# Modine Manufacturing Co: Form 10-Q for the period ended Dec 31, 2018

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2019-02-01
- Accepted by EDGAR: Feb 1, 2019, 11:02 ET
- Period: 2018-12-31
- Accession: 0001140361-19-002195
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036119002195/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036119002195/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-10-01 to 2018-12-31 | $541.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2018-04-01 to 2018-12-31 | $1.66bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2018-10-01 to 2018-12-31 | $449.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2018-04-01 to 2018-12-31 | $1.38bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2018-10-01 to 2018-12-31 | $91.7m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-04-01 to 2018-12-31 | $273.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-10-01 to 2018-12-31 | $57.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-04-01 to 2018-12-31 | $179.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-10-01 to 2018-12-31 | $33.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-04-01 to 2018-12-31 | $91.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-10-01 to 2018-12-31 | $6.2m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-04-01 to 2018-12-31 | $18.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-10-01 to 2018-12-31 | $8.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-04-01 to 2018-12-31 | −$9.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-10-01 to 2018-12-31 | $18.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-04-01 to 2018-12-31 | $78.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-10-01 to 2018-12-31 | $0.35 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-04-01 to 2018-12-31 | $1.53 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-10-01 to 2018-12-31 | $0.36 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-04-01 to 2018-12-31 | $1.55 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-10-01 to 2018-12-31 | 51,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-04-01 to 2018-12-31 | 51,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-04-01 to 2018-12-31 | $67.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-04-01 to 2018-12-31 | $58.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2018-12-31 | $30.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-12-31 | $614.9m | us-gaap:AssetsCurrent |
| Total assets | at 2018-12-31 | $1.51bn | us-gaap:Assets |
| Current liabilities | at 2018-12-31 | $474.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-12-31 | $972.0m | us-gaap:Liabilities |
| Short-term borrowings | at 2018-12-31 | $67.5m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2018-12-31 | $533.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,800 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, 2018 was the third quarter of fiscal 2019.

#### Third Quarter Highlights

Net sales in the third quarter of fiscal 2019 increased $28.3 million, or 6 percent, from the third quarter of fiscal 2018, primarily due to higher sales in all of our operating segments. Gross profit increased $6.3 million and gross margin improved 20 basis points to 16.9 percent, as the benefit from higher sales volume was partially offset by unfavorable material costs, including the direct and indirect impacts of tariffs, and temporary operating inefficiencies largely resulting from increased volumes and new program launches at certain manufacturing facilities. Selling, general and administrative (“SG&A”) expenses decreased $3.6 million, or 130 basis points as a percentage of sales. Restructuring expenses decreased $8.9 million, primarily due the closure of a manufacturing facility during the third quarter of the prior year. Operating income during the third quarter of fiscal 2019 increased $19.7 million to $33.6 million, primarily due to higher gross profit and lower restructuring and SG&A expenses. In addition, our income tax provision decreased $26.6 million in the third quarter of fiscal 2019 compared with the prior-year period, primarily due to charges associated with the U.S. Tax Cuts and Jobs Act (the “Tax Act”) during the third quarter of fiscal 2018. As a result of the higher operating income and lower income tax provision, our net earnings of $18.3 million in the third quarter improved $46.2 million compared with the net loss of $27.9 million in the third quarter of the prior year.

#### Year-to-date Highlights

Net sales in the first nine months of fiscal 2019 increased $119.5 million, or 8 percent, from the same period in the prior year, primarily due to higher sales in all of our operating segments. Gross profit increased $13.9 million, yet gross margin declined 40 basis points to 16.5 percent, as the benefit from higher sales volume was more than offset by unfavorable material costs and temporary operating inefficiencies largely related to increased volumes and new program launches. SG&A expenses decreased $2.3 million, or 100 basis points as a percentage of sales, and restructuring expenses decreased $10.8 million, primarily due to the closure of a manufacturing facility during fiscal 2018. Operating income during the first nine months of fiscal 2019 increased $26.2 million to $91.2 million, primarily due to the higher gross profit and lower restructuring expenses. The impacts of our accounting for the Tax Act significantly impacted our $9.3 million income tax benefit in the first nine months of fiscal 2019, as compared with an income tax provision of $37.4 million for the same period in the prior year. As a result of the higher operating income and the impact of income taxes, our net earnings of $79.5 million in the first nine months of fiscal 2019 improved $73.7 million compared with the same period in the prior year.

