 30.8 percent, primarily due to favorable sales mix. SG&A expenses increased $3.9 million, primarily due to the absence of $4.6 million of recoveries from business interruption insurance for the Airedale fire received in the prior year, partially offset by a $0.8 million favorable impact of foreign currency exchange rate changes. Operating income of $12.7 million decreased $3.5 million compared with the prior year, primarily due to higher SG&A expenses, partially offset by higher gross profit.

#### Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at December 31, 2015 of $81.5 million, and an available borrowing capacity of $209.0 million under lines of credit provided by banks in the United States and abroad. Given our extensive international operations, significant amounts of our cash and cash equivalents are held by our non-U.S. subsidiaries. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.

Net cash provided by operating activities for the nine months ended December 31, 2015 was $65.4 million, a $21.3 million increase compared with the same period in the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital, partially offset by lower operating earnings in the current year. Capital expenditures of $42.3 million during the first nine months of fiscal 2016 increased $0.4 million compared with the same period in fiscal 2015.

In October 2015, our Board of Directors approved a 12-month, $50.0 million share repurchase program. During the third quarter of fiscal 2016, we repurchased $2.1 million of shares under this program. Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

#### 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 EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense. We were in compliance with our debt covenants as of December 31, 2015 and expect to remain in compliance through the remainder of fiscal 2016 and beyond.

#### Forward-Looking Statements

This report, including, but not limited to, the discussion 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, 2015. Other risks and uncertainties include, but are not limited to, the following:

#### 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, 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 and North America, and the continued deterioration in and weak forecasts for the Brazilian economy;
- 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 manage 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 current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental emissions standards.

#### Operational Risks:

- The overall health and increasing price-down focus of our original equipment manufacturer customers in light of 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 customer 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, particularly in the face of macro-economic instability;
- Our ability to effectively and efficiently realize expected commercial and operational efficiencies and associated cost savings and other benefits associated with our Strengthen, Diversify and Grow transformational strategy;
- Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims;
- 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;
- Complexities and inefficiencies introduced by the September 2013 fire at our Airedale facility in the U.K., including our ability to complete our relocation to the new facility in an efficient and timely manner while continuing to meet customer demands;
- Our ability to effectively and efficiently complete restructuring activities in our Europe segment and realize expected cost reductions and increased competitiveness and profitability as a result;
- Our ability to complete the transition of our Washington, Iowa 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.

#### Strategic Risks:

- Our ability to identify and execute appropriate opportunities to enable us to achieve our Strengthen, Diversify and Grow transformational strategy in order to position us for long-term success.

#### 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;
- The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, British pound, and Indian rupee relative to the U.S. dollar; and
- Our ability to realize the benefits of tax assets in various jurisdictions in which we operate.

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, 2015. The Company’s market risks have not materially changed since the fiscal 2015 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, 2015.

#### Changes in Internal Control Over Financial Reporting

During the third quarter of fiscal 2016, there was no change in the Company’s internal control over financial reporting that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Feb 3, 2016.
Source: SEC EDGAR, the filing index for accession 0001140361-16-049943. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.