EXHIBIT 13
Management's Discussion & Analysis
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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," "plan," or similar expressions
are used, these words indicate forward-looking statements. These
statements are not guarantees of future performance and involve
known 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.
In April 2001, Modine acquired Thermacore International,
Inc. (Thermacore) in a merger accounted for as a pooling of
interests. All information is presented to include
Thermacore for all periods.
Modine Manufacturing Company's fiscal 2002 sales declined
four percent to $1,074.8 million from $1,121.4 million a
year ago. The company's current fiscal year results
contained several one-time items relating to its
restructuring, other closure-related costs, changes in
workers' compensation reserves, the Thermacore acquisition
and the sale of a long-term asset. In addition, Modine's
prior fiscal year included pretax patent settlements
totaling $17.0 million. Excluding one-time items in both
fiscal 2001 and 2002, Modine's twelve-month fully diluted
earnings per share declined 26 percent to $0.88 from $1.19.
Modine's fiscal year results were adversely affected by
continued weakness in the aftermarket, heavy-duty truck, off-
highway, and electronics markets. However, in the light
vehicle market, Modine experienced strength during the year
from the introduction of new automotive programs. Modine's
aftermarket business is continuing to experience severe
pricing pressure from new entrants and an excess supply of
product.
In fiscal 2002, including exports from domestic businesses,
47 percent of total revenues were generated from sales to
customers outside of the United States. Net sales generated
by Modine's international operations were 36 percent of
total revenues, and exports from the United States were 11
percent of total revenues.
Modine's European Operations segment supplies products from
business units in Europe primarily to European original
equipment manufacturers (OEMs) of light and heavy-duty
vehicles or engines. Sales in the European Operations
declined one percent to $302.4 million from $305.0 million
during the fiscal year. Operating income declined 25 percent
to $23.3 million from $31.0 million earned in the previous
year, as measured in U.S. dollars. Compared to the prior
year, the weaker Euro had a negative translation effect of
approximately $8.2 million on fiscal 2002 consolidated
sales. Modine's European Operations experienced strength
from the automotive area, but was hindered by weakness in
the heavy-duty area.
The Distributed Products segment provides heat transfer
products for the North American and European vehicular
replacement markets and the North American building HVAC
(heating, ventilating, and air conditioning) market. In
addition, this segment provides cooling solutions for the
global electronics markets. Distributed Products' sales
declined ten percent to $381.3 million during fiscal 2002
from $425.0 million. Operating income declined 58 percent to
$9.9 million from $23.7 million in the year ago period. This
segment was adversely affected by a number of factors. The
aftermarket portion continues to experience significant
pricing pressure, resulting from soft demand, new
competition and excess supply of product. In addition, the
HVAC portion experienced general softness from a weakening
economy and a mild winter. Lastly, electronics cooling sales
have been adversely affected by a global slump in
semiconductor sales and a telecommunications equipment
industry that was off sharply from the previous year.
Modine's Original Equipment segment includes sales to North
American light, medium, and heavy-duty OEMs. During the
year, Original Equipment sales declined two percent to
$457.0 million from $467.3 million. Operating income
declined 19 percent to $66.2 million from $82.2 million in
the previous year. Segment results were positively impacted
by the introduction of new automotive programs. However,
this improvement was more than offset by continued weakness
in the heavy-duty truck, construction, and industrial
markets.
Revenues from Modine's top ten customers accounted for 51
percent of the company's total sales. Modine's largest
customer accounted for slightly more than ten percent of
sales. Overall, Modine continues to have a well-diversified
customer base.
SALES BY MARKET
OEM passenger car and light truck market. In fiscal 2002,
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30 percent of Modine's sales were to worldwide original
equipment manufacturers of passenger cars and light trucks.
This market segment accounted for approximately 25 percent
of Modine's revenues in the prior year. The passenger car
and light truck market continues to represent the largest
portion of Modine's sales. The company's revenues from this
market were up 14 percent from the previous year. The
European passenger car and light-truck markets were flat
with the previous year. Even though industry volumes were
down slightly from the prior year, North American light
vehicle sales resulted in the second best year on record.
Modine's North American sales were strong as a result of the
introduction of several new programs. During the year,
Modine announced that it had been selected by
DaimlerChrysler to supply the radiator module for the 2002
Dodge Ram. Modine also announced that it had been chosen by
BMW to supply engine cooling modules for future vehicle
programs. Modine remains enthusiastic about the passenger
car and light-truck market as its new programs continue to
ramp up. The company is also encouraged about the continued
growth of diesel engines in the light vehicle market and the
opportunities for exhaust gas recirculation (EGR) coolers.
Vehicle Aftermarket. Modine's sales of replacement parts
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to the automotive aftermarket were seven percent lower from the
prior fiscal year. Aftermarket sales accounted for 23
percent of Modine's fiscal 2002 sales versus 24 percent in
the prior year. The aftermarket industry experienced another
difficult year. Large competitors, such as Delphi and
Visteon, have expanded their position in the market. The
combination of new entrants, soft demand, and mild weather
resulted in excess supply of product. Modine's aftermarket
group also experienced severe pricing pressure throughout
the year. In addition, a labor strike at one of Modine's
manufacturing facilities created a shortage of some
aftermarket products. Also during the year, Modine and
Advance Auto mutually agreed to end their supply agreement
in May of 2002. The company's aftermarket group continues to
focus on several initiatives, including working capital
reductions, freight reductions, new distribution channels in
Europe, operational improvements at distribution centers,
and the rationalization of under-performing locations.
Moving forward, Modine does not see a meaningful change in
the near-term competitive landscape. The company will
continue to focus on increasing its product line, reducing
operating costs, and further asset rationalization.
OEM heavy duty and medium duty truck market. Sales to the
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medium and heavy-duty truck market accounted for 15 percent
of Modine's total sales as compared to 17 percent in the
year ago period. Heavy-duty and medium-duty truck revenues
declined by 12 percent from the previous year. The North
American truck industry experienced another down year with
heavy-duty and medium-duty build rates remaining at
depressed levels. The European truck market faired a little
better, with a slight year-over-year decline. In the future,
the EPA's (Environmental Protection Agency) new emission
standards are expected to have a positive effect on Modine.
The EPA has mandated that Class 8 engine manufacturers
reduce air pollutants. Most engine manufacturers are going
to an exhaust gas recirculation (EGR) cooled engine. Modine
is one of the industry's technological leaders in EGR
coolers for the global engine market. The EPA's more
stringent emission requirements require heavy truck cooling
systems to be completely redesigned and afford Modine an
opportunity to accelerate the conversion from copper/brass
radiators to all-aluminum products. Moving forward, Modine
expects further growth opportunities as the company expands
its HVAC (heating, ventilating, and air conditioning)
business in the truck market.
OEM off-highway market. Modine's off-highway market segment
----------------------
accounted for approximately 11 percent of total sales for
fiscal 2002. Sales to this market increased one percent from
the prior year. During the year, the construction market
declined approximately ten percent. In the agricultural
market, demand for higher horsepower tractors and harvesting
machines strengthened from cyclical lows seen in 2000, while
the demand for smaller horsepower tractors declined.
Industry analysts expect both the construction and
agricultural equipment markets to be flat for the upcoming
year. Modine is enthusiastic about the trend of including
more climate control in off-highway vehicles. Also, an
increasing number of small vehicles or machines are
including HVAC (heating, ventilating, and air conditioning)
options. Modine sees opportunities to gain market share and
capitalize on this growth trend in HVAC. In this segment,
Modine is also benefiting from more stringent emissions
regulations. Changes in emissions regulations are increasing
the demand for Modine's aluminum products and allowing the
company to increase its content as the cooling systems are
being redesigned.
OEM industrial market. Fiscal year sales to the industrial
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market declined 24 percent from the prior year. Sales in
this market accounted for nine percent of Modine's total
fiscal 2002 sales as compared to 11 percent in the year ago
period. The industrial market includes a variety of
customers who manufacture engines, generator sets,
refrigeration equipment, compressors, lift trucks, and other
applications. The industrial market weakened during the last
year as the demand for power generation equipment slowed.
Also, the material handling market (lift trucks) declined
over 30 percent from its previous peak. The compressor
market remained stable, but there was increased pricing
pressure. For fiscal 2003, Modine expects most of the
segments to be flat, but looks for a slight increase in the
power generation market.
Building HVAC market. Sales to the building HVAC (heating,
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ventilating, and air conditioning) market remained at
approximately seven percent of Modine's revenues for both
fiscal 2001 and 2002. Total revenues in this market declined
ten percent from the prior year. All portions of the HVAC
industry were off sharply during the fiscal year. The market
for gas-fired unit heaters and gas-fired duct furnaces
declined by 20 percent and 11 percent, respectively. The
infrared heater market declined 15 percent during the
calendar year. Modine's HVAC group focused on continuous
improvement activities and tight financial control. Also,
despite the market decline, Modine was able to generate a
revenue increase in its Hot Dawg residential garage heater
line. For the next fiscal year, industry analysts expect the
HVAC market to be flat with the previous year. As a result,
Modine's building HVAC group is focusing on market share
improvement and cost containment.
Electronics market. Modine's sales to the electronics market
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declined by 30 percent during fiscal 2002. Revenues in this
market accounted for approximately four percent of Modine's
sales. Thermacore accounted for approximately five percent
of Modine's fiscal 2001 revenues. The market has been
adversely affected by a dramatic fall-off in global
semiconductor sales. Most recently, semiconductor industry
sales were $30 billion in the fourth quarter of 2001, down
from $47 billion in the year ago period. In addition, the
telecommunications hardware and services industry declined
approximately 30 percent during calendar 2001. Also,
computer sector sales declined approximately 20 percent
during 2001. This widespread weakness has had a major impact
on the electronics cooling market. Despite this
unprecedented downturn, Thermacore won some significant
programs, continued to develop new thermal technologies, and
received funding from a number of customers, including
Raytheon and Northrop Grumman, for key research projects.
SALES BY PRODUCT
Modules or Complete Heat Transfer Packages. This product
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line includes various heat transfer components supplied by
Modine, plus auxiliary parts produced by other suppliers, in
assemblies that can be installed as units or systems by
customers. 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 vehicle
platforms. This allows Modine to sell more content,
including heat exchangers and other necessary parts, for
each program. Fiscal 2002 module sales increased 16 percent
over the previous year. The segment accounted for 27 percent
of total sales versus 22 percent in fiscal 2001. Moving
forward, Modine expects the module segment to continue
growing at a faster rate than component sales.
Radiators. Sales of individual radiators and cores
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declined 11 percent from the previous year. In fiscal 2002,
this product segment accounted for 27 percent of total sales
versus 29 percent in fiscal 2001. During the year, Modine
was able to increase its radiator sales to OEM customers,
including modules. However, this increase was offset by a
decline in aftermarket radiator sales. New competition,
excess product supply, and mild weather contributed to
another soft year for the aftermarket.
