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 September 26, 1999
------------------
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 (262) 636-1200
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NOT APPLICABLE
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(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 5, 1999
------------------------------ -------------------------------
Common Stock, $0.625 Par Value 29,515,364
MODINE MANUFACTURING COMPANY
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 26 and March 31, 1999 3
Consolidated Statements of Earnings -
For the Three Months Ended
September 26, 1999 and 1998
and the Six Months Ended
September 26, 1999 and 1998 4
Consolidated Statements of Cash Flows -
For the Six Months Ended September 26,
1999 and 1998 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 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 20
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
September 26, 1999 and March 31, 1999
(In thousands, except per-share amounts)
(Unaudited)
September 26, 1999 March 31, 1999
------------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $ 57,014 $ 49,163
Trade receivables, less allowance for
doubtful accounts of $3,981 and
$3,749, respectively 186,337 182,910
Inventories 182,566 178,949
Deferred income taxes and other
current assets 44,139 42,074
-------- --------
Total current assets 470,056 453,096
-------- --------
Noncurrent assets:
Property, plant, and equipment -- net 326,697 303,764
Investment in affiliates 27,919 24,327
Goodwill and other intangible assets--net 76,368 80,411
Deferred charges and other noncurrent
assets 56,317 54,141
-------- --------
Total noncurrent assets 487,301 462,643
-------- --------
Total assets $957,357 $915,739
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Short-term debt $ 71,709 $ 68,998
Long-term debt -- current portion 5,693 4,766
Accounts payable 79,123 97,443
Accrued compensation and employee
benefits 47,846 48,869
Income taxes 7,723 9,694
Accrued expenses and other current
liabilities 30,716 26,825
-------- --------
Total current liabilities 242,810 256,595
-------- --------
Other liabilities:
Long-term debt 177,567 143,838
Deferred income taxes 20,481 20,533
Other noncurrent liabilities 41,944 41,554
-------- --------
Total noncurrent liabilities 239,992 205,925
-------- --------
Total liabilities 482,802 462,520
-------- --------
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 13,586 13,543
Retained earnings 489,167 469,142
Accumulated other comprehensive loss (18,230) (18,341)
Treasury stock at cost: 788 and 817
shares, respectively (27,381) (28,198)
Restricted stock - unamortized value (1,551) (1,891)
-------- --------
Total shareholders' investment 474,555 453,219
-------- --------
Total liabilities and shareholders'
investment $957,357 $915,739
======== ========
<FN>
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended September 26, 1999 and 1998
For the six months ended September 26, 1999 and 1998
(In thousands, except per-share amounts)
(Unaudited)
Three months ended Six months ended
----------------------- -----------------------
September 26 September 26
----------------------- -----------------------
1999 1998 1999 1998
----------------------- -----------------------
Net Sales $286,691 $272,961 $570,538 $546,065
Cost of sales 207,103 197,003 408,985 391,649
-------- -------- -------- --------
Gross profit 79,588 75,958 161,553 154,416
Selling, general, and administrative expenses 54,707 48,390 106,451 94,002
-------- -------- -------- --------
Income from operations 24,881 27,568 55,102 60,414
Interest expense (1,921) (979) (3,514) (2,025)
Other income -- net 921 3,083 3,595 3,939
-------- -------- -------- --------
Earnings before income taxes 23,881 29,672 55,183 62,328
Provision for income taxes 8,785 10,591 20,578 23,167
-------- -------- -------- --------
Net earnings $ 15,096 $ 19,081 $ 34,605 $ 39,161
======== ======== ======== ========
Net earnings per share of common stock
- Basic $0.51 $0.64 $1.17 $1.32
- Assuming dilution $0.51 $0.63 $1.16 $1.30
======== ======== ======== ========
Dividends per share $0.23 $0.21 $0.46 $0.42
======== ======== ======== ========
Weighted average shares -- basic 29,536 29,617 29,532 29,631
Weighted average shares -- assuming dilution 29,838 30,049 29,844 30,117
======== ======== ======== ========
<FN>
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Six Months Ended September 26, 1999 and 1998
(Unaudited)
Six months ended September 26
-----------------------------
1999 1998
---------- ----------
Net cash provided by operating activities $29,689 $48,101
Cash flows from investing activities:
Expenditures for property, plant, and
equipment (48,390) (47,691)
Investments in affiliates (1,500) (17,066)
Proceeds from dispositions of property,
plant, and equipment 151 90
Other -- net (193) (64)
------- -------
Net cash used for investing activities (49,932) (64,731)
Cash flows from financing activities:
Increase (decrease) in short-term debt -- net 3,514 (4,170)
Additions to long-term debt 61,074 35,570
Reductions of long-term debt (22,683) (4,242)
Issuance of common stock, including
treasury stock 2,539 1,409
Purchase of treasury stock (2,767) (5,670)
Cash dividends paid (13,583) (12,447)
------- -------
Net cash provided from financing activities 28,094 10,450
------- -------
Net increase (decrease) in cash and
cash equivalents 7,851 (6,180)
Cash and cash equivalents at beginning
of period 49,163 36,410
------- -------
Cash and cash equivalents at end of period $57,014 $30,230
======= =======
<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)
------------------------------------------------------------
September 26, 1999 March 31, 1999
------------------------------------------------------------
Raw materials $ 40,394 $ 40,529
Work in process 37,185 41,863
Finished goods 104,987 96,557
-------- --------
Total inventories $182,566 $178,949
======== ========
2. Property, plant, and equipment is composed of:
(in thousands)
------------------------------------------------------------
September 26, 1999 March 31, 1999
------------------------------------------------------------
Gross property,
plant & equipment $627,957 $594,646
Less accumulated
depreciation (301,260) (290,882)
-------- --------
Net property,
plant & equipment $326,697 $303,764
======== ========
3. Intangible assets include:
(in thousands)
------------------------------------------------------------
September 26, 1999 March 31, 1999
------------------------------------------------------------
Goodwill $91,750 $92,548
Patents and product
technology 8,389 8,389
Other intangibles 3,312 3,326
Less accumulated
amortization (27,083) (23,852)
------- -------
Net intangible assets $76,368 $80,411
======= =======
4. Segment data:
(In thousands)
-------------------------------------------------------------------------
Sales Operating income*
----- -----------------
Quarter ended Sept. 26, 1999 1998 1999 1998
-------------------------------------------------------------------------
Sales and operating income:
Original Equipment $110,400 $115,662 $ 15,087 $ 11,951
Distributed Products 102,859 85,403 12,296 13,210
European Operations 83,432 79,324 5,936 9,194
-------------------------------------------------------------------------
Segment sales and
operating income 296,691 280,389 33,319 34,355
Corporate & administrative
expenses - - (6,926) (5,635)
Eliminations (10,000) (7,428) (37) (85)
Other items not allocated
to segments - - (2,475) 1,037
-------------------------------------------------------------------------
Total net sales and
earnings before taxes $286,691 $272,961 $ 23,881 $ 29,672
-------------------------------------------------------------------------
(In thousands)
-------------------------------------------------------------------------
Sales Operating income*
----- -----------------
Six months ended Sept. 26, 1999 1998 1999 1998
-------------------------------------------------------------------------
Sales and operating income:
Original Equipment $231,473 $246,963 $ 36,213 $ 32,204
Distributed Products 187,450 155,675 19,962 22,410
European Operations 171,500 159,184 15,074 19,494
-------------------------------------------------------------------------
Segment sales and
operating income 590,423 561,822 71,249 74,108
Corporate & administrative
expenses - - (13,171) (11,489)
Eliminations (19,885) (15,757) (20) (77)
Other items not allocated
to segments - - (2,875) (214)
------------------------------------------------------------------------
Total net sales and
earnings before taxes $570,538 $546,065 $ 55,183 $ 62,328
------------------------------------------------------------------------
*Beginning with the second quarter, management implemented a
change in the basis for measuring segment profit or loss.
The amortization of goodwill is no longer recorded as a
charge to SG & A expenses, but is now included in other
items not allocated to segments. This change was made by
management to provide a more consistent basis across the
segments for assessing performance. The quarterly and six-
month information presented above has been restated for
earlier periods to reflect the effects of this change.
