# Modine Manufacturing Co: Form 10-Q for the period ended Dec 31, 2017

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2018-01-31
- Accepted by EDGAR: Jan 31, 2018, 10:41 ET
- Period: 2017-12-31
- Accession: 0001140361-18-004075
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036118004075/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036118004075/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2017-10-01 to 2017-12-31 | $427.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2017-04-01 to 2017-12-31 | $1.28bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2017-10-01 to 2017-12-31 | $85.4m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2017-04-01 to 2017-12-31 | $260.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2017-10-01 to 2017-12-31 | $60.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2017-04-01 to 2017-12-31 | $182.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-10-01 to 2017-12-31 | $13.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2017-04-01 to 2017-12-31 | $65.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-10-01 to 2017-12-31 | $6.3m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2017-04-01 to 2017-12-31 | $19.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-10-01 to 2017-12-31 | $35.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2017-04-01 to 2017-12-31 | $37.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-10-01 to 2017-12-31 | −$28.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2017-04-01 to 2017-12-31 | $4.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-10-01 to 2017-12-31 | −$0.57 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2017-04-01 to 2017-12-31 | $0.09 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-10-01 to 2017-12-31 | −$0.57 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2017-04-01 to 2017-12-31 | $0.09 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-10-01 to 2017-12-31 | 50,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2017-04-01 to 2017-12-31 | 50,600,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2017-04-01 to 2017-12-31 | $105.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2017-04-01 to 2017-12-31 | $55.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2017-12-31 | $47.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-12-31 | $583.6m | us-gaap:AssetsCurrent |
| Total assets | at 2017-12-31 | $1.50bn | us-gaap:Assets |
| Current liabilities | at 2017-12-31 | $469.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-12-31 | $1.03bn | us-gaap:Liabilities |
| Short-term borrowings | at 2017-12-31 | $53.5m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2017-12-31 | $463.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,265 characters.

When we use the terms “Modine,” “we,” “us,” the “Company,” or “our” in this report, we are referring to Modine Manufacturing Company. Our fiscal year ends on March 31 and, accordingly, all references to quarters refer to our fiscal quarters. The quarter ended December 31, 2017 was the third 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). 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. As we have consolidated CIS financial results since the acquisition date, the third quarter of fiscal 2017 included one month of financial results from CIS operations.

In December 2017, the Tax Cuts and Jobs Act (“U.S. tax reform”) was enacted and included numerous changes to existing U.S. tax regulations, including U.S. corporate tax rates, business deductions, and taxes on income in foreign jurisdictions. During the third quarter of fiscal 2018, we recorded provisional charges totaling $35.7 million for certain income tax effects of the U.S. tax reform. See Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information.

#### Third Quarter Highlights

Net sales in the third quarter of fiscal 2018 increased $162.9 million, or 47 percent, from the third quarter of fiscal 2017, primarily due to a $110.2 million increase in sales in our CIS segment, which we owned for one month in the third quarter of the prior year, and higher sales in all of our other operating segments. Gross profit increased $26.4 million, including $14.2 million of additional contribution from our CIS segment. Selling, general and administrative (“SG&A”) expenses increased $10.1 million, primarily due to a $9.0 million increase of SG&A expenses in our CIS segment. Restructuring expenses increased $7.8 million, primarily due to severance expenses related to the recent closure of a manufacturing facility in Austria within the CIS segment. In addition, we recorded a $1.3 million asset impairment charge related to this CIS Austria facility. Operating income during the third quarter of fiscal 2018 increased $7.2 million to $13.9 million. Our net loss of $27.9 million represents a $29.8 million decline compared with the third quarter of the prior year, primarily due to $35.7 million of charges associated with U.S. tax reform, partially offset by the increase in operating income.

