1.      General

The accompanying consolidated financial statements, which have not been audited by independent auditors, were prepared in conformity with generally accepted accounting principles and such principles were applied on a basis consistent with the preparation of the consolidated financial statements in Modine's March 31, 2004 Annual Report filed with the Securities and Exchange Commission, except for reclassifications made to conform the prior year with the current year's presentation. The financial information furnished includes 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 sixnine months of fiscal 2005 are not necessarily indicative of the results to be expected for the full year.

Certain notes and other information havehas been condensed or omitted from these interim financial statements. Therefore, such statements should be read in conjunction with the consolidated financial statements and related notes contained in Modine's 2004 Annual Report to Shareholders, which statements and notes were incorporated by reference in Modine's Annual Report on Form 10-K for the year ended March 31, 2004.

2.      Significant accounting policies

Cash and cash equivalents --

Credit balances for checks written but not yet presented for payment have been classified as a reduction to cash and cash equivalents. Previously these credit balances have been included in accounts payable. Prior year balances have been reclassified to conform to the current year presentation. These credit balances were $9,162,000 and $11,127,000 at March 31, 2004 and 2003. At SeptemberDecember 26, 2003 the credit balance was $10,821,000.
$5,245,000.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year's presentation.

Stock basedStock-based compensation --

Stock based compensation is recognized by the Company using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of Modine stock at the date of the grant over the amount an employee must pay to acquire the stock. If the fair-value-based method of accounting for the stock option grants for the periods shown had been applied in accordance with Statements of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," requiring quarterly SFAS No. 123 pro forma disclosure, Modine's net earnings and net earnings per share would have been changed as follows:

(In thousands, except per share amounts)

New Accounting Pronouncements -

In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position No. 106-2 ("FSP 106-2"), "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "Act"). The Act introduces a prescription drug benefit under Medicare ("Medicare Part D") as well as a federal subsidy to sponsors of post-retirement health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. FSP 106-2 superseded FSP 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," which was issued in January 2004 and permitted a sponsor of a post-retirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act until more authoritative guidance on the accounting for the federal subsidy was issued. Modine elected the one-time deferral allowed underunde r FSP 1 06-1106-1 and as a result any measures of the accumulated post-retirement benefit obligation or net periodic post-retirement benefit cost were not previously reflected in the financial statements or the accompanying notes. FSP 106-2 provides authoritative guidance on the accounting for the federal subsidy and specifies the disclosure requirements for employers who have adopted FSP 106-2, including those who are unable to determine whether benefits provided under its plan are actuarially equivalent to Medicare Part D. FSP 106-2 became effective and was adopted by Modine in the second quarter of fiscal 2005. Accordingly, the information required by FSP 106-2 is presented in Note 3 below.

In November 2004, the FASB issued a Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs -- An Amendment of ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). The Company is required to adopt the provisions of SFAS No. 151 effective for inventory costs incurred beginning during fiscal 2007. The Company does not expect the adoption of this statement to have a material impact on our financial condition or results of operations.

In December 2004, the FASB issued a SFAS No. 153, "Exchanges of Nonmonetary Assets -- An Amendment of APB Opinion No. 29," which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The Company is required to adopt SFAS No. 153 for nonmonetary asset exchanges occurring beginning in the first quarter of fiscal 2007. The Company does not expect the adoption of this statement to have a material impact on our financial condition or results of operations.

In December 2004, the FASB issued a revised SFAS No. 123(R), "Share-Based Payment -- an Amendment of FASB Statements No. 123 and 95."SFAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments, focusing primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions.  SFAS No. 123(R) requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions) and recognize the cost over the period during which an employee is required to provide service in exchange for the award.  The Company is required to adopt SFAS No. 123(R) in fiscal 2006.  The Company is evaluating the impact of SFAS No . 123(R) and expects that it will record non-cash stock compensation expenses.  The adoption of SFAS No. 123(R) is expected to have a similar, or slightly smaller, annual effect, on our results of operations than the impact reported in the SFAS No. 123 pro forma disclosure in Modine's 2004 Annual Report to Shareholders. The adoption of this statement is not expected to have any impact on the Company's financial condition or cash flows.

On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was signed into law. Among its provisions, the Act provides for a one-time special dividends received deduction for certain qualifying dividends from controlled foreign corporations. The Company may elect to apply this provision to qualifying repatriations of foreign earnings in either the balance of fiscal 2005 or in fiscal 2006. Due to the complexity of the repatriation provision, the Company is still evaluating the effects of this provision on its repatriation planning and is awaiting the issuance of further clarifying regulations before finalizing our evaluation. Accordingly, we have not determined what actions we might take in response to the Act or the impact, if any, the Act may have on the income tax provision.

In addition, the American Jobs Creation Act provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the Act also provides for a two-year phase-out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. Under guidance in FASB Staff Position No. 109-1, Application of FASB Statement No. 109, "Accounting for Income Taxes," to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, the deduction will be treated as "special deduction" as described in FASB Statement No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the tax return. The Company is currently evaluating whether its production ac tivities qualify for these special deductions. If the production activities qualify under the Act, the first time the Company could claim the deduction would be in its fiscal 2006 year.

3.     Pension and other post-retirement benefit plans

Costs for Modine's pension and other post-retirement benefit plans for the three and sixnine months ended SeptemberDecember 26, 2004 and 2003 include the following components:

The pensionPension curtailment of $430,000 was recorded in the first quarter of fiscal 2005 related to the expiration of the eligibility period for employees in one of the Company's pension plans.

In the third quarter an additional curtailment of $434,000 was recorded to reflect the modification to the Modine Manufacturing Company Pension Plan for Non-Union Hourly Paid Factory and Salaried Employees, a defined benefit plan. Effective April 1, 2006, no service performed after March 31, 2006 will be counted when calculating an employee's years of credited service under the pension plan formula. Salaried employees, currently covered under the existing salaried pension plan, will be eligible to participate beginning April 1, 2006 in the defined contribution plan which was implemented in calendar 2004 for certain new salaried employees.

The Company expects to contribute approximatelycontributed $1.7 million to its domestic qualified plans in December 2004. This amount includes $173,000the third quarter of fiscal 2005. An additional $112,000 is expected to be contributed in statutory contributions reported previously.

the fourth quarter.

Certain of Modine's post-retirement benefit plans covering U.S. retirees currently provide certain prescription benefits to eligible participants. The Company's actuaries have determined that several of the prescription drug plans for retirees and their dependents provide a benefit that is ata least actuarially equivalent to Medicare Part D under the Act.

The Act had the effect of reducing the accumulated postretirement benefit cost obligation by $2.2 million. We have applied the Act retrospectively. This will result in an expense reduction of $300,000 in the net periodic benefit cost for the 2005 fiscal year. The companyCompany has recorded one-half, or $150,000,$75,000 in the third quarter and a total of $225,000 for the nine months ended December 26, 2004 of this expense as reduction in interest cost and unrecognized net loss and gain in the second quarter financial statements.

On October 4, 2004, the Company announced that effective April 1, 2006, the Modine Salaried Employee Pension Plan, a defined benefit plan, is being modified so that no service performed after March 31, 2006 will be counted when calculating an employee's years of credited service under the pension plan formula. The effect of this change will result in a curtailment charge being recorded in the third quarter of approximately $434,000. Salaried employees, currently covered under the existing salaried pension plan, will be eligible to participate beginning April 1, 2006 in the defined contribution plan which was implemented in calendar 2004 for certain new salaried employees.
gain.

4.     Other income -- net

5.     Earnings Per Share

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

(In thousands, except per share amounts)

6.      Comprehensive Earnings

Comprehensive earnings/(loss)earnings (in thousands), which represents net earnings adjusted by the change in foreign currencyforeign-currency translation and minimum pension liability recorded in shareholders' equity for the periods ended SeptemberDecember 26, 2004 and 2003 respectively, were $15,624$42,346 and ($13,364)$27,757 for three months then ended, and $23,713$66,059 and $16,479$44,236 for sixnine months then ended.

7.      Inventory

The amountscomponents of raw material, work in process and finished goods cannot be determined exactly except by physical inventories. Based on partial interim physical inventories and percentage relationships at the time of complete physical inventories, management believes the amounts shown belowinventory are reasonable estimates of raw material, work in process and finished goods.as follows:

8.      Property, Plant, and Equipment

9.      Acquisition
Acquisitions

On April 29, 2004, Modine announced a definitive agreement to purchase the Automotive Climate Control Division (ACC) of WiniaMando Inc. Effective July 31, 2004, Modine acquired the South Korean assets of ACC.the Automotive Climate Control Division of WiniaMando Inc. (ACC). In addition, effective September 3, 2004, Modine acquired WiniaMando's wholly owned subsidiary in Shanghai, China. Subsequent to the end of the quarter, onOn October 22, 2004, Modine completed the final element of these acquisitions, by acquiring athe 50% equity interest in a joint venture in Hefei, China after receiving certain necessary approvals by the Chinese government. This latter acquisition was closed effective October 15, 2004.

The total estimated purchase price of the assets and liabilities assumed in the Korean operation and the equity interests in the Chinese operations, including the joint venture interest that closed oneffective October 22,15, 2004, is approximately $85$85.5 million in cash. As part of the purchase agreement, $10.0 million dollars of the purchase price was placed in escrow to cover any potential claims or adjustments that may arise during the 21-monthfor a 21 month period from the date of the Korean closing. WiniaMando's obligations to Modine in the event of a claimbreach are subject to certain limitations and exceptions as defined in the Asset Purchase Agreement.acquisition agreement. The completed portions of the acquisitionacquisitions that closed in August and September were accounted for under the purchase method. Acquired assets and liabilities assumed were recorded at their respective fair market values. The excess of the purchase price, including estimated professional service and other acquisition costs, over the fair market values of the assets and liabilities acqu iredliabilitie s acquired was recorded as goodwill. Goodwill recorded at SeptemberDecember 26, 2004 from the South Korean asset acquisition and the equity interest in the Shanghai, China operation totaled $928,000.$351,000 and $448,000, respectively. The adjustments made to the goodwill amount previously reported in the second quarter reflect changes in the amount of estimated professional services and certain adjustments to Korean fixed assets valuations and accounts receivables balances acquired. Additional adjustments may result from finalization of professional services costs incurred as part of the acquisitions and any potential claims or adjustments that may arise in the 21 month claim period as defined in the escrow agreement. The Company currently expects that the entire amountgoodwill amounts will not be deductible for income tax purposes.

The 50 % equity interest in the Hefei, China joint venture, which closed in October, is being accounted for under the equity method. The carrying value of the investment at December 26, 2004 was less th an the underlying value of the net assets by $518,000. The excess, which relates to certain tangible assets, is being amortized into income over the estimated remaining lives of the assets.

The newly acquired wholly owned operations in Korea and China are included in the Original Equipment segment forwhile the 50% equity interest in the Hefei joint venture is being reported in the "Other items not allocated to segments" similar to the Company's other equity investments in affiliates. For financial reporting purposes, the newly acquired operations and equity investment, discussed above, are included in the consolidated financial statements using a one-month delay similar to the Company's other foreign subsidiaries. Accordingly, the operational results reported for the second quarter of fiscal 2005 include only one monthfour months of activity from the South Korean manufacturing plant.plant, three months of activity from the wholly owned Chinese manufacturing plant and one and one-half months from the joint venture company in China. For balance sheet and cash flow purposes, both the Koreannewly acquired operations (in the second and Chinese operations acquired during the quarterthird quarters of fiscal 2005) are included in the reported amounts.

The following provides a preliminary allocation of the purchase price forof the South Korean and Chinese (whollyoperation's, wholly owned subsidiary in Shanghai) acquisitions of assets.Shanghai, China.

The following unaudited pro-forma financial information summarizes the estimated combined results of operations of the Company, and the South Korean and Shanghai, China operations of ACC, assumingthe Automotive Climate Control Division of WiniaMando. Also included in the pro-forma financial information presented is the results of operations from the joint venture company in Hefei, China recorded using the equity method. The financial information presented assumes that each of the acquisitions had taken place on April 1, 2003. The unaudited pro-forma combined results of operations reflect adjustments for interest expense and income, revised depreciation based on the fair market value of the property, plant and equipment, removal of goodwill amortization not allowable under U.S. GAAP, removal of one-time separation expenses paid to employees, and removal of certain incorporation and consulting fees incurred when WiniaMando was purchased by itsthe former owners and allocated to ACC.

The unaudited pro forma financial information presented above is for informational purposes only and does not necessarily reflect the results of operations that would have occurred had the acquisitions, completed in the second quarterand third quarters of fiscal 2005, actually taken place on the date assumed above, norand those results are those resultsnot necessarily indicative of the results of future combined operations.

Headquartered near Seoul, South Korea, with manufacturing facilities in Asan City, Modine Korea, LLC (formerly ACC) designs and manufacturers heating, ventilating and air conditioning (HVAC) systems for minivans, SUVs, commercial vehicles, trucks, buses and trains as well as other heat transfer components. The acquisition is expected to increase Modine's revenue by more than 15%, provide many complementary products to those of Modine and leverage Modine's significant technology investment. These acquisitions addadded nearly 700 people to Modine's ranks as well as a state-of-the-art wind tunnel, research center and manufacturing plant in South Korea and a wholly owned facility in Shanghai, China, as well as a 50/50 joint venture in Hefei, China.

10.     Restructuring and other plant closure costs

On June 17, 2004, the Company, through its Electronics Cooling Group (which is reported in the Distributed Products segment), announced plans to close its Guaymas, Mexico plant due to a shift in customer sourcing and over-capacity in its North American operations. The move, which consisted of transferring equipment and current operations to Lancaster, Pennsylvania and Hsinchu, Taiwan, was designed to reduce operating expenses, improve asset utilization and focus manufacturing operations closer to the electronics customer'scustomers' assembly facilities. The financial statement impact, which includes restructuring and other closure costs, through the secondthird quarter of fiscal 2005, was $2,153,000 with approximately $100,000 of the remaining costs to be recorded in October 2004.$2,114,000. These expenses are reported in the line items "restructuring charges" and "cost of sales" in the consolidated statements of earnings. The restructuring costs include severance due to a workforce reduction of 28 employees, and a negotiated b uyout,buyout, reached at the end of the second quarter, on a non-cancelable operating leaseleas e that was due to expire in April 2008. In the first quarter, the restructuring charges recognized on the non-cancelable operating lease were recorded at fair value as the lessor had not given an indication to the Company that he was willing to enter into buyout discussions. The resulting discussions and subsequent agreement reached at the end of the second quarter resulted in a $0.6 million reduction to the original restructuring amount recognized in the first quarter. The "other closure costs" consist primarily of accelerated depreciation of certain assets that willare no longer be utilized.