#### Recent Event

On January 29, 2019, we announced that we are evaluating strategic alternatives for our automotive business within our Vehicular Thermal Solutions (“VTS”) segment. Our primary objectives include optimizing the VTS segment’s future profitability profile and prioritizing future capital investments in our other businesses. We expect to complete our evaluation over the next several quarters to determine what actions we may take as a result, if any.

#### 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, 2018 and 2017:

*(in millions)*

|  | Three months ended December 31, 2018 $'s | % of sales | 2017 $'s | % of sales | Nine months ended December 31, 2018 $'s | % of sales | 2017 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $541.0 | 100.0% | $512.7 | 100.0% | $1,656.0 | 100.0% | $1,536.5 | 100.0% |
| Cost of sales | 449.3 | 83.1% | 427.3 | 83.3% | 1,382.1 | 83.5% | 1,276.5 | 83.1% |
| Gross profit | 91.7 | 16.9% | 85.4 | 16.7% | 273.9 | 16.5% | 260.0 | 16.9% |
| Selling, general and administrative expenses | 57.2 | 10.6% | 60.8 | 11.9% | 179.9 | 10.9% | 182.2 | 11.9% |
| Restructuring expenses | 0.5 | 0.1% | 9.4 | 1.8% | 0.7 | - | 11.5 | 0.7% |
| Impairment charges | 0.4 | 0.1% | 1.3 | 0.3% | 0.4 | - | 1.3 | 0.1% |
| Loss on sale of assets | - | - | - | - | 1.7 | 0.1% | - | - |
| Operating income | 33.6 | 6.2% | 13.9 | 2.7% | 91.2 | 5.5% | 65.0 | 4.2% |
| Interest expense | (6.2) | -1.1% | (6.3) | -1.2% | (18.9) | -1.1% | (19.5) | -1.3% |
| Other expense – net | (0.5) | -0.1% | (0.3) | -0.1% | (2.1) | -0.1% | (2.3) | -0.1% |
| Earnings before income taxes | 26.9 | 5.0% | 7.3 | 1.4% | 70.2 | 4.2% | 43.2 | 2.8% |
| (Provision) benefit for income taxes | (8.6) | -1.6% | (35.2) | -6.9% | 9.3 | 0.6% | (37.4) | -2.4% |
| Net earnings (loss) | $18.3 | 3.4% | $(27.9) | -5.5% | $79.5 | 4.8% | $5.8 | 0.4% |

#### Comparison of Three Months Ended December 31, 2018 and 2017

Third quarter net sales of $541.0 million were $28.3 million, or 6 percent, higher than the third quarter of the prior year, primarily due to higher sales in all of our operating segments, partially offset by a $12.8 million unfavorable impact of foreign currency exchange rate changes.

Third quarter gross profit increased $6.3 million and gross margin improved 20 basis points to 16.9 percent. The improvement in gross margin was primarily due to higher sales volume and was partially offset by unfavorable material costs, including the direct and indirect impacts of tariffs, and temporary operating inefficiencies largely related to increased volumes and multiple new program launches in our VTS segment. In addition, gross profit was unfavorably impacted by $1.8 million from foreign currency exchange rate changes.

Third quarter SG&A expenses decreased $3.6 million, or 130 basis points as a percentage of sales. The decrease in SG&A expenses was primarily due to a $1.1 million environmental recovery in the VTS segment, lower integration costs associated with our November 2016 acquisition of the Luvata Heat Transfer Solutions (“Luvata HTS”) business, and lower compensation-related expenses. In addition, SG&A expenses were favorably impacted by $1.2 million from foreign currency exchange rate changes.

Restructuring expenses of $0.5 million in the third quarter of fiscal 2019 decreased $8.9 million compared with the prior year, primarily due to lower severance-related expenses associated with the closure of an Austrian manufacturing facility within the Commercial and Industrial Solutions (“CIS”) segment during fiscal 2018.