#### Year-to-Date Highlights

Net sales in the first nine months of fiscal 2018 increased $521.8 million, or 51 percent, from the same period last year, primarily due to $416.9 million of additional sales from our CIS segment and higher sales in all of our other operating segments. Gross profit increased $90.7 million, including $62.0 million of additional contribution from our CIS segment. SG&A expenses increased $39.1 million, primarily due to a $37.9 million increase in SG&A expenses in our CIS segment. Operating income during the first nine months of fiscal 2018 increased $43.6 million to $65.0 million. Our net earnings of $5.8 million decreased $1.0 million compared with the same period in the prior year, primarily due to $35.7 million of charges associated with U.S. tax reform and higher interest expense, partially offset by the increase in operating income.

#### CONSOLIDATED RESULTS OF OPERATIONS

The following table presents our consolidated financial results on a comparative basis for the three and nine months ended December 31, 2017 and 2016:

*(in millions)*

|  | Three months ended December 31, 2017 $'s | % of sales | 2016 $'s | % of sales | Nine months ended December 31, 2017 $'s | % of sales | 2016 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $512.7 | 100.0% | $349.8 | 100.0% | $1,536.5 | 100.0% | $1,014.7 | 100.0% |
| Cost of sales | 427.3 | 83.3% | 290.8 | 83.1% | 1,276.5 | 83.1% | 845.4 | 83.3% |
| Gross profit | 85.4 | 16.7% | 59.0 | 16.9% | 260.0 | 16.9% | 169.3 | 16.7% |
| Selling, general and administrative expenses | 60.8 | 11.9% | 50.7 | 14.5% | 182.2 | 11.9% | 143.1 | 14.1% |
| Restructuring expenses | 9.4 | 1.8% | 1.6 | 0.5% | 11.5 | 0.7% | 6.0 | 0.6% |
| Impairment charge | 1.3 | 0.3% | - | - | 1.3 | 0.1% | - | - |
| Gain on sale of facility | - | - | - | - | - | - | (1.2) | -0.1% |
| Operating income | 13.9 | 2.7% | 6.7 | 1.9% | 65.0 | 4.2% | 21.4 | 2.1% |
| Interest expense | (6.3) | -1.2% | (4.5) | -1.3% | (19.5) | -1.3% | (10.5) | -1.0% |
| Other expense – net | (0.3) | -0.1% | (1.0) | -0.3% | (2.3) | -0.1% | (2.8) | -0.3% |
| Earnings before income taxes | 7.3 | 1.4% | 1.2 | 0.3% | 43.2 | 2.8% | 8.1 | 0.8% |
| (Provision) benefit for income taxes | (35.2) | -6.9% | 0.7 | 0.2% | (37.4) | -2.4% | (1.3) | -0.1% |
| Net (loss) earnings | $(27.9) | -5.5% | $1.9 | 0.5% | $5.8 | 0.4% | $6.8 | 0.7% |

#### Comparison of Three Months Ended December 31, 2017 and 2016

Third quarter net sales of $512.7 million were $162.9 million, or 47 percent, higher than the third quarter of the prior year, primarily due to $110.2 million of additional sales from our CIS segment, which we owned for one month in the third quarter of the prior year, higher sales in all of our other operating segments, and a $15.9 million favorable impact of foreign currency exchange rate changes.

Third quarter gross profit increased $26.4 million, primarily due to $14.2 million of additional contribution from our CIS segment and higher gross profit in our Building HVAC, Americas, and Asia segments. Third quarter gross profit was favorably impacted by $2.1 million from foreign currency exchange rate changes. Gross margin declined 20 basis points to 16.7 percent, as the benefits from higher sales volume and the absence of a $2.9 million inventory purchase accounting adjustment, which was recorded at Corporate in the prior year, were offset by unfavorable sales mix, higher material costs, and the absence of favorable customer pricing settlements in Europe recorded in the prior year.

SG&A expenses increased $10.1 million from the third quarter of fiscal 2017 to the third quarter of fiscal 2018, primarily due to a $9.0 million increase in SG&A expenses in our CIS segment, a $1.4 million unfavorable impact of foreign currency exchange rate changes, and higher compensation-related expenses, partially offset by lower costs incurred related to the acquisition of Luvata HTS. SG&A expenses, as a percentage of net sales, decreased 260 basis points compared with the third quarter of the prior year.

Restructuring expenses of $9.4 million in the third quarter of fiscal 2018 increased $7.8 million compared with the prior year, primarily due to severance-related expenses in the CIS segment related to the closure of a manufacturing facility in Austria.

During the third quarter of fiscal 2018, we recorded a $1.3 million impairment charge related to the closure of a CIS manufacturing facility in Austria.

Operating income of $13.9 million in the third quarter of fiscal 2018 improved $7.2 million compared with the third quarter of fiscal 2017, primarily due to higher earnings in the Americas, Asia and Building HVAC segments.

Interest expense increased $1.8 million to $6.3 million in the third 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 provision for income taxes was $35.2 million in the third quarter of fiscal 2018, compared with a benefit for income taxes of $0.7 million in the third quarter of fiscal 2017. The $35.9 million change was primarily due to charges totaling $35.7 million in the third quarter of fiscal 2018 related to the recently-enacted U.S. tax reform. In addition, the tax provision in the third quarter of fiscal 2018 included a $2.2 million benefit from a development tax credit in Hungary.

Fiscal 2018 year-to-date net sales of $1,536.5 million were $521.8 million, or 51 percent, higher than the same period last year, primarily due to $416.9 million of additional sales from our CIS segment, higher sales in all of our other segments, and an $18.7 million favorable impact of foreign currency exchange rate changes.

Fiscal 2018 year-to-date gross profit of $260.0 million increased $90.7 million from the same period last year, due primarily to $62.0 million of incremental gross profit in our recently-acquired CIS segment and higher gross profit in our Americas, Asia, and Building HVAC segments. Year-to-date gross profit was favorably impacted by $2.4 million from foreign currency exchange rate changes. Gross margin improved 20 basis points to 16.9 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 $39.1 million from the same period last year, primarily due to a $37.9 million increase in SG&A expenses in our CIS segment, higher compensation-related expenses, and a $1.5 million unfavorable impact of foreign currency exchange rate changes, partially offset by lower costs incurred related to the acquisition of Luvata HTS. SG&A expenses, as a percentage of net sales, decreased 220 basis points compared with the same period last year.

Restructuring expenses of $11.5 million during the first nine months of fiscal 2018 increased $5.5 million compared with the same period last year, primarily due to severance-related expenses in the CIS segment related to the closure of a manufacturing facility in Austria.

During fiscal 2018, we recorded a $1.3 million impairment charge related to the closure of the CIS manufacturing facility in Austria.

During 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 $65.0 million during the first nine months of fiscal 2018 represents a $43.6 million improvement compared with same period last year, primarily due to $14.6 million of incremental operating income contributed by our CIS segment and higher earnings in the Americas, Asia and Building HVAC segments.

Interest expense increased $9.0 million to $19.5 million in the first nine 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 $37.4 million and $1.3 million in the first nine months of fiscal 2018 and 2017, respectively. The $36.1 million increase was primarily due to $35.7 million of charges recorded in the third quarter of fiscal 2018 related to U.S. tax reform and increased operating earnings in the current year, partially offset by tax benefits of $7.9 million from a development tax credit in Hungary and a $1.8 million reduction of unrecognized tax benefits resulting from a lapse in statutes of limitations. We expect the full-year fiscal 2018 benefit for the Hungary development tax credit to total approximately $11.0 million. 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 the fourth quarter of fiscal 2018 or in fiscal 2019. See Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information regarding U.S. tax reform and 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 full period during the three and nine months ended December 31, 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 nine months ended December 31, 2017 and 2016:

*(in millions)*

| Americas | Three months ended December 31, 2017 $'s | % of sales | 2016 $'s | % of sales | Nine months ended December 31, 2017 $'s | % of sales | 2016 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $140.5 | 100.0% | $123.4 | 100.0% | $430.7 | 100.0% | $389.4 | 100.0% |
| Cost of sales | 118.8 | 84.6% | 105.0 | 85.1% | 361.0 | 83.8% | 329.9 | 84.7% |
| Gross profit | 21.7 | 15.4% | 18.4 | 14.9% | 69.7 | 16.2% | 59.5 | 15.3% |
| Selling, general and administrative expenses | 12.7 | 9.0% | 11.3 | 9.2% | 39.3 | 9.1% | 40.1 | 10.3% |
| Restructuring expenses | 0.1 | 0.1% | 1.4 | 1.1% | 1.6 | 0.4% | 5.2 | 1.3% |
| Operating income | $8.9 | 6.3% | $5.7 | 4.6% | $28.8 | 6.7% | $14.2 | 3.6% |

#### Comparison of Three Months Ended December 31, 2017 and 2016

Americas net sales increased $17.1 million, or 14 percent, from the third quarter of fiscal 2017 to the third quarter of fiscal 2018, primarily due to higher sales volume to commercial vehicle, off-highway, and automotive customers. Gross profit increased $3.3 million and gross margin improved 50 basis points, primarily due to higher sales volume and improved production efficiencies, partially offset by unfavorable material costs. SG&A expenses increased $1.4 million, primarily due to a lower recovery of development costs and higher compensation-related expenses. Restructuring expenses decreased $1.3 million in the third quarter of fiscal 2018, primarily due to lower plant consolidation costs. Operating income increased $3.2 million to $8.9 million, primarily due to higher gross profit.

Americas year-to-date net sales increased $41.3 million, or 11 percent, from the same period last year, primarily due to higher sales volume to off-highway and commercial vehicle customers, increased aftermarket sales in Brazil, and a $2.0 million favorable impact of foreign currency exchange rate changes. Gross profit increased $10.2 million and gross margin improved 90 basis points, primarily due to higher sales volume and improved production efficiencies, partially offset by unfavorable material costs. SG&A expenses decreased $0.8 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, partially offset by legal costs incurred for an environmental matter associated with a previously-owned manufacturing facility. Restructuring expenses decreased $3.6 million, primarily due to lower plant consolidation and severance expenses. Operating income increased $14.6 million to $28.8 million, primarily due to higher gross profit and lower restructuring expenses.

*(in millions)*

| Europe | Three months ended December 31, 2017 $'s | % of sales | 2016 $'s | % of sales | Nine months ended December 31, 2017 $'s | % of sales | 2016 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $134.6 | 100.0% | $119.8 | 100.0% | $405.4 | 100.0% | $389.7 | 100.0% |
| Cost of sales | 116.7 | 86.7% | 101.2 | 84.5% | 348.6 | 86.0% | 329.4 | 84.5% |
| Gross profit | 17.9 | 13.3% | 18.6 | 15.5% | 56.8 | 14.0% | 60.3 | 15.5% |
| Selling, general and administrative expenses | 10.5 | 7.8% | 9.9 | 8.2% | 32.3 | 8.0% | 30.8 | 7.9% |
| Restructuring expenses (income) | 1.1 | 0.9% | 0.1 | 0.1% | 1.7 | 0.4% | (0.2) | -0.1% |
| Gain on sale of facility | - | - | - | - | - | - | (1.2) | -0.3% |
| Operating income | $6.3 | 4.6% | $8.6 | 7.2% | $22.8 | 5.6% | $30.9 | 7.9% |

