EXHIBIT 13
management's discussion & analysis of operations
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Modine Manufacturing Company's fiscal-2001 sales were down
6.5 percent from the prior year's record level and earnings were
27.2-percent lower than the year before. After a fairly strong
start, the company was impacted significantly by a sharp
deterioration in North American market fundamentals in the second
half of the fiscal year. As the economy weakened, the heavy-duty
truck market fell sharply from record-high levels, light-vehicle
sales slowed significantly as plants were shut down to reduce
dealer inventories, and the aftermarket continued to soften. In
addition to these North American factors, the Euro remained
sharply lower against the U.S. dollar, more than offsetting
otherwise strong European results. The impact of changes in
currency-exchange rates from the prior year decreased worldwide
consolidated sales by five-percent and earnings by seven percent.
In fiscal 2001, including exports from domestic businesses,
46 percent of total revenues were generated from sales to
customers outside the United States. Net sales generated by
Modine's international operations were 36 percent of total
revenues, and exports from the United States were 10 percent of
total revenues.
Despite the continued weakness of the Euro versus the U.S.
dollar, Modine's European Operations segment experienced 2-percent
sales growth and a 28-percent increase in operating income during
fiscal 2001, measured in U.S. dollars. This segment supplies
products from business units in Europe primarily to European
original-equipment manufacturers (OEMs) of vehicles and engines.
European revenue advances were aided by new truck-cooling-module
programs, a new product - the exhaust-gas-recirculation (EGR)
cooler - and increased penetration in the construction-equipment
market.
In the Distributed Products segment, worldwide sales
decreased 8 percent and operating income was down 44 percent due
both to soft demand and increased competitive pressures. The
Distributed Products segment provides heat-transfer products for
the North American and European vehicular replacement markets and
the building-HVAC&R (heating, ventilating, air-conditioning, &
refrigeration) market.
The Original Equipment (North America) segment's sales were
11-percent lower than the prior year. Sales to off-highway-
equipment OEMs were up, but Modine's business serving truck and
automobile manufacturers was down significantly compared with the
previous year. Operating income for this segment was down 27-
percent due to decreased volume and to incremental costs in
support of new business.
See Note 20 to the consolidated financial statements for more
details of segment and geographic information.
Modine's fiscal-2001 revenues from its top ten customers,
including their multiple brands and models, were 49.4 percent of
total sales. One OEM customer accounted for slightly more than ten
percent of sales; all other customers were less. Overall, Modine
continues to have a highly diversified market and customer base.
FISCAL-YEAR SALES BY MARKET
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OEM passenger-car and light-truck market: In fiscal 2001,
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26 percent of Modine's sales were to worldwide original-equipment
manufacturers of passenger cars and light trucks. This market again
had the largest sales total for Modine. Revenues were down eight
percent from the year before, due primarily to production cutbacks
by North American OEMs, which make up a fifth of Modine's sales to
this market. The company's European operations increased their
unit volumes to OEM customers in the passenger-car and light-truck
market, however sales revenues were virtually flat due to the
stronger U.S. dollar versus the Euro. The company continues to
forge strong relationships with customers such as BMW,
DaimlerChrysler, and Volkswagen. Modine meets the needs of these
key customers on a global basis.
Modine's new Toledo, Ohio, assembly plant, which serves the
newly-introduced Jeep Liberty program for DaimlerChrysler, began
pilot production at the end of fiscal 2001. This plant leverages
the company's experience from a similar plant launched three years
ago in Europe to support the conversion to modules for BMW. The
Toledo facility uses sophisticated processes to assemble
automotive engine-cooling modules in line sequence. The modules
contain components from several Modine facilities in the United
States and Europe and from other suppliers. The North American
partnership with DaimlerChrysler is helping to establish a
stronger relationship between Modine's European operations and
DaimlerChrysler in Europe.
OEM heavy-duty and medium-duty truck market: Sales to this
-------------------------------------------
market made up 18 percent of Modine's total revenues for fiscal
2001. Modine's sales to this market were down 16 percent from
the prior year. Sharply decreased demand for heavy commercial
vehicles in North America, compounded by a large inventory of
new and slightly-used heavy-duty trucks, caused production
cutbacks by OEM customers, decreasing Modine's sales for these
applications by 31 percent, compared with the previous year. In
the medium-duty truck category, Modine launched engine-cooling
modules for International Truck's new NGV (Next Generation
Vehicle) truck line, International's first complete redesign
of its medium-duty trucks in 20 years.
European OEMs accounted for 39 percent of Modine's sales to
the truck market in fiscal 2001. Despite the weakness of the Euro,
revenues from these customers grew seven percent year-over-year in
U.S. dollars. Major factors included successful launches of
cooling modules for DAF and Leyland, establishing a stronger
relationship between Modine's European operations and PACCAR.
Modine also provided a new product - the first EGR-cooler system
for heavy-duty trucks worldwide - for use on MAN vehicles.
In fiscal 2002, Modine will be working on engine-cooling
modules to help Peterbilt and Kenworth meet new emission
requirements. More modules are being developed for a continuation
of International Truck's launch of its family of NGV vehicles. The
company is also continuing further development of its Compact
Cooling System (CCS). The CCS uses a unique design to reduce the
space required for the cooling system in the engine compartment of
a heavy-duty truck by a significant amount, allowing for more-
aerodynamic configurations. In addition, Modine started
development of a new cooling module for medium-duty trucks in
Europe.
OEM industrial market: This market includes a variety of
---------------------
customers who manufacture engines, generator sets, refrigeration
equipment, compressors, lift trucks, and other applications.
Modine's fiscal-2001 revenues from this market were the same as
the previous year, constituting about 12 percent of the company's
total sales. A large portion of the revenues in this market is
from sales to manufacturers of engines, some of which are destined
for use in the truck market.
The continuing evolution in environmental regulations drove
increased business in compressor markets, resulting in a greater
demand for some of Modine's products. In addition, material-
handling equipment and electrical power generation (EPG) showed
growth in fiscal 2001. Continued demand for EPG will provide
further growth in on-engine components as well as opportunities to
expand Modine's marketshare of related heat exchangers in this
industrial market.
OEM off-highway market: Modine sales to the global off-highway-
----------------------
equipment market in fiscal 2001 grew 13 percent from the year before.
Sales to this market made up 11 percent of total revenues in fiscal
2001. Modine has a substantial share of this market, which enjoyed
growth during the period. This year-over-year growth resulted
primarily from stronger-than-anticipated recovery in agricultural-
, building-, construction-, mining-, and related-equipment
markets. Market growth in construction- and agricultural-equipment
markets came primarily from increased sale of smaller-horsepower
machines and utility tractors as well as growth in equipment-
rental markets. In Europe, Modine's operations benefited from new
programs for OEM customers Liebherr and Volvo.
By focusing on key, strategic, global customers, Modine
implemented a major change from the past in its approach to this
market. The company has been successful in capturing a high
percentage of targeted programs at these customers by leveraging
new technology, systems capabilities, and a multi-continent
presence.
The OEM off-highway-equipment market for fiscal 2002 is
projected to be flat to down slightly, as small-equipment sales
level out and larger-equipment demand declines due to an expected
economic slowdown across worldwide markets. Modine will continue
to pursue market differentiation through a continued focus on
technology, including expansion of aluminum products for these
markets.
Vehicle aftermarket: Modine's sales of replacement parts to
-------------------
the automotive aftermarket were ten-percent lower than the prior
year. These aftermarket sales constituted 25 percent of the
company's total consolidated revenues for fiscal 2001.
Soft demand, an increased number of competitors, and pricing
competition impacted Modine's results in the last fiscal year,
challenging the company to respond in a number of ways. Modine
reduced underperforming assets in the aftermarket by closing eight
branch operations during the fiscal year. Working capital was
reduced 15 percent as a result of increased focus on management of
inventories and receivables. Improvements at the Kansas City,
Missouri, distribution center, decreased order turnaround time by
60 percent. To increase overall margins and reduce outsourcing,
Modine accelerated its internal product development. The company
worked to grow its national accounts with customers such as NAPA
and Advance Auto, and it implemented a further rollout of air-
conditioning products into the western part of North America. In
Mexico, Modine's operations were registered to ISO 9001 and grew
sales by 10 percent.
Building-HVAC market: Modine's revenues from the building-
--------------------
HVAC (heating ventilating, and air-conditioning) market grew
three-percent year-over-year. Sales to this market remain at
approximately seven percent of the company's total revenues.
Core product-line sales were off due to market reductions
driven by lowered inventories in the distribution chain and by
mild weather. This was offset primarily by a 37-percent increase
in sales of secondary heat-exchangers for high-efficiency
residential furnaces. In addition, the Hot Dawg residential garage
heater enjoyed double-digit sales gains as the company developed a
contractor network and related Internet websites.
Modine launched a new separated-combustion product line of
duct-furnace/make-up-air units in fiscal 2001. The company also
entered the direct-to-contractor distribution channel with the
launch of an expanded product offering under the Modine Airsystems
brand.
SALES BY PRODUCT LINE
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Modine's customers continue to demand more modular assemblies
and complete heat-transfer systems. To help respond to these and
other needs of its customers, Modine has invested in state-of-the-
art technical centers to serve North America and Europe. These new
technical centers will play an absolutely critical role in the
development of new thermal-management technologies that Modine
produces for its customers, both in its core markets as well as in
the new, nontraditional ones that the company is entering.
Total modules & complete heat-transfer packages: This product
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line includes various heat exchangers, plus auxiliary parts, in
assemblies that can be installed as units or systems by OEM
customers. Sales of this product category decreased nine percent
from the year before, reflecting production cutbacks by vehicle
OEMs. The product category remained at 22 percent of total
revenues.
Modine has been shifting from the role of a component
supplier to the position of a supplier of complete modules and
systems. The company's responsibilities increase as Modine
undertakes the initial design of customers' systems in conjunction
with their design of the applications. This also allows Modine to
sell more content, including heat exchangers and other necessary
parts, for each program.
Radiators: Sales of radiators were down nearly seven percent
---------
from the previous year. This product segment made up about 31 percent
of Modine's total revenues for fiscal 2001. Replacement radiators
for the aftermarket constitute about two thirds of this category
and accounted for practically all of the shortfall from the year
before.
Oil coolers: The company's sales of oil-coolers - for cooling
-----------
engine and transmission oil as well as certain fuels - were two-
percent lower year-over-year. This product category constituted
about 17 percent of Modine's total revenues in fiscal 2001.
Sales of Modine's Donut oil-cooler line, which accounts for
roughly 30 percent of the total sales in this category, were
virtually unchanged from the prior year. Modine now offers both
steel and aluminum versions of this key product to meet changing
customer needs. The Donut oil-cooler, a sophisticated, compact
product, is often used in high-performance automobiles,
particularly in Europe. It remains a specialty that has gained
Modine much respect in the worldwide industry.
Certain stacked-plate oil-cooler technology developed by
Modine in Europe is being aggressively marketed now to North
American OEMs of on-highway vehicles.
Vehicular air-conditioning parts & systems: Modine's sales of
------------------------------------------
vehicular air-conditioning parts in fiscal 2001 decreased 20 percent,
compared with the prior year. The product category made up ten
percent of the company's total annual revenues for the most recent
fiscal year. The decrease in fiscal 2001 was due to a combination
of 24-percent lower sales to OEM customers and 11-percent to the
aftermarket.
Charge-air coolers: Fiscal-2001 sales of charge-air coolers
------------------
were down almost two percent compared with the year before. Sales
of these products constituted nine percent of Modine's total
revenues for fiscal 2001.
Emerging emission and noise regulations are driving off-
highway-equipment redesigns that will require charge-air cooling.
In addition, future rapid growth in large, engine-generator sets
needing charge-air coolers could be beneficial to Modine.
Building-HVAC: Modine's sales of the building-HVAC product
-------------
line were up three percent in fiscal 2001. Sales of these products
in that year were seven percent of total company revenues.
PF (parallel flow) technology is expanding into this product
category as Modine is partnering with a world leader in
refrigerant compressor technology on initial commercial
applications in the HVAC&R market. The unique nature of PF
technology and robust product design could provide significant
system cost savings.
