SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 2001
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-1373
------
MODINE MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
WISCONSIN 39-0482000
-------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 DeKoven Avenue, Racine, Wisconsin 53403-2552
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (262) 636-1200
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NOT APPLICABLE
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(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 7, 2002
------------------------------ -------------------------------
Common Stock, $0.625 Par Value 33,355,631
MODINE MANUFACTURING COMPANY
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 26 and March 31, 2001 3
Consolidated Statements of Earnings -
For the Three Months Ended
December 26, 2001 and 2000
and the Nine Months Ended
December 26, 2001 and 2000 4
Consolidated Statements of Cash Flows -
For the Nine Months Ended December 26,
2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 24
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
December 26, 2001 and March 31, 2001
(In thousands, except per-share amounts)
(Unaudited)
December 26, 2001 March 31, 2001
----------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 63,828 $ 21,744
Trade receivables, less allowance for
doubtful accounts of $3,362 and
$2,459, respectively 169,226 177,972
Inventories 125,586 153,096
Deferred income taxes and other current
assets 36,868 55,248
-------- --------
Total current assets 395,508 408,060
-------- --------
Noncurrent assets:
Property, plant, and equipment -- net 354,726 366,854
Investment in affiliates 25,035 26,403
Goodwill and other intangible assets -- net 58,657 64,886
Deferred charges and other noncurrent assets 75,920 70,975
-------- --------
Total noncurrent assets 514,338 529,118
-------- --------
Total assets $909,846 $937,178
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Short-term debt $ 483 $ 27,281
Long-term debt -- current portion 41,960 17,879
Accounts payable 73,518 80,028
Accrued compensation and employee benefits 47,177 49,161
Income taxes 6,420 6,590
Accrued expenses and other current
liabilities 33,398 29,071
-------- --------
Total current liabilities 202,956 210,010
-------- --------
Other liabilities:
Long-term debt 117,811 137,766
Deferred income taxes 33,086 31,796
Other noncurrent liabilities 40,586 38,909
-------- --------
Total noncurrent liabilities 191,483 208,471
-------- --------
Total liabilities 394,439 418,481
-------- --------
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 33,721 and 33,663
shares 21,076 21,039
Additional paid-in capital 18,296 17,468
Retained earnings 518,481 528,653
Accumulated other comprehensive loss (29,869) (23,651)
Treasury stock at cost: 407 and 812
shares, respectively (10,391) (23,564)
Restricted stock - unamortized value (2,186) (1,248)
-------- --------
Total shareholders' investment 515,407 518,697
-------- --------
Total liabilities and shareholders'
investment $909,846 $937,178
======== ========
<FN>
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended December 26, 2001 and 2000
For the nine months ended December 26, 2001 and 2000
(In thousands, except per-share amounts)
(Unaudited)
Three months ended Nine months ended
--------------------- ---------------------
December 26 December 26
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net Sales $270,433 $265,393 $820,178 $849,890
Cost of sales 203,592 195,209 614,411 615,918
-------- -------- -------- --------
Gross profit 66,841 70,184 205,767 233,972
Selling, general, and administrative expenses 53,864 56,808 165,438 173,521
Restructuring charges 8,507 - 8,507 -
-------- -------- -------- --------
Income from operations 4,470 13,376 31,822 60,451
Interest expense (1,822) (1,946) (6,029) (6,425)
Patent settlements - - - 16,959
Other income -- net 1,017 1,178 6,210 5,886
-------- -------- -------- --------
Earnings before income taxes 3,665 12,608 32,003 76,871
Provision for income taxes 2,413 5,549 13,704 30,236
-------- -------- -------- --------
Net earnings $ 1,252 $ 7,059 $ 18,299 $ 46,635
======== ======== ======== ========
Net earnings per share of common stock
- Basic $0.04 $0.22 $0.55 $1.45
- Assuming dilution $0.04 $0.22 $0.55 $1.42
======== ======== ======== ========
Dividends per share $0.25 $0.25 $0.75 $0.75
======== ======== ======== ========
Weighted average shares -- basic 33,224 32,198 33,050 32,180
Weighted average shares -- assuming dilution 33,382 32,813 33,325 32,832
======== ======== ======== ========
<FN>
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Nine Months Ended December 26, 2001 and 2000
(Unaudited)
Nine months ended December 26
-----------------------------
2001 2000
---------- ----------
Net cash provided by operating activities $107,611 $119,958
Cash flows from investing activities:
Expenditures for property, plant, and equipment (31,178) (58,850)
Acquisitions, net of cash acquired - 249
Investments in affiliate 74 343
Proceeds from dispositions of property, plant,
and equipment 2,276 313
Other -- net 306 (2,711)
-------- --------
Net cash used for investing activities (28,522) (60,656)
Cash flows from financing activities:
(Decrease)/increase in short-term debt -- net (26,544) 4,530
Additions to long-term debt 46,573 46,602
Reductions of long-term debt (40,586) (98,851)
Issuance of common stock, including treasury
stock 9,196 4,582
Purchase of treasury stock (835) (4,355)
Cash dividends paid (24,809) (21,954)
-------- --------
Net cash (used for) financing activities (37,005) (69,446)
-------- --------
Net increase/(decrease) in cash and cash
equivalents 42,084 (10,144)
Cash and cash equivalents at beginning of period 21,744 31,242
-------- --------
Cash and cash equivalents at end of period $ 63,828 $ 21,098
======== ========
<FN>
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
1. In the third quarter, the Company initiated a restructuring
plan to reduce costs and increase future operating efficiency by
consolidating a portion of its operations. This restructuring
plan includes the closure of three manufacturing plants in North
America located in LaPorte (Indiana), Knoxville (Tennessee) and
St. Paul (Minnesota). The plants located in LaPorte and
Knoxville manufacture products for customers in the Company's
heavy-duty and industrial markets. The plant located in St. Paul
produces products for the Company's HVAC market. The Company is
relocating the production of the majority of the products
previously made in these facilities to other Company locations.
It is however ceasing the production of air turnover units,
building evaporator units, and indirect fired heating units
previously produced at the St. Paul facility and also
rationalizing certain customer relationships as part of the
restructuring process. Separate personnel reductions were also
initiated as part of the restructuring plan at three other U.S.
facilities located in Harrodsburg, Kentucky, Trenton, Missouri
and the Corporate headquarters in Racine, Wisconsin. Included in
the European portion of the restructuring plan is a plant closure
taking place in Bernhausen, Germany and personnel reductions at
the Company's manufacturing facility in Granada, Spain. The
Company will be exiting the assembly of air conditioning
equipment, previously performed at the Bernhausen facility, for
off-highway equipment manufacturers as part of the restructuring.
Personnel reductions and final phase out of the named
manufacturing facilities have occurred, or are expected to occur,
over the next twelve months.
In connection with the restructuring plan, approximately 400
employees have been or will be terminated. The planned
reductions will total approximately 300 employees in the
U.S. and approximately 100 employees in Europe at the
locations specified above. Estimated employee termination
costs of $6.0 million have been accrued. Of the total
number of employees affected, approximately 19 employees
were terminated as of the end of the third quarter and have
received final benefit payments of $0.1 million.
In addition to the costs of terminating employees, the other
principal costs of the restructuring plan include the write-off
of goodwill ($1 million) associated with the St. Paul facility,
post-closing operating expenses for the facilities to be sold
in LaPorte, Knoxville, and St. Paul, and other disposal costs.
In total, these costs are approximately, $2.5 million.
In addition to the restructuring costs, other closure-
related costs recorded in the third quarter were $1.1
million in pension curtailment costs for the Laporte and
Knoxville facilities, $0.6 million in increased
depreciation in conjunction with the reduction of the useful
lives of assets at the facilities to be closed, and $0.5
million of inventory identified as obsolete.
Other special one-time items recorded in the quarter
included a $1.0 million asset impairment identified at one
of the Company's foreign facilities. The impairment
consisted of $0.7 million reduction in the value of fixed
assets and a $0.3 million write-off of goodwill. Also
recorded in the quarter was the write-down of the unitary
air conditioning product line marketed by the Company's HVAC
division. The write-down consisted of $0.4 million in
obsolete inventory and $0.2 million in fixed asset
impairments.
The following table provides a summary of restructuring and
one-time closure costs recorded in the third quarter.
Restructuring Charges (in millions)
--------------------- -------------
Employee severance and related benefits $6.0
Goodwill impairment 1.0
Post-closing operating expenses 0.8
Other disposal costs 0.7
----
Total restructuring costs $8.5
Other Closure Costs
-------------------
Pension curtailment costs $1.1
Obsolete inventory charges 0.9
Fixed assets impairments 0.9
Depreciation (change in useful lives) 0.6
Goodwill impairment 0.3
----
Total other closure costs $3.8
Total restructuring and other closure costs $12.3
=====
2. In the third quarter of fiscal 2002, the Company's risk
management group undertook a comprehensive review of the
estimating techniques utilized to determine the Company's overall
insurance reserves. Based upon improving claim experience, from
a detailed analysis performed on the frequency and severity of
the workers' compensation claims, the Company reduced its
accounting estimates for workers' compensation reserves by $6.5
million on a pre-tax basis and by $4.0 million, or $0.12 cents
per basic and diluted share, on an after-tax basis.
3. As indicated following the second quarter of fiscal 2002,
the Board of Directors declared on January 16, 2002 a
quarterly dividend of 12.5 cents per share. This represents
a 50% reduction from the previous quarterly rate of 25 cents
per share.
4. On April 27, 2001, Modine Manufacturing Company (Modine)
acquired Thermacore International, Inc. (Thermacore) in a
business combination accounted for as a pooling of interests.
Thermacore, which provides advanced cooling solutions for
customers in the electronics and telecommunications industries,
became a wholly owned subsidiary of Modine through the initial
exchange of approximately 3.3 million shares of Modine common
stock for all of the outstanding common and preferred stock of
Thermacore International, Inc. In addition, approximately 0.3
million shares of Modine common stock were allocated to cover
outstanding Thermacore stock options which were converted to
Modine stock options as part of the transaction. The accompanying
financial statements are based upon the assumption that the
companies were combined for the first nine months of fiscal 2002,
and the financial statements of prior periods have been restated
to give effect to the combination.
Prior to the date of the combination, there were no business
transactions between Modine and Thermacore. No significant
adjustments have been made to conform the accounting
policies of the combining companies. No adjustments to
retained earnings were required to conform Thermacore to
Modine's March 31st year-end.
Summarized results of operations of the separate companies
for the period prior to acquisition, April 1, 2001 through
April 27, 2001, and included in the current fiscal year's
operations are as follows:
(Unaudited in 000's)
---------------------------------
Modine Thermacore
------- ------------
Net sales $86,065 $3,496
Net earnings (loss) 3,368 (1,655)
Included in the operating results shown for April are
$351,000 and $2,468,000 in pre-tax acquisition costs
recorded for Modine and Thermacore, respectively.
Following is a reconciliation of the amounts of net sales
and net earnings previously reported for the third quarter
and nine-month period ended December 26, 2000 with the
restated amounts.
(Unaudited in 000's) (Unaudited in 000's)
Three months ended Nine months ended
December 26, 2000 December 26, 2000
-------------------- --------------------
Net sales
Modine $252,346 $808,605
Thermacore 13,047 41,285
-------- --------
Combined $265,393 $849,890
======== ========
Net earnings
Modine $6,109 $43,089
Thermacore 950 3,546
------ -------
Combined $7,059 $46,635
====== =======
5. Raw Material, Work-in-Progress and Finished Goods. The
amounts of raw material, work in process and finished goods
cannot be determined exactly except by physical inventories.
Based on partial interim physical inventories and percentage
relationships at the time of complete physical inventories,
Management believes the amounts shown below are reasonable
estimates of raw material, work in process and finished
goods.
(in thousands)
-------------------------------------------------------------
December 26, 2001 March 31, 2001
-------------------------------------------------------------
Raw materials $ 28,280 $ 32,774
Work in process 31,130 37,321
Finished goods 66,176 83,001
-------- --------
Total inventories $125,586 $153,096
======== ========
6. Property, Plant, and Equipment.
(in thousands)
-------------------------------------------------------------
December 26, 2001 March 31, 2001
-------------------------------------------------------------
Gross property,
plant & equipment $714,047 $697,063
Less accumulated
depreciation (359,321) (330,209)
-------- --------
Net property,
plant & equipment $354,726 $366,854
======== ========
7. Intangible assets.
(in thousands)
-------------------------------------------------------------
December 26, 2001 March 31, 2001
-------------------------------------------------------------
Goodwill $86,516 $90,361
Patents and product
technology 6,901 6,901
Other intangibles 2,972 2,925
Less accumulated
amortization (37,732) (35,301)
------- -------
Net intangible assets $58,657 $64,886
======= =======
8. Segment data.
(In thousands)
-----------------------------------------------------------------
Quarter ended December 26, 2001 2000
---- ----
Sales:
Original Equipment $116,693 $108,302
Distributed Products 89,773 99,901
European Operations 81,091 75,030
-----------------------------------------------------------------
Segment sales 287,557 283,233
Eliminations (17,124) (17,840)
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Total net sales $270,433 $265,393
-----------------------------------------------------------------
Operating income:
Original Equipment $ 16,266 $ 17,127
Distributed Products (1,743) 4,676
European Operations 5,793 8,301
-----------------------------------------------------------------
Segment operating income 20,316 30,104
Corporate & administrative
expenses (15,873) (16,776)
Eliminations 27 48
Other items not allocated
to segments (805) (768)
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Earnings before income taxes $ 3,665 $ 12,608
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(In thousands)
-----------------------------------------------------------------
Nine Months ended December 26, 2001 2000
---- ----
Sales:
Original Equipment $337,671 $349,363
Distributed Products 298,548 328,489
European Operations 233,625 227,966
-----------------------------------------------------------------
Segment sales 869,844 905,818
Eliminations (49,666) (55,928)
-----------------------------------------------------------------
Total net sales $820,178 $849,890
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Operating income:
Original Equipment $ 48,654 $ 61,254
Distributed Products 10,574 24,355
European Operations 18,826 25,031
-----------------------------------------------------------------
Segment operating income 78,054 110,640
Corporate & administrative
expenses (46,321) (50,290)
Eliminations 89 101
Other items not allocated
to segments 181 16,420
-----------------------------------------------------------------
Earnings before income taxes $ 32,003 $ 76,871
-----------------------------------------------------------------
In the first quarter of fiscal 2002, Modine acquired
Thermacore International, Inc. in a business combination
accounted for as a pooling of interests. Sales and
operating income results for the periods presented above
have been restated to include Thermacore in the Distributed
Products segment. Included in the reported results for
Thermacore in the December 2001 quarter and nine-month
period are $(0.1) million and $2.6 million, respectively, of
acquisition costs. In addition to the Thermacore
acquisition, Management also introduced other changes in the
current year to the segment reporting structure. Two changes
made in the first quarter of the current fiscal year that
affected operating results previously reported in the
December 2000 quarter and nine-month period were the
relocation of the Goch, Germany facility previously reported
in the Original Equipment segment to the European Operations
segment and the Emporia, Kansas facility previously reported
in the Distributed Products segment to the Original
Equipment segment. These revisions were made to align the
plants with the current management reporting structure.
Sales and operating income presented for the December 2000
quarter and nine-month period have been restated to reflect
the realignment of these two manufacturing facilities. Other
less significant changes also made in the beginning of the
current year that affected Corporate and administrative
expenses reported in the December 2001 quarter and nine-
month period were the relocation of the Fuel Cell group to
the Original Equipment segment and the relocation of the
Engine Products staff to Corporate from the Original
Equipment segment. Sales and operating income data
presented for the December 2000 quarter and nine-month
period were not restated for these two changes due to their
insignificance.
(In thousands)
---------------------------------------------------------------
December 26, March 31,
Period ending 2001 2001
---------------------------------------------------------------
Assets:
Original Equipment $216,097 $201,906
Distributed Products 233,104 260,446
European Operations 212,934 214,186
Corporate & Administrative 260,775 274,575
Eliminations (13,064) (13,935)
---------------------------------------------------------------
Total assets $909,846 $937,178
---------------------------------------------------------------
The asset data presented has been restated for March 31,
2001 to reflect the Thermacore acquisition and the segment
relocation of the two manufacturing facilities as previously
discussed.
9. Recent developments concerning legal proceedings reported in
Modine Manufacturing Company's ("Modine or Company") Form 10-K
report for the year ended March 31, 2001, are updated in Part
II, Other Information, Item 1, Legal Proceedings. While the
outcome of these proceedings is uncertain, in the opinion of
Modine's Management, any liabilities that may result from
such proceedings are not reasonably likely to have a
material effect on Modine's liquidity, financial condition,
or results of operations.
10. The net earnings per share of common stock and computation
components of basic and diluted earnings per share are as
follows:
(In thousands, except per-share amounts)
------------------------------------------------------------------------
Three months ended Nine months ended
December 26 December 26
------------------------------------------------------------------------
2001 2000 2001 2000
------------------------------------------------------------------------
Net earnings per share of
-------------------------
common stock:
------------
- basic $0.04 $0.22 $0.55 $1.45
- assuming dilution $0.04 $0.22 $0.55 $1.42
Numerator:
---------
Income available to
common shareholders $1,252 $7,059 $18,299 $46,635
Denominator:
-----------
Weighted average shares
outstanding - basic 33,224 32,198 33,050 32,180
Effect of dilutive
securities - options* 158 615 275 652
Weighted average shares
outstanding - assuming
dilution 33,382 32,813 33,325 32,832
------------------------------------------------------------------------
*There were outstanding options to purchase common stock at prices that
exceeded the average market price for the income statement period as
follows:
Average market price
per share $22.07 $25.65 $25.48 $25.37
Number of shares 2,191 1,263 1,255 1,263
11. Comprehensive earnings (in thousands), which represents net
earnings adjusted by the change in foreign-currency translation
and minimum pension liability recorded in shareholders' equity
for the periods ended December 26, 2001 and 2000, respectively,
were $3,611 and $(988) for three months, and $12,081 and $33,169
for nine months.
12. In June 2001, the Financial Accounting Standards Board
issued SFAS 141 "Business Combinations" and SFAS 142
"Goodwill and Other Intangible Assets." SFAS 141 requires
that all business combinations initiated after June 30, 2001
be accounted for under the purchase method. With the
adoption of SFAS 142, goodwill is no longer subject to
amortization over its estimated useful life. Instead,
goodwill will be subject to at least an annual assessment
for impairment by applying a fair-value-based test.
Similarly, goodwill associated with equity method
investments is no longer amortized. Equity-method goodwill
is not, however, subject to the new impairment rules; the
impairment guidance in existing pronouncements for equity-
method investments will continue to apply. In addition,
under the new rules, acquired intangible assets will be
separately recognized if the benefit of the intangible asset
is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed,
rented or exchanged, regardless of the acquirer's intent to
do so. The provisions of Statement 142 must be applied with
fiscal years beginning after December 15, 2001. As a result,
Modine will adopt SFAS No. 142 beginning April 1, 2002.
Management is currently assessing the implementation
guidance being provided by the FASB and other regulatory
bodies and has not yet determined the effect, if any, the
new rules will have on the Company's financial position or
results of operations. Any adjustments arising from the
initial impairment assessment would be reported as the
cumulative effect of a change in accounting principles.
13. On April 1, 2001, Modine adopted Statement of Financial
Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" and Statement
of Financial Accounting Standards No. 138 "Accounting For
Certain Derivative Instruments and Certain Hedging
Activities." No adjustments to the fiscal 2001-02 financial
statements were necessary upon adoption of the new
regulations set forth in SFAS 133 and 138. Modine maintains
a foreign risk-management strategy that uses derivative
instruments in a limited way to protect assets and
obligations already held by Modine and to protect its cash
flows. Derivative instruments are not used for the purpose
of generating income or speculative activity. Leverage
derivatives are prohibited by Company policy. Modine's
derivative/hedging activity can be categorized generally
into three main areas:
Hedges of Net Investments in Foreign Subsidiaries
-------------------------------------------------
The Company has a number of investments in wholly owned
foreign subsidiaries and non-consolidated foreign joint
ventures. The net assets of these subsidiaries are exposed
to currency exchange-rate volatility. The Company uses non-
derivative financial instruments to hedge this exposure.
The currency exposure related to the net assets of Modine's
European subsidiaries and its joint venture in Japan is
managed partially through foreign-currency-denominated debt
agreements entered into by the parent. For the third
quarter, $4.4 million of net gains related to the foreign-
currency-denominated debt agreements were included in the
cumulative translation adjustment. On a year-to-date basis,
the cumulative translation adjustment recorded for foreign-
currency-denominated debt agreements was essentially
unchanged from the prior year-end.
Foreign-Exchange Contracts Hedging Foreign Denominated Trade
------------------------------------------------------------
Receivables
-----------
The Company routinely exports its products to Europe in
sales transactions, some of which result in foreign-currency-
denominated trade receivables. The Company enters into
foreign exchange contracts, generally with terms of 90 days
or less, to hedge these specific foreign-currency-
denominated trade receivables. These contracts do not
subject Modine to significant risk due to the exchange-rate
movements because gains and losses on these contracts offset
gains and losses on the trade receivables being hedged.
Sales and Purchase Contracts
----------------------------
The Company on a regular basis enters into long-term sales
and purchase contracts with vendors and customers that link
the prices charged for materials such as copper and aluminum
to certain published commodity indices. These transactions
are routine in nature and provide no net settlement
provision and no market mechanism to facilitate net
settlement. As a result, Management has determined that
these transactions fall outside of the provisions of SFAS
133 and 138.
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. These transactions are infrequent and immaterial
to the results of operations and the financial condition of
the Company.
14. The accompanying consolidated financial statements, which
have not been audited by independent certified public
accountants, were prepared in conformity with generally accepted
accounting principles and such principles were applied on a basis
consistent with the preparation of the consolidated financial
statements in Modine's March 31, 2001 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission. The financial
information furnished includes all normal recurring adjustments
that are, in the opinion of Management, necessary for a fair
presentation of results for the interim period. Results for the
first nine months of fiscal 2002 are not necessarily indicative
of the results to be expected for the full year.
15. Certain notes and other information have been condensed or
omitted from these interim financial statements. Therefore,
these statements should be read in conjunction with the
consolidated financial statements and related notes
contained in Modine's 2001 Annual Report to shareholders,
which statements and notes were incorporated by reference in
Modine's Form 10-K Report for the year ended March 31, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
The following discussion and analysis provides information, which
Management believes, is relevant to an assessment and
understanding of Modine's consolidated results of operations and
financial condition. This discussion should be read in
conjunction with the consolidated financial statements and notes
thereto.
RESULTS OF OPERATIONS
- ---------------------
Comparison of the Third Quarter of 2001-02 with the Third Quarter
- -----------------------------------------------------------------
of 2000-01
- ----------
Net sales for the third quarter of fiscal 2001-02 were $270.4
million, up 1.9% from the $265.4 million reported in the third
quarter of last year. Sales would have been approximately $4.6
million lower without the impact of a stronger Euro in relation
to the U.S. dollar when compared to the same quarter last year.
U.S. dollar revenues in two out of the three Company segments
were higher than the same quarter a year ago. Revenues recorded
in the Original Equipment segment were up by 7.7% from the same
period last year. Improved revenues were primarily driven by the
introduction of new programs in the segment's automotive
business. The Original Equipment segment did, however, continue
to experience weakness in its heavy-duty and truck markets.
Third quarter results for the Company's European Operations
segment improved by a little over 3% in local currency from year-
ago levels while improving 8.1% in U.S. dollars with year over
year Euro exchange rate differences for the third quarter
contributing $3.8 million. The introduction of new programs in
the European automotive market was the main factor contributing
to improved revenues. As in North America, the Company
experienced continued softness in its truck and heavy-duty
markets in Europe. In the Distributed Products segment, revenues
declined by just over 10%. Automotive aftermarket sales were
very weak due to sluggish demand and pricing pressures related to
excess industry capacity and aggressive new entrants into the
market. Declining construction activity during the quarter and
the relatively mild winter weather to-date hurt the Company's
building ventilation and cooling business. The electronics
cooling market continues to be affected by an overall downturn in
the computer and telecommunications markets after several years
of rapid expansion.
Gross profit for the third quarter of fiscal 2001-2002, exclusive
of restructuring charges, as a percentage of sales, was 24.7%.
This was a 1.7 percentage point decline from the 26.4 % earned in
the third quarter last year. Gross profit recorded in the
quarter was adversely effected by other (one-time) non-
restructuring closure related costs recorded in manufacturing
overhead of approximately $3.2 million. More than offsetting
these one-time closure expenses were reductions made to workers'
compensation insurance reserves resulting from a change in
accounting estimates totaling $4.2 million. These reductions
resulted from a comprehensive review conducted by the Company's
risk management group of the Company's overall insurance reserves
and the underlying methods for estimating those reserves.
Manufacturing overhead costs, excluding the one-time items rose
by 1.2 percentage points. Material costs, as a percentage of
sales, rose by 1.1 percentage points, while labor declined
slightly when compared to the same quarter one year ago. Overall,
gross margins were down across all segments with the Distributed
Products segment experiencing the largest margin decline from the
same quarter one year ago.
Selling, general and administrative expenses, exclusive of the
restructuring costs, were $53.9 million. This was a 2.9 million
or 5.2% decline, over last year's third quarter. As a percentage
of sales, selling, general and administrative costs fell to 19.9%
from 21.4% the year before. Reductions recorded to workers'
compensation insurance reserves of $2.3 million during the
quarter accounted for approximately 79% of the absolute dollar
change. Some of the other larger selling, general, and
administrative expense changes were higher depreciation of $0.5
million, lower statutory and fringe benefits of $0.7 million, and
lower maintenance and rearrangement costs of $0.5 million.
Restructuring costs recorded in the quarter were $8.5 million and
consisted of $6.0 million in severance and related benefits,
$1.0 million in goodwill write-downs, $0.8 million in
anticipated post-closing operating expenses for facilities to be
sold, and $0.7 million in other disposal costs.
Operating income at 1.7% of sales was 3.3 percentage points lower
than last year's 5.0%. Excluding the one-time items resulting in
a net charge of $5.6 million during the quarter, operating income
declined by 24.7% to $10.1 million. Continued weakness in the
U.S. economy resulting in lower sales volumes in most of the
Company's markets and the one-time items recorded in the quarter
were the major factors contributing to the decline.
Interest expense declined slightly from the same quarter one year
ago.
Net non-operating income in the current quarter was virtually
unchanged from the same quarter of the previous year. Included
in the current year were one-time closure costs totaling $0.2
million.
The Company's effective tax rate increased to 65.8% from 44.0 %
when compared to the same period last year. The tax rate rose
substantially due to the greater relative impact of non-
deductible expenses in this year's third quarter when compared to
the same quarter one year ago.
Net earnings for the third quarter of $1.3 million were 82.3%
lower than last year's $7.1 million earned in the third quarter.
Earnings per share were $0.04 per share on a basic and diluted
basis, compared with $0.22 per share basic and diluted in the
prior year. Earnings in the current period were impacted
negatively by pre-tax restructuring charges of $8.5 million and
other pre-tax closure related costs of $3.8 million associated
with the Company's previously announced plans to reduce
manufacturing capacity. Partially offsetting these charges was a
$6.5 million pretax reduction in workers' compensation insurance
reserves, which resulted from a change in accounting estimates.
Comparison of the First Nine Months of 2001-02 with the First
- -------------------------------------------------------------
Nine Months of 2000-01
- ----------------------
Net sales for the first nine months of fiscal 2001-02 were $820.2
million, down 3.5% from the $849.9 million reported in the same
period of last year. Sales were negatively impacted by
approximately $6.0 million from a stronger U.S. dollar in
relation to the Euro in the first half of the year.
Overall, only one segment reported an increase over the same
period one year ago. The European Operations segment improved by
4.8% in local currency from year-ago levels, but finished up only
2.5% in dollars' terms due to the adverse currency translation
impact of $5.2 million recorded in the first nine months of the
year. In the Original Equipment segment, sales declined by 3.3%.
Although new programs with automotive businesses in North America
positively affected this market, reduced demand in the North
American truck market and heavy-duty markets together with
relatively flat sales in the agricultural and construction markets
contributed to lower revenues in the first nine months. The
Distributed Products segment weakened by a little over 9%, with
major factors including a very soft North American aftermarket,
declining construction activity and mild winter weather affecting
the HVAC market, and the continued weakness in the computer and
telecommunications markets.
Gross profit (exclusive of restructuring costs) of 25.1% was down
2.4 percentage points from the first nine months of the previous
year. As mentioned above in the quarterly analysis, one-time
closure costs accounted for $3.2 million of the decline. These
additional expenses were offset by a $4.2 million reduction in
workers' compensation insurance reserves. Material costs, as a
percentage of sales, grew by 1.4 percentage points, while labor
declined slightly, and the ratio of manufacturing overhead to
sales, excluding the one-time items, rose by 1.2 percentage
points. Gross profits, in dollars, were down across all segments
of the Company reflecting the weakened worldwide economies and
the Company's closure activities.
Selling, general and administrative expenses (exclusive of
restructuring costs) of $165.4 million decreased by $8.1 million,
or 4.7%, over the first nine months of last year, while
decreasing to 20.2% from 20.4%, as a percentage of sales. Without
the one-time pre-tax charges of $3.2 million related to the
Thermacore acquisition, $0.4 million in other closure costs, and
the reduction in workers' compensation reserves of $2.3 million,
selling, general and administrative expenses would have registered
a 5.4% decline and dropped to 20.0%, as a percentage of sales.
Restructuring costs recorded year-to-date were $8.5 million as
previously explained in the quarterly analysis of operating
results.
Operating income at 3.9% of sales was down 3.2 percentage points
from the 7.1% in the first nine months of the previous year.
Excluding the restructuring and one-time items resulting in a net
charge of $5.6 million and Thermacore acquisition costs of $3.2
million, operating income would have declined 32.7% to $40.7
million from $60.5 million. Lower sales volumes in many of the
Company's markets, one-time acquisition, restructuring, and
closure costs and negative currency translation were all factors
contributing to the reduction.
Interest expense declined $0.4 million, or just over 6% from the
same nine month period one year ago. Average outstanding debt
levels for the nine months declined from the same period one year
ago. The reduction in short-term debt used for working capital
requirements was a major factor leading to the reduction in
interest expense.
Net non-operating income, exclusive of the $17.0 million received
in patent settlements in the prior year, rose by 5.5%, or $0.3
million, to $6.2 million. Major items included royalties of $2.6
million, equity earnings of affiliates of $2.2 million, profit on
tooling sales of $1.4 million and profit on the disposal of plant
property and equipment of $1.3 million.
The Company's effective tax rate increased by 3.5 percentage
points to 42.8%, when compared to the same period last year. The
rate increase was primarily due to non-deductible expenses
incurred as part of the Thermacore acquisition and restructuring
and one-time closure costs incurred in the third quarter.
Net earnings for the first nine months of the current year were
$18.3 million, or $0.55 basic and diluted earnings per share.
This compares to $46.6 million, or $1.45 basic and $1.42 diluted
earnings per share, for the same nine-month period the year
before. Year-to-date earnings included the same one-time items
that affected the third quarter as well as additional expenses
related to the Thermacore acquisition. In total, these one-time
items reduced year-to-date earnings by $9.1 million on a pretax
basis. Last year's results included one-time patent settlements,
which increased earnings on a pre-tax basis by $17.0 million.
Annualized return on shareholders' investment for the current
period was 4.7%.
Outlook for the Remainder of the Year
- -------------------------------------
Modine continues to experience weakness in many of its core
markets. Management has responded by taking strong measures to
improve short-term performance while continuing to work on future
thermal management technologies that will create long-term growth
opportunities for Modine. The Company is executing its previously
announced restructuring plan and expects to incur other closure-
related costs over the next twelve months. Through the
restructuring, Modine will reduce under performing assets and
increase overall asset utilization. Excluding restructuring costs
and other one-time items, Modine anticipates that its earnings for
the fiscal year ending March 31, 2002 will be at the lower end of
the $0.75 to $0.85 range provided in the Company's last quarterly
earnings release. Modine continues to win new business in its
core markets, as demonstrated by its recent announcement with BMW.
In addition, its research and development work in electronics
cooling, CO2 air conditioning, and fuel cells is creating
significant new growth opportunities for the Company. Forward
looking statements about sales, earnings, and operations in this
Outlook involve both risks and uncertainties, as detailed in
Exhibit 99 to this Form 10-Q.
FINANCIAL CONDITION
- -------------------
Comparison between December 26, 2001 and March 31, 2001
- -------------------------------------------------------
Current assets
- --------------
Cash and cash equivalents of $63.8 million were $42.1 million
higher than March 31, 2001. For the first nine months of fiscal
2002, cash provided by operating activities, the issuance of
common stock, including treasury stock, and proceeds from the
disposition of property, plant and equipment exceeded capital
expenditures, debt repayments and the quarterly dividend payments.
Trade receivables of $169.2 million were down $8.7 million (4.9%).
Overall inventory levels decreased $27.5 million to $125.6
million compared to the prior year-end. Major factors
contributing to the decrease were on-going management programs to
reduce overall inventory levels with the aftermarket division,
accounting for over $15 million of the reduction. A number of
the Company's operating divisions also recorded declines for the
period.
Deferred income taxes and other current assets declined by $18.4
million to $36.9 million from year-end. Several of the largest
items contributing to the change were a reduction in unbilled
customer tooling and lower prepaid income taxes and deferred tax
assets.
The current ratio was relatively unchanged at 1.9 to 1. Net
working capital decreased $5.5 million. Major balance sheet
items influencing the change were lower deferred income taxes and
other current assets, lower inventories and trade receivables
together with an increase in accrued expenses, and other current
liabilities. These changes were offset in part by a significant
increase in cash and cash equivalents, lower accounts payable and
accrued employee compensation and employee benefits, and a
reduction in debt due within a year.
Non-current Assets
- ------------------
Net property, plant and equipment assets of $354.7 million
declined $12.1 million from year-end. Capital expenditures during
the first nine months were lower than depreciation, retirements
and foreign currency translation. Expenditures for European
production, administrative, and technical center facilities, new
programs for automotive and truck OEM customers, process and
facility improvements, tooling for new products and other new
equipment purchases were among the larger capital expenditures.
Outstanding commitments for capital expenditures were $15.1
million at December 26, 2001. Over one-half of the
commitments relate to Modine's European operations. The
outstanding commitments will be financed through a combination of
funds generated from operations and third-party borrowing as
required.
Investments in unconsolidated affiliates of $25.0 million
declined $1.4 million from the prior year-end. The largest item
contributing to the decrease in the first nine months of fiscal
2002 was the unfavorable currency translation effect on Modine's
Brazilian joint venture company, Radiadores Visconde, Ltda.
Higher equity earnings partially offset this negative currency
translation effect.
Intangible assets decreased by $6.2 million. Amortization was
responsible for the largest portion of the decrease. Also
influencing the change was a goodwill impairment charge recorded
of $1.3 million. Foreign currency translation on goodwill
recorded in local foreign currencies was another factor
contributing to the overall change for the first nine months of
the year.
Deferred charges and other noncurrent assets increased by $4.9
million. The net increase is primarily the result of continuing
recognition of the surplus in Modine's overfunded pension plans
and higher long-term deferred tax assets.
Current Liabilities
- -------------------
Accounts payable and other current liabilities of $154.1 million
were $4.2 million lower than in March 2001. Normal timing
differences and the level of operating activity were responsible
for changes in the various components. Accrued income taxes
decreased $0.2 million due to timing differences in making
estimated payments.
Debt
- ----
Outstanding debt decreased by $22.6 million to $160.3 million
from the March 31, 2001 balance of $182.9 million. Domestic long-
term debt increased $5.7 million with existing lenders.
Approximately $7.0 million of long-term debt, originally secured
during the construction of the Company's Pontevico, Italy
manufacturing facility, was refinanced in Europe. Overall, long-
term debt in Europe decreased $1.6 million. Total Company short-
term borrowing decreased $26.8 million to $0.5 million. Of that,
the domestic portion of the reduction in short-term debt totaled
$18.5 million and the foreign portion was $8.3 million. Total
debt assumed in the Thermacore acquisition of $14.0 million was
refinanced using current credit lines with an existing lender at
more favorable interest rates.
Consolidated unused lines of credit increased $0.2 million to
$49.2 million during the quarter, bringing the year-to-date
decrease to $18.5 million. The Company reduced its available
lines with banks by $32.7 million from year-end and also reduced
its actual borrowing on those lines by $14.0 million.
Domestically, Modine's unused lines of credit totaled $35.6
million. Foreign unused lines of credit totaled $13.6 million.
Total debt as a percentage of shareholders' equity decreased from
35.3% to 31.1%.
Shareholders' Investment
- ------------------------
Total shareholders' investment decreased by $3.3 million to a
total of $515.4 million. Net earnings of $18.3 million in the
first nine months of fiscal 2002 were more than offset by
dividends paid to shareholders of $24.8 million. Unfavorable
foreign currency translation of $6.2 million was reported as the
dollar strengthened against the Euro, and the Brazilian Real
declined in value by approximately 22% in the first nine months
of the fiscal year. A reduction in treasury shares held by the
Company resulted in a $13.2 million decrease in treasury stock.
A corresponding decrease in retained earnings of $3.7 million to
record the losses on the issuance of treasury shares to satisfy
stock option exercises, stock awards, and employee stock plan
requirements was also recorded in the nine months of the year.
Liquidity
- ---------
Management believes that the Company's ability to generate cash
from operations and its borrowing capacity are adequate to fund
operating, capital spending and other needs for the foreseeable
future. During the current fiscal year, Modine improved its
balance sheet, reduced capital spending, reduced total debt and
generated strong cash flow. Excluding cash, Modine has reduced
its working capital by $47.6 million or 27% during the first nine
months of the fiscal year. A major driver of the working capital
improvement was a $27.5 million or 18% reduction in inventory.
Also in the first nine months of the year, the Company has
reduced capital spending to $31.2 million from $58.9 million in
the prior year. Modine ended the period with $63.8 million in
cash, a $42.1 million increase from the beginning of the year.
For the quarter and year-to-date, the Company was able to
generate cash flow from operations of $38.1 million and $107.6
million, respectively. As a result, Modine was able to reduce
total debt from the beginning of the year by $22.6 million, to
$160.3 million.
As previously announced at its October 17, 2002, meeting, the
Board of Directors reduced the quarterly dividend payable on
March 7, 2002, to 12.5 cents per share, due to the uncertain
economic outlook and weakness in Modine's core markets. This
represents a 50% reduction from the previous quarterly rate of 25
cents per share. In making this decision, the Board considered
Modine's recent forecast, on-going capital needs, and the
dividend policies of comparable companies. This decision affords
the Company more financial flexibility to reduce debt and
decrease cash outflows, and the opportunity to pursue other
measures to increase shareholder value in the future.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of business, Modine and its subsidiaries are
named as defendants in various lawsuits and enforcement
proceedings by private parties, the Occupational Safety and Health
Administration, the Environmental Protection Agency, other
governmental agencies, and others in which claims, such as
personal injury, property damage, or antitrust and trade
regulation issues, are asserted against Modine. While the outcome
of these proceedings is uncertain, in the opinion of Modine's
Management and counsel, any liabilities that may result from such
proceedings are not reasonably likely to have a material effect on
Modine's liquidity, financial condition or results of operations.
Many of the pending damage claims are covered by insurance and, in
addition, Modine from time to time establishes reserves for
uninsured liabilities.
The Mitsubishi and Showa Litigation
-----------------------------------
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
PFr Parallel Flow Technology and Showa's SC condenser. On July
14, 2000, Modine and Showa reached a settlement and entered into a
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 one-time
payments of approximately $29.9 million are payable to Modine if
the validity of Modine's PF patent in Japan is confirmed. The
patent confirmation proceedings in Japan, which the Company
expected to be completed by December 31, 2001, have not yet been
completed. The Company continues to await the results of those
proceedings. Modine is currently receiving running royalties of
approximately $3.5 to $4.0 million annually from certain Japanese
competitors related to its PF patent in Japan. This revenue
stream, which is expected to continue until the underlying patents
expire in 2006-2008, would cease immediately if there is an
unfavorable decision for Modine in the aforementioned Japanese
confirmation proceedings.
Other Matters
-------------
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.
Other previously reported legal proceedings have been settled or
the issues resolved so as to not merit further reporting.
Under the rules of the Securities and Exchange Commission,
certain environmental proceedings are not deemed to be ordinary
or routine proceedings incidental to the Company's business and
are required to be reported in the Company's annual and/or
quarterly reports. The Company is not currently a party to any
such proceedings.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
--------
The following exhibits are included for information only unless
specifically incorporated by reference in this report:
Reference Number
per Item 601 of
Regulation S-K Page
- ---------------- ----
4(a) Rights Agreement dated as of October 16,
1986 between the Registrant and First
Chicago Trust Company of New York (Rights
Agent) (filed by reference to the
Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1997).
4(b)(i) Rights Agreement Amendment No. 1 dated as
of January 18, 1995 between the Registrant
and First Chicago Trust Company of New York
(Rights Agent) (filed by reference to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 2000).
4(b)(ii) Rights Agreement Amendment No. 2 dated as
of January 18, 1995 between the Registrant
and First Chicago Trust Company of New York
(Rights Agent) (filed by reference to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 2000).
4(b)(iii) Rights Agreement Amendment No. 3 dated as
of October 15, 1996 between the Registrant
and First Chicago Trust Company of New York
(Rights Agent) (filed by reference to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 2001).
4(b)(iv) Rights Agreement Amendment No. 4 dated as
of November 10, 1997 between the Registrant
and Norwest Bank Minnesota, N.A., [now known
as Wells Fargo Bank Minnesota, N.A.] (Rights
Agent) (filed by reference to the exhibit
contained within the Registrant's Quarterly
Report on Form 10-Q dated December 26, 1997).
Note: The amount of long-term debt authorized
----
under any instrument defining the rights of
holders of long-term debt of the Registrant,
other than as noted above, does not exceed
ten percent of the total assets of the
Registrant and its subsidiaries on a
Reference Number
per Item 601 of
Regulation S-K Page
- ---------------- ----
consolidated basis. Therefore, no such
instruments are required to be filed as
exhibits to this Form. The Registrant agrees
to furnish copies of such instruments to the
Commission upon request.
99* Important Factors and Assumptions Regarding
Forwarding-Looking Statements. 25
*Filed herewith.
(b) Reports on Form 8-K:
-------------------
The Company filed one Report on Form 8-K, described as follows:
1. Dated October 17, 2001, to report financial results for the
quarter ending September 26, 2001, the Company's upcoming
restructuring actions and the Company's intention to reduce
the next quarter's dividend by 50% as compared with the
previous quarterly rate.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY
(Registrant)
By: E. T. THOMAS
------------------------------------
E. T. Thomas, Senior Vice President,
and Chief Financial Officer
(Principal Financial Officer)
Date: February 7, 2002 By: D. R. ZAKOS
-------------------------------------
D. R. Zakos, Vice President,
General Counsel and Secretary