SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1999
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-1373
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MODINE MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
WISCONSIN 39-0482000
--------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1500 DeKoven Avenue, Racine, Wisconsin 53403-2552
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (262) 636-1200
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NOT APPLICABLE
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(Former name or former address, if changed since last report.)
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 for 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 X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 7, 2000
------------------------------ -------------------------------
Common Stock, $0.625 Par Value 29,337,131
MODINE MANUFACTURING COMPANY
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 26 and March 31, 1999 3
Consolidated Statements of Earnings -
For the Three Months Ended
December 26, 1999 and 1998
and the Nine Months Ended
December 26, 1999 and 1998 4
Consolidated Statements of Cash Flows -
For the Nine Months Ended December 26,
1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 20
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
December 26, 1999 and March 31, 1999
(In thousands, except per-share amounts)
(Unaudited)
December 26, 1999 March 31, 1999
----------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 30,804 $ 49,163
Trade receivables, less allowance for
doubtful accounts of $4,111 and $3,749,
respectively 185,351 182,910
Inventories 177,683 178,949
Deferred income taxes and other current
assets 41,892 42,074
-------- --------
Total current assets 435,730 453,096
-------- --------
Noncurrent assets:
Property, plant, and equipment -- net 336,125 303,764
Investment in affiliates 28,549 24,327
Goodwill and other intangible
assets -- net 74,166 80,411
Deferred charges and other noncurrent
assets 62,853 54,141
-------- --------
Total noncurrent assets 501,693 462,643
-------- --------
Total assets $937,423 $915,739
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Short-term debt $ 71,672 $ 68,998
Long-term debt -- current portion 4,212 4,766
Accounts payable 75,955 97,443
Accrued compensation and employee
benefits 49,450 48,869
Income taxes 8,707 9,694
Accrued expenses and other current
liabilities 32,146 26,825
-------- --------
Total current liabilities 242,142 256,595
-------- --------
Other liabilities:
Long-term debt 156,649 143,838
Deferred income taxes 20,354 20,533
Other noncurrent liabilities 41,416 41,554
-------- --------
Total noncurrent liabilities 218,419 205,925
-------- --------
Total liabilities 460,561 462,520
-------- --------
Shareholders' investment:
Preferred stock, $0.025 par value,
authorized 16,000 shares, issued - none - -
Common stock, $0.625 par value,
authorized 80,000 shares, issued
30,342 shares 18,964 18,964
Additional paid-in capital 13,581 13,543
Retained earnings 498,343 469,142
Accumulated other comprehensive loss (21,718) (18,341)
Treasury stock at cost: 935 and 817
shares, respectively (31,135) (28,198)
Restricted stock - unamortized value (1,173) (1,891)
-------- --------
Total shareholders' investment 476,862 453,219
-------- --------
Total liabilities and shareholders'
investment $937,423 $915,739
======== ========
<FN>
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended December 26, 1999 and 1998
For the nine months ended December 26, 1999 and 1998
(In thousands, except per-share amounts)
(Unaudited)
Three months ended Nine months ended
-------------------- --------------------
December 26 December 26
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net Sales $283,520 $284,355 $854,058 $830,420
Cost of sales 205,184 207,242 614,169 598,891
-------- -------- -------- --------
Gross profit 78,336 77,113 239,889 231,529
Selling, general, and administrative expenses 57,016 51,020 163,467 145,022
-------- -------- -------- --------
Income from operations 21,320 26,093 76,422 86,507
Interest expense (2,490) (1,718) (6,004) (3,743)
Other income -- net 772 3,587 4,367 7,526
-------- -------- -------- --------
Earnings before income taxes 19,602 27,962 74,785 90,290
Provision for income taxes 3,407 10,621 23,985 33,788
-------- -------- -------- --------
Net earnings $ 16,195 $ 17,341 $ 50,800 $ 56,502
======== ======== ======== ========
Net earnings per share of common stock
- Basic $0.55 $0.59 $1.72 $1.91
- Assuming dilution $0.55 $0.58 $1.71 $1.88
======== ======== ======== ========
Dividends per share $0.23 $0.21 $0.69 $0.63
======== ======== ======== ========
Weighted average shares -- basic 29,494 29,548 29,519 29,603
Weighted average shares -- assuming dilution 29,657 29,992 29,781 30,075
======== ======== ======== ========
<FN>
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Nine Months Ended December 26, 1999 and 1998
(Unaudited)
Nine months ended December 26
-----------------------------
1999 1998