(In thousands)
------------------------------------------------------------------
September 26, March 31,
Period ending 1999 1999
------------------------------------------------------------------
Assets:
Original Equipment $202,772 $157,466
Distributed Products 172,721 158,386
European Operations 252,535 237,036
Corporate & Administrative 386,654 377,592
Eliminations (57,325) (14,741)
-----------------------------------------------------------------
Total assets $957,357 $915,739
-----------------------------------------------------------------
5. Recent developments concerning legal proceedings reported in
Modine Manufacturing Company ("Modine or Company") Form 10-K
report for the year ended March 31, 1999, are updated in Part
II, Other Information, Item 1, Legal Proceedings. While the
outcome of these proceedings is uncertain, in the opinion of
Modine's management, any liabilities that may result from such
proceedings are not reasonably likely to have a material effect on
Modine's liquidity, financial condition, or results of operations.
6. The net earnings per share of common stock and computation
components of basic and diluted earnings per share are as follows:
(In thousands, except per-share amounts)
-------------------------------------------------------------------------
Three months ended Six months ended
September 26 September 26
-------------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------------
Net earnings per share of
common stock:
-------------------------
- basic $0.51 $0.64 $1.17 $1.32
- assuming dilution $0.51 $0.63 $1.16 $1.30
Numerator:
----------
Income available to
common shareholders $15,096 $19,081 $34,605 $39,161
Denominator:
-----------
Weighted average shares
outstanding - basic 29,536 29,617 29,532 29,631
Effect of dilutive
securities - options* 302 432 312 486
------- ------- ------- -------
Weighted average shares
outstanding - assuming
dilution 29,838 30,049 29,844 30,117
-------------------------------------------------------------------------
*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 $30.30 $32.24 $30.37 $33.57
Number of shares 740 358 740 303
7. Comprehensive earnings (in thousands), which represents net
earnings adjusted by the change in foreign-currency translation
and minimum pension liability recorded in shareholders' equity
for the periods ended September 26, 1999 and 1998, respectively,
were $15,762 and $18,061 for three months, and $34,716 and
$38,531 for six months.
8. In June 1999, the Financial Accounting Standards Board
issued SFAS No.137 deferring the effective date of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
The statement is now effective for fiscal years beginning after
June 15, 2000. Modine will adopt SFAS No. 133 beginning April 1,
2001. Adoption of this statement is not expected to have a
material effect on Modine's financial position or results of
operations.
9. On October 20, 1999, Modine announced it would begin a stock
buyback program with an initial commitment to repurchase 300,000
shares. Management is authorized to repurchase, each year, up to
ten percent of the outstanding stock. Modine has, in the past,
repurchased small numbers of shares for various employee stock
plans and other corporate purposes.
10. The accompanying consolidated financial statements, which
have not been audited by independent certified public
accountants, were prepared in conformity with generally
accepted accounting principles and such principles were
applied on a basis consistent with the preparation of the
consolidated financial statements in Modine's March 31, 1999
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 six
months of fiscal 2000 are not necessarily indicative of the
results to be expected for the full year.
11. 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 Modine's 1999 Annual Report to
stockholders which statements and notes were incorporated by
reference in Modine's Form 10-K Report for the year ended
March 31, 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
The following discussion and analysis provides information which
Management believes is relevant to an assessment and
understanding of Modine's consolidated results of operations and
financial condition. This discussion should be read in
conjunction with the consolidated financial statements and notes
thereto.
RESULTS OF OPERATIONS
- ---------------------
Comparison of the Second Quarter of 1999-2000 with the Second
- -------------------------------------------------------------
Quarter of 1998-99
- ------------------
Net sales for the second quarter of fiscal 1999-2000 were at a
record level for any quarter at $286.7 million, up 5.0% from the
$273.0 million reported in the second quarter of last year.
Aftermarket sales in the United States grew as a result of
incremental sales recorded by a regional distributor acquired in
October 1998. Overall revenues in the European Operations segment
grew a little over 5% despite the negative currency-translation
impact recorded in the quarter which lowered European sales by
6%. The Original Equipment segment recorded mixed results for
the quarter. Modine's sales to original-equipment-manufacturer
(OEM) customers in the truck and automobile markets continued to
grow while sales to the off-highway-equipment market remained
depressed by a global slowdown.
Gross margin at 27.8%, as a percentage of sales, was unchanged
from the second quarter of the previous year.
Selling, general and administrative expenses, at 19.1% of revenues,
were higher than historical averages primarily in the North American
aftermarket, which acquired a large, regional distributor in October
1998. These expenses are expected to decrease through recently
introduced cost-reduction programs which are focusing are improving
and streamlining order taking and distribution procedures.
