EXHIBIT 13
Management's discussion and analysis of operations
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Modine Manufacturing Company set records for both sales and
earnings in the fiscal year ended March 31, 1998.
The company achieved a 13.7-percent increase in earnings on a
4.1-percent growth in sales and passed the billion-dollar sales
milestone for the first time in the company's 82-year history.
Modine has been growing at an accelerated rate recently, adding
a half-billion of sales in just six years.
Excluding the impact of the change in exchange rates, worldwide
consolidated sales would have been up by 8.7 percent, more than double
the reported sales increase. About one-third of Modine's annual sales
are in other than U.S. currency, therefore the stronger dollar had a
negative translation effect of approximately $45.5 million on fiscal-
1998 consolidated sales, compared with the prior year.
U.S. export sales of $131.5 million were up 11.5 percent compared
with the year before. Reported sales from nondomestic operations rose
1.5 percent, despite being expressed in the stronger U.S. dollar. In
total, 43.5 percent of Modine's annual sales were outside the United
States, unchanged from the prior year.
The company's 1997-98 revenues from its top ten customers were
42.4 percent of total sales, compared with 40.7 percent in the prior
year. Modine's largest customer represented less than seven percent
of total revenues in both fiscal 1998 and 1997, reflecting the company's
sustained efforts to assemble a portfolio of diversified customers and
markets. Diversification helps to protect Modine from the cycles of any
one economy, industry, or company.
In January 1998, Modine acquired the business and assets of a
small but respected company that manufactures infrared heaters for
commercial, industrial, and residential buildings. The integration
of this acquisition with Modine's business is expected to
significantly increase the acquired operation's $2 million in
annualized sales in future years.
Fiscal-year sales by market
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OEM passenger-car and light-truck market: In fiscal 1998, 23.6
percent of Modine's sales were to worldwide original-equipment
manufacturers (OEMs) in the passenger-car and light-truck market.
Nearly two-thirds of these sales were to customers outside the
United States.
Unit volumes in the OEM passenger-car and light-truck market
were up year-over-year. However, reported fiscal-year sales were
down 6.8 percent, due to currency-translation effects. Several new
programs, both in Europe and North America, should significantly
boost revenues from this market over the next few years.
As in other markets, Modine is shifting from being a component
supplier to being a module or system supplier. This requires the
company to assume more design responsibility as well. To better
serve its customer base, Modine has institutionalized the concept
of continuous improvement within its manufacturing operations and
established certified-quality systems. The result has been improved
productivity and throughput in Modine's plants.
Demand for improved products and systems continues to be strong
in the passenger-car and light-truck market. Need to reduce the
weight of products has driven customers to prefer aluminum over
steel, copper, and brass. Regulations for emissions and engine
efficiency have stimulated the need for fuel coolers, improved
engine-oil coolers, higher-performing transmission-cooler
designs, and a variety of alternative coolers; and Modine has a
broad offering of all of these products.
In April 1998, Modine began construction of a plant in
Pontevico, Italy, to produce heat-exchange components and
modules for the automotive market.
Modine's customer base continues to become more global in
nature. As customers increasingly expect suppliers to support
their global initiatives through local manufacturing
operations, Modine is carefully and strategically assessing the
need to expand geographical production into such areas as Latin
America and the Pacific Rim.
OEM medium- and heavy-truck market: The largest growth in
Modine's 1997-98 sales was to OEMs of medium and heavy trucks.
Revenues increased 19.5 percent over the prior year and
represented 17.7 percent of Modine's consolidated sales in
fiscal 1998. Strong growth resulted from favorable industry
dynamics in North America and Europe.
A changing industry dynamic that has potential for larger
rewards, with potential for larger risks, is the shift of
responsibility from the OEMs to suppliers for the design,
delivery, warranty, and management of complete systems.
Customer orders remain strong in North America, where the
OEMs are continuing to step up their line rates. The North
American market also is at the beginning of a shift to aluminum
radiators from copper/brass products in medium and heavy trucks.
Currently, there is little aluminum-radiator production for
North American large trucks. But this could change dramatically
within the next three to five years as additional testing is
concluded.
In contrast, virtually all large trucks in Europe are equipped
with aluminum radiators. Modine's new aluminum-product plant in
Kirchentellinsfurt, Germany, will bring greater efficiencies in
production and product flow, making the company more competitive
in that continent's truck market. The plant also gives Modine
additional capacity for larger market penetration in the future.
OEM off-highway market: In fiscal 1998, Modine's business with
off-highway-equipment manufacturers constituted the market with
the second-highest growth over the prior year and provided 14.2
percent of the year's revenues. The 16.6-percent annual sales
increase reflected agricultural- and construction-equipment
market volumes that are at the highest level in the last decade.
Much of the growth and product-line expansion in the construction-
equipment market has been in small and light-size equipment.
The off-highway industry is becoming a more globalized business
as OEMs expand their presence off-shore. However, North America
remains a strong center due to worldwide competitiveness.
Emissions regulations are driving some of the growth here for
Modine, much as they did earlier for trucks. Tighter regulations
started in the U.S.A. in 1996 and become more stringent over a
five-year period. A similar situation will begin in Europe in 1999.
This favors Modine's higher-technology product line as it drives the
need for more charge-air coolers and more-efficient heat exchangers.
As in other OEM businesses, there is a trend toward
partnerships with customers. As a result, Modine will assume more
responsibility for system design. Modine's competitive advantages
include a full line of product offerings plus the engineering and
technical expertise to design and build complete systems.
During fiscal 1998, Modine converted the Camdenton, Missouri,
plant to an aluminum-products factory that primarily serves the
off-highway market. Continued growth compels Modine to address
additional capacity issues in the new fiscal year. In Europe,
Modine will begin construction of a new plant in Tubingen,
Germany, that will give the company some lower-cost, more-
efficient production of copper-brass radiators.
OEM industrial market: Sales to engine-manufacturing customers
provided the biggest impetus to an overall 6.6-percent revenue
growth in Modine's OEM industrial market, which made up 12.8
percent of fiscal 1998 sales. A portion of the engine
production goes to the truck industry, which, as mentioned
above, has been operating at high levels.
U.S. exports to engine manufacturers and to other industrial-
market customers also contributed to the sales increase, the
third-largest for Modine last year. The market includes a
diverse array of customers and industries whose products
include refrigeration equipment, compressors, generator sets,
lift trucks, and other applications.
Vehicle aftermarket: Modine's revenues from its worldwide
aftermarket business rose slightly, compared with the year
before. Aftermarket sales formed 22.2 percent of the company's
total last year.
Effects of the El Nino weather pattern were reported in the
industry, particularly in North America. It is generally believed
that the mild summer and winter resulted in lower demand for
aftermarket products such as radiators, which are affected by
temperature extremes. In addition, continued heavy competition
from Asian producers, where capacity normally going to original-
equipment markets has been redirected to the aftermarket, has kept
pressure on pricing. On the positive side, the Mexican aftermarket
has shown growth and the new fiscal year will also see expansion in
Central America.
There will be a steady growth emphasis in the United States on
new market channels in order to increase the company's market
share. Growth in Europe will be boosted by the construction of a
new plant in Mill, The Netherlands, that will make aluminum heat
exchangers for the passenger-car aftermarket. Also, in fiscal 1998,
Modine added new sales and service centers in Switzerland and Italy
to serve the replacement-parts markets there.
Building-HVAC market: Modine's building-HVAC (heating,
ventilating, air-conditioning) sales in fiscal 1998 were flat,
compared with the previous year. As in the aftermarket,
relatively mild U.S. temperatures in recent years, during both
the summers and winters, held down the volume of business.
Modine began taking steps last year -- via product-line
expansion and more proactive, customer-focused programs -- to
more rapidly grow this business, which was 7.5 percent of total
sales. An "Indoor Air Solutions" theme and a changed market
identity make up the center of an aggressive marketing-
communications and ad campaign. "Indoor Air Solutions" refers to
systems that can move, filter, heat, cool, and control the humidity
of air in a building.
Customer training received renewed focus as Modine brought
sales representatives together for a number of training courses.
The newly developed Breeze brand of computerized selling and
training tools were developed to augment Modine's marketing
efforts. Several products from previously acquired businesses
were consolidated under the Modine brandname during fiscal 1998.
In the fourth fiscal quarter, Modine acquired Sun Technology
Corporation, which manufactures Ray-Tec infrared heaters for
commercial, industrial, and residential buildings. This
capacity to manufacture its own infrared heaters is expected
to favorably impact Modine's future sales and earnings. The
company is evaluating additional growth potential in the
building-HVAC market through both acquisitions and
associations with other global companies.
Sales by product line in fiscal 1998
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With increased customer demand for more modular assemblies and
complete heat-transfer systems, Modine's products are increasingly
designed together as a package. Additional business of this type
will result in the establishment of more plants to meet customers'
needs and in the company selling more content, from several product
lines, per application.
Radiators: At 39.7 percent of total revenues, radiators and
radiator cores remain the largest product-line category for
Modine. A little over half of these products are sold through
Modine's aftermarket operations in North America and Europe.
Slightly more than one-quarter of the total product category
is manufactured and sold by the company's overseas plants.
While aluminum radiators make up a significant portion of
European production, they constitute only a small but growing
portion in North America, mainly in the aftermarket.
A trend of this product line in the aftermarket is the
continuing shift of customer preference for complete
replacement radiators at the expense of radiator cores, which
favors Modine's strength in the aftermarket.
On the OEM side, the newly-introduced Square-Wave serpentine-
fin radiator should prove popular with the makers of off-
highway equipment. The product is designed to have less
clogging and, therefore, less downtime on these big machines.
Charge-air coolers: Charge-air coolers recorded the greatest
annual sales growth of all product lines, rising 18.0 percent
in fiscal 1998 and constituting 12.1 percent of total sales.
Environmental factors have been driving the sales growth. U.S.
emissions regulations on big trucks sparked demand in the early
'90s, followed by similar regulations in Europe. In addition,
Modine supplies charge-air coolers for the European diesel-car
market. Growth of the total product line is expected to
continue because of emissions regulations in off-highway
markets.
Oil coolers: Sales of oil coolers grew 11.2 percent over the
prior year, representing the second-highest increase among
Modine's product lines. Oil coolers now make up 17.4 percent of
total sales. Sales growth from European operations fueled the
majority of the annual increase. An expanded plant in
Mezokovesd, Hungary, added capacity last year.
Vehicular air-conditioning: Revenues from air-conditioning
components and systems for vehicles were 20.1 percent of
Modine's total in fiscal 1998. Reported sales were down 3.9
percent from the year before, partly due to the translation
effects of a stronger U.S. dollar. There also were fewer sales
of dealer-installed kits in North America, where air-
conditioning is essentially standard equipment. The growth
potential is in Europe, where only an estimated 30 percent of
OEM cars will have these systems installed in 1998.
Building-HVAC: The building-HVAC product-line's sales,
constituting 7.5 percent of Modine's total, were essentially
flat year-over-year. As discussed earlier, management has
targeted this product line for increased growth in the future.
A small acquisition in January 1998 added a line of infrared
heaters. The new fiscal-year's sales should also be stimulated
by Modine's recently introduced Hot Dawg heater for residential
garages, a product that already has stirred interest in the
industry.
The use of Modine's patented PF (parallel flow) technology in
the building-HVAC market should grow in the future. For
example, Modine developed a unique, V-shaped evaporator using
the PF design. As part of a national field-test program, a
Florida company tested this product in residential air-
conditioning systems and found that it operates at higher
efficiency while providing significantly more dehumidification
than competing technologies. This is the reverse of what
typically happens, where dehumidification is usually sacrificed
for higher efficiency.
Capital expenditures
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Capital expenditures of $80.7 million in fiscal 1998 were 48.0-
percent higher than the prior year. Significant expenditures
included those for the Racine technical center, expansions of
Modine's European facilities, building-improvement projects at
domestic plant locations, process improvements, tooling for new
products, and the addition of processing equipment at a number of
facilities. Capital expenditures were financed primarily from cash
generated internally as well as from some external borrowings.
Outstanding commitments for capital expenditures at March 31,
1998, were approximately $48.1 million. Most of the commitments
relate to the Racine technical center, plant expansions and
conversions, process improvements, tooling for new products, and
various new equipment. A year earlier, there were outstanding
commitments of $27.0 million.
Research and development
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Modine's investment in research and development of $16.8 million
rose less than one percent in fiscal 1998 following 15.8- and 33.1-
percent increases in each of the two prior years, respectively.
A recent new product that has completed its first year of
production is the latent-heat battery, a heat-storage device that
currently is an option on a single "premium" car made in Europe.
The product stores engine heat for release upon startup of the
engine. It delivers immediate heating and defrosting, less engine
wear, and a reduction in emissions.
In another endeavor, Modine is a key player in a U.S. program
to develop fuel-cell technology. The company is working with several
other entities to develop practical fuel cells as possible
alternatives to the internal combustion engine. Each fuel-cell
system contains about a half-dozen heat exchangers, and Modine is
well positioned to be a major supplier for this technology.
To test new product designs at the extreme, Modine's R&D function,
for most of this decade, has been working with Roger Penske's racing
team for "Championship" cars. Modine supplies all of the heat
exchangers for these racing cars to study them under the most grueling
circumstances. Since Modine began this relationship, the products have
performed flawlessly and the company has gained valuable data and
experience that can be considered in more mundane applications.
The company's R&D efforts cover process technology as well as
new products. This results in many, more-efficient techniques
and equipment that are proprietary to Modine. Also, at the end
of fiscal 1998, Modine owned a total of 998 patents in various
countries, an 8.4-percent increase over the year before.
Employment and quality achievement
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Total worldwide employment at Modine was 8,375 on March 31,
1998, up 6.4 percent from the previous year. The number of
corporate administrative staff remained the same as the
previous year.
In the march to improved quality systems, the employees at
14 Modine plants earned 20 quality awards from customers during
the fiscal year. Six plants also received seven recertifications
from their customers or regulatory agencies.
Six plants were registered to ISO-9002 during the year by
Lloyd's Register Quality Assurance. The International Organization
for Standardization (ISO) develops common manufacturing, trade, and
communications standards to facilitate the worldwide exchange of
goods and services. Modine plants in Clinton, Knoxville, and
Lawrenceburg, Tennessee; McHenry, Illinois; Richland County, South
Carolina; and Trenton, Missouri, joined three other Modine plants
registered to the standard. Modine's plant in Goch, Germany, became
registered to ISO-9001, which includes control of product design.
Seven sites upgraded their registrations to include the QS-9000
requirements developed by Chrysler, Ford, General Motors, and four
truck manufacturers. They include the Automotive, Truck, and Heavy
Duty and Industrial Divisions at corporate headquarters in Racine,
Wisconsin, and plants in Berndorf, Austria; Harrodsburg, Kentucky;
Joplin and Trenton, Missouri; Logansport, Indiana; and Richland
County, South Carolina. QS-9000 is a quality-system requirement,
based on ISO-9000, that includes other requirements specific to
the domestic automotive and heavy-truck industries. The Berndorf,
Austria, plant was also registered to VDA 6.1, the automotive
quality standard in Germany.
Modine plants and divisions continue to pursue registration to
ISO-9000, QS-9000, and VDA. Meeting these requirements helps
Modine to position itself to obtain new business as well as to
meet its customers' requirements at facilities worldwide.
Hedging and foreign-currency-exchange contracts
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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.
Environmental matters
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Modine complies worldwide with laws relating to the protection
of the environment. Expenditures to comply with these increasingly
complex and stringent laws could be significant in future years but
are not expected to have a material impact on the company's
competitive or financial position. If new laws containing more
stringent requirements are enacted, expenditures may be higher
than the estimates of future environmental costs provided below.
About $0.7 million in capital expenditures related to
environmental projects were made in 1997-98. Modine currently
expects expenditures for environmentally related capital
projects to be about $2.8 million in 1998-99.
Environmental expenses charged to current operations, including
remediation costs, totaled about $2.3 million in fiscal 1998. These
expenses include operating and maintenance costs: for solid-waste
treatment, storage, and disposal and for air- and water-pollution-
control facilities; for costs incurred in conducting environmental-
compliance activities; and for other matters.
Modine accrues for environmental remediation activities relating
to past operations -- including those under the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA),
often referred to as "Superfund," and under the Resource Conservation
and Recovery Act (RCRA) -- when it is probable that a liability has
been incurred and reasonable estimates can be made.
Modine from time to time receives notices from the Environmental
Protection Agency and state environmental agencies that the company
is a "potentially responsible party" (PRP) under CERCLA and state law.
These notices claim potential liability for remediation costs of
disposal sites that are not company-owned and allegedly contain
wastes attributable to Modine from past operations. Modine's share
of remediation costs at these sites cannot be accurately predicted
due to the large number of PRPs involved. For the 9 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 ("de minimus"), there may be
insufficient documentation linking Modine to the site, and the
other PRPs have the financial resources to meet their obligations.
It is likely that Modine will, in the future, incur additional
remediation charges, but such costs are unknown and not determinable
at this time. There are no currently known, unrecorded liabilities
that would have a material effect on the company's consolidated
financial position or results of operations.
European currencies and the Euro
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Modine does business in a number of countries throughout Europe.
The company is preparing for the arrival of the Euro as a replacement
for many national currencies and will be able to conduct business in
the new currency beginning in January 1999.
Year 2000
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In response to the Year 2000 issue, Modine initiated a project
in early 1997 to identify, evaluate, and implement changes to its
existing computerized business systems. The company is addressing
the issue through a combination of modifications to existing
programs and of conversions to Year 2000 compliant software. The
total cost associated with the required modifications is not
expected to be material to Modine's consolidated results of
operations and financial position and is being expensed as
incurred.
In addition, the company is communicating with its customers,
suppliers, and other service providers to determine whether they
are actively involved in projects to ensure that their products
and business systems will be Year 2000 compliant.
If modifications and conversions by Modine and those with whom
it conducts business are not made in a timely manner, the Year
2000 issue could have a material adverse effect on the company's
business, financial condition, and results of operations.
Forward-looking statements
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Other than historical matters or comparative results, the matters
discussed in this report, particularly the sales forecast and factors
affecting earnings, include forward-looking statements that involve
risks and uncertainties. These cautionary statements are being made
pursuant to the provisions of the Private Securities Litigation Reform
Act of 1995 and with the intention of obtaining the benefits of the
"safe harbor" provisions of the Act. Investors are cautioned that any
forward-looking statements made by Modine are not guarantees of future
performance and that actual results may differ materially from those
in the forward-looking statements as a result of various factors,
including: customers' integration of products currently being supplied
by the company; the success of Modine or its competitors in obtaining
the business of the customer base; the ability to pass on increased
costs to customers; variation in currency-exchange rates in view of
a large portion of the company's business being nondomestic; the
impact of Year 2000 compliance by the company or those entities with
which the company does business; labor relations at Modine, its
customers, and its suppliers, which may affect the continuous supply
of product; and the ability to improve acquisitions' operations.
In making statements about Modine's fiscal-1999 operating results,
management has assumed relatively stable economic conditions in the
United States and worldwide, no unanticipated swings in the business
cycles affecting customer industries, and a reasonable legislative
and regulatory climate in those countries where Modine does business.
Readers are cautioned not to place undue reliance on Modine's
forward-looking statements, which speak only as of the date of
this report's writing.
Management's discussion and analysis of results from operations
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Sales
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Sales for the year ended March 31, 1998, were $1.04 billion, up
$41.4 million or 4.1 percent from the prior year. Increases were
greatest in the medium- and heavy-truck markets, followed by the
off-highway-equipment market, partially offset by a slight decline
in the car and light-truck market due to currency-translation
effects. With about one-third of Modine's annual sales being in
other than U.S. currency, the stronger dollar again had a negative
translation effect of approximately $45.5 million on fiscal-1998
consolidated sales, compared with the prior year.
Fiscal-1997 sales were $999.0 million, up $8.6 million or
0.9 percent from the prior year. A full year of sales from a fiscal
1996 acquisition was partially offset by the mid-year sale of a
copper-tubing plant in Dowagiac, Michigan, in that same year.
Sales reductions included an unfavorable exchange-rate effect of
approximately $22 million and a reduction in demand for passenger-
car and truck components.
Sales for fiscal 1996 were $990.5 million, up $77.5 million or
8.5 percent. European operations added $54.0 million to sales, with
just over half of that from exchange-rate gains. The acquisition of
the former Signet Systems business as of July 31, 1995, also added
$46.7 million. Declines occurred as a result of the sale of the
copper-tubing plant in October 1995, and in passenger-car and
residential-HVAC components.
Gross profit
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Gross profit was 28.9 percent of sales for fiscal 1998, 1.1
percentage points higher than 1997, primarily due to efficiency
improvements in Europe, the volume effect of the truck market,
and reduced material costs.
For fiscal 1997, gross profit was 27.8 percent of sales, 2.0
percentage points higher than the previous year, primarily due to
decreased material costs and to cost improvements mainly in Europe.
Gross profit in fiscal 1996 was 25.8 percent of sales, 2.7
percentage points lower than in fiscal 1995. The primary cause
was increased material costs. Also affecting the percentage were
higher sales by the European operations and an acquisition, both
of which were earning lower than company-average gross margins.
Selling, general, and administrative (SG&A) expenses
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Primarily as a result of sales increases, SG&A expense for
fiscal 1998 increased by $6.8 million, or 3.8 percent, from the
prior year to $183.3 million. As a percent of sales, however,
SG&A decreased from 17.7 percent to 17.6 percent.
For fiscal 1997, SG&A expense totaled $176.6 million, up $15.5
million or 9.6 percent from the previous year. Major causes for
the increase were the inclusion of an acquisition for a full year
plus additional sales branches and distribution expenses in the
aftermarket.
In fiscal 1996, SG&A expense totaled $161.1 million, up $12.7
million or 8.5 percent from fiscal 1995. Included in the year
was the eight-month effect of the Signet Systems acquisition.
Income from operations
- ----------------------
In fiscal 1998, income from operations was $117.5 million,
up $16.6 million or 16.5 percent. European operations, strong
activity in the North American truck market, and lower material
costs account for the majority of this increase.
Fiscal-1997 income from operations was $100.9 million, up
$6.6 million or 7.0 percent. The improvement was primarily due
to reduction in material prices and to cost improvements.
Income from operations in fiscal 1996 was $94.3 million,
down $17.8 million or 15.9 percent, primarily due to increases
in material prices.
Interest expense
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Fiscal-1998 interest expense was $4.0 million, down $1.0
million or 19.3 percent from the prior year. Lower interest
rates caused this reduction.
Fiscal-1997 interest expense was $5.0 million, down $1.8
million or 27.2 percent from the prior year. Reduced debt
and lower interest rates allowed this decrease to occur.
Interest expense in fiscal 1996, at $6.8 million, was up $0.4
million or 6.9 percent as a result of borrowings related to the
Signet Systems acquisition. Interest rates were lower than the
previous year.
Other income, net
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Other income for fiscal 1998 was $2.5 million, which was $0.6
million more than 1997. This increase was due, primarily, to
increases in royalty income.
For fiscal 1997, other income was $1.9 million, which was $9.8
million less than the prior year, primarily due to a gain of
$5.0 million in fiscal 1996 from the sale of the company's
copper-tubing plant and to gains on the sale of other equipment.
Other income in fiscal 1996, at $11.7 million, was $8.5 million
higher than the previous year, due mainly to the sale of assets
referred to above.
Provision for income taxes
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The effective tax rate for fiscal 1998 was 37.5 percent, up 2.7
percentage points from fiscal 1997, due primarily to higher tax
rates on increased foreign earnings. Also, use of tax losses
carried forward in prior years in certain European operations
resulted in an increased tax rate in fiscal 1998.
For fiscal 1997, the effective tax rate was 34.8 percent, down
3.3 percentage points from the prior year. The major cause for
this reduction was utilization of tax losses carried forward
from prior years in Modine's European operations.
The company had a slightly higher effective tax rate in fiscal
1996, at 38.1 percent versus 37.1 percent in the prior year.
Higher rates on certain foreign earnings were the primary factor.
Net earnings
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Net earnings in fiscal 1998 were $72.5 million, representing
7.0 percent of sales and a 17.9 percent return on average
shareholders' investment (ROE). This is an increase of $8.7
million or 13.7 percentage points over fiscal 1997. Improved
European operations, higher North American truck-market sales,
and lower material costs were the major causes of this
improvement.
Fiscal-1997 net earnings of $63.8 million -- 6.4 percent of
sales and a 17.3-percent ROE -- were up 3.9 percent or $2.4
million from the previous fiscal year. Lower material costs and
other cost improvements were the primary causes of the
improvement. The prior fiscal year included $3.1 million, or
approximately 10 cents per diluted share, relating to a gain on
the sale of the copper-tubing business.
Net earnings in fiscal 1996 of $61.4 million -- 6.2 percent of
sales and an 18.7-percent ROE -- were down $7.0 million or 10.3
percent from fiscal 1995. The reduction was primarily due to
increased material costs.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per-share amounts)
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For the years ended March 31 1998 1997 1996
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Net sales $1,040,418 $999,046 $990,493
Cost of sales 739,619 721,626 735,120
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Gross Profit 300,799 277,420 255,373
Selling, General, and Administrative expenses 183,323 176,552 161,082
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Income from operations 117,476 100,868 94,291
Interest Expense (4,010) (4,972) (6,825)
Other income -- net 2,506 1,887 11,683
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Earnings before income taxes 115,972 97,783 99,149
Provision for income taxes 43,501 34,020 37,750
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Net earnings $ 72,471 $ 63,763 $ 61,399
========== ======== ========
Net earnings per share of common stock
Basic $2.44 $2.14 $2.07
Assuming dilution $2.39 $2.10 $2.03
<FN>
The notes to consolidated financial statements are an integral
part of these statements.
Management's discussion of financial position
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Current assets
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Cash and cash equivalents increased by $1.6 million to $36.4
million. Refer to the sources and uses of funds detail in the
accompanying statement of cash flows.
Trade receivables, net of allowances for doubtful accounts, at
$162.2 million, were up $12.4 million due to increased sales
levels and an extended-payment-terms program in the North
American aftermarket.
Inventories increased by $10.6 million to $152.7 million to
support higher sales levels and from a slight decrease in
inventory turns.
Deferred income taxes and other current assets of $41.9 million
increased by $2.5 million due mainly to an increase in tooling
costs not yet billed to customers.
The current ratio decreased slightly to 2.0-to-1 from 2.2-to-1.
Noncurrent assets
- -----------------
Property, plant, and equipment increased by $38.1 million to
$248.3 million due to capital expenditures of $80.7 million,
primarily for production-facility expansion and the
construction of the new technical center in Racine.
Investment in affiliates decreased by $1.1 million, primarily
due to the dividends received from the company's joint venture
in Japan.
Intangible assets decreased by $3.6 million to $59.4 million,
mostly due to amortization of goodwill and to the effect of
foreign-exchange rates on the European portion of goodwill.
Deferred charges and other noncurrent assets increased by $3.6
million to $49.9 million, primarily due to continued recognition
of a surplus in the company's over-funded pension plans.
Current liabilities
- -------------------
Short-term debt and the current portion of long-term debt
increased in net by $6.7 million, mainly due to short-term
borrowing in Europe and North America for financing of
construction projects.
Accounts payable increased by $12.2 million to $84.3 million,
primarily from the effect of supporting a higher sales level.
Accrued compensation and employee benefits increased by $3.6
million due to increased workers' compensation reserves and the
timing of the final pay period relative to the year-end.
Noncurrent liabilities
- ----------------------
Long-term debt increased by $4.4 million to $89.6 million at
yearend as a result of financing for capacity expansion.
As a percent of shareholders' investment, long-term debt was
21.2 percent. Total debt to equity was 26.8 percent, up 0.3
percentage points from fiscal 1997.
Shareholders' investment
- ------------------------
Total shareholders' investment increased by $36.8 million to
$422.5 million, the major change being retained earnings, which
benefited from net earnings of $72.5 million (less dividends
paid of $22.6 million).
The foreign-currency translation adjustment increased by $5.1
million as European currencies weakened against the dollar
during the year.
Additional paid-in capital was up $2.6 million as a result of
treasury-stock sales, while net purchases pushed up treasury
stock by $6.0 million.
During fiscal 1998, $17.0 million was expended to acquire an
additional 523,000 treasury shares; while 354,000 shares were
used to satisfy requirements for stock options, stock awards,
and employee stock-purchase plans.
During fiscal 1997, $6.8 million was expended to acquire an
additional 252,000 treasury shares; while 326,000 shares were
used to satisfy requirements for stock options, stock awards,
and employee stock-purchase plans.
During fiscal 1996, $8.7 million was expended to acquire an
additional 278,000 treasury shares; and 337,000 shares were
used to satisfy requirements for stock options, stock awards,
and employee stock-purchase plans.
Book value per share increased by $1.31 during the year to
$14.24, a 10.7-percent compound annual growth rate since fiscal
1988.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)
- ------------------------------------------------------------------------------
March 31 1998 1997
- ------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 36,410 $ 34,822
Trade receivables, less allowance for doubtful
accounts of $4,585 and $4,140 162,177 149,800
Inventories 152,674 142,115
Deferred income taxes and other current assets 41,922 39,405
--------- ---------
Total current assets 393,183 366,142
--------- ---------
Noncurrent assets:
Property, plant, and equipment - net 248,253 210,115
Investment in affiliates 8,376 9,497
Intangible assets - net 59,355 62,948
Deferred charges and other noncurrent assets 49,857 46,253
--------- ---------
Total noncurrent assets 365,841 328,813
--------- ---------
Total assets $ 759,024 $ 694,955
========= =========
Liabilities and shareholders' investment
Current liabilities:
Short-term debt $ 20,878 $ 2,962
Long-term debt _ current portion 2,835 14,061
Accounts payable 84,345 72,173
Accrued compensation and employee benefits 48,081 44,497
Income taxes 10,073 7,535
Accrued expenses and other current liabilities 26,516 28,771
--------- ---------
Total current liabilities 192,728 169,999
--------- ---------
Noncurrent liabilities:
Long-term debt 89,587 85,197
Deferred income taxes 14,258 13,331
Other noncurrent liabilities 39,976 40,740
--------- ---------
Total noncurrent liabilities 143,821 139,268
--------- ---------
Total liabilities 336,549 309,267
--------- ---------
Shareholders' investment:
Preferred stock, $0.025 par value, authorized
16,000 shares, issued - none - -
Common stock, $0.625 par value, authorized
80,000 shares, issued 30,342 shares 18,964 18,964
Additional paid-in capital 12,384 9,760
Retained earnings 423,001 378,740
Foreign currency translation adjustment (8,102) (3,016)
Treasury stock at cost: 678 and 509 common
shares (20,977) (14,949)
Restricted stock _ unamortized value (2,795) (3,811)
--------- ---------
Total shareholders' investment 422,475 385,688
--------- ---------
Total liabilities and shareholders'
investment $ 759,024 $ 694,955
========= =========
<FN>
The notes to consolidated financial statements are an integral
part of these statements.
Management's discussion of cash flows
- -------------------------------------
Net cash provided by operating activities
- -----------------------------------------
Net cash provided by operating activities in fiscal 1998 was
$102.9 million, up $2.7 million from the prior year mainly as a
result of higher earnings. Working-capital requirements grew as
a result of the increasing sales volume and its net effect on
receivables, inventory, and payables.
Net cash from operating activities in fiscal 1997 was $100.2
million, up $15.6 million from the prior year as a result of
higher earnings and significantly higher noncash adjustments,
which were impacted in the prior year by the gains on sales of
a business and other assets. Also, depreciation was higher and
earnings from affiliates, net of dividends received, were
lower. Working-capital demands were also lower than the prior
year.
Net cash from operating activities in fiscal 1996 was
$84.6 million, up $17.6 million from fiscal 1995. Lower working-
capital demands were the major reasons. A partial offset came
from lower earnings and noncash adjustments (including: gains
from sales of the extruded-copper-tubing business and other
fixed assets; and a reduction in allowance for doubtful
accounts).
Capital expenditures
- --------------------
Capital expenditures for fiscal 1998 were $80.7 million, $26.2
million higher than in fiscal 1997, reflecting: construction of
the Racine technical center, upgrading and expanding European
facilities, and process improvements at the North American
plants.
Capital expenditures for fiscal 1997 were $54.5 million,
slightly lower than the prior year, and included significant
capital improvements and expansions, including a new facility
in South Carolina and several projects in Europe.
Capital expenditures for fiscal 1996 were $55.7 million, up
$21.6 million from the prior year, reflecting new facilities in
South Carolina and The Netherlands, plus other capacity expansions.
Acquisitions, divestiture, sales of assets, and investments in
- --------------------------------------------------------------
affiliates
- ----------
During fiscal 1998, Modine acquired 100 percent of the assets
of Sun Technology Corporation of Shelby Township, Michigan, a
manufacturer of infrared heaters. The cash cost of the acquisition
was $2.6 million, net of cash acquired and a promissory note to the
seller for $320,000. See Note 11 to the consolidated financial
statements for further detail.
In fiscal 1997, Modine acquired a 41.3-percent interest in
Constructions Mecaniques Mota, S.A., an oil-cooler manufacturer in
France, which has been treated as a nonconsolidated affiliate by
Modine. The cost of the investment was $4.2 million. See Note 11 to
the consolidated financial statements for further detail.
During fiscal 1996, Modine acquired 100 percent of the assets
of: Signet Systems, Inc., an air-conditioning systems business
located in Harrodsburg, Kentucky, and Goch, Germany; and
Radiadores Montana, a Spanish aftermarket company. Modine also
purchased the remaining 57-percent interest in Radinam S.A., a
joint-venture company in Mexico. The combined net cash price
of these acquisitions was $56.8 million. The company also
disposed of its extruded-copper-tubing plant in Dowagiac,
Michigan, for $9.1 million. See Note 11. Modine also sold, for
$3.9 million, other equipment that was no longer required.
Changes in debt: short- and long-term
- -------------------------------------
Overall, company debt increased by $17.1 million during fiscal
1998. New borrowings include short-term debt to provide financing
for construction projects in Europe and North America. Also, maturing
debt was refinanced with long-term borrowing.
During fiscal 1997, company debt increased by $1.9 million.
This increase included borrowings in French francs, for the equity
investment during the year, and some additional borrowings in Germany
and The Netherlands relative to facility expansion. These borrowings
were nearly offset by $15.7 million in repayments of long-term debt
and an $8.3-million repayment of short-term debt.
In fiscal 1996, the company made $10.6 million in scheduled and
$35.3 million in discretionary repayments of long-term debt. The
company also added $70.0 million to long-term debt, partly due to
acquisitions and partly to replace certain portions of the long-term
debt that was repaid during the year.
Treasury stock
- --------------
Treasury stock activity is detailed in Management's discussion
of financial position, page 20.
Dividends paid
- --------------
Dividends for fiscal 1998 totaled $22.6 million or 76 cents per
share. An increase of 8 cents per share was declared, effective in
May 1997.
For fiscal 1997, dividends totaled $20.3 million, representing
a rate of 68 cents per share. An increase of 8 cents per share
was declared, effective in May 1996.
Dividends for fiscal 1996 were $17.8 million, representing a
rate of 60 cents per share. An increase of 8 cents per share
was declared, effective in May 1995.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- ----------------------------------------------------------------------------------------
For the years ended March 31 1998 1997 1996
- ----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 72,471 $ 63,763 $ 61,399
Adjustments to reconcile net earnings with
cash provided by operating activities:
Depreciation and amortization 41,767 41,504 39,641
Gain on sale of business - - (5,009)
Pensions (2,256) (2,275) (3,000)
Loss/(gain) from disposition of property,
plant, and equipment 837 1,038 (1,852)
Deferred income taxes (91) (1,452) (1,759)
Provision for losses on accounts receivable 497 (866) (1,477)
Undistributed earnings of affiliates,
net of dividends received 679 51 (1,202)
Other - net 2,884 1,184 1,421
--------------------------------
116,788 102,947 88,162
--------------------------------
Change in operating assets and liabilities
excluding acquisitions:
Trade receivables (16,526) (7,851) 12,303
Inventories (13,236) 3,889 (3,706)
Deferred income taxes and other current
assets (2,781) (2,725) (6,286)
Accounts payable 13,855 (1,819) (2,716)
Accrued compensation and employee benefits 3,724 2,611 1,447
Income taxes 3,081 (1,000) (1,996)
Accrued expenses and other current
liabilities (1,977) 4,178 (2,628)
--------------------------------
Net cash provided by operating activities 102,928 100,230 84,580
--------------------------------
Cash flows from investing activities:
Expenditures for property, plant, and
equipment (80,682) (54,529) (55,689)
Acquisitions, net of cash acquired (2,604) (1,629) (56,798)
Proceeds from sale of business - - 9,117
Proceeds from dispositions of assets 1,927 881 3,895
Investments in affiliates - (4,236) -
Increase in deferred charges and other
noncurrent assets (1,003) (1,805) (296)
Other - net (200) (62) 13
--------------------------------
Net cash (used for) investing activities (82,562) (61,380) (99,758)
--------------------------------
Cash flows from financing activities:
Increase/(decrease) in short-term
debt - net 18,597 (8,330) (2,007)
Additions to long-term debt 27,102 25,925 69,967
Reductions of long-term debt (28,607) (15,681) (45,861)
Issuance of common stock, including
treasury stock 4,567 4,265 5,275
Purchase of treasury stock (16,990) (6,832) (8,740)
Cash dividends paid (22,605) (20,292) (17,802)
Other - net - (347) (9)
--------------------------------
Net cash (used for)/provided by financing
activities (17,936) (21,292) 823
--------------------------------
Effect of exchange-rate changes on cash (842) (694) (378)
--------------------------------
Net increase/(decrease) in cash and cash
equivalents 1,588 16,864 (14,733)
Cash and cash equivalents at beginning of year 34,822 17,958 32,691
--------------------------------
Cash and cash equivalents at end of year $ 36,410 $ 34,822 $ 17,958
================================
Cash paid during the year for:
Interest, net of amounts capitalized $ 4,434 $ 5,035 $ 6,849
Income taxes $ 37,715 $ 34,428 $ 37,716
<FN>
The notes to consolidated financial statements are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(In thousands, except per-share amounts)
- -----------------------------------------------------------------------------------------------------------------------------
Foreign- Restricted
For the years Additional currency Treasury stock stock -
ended March 31, Common Stock paid-in Retained translation at cost unamortized
-------------- ------------------
1998, 1997, and 1996 shares amount capital earnings adjustment shares amount value
- -----------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 30,342 $18,964 $ 7,897 $296,614 $ 5,159 (642) $(16,669) $(3,693)
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings -- -- -- 61,399 -- -- -- --
Cash dividends, $0.60 per share -- -- -- (17,802) -- -- --
Purchase of treasury stock -- -- -- -- -- (278) (8,740) --
Stock options and awards
including related tax benefits -- -- 879 (704) -- 191 4,005 (1,120)
Employee stock-purchase and
-ownership plans -- -- 367 (314) -- 146 3,797 --
Foreign-currency translation
adjustment -- -- -- -- (1,724) -- -- --
Amortization of deferred
compensation under
restricted stock plans -- -- -- -- -- -- -- 1,105
- -----------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 30,342 18,964 9,143 339,193 3,435 (583) (17,607) (3,708)
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings -- -- -- 63,763 -- -- -- --
Cash dividends, $0.68 per share -- -- -- (20,292) -- -- -- --
Purchase of treasury stock -- -- -- -- -- (252) (6,832) --
Stock options and awards
including related tax benefits -- -- 603 (3,627) -- 214 6,299 (1,297)
Employee stock-purchase and
-ownership plans -- -- 14 (297) -- 112 3,191 --
Foreign-currency translation
adjustment -- -- -- -- (6,451) -- -- --
Amortization of deferred
compensation under
restricted stock plans -- -- -- -- -- -- 1,194 --
- -----------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 30,342 18,964 9,760 378,740 (3,016) (509) (14,949) (3,811)
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings -- -- -- 72,471 -- -- -- --
Cash dividends, $0.76 per share -- -- -- (22,605) -- -- -- --
Purchase of treasury stock -- -- -- -- -- (523) (16,990) --
Stock options and awards
including related tax benefits -- -- 2,583 (5,585) -- 346 10,736 (798)
Employee stock-purchase and
-ownership plans -- -- 41 (20) -- 8 226 --
Foreign-currency translation
adjustment -- -- -- -- (5,086) -- -- --
Amortization of deferred
compensation under
restricted stock plans -- -- -- -- -- -- 1,814
- -----------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 30,342 $18,964 $12,384 $423,001 $(8,102) (678) $(20,977) $(2,795)
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
The notes to consolidated financial statements are an integral
part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Significant accounting policies
-------------------------------
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 the company'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 consolidations. Operations of subsidiaries outside the
United States and Canada are included for periods ending one month prior
to the company's year end in order to ensure timely preparation of the
consolidated financial statements. Investments in affiliated companies
in which ownership exceeds 20 percent are accounted for by the equity
method. The investments are stated at cost plus a proportionate share of
the undistributed net income. The company's share of the affiliates' net
income is reflected in net earnings.
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 a separate component of shareholders' investment.
Translation adjustments relating to countries with highly inflationary
economies and foreign-currency transaction gains or losses are included
in net earnings.
Financial instruments: Foreign-exchange options and forward contracts
---------------------
on foreign currencies are entered into by the company as hedges against the
impact of currency fluctuations on certain sales and purchase transactions
and are not used to engage in speculation. Gains and losses are recognized
when these instruments are settled.
Income taxes: Deferred tax liabilities and assets are determined based
------------
on the difference between the amounts reported in the financial statement
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: In fiscal 1998, the company adopted Statement of
------------------
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share."
Accordingly, 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. All prior-period amounts have been restated
for comparable purposes. Also see Note 7.
Cash equivalents: For purposes of the cash flows statement, the
----------------
company considers all highly liquid investments with a maturity 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.
------------------------------
Depreciation is provided using, principally, declining-balance methods
for machinery and equipment, and the straight-line method for buildings
and other assets over their expected useful lives. 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.
The company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," at
the beginning of fiscal 1997. This statement requires recognition of
impairment losses for long-lived assets whenever events or changes in
circumstances result in the carrying amount of the assets exceeding the
sum of the expected future cash flows associated with such assets. The
measurement of the impairment losses to be recognized is to be based on
the difference between the fair values and the carrying amounts of the
assets. The effect of the adoption of this policy on April 1, 1996,
was immaterial to the consolidated financial results of the company.
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.
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: The company has elected to account for
------------------------
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation cost for stock options is
measured at the excess, if any, of the quoted market price of the company
stock at the date of the grant over the amount an employee must pay to
acquire the stock. Also see Note 18.
Accounting principles to be adopted: In 1997, the Financial
-----------------------------------
Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," and, in 1998, issued SFAS
No. 132, "Employers' Disclosures About Pensions and Other Postretirement
Benefits." These standards, which the company will adopt in fiscal
1999, expand or modify disclosures and, accordingly, will not have
an effect on the company's liquidity, financial position, or results
of operations.
Reclassifications: Certain prior-year amounts have been reclassified
-----------------
to conform with the fiscal-1998 presentation.
2 Research and development costs
------------------------------
Research and development costs charged to operations totaled
$16,816,000 in fiscal 1998, $16,804,000 in fiscal 1997, and
$14,512,000 in fiscal 1996.
3 Pension plans
-------------
Domestic qualified defined-benefit plans: The company 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 on that
same basis or a monthly retirement benefit amount for various hourly
plans. 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. Fiscal-1996 results include plans
of the company's Signet acquisition and the effects of the Dowagiac
divestiture.
Net pension credits, computed using the projected unit credit method,
include the following components:
(In thousands)
- ----------------------------------------------------------------------------
Years ended March 31 1998 1997 1996
- ----------------------------------------------------------------------------
Benefits earned during the year $ 4,638 $ 4,162 $ 4,035
Interest accrued on benefits
earned in prior years 8,403 7,317 6,720
Actual return on assets (29,206) (12,263) 2,941
Net amortization and deferral 14,653 (1,793) (16,982)
- ----------------------------------------------------------------------------
Net pension (credit) $ (1,512) $ (2,577) $ (3,286)
- ----------------------------------------------------------------------------
Actuarial assumptions:
Discount rate (to calculate
present value of future benefits) 7.5% 7.5% 7.5%
Average salary-growth rate 5.0% 5.5% 5.5%
Return on plan assets 9.0% 9.0% 9.0%
- ----------------------------------------------------------------------------
Funded status of the plans at March 31, 1998 and 1997:
(In thousands)
- ----------------------------------------------------------------------------
Assets exceed Accumulated
accumulated benefits
March 31, 1998 benefits exceed assets
- ----------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $ (83,376) $(544)
Nonvested (5,561) (301)
------------------------
Accumulated benefit obligation (88,937) (845)
Effect of projected salary increases (31,509) --
------------------------
Projected benefit obligation (120,446) (845)
Less: Plan assets at fair value 186,848 793
------------------------
Plan assets in excess of/(less than)
projected benefit obligation 66,402 (52)
Adjusted for items not yet recognized
in earnings:
Unrecognized net benefit (asset)/obligation
remaining from initial adoption
of FASB Statement No. 87 (366) (2)
Effect of benefit changes on
prior years' service cost 1,443 277
Remaining unrecognized net (gain)/loss (20,582) 114
Adjustment to recognize minimum liability -- (389)
- ----------------------------------------------------------------------------
Prepaid/(accrued) pension expense
included in the balance sheets $ 46,897 $ (52)
- ----------------------------------------------------------------------------
(In thousands)
- ----------------------------------------------------------------------------
Assets exceed Accumulated
accumulated benefits
March 31, 1997 benefits exceed assets
- ----------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $ (70,136) $(42)
Nonvested (4,808) --
-------------------------
Accumulated benefit obligation (74,944) (42)
Effect of projected salary increases (30,351) --
-------------------------
Projected benefit obligation (105,295) (42)
Less: Plan assets at fair value 160,290 36
-------------------------
Plan assets in excess of/(less than)
projected benefit obligation 54,995 (6)
Adjusted for items not yet recognized
in earnings:
Unrecognized net benefit (asset)/obligation
remaining from initial adoption
of FASB Statement No. 87 (440) --
Effect of benefit changes on
prior years' service cost 1,256 --
Remaining unrecognized net (gain)/loss (12,232) 13
Adjustment to recognize minimum liability -- (13)
-------------------------
Prepaid/(accrued) pension expense
included in the balance sheets $ 43,579 $ (6)
- ----------------------------------------------------------------------------
As of March 31, 1998 and 1997, the plans held 1,624,000 and
1,870,000 shares, respectively, of Modine common stock.
Defined-benefit plans of foreign subsidiaries: The company'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 thousands)
- ----------------------------------------------------------------------------
Years ended March 31 1998 1997
- ----------------------------------------------------------------------------
Expense recognized $ 1,150 $ 913
Accumulated benefit obligation 10,774 10,155
Projected benefit obligation 12,197 11,431
Fair value of plan assets 1,128 601
- ----------------------------------------------------------------------------
Actuarial assumptions:
Discount rate (to calculate present
value of future benefits) 5.5%-12.5% 7.5%-12.5%
Average salary-growth rate 3.0%-8.5% 3.0%-8.5%
- ----------------------------------------------------------------------------
Domestic qualified defined-contribution plans: The company has
---------------------------------------------
several 401(k) and savings plans that cover most of its domestic
employees. These plans provide company matching under various
formulas. The cost of the company's contributions to the plans
(including stock purchase plans discussed in Note 18) for fiscal
1998, 1997, and 1996 were $6,666,000, $6,424,000, and $6,454,000,
respectively.
4 Postretirement benefits other than pensions
-------------------------------------------
The company 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.
Postretirement benefit expense:
(In thousands)
- ----------------------------------------------------------------------------
Years ended March 31 1998 1997 1996
- ----------------------------------------------------------------------------
Service cost $ 310 $ 322 $ 293
Interest cost 1,624 1,653 1,525
Net amortization (560) (522) (582)
- ----------------------------------------------------------------------------
Net periodic postretirement
benefit cost $1,374 $1,453 $1,236
- ----------------------------------------------------------------------------
Postretirement benefit liability:
(In thousands)
- ---------------------------------------------------------------------------
March 31 1998 1997
- ---------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $17,055 $17,147
Fully eligible active plan participants 1,742 1,761
Other active plan participants 3,908 4,212
-----------------
Total accumulated postretirement benefit obligation 22,705 23,120
Net gains/(losses) 1,042 510
Unamortized net reduction in obligation 3,036 3,509
- ----------------------------------------------------------------------------
Accrued postretirement benefit obligation $26,783 $27,139
- ----------------------------------------------------------------------------
These plans are unfunded. The company periodically amends the plans
changing the contribution rate of retirees and the amounts and forms of
coverage. An annual limit on the company'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 the company's then current cost. These
changes reduced the accrued obligation and the reduction is being
amortized as a component of the benefit cost. The Signet acquisition
added to the fiscal 1996 obligation while the Dowagiac divestiture
reduced it.
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.5 percent at both March 31, 1998 and 1997. The
projected healthcare costs trend rates used were 9 percent for both fiscal
1998 and 1997, and 10-11 percent for fiscal 1996, trending down gradually to
5 percent over several years. The effects of these assumption changes on
accrued postretirement benefit cost and related expense are being amortized.
The healthcare-cost trend-rate assumption can have a significant effect
on the amounts reported. Increasing the assumed healthcare-cost trend rates
by one percentage point in each year would have increased the accumulated
postretirement benefit obligation by $1,406,000 as of March 31, 1998, and
the net periodic postretirement benefit cost for fiscal 1998 by $110,000.
5 Leases
------
The company leases various facilities and equipment. Rental
expense under operating leases totaled $10,912,000 in fiscal 1998,
$11,876,000 in fiscal 1997, and $12,211,000 in fiscal 1996.
Future minimum rental commitments at March 31, 1998, under
noncancelable leases were:
(In thousands)
- ----------------------------------------------------------------------------
Years ending March 31
- ----------------------------------------------------------------------------
1999 $ 6,757 2002 $ 937
2000 4,788 2003 586
2001 3,008 2004 and beyond 2,550
- ----------------------------------------------------------------------------
Total future minimum rental commitments $18,626
- ----------------------------------------------------------------------------
6 Income taxes
------------
Income-tax expense attributable to income from operations consists of:
(In thousands)
- -----------------------------------------------------------------------------
Years ended March 31 1998 1997 1996
- -----------------------------------------------------------------------------
Federal:
Current $26,913 $25,171 $29,497
Deferred (55) 265 (930)
State:
Current 4,008 3,769 5,646
Deferred 22 134 (49)
Foreign:
Current 12,506 6,692 4,613
Deferred 107 (2,011) (1,027)
- ----------------------------------------------------------------------------
Totals charged to earnings $43,501 $34,020 $37,750
- ----------------------------------------------------------------------------
Income-tax expense attributable to income from operations
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 1998 1997 1996
- ----------------------------------------------------------------------------
Statutory federal tax 35.0% 35.0% 35.0%
State taxes, net of federal benefit 2.3 2.6 3.6
Taxes on non-U.S. earnings
and losses 0.2 (2.2) 0.7
Other -- (0.6) (1.2)
- ----------------------------------------------------------------------------
Effective tax rate 37.5% 34.8% 38.1%
- ----------------------------------------------------------------------------
The significant components of deferred income-tax expense
attributable to income from operations are as follows:
(In thousands)
- ----------------------------------------------------------------------------
Years ended March 31 1998 1997 1996
- ----------------------------------------------------------------------------
Pensions $ 1,617 $ 1,473 $ 1,790
Depreciation 1,201 627 (260)
Inventories 432 161 (812)
Employee benefits (1,357) (994) (727)
Other (1,819) (2,879) (1,997)
- ----------------------------------------------------------------------------
Totals charged to earnings $ 74 $(1,612) $(2,006)
- ----------------------------------------------------------------------------
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 1998 1997
- ----------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable $ 1,421 $ 1,174
Inventories 3,401 3,815
Plant and equipment 1,127 552
Employee benefits 20,067 18,677
Net operating-loss and tax-credit carry-forwards 6,144 5,734
Other 7,380 7,590
-----------------------
Total gross deferred assets 39,540 37,542
Less valuation allowance 3,947 4,127
-----------------------
Net deferred tax assets 35,593 33,415
-----------------------
Deferred tax liabilities:
Pension 18,585 17,299
Plant and equipment 9,376 8,722
Other 1,497 1,098
-----------------------
Total gross deferred tax liabilities 29,458 27,119
- ----------------------------------------------------------------------------
Net deferred tax asset $ 6,135 $ 6,296
- ----------------------------------------------------------------------------
The valuation allowance for deferred tax assets as of April 1, 1997, was
$4,127,000. The allowance decreased by $180,000 during the year and relates
primarily to certain, foreign, net-operating-loss carry-forward activities.
At March 31, 1998, the company had net foreign-tax-credit carry-forwards
of $96,000 that will expire in 1999. Tax-loss carry-forwards of $12,514,000
exist in jurisdictions outside the United States. If not utilized against
taxable income, $171,000 and $208,000 of tax losses will expire in 2001 and
2002 respectively. The remaining $12,135,000 of tax losses may be carried
forward indefinitely.
The undistributed earnings of certain foreign subsidiaries and joint-
venture companies totaled $70,016,000 as of March 31, 1998. The earnings
are considered permanently reinvested in foreign operations and, therefore,
no provision has been made for any U.S. taxes.
7 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 1998 1997 1996
- ----------------------------------------------------------------------------
Net earnings per share of common stock:
Basic $2.44 $2.14 $2.07
Assuming dilution 2.39 2.10 2.03
Numerator:
Income available to common
shareholders $72,471 $63,763 $61,399
Denominator:
Weighted average shares
outstanding - basic 29,726 29,833 29,670
Effect of dilutive securities -
options 563 520 596
---------------------------
Weighted average shares
outstanding - assuming dilution 30,289 30,353 30,266
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 $32.63 $26.27 $30.29
Number of shares 318 516 45
- ----------------------------------------------------------------------------
8 Cash and cash equivalents
-------------------------
Under the company'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 $10,002,000, $10,732,000, and $10,046,000 at
March 31, 1998, 1997, and 1996, respectively.
All the short-term investments at March 31, 1998, 1997, and 1996, were
of a duration of less than three months and were treated as cash equivalents,
which approximate fair value.
9 Inventories
-----------
Inventories include:
(In thousands)
- ----------------------------------------------------------------------------
March 31 1998 1997
- ----------------------------------------------------------------------------
Raw materials $ 41,164 $ 41,592
Work in process 41,231 37,317
Finished goods 70,279 63,206
- ----------------------------------------------------------------------------
Total inventories $152,674 $142,115
- ----------------------------------------------------------------------------
10 Property, plant, and equipment
------------------------------
Property, plant, and equipment is composed of:
(In thousands)
- ----------------------------------------------------------------------------
March 31 Depreciable lives 1998 1997
- ----------------------------------------------------------------------------
Land --- $ 6,016 $ 7,306
Buildings and improvements 10-40 years 119,517 112,353
Machinery and equipment 3-12 years 268,157 251,655
Office equipment 5-14 years 36,584 37,360
Transportation equipment 3-7 years 17,181 17,007
Construction in progress --- 63,413 33,233
-------------------
510,868 458,914
Less accumulated depreciation 262,615 248,799
- ------------------------------------------------------------------------
Net property, plant, and equipment $248,253 $210,115
- ----------------------------------------------------------------------------
Depreciation expense was $35,192,000, $35,288,000, and $34,962,000
for the fiscal years ended 1998, 1997, and 1996, respectively.
11 Acquisitions and divestiture
----------------------------
Acquisitions: Effective January 1, 1998, the company acquired the
------------
business, assets, and certain liabilities of Sun Technology Corporation,
located in Shelby Township, Michigan. Sun Technology manufactures Ray-Tec
infrared heaters for commercial, industrial, and residential buildings.
The acquisition purchase price of $3,173,000 was paid for with cash and
a promissory note for $320,000. Goodwill created by the acquisition was
$2,226,000 and is being amortized over 15 years on a straight-line basis.
The investment is being accounted for by the purchase method. This
investment did not have a material effect on the consolidated results
of operations and, accordingly, pro-forma information is not presented.
The results of operations are included in the consolidated financial
statements since the date of acquisition.
On October 31, 1996, the company, through its wholly owned
subsidiary, Modine GmbH, purchased 41.33 percent of Constructions
Mecaniques Mota, S.A. (CMM), based near Marseilles in Provence, France.
CMM produces tube-bundle oil coolers for truck, industrial, and marine
engines. Major European vehicle manufacturers are among its customers.
The purchase price of $4,236,000 was paid for by using an existing
unsecured revolving credit arrangement. Goodwill recorded as part of
the investment was $2,476,000 and is being amortized on a straight-line
basis over 15 years. The investment is being accounted for under the
equity method.
In the first quarter of fiscal 1996, the company made two small
acquisitions. Effective April 1, 1995, the company, through its wholly
owned subsidiary NRF Holding B.V., acquired Radiadores Montana S.A.
based in Granada, Spain. Montana is a manufacturer and distributor to
the automotive aftermarket, producing radiators and radiator cores,
oil coolers, heaters, and air-conditioning condensers and evaporators
for on- and off-highway vehicles and for industrial applications. At
the end of May 1995, the company acquired its partner's 57-percent
ownership in the joint-venture company Radinam S.A., which owns Mexpar
(Manufacturera Mexicana de Partes de Automoviles S.A. de C.V.), a
radiator manufacturer in Mexico City. Mexpar produces automotive
radiators primarily for the aftermarket and also serves original-
equipment manufacturers of vehicles in Mexico.
As of July 31, 1995, the company acquired the business, assets,
and certain liabilities of the Signet Systems Division from The Equion
Corporation. The acquisition included the main plant in Harrodsburg,
Kentucky, an operation in Goch, Germany, and a sales and engineering
office in Detroit, Michigan. Signet, now operating as Modine Climate
Systems Inc., is a full-service supplier of climate-control systems
and components to the automotive, truck, and off-highway vehicle
markets in North America and Europe.
The combined adjusted purchase price of all the fiscal-1996
acquisitions totaled $64,210,000 and was paid for with cash provided
by operations, with new and existing unsecured revolving credit
arrangements, and promissory notes to Equion Corporation totaling
$5,000,000. Combined goodwill and other intangibles created by the
acquisitions were $41,187,000 and $14,000 respectively. Goodwill is
being amortized on a straight-line basis over 15 years.
The results of operations are included in the consolidated
financial statements since the respective effective dates of
acquisition. The majority-owned foreign operations are reported
using a one-month delay, which is consistent with the company's
policy for reporting operations outside the United States and
Canada. All of the acquisitions made in fiscal 1996 have been
accounted for using the purchase method. The company had used
the equity method to account for its interest in Radinam S.A.
prior to majority ownership. The company continues to use the
plants, machinery and equipment, and other assets acquired in
these acquisitions for the manufacture of heat-transfer products.
Details of businesses acquired in purchase transactions were
as follows:
(In thousands)
- --------------------------------------------------------------------------
Year ended March 31 1996
- --------------------------------------------------------------------------
Value of assets acquired, including intangibles,
excluding cash acquired of $2,412 $ 89,096
Liabilities assumed and created (29,036)
Equity investment in affiliates (3,262)
- --------------------------------------------------------------------------
Net cash paid for acquisitions $ 56,798
- --------------------------------------------------------------------------
Divestiture: In October 1995, the company completed the sale of
-----------
its copper-extrusion business in Dowagiac, Michigan, to National Tube
Holding Company, Inc., of Birmingham, Alabama. The company recognized
a pretax gain of $5,009,000, including $1,430,000 from the curtailment
and settlement of certain pension and benefit obligations, negotiated
subsequent to the sale.
On a pro-forma basis, the unaudited consolidated results of
operations would have been as follows had the acquisitions and disposal
made in fiscal 1996, occurred on April 1, 1994:
(Dollars in thousands, except per-share amounts)
- ----------------------------------------------------------------------------
Year ended March 31 (unaudited) 1996
- ----------------------------------------------------------------------------
Net sales $1,001,007
Net earnings 59,807
Net earnings per share:
Basic $2.02
Assuming dilution 1.98
- ----------------------------------------------------------------------------
The pro-forma financial information presented above is for informational
purposes only and does not necessarily reflect the results of operations that
would have occurred had the divestiture and acquisitions, completed in fiscal
1996, taken place on the date assumed above, nor are those results necessarily
indicative of the results of future combined operations.
12 Intangible assets
-----------------
Intangibles include:
(In thousands)
- ----------------------------------------------------------------------------
March 31 1998 1997
- ----------------------------------------------------------------------------
Goodwill $67,020 $66,644
Patents and product technology 8,389 8,389
Other intangibles 1,096 800
---------------------
76,505 75,833
Less accumulated amortization 17,150 12,885
- ----------------------------------------------------------------------------
Net intangible assets $59,355 $62,948
- ----------------------------------------------------------------------------
Amortization expense for intangible assets was $4,761,000, $5,022,000,
and $3,574,000 for the fiscal years ended 1998, 1997, and 1996, respectively.
13 Deferred charges and other noncurrent assets
--------------------------------------------
Deferred charges and other noncurrent assets include:
(In thousands)
- ----------------------------------------------------------------------------
March 31 1998 1997
- ----------------------------------------------------------------------------
Prepaid pension costs - qualified and
nonqualified plans $48,086 $44,539
Other noncurrent assets 1,771 1,714
- ----------------------------------------------------------------------------
Total deferred charges and other
noncurrent assets $49,857 $46,253
- ----------------------------------------------------------------------------
14 Indebtedness
------------
Long-term debt at March 31, 1998 and 1997, includes:
(Dollars in thousands)
- ------------------------------------------------------------------------------
Fiscal
Interest rate at year of
Type of issue March 31, 1998 maturity 1998 1997
- ------------------------------------------------------------------------------
Denominated in U.S. dollars:
Fixed rate -
Notes -- $ 9,600
Revenue bonds 7.50% 2003 $ 1,450 1,800
Variable rate -
Notes 6.92-8.50% 1999-2000 1,870 4,000
Weighted average
interest rate 7.23%
Revenue bonds 3.55%-3.75% 2008-2016 5,940 5,940
Weighted average
interest rate 3.65%
Denominated in foreign currency:
Fixed rate -
Notes and other debt 3.50%-11.00% 2004-2006 1,901 2,051
Weighted average
interest rate 3.90%
Variable rate -
Notes and other debt 1.01%-7.00% 2000-2004 81,261 75,865
Weighted average
interest rate 3.95%
----------------
92,422 99,256
Capital lease obligation -- 2
----------------
92,422 99,258
Less current portion 2,835 14,061
- -----------------------------------------------------------------------------
Total $89,587 $85,197
- -----------------------------------------------------------------------------
Certain of the company's loan agreements limit the use of retained
earnings for the payment of cash dividends and the acquisition of treasury
stock. Under the most restrictive, $165,700,000 was available for these
purposes at March 31, 1998. (However, these restricted payments may not
exceed $30,000,000 in any fiscal year.) Other loan agreements give certain
existing unsecured lenders security equal to any future secured borrowing.
At March 31, 1998, the carrying value of the company's long-term debt
approximates fair value.
Long-term debt matures as follows:
(In thousands)
- ----------------------------------------------------------------------------
Years ending March 31
- ----------------------------------------------------------------------------
1999 $ 2,835 2002 $ 661
2000 24,549 2003 22,160
2001 14,560 2004 and beyond 27,657
- ----------------------------------------------------------------------------
The company maintains credit agreements with banks in the United
States and abroad. The foreign unused lines of credit at March 31, 1998,
were approximately $10,688,000, while the parent company had approximately
$3,294,000 available under a domestic multi-currency revolving credit
agreement. A maximum of $20,500,000 in short-term bank borrowings were
outstanding during the year ended March 31, 1998. The weighted average
interest rate on short-term borrowings was 5.60 percent at March 31, 1998,
and 3.55 percent at March 31, 1997.
Interest expense charged to earnings was as follows:
(In thousands)
- ----------------------------------------------------------------------------
Years ended March 31 1998 1997 1996
- ----------------------------------------------------------------------------
Gross interest cost $4,687 $5,483 $7,116
Capitalized interest on major
construction projects (677) (511) (291)
- ----------------------------------------------------------------------------
Interest expense $4,010 $4,972 $6,825
- ----------------------------------------------------------------------------
15 Foreign-exchange contracts/derivatives
--------------------------------------
The company uses derivative financial instruments in a limited
way as a tool to manage the company's financial risk. Their use
is restricted primarily to hedging assets and obligations
already held by the company and they are used to protect cash
of the company rather than generate income or engage in
speculative activity. Leveraged derivatives are prohibited by
company policy.
The company from time to time enters into foreign-currency-
exchange contracts, generally with terms of 90 days or less, to
hedge specific foreign-currency-denominated transactions. The
effect of this practice is to minimize the impact of foreign-
exchange-rate movements on the company's operating income. The
company's foreign-currency-exchange contracts do not subject the
company to 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, 1998 and 1997, the parent company had
approximately $2,819,000 and $3,498,000, respectively, in
outstanding forward foreign-exchange contracts denominated in
French francs. The difference between these contracts' values
and the fair value of these instruments in the aggregate was not
material. Certain subsidiaries have transactions in currencies
other than their functional currencies and, from time to time,
enter into forward and option contracts to hedge the purchase of
inventory or to sell nonfunctional currency receipts. Non-U.S.
dollar financing transactions through intercompany loans or local
borrowings in the corresponding currency generally are effective
as hedges of long-term investments. See also Note 14.
16 Other noncurrent liabilities
----------------------------
Other noncurrent liabilities include:
(In thousands)
- --------------------------------------------------------------------------
March 31 1998 1997
- --------------------------------------------------------------------------
Postretirement benefits other
than pensions $25,272 $25,718
Pensions 12,186 12,558
Other 2,518 2,464
- --------------------------------------------------------------------------
Total other noncurrent liabilities $39,976 $40,740
- --------------------------------------------------------------------------
17 Shareholder rights plan
-----------------------
The company has a shareholder rights plan to protect against
coercive takeover tactics. Under the plan, each share of the company'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 the
company'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 the company, at a price of $0.0125 per right, at any time
before 20 percent or more of the company's common stock has been acquired.
The rights expire on October 27, 2006, unless previously redeemed.
18 Stock option, award, and purchase plans
---------------------------------------
Stock option and award plans: In July of 1985 and 1994,
shareholders approved plans providing for the granting of options to
officers, other key employees, and to non-employee directors to
purchase common stock of the company. Options granted under the plans,
which vest immediately, are either nonqualified or incentive stock
options and carry a price equal to the market price on the date of
grant. Both incentive stock options and nonqualified stock options
terminate 10 years after date of grant.
The 1985 and 1994 Incentive Stock Plans also provide for the
granting of stock awards. Restricted stock awards were granted
for 25,000, 52,000, and 50,000 shares in fiscal 1998, 1997, and
1996, respectively. Shares are awarded at no cost to the
employee and are placed in escrow until certain employment
restrictions lapse. The value of shares awarded is amortized
over the seven-year restriction period. The amounts charged to
operations in fiscal 1998, 1997, and 1996 were $1,814,000,
$1,194,000, and $1,105,000, 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, 1995 1,766 $16.74
- ---------------------------------------------------------------------------
Granted 313 24.28
Exercised (143) 9.93
- ---------------------------------------------------------------------------
Outstanding March 31, 1996 1,936 18.46
- ---------------------------------------------------------------------------
Granted 312 25.33
Exercised (163) 8.35
- ---------------------------------------------------------------------------
Outstanding March 31, 1997 2,085 20.27
- ---------------------------------------------------------------------------
Granted 318 33.56
Exercised (323) 13.33
- ---------------------------------------------------------------------------
Outstanding March 31, 1998 2,080 $23.38
- ---------------------------------------------------------------------------
Options outstanding and exercisable as of March 31, 1998:
- -----------------------------------------------------------------------------
Weighted- Weighted-
average average exercise Shares
Range of exercise prices remaining life price per share (in thousands)
- -----------------------------------------------------------------------------
$7.875 - 14.99 2.75 $10.59 393
15.00 - 24.99 6.00 20.18 566
25.00 - 34.99 8.00 29.49 1,121
- -----------------------------------------------------------------------------
Total outstanding and exercisable $23.38 2,080
- -----------------------------------------------------------------------------
A further 2,177,000 shares were available for the granting of
additional options or awards at March 31, 1998.
The company has elected to continue to measure compensation
cost using the intrinsic value method of accounting prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, no compensation cost
has been recognized related to its stock option plans. If the
fair-value based method of accounting for the 1998, 1997, and
1996 stock option grants had been applied in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," the
company's net earnings and net earnings per share would have
been reduced as summarized below:
(Dollars in thousands, except per share amounts)
- ----------------------------------------------------------------------------
Years ended March 31 1998 1997 1996
- ----------------------------------------------------------------------------
Net earnings as reported $72,471 $63,763 $61,399
Net earnings pro forma 69,597 61,375 59,205
Net earnings per share (basic)
as reported $2.44 $2.14 $2.07
Net earnings per share (basic)
pro forma 2.34 2.06 2.00
- ----------------------------------------------------------------------------
The following assumptions were used to compute the fair value
of the option grants in fiscal 1998, 1997, and 1996 using the
Black-Scholes option-pricing model: a risk-free interest rate
of 5.43 percent, 6.26 percent, and 5.41 percent, respectively;
stock volatility of 27.0 percent, 30.0 percent, and 31.0 percent,
respectively; a dividend yield of 2.2 percent, 2.2 percent, and
2.4 percent, respectively; and, for each of the three years,
expected option lives of five years.
Stock purchase plans: The company also has adopted several
--------------------
defined-contribution stock purchase plans. The plans permit
employees to make monthly investments at current market prices
based on a specified percentage of compensation. The company
matches a portion of the employees' contribution.
Activity in the plans for fiscal 1998, 1997, and 1996 resulted
in the purchase of 577,000, 670,000, and 590,000 shares of company
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 the company's contributions to the plans for fiscal 1998,
1997, and 1996 were $6,179,000, $5,930,000, and $6,110,000,
respectively.
19 Segment and geographic area information
---------------------------------------
The company operates predominantly in a single industry, the
production and sale of heat-transfer equipment. Information
about the company by geographic operating area is presented
below:
(In thousands)
- ----------------------------------------------------------------------------
Years ended March 31 1998 1997 1996
- ----------------------------------------------------------------------------
Sales to unaffiliated customers from
company facilities located in:
United States $ 719,221 $682,533 $684,289
Europe 290,915 291,945 285,800
Canada and Latin America 30,282 24,568 20,404
- ----------------------------------------------------------------------------
Net sales $1,040,418 $999,046 $990,493
- ----------------------------------------------------------------------------
Sales between geographic areas:
United States $ 10,774 $ 8,359 $ 4,615
Europe 349 367 125
Canada and Latin America 11,710 6,208 4,021
- ----------------------------------------------------------------------------
Total inter-area sales $ 22,833 $ 14,934 $ 8,761
- ----------------------------------------------------------------------------
Operating profit or loss:
United States $ 91,096 $ 90,251 $ 97,113
Europe 32,169 15,998 8,861
Canada and Latin America 5,284 2,775 917
Corporate, eliminations,
and other (12,577) (11,241) (7,742)
- ----------------------------------------------------------------------------
Earnings before income taxes $ 115,972 $ 97,783 $ 99,149
- ----------------------------------------------------------------------------
Identifiable assets:
United States $ 530,181 $479,821 $476,390
Europe 192,863 177,990 169,211
Canada and Latin America 30,405 22,294 24,932
Corporate, eliminations,
and other 5,575 14,850 1,303
- ----------------------------------------------------------------------------
Total assets $ 759,024 $694,955 $671,836
- ----------------------------------------------------------------------------
Included in the United States sales to unaffiliated customers
are export sales of $131,504,000, $117,906,000, and $127,335,000, in
fiscal 1998, 1997, and 1996, respectively, the majority to customers
in Europe. During the last three fiscal years, no single customer has
accounted for more than 10 percent of revenues.
20 Contingencies and litigation
----------------------------
In the normal course of business, the company and its subsidiaries
have been named as defendants in various lawsuits and enforcement
proceedings in which claims are asserted against the company by
private parties, the Occupational Safety and Health Administration,
the Environmental Protection Agency, other governmental agencies,
and others. The company is also subject to other liabilities that
arise in the ordinary course of its business. Based on the information
available, the company does not expect that any unrecorded liability
related to these matters would have a material effect on the
consolidated financial statements.
In November 1991, the company filed a lawsuit against Mitsubishi
Motor Sales of America, Inc., and Showa Aluminum Corporation, alleging
infringement of the company's patent on parallel-flow air-conditioning
condensers. The suit seeks an injunction to prohibit continued
infringement, an accounting for damages, a trebling of such damages
for willful infringement, and reimbursement of attorneys' fees. In
December 1991, the company submitted a complaint to the U.S.
International Trade Commission (ITC) requesting that the ITC ban the
import and sale of parallel-flow air-conditioning condensers and
systems or vehicles that contain them, which are the subject of the
aforementioned lawsuit. In August 1997, the ITC issued an Order
excluding from U.S. import Showa condensers that infringe Modine
Manufacturing Company's parallel-flow patent. The ITC's Order covers
condensers, their parts, and certain products including them, such as
air-conditioning kits and systems. It directs the U.S. Customs Service
to exclude from importation into the United States such products
manufactured by Showa Aluminum Corporation of Japan and Showa Aluminum
Corporation of America. The decision is based on a Modine U.S. patent
covering condensers with tube hydraulic diameters less than 0.04822
inches. The Showa companies must certify to Customs officials that
any condenser items imported by them do not infringe Modine's parallel-
flow patent. The Showa companies must also file annual reports with the
ITC regarding their sales of Showa parallel-flow condensers in the United
States. The ITC Order has been appealed by Showa to the U.S. Court of
Appeals for the Federal Circuit. In July of 1994, Showa filed a lawsuit
against the company alleging infringement by the company of certain Showa
patents pertaining to condensers. In June 1995, the company filed a motion
for partial summary judgment against such lawsuit. In December of 1994,
the company filed another lawsuit against Mitsubishi and Showa pertaining
to a newly issued patent on parallel-flow air-conditioning condensers.
Both 1994 suits have been stayed pending the outcome of re-examination
in the U.S. Patent Office of the patents involved. In October of 1997,
Modine was issued a Japanese patent (in spite of opposition by many
parties) covering parallel-flow air-conditioning condensers having tube
hydraulic diameters less than 0.070 inches. A similar patent has been
issued to Modine by the European Patent Office and is currently in the
opposition stage. All legal and court costs associated with these
cases have been expensed as they were incurred.
21 Quarterly financial data (unaudited)
------------------------------------
Quarterly financial data are summarized below:
(In thousands, except per-share amounts)
- ----------------------------------------------------------------------------
Fiscal 1998 quarters ended June Sept. Dec. March
- ----------------------------------------------------------------------------
Net sales $256,923 $260,806 $267,699 $254,990
Gross profit 75,041 75,289 75,585 74,884
Net earnings 18,185 18,229 17,836 18,221
Net earnings per share
of common stock:
Basic $0.61 $0.61 $0.60 $0.62
Assuming dilution 0.60 0.60 0.59 0.60
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Fiscal 1997 quarters ended June Sept. Dec. March
- ----------------------------------------------------------------------------
Net sales $248,514 $254,224 $252,972 $243,336
Gross profit 67,351 69,115 71,104 69,850
Net earnings 16,390 15,654 15,402 16,317
Net earnings per share
of common stock:
Basic $0.55 $0.52 $0.52 $0.55
Assuming dilution 0.54 0.52 0.51 0.53
- ----------------------------------------------------------------------------
Independent auditors' report
To the Shareholders and Board of Directors
Modine Manufacturing Company
Racine, Wisconsin
We have audited the accompanying consolidated balance sheets
of Modine Manufacturing Company and Subsidiaries as of March 31,
1998 and 1997, and the related consolidated statements of earnings,
shareholders' investment, and cash flows for each of the three years
in the period ended March 31, 1998. These financial statements are
the responsibility of the company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Modine Manufacturing Company and Subsidiaries
as of March 31, 1998, and 1997, and the consolidated results of
their operations and their cash flows for each of the three years
in the period ended March 31, 1998, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND LLP
Coopers & Lybrand L.L.P.
Chicago, Illinois
April 29, 1998