Oil Coolers. Modine now offers both steel and aluminum
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oil coolers to meet changing customer needs. Oil coolers are
often used in high-performance automobiles, particularly in
Europe. In the US, Modine began manufacturing a new product,
the stacked plate oil cooler, for on-highway diesel
applications. Going forward, Modine is enthusiastic about
both the on- and off-highway stacked plate oil cooler
opportunities. For fiscal 2002, Modine's oil cooler
component sales declined 13 percent from the previous year.
As a percent of total sales, oil coolers accounted for 15
percent in 2002 versus 16 percent in 2001.
Charge Air Coolers. Charge-air cooler component sales
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declined two percent from the previous year. This product
segment remained at nine percent of sales for both fiscal
2001 and 2002. Segment results declined due to softness in
the vehicle and power generation markets. Going forward,
Modine sees growth for charge-air coolers driven by
increased penetration of diesel engines in the light vehicle
market, new emissions standards and increased module sales.
Vehicular Air Conditioning Parts & Systems. Modine's sales
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of vehicular air conditioning parts in fiscal 2002 decreased
17 percent, compared with the prior year. The product
category accounted for seven percent of Modine's total sales
versus eight percent in the prior fiscal year. The increase
in air conditioning parts for modules was offset by a
decrease in component sales to both OEM and aftermarket
customers. In the aftermarket, mild weather throughout the
year had an adverse impact on segment sales. In the future,
Modine believes that it can capitalize on its CO2 components
and systems to drive growth in the vehicular HVAC segment.
Building HVAC. Modine's sales of the building HVAC product
-------------
category were down ten percent during the fiscal year. HVAC
products remained at seven percent of Modine's sales for
both fiscal 2001 and 2002. As discussed previously in
Modine's sales by market, building HVAC sales were adversely
affected by soft demand for gas-fired unit heaters, gas-
fired duct furnaces, and infrared heaters.
Electronics. During fiscal 2002, product sales for the
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electronics market declined 30 percent. This product segment
accounted for four percent of Modine's fiscal 2002 sales
compared to five percent in the year ago period. As
discussed previously in Modine's sales by market, this
product category has been adversely affected by a dramatic
fall-off in global semiconductor sales. In addition, the
telecommunications hardware and services industry was off
sharply from the previous year's levels.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60 was issued by the
Securities and Exchange Commission during 2001 and requires
all registrants, including the company, to include a
discussion of "critical" accounting policies or methods used
in the preparation of financial statements. We believe the
following critical accounting policies reflect our more
significant judgements and estimates used in the preparation
of our consolidated financial statements.
Net Sales. The company recognizes revenue as products
---------
are shipped to customers. The amount is recorded net of
applicable provisions for sales rebate programs, volume
incentives and returns and allowances. At the time of
revenue recognition the company also provides an estimate of
potential bad debts, warranty expense, as well as an amount
anticipated to be granted to customers under available
advertising and marketing programs. These estimates are
based upon historical experience, anticipated business
trends, and the current economic conditions.
Inventories. Inventories are valued at the lower of cost
-----------
on a first-in, first-out basis, or market value. Inventories
are reviewed on a continuing basis for excess or obsolete
stock with a provision recorded, where appropriate.
Intangible Assets. Goodwill is amortized on a straight-
-----------------
line basis over its estimated useful life, principally
over a fifteen-year period. The company evaluates the
recoverability of goodwill by estimating the future
undiscounted cash flows of the business to which the
goodwill relates. In determining the estimated future cash
flows, the company considers current and projected future
levels of income as well as business trends, prospects and
market and economic conditions. If an impairment is
determined to exist, a write-down to market or discounted
cash flow is made and the impairment loss is recognized by a
charge against current operations. In June 2001, SFAS142
"Goodwill and Other Intangible Assets" was issued by the
FASB. Under this new standard, goodwill and intangible
assets having indefinite lives will no longer be amortized,
but will be subject to annual impairment tests.
ACCOUNTING PRONOUNCEMENTS.
Details of the impact that the recently issued accounting
standards will have on the financial statements of Modine
can be found in Note 1 to the consolidated financial statements.
CAPITAL EXPENDITURES
Capital expenditures of $35.8 million in fiscal year 2002
were 51 percent lower than the prior year. Significant
expenditures included: European administrative and technical
center facilities, tooling for new products, equipment for
new customer programs, and process improvements at a number
of facilities. Capital expenditures were financed primarily
from cash generated internally. Outstanding commitments for
capital expenditures at March 31, 2002 were approximately
$14.4 million. Approximately $6.5 million of the commitments
related to the European technical center and to European
plant expansions and conversions as well as to programs for
automotive and truck original equipment customers, process
improvements, tooling for new products, and various new
equipment. A year earlier, there were outstanding
commitments of $25.8 million.
RESEARCH & DEVELOPMENT
In fiscal 2002, Modine increased its research and
development spending by six percent to $29.9 million.The
company ended the year with 1,459 worldwide patents, an
increase of 148 patents over last year. Modine moved further
towards utilizing computers to simulate engineering. Through
the use of sophisticated software, Modine can predict
component or system durability and overall performance.
Modine's efforts in simulated engineering have resulted in
substantial cost savings and faster product design cycles.
Also during the year, Modine began to integrate its thermal
management skills with those of Thermacore. The two
companies collaborated on several key projects and are
continuing to develop advanced electronics cooling
technologies. In addition, Modine's Fuel Cell Products Group
continued its development work on thermal solutions for
stationary power and vehicular fuel cells. Modine is working
with some of the industry's leading developers of fuel cells
and has earned a strong reputation for its thermal
management skills. Lastly, Modine made significant progress
in its development of CO2 components and systems. CO2
systems, which can be used for both heating and cooling, are
very efficient and environmentally friendly. Modine is
currently exploring several commercial applications for its
CO2 components and systems. As part of its long-term
strategy, Modine retains its commitment to research and
development. Since 1998, R&D expenditures have increased at
an average annual rate of 13 percent. The company believes
these investments will result in new products, new
technologies, and opportunities to enter new growth markets.
QUALITY IMPROVEMENT
The Modine 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 facility worldwide. It also minimizes the risk
associated with unacceptable product quality and serves to
meet a Modine guiding principle of exceeding customer
expectations. Continuous quality improvement is measured by
nine quality indicators, some of which include first-pass
yield, customer satisfaction, and supplier performance.
Modine encourages and rewards continuous quality improvement
throughout the company. Continuous improvement is formally
recognized at Modine through various programs.
During the year, Modine's quality programs had many
successes. The company's common, global quality system was
refined to include global standard practices, ensuring that
work done across the globe is according to a common
standard. In the coming year, the global quality system will
be expanded to include Thermacore.
In its second year, the President's Award for Corporate
Excellence (PACE), stimulated 15 projects in North America
and Europe. PACE is a quality award that recognizes
administrative employees who develop projects to reduce
waste, eliminate bureaucracy, improve processes and reduce
errors.
In fiscal 2002, the McHenry, Illinois and Pliezhausen,
Germany facilities earned the President's Award, the
company's top honor for continuous improvement at
manufacturing facilities. These facilities had outstanding
performance in 15 separate categories, which include key
elements of safety, environment, quality, delivery, cost,
and productivity.
Also during the fiscal year, our Toledo, Ohio and Emporia,
Kansas facilities were registered to QS-9000 and our
Pontevico, Italy and Uden, The Netherlands facilities were
registered to VDA 6.1. All Modine facilities that are
required to be registered to ISO 9000, QS-9000 and/or VDA
6.1 are now registered. In 2001, our Camdenton and Joplin
facilities, both in Missouri, were recognized by Caterpillar
as Certified Suppliers.
ENVIRONMENTAL, HEALTH & SAFETY
Modine is strengthening its commitment to the environment
by implementing the Environmental Management System (EMS) at
all of its original equipment locations throughout the
world. This system is based on the internationally
recognized ISO 14000 standard for environmental management
systems. Modine's EMS provides a common framework and the
tools needed to conserve resources, improve manufacturing
process efficiency, minimize liability exposure and reduce
operational costs.
In calendar 2001, Modine's North American facilities reduced
waste for a fifth consecutive year with a 21 percent year-
over-year decrease (normalized for sales dollars). Overall,
these facilities achieved an impressive 51 percent reduction
in waste/sales dollars since 1996. The reduced use of
solvents, conversion to more environmentally-friendly
chemicals, shift to returnable packaging, and the generation
of less scrap contributed to this long-term, sustained waste
reduction achievement.
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. An obligation may also
arise when a Modine-owned facility is closed or sold. These
expenditures most often relate to facilities and sites where
past operations followed practices and procedures that were
considered acceptable under then-existing regulations, but
will now require investigative and/or remedial work to
ensure sufficient protection to the environment. Three of
the company's manufacturing facilities currently have been
identified as requiring soil and/or groundwater remediation.
Because of the joint liability of former landowners and
contractual obligations, it is unlikely these remediation
efforts will have a material effect on the company's
consolidated financial condition.
Environmental regulations, as well as the company's policy
to continuously improve upon its environmental management
programs, will require capital equipment expenditures over
the coming years. For the fiscal year ending March 31, 2002
capital expenditures related to environmental projects were
$0.2 million. These environmental expenditures include
capital outlays to retrofit existing facilities, as well as
those associated with new facilities and other compliance
costs. Modine currently expects expenditures for
environmentally related capital projects to be about $0.5
million in fiscal 2003.
Environmental expenses charged to current operations,
including remediation costs, totaled about $3.8 million for
the fiscal year ending March 31, 2002. These expenses
include solid waste disposal and operating and maintenance
costs incurred in conducting environmental compliance
activities. Although some of these environmental costs may
be substantial, the Company has no reason to believe these
costs vary significantly from costs incurred by other
companies engaged in similar businesses.
Although there are currently no known liabilities that
might have a material effect on the company's consolidated net
assets, the Environmental Protection Agency has designated
Modine as a potentially responsible party ("PRP") for
remediation of six waste disposal sites. These sites are not
company owned and allegedly contain wastes attributable to
Modine from past operations. For the six sites currently
known, the company's potential liability will be
significantly less than the total site remediation because
the percentage of material attributable to Modine is
relatively low.
Success with health and safety is setting Modine apart
from its competition. Health and safety performance continues
to move in a positive direction. Recordable and Lost Workday
(LWDII) incident rates improved from the previous year by 23
and 30 percent, respectively. Over the past five years,
Modine has seen a 58 percent reduction in the recordable
incident rate and a 53 percent reduction in the LWDII rate.
Modine's Richland facility was the second 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 company expects to see more facilities reach
"Star" level over the next few years.
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
15 to the consolidated financial statements.
SALES
Sales of $1.07 billion for the year ended March 31, 2002,
are discussed in detail in the preceding portion of
Management's discussion & analysis.
