# Modine Manufacturing Co: Form 10-Q for the period ended Jun 30, 2016

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2016-08-03
- Accepted by EDGAR: Aug 3, 2016, 11:13 ET
- Period: 2016-06-30
- Accession: 0001140361-16-074541
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036116074541/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036116074541/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-04-01 to 2016-06-30 | $347.2m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-04-01 to 2016-06-30 | $285.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2016-04-01 to 2016-06-30 | $62.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2016-04-01 to 2016-06-30 | $44.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-04-01 to 2016-06-30 | $15.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-04-01 to 2016-06-30 | $3.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-04-01 to 2016-06-30 | $3.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-04-01 to 2016-06-30 | $8.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-04-01 to 2016-06-30 | $0.18 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-04-01 to 2016-06-30 | $0.18 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-04-01 to 2016-06-30 | 47,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 3 months, 2016-04-01 to 2016-06-30 | $14.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-06-30 | $64.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-06-30 | $417.4m | us-gaap:AssetsCurrent |
| Total assets | at 2016-06-30 | $925.4m | us-gaap:Assets |
| Current liabilities | at 2016-06-30 | $280.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-06-30 | $537.6m | us-gaap:Liabilities |
| Short-term borrowings | at 2016-06-30 | $37.5m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2016-06-30 | $381.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 19,000 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 June 30, 2016 was the first quarter of fiscal 2017.

During fiscal 2016, we announced our Strengthen, Diversify and Grow strategic transformational framework. Guided by this framework, we are progressing in our “Strengthen” initiatives to, among other things, achieve global procurement savings and efficiencies, optimize our manufacturing footprint, implement a new global organizational structure, and reduce personnel costs. In addition, we are investing significant management time and company resources in evaluating opportunities that would enable us to achieve our “Diversify” and “Grow” objectives.

*First Quarter Highlights:* Net sales in the first quarter of fiscal 2017 increased $1.1 million, or less than 1 percent, from the first quarter of fiscal 2016, primarily due to higher sales volume to automotive customers, partially offset by lower sales volume to commercial vehicle and off-highway customers. Gross profit increased $5.0 million and gross margin improved 130 basis points, primarily due to lower material costs and improved production efficiencies. During the first quarter of fiscal 2017, our net earnings were $8.9 million, an increase of $3.4 million compared with net earnings of $5.5 million in the first quarter of the prior year.

#### CONSOLIDATED RESULTS OF OPERATIONS

The following table presents our consolidated financial results on a comparative basis for the three months ended June 30, 2016 and 2015:

*(in millions)*

|  | Three months ended June 30, 2016 $'s | % of sales | 2015 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $347.2 | 100.0% | $346.1 | 100.0% |
| Cost of sales | 285.2 | 82.2% | 289.1 | 83.5% |
| Gross profit | 62.0 | 17.8% | 57.0 | 16.5% |
| Selling, general and administrative expenses | 44.6 | 12.8% | 42.8 | 12.4% |
| Restructuring expenses | 2.3 | 0.7% | 2.6 | 0.7% |
| Operating income | 15.1 | 4.3% | 11.6 | 3.4% |
| Interest expense | (3.0) | -0.9% | (2.8) | -0.8% |
| Other expense – net | (0.2) | - | - | - |
| Earnings before income taxes | 11.9 | 3.4% | 8.8 | 2.6% |
| Provision for income taxes | (3.0) | -0.8% | (3.3) | -1.0% |
| Net earnings | $8.9 | 2.6% | $5.5 | 1.6% |

First quarter net sales of $347.2 million were $1.1 million, or less than 1 percent, higher than the first quarter of the prior year, primarily due to higher sales in our Europe and Asia segments, partially offset by lower sales in our Americas segment and a $1.6 million unfavorable impact of foreign currency exchange rate changes.

First quarter gross profit increased $5.0 million and gross margin improved 130 basis points to 17.8 percent, primarily due to lower material costs, improved production efficiencies and cost savings resulting from procurement initiatives, net of associated expenses for professional services.

First quarter SG&A expenses increased $1.8 million, primarily due to expenses for professional services related to business development activities and higher employee benefit and incentive compensation expenses, partially offset by a $0.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $2.3 million in the first quarter of fiscal 2017 primarily consisted of severance expenses associated with targeted headcount reductions at several locations and a voluntary retirement program in the U.S., and equipment transfer costs related to plant consolidation activities in the Americas segment.