In the third quarter of fiscal 2005 an adjustment to other closure costs of ($148,000) was recorded upon final disposition of fixed assets at the Guaymas facility.

A summary of the restructuring and other closure costs recognized in the first two quartersnine months of fiscal 2005 are as follows:

At September 26, 2004,The following table displays the components of the accrued liability associated with this decision to restructure consisted of the following:restructuring liability:

Changes in the carrying amount of goodwill through the sixnine months ended SeptemberDecember 26, 2004, by segment and in the aggregate, are summarized in the following table:

Effective July 31 2004 and September 3, 2004, respectively, the Company completed the acquisition of the South Korean assets and 100% equity interest in Shanghai, China of ACC.the Automotive Climate Control Division (ACC) of WiniaMando Inc. Based upon a preliminary allocation of the purchase prices, the excess of the South Korean operations purchase price over the fair value of the net assets acquired is $928,000$799,000 and has been recorded as goodwill. The newly acquired operations are included in the Original Equipment segment for reporting purposes using a one-month delay.

Additional disclosures related to acquired intangible assets are as follows:

The aggregate amortization expense for the sixnine months ended SeptemberDecember 26, 2004 and 2003 were $132,000$198,000 and $190,000,$255,000, respectively. Total estimated annual amortization expense expected for fiscal years 2005 through 2010 and beyond are as follows:

12.     Indebtedness

On October 27, 2004, Modine replacedamended and terminatedrestated its $150 million multi-currency revolving credit facility, which was to expire in April 2005. The new facility has aextended the term for five year term,years, expiring in October 2009, and a credit limit ofincreased the facility to $200 million, with a customary accordion feature that allows for an additional $75 million of borrowing capacity. The indebtedness incurred by the Company under the newterms of this credit facility is secured by a guarantee from all direct and indirect material domestic subsidiaries. The new credit facility containscontain various restrictive financial covenants relating to maximum debt-to-EBITDA and minimum interest coverage ratio. In addition, the credit facility contains limitations on investments, liens, dividends and other indebtedness. Borrowings under the credit facility bear interest at a rate of LIBOR plus a spread based on certain financial criteria, or the prime rate at Modine's option. Financing fees and other third-party costs currently estimated to be $0.6are $0.7 million and the remaining unamortized balance of $0.1 million from the previous credit facility, will be amortized over the five- yearfive-year life of the new revolving credit facility.

In addition, approximately $68 million of debt was reclassified from long-term to the current portion of long-term debt ahead of the planned refinancing of a September 2005 note.

13.     Financial Instruments

The Company invests excess cash in investment quality short-term liquid debt instruments. Such investments are made only in instruments issued by high quality institutions. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to a diverse group of customers operating throughout the world. At SeptemberDecember 26, 2004 and March 31, 2004 approximately 58%60% and 54%, respectively, of the Company's trade accounts receivables were from the Company's top ten individual customers. These customers operate primarily in the automotive, truck, and heavy equipment markets and are all influenced by many of the same market and general economic factors. To reduce credit risk, the Company performs periodic credit evaluations of each customer and actively monitors its financial condition and developing business news. The Company does not generally requirerequir e collateral or advanced payments from its customers, but does so in those cases where we identify a substantial credit risk. Credit losses to customers operating in the markets served by the Company have not been material. Total bad debt write-offs have been well below 1% of outstanding trade receivable balances for the presented periods.

In addition to the external borrowing, the Company has certain foreign-denominated long-term inter-company loans that are sensitive to foreign exchange rates. These loans are not hedged at SeptemberDecember 26, 2004 and, as such, are exposed to transactional currency risk. At SeptemberDecember 26, 2004, the Company has a 43.1 billion won or, $37.5$41.1 million dollar, eight year8-yr loan to its wholly owned subsidiary Modine Korea.Korea, LLC. The potential loss from a hypothetical 10% change in the exchange rates between the South Korean Wonwon and the U.S. Dollardollar could result in an adverse or favorable currency transaction gain /(loss) of approximately $3.75$4.11 million dollars. For the three and sixnine months ended SeptemberDecember 26, 2004, the Company had recorded $0.4$3.7 million and $4.1 million, respectively, in currency transaction gains in "other income" from the date of the initial loan in August 2004. The Company is currently investigating potential alternatives to mitigate this foreign currency exposure. Similarly, the Company's wholly owned German subsidiary Modine Holding Gmb H,GmbH has an 11.1 million Euro, or $13.5$14.8 million dollars, on-demand loan to its wholly owned subsidiary Modine Hungaria Kft., at SeptemberDecember 26, 2004. The potential loss from a hypothetical 10% change in exchange rates between the Euro and the Hungarian Forint, assuming a stable exchange rate between the Euro and the U.S. dollar, could result in an adverse or favorable currency transaction gain/(loss) of approximately $1.35$1.48 million dollars. For the three months ended SeptemberDecember 26, 2004 and 2003, the Company recorded in "other income/(expense)" transaction (losses)/gains of ($0.2)0.4) million and $0.8$0.4 million, respectively. For the sixnine months ended SeptemberDecember 26, 2004 and 2003, transaction (losses)/gains recorded were ($0.9)1.3) million and $1.0$1.4 million, respectively.

14.     Foreign Exchange Contracts/Derivatives/Hedges

Modine maintains a foreign risk-management strategy that uses derivative instruments in a limited way to protect assets and obligations already held by Modine and to protect its cash flows. Derivative instruments are not used for the purpose of generating income or speculative activity. Leveraged derivatives are prohibited by Company policy. Modine's principal derivative/hedging activity in the first sixnine months of fiscal 2005 consisted of the following:

Hedges of Net Investments in Foreign Subsidiaries

The Company has a number of investments in wholly owned foreign subsidiaries and non-consolidated foreign joint ventures. The net assets of these subsidiaries are exposed to currency exchange rate volatility. The Company uses non-derivative financial instruments to hedge this exposure. The currency exposure related to the net assets of Modine's European subsidiaries are managed partially through foreign-currency-denominated debt agreements entered into by the parent. For the three months and sixnine months ended SeptemberDecember 26, 2004, $0.5$6.3 million and $6.1 million in net losses, and $0.2 million in net gains, respectively, related to the foreign-currency-denominated debt agreements were included in the cumulative translation adjustment.

		(In thousands)
Warranty accruals	2004	2003
Three months ended September 26:
Balance at June 26	$20,770	$13,470
Accruals for warranties issued in current year	2,459	2,204
Accruals related to pre-existing warranties	(115)	228
Accruals balances assumed upon acquisition	3,037	-
Settlements made	(2,616)	(2,756)
Effect of exchange-rate changes on the warranty liability	151	(370)
Balance at September 26	$23,686	$12,776
Six months ended September 26:
Balance at March 31	$20,916	$12,970
Accruals for warranties issued in current year	5,080	4,660
Accruals related to pre-existing warranties	329	482
Accruals balances assumed upon acquisition	3,037	-
Settlements made	(5,681)	(5,338)
Effect of exchange-rate changes on the warranty liability	5	2
Balance at September 26	$23,686	$12,776

		(In thousands)
Three months ended September 26,	2004	2003
Sales :
Original Equipment	$ 159,345	$ 105,769
Distributed Products	90,509	97,855
European Operations	118,295	82,271
Segment sales	368,149	285,895
Eliminations	(4,529)	(6,836)
Total net sales	$ 363,620	$ 279,059
Operating income:
Original Equipment	$ 21,294	$ 9,573
Distributed Products	(355)	2,031
European Operations	13,231	6,296
Segment operating income	34,170	17,900
Corporate & administrative expenses	(13,922)	(14,623)
Eliminations	32	36
Other items not allocated to segments	2,263	3,098
Earnings before income taxes	$ 22,543	$ 6,411

		(In thousands)
Six Months ended September 26,	2004	2003
Sales:
Original Equipment	$303,074	$216,750
Distributed Products	175,590	183,086
European Operations	241,391	184,556
Segment Sales	720,055	584,392
Eliminations	(9,073)	(16,435)
Total net sales	$710,982	$567,957
Operating Income
Original Equipment	$42,973	$26,278
Distributed Products	(493)	872
European Operations	26,448	20,022
Segment operating income	68,928	47,172
Corporate & administrative expenses	(27,525)	(28,774)
Eliminations	30	69
Other items not allocated to segments	4,556	5,126
Earnings before income taxes	$ 45,989	$ 23,593

		(In thousands)
	September 26,	March 31,
Period ending	2004	2004
Assets:
Original Equipment	$ 378,265	$ 223,130
Distributed Products	197,801	197,533
European Operations	333,441	332,858
Corporate & Administrative	264,846	222,187
Eliminations	(88,566)	(5,678)
Total assets	$ 1,085,787	$ 970,030

Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of Modine's consolidated results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto.

RESULTS OF OPERATIONS

Comparison of the SecondThird Quarter of 2004-05Fiscal 2005 with the SecondThird Quarter of 2003-04Fiscal 2004

SecondThird quarter record net sales of $363.6$418.4 million were 30.3%34.6% higher than the $279.1$310.8 million reported in the secondthird quarter of last year. This is the Company's fourthfifth consecutive quarter of record sales. Sales were positively impacted by net favorable currency exchange rates, primarily the stronger Euroeuro in relation to the U.S. Dollar,dollar, of approximately $8.5$11.9 million when compared to the same quarter last year. Also contributing to the net sales increase were one montha full three months of operating results from Modine Asia, the Company's South Korean and Chinese manufacturing facility recentlyfacilities acquired from WiniaMando Inc.
as part of the purchase of WiniaMando's Automotive Climate Control (ACC) business during the second quarter.

Revenues from the Original Equipment segment grew by 50.7%63.0% or $53.6$77.5 million, from the same quarter last year. The current year results include the first full quarter of revenues from Modine Asia, as noted above. Sales increases in the Original Equipment segmentexisting markets were driven by large volume improvements in the truck market and heavy dutyto a lesser extent but still sizable increase in the heavy-duty and industrial business, smaller revenue increases alsobusiness. Sales decreases occurred in the Automotiveautomotive market when compared to the secondthird quarter of the prior year.year due to reduced volumes for certain vehicle platforms and continued pricing pressures. The Original Equipment segment is benefiting from a combination of new business programs and general industrial and agricultural market recoveries. The current year also included one month of revenues from the South Korean manufacturing facility acquired in the second quarter, as noted above. Revenues from the European Operations segment grew by 43.8%26.1%, or $36.0$27.9 million, from the same quarter last year. Excluding the impact of the stronger Euroeuro in relation to the U.S. Dollar,dollar, revenues would have increased by 34.2%16.0%. Volume increases were recorded in both the European automotive and heavy-duty and industrial markets, in addition to the fa vorablefavorable impact in the exchange rate. In the Distributed Products segment, revenue decreased 7.5%slightly by 1.9%, or $7.3$1.6 million. Significantly decreasedDecreased revenues in the Aftermarket of 8.5% and to a lesser extentsmall decline in the electronics cooling markets were partially offset by almost a 16%9.0% increase in HVAC&R (heating, ventilating, air conditioning and refrigeration) revenues. In addition to the increasingly competitive nature of the marketplace, which continues to reduce revenues, the aftermarket business was negatively impacted during the second quarter of fiscal 2005 due to the cooler U.S. summer weather, reduced travel and the effects from hurricanes in the southeast United States. The electronics cooling business continues to experience the effects of a slow recovery in the markets served, while at the same time it is experiencing benefits from cost-containment programs, the acceleration of new business in Taiwan, and the plant restructuring initiatives described herein.

Gross profit, as a percentage of sales, was 22.9%. This was a 0.9% increase0.4% decrease as a percentage of sales from the 22.0%23.3% earned in the secondthird quarter of the previous year. Higher gross margins were reported in the Original EquipmentEuropean Operations and European Operationsthe Distributed Products segments while the gross margin declined by less than 1%3 percentage points in the Distributed productsOriginal Equipment segment. Improved gross margins were reported in the majority of the Company's major markets, while the North American automotive, heavy-duty and aftermarketindustrial, and HVAC&R markets registered declines, and the electronics cooling market remained essentially unchanged.declines. Higher material costs as a percentage of sales were more thanpartially offset by lower manufacturing overhead costs as a percentage of sales. Labor costs as a percentage of sales declined slightly in the same period comparison to one year ago. Rising metalcommodity market prices, which are calculated and passed through when possible to original equipment customers on a delayed basis, once again negatively impacted the material content as a percentage of sales. Impr ovedImproved sales volumesv olumes allowed for better utilization of the fixed component of manufacturing overhead during the quarter. As mentionedThe prior year gross profit was negatively impacted by incremental expenses of $2.2 million as a result of an agreement reached with a European Original Equipment customer relating to a product performance issue and approximately $1.0 million in previous filings, new product launches and program scope changes had adversely affected manufacturing overhead in the second quarter last year.
warranty costs associated with a North American Original Equipment customer.

Selling, general and administrative expenses, as a percentage of $63.5sales, was 16.8%. This was a 1.9% decrease as a percentage of sales from the 18.7% recorded in the third quarter of the previous year. In absolute dollar terms, selling, general and administrative expenses of $70.4 million increased by 9.2%21.0% from the prior year's secondthird quarter of $58.1$58.2 million. The inclusion of one-month'sa full quarter of operating results for the new Korean acquisitionModine Asia acquisitions accounted for $1.1$4.3 million, or 21%35% of the increase. The impact of currency exchange rates, primarily the stronger Euroeuro in relation to the U.S. dollar, also contributed approximately 19%10%, or $1.0$1.2 million, to the overall increase. The largest items contributing to the remaining increase were wages, fringe benefits and other personnel-related benefitsbenefits. In addition, professional services were higher during the quarter related to Sarbanes-Oxley 404 requirements and higher depreciation.the spin-off of the aftermarket business.

Restructuring added $0.6charges reduced income by $0.1 million to income during the current quarter as a buyout agreement was reached with the lessorfinal remaining termination payments were completed related to the previously announced closure of the Guaymas, Mexico facility reducing the closing cost initially recorded in the first quarter at fair value. At the time of the initial recording of the restructuring charge in the first quarter, the lessor had not shown an interest in actively engaging in buyout discussions. This leased manufacturing facility was closed in September as part of the electronicCompany's electronics cooling group restructuring announced in June 2004.

business.

Income from operations of $20.3$25.1 million increased by $17.0$10.9 million, or 512.1%75.9% over the same quarter last year. The Original Equipment segment's operating income increased 122.4%40.1% to $21.3$23.0 million from $9.6$16.4 million onea year ago. PriorThe current year secondresults include the first full quarter results were impacted negatively by program launch costs, costs associated with a program scope change,of operations from Modine Asia as previously discussed. The truck and heavy-duty & industrial markets benefited from new business programs as well as the steady recovery in general industrial and agricultural markets. The Company continues to implement cost reduction programs which are generating operating improvements. Partially offsetting this strong performance was the North American automotive business, which had reduced volumes for certain vehicle platforms and continued pricing pressures.pressure. The European Operations segment's operating income increased 110.1%67.8% to $13.2$20.3 million from $6.3$12.1 million one year ago. Major influences were continued growth in the automotive and heavy-duty businesses, and the stronger Euroeuro in relation to the U.S. Dollar,dollar, offset in part by higher selling, general and administration costs in support of new business programs. The Distributed Products segment's operating incomeloss decreased 117.5%39.0% to a loss of $0.4$0.6 million from incomea loss of $2.0$1.0 million onea year ago. Significantly weakerWeaker Aftermarket results from increasing competition, cooler U.S. summer weather and the effects from hurricanes in the south east United Stateswere more than offset by a stronger performance by the HVAC&R business and a reduced operating loss in the electronics cooling business as the results of cost-containment programs, acceleration of new business in Taiwan and plant restructuring initiatives begincontinue to take effect.
effect, coupled with slightly improved profits in HVAC&R market.

Interest expense increased 19.6%24.7%, or $0.2$0.3 million, while average outstanding debt levels increased $4.1$32.5 million, or approximately 3.8%31.3%, from the same quarter one year ago. The increase in interest expense is mainly due to increased borrowings to fund, in part, the acquisition of the assets of the ACC Division of WiniaMando Inc,acquisitions, debt assumed as part of the acquisition and lines of credit interestshort-term borrowing recorded by the new Korean subsidiary. The relationship of the increase in the interest expense compared to the increase in debt level was also influenced by exchange rate fluctuations on Euro-denominatedeuro-denominated loans.

Net non-operating income decreasedincreased by $0.6$1.5 million from the same quarter one year ago. Royalty income was down $0.5 million from the second quarter last year. Also, the gain from the sale of property and equipment was down $0.3 million and favorable exchange gainsGains on foreign currency transactions were down $0.6up $2.4 million compared tofrom the same periodquarter one year ago. The gains were derived predominantly from unhedged inter-company loans. The Company currently has an inter-company loan denominated in euros with the Company's wholly owned Hungarian subsidiary and an inter-company loan denominated in Korean won with the Company's wholly owned Korea subsidiary. Equity in earnings of non-consolidated affiliates was up $0.8$0.6 million from the secondthird quarter last year with continued strong performance from Modine's Brazilian joint venture, Radiadores Visconde, Ltda. Equity in earnings of non-consolidated affiliates also includes the Company's share of the 50% equity interest in the newly acquired joint venture in Hefei, China. Royalty income was down $0.9 million from the third quarter last year. The prior year included recognition of $0.7 million in royalty income that was in arrears from a ma nufacturer producing heat transfer products for the power generation industry. Profits recorded on the sale of property, equipment and tooling also declined by $0.7 million from the same period one year ago. The prior year included the sale of the LaPorte, Indiana manufacturing facility as part of the restructuring program announced in fiscal 2002.

The provision for income taxes in the current quarter was $8.5$11.2 million compared to last years' secondthird quarter expense of $2.1$5.8 million. The effective tax rate of 37.7% was 4.937.2% represents an increase of 5.0 percentage points higher than infrom the same period one year ago.prior year. The increase results primarily from repatriation of foreign earningsthe following: higher state income taxes and foreign tax rate differentials, offset by a decrease in state income taxes.differential.

Net earnings for the quarter of $14.1$18.9 million, or $0.41$0.56 basic earnings per share and $0.55 diluted earnings per share were up when compared to last year's secondthird quarter net earnings of $4.3$12.3 million, or $0.13$0.36 basic and diluted earnings per share. Return on shareholders' equity through the secondthird quarter of the current fiscal year was 9.4%12.1%.

Comparison of the First SixNine Months of 2004-05Fiscal 2005 with the First SixNine Months of 2003-04Fiscal 2004

Net sales for the first sixnine months of fiscal 2004-05 were $711.0$1,129.4 million, up 25.2%28.5% from the $568.0$878.8 million reported in the same period of last year. Sales were positively impacted by net favorable currency exchange rates, primarily the stronger Euroeuro in relation to the U.S. Dollar,dollar, of approximately $19.7$31.6 million, when compared to the first sixnine months of last year.

Overall, changes in the Company's segment sales were mixed for the first sixnine months of the year. In the Original Equipment segment, net sales grew by 39.8%48.2%. Sales increases were seen in all markets served by the segment. The current year includes four months of revenues from new Modine Asia acquisitions, or approximately 40% of the segments overall increase. The largest improvement in existing markets was recorded in the truck market as a result of new product launches in the second half of last year. The heavy-duty and industrial market also recorded strong improvements followed by a smallersmall increase in the automotive market. The current year also included one month of revenues from the South Korean manufacturing facility acquired in the second quarter. The European Operations segment net sales increased by 30.8%29.1% from year-ago levels. Both the European automotive and heavy-duty markets reported sale volume increases in addition to the favorable currency translation impact of $18.2$29.0 million recorded in the first halfnine months of the year. The Distributed Products segment sales weakened by 4.1%3.4%. Reduced Aftermarket revenues were theth e major contributor to the declin edecline from the same period one year ago. The Aftermarket business continues to experience negative sales impact associated with the increasing competition in the markets served. CoolerIn addition, cooler summer weather in the United States and the effects of the hurricane season in the southeast portion of the United States were significant factors contributing to disappointing sales in the first sixnine months of fiscal 2005. Partially offsetting the Aftermarket declines were stronger coil sales in the commercial HVAC&R business. The Electronics Coolingelectronics cooling business also experienced lower sales in the first six monthsnine-months of fiscal 2005 as the division undertook a plant restructuring initiative and the ramp-up of manufacturing operations for new business in Taiwan.

Gross profit of 23.2%23.1% was down 0.4 percentage points when compared with the first sixnine months of the previous year. An increase in material costs, as a percentage of sales, was the largest driver in the reduction in gross profit. Rising metalcommodity market prices, which are calculated and passed through when possible to original equipment customers on a delayed basis, once again negatively impacted the material content as a percentage of sales. As a percentage of sales, labor remained virtually unchanged,declined slightly while manufacturing overhead improved from the prior year results which as disclosed previously, included additional program launch costs and a program scope change. Gross profits, in dollars, grew in the Original Equipment, and European Operations, and Distributed Products segments by 41%, 39% and 33%1%, respectively, while declining in the Distributed Products segment by 4%.respectively.

Selling, general and administrative expenses of $122.9$193.4 million, or 17.3%17.1% of sales, decreased 3.02.6 percentage points when compared to the first sixnine months of last year. Selling, general and administrative expenses, in absolute dollars, grew by $7.6$19.8 million. The inclusion of four months of operating results for the new Modine Asia acquisitions accounted for $5.4 million, or 27% of the increase. The impact of currency exchange rates, primarily the stronger Euroeuro in relation to the U.S. Dollar,dollar, contributed to approximately 30 percent,18%, or $2.3$3.5 million, of the overall dollar increase. The largest items contributing to the remaining increase were wages and other compensation, depreciation expenses and higher professional and other contract services.

Restructuring charges of $0.9$1.0 million were recorded during the first sixnine months related to the previously announced closure of the Guaymas, Mexico facility in the Company's Electronics Coolingelectronics cooling business. The closure is the result of a shift in customer sourcing and overcapacity in North American operations for the electronic cooling market. The charges recorded during the current year include $0.7 million for a lease buyout agreement and severance costs of $0.2$0.3 million.

Operating income of $41.4$66.6 million, or 5.8%5.9% of sales, was up 2.52.2 percentage points as a percentage of sales, from $18.5$32.8 million, or 3.3%3.7% of sales, in the first halfnine months of the previous year. The Original Equipment segment's operating income increased 63.5%54.5% to $43.0$65.9 million from $26.3$42.7 million one year ago. Current year results were positively impacted by new business programs, general industrial and agricultural market recoveries and operational enhancements.improvements and cost reductions. The European Operations segment's operating income increased 32.1%45.5% to $26.4$46.8 million from $20.0$32.1 million one year ago. Major influences were the stronger Euro in relation to the Dollar and higher sales volumes in both the automotive and heavy-duty markets.markets along with the stronger euro in relation to the dollar. The Distributed Products segment's operating income decreased 156.5%loss increased to a loss of $0.5$1.1 million from incomea loss of $0.9$0.1 million one year ago. The Company continues to experience weakness in the aftermarket business, due in part, to weather related factors encountered this summer. Restructuringsummer whic h were partially offset by a stronger year-over-year performance in the electronics cooling business as the results of cost-containment programs, acceleration of new business in Taiwan and plant restructuring initiatives during the year. Included in the electronic cooling results were $2.1 million restructuring charges and other closure costs recorde d in the Electronic Cooling market alsowhich negatively impacted operating income for the segment in the current year.

Interest expense increased $0.1$0.4 million, or just over 3%10% from the same sixnine month-period one year ago.

The increase in interest expense is mainly due to increased borrowings to fund, in part, the acquisition of ACC, debt assumed as part of the acquisition and short-term borrowing recorded by the new South Korean subsidiary.

Net non-operating income decreasedincreased by $0.5$1.0 million from the same six-monthnine-month period one year ago. Equity earnings of non-consolidated affiliates were up $1.8$2.4 million due primarily to the strong operating performance of the Company's Brazilian joint venture. Lossesventure, while smaller improvements were recognized by the Company's other joint ventures. Gains on foreign currency transactions were $0.6up $0.8 million forfrom the first sixnine months of fiscal 2005, a $1.5 million year-over-year swing2005. The gains were derived predominantly from one year ago. Current year transaction losses versus prior year transaction gains onunhedged inter-company loans. The Company currently has an unhedged inter-company loan denominated in Euros toeuros with the Company's wholly owned Hungarian subsidiary accounted for approximately $1.9and an inter-company loan denominated in Korean won with the Company's wholly owned Korea subsidiary. Royalty income has declined $0.9 million offrom the year-over-year swing for the six month period. Profitsame nine-month period one year ago. Profits recorded on the sale of property, equipment and tooling sales also declined by $0.5$1.2 million from the same period one year ago.

The prior year included the sale of the LaPorte, Indiana m anufacturing facility as part of the restructuring program announced in fiscal 2002.

The provision for income taxes in the first sixnine months was $18.1$29.3 million compared to $8.0 millionlast year's first nine months' expense for the same period one year ago.of $13.8 million. The effective tax rate of 39.4% is 5.538.5% represents an increase of 5.3 percentage points higher thanfrom the 33.9% reported one year ago.prior year. The increase resultedstems primarily from repatriation ofthe following: foreign earnings a one-time income shift between taxing jurisdictions and an increase in valuation allowance related to certainrepatriation, foreign tax loss carry forwards.
rate differential, and higher state income taxes.

Net earnings were $27.9$46.8 million or $0.82$1.38 basic earnings per share and $0.81$1.36 diluted earnings per share for the first sixnine months of the fiscal 2005. This compares to earnings of $15.6$27.9 million, or $0.46$0.82 basic and diluted earnings per share, for the first sixnine months of the prior year. Return on shareholders' equity through the secondthird quarter of the current fiscal year was 9.4%10.1%.

Outlook for the Remainder of the Year

Management is confident that the Company will significantly exceed the original fiscal 2005 sales and earnings per share guidance provided earlier thisat the start of the year. Management expectsFourth quarter results, though, may be only in-line or slightly below last year's level of 37 cents per share given the second halfabsence of a gain from plant sales recorded in fiscal 20052004, as well as softening in certain economies such as Asia and the market challenges our Aftermarket business continues to be stronger than the first half'sface ahead of its spin off and merger with Transpro. The Company is encouraged about prospects for continued growth in earnings per share, of 81 cents, due tocash flows and underlying revenues next year and will provide a more comprehensive outlook for fiscal 2006 in the accretive impactyear-end earnings release and conference call in early May. Among the factors that give us confidence at this early juncture are a strong line-up of our acquisitions from WiniaMando, new business programs and continued market strengtha continuation of solid demand in several of our businesses.North American and European markets. These forward-looking statements regardingrega rding sales, earnings, and operations are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. See "Important Factors and Assumptions Regarding Forward-Looking Statements" below.

Sarbanes-Oxley Act and Other SEC Rules

The Company is currently undergoing a comprehensive effort to ensure compliance with the new regulations under Section 404 of the Sarbanes-Oxley Act that take effect for the Company's fiscal year ending March 31, 2005. This effort includes internal control documentation and testing of key controls under the direction of senior management. While the Company has not completed an evaluation of all deficiencies, it has not been notified that any item is considered to be either a significant deficiency or material weakness.

FINANCIAL CONDITION

Comparison between SeptemberDecember 26, 2004 and March 31, 2004

Current assets

Cash and cash equivalents of $27.6$43.4 million decreased $35.6$19.9 million from the March 31, 2004 balance. The acquisition of the South Korean assets, and the 100% equity interest in the Shanghai, China subsidiary and the 50% equity interest in the joint venture in Hefei, China of the ACC, Division of WiniaMando Inc., capital expenditures and dividend payments were the main uses of cash. Cash provided by operating activities, additional net borrowing in conjunction with the acquisition and the issuance of common stock, upon the exercise of options granted pursuant to employee benefit plans, were the main sources of cash during the period.

Trade receivables of $250.2$268.1 million were up $70.0$87.9 million from year-end. Excluding the impact of the recent Asian acquisitions which added $45.3$52.5 million to the trade receivables balance, the remaining $24.7$35.4 million in changes are attributable to higher sales (excluding the new acquisitions) over the previous 60 days of almost $7$7.7 million, seasonal sales programs in the HVAC&R and Aftermarketaftermarket divisions and timing differences in collections from major customers created by closing on the 26^th of the month throughout the year and the 31^st of the month at year-end.year-end along with increases due to foreign currency translation.

Inventory levels increased by $14.2$11.3 million from year-end to $150.7$147.7 million at the end of the secondthird quarter. Excluding the impact of the acquisition which added $13.4$12.3 million to the inventory balance, the remaining changes consisted of a $6.1an $8.0 million reduction in Aftermarketaftermarket inventories, offset by increases in the remaining operating divisions, except for the European heavy-duty division, which was virtually unchanged.divisions. Seasonal factors were the main item influencing the change in the Distributed Products segment, which includes the Aftermarketaftermarket and HVAC&R divisions.

Inventory increases in the remaining operating divisions were driven by increased sales levels and rising material costs and foreign currency translation.

Deferred income taxes and other current assets increased by $6.1$4.2 million to $59.4$57.6 million from year-end. The largest item contributing to the change is $8.2$4.8 million of other current assets from the newly acquired South Korean and Chinese operations of the ACC Division of WiniaMando Inc.acquisitions in Modine Asia. The remaining $2.1$0.6 million decrease from existing operations came from a number of categories with the largest two changes being a $2.8 million reduction in prepaid taxes and a $2.7$1.9 million increase in unexpired insurance.unbilled customer tooling.

The current ratio decreased from 2.1 to 1 to 1.91.5 to 1. Net working capital increased $0.5decreased $59.3 million to $229.7$169.8 million. ExcludingThe major item contributing to the $19.3overall decrease was due to the reclassification of approximately $68 million of debt from long-term to current ahead of the planned refinancing of a September 2005 note, in working capital added fromaddition the recent acquisition of the ACC assets added $22.2 million in working capital. Excluding the reclassification of debt and the recent acquisition, the other major items contributing to the overall change were lower cash and cash equivalents, lower inventories, lower other current assets, additional debt due within a year, higher accrued expenses and other current liabilities and higher income taxes. These reductions in working capital were offset in part by higher trade receivables and lower accounts payable.

Noncurrent assets

Net property, plant and equipment, of $457.4$481.3 million increased by $59.7$83.6 million over year-end balance of $397.7 million. Included in the SeptemberDecember consolidated balance sheet were $67.3$74.0 million from the operations acquired from WiniaMandoACC in the quarter. Depreciation and retirements,period. Capital expenditures along with the foreign currency translation were higher than capital expendituresdepreciation and retirements for the remaining operations. Outstanding commitments for capital expenditures were $29.9$24.5 million at SeptemberDecember 26, 2004. More than 70 percent60% of the commitments relate to Modine's European operations. These commitments include tooling and equipment and toolingpurchases for new BMW programs, improvements in Germany, wind tunnel equipmentmanufacturing processes in Bonladen, Germanyboth North America and EGREurope and Plate oil cooler programs in Hungary.the future installation of SAP ERP software. The outstanding commitments will be financed through a combination of funds generated from operations and third-party borrowing as required.

Investments in unconsolidated affiliates of $29.7$35.4 million increased by $1.6$7.3 million from year-end. Equity earnings of affiliates were $2.7$4.1 million for the first sixnine months of fiscal 2005 as Radiadores Visconde, the Company's joint venture in Brazil, continued to produce strong operating results. Items offsettingOffsetting the earnings recorded in the first sixnine months were dividends received from Radiadores Visconde of $0.7 million andmillion. On October 22, 2004, Modine completed the acquisition from WinniaMando of the 50% equity interest in a joint venture in Hefei, China for $2.2 million. In addition, net unfavorablefavorable currency translation of $0.4 million.

$1.8 million was recorded since the end of the year.

Goodwill increased by $0.5$0.8 million to $33.1$33.4 million. This increase consisted of $0.9$0.8 million originating from the recent Korean operations acquired from WiniaMando, Inc. and the remainder, $0.4 million, the result of unfavorable fluctuations in foreign currency exchange rates.Modine Asia ACC acquisitions. Intangible assets declined by $0.6$0.5 million, which was primarily caused by a reduction in the noncurrent pension liability due to the recognition of a pension curtailment change in the first quarter. The remaining reduction is related to amortization expense recorded in the first sixnine months of the current year.year offset in part by a non-compete agreement recorded during the third quarter.

Deferred charges and other noncurrent assets decreasedincreased by $0.2$0.8 million. Excluding the impact of the ACC acquisition which added $0.8$1.2 million to the balance, the largest factor influencing the remaining $1.0$0.4 million decrease was the result of continuing recognition of a change in deferred pension assets.

Current Liabilities

Accounts payable and other current liabilities of $224.2$247.0 million were $35.3$58.1 million higher than in March 2004. Excluding the impact of the ACCModine Asia acquisitions, which added $41.2$47.0 million in current liabilities to the balance sheet at SeptemberDecember 26, 2004, the remaining $5.9$11.1 million decreaseincrease was due to normal timing differences in the level of operating activity.activity and the impact of exchange rates on foreign currency balances, primarily the stronger euro in comparison to the dollar. Accrued income taxes increased $4.3$11.0 million, primarily from improved profits and timing differences in making estimated payments.

Debt

Total outstanding debt increased $53.8$40.0 million to $141.7$127.9 million from the March 2004 balance of $87.9 million. The change in short-term debt accounted for $14.3$1.1 million of the total increase with $7.0 million arising from borrowing on the Korean lines of credit. The remaining $7.3 million consisted of credit balances for checks written and not yet presented for payment, in excess of domestic cash balances at September 26, 2004. Domestic long-term debt increased $38.8$47.1 million mainly due to the utilization of existing credit lines to finance the acquisition of WiniaMando Inc.'s ACC Division.acquisitions. International long-term debt increased $0.7decreased $8.2 million during the period. Debt from the acquired in the Korean acquisitionoperations of $2.4$2.7 million was offset by a decrease of $1.7$10.9 million in Europe that consisted of $1.1$12.4 million in scheduled and discretionary payments and a $0.6$1.5 million decreaseincrease in the dollar value of Euroeuro denominated loans.

Consolidated available lines of credit decreased $28.5increased $56.7 million to $134.3$191.0 million during the quarter. An additional $50.0$75.0 million remainedis available on the credit line revolver, subject to lenders' approval, bringing the total available up to $184.3$266.0 million. Domestically, Modine's unused lines of credit decreased $39.0$48.0 million to $111.0$159.0 million, due to the above-mentioned utilization of existingnew five-year credit lines related tofacility the acquisition.Company entered into on October 27, 2004. Foreign unused lines of credit, which include $10.4$18.0 million of newavailable credit lines in South Korea, were $23.3$32.0 million. At the end of the secondthird quarter of fiscal 2005, total debt-to-capital (capital = total debt + shareholders equity) was 19.0%16.6% compared with 13.0% at the end of fiscal 2004.

Subsequent to the end of the quarter, on

On October 27, 2004, the Company amended and restated its $150 million multi-currency revolving credit facility, which was due to in expire in April 2005. The new facility extended the term for five years, expiring in October 2009 and increased the facility to $200 million, with a customary accordion feature that allows for an additional $75 million of borrowing capacity. For further details, see Note 12 in the accompanying notes to financial statements.

Shareholders' Equity

Total shareholders' equity increased from year-end by $17.8$58.2 million to a total of $604.3$644.8 million. Retained earnings increased by $17.4$30.8 million. The additions to retained earnings included $27.9$46.8 million in net earnings reported year-to-date, offset in part by $10.4$16.0 million in dividend payments. NetunfavorableNetfavorable foreign currency translation of $4.1$19.3 million was recorded in the period. The largest portion of the change resulted from the U.S. Dollardollar weakening against the Euroeuro and Korean won while other less significant changes occurred in other foreign currencies. Also favorably impacting shareholders' equity was an increase in paid-in capital and common stock of $5.4$9.2 million. This increase resulted from the issuance of common stock used to satisfy stock option exercises and employeerestricted stock plans requirements.grants. Also recognized in paid-in capital were the associated tax benefits resulting from stock option exercises.
Treasury stock purchases in the period were $1.0 million and represented shares purchased by the Company in connection with stock options and restricted stock activity.

Liquidity

Operating cash flow for the quarter and six-monthsnine-months ended SeptemberDecember 26, 2004 were $29.0$57.0 million and $31.7$88.6 million, respectively, compared to $32.7$40.9 million and $47.1$88.1 million one year ago for the same periods, respectively. The differences for the quarter were mainly the result of higher net earnings adjusted for non-cash items offset in part by a larger increase in accounts receivable this year, due to highera 35% year-over-year increase in third quarter sales, which included the first full quarter of operations from Modine Asia as a 30% increase overresult of the same quarter one year ago,ACC acquisitions, and a larger decrease in accounts payable overversus an increase in the same quarterperiod last year. Management continuesStrong operating cash flow in the quarter enabled the Company to focuspay down debt by $22.5 million and increase its effortscash balance by $15.7 million. In addition, the Company announced a 6.6% increase in the Company's annual common stock dividend rate to 65 cents per share from 61 cents per share which began effective with the dividend paid on improvingDecember 2, 2004.

Due to the reclassification of approximately $68 million of debt ahead of the planned refinancing of a September 2005 note, working capital.capital at the close of the third quarter fell sharply to $169.8 million from $229.7 million at the end of the second quarter and $229.1 million at fiscal 2004 year-end. The Company does not anticipate any liquidity issues arising from this planned refinancing. Compared with the prior year, inventory turns increased from 7.6 to 8.7 and days sales outstanding increased one day to 5356 days and inventory turns increased from 6.6 to 7.7. 51 days, with both increases essentially driven by the addition of the customer base from the ACC acquisition.

The Company expects cash flows to remain strong in the current fiscal year and to meet its future operating, capital expenditure and strategic business opportunity costs primarily through a combination of existing cash balances, cash flows generated from operating activities and borrowings under committed and uncommitted lines of credit. The Company expects to make scheduled and discretionary debt repayments in fiscal 2005 with internally generated funds. Modine believes that its internally generated cash flow, together with access to external resources, will be sufficient to satisfy existing commitments and plans.

The acquisitions in the second quarter of the South Korean and Shanghai, China operations of WiniaMando Inc., which closed on July 31, 2004 and September 3, 2004 respectively, were financed through a draw down of existing cash balances and utilization of $49 million in existing credit lines. The company subsequently paid down $10 million of long-term debt in the quarter with funds generated by operating cash flows.

As previously discussed in the Note 3 "Pension and Other Postretirement Benefits," the company expects to make pension contributions in the third quarter of $1.7 million. These contributions will be funded by cash generated through normal operations.

Short-term debt increased $14.3 million as the Company's new operations in Korea borrowed $7.0 million against their existing lines of credit and, domestically, because checks written but not yet presented for payment were reclassified to short-term debt as they exceeded book cash balances at September 26, 2004.

On October 27, 2004, Modine amended and restated its $150 million multi-currency revolving credit facility, which was to expire in April 2005. The new facility extended the term for five years, expiring in October 2009, and increased the facility to $200 million, with an increase in a customary accordion feature from $50 million to $75 million in additional borrowing capability. Based on the company'sCompany's strong balance sheet, improved financial position and the favorable bank market, the new facility has a lower cost, is unsecured and has fewer restrictive covenants.

With this increase in the credit facility and strong operating cash flows, management believes it is positioned to provide the necessary financial resources to take advantage of additional potential strategic business opportunities that may arise within fiscal 2005.

in the near future.

Environmental

Please see Footnote 17 to the Notes to Consolidated Financial Statements (unaudited) herein.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, Modine is subject to market exposure from changes in foreign exchange rates, interest rates, credit risk, economic risk and commodity price risk.


Foreign Currency Risk

Modine is subject to the risk of changes in foreign currency exchange rates due to its operations in foreign countries. Modine has manufacturing facilities in Mexico, Taiwan, South Korea, China and throughout Europe. It also has equity investments in companies located in France, Japan, Brazil and China (effective with the acquisition on October 15,22, 2004). Modine sells and distributes its products throughout the world. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company manufactures, distributes and sells it products. The Company's operating results are principally exposed to changes in exchange rates between the U. S. Dollardollar and the European currencies, primarily the Euro,euro, and are also exposed, as the result of the acquisitions made in the second quarter, to the change between the U.S, dollar and the Korean Won.won. Changes in foreign currency exchange rates for the Company's foreign subsidiaries reporting in local currencies are generally reported as a component of shareholders' equity. The Company's favorable/(unfavorable)favorable currency translation adjustments recorded for the sixnine months ended SeptemberDecember 26, 2004 and for the twelve months ended March 31, 2004 were ($4.1)$19.3 million and $28.5 million, respectively. As of SeptemberDecember 26, 2004 and March 31, 2004, the Company's foreign subsidiaries had net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk of $86.0$92.3 million and $73.7 million, respectively. The potential decrease in the net current assets from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be approximately $8.6$9.2 million and $7.4 million, respectively. This sensitivity analysis presented assumes a parallel shift in foreign currency exchange rates. Exchange rates rarely move in the same direction relative to the U.S. Dollar.dollar. This assumption may overstate t hethe impact of changing exchangeexch ange rates on individual assets and liabilities denominated in a foreign currency.

The Company has certain foreign denominated long-term debt obligations that are sensitive to foreign currency exchange rates. The following table presents the future principal cash flows and weighted average interest rates by expected maturity dates. The fair value of long-term debt is estimated by discounting the future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. The carrying value of the debt approximates fair value.