Miscellaneous products: EGR (exhaust-gas-recirculation)
----------------------
systems using special cooling technology provide a way to reduce
emissions from engines for trucks and other applications. Although
Modine is developing or producing EGR coolers for several customers,
an anticipated program with Caterpillar was canceled because the
customer decided to proceed with an alternative technology.
CAPITAL EXPENDITURES
- --------------------
Capital expenditures of $66.3 million in fiscal 2001 were
26.4-percent lower than the prior year. Significant expenditures
included those for: further North American technical-center
equipment; European production, administrative, and technical
center facilities; tooling for new products; and facility and
processing improvements at a number of facilities. Capital
expenditures were financed primarily from cash generated
internally.
Outstanding commitments for capital expenditures at March 31,
2001, were approximately $25.8 million. Approximately $14.3
million of the commitments relate to the European technical center
and to European plant expansions and conversions as well as to new
programs for automotive and truck OEM customers, process
improvements, tooling for new products, and various new equipment.
A year earlier, there were outstanding commitments of $36.3
million.
RESEARCH AND DEVELOPMENT
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Modine's investment in research and development has been
increasing steadily in recent years. Fiscal-2001's expenditures of
$25.1 million were 22 percent more than the year before, largely
driven by the new fuel-cell program but also including increased
efforts with carbon dioxide (CO2) air-conditioning systems. The
company's investments in R&D, creating new technology, have shown
a 13-percent compound annual growth rate over the last ten years.
R&D expenditures are expected to increase substantially
during fiscal 2002. Improved facilities in Europe will account for
part of the growth. The acquisition of Thermacore, which also
relies on product innovation to achieve success in its markets,
will add to Modine's total investment in research and development.
QUALITY IMPROVEMENT
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Modine's corporate quality initiatives include: implementing
one common, global, quality-management system; assuring design,
product, and process consistency; measuring and improving key
quality indicators; and recognizing quality achievement.
The global quality-management system has been implemented at
all sites to help ensure that customers receive the same, high-
quality products and services from any Modine facility worldwide.
It also minimizes the risks associated with unacceptable product
quality and serves to meet one of Modine's guiding principles by
exceeding customer expectations.
Continuous quality improvement is measured by eleven quality
indicators that include customer satisfaction, cost of quality,
and supplier performance. Modine encourages and rewards continuous
quality-improvement throughout the company.
Continuous improvement is formally recognized at Modine
through various programs:
- The President's Award was established in 1999 to recognize
continuous improvement at manufacturing facilities. Plants are
measured, in overall performance and year-over-year improvement,
on a number of criteria, including throughput, on-time delivery,
sales per employee, sales per square foot, controllable costs,
several safety measurements, and environmental issues.
- First-pass yield, one of the criteria for the President's
Award, was singled out for a special initiative last year,
challenging plants to achieve a 40-percent improvement, over a
three-year period, in the success rate of first test or
inspection. Three plants met the challenge a year early.
- The President's Corporate Excellence Award was newly
created to recognize improvements initiated by administrative
staff. The first winning project alone saved the company more than
$400,000 in the first year.
Continuous improvements in Modine's quality-management system
resulted in numerous achievements worldwide during the last fiscal
year. Five sites (LaPorte, Indiana; Buena Vista, Virginia; West
Kingston, Rhode Island; Pontevico, Italy; and Kirchentellinsfurt,
Germany) were registered to ISO-9002. The Mexico City, Mexico,
plant earned ISO-9001 registration, and the Wackersdorf, Germany,
plant earned registration to VDA6.1 in the last fiscal year. Of
Modine's 35 manufacturing sites, 33 are now registered to ISO-
9000, QS-9000, or VDA6.1.
HEDGING AND FOREIGN-CURRENCY-EXCHANGE CONTRACTS
- -----------------------------------------------
On a limited basis, Modine enters into foreign-exchange
options and forward contracts on foreign currencies as hedges
against the impact of currency fluctuations. See Note 14 to the
consolidated financial statements.
ENVIRONMENTAL, HEALTH AND SAFETY
- --------------------------------
Modine has a long-standing corporate environmental policy
that demonstrates the company's commitment to protecting the
environment and maintaining compliance with all environmental laws
worldwide. In calendar 2000, the company's North American
facilities achieved a 12-percent year-over-year reduction in
waste. This is a continuation of previous years' performance and
has resulted in a 40-percent overall waste-reduction since 1996.
Expenditures to comply with increasingly stringent laws could be
significant in future years but are not expected to have a
material impact on the company's competitive or financial
position. If new laws containing more-stringent requirements are
enacted, expenditures may be higher than current estimates of
future environmental costs.
Modine has no significant capital needs regarding
environmental issues. Environmental expenses and capital
expenditures were immaterial in fiscal 2001 and are expected to
remain so in fiscal 2002.
Modine accrues for environmental remediation activities
relating to past operations - including those under the
Comprehensive Environmental Response, Compensation, and Liability
Act (CERCLA), often referred to as "Superfund," and under the
Resource Conservation and Recovery Act (RCRA) - when it is
probable that a liability has been incurred and reasonable
estimates can be made.
Modine from time to time receives notices from the
Environmental Protection Agency and state environmental agencies
that the company is a "potentially responsible party" (PRP) under
CERCLA and state law. These notices claim potential liability for
remediation costs of disposal sites that are not company-owned and
allegedly contain wastes attributable to Modine from past
operations. Modine's share of remediation costs at these sites
cannot be predicted accurately due to the large number of PRPs
involved. For the six sites currently known, the company's
potential liability will be significantly less than the total site-
remediation cost, because the percentage of material attributable
to Modine is relatively low.
It is likely that Modine will, in the future, incur
additional remediation charges, but such costs are unknown and not
determinable at this time. There are no currently known,
unrecorded liabilities that would have a material effect on the
company's consolidated financial position or results of
operations.
Health and safety performance continues to move in a positive
direction. Recordable and Lost Workday (LWDII) incident rates
improved from the previous year by 24 and 31 percent,
respectively. Over the past five years, Modine has seen a 60-
percent reduction in the recordable incident rate and a 55-percent
reduction in the LWDII rate. Success with health and safety is
setting Modine apart from its competition. The company's record is
31-percent better than its Standard Industrial Codes (SIC) 3714,
"Motor Vehicle Parts and Accessories," and 34 "Fabricated Metal
Products" (based upon 1999 rates established by the Bureau of
Labor Statistics). This has resulted in Modine setting a higher
goal for itself, which is to exceed the standards for General
Industry Recordable and LWDII injury rates.
Modine's St. Paul facility was the first location to become a
safety "Star" plant. The Modine "Star" is awarded to those
facilities that achieve 100-percent compliance with 22 health and
safety elements and attain a recordable and LWDII rate below the
general industry average for a twelve-month period. The Modine
Star program is modeled after the Occupational Safety and Health
Administration's Voluntary Protection Program (VPP). The company
expects to see more facilities reach Star level over the next few
years.
Modine's efforts to prevent musculo-skeletal disorders are
exceptional, according to professionals in the industry. Many of
Modine's U.S. plants have a program that involves the use of
occupational therapists. The therapists observe employees do their
jobs and provide coaching on proper body mechanics, stretching,
and off-the-job safety. In addition, these specialists are
actively involved in the improvement of ergonomics in both
existing and planned production processes. The occupational
therapists visit Modine plants frequently to help promote a
positive safety culture and ensure an on-going education process.
The changes that have occurred over time are making a difference
in the prevention of sprains, strains, and repetitive-motion
injuries.
EURO CONVERSION
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The Euro was introduced in Europe on January 1, 1999. Eleven
of the fifteen, member countries of the European Union agreed to
adopt the Euro as their common legal currency on that date. Fixed
conversion rates between these participating countries' existing
currencies and the Euro have been established. The legacy
currencies are scheduled to remain legal tender as denominations
of the Euro until at least January 1, 2002, but not later than
July 1, 2002. During this transition period, the parties may
settle transactions using either the Euro or a participating
country's legacy currency.
Certain of Modine's business functions in Europe introduced
Euro-capability as of January 1, 1999, including systems for
making and receiving certain payments, pricing, and invoicing.
Other business functions and financial reporting are in the
process of being converted to the Euro by the end of the
transition period; however, some will be converted earlier where
operationally efficient or cost effective, or to meet customer
requirements. Any delays in the company's ability to become Euro-
compliant, or in its key suppliers and customers to become Euro-
compliant, could result in an interruption of the company's
business activities or operations. The impact, if any, of these
interruptions upon the results of operations, financial condition,
and cash flows has not yet been determined.
SUBSEQUENT EVENT
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In April 2001, Modine acquired Thermacore International, Inc.
Modine allocated 3.6 million additional shares of common stock -
including 3.3 million shares issued initially and 0.3 million held
to cover outstanding options - and assumed $22 million in
liabilities to consummate the transaction, which will be accounted
for as a pooling of interests.
FORWARD-LOOKING STATEMENTS
- --------------------------
This report contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995 that are subject to risks and uncertainties. Forward-
looking statements include information concerning future financial
results of Modine. Also, when words such as "intend," "anticipate,"
"believe," "expect," or "plan," or similar expressions are used,
these words indicate forward-looking statements. These statements
are not guarantees of future performance and involve known risks
and unknown risks, uncertainties, and other factors that may cause
the actual results, performance, or achievements to differ materially
from the future results, performance, or achievements expressed or
implied in the forward-looking statements. These factors include the
ability of Modine to compete for business, the ability of various
customers and suppliers to achieve projected sales and production
levels, the cyclical nature of the vehicular industry, work
stoppages at major customers, competitive pressures on sales and
pricing, increases in production or material costs that cannot be
recouped in product pricing, the ability to improve acquisitions'
operations, and international economic conditions. Modine does not
assume any obligation to update any of these forward-looking
statements.
management's discussion & analysis of results of operations
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SALES
- -----
Sales for the year ended March 31, 2001, are discussed in
detail in the preceding Management's discussion & analysis of
operations.
For the year ended March 31, 2000, sales of $1.14 billion were
three percent higher than the previous year's $1.11 billion. Weaker
European currencies had a negative translation effect of approximately
$27.9 million compared with the prior year. Sales in the Distributed
Products segment were up primarily due to a full year's operation of
the Core Holdings, Inc., acquisition made mid-way through fiscal 1999.
Net sales for the European Operations segment improved slightly with
improved automotive-OEM sales and lower off-highway market sales. The
Original Equipment (North America) segment declined marginally, with
stronger sales to the truck market and lower sales to the construction
and agricultural-equipment markets.
Sales for the year ended March 31, 1999, were $1.11 billion,
up $71.0 million or seven percent from the prior year. Sales in
the Distributed Products segment were up primarily due to the mid-
year acquisition of Core Holdings, Inc. Net sales for the European
Operations segment were up with improved automotive-OEM sales
leading the way. The Original Equipment (North America) segment
was essentially flat with stronger truck market sales and lower
agricultural market sales. The weaker dollar had a positive
translation effect of approximately $4.0 million on fiscal-1999
consolidated sales, compared with the prior year.
GROSS PROFIT
- ------------
The current year gross profit of $278.7 million, (26 percent
of sales) compares with $317.5 million (28 percent of sales) in
the previous year. The principal factors responsible for the
current margin reduction were the lower sales volume, increased
material costs pursuant to higher commodity prices, continuing
pricing pressures, incremental costs in support of new business,
and the one-time costs of exiting an unprofitable product line in
Europe. Improvements were recorded in the European Operations
segment, despite the recognition of the exiting costs, but those
gains were more than offset by lower gross-profit returns in the
other reporting segments.
Gross profit was 28 percent of sales for fiscal 2000, the same
percentage as in fiscal 1999. Improvement recorded in the truck
division was generally offset by lower gross-profit returns, as a
percent of sales, earned by the company's other operating units.
For fiscal 1999, gross profit was 28 percent of sales, one
percentage point lower than 1998, primarily due to temporary start-
up inefficiencies at new European production and assembly
facilities and to pricing constraints imposed by certain OEM
customers.
SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSES
- ----------------------------------------------------
SG&A expense of $217.0 million declined slightly by $1.5
million, but increased to 20 percent of sales from 19 percent in
the preceding year. The current year included substantially higher
research and development expenditures, severance charges related to
staffing reductions as the company reacted to the slowing economy,
offset by a reduction in bad-debt expense and other expenses.
In fiscal 2000, SG&A expenses of $218.5 million grew by $21.8
million, to 19 percent of sales from 18 percent in the preceding
year. Factors influencing the changes were the full-year effect of
Core Holdings, Inc., a large aftermarket distributor acquired in
fiscal 1999, ongoing litigation costs to protect our patents,
increased depreciation on the new technical center in Racine, and
upgrades to computer-related business systems.
In fiscal 1999, SG&A expenses of $196.6 million, 18 percent
of sales, were $13.3 million over the year before but were in line
with the prior year as a percent of sales. Excluding the mid-year
Core Holdings acquisition, SG&A expenses rose only three percent
over the prior year.
INCOME FROM OPERATIONS
- ----------------------
Income from operations of $61.7 million for fiscal 2001
declined $37.3 million from the previous year. The 38-percent
reduction was driven primarily by lower sales volume, increased
material costs pursuant to higher commodity prices, negative
currency translation, incremental costs in support of new
business, the costs of exiting an unprofitable product line in
Europe, and staff-reduction costs.
Income from operations of $99.0 million for fiscal 2000
declined $14.3 million from the prior year. The 13-percent
reduction was predominantly a result of higher SG&A costs, as
discussed in the preceding section.
Income from operations of $113.3 million for fiscal 1999
compares with $117.5 for the prior period. The nearly four-percent
decline was principally the result of start-up inefficiencies at
new facilities in Europe and higher SG&A costs related to
activities of the Core Holdings acquisition.
INTEREST EXPENSE
- ----------------
In fiscal 2001, interest expense declined slightly from the
previous year to $8.0 million. Higher interest rates and
comparatively lower amounts of capitalized interest offset most of
the benefit from reductions in the level of debt outstanding.
Interest expense of $8.5 million in fiscal 2000 increased
$2.7 million over fiscal 1999. In addition to higher interest
rates, the increase was also the result of increased financing for
technical-center construction in the U.S. and in Europe, facility
expansion in Europe, and the full-year effects of acquisition and
equity investments made in the preceding year.
Fiscal-1999 interest expense was $5.7 million, up $1.7
million from the preceding year. Increased borrowing for an
acquisition, equity investments, and worldwide construction
projects caused the increase.
PATENT SETTLEMENTS
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In fiscal 2001, agreements were reached with Showa Aluminum
Corporation and Mitsubishi Motors, which resulted in $17.0 million
of patent-settlement income for past infringement of Modine's PF
(parallel flow) patents.
In fiscal 2000, a $1.0-million settlement for past
infringement of Modine's PF patents was recognized.
PF patent settlements reached with two companies for past
infringement resulted in $3.8 million of income being recorded in
fiscal 1999.
OTHER INCOME, NET
- -----------------
Other income in fiscal 2001 grew by $3.9 million to $7.7
million. The increase was driven by higher equity earnings from
affiliates, the remaining gain from the earlier sale of a facility
in Michigan, and increased profit from tooling sales.
Other income in fiscal 2000 of $3.8 million declined by $2.9
million from the previous fiscal year's total of $6.7 million,
which included a gain relative to the earlier sale of a facility
in Michigan.
In fiscal 1999, other income of $6.7 million, $4.2 million
over the prior period, included $3.9 million recognized on the
earlier sale of a non-strategic, copper-tubing facility in Michigan.
PROVISION FOR INCOME TAXES
- --------------------------
The effective tax rate for fiscal 2001 rose by 7.8 percentage
points to 39.2 percent. The significantly higher effective tax
rate, compared with the year before, related to prior-year changes
in a net-operating-loss carryforward at a foreign subsidiary and
to foreign-tax-rate differentials.
For fiscal 2000, the effective tax-rate declined 6.0
percentage points to 31.4 percent. Foreign-tax-rate differentials
and implementation of a tax strategy relating to a net-operating-
loss carry-forward at a foreign subsidiary were the main factors
contributing to the change.
The 37.4-percent effective tax rate for fiscal 1999 compares
with a 37.5-percent rate for fiscal 1998. Higher state taxes, net
of federal benefit, were more than offset by reduced taxation on
non-U.S. earnings and losses and by other changes.
NET EARNINGS
- ------------
Net earnings in fiscal 2001 fell 27.2 percent to $47.6 million
($1.62 per diluted share) from $65.4 million ($2.20 per diluted
share). Return on average shareholders' investment (ROI) was ten
percent. Net earnings declined as a percent of sales to four percent
in fiscal 2001. The reduction in net earnings was the result of the
lower sales volume, pricing pressures, higher material costs as a
percentage of sales, negative currency translation, incremental
costs in support of new business, costs of exiting an unprofitable
product line, and staff reduction costs, which were partially offset
by the patent settlements received.
Net earnings declined 11.5 percent in fiscal 2000 to $65.4
million ($2.20 per diluted share) from $73.9 million ($2.46 per
diluted share). On a relative basis, net earnings dipped to six
percent of sales in fiscal 2000 and ROI slipped to 14 percent.
Increased aftermarket distribution costs and pricing pressures,
new-plant start-up costs, and the adverse effect of a stronger
U.S. dollar on international results were the major factors
leading to lower earnings.
For the year ended March 31, 1999, net earnings were $73.9
million ($2.46 per diluted share), a $1.4-million or 2.0-percent
improvement over the previous year's $72.5 million ($2.39 per
diluted share). As a percent of sales, fiscal 1999 net earnings
were seven percent, the same as the prior year, and a 17-percent ROI.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per-share amounts)
- --------------------------------------------------------------------------------
For the years ended March 31 2001 2000 1999
- --------------------------------------------------------------------------------
Net sales $1,065,395 $1,139,269 $1,111,447
Cost of sales 786,691 821,779 801,520
-----------------------------------------
Gross profit 278,704 317,490 309,927
Selling, general, and administrative
expenses 217,003 218,452 196,636
-----------------------------------------
Income from operations 61,701 99,038 113,291
Interest expense (8,040) (8,467) (5,722)
Patent settlements 16,959 1,000 3,757
Other income - net 7,704 3,760 6,744
-----------------------------------------
Earnings before income taxes 78,324 95,331 118,070
Provision for income taxes 30,719 29,928 44,127
-----------------------------------------
Net earnings $ 47,605 $ 65,403 $ 73,943
=========================================
Net earnings per share of common
stock:
Basic $1.62 $2.22 $2.50
Assuming dilution $1.62 $2.20 $2.46
<FN>
The notes to consolidated financial statements are an integral part of
these statements.
management's discussion of financial position
- ---------------------------------------------
CURRENT ASSETS
- --------------
Cash and cash equivalents decreased by $10.7 million to $20.4
million. Details of the sources and uses of funds can be found in
the accompanying statement of cash flows.
Trade receivables, net of allowances for doubtful accounts,
at $167.7 million, were down $15.1 million from one year ago.
Declines in year-over-year fourth-quarter sales in the Original
Equipment (North America) and Distributed Products segments were
the main factors leading to the overall decrease.
As a result of Modine's focus on working capital, the company was
able to reduce inventories by $23.0 million to $145.6 million, with the
majority of the change attributable to U.S. aftermarket operations.
Smaller reductions were achieved in a number of other operations. The
number of days of inventory on hand was reduced by six days from the
prior year-end.
Deferred income taxes and other current assets grew by $6.7
million to $53.8 million. The largest item contributing to the
change was an estimated income-tax payment in the current year
that will be applied to future income-tax liabilities.
The current ratio of 2.0-to-1 decreased by 17 percent from last
year's 2.4-to-1 as a result of the company's effort to reduce its
working capital requirements. Reductions in cash, trade accounts
receivable, and inventories together with increases in short-term
debt and the current portion of long-term debt were the largest
items influencing the change.
NONCURRENT ASSETS
- -----------------
Net property, plant, and equipment of $353.4 million increased
by $15.4 million due primarily to capital expenditures of $66.3
million. Among the factors contributing to the growth in fixed
assets were: continuing facility expansions in Europe; equipment
purchases for the new Toledo, Ohio, assembly plant and the Racine
test facility; and preparation for the introduction of new
customer-programs in the next several years.
Equity investments in affiliates of $26.4 million decreased $2.0
million in the current year. Higher equity earnings in fiscal 2001
were more than offset by: an unfavorable currency-translation
impact recognized on Modine's 50-percent equity investment in
Radiadores Visconde, Ltda., in Brazil; a partial return of capital
from Modine's 50-percent equity investment in Nikkei Heat
Exchanger Company Ltd. (NEX) in Japan; a dividend received from
NEX; and the purchase of the remaining 50-percent interest in
Daikin-Modine Inc. from Daikin Industries, Ltd.
Intangible assets of $62.3 million were $8.0 million lower than
last year, largely as a result of the impact of foreign currency
translation and amortization expense recorded in the current year.
Deferred charges and other noncurrent assets of $70.5 million
increased $5.8 million over the prior period, primarily a result
of a $5.1-million increase in the surplus of the company's over-
funded pension plans.
CURRENT LIABILITIES
- -------------------
Short-term debt and the current portion of long-term debt,
totaling $34.6 million, increased by $25.1 million. Approximately
$15.0 million of the increase is due to a reclassification from
long-term debt for payments due within the next year. The company
currently plans to refinance this debt with new long-term
borrowing in fiscal 2002. The remaining increase in the current
year was usage of short-term credit lines for daily liquidity.
Accounts payable decreased by $9.0 million to $75.9 million.
Lower inventory levels, variations in the level of overall purchasing
activity, and the favorable impact from foreign-currency
translation were the main factors contributing to the reduction.
NONCURRENT LIABILITIES
- ----------------------
Long-term debt decreased by $76.8 million to $134.4 million at
year-end. Approximately $15.0 million of the reduction is due to a
reclassification to the current portion of long-term debt. The
balance of the change is due to repayments, including $40.0 million
in discretionary payments, and the effect of the foreign-currency
translation. Funds to reduce the debt came from patent settlements
and lower working-capital and capital-expenditure requirements.
As a percent of shareholders' investment, long-term debt was
26.8 percent at year-end. Total debt to equity was 33.7 percent, down
12.2 percentage points from fiscal 2000.
SHAREHOLDERS' INVESTMENT
- ------------------------
Total shareholders' investment of $501.9 million increased $21.6
million over the prior period. The major changes were from retained
earnings, which benefited from net earnings of $47.6 million (less
dividends paid of $29.3 million), and use of treasury stock for stock
options exercised and employee stock-purchase plans.
Accumulated other comprehensive loss of $23.4 million increased
$1.7 million over the prior year. The most significant component
was the foreign-currency-translation adjustment, which increased
$2.0 million. The Euro, which weakened against the dollar during
the year, and translation losses recorded on the company's equity
investment in its Brazilian affiliate were offset in part by the
favorable foreign-currency effects on the company's foreign-
denominated borrowings.
During fiscal 2001, $5.2 million was expended to acquire
199,000 treasury shares while $16.0 million of treasury stock
(468,000 shares) was used to satisfy requirements for stock options
and employee stock-purchase plans. The number of shares of common
stock outstanding at year-end increased to 29,530,000 shares.
During fiscal 2000, $12.1 million was expended to acquire
459,000 treasury shares, 300,000 shares of which were repurchased
for $7.6 million under a buy-back program announced in October,
while $5.9 million of treasury stock (195,000 shares) was used to
satisfy requirements for stock options, stock awards, and employee
stock-purchase plans. The number of shares of common stock
outstanding at year-end dropped to 29,261,000 shares.
During fiscal 1999, $15.2 million was expended to acquire
418,000 treasury shares, while $8.0 million of treasury stock
(279,000 shares) was used to satisfy requirements for stock options,
stock awards, and employee stock-purchase plans. The number of
shares of common stock outstanding at year-end was 29,525,000 shares.
Book value per share increased by $0.58 during fiscal 2001 to
$16.99, a 7.7-percent compound annual growth rate for the last
five years.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)
- ----------------------------------------------------------------------------
March 31 2001 2000
- ----------------------------------------------------------------------------
Assets
Current assets:
- --------------
Cash and cash equivalents $ 20,401 $ 31,070
Trade receivables, less allowance for doubtful
accounts of $2,391 and $4,436 167,665 182,724
Inventories 145,579 168,597
Deferred income taxes and other current assets 53,842 47,164
------------------
Total current assets 387,487 429,555
------------------
Noncurrent assets:
- -----------------
Property, plant, and equipment - net 353,357 337,987
Investment in affiliates 26,403 28,440
Goodwill and other intangible assets - net 62,316 70,339
Deferred charges and other noncurrent assets 70,548 64,786
------------------
Total noncurrent assets 512,624 501,552
------------------
Total assets $900,111 $931,107
==================
Liabilities and shareholders' investment
Current liabilities:
- -------------------
Short-term debt $ 16,756 $ 6,319
Long-term debt - current portion 17,816 3,128
Accounts payable 75,856 84,893
Accrued compensation and employee benefits 48,434 46,479
Income taxes 6,045 7,336
Accrued expenses and other current liabilities 28,287 27,322
------------------
Total current liabilities 193,194 175,477
------------------
Noncurrent liabilities:
- ----------------------
Long-term debt 134,359 211,112
Deferred income taxes 31,796 24,536
Other noncurrent liabilities 38,909 39,740
------------------
Total noncurrent liabilities 205,064 275,388
------------------
Total liabilities 398,258 450,865
------------------
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 14,111 13,573
Retained earnings 516,950 505,522
Accumulated other comprehensive loss (23,360) (21,629)
Treasury stock at cost: 812 and 1,081
common shares (23,564) (34,394)
Restricted stock - unamortized value (1,248) (1,794)
------------------
Total shareholders' investment 501,853 480,242
------------------
Total liabilities and shareholders'
investment $900,111 $931,107
==================
<FN>
The notes to consolidated financial statements are an integral
part of these statements.
management's discussion of cash flows
- -------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES
- -----------------------------------------
Net cash provided by operating activities in fiscal 2001 was
$122.7 million, up $31.5 million from the prior year and a record
for Modine. Major items contributing to the overall change were
the reduced working-capital requirements as a result of the
company's programs in this area and a favorable noncash adjustment
for deferred income taxes, both offset partially by lower earnings.
Net cash provided by operating activities in fiscal 2000 was
$91.2 million, down $14.0 million from the prior year. Major items
contributing to the overall change were lower earnings, a noncash
adjustment for deferred income taxes that moved in the opposite
direction from the previous year, and working-capital demands that
were higher in fiscal 2000, which were partially offset by higher
noncash depreciation and amortization adjustments.
Net cash provided by operating activities in fiscal 1999 was
$105.2 million, up $2.2 million from the prior year as a result of
higher earnings and positive noncash adjustments in deferred
income taxes and in depreciation and amortization. These increases
were offset in part as working-capital requirements grew from
increased sales volume and the post-acquisition impact of the
United States aftermarket expansion.
CAPITAL EXPENDITURES
- --------------------
Capital expenditures for fiscal 2001 were $66.3 million,
$23.8-million lower than the prior year. They included: on-going
construction and equipment costs of a new technical center in
Europe, continued production and administrative facility expansion
in Europe, costs associated with the purchase of equipment and
tooling for new customer programs, facility improvements at
existing locations, and additional equipment costs for the
technical center in Racine.
Capital expenditures for fiscal 2000 were $90.1 million,
slightly lower than the prior year. They included: on-going
construction and equipment costs of new technical centers in
the U.S.A. and Europe, production and administrative facility
expansion in Europe, replacement of two corporate aircraft, the
migration to a new computer platform and implementation of new
systems software in the United States, and the costs associated
with equipment and tooling for new customer-programs.
Capital expenditures for fiscal 1999 were $90.9 million,
$10.2 million higher than in fiscal 1998. They included:
construction and equipment costs associated with the Racine
technical center, continuing expansion and upgrading of our
European production facilities, and equipment purchases at
existing facilities in North America and Europe.
ACQUISITIONS AND INVESTMENTS IN AFFILIATES
- ------------------------------------------
During fiscal 2001, Modine invested $0.2 million to acquire
the remaining 50-percent share of Daikin-Modine, Inc., a former
joint venture between Modine and Daikin Industries, Ltd. Separately,
Modine received a return of capital of $0.5 million from another
joint venture, Nikkei Heat Exchanger Company Ltd. (NEX). See note
10 to the consolidated financial statements for further detail.
During fiscal 2000, Modine made an additional $2.7-million
investment in Daikin-Modine, Inc. Modine's total investment in the
50-percent-owned joint venture at the end of fiscal 2000 was $4.2
million. See note 10 to the consolidated financial statements for
further detail.
During fiscal 1999, Modine acquired Core Holdings, Inc., of
Orlando, Florida, an aftermarket wholesale distributor. The cash
cost of the acquisition was $19.8 million, net of cash acquired,
and promissory notes to the sellers of $3.9 million. Investments
in affiliates during the year consisted of the purchase of a
50-percent interest in Radiadores Visconde, Ltda., a Brazilian
heat-transfer company based in Sao Paulo, Brazil, for $16.2 million
in cash and a $10.0-million promissory note to the sellers. Modine
also formed a new joint-venture company with Daikin Industries, Ltd.
Investments made through year-end in Daikin-Modine, Inc., totaled
$1.5 million. See note 10 to the consolidated financial statements
for further detail.
CHANGES IN DEBT: SHORT- AND LONG-TERM
- -------------------------------------
In fiscal 2001, company debt decreased $41.5 million, primarily
due to discretionary repayments of $40.0 million of domestic long-
term debt. The reduction in debt was a result of the patent
settlement proceeds received and of reduced working capital and
capital-expenditure requirements.
In fiscal 2000, company debt increased $21.4 million, primarily
to support working-capital and capital-expenditure requirements.
During the year, Modine entered into a Euro 50.8-million ($53
million) term loan. Proceeds were used to pay down short-term
European bank debt. The company also entered into a long-term $60-
million multicurrency revolving-credit agreement, which was used
to replace short-term debt.
Overall, company debt increased by $72.0 million in fiscal 1999.
New borrowings included short- and long-term debt used to provide
financing for acquisitions, equity investments in affiliates, and
construction projects in Europe and North America. Reductions in
long-term debt resulted from refinancing existing bank-debt in
Europe with governmental loans and prepayment of an industrial
revenue bond in the United States.
TREASURY STOCK
- --------------
Treasury stock activity is detailed in Management's discussion
of financial position and Note 16 to the consolidated financial
statements.
DIVIDENDS PAID
- --------------
Dividends for fiscal 2001 totaled $29.3 million, or $1.00 per
share. This represented an increase of 8 cents per share over the
previous year. Dividends in fiscal 2000 and 1999 were $27.1 and
$24.8 million, respectively, representing rates of 92 cents and 84
cents per share, respectively, both increasing eight cents per
share each year over the previous year.
LIQUIDITY
- ---------
The future operating and capital-expenditure needs of the company
are expected to be met primarily through funds generated from
continuing operations and from additional borrowing as required.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- -------------------------------------------------------------------------------
For the years ended March 31 2001 2000 1999
- -------------------------------------------------------------------------------
Cash flows from operating activities:
- ------------------------------------
Net earnings $ 47,605 $ 65,403 $ 73,943
Adjustments to reconcile net earnings with
cash provided by operating activities:
Depreciation and amortization 49,947 48,822 44,182
Pensions (2,779) (2,686) (2,465)
Loss from disposition of property, plant,
and equipment 2,505 582 123
Deferred income taxes 9,615 (2,235) 5,652
Provision for losses on accounts receivable (2,087) 734 (855)
Undistributed earnings of affiliates, net of
dividends received (1,509) 800 841
Other - net 1,004 163 1,577
----------------------------
104,301 111,583 122,998
----------------------------
Change in operating assets and liabilities
excluding acquisitions:
Trade receivables 13,388 (9,147) (15,100)
Inventories 20,700 4,799 (6,789)
Deferred income taxes and other current
assets (8,713) (5,909) 4,661
Accounts payable (7,892) (8,674) 4,819
Accrued compensation and employee benefits 860 (2,936) (715)
Income taxes (988) (1,257) (2,234)
Accrued expenses and other current
liabilities 1,036 2,743 (2,469)
----------------------------
Net cash provided by operating activities 122,692 91,202 105,171
- ----------------------------------------- ----------------------------
Cash flows from investing activities:
- ------------------------------------
Expenditures for property, plant, and
equipment (66,310) (90,147) (90,860)
Acquisitions, net of cash acquired 249 - (19,826)
Proceeds from dispositions of assets 815 2,140 524
Investments in affiliates 469 (2,700) (17,687)
Increase in deferred charges and other
noncurrent assets (1,492) (2,537) (895)
Other - net (21) (56) (150)
----------------------------
Net cash used for investing activities (66,290) (93,300) (128,894)
- -------------------------------------- ----------------------------
Cash flows from financing activities:
- ------------------------------------
Increase/(decrease) in short-term debt - net 10,058 (60,569) 48,112
Additions to long-term debt 47,183 129,818 46,810
Reductions of long-term debt (98,703) (47,837) (22,924)
Issuance of common stock, including
treasury stock 9,127 2,965 5,054
Purchase of treasury stock (5,167) (12,102) (15,203)
Cash dividends paid (29,307) (27,102) (24,832)
----------------------------
Net cash (used for)/provided by financing
- -----------------------------------------
activities (66,809) (14,827) 37,017
---------- ----------------------------
Effect of exchange-rate changes on cash (262) (1,168) (541)
- --------------------------------------- ----------------------------
Net (decrease)/increase in cash and cash
equivalents (10,669) (18,093) 12,753
Cash and cash equivalents at beginning of year 31,070 49,163 36,410
- ---------------------------------------------- ----------------------------
Cash and cash equivalents at end of year $ 20,401 $ 31,070 $ 49,163
- ---------------------------------------- ============================
Cash paid during the year for:
Interest, net of amounts capitalized $ 7,775 $ 8,297 $ 4,948
Income taxes $ 29,046 $ 33,314 $ 37,071
<FN>
The notes to consolidated financial statements are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(In thousands, except per-share amounts)
- ----------------------------------------------------------------------------------------------------------------
Accumulated Restricted
For the years Additional other stock-
ended March 31, Common paid-in Retained comprehensive Treasury unamortized
2001, 2000, and 1999 stock capital earnings income/(loss) stock value Total
- ----------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 $18,964 $12,384 $423,001 $ (8,102) $(20,977) $(2,795) $422,475
- ----------------------------------------------------------------------------------------------------------------
Net earnings -- -- 73,943 -- -- -- 73,943
Other comprehensive (loss):
Foreign-currency
translation -- -- -- (9,831) -- -- (9,831)
Minimum pension liability
(net of tax benefit of
$260) -- -- -- (408) -- -- (408)
Total comprehensive income -- -- -- -- -- -- 63,704
Cash dividends, $0.84 per
share -- -- (24,832) -- -- -- (24,832)
Purchase of treasury stock -- -- -- -- (15,203) -- (15,203)
Stock options and awards
including related tax
benefits -- 882 (2,970) -- 6,165 (11) 4,066
Employee stock-purchase and
-ownership plans -- 277 -- -- 1,817 -- 2,094
Amortization of deferred
compensation under
restricted stock plans -- -- -- -- -- 915 915
- ---------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 18,964 13,543 469,142 (18,341) (28,198) (1,891) 453,219
- ---------------------------------------------------------------------------------------------------------------
Net earnings -- -- 65,403 -- -- -- 65,403
Other comprehensive (loss):
Foreign-currency
translation -- -- -- (3,144) -- -- (3,144)
Minimum pension liability
(net of tax benefit of $5) -- -- -- (144) -- -- (144)
Total comprehensive income -- -- -- -- -- -- 62,115
Cash dividends, $0.92 per
share -- -- (27,102) -- -- -- (27,102)
Purchase of treasury stock -- -- -- -- (12,102) -- (12,102)
Stock options and awards
including related tax
benefits -- 28 (1,798) -- 3,719 (975) 974
Employee stock-purchase and
-ownership plans -- 2 (123) -- 2,187 -- 2,066
Amortization of deferred
compensation under
restricted stock plans -- -- -- -- -- 1,072 1,072
- ----------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 18,964 13,573 505,522 (21,629) (34,394) (1,794) 480,242
- ----------------------------------------------------------------------------------------------------------------
Net earnings -- -- 47,605 -- -- -- 47,605
Other comprehensive
income/(loss):
Foreign-currency
translation -- -- -- (1,991) -- -- (1,991)
Minimum pension liability
(net of taxes of $149) -- -- -- 260 -- -- 260
Total comprehensive income -- -- -- -- -- -- 45,874
Cash dividends, $1.00 per
share -- -- (29,307) -- -- -- (29,307)
Purchase of treasury stock -- -- -- -- (5,167) -- (5,167)
Stock options and awards
including related tax
benefits -- 538 (5,028) -- 10,005 -- 5,515
Employee stock-purchase and
-ownership plans -- -- (1,842) -- 5,992 -- 4,150
Amortization of deferred
compensation under
restricted stock plans -- -- -- -- -- 546 546
- ----------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 $18,964 $14,111 $516,950 $(23,360) $(23,564) $(1,248) $501,853
- ----------------------------------------------------------------------------------------------------------------
<FN>
The notes to consolidated financial statements are an integral
part of these statements.