#### Comparison of Three Months Ended December 31, 2017 and 2016

Europe net sales increased $14.8 million, or 12 percent, from the third quarter of fiscal 2017 to the third quarter of fiscal 2018, primarily due to an $11.1 million favorable impact of foreign currency exchange rate changes and higher sales volume to automotive and off-highway customers. Gross profit decreased $0.7 million and gross margin declined 220 basis points to 13.3 percent, primarily due to the absence of favorable customer pricing settlements recorded in the prior year. In addition, gross profit was favorably impacted by $1.4 million from foreign currency exchange rate changes. SG&A expenses increased $0.6 million, primarily due to a $0.9 million unfavorable impact of foreign currency exchange rate changes. Restructuring expenses increased $1.0 million in the third quarter of fiscal 2018, primarily due to higher severance expenses. Operating income of $6.3 million decreased $2.3 million, primarily due to higher restructuring expenses and lower gross profit.

Europe year-to-date net sales increased $15.7 million, or 4 percent, from the same period last year, primarily due to a $14.6 million favorable impact of foreign currency exchange rate changes and higher sales volume to off-highway and automotive customers, partially offset by the planned wind-down of certain commercial vehicle programs. Gross profit decreased $3.5 million and gross margin declined 150 basis points to 14.0 percent, primarily due to unfavorable material costs and the absence of the favorable customer pricing settlements recorded in the prior year, partially offset by improved production efficiencies. In addition, gross profit was favorably impacted by $2.0 million from foreign currency exchange rate changes. SG&A expenses increased $1.5 million, primarily due to a $1.1 million unfavorable impact of foreign currency exchange rate changes and higher compensation-related expenses. Restructuring expenses increased $1.9 million, primarily due to higher severance expenses and equipment transfer costs. During 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 of $22.8 million decreased $8.1 million, primarily due to lower gross profit and higher restructuring and SG&A expenses.

*(in millions)*

| Asia | Three months ended December 31, 2017 $'s | % of sales | 2016 $'s | % of sales | Nine months ended December 31, 2017 $'s | % of sales | 2016 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $42.8 | 100.0% | $28.6 | 100.0% | $117.7 | 100.0% | $78.2 | 100.0% |
| Cost of sales | 34.6 | 81.0% | 23.6 | 82.4% | 95.8 | 81.4% | 65.1 | 83.3% |
| Gross profit | 8.2 | 19.0% | 5.0 | 17.6% | 21.9 | 18.6% | 13.1 | 16.7% |
| Selling, general and administrative expenses | 3.1 | 7.3% | 2.4 | 8.4% | 9.3 | 7.9% | 8.2 | 10.4% |
| Operating income | $5.1 | 11.7% | $2.6 | 9.2% | $12.6 | 10.7% | $4.9 | 6.3% |

25

#### Comparison of Three Months Ended December 31, 2017 and 2016

Asia net sales increased $14.2 million, or 50 percent, from the third quarter of fiscal 2017 to the third quarter of fiscal 2018, primarily due to higher sales volume to off-highway customers in all geographic markets and automotive customers in China and India. Foreign currency exchange rate changes favorably impacted third quarter net sales by $1.5 million. Gross profit increased $3.2 million and gross margin improved 140 basis points to 19.0 percent, primarily due to higher sales volume. SG&A expenses increased by $0.7 million compared with the prior year, yet decreased 110 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses incurred in support of the recent business growth. Operating income of $5.1 million increased $2.5 million, primarily due to higher gross profit.

Asia year-to-date net sales increased $39.5 million, or 51 percent, from the same period last year, primarily due to higher sales volume to off-highway customers in all geographic markets and automotive customers in China and India. Gross profit increased $8.8 million and gross margin improved 190 basis points to 18.6 percent, primarily due to higher sales volume. SG&A expenses increased by $1.1 million compared with the prior year, yet decreased 250 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses. Operating income of $12.6 million increased $7.7 million, primarily due to higher gross profit.

*(in millions)*

| Building HVAC | Three months ended December 31, 2017 $'s | % of sales | 2016 $'s | % of sales | Nine months ended December 31, 2017 $'s | % of sales | 2016 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $56.1 | 100.0% | $47.2 | 100.0% | $147.9 | 100.0% | $132.8 | 100.0% |
| Cost of sales | 37.1 | 66.2% | 31.9 | 67.6% | 102.9 | 69.6% | 95.7 | 72.0% |
| Gross profit | 19.0 | 33.8% | 15.3 | 32.4% | 45.0 | 30.4% | 37.1 | 28.0% |
| Selling, general and administrative expenses | 9.8 | 17.4% | 8.5 | 18.0% | 26.4 | 17.8% | 26.0 | 19.6% |
| Restructuring expenses | - | - | 0.1 | 0.2% | - | - | 0.7 | 0.5% |
| Operating income | $9.2 | 16.5% | $6.7 | 14.2% | $18.6 | 12.6% | $10.4 | 7.8% |

#### Comparison of Three Months Ended December 31, 2017 and 2016

Building HVAC net sales increased $8.9 million, or 19 percent, from the third quarter of fiscal 2017 to the third quarter of fiscal 2018, primarily due to higher ventilation and heating product sales in North America, higher ventilation product sales in the U.K., and a $1.3 million favorable impact of foreign currency exchange rate changes. Gross profit increased $3.7 million and gross margin improved 140 basis points to 33.8 percent, primarily due to higher sales volume, favorable sales mix, and improved production efficiencies in the U.K. SG&A expenses increased $1.3 million, yet decreased 60 basis points as a percentage of sales, primarily due to higher compensation-related expenses, including commission expenses resulting from the increased sales. Operating income of $9.2 million increased $2.5 million, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Building HVAC year-to-date net sales increased $15.1 million, or 11 percent, from the same period last year, primarily due to higher ventilation and heating product sales in North America, partially offset by a $0.9 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $7.9 million and gross margin improved 240 basis points to 30.4 percent, primarily due to higher sales volume. SG&A expenses increased $0.4 million, yet decreased 180 basis points as a percentage of sales. Restructuring expenses decreased $0.7 million due to the absence of severance expenses incurred in the prior year. Operating income of $18.6 million increased $8.2 million, primarily due to higher gross profit.

#### Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at December 31, 2017 of $47.8 million, and an available borrowing capacity of $168.8 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 foreign withholding taxes 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 nine months ended December 31, 2017 was $105.6 million, which was a $70.6 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, lower payments for restructuring expenses and costs associated with the acquisition and integration of Luvata HTS in the current year, and favorable net changes in working capital. Capital expenditures of $55.0 million during the first nine months of fiscal 2018 increased $9.0 million compared with the same period in the prior year, primarily due to capital expenditures by our recently-acquired CIS segment, equipment purchases to expand our manufacturing capacity in China, and tooling and equipment purchases to support new product launches.

#### Debt

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 leverage ratio covenants, the most restrictive of 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”). 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 December 31, 2017, our leverage ratio and interest coverage ratio was 2.5 and 7.9, respectively. We were in compliance with our debt covenants as of December 31, 2017 and expect to remain in compliance during the balance of fiscal 2018 and beyond.

#### Shelf Registration Statement

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.

#### Contractual Obligations

Other than the transition tax liability recorded as a result of U.S. tax reform, as discussed in Note 8 of the Notes to Condensed Consolidated Financial Statements, there have not been any material changes in the Company’s contractual obligations since March 31, 2017, as reported in Item 7. in Part II. of the Company’s Annual Report on Form 10-K.

#### 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 regulatory and/or policy changes, including those related to tax and trade, that have been or 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 continuing economic challenges in some 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 maintain our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) in our target range of 1.5 to 2.5 in an efficient manner;
- Costs arising from the integration of Luvata HTS;
- 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;
- The effects of the recently-enacted U.S. tax reform legislation on our business, some of which are uncertain and may be material; 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, 1,348 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 December 31, 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 third quarter of fiscal 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Jan 31, 2018.
Source: SEC EDGAR, the filing index for accession 0001140361-18-004075. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.