# Modine Manufacturing Co: Form 10-Q for the period ended Sep 30, 2017

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2017-11-01
- Accepted by EDGAR: Nov 1, 2017, 10:54 ET
- Period: 2017-09-30
- Accession: 0001140361-17-040436
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036117040436/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036117040436/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2017-07-01 to 2017-09-30 | $422.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2017-04-01 to 2017-09-30 | $849.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2017-07-01 to 2017-09-30 | $86.1m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2017-04-01 to 2017-09-30 | $174.6m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2017-07-01 to 2017-09-30 | $62.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2017-04-01 to 2017-09-30 | $121.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-07-01 to 2017-09-30 | $23.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-04-01 to 2017-09-30 | $51.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-07-01 to 2017-09-30 | $6.6m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2017-04-01 to 2017-09-30 | $13.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-07-01 to 2017-09-30 | −$500.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-04-01 to 2017-09-30 | $2.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-07-01 to 2017-09-30 | $15.9m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-04-01 to 2017-09-30 | $32.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-07-01 to 2017-09-30 | $0.31 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-04-01 to 2017-09-30 | $0.65 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-07-01 to 2017-09-30 | $0.32 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-04-01 to 2017-09-30 | $0.66 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-07-01 to 2017-09-30 | 50,700,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-04-01 to 2017-09-30 | 50,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2017-04-01 to 2017-09-30 | $71.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2017-04-01 to 2017-09-30 | $36.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2017-09-30 | $50.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-09-30 | $603.4m | us-gaap:AssetsCurrent |
| Total assets | at 2017-09-30 | $1.54bn | us-gaap:Assets |
| Current liabilities | at 2017-09-30 | $481.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-09-30 | $1.05bn | us-gaap:Liabilities |
| Short-term borrowings | at 2017-09-30 | $67.6m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2017-09-30 | $482.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 30,137 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, 2017 was the second quarter of fiscal 2018.

On November 30, 2016, we acquired Luvata Heat Transfer Solutions (“Luvata HTS”) for consideration totaling $415.6 million ($388.2 million, net of cash acquired). Now operating as our Commercial and Industrial Solutions (“CIS”) segment, this business is a leading global supplier of coils, coolers and coatings to the heating, ventilation, air conditioning, and refrigeration industry.

#### Second Quarter Highlights

Net sales in the second quarter of fiscal 2018 increased $190.6 million, or 60 percent, from the second quarter of fiscal 2017, primarily due to $149.2 million of incremental sales from our CIS segment and higher sales in all of our other operating segments. Gross profit increased $38.1 million, including $22.5 million contributed by our CIS segment. Gross margin improved 190 basis points to 17.0 percent, primarily driven by higher sales volume. Selling, general and administrative (“SG&A”) expenses increased $14.0 million, primarily due to $14.4 million of SG&A expenses in our CIS segment. Our net earnings of $16.3 million represent a $20.3 million improvement compared with the second quarter of the prior year.

#### Year-to-Date Highlights

Net sales in the first six months of fiscal 2018 increased $358.9 million, or 54 percent, from the same period last year, primarily due to $306.7 million of incremental sales from our CIS segment and higher sales in our Asia, Americas, and Building HVAC segments. Gross profit increased $64.3 million, including $47.8 million contributed by our CIS segment. Gross margin improved 50 basis points to 17.1 percent, primarily driven by higher sales volume, partially offset by unfavorable material costs. SG&A expenses increased $29.0 million, primarily due to $28.9 million of SG&A expenses in our CIS segment. Our net earnings of $33.7 million represent a $28.8 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, 2017 and 2016:

*(in millions)*

|  | Three months ended September 30, 2017 $'s | % of sales | 2016 $'s | % of sales | Six months ended September 30, 2017 $'s | % of sales | 2016 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $508.3 | 100.0% | $317.7 | 100.0% | $1,023.8 | 100.0% | $664.9 | 100.0% |
| Cost of sales | 422.2 | 83.0% | 269.7 | 84.9% | 849.2 | 82.9% | 554.6 | 83.4% |
| Gross profit | 86.1 | 17.0% | 48.0 | 15.1% | 174.6 | 17.1% | 110.3 | 16.6% |
| Selling, general and administrative expenses | 62.2 | 12.2% | 48.2 | 15.2% | 121.4 | 11.9% | 92.4 | 13.9% |
| Restructuring expenses | 0.4 | 0.1% | 2.1 | 0.7% | 2.1 | 0.2% | 4.4 | 0.7% |
| Gain on sale of facility | - | - | (1.2) | -0.4% | - | - | (1.2) | -0.2% |
| Operating income (loss) | 23.5 | 4.6% | (1.1) | -0.4% | 51.1 | 5.0% | 14.7 | 2.2% |
| Interest expense | (6.6) | -1.3% | (3.0) | -1.0% | (13.2) | -1.3% | (6.0) | -0.9% |
| Other expense – net | (1.1) | -0.2% | (0.9) | -0.3% | (2.0) | -0.2% | (1.8) | -0.3% |
| Earnings (loss) before income taxes | 15.8 | 3.1% | (5.0) | -1.6% | 35.9 | 3.5% | 6.9 | 1.0% |
| Benefit (provision) for income taxes | 0.5 | 0.1% | 1.0 | 0.3% | (2.2) | -0.2% | (2.0) | -0.3% |
| Net earnings (loss) | $16.3 | 3.2% | $(4.0) | -1.3% | $33.7 | 3.3% | $4.9 | 0.7% |

20

#### Comparison of Three Months Ended September 30, 2017 and 2016

Second quarter net sales of $508.3 million were $190.6 million, or 60 percent, higher than the second quarter of the prior year, primarily due to $149.2 million of incremental sales from our CIS segment, higher sales in our Americas, Asia, Europe and Building HVAC segments, and a $7.5 million favorable impact of foreign currency exchange rate changes.

Second quarter gross profit increased $38.1 million and gross margin improved 190 basis points to 17.0 percent, primarily due to higher sales volume and improved production efficiencies, partially offset by unfavorable material costs and incremental depreciation and amortization expense resulting from purchase accounting for Luvata HTS. In addition, gross profit was favorably impacted by $1.1 million from foreign currency exchange rate changes. Many of our customer contracts include material pass-through provisions, on a lag-basis, that allow us to prospectively adjust customer pricing. These provisions aided in alleviating the negative gross margin impact of higher metals costs during the second quarter and we expect this trend to continue as we progress through fiscal 2018.

SG&A expenses increased $14.0 million from the second quarter of fiscal 2017 to the second quarter of fiscal 2018, primarily due to $14.4 million of SG&A expenses in our CIS segment. SG&A expenses, as a percentage of net sales, decreased 300 basis points compared with the second quarter of the prior year. Foreign currency exchange rate changes unfavorably impacted SG&A expenses during the second quarter by $0.6 million.

Restructuring expenses of $0.4 million in the second quarter of fiscal 2018 decreased $1.7 million compared with the prior year, primarily due to lower plant consolidation and severance expenses in the Americas segment.

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 $23.5 million in the second quarter of fiscal 2018 improved $24.6 million compared with the second quarter of fiscal 2017, primarily due to $8.1 million of operating income contributed by our CIS segment and higher gross profit in each of our other segments.

Interest expense increased $3.6 million to $6.6 million in the second quarter of fiscal 2018, primarily due to the debt issued in November 2016 to finance a significant portion of our acquisition of Luvata HTS.

The benefit for income taxes was $0.5 million and $1.0 million in the second quarter of fiscal 2018 and 2017, respectively. The tax benefit in fiscal 2018 included a $2.2 million benefit from a development tax credit in Hungary and a $1.8 million reduction of unrecognized tax benefits associated with a lapse in statutes of limitations.

Fiscal 2018 year-to-date net sales of $1,023.8 million were $358.9 million, or 54 percent, higher than the same period last year, primarily due to $306.7 million of incremental sales from our CIS segment, higher sales in our Asia, Americas and Building HVAC segments, and a $2.8 million favorable impact of foreign currency exchange rate changes.

Fiscal 2018 year-to-date gross profit of $174.6 million increased $64.3 million from the same period last year and gross margin improved 50 basis points to 17.1 percent, primarily due to higher sales volume and improved production efficiencies, partially offset by unfavorable material costs and incremental depreciation and amortization expense resulting from purchase accounting for Luvata HTS.

Fiscal 2018 year-to-date SG&A expenses increased $29.0 million from the same period last year, primarily due to $28.9 million of SG&A expenses in our CIS segment. SG&A expenses, as a percentage of net sales, decreased 200 basis points compared with the same period last year.

Restructuring expenses of $2.1 million during the first six months of fiscal 2018 decreased $2.3 million compared with the same period last year, primarily due to lower plant consolidation and severance expenses in the Americas segment, partially offset by plant transfer costs in the Europe segment during fiscal 2018.

Operating income of $51.1 million during the first six months of fiscal 2018 represents a $36.4 million improvement compared with same period last year, primarily due to $18.9 million of operating income contributed by our CIS segment and higher gross profit in the Americas, Asia and Building HVAC segments.

Interest expense increased $7.2 million to $13.2 million in the first six months of fiscal 2018, primarily due to debt issued to finance a significant portion of our acquisition of Luvata HTS.

The provision for income taxes was $2.2 million and $2.0 million in the first six months of fiscal 2018 and 2017, respectively. The tax provision in fiscal 2018 included a $5.7 million benefit from a development tax credit in Hungary and a $1.8 million benefit, during the second quarter, for a reduction of unrecognized tax benefits resulting from the lapse in statutes of limitations. We expect the full-year benefit for the Hungary development tax credit to total approximately $10.0 million for fiscal 2018. We do not expect the impact of this tax credit to be significant in fiscal 2019. It is possible that we may release the tax valuation allowance (approximately $3.0 million) in a foreign jurisdiction in late fiscal 2018 or in fiscal 2019. See Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information regarding income tax valuation allowances.

#### SEGMENT RESULTS OF OPERATIONS

Since the date we acquired Luvata HTS (November 30, 2016), we have included CIS segment financial results within our consolidated results of operations. As CIS financial results were not included in our consolidated financial statements for the six months ended September 30, 2016, we have not provided separate discussion of our CIS segment below. The contributions of our CIS segment are included within the discussion of our consolidated financial results above. The following is a discussion of our segment results of operations for the three and six months ended September 30, 2017 and 2016:

*(in millions)*

| Americas | Three months ended September 30, 2017 $'s | % of sales | 2016 $'s | % of sales | Six months ended September 30, 2017 $'s | % of sales | 2016 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $141.9 | 100.0% | $126.0 | 100.0% | $290.2 | 100.0% | $266.0 | 100.0% |
| Cost of sales | 120.4 | 84.8% | 110.1 | 87.4% | 242.2 | 83.4% | 224.9 | 84.5% |
| Gross profit | 21.5 | 15.2% | 15.9 | 12.6% | 48.0 | 16.6% | 41.1 | 15.5% |
| Selling, general and administrative expenses | 13.6 | 9.6% | 15.4 | 12.2% | 26.6 | 9.2% | 28.8 | 10.8% |
| Restructuring expenses | 0.1 | 0.1% | 1.6 | 1.3% | 1.5 | 0.5% | 3.8 | 1.4% |
| Operating income (loss) | $7.8 | 5.5% | $(1.1) | -0.9% | $19.9 | 6.9% | $8.5 | 3.2% |

22

#### Comparison of Three Months Ended September 30, 2017 and 2016

Americas net sales increased $15.9 million, or 13 percent, from the second quarter of fiscal 2017 to the second quarter of fiscal 2018, primarily due to higher sales volume to off-highway, commercial vehicle, and automotive customers, increased aftermarket sales in Brazil, and a $0.5 million favorable impact of foreign currency exchange rate changes. Gross profit increased $5.6 million and gross margin improved 260 basis points, primarily due to higher sales volume and improved production efficiencies, partially offset by unfavorable material costs. SG&A expenses decreased $1.8 million, primarily due to the absence of a $1.6 million charge recorded in the prior year related to a legal matter in Brazil, which has since been settled and paid. Restructuring expenses decreased $1.5 million in the second quarter of fiscal 2018, primarily due to lower plant consolidation and severance expenses. Operating income of $7.8 million represents an $8.9 million improvement compared with the second quarter of fiscal 2017, primarily due to higher gross profit and lower SG&A and restructuring expenses.

Americas year-to-date net sales increased $24.2 million, or 9 percent, from the same period last year, primarily due to higher sales volume to off-highway customers, increased sales in Brazil, and a $1.8 million favorable impact of foreign currency exchange rate changes. Gross profit increased $6.9 million and gross margin improved 110 basis points, primarily due to higher sales volume and improved production efficiencies, partially offset by unfavorable material costs. SG&A expenses decreased $2.2 million, primarily due to the absence of the Brazil legal charge that was recorded in fiscal 2017 and ongoing cost-control initiatives. Restructuring expenses decreased $2.3 million, primarily due to lower plant consolidation and severance expenses. Operating income increased $11.4 million to $19.9 million, primarily due to higher gross profit and lower restructuring and SG&A expenses.

*(in millions)*

| Europe | Three months ended September 30, 2017 $'s | % of sales | 2016 $'s | % of sales | Six months ended September 30, 2017 $'s | % of sales | 2016 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $134.5 | 100.0% | $123.9 | 100.0% | $270.8 | 100.0% | $269.9 | 100.0% |
| Cost of sales | 114.9 | 85.5% | 107.5 | 86.8% | 231.9 | 85.6% | 228.2 | 84.6% |
| Gross profit | 19.6 | 14.5% | 16.4 | 13.2% | 38.9 | 14.4% | 41.7 | 15.4% |
| Selling, general and administrative expenses | 10.7 | 7.9% | 10.6 | 8.5% | 21.8 | 8.1% | 20.9 | 7.7% |
| Restructuring expenses (income) | 0.3 | 0.2% | - | - | 0.6 | 0.2% | (0.3) | -0.1% |
| Gain on sale of facility | - | - | (1.2) | -1.0% | - | - | (1.2) | -0.5% |
| Operating income | $8.6 | 6.4% | $7.0 | 5.7% | $16.5 | 6.1% | $22.3 | 8.3% |

#### Comparison of Three Months Ended September 30, 2017 and 2016

Europe net sales increased $10.6 million, or 9 percent, from the second quarter of fiscal 2017 to the second quarter of fiscal 2018, primarily due to a $6.9 million favorable impact of foreign currency exchange rate changes and higher sales volume to automotive and off-highway customers, partially offset by the planned wind-down of certain commercial vehicle programs. Gross profit increased $3.2 million and gross margin improved 130 basis points to 14.5 percent, primarily due to improved production efficiencies and higher sales volume. In addition, gross profit was favorably impacted by $1.0 million from foreign currency exchange rate changes. SG&A expenses remained relatively flat compared with the prior year and decreased 60 basis points as a percentage of sales. Restructuring expenses in the second quarter of fiscal 2018 of $0.3 million consisted primarily of equipment transfer costs. Operating income of $8.6 million increased $1.6 million, primarily due to higher gross profit.

Europe year-to-date net sales increased $0.9 million, or less than 1 percent, from the same period last year, primarily due to higher tooling sales, higher sales volume to off-highway and automotive customers, and a $3.5 million favorable impact of foreign currency exchange rate changes, partially offset by the planned wind-down of certain commercial vehicle programs. Gross profit decreased $2.8 million and gross margin declined 100 basis points to 14.4 percent, primarily due to unfavorable material costs, partially offset by improved production efficiencies. In addition, gross profit was favorably impacted by $0.6 million from foreign currency exchange rate changes. SG&A expenses increased $0.9 million, primarily due to higher compensation-related expenses. Restructuring expenses of $0.6 million in fiscal 2018 consisted primarily of equipment transfer costs. Operating income of $16.5 million decreased $5.8 million, primarily due to lower gross profit and higher SG&A and restructuring expenses.