Operating income of 8.7% was 1.4% lower as a percentage of sales
than last year as a result of the higher selling, general and
administrative expenses at the newly acquired aftermarket
distribution facilities mentioned above.
Interest expense increased $0.9 million, or 96%, from the same
quarter a year ago while average outstanding debt levels during
the quarter increased by approximately $94 million, or 69%.
Interest expense grew faster as the result of rising interest
rates compared to the same quarter a year ago. Net non-operating
income in the current quarter declined $2.2 million, or 70%, from
the same quarter last year which included a lump-sum payment
recorded as income for past royalties related to worldwide
licensing agreements for Modine's patented PF technology.
The effective tax rate increased 1.1% when compared to the same
period last year. Higher effective federal and state income tax
rates were partially offset by lower effective foreign income tax
rates.
Net earnings for the second quarter of $15.1 million were 21%
lower than last year's second quarter. Earnings per share were
$0.51 basic and diluted, compared to $0.64 basic and $0.63
diluted in the prior year. The lower earnings, as expected, were
due in large part to a one-time lump-sum royalty payment recorded
as income in the second quarter last year and the higher SG&A
expense discussed above.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
---------------------
Comparison of the First Six Months of 1999-2000 with the First
- --------------------------------------------------------------
Six Months of 1998-99
- ---------------------
Record level net sales for the first six months of fiscal 1999-
2000 reached $570.5 million, a 4% improvement over last year's
record. The strongest sales increases for the first six months
of the year were recorded in the Distributed Products segment.
The increase is the result of incremental sales recorded by a
regional U.S. aftermarket distributor acquired in October 1998.
Revenues from European Operations segment were up 8% despite the
unfavorable currency-effect in the first half of the year of
approximately $6.1 million. Sales to original-equipment-
manufacturer (OEM) customers in the truck and automotive markets
of the Original Equipment segment were also ahead of last year,
but were partly offset by a continuing slowdown in the global,
off-highway-equipment market.
Gross margin of 28.3%, as a percent of sales, was unchanged from
the first six months of the previous year. Improvement in
Original Equipment segment was offset by lower gross margins
earned in recently opened European production facilities in the
European Operations segment and a small decline in the
Distributed Products segment.
Selling, general and administrative expenses of $106.5 million
increased 13.2% over the first six months of last year.
Approximately 90% of the increase can be attributed to a large
regional U.S. aftermarket distributor acquired in October 1998.
As previously mentioned, these expenses are expected to decrease
through cost-reduction programs as Modine continues with the
assimilation of these operations.
Operating income declined by 1.4%, as a percentage of sales, over
the first half of the previous year, as a result of higher
selling, general and administrative expenses at newly acquired
distribution facilities previously discussed.
Interest expense increased $1.5 million, or 74% over the same six
month period a year ago. Average outstanding debt levels increased
at a similar percentage. Financing of ongoing construction projects
and debt acquired and incurred in conjunction with acquisitions in
the prior year were the primary reasons for the growth in interest
expense. Net non-operating income in the prior year included a lump-
sum payment recorded as income for past royalties related to worldwide
licensing agreements for Modine's patented PF technology.
The effective tax rate increased by 0.1% when compared to the
same period last year.
Net earnings for the first six months of the current year were
$34.6 million, or $1.17 basic and $1.16 diluted earnings per
share. This compares to $39.2 million, or $1.32 basic and $1.30
diluted earnings per share, for the same six month period the
year before. The lower earnings, as expected, were due in large
part to the one-time lump-sum royalty payment recorded as income
in the second quarter last year and higher SG&A expenses.
Annualized return on shareholders' investment, at 15% was within
management's target range.
Outlook for the Remainder of the Year
- -------------------------------------
For the next two quarters, we expect the current environment to
continue and the fiscal-year changes in sales and earnings to be
similar to the first six months. Our expectation is that results
will then begin to improve. Our five-year plan has large,
incremental increases in revenues. Currently, about 50 percent
of plan sales to OEM customers are booked, coming from ten, new,
multiyear programs. Customers include global automotive, truck,
and off-highway original-equipment manufacturers. Production for
the first of these new programs begins next fiscal year and
others begin shortly thereafter. In addition, Modine continues
to actively seek acquisitions that will complement its progress
into vehicular modules and systems, which is an important part of
our strategy for the future. We feel very confident in our
future and optimistic about Modine's growth prospects. Forward
looking statements about sales, earnings, and operations in this
Outlook involve both risks and uncertainties, as detailed in
Exhibit 99 to this Form 10-Q.
