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WISCONSIN		39-0482000
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1500 DeKoven Avenue, Racine, Wisconsin		53403
(Address of principal executive offices)		(Zip Code)

Large Accelerated Filer ☐		Accelerated Filer ☑
Non-accelerated Filer ☐	(Do not check if a smaller reporting company)	Smaller reporting company ☐
		Emerging growth company ☐

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements.	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	30
Item 4.	Controls and Procedures.	30
PART II.	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	31
Item 6.	Exhibits.	32
SIGNATURE		33

		Three months ended December 31,								Nine months ended December 31,
		2017				2016				2017				2016
Net sales		$	512.7			$	349.8			$	1,536.5			$	1,014.7
Cost of sales			427.3				290.8				1,276.5				845.4
Gross profit			85.4				59.0				260.0				169.3
Selling, general and administrative expenses			60.8				50.7				182.2				143.1
Restructuring expenses			9.4				1.6				11.5				6.0
Impairment charge			1.3				-				1.3				-
Gain on sale of facility			-				-				-				(1.2	)
Operating income			13.9				6.7				65.0				21.4
Interest expense			(6.3	)			(4.5	)			(19.5	)			(10.5	)
Other expense – net			(0.3	)			(1.0	)			(2.3	)			(2.8	)
Earnings before income taxes			7.3				1.2				43.2				8.1
(Provision) benefit for income taxes			(35.2	)			0.7				(37.4	)			(1.3	)
Net (loss) earnings			(27.9	)			1.9				5.8				6.8
Net earnings attributable to noncontrolling interest			(0.4	)			(0.2	)			(1.2	)			(0.6	)
Net (loss) earnings attributable to Modine		$	(28.3	)		$	1.7			$	4.6			$	6.2
Net (loss) earnings per share attributable to Modine shareholders:
Basic		$	(0.57	)		$	0.04			$	0.09			$	0.13
Diluted		$	(0.57	)		$	0.04			$	0.09			$	0.13
Weighted-average shares outstanding:
Basic			50.0				47.9				49.8				47.3
Diluted			50.0				48.5				50.6				47.7

		Three months ended December 31,								Nine months ended December 31,
		2017				2016				2017				2016
Net (loss) earnings		$	(27.9	)		$	1.9			$	5.8			$	6.8
Other comprehensive income (loss):
Foreign currency translation			5.0				(14.8	)			32.8				(17.7	)
Defined benefit plans, net of income taxes of $0.4, $0.4, $1.3 and $1.3 million			0.9				0.9				2.6				2.6
Cash flow hedges, net of income taxes of $0.2, $0, $0.2 and $0 million			0.4				-				0.4				-
Total other comprehensive income (loss)			6.3				(13.9	)			35.8				(15.1	)
Comprehensive income (loss)			(21.6	)			(12.0	)			41.6				(8.3	)
Comprehensive (income) loss attributable to noncontrolling interest			(0.8	)			0.4				(1.6	)			(0.1	)
Comprehensive income (loss) attributable to Modine		$	(22.4	)		$	(11.6	)		$	40.0			$	(8.4	)

		December 31, 2017				March 31, 2017
ASSETS
Cash and cash equivalents		$	47.8			$	34.2
Trade accounts receivable – net			289.0				295.2
Inventories			186.8				168.5
Other current assets			60.0				55.4
Total current assets			583.6				553.3
Property, plant and equipment – net			491.3				459.0
Intangible assets – net			132.5				134.1
Goodwill			172.2				165.1
Deferred income taxes			95.6				108.4
Other noncurrent assets			27.0				29.6
Total assets		$	1,502.2			$	1,449.5
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt		$	53.5			$	73.4
Long-term debt – current portion			37.9				31.8
Accounts payable			243.7				230.3
Accrued compensation and employee benefits			89.0				74.8
Other current liabilities			44.9				45.1
Total current liabilities			469.0				455.4
Long-term debt			394.5				405.7
Deferred income taxes			9.4				9.7
Pensions			105.7				119.4
Other noncurrent liabilities			52.0				38.1
Total liabilities			1,030.6				1,028.3
Commitments and contingencies (see Note 15)
Shareholders' equity:
Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none			-				-
Common stock, $0.625 par value, authorized 80.0 million shares, issued 52.3 million and 51.8 million shares			32.7				32.4
Additional paid-in capital			227.2				216.4
Retained earnings			377.3				372.4
Accumulated other comprehensive loss			(146.4	)			(181.8	)
Treasury stock, at cost, 1.8 million and 1.7 million shares			(27.1	)			(25.4	)
Total Modine shareholders' equity			463.7				414.0
Noncontrolling interest			7.9				7.2
Total equity			471.6				421.2
Total liabilities and equity		$	1,502.2			$	1,449.5

		Nine months ended December 31,
		2017				2016
Cash flows from operating activities:
Net earnings		$	5.8			$	6.8
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			56.8				39.9
Stock-based compensation expense			7.6				6.1
Impairment charge			1.3				-
Gain on sale of facility			-				(1.2	)
Deferred income taxes			10.1				(9.1	)
Other – net			6.6				1.5
Changes in operating assets and liabilities:
Trade accounts receivable			22.3				33.2
Inventories			(10.5	)			-
Accounts payable			2.2				(21.1	)
Other assets and liabilities			3.4				(21.1	)
Net cash provided by operating activities			105.6				35.0
Cash flows from investing activities:
Expenditures for property, plant and equipment			(55.0	)			(46.0	)
Acquisition of Luvata HTS – net of cash acquired			-				(363.9	)
Proceeds from dispositions of assets			0.1				4.3
Other – net			(0.9	)			0.4
Net cash used for investing activities			(55.8	)			(405.2	)
Cash flows from financing activities:
Borrowings of debt			121.5				475.4
Repayments of debt			(162.5	)			(113.2	)
Dividend paid to noncontrolling interest			(0.9	)			-
Financing fees paid			-				(8.5	)
Other – net			2.7				(0.3	)
Net cash (used for) provided by financing activities			(39.2	)			353.4
Effect of exchange rate changes on cash			3.0				(2.1	)
Net increase (decrease) in cash and cash equivalents			13.6				(18.9	)
Cash and cash equivalents – beginning of period			34.2				68.9
Cash and cash equivalents – end of period		$	47.8			$	50.0

Cash and cash equivalents		$	27.4
Trade accounts receivable			86.1
Inventories			55.0
Property, plant and equipment			120.4
Intangible assets			130.2
Goodwill			151.9
Other assets			39.1
Accounts payable			(73.7	)
Accrued compensation and employee benefits			(24.3	)
Deferred income taxes			(39.5	)
Pensions			(14.3	)
Other liabilities			(42.7	)
Purchase price		$	415.6

		Three months ended December 31, 2016				Nine months ended December 31, 2016
Net sales		$	439.5			$	1,393.3
Net earnings attributable to Modine			8.5				26.8
Net earnings per share attributable to Modine shareholders:
Basic		$	0.17			$	0.54
Diluted			0.17				0.53

		Three months ended December 31,								Nine months ended December 31,
		2017				2016				2017				2016
Service cost		$	0.1			$	0.1			$	0.4			$	0.4
Interest cost			2.5				2.5				7.4				7.3
Expected return on plan assets			(2.9	)			(3.1	)			(8.9	)			(9.2	)
Amortization of unrecognized net loss			1.4				1.4				4.2				4.2
Curtailment gain (a)			(0.3	)			-				(0.3	)			-
Net periodic benefit cost		$	0.8			$	0.9			$	2.8			$	2.7

During the nine months ended December 31, 2017 and 2016, the Company contributed $11.1 million and $6.3 million, respectively, to its U.S. pension plans.

Note 5:

Stock-Based Compensation

The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and other executives that consists of stock awards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors.

The Company calculates compensation expense based upon the fair value of the instruments at the time of grant and subsequently recognizes expense ratably over the respective vesting periods of the stock-based awards.  The Company recognized stock-based compensation expense of $2.2 million and $2.6 million for the three months ended December 31, 2017 and 2016, respectively.  The Company recognized stock-based compensation expense of $7.6 million and $6.1 million for the nine months ended December 31, 2017 and 2016, respectively.  The performance component of awards granted under the Company’s long-term incentive plan during the first quarter of fiscal 2018 is based upon both a target three-year average return on average capital employed and a target three-year average revenue growth at the end of the three-year performance period.