Operating income of $15.1 million in the first quarter of fiscal 2017 increased $3.5 million from $11.6 million in the first quarter of fiscal 2016, primarily due to higher gross profit, partially offset by higher SG&A expenses.

The provision for income taxes was $3.0 million and $3.3 million in the first quarter of fiscal 2017 and 2016, respectively. The $0.3 million decrease was primarily related to changes in the mix of foreign and domestic earnings.

#### SEGMENT RESULTS OF OPERATIONS

The following is a discussion of our segment results of operations for the three months ended June 30, 2016 and 2015:

*(in millions)*

| Americas | Three months ended June 30, 2016 $'s | % of sales | 2015 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $140.0 | 100.0% | $159.1 | 100.0% |
| Cost of sales | 114.9 | 82.1% | 132.4 | 83.2% |
| Gross profit | 25.1 | 17.9% | 26.7 | 16.8% |
| Selling, general and administrative expenses | 13.6 | 9.7% | 14.7 | 9.3% |
| Restructuring expenses | 2.2 | 1.6% | 2.7 | 1.7% |
| Operating income | $9.3 | 6.6% | $9.3 | 5.8% |

Americas net sales decreased $19.1 million, or 12 percent, from the first quarter of fiscal 2016 to the first quarter of fiscal 2017. Sales were lower in both North America and Brazil, including a $1.9 million unfavorable impact of foreign currency exchange rate changes. Sales in North America decreased $16.6 million, primarily due to lower sales volume to commercial vehicle and off-highway customers, partially offset by higher sales volume to automotive customers. Sales volume to original equipment manufacturer customers in Brazil also declined during the first quarter of fiscal 2017, as economic conditions in Brazil remained weak. Gross profit decreased $1.6 million, primarily due to lower sales volume, yet gross margin improved 110 basis points to 17.9 percent. The gross margin improvement was primarily due to lower material costs and cost savings resulting from procurement initiatives. SG&A expenses decreased $1.1 million, primarily due to ongoing cost-control initiatives. Restructuring expenses of $2.2 million in the first quarter of fiscal 2017 primarily consisted 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. Operating income of $9.3 million during the first quarter of fiscal 2017 was consistent with the prior year, as lower gross profit was offset by lower SG&A and restructuring expenses.

*(in millions)*

| Europe | Three months ended June 30, 2016 $'s | % of sales | 2015 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $146.0 | 100.0% | $131.2 | 100.0% |
| Cost of sales | 120.9 | 82.8% | 116.1 | 88.5% |
| Gross profit | 25.1 | 17.2% | 15.1 | 11.5% |
| Selling, general and administrative expenses | 10.4 | 7.1% | 9.5 | 7.3% |
| Restructuring income | (0.3) | -0.2% | (0.1) | -0.1% |
| Operating income | $15.0 | 10.3% | $5.7 | 4.3% |

Europe net sales increased $14.8 million, or 11 percent, from the first quarter of fiscal 2016 to the first quarter of fiscal 2017, primarily due to higher sales volume to automotive and commercial vehicle customers and a $2.9 million favorable impact of foreign currency exchange rate changes. Gross profit increased $10.0 million and gross margin improved 570 basis points to 17.2 percent, primarily due to higher sales volume, lower material costs, cost savings resulting from procurement initiatives, and improved production efficiencies. In addition, gross profit was favorably impacted by $0.5 million from foreign currency exchange rate changes. SG&A expenses increased $0.9 million, but decreased as a percentage of sales. Operating income increased $9.3 million to $15.0 million during the first quarter of fiscal 2017, primarily due to higher gross profit.