FINANCIAL CONDITION
- -------------------
Comparison between September 26, 1999 and March 31, 1999
- --------------------------------------------------------
Current assets
- --------------
Cash and cash equivalents of $57.0 million were $7.9 million
higher than March 31, 1999. Cash provided by operating
activities and increased borrowing for the first six months
exceeded capital expenditures, investments in affiliates and the
quarterly dividend payments.
Trade receivables of $186.3 million were up $3.4 million (2%)
over year-end primarily due to increased sales volume (up 2% over
the fourth fiscal quarter in 1998-99), and normal seasonal
promotions in the HVAC&R market.
Overall inventory levels grew $3.6 million to $182.6 million
compared to year-end. The increase was in the finished goods
levels at certain U.S. aftermarket distribution centers and
relates to normal seasonal activity.
Deferred income taxes and other current assets increased by $2.1
million over year-end. Higher royalties receivable and increases
in deferred taxes were the major items contributing to the change.
Working capital of $ 227.2 million increased 15.6% over year-end.
The current ratio increased slightly to 1.9 to 1 from 1.8 to 1.
Increases in cash, trade receivables, inventories, and lower
accounts payable, were only partly offset by higher short-term
debt and accrued expenses.
Property, Plant and Equipment
- -----------------------------
Net property, plant and equipment increased $22.9 million to
$326.7 million as capital expenditures exceeded depreciation,
retirements and foreign currency translation impact. Continuing
facility construction and expansion costs in Germany, Italy, and
the Netherlands, ongoing costs associated with the implementation
of SAP financial systems in North America, and costs associated
with new equipment and tooling for new customer programs were
among the items contributing to the increase shown. Outstanding
capital expenditure commitments were $41.2 million at September 26,
1999, compared to $38.6 million at March 31, 1999. The largest
commitment is related to the construction of a new technical
center/administration building in Germany. The outstanding
commitments will be financed primarily through internally
generated cash and external borrowing, as required.
Investment in Affiliates
- ------------------------
Investments of $27.9 million were $3.6 million higher than at
March 31, 1999. A $1.5 million additional investment into the
Daikin-Modine joint venture combined with the favorable exchange
rate impact in connection with our Brazil investment in
Radiadores Visconde, Ltda. lead to the overall increase shown.
Intangible Assets
- -----------------
Intangible assets, net of accumulated amortization declined $4.0
million. Amortization and foreign currency translations were the
main factors contributing to the change.
Deferred Charges and Other Assets
- ---------------------------------
Deferred charges and other assets increased $2.2 million. The
net increase is primarily the result of continuing recognition of
the surplus in Modine's overfunded pension plans.
Current Liabilities
- -------------------
Accounts payable and other current liabilities of $157.7 million
were $15.5 million lower than March 1999. Normal timing
differences in the level of operating activity were responsible
for the decline. Accrued income taxes decreased $2.0 million
from timing differences in making estimated payments and certain
federal tax benefits.
Debt
- ----
Outstanding debt increased by $37.4 million from March 31, 1999,
primarily to support working capital and capital expenditure
requirements. Long-term debt increased by $34.7 million. Modine
entered into a Euro 50.8 million ($53.0 million) credit agreement
in the second quarter. A portion of the proceeds was used to pay
down the equivalent of $32 million in short and long-term
European bank debt. The U.S. portion of short-term debt
increased by $14 million, and the European portion decreased
$11.3 million.
Domestically, Modine's unused lines of credit were $0.7 million.
Non-U.S. unused lines of credit were $3.5 million. Total debt as
a percentage of shareholders' equity increased from 48.0% at
March 31, 1999 to 53.7%.
Shareholders' Investment
- ------------------------
Total shareholders' investment increased by $21.3 million to a
total of $474.6 million. The net increase came primarily from
net earnings of $34.6 million for the first six months, partially
offset with dividends paid to shareholders of $13.6 million.
Year 2000 Remediation Program
- -----------------------------
General: In response to the Year 2000 issue, Modine
-------
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 Modine'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. In addition to business systems, additional programs
to ensure supplier continuity and process capability were
initiated. All of the above projects were funded through normal
operating cash flow. The total cost associated with the required
modifications was not material to Modine's consolidated results
of operations and financial position.
