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

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2016-11-02
- Accepted by EDGAR: Nov 2, 2016, 10:42 ET
- Period: 2016-09-30
- Accession: 0001140361-16-084453
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036116084453/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036116084453/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-07-01 to 2016-09-30 | $317.7m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2016-04-01 to 2016-09-30 | $664.9m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-07-01 to 2016-09-30 | $270.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2016-04-01 to 2016-09-30 | $555.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2016-07-01 to 2016-09-30 | $47.7m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2016-04-01 to 2016-09-30 | $109.7m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2016-07-01 to 2016-09-30 | $48.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2016-04-01 to 2016-09-30 | $93.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-07-01 to 2016-09-30 | −$1.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2016-04-01 to 2016-09-30 | $13.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-07-01 to 2016-09-30 | $3.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2016-04-01 to 2016-09-30 | $6.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-07-01 to 2016-09-30 | −$1.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2016-04-01 to 2016-09-30 | $2.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-07-01 to 2016-09-30 | −$4.1m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2016-04-01 to 2016-09-30 | $4.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-07-01 to 2016-09-30 | −$0.09 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2016-04-01 to 2016-09-30 | $0.09 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-07-01 to 2016-09-30 | −$0.09 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2016-04-01 to 2016-09-30 | $0.09 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-07-01 to 2016-09-30 | 47,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2016-04-01 to 2016-09-30 | 47,300,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 6 months, 2016-04-01 to 2016-09-30 | $32.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-09-30 | $63.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-09-30 | $402.1m | us-gaap:AssetsCurrent |
| Total assets | at 2016-09-30 | $912.0m | us-gaap:Assets |
| Current liabilities | at 2016-09-30 | $272.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-09-30 | $523.1m | us-gaap:Liabilities |
| Short-term borrowings | at 2016-09-30 | $37.3m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2016-09-30 | $381.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 30,963 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, 2016 was the second quarter of fiscal 2017.

In September 2016, we entered into a definitive agreement to acquire Luvata Heat Transfer Solutions (“Luvata HTS”) for total consideration of approximately $420.0 million. Luvata HTS is a leading global supplier of coils and coatings to the heating, ventilation, air conditioning, and refrigeration (“HVAC&R”) industry, with more than $500.0 million of net sales in 2015. Our pending acquisition of Luvata HTS addresses both our “Diversify” and “Grow” commitments of our transformational Strengthen, Diversify and Grow strategy launched in fiscal 2016. The acquisition of Luvata HTS will increase our industrial business portfolio, broaden our customer base, reduce cyclical exposure, and expand our margin and growth profile. We expect to complete this acquisition during the third quarter of fiscal 2017, subject to customary closing conditions.

*Second Quarter Highlights:* Net sales in the second quarter of fiscal 2017 decreased $16.3 million, or 5 percent, from the second quarter of fiscal 2016, primarily due to lower sales volume to commercial vehicle and off-highway customers, partially offset by higher sales volume to automotive customers. Our gross margin and selling, general and administrative expenses (“SG&A”), as compared with the second quarter of fiscal 2016, were favorably impacted by a large pension settlement loss in the prior year. During the second quarter of fiscal 2016, we offered a voluntary lump-sum payout program to certain eligible former employees participating in our U.S. pension plans (see Note 3 of the Notes to Condensed Consolidated Financial Statements for additional information). As a result of this program, we recorded a $39.2 million non-cash pension settlement loss in the second quarter of the prior year, which we recorded to cost of sales ($8.3 million) and SG&A expenses ($30.9 million). Our net loss of $4.0 million represents an $18.5 million improvement compared with the same period in fiscal 2016, primarily due to the absence of the pension settlement loss of $24.0 million, net of income taxes.

*Year-to-Date Highlights:* Net sales in the first six months of fiscal 2017 decreased $15.2 million, or 2 percent, from the same period last year, primarily due to lower sales volume to commercial vehicle and off-highway customers, partially offset by higher volume to automotive customers. Gross profit increased $7.0 million and our gross margin increased to 15.0 percent, primarily due to the absence of the pension settlement loss recognized in the prior year. SG&A expenses decreased $26.3 million, primarily due to the absence of the pension settlement loss in the prior year. Our year-to-date net earnings of $4.9 million represent a $21.9 million improvement compared with the same period in the prior year.

#### CONSOLIDATED RESULTS OF OPERATIONS

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

*(in millions)*

|  | Three months ended September 30, 2016 $'s | % of sales | 2015 $'s | % of sales | Six months ended September 30, 2016 $'s | % of sales | 2015 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $317.7 | 100.0% | $334.0 | 100.0% | $664.9 | 100.0% | $680.1 | 100.0% |
| Cost of sales | 270.0 | 85.0% | 288.3 | 86.3% | 555.2 | 83.5% | 577.4 | 84.9% |
| Gross profit | 47.7 | 15.0% | 45.7 | 13.7% | 109.7 | 16.5% | 102.7 | 15.1% |
| Selling, general and administrative expenses | 48.7 | 15.3% | 76.8 | 23.0% | 93.3 | 14.0% | 119.6 | 17.6% |
| Restructuring expenses | 2.1 | 0.7% | 1.0 | 0.3% | 4.4 | 0.7% | 3.6 | 0.5% |
| Gain on sale of facility | (1.2) | -0.4% | - | - | (1.2) | -0.2% | - | - |
| Operating (loss) income | (1.9) | -0.6% | (32.1) | -9.6% | 13.2 | 2.0% | (20.5) | -3.0% |
| Interest expense | (3.0) | -1.0% | (2.7) | -0.8% | (6.0) | -0.9% | (5.5) | -0.8% |
| Other expense – net | (0.1) | - | (0.1) | - | (0.3) | -0.1% | (0.1) | - |
| (Loss) earnings before income taxes | (5.0) | -1.6% | (34.9) | -10.4% | 6.9 | 1.0% | (26.1) | -3.8% |
| Benefit (provision) for income taxes | 1.0 | 0.3% | 12.4 | 3.7% | (2.0) | -0.3% | 9.1 | 1.3% |
| Net (loss) earnings | $(4.0) | -1.3% | $(22.5) | -6.7% | $4.9 | 0.7% | $(17.0) | -2.5% |

#### Comparison of Three Months Ended September 30, 2016 and 2015

Second quarter net sales of $317.7 million were $16.3 million, or 5 percent, lower than the second quarter of the prior year, primarily due to lower sales in our Americas and Europe segments and a $2.6 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in our Asia segment.

Second quarter gross profit increased $2.0 million and gross margin improved 130 basis points to 15.0 percent. These increases were primarily due to the absence of an $8.3 million pension settlement loss recognized in the prior year and cost savings resulting from procurement initiatives, partially offset by lower sales volume and temporary production inefficiencies largely related to plant consolidation activities and product launches.

SG&A expenses decreased $28.1 million from the second quarter of fiscal 2016 to the second quarter of fiscal 2017, primarily due to the absence of a $30.9 million pension settlement loss recognized in the prior year, partially offset by a $1.6 million charge related to a legal matter in Brazil and $3.0 million of costs incurred in connection with our pending acquisition of Luvata HTS, which consisted principally of third-party legal and due diligence costs.

Restructuring expenses increased $1.1 million to $2.1 million in the second quarter of fiscal 2017, primarily due to equipment transfer costs related to plant consolidation activities in the Americas segment and severance expenses associated with targeted headcount reductions at several locations.

During the second quarter of fiscal 2017, we sold a manufacturing facility within our Europe segment for cash proceeds of $4.3 million and recognized a $1.2 million gain as a result.

The operating loss of $1.9 million in the second quarter of fiscal 2017 represents a $30.2 million improvement from an operating loss of $32.1 million in the second quarter of fiscal 2016. This improvement was primarily due to the absence of the $39.2 million pension settlement loss in the second quarter of fiscal 2016, partially offset by the impact of lower sales volume and acquisition-related costs.

The benefit for income taxes was $1.0 million and $12.4 million in the second quarter of fiscal 2017 and 2016, respectively. The $11.4 million decrease was primarily due to a $15.2 million income tax benefit related to the pension settlement loss in the prior year and lower operating earnings.

Fiscal 2017 year-to-date net sales of $664.9 million were $15.2 million, or 2 percent, lower than the same period last year, primarily due to lower sales in our Americas segment and a $4.2 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in our Asia and Europe segments.

Fiscal 2017 year-to-date gross profit of $109.7 million increased $7.0 million from the same period last year and gross margin improved 140 basis points to 16.5 percent. These increases were primarily due to the absence of an $8.3 million pension settlement loss recognized in the prior year and cost savings resulting from procurement initiatives, partially offset by temporary production inefficiencies largely related to plant consolidation activities and product launches.

Fiscal 2017 year-to-date SG&A expenses decreased $26.3 million from the same period last year. The decrease was primarily due to the absence of a $30.9 million pension settlement loss recognized in the prior year, partially offset by $4.4 million of costs incurred in connection with our pending acquisition of Luvata HTS.

Restructuring expenses increased $0.8 million, primarily due to equipment transfer costs related to plant consolidation activities in the Americas segment and severance expenses.

During the second quarter of fiscal 2017, we sold a manufacturing facility within our Europe segment for cash proceeds of $4.3 million and recognized a $1.2 million gain as a result.

Operating income of $13.2 million during the first six months of fiscal 2017 represents a $33.7 million improvement from an operating loss of $20.5 million in the same period last year, primarily due to the absence of the $39.2 million pension settlement loss recognized in the prior year, partially offset by $4.4 million of acquisition-related costs.

The provision for income taxes was $2.0 million during the first six months of fiscal 2017, compared with a benefit for income taxes of $9.1 million in the prior year. The $11.1 million change was primarily due to a $15.2 million income tax benefit related to the pension settlement loss in the prior year and a decrease in operating earnings. It is possible that approximately $6.0 million of the valuation allowance against our deferred tax assets in a foreign jurisdiction could be released in the second half of fiscal 2017 or in fiscal 2018. See Note 7 of the Notes to Condensed Consolidated Financial Statements for additional information.

#### SEGMENT RESULTS OF OPERATIONS

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

*(in millions)*

| Americas | Three months ended September 30, 2016 $'s | % of sales | 2015 $'s | % of sales | Six months ended September 30, 2016 $'s | % of sales | 2015 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $126.0 | 100.0% | $144.2 | 100.0% | $266.0 | 100.0% | $303.3 | 100.0% |
| Cost of sales | 110.2 | 87.4% | 120.8 | 83.7% | 225.1 | 84.6% | 253.2 | 83.5% |
| Gross profit | 15.8 | 12.6% | 23.4 | 16.3% | 40.9 | 15.4% | 50.1 | 16.5% |
| Selling, general and administrative expenses | 15.6 | 12.4% | 14.7 | 10.2% | 29.2 | 11.0% | 29.4 | 9.7% |
| Restructuring expenses | 1.6 | 1.3% | 0.9 | 0.7% | 3.8 | 1.4% | 3.6 | 1.2% |
| Operating (loss) income | $(1.4) | -1.1% | $7.8 | 5.4% | $7.9 | 3.0% | $17.1 | 5.6% |

19

#### Comparison of Three Months Ended September 30, 2016 and 2015

Americas net sales decreased $18.2 million, or 13 percent, from the second quarter of fiscal 2016 to the second quarter of fiscal 2017. 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 in Brazil also declined during the second quarter of fiscal 2017, as economic conditions remained weak. These sales declines were partially offset by a $1.2 million favorable impact of foreign currency exchange rate changes. Gross profit decreased $7.6 million and gross margin decreased 370 basis points to 12.6 percent. These decreases were primarily due to lower sales volume and temporary production inefficiencies largely related to plant consolidation activities and product launches, partially offset by lower material costs and cost savings resulting from procurement initiatives. SG&A expenses increased $0.9 million, primarily due to a $1.6 million charge related to a legal matter in Brazil (see Note 14 of the Notes to Condensed Consolidated Financial Statements for more information), partially offset by a higher recovery of development costs. Restructuring expenses in the second quarter of fiscal 2017 of $1.6 million consisted primarily of equipment transfer costs related to plant consolidation activities in North America and severance expenses. The operating loss of $1.4 million represents a $9.2 million decline from the prior year operating income of $7.8 million and was primarily due to lower gross profit.

Americas year-to-date net sales decreased $37.3 million, or 12 percent, from the same period last year. Sales in North America decreased $33.2 million, primarily due to lower sales volume to commercial vehicle and off-highway customers, partially offset by higher sales volume to automotive customers. Sales in Brazil also declined, as economic conditions in Brazil remained weak. Gross profit decreased $9.2 million and gross margin decreased 110 basis points to 15.4 percent. These decreases were primarily due to lower sales volume and temporary production inefficiencies, partially offset by lower material costs and cost savings resulting from procurement initiatives. SG&A expenses decreased $0.2 million, primarily due to a higher recovery of development costs and lower compensation-related expenses, partially offset by expenses related to the legal matter in Brazil. Restructuring expenses of $3.8 million in fiscal 2017 consisted primarily of equipment transfer costs related to the plant consolidation activities and severance expenses. Operating income decreased $9.2 million to $7.9 million, primarily due to lower gross profit.

*(in millions)*

| Europe | Three months ended September 30, 2016 $'s | % of sales | 2015 $'s | % of sales | Six months ended September 30, 2016 $'s | % of sales | 2015 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $123.9 | 100.0% | $127.7 | 100.0% | $269.9 | 100.0% | $258.9 | 100.0% |
| Cost of sales | 107.7 | 86.9% | 113.0 | 88.5% | 228.6 | 84.7% | 229.1 | 88.5% |
| Gross profit | 16.2 | 13.1% | 14.7 | 11.5% | 41.3 | 15.3% | 29.8 | 11.5% |
| Selling, general and administrative expenses | 10.7 | 8.7% | 9.6 | 7.5% | 21.1 | 7.8% | 19.1 | 7.4% |
| Restructuring expenses (income) | - | - | 0.1 | - | (0.3) | -0.1% | - | - |
| Gain on sale of facility | (1.2) | -1.0% | - | - | (1.2) | -0.5% | - | - |
| Operating income | $6.7 | 5.4% | $5.0 | 4.0% | $21.7 | 8.1% | $10.7 | 4.1% |

#### Comparison of Three Months Ended September 30, 2016 and 2015

Europe net sales decreased $3.8 million, or 3 percent, from the second quarter of fiscal 2016 to the second quarter of fiscal 2017, primarily due to the planned wind down of certain automotive programs and lower sales volume to off-highway customers. Gross profit increased $1.5 million and gross margin increased 160 basis points to 13.1 percent, primarily due to cost savings resulting from procurement initiatives and favorable sales mix. SG&A expenses increased $1.1 million, primarily due to a lower recovery of development costs and higher compensation-related expenses. During the second quarter of fiscal 2017, we sold a manufacturing facility for cash proceeds of $4.3 million and recorded a $1.2 million gain as a result. Operating income increased $1.7 million to $6.7 million during the second quarter of fiscal 2017, primarily due to higher gross profit and the gain on sale of facility, partially offset by higher SG&A expenses.

Europe year-to-date net sales increased $11.0 million, or 4 percent, from the same period last year, primarily due to higher sales volume to automotive and commercial vehicle customers and a $3.2 million favorable impact of foreign currency exchange rate changes, partially offset by the planned wind down of certain programs. Gross profit increased $11.5 million and gross margin improved 380 basis points to 15.3 percent, primarily due to higher sales volume, cost savings resulting from procurement initiatives, and favorable sales mix. SG&A expenses increased $2.0 million, primarily due to higher compensation-related expenses. Operating income increased $11.0 million to $21.7 million, primarily due to higher gross profit.

*(in millions)*

| Asia | Three months ended September 30, 2016 $'s | % of sales | 2015 $'s | % of sales | Six months ended September 30, 2016 $'s | % of sales | 2015 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $24.7 | 100.0% | $18.1 | 100.0% | $49.6 | 100.0% | $37.4 | 100.0% |
| Cost of sales | 21.0 | 85.1% | 16.0 | 88.2% | 41.5 | 83.8% | 31.8 | 84.9% |
| Gross profit | 3.7 | 14.9% | 2.1 | 11.8% | 8.1 | 16.2% | 5.6 | 15.1% |
| Selling, general and administrative expenses | 2.9 | 11.5% | 3.3 | 18.5% | 5.8 | 11.6% | 6.4 | 17.3% |
| Operating income (loss) | $0.8 | 3.4% | $(1.2) | -6.7% | $2.3 | 4.6% | $(0.8) | -2.2% |

#### Comparison of Three Months Ended September 30, 2016 and 2015

Asia net sales increased $6.6 million, or 37 percent, from the second quarter of fiscal 2016 to the second 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 $0.8 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $1.6 million and gross margin increased 310 basis points to 14.9 percent, primarily due to higher sales volume. SG&A expenses decreased $0.4 million, primarily due to lower compensation-related expenses. Operating income of $0.8 million represents a $2.0 million improvement compared with the second quarter of fiscal 2016 and was primarily due to higher gross profit.

Asia year-to-date net sales increased $12.2 million, or 33 percent, from the same period last year, 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, partially offset by a $2.1 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $2.5 million and gross margin improved 110 basis points to 16.2 percent, primarily due to higher sales volume. SG&A expenses decreased $0.6 million, primarily due to lower compensation-related expenses. Operating income of $2.3 million represents a $3.1 million improvement compared with the same period in fiscal 2016 and was primarily due to higher gross profit.

*(in millions)*

| Building HVAC | Three months ended September 30, 2016 $'s | % of sales | 2015 $'s | % of sales | Six months ended September 30, 2016 $'s | % of sales | 2015 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $45.7 | 100.0% | $48.8 | 100.0% | $85.6 | 100.0% | $90.1 | 100.0% |
| Cost of sales | 33.9 | 74.2% | 34.2 | 70.1% | 63.8 | 74.5% | 64.1 | 71.1% |
| Gross profit | 11.8 | 25.8% | 14.6 | 29.9% | 21.8 | 25.5% | 26.0 | 28.9% |
| Selling, general and administrative expenses | 8.9 | 19.3% | 10.7 | 22.0% | 17.6 | 20.6% | 20.0 | 22.2% |
| Restructuring expenses | 0.2 | 0.5% | - | - | 0.6 | 0.7% | - | - |
| Operating income | $2.7 | 6.0% | $3.9 | 7.9% | $3.6 | 4.2% | $6.0 | 6.7% |

#### Comparison of Three Months Ended September 30, 2016 and 2015

Building HVAC net sales decreased $3.1 million, or 6 percent, from the second quarter of fiscal 2016 to the second quarter of fiscal 2017, primarily due to a $3.4 million unfavorable impact of foreign currency exchange rate changes and lower heating and ventilation product sales in North America, partially offset by increased air conditioning and ventilation product sales in the U.K. Gross profit decreased $2.8 million and gross margin declined 410 basis points to 25.8 percent, primarily due to unfavorable sales mix, production inefficiencies in the U.K., and higher depreciation expense in the current year resulting from replacement assets associated with the Airedale fire, which were not yet in use during the second quarter of the prior year. In addition, gross profit was unfavorably impacted by $0.4 million from foreign currency exchange rate changes. SG&A expenses decreased $1.8 million, primarily due to lower commission costs and a $0.5 million favorable impact of foreign currency exchange rate changes. Restructuring expenses of $0.2 million in the second quarter of fiscal 2017 consisted of employee severance expenses. Operating income decreased $1.2 million during the second quarter of fiscal 2017, primarily due to lower gross profit, partially offset by lower SG&A expenses.