*(in millions)*

| Asia | Three months ended September 30, 2017 $'s | % of sales | 2016 $'s | % of sales | Six months ended September 30, 2017 $'s | % of sales | 2016 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $39.5 | 100.0% | $24.7 | 100.0% | $74.9 | 100.0% | $49.6 | 100.0% |
| Cost of sales | 32.1 | 81.1% | 21.0 | 85.1% | 61.2 | 81.7% | 41.5 | 83.8% |
| Gross profit | 7.4 | 18.9% | 3.7 | 14.9% | 13.7 | 18.3% | 8.1 | 16.2% |
| Selling, general and administrative expenses | 3.2 | 8.2% | 2.9 | 11.5% | 6.2 | 8.2% | 5.8 | 11.6% |
| Operating income | $4.2 | 10.7% | $0.8 | 3.4% | $7.5 | 10.1% | $2.3 | 4.6% |

#### Comparison of Three Months Ended September 30, 2017 and 2016

Asia net sales increased $14.8 million, or 60 percent, from the second quarter of fiscal 2017 to the second quarter of fiscal 2018, primarily due to higher sales volume to off-highway customers in all of our geographic markets and automotive customers in China and India. Gross profit increased $3.7 million and gross margin improved 400 basis points to 18.9 percent, primarily due to higher sales volume. SG&A expenses increased by $0.3 million compared with the prior year, yet decreased 330 basis points as a percentage of sales. Operating income of $4.2 million increased $3.4 million, primarily due to higher gross profit.

Asia year-to-date net sales increased $25.3 million, or 51 percent, from the same period last year, primarily due to higher sales volume to off-highway customers in all of our geographic markets and automotive customers in China and India. Gross profit increased $5.6 million and gross margin improved 210 basis points to 18.3 percent, primarily due to higher sales volume. SG&A expenses increased by $0.4 million compared with the prior year, yet decreased 340 basis points as a percentage of sales. Operating income of $7.5 million increased $5.2 million, primarily due to higher gross profit.

*(in millions)*

| Building HVAC | Three months ended September 30, 2017 $'s | % of sales | 2016 $'s | % of sales | Six months ended September 30, 2017 $'s | % of sales | 2016 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $48.8 | 100.0% | $45.7 | 100.0% | $91.8 | 100.0% | $85.6 | 100.0% |
| Cost of sales | 33.9 | 69.5% | 33.9 | 74.2% | 65.8 | 71.7% | 63.8 | 74.5% |
| Gross profit | 14.9 | 30.5% | 11.8 | 25.8% | 26.0 | 28.3% | 21.8 | 25.5% |
| Selling, general and administrative expenses | 8.6 | 17.5% | 8.8 | 19.2% | 16.6 | 18.0% | 17.5 | 20.5% |
| Restructuring expenses | - | - | 0.2 | 0.5% | - | - | 0.6 | 0.7% |
| Operating income | $6.3 | 13.0% | $2.8 | 6.1% | $9.4 | 10.3% | $3.7 | 4.3% |

#### Comparison of Three Months Ended September 30, 2017 and 2016

Building HVAC net sales increased $3.1 million, or 7 percent, from the second quarter of fiscal 2017 to the second quarter of fiscal 2018, primarily due to higher school ventilation and heating product sales in North America, partially offset by lower air conditioning product sales in the U.K. Gross profit increased $3.1 million and gross margin improved 470 basis points to 30.5 percent, primarily due to higher sales volume, favorable sales mix, and improved production efficiencies in the U.K. SG&A expenses decreased $0.2 million, or 170 basis points as a percentage of sales, primarily due to lower compensation-related expenses, including the impact of previous headcount reductions. Operating income of $6.3 million increased $3.5 million, primarily due to higher gross profit.

Building HVAC year-to-date net sales increased $6.2 million, or 7 percent, from the same period last year, primarily due to higher school ventilation and heating product sales in North America, partially offset by a $2.2 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $4.2 million and gross margin improved 280 basis points to 28.3 percent, primarily due to higher sales volume. In addition, gross profit was unfavorably impacted by $0.4 million from foreign currency exchange rate changes. SG&A expenses decreased $0.9 million, primarily due to lower compensation-related expenses. Operating income of $9.4 million increased $5.7 million, primarily due to higher gross profit and lower SG&A and restructuring expenses.

#### Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at September 30, 2017 of $50.5 million, and an available borrowing capacity of $154.2 million under lines of credit provided by banks in the United States and abroad. Given our extensive international operations, approximately $46.0 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 may 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, 2017 was $71.1 million, which was a $57.5 million increase compared with the same period in the prior year. This increase in operating cash flow primarily resulted from an increase in operating earnings, including contributions from our CIS segment, and favorable net changes in working capital that were largely attributable to increases in accounts payable resulting from the timing of payments to vendors. Capital expenditures of $36.8 million during the first six months of fiscal 2018 increased $4.8 million compared with the same period in the prior year, primarily due to equipment purchases to expand our manufacturing capacity in China, tooling and equipment purchases to support new product launches, and capital expenditures by our recently-acquired CIS segment.

Our debt agreements require us to maintain compliance with various covenants. The term loans require prepayments, as defined in the credit agreement, in the event our annual excess cash flow exceeds defined levels or in the event of certain asset sales. In addition, 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 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”). As permitted by the credit agreements and in connection with our acquisition of Luvata HTS, the leverage ratio covenant limit is temporarily raised to no more than three and one-half times Adjusted EBITDA for the third quarter of fiscal 2018 through the first quarter of fiscal 2019. 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. At September 30, 2017, our leverage ratio and interest coverage ratio was 2.6 and 7.7, respectively. We were in compliance with our debt covenants as of September 30, 2017 and expect to remain in compliance during the balance of fiscal 2018 and beyond.

We filed a shelf registration statement with the Securities and Exchange Commission, which was declared effective as of June 26, 2017. The shelf registration statement allows us to offer and sell, from time to time, shares of our common stock and certain other equity or debt securities in one or more offerings in amounts, at prices and on terms that we determine at the time of any such offering, with an aggregate initial offering price of up to $200.0 million.

#### 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, 2017. 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 and uncertainty associated with cross-border trade, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China and North America, and the general uncertainties about the impact of potential regulatory and/or policy changes, including those related to tax and trade, that may be implemented in the United States, as well as continuing uncertainty regarding the longer-term implications of “Brexit”;
- 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 integrate the former Luvata HTS operations into Modine, realize cost and revenue synergies in accordance with our expectations, and effectively manage any unanticipated risks that arise, while also maintaining stability within the acquired business and appropriate focus on the rest of Modine’s business;
- The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, 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 and overall service pressures from customers, particularly in the face of macro-economic instability;
- Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims;
- 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 base with appropriately skilled and stable labor, 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;
- Costs and other effects of the investigation and remediation of environmental contamination; particularly when related to the actions or inactions of others and/or facilities over which we have no control;
- 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;
- The constant and increasing pressures associated with healthcare and associated insurance costs; and
- Costs and other effects of unanticipated litigation, claims, or other obligations.

#### Strategic Risks:

- Our ability to successfully take advantage of our increased presence in the “industrial” markets, with our Commercial and Industrial Solutions and Building HVAC businesses, while maintaining appropriate focus on the market opportunities presented by our vehicular business; and
- Our ability to identify and execute additional growth and diversification opportunities 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 an unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
- The impact of potential increases in interest rates, particularly in LIBOR and EURIBOR in relation to our variable-rate debt obligations;
- Our ability to bring our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) back into our target range of 1.5 to 2.5 in an efficient manner following our acquisition of Luvata HTS;
- Costs arising from the integration of Luvata HTS and the timing and impact of potential purchase accounting adjustments;
- The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, and British pound, 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, 2017. The Company’s market risks have not materially changed since the fiscal 2017 Form 10-K was filed.

## Controls and procedures

As filed, 1,350 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 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, 2017.

#### Changes in Internal Control Over Financial Reporting

As part of its post-closing integration activities for the Luvata HTS acquisition, the Company is engaged in assessing, refining and harmonizing the internal controls and processes of the acquired business with those of the Company. This customary integration-related process has resulted in a change in the Company’s internal control over financial reporting during the second quarter of fiscal 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Nov 1, 2017.
Source: SEC EDGAR, the filing index for accession 0001140361-17-040436. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.