----------- -----------
Net cash provided by operating activities $ 59,237 $ 89,925
Cash flows from investing activities:
Expenditures for property, plant, and equipment (73,638) (68,988)
Acquisitions, excluding cash acquired - (19,826)
Investments in affiliates (2,100) (17,085)
Proceeds from dispositions of property, plant,
and equipment 288 315
Increase in deferred charges and other
noncurrent assets (2,232) (119)
Other -- net (17) (51)
-------- --------
Net cash used for investing activities (77,699) (105,754)
Cash flows from financing activities:
Increase in short-term debt -- net 3,888 22,895
Additions to long-term debt 63,436 45,773
Reductions of long-term debt (42,643) (22,631)
Issuance of common stock, including
treasury stock 2,675 3,012
Purchase of treasury stock (6,888) (14,765)
Cash dividends paid (20,365) (18,634)
-------- --------
Net cash provided from financing activities 103 15,650
-------- --------
Net decrease in cash and cash equivalents (18,359) (179)
Cash and cash equivalents at beginning of period 49,163 36,410
-------- --------
Cash and cash equivalents at end of period $ 30,804 $ 36,231
======== ========
<FN>
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. The amounts 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
below are reasonable estimates of raw material, work in
process and finished goods.
(in thousands)
------------------------------------------------------------
December 26, 1999 March 31, 1999
------------------------------------------------------------
Raw materials $ 36,771 $ 40,529
Work in process 38,459 41,863
Finished goods 102,453 96,557
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Total inventories $ 177,683 $ 178,949
========= =========
2. Property, plant, and equipment is composed of:
(in thousands)
------------------------------------------------------------
December 26, 1999 March 31, 1999
------------------------------------------------------------
Gross property,
plant & equipment $ 638,337 $ 594,646
Less accumulated
depreciation (302,212) (290,882)
--------- ---------
Net property,
plant & equipment $ 336,125 $ 303,764
========= =========
3. Intangible assets include:
(in thousands)
------------------------------------------------------------
December 26, 1999 March 31, 1999
------------------------------------------------------------
Goodwill $90,891 $92,548
Patents and product
technology 8,389 8,389
Other intangibles 3,296 3,326
Less accumulated
amortization (28,410) (23,852)
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Net intangible assets $74,166 $80,411
======= =======
4. Segment data:
(In thousands)
------------------------------------------------------------------------
Sales Operating income*
------------------- ------------------
Quarter ended Dec. 26, 1999 1998 1999 1998
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Sales and operating income:
Original Equipment $120,979 $118,882 $18,334 $16,722
Distributed Products 81,209 79,199 3,252 6,009
European Operations 91,255 94,534 9,517 11,039
------------------------------------------------------------------------
Segment sales and
operating income 293,443 292,615 31,103 33,770
Corporate & administrative
expenses - - (8,353) (6,294)
Eliminations (9,923) (8,260) 44 139
Other items not allocated
to segments - - (3,192) 347
------------------------------------------------------------------------
Total net sales and
earnings before taxes $283,520 $284,355 $19,602 $27,962
------------------------------------------------------------------------
(In thousands)
------------------------------------------------------------------------
Sales Operating income*
------------------- ------------------
Nine months ended Dec. 26, 1999 1998 1999 1998
------------------------------------------------------------------------
Sales and operating income:
Original Equipment $352,452 $365,845 $ 54,548 $ 48,926
Distributed Products 268,659 234,874 23,214 28,419
European Operations 262,755 253,718 24,591 30,533
------------------------------------------------------------------------
Segment sales and
operating income 883,866 854,437 102,353 107,878
Corporate & administrative
expenses - - (21,524) (17,783)
Eliminations (29,808) (24,017) 23 62
Other items not allocated
to segments - - (6,067) 133
------------------------------------------------------------------------
Total net sales and
earnings before taxes $854,058 $830,420 $ 74,785 $ 90,290
------------------------------------------------------------------------
*Beginning in the second quarter of fiscal year 2000,
management implemented a change in the basis for measuring
segment profit or loss. The amortization of goodwill is no
longer recorded as a charge to SG & A expenses, but is now
included in other items not allocated to segments. This
change was made by management to provide a more consistent
basis across the segments for assessing performance. The
quarterly and nine-month information presented above has
been restated for earlier periods to reflect the effects of
this change.
(In thousands)
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December 26, March 31,
Period ending 1999 1999**
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Assets:
Original Equipment $272,174 $231,841
Distributed Products 206,162 182,636
European Operations 233,362 237,036
Corporate & Administrative 275,909 277,579
Eliminations (50,184) (13,353)
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Total assets $937,423 $915,739
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** Beginning in the third quarter of fiscal year 2000, a
change was introduced in the method of recording trade
receivables. Trade receivables previously reported as
Corporate & Administrative are now reported directly in the
applicable segment. This change was made as part of the
transition to new financial systems software beginning in
October. The information presented above has been restated
at March 31, 1999 to reflect the effects of this change.
5. Recent developments concerning legal proceedings reported in
Modine Manufacturing Company ("Modine or Company") Form 10-K
report for the year ended March 31, 1999, are updated in
Part II, Other Information, Item 1, Legal Proceedings. While
the outcome of these proceedings is uncertain, in the opinion
of Modine's management, any liabilities that may result from
such proceedings are not reasonably likely to have a
material effect on Modine's liquidity, financial condition,
or results of operations.
6. In June 1999, the Financial Accounting Standards Board
issued SFAS No. 137 deferring the effective date of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
The statement is now effective for fiscal years beginning after
June 15, 2000. Modine will adopt SFAS No. 133 beginning April 1,
2001. Adoption of this statement is not expected to have a
material effect on Modine's financial position or results of
operations.
7. On October 20, 1999, Modine announced it would begin a stock
buyback program with an initial commitment to repurchase 300,000
shares. Management is authorized to repurchase, each year, up to
ten percent of the outstanding stock. Modine has, in the past,
repurchased small numbers of shares for various employee stock
plans and other corporate purposes.
8. The net earnings per share of common stock and computation
components of basic and diluted earnings per share are as
follows:
(In thousands, except per-share amounts)
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Three months ended Nine months ended
December 26 December 26
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1999 1998 1999 1998
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Net earnings per share of
common stock:
-------------------------
- basic $0.55 $0.59 $1.72 $1.91
- assuming dilution $0.55 $0.58 $1.71 $1.88
Numerator:
----------
Income available to common
shareholders $16,195 $17,341 $50,800 $56,502
Denominator:
-----------
Weighted average shares
outstanding - basic 29,494 29,548 29,519 29,603
Effect of dilutive
securities - options* 163 444 262 472
Weighted average shares
outstanding - assuming
dilution 29,657 29,992 29,781 30,075
-------------------------------------------------------------------------
*There were outstanding options to purchase common stock
at prices that exceeded the average market price for the
income statement period as follows:
Average market price
per share $24.82 $33.68 $27.99 $33.61
Number of shares 1,458 297 1,149 297
9. Comprehensive earnings (in thousands), which represents net
earnings adjusted by the change in foreign-currency
translation and minimum pension liability recorded in
shareholders' equity for the periods ended December 26, 1999
and 1998, respectively, were $12,707 and $19,459 for three
months, and $47,423 and $57,990 for nine months.
10. During the quarter ended December 26, 1999, management
reversed approximately $4,000,000 of its tax valuation
allowance related to foreign net operating loss
carryforwards. Management believes that the available
positive evidence and projected future earnings of the
foreign subsidiary, resulting from the implementation of a
tax strategy, will more likely than not result in the
realization of the net operating loss carryforward.
11. The accompanying consolidated financial statements,
which have not been audited by independent certified public
accountants, 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, 1999
Annual Report filed with the Securities and Exchange
Commission. The financial information furnished includes
all normal recurring accrual adjustments which are, in the
opinion of Management, necessary for a fair statement of
results for the interim period. Results for the first nine
months of fiscal 2000 are not necessarily indicative of the
results to be expected for the full year.
12. Certain notes and other information have been condensed or
omitted from these interim financial statements which consolidate
both domestic and foreign wholly-owned subsidiaries. Therefore,
such statements should be read in conjunction with the
consolidated financial statements and related notes contained in
Modine's 1999 Annual Report to stockholders which statements and
notes were incorporated by reference in Modine's Form 10-K Report
for the year ended March 31, 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
The following discussion and analysis provides information which
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 Third Quarter of 1999-00 with the Third Quarter
- -----------------------------------------------------------------
of 1998-99
- ----------
Net sales for the third quarter of fiscal 1999-2000 were
essentially flat at $283.5 million, a decrease of $0.8 million,
from the same quarter one year ago.
Overall, sales to the Original Equipment segment grew by
approximately 2%. Strong sales growth to original-equipment-
manufacturer (OEM) customers in the truck market was offset by
decreased sales to the OEMs of agricultural and earthmoving
equipment. Sales to the Distributed Products segment registered
a 3% increase for the quarter. Higher revenues resulting from
sales by a U.S. regional aftermarket distributor purchased last
October were virtually offset by lower than planned demand from
the automotive aftermarket and building-HVAC market. In the
European Operations segment, revenues (including currency impact)
declined by approximately 3%. Without the negative currency-
translation impact recorded in the quarter, year over year sales
in the European Operations segment would have grown by over 6%.
Higher sales to original-equipment customers in the truck market
was also major factor influencing the growth, excluding currency
impact, recorded in this segment.
Gross margin at 27.6%, as a percentage of sales, was up slightly,
0.5% from the third quarter of the previous year. Improvements
in the truck and HVAC markets were partially offset by reductions
in the other markets Modine serves.
Selling, general and administrative expenses, at 20.1% of
revenues, were higher than historical averages primarily in the
North American aftermarket, which acquired a large, regional
distributor in October 1998. These expenses are expected to
decrease through recently introduced cost-reduction programs.
Operating income of 7.5% was 1.7% lower, as a percentage of
sales, than last year principally as a result of the higher
selling, general and administrative expenses at the newly
acquired aftermarket distribution facilities mentioned above.
Interest expense increased $0.8 million, or 45%, from the same
quarter a year ago while average outstanding debt levels during
the quarter increased by approximately $62 million, or 34%.
Interest expense grew faster as the result of rising interest
rates compared to the same quarter a year ago. Net non-operating
income in the current quarter declined $2.8 million, or 78%, from
the same quarter last year which included a gain related to the
previous sale of a closed facility in Michigan.
The effective tax rate decreased 20.6% when compared to the same
period last year. Implementation of a tax strategy that allowed
the Company to release a tax-valuation allowance relating to net
operating loss carryforwards at a foreign subsidiary was the
primary factor contributing to the change.
Net earnings for the third quarter of $16.2 million were 7% lower
than last year's third quarter. Earnings per share were $0.55
basic and diluted, compared to $0.59 basic and $0.58 diluted in
the prior year. Earnings in the prior-year's quarter were
positively impacted by a gain related to the previous sale of a
closed facility in Michigan, with no comparable gain in this
year's quarter. Higher SG&A and interest expenses as discussed
above also negatively impacted the current year's third quarter
results. Positively affecting the current year's third quarter
results was the release of a tax valuation allowance relating to
net operating loss carryforwards at a foreign subsidiary.
Comparison of the First Nine Months of 1999-2000 with the First
- ---------------------------------------------------------------
Nine Months of 1998-99
- ----------------------
Record level net sales for the first nine months of fiscal 1999-
2000 reached $854.1 million, a 3% improvement over last year's
record. The strongest sales increases for the first nine months
of the year were recorded in the Distributed Products segment.
The increase is the result of incremental sales recorded by a
regional U.S. aftermarket distributor acquired in October 1998.
Revenues from European Operations segment were up 4% despite the
unfavorable currency-effect in the first nine months of the year
of approximately $15.3 million. Increased sales to original
equipment manufacturer customers in the truck and automobile
markets were the main factors influencing the growth (excluding
currency impact) recorded in the European Operations segment.
Sales to original-equipment-manufacturer (OEM) customers in the
truck market of the Original Equipment segment were also ahead of
last year, but were more than offset by a continuing slowdown in
sales to OEMs of agricultural and earthmoving equipment.
Gross margin of 28.1%, as a percent of sales, was up 0.2% from
the first nine months of the previous year. Improvements were
shown in the truck and automobile markets of the Original
Equipment segment while lower gross margins were earned in
recently opened European production facilities in the European
Operations segment. The Distributed Products segment registered
a small overall decline with automotive aftermarket more than
offsetting improvement recorded in the HVAC market. Overall,
reductions in labor and overhead as percentages of sales, offset
higher material costs as a percentage of sales.
Selling, general and administrative expenses of $163.5 million
increased 12.7% over the first nine months of last year.
Approximately 70% of the increase can be attributed to a large
regional U.S. aftermarket distributor acquired in October 1998.
As previously mentioned, these expenses are expected to decrease
through cost-reduction programs as Modine continues with the
assimilation of these operations.
Operating income declined by 1.5%, as a percentage of sales,
over the first nine months of the previous year, primarily as
a result of higher selling, general and administrative expenses
at the newly acquired distribution facilities previously
discussed.
Interest expense increased $2.3 million, or 60% over the
same nine month period a year ago. Average outstanding debt
levels increased at a similar percentage. Financing of ongoing
construction projects and debt acquired and incurred in
conjunction with acquisitions in the prior year were the
primary reasons for the growth in interest expense. Net
non-operating income declined by $3.2 million. Non-operating
income in last-year's third quarter was positively impacted
by a gain related to the previous sale of a closed facility
in Michigan, with no comparable gain in this year's third
quarter.
The effective tax rate decreased by 5.3% when compared to the
same period last year. Foreign tax rate differentials and
implementation of a tax strategy that allowed the Company to
release a tax-valuation allowance relating to net operating
loss carryforwards at a foreign subsidiary were two of the
factors contributing to the change.
Net earnings for the first nine months of the current year were
$50.8 million, or $1.72 basic and $1.71 diluted earnings per
share. This compares to $56.5 million, or $1.91 basic and $1.88
diluted earnings per share, for the same nine month period the
year before. The lower earnings, as expected, were due in large
part to lower non-operating income and higher SG&A expenses as
discussed above.
Outlook for the Remainder of the Year
- -------------------------------------
Modine remains financially strong as the company advances
through a temporary period of preparation for much stronger
growth in succeeding years. Management anticipates that the
Company's current performance will continue to the end of our
fourth fiscal quarter. Operating earnings should begin to
improve during the next fiscal year after new-plant startups
are complete. Our long-term prospects remain excellent as
new business starts to ramp up in the first calendar quarter
of 2001. Forward looking statements about sales, earnings,
and operations in this Outlook involve both risks and
uncertainties, as detailed in Exhibit 99 to this Form 10-Q.
FINANCIAL CONDITION
- -------------------
Comparison between December 26, 1999 and March 31, 1999
- -------------------------------------------------------
Current assets
- --------------
Cash and cash equivalents of $30.8 million were $18.4 million
lower than March 31, 1999. Cash used for capital expenditures,
investments in affiliates, pension payments and quarterly
dividend payments exceeded cash provided by operating activities
and increased borrowing during the first nine months.
Trade receivables of $185.4 million were up $2.4 million (1%)
over year-end primarily due to increased sales volume (up 1%, or
$2.5 million, over the fourth fiscal quarter in 1998-99).
Overall inventory levels declined $1.3 million to $177.7 million
compared to year-end. The decrease was the result of lower raw
material and work-in-process levels at company facilities
producing products for the original equipment and HVAC markets.
These decreases were offset in part by higher finished goods
inventory levels at certain U.S. aftermarket distribution
centers.
Working capital of $193.6 million decreased 1.5% from year-end.
The current ratio remained at 1.8 to 1. A large reduction in
cash was offset by a higher reduction in accounts payable.
Smaller changes in the remaining current assets and liabilities
categories also contributed to the overall change recorded.
Property, Plant and Equipment
- -----------------------------
Net property, plant and equipment increased $32.4 million to
$336.1 million as capital expenditures exceeded depreciation,
retirements and foreign currency translation impact. Continuing
facility construction and expansion costs in Germany, Italy, and
the Netherlands, ongoing costs associated with the implementation
of SAP financial systems in North America, and costs associated
with equipment and tooling for new customer programs were among
the items contributing to the increase shown. Outstanding
capital expenditure commitments were $37.1 million at December 26,
1999, compared to $38.6 million at March 31, 1999. The largest
commitment is related to the construction of a new technical
center/administration building in Germany. The outstanding
commitments will be financed primarily through internally
generated cash and external borrowing, as required.
Investment in Affiliates
- ------------------------
Investments of $28.5 million were $4.2 million higher than at
March 31, 1999. A $2.1 million additional investment into the
Daikin-Modine joint venture combined with the favorable exchange
rate impact on the investments in our Brazilian and Japanese
joint ventures contributed to the overall increase shown.
Intangible Assets
- -----------------
Intangible assets, net of accumulated amortization, declined $6.2
million. Amortization and foreign currency translation were the
main factors contributing to the change.
Deferred Charges and Other Assets
- ---------------------------------
Deferred charges and other assets increased $8.7 million. The
net increase is primarily the result of continuing recognition of
the surplus in Modine's overfunded pension plans and recognition
of a $4.0 million deferred tax asset, $3.5 million which was
classified as long-term. The recognition of the deferred tax
asset is due to the release of a tax valuation allowance related
to net operating loss carryforwards at a foreign subsidiary.
Current Liabilities
- -------------------
Accounts payable and other current liabilities of $157.6 million
were $15.6 million lower than March 1999. Normal timing
differences in the level of operating activity were responsible
for the decline. Accrued income taxes decreased $1.0 million
from timing differences in making estimated payments and certain
federal tax benefits.
Debt
- ----
Outstanding debt increased by $14.9 million from March 31, 1999,
primarily to support working capital and capital expenditure
requirements. Long-term debt increased by $12.3 million. Modine
entered into a Euro 50.8 million ($53.0 million) credit agreement
in the second quarter. A portion of the proceeds was used to pay
down the equivalent of $32.0 million in short and long-term
European bank debt. The U.S. portion of short-term debt
increased by $12.5 million, and the European portion decreased
$9.8 million.
Domestically, Modine's unused lines of credit were $0.7 million.
Foreign unused lines of credit increased $30.1 million, to $33.7
million. Most of the increase was in Germany, due to
intercompany loans that were used to reduce outstanding bank
debt. Total debt as a percentage of shareholders' equity
increased from 48.0% at March 31, 1999 to 48.8% at December 26,
1999.
Shareholders' Investment
- ------------------------
Total shareholders' investment increased by $23.6 million to a
total of $476.9 million. The net increase came primarily from
net earnings of $50.8 million for the first nine months,
partially offset by dividends paid to shareholders of $20.4
million, net treasury stock activity of $2.9 million and
unfavorable foreign currency translation impact of $3.4 million.
Year 2000 Remediation Program
- -----------------------------
General: In response to the Year 2000 issue, Modine
-------
initiated a number of projects in early 1997 to identify,
evaluate, and implement changes to its existing computerized
business systems. Each of the projects followed a four-phase
approach, which included inventory, assessment, remediation or
replacement, and system integration testing. All of the Year
2000 efforts were carried on globally, and plans, executive
sponsorship and funding were put in place to address the effort.
A number of Modine's current systems were already Year 2000
compliant and where third party software was being utilized,
upgrades to the vendor's Year 2000 compliant versions have been
completed. In addition to business systems, additional programs
to ensure supplier continuity and process capability were initiated.
All of the above projects were funded through normal operating cash
flow. The total global cost of $9.8 million associated with the
required modifications was not material to Modine's consolidated
results of operations and financial position.
Business Systems: The systems conversion and testing of all
----------------
critical business systems in North America and Europe were
completed by June 1999. These tests were conducted by Modine's
internal staff. Computer hardware and local area network
infrastructure were also converted to ensure compliance in its
business system and desktop operations. All business systems
throughout North America and Europe have been functioning
properly with no outstanding Year 2000 issues since the
millennium rollover January 1, 2000.
Suppliers: With respect to suppliers, Modine surveyed its
---------
material and service suppliers throughout 1998 and 1999 to
determine whether they were actively involved in Year 2000
remediation projects. To validate our supplier responses, we
also conducted a series of on-site supplier audits. Those
suppliers not able to validate their Year 2000 readiness, were
directed to retain an additional 30 days of inventory. No
shortages or delays have been experienced as a result of any Year
2000 supplier issues to date.
Facilities & Embedded Systems: In addition, for non-IT areas,
-----------------------------
a major effort to assess Modine's production facilities to include
embedded systems, was conducted by a third party consulting firm
specialized in this type of activity. The facilities evaluation
was completed in the fourth calendar quarter of 1998. Dependent
upon formal risk assessments by facility and corporate teams,
recommended actions included testing, repair, replacement, upgrading,
and/or retirement of specific systems or components. No Year 2000
disruptions occurred at the Company's manufacturing or distribution
facilities.
Risks & Contingency Planning: To alleviate concerns with Year
----------------------------
2000 issues, both internal and external, Modine developed and
implemented contingency plans in the critical areas of the business.
We also developed operational and supplier contingency plans for all
our manufacturing and distribution facilities, increased stocking
plans where necessary, established on site millennium cutover teams
globally, and developed business system and plant equipment testing
procedures for the millennium rollover prior to our first day of
production. Our contingency plans were followed as planned and all
facility, system, and production testing was completed by noon
January 1, 2000. Based upon the project team's assessment,
management believes no future remediation efforts will be required.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of business, the Company and its subsidiaries
are named as defendants in various lawsuits and enforcement
proceedings by private parties, the Occupational Safety and Health
Administration, the Environmental Protection Agency, other
governmental agencies, and others in which claims, such as personal
injury, property damage, or antitrust and trade regulation issues,
are asserted against the Company. While the outcome of these
proceedings is uncertain, in the opinion of the Company's Management
and counsel, any liabilities that may result from such proceedings
are not reasonably likely to have a material effect on the Company's
liquidity, financial condition or results of operations. Many of
the pending damage claims are covered by insurance and, in addition,
the Company from time to time establishes reserves for uninsured
liabilities.
The Mitsubishi and Showa Litigation
-----------------------------------
In November 1991, the Company filed a lawsuit against Mitsubishi
Motor Sales of America, Inc., and Showa Aluminum Corporation,
alleging infringement of the Company's patent on parallel-flow
air-conditioning condensers. The suit seeks an injunction to
prohibit continued infringement, an accounting for damages, a
trebling of such damages for willful infringement, and
reimbursement of attorneys' fees. In December 1991, the Company
submitted a complaint to the U.S. International Trade commission
(ITC) requesting that the ITC ban the import and sale of parallel-
flow air-conditioning condensers and systems or vehicles that
contain them, which are the subject of the November 1991 lawsuit.
In August, 1997, the ITC issued an Order excluding from U.S. import
Showa condensers that infringe Modine Manufacturing Company's
parallel-flow patent. The ITC's Order covers condensers, their
parts, and certain products including them, such as air-conditioning
kits and systems. It directs the U.S. Customs Service to exclude
from importation into the United States such products manufactured
by Showa Aluminum Corporation of Japan and Showa Aluminum Corporation
of America. The decision is based on a Modine U.S. patent covering
condensers with tube hydraulic diameters less than 0.04822 inches.
The Showa companies must certify to Customs officials that any
condenser items imported by them do not infringe Modine's parallel-
flow patent. The Showa companies must also file annual reports with
the ITC regarding their sales of Showa parallel-flow condensers in
the United States.
In July, 1994, Showa filed a lawsuit against the Company alleging
infringement by the Company of certain Showa patents pertaining to
condensers. In June 1995, the Company filed a motion for partial
summary judgment against such lawsuit. In December of 1994, the
Company filed another lawsuit against Mitsubishi and Showa
pertaining to a newly issued patent on parallel-flow air-
conditioning condensers. Both 1994 suits have been stayed pending
the outcome of re-examination in the U.S. Patent Office of the
patents involved.
In October of 1999, the U.S. Patent Office Board of Appeals
rejected the Company's 1994 PF patent which rejection is being
appealed to the Court of Appeals for the Federal Circuit.
In October of 1997, Modine was issued a Japanese patent covering
parallel-flow air-conditioning condensers having tube hydraulic
diameters less than 0.070 inches.
In August of 1998, the Company filed a patent infringement suit
in Japan against Showa with respect to this patent seeking an
injunction and damages. Several patents have been issued to
Modine by the European Patent Office, one having been rejected at
the opposition level, which is being appealed.
All legal and court costs associated with these cases have been
expensed as they were incurred.
Item 5. Other Information.
As previously reported, in October, 1999, Modine announced that it
intended to acquire up to 300,000 of the issued and outstanding
shares of the common stock of the Company. Since October 20, 1999,
the Company has purchased at market price a total of 241,100 shares.
See also Footnote 7 to the Notes to Consolidated Financial Schedules.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
--------
The following exhibits are included for information only unless
specifically incorporated by reference in this report:
Reference Number
per Item 601 of
Regulation S-K Page
- ---------------- ----
3 Restated By-Laws (as amended)
4(a) Rights Agreement dated as of October 16, 1986
between the Registrant and First Chicago Trust
Company of New York (Rights Agent) (filed by
reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31,
1997).
Reference Number
per Item 601 of
Regulation S-K Page
- ---------------- ----
4(b)(i) Rights Agreement Amendment No. 1 dated as of
January 18, 1995 between the Registrant and
First Chicago Trust Company of New York (Rights
Agent) (filed by reference to the exhibit
contained within the Registrant's Current Report
on Form 8-K dated January 13, 1995).
4(b)(ii) Rights Agreement Amendment No. 2 dated as of
January 18, 1995 between the Registrant and First
Chicago Trust Company of New York (Rights Agent)
(filed by reference to the exhibit contained within
the Registrant's Current Report on Form 8-K dated
January 13, 1995).
4(b)(iii) Rights Agreement Amendment No. 3 dated as of
October 15, 1996 between the Registrant and First
Chicago Trust Company of New York (Rights Agent)
(filed by reference to the exhibit contained
within the Registrant's Quarterly Report on
Form 10-Q dated December 26, 1996).
4(b)(iv) Rights Agreement Amendment No. 4 dated as of
November 10, 1997 between the Registrant and
Norwest Bank Minnesota, N.A., (Rights Agent)
(filed by reference to the exhibit contained
within the Registrant's Quarterly Report on
Form 10-Q dated December 26, 1997).
Note: The amount of long-term debt authorized
----
under any instrument defining the rights of
holders of long-term debt of the Registrant,
other than as noted above, does not exceed ten
percent of the total assets of the Registrant
and its subsidiaries on a consolidated basis.
Therefore, no such instruments are required to
be filed as exhibits to this Form. The Registrant
agrees to furnish copies of such instruments to the
Commission upon request.
27* Financial Data Schedule (electronic transmission
only).
99* Important Factors and Assumptions Regarding
Forwarding-Looking Statements. 22
*Filed herewith.
(b) Reports on Form 8-K:
The Company filed no Report on Form 8-K during the quarter ended
December 26, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY
(Registrant)
By: A. D. REID
--------------------------------------
A. D. Reid, Vice President,
Finance and Chief Financial Officer
(Principal Financial Officer)
Date: February 8, 2000 By: W. E. PAVLICK
--------------------------------------
W. E. Pavlick, Senior Vice President,
General Counsel and Secretary