Building HVAC year-to-date net sales decreased $4.5 million, or 5 percent, from the same period last year, primarily due to a $4.8 million unfavorable impact of foreign currency exchange rate changes and lower ventilation and heating product sales in North America, partially offset by increased ventilation and air conditioning product sales in the U.K. Gross profit decreased $4.2 million and gross margin declined 340 basis points to 25.5 percent, primarily due to unfavorable sales mix, higher depreciation expense in the current year resulting from replacement assets associated with the Airedale fire, which were not yet in use during the prior year, and production inefficiencies in the U.K. In addition, gross profit was unfavorably impacted by $0.7 million from foreign currency exchange rate changes. SG&A expenses decreased $2.4 million, primarily due to lower commission costs and a $0.8 million favorable impact of foreign currency exchange rate changes. Restructuring expenses of $0.6 million consisted of employee severance expenses. Operating income of $3.6 million decreased $2.4 million compared with the prior year, primarily due to lower gross profit, 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 September 30, 2016 of $63.0 million, and an available borrowing capacity of $201.0 million under lines of credit provided by banks in the United States and abroad. Given our extensive international operations, approximately $60.0 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 six months ended September 30, 2016 was $13.6 million, which was a $16.2 million decrease compared with the same period in the prior year. This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, payments for restructuring and acquisition-related costs, and lower operating earnings in the current year, considering the pension settlement in the prior year resulted in a non-cash loss. Capital expenditures of $32.0 million during the first six months of fiscal 2017 increased $1.8 million compared with the same period in fiscal 2016.

#### Luvata HTS Acquisition

In September 2016, we entered into a definitive agreement to acquire Luvata HTS for consideration totaling approximately $420.0 million, including 2.2 million shares of Modine common stock. We expect to complete this acquisition during the third quarter of fiscal 2017, subject to customary closing conditions. We are planning to finance the cash consideration through a combination of new long-term debt, cash on hand, and borrowings under our revolving credit facility.

#### 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 regards to our pending acquisition of Luvata HTS, our leverage ratio may be temporarily raised for several quarters, based on 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 September 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 longer-term implications of the “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:

- Our ability to successfully close the Luvata HTS acquisition and efficiently integrate the Luvata HTS operations into Modine in accordance with our expectations;
- 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 consistently structure our operations in order to develop and maintain a competitive cost basis with appropriately skilled and stable labor pools, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;
- 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, not only for Modine’s current operations, but also for the to-be-acquired Luvata HTS operations;
- 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 and increasing pressures associated with healthcare and insurance costs.

#### Strategic Risks:

- Our ability to successfully increase our presence in and focus on the “industrial” markets, with our Building HVAC and Coils businesses, without shifting attention away from the powertrain and engine-cooling markets, where we enjoy and desire to preserve leading positions; and
- Our ability to identify and execute additional growth and diversification opportunities following the Luvata HTS integration in order to position us for long-term success.

#### Financial Risks:

- Our ability to fund our global liquidity requirements efficiently for Modine’s current operations, 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;
- Our ability to bring our leverage ratio (net debt/Adjusted EBITDA) back into our target range of 1.5-2.5x in an efficient manner following our acquisition of Luvata HTS;
- 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, 1,111 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, 2016.

#### Changes in Internal Control Over Financial Reporting

During the second 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 Nov 2, 2016.
Source: SEC EDGAR, the filing index for accession 0001140361-16-084453. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.