*(in millions)*

| Asia | Three months ended June 30, 2016 $'s | % of sales | 2015 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $24.9 | 100.0% | $19.3 | 100.0% |
| Cost of sales | 20.5 | 82.4% | 15.8 | 81.9% |
| Gross profit | 4.4 | 17.6% | 3.5 | 18.1% |
| Selling, general and administrative expenses | 2.9 | 11.8% | 3.1 | 16.2% |
| Operating income | $1.5 | 5.8% | $0.4 | 1.9% |

Asia net sales increased $5.6 million, or 29 percent, from the first quarter of fiscal 2016 to the first quarter of fiscal 2017, primarily due to higher sales volume to automotive and off-highway customers in China and incremental sales from our recently-formed joint venture in China, Modine Puxin Thermal Systems (Jiangsu) Co., Ltd., partially offset by a $1.3 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $0.9 million, primarily due to higher sales volume. SG&A expenses decreased $0.2 million, due to a favorable impact of foreign currency exchange rate changes. Operating income increased $1.1 million to $1.5 million during the first quarter of fiscal 2017, primarily due to higher gross profit.

*(in millions)*

| Building HVAC | Three months ended June 30, 2016 $'s | % of sales | 2015 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $39.9 | 100.0% | $41.3 | 100.0% |
| Cost of sales | 29.9 | 74.9% | 29.9 | 72.3% |
| Gross profit | 10.0 | 25.1% | 11.4 | 27.7% |
| Selling, general and administrative expenses | 8.7 | 21.9% | 9.3 | 22.5% |
| Restructuring expenses | 0.4 | 1.0% | - | - |
| Operating income | $0.9 | 2.2% | $2.1 | 5.2% |

18

Building HVAC net sales decreased $1.4 million, or 3 percent, from the first quarter of fiscal 2016 to the first quarter of fiscal 2017, primarily due to a $1.4 million unfavorable impact of foreign currency exchange rate changes and lower cooling product sales to the school market in North America, partially offset by increased ventilation product sales in the U.K. Gross profit decreased $1.4 million and gross margin declined 260 basis points to 25.1 percent, primarily due to recent competitive pricing pressures in the U.K. resulting from the relative values of the British pound and the euro, higher depreciation expense in the current year resulting from replacement assets associated with the Airedale fire, which were not yet in use during the first quarter of the prior year, and production inefficiencies in the U.K. SG&A expenses decreased $0.6 million, primarily due to lower commission costs and a $0.2 million favorable impact of foreign currency exchange rate changes. Restructuring expenses of $0.4 million in the first quarter of fiscal 2017 primarily consisted of employee severance expenses associated with voluntary retirement programs in the U.K. and the U.S. Operating income decreased $1.2 million to $0.9 million during the first quarter of fiscal 2017, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.

#### Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at June 30, 2016 of $64.1 million, and an available borrowing capacity of $198.0 million under lines of credit provided by banks in the United States and abroad. Given our extensive international operations, approximately $50.0 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds would be subject to U.S. tax if repatriated. 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 three months ended June 30, 2016 was $1.6 million, which was a $1.7 million increase from the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital, including lower incentive compensation payments during the first quarter of fiscal 2017 compared with the first quarter of the prior year. Capital expenditures of $14.5 million during the first three months of fiscal 2017 decreased $1.5 million compared with the same period in fiscal 2016.

During fiscal 2016, our Board of Directors approved a $50.0 million share repurchase program, which expires in November 2016. During the first quarter of fiscal 2017, we did not repurchase shares under this program and had approximately $43.0 million of the repurchase authorization remaining at June 30, 2016. Our decision whether and to what extent to repurchase additional shares depends 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”). In the event of an acquisition, our leverage ratio may be temporarily raised for several quarters, per the terms of our debt agreements. 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 June 30, 2016 and expect to remain in compliance through the remainder of fiscal 2017 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, 2016. 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, the continued deterioration in and weak forecasts for the Brazilian economy, and the continuing uncertainty regarding the recent “Brexit” vote in Great Britain;
- The impact of potential increases in commodity prices, including our ability to successfully manage our exposure and/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel) on to customers, as well as the inherent lag in timing of such pass-through arrangements; 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 and/or energy standards and objectives.

#### 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;
- 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 investigation and 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 constant pressures associated with healthcare and insurance costs.

#### Strategic Risks:

- Our ability to identify and execute appropriate growth and diversification 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 effectively 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, 2016. The Company’s market risks have not materially changed since the fiscal 2016 Form 10-K was filed.

## Controls and procedures

As filed, 1,105 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 June 30, 2016.

#### Changes in Internal Control Over Financial Reporting

During the first quarter of fiscal 2017, 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 Aug 3, 2016.
Source: SEC EDGAR, the filing index for accession 0001140361-16-074541. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.