SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1998
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-1373
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MODINE MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
WISCONSIN 39-0482000
--------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1500 DeKoven Avenue, Racine, Wisconsin 53403-2552
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 636-1200
---------------
NOT APPLICABLE
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(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 5, 1999
------------------------------ -------------------------------
Common Stock, $0.625 Par Value 29,509,029
MODINE MANUFACTURING COMPANY
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 26 and March 31, 1998 3
Consolidated Statements of Earnings -
For the Three Months Ended
December 26, 1998 and 1997
and the Nine Months Ended
December 26, 1998 and 1997 4
Consolidated Statements of Cash Flows -
For the Nine Months Ended December 26,
1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 21
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
December 26, 1998 and March 31, 1998
(In thousands, except per-share amounts)
(Unaudited)
December 26, 1998 March 31,1998
----------------- -------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 36,231 $ 36,410
Trade receivables, less allowance for
doubtful accounts of $3,994 and $4,585 174,548 162,177
Inventories 160,208 152,674
Deferred income taxes and other current
assets 39,859 41,922
-------- --------
Total current assets 410,846 393,183
-------- --------
Other assets:
Property, plant, and equipment -- net 296,659 248,253
Investment in affiliates 36,120 8,376
Goodwill and other intangible assets -- net 82,928 59,355
Deferred charges and other noncurrent assets 52,639 49,857
-------- --------
Total other assets 468,346 365,841
-------- --------
Total assets $879,192 $759,024
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- ----------------------------------------
Current liabilities:
Short-term debt $ 44,269 $ 20,878
Long-term debt -- current portion 8,264 2,835
Accounts payable 79,700 84,345
Accrued compensation and employee benefits 47,611 48,081
Income taxes 15,843 10,073
Accrued expenses and other current
liabilities 28,068 26,516
-------- --------
Total current liabilities 223,755 192,728
-------- --------
Other liabilities:
Long-term debt 148,239 89,587
Deferred income taxes 13,732 14,258
Other noncurrent liabilities 41,758 39,976
-------- --------
Total other liabilities 203,729 143,821
-------- --------
Total liabilities 427,484 336,549
-------- --------
Shareholders' investment:
Preferred stock, $0.025 par value,
authorized 16,000 shares, issued - none - -
Common stock, $0.625 par value, authorized
80,000 shares, issued 30,342 shares 18,964 18,964
Additional paid-in capital 13,318 12,384
Retained earnings 457,899 423,001
Foreign currency translation adjustment (6,614) (8,102)
Treasury stock at cost: 872 and 678 shares,
respectively (29,753) (20,977)
Restricted stock - unamortized value (2,106) (2,795)
-------- --------
Total shareholders' investment $451,708 $422,475
-------- --------
Total liabilities and shareholders' investment $879,192 $759,024
======== ========
<FN>
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended December 26, 1998 and 1997
For the nine months ended December 26, 1998 and 1997
(In thousands, except per-share amounts)
(Unaudited)
Three months ended Nine months ended
-------------------- --------------------
December 26 December 26
-------------------- --------------------
1998 1997 1998 1997
-------------------- --------------------
Net Sales $284,355 $267,699 $830,420 $785,428
Cost of sales 207,242 192,114 598,891 559,513
-------- -------- -------- --------
Gross profit 77,113 75,585 231,529 225,915
Selling, general, and administrative expenses 51,020 45,015 145,022 135,839
-------- -------- -------- --------
Income from operations 26,093 30,570 86,507 90,076
Non-operating income 4,852 1,918 12,041 5,993
Interest expense (1,718) (842) (3,743) (2,950)
Non-operating expense (1,265) (1,634) (4,515) (4,859)
-------- -------- -------- --------
Earnings before income taxes 27,962 30,012 90,290 88,260
Provision for income taxes 10,621 12,176 33,788 34,010
-------- -------- -------- --------
Net earnings $ 17,341 $ 17,836 $ 56,502 $ 54,250
======== ======== ======== ========
Net earnings per share of common stock
- Basic $0.59 $0.60 $1.91 $1.82
- Assuming dilution $0.58 $0.59 $1.88 $1.79
======== ======== ======== ========
Dividends per share $0.21 $0.19 $0.63 $0.57
======== ======== ======== ========
Weighted average shares -- basic 29,548 29,720 29,603 29,762
Weighted average shares -- diluted 29,992 30,316 30,075 30,297
======== ======== ======== ========
<FN>
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Nine Months Ended December 26, 1998 and 1997
(Unaudited)
Nine months ended December 26
-----------------------------
1998 1997
---------- ----------
Net cash provided by operating activities $ 89,925 $ 72,160
Cash flows from investing activities:
Expenditures for property, plant, and
equipment (68,988) (52,668)
Acquisitions, excluding cash acquired (19,826) -
Investments in affiliates (17,085) -
Proceeds from dispositions of property,
plant, and equipment 315 1,883
Other -- net (170) (91)
-------- --------
Net cash (used for) investing activities (105,754) (50,876)
Cash flows from financing activities:
Increase in short-term debt -- net 22,895 11,158
Additions to long-term debt 45,773 15,179
Reductions of long-term debt (22,631) (27,273)
Issuance of common stock, including
treasury stock 3,012 3,364
Purchase of treasury stock (14,765) (11,480)
Cash dividends paid (18,634) (16,960)
-------- --------
Net cash provided by/(used for)
financing activities 15,650 (26,012)
-------- --------
Net (decrease) in cash and cash equivalents (179) (4,728)
Cash and cash equivalents at beginning of
period 36,410 34,822
-------- --------
Cash and cash equivalents at end of period $ 36,231 $ 30,094
======== ========
<FN>
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
1. The amounts of raw material, work in process and finished
goods cannot be determined exactly except by physical
inventories. Based on partial interim physical inventories
and percentage relationships at the time of complete
physical inventories, Management believes the amounts shown
below are reasonable estimates of raw material, work in
process and finished goods.
(In Thousands)
-------------------------------------------------------------
December 26, 1998 March 31, 1998
-------------------------------------------------------------
Raw materials $ 36,458 $ 41,164
Work in process 41,197 41,231
Finished goods 82,553 70,279
-------- --------
Total inventories $160,208 $152,674
======== ========
2. Property, plant, and equipment is composed of:
(In Thousands)
-------------------------------------------------------------
December 26, 1998 March 31, 1998
-------------------------------------------------------------
Gross property,
plant & equipment $586,225 $510,868
Less accumulated
depreciation (289,566) (262,615)
-------- --------
Net property,
plant & equipment $296,659 $248,253
======== ========
3. Intangible assets include:
(In Thousands)
-------------------------------------------------------------
December 26, 1998 March 31, 1998
Goodwill and other
intangible assets $106,114 $76,505
Less accumulated
amortization (23,186) (17,150)
-------- -------
Net goodwill and other
intangible assets $ 82,928 $59,355
======== =======
4. Recent developments concerning legal proceedings reported in
the Company's Form 10-K report for the year ended March 31,
1998, are updated in Part II, Other Information, Item 1,
Legal Proceedings. While the outcome of these proceedings
is uncertain, in the opinion of the Company's management,
any liabilities that may result from such proceedings are
not reasonably likely to have a material effect on the
Company's liquidity, financial condition, or results of
operations.
5. The computation of basic and diluted earnings per share is
as follows:
(In thousands, except per-share amounts)
----------------------------------------------------------------------
Three months Nine months
ended ended
December 26 December 26
----------------------------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------------------------
Net earnings per share of
-------------------------
common stock:
------------
- Basic $0.59 $0.60 $1.91 $1.82
- Assuming dilution $0.58 $0.59 $1.88 $1.79
Numerator:
----------
Income available to
common shareholders $17,341 $17,836 $56,502 $54,250
Denominator:
------------
Weighted average shares
outstanding - Basic 29,548 29,720 29,603 29,762
Effect of dilutive
securities - options* 444 596 472 535
------- ------- ------- -------
Weighted average shares
outstanding - Assuming
dilution 29,992 30,316 30,075 30,297
* There were outstanding options to purchase common
stock at prices that exceeded the average market
price for the income statement period as follows:
Average market
price per share $33.68 $34.42 $33.61 $31.81
Number of shares 297 None 297 45
6. On August 6, 1998, the Company completed the acquisition of
a 50% interest in Radiadores (Visconde) Ltda., a Brazilian
heat transfer company. The investment included cash and a
promissory note. The investment is accounted for using the
equity method. The company's share of the results of
operations is currently included in the consolidated
financial statements using a two-month delay. The Company
anticipates that the results will be reported using a one-
month delay by the end of the fourth quarter.
Visconde employs approximately 750 people at facilities in
San Paulo. It produces heat-exchanger components,
assemblies, and modules primarily for the aftermarket, but
also for sale to original-equipment customers in the truck,
engine, agricultural-tractor, hydraulic-system, compressor,
marine, construction-equipment, power-generator, and
industrial markets.
On October 8, 1998, the Company completed the acquisition
of Core Holdings, Inc. of Orlando, Florida, an aftermarket
wholesale distributor specializing in complete lines of
vehicular engine-cooling and air-conditioning systems
products. The acquisition purchase price was $24.3 million.
The transaction was financed with cash, existing short-term
borrowing facilities and $3.9 million of promissory notes to
the seller. The investment is accounted for using the
purchase method. Goodwill created by the acquisition is
$22.5 million and is being amortized on a straight-line
basis over 15 years. The results of operations are included
in the consolidated financial statements for the quarter
since the effective date of the acquisition.
Core Holdings had sales of $54.1 million in 1997. Its 350
employees operate out of more than 50 locations throughout
the southeastern United States. Core Holdings also ships
its full line of air-conditioning parts to warehouse
distributors in other geographic markets. It distributes
primarily to radiator shops, air-conditioning shops,
specialty repair shops and garages. In addition, it
manufactures air-conditioning parts at a plant in Texas.
The investments do not have a material effect on the
consolidated results of operations and, accordingly, pro-
forma financial information is not presented.
7. On April 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive
Income," which became effective for interim and annual financial
statement periods in fiscal years beginning after December 15,
1997. This pronouncement established new standards for reporting
comprehensive income and its components; however, the adoption of
SFAS No. 130 has had no impact on the Company's net income or
shareholders' equity. For the Company, the difference between
net income as historically reported in the statements of
consolidated income, and comprehensive income, is foreign
currency translation recorded in shareholders' equity.
Comprehensive earnings for the periods ended December 26, 1998
and 1997, respectively, were $19,459 thousand and $17,765
thousand for the three months and $57,990 thousand and $50,765
thousand for the nine months.
8. On June 15, 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The statement requires companies
to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value.
The accounting for changes in fair value, gains or losses,
depends on the intended use of the derivative and its
resulting designation. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15,
1999. The Company will adopt SFAS 133 beginning April 1,
2000. Adoption of this statement is not expected to have a
material effect on earnings or financial position.
9. The accompanying consolidated financial statements, which
have not been audited by independent certified public
accountants, were prepared in conformity with generally
accepted accounting principles and such principles were
applied on a basis consistent with the preparation of the
consolidated financial statements in the Company's March 31,
1998 Annual Report filed with the Securities and Exchange
Commission. The financial information furnished includes
all normal recurring accrual adjustments which are, in the
opinion of Management, necessary for a fair statement of
results for the interim period. Results for the first nine
months of fiscal 1999 are not necessarily indicative of the
results to be expected for the full year.
10. Certain notes and other information have been condensed or
omitted from these interim financial statements which
consolidate both domestic and foreign wholly-owned
subsidiaries. Therefore, such statements should be read in
conjunction with the consolidated financial statements and
related notes contained in the Company's 1998 Annual Report
to stockholders which statements and notes were incorporated
by reference in the Company's Form 10-K Report for the year
ended March 31, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
The following discussion and analysis provides information which
Management believes is relevant to an assessment and
understanding of the Company's consolidated results of operations
and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and notes
thereto.
RESULTS OF OPERATIONS
- ---------------------
Comparison of the Third Quarter of 1998-99 with the Third Quarter
- -----------------------------------------------------------------
of 1997-98
- ----------
Net sales for the third quarter of fiscal 1998-99 were $284.4
million, up 6.2% from the $267.7 million reported in the third
quarter of last year.
Quarterly sales increased substantially in Europe as a result of
new programs. Currency translation effects had a small positive
impact upon year over year sales for the quarter. On a worldwide
basis the original-equipment automotive and industrial markets
registered the largest sales increases. Domestic aftermarket
sales were assisted by the recent acquisition of Core Holdings,
Inc. Short-term softening in the agricultural- and construction-
equipment market and the European truck market hampered revenue
growth in the quarter. Also effecting the quarter were a slow
seasonal start in the building-heating market as well as on-going
pricing pressures in the North American aftermarket and in
Europe.
Gross margin decreased 1.1%, as a percentage of sales, over the
third quarter of the previous year to 27.1% from 28.2%. Lower
gross margins earned in recently opened European production
facilities were the main factor leading to the decline.
Selling, general and administrative expenses increased 13.3% over
last year's third quarter while increasing 1.1% as a percentage
of sales. Excluding the recent Core Holdings acquisition,
selling, general and administrative expenses grew by only 5.5%,
consistent with sales growth and inflation.
Operating income decreased 2.2%, as a percentage of sales over
last year's third quarter, to 9.2 % from 11.4%. Contributing
factors were lower margins earned at newly opened production
facilities in Europe and the effect of including the Core
acquisition in the quarterly operating results for the first
time.
Average outstanding debt levels during the quarter increased by
approximately $84.6 million, or 84.7%, from the same quarter a
year ago while interest expense increased 104%, for the same time
period. The October acquisition of Core Holdings, including
higher interest rate debt assumed, and the joint venture purchase
and start-up activity reported earlier in the year were the main
factors leading to higher borrowing levels and interest expense.
Non-operating income in the current quarter, included a gain on
the sale of a closed facility in Michigan.
The effective tax rate decreased by 2.6% when compared to the
same period last year. The largest factor influencing the
decrease was a differential in foreign tax rates compared to U.S.
rates.
Net earnings for the third quarter decreased 2.8% to $17.3
million, or $0.59 basic and $0.58 diluted earnings per share from
last year's $17.8 million, or $0.60 basic and $0.59 diluted
earnings per share. Annualized return on shareholders'
investment, at 15.5% for the quarter, was in management's target
range of 15-20%.
Comparison of the First Nine Months of 1998-99 with the First
- -------------------------------------------------------------
Nine Months of 1997-98
- ----------------------
Net sales for the first nine months of fiscal 1998-99 reached a
record $830.4 million, up 5.7% from the $785.4 million reported
in the first nine months of last year. Revenues from European
operations were up significantly compared with the same period a
year ago. Currency translation effects had a minimal impact upon
year over year sales. On a worldwide basis the strongest sales
increases were to the original-equipment automotive market and to
the industrial market. Other major markets registered small
increases except for the building-HVAC market which remained down
for the year.
Gross margin decreased 0.9%, as a percent of sales, over the
first nine months of the previous year to 27.9% from 28.8%. Lower
gross margins earned in recently opened European production
facilities were a contributing factor to the overall decline.
Selling, general and administrative expenses increased 6.8% over
the first nine months last year while increasing 0.2% as a
percentage of sales. Without the recent Core Holdings
acquisition, these expenses grew by only 4.2%, consistent with
sales growth and inflation.
Operating income decreased by 4.0% over the first nine months of
the previous year, while decreasing 1.1% as a percentage of
sales. Among the contributing factors were lower margins earned
at newly opened production facilities in Europe and the effect of
including the Core Holdings acquisition in the year-to-date
operating results.
Average outstanding debt levels during the first nine months
increased by approximately $47.1 million, or 46.6%, over the same
period a year ago. Corresponding interest expense increased by
26.9%, or $0.8 million, over the same nine-month period, a year
ago. An increase in major property, plant and equipment projects
resulted in larger amounts of interest being capitalized in the
current period which partially offset the increased interest
expense resulting from the October acquisition of Core Holdings
and the joint venture activity reported earlier in the year.
Non-operating income included an amount for past royalties
related to worldwide licensing agreements for Modine's patented
PF technology and a gain on the sale of a closed facility in
Michigan.
The effective tax rate decreased by 1.1% when compared to the
same period last year.
Net earnings for the nine months increased 4.2% to $56.5 million,
or $1.91 basic and $1.88 diluted earnings per share from last
year's $54.3 million, or $1.82 basic and $1.79 diluted earnings per
share. Annualized return on shareholders' investment, at 17.2% for
the nine months, was in management's target range of 15-20%.
Year 2000 Remediation Program
- -----------------------------
General
-------
In response to the Year 2000 issue, the Company initiated a
number of projects in early 1997 to identify, evaluate, and
implement changes to its existing computerized business systems.
Each of the projects followed a four phase approach which
included inventory, assessment, remediation or replacement, and
system integration testing. All of the Year 2000 efforts were
carried on globally, and plans, executive sponsorship and funding
were put in place to address the effort. A number of the
Company's current systems were already Year 2000 compliant and
where third party software was being utilized, upgrades to the
vendor's Year 2000 compliant versions have been completed or are
in process. In addition to business systems, additional programs
to ensure supplier continuity and process capability were
initiated. All of the above projects are currently being funded
through normal operating cash flow. The total cost associated with
the required modifications is not expected to be material to the
Company's consolidated results of operations and financial position.
Business Systems
----------------
In North America, the conversion and remediation effort of the
Company's internally developed systems is being addressed by an
external party. The external party is also validating the Year
2000 changes with internally prepared tests scripts. Computer
hardware and LAN infrastructure is also in the process of being
converted to ensure compliance in its business system and desktop
operation. The expected Year 2000 costs for North America are
$4.5 million of which approximately 80% has been already expended.
The systems conversion project is in the last phase, system
integration testing, and is being conducted by Modine internal
staff. The project is 80% complete, and is scheduled for a second
calendar quarter 1999 completion. Recent accomplishments in
North America during the quarter include the conversion of
business systems in Mexico and Canada to achieve Year 2000
compliance through a controlled series of system migration and
software upgrades.
Outside of North America, Year 2000 compliance is being achieved
by replacing current applications with SAP, a Year 2000 compliant
package of integrated manufacturing and financial software. Also
included are hardware migrations, LAN, e-mail and desktop upgrades
and replacements. The Year 2000 international cost associated with
the project is $4.6 million of which 80% has been expended. The
project is progressing and, depending on site, is in various stages
of readiness, most of which are completed. Overall, the European
project is 80% complete, and scheduled for a third calendar quarter
1999 completion.
Suppliers & Customers
---------------------
With respect to suppliers, the Company has surveyed its material
and service suppliers to determine whether they are actively
involved in Year 2000 remediation projects that will ensure that
services to Modine will continue without interruption to any of
Modine's business processes. The Company has since developed a
second, more detailed survey that has been resent to our suppliers
to gain better insight into their actual Year 2000 status. To date,
85% of the surveys have been returned, of which 100% have indicated
that they are or will be compliant by July 1, 1999. The responses
are being used as the basis of developing specific contingency plans
for those suppliers who cannot meet our compliance deadline.
With our dependency on customers for sales and cash flow, Year
2000 interruptions in our customers' operations could result in
reduced sales, increased inventory or receivable levels and cash
flow reductions. While these events are possible, our customer
base is broad enough to minimize the effects of a single occurrence.
Facilities & Embedded Systems
-----------------------------
In addition, for non-IT areas, a major effort to assess Modine's
production facilities to include embedded systems, is in process
and is being conducted by a third party consulting firm
specialized in this type of activity. The facilities evaluation
was completed in the fourth calendar quarter of 1998. Dependent
upon formal risk assessments by facility and corporate teams,
recommended actions include testing, repair, replacement,
upgrading, and/or retirement of specific systems or components.
Modine expects to complete any testing and/or any systems
remediation activities by the end of the second calendar quarter
of 1999, and development of contingency plans, if needed, by the
third calendar quarter of 1999. Cost for the inventory
assessment is $300,000. The projected budget for remediations is
estimated to be $360,000.
Risks & Contingency Planning
----------------------------
The failure to correct a material Year 2000 problem could result
in an interruption of the Company's business activities or
operations. Modine's Year 2000 projects were designed and are
being implemented to significantly reduce that possibility.
Despite the significant efforts to address Year 2000 concerns,
the Company could potentially experience disruptions to some of
its operations, including those resulting from non-compliant
systems used by its suppliers and customers. To alleviate those
concerns, Modine is actively involved in developing and
implementing contingency plans in the critical areas of the
business. We have already issued operational contingency plans to
our manufacturing facilities and are continuing to formalize system
and supplier contingency plans. The Company will continue that
process throughout 1999 whenever the risk appears to be warranted.
Euro Conversion
- ---------------
A single currency called the Euro was introduced in Europe on
January 1, 1999. Eleven of the fifteen member countries of the
European Union agreed to adopt the Euro as their common legal
currency on that date. Fixed conversion rates between these
participating countries' existing currencies and the Euro have
been established. The legacy currencies are scheduled to remain
legal tender as denominations of the Euro until at least January
1, 2002, but not later than July 1, 2002. During this transition
period, the parties may settle transactions using either the Euro
or a participating country's legacy currency.
Certain of Modine's business functions in Europe introduced Euro-
capability as of January 1, 1999, including systems for making
and receiving certain payments, pricing and invoicing. Other
business functions and financial reporting will be converted to
the Euro by the end of the transition period, but may be
converted earlier where operationally efficient or cost effective,
or to meet customer requirements. Any delays in the Company's
ability to become Euro compliant, or in its key suppliers and
customers to be Euro compliant could result in an interruption
of the Company's business activities or operations. The impact,
if any, of these interruptions upon the results of operations,
financial condition and cash flows has not yet been determined.
Outlook for the Remainder of the Year
- -------------------------------------
Management expects short-term market factors to result in fiscal
1999 sales growth being close to earlier projections made last
summer while earnings are anticipated to increase at a slightly
lower percentage. Beginning in calendar year 2000, the Company
expects to benefit from significant new business with large
customers such as Chrysler and PACCAR. Improved profitability in
Germany from new business, efficiency improvements, and a reduced
workforce are also anticipated. These forward-looking statements
regarding sales and earnings are subject to certain risks and
uncertainties which could cause actual results to differ
materially from those projected. See "Important Factors and
Assumptions Regarding Forward-Looking Statements" attached hereto
as exhibit 99 and incorporated herein by reference.
FINANCIAL CONDITION
- -------------------
Comparison between December 26, 1998 and March 31, 1998
- -------------------------------------------------------
Current Assets
- --------------
Cash and cash equivalents decreased by $0.2 million to a total of
$36.2 million. The Company's primary sources of liquidity and
capital resources were cash provided by operations and the use of
available borrowing facilities.
Net trade receivables increased $12.4 million, or 7.6%.
Approximately $2.4 million of the increase can be attributed to
the recent Core Holdings acquisition. The remainder of the
overall increase can be attributed to higher sales for the third
quarter of fiscal 98-99 in the amount of $29.4 million or 11.5%
compared to the sales in the fourth quarter of the prior year.
Overall inventory levels increased by $7.5 million. While the
acquisition of Core Holdings increased inventories by more than
this amount, others factors affecting inventory levels were
ongoing management efforts to control inventory levels, changes
in sales volumes, exchange rate fluctuations in Europe, process
and product line changes at certain manufacturing facilities and
a normal seasonal decline in the HVAC division.
Deferred income taxes and other current assets decreased $2.1
million. The largest items influencing change were a reduction
in unbilled customer tooling, an increase in foreign currency
contracts hedging sales in French francs, an increase in
receivables from the company's stock plans trustee and the Core
Holdings acquisition.
Working capital decreased approximately 6.7% to $187.1 million
from $200.5 million and the current ratio declined slightly to
1.8 to 1 from 2.0 to 1. A number of categories experienced
changes, with the largest item influencing the change being an
increase in debt due within one year. Partially offsetting this
change were increases in both trade receivables and inventory.
The Core Holdings acquisition was also a factor contributing to
the overall changes recorded.
Property, Plant and Equipment
- -----------------------------
Net property, plant and equipment increased $48.4 million to
$296.7 million as capital expenditures exceeded depreciation,
retirements and foreign currency translation impact. Outstanding
material commitments for capital expenditures were $49.6 million
at December 26, 1998, compared to $48.1 million at March 31, 1998.
The largest commitment of approximately $27.2 million is related to
facility expansions, improvements, equipment upgrades, and new
equipment for a number of European plants. Another $4.2 million
relates to the construction of a new technical center in Racine,
Wisconsin. The outstanding commitments will be financed primarily
through internally generated cash and external borrowing, as required.
Goodwill and Other Intangible Assets
- ------------------------------------
Goodwill and other intangible assets, net of accumulated
amortization increased $23.6 million. The main factor
contributing to the increase was the $21.5 million recorded in
conjunction with the Core Holdings acquisition Amortization and
foreign currency translations were also factors contributing to
the overall change.
Deferred Charges and Other Noncurrent Assets
- --------------------------------------------
Deferred charges and other noncurrent assets increased $2.8
million. The net increase is primarily the result of continuing
recognition of the surplus in the Company's overfunded pension
plans.
Current Liabilities
- -------------------
Accounts payable and various accrued expenses decreased $3.6
million. An increase of $7.0 million from the Core acquisition
was offset by normal timing differences in the level of operating
activity in other areas of the company. Accrued income taxes
increased $5.8 million with Core contributing $1.7 million of the
increase with the remainder arising from normal timing
differences in making estimated tax payments and federal tax
benefits resulting from the exercise of stock options.
Debt
- ----
Outstanding debt increased by $87.5 million from March 31, 1998.
Long-term debt increased by $64.1 million. The major events
influencing the change were the purchase of Core Holdings, Inc.,
headquartered in Miami, the purchase of a 50% interest in
Radiadores Visconde located in Brazil, the startup of the newly
formed joint venture company, Daikin-Modine, Inc., and capital
expenditures in Europe for facility expansion and modernization.
Most of the increase in the long-term debt was domestic. During
this time, short-term debt increased by $23.4 million. The U.S.
portion of short-term debt increased by $19.0 million and the
European portion outstanding increased $4.4 million.
Consolidated available lines of credit increased by $1.4 million.
Domestically, the Company's multi-currency revolver was increased
from $25 million to $50 million, and is fully utilized. Foreign
unused lines of credit at December 26, 1998 were $14.7 million.
Total debt as a percentage of shareholders' equity increased from
26.8% to 44.4%.
Shareholders' Investment
- ------------------------
Total shareholders' investment increased by $29.2 million to a
total of $451.7 million. The net increase came primarily from
net earnings of $56.5 million for the first nine months.
Dividends paid to shareholders of $18.6 million, net treasury
stock activity of $8.8 million, favorable foreign currency
translation impact of $1.5, and other minor changes to the
capital accounts also contributed to the change.
Other
- -----
Subsequent to the end of the third quarter, recent economic
events in Brazil led to the devaluation of its currency. As a
result of the devaluation and subsequent exchange rate movements,
the value of the Company's investment in its recently formed
Brazilian joint venture has been affected. Although the
devaluation is expected to have a minimal impact on the Company's
fourth quarter net earnings, it will unfavorably impact the
foreign currency translation adjustment to be reported in
shareholders' equity and comprehensive earnings if exchange rates
remain at their current levels.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of business, the Company and its
subsidiaries are named as defendants in various lawsuits and
enforcement proceedings by private parties, the Occupational
Safety and Health Administration, the Environmental Protection
Agency, other governmental agencies, and others in which claims,
such as personal injury, property damage, or antitrust and trade
regulation issues, are asserted against the Company. While the
outcome of these proceedings is uncertain, in the opinion of the
Company's Management and counsel, any liabilities that may result
from such proceedings are not reasonably likely to have a
material effect on the Company's liquidity, financial condition
or results of operations. Many of the pending damage claims are
covered by insurance and, in addition, the Company from time to
time establishes reserves for uninsured liabilities.
The Mitsubishi and Showa Litigation
-----------------------------------
In November 1991, the Company filed a lawsuit in the Federal
District Court in Milwaukee, Wisconsin against Mitsubishi Motor
Sales of America, Inc. and Showa Aluminum Corporation, alleging
infringement of the Company's Patent No. 4,998,580 on parallel-
flow air-conditioning condensers. The suit seeks an injunction
to prohibit continued infringement and accounting for damages, a
trebling of such damages for willful infringement, and
reimbursement of attorneys' fees. In December of 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
flow path 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 companies must also file annual
reports with the ITC regarding their sales of Showa parallel-flow
condensers in the United States.
In July of 1994, Showa filed a lawsuit against the Company in the
Federal District Court in Columbus, Ohio alleging infringement by
the Company of Showa's patents pertaining to double circuit
condensers and baffles therefor (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 Motor Sales of America, Inc. and Showa Aluminum
Corporation in the Federal District Court in Milwaukee, Wisconsin
pertaining to the Company's newly-issued Patent No. 5,372,188
also pertaining to parallel-flow air-conditioning condensers but
having tube flow path hydraulic diameters less than 0.070 inches.
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 has been issued Japanese Patent No.
2,132,321 covering parallel-flow air conditioning condensers
having tube flow path hydraulic diameters less than 0.070 inches.
In August of 1998, the Company filed a patent infringement suit
in Japan against Showa with respect to such patent seeking an
injunction and damages. A similar patent has been issued to the
Company 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.
Other previously reported legal proceedings have been settled or
the issues resolved so as to not merit further reporting.
Item 5. Other Information.
On October 8, 1998, the Company completed the acquisition of Core
Holdings, Inc. of Orlando, Florida, an aftermarket wholesale
distributor specializing in complete lines of vehicular engine-
cooling and air-conditioning systems products. For additional
information see footnote 6 to the Notes to Consolidated Financial
Statements (Unaudited) herein.
Subsequent to the end of the quarter, on January 20, 1999, the
Company's Board of Directors elected Marsha Williams to serve as
a new director of the corporation, expanding the number of board
members to ten. Please see the Company's News Release dated
February 8, 1999, attached to this Report Form 10-Q as Exhibit
99(b), for further information.
As previously reported, in May of 1986, the Board of Directors
authorized the Company to acquire up to 10% per year of the
issued and outstanding shares of the common stock of the Company.
Pursuant to this authorization, the Company purchases shares of
its common stock from time to time as such shares become
available on the open market, from the Company's pension plans,
or in private transactions for resale to the employee stock
purchase plans and for other corporate purposes. Since December 31,
1996, the Company has purchased at market price a total of 1,058,203
shares, 132,884 shares of which were purchased during the fourth
fiscal quarter of 1996-97; 362,427 shares of which were purchased
from April 1, 1996 through December 31, 1997; 160,293 shares of
which were purchased during the fourth fiscal quarter of 1997-98,
and 402,599 shares of which were purchased from April 1, 1998
through December 31, 1998. The Company currently has 833,135
shares (as of February 5, 1999) in its Treasury.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
--------
The following exhibits are included for information only unless
specifically incorporated by reference in this report:
Reference Number
per Item 601 of
Regulation S-K Page
- -------------- ----
3(a) Restated Articles of Incorporation
(as amended) (filed by reference to
the Registrant's Annual Report on
Form 10-K for the fiscal year ended
March 31, 1994).
3(b)* Restated By-Laws (as amended January 20,
1999). 22
4(a) Rights Agreement dated as of October 16,
1986 between the Registrant and First
Chicago Trust Company of New York (Rights
Agent) (filed by reference to the
Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1997).
4(b)(i) Rights Agreement Amendment No. 1 dated as
of January 18, 1995 between the Registrant
and First Chicago Trust Company of New York
(Rights Agent) (filed by reference to the
exhibit contained within the Registrant's
Current Report on Form 8-K dated January 13,
1995).
4(b)(ii) Rights Agreement Amendment No. 2 dated as
of January 18, 1995 between the Registrant
and First Chicago Trust Company of New York
(Rights Agent) (filed by reference to the
exhibit contained within the Registrant's
Current Report on Form 8-K dated January 13,
1995).
Reference Number
per Item 601 of
Regulation S-K Page
- -------------- ----
4(b)(iii) Rights Agreement Amendment No. 3 dated as
of October 15, 1996 between the Registrant
and First Chicago Trust Company of New York
(Rights Agent) (filed by reference to the
exhibit contained within the Registrant's
Quarterly Report on Form 10-Q dated
December 26, 1996).
4(b)(iv) Rights Agreement Amendment No. 4 dated as
of November 10, 1997 between the Registrant
and Norwest Bank Minnesota, N.A., (Rights
Agent) (filed by reference to the exhibit
contained within the Registrant's Quarterly
Report on Form 10-Q dated December 26, 1997).
Note: The amount of long-term debt
authorized under any instrument defining
the rights of holders of long-term debt of
the Registrant, other than as noted above,
does not exceed ten percent of the total
assets of the Registrant and its subsidiaries
on a consolidated basis. Therefore, no such
instruments are required to be filed as
exhibits to this Form. The Registrant
agrees to furnish copies of such instruments
to the Commission upon request.
27* Financial Data Schedule (electronic
transmission only).
99(a)* Important Factors and Assumptions Regarding
Forwarding-Looking Statements. 33
99(b)* News Release dated February 8, 1999
regarding new director. 34
*Filed herewith.
(b) Reports on Form 8-K:
-------------------
The Company filed no Reports on Form 8-K during the quarter ended
December 26, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY
(Registrant)
By: A. D. REID
---------------------------------------
A. D. Reid, Vice President,
Finance and Chief Financial Officer
(Principal Financial Officer)
Date: February 8, 1998 By: W. E. PAVLICK
---------------------------------------
W. E. Pavlick, Senior Vice President,
General Counsel and Secretary