# Modine Manufacturing Co: Form 10-Q for the period ended Dec 31, 2019

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2020-02-05
- Accepted by EDGAR: Feb 5, 2020, 11:13 ET
- Period: 2019-12-31
- Accession: 0001140361-20-002341
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036120002341/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036120002341/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-10-01 to 2019-12-31 | $473.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2019-04-01 to 2019-12-31 | $1.50bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-10-01 to 2019-12-31 | $399.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2019-04-01 to 2019-12-31 | $1.27bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-10-01 to 2019-12-31 | $73.5m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2019-04-01 to 2019-12-31 | $232.6m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-10-01 to 2019-12-31 | $63.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2019-04-01 to 2019-12-31 | $194.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-10-01 to 2019-12-31 | $8.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-04-01 to 2019-12-31 | $32.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-10-01 to 2019-12-31 | $5.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2019-04-01 to 2019-12-31 | $17.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-10-01 to 2019-12-31 | $1.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-04-01 to 2019-12-31 | $8.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-10-01 to 2019-12-31 | $1.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-04-01 to 2019-12-31 | $4.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-10-01 to 2019-12-31 | $0.02 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-04-01 to 2019-12-31 | $0.09 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-10-01 to 2019-12-31 | $0.02 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-04-01 to 2019-12-31 | $0.09 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-10-01 to 2019-12-31 | 51,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-04-01 to 2019-12-31 | 51,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-04-01 to 2019-12-31 | $45.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-04-01 to 2019-12-31 | $58.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2019-04-01 to 2019-12-31 | $2.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-12-31 | $36.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-12-31 | $611.3m | us-gaap:AssetsCurrent |
| Total assets | at 2019-12-31 | $1.54bn | us-gaap:Assets |
| Current liabilities | at 2019-12-31 | $474.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-12-31 | $992.2m | us-gaap:Liabilities |
| Short-term borrowings | at 2019-12-31 | $101.2m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2019-12-31 | $537.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,811 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, 2019 was the third quarter of fiscal 2020.

#### Third Quarter Highlights

Net sales in the third quarter of fiscal 2020 decreased $67.6 million, or 12 percent, from the third quarter of fiscal 2019, primarily due to lower sales in our Vehicular Thermal Solutions (“VTS”) and Commercial and Industrial Solutions (“CIS”) operating segments, largely driven by weakness in key end markets. Foreign currency exchange rate changes negatively impacted sales in third quarter of fiscal 2020 by $7.1 million. Cost of sales decreased $49.4 million, or 11 percent, from the third quarter of fiscal 2019, primarily due to lower sales volume. Gross profit decreased $18.2 million and gross margin declined 140 basis points to 15.5 percent. Selling, general and administrative (“SG&A”) expenses increased $6.3 million, primarily due to separation and project costs associated with our review of strategic alternatives for the VTS segment’s automotive business, which increased approximately $11.0 million compared with the third quarter of fiscal 2019. Operating income during the third quarter of fiscal 2020 decreased $25.4 million to $8.2 million, primarily due to lower gross profit and higher SG&A expenses.

#### Year-to-date Highlights

Net sales in the first nine months of fiscal 2020 decreased $153.4 million, or 9 percent, from the same period last year, primarily due to lower sales in our VTS and CIS operating segments, partially offset by higher sales in our Building HVAC Systems (“BHVAC”) segment. Foreign currency exchange rate changes negatively impacted sales in the first nine months of fiscal 2020 by $35.8 million. Cost of sales decreased $112.1 million, or 8 percent, from the same period last year, primarily due to lower sales volume. Gross profit decreased $41.3 million and gross margin declined 100 basis points to 15.5 percent. SG&A expenses increased $14.5 million, primarily due to separation and project costs associated with our review of strategic alternatives for the VTS segment’s automotive business, which increased approximately $32.0 million compared with the first nine months of fiscal 2019. Operating income during the first nine months of fiscal 2020 decreased $58.9 million to $32.3 million, primarily due to lower gross profit and higher SG&A expenses.