notes to consolidated financial statements
- ------------------------------------------
NOTE 1 Significant accounting policies
- ------ -------------------------------
Nature of operations: Modine Manufacturing Company (Modine)
--------------------
is a leading global developer, manufacturer, and marketer of heat
exchangers and systems for use in on-highway and off-highway OEM
(original equipment manufacturer) vehicular applications, and for
sale to the automotive aftermarket (as replacement parts) and to a
wide array of building markets. Product lines include radiators &
radiator cores, vehicular air conditioning, oil coolers, charge-air
coolers, heat-transfer & heat-storage packages and modules, and
building-HVAC (heating, ventilating, and air-conditioning) equipment.
Basis of presentation: The financial statements are prepared
---------------------
in conformity with generally accepted accounting principles in the
United States. These principles require management to make certain
estimates and assumptions in determining Modine's assets,
liabilities, revenue, expenses, and related disclosures. Actual
amounts could differ from those estimates.
Consolidation principles: The consolidated financial statements
------------------------
include the accounts of Modine Manufacturing Company and its
majority-owned subsidiaries. Material intercompany transactions and
balances are eliminated in consolidation. Operations of subsidiaries
outside the United States and Canada are included for periods ending
one month prior to Modine's year end in order to ensure timely
preparation of the consolidated financial statements. Investments
in affiliated companies in which ownership is 20 percent or more
are accounted for by the equity method. The investments are stated
at cost plus or minus a proportionate share of the undistributed
net income (loss). Modine's share of the affiliates' net income
(loss) is reflected in net earnings.
Revenue Recognition: Sales revenue is recognized at the time
-------------------
of product shipment to customers and appropriate provision is made
for uncollectible accounts.
Translation of foreign currencies: Assets and liabilities of
---------------------------------
foreign subsidiaries and equity investments are translated into
U.S. dollars at year-end exchange rates, and income and expense
items are translated at the average exchange rates for the year.
Resulting translation adjustments are reported as an other-
comprehensive-income (loss) item, included in shareholders'
investment. Translation adjustments relating to countries with
highly inflationary economies and foreign-currency transaction
gains or losses are included in net earnings.
Financial instruments: Foreign-exchange options and forward
---------------------
contracts on foreign currencies are entered into by Modine as
hedges against the impact of currency fluctuations on certain
sales and purchase transactions and are not used to engage in
speculation. Gains and losses are recognized when these
instruments are settled.
Income taxes: Deferred tax liabilities and assets are
------------
determined based on the difference between the amounts reported
in the financial statements and the tax bases of assets and
liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.
Earnings per share: Basic earnings per share is calculated
------------------
based on the weighted average number of common shares outstanding
during the year, while diluted earnings per share is calculated
based on the dilutive effect of common shares that could be issued.
Also see Note 6.
Cash equivalents: For purposes of the cash flows statement,
----------------
Modine considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Inventories: Inventories are valued at the lower of cost, on a
-----------
first-in, first-out basis, or market value.
Property, plant, and equipment: These assets are stated at
------------------------------
cost. For financial reporting purposes, depreciation is computed
using, principally, the straight-line method over the expected
useful life of the asset. Maintenance and repair costs are charged
to earnings as incurred. Costs of improvements are capitalized.
Upon the sale or other disposition of an asset, the cost and related
accumulated depreciation are removed from the accounts and the
gain or loss is included in net earnings.
Intangible assets: The excess of cost over fair value of the net
-----------------
assets of businesses acquired is amortized using the straight-line
method primarily over a fifteen-year period. Costs of acquired
patents and product technology are amortized using the straight-
line method over the shorter of their estimated useful life or 15
years.
Impairment of long-lived and intangible assets: When facts and
----------------------------------------------
circumstances indicate that the carrying value of long-lived assets,
including intangibles, may be impaired, an evaluation of
recoverability is performed by comparing the carrying value of the
assets with the estimated future undiscounted cash flows, in
addition to other quantitative and qualitative analyses. If an
impairment is determined to exist, a write-down to market value or
discounted cash flow is made and the impairment loss is recognized
by a charge against current operations.
Environmental expenditures: Environmental expenditures related
--------------------------
to current operations that qualify as property, plant, and equipment
or that substantially increase the economic value or extend the
useful life of an asset are capitalized and all other expenditures
are expensed as incurred. Environmental expenditures that relate
to an existing condition caused by past operations are expensed.
Liabilities are recorded when environmental assessments and/or
remedial efforts are probable and the costs can be reasonably
estimated.
Stock-based compensation: Stock-based compensation is recognized
------------------------
using the intrinsic value method. Accordingly, compensation cost
for stock options is measured at 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. Also see Note 19.
New Accounting Pronouncements: In December 1999, the Securities
-----------------------------
and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB)
No. 101, "Revenue Recognition in Financial Statements," which
addresses selected revenue recognition issues. Modine implemented
SAB No. 101 during fiscal 2001. The effect of implementing SAB No.
101 was not material to Modine's results of operations for any period.
In November 2000, the Emerging Issues Task Force (EITF) issued
EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees
and Costs." This issue addresses several items, including the
disclosure of the classification of shipping and handling costs if
these costs are not included as part of cost of sales. Modine
currently includes certain shipping and handling costs, primarily
from the Distributed Products reporting segment, as part of selling,
general and administrative expenses on the Consolidated Statements
of Earnings. These costs include costs to physically move finished
goods from the Company's distribution or manufacturing facilities
to the customer, as well as costs incurred to move products between
facilities within Modine's distribution system. For the years ended
March 31, 2001, 2000, and 1999, these shipping and handling costs
were $12.2 million, $13.0 million, and $11.7 million, respectively.
Accounting principles to be adopted: In 1998, the Financial
-----------------------------------
Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement requires
companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The
accounting for changes in fair value, gains, or losses depends on
the intended use of the derivative and its resulting designation.
The statement, which had its effective date deferred by SFAS No.
137, 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.
Reclassifications: Certain prior-year amounts have been
-----------------
reclassified to conform with the current-year presentation.
NOTE 2 Research and development costs
- ------ ------------------------------
Research and development costs charged to operations totaled
$25,074,000 in fiscal 2001, $20,528,000 in fiscal 2000, and
$18,252,000 in fiscal 1999.
NOTE 3 Pension and other postretirement benefit plans
- ------ ----------------------------------------------
Pensions: Modine has several noncontributory, defined-benefit,
--------
pension plans that cover most of its domestic employees. The
benefits provided are based primarily on years of service and
average compensation for the salaried plans and some hourly plans.
Other hourly plans are based on a monthly retirement benefit
amount. Funding policy for domestic, qualified plans is to
contribute annually not less than the minimum required by
applicable law and regulation, nor more than the maximum amount
that can be deducted for federal income-tax purposes. Plan assets
principally consist of equity and fixed-income securities. As of
March 31, 2001 and 2000, the plans held 993,000 and 994,000
shares, respectively, of Modine common stock.
Modine's foreign subsidiaries have defined-benefit plans and/or
termination indemnity plans covering substantially all of their
eligible employees. The benefits under these plans are based on
years of service and final average compensation levels. Funding is
limited to statutory requirements.
The projected benefit obligation, accumulated benefit obligation,
and fair value of plan assets for the pension plans with accumulated
benefit obligations in excess of plan assets were $16,128,000,
$13,758,000, and $435,000, respectively, as of March 31, 2001, and
$15,638,000, $14,306,000, and $687,000, respectively, as of March 31,
2000.
Modine has several defined-contribution plans that cover most
of its domestic employees. These 401(k) and savings plans provide
company matching under various formulas. The cost of Modine's
contributions to the plans (including retirement plans discussed
in Note 19) for fiscal 2001, 2000, and 1999 were $6,635,000,
$7,744,000, and $6,831,000, respectively.
Other postretirement plans: Modine and certain of its domestic
--------------------------
subsidiaries provide selected healthcare and life-insurance benefits
for retired employees. Designated employees may become eligible for
those benefits when they retire. These plans are unfunded. Modine
periodically amends the plans, changing the contribution rate of
retirees and the amounts and forms of coverage. An annual limit
on Modine's liability (a "cap") was established for most plans
between fiscal 1994 and fiscal 1996 after original recognition
of the liability in fiscal 1993. It maximizes future costs at
200 percent of Modine's then-current cost. These changes reduced
the accrued obligation and the reduction is being amortized as a
component of the benefit cost.
The change in benefit obligations and plan assets as well as the
funded status of Modine's pension and other postretirement plans
were as follows:
(In thousands)
- ------------------------------------------------------------------------------
Other
Pensions postretirement
------------------- --------------------
Years ended March 31 2001 2000 2001 2000
- ------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at
beginning of year $152,034 $155,754 $ 23,135 $ 23,816
Service cost 5,653 5,875 312 374
Interest cost 11,257 10,630 1,777 1,629
Plan amendments 171 1,256 -- --
Actuarial loss/(gain) 1,569 (13,237) 1,558 (825)
Benefits paid (6,562) (6,723) (2,421) (2,286)
Settlement 458 166 -- --
Contributions by plan
participants -- -- 413 427
Currency-translation adjustment (675) (1,687) -- --
- ------------------------------------------------------------------------------
Benefit obligation
at end of year $163,905 $152,034 $ 24,774 $ 23,135
- ------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets
at beginning of year $196,334 $196,396 $ -- $ --
Actual return on
plan assets 13,801 1,808 -- --
Employer contributions 3,958 5,025 2,008 1,859
Contributions by plan
participants -- -- 413 427
Benefits paid (6,562) (6,723) (2,421) (2,286)
Currency-translation adjustment (73) (172) -- --
- ------------------------------------------------------------------------------
Fair value of plan
assets at end of year $207,458 $196,334 $ -- $ --
- ------------------------------------------------------------------------------
Funded status:
Funded status at end of year $ 43,553 $ 44,300 $(24,774) $(23,135)
Unrecognized net
loss/(gain) 2,400 (3,890) 867 (737)
Unrecognized prior
service cost 2,756 3,028 (1,629) (2,091)
Unrecognized net
transition obligation 317 487 -- --
- ------------------------------------------------------------------------------
Net amount recognized $ 49,026 $ 43,925 $(25,536) $(25,963)
- ------------------------------------------------------------------------------
Amounts recognized in the
balance sheet consist of:
Prepaid benefit cost $ 62,371 $ 56,974 $ -- $ --
Accrued benefit
liability (14,265) (14,860) (25,536) (25,963)
Intangible asset 537 994 -- --
Accumulated other
comprehensive income 383 817 -- --
- ------------------------------------------------------------------------------
Net amount recognized $ 49,026 $ 43,925 $(25,536) $(25,963)
- ------------------------------------------------------------------------------
Costs for Modine's pension and other postretirement benefit plans
include the following components:
(In thousands)
- ----------------------------------------------------------------------------
Years ended March 31 2001 2000 1999
- ----------------------------------------------------------------------------
Pensions:
Components of net periodic
benefit cost (gain):
Service cost $ 5,653 $ 5,875 $ 5,567
Interest cost 11,257 10,630 10,299
Expected return on plan assets (18,649) (17,567) (16,433)
Amortization of:
Unrecognized net loss (gain) (18) 95 (117)
Unrecognized prior service cost 371 380 340
Unrecognized net obligation
(asset) 125 93 213
Adjustment for settlement/
curtailment 660 574 --
- ----------------------------------------------------------------------------
Net periodic benefit
cost (gain) $ (601) $ 80 $ (131)
- ----------------------------------------------------------------------------
Other postretirement plans:
Components of net periodic
benefit cost:
Service cost $ 312 $ 374 $ 327
Interest cost 1,777 1,629 1,626
Amortization of:
Unrecognized net (gain) (46) (46) (109)
Unrecognized prior service cost (462) (473) (473)
- ----------------------------------------------------------------------------
Net periodic benefit cost $ 1,581 $ 1,484 $ 1,371
- ----------------------------------------------------------------------------
The following weighted-average assumptions were used to determine
Modine's obligation under the plans:
- -------------------------------------------------------------------------
Years ended March 31 2001 2000
------------------------------------------
U.S. Foreign U.S. Foreign
plans plans plans plans
- -------------------------------------------------------------------------
Pensions:
Discount rate 7.5% 7.5% 7.5% 7.4%
Expected return on plan
assets 9.0% 13.8% 9.0% 14.4%
Rate of compensation
increase 4.0% 3.2% 4.0% 3.1%
- -------------------------------------------------------------------------
Other postretirement plans:
Discount rate 7.5% 7.5%
Rate of compensation
increase 4.0% 4.0%
- -------------------------------------------------------------------------
With regards to the postretirement plans, for measurement
purposes, a 5.0-percent healthcare-cost trend rate was assumed for
fiscal year 2001 for pre-65 benefits and for post-65 benefits.
Assumed healthcare-cost trend rates affect the amounts reported
for the healthcare plan. A one-percentage-point change in assumed
healthcare-cost trend rates would have the following effects:
(In thousands)
- ------------------------------------------------------------------------
One percentage point
-----------------------
Year ended March 31, 2001 increase decrease
- ------------------------------------------------------------------------
Effect on total of service and interest cost $ 93 $ (88)
Effect on post-retirement benefit obligation 1,226 (1,161)
- ------------------------------------------------------------------------
NOTE 4 Leases
- ------ ------
Modine leases various facilities and equipment. Rental expense
under operating leases totaled $13,022,000 in fiscal 2001, $14,817,000
in fiscal 2000, and $12,618,000 in fiscal 1999.
Future minimum rental commitments at March 31, 2001, under
noncancelable operating leases were:
(In thousands)
- --------------------------------------------------------------------
Years ending March 31
- --------------------------------------------------------------------
2002 $8,173 2005 $1,933
2003 5,228 2006 1,227
2004 3,537 2007 and beyond 324
- --------------------------------------------------------------------
Total future minimum rental commitments $20,422
- --------------------------------------------------------------------
NOTE 5 Income taxes
- ------ ------------
The U.S. and foreign components of earnings before income taxes
and the income-tax expense consist of:
(In thousands)
- --------------------------------------------------------------------------
Years ended March 31 2001 2000 1999
- --------------------------------------------------------------------------
Components of earnings before
income taxes:
United States $55,701 $70,114 $ 98,945
Foreign 22,623 25,217 19,125
- --------------------------------------------------------------------------
Total earnings before income taxes $78,324 $95,331 $118,070
- --------------------------------------------------------------------------
Income tax expense:
Federal:
Current $ 7,834 $20,231 $ 22,983
Deferred 6,627 2,959 4,995
State:
Current 1,123 3,319 4,836
Deferred 690 337 497
Foreign:
Current 12,134 8,746 9,595
Deferred 2,311 (5,664) 1,221
- --------------------------------------------------------------------------
Totals charged to earnings $30,719 $29,928 $ 44,127
- --------------------------------------------------------------------------
Income-tax expense attributable to earnings before income taxes
differed from the amounts computed by applying the statutory U.S.
federal income-tax rate as a result of the following:
- --------------------------------------------------------------------------
Years ended March 31 2001 2000 1999
- --------------------------------------------------------------------------
Statutory federal tax 35.0% 35.0% 35.0%
State taxes, net of federal benefit 1.6 2.6 3.0
Taxes on non-U.S. earnings and losses (0.2) (7.8) (0.2)
Other 2.8 1.6 (0.4)
- --------------------------------------------------------------------------
Effective tax rate 39.2% 31.4% 37.4%
- --------------------------------------------------------------------------
The significant components of deferred income-tax expense attributable
to earnings before income taxes are as follows:
(In thousands)
- --------------------------------------------------------------------------
Years ended March 31 2001 2000 1999
- --------------------------------------------------------------------------
Pensions $ 1,876 $ 1,707 $1,294
Depreciation 3,322 3,622 2,023
Inventories 1,148 (575) (148)
Employee benefits (131) 679 817
Benefit of tax losses (1,507) (7,185) (392)
Other 4,920 (616) 3,119
- --------------------------------------------------------------------------
Totals charged to earnings $ 9,628 $(2,368) $6,713
- --------------------------------------------------------------------------
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows:
(In thousands)
- ---------------------------------------------------------------------------
March 31 2001 2000
- ---------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable $ 573 $ 1,366
Inventories 4,427 5,660
Plant and equipment 1,104 937
Employee benefits 19,342 18,683
Net operating-loss and tax-credit
carry-forwards 7,781 9,217
Other 6,932 7,747
--------------------
Total gross deferred assets 40,159 43,610
Less valuation allowance 592 856
- --------------------------------------------------------------------------
Net deferred tax assets 39,567 42,754
- --------------------------------------------------------------------------
Deferred tax liabilities:
Pension 24,422 22,012
Plant and equipment 18,285 14,846
Other 3,195 2,686
--------------------
Total gross deferred tax liabilities 45,902 39,544
- --------------------------------------------------------------------------
Net deferred tax (liability)/asset $ (6,335) $ 3,210
- --------------------------------------------------------------------------
The valuation allowance for deferred tax assets as of April 1,
2000, was $856,000. The valuation allowance decreased by $264,000
during the year and relates primarily to certain, foreign, net-
operating-loss carryforward activities.
At March 31, 2001, the company had tax-loss carryforwards of
$22,566,000 existing in jurisdictions outside of the United
States. If not utilized against taxable income, the tax losses
will expire as follows:
(In thousands)
- --------------------------------------------------------------------------
Years ending March 31
- --------------------------------------------------------------------------
2004 $ 873 2007 $ --
2005 2,348 2008 531
2006 1,963 No expiration date 16,851
- --------------------------------------------------------------------------
As of March 31, 2001, Modine has provided $317,000 of U.S. tax on
undistributed earnings of certain subsidiaries and equity investment
companies considered not permanently reinvested. Undistributed earnings
considered permanently reinvested in foreign operations totaled
$129,862,000 and no provision has been made for any U.S. taxes that
would be payable upon the distribution of such earnings, and it is not
practicable to determine the amount of the related, unrecognized,
deferred-income-tax liability.
NOTE 6 Earnings per share
- ------ ------------------
The computational components of basic and diluted earnings per
share are as follows:
(In thousands, except per-share amounts)
- --------------------------------------------------------------------------
Years ended March 31 2001 2000 1999
- --------------------------------------------------------------------------
Net earnings per share of
common stock:
Basic $1.62 $2.22 $2.50
Assuming dilution 1.62 2.20 2.46
Numerator:
Net earnings available to
common shareholders $47,605 $65,403 $73,943
Denominator:
Weighted average shares
outstanding - basic 29,308 29,471 29,579
Effect of dilutive
securities - options 136 232 436
---------------------------
Weighted average shares
outstanding - assuming
dilution 29,444 29,703 30,015
There were outstanding options
to purchase common stock
excluded from the dilutive
calculation because their prices
exceeded the average market
price for the earnings statement
periods as follows:
Average market price per share $25.19 $27.03 $32.57
Number of shares 1,438 1,169 645
- --------------------------------------------------------------------------
NOTE 7 Cash and cash equivalents
- ------ -------------------------
Under Modine's cash management system, certain cash balances
reflect credit balances to the extent that checks written have not
yet been presented for payment. These credit balances, included in
accounts payable, were approximately $8,571,000, $7,699,000, and
$9,814,000 at March 31, 2001, 2000, and 1999, respectively.
All the short-term investments at March 31, 2001, 2000, and 1999,
were of an initial duration of less than three months and were
treated as cash equivalents, which approximate fair value.
NOTE 8 Inventories
- ------ -----------
Inventories include:
(In thousands)
- ------------------------------------------------------------------------
March 31 2001 2000
- ------------------------------------------------------------------------
Raw materials $ 28,380 $ 35,872
Work in process 36,073 39,146
Finished goods 81,126 93,579
- ------------------------------------------------------------------------
Total inventories $145,579 $168,597
- ------------------------------------------------------------------------
NOTE 9 Property, plant, and equipment
- ------ ------------------------------
Property, plant, and equipment is composed of:
(In thousands)
- --------------------------------------------------------------------
March 31 Depreciable lives 2001 2000
- --------------------------------------------------------------------
Land -- $ 7,733 $ 7,966
Buildings and improvements 10-40 years 168,295 164,449
Machinery and equipment 3-12 years 358,712 336,064
Office equipment 3-14 years 56,094 48,754
Transportation equipment 3-7 years 15,450 14,924
Construction in progress -- 71,691 62,013
------------------
677,975 634,170
Less accumulated depreciation 324,618 296,183
- --------------------------------------------------------------------
Net property, plant, and equipment $353,357 $337,987
- --------------------------------------------------------------------
Depreciation expense was $42,623,000, $39,360,000, and $37,411,000
for the fiscal years ended 2001, 2000, and 1999, respectively.
NOTE 10 Acquisitions and equity investments
- ------- -----------------------------------
In June 2000, Modine purchased the remaining 50-percent share
of Daikin-Modine, Inc., from its joint-venture partner, Daikin
Industries, Ltd. The joint venture was established in June 1998 to
develop, manufacture, and market commercial, unitary, air-
conditioning systems. Investment capital provided by Modine in
fiscal 2000 totaled $2,700,000. The purchase of the remaining 50-
percent interest for $200,000 resulted in a "bargain purchase"
and, as such, the value of the acquired property, plant, and
equipment was reduced proportionately by the amount of the bargain
element. The value of the assets acquired, after giving effect to
the bargain element and excluding cash acquired of $449,000, was
$1,186,000. Liabilities assumed in the transaction were
$1,346,000. Net cash received from the acquisition was $249,000.
The continuing operation has been integrated into Modine's
Commercial HVAC&R Division and its operating results reported in
the Distributed Products reporting segment since the purchase of
the remaining 50-percent share.
On August 6, 1998, Modine, through its wholly owned Brazilian
subsidiary, purchased a 50-percent interest in Radiadores Visconde,
Ltda., a Brazilian heat-transfer company based in Sao Paulo, Brazil.
Visconde produces heat-exchanger components, assemblies, and modules
primarily for the aftermarket but also for sale to original-equipment
customers in the truck, engine, agricultural-tractor, hydraulic-system,
compressor, marine, construction-equipment, power-generator, and
industrial markets. The purchase price of $26,187,000 was financed
through a combination of cash provided by operations, borrowing under
Modine's revolver, and a promissory note in the amount of $10,000,000
to the sellers. Goodwill recorded as part of the investment was
$17,536,000 and is being amortized on a straight-line basis over
15 years. The investment is being accounted for under the equity
method using a one-month reporting delay.
On October 6, 1998, Modine finalized the acquisition of Core
Holdings, Inc., of Orlando, Florida, an aftermarket wholesale
distributor specializing in complete lines of vehicular engine-
cooling and air-conditioning systems products. The acquisition
purchase price was $24,300,000. The transaction was financed with cash,
existing short-term borrowing facilities, and $3,921,000 of promissory
notes to the sellers. The investment is accounted for using the
purchase method. Goodwill, recognized as a result of the acquisition,
was $25,261,000 and is being amortized on a straight-line basis over
15 years. The results of operations are included in the consolidated
financial statements since the effective date of the acquisition.
The investments presented above did not have a material effect on
the consolidated results of operations and, accordingly, pro-forma
information is not presented.
Subsequent to the fiscal year end, in April 2001, Modine finalized
the acquisition of Thermacore International, Inc., of Lancaster,
Pennsylvania, a provider of advanced thermal solutions for the
electronics industry. Modine exchanged approximately 3.6 million shares
of common stock for all the outstanding stock of Thermacore. The
transaction will be accounted for as a pooling of interests.
NOTE 11 Intangible assets
- ------- -----------------
Intangible assets include:
(In thousands)
- ---------------------------------------------------------------------
March 31 2001 2000
- ---------------------------------------------------------------------
Goodwill $87,644 $ 89,815
Patents and product technology 6,901 8,389
Other intangibles 2,813 3,204
------------------
97,358 101,408
Less accumulated amortization 35,042 31,069
- ---------------------------------------------------------------------
Net intangible assets $62,316 $ 70,339
- ---------------------------------------------------------------------
Amortization expense for intangible assets was $6,778,000,
$8,390,000, and $5,856,000 for the fiscal years ended 2001, 2000,
and 1999, respectively.
NOTE 12 Deferred charges and other noncurrent assets
- ------- --------------------------------------------
Deferred charges and other noncurrent assets include:
(In thousands)
- ------------------------------------------------------------------
March 31 2001 2000
- ------------------------------------------------------------------
Prepaid pension costs - qualified
and nonqualified plans $62,496 $57,421
Other noncurrent assets 8,052 7,365
- ------------------------------------------------------------------
Total deferred charges and other
noncurrent assets $70,548 $64,786
- ------------------------------------------------------------------
NOTE 13 Indebtedness
- ------- ------------
Long-term debt at March 31, 2001 and 2000, includes:
(Dollars in thousands)
- --------------------------------------------------------------------------
Interest rate Fiscal
percentage at year of
Type of issue March 31, 2001 maturity 2001 2000
- --------------------------------------------------------------------------
Denominated in
U.S. dollars:
Fixed rate -
Notes 5.00-8.00 2002-2004 $ 11,643 $ 13,391
Weighted average
interest rate 5.24
Revenue bonds 7.50 2003 400 750
Variable rate -
Note 5.58 2003 15,000 55,000
Revenue bonds 3.65 2008 3,000 3,000
Denominated in
foreign currency:
Fixed rate -
Notes and
other debt 3.25-11.00 2004-2009 56,209 13,301
Weighted average
interest rate 5.62
Variable rate -
Notes and
other debt .36-7.25 2002-2010 65,923 128,798
Weighted average
interest rate 4.88
152,175 214,240
Less current portion 17,816 3,128
- --------------------------------------------------------------------------
Total $134,359 $211,112
- --------------------------------------------------------------------------
In the third quarter of fiscal 2001, Modine completed a 50-million-
Euro (approximately $44,100,000) private placement of unsecured
6.08-percent senior notes due September 29, 2005. Proceeds of the
note were used to redeem the outstanding Euro term loan. Certain
of Modine's financing agreements require it to maintain specific
financial ratios and place certain limitations on dividend
payments and the acquisition of treasury stock. Other loan
agreements give certain existing unsecured lenders security equal
to any future secured borrowing. Modine is in compliance with
these covenants at March 31, 2001.
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. At March 31, 2001 and 2000,
the carrying value of Modine's long-term debt approximates fair
value.
Long-term debt matures as follows:
(In thousands)
- ----------------------------------------------------------------
Years ending March 31
- ----------------------------------------------------------------
2002 $17,816 2005 $ 1,627
2003 56,695 2006 45,535
2004 11,874 2007 and beyond 18,628
- ----------------------------------------------------------------
Modine also maintains credit agreements with banks abroad.
The foreign unused lines of credit at March 31, 2001, were
approximately $19,034,000. Domestic unused lines of credit at
March 31, 2001, were approximately $45,657,000. A maximum of
$16,756,000 in short-term bank borrowings was outstanding during
the year ended March 31, 2001. The weighted average interest rate
on short-term borrowings was 5.58 percent at March 31, 2001, and
4.67 percent at March 31, 2000.
Interest expense charged to earnings was as follows:
(In thousands)
- -------------------------------------------------------------------
Years ended March 31 2001 2000 1999
- -------------------------------------------------------------------
Gross interest cost $ 9,724 $ 9,980 $ 7,538
Capitalized interest on major
construction projects (1,684) (1,513) (1,816)
- -------------------------------------------------------------------
Interest expense $ 8,040 $ 8,467 $ 5,722
- -------------------------------------------------------------------
NOTE 14 Foreign exchange contracts/derivatives/hedges
- ------- ---------------------------------------------
Modine uses derivative financial instruments in a limited way
as a tool to manage its financial risk. Their use is restricted
primarily to hedging assets and obligations already held by Modine
and they are used to protect cash rather than generate income or
engage in speculative activity. Leveraged derivatives are
prohibited by company policy.
Modine from time to time enters into foreign-currency-exchange
contracts, generally with terms of 90 days or less, to hedge
specific foreign-currency-denominated transactions. The effect of
this practice is to minimize the impact of foreign-exchange-rate
movements on Modine's operating income. Modine's foreign-currency-
exchange contracts do not subject it to significant risk due to
exchange-rate movements because gains and losses on these
contracts offset gains and losses on the assets and liabilities
being hedged.
As of March 31, 2001 and 2000, the parent company had
approximately $2,467,000 and $2,549,000, respectively, in
outstanding forward foreign-exchange contracts denominated
in Euros and French francs. The difference between these
contracts' values and the fair value of these instruments
in the aggregate was not material. Certain subsidiaries have
transactions in currencies other than their functional
currencies and, from time to time, enter into forward and
option contracts to hedge the purchase of inventory or to
sell nonfunctional currency receipts. Non-U.S. dollar
financing transactions through intercompany loans or local
borrowings in the corresponding currency generally are
effective as hedges of long-term investments. See also
Note 13.
NOTE 15 Other noncurrent liabilities
- ------- ----------------------------
Other noncurrent liabilities include:
(In thousands)
- -------------------------------------------------------------------
March 31 2001 2000
- -------------------------------------------------------------------
Postretirement benefits other
than pensions $22,966 $23,595
Pensions 13,381 13,583
Other 2,562 2,562
- -------------------------------------------------------------------
Total other noncurrent liabilities $38,909 $39,740
- -------------------------------------------------------------------
NOTE 16 Common and treasury stock
- ------- -------------------------
Following is a summary of common and treasury stock activity.
- --------------------------------------------------------------------------
Treasury stock
Common stock at cost
----------------- -------------------
shares amount shares amount
- --------------------------------------------------------------------------
Balance March 31, 1998 30,342 $18,964 (678) $(20,977)
Purchase of treasury stock -- -- (418) (15,203)
Stock options and
awards including related
tax benefits -- -- 215 6,165
Employee stock-purchase
and -ownership plans -- -- 64 1,817
- --------------------------------------------------------------------------
Balance March 31, 1999 30,342 18,964 (817) (28,198)
- --------------------------------------------------------------------------
Purchase of treasury stock -- -- (459) (12,102)
Stock options and
awards including related
tax benefits -- -- 124 3,719
Employee stock-purchase
and -ownership plans -- -- 71 2,187
- --------------------------------------------------------------------------
Balance March 31, 2000 30,342 18,964 (1,081) (34,394)
- --------------------------------------------------------------------------
Purchase of treasury stock -- -- (199) (5,167)
Stock options and
awards including related
tax benefits -- -- 296 10,005
Employee stock-purchase
and -ownership plans -- -- 172 5,992
- --------------------------------------------------------------------------
Balance March 31, 2001 30,342 $18,964 (812) $(23,564)
- --------------------------------------------------------------------------
NOTE 17 Shareholder rights plan
- ------- -----------------------
Modine has a shareholder rights plan to protect against coercive
takeover tactics. Under the plan, each share of Modine's common
stock carries one right that entitles the holder to purchase a unit
of 1/100 Preferred Series A Participating Stock at $95.00 per unit.
The rights are not currently exercisable but will become exercisable
10 days after a shareholder has acquired 20 percent or more, or has
commenced a tender or exchange offer for 30 percent or more, of
Modine's common stock. In the event of certain mergers, sales of
assets, or self-dealing transactions involving a 20-percent-or-more
shareholder, each right not owned by such 20-percent-or-more holder
will be modified so that it will then be exercisable for common
stock having a market value of twice the exercise price of the
right. The rights are redeemable in whole by Modine, at a price of
$0.0125 per right, at any time before 20 percent or more of Modine's
common stock has been acquired. The rights expire on October 27, 2006,
unless previously redeemed.
NOTE 18 Accumulated other comprehensive income/(loss)
- ------- ---------------------------------------------
The components of accumulated other comprehensive income/(loss),
net of applicable income taxes, consist of:
(In thousands)
- ---------------------------------------------------------------------
March 31 2001 2000
- ---------------------------------------------------------------------
Unrealized foreign-currency-
translation adjustments $(23,067) $(21,076)
Minimum pension-liability adjustments (293) (553)
- ---------------------------------------------------------------------
Accumulated other comprehensive
income/(loss) $(23,360) $(21,629)
- ---------------------------------------------------------------------
NOTE 19 Stock-retirement, option, and award plans
- ------- -----------------------------------------
Retirement plans: Modine has adopted several, qualified, defined-
----------------
contribution, stock-purchase plans; 401(k) plans; and a nonqualified,
deferred-compensation plan for certain, designated employees. The
stock-purchase plans permitted employees to make monthly investments
at current market prices based on a specified percentage of
compensation. As of December 31, 1998, the stock-purchase plans were
frozen and no additional contributions were made. The plans continue
to earn dividends, which are reinvested in Modine common stock. The
401(k) plans and deferred-compensation plan allow employees to choose
among various investment alternatives, including Modine common stock.
Modine matches a portion of the employees' contribution, primarily in
Modine common stock.
Activity in the plans for fiscal 2001, 2000, and 1999 resulted
in the purchase of 468,000, 487,000, and 506,000 shares of Modine
common stock, respectively. These purchases were made from the
employee-pension-plan trusts, private purchases, and treasury shares.
It is anticipated that future purchases will be made from all three
sources at the discretion of the plans' administrative committees.
Costs of Modine's contributions to the plans for fiscal 2001, 2000,
and 1999 were $6,207,000, $7,288,000, and $6,321,000, respectively.
Stock option and award plans: In July 1985 and 1994, shareholders
----------------------------
approved plans providing for the granting of options to officers,
other key employees, and to nonemployee directors to purchase
common stock of Modine. In July 1999, shareholders reapproved the
1994 plan. In July 2000, the 1994 plan for nonemployee directors
was terminated and replaced with a new plan approved by the Board
of Directors. This action was taken, in conjunction with a
simultaneous decision to freeze the Directors Emeritus Retirement
Plan effective July 1, 2000, with no further benefits accruing
under that plan. Options granted under the plans, which vest
immediately, are either nonqualified or incentive stock options
and carry a price equal to the market price on the date of grant.
Both incentive stock options and nonqualified stock options
terminate 10 years after date of grant.
The 1985 and 1994 Incentive Stock Plans also provide for the
granting of stock awards. No restricted stock awards were granted
in fiscal 2001. Restricted stock awards were granted for 39,000
and 1,500 shares in fiscal 2000 and 1999, respectively. Shares are
awarded at no cost to the employee and are placed in escrow until
certain employment restrictions lapse. The value of shares awarded
is amortized over the five- to six-year restriction periods. The
amounts charged to operations in fiscal 2001, 2000, and 1999 were
$546,000, $1,072,000 and $915,000, respectively.
Following is a summary of incentive and nonqualified option
activity under the plans.
- ------------------------------------------------------------------------
Weighted-average
Shares exercise price
(in thousands) per share
- ------------------------------------------------------------------------
Outstanding March 31, 1998 2,080 $23.38
Granted 333 33.36
Exercised (215) 13.77
Forfeitures (18) 27.31
- ------------------------------------------------------------------------
Outstanding March 31, 1999 2,180 25.82
- ------------------------------------------------------------------------
Granted 343 25.86
Exercised (85) 10.59
- ------------------------------------------------------------------------
Outstanding March 31, 2000 2,438 26.36
- ------------------------------------------------------------------------
Granted 367 24.08
Exercised (296) 16.79
Forfeitures (54) 29.27
- ------------------------------------------------------------------------
Outstanding March 31, 2001 2,455 $27.10
- ------------------------------------------------------------------------
Options outstanding and exercisable as of March 31, 2001:
- ------------------------------------------------------------------------
Weighted- Weighted-average
Range of average exercise price Shares
exercise prices remaining life per share (in thousands)
- ------------------------------------------------------------------------
$ 8.75 - 14.99 .75 $12.50 33
15.00 - 24.99 6.01 21.59 694
25.00 - 34.99 6.41 29.59 1,728
- ------------------------------------------------------------------------
Total outstanding and exercisable $27.10 2,455
- ------------------------------------------------------------------------
A further 1,344,000 shares were available for the granting of
additional options or awards at March 31, 2001.
Modine continues to account for its stock options using the
intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Since the exercise price of the options that have been
awarded was equal to the market price on the date of the grant, no
compensation expense was required to be recognized. If the fair-
value based method of accounting for the 2001, 2000, and 1999
stock option grants had been applied in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation," Modine's net
earnings and net earnings per share would have been reduced as
summarized below:
(In thousands, except per-share amounts)
- ------------------------------------------------------------------
Years ended March 31 2001 2000 1999
- ------------------------------------------------------------------
Net earnings as reported $47,605 $65,403 $73,943
Net earnings pro forma 44,980 62,855 71,206
Net earnings per share (basic)
as reported $1.62 $2.22 $2.50
Net earnings per share (basic)
pro forma 1.53 2.13 2.41
- ------------------------------------------------------------------
The following assumptions were used to compute the fair value
of the option grants in fiscal 2001, 2000, and 1999 using the
Black-Scholes option-pricing model: a risk-free interest rate of
4.85-6.24 percent, 5.82-6.60 percent, and 4.53 percent, respectively;
stock volatility of 31.5-33.3 percent, 26.9-28.8 percent, and 26.3
percent, respectively; a dividend yield of 2.6-2.8 percent, 2.4-
2.5 percent, and 2.2 percent, respectively; and an expected option
life of five and one-half years, five years, and five years,
respectively.
NOTE 20 Segment and geographic information
- ------- ----------------------------------
Modine's product line consists of heat-transfer components and
systems. Modine serves the vehicular, industrial, commercial, and
building-HVAC original-equipment and replacement markets. Modine's
segments, which are organized on the basis of market categories or
geographical responsibility, are as follows: Original Equipment,
which provides heat-transfer products, generally from business
units in North America, to original-equipment manufacturers of on-
highway and off-highway vehicles, as well as to industrial- and
commercial-equipment manufacturers, located primarily in North
America; Distributed Products, which provides heat-transfer
products primarily for the North American and European vehicular
replacement markets and the North American building-HVAC market,
from business units in North America and Europe; and European
Operations, which provides heat-transfer products, primarily to
European original-equipment manufacturers of on-highway and off-
highway vehicles and industrial-equipment manufacturers. Modine
has assigned specific business units to a segment based
principally on these defined markets and their geographical
location. Each of Modine's segments is individually managed and
has separate financial results reviewed by its chief, operating
decision-makers. These results are used by management both in
evaluating the performance of, and in allocating current and
future resources to, each of the segments. Modine evaluates
segment performance based on operating income and the efficient
use of long-lived and total assets. The accounting policies of the
segments are the same as those of Modine as a whole.
Totals presented are inclusive of all adjustments needed to
reconcile to the data provided in Modine's consolidated financial
statements and related notes.
Segment data:
(In thousands)
- ---------------------------------------------------------------------------
Years ended March 31 2001 2000 1999
- ---------------------------------------------------------------------------
Sales:
Original Equipment $ 433,957 $ 485,338 $ 491,532
Distributed Products 372,702 406,111 373,195
European Operations 297,494 292,862 284,437
----------------------------------------
Segment sales 1,104,153 1,184,311 1,149,164
Eliminations (38,758) (45,042) (37,717)
- ---------------------------------------------------------------------------
Total net sales $1,065,395 $1,139,269 $1,111,447
- ---------------------------------------------------------------------------
Operating income:
Original Equipment $ 66,950 $ 92,292 $ 92,488
Distributed Products 24,016 42,785 52,068
European Operations 33,624 26,183 31,200
-----------------------------------------
Segment operating income 124,590 161,260 175,756
Corporate & administrative
expenses (63,022) (62,303) (62,546)
Eliminations 133 81 81
Other items not allocated
to segments 16,623 (3,707) 4,779
- ---------------------------------------------------------------------------
Earnings before
income taxes $ 78,324 $ 95,331 $ 118,070
- ---------------------------------------------------------------------------
Intersegment sales are accounted for based on an established
markup over production costs.
In the first quarter of fiscal 2001, a change was made by
management to relocate the aftermarket business unit of the
European Operations segment to the Distributed Products segment.
The corresponding prior years' data have been restated to reflect
the effects of this change.
Operating income for the reportable segments excludes all general
corporate and administrative expenses except for certain expenses
allocated for use of the company aircraft, technical center, and
general building use. Functions included in corporate and
administrative expenses include: certain research and development
costs, information technology, quality assurance, legal, finance,
human resources, environmental, amortization of goodwill from
acquisitions that benefit the entire company, and other general
corporate expenses.
Other items not allocated to segments include patent settlements
and running royalties, interest income and expenses, equity in the
earnings of affiliates, and dividend income.
(In thousands)
- ------------------------------------------------------------------------
Years ended March 31 2001 2000 1999
- ------------------------------------------------------------------------
Assets:
Original Equipment $248,196 $265,495 $231,841
Distributed Products 229,327 263,733 257,350
European Operations 205,323 189,803 192,282
Corporate & administrative 272,999 264,562 249,044
Eliminations (55,734) (52,486) (14,778)
- ------------------------------------------------------------------------
Total assets $900,111 $931,107 $915,739
- ------------------------------------------------------------------------
Capital expenditures:
Original Equipment $ 14,855 $ 19,714 $ 24,766
Distributed Products 5,268 11,095 12,226
European Operations 28,058 33,155 38,376
Corporate & administrative 18,129 26,272 15,542
Eliminations -- (89) (50)
- ------------------------------------------------------------------------
Total capital expenditures $ 66,310 $ 90,147 $ 90,860
- ------------------------------------------------------------------------
Depreciation and amortization
expense:
Original Equipment $ 14,964 $ 16,270 $ 15,764
Distributed Products 10,722 10,536 8,973
European Operations 11,381 11,213 10,807
Corporate & administrative 13,021 10,955 8,788
Eliminations (141) (152) (150)
- ------------------------------------------------------------------------
Total depreciation and
amortization expense $ 49,947 $ 48,822 $ 44,182
- ------------------------------------------------------------------------
Corporate assets include: cash and cash equivalents, accounts and
notes receivable, investments in affiliates, intangibles, and
significant long-lived assets. Eliminations consist primarily of
intracompany loans and receivables.
Eliminations of capital expenditures are primarily due to sales
between segments in excess of book value.
Geographic data:
(In thousands)
- ------------------------------------------------------------------------
Years ended March 31 2001 2000 1999
- ------------------------------------------------------------------------
Sales to unaffiliated customers
from company facilities
located in:
United States $ 681,907 $ 757,074 $ 740,094
Germany 221,642 212,474 221,725
Other countries 161,846 169,721 149,628
- ------------------------------------------------------------------------
Net sales $1,065,395 $1,139,269 $1,111,447
- ------------------------------------------------------------------------
Long-lived assets:
United States $ 367,393 $ 364,456 $ 344,948
Germany 85,092 71,372 62,263
Other countries 60,913 66,622 60,918
Eliminations (774) (898) (5,486)
- ------------------------------------------------------------------------
Total long-lived assets $ 512,624 $ 501,552 $ 462,643
- ------------------------------------------------------------------------
Net sales are attributed to countries based on the location of
the selling unit.
Long-lived assets are primarily physical property, plant, and
equipment, but also include investments, intangibles, and other
long-term assets. Eliminations are primarily intracompany loans
and sales of property, plant, and equipment.
Major Customers: European Operations and Original-Equipment
---------------
segment sales to Bayerische Motoren Werke (BMW) accounted for
approximately 10.8-percent of total company revenues in fiscal
2001. In the previous two fiscal years, no single customer
accounted for more than 10-percent of revenues.
NOTE 21 Contingencies and litigation
- ------- ----------------------------
In the normal course of business, Modine and its subsidiaries
have been named as defendants in various lawsuits and enforcement
proceedings in which claims are asserted against Modine by private
parties, the Occupational Safety and Health Administration, the
Environmental Protection Agency, other governmental agencies, and
others. Modine is also subject to other liabilities that arise in
the ordinary course of its business. Many of the pending damage
claims are covered by insurance and, in addition, Modine from time
to time establishes reserves for uninsured liabilities. Based on
the information available, Modine does not expect that any
unrecorded liability related to these matters would have a
material effect on the consolidated financial statements.
Over the last 10 years, Modine and Showa Aluminum Corporation
(and Mitsubishi Motors in some cases) have instituted various lawsuits
and legal proceedings against each other pertaining to Modine's PF
(Parallel Flow) technology and Showa's SC condenser. On July 14,
2000, Modine and Showa reached a settlement and license agreement.
The agreement calls for cross-licensing of these technologies
between the parties. As a result of the agreement and another with
Mitsubishi Heavy Industries, Modine received, in the first and
second quarters of fiscal 2001, payments totaling $17 million
representing partial settlement for past infringement of Modine's
PF technology. Subsequent payments of approximately $27 million
are payable to Modine subject to confirmation of the validity of
Modine's PF patents in Japan, the United States, and the European
Union. Running royalties are applicable to future sales by Showa
and Mitsubishi for the use of Modine's PF technology through the
expiration of the corresponding patents in 2006-2008. All legal
proceedings between the parties are being dismissed. Other
previously reported legal proceedings between the parties have
been settled or the issues resolved so as to not merit further
reporting. In February 2000, Modine filed a complaint against
Delphi Automotive Systems Corporation in the U.S. District Court
in Milwaukee, Wisconsin, alleging infringement of its PF patent.
All legal and court costs associated with these cases have been
expensed as they were incurred.
NOTE 22 Quarterly financial data (unaudited)
- ------- ------------------------------------
Quarterly financial data are summarized below:
(In thousands, except per-share amounts)
- ----------------------------------------------------------------------
Fiscal 2001
quarters ended June Sept. Dec. March
- ----------------------------------------------------------------------
Net sales $286,484 $269,775 $252,346 $256,790
Gross profit 82,587 71,011 65,462 59,644
Net earnings 17,962 19,018 6,109 4,516
Net earnings per
share of
common stock:
Basic $0.61 $0.65 $0.21 $0.15
Assuming dilution 0.61 0.65 0.20 0.15
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Fiscal 2000
quarters ended June Sept. Dec. March
- -----------------------------------------------------------------------
Net sales $283,847 $286,691 $283,520 $285,211
Gross profit 81,965 79,588 78,336 77,601
Net earnings 19,509 15,096 16,195 14,603
Net earnings per
share of
common stock:
Basic $0.66 $0.51 $0.55 $0.50
Assuming dilution 0.65 0.51 0.55 0.49
- -----------------------------------------------------------------------
report of independent accountants
- ---------------------------------
To the Shareholders and Board of Directors
Modine Manufacturing Company
Racine, Wisconsin:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of earnings, cash flows, and
shareholders' investment present fairly, in all material respects,
the financial position of Modine Manufacturing Company and its
subsidiaries at March 31, 2001 and March 31, 2000, and the results
of their operations and their cash flows for each of the three
years in the period ended March 31, 2001, in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted
our audits of these statements in accordance with auditing
standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
April 27, 2001