During the third quarter of fiscal 2018, we recorded a $1.3 million impairment charge associated with the closure of the Austrian CIS manufacturing facility. During the third quarter of fiscal 2019, we recorded an additional $0.4 million impairment charge related to this facility.

Operating income of $33.6 million in the third quarter of fiscal 2019 increased $19.7 million compared with the third quarter of fiscal 2018, primarily due to higher earnings in the CIS and Building HVAC Systems (“BHVAC”) segments, partially offset by lower earnings in the VTS segment.

The provision for income taxes was $8.6 million and $35.2 million in the third quarter of fiscal 2019 and 2018, respectively. The $26.6 million decrease was primarily due to a decrease in income tax charges related to the Tax Act, which were $32.6 million lower in the third quarter of fiscal 2019 compared with the same period in the prior year, partially offset by increased operating earnings in the current year and the absence of a $2.2 million benefit from a development tax credit in Hungary recorded in the prior year. See Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information.

#### Comparison of Nine Months Ended December 31, 2018 and 2017

Fiscal 2019 year-to-date net sales of $1,656.0 million were $119.5 million, or 8 percent, higher than the same period last year, primarily due to higher sales in all of our operating segments.

Fiscal 2019 year-to-date gross profit of $273.9 million increased $13.9 million from the same period last year, yet gross margin declined 40 basis points to 16.5 percent. The decline in gross margin was primarily due to unfavorable material costs and temporary operating inefficiencies, partially offset by higher sales volume.

Fiscal 2019 year-to-date SG&A expenses decreased $2.3 million, or 100 basis points as a percentage of sales, compared with the same period in the prior year. The decrease in SG&A expenses was primarily due to lower integration costs associated with our acquisition of Luvata HTS and lower third-party strategic advisory costs recorded at Corporate, partially offset by higher environmental charges within our VTS segment. During the first nine months of fiscal 2019, we recorded $1.2 million of third-party consulting costs related to our ongoing evaluation of strategic alternatives for our automotive business within the VTS segment.

Fiscal 2019 year-to-date restructuring expenses and impairment charges decreased $10.8 million and $0.9 million, respectively, as compared with the same period in the prior year, primarily due to the closure of a CIS manufacturing facility during fiscal 2018.

During the second quarter of fiscal 2019, we sold our South African business within the BHVAC segment and, as a result, recorded a loss of $1.7 million.

Operating income of $91.2 million during the first nine months of fiscal 2019 increased $26.2 million compared with the same period last year, primarily due to higher earnings in the CIS and BHVAC segments, partially offset by lower earnings in the VTS segment.

The benefit for income taxes was $9.3 million during the first nine months of fiscal 2019, compared with a provision for income taxes of $37.4 million during the same period in the prior year. The $46.7 million change was primarily due to our accounting for the impacts of the Tax Act. As a result of the Tax Act, we recorded provisional income tax charges totaling $35.7 million in the prior year, compared with income tax benefits totaling $7.7 million in the current year. In addition, we recorded income tax benefits totaling $17.0 million in the current year resulting from the recognition of tax assets for foreign tax credits and other attributes, partially offset by the absence of a $7.9 million benefit from a development tax credit in Hungary recorded in the prior year and increased operating earnings in the current year. See Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information.

#### SEGMENT RESULTS OF OPERATIONS

Effective April 1, 2018, we formed the VTS segment by combining our Americas, Europe, and Asia operations to enable us to operate as a more global, product-based organization. We also merged our Americas coils business into the CIS segment to accelerate operational improvements and organizational efficiencies. We began reporting financial results for our new segments beginning in fiscal 2019. Segment financial information for fiscal 2018 has been recast to conform to the fiscal 2019 presentation.

The following is a discussion of our segment results of operations for the three and nine months ended December 31, 2018 and 2017:

### Vehicular Thermal Solutions

*(in millions)*

|  | Three months ended December 31, 2018 $'s | % of sales | 2017 $'s | % of sales | Nine months ended December 31, 2018 $'s | % of sales | 2017 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $323.3 | 100.0% | $313.0 | 100.0% | $1,011.7 | 100.0% | $938.9 | 100.0% |
| Cost of sales | 281.9 | 87.2% | 266.5 | 85.1% | 871.7 | 86.2% | 794.5 | 84.6% |
| Gross profit | 41.4 | 12.8% | 46.5 | 14.9% | 140.0 | 13.8% | 144.4 | 15.4% |
| Selling, general and administrative expenses | 25.5 | 7.9% | 26.6 | 8.5% | 84.4 | 8.3% | 81.3 | 8.7% |
| Restructuring expenses | 0.4 | 0.1% | 1.2 | 0.4% | 0.5 | 0.1% | 3.3 | 0.3% |
| Operating income | $15.5 | 4.8% | $18.7 | 6.0% | $55.1 | 5.4% | $59.8 | 6.4% |

#### Comparison of Three Months Ended December 31, 2018 and 2017

VTS net sales increased $10.3 million, or 3 percent, from the third quarter of fiscal 2018 to the third quarter of fiscal 2019, primarily due to higher sales volume, including sales from new program launches, to automotive and commercial vehicle customers in North America and to off-highway customers in North America and Asia, partially offset by lower sales volume to customers in Europe. Foreign currency exchange rate changes had an unfavorable $9.3 million impact on third quarter sales. Gross profit decreased $5.1 million and gross margin declined 210 basis points to 12.8 percent. The decline in gross margin was primarily due to unfavorable material costs and temporary operating inefficiencies largely related to increased volumes and new program launches at certain manufacturing facilities, partially offset by higher sales volume. In addition, foreign currency exchange rate changes had an unfavorable $1.2 million impact on gross profit. SG&A expenses decreased $1.1 million, or 60 basis points as a percentage of sales, primarily due to a $1.1 million recovery of environmental investigation costs from a prior owner of a closed manufacturing facility in the U.S. and a $0.7 million favorable impact of foreign currency exchange rate changes, partially offset by higher compensation-related expenses. Restructuring expenses decreased $0.8 million, primarily due to lower plant consolidation and severance expenses. Operating income decreased $3.2 million to $15.5 million during the third quarter, primarily due to lower gross profit.

#### Comparison of Nine Months Ended December 31, 2018 and 2017

VTS year-to-date net sales increased $72.8 million, or 8 percent, from the same period last year, primarily due to higher sales volume to off-highway and automotive customers in North America and Asia, partially offset by lower sales volume to customers in Europe and a $4.2 million unfavorable impact of foreign currency exchange rate changes. Gross profit decreased $4.4 million and gross margin declined 160 basis points to 13.8 percent. The decline in gross margin was primarily due to unfavorable material costs and temporary operating inefficiencies largely related to increased volumes and new program launches at certain manufacturing facilities, partially offset by higher sales volume. SG&A expenses increased $3.1 million, primarily due to higher compensation-related expenses and higher environmental charges related to previously-owned manufacturing facilities in the U.S., partially offset by a $0.5 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, SG&A expenses decreased 40 basis points to 8.3 percent. Restructuring expenses decreased $2.8 million, primarily due to lower plant consolidation and severance expenses. Operating income decreased $4.7 million to $55.1 million, primarily due to lower gross profit and higher SG&A expenses, partially offset by lower restructuring expenses.

### Commercial and Industrial Solutions

*(in millions)*

|  | Three months ended December 31, 2018 $'s | % of sales | 2017 $'s | % of sales | Nine months ended December 31, 2018 $'s | % of sales | 2017 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $167.0 | 100.0% | $159.0 | 100.0% | $529.1 | 100.0% | $494.2 | 100.0% |
| Cost of sales | 138.8 | 83.1% | 139.0 | 87.4% | 444.0 | 83.9% | 423.5 | 85.7% |
| Gross profit | 28.2 | 16.9% | 20.0 | 12.6% | 85.1 | 16.1% | 70.7 | 14.3% |
| Selling, general and administrative expenses | 14.6 | 8.8% | 14.4 | 9.1% | 45.3 | 8.6% | 44.7 | 9.0% |
| Restructuring expenses | 0.1 | 0.1% | 8.2 | 5.1% | 0.2 | - | 8.2 | 1.7% |
| Impairment charges | 0.4 | 0.2% | 1.3 | 0.8% | 0.4 | 0.1% | 1.3 | 0.3% |
| Operating income (loss) | $13.1 | 7.8% | $(3.9) | -2.4% | $39.2 | 7.4% | $16.5 | 3.3% |

#### Comparison of Three Months Ended December 31, 2018 and 2017

CIS net sales increased $8.0 million, or 5 percent, from the third quarter of fiscal 2018 to the third quarter of fiscal 2019, primarily due to higher sales volume to data center and commercial refrigeration customers, partially offset by a $2.8 million unfavorable impact of foreign currency exchange rate changes and lower sales volume to industrial customers. Gross profit increased $8.2 million and gross margin improved 430 basis points to 16.9 percent, primarily due to higher sales volume, favorable sales mix, and improved operating efficiencies. SG&A expenses increased $0.2 million compared with the prior year, yet decreased 30 basis points as a percentage of sales. Restructuring expenses decreased $8.1 million, primarily due to the absence of severance-related expenses recorded in the prior year 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 Austrian facility. During the third quarter of fiscal 2019, we recorded an additional $0.4 million impairment charge related to the closed facility. Operating income of $13.1 million represents a $17.0 million improvement compared with the third quarter of fiscal 2018, primarily due to higher gross profit and lower restructuring expenses.

#### Comparison of Nine Months Ended December 31, 2018 and 2017

CIS year-to-date net sales increased $34.9 million, or 7 percent, from the same period last year, primarily due to higher sales volume to data center customers, partially offset by lower sales volume to industrial customers. Foreign currency exchange rate changes favorably impacted year-to-date sales by $1.2 million. Gross profit increased $14.4 million and gross margin improved 180 basis points to 16.1 percent, primarily due to higher sales volume and favorable sales mix. SG&A expenses increased $0.6 million compared with the prior year, yet decreased 40 basis points as a percentage of sales. Restructuring expenses decreased $8.0 million, primarily due to the closure of the Austrian facility during fiscal 2018. Operating income of $39.2 million increased $22.7 million, primarily due to higher gross profit and lower restructuring expenses.

### Building HVAC Systems

*(in millions)*

|  | Three months ended December 31, 2018 $'s | % of sales | 2017 $'s | % of sales | Nine months ended December 31, 2018 $'s | % of sales | 2017 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $64.2 | 100.0% | $56.1 | 100.0% | $159.9 | 100.0% | $147.9 | 100.0% |
| Cost of sales | 42.2 | 65.7% | 37.1 | 66.2% | 111.3 | 69.6% | 102.9 | 69.6% |
| Gross profit | 22.0 | 34.3% | 19.0 | 33.8% | 48.6 | 30.4% | 45.0 | 30.4% |
| Selling, general and administrative expenses | 9.0 | 14.0% | 9.8 | 17.4% | 25.9 | 16.2% | 26.4 | 17.8% |
| Loss on sale of assets | - | - | - | - | 1.7 | 1.1% | - | - |
| Operating income | $13.0 | 20.3% | $9.2 | 16.5% | $21.0 | 13.1% | $18.6 | 12.6% |

28

#### Comparison of Three Months Ended December 31, 2018 and 2017

BHVAC net sales increased $8.1 million, or 14 percent, from the third quarter of fiscal 2018 to the third quarter of fiscal 2019, primarily due to higher sales of heating products in North America and air conditioning products in the U.K, partially offset by a $0.7 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $3.0 million and gross margin improved 50 basis points to 34.3 percent, primarily due to higher sales volume, favorable sales mix, and improved product pricing. SG&A expenses decreased $0.8 million compared with the prior year and decreased 340 basis points as a percentage of sales, primarily due to cost-control initiatives. Operating income of $13.0 million increased $3.8 million, primarily due to higher gross profit.

#### Comparison of Nine Months Ended December 31, 2018 and 2017

BHVAC year-to-date net sales increased $12.0 million, or 8 percent, from the same period last year, primarily due to higher sales of heating products in North America and air conditioning products and parts and controls in the U.K. In addition, foreign currency exchange rate changes favorably impacted year-to-date sales by $0.4 million. Gross profit increased $3.6 million. Gross margin of 30.4 percent was consistent with the prior year, as the benefit from higher sales volume was largely offset by unfavorable material costs. SG&A expenses decreased $0.5 million compared with the prior year and decreased 160 basis points as a percentage of sales. During the second quarter of fiscal 2019, we completed the sale of our business in South Africa and, as a result, recorded a loss of $1.7 million. See Note 1 of the Notes to Condensed Consolidated Financial Statements for additional information on this transaction. Operating income of $21.0 million increased $2.4 million, primarily due to higher gross profit, partially offset by the $1.7 million loss on sale of the South African business.

#### Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of December 31, 2018 of $30.7 million, and an available borrowing capacity of $127.9 million under lines of credit provided by banks in the United States and abroad. Given our extensive international operations, approximately $23.0 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, 2018 was $67.4 million, which represents a $38.6 million decrease compared with $106.0 million of net cash provided by operating activities during the same period in the prior year. This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, partially offset by the favorable impact of stronger earnings. The unfavorable changes in working capital during the first nine months of fiscal 2019, compared with the same period in the prior year, included higher inventory levels associated with higher sales levels, decreases in accounts payable resulting from the timing of payments to vendors, and higher incentive compensation and other employee benefit payments. Capital expenditures of $58.7 million during the first nine months of fiscal 2019 increased $3.7 million compared with the same period in the prior year.

#### 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. As of December 31, 2018, our leverage ratio and interest coverage ratio were 2.2 and 9.0, respectively. We were in compliance with our debt covenants as of December 31, 2018 and expect to remain in compliance during the balance of fiscal 2019 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.

#### Share Repurchase Program

Effective October 30, 2018, our Board of Directors approved a two-year, $50.0 million share repurchase program, which allows us to repurchase shares of our common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as our authorized officers deem appropriate. During the third quarter of fiscal 2019, we repurchased $0.6 million of common stock under this program. Our decision whether and to what extent to repurchase additional shares under this program will depend on a number of factors, including business conditions, other cash priorities, and stock price.

#### Forward-Looking Statements

This report, including, but not limited to, the discussion under Item 7. 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, 2018. 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 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 or by its trade partners, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;
- The impact of potential price increases associated with raw materials and other purchased component inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums or fabrication costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs. This risk includes our ability to successfully manage our exposure, adjust product pricing in response to price increases, and/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel) on to customers through contract provisions, as well as the inherent lag in timing of applicable pass-through arrangements; and
- The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.

#### Operational Risks:

- The overall health and 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 operating inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims;
- Unanticipated delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
- Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
- Our ability to realize cost and revenue synergies associated with our acquisition of Luvata HTS in accordance with our expectations, and to effectively manage any unanticipated risks that arise;
- 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;
- Our ability to effectively and efficiently complete restructuring activities and realize the anticipated benefits thereof;
- Our ability to recruit and maintain talent, including personnel in managerial, leadership and administrative functions, in light of tightening global labor markets;
- Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
- The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
- 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 CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our VTS business;
- The success of our evaluation of strategic alternatives for our automotive business within our VTS segment in optimizing the segment’s future profitability;
- Our ability to identify and execute additional growth and diversification opportunities in order to position us for long-term success; and
- The potential expense, disruption or other impacts that could result from unanticipated actions by activist shareholders.

#### Financial Risks:

- Our ability to fund our global liquidity requirements efficiently for Modine’s current operations 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;
- 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;
- Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; 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, 2018. The Company’s market risks have not materially changed since the fiscal 2018 Form 10-K was filed.

## Controls and procedures

As filed, 1,153 characters.

#### Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2018.

#### Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the third quarter of fiscal 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Feb 1, 2019.
Source: SEC EDGAR, the filing index for accession 0001140361-19-002195. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.