For the year ended March 31, 2001, sales of $1.12 billion
were down $53.6 million or five percent from the preceding
year. Weaker European currencies had a negative translation
effect on the sales of approximately $53.2 million compared
with the prior year. Excluding the impact of the change in
currency exchange rates, total worldwide consolidated sales
were essentially unchanged. Sales in the Original Equipment
North America segment fell 11 percent on lower heavy truck
and light vehicle market sales. Distributed Products segment
sales were down three percent with a soft North American
aftermarket and negative translation effect on the segment's
European operations being partially offset by stronger
electronics cooling product sales. The European Operations
segment produced increased sales to both OEM-automotive and
off-highway markets but the translation effect offset much
of the gain. Net sales from U.S. facilities accounted for 65
percent of consolidated revenues for the year, with
approximately 18 percent of that amount being exported.
Overall, 53 percent of net sales were to U.S. customers and
47 percent to non-U.S. customers.
Sales for the year ended March 31, 2000, of $1.17 billion
were three percent higher than the previous year's $1.14
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 and higher electronics cooling sales. 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.
GROSS PROFIT
The current year gross profit of $264.5 million declined
to 25 percent of sales from the $298.2 million or 27 percent
of sales in the preceding year. Lower sales volumes,
significant pricing pressures, increasing purchased
component content, and closure costs outside of the
restructuring, all contributed to the lower return. Included
in gross profit is a $4.2 million benefit from a reduction
in workers' compensation insurance reserve estimates as a
result of the company's improving experience. Gross profit,
in dollars, was down all across the company, reflecting the
weakened worldwide economies, except for the North American
automotive market where the company has been able to gain
additional business.
The fiscal 2001 gross profit of $298.2 million, (27 percent
of sales) compares with $330.3 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. Improvements recorded in
the truck and electronics divisions were generally offset by
lower gross-profit returns, as a percent of sales, earned by
the company's other operating units.
SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSES
In fiscal 2002, SG&A expense dropped $7.7 million to
$221.7 but increased to 21 percent of sales from 20 percent in
the prior year. Reductions in compensation and related benefit
costs, along with lower sales promotion and distribution costs
more than offset the $3.4 million in Thermacore acquisition
costs and increases in depreciation and amortization, research
and development expenditures, and the return to a more normal
bad debt expense level.
SG&A expense of $229.4 million in fiscal 2001 was virtually
identical to the preceding year and remained at 20 percent
of sales. The 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 $229.4 million grew by
$25.8 million, to 20 percent of sales from 18 percent in the
preceding year. Factors influencing the changes were the
full-year effect of a large aftermarket distributor acquired
in fiscal 1999, ongoing litigation costs to protect our
patents, increased depreciation on the new technical center
in Racine, upgrades to computer-related business systems,
and expansion of the electronics cooling business outside of
North America.
RESTRUCTURING CHARGES
In the third quarter of fiscal 2002, the company
initiated a restructuring plan to reduce costs and increase
future operating efficiency. Charges of $7.5 million were
recognized for plans to close manufacturing facilities in
North America and Europe and for other personnel reductions
in both areas. Additional information is detailed in Note 11
to the consolidated financial statements.
INCOME FROM OPERATIONS
Income from operations in fiscal 2002 of $35.2 million
declined $33.5 million from the preceding year. The
reduction in gross profit discussed above carried down to
operating income as the effect of the $7.7 million reduction
in SG&A expense was offset by the $7.5 million restructuring
charge.
In fiscal 2001, income from operations of $68.7 million
declined $32.2 million from the previous year. The 32
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 $100.9 million for fiscal 2000
declined $14.1 million from the prior year. The 12 percent
reduction was predominantly a result of higher SG&A costs,
as discussed in the preceding section.
INTEREST EXPENSE
Interest expense of $7.8 million in fiscal 2002 was down
$1.0 million from the preceding year. Reduced levels of
short-term borrowing and lower interest rates provided the
benefit which was partially offset by a $1.5 million
reduction in the amount of interest capitalized.
In fiscal 2001, interest expense declined slightly from the
previous year to $8.8 million. Higher interest rates offset
most of the benefit from reductions in the level of debt
outstanding and higher amounts of capitalized interest.
Interest expense of $8.9 million in fiscal 2000 increased
$2.8 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.
PATENT SETTLEMENTS
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 use of Modine's
PF (parallel flow) technology.
In fiscal 2000, a $1.0 million settlement for past use of
Modine's PF technology was recognized.
OTHER INCOME, NET
In fiscal 2002, other income increased by $4.5 million to
$12.7 million. The increase was primarily the result of a
$3.5 million gain on the sale of one of the company's
aircraft and the disposal of some excess real estate.
Other income in fiscal 2001 grew by $3.9 million to $8.2
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 $3.7 million declined by
$3.5 million from the previous fiscal year's total of $7.2
million, which included a gain relative to the earlier sale
of a facility in Michigan.
PROVISION FOR INCOME TAXES
The effective tax rate for fiscal 2002 rose by 2.7
percentage points to 41.8 percent. This percentage increase
over the preceding year was influenced by upward movement
from nondeductible costs associated with the acquisition of
Thermacore and increased nondeductible goodwill
amortization, offset by downward pressure from foreign tax
rate differentials.
The effective tax rate for fiscal 2001 rose by 7.7
percentage points to 39.1 percent. The significantly higher
effective tax rate, compared with the year before, related
to the prior year benefit from the implementation of a tax
strategy relating to 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 carryforward at a foreign subsidiary
were the main factors contributing to the change.
NET EARNINGS
Net earnings declined 55 percent in fiscal 2002 to $23.3
million ($0.70 per diluted share) from $51.8 million ($1.58
per diluted share). Return on average shareholders' equity
(ROE) slipped to five percent and net earnings as a percent
of sales to two percent. Reductions in SG&A expense, the
additional North American automotive business and the
favorable impact on the workers' compensation and the
aircraft sale were more than offset by the lower sales
volumes, pricing pressures, increased purchased component
content, and the restructuring and other closure costs.
Excluding the one-time items of restructuring and other
closure costs, the Thermacore acquisition costs, the
reduction in the workers' compensation reserve estimates and
the aircraft sale from fiscal 2002 and the patent settlements
in fiscal 2001, Modine's earnings per share would have declined
26 percent to $0.88 per fully diluted share in fiscal 2002
from $1.19 per fully diluted share in fiscal 2001.
Net earnings in fiscal 2001 fell 22 percent to $51.8
million ($1.58 per diluted share) from $66.3 million ($2.01
per diluted share). ROE declined to ten percent. Net earnings
declined as a percent of sales to five 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 12 percent in fiscal 2000 to $66.3
million ($2.01 per diluted share) from $75.1 million ($2.25
per diluted share). Net earnings dipped to six percent of
sales in fiscal 2000 and ROE 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.
CURRENT ASSETS
Cash and cash equivalents increased by $53.7 million to
$75.4 million. Details of the sources and uses of funds can
be found in management's discussion of cash flows and the
accompanying consolidated statement of cash flows.
Trade receivables, net of allowances for doubtful accounts,
at $162.5 million, were down $15.5 million from one year ago.
Declines in year-over-year fourth-quarter sales in the
Distributed Products and European Operations segments were
the main factors leading to the overall decrease.
As a result of management's continuing focus on improving
working capital, the company was able to reduce inventories
by $31.4 million to $121.7 million, with a large portion of
the change attributable to U.S. aftermarket operations.
Additional reductions were achieved in all operating divisions
except for the automotive division, which registered a small
increase to accommodate its increased sales volume. The number
of days of inventory on hand was reduced by twelve days from
the prior year-end.
Deferred income taxes and other current assets declined by
$8.8 million to $46.4 million. The largest item contributing
to the change was a reduction in income tax prepayments of
$4.9 million with a smaller impact from a reduction in the
balance of unbilled tooling to customers.
The current ratio of 2.4-to-1 increased from last year's
1.9-to-1 as a result of the company's record cash flow from
operations. An increase in cash along with reductions in
debt due within the next twelve months were offset in part
by decreases in trade accounts receivable, inventories, and
deferred income taxes and other current assets.
NONCURRENT ASSETS
Net property, plant, and equipment of $340.4 million
decreased by $26.5 million in fiscal 2002. Depreciation
expense of $53.6 million exceeded lower capital spending by
$17.8 million. Major additions during the year included
ongoing construction and equipment costs of a new technical
center and administration building in Europe and preparation
for the introduction of new customer-programs in the next
several years.
Equity investments in affiliates of $25.0 million decreased
$1.4 million in the current year. Equity earnings, net of
goodwill amortization, for fiscal 2002 were more than offset
by: unfavorable currency-translation impacts recognized on
Modine's 50-percent equity investments in Radiadores Visconde,
Ltda., in Brazil and Nikkei Heat Exchanger Co., Ltd. (NEX), in
Japan and a dividend received from NEX.
Intangible assets of $55.1 million were $9.8 million lower
than last year, largely as a result of annual amortization
expense of $6.4 million, write-offs of impaired goodwill and
heat battery technology totaling $2.7 million, and the
impact of foreign currency translation.
Deferred charges and other noncurrent assets of $76.7
million increased $5.7 million over the prior period,
primarily a result of a $4.1-million increase in the surplus
of the company's over-funded pension plans and an increase
in long-term deferred tax assets of $1.2 million.
CURRENT LIABILITIES
Short-term debt and the current portion of long-term debt,
totaling $10.8 million, decreased by $34.7 million.
Discretionary repayments of $26.5 million in short-term debt and
$7.3 million in the current portion of long-term debt, originally
secured during the construction of the company's Pontevico, Italy
manufacturing facility, were the primary factors responsible for
the decrease. The remaining decrease resulted from scheduled
repayments and foreign currency translation.
Accounts payable remained virtually unchanged from the
prior year.
NONCURRENT LIABILITIES
Long-term debt increased by $2.2 million to $139.7 million
at year-end. The components of the change include an increase
of $10.5 million from Thermacore's short-term debt that was
refinanced at the time of acquisition offset in part by a net
reduction in outstanding borrowings of $4.2 million in the
United States and $1.9 million in Europe. The remaining
decrease is due to foreign currency translation.
As a percent of shareholders' equity, long-term debt was
27.1 percent at year-end. Total debt to equity was 29.1
percent, down 6.2 percentage points from fiscal 2001.
Other non-current liabilities at $40.8 million were $1.9
million higher than last year. The increase resulted primarily
from advance royalty payments received from licensees, deferred
revenue from extended warranty payments received from customers,
and long-term environmental reserves established during the
current year.
SHAREHOLDERS' EQUITY
Total shareholders' equity of $516.0 million decreased
$2.7 million over the prior period. The major changes were from
retained earnings, accumulated other comprehensive loss and
treasury stock transactions. Retained earnings declined by
$9.8 million from the prior year. Net earnings added $23.3
million in the year while dividend payments of $29.0 million
reduced retained earnings and treasury stock issued to satisfy
stock options exercised, stock awards, and employee stock-
purchase plans resulted in a further $4.1 million reduction
during the year.
Accumulated other comprehensive loss of $33.5 million
increased $9.8 million over the prior year. The most
significant component was the foreign-currency-translation
adjustment, which increased $9.1 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 2002, $1.3 million was expended to acquire
46,000 treasury shares while $17.9 million of treasury stock
(586,000 shares) was used to satisfy requirements for stock
options and employee stock-purchase plans. In addition,
80,000 new shares of common stock were issued to satisfy
stock options and employee stock-purchase plans. In April
2001, 3,327,000 common shares were issued in conjunction
with the pooling transaction with Thermacore International,
Inc. The number of shares of common stock outstanding at
year-end increased to 33,471,000 shares.
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. In addition,
426,000 new shares of common stock were issued to satisfy
stock option exercises. The number of shares of common stock
outstanding at year-end, including the shares issued in the
pooling transaction mentioned above, totaled 32,851,000 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
1999. Another $5.9 million of treasury stock (195,000 shares)
was used to satisfy requirements for stock options, stock awards,
and employee stock-purchase plans. Six thousand new shares of
common stock were also issued to satisfy stock option exercises.
The number of shares of common stock outstanding, including the
shares issued in the pooling transaction in April 2001, at year-
end dropped to 32,156,000 shares.
Book value per share declined two percent, or $0.37, during
fiscal 2002 to $15.42.
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities in fiscal 2002
was a record $131.4 million, up $5.6 million from the prior
year. Major items contributing to the overall change were
the reduced working-capital requirements as a result of the
company's continued programs in this area, higher non-cash
depreciation and amortization adjustments, being partially
offset by lower earnings. Working-capital requirements included
a one-time non-cash restructuring charge of $5.6 million.
Further details regarding restructuring charges recorded in
fiscal 2002 can be found in Note 11 to the consolidated
financial statements.
Net cash provided by operating activities in fiscal 2001
was $125.8 million, up $35.7 million from the prior year.
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 non-cash adjustment for deferred
income taxes, both offset partially by lower earnings.
Net cash provided by operating activities in fiscal 2000 was
$90.1 million, down $15.3 million from the prior year. Major
items contributing to the overall change were lower earnings, a
non-cash 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 non-cash depreciation and amortization
adjustments.
CAPITAL EXPENDITURES
Capital expenditures for fiscal 2002 were $35.8 million,
$37.1 million lower than prior year, a direct result of
management's initiative to reduce capital spending. Major
areas of capital spending included: on-going construction
and equipment costs of a new technical center in Europe,
continued production and administrative facility expansion in
Europe, and costs associated with the purchase of equipment
and tooling for new customer programs.
Capital expenditures for fiscal 2001 were $72.9 million,
$20.3 million lower than 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 $93.2 million,
slightly lower than prior year. They included: on-going
construction and equipment costs of new technical centers in
the U.S. 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.
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.
PROCEEDS FROM THE DISPOSITION OF ASSETS
During fiscal 2002, Modine received proceeds from the
disposition of assets of $6.6 million. The major items included
the sale of an aircraft for $4.1 million and various real estate
for $2.1 million.
CHANGES IN DEBT: SHORT- AND LONG-TERM
In fiscal 2002, company debt decreased $29.2 million,
primarily due to discretionary repayments of $26.5 million
of short-term debt and $2.7 million of long-term debt.
Lower working capital and capital-expenditure requirements
allowed for the reduction of outstanding debt. Total debt
assumed as part of the Thermacore acquisition was $14.0
million. The majority was refinanced with available lines
of credit at more favorable interest rates.
In fiscal 2001, company debt decreased $37.2 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 $24.9 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 multi-currency revolving-
credit agreement which was used to replace short-term debt.
TREASURY STOCK
Treasury stock activity is detailed in the discussion
of shareholders' equity and Note 17 to the consolidated
financial statements.
DIVIDENDS PAID
Dividends for fiscal 2002 totaled $29.0 million, or 87.5
cents per share. This is a decrease of 12.5 cents per share
over the previous year and includes one quarterly dividend at
the new rate of 12.5 cents per quarter. Dividends in fiscal
2001 and 2000 were $29.3 and $27.1 million, respectively,
representing rates of $1.00 and 92 cents per share, respectively,
and those dividends increased 8 cents per share each year over
the previous year.
LIQUIDITY
Future operating and capital-expenditure needs of the
company are expected to be generated primarily through a
combination of internally generated funds and external
financing arrangements. The company believes that its
internally generated liquidity, together with access to
external resources, will be sufficient to satisfy existing
commitments and plans. In addition, the company believes it
is positioned to provide necessary financial resources to
take advantage of potential strategic business opportunities
that arise within fiscal 2003. In April 2002, subsequent to
the fiscal year end, Modine entered into a new $150.0 million
multi-currency, revolving credit facility. Initially, $64.0
million was borrowed against this new facility and used to
pay down existing debt. See Note 14 to the consolidated
financial statements for further detail.
The following tables represent our obligations and
commitments to make future payments under contracts, such as
debt and lease agreements, and under contingent commitments,
such as debt guarantees, as of March 31, 2002.
CONTRACTUAL OBLIGATIONS
(in thousands)
- -----------------------------------------------------------------------------
Less than 1-3 4-5 After 5
March 31, 2002 Total 1 year years years years
- -----------------------------------------------------------------------------
Short-term borrowing $ 726 $ 726 $ -- $ -- $ --
Long-term debt 149,684 10,030 14,360 113,315 11,979
Capital lease obligations 23 23 -- -- --
Operating leases 25,142 8,342 9,650 4,441 2,709
Capital expenditure
commitments 14,398 14,398 -- -- --
Other long-term
obligations 3,258 34 68 68 3,088
- -----------------------------------------------------------------------------
Total contractual
obligations $193,231 $ 33,553 $24,078 $117,824 $17,776
- -----------------------------------------------------------------------------
OTHER COMMERCIAL COMMITMENTS
(in thousands)
- -----------------------------------------------------------------------------
Less than 1-3 4-5 After 5
March 31, 2002 Total 1 year years years years
- -----------------------------------------------------------------------------
Maximum loan
commitment $ 35,657 $ 657 $35,000 -- $ --
Standby letters of credit 3,259 -- -- -- 3,259
Maximum guarantees 16,588 -- -- -- 16,588
Surety bonds 4,795 4,795 -- -- --
- -----------------------------------------------------------------------------
Total other commercial
commitments $ 60,299 $ 5,452 $35,000 -- $19,847
- -----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per-share amounts)
- -------------------------------------------------------------------------------
For the years ended March 31 2002 2001 2000
- -------------------------------------------------------------------------------
Net sales $1,074,760 $1,121,399 $1,174,956
Cost of sales 810,291 823,220 844,701
----------------------------------------
Gross profit 264,469 298,179 330,255
- ------------
Selling, general, and administrative
expenses 221,733 229,443 229,361
Restructuring charges 7,540 -- --
----------------------------------------
Income from operations 35,196 68,736 100,894
- ----------------------
Interest expense (7,793) (8,784) (8,913)
Patent settlements -- 16,959 1,000
Other income - net 12,707 8,152 3,733
----------------------------------------
Earnings before income taxes 40,110 85,063 96,714
- ----------------------------
Provision for income taxes 16,765 33,233 30,382
----------------------------------------
Net earnings $ 23,345 $ 51,830 $ 66,332
- ------------ ========================================
Net earnings per share of common
- --------------------------------
stock:
-----
Basic $0.70 $1.61 $2.05
Assuming dilution $0.70 $1.58 $2.01
<FN>
The notes to consolidated financial statements are an integral part of these
statements.
</FN>
CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)
- ----------------------------------------------------------------------------
March 31 2002 2001
- ----------------------------------------------------------------------------
Assets
Current assets:
- --------------
Cash and cash equivalents $ 75,402 $ 21,744
Trade receivables, less allowance for
doubtful accounts of $3,217 and $2,459 162,462 177,972
Inventories 121,663 153,096
Deferred income taxes and other current assets 46,443 55,219
- ----------------------------------------------------------------------------
Total current assets 405,970 408,031
- ----------------------------------------------------------------------------
Noncurrent assets:
- -----------------
Property, plant, and equipment - net 340,388 366,854
Investment in affiliates 24,981 26,403
Goodwill and other intangible assets - net 55,054 64,886
Deferred charges and other noncurrent assets 76,651 70,997
- ----------------------------------------------------------------------------
Total noncurrent assets 497,074 529,140
- ----------------------------------------------------------------------------
Total assets $903,044 $937,171
============================================================================
Liabilities and shareholders' equity
Current liabilities:
- -------------------
Short-term debt $ 726 $ 27,281
Long-term debt - current portion 10,030 18,196
Accounts payable 80,112 80,028
Accrued compensation and employee benefits 46,797 49,161
Income taxes 4,799 6,115
Accrued expenses and other current liabilities 29,040 29,072
- ----------------------------------------------------------------------------
Total current liabilities 171,504 209,853
- ----------------------------------------------------------------------------
Noncurrent liabilities:
- ----------------------
Long-term debt 139,654 137,449
Deferred income taxes 35,127 32,263
Other noncurrent liabilities 40,760 38,909
- ----------------------------------------------------------------------------
Total noncurrent liabilities 215,541 208,621
- ----------------------------------------------------------------------------
Total liabilities 387,045 418,474
- ----------------------------------------------------------------------------
Shareholders' equity:
- --------------------
Preferred stock, $0.025 par value, authorized
16,000 shares, issued - none -- --
Common stock, $0.625 par value, authorized 80,000
shares issued 33,743 and 33,663 shares 21,089 21,039
Additional paid-in capital 19,166 17,468
Retained earnings 518,900 528,653
Accumulated other comprehensive loss (33,494) (23,651)
Treasury stock at cost: 272 and 812 common shares (6,976) (23,564)
Restricted stock - unamortized value (2,686) (1,248)
- ----------------------------------------------------------------------------
Total shareholders' equity 515,999 518,697
- ----------------------------------------------------------------------------
Total liabilities and shareholders' equity $903,044 $937,171
============================================================================
<FN>
The notes to consolidated financial statements are an integral part of
these statements.
</FN>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- --------------------------------------------------------------------------------
For the years ended March 31 2002 2001 2000
- --------------------------------------------------------------------------------
Cash flows from operating activities:
- ------------------------------------
Net earnings $ 23,345 $ 51,830 $ 66,332
Adjustments to reconcile net earnings with
cash provided by operating activities:
Depreciation and amortization 63,508 51,908 50,380
Pensions (3,257) (2,779) (2,686)
(Gain)/loss from disposition of property,
plant, and equipment (4,630) 2,505 582
Deferred income taxes 2,515 9,972 (2,125)
Provision for losses on accounts receivable 756 (2,087) 734
Undistributed (earnings)/losses of affiliates,
net of dividends received (1,827) (1,509) 800
Restructuring 5,609 -- --
Other - net 3,581 642 (97)
- -------------------------------------------------------------------------------
89,600 110,482 113,920
- -----------------------------------------------------------------------------
Change in operating assets and liabilities
excluding acquisitions:
Trade receivables 12,006 11,622 (12,470)
Inventories 28,362 17,300 3,477
Deferred income taxes and other current assets 9,395 (8,409) (6,116)
Accounts payable 1,353 (5,999) (8,685)
Accrued compensation and employee benefits (7,324) 860 (2,936)
Income taxes (1,316) (1,161) (1,303)
Accrued expenses and other current
liabilities (672) 1,069 4,190
- -------------------------------------------------------------------------------
Net cash provided by operating activities 131,404 125,764 90,077
- -------------------------------------------------------------------------------
Cash flows from investing activities:
- ------------------------------------
Expenditures for property, plant, and
equipment (35,763) (72,890) (93,212)
Acquisitions, net of cash acquired -- 249 --
Proceeds from dispositions of assets 6,605 815 2,140
Investments in affiliates 74 345 (2,641)
Increase in deferred charges and other
noncurrent assets (750) (1,492) (2,537)
Other - net -- (944) (80)
- -------------------------------------------------------------------------------
Net cash used for investing activities 29,834) (73,917) (96,330)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
- ------------------------------------
Increase/(decrease) in short-term debt - net (26,532) 14,665 (60,414)
Additions to long-term debt 54,771 47,183 133,477
Reductions of long-term debt (57,479) (99,064) (48,142)
Issuance of common stock, including
treasury stock 12,447 10,607 2,965
Purchase of treasury stock (1,293) (5,167) (12,102)
Cash dividends paid (28,981) (29,307) (27,102)
Other - net -- -- (184)
- -------------------------------------------------------------------------------
Net cash (used for)/provided by financing
activities (47,067) (61,083) (11,502)
- -------------------------------------------------------------------------------
Effect of exchange-rate changes on cash (845) (262) (1,168)
- -------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash
equivalents 53,658 (9,498) (18,923)
Cash and cash equivalents at beginning of year 21,744 31,242 50,168
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 75,402 $ 21,744 $ 31,245
===============================================================================
Cash paid during the year for:
Interest, net of amounts capitalized $ 6,639 $ 8,467 $ 8,768
Income taxes $ 10,058 $ 29,674 $ 33,849
<FN>
The notes to consolidated financial statements are an integral part of
these statements.
</FN>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per-share amounts)
- ---------------------------------------------------------------------------------------------------------------
Accumulated Restricted
For the years Additional other stock-
ended March 31, Common paid-in Retained comprehensive Treasury unamortized
2002, 2001, and 2000 stock capital earnings income/(loss) stock value Total
===============================================================================================================
Balance, March 31, 1999 $20,769 $15,390 $475,693 $(18,373) $(28,198) $(2,199) $463,082
- ---------------------------------------------------------------------------------------------------------------
Net earnings -- -- 66,332 -- -- -- 66,332
Other comprehensive (loss):
Foreign-currency translation -- -- -- (3,106) -- -- (3,106)
Minimum pension liability
(net of tax benefit of $5) -- -- -- (144) -- -- (144)
Total comprehensive income -- -- -- -- -- -- 63,082
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 4 315 (1,798) -- 3,719 (975) 1,265
Employee stock-purchase and
-ownership plans -- 2 (123) -- 2,187 -- 2,066
Amortization of deferred
compensation under
restricted stock plans -- -- -- -- -- 1,252 1,252
- ---------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 20,773 15,707 513,002 (21,623) (34,394) (1,922) 491,543
- ---------------------------------------------------------------------------------------------------------------
Net earnings -- -- 51,830 -- -- -- 51,830
Other comprehensive (loss):
Foreign-currency translation -- -- -- (2,288) -- -- (2,288)
Minimum pension liability
(net of tax benefit of
$149) -- -- -- 260 -- -- 260
Total comprehensive income -- -- -- -- -- -- 49,802
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 266 1,761 (5,028) -- 10,005 -- 7,004
Employee stock-purchase and
-ownership plans -- -- (1,844) -- 5,992 -- 4,148
Amortization of deferred
compensation under
restricted stock plans -- -- -- -- -- 674 674
- ---------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 21,039 17,468 528,653 (23,651) (23,564) (1,248) 518,697
- ---------------------------------------------------------------------------------------------------------------
Net earnings -- -- 23,345 -- -- -- 23,345
Other comprehensive (loss):
Foreign-currency translation -- -- -- (9,131) -- -- (9,131)
Minimum pension liability
(net of taxes of $449) -- -- -- (712) -- -- (712)
Total comprehensive income -- -- -- -- -- -- 13,502
Cash dividends, $0.875 per
share -- -- (28,981) -- -- -- (28,981)
Purchase of treasury stock -- -- -- -- (1,293) -- (1,293)
Stock options and awards
including related tax
benefits 42 1,309 (2,577) -- 9,124 (2,294) 5,604
Employee stock-purchase and
-ownership plans 8 389 (1,540) -- 8,757 -- 7,614
Amortization of deferred
compensation under
restricted stock plans -- -- -- -- -- 856 856
- ---------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 $21,089 $19,166 $518,900 $(33,494) $(6,976) $(2,686) $515,999
===============================================================================================================
<FN>
The notes to consolidated financial statements are an integral part of
these statements.
</FN>
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, industrial,
refrigeration, fuel cell, electronics, and telecommunications
markets. Product lines include radiators and radiator cores,
vehicular air conditioning, oil coolers, charge air coolers,
heat-transfer packages and modules, building-HVAC (heating,
ventilating, and air-conditioning) equipment, and electronics
cooling solutions.
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.
In April 2001, Modine completed the acquisition of Thermacore
International, Inc. (Thermacore) in a business combination accounted
for as a pooling of interests. Accordingly, the historical consolidated
financial statements and accompanying notes have been restated to
include Thermacore for all periods presented. Also see Note 10.
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' equity. Foreign currency
transaction gains or losses are included in net earnings.
Forward exchange contracts: 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.
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 20.
Accounting Standards Changes and New Pronouncements: 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, 2002,
2001, and 2000, these shipping and handling costs were
$10,303,000, $12,202,000, and $13,043,000, respectively.
On April 1, 2001 Modine adopted 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.
No adjustments to the fiscal 2002 financial statements were
necessary upon adoption of this statement.
SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets," were issued in June
2001. SFAS No. 141 and SFAS No. 142 are effective for Modine
beginning April 1, 2002. Under these new standards, goodwill
and intangible assets having indefinite lives will no longer
be amortized but will be subject to annual impairment tests.
Depreciation and amortization includes goodwill amortization of
$5,523,000 in fiscal 2002 which will be discontinued in fiscal
2003 upon adoption of SFAS No. 142. Modine is in the process of
performing the required impairment tests of goodwill and
intangible assets as of April 1, 2002, and does not expect any
material write-offs upon implementation of this standard.
SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," was issued in August 2001 and is
effective beginning April 1, 2002. SFAS No. 144 provides a
single, comprehensive accounting model for impairment and
disposal of long-lived assets and discontinued operations.
Adoption is not expected to result in any material effects
on Modine's financial statements.
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 $29,877,000 in fiscal 2002, $28,059,000 in fiscal 2001,
and $23,011,000 in fiscal 2000.
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, 2002
and 2001, the plans held 993,000 and 993,000 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. In fiscal 2002, Modine changed the pension
valuation date to December 31.
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 $20,232,000, $19,360,000, and $6,314,000,
respectively, as of March 31, 2002, and $16,128,000,
$13,758,000, and $435,000, respectively, as of March 31,
2001.
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 20) for fiscal 2002,
2001, and 2000 were $3,300,000, $6,780,000, and $7,862,000,
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 2002 2001 2002 2001
=============================================================================
Change in benefit obligation:
Benefit obligation at
beginning of year $163,905 $152,034 $ 24,774 $ 23,135
Service cost 5,655 5,653 407 312
Interest cost 11,771 11,257 2,179 1,777
Plan amendments 1,776 171 -- --
Actuarial (gain)/loss (4,639) 1,569 5,394 1,558
Benefits paid (6,744) (6,562) (2,753) (2,421)
Settlement -- 458 -- --
Contributions by plan
participants -- -- 521 413
Currency-translation adjustment (610) (675) -- --
- -----------------------------------------------------------------------------
Benefit obligation at
end of year $171,114 $163,905 $ 30,522 $ 24,774
- -----------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of year $207,458 $196,334 $ -- $ --
Actual return on plan assets (4,779) 13,801 -- --
Employer contributions 3,886 3,958 2,232 2,008
Contributions by plan
participants -- -- 521 413
Benefits paid (6,744) (6,562) (2,753) (2,421)
Currency-translation adjustment 49 (73) -- --
- -----------------------------------------------------------------------------
Fair value of plan assets
at end of year $199,870 $207,458 $ -- $ --
- -----------------------------------------------------------------------------
Funded status:
Funded status at end of year $ 28,756 $ 43,553 $(30,522) $(24,774)
Unrecognized net loss 21,879 2,400 5,956 867
Unrecognized prior service cost 3,391 2,756 (1,166) (1,629)
Unrecognized net transition
obligation 153 317 -- --
- -----------------------------------------------------------------------------
Net amount recognized $ 54,179 $ 49,026 $(25,732) $(25,536)
- -----------------------------------------------------------------------------
Amounts recognized in the
balance sheet consist of:
Prepaid benefit cost $ 66,621 $ 62,371 $ -- $ --
Accrued benefit liability (13,804) (14,265) (25,732) (25,536)
Intangible asset 73 537 -- --
Accumulated other comprehensive
income 1,289 383 -- --
- -----------------------------------------------------------------------------
Net amount recognized $ 54,179 $ 49,026 $(25,732) $(25,536)
- -----------------------------------------------------------------------------
Costs for Modine's pension and other postretirement benefit
plans include the following components:
(In thousands)
- ----------------------------------------------------------------------------
Years ended March 31 2002 2001 2000
- ----------------------------------------------------------------------------
Pensions:
Components of net periodic
benefit cost (gain):
Service cost $ 5,655 $ 5,653 $ 5,875
Interest cost 11,771 11,257 10,630
Expected return on plan assets (19,712) (18,649) (17,567)
Amortization of:
Unrecognized net loss (gain) 53 (18) 95
Unrecognized prior service cost 504 371 380
Unrecognized net obligation 122 125 93
Adjustment for settlement/curtailment 881 660 574
- ----------------------------------------------------------------------------
Net periodic benefit cost (gain) $ (726) $ (601) $ 80
- ----------------------------------------------------------------------------
Other postretirement plans:
Components of net periodic
benefit cost:
Service cost $ 407 $ 312 $ 374
Interest cost 2,179 1,777 1,629
Amortization of:
Unrecognized net loss (gain) 305 (46) (46)
Unrecognized prior service cost (462) (462) (473)
- ----------------------------------------------------------------------------
Net periodic benefit cost $ 2,429 $ 1,581 $ 1,484
- ----------------------------------------------------------------------------
The following weighted-average assumptions were used to determine
Modine's obligation under the plans:
- -----------------------------------------------------------------------------
Years ended March 31 2002 2001
--------------------------------------------
Foreign Foreign
U.S. plans plans U.S. plans plans
- -----------------------------------------------------------------------------
Pensions:
Discount rate 7.5% 7.2% 7.5% 7.5%
Expected return on plan assets 9.0% 11.3% 9.0% 13.8%
Rate of compensation increase 4.0% 3.1% 4.0% 3.2%
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 10 percent healthcare cost trend rate was assumed for
fiscal year 2002 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, 2002 increase decrease
- --------------------------------------------------------------------------
Effect on total of service and interest cost $ 104 $ (99)
Effect on post-retirement benefit obligation 1,383 (1,313)
- --------------------------------------------------------------------------
NOTE 4 LEASES
- ------ ------
Modine leases various facilities and equipment. Rental expense
under operating leases totaled $13,909,000 in fiscal 2002, $13,826,000
in fiscal 2001, and $15,385,000 in fiscal 2000.
Future minimum rental commitments at March 31, 2002, under
noncancelable operating leases were:
(In thousands)
- -------------------------------------------------------------------
Years ending March 31
- -------------------------------------------------------------------
2003 $8,342 2006 $ 2,411
2004 5,773 2007 2,030
2005 3,877 2008 and beyond 2,709
- -------------------------------------------------------------------
Total future minimum rental commitments $25,142
- -------------------------------------------------------------------
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 2002 2001 2000
- --------------------------------------------------------------------------
Components of earnings before income taxes:
United States $23,882 $62,100 $71,431
Foreign 16,228 22,963 25,283
- --------------------------------------------------------------------------
Total earnings before income taxes $40,110 $85,063 $96,714
- --------------------------------------------------------------------------
Income tax expense:
Federal:
Current $ 5,488 $ 9,954 $21,040
Deferred 2,401 6,674 2,540
State:
Current 718 1,281 3,318
Deferred 251 729 539
Foreign:
Current 8,640 12,221 8,392
Deferred (733) 2,374 (5,447)
- --------------------------------------------------------------------------
Totals charged to earnings $16,765 $33,233 $30,382
- --------------------------------------------------------------------------
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 2002 2001 2000
- ----------------------------------------------------------------------
Statutory federal tax 35.0% 35.0% 35.0%
State taxes, net of federal benefit 1.9 1.7 2.8
Goodwill amortization 3.1 1.0 0.9
Nondeductible acquisition costs 2.4 -- --
Taxes on non-U.S. earnings and losses (1.4) (0.2) (7.9)
Other 0.8 1.6 0.6
- ----------------------------------------------------------------------
Effective tax rate 41.8% 39.1% 31.4%
- ----------------------------------------------------------------------
The significant components of deferred income tax expense
attributable to earnings before income taxes are as follows:
(In thousands)
- ------------------------------------------------------------------------
Years ended March 31 2002 2001 2000
- ------------------------------------------------------------------------
Pensions $2,028 $1,876 $ 1,707
Depreciation 2,781 3,322 3,622
Inventories (595) 1,148 (575)
Employee benefits 1,910 (131) 679
Restructuring costs (1,679) -- --
Benefit of tax losses (1,098) (1,507) (7,185)
Other (1,428) 5,069 (616)
- ------------------------------------------------------------------------
Totals charged to earnings $1,919 $9,777 $(2,368)
- ------------------------------------------------------------------------
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 2002 2001
- ------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable $ 892 $ 599
Inventories 5,134 4,671
Plant and equipment 995 1,104
Employee benefits 17,770 19,450
Net operating loss and tax credit carry forwards 8,395 7,781
Restructuring costs 1,673 --
Other 8,455 6,979
-----------------
Total gross deferred assets 43,314 40,584
Less valuation allowance 557 592
-----------------
Net deferred tax assets 42,757 39,992
-----------------
Deferred tax liabilities:
Pension 26,115 24,422
Plant and equipment 21,438 18,886
Other 3,337 3,195
-----------------
Total gross deferred tax liabilities 50,890 46,503
- ------------------------------------------------------------------------
Net deferred tax (liability)/asset $(8,133) $(6,511)
- ------------------------------------------------------------------------
The valuation allowance for deferred tax assets as of April 1, 2001,
was $592,000. The valuation allowance decreased by $35,000 during the year
and relates primarily to certain, foreign, net operating loss carryforward
activities.
At March 31, 2002, the company had tax loss carryforwards of
$24,024,000 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 $ 761 2008 $ 969
2005 2,165 2009 207
2006 1,902 No expiration date 16,573
2007 1,447
- ----------------------------------------------------------------
As of March 31, 2002, Modine has provided $321,000 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 $141,398,000 and no provision has been made for
any U.S. taxes that would be payable upon the distribution of such
earnings.
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 2002 2001 2000
- -----------------------------------------------------------------------------
Net earnings per share of common stock:
Basic $0.70 $1.62 $2.05
Assuming dilution 0.70 1.58 2.01
Numerator:
Net earnings available to
common shareholders $23,345 $51,830 $66,332
Denominator:
Weighted average shares outstanding - basic 33,132 32,258 32,362
Effect of dilutive securities - options 274 601 701
----------------------------
Weighted average shares
outstanding - assuming dilution 33,406 32,859 33,063
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 $25.65 $25.19 $27.03
Number of shares 1,246 1,438 1,169
- -----------------------------------------------------------------------------
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 $8,398,000, $8,571,000, and
$7,699,000 at March 31, 2002, 2001, and 2000, respectively.
All the short-term investments at March 31, 2002, 2001, and
2000, 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 2002 2001
- -----------------------------------------------------------------------
Raw materials $ 25,370 $ 32,774
Work in process 31,673 37,321
Finished goods 64,620 83,001
- -----------------------------------------------------------------------
Total inventories $121,663 $153,096
- -----------------------------------------------------------------------
NOTE 9 PROPERTY, PLANT, AND EQUIPMENT
- ------ ------------------------------
Property, plant, and equipment is composed of:
(In thousands)
- ------------------------------------------------------------------------
March 31 Depreciable lives 2002 2001
- ------------------------------------------------------------------------
Land -- $ 7,384 $ 7,733
Buildings and improvements 10-40 years 196,663 170,586
Machinery and equipment 3-12 years 399,161 367,830
Office equipment 3-14 years 69,462 60,472
Transportation equipment 3-7 years 9,442 15,508
Construction in progress -- 20,783 74,934
------------------
702,895 697,063
Less accumulated depreciation 362,507 330,209
- ------------------------------------------------------------------------
Net property, plant, and equipment $340,388 $366,854
- ------------------------------------------------------------------------
Depreciation expense was $53,587,000, $44,359,000, and $40,640,000
for the fiscal years ended 2002, 2001, and 2000, respectively.
NOTE 10 ACQUISITIONS AND EQUITY INVESTMENTS
- ------- -----------------------------------
On April 27, 2001, Modine acquired Thermacore International, Inc.
(Thermacore) in a business combination accounted for as a pooling of
interests. Thermacore, which produces advanced cooling solutions for
equipment in the computer, telecommunications, medical, aerospace,
networking and power-semiconductor markets, became a wholly owned
subsidiary of Modine through the initial exchange of approximately
3,327,000 shares of Modine common stock for all the outstanding
common and preferred stock of Thermacore International, Inc. In
addition, approximately 294,000 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 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
companies. No adjustments to retained earnings were required to conform
Thermacore to Modine's March 31 year-end. Previously reported results
of operations have been consolidated by combining quarterly operating
results reported by Thermacore for the periods April 1, 1999 - March 31,
2000 and April 1, 2000 - March 31, 2001.
Summarized results of operations of the separate companies
for the period prior to acquisition, April 1, 2001 through April 27,
2001 and included in fiscal 2002 operations are as follows:
(In thousands)
- ----------------------------------------------------------------
April 1-27, 2001 Modine Thermacore
Net sales $86,065 $ 3,496
Net earnings (loss) 3,368 (1,655)
- ----------------------------------------------------------------
Included in the operating results shown for April of 2001
are $351,000 and $2,209,000 in after-tax acquisition costs
recorded for Modine and Thermacore, respectively.
Following is a reconciliation of the accounts of net sales and
net earnings previously reported for the twelve-month periods ended
March 31, 2001 and March 31, 2000 with the restated amounts.
(In thousands)
- --------------------------------------------------------------------
Twelve Months ended March 31 2001 2000
- --------------------------------------------------------------------
Net sales:
Modine $1,065,395 $1,139,269
Thermacore 56,004 35,687
- --------------------------------------------------------------------
Combined $1,121,399 $1,174,956
- --------------------------------------------------------------------
Net earnings:
Modine $ 47,605 $ 65,403
Thermacore 4,225 929
- --------------------------------------------------------------------
Combined $ 51,830 $ 66,332
- --------------------------------------------------------------------
In June of 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
of 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. This investment, accounted for as a purchase transaction,
did not have a material effect on the consolidated results of
operations and, accordingly, pro-forma information is not presented.
NOTE 11 RESTRUCTURING AND PLANT CLOSURES
- ------- --------------------------------
In the third quarter of fiscal 2002, Modine 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 manufacturing facilities
located in LaPorte and Knoxville currently produce products for
customers in the company's heavy-duty and industrial markets. The
facility located in St. Paul manufactures products for the company's
HVAC market. Modine 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. Modine 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 nine months.
Anticipated staff reductions, as originally estimated in the
third quarter, were determined to be approximately 400 employees.
The planned reductions included 300 employees in the U.S. and 100
employees in Europe. In the fourth quarter, this estimate was revised
downward by approximately 62 employees in Europe and eight employees
in the U.S. These personnel were relocated to other company facilities
or left the company prior to receiving separation benefits. As a result,
anticipated termination costs of $5,938,000 established in the third
quarter were reduced by $932,000 in Europe and $61,000 in the U.S. Of
the total number of employees affected, 65 employees were terminated
as of the end of the fiscal year and thus far have received benefit
payments of $903,000.
In addition to the costs of terminating employees, the other
principal costs of the restructuring plan include the $1,043,000
write-off of goodwill 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 $2,569,000.
The following table displays the components of the accrued
restructuring liability:
(In thousands)
- -------------------------------------------------------------------
2002
- -------------------------------------------------------------------
Termination Benefits:
Balance at November 1, 2001 $5,938
Adjustments (993)
Payments (903)
- -------------------------------------------------------------------
Balance at March 31, 2002 $4,042
- -------------------------------------------------------------------
Other Restructuring Charges:
Balance at November 1, 2001 $2,569
Non-cash Goodwill Impairment (1,043)
Payments --
- -------------------------------------------------------------------
Balance at March 31, 2002 $1,526
- -------------------------------------------------------------------
In addition to the restructuring costs, other closure-related
and business rationalization costs recorded in the year were $881,000
in pension curtailment costs for the LaPorte and Knoxville facilities,
$1,397,000 in accelerated depreciation in conjunction with the
reduction of the useful lives of assets at the facilities to be closed,
and $515,000 of inventory identified as obsolete. Other one-time items
recorded in the year included a $1,851,000 asset impairment identified
at one of the company's foreign facilities, consisting of a $804,000
reduction in the value of fixed assets, a $768,000 write-down of the
inventory value and a $279,000 write-off of goodwill. Also recorded
during the year was the write-down of the unitary air conditioning
product line marketed by the company's HVAC division, consisting of
$455,000 in obsolete inventory and $221,000 in fixed asset impairments.