Business Systems: In North America, the conversion and
----------------
remediation effort of Modine's internally developed systems was
addressed by an external party. The systems conversion and
testing of all critical systems was completed by May 8, 1999, and
was conducted by Modine internal staff. Computer hardware and
LAN infrastructure were also converted to ensure compliance in
its business system and desktop operations. The year 2000 costs
for North America were $5.7 million. Other accomplishments in
North America included the conversion of business systems in
Mexico and Canada to achieve year 2000 compliance through a
controlled series of system migration and software upgrades.
Management has also initiated a freeze on all non-critical
information system modifications effective November 1, 1999
through January 10, 2000.
Outside North America, Year 2000 compliance was achieved by
replacing current applications with SAP, a Year 2000 compliant
package of integrated manufacturing and financial software. Also
included were hardware migrations, LAN e-mail and desktop
upgrades and replacements. Modine's Year 2000 European costs
for remediation were approximately $4.8 million. Remediation of
critical systems has been completed successfully at all sites.
Suppliers & Customers: With respect to suppliers, Modine 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. Modine 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 validate our supplier responses, we also
have conducted a series of on-site supplier Y2K audits. Those
suppliers not able to validate their Y2K readiness, have been
directed to retain an additional 30 days of inventory. Our
manufacturing facilities are also reserving on-site inventory so
that our customer base is not affected by any unforeseen Y2K events.
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 included
testing, repair, replacement, upgrading, and/or retirement of
specific systems or components. Modine completed its systems
remediation efforts of critical activities by the second calendar
quarter of 1999. Cost for the inventory assessment was $300,000.
Remediation costs were $250,000.
Customer Audit: Modine has been asked and has participated
--------------
in independent and specific customer audits to ensure Y2K
compliance to our customer base. Modine has fared well in those
reviews and is actively involved in keeping the exchange of
information on-going between Modine and its customer base.
Risks & Contingency Planning: The failure to correct
----------------------------
a material Year 2000 problem could result in an interruption of
Modine'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, Modine 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 has developed and implemented
contingency plans in the critical areas of the business. We have
developed operational and supplier contingency plans for all our
manufacturing and distribution facilities, increased stocking
plans where necessary, established on site millennium cutover
teams globally, and developed business system and plant equipment
testing procedures for January 1, 2000, two days prior to our
first day of production. Although we feel our contingency plans
are very mature, we will continue to refine them throughout 1999,
wherever the risk warrants it.
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 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 November 1991 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.
In July, 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 1999, the U.S. Patent Office Board of Appeals
rejected the Company's 1994 PF patent which rejection is being
appealed to the Court of Appeals for the Federal Circuit.
In October of 1997, Modine was issued a Japanese patent covering
parallel-flow air-conditioning condensers having tube 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 this patent seeking an
injunction and damages. Several patents have been issued to
Modine by the European Patent Office, one having been rejected at
the opposition level, which is being appealed.
All legal and court costs associated with these cases have been
expensed as they were incurred.
Item 5. Other Information.
On September 15, 1999, Frank P. Incropera was elected to serve as
a new director of the corporation with a term to expire in 2002.
This expands the number of board members to ten.
Incropera was named the McCloskey dean of the University of Notre
Dame's College of Engineering in 1998 after serving as the Head
of the School of Mechanical Engineering at Purdue University.
He received his B.S. degree from Massachusetts Institute of
Technology and his M.S. and Ph.D. degrees from Stanford
University, all in mechanical engineering. The recipient of
numerous academic and professional awards, he is the author or co-
author of nine books and more than 200 archival journal articles.
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* Restated By-Laws (as amended) 21
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).
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.
Reference Number
per Item 601 of
Regulation S-K Page
- -------------- ----
27* Financial Data Schedule (electronic
transmission only).
99* Important Factors and Assumptions Regarding
Forwarding-Looking Statements. 32
*Filed herewith.
(b) Reports on Form 8-K:
-------------------
The Company filed one Report on Form 8-K during the quarter ended
September 26, 1999 introducing the new director as referenced in
Item 5. The date of the Report is September 15, 1999.
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: November 8, 1999 By: W. E. PAVLICK
----------------------------------------
W. E. Pavlick, Senior Vice President,
General Counