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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2014

or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 1-1373

(Exact name of registrant as specified in its charter)

 

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)

Registrant's telephone number, including area code (262) 636‑1200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

 

The number of shares outstanding of the registrant's common stock, $0.625 par value, was 47,874,690 at January 28, 2015.

 

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MODINE MANUFACTURING COMPANY

TABLE OF CONTENTS

 

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PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements.

MODINE MANUFACTURING COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and nine months ended December 31, 2014 and 2013

(In millions, except per share amounts)

(Unaudited)

 

The notes to condensed consolidated financial statements are an integral part of these statements.

 

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MODINE MANUFACTURING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three and nine months ended December 31, 2014 and 2013

(In millions)

(Unaudited)

The notes to condensed consolidated financial statements are an integral part of these statements.

 

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MODINE MANUFACTURING COMPANY

CONSOLIDATED BALANCE SHEETS

December 31, 2014 and March 31, 2014

(In millions, except per share amounts)

(Unaudited)

The notes to condensed consolidated financial statements are an integral part of these statements.

 

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MODINE MANUFACTURING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended December 31, 2014 and 2013

(In millions)

(Unaudited)

The notes to condensed consolidated financial statements are an integral part of these statements.

 

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Note 1:

General

 

The accompanying condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States applied on a basis consistent with those principles used in the preparation of the annual consolidated financial statements of Modine Manufacturing Company (“Modine” or the “Company”) for the fiscal year ended March 31, 2014.  The financial statements include all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods.  Results for the first nine months of fiscal 2015 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and related notes in Modine's Annual Report on Form 10-K for the year ended March 31, 2014.

Discontinued operations:  During fiscal 2009, the Company sold its Electronics Cooling business.  The buyer financed a portion of the selling price by issuing promissory notes payable to Modine.  During the third quarter of fiscal 2015, the Company received $1.5 million from the buyer, which represented the final payment on the promissory notes.  The Company had previously recorded a reserve against a portion of the promissory notes due to collectability concerns.  As a result, the Company recorded a gain of $0.9 million ($0.6 million after income taxes) during the third quarter of fiscal 2015.

Out of period adjustment:  During the second quarter of fiscal 2014, the Company recorded a customer pricing adjustment that related to prior fiscal years.  The impact of this error to the second quarter of fiscal 2014 decreased pre-tax earnings by $0.6 million ($0.5 million after-tax).  The Company does not believe that the impact of this error is material to its financial statements for the nine months ended December 31, 2013.

New revenue recognition accounting guidance:  In May 2014, the Financial Accounting Standards Board issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers.  The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about revenue arising from contracts with customers.  This new guidance is effective for the Company’s first quarter of fiscal 2018 and early application is not permitted.  The Company is currently evaluating the impact the new guidance will have on its consolidated financial statements.

Note 2:

Airedale Facility Fire

On September 6, 2013, a fire caused significant destruction to the Company’s Airedale manufacturing facility and offices in Rawdon (Leeds), United Kingdom.  The Company reports Airedale’s financial results within the Building HVAC segment (previously known as Commercial Products).  There were no injuries caused by the fire.  The Rawdon facility, which was leased, was used to manufacture cooling products and solutions for a variety of applications, including data centers, clean rooms, retail, leisure and process cooling. The fire caused the Company to temporarily suspend manufacturing at the Rawdon site; however, the Company transferred its operations to temporary facilities and has begun rebuilding the leased facility.

The Company maintains insurance coverage for damage to the leased facility, equipment, inventory, other assets, business interruption and lost profits, and recovery-related expenses caused by the fire.  The Company believes that reimbursement from its insurance provider is probable for substantially all losses and costs directly attributable to the fire.  During the first quarter of fiscal 2015, the Company recorded a $2.6 million recovery from business interruption insurance for fiscal 2014 lost profits.  During the third quarter of fiscal 2015, the Company recorded a $2.0 million recovery from business interruption insurance for year-to-date lost profits in fiscal 2015.  The Company recorded these recoveries for lost profits within selling, general and administrative (“SG&A”) expenses.  Since the date of the fire, the Company has received cumulative cash proceeds of $60.6 million from its insurance provider for covered losses.  In addition, the Company has written-off inventory of $4.7 million and equipment with a net book value of $1.4 million and incurred costs directly attributable to the fire totaling $18.9 million.  The Company has recorded these losses and costs, which totaled $25.0 million, in the same statement of operations line as the related insurance recovery.

 

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The terms of the Rawdon lease agreement obligate the Company to rebuild the damaged facility.  As of December 31, 2014, the Company has capitalized reconstruction costs of $12.9 million, and has recorded this asset on the consolidated balance sheet within other current assets.  The Company estimates the total cost of reconstruction to be $56.9 million.  As of December 31, 2014, the liability to rebuild the facility was $56.9 million, which was recorded within other current liabilities, and the total receivable from the Company’s insurance provider was $25.9 million, which was recorded within other current assets.  As of March 31, 2014, the liability to rebuild the facility was $45.0 million ($37.0 million within other current liabilities and $8.0 million within other noncurrent liabilities), and the receivable from the Company’s insurance provider was $25.4 million ($18.4 million within other current assets and $7.0 million within other noncurrent assets).  The Company increased its estimate of the cost to rebuild the Rawdon facility and the associated insurance receivable by $11.9 million during fiscal 2015, primarily due to an increase in costs to prepare the site’s foundation for reconstruction.

Note 3:

Fair Value Measurements

Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  Fair value measurements are classified under the following hierarchy:

·

Level 1 – Quoted prices for identical instruments in active markets.

·

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

·

Level 3 – Model-derived valuations in which one or more significant inputs are not observable.

When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1.  In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2.  If quoted or observable market prices are not available, fair value is based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates.  These measurements are classified as Level 3.

The carrying values of cash and cash equivalents, trade accounts receivable, and accounts payable approximate fair value due to the short-term nature of these instruments.  The Company holds trading securities in a deferred compensation trust to fund obligations under Modine’s non-qualified deferred compensation plan.  The securities’ fair values, which are recorded as other noncurrent assets, are determined based on quoted prices from active markets and classified within Level 1 of the valuation hierarchy.  The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust.  The fair values of the Company’s trading securities and deferred compensation obligations each totaled $2.9 million and $2.6 million at December 31, 2014 and March 31, 2014, respectively.  The fair value of the Company’s debt is disclosed in Note 14.

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Note 4:

Pensions

During the three months ended December 31, 2014 and 2013, the Company contributed $2.1 million and $2.8 million, respectively, to its U.S. pension plans.  During the nine months ended December 31, 2014 and 2013, the Company contributed $5.9 million and $6.2 million, respectively, to its U.S. pension plans.  Pension cost included the following components:

 

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 executives that consists of restricted stock and stock option components granted for retention and performance, (2) a discretionary equity program for management and other key employees, and (3) stock options and/or stock awards for non-employee directors.

Compensation cost is calculated based on the fair value of the instrument at the time of grant, and is recognized as expense over the vesting period of the stock-based award.  The Company recognized stock-based compensation cost of $0.9 million and $1.5 million for the three months ended December 31, 2014 and 2013, respectively.  The Company recognized stock-based compensation cost of $3.6 million and $3.1 million for the nine months ended December 31, 2014 and 2013, respectively.  The performance component of awards granted under the Company’s long-term incentive plan during the first quarter of fiscal 2015 is based upon a target three-year average consolidated return on average capital employed and three-year average revenue growth.

The fair value of stock-based compensation awards granted during the nine months ended December 31, 2014 and 2013 were as follows:

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As of December 31, 2014, unrecognized compensation cost related to non-vested stock-based compensation awards, which will be amortized over the remaining service periods, was as follows:

Note 6:

Restructuring Activities

During fiscal 2013, the Company announced its intention to restructure its Europe segment.  The Company’s restructuring actions and plans have included exiting certain non-core product lines based upon Modine’s global product strategy, reducing manufacturing costs, consolidating production facilities, implementing headcount reductions, and disposing of and selling certain underperforming or non-strategic assets. The restructuring activities are designed to align the cost structure of the segment with the segment’s strategic focus on the commercial vehicle, off-highway, automotive component, and engine products markets, while improving gross margin and return on average capital employed.

Since commencement of the Europe segment restructuring program, the Company has recorded $28.6 million of employee severance costs, primarily related to headcount reductions at two manufacturing facilities and the segment headquarters, $26.1 million of asset impairment charges, and $9.3 million of accelerated depreciation and other restructuring and repositioning expenses.

Restructuring and repositioning expenses related to the Europe segment restructuring program were as follows:

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The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance related to the Europe segment restructuring program were as follows:

During the third quarter of fiscal 2015, the Company sold a wind tunnel within the Europe segment, which was previously reported as an asset held for sale, for cash proceeds of $5.8 million and recognized a gain of $3.2 million.

During the three months ended December 31, 2013, the Company recorded asset impairment charges of $2.0 million, primarily related to a manufacturing facility in Germany that the Company plans to close.

During the three and nine months ended December 31, 2014, the Company recorded $0.7 million and $1.2 million, respectively, of restructuring expenses in its South America segment due to employee severance-related costs.  The headcount reductions were in response to the economic slowdown in Brazil and reflect the Company’s objective to maintain profitability in the segment despite lower sales volume.

During the fourth quarter of fiscal 2014, the Company approved a plan to close its McHenry, Illinois manufacturing facility, reflecting its focus on operating scale manufacturing facilities to improve overall competitiveness and profitability.  The Company has begun to transfer the facility’s current production to other existing North America segment manufacturing facilities.  During the three and nine months ended December 31, 2014, the Company recorded $0.6 million and $0.8 million, respectively, of restructuring expenses related to the planned closure, primarily for equipment transfer costs.

 

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MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

(unaudited)

 

Note 7:

Other Income and Expense

Other income and expense consisted of the following:

 

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 transactions denominated in a foreign currency, along with unrealized gains and losses on foreign currency exchange contracts.

Note 8:

Income Taxes

For the three months ended December 31, 2014 and 2013, the Company’s effective income tax rate was 24.8 percent and (30.8) percent, respectively.  For the nine months ended December 31, 2014 and 2013, the Company’s effective income tax rate was 34.2 percent and 39.9 percent, respectively.

The most significant factors impacting changes in the effective tax rate for the three and nine months ended December 31, 2014, as compared with the prior-year periods, were increases in the valuation allowance relating to certain foreign jurisdictions for which no income tax benefit is recognized, the changing mix of foreign and domestic earnings, and a $2.5 million benefit in fiscal 2014 from a foreign tax law change.   At December 31, 2014, the Company continued to record a full valuation allowance against its net deferred tax assets in certain foreign jurisdictions ($44.2 million) and a valuation allowance against certain U.S. deferred tax assets ($15.4 million), as it is more likely than not that these assets will not be realized based on historical financial results.  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.

Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with the 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 tax impacts of certain significant, unusual or infrequently occurring items are recorded in the period in which they occur. The impact of the Company’s operations in certain foreign locations are excluded from the overall effective tax rate methodology and recorded 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 next twelve months.

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MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

(unaudited)

 

Note 9:

Earnings Per Share

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

 

For the three and nine months ended December 31, 2014, the calculation of diluted earnings per share excluded 0.9 million and 0.7 million stock options, respectively, because they were anti-dilutive.  For the three and nine months ended December 31, 2013, the calculation of diluted earnings per share excluded 0.5 million and 0.7 million stock options, respectively, because they were anti-dilutive.  For the three months ended December 31, 2013, the total number of potential dilutive securities was 0.8 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:

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MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

(unaudited)

 

Note 11:

Property, Plant and Equipment

Property, plant and equipment consisted of the following:

Note 12: Goodwill and Intangible Assets

Changes in the carrying amount of goodwill were as follows:

Intangible assets consisted of the following:

Amortization expense for the three months ended December 31, 2014 and 2013 was $0.4 million and $0.2 million, respectively.  Amortization expense for the nine months ended December 31, 2014 and 2013 was $1.2 million and $0.6 million, respectively.  Estimated future amortization expense is as follows:

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MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

(unaudited)

 

Note 13:

Product Warranties

Changes in accrued warranty costs were as follows:

Note 14:

Indebtedness

The Company’s long-term debt includes $125.0 million of 6.8 percent Senior Notes.  The Company also maintains a $175.0 million domestic revolving credit facility, which expires in August 2018.  At December 31, 2014 and March 31, 2014, the Company had no borrowings outstanding under its revolving credit facility.

The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at December 31, 2014 and March 31, 2014 of $23.0 million and $32.4 million, respectively.  At December 31, 2014, the Company’s foreign unused lines of credit totaled $43.0 million.  In aggregate, the Company had total available lines of credit of $218.0 million at December 31, 2014.

Provisions in the Company’s revolving credit facility, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses.  The Company was in compliance with its debt covenants as of December 31, 2014.

 

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, 2014 and March 31, 2014, the carrying value of Modine’s long-term debt approximated fair value, with the exception of the Senior Notes, which had a fair value of approximately $136.0 million and $140.0 million, respectively.  The fair value of the Senior Notes is categorized as Level 2 within the fair value hierarchy.  Refer to Note 3 for the definition of a Level 2 fair value measurement.

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MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

(unaudited)

 

Note 15:

Contingencies and Litigation

Environmental: The United States Environmental Protection Agency has designated the Company as a potentially responsible party for remediation of three sites where the Company had involvement.  These sites include: 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 and 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 Modine’s relatively small portion of contributed materials.