In addition, miscellaneous shut-down related costs of $110,000 have
been incurred by the North American facilities.
The following table provides a summary of restructuring and one-
time closure/business rationalization costs recorded:
(In thousands)
- ----------------------------------------------------------------------
Year Ended March 31 2002
- ----------------------------------------------------------------------
Restructuring Charges:
Employee severance and related benefits $ 4,971
Goodwill impairment 1,043
Post-closing operating expenses 845
Other disposal costs 681
-------
Total restructuring costs 7,540
-------
Other Closure Costs:
Assets impairments 2,072
Depreciation (change in useful lives) 1,397
Pension curtailment costs 881
Obsolete inventory charges 970
Miscellaneous other closure costs 110
-------
Total other closure costs 5,430
- ----------------------------------------------------------------------
Total restructuring and other closure costs $12,970
- ----------------------------------------------------------------------
NOTE 12 INTANGIBLE ASSETS
- ------- -----------------
Intangible assets include:
(In thousands)
- -----------------------------------------------------------------------
March 31 2002 2001
- -----------------------------------------------------------------------
Goodwill $85,984 $ 90,362
Patents and product technology 3,951 6,901
Other intangibles 2,456 2,925
-------------------
92,391 100,188
Less accumulated amortization 37,337 35,302
- -----------------------------------------------------------------------
Net intangible assets $55,054 $ 64,886
- -----------------------------------------------------------------------
Amortization expense for intangible assets was $9,065,000,
$6,875,000, and $8,488,000 for the fiscal years ended 2002,
2001, and 2000, respectively.
NOTE 13 DEFERRED CHARGES AND OTHER NONCURRENT ASSETS
- ------- --------------------------------------------
Deferred charges and other noncurrent assets include:
(In thousands)
- ----------------------------------------------------------------------
March 31 2002 2001
- ----------------------------------------------------------------------
Prepaid pension costs -
qualified and nonqualified plans $66,622 $62,496
Other noncurrent assets 10,029 8,501
- ----------------------------------------------------------------------
Total deferred charges and other
noncurrent assets $76,651 $70,997
- ----------------------------------------------------------------------
NOTE 14 INDEBTEDNESS
- ------- ------------
Long-term debt at March 31, 2002 and 2001, includes:
(Dollars in thousands)
- ----------------------------------------------------------------------------
Interest rate Fiscal
percentage at year of
Type of issue March 31, 2002 maturity 2002 2001
- ----------------------------------------------------------------------------
Denominated in U.S. dollars:
Fixed rate -
Notes 5.00-8.87 2003-2004 $ 10,877 $ 14,938
Weighted average interest rate 5.09
Revenue bonds 7.50 2003 50 400
Variable rate -
Note 2.33 2006 25,000 15,161
Revenue bonds 1.70 2008 3,000 3,000
Denominated in foreign currency:
Fixed rate -
Notes and other debt 3.25-6.08 2004-2012 63,409 56,209
Weighted average interest rate 5.45
Variable rate -
Notes and other debt .29-7.25 2003-2010 47,348 65,937
Weighted average interest rate 3.42
------------------
149,684 155,645
Less current portion 10,030 18,196
- ----------------------------------------------------------------------------
Total $139,654 $137,449
- ----------------------------------------------------------------------------
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, 2002.
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,
2002 and 2001, the carrying value of Modine's long-term debt
approximates fair value.
Long-term debt matures as follows:
(In thousands)
- ---------------------------------------------------------------------
Years ending March 31
- ---------------------------------------------------------------------
2003 $10,030 2006 $110,244
2004 11,782 2007 3,071
2005 2,578 2008 and beyond 11,979
- ---------------------------------------------------------------------
Modine also maintains credit agreements with banks abroad.
The foreign unused lines of credit at March 31, 2002, were
approximately $16,588,000. Domestic unused lines of credit
at March 31, 2002, were approximately $35,657,000. A maximum
of $25,624,000 in short-term bank borrowings was outstanding
during the year ended March 31, 2002. The weighted average
interest rate on short-term borrowings was 5.05 percent at
March 31, 2002, and 5.67 percent at March 31, 2001.
Interest expense charged to earnings was as follows:
(In thousands)
- ---------------------------------------------------------------------
Years ended March 31 2002 2001 2000
- ---------------------------------------------------------------------
Gross interest cost $8,013 $10,468 $10,426
Capitalized interest on major
construction projects (220) (1,684) (1,513)
- ---------------------------------------------------------------------
Interest expense $7,793 $ 8,784 $ 8,913
- ---------------------------------------------------------------------
Subsequent to the fiscal year end, on April 17, 2002, Modine
entered into a new $150,000,000 multi-currency, revolving
credit facility with a syndicate of banks that will mature
in April 2005. Initially, Modine borrowed $64,000,000
against this new facility, which was used to pay off
existing debt. At the same time, Modine terminated credit
facilities with two separate banks. The indebtedness
incurred by the company under the credit facility is secured
by a guarantee from all domestic subsidiaries and a pledge
of 65 percent of the voting stock of material foreign
subsidiaries. The terms of this credit facility contain
various restrictive financial covenants relating to maximum
debt-to-EBITDA, minimum interest coverage ratio and minimum
level of net worth. In addition, the credit facility
contains limitations on investments, liens, dividends and
other indebtedness. Borrowings under the credit facility
bear interest at a rate of LIBOR plus a spread based on
certain financial criteria, or the prime rate at Modine's
option. Financing fees will be amortized over the life of
the facility.
NOTE 15 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 periodically 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, 2002 and 2001, the parent company had
approximately $662,000 and $2,467,000, respectively, in
outstanding forward foreign exchange contracts denominated
in Euros. The difference between these contracts' values and
the fair value of these instruments in the aggregate was not
material. 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 14.
NOTE 16 OTHER NONCURRENT LIABILITIES
- ------- ----------------------------
Other noncurrent liabilities include:
(In thousands)
- ------------------------------------------------------------------------
March 31 2002 2001
- ------------------------------------------------------------------------
Postretirement benefits other than pensions $22,818 $22,966
Pensions 13,274 13,381
Other 4,668 2,562
- ------------------------------------------------------------------------
Total other noncurrent liabilities $40,760 $38,909
- ------------------------------------------------------------------------
NOTE 17 COMMON AND TREASURY STOCK
- ------- -------------------------
Following is a summary of common and treasury stock
activity.
(In thousands)
- ----------------------------------------------------------------------------
Treasury stock
Common stock at cost
- ----------------------------------------------------------------------------
shares amount shares amount
- ----------------------------------------------------------------------------
Balance March 31, 1999 33,231 $20,769 (817) $(28,198)
Purchase of treasury stock -- -- (459) (12,102)
Stock options and awards including
related tax benefits 6 4 124 3,719
Employee stock-purchase and
-ownership plans -- -- 71 2,187
- ----------------------------------------------------------------------------
Balance March 31, 2000 33,237 20,773 (1,081) (34,394)
- ----------------------------------------------------------------------------
Purchase of treasury stock -- -- (199) (5,167)
Stock options and awards including
related tax benefits 426 266 296 10,005
Employee stock-purchase and
-ownership plans -- -- 172 5,992
- ----------------------------------------------------------------------------
Balance March 31, 2001 33,663 21,039 (812) (23,564)
- ----------------------------------------------------------------------------
Purchase of treasury stock -- -- (46) (1,292)
Stock options and awards including
related tax benefits 68 42 296 9,124
Employee stock-purchase and
ownership plans 12 8 290 8,756
- ----------------------------------------------------------------------------
Balance March 31, 2002 33,743 $21,089 (272) $ (6,976)
- ----------------------------------------------------------------------------
NOTE 18 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 19 ACCUMULATED OTHER COMPREHENSIVE (LOSS)
- -----------------------------------------------
The components of accumulated other comprehensive (loss),
net of applicable income taxes, consist of:
(In thousands)
- ----------------------------------------------------------------------------
March 31 2002 2001
- ----------------------------------------------------------------------------
Unrealized foreign-currency-translation adjustments $(32,489) $(23,358)
Minimum pension-liability adjustments (1,005) (293)
- ----------------------------------------------------------------------------
Accumulated other comprehensive (loss) $(33,494) $(23,651)
- ----------------------------------------------------------------------------
NOTE 20 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. Effective
December 31, 2001, the stock plans were merged into one plan
and on January 1, 2002, the plan was converted into an
employee stock ownership plan (ESOP). The plan continues to
earn dividends, which may be received in cash, beginning in
April of 2002, or reinvested in Modine common stock.
Beginning in March of 2002, employees under age 59 1/2 can
diversify 25 percent of their stock held in the ESOP and
transfer this portion to the 401(k) plan investments.
Employees over 59 1/2 can diversify 100 percent of their
holdings in the ESOP. 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. During fiscal 2002, the
company merged several of the 401(k) plans, eliminated the
after-tax contribution plan at Climate Systems, a wholly
owned Modine subsidiary, and converted the Thermacore and
Climate Systems company match to Modine common stock.
Activity in the plans for fiscal 2002, 2001, and 2000
resulted in the purchase of 302,000, 468,000, and 487,000
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 2002, 2001,
and 2000 were $3,137,000, $6,237,000, and $7,288,000,
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 of
1999, shareholders reapproved the 1994 plan. In July of
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. In April
of 2001, 294,000 shares of Modine common stock were allocated to
cover the outstanding Thermacore options which were converted to
Modine stock options as part of the business combination accounted
for as a pooling transactions. Options granted under the Thermacore
1995 and 1997 incentive plans, which vest at 25% per year after the
first year, are either non-qualified or incentive stock options and,
in most cases, carry a price equal to the market price at the date of
grant. Options granted under the 1985 and 1994 Modine 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. Restricted stock awards were granted for
82,500 and 39,000 shares in fiscal 2002 and 2000, respectively. No
restricted stock awards were granted in fiscal 2001. 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 period. The value
of the Thermacore stock awards, which were converted to Modine
shares as part of the pooling transaction, is also in escrow until
certain employment restrictions lapse. These awards are being
amortized over a four year to four and one-half year period. The
amounts charged to operations in fiscal 2002, 2001, and 2000 were
$856,000, $674,000, and $1,252,000, respectively.
Following is a summary of incentive and nonqualified option
activity under the plans.
- ----------------------------------------------------------------------
Shares Weighted-average
in thousands) exercise price per share
- ----------------------------------------------------------------------
Outstanding March 31, 1999 2,798 $21.28
- ----------------------------------------------------------------------
Granted 423 22.86
Exercised (91) 10.21
Forfeitures (12) 9.53
- ----------------------------------------------------------------------
Outstanding March 31, 2000 3,118 21.86
- ----------------------------------------------------------------------
Granted 434 22.64
Exercised (723) 9.60
Forfeitures (74) 23.58
- ----------------------------------------------------------------------
Outstanding March 31, 2001 2,755 25.15
- ----------------------------------------------------------------------
Granted 571 23.44
Exercised (289) 16.73
Forfeitures (27) 29.25
- ----------------------------------------------------------------------
Outstanding March 31, 2002 3,010 $25.60
- ----------------------------------------------------------------------
Options outstanding and exercisable as of March 31, 2002:
- -----------------------------------------------------------------------------
Weighted- Weighted-average
average exercise price per Shares
Range of exercise prices remaining life share (in thousands)
- -----------------------------------------------------------------------------
$ 4.93 - 14.99 7.07 $10.18 225
15.00 - 24.99 7.36 22.26 1,043
25.00 - 34.99 5.55 29.58 1,742
- -----------------------------------------------------------------------------
Total outstanding and
exercisable $25.60 3,010
- -----------------------------------------------------------------------------
A further 703,000 shares were available for the granting of
additional options or awards at March 31, 2002.
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 2002, 2001, and 2000 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 2002 2001 2000
- -------------------------------------------------------------------------
Net earnings as reported $23,345 $51,830 $66,332
Net earnings pro forma 19,101 48,489 62,583
Net earnings per share (basic) as reported $0.70 $1.61 $2.05
Net earnings per share (basic) pro forma 0.57 1.51 1.93
- -------------------------------------------------------------------------
The following assumptions were used to compute the fair
value of the option grants in fiscal 2002, 2001, and 2000 using
the Black-Scholes option-pricing model: a risk-free interest rate
of 4.2-4.7 percent, 4.9-6.7 percent, and 5.8-6.7 percent,
respectively, stock volatility of 33.1-38.3 percent, 28.5-33.3
percent, and 26.9-28.8 percent, respectively, a dividend yield
of 2.8-3.1 percent, 2.5-2.8 percent, and 2.4-2.5 percent,
respectively, and an expected option life of six years, five
and one-half years, and five years, respectively.
NOTE 21 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 and
the electronics cooling markets. Modine operates in three business
segments, which are organized on the basis of market categories
or geographical responsibility. They are as follows: 1) 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; 2) 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 located in North America
and Europe and electronics cooling products for the computer and
telecommunications equipment markets in North America, Europe,
and Asia from business units in those three areas; and 3) 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 in evaluating the performance of
each business segment, and in making decisions on the allocation
of resources among the company's various businesses. Modine
evaluates segment performance based on operating income and the
return on capital employed. The significant 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 the first quarter of fiscal 2002, Modine
------------
acquired Thermacore International, Inc. in a business
combination accounted for as a pooling of interests.
Thermacore activity is included in the Distributed Products
segment for all years being reported in the accompanying
tables. Two additional changes made by management in the
first quarter of fiscal 2002 were to relocate 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. The
corresponding prior years' data has been restated to reflect
the effects of these changes.
(In thousands)
- ----------------------------------------------------------------------------
Years ended March 31 2002 2001 2000
- ----------------------------------------------------------------------------
Sales:
Original Equipment $ 456,994 $ 467,289 $ 526,131
Distributed Products 381,309 424,981 437,152
European Operations 302,407 304,995 299,599
----------------------------------
Segment sales 1,140,710 1,197,265 1,262,882
Eliminations (65,950) (75,866) (87,926)
- ----------------------------------------------------------------------------
Total net sales $1,074,760 $1,121,399 $1,174,956
- ----------------------------------------------------------------------------
Operating income:
Original Equipment $ 66,237 $ 82,190 $ 102,290
Distributed Products 9,947 23,748 37,062
European Operations 23,331 30,959 23,764
-----------------------------------
Segment operating income 99,515 136,897 163,116
Corporate & administrative expenses (64,462) (68,292) (62,303)
Eliminations 143 131 81
Other items not allocated to segments 4,914 16,327 (4,180)
- ----------------------------------------------------------------------------
Earnings before income taxes $ 40,110 $ 85,063 $ 96,714
- ---------------------------------------------------------------------------
Intersegment sales are accounted for based on an established
markup over production costs.
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, the engine products
development group, 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, gain on the
sale of one of the company's aircraft and dividend income.
(In thousands)
- ------------------------------------------------------------------------------
Years ended March 31 2002 2001 2000
- ------------------------------------------------------------------------------
Assets:
Original Equipment $211,209 $201,906 $218,247
Distributed Products 222,267 260,439 267,876
European Operations 210,117 214,186 199,547
Corporate & administrative 276,749 274,575 264,658
Eliminations (17,298) (13,935) (7,920)
- ------------------------------------------------------------------------------
Total assets $903,044 $937,171 $942,408
- ------------------------------------------------------------------------------
Capital expenditures:
Original Equipment $ 40,616 $ 15,139 $ 20,253
Distributed Products 6,662 11,316 13,570
European Operations 21,923 28,159 33,206
Corporate & administrative (33,438) 18,276 26,272
Eliminations -- -- (89)
- ------------------------------------------------------------------------------
Total capital expenditures $ 35,763 $ 72,890 $ 93,212
- ------------------------------------------------------------------------------
Depreciation and amortization expense:
Original Equipment $ 21,946 $ 15,167 $ 17,070
Distributed Products 14,435 11,990 11,294
European Operations 12,745 11,569 11,213
Corporate & administrative 14,517 13,323 10,955
Eliminations (135) (141) (152)
- ------------------------------------------------------------------------------
Total depreciation and amortization expense $ 63,508 $ 51,908 $ 50,380
- ------------------------------------------------------------------------------
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 2002 2001 2000
- ---------------------------------------------------------------------------
Sales to unaffiliated customers
from company facilities located in:
United States $ 688,676 $ 730,229 $ 786,658
Germany 222,322 221,642 212,474
Other countries 163,762 169,528 175,824
- ----------------------------------------------------------------------------
Net sales $1,074,760 $1,121,399 $1,174,956
- ----------------------------------------------------------------------------
Long-lived assets:
United States $ 351,641 $ 383,909 $ 375,306
Germany 86,578 85,092 71,372
Other countries 59,523 60,913 66,622
Eliminations (668) (774) (898)
- ----------------------------------------------------------------------------
Total long-lived assets $ 497,074 $ 529,140 $ 512,402
- ----------------------------------------------------------------------------
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 10.5 percent and 10.8 percent of total
company revenues in fiscal 2002 and fiscal 2001,
respectively. In fiscal 2000, no single customer accounted
for more than 10 percent of revenues.
NOTE 22 LITIGATION AND CONTINGENCIES
- ------- ----------------------------
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 PF
(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 two parties. As
a result of the Showa 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. Based on an unfavorable decision
from the Japanese patent office Board of Appeals in March of
2002, Modine will no longer receive royalty payments in
Japan related to its PF technology. Since July of 2000,
Modine has been receiving royalty payments from certain
Japanese competitors related to its PF patents, which expire
in 2006. Over the last twelve months, royalties from
Japanese companies have accounted for approximately $2.9
million of pretax income. The company is reviewing its
options regarding an appeal of the March of 2002 ruling.
Over the last 10 years, Modine has been defending its PF
technology in Japan. Modine had estimated a one-time royalty
payment of approximately $29.9 million to cover past
infringements if the validity of its PF patent in Japan was
confirmed. Since this ruling does not effect Modine's
royalty income outside of Japan, Modine will continue to
collect royalties for PF products produced in Europe and the
United States where, to date, its patents have been upheld.
The Lake Shore Litigation: Lake Shore Radiator, a former
-------------------------
independent warehouse distributor of Modine's Aftermarket
Division, filed a lawsuit against Modine in the Federal
Court in Jacksonville, Florida in July of 2000. Lake Shore
has alleged that Modine violated certain antitrust laws,
breached portions of its distributor agreement and
wrongfully terminated its relationship with Lake Shore.
Modine has answered each of the allegations in Lake Shore's
complaint and denied any liability. Trial is scheduled to
begin in October of 2002.
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. 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 when
appropriate Modine accrues for uninsured liabilities. While
the outcomes of these matters, including those discussed
above, are uncertain, Modine does not expect that any
unrecorded liabilities that may result from these matters is
reasonably likely to have a material effect on Modine's
liquidity, financial condition or results of operations.
NOTE 23 QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------- ------------------------------------
Quarterly financial data are summarized below:
(In thousands, except per-share amounts)
- ---------------------------------------------------------------------------
Fiscal 2002 quarters ended June Sept. Dec. March
- ---------------------------------------------------------------------------
Net sales $280,631 $269,114 $270,433 $254,582
Gross profit 73,963 64,963 66,841 58,702
Net earnings (a) (b) (c) 10,218 6,829 1,252 5,046
Net earnings per share of
common stock:
Basic $0.31 $0.21 $0.04 $0.15
Assuming dilution 0.31 0.20 0.04 0.15
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Fiscal 2001 quarters ended June Sept. Dec. March
- ----------------------------------------------------------------------------
Net sales $300,441 $284,056 $265,393 $271,509
Gross profit 87,887 75,901 70,184 64,207
Net earnings (d) 19,213 20,363 7,059 5,195
Net earnings per share of
common stock:
Basic $0.60 $0.63 $0.22 $0.16
Assuming dilution 0.59 0.62 0.22 0.16
- ----------------------------------------------------------------------------
(a) The 1st quarter of fiscal 2002 includes acquisition
expenses of $3,105,000 ($2,865,000 after-tax) related to the
Thermacore International, Inc. pooling transaction.
(b) The 3rd quarter of fiscal 2002 includes $12,333,000
($8,275,000 after-tax) in restructuring and other closure
expenses. Also recorded in the 3rd quarter was a reduction
to the workers compensation insurance reserves, due to a
change in accounting estimate, increasing earnings by
$6,504,000 ($3,974,000 after-tax).
(c) The 4th quarter of fiscal 2002 includes the gain on the
sale of one of the company's aircraft totaling $3,500,000
($1,879,000 after-tax). Also recorded in the 4th quarter
were additional restructuring and other closure expenses
totaling $637,000 ($375,000 after-tax).
(d) The 1st and 2nd quarters of fiscal 2001 include PF
patent settlements received increasing earnings by
$1,875,000 ($1,407,000 after-tax) and $15,084,000
($11,312,000 after-tax), respectively.
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' equity present fairly, in all
material respects, the financial position of Modine
Manufacturing Company and its subsidiaries at March 31, 2002
and March 31, 2001, and the results of their operations and
their cash flows for each of the three years in the period
ended March 31, 2002 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. The consolidated financial statements give
retroactive effect to the merger of Thermacore
International, Inc. on April 27, 2001 in a transaction
accounted for as a pooling of interests, as described in
Note 10 to the consolidated financial statements. We did not
audit the financial statements of Thermacore International,
Inc., which statements reflect total assets of $37,058,922
as of March 31, 2001 and total revenues of $56,005,487 and
$35,687,000 for the years ended March 31, 2001 and 2000,
respectively. Those statements were audited by other
auditors which report thereon has been furnished to us, and
our opinion expressed herein, insofar as it relates to the
amounts included for Thermacore International, Inc., is
based solely on the report of other auditors. We conducted
our audits of these statements in accordance with auditing
standards general 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
April 30, 2002