We previously announced our evaluation of strategic alternatives for the automotive business within our VTS segment. We are committed to exiting this business in a manner that is in the best interest of our shareholders and are evaluating all alternatives. It is possible that our exit strategy may ultimately include a combination of both selling and winding-down or closing portions of the automotive business. We have spent considerable time and money working towards the separation of the automotive business and preparing for a potential sale. We have dedicated resources to physically separate the automotive manufacturing operations, including resources for IT systems and separate business processes, and have also established new legal entities. We believe these resource investments are critical to exiting the automotive business. We remain committed to our strategy of becoming a diversified industrial company and executing on the best strategic alternative for the automotive business in order to both optimize our VTS segment’s financial performance and maximize shareholder value.

#### 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, 2019 and 2018:

*(in millions)*

|  | Three months ended December 31, 2019 $'s | % of sales | 2018 $'s | % of sales | Nine months ended December 31, 2019 $'s | % of sales | 2018 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $473.4 | 100.0% | $541.0 | 100.0% | $1,502.6 | 100.0% | $1,656.0 | 100.0% |
| Cost of sales | 399.9 | 84.5% | 449.3 | 83.1% | 1,270.0 | 84.5% | 1,382.1 | 83.5% |
| Gross profit | 73.5 | 15.5% | 91.7 | 16.9% | 232.6 | 15.5% | 273.9 | 16.5% |
| Selling, general and administrative expenses | 63.5 | 13.4% | 57.2 | 10.6% | 194.4 | 12.9% | 179.9 | 10.9% |
| Restructuring expenses | 2.6 | 0.6% | 0.5 | 0.1% | 6.7 | 0.4% | 0.7 | - |
| Impairment charge | - | - | 0.4 | 0.1% | - | - | 0.4 | - |
| (Gain) loss on sale of assets | (0.8) | -0.2% | - | - | (0.8) | - | 1.7 | 0.1% |
| Operating income | 8.2 | 1.7% | 33.6 | 6.2% | 32.3 | 2.1% | 91.2 | 5.5% |
| Interest expense | (5.6) | -1.2% | (6.2) | -1.1% | (17.3) | -1.2% | (18.9) | -1.1% |
| Other income (expense) – net | 0.1 | - | (0.5) | -0.1% | (2.3) | -0.2% | (2.1) | -0.1% |
| Earnings before income taxes | 2.7 | 0.6% | 26.9 | 5.0% | 12.7 | 0.8% | 70.2 | 4.2% |
| (Provision) benefit for income taxes | (1.7) | -0.4% | (8.6) | -1.6% | (8.3) | -0.5% | 9.3 | 0.6% |
| Net earnings | $1.0 | 0.2% | $18.3 | 3.4% | $4.4 | 0.3% | $79.5 | 4.8% |

#### Comparison of Three Months Ended December 31, 2019 and 2018

Third quarter net sales of $473.4 million were $67.6 million, or 12 percent, lower than the third quarter of the prior year, primarily due to lower sales in our VTS and CIS segments and a $7.1 million unfavorable impact of foreign currency exchange rate changes. Sales decreased $51.4 million and $19.5 million in our VTS and CIS segments, respectively. Sales increased $0.7 million in our BHVAC segment.

Third quarter cost of sales decreased $49.4 million, or 11 percent, primarily due to lower sales volume and a $6.3 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 140 basis points to 84.5 percent and was negatively impacted by approximately 100 basis points due to higher labor and inflationary costs. In addition, we recorded approximately $2.0 million of costs at Corporate for program and equipment transfers associated with the separation of the VTS segment’s automotive business in preparation of a potential sale.

As a result of lower sales and higher cost of sales as a percentage of sales, third quarter gross profit decreased $18.2 million and gross margin declined 140 basis points to 15.5 percent.

Third quarter SG&A expenses increased $6.3 million. The increase in SG&A expenses was primarily due to separation and project costs recorded at Corporate associated with our review of strategic alternatives for the VTS segment’s automotive business, which increased approximately $11.0 million. These costs primarily related to accounting, legal, and IT professional services, including costs associated with the separation of the automotive business from the VTS segment’s other businesses and preparation for a potential sale. This increase was partially offset by lower compensation-related expenses, including incentive compensation, which decreased approximately $3.0 million.

Restructuring expenses totaled $2.6 million in the third quarter of fiscal 2020 and primarily consisted of severance expenses related to targeted headcount reductions in support of our objective to reduce operational and SG&A cost structures. In January 2020, we approved additional headcount reductions in Europe and North America within the VTS segment and, as a result, expect to record approximately $4.0 million of severance expenses during the fourth quarter of fiscal 2020.

During the third quarter of fiscal 2019, we recorded a $0.4 million asset impairment charge within the CIS segment related to a previously-closed manufacturing facility in Austria.

During the third quarter of fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million within the VTS segment.

Operating income of $8.2 million in the third quarter of fiscal 2020 decreased $25.4 million compared with the third quarter of fiscal 2019. This decrease was primarily due to an increase of approximately $13.0 million of separation and project costs associated with our review of strategic alternatives for our automotive business and lower earnings in our VTS and CIS segments, which decreased $11.2 million and $4.8 million, respectively.

The provision for income taxes was $1.7 million and $8.6 million in the third quarter of fiscal 2020 and 2019, respectively. The $6.9 million decrease was primarily due to lower operating earnings, the absence of a $3.1 million income tax charge recorded in the prior year related to the Tax Cuts and Jobs Act (the “Tax Act”), and an income tax benefit recognized in the current year for a tax incentive in Italy. These factors, which lowered our tax provision compared with the prior year, were partially offset by a $3.0 million income tax charge for a valuation allowance on certain U.S. deferred tax assets, a net income tax charge of $2.7 million resulting from legal entity restructuring in preparation for a potential sale of our automotive business, and the absence of income tax benefits recorded in the prior year related to foreign tax credits and a manufacturing deduction in the U.S.

#### Comparison of Nine Months Ended December 31, 2019 and 2018

Fiscal 2020 year-to-date net sales of $1,502.6 million were $153.4 million, or 9 percent, lower than the same period last year, primarily due to lower sales in our VTS and CIS segments and a $35.8 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in our BHVAC segment. Sales decreased $114.0 million and $56.1 million in our VTS and CIS segments, respectively. Sales increased $10.0 million in our BHVAC segment.

Fiscal 2020 year-to-date cost of sales of $1,270.0 million decreased $112.1 million, or 8 percent, primarily due to lower sales volume and a $30.8 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 100 basis points to 84.5 percent and was negatively impacted by approximately 90 basis points due to higher labor and inflationary costs and,

to a lesser extent, by sales mix. These negative impacts were partially offset by favorable material costs, which impacted costs of sales by approximately 20 basis points. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.

As a result of lower sales and higher cost of sales as a percentage of sales, fiscal 2020 year-to-date gross profit decreased $41.3 million and gross margin declined 100 basis points to 15.5 percent.

Fiscal 2020 year-to-date SG&A expenses increased $14.5 million. The increase in SG&A was primarily due to separation and project costs recorded at Corporate associated with our review of strategic alternatives for the VTS segment’s automotive business, which increased approximately $32.0 million. This increase was partially offset by lower compensation-related expenses, which decreased approximately $9.0 million, lower environmental charges related to previously-owned manufacturing facilities in the U.S., which decreased approximately $2.0 million, and a $3.2 million favorable impact from foreign currency exchange rate changes.

Restructuring expenses of $6.7 million during the first nine months of fiscal 2020 increased $6.0 million compared with the same period last year, primarily due to higher severance expenses related to targeted headcount reductions.

Operating income of $32.3 million during the first nine months of fiscal 2020 decreased $58.9 million compared with the same period last year. This decrease was primarily due to an increase of approximately $32.0 million of separation and project costs associated with our review of strategic alternatives for our automotive business and lower earnings in our VTS and CIS segments, which decreased $26.1 million and $13.4 million, respectively, partially offset by higher earnings in our BHVAC segment, which increased $6.6 million.

The provision for income taxes was $8.3 million during the first nine months of fiscal 2020, compared with a benefit for income taxes of $9.3 million during the same period in the prior year. The $17.6 million change was primarily due to the absence of income tax benefits totaling $24.7 million recorded in the prior year and income tax charges totaling $5.7 million in the current year, partially offset by lower operating earnings in the first nine months of fiscal 2020. The $24.7 million of income tax benefits recorded in fiscal 2019 related to the recognition of tax assets for foreign tax credits and a manufacturing deduction in the U.S. and our accounting for the Tax Act. The $5.7 million of income tax charges in fiscal 2020 were comprised of a $3.0 million charge to establish a valuation allowance on certain U.S. deferred tax assets and a net $2.7 million charge associated with legal entity restructuring.

#### SEGMENT RESULTS OF OPERATIONS

The following is a discussion of our segment results of operations for the three and nine months ended December 31, 2019 and 2018:

*(in millions)*

| Vehicular Thermal Solutions | Three months ended December 31, 2019 $'s | % of sales | 2018 $'s | % of sales | Nine months ended December 31, 2019 $'s | % of sales | 2018 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $271.9 | 100.0% | $323.3 | 100.0% | $897.7 | 100.0% | $1,011.7 | 100.0% |
| Cost of sales | 243.0 | 89.4% | 281.9 | 87.2% | 788.5 | 87.8% | 871.7 | 86.2% |
| Gross profit | 28.9 | 10.6% | 41.4 | 12.8% | 109.2 | 12.2% | 140.0 | 13.8% |
| Selling, general and administrative expenses | 23.8 | 8.7% | 25.5 | 7.9% | 75.9 | 8.5% | 84.4 | 8.3% |
| Restructuring expenses | 1.6 | 0.6% | 0.4 | 0.1% | 5.1 | 0.6% | 0.5 | 0.1% |
| Gain on sale of assets | (0.8) | -0.3% | - | - | (0.8) | -0.1% | - | - |
| Operating income | $4.3 | 1.6% | $15.5 | 4.8% | $29.0 | 3.2% | $55.1 | 5.4% |

#### Comparison of Three Months Ended December 31, 2019 and 2018

VTS net sales decreased $51.4 million, or 16 percent, from the third quarter of fiscal 2019 to the third quarter of fiscal 2020, primarily due to lower sales volume, a $4.9 million unfavorable impact of foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales to commercial vehicle and off-highway customers decreased $23.7 million and $19.1 million, respectively. These sales declines largely resulted from weakness in global vehicular markets and the planned wind-down of certain commercial vehicle programs.

VTS cost of sales decreased $38.9 million, or 14 percent, from the third quarter of fiscal 2019 to the third quarter of fiscal 2020, primarily due to lower sales volume and a $4.3 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 220 basis points to 89.4 percent. Beyond the unfavorable impact of the lower sales volume, higher labor and inflationary costs and unfavorable customer pricing negatively impacted cost of sales by approximately 110 basis points and 80 basis points, respectively. Higher depreciation costs, primarily resulting from recent manufacturing capacity expansion in China and Hungary, also negatively impacted cost of sales to a lesser extent. These negative impacts were partially offset by improved operating efficiencies and cost savings from procurement initiatives.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $12.5 million and gross margin declined 220 basis points to 10.6 percent.

SG&A expenses decreased $1.7 million compared with the prior year yet increased 80 basis points as a percentage of sales. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2.0 million, and a $0.5 million favorable impact of foreign currency exchange rate changes, partially offset by the absence of a $1.1 million recovery of environmental investigation costs from a prior property owner received in the prior year.

Restructuring expenses during the third quarter of fiscal 2020 totaled $1.6 million and primarily consisted of severance expenses resulting from targeted headcount reductions in North America. In January 2020, we approved additional headcount reductions in Europe and North America and, as a result, expect to record approximately $4.0 million of severance expenses during the fourth quarter of fiscal 2020.

During the third quarter of fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million.

Operating income decreased $11.2 million to $4.3 million during the third quarter, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses and the $0.8 million gain on sale of the closed manufacturing facility in Germany.

#### Comparison of Nine Months Ended December 31, 2019 and 2018

VTS year-to-date net sales decreased $114.0 million, or 11 percent, from the same period last year, primarily due to lower sales volume, a $23.6 million unfavorable impact of foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales to customers in Europe decreased $60.6 million and sales to off-highway customers in Asia and North America decreased $21.4 million and $14.4 million, respectively.

VTS year-to-date cost of sales decreased $83.2 million, or 10 percent, primarily due to lower sales volume and a $20.4 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 160 basis points to 87.8 percent. Beyond the unfavorable impact of the lower sales volume, higher labor and inflationary costs and unfavorable customer pricing negatively impacted cost of sales by approximately 100 basis points and 70 basis points, respectively. Higher depreciation costs, primarily resulting from recent manufacturing capacity expansion in China and Hungary, also negatively impacted cost of sales to a lesser extent. These negative impacts were partially offset by favorable material costs, which impacted cost of sales by approximately 30 basis points, improved operating efficiencies and cost savings from procurement initiatives. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $30.8 million and gross margin declined 160 basis points to 12.2 percent.

VTS year-to-date SG&A expenses decreased $8.5 million compared with the prior year yet increased 20 basis points as a percentage of sales. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6.0 million, lower environmental charges related to previously-owned manufacturing facilities in the U.S, which decreased approximately $2.0 million, and a $2.0 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2020 increased $4.6 million, primarily due to higher severance expenses resulting from targeted headcount reductions in Europe and in the Americas.

Operating income decreased $26.1 million to $29.0 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses and the $0.8 million gain on sale of the closed manufacturing facility in Germany.

*Commercial and Industrial Solutions*

*(in millions)*

|  | Three months ended December 31, 2019 $'s | % of sales | 2018 $'s | % of sales | Nine months ended December 31, 2019 $'s | % of sales | 2018 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $147.5 | 100.0% | $167.0 | 100.0% | $473.0 | 100.0% | $529.1 | 100.0% |
| Cost of sales | 124.8 | 84.6% | 138.8 | 83.1% | 403.1 | 85.2% | 444.0 | 83.9% |
| Gross profit | 22.7 | 15.4% | 28.2 | 16.9% | 69.9 | 14.8% | 85.1 | 16.1% |
| Selling, general and administrative expenses | 13.7 | 9.3% | 14.6 | 8.8% | 42.8 | 9.1% | 45.3 | 8.6% |
| Restructuring expenses | 0.7 | 0.5% | 0.1 | 0.1% | 1.3 | 0.3% | 0.2 | - |
| Impairment charge | - | - | 0.4 | 0.2% | - | - | 0.4 | 0.1% |
| Operating income | $8.3 | 5.6% | $13.1 | 7.8% | $25.8 | 5.4% | $39.2 | 7.4% |

#### Comparison of Three Months Ended December 31, 2019 and 2018

CIS net sales decreased $19.5 million, or 12 percent, from the third quarter of fiscal 2019 to the third quarter of fiscal 2020, primarily due to lower sales volume and a $2.3 million unfavorable impact of foreign currency exchange rate changes. Sales to commercial HVAC&R and data center cooling customers decreased $10.3 million and $10.0 million, respectively.

CIS cost of sales decreased $14.0 million, or 10 percent, from the third quarter of fiscal 2019 to the third quarter of fiscal 2020, primarily due to lower sales volume and a $1.9 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 150 basis points to 84.6 percent, primarily due to the unfavorable impact of lower sales volume and unfavorable sales mix.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $5.5 million and gross margin declined 150 basis points to 15.4 percent.

SG&A expenses decreased $0.9 million compared with the prior year yet increased 50 basis points as a percentage of sales. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased $0.6 million, and cost-control initiatives.

Restructuring expenses during the third quarter of fiscal 2020 totaled $0.7 million and primarily consisted of severance expenses resulting from targeted headcount reductions and equipment transfer and plant consolidation costs.

During the third quarter of fiscal 2019, we recorded a $0.4 million asset impairment charge related to a previously-closed manufacturing facility in Austria.

Operating income decreased $4.8 million to $8.3 million during the third quarter, primarily due to lower gross profit, partially offset by lower SG&A expenses.

#### Comparison of Nine Months Ended December 31, 2019 and 2018

CIS year-to-date net sales decreased $56.1 million, or 11 percent, from the same period last year, primarily due to lower sales volume and a $10.2 million unfavorable impact of foreign currency exchange rate changes. Sales to data center cooling and commercial HVAC&R customers decreased $29.2 million and $26.4 million, respectively.

CIS year-to-date cost of sales decreased $40.9 million, or 9 percent, primarily due to lower sales volume and an $8.7 million favorable foreign currency exchange rate impact. As a percentage of sales, cost of sales increased 130 basis points to 85.2 percent, primarily due to the unfavorable impact of lower sales volume and unfavorable sales mix.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $15.2 million and gross margin declined 130 basis points to 14.8 percent.

CIS year-to-date SG&A expenses decreased $2.5 million compared with the prior year yet increased 50 basis points as a percentage of sales. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $1.0 million, a $0.9 million favorable impact of foreign currency exchange rate changes, and cost-control initiatives.

Restructuring expenses during the first nine months of fiscal 2020 increased $1.1 million, primarily due to higher equipment transfer and plant consolidation costs.

Operating income decreased $13.4 million to $25.8 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.

*Building HVAC Systems*

*(in millions)*

|  | Three months ended December 31, 2019 $'s | % of sales | 2018 $'s | % of sales | Nine months ended December 31, 2019 $'s | % of sales | 2018 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $64.9 | 100.0% | $64.2 | 100.0% | $169.9 | 100.0% | $159.9 | 100.0% |
| Cost of sales | 41.8 | 64.5% | 42.2 | 65.7% | 115.4 | 67.9% | 111.3 | 69.6% |
| Gross profit | 23.1 | 35.5% | 22.0 | 34.3% | 54.5 | 32.1% | 48.6 | 30.4% |
| Selling, general and administrative expenses | 9.6 | 14.7% | 9.0 | 14.0% | 26.9 | 15.8% | 25.9 | 16.2% |
| Loss on sale of assets | - | - | - | - | - | - | 1.7 | 1.1% |
| Operating income | $13.5 | 20.8% | $13.0 | 20.3% | $27.6 | 16.2% | $21.0 | 13.1% |

#### Comparison of Three Months Ended December 31, 2019 and 2018

BHVAC net sales increased $0.7 million, or 1 percent, from the third quarter of fiscal 2019 to the third quarter of fiscal 2020, primarily due to higher sales in the U.S., which increased $2.3 million, partially offset by lower sales in the U.K., which decreased $1.6 million. The higher sales in the U.S. were primarily driven by increased sales of heating and ventilation products. The lower sales in the U.K. were primarily due to lower sales of air conditioning and ventilation products.

BHVAC cost of sales decreased $0.4 million, or 1 percent, from the third quarter of fiscal 2019 to the third quarter of fiscal 2020. As a percentage of sales, cost of sales decreased 120 basis points to 64.5 percent and was positively impacted by favorable sales mix and customer pricing.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $1.1 million and gross margin improved 120 basis points to 35.5 percent.

SG&A expenses increased $0.6 million, or 70 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, including commission expenses resulting from the increased sales in the U.S.

Operating income of $13.5 million increased $0.5 million, primarily due to higher gross profit, partially offset by higher SG&A expenses.

#### Comparison of Nine Months Ended December 31, 2019 and 2018

BHVAC year-to-date net sales increased $10.0 million, or 6 percent, from the same period last year, primarily due to higher sales volume, partially offset by a $2.2 million unfavorable impact of foreign currency exchange rate changes. Sales of ventilation and heating products in the U.S. increased $7.6 million and $5.5 million, respectively.

BHVAC year-to-date cost of sales increased $4.1 million, or 4 percent, from the same period last year, primarily due to higher sales volume, partially offset by a $1.8 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 170 basis points to 67.9 percent, primarily due to favorable sales mix and customer pricing.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $5.9 million and gross margin improved 170 basis points to 32.1 percent.

BHVAC year-to-date SG&A expenses increased $1.0 million from the prior year yet decreased 40 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, including commission expenses resulting from the increased sales.

During the second quarter of fiscal 2019, we sold our business in South Africa and, as a result, recorded a loss of $1.7 million.

Operating income of $27.6 million increased $6.6 million, primarily due to higher gross profit and the loss on sale of our South African business in the prior year.

#### Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of December 31, 2019 of $36.2 million, and an available borrowing capacity of $135.4 million under our revolving credit facility. Given our extensive international operations, approximately $33.0 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, 2019 was $45.9 million, which represents a $21.5 million decrease compared with $67.4 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 lower operating earnings in the current year and payments for separation and project costs associated with our strategic review of alternatives for the VTS segment’s automotive business, partially offset by favorable net changes in working capital. The favorable changes in working capital during the first nine months of fiscal 2020, compared with the same period in the prior year, included lower employee benefit and incentive compensation payments. Capital expenditures of $58.2 million during the first nine months of fiscal 2020 decreased $0.5 million compared with the same period in the prior year and included approximately $4.0 million of capital investments associated with preparing for the potential sale of our automotive business.

#### Debt

On January 31, 2020, we issued $100.0 million of 5.9 percent Senior Notes with repayments ending in fiscal 2029. We used the proceeds from the new notes to prepay the $73.0 million principal balance of the 6.8 percent Senior Notes, which were scheduled to mature in August 2020, and to repay a portion of the borrowings on our revolving credit facility.

Our debt agreements require us to maintain compliance with various covenants. As specified in the credit agreement, the term loans may require prepayments 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 agreements, 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, 2019, our leverage ratio and interest coverage ratio were 2.3 and 8.4, respectively. We were in compliance with our debt covenants as of December 31, 2019 and expect to remain in compliance during the balance of fiscal 2020 and beyond.

#### Forward-Looking Statements

This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2019. 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 and suppliers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs (and potential trade war impacts resulting from tariffs or retaliatory actions), inflation, changes in interest rates, recession and recovery therefrom, restrictions and uncertainty associated with cross-border trade, public health crises, such as pandemics and epidemics, 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, including aluminum, copper, steel and stainless steel (nickel), 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 and the behavior of our suppliers. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; 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;
- 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 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;
- 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 reduce our cost structure in response to sales volume declines and to complete restructuring activities and realize the anticipated benefits of those activities;
- 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;
- Our ability to recruit and maintain talent, including personnel in managerial, leadership and administrative functions, in light of tight 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;
- 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 realize anticipated benefits from our increased “industrial” market presence, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our VTS business;
- Our ability to successfully separate and sell our automotive business within our VTS segment at a price that is sufficient to maximize the value of the business, and in order to optimize the segment’s future financial performance;
- Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and
- The potential impacts from unanticipated actions by activist shareholders, including disruption of our business and related costs.

#### 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 the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;
- 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 potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
- 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, 2019. The Company’s market risks have not materially changed since the fiscal 2019 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, 2019.

#### Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the third quarter of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Feb 5, 2020.
Source: SEC EDGAR, the filing index for accession 0001140361-20-002341. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.