The fair value of stock-based compensation awards granted during the nine months ended December 31, 2017 and 2016 were as follows:

		Nine months ended December 31,
		2017								2016
		Shares				Fair Value Per Award				Shares				Fair Value Per Award
Stock options			0.2			$	7.30				0.3			$	4.60
Restricted stock awards			0.2			$	15.90				0.3			$	10.03
Performance stock awards			0.2			$	15.90				0.3			$	10.00
Unrestricted stock awards			0.1			$	16.95				0.1			$	9.38

The Company used the following assumptions in determining fair value for stock options:

		Nine months ended December 31,
		2017				2016
Expected life of awards in years			6.4				6.4
Risk-free interest rate			1.9	%			1.4	%
Expected volatility of the Company's stock			44.3	%			45.5	%
Expected dividend yield on the Company's stock			0.0	%			0.0	%

 

 

As of December 31, 2017, unrecognized compensation expense related to non-vested stock-based compensation awards, which will be amortized over the remaining service periods, was as follows:

		Unrecognized Compensation Expense				Weighted-Average Remaining Service Period in Years
Stock options		$	2.6				2.7
Restricted stock awards			6.1				2.7
Performance stock awards			5.2				1.9
Total		$	13.9				2.4

Note 6:

Restructuring Activities

During the third quarter of fiscal 2018, the Company ceased production at its Gailtal, Austria manufacturing facility, primarily to reduce excess capacity and lower manufacturing costs in Europe.  As a result of this facility closure, the Company recorded $8.2 million of restructuring expenses, within the CIS segment, during the third quarter of fiscal 2018.  These restructuring expenses primarily related to employee severance and related benefits.  Also in the third quarter of fiscal 2018, the Company recorded a $1.3 million asset impairment charge to reduce the carrying value of the Austrian facility to its estimated fair value, less costs to sell.

The Company’s restructuring actions during the first nine months of fiscal 2018 also included plant consolidation activities in the Americas segment and targeted headcount reductions in the Americas and Europe segments.  In addition, the Company transferred production of certain product lines to Hungary from other manufacturing facilities within the Europe segment, primarily to expand its low-cost country footprint in Europe and to ensure continued competitiveness in the region.

The Company’s restructuring actions during the first nine months of fiscal 2017 primarily consisted of plant consolidation activities and targeted headcount reductions in the Americas segment.

Restructuring and repositioning expenses were as follows:

		Three months ended December 31,								Nine months ended December 31,
		2017				2016				2017				2016
Employee severance and related benefits		$	8.6			$	0.1			$	9.2			$	2.2
Other restructuring and repositioning expenses			0.8				1.5				2.3				3.8
Total		$	9.4			$	1.6			$	11.5			$	6.0

Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.

 

 

The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:

		Three months ended December 31,
		2017				2016
Beginning balance		$	3.0			$	9.2
Additions			8.6				0.1
Payments			(0.6	)			(1.3	)
Effect of exchange rate changes			0.2				(0.5	)
Ending balance		$	11.2			$	7.5

		Nine months ended December 31,
		2017				2016
Beginning balance		$	6.5			$	14.7
Additions			9.2				2.2
Payments			(5.1	)			(8.5	)
Effect of exchange rate changes			0.6				(0.9	)
Ending balance		$	11.2			$	7.5

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

Note 7:

Other Income and Expense

Other income and expense consisted of the following:

		Three months ended December 31,								Nine months ended December 31,
		2017				2016				2017				2016
Equity in earnings of non-consolidated affiliate		$	0.1			$	-			$	-			$	0.1
Interest income			0.1				0.1				0.3				0.3
Foreign currency transactions (a)			0.1				(0.4	)			(0.4	)			(1.0	)
Net periodic benefit cost (b)			(0.6	)			(0.7	)			(2.2	)			(2.2	)
Total other expense - net		$	(0.3	)		$	(1.0	)		$	(2.3	)		$	(2.8	)

 

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(a)

Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on foreign currency exchange contracts.

(b)

Represents net periodic benefit cost, exclusive of service cost, for the Company’s pension and postretirement plans.

 

 

Note 8:

Income Taxes

The Company’s effective tax rate for the three months ended December 31, 2017 and 2016 was 482.2 percent and (58.3) percent, respectively.  The Company’s effective tax rate for the nine months ended December 31, 2017 and 2016 was 86.6 percent and 16.0 percent, respectively.  The effective tax rates for the fiscal 2018 periods are higher than in the prior year, primarily due to third quarter charges totaling $35.7 million related to the recently-enacted tax reform legislation in the U.S.  Other factors that impacted the Company’s effective tax rate for the three and nine months ended December 31, 2017, as compared with the prior-year periods, were income tax benefits resulting from a development tax credit in Hungary, changes in the valuation allowances related to certain foreign jurisdictions, and changes in the mix of foreign and domestic earnings.  In addition, the effective tax rate for the nine months ended December 31, 2017 benefitted from a $1.8 million reduction in unrecognized tax benefits during the second quarter of fiscal 2018 that resulted from a lapse in statutes of limitations.  The development tax credit in Hungary resulted in a tax benefit of $2.2 million and $7.9 million in the three and nine months ended December 31, 2017, respectively.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).  The Tax Act includes broad and complex changes to the U.S. tax code, including (i) a reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018, and (ii) a transition tax on certain unrepatriated earnings of foreign subsidiaries.  For fiscal 2018, the Company will record its income tax provision based on a blended U.S. statutory tax rate of 31.5 percent, which is based on a proration of the applicable tax rates before and after the effective date of the Tax Act.  The statutory tax rate of 21 percent will apply for fiscal 2019 and beyond.

The Tax Act also puts in place new tax laws that may impact the Company’s taxable income beginning in fiscal 2019, which include, but are not limited to (i) creating a base erosion anti-abuse tax (BEAT), which is a new minimum tax, (ii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (iii) adding a new provision designed to tax global intangible low taxed income (GILTI), (iv) adding a provision that could limit the amount of deductible interest expense, and (v) limiting the deductibility of certain executive compensation.

Shortly after the Tax Act was enacted, the SEC issued accounting guidance, which provides a one-year measurement period during which a company may complete its accounting for the impacts of the Tax Act.  To the extent a company’s accounting for certain income tax effects of the Tax Act is incomplete, the company may determine a reasonable estimate for those effects and record a provisional estimate in its financial statements.  If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted.

During the third quarter of fiscal 2018, the Company recorded provisional discrete tax charges of $35.7 million related to the Tax Act.  The Company adjusted its U.S. deferred tax assets by $20.7 million due to the reduction in the U.S. federal corporate tax rate.  This net reduction in deferred tax assets also included the estimated impact on the Company’s net state deferred tax assets.  In addition, the Company recorded a $15.0 million charge for the transition tax.  The Company expects to pay this estimated $15.0 million tax liability over the next eight years, beginning with a payment of approximately $1.0 million in fiscal 2019.

The Company is also analyzing other provisions of the Tax Act to determine if they will impact the Company’s effective tax rate in fiscal 2018 or in the future.  These provisions include BEAT, as described above, the elimination of U.S. federal income taxes on dividends from foreign subsidiaries, the new limits on the deductibility of interest expense and executive compensation, and the state tax implications of the Tax Act, including the impact of the transition tax and the impact on the realizability of tax attributes and valuation allowances.

The Tax Act includes a provision designed to tax GILTI, as described above, starting in fiscal 2019.  The Company has elected to record the tax effects of the GILTI provision as a period expense in the applicable tax year.  As a result, the Company does not expect GILTI to impact its fiscal 2018 income tax provision.

 

 

For various reasons, the Company has not completed its accounting for the income tax effects of certain elements of the Tax Act.  In regards to the reduction in the U.S. corporate tax rate, the Company is continuing to analyze the temporary differences that existed on the date of enactment, and the temporary differences originating in the current fiscal year.  In regards to the transition tax, the Company is awaiting further interpretative guidance, continuing to assess available tax methods and elections, and continuing to gather additional information to more precisely compute the amount of this tax.  Previously, the Company’s practice and intention was to reinvest, with certain insignificant exceptions, the earnings of its non-U.S. subsidiaries outside of the U.S.  As a result, the Company did not record U.S. deferred income taxes or foreign withholding taxes for these earnings.  The Company is currently analyzing its global working capital requirements and the potential tax liabilities that would be incurred if the non-U.S. subsidiaries distribute cash to the U.S. parent, which include local country withholding tax and potential U.S. state taxes.  The Company expects to complete its analysis of the accounting guidance related to the Tax Act and its evaluation of the impacts of the Tax Act in the fourth quarter of fiscal 2018 or in early fiscal 2019.

At December 31, 2017, valuation allowances against deferred tax assets in certain foreign jurisdictions totaled $47.4 million and valuation allowances against certain U.S. deferred tax assets totaled $7.0 million, as it is more likely than not these assets will not be realized based upon historical financial results.  The $1.2 million increase in the U.S. valuation allowances during the three months ended December 31, 2017 relates mainly to adjustments made to state tax attributes as a result of tax reform.  The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions until the need for a valuation allowance is eliminated.  The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized.  The Company may release the valuation allowance (approximately $3.0 million) in a foreign jurisdiction during the fourth quarter of fiscal 2018 or in fiscal 2019.

Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with its estimated annual effective tax rate.  Under this methodology, the Company applies its estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter.  The Company records the tax impacts of certain significant, unusual or infrequently occurring items in the period in which they occur.  The Company excluded the impact of its operations in certain foreign locations from the overall effective tax rate methodology and recorded them discretely based upon year-to-date results because the Company anticipates net operating losses for the full fiscal year in these jurisdictions.  The Company does not anticipate a significant change in unrecognized tax benefits during the remainder of fiscal 2018.

 

 

Note 9:

Earnings Per Share

The components of basic and diluted earnings per share were as follows:

		Three months ended December 31,								Nine months ended December 31,
		2017				2016				2017				2016
Net (loss) earnings attributable to Modine		$	(28.3	)		$	1.7			$	4.6			$	6.2
Less: Undistributed earnings attributable to unvested shares			-				-				-				(0.1	)
Net (loss) earnings available to Modine shareholders		$	(28.3	)		$	1.7			$	4.6			$	6.1
Weighted-average shares outstanding - basic			50.0				47.9				49.8				47.3
Effect of dilutive securities			-				0.6				0.8				0.4
Weighted-average shares outstanding - diluted			50.0				48.5				50.6				47.7
Earnings per share:
Net (loss) earnings per share - basic		$	(0.57	)		$	0.04			$	0.09			$	0.13
Net (loss) earnings per share - diluted		$	(0.57	)		$	0.04			$	0.09			$	0.13

For both the three and nine months ended December 31, 2017, the calculation of diluted earnings per share excluded 0.2 million stock options because they were anti-dilutive.  For the three and nine months ended December 31, 2016, the calculation of diluted earnings per share excluded 0.9 million and 1.0 million stock options, respectively, because they were anti-dilutive.  For the three months ended December 31, 2017, the total number of potentially dilutive securities was 1.1 million.  However, these securities were not included in the computation of diluted net loss per share since to do so would have decreased the loss per share.

Note 10:

Inventories

Inventories consisted of the following:

		December 31, 2017				March 31, 2017
Raw materials and work in process		$	140.0			$	127.7
Finished goods			46.8				40.8
Total inventories		$	186.8			$	168.5

Note 11:

Property, Plant and Equipment

Property, plant and equipment consisted of the following:

		December 31, 2017				March 31, 2017
Gross property, plant and equipment		$	1,266.2			$	1,177.6
Accumulated depreciation			(774.9	)			(718.6	)
Net property, plant and equipment		$	491.3			$	459.0

 

 

Note 12:

Goodwill and Intangible Assets

Changes in the carrying amount of goodwill were as follows:

		Asia				Building HVAC				CIS				Total
Goodwill, March 31, 2017		$	0.5			$	13.7			$	150.9			$	165.1
Acquisition (a)			-				-				1.3				1.3
Effect of exchange rate changes			-				0.8				5.0				5.8
Goodwill, December 31, 2017		$	0.5			$	14.5			$	157.2			$	172.2

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(a)

During the first six months of fiscal 2018, the Company recorded a $1.3 million increase to goodwill as a result of measurement period adjustments made in connection with purchase accounting for the acquisition of Luvata HTS.  See Note 2 for additional information.

Intangible assets consisted of the following:

		December 31, 2017												March 31, 2017
		Gross Carrying Value				Accumulated Amortization				Net Intangible Assets				Gross Carrying Value				Accumulated Amortization				Net Intangible Assets
Customer relationships		$	63.6			$	(4.7	)		$	58.9			$	60.5			$	(1.7	)		$	58.8
Trade names			60.1				(9.8	)			50.3				58.4				(7.2	)			51.2
Acquired technology			28.4				(5.1	)			23.3				27.0				(2.9	)			24.1
Total intangible assets		$	152.1			$	(19.6	)		$	132.5			$	145.9			$	(11.8	)		$	134.1

The Company recorded amortization expense of $2.5 million and $1.1 million for the three months ended December 31, 2017 and 2016, respectively.  The Company recorded amortization expense of $7.3 million and $1.9 million for the nine months ended December 31, 2017 and 2016, respectively.  Estimated future amortization expense is as follows:

Fiscal Year		Estimated Amortization Expense
Remainder of 2018		$	2.4
2019			9.6
2020			9.5
2021			8.9
2022			8.7
2023 & Beyond			93.4

 

 

Note 13:

Product Warranties

Changes in accrued warranty costs were as follows:

		Three months ended December 31,
		2017				2016
Beginning balance		$	9.4			$	8.4
Warranties recorded at time of sale			2.0				1.4
Adjustments to pre-existing warranties			0.2				0.1
Additions due to acquisition			-				4.1
Settlements			(2.1	)			(2.1	)
Effect of exchange rate changes			0.1				(0.3	)
Ending balance		$	9.6			$	11.6

		Nine months ended December 31,
		2017				2016
Beginning balance		$	10.0			$	8.3
Warranties recorded at time of sale			4.7				3.9
Adjustments to pre-existing warranties			-				-
Additions and adjustments due to acquisition (a)			(1.0	)			4.1
Settlements			(4.6	)			(4.4	)
Effect of exchange rate changes			0.5				(0.3	)
Ending balance		$	9.6			$	11.6

 

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(a)

During fiscal 2018, the Company decreased its liability for product warranties by $1.0 million as a result of measurement period adjustments made in connection with purchase accounting for the acquisition of Luvata HTS.  See Note 2 for additional information.

Note 14:

Indebtedness

Long-term debt consisted of the following:

	Fiscal year of maturity		December 31, 2017				March 31, 2017
Term loans	2022		$	270.4			$	268.9
6.8% Senior Notes	2021			105.0				117.0
5.8% Senior Notes	2027			50.0				50.0
Other (a)	2032			12.7				8.3
				438.1				444.2
Less: current portion				(37.9	)			(31.8	)
Less: unamortized debt issuance costs				(5.7	)			(6.7	)
Total long-term debt			$	394.5			$	405.7

 

---

(a)

Other long-term debt includes borrowings by foreign subsidiaries, capital lease obligations and other financing-type obligations.

 

 

At December 31, 2017 and March 31, 2017, the Company had $22.7 million and $40.4 million, respectively, of short-term borrowings under its $175.0 million multi-currency revolving credit facility, which expires in November 2021.  At December 31, 2017, domestic letters of credit totaled $3.9 million, resulting in available capacity under the Company’s revolving credit facility of $148.4 million.  The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at December 31, 2017 and March 31, 2017 of $30.8 million and $33.0 million, respectively.  At December 31, 2017, the Company’s foreign unused lines of credit totaled $20.4 million.  In aggregate, the Company had total available lines of credit of $168.8 million at December 31, 2017.

Provisions in the Company’s amended and restated credit agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses.  Under its primary debt agreements in the U.S., the Company has provided liens on substantially all domestic assets.  In addition, the term loans require prepayments, as defined in the credit agreement, in the event the Company’s annual excess cash flow exceeds defined levels or in the event of certain asset sales.  The Company is also subject to leverage ratio covenants, the most restrictive of which requires the Company to limit its consolidated indebtedness, less a portion of its 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”).  The Company is also subject to an interest expense coverage ratio covenant, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense.  The Company was in compliance with its debt covenants as of December 31, 2017.

The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities.  At December 31, 2017 and March 31, 2017, the carrying value of the Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of approximately $159.0 million and $170.0 million, respectively.  The fair value of the Company’s long-term debt is categorized as Level 2 within the fair value hierarchy.  Refer to Note 3 for the definition of a Level 2 fair value measurement.

Note 15:

Contingencies and Litigation

The United States Environmental Protection Agency has designated the Company as a potentially responsible party for remediation of three sites.  These sites are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois).  In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri).  These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations.  The percentage of material allegedly attributable to Modine is relatively low.  Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions.  The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined.  Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be material to the Company’s financial position due to its relatively small portion of contributed materials.

 

 

The Company has recorded environmental accruals for obligations assumed as a result of its recent acquisition of Luvata HTS, the most significant of which relates to historical soil and groundwater contamination remediation and monitoring for a manufacturing site in the United States.  In addition, the Company has recorded environmental investigation and remediation accruals related to subsurface contamination at its former manufacturing facility in the Netherlands, investigative and remedial work related to a previously-owned manufacturing facility in the United States, and groundwater contamination at its manufacturing facility in Brazil, along with accruals for lesser environmental matters at certain other facilities in the United States.  These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance.  The accruals for these environmental matters totaled $17.0 million and $16.8 million at December 31, 2017 and March 31, 2017, respectively.  As additional information becomes available, the Company will re-assess the liabilities related to these matters and revise the estimated accruals, if necessary.  Based upon currently available information, the Company believes the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position.  However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages.

As of March 31, 2017, the Company accrued $4.7 million related to alleged violations of Brazil’s antitrust regulations.  During the first quarter of fiscal 2018, the Company paid $4.7 million to Brazil’s Administrative Council for Economic Defense to settle this matter.

In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine.  In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits or proceedings are not expected to have a material adverse effect on the Company’s financial position.

Note 16:

Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss were as follows:

		Three months ended December 31, 2017																Nine months ended December 31, 2017
		Foreign Currency Translation				Defined Benefit Plans				Cash Flow Hedges				Total				Foreign Currency Translation				Defined Benefit Plans				Cash Flow Hedges				Total
Beginning balance		$	(19.0	)		$	(133.3	)		$	-			$	(152.3	)		$	(46.8	)		$	(135.0	)		$	-			$	(181.8	)
Other comprehensive income before reclassifications			4.6				-				0.6				5.2				32.4				-				0.6				33.0
Reclassifications for amortization of unrecognized net loss (a)			-				1.3				-				1.3				-				3.9				-				3.9
Income taxes			-				(0.4	)			(0.2	)			(0.6	)			-				(1.3	)			(0.2	)			(1.5	)
Total other comprehensive income			4.6				0.9				0.4				5.9				32.4				2.6				0.4				35.4
Ending balance		$	(14.4	)		$	(132.4	)		$	0.4			$	(146.4	)		$	(14.4	)		$	(132.4	)		$	0.4			$	(146.4	)

 

 

		Three months ended December 31, 2016												Nine months ended December 31, 2016
		Foreign Currency Translation				Defined Benefit Plans				Total				Foreign Currency Translation				Defined Benefit Plans				Total
Beginning balance		$	(39.0	)		$	(136.5	)		$	(175.5	)		$	(36.0	)		$	(138.2	)		$	(174.2	)
Other comprehensive income (loss) before reclassifications			(14.2	)			-				(14.2	)			(17.2	)			-				(17.2	)
Reclassifications for amortization of unrecognized net loss (a)			-				1.3				1.3				-				3.9				3.9
Income taxes			-				(0.4	)			(0.4	)			-				(1.3	)			(1.3	)
Total other comprehensive income (loss)			(14.2	)			0.9				(13.3	)			(17.2	)			2.6				(14.6	)
Ending balance		$	(53.2	)		$	(135.6	)		$	(188.8	)		$	(53.2	)		$	(135.6	)		$	(188.8	)

 

---

(a)

Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans.  See Note 4 for additional information about the Company’s pension plans.

Note 17:

Segment Information

The following is a summary of net sales, gross profit, operating income, and total assets by segment.  In fiscal 2018, the Company adopted new accounting guidance related to the income statement presentation of pension and postretirement costs.  Accordingly, the Company recast the comparable fiscal 2017 segment financial results to conform to the current-period presentation.  See Note 1 for additional information on this new accounting guidance.

		Three months ended December 31,								Nine months ended December 31,
Net sales:		2017				2016				2017				2016
Americas		$	140.5			$	123.4			$	430.7			$	389.4
Europe			134.6				119.8				405.4				389.7
Asia			42.8				28.6				117.7				78.2
Commercial and Industrial Solutions (a)			144.9				34.7				451.6				34.7
Building HVAC			56.1				47.2				147.9				132.8
Segment total			518.9				353.7				1,553.3				1,024.8
Corporate and eliminations			(6.2	)			(3.9	)			(16.8	)			(10.1	)
Net sales		$	512.7			$	349.8			$	1,536.5			$	1,014.7

 

 

		Three months ended December 31,																Nine months ended December 31,
		2017								2016								2017								2016
Gross profit:		$'s				% of sales				$'s				% of sales				$'s				% of sales				$'s				% of sales
Americas		$	21.7				15.4	%		$	18.4				14.9	%		$	69.7				16.2	%		$	59.5				15.3	%
Europe			17.9				13.3	%			18.6				15.5	%			56.8				14.0	%			60.3				15.5	%
Asia			8.2				19.0	%			5.0				17.6	%			21.9				18.6	%			13.1				16.7	%
Commercial and Industrial Solutions (a)			18.6				12.9	%			4.4				12.7	%			66.4				14.7	%			4.4				12.7	%
Building HVAC			19.0				33.8	%			15.3				32.4	%			45.0				30.4	%			37.1				28.0	%
Segment total			85.4				16.4	%			61.7				17.5	%			259.8				16.7	%			174.4				17.0	%
Corporate and eliminations			-				-				(2.7	)			-				0.2				-				(5.1	)			-
Gross profit		$	85.4				16.7	%		$	59.0				16.9	%		$	260.0				16.9	%		$	169.3				16.7	%

		Three months ended December 31,								Nine months ended December 31,
Operating income:		2017				2016				2017				2016
Americas		$	8.9			$	5.7			$	28.8			$	14.2
Europe			6.3				8.6				22.8				30.9
Asia			5.1				2.6				12.6				4.9
Commercial and Industrial Solutions (a)			(4.6	)			(0.3	)			14.3				(0.3	)
Building HVAC			9.2				6.7				18.6				10.4
Segment total			24.9				23.3				97.1				60.1
Corporate and eliminations			(11.0	)			(16.6	)			(32.1	)			(38.7	)
Operating income		$	13.9			$	6.7			$	65.0			$	21.4

		December 31, 2017				March 31, 2017
Total assets:
Americas		$	275.9			$	282.9
Europe			308.1				269.4
Asia			132.5				111.3
Commercial and Industrial Solutions			606.8				576.0
Building HVAC			88.8				85.2
Corporate and eliminations (b)			90.1				124.7
Total assets		$	1,502.2			$	1,449.5

 

---

(a)

The Company acquired Luvata HTS on November 30, 2016 and began operating the business as its CIS segment.  As the Company has consolidated CIS financial results since the acquisition date, the three and nine months ended December 31, 2016 included one month of financial results from CIS operations.  During the three months ended December 31, 2017, the Company recorded restructuring expenses and an impairment charge totaling $9.5 million within the CIS segment associated with the closure of a manufacturing facility in Austria.  See Note 6 for additional information.

(b)

The decrease in total assets at Corporate was primarily due to a decrease in deferred tax assets resulting from the impact of tax reform in the U.S.  See Note 8 for additional information regarding the reduction in the corporate tax rate in the U.S.

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

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.

 

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

		Three months ended December 31,																Nine months ended December 31,
		2017								2016								2017								2016
(in millions)		$'s				% of sales				$'s				% of sales				$'s				% of sales				$'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.

Comparison of Nine Months Ended December 31, 2017 and 2016

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.

 

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:

Americas
		Three months ended December 31,																Nine months ended December 31,
		2017								2016								2017								2016
(in millions)		$'s				% of sales				$'s				% of sales				$'s				% of sales				$'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	%