The Company has recorded environmental investigation and remediation accruals for groundwater contamination at its manufacturing facility in Brazil and subsurface contamination at its former manufacturing facility in the Netherlands, along with other lesser environmental matters at certain facilities located 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 $4.2 million and $5.1 million at December 31, 2014 and March 31, 2014, respectively.  As additional information becomes available, the Company will assess any potential liability related to these matters and revise the estimated accrual, if necessary.  Based on currently available information, the Company believes that 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.  During fiscal 2011, one of the adjacent businesses to the Company’s facility in Brazil filed suit against Modine’s Brazilian subsidiary seeking remediation and certain other damages as a result of contamination allegedly attributable to Modine’s operations.  The Company is defending this suit and believes that the ultimate outcome of this matter will not be material.

Europe value added tax:  During fiscal 2012, the Company determined it was not properly applying value added tax (“VAT”) to certain cross-border transactions within the Europe segment and established an accrual of $10.7 million for estimated VAT liabilities, including interest and penalties.  During fiscal 2013 and 2014, the Company completed the registration and filing process with the taxing authorities and began making payments to the applicable jurisdictions.  During the three and nine months ended December 31, 2014, the Company recorded reductions to SG&A expenses of $1.0 million and $1.2 million, respectively.  During the three and nine months ended December 31, 2013, the Company recorded reductions to SG&A expenses of $1.1 million and $1.6 million, respectively.  These reductions resulted from favorable changes to the estimated VAT obligations.

Other litigation: 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 consolidated financial statements.

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Note 16:

Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss were as follows:

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(a)	Amounts are included in the calculation of net periodic benefit cost.  See Note 4 for additional information.

(b)	Reclassifications for commodity derivatives are included in cost of sales.

Note 17:

Segment Information

During the first quarter of fiscal 2015, the Company changed the name of its Commercial Products segment to Building HVAC in order to better reflect the nature of the segment’s product lines.  There were no changes to the operations or reported financial results of the segment as a result.  The following is a summary of net sales, gross profit, operating income, and total assets by segment:

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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, 2014 was the third quarter of fiscal 2015.

Third Quarter Highlights:  Sales in the third quarter of fiscal 2015 increased $16.6 million, or 5 percent, from the third quarter of fiscal 2014, due to sales increases in our Building HVAC, Asia and North America segments, partially offset by lower sales in our South America segment, as economic conditions remained weak in Brazil, and in our Europe segment, where sales volume increases were more than offset by unfavorable foreign currency exchange rate changes, primarily associated with the recent strengthening of the U.S. dollar.  Gross profit increased $2.6 million, primarily due to sales volume improvements.  Selling, general and administrative (“SG&A”) expenses decreased slightly as a percentage of sales.  During the third quarter of fiscal 2015, our net earnings from continuing operations were $9.1 million, compared with a net loss of $3.4 million in the prior year.

Year-to-Date Highlights:  Sales in the first nine months of fiscal 2015 increased $46.4 million, or 4 percent, from the same period last year, due to sales increases in each of our business segments, except in our South America segment, in which sales were negatively impacted by continued weak economic conditions in Brazil.  Gross profit increased $7.9 million, primarily due to sales volume improvements.  SG&A expenses decreased slightly as a percentage of sales.  During the first nine months of fiscal 2015, our net earnings from continuing operations were $25.2 million, compared with $12.2 million in the prior year.

The following table presents consolidated financial results on a comparative basis for the three and nine months ended December 31, 2014 and 2013:

 

Comparison of Three Months Ended December 31, 2014 and 2013

Third quarter sales of $363.6 million were $16.6 million, or 5 percent, higher than the third quarter of the prior year, due to sales increases in our Building HVAC, Asia, and North America segments, partially offset by decreased sales in our South America segment, as economic conditions remained weak in Brazil, and lower sales in our Europe segment, where higher sales volume was more than offset by a $12.1 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the recent strengthening of the U.S. dollar.

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Third quarter gross profit increased $2.6 million from the third quarter of fiscal 2014, primarily due to sales volume improvements, partially offset by higher material costs and a $1.5 million unfavorable impact of foreign currency exchange rate changes.  Gross margin of 16.4 percent remained consistent with the third quarter of the prior year.

SG&A expenses increased $0.7 million from the third quarter of fiscal 2014 to the third quarter of fiscal 2015, yet decreased slightly as a percentage of sales to 12.5 percent.  The $0.7 million increase was primarily due to higher engineering and development costs, partially offset by lower compensation-related expenses and a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses decreased $7.5 million in the third quarter of fiscal 2015 compared with the prior year, due to lower restructuring costs in Germany, as we have entered the final stages of our European restructuring program, partially offset by higher severance-related costs in South America and plant consolidation activities in North America.

During the third quarter of fiscal 2015, we sold a wind tunnel within our Europe segment that we no longer considered to be a core asset, and recognized a gain of $3.2 million.  During the third quarter of fiscal 2014, we recorded asset impairment charges of $2.0 million, primarily related to the planned closure of a manufacturing facility in Germany.

Operating income of $15.5 million in the third quarter of fiscal 2015 represented a $14.6 million increase from $0.9 million in the third quarter of fiscal 2014, primarily due to a reduction in restructuring expenses, the $3.2 million gain from the sale of the wind tunnel and increased gross profit.

Interest expense in the third quarter of fiscal 2015 decreased $0.4 million, or 13 percent, compared with the third quarter of the prior year, primarily due to lower outstanding short-term debt.

The provision for income taxes was $3.0 million and $0.8 million in the third quarter of fiscal 2015 and 2014, respectively.  The $2.2 million increase was primarily related to a $2.5 million benefit from a foreign tax law change in the third quarter of fiscal 2014 and higher income tax expense due to the reversal of U.S. income tax valuation allowances during the fourth quarter of fiscal 2014, partially offset by tax benefits associated with the retroactive extension of certain U.S. tax laws in the third quarter of fiscal 2015.

Earnings from discontinued operations, net of income taxes, of $0.6 million in the third quarter of fiscal 2015 related to a gain associated with the final collection of proceeds from the fiscal 2009 sale of our Electronic Cooling business.

Comparison of Nine Months Ended December 31, 2014 and 2013

Fiscal 2015 year-to-date sales of $1,133.4 million were $46.4 million, or 4 percent, higher than the same period last year, due to improved sales in each of our business segments, except in our South America segment, in which sales were negatively impacted by continued weak economic conditions in Brazil.  Total Company year-to-date sales were negatively impacted by a $7.0 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the recent strengthening of the U.S. dollar.

Fiscal 2015 year-to-date gross profit of $183.8 million increased $7.9 million from the same period last year, primarily due to sales volume improvements and $4.3 million of accelerated depreciation recorded in the prior year due to manufacturing process changes at a facility in Germany.

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Fiscal 2015 year-to-date SG&A expenses increased $2.9 million from the same period last year, yet decreased slightly as a percentage of sales to 12.0 percent.  The increase was primarily due to higher compensation-related expenses, increased engineering and development costs, and SG&A expenses at Barkell Limited (“Barkell”), which we acquired in the fourth quarter of fiscal 2014, partially offset by recoveries totaling $4.6 million from business interruption insurance recognized during fiscal 2015 related to the Airedale fire.

Restructuring expenses decreased $6.8 million in the nine months of fiscal 2015 compared with the prior year, due to lower restructuring costs in Germany, as we have entered the final stages of our European restructuring program, partially offset by higher severance-related costs in South America and plant consolidation activities in North America.

During fiscal 2015, we sold a wind tunnel within our Europe segment that we no longer considered to be a core asset, and recognized a gain of $3.2 million.

Operating income of $47.5 million during the first nine months of fiscal 2015 increased $17.0 million from the same period last year, primarily due to higher gross profit, a reduction in restructuring expenses, and the gain from the sale of the wind tunnel, partially offset by slightly higher SG&A expenses.

Interest expense decreased $0.5 million, or 5 percent, during the first nine months of fiscal 2015 compared with the prior year, primarily due to lower outstanding short-term debt.

The provision for income taxes was $13.1 million and $8.1 million during the first nine months of fiscal 2015 and 2014, respectively.  The $5.0 million increase was primarily due to higher income tax expense related to the reversal of U.S. income tax valuation allowances during the fourth quarter of fiscal 2014 and a $2.5 million benefit from a foreign tax law change in the prior year, partially offset by tax benefits associated with the retroactive extension of certain U.S. tax laws in the current year.

Earnings from discontinued operations, net of income taxes, of $0.6 million in fiscal 2015 relates to a gain associated with the final collection of proceeds from the fiscal 2009 sale of our Electronic Cooling business.

During the first quarter of fiscal 2015, we changed the name of our Commercial Products segment to Building HVAC in order to better reflect the nature of the segment’s product lines.  There were no changes to the operations or reported financial results of the segment as a result.

The following is a discussion of our segment results of operations for the three and nine months ended December 31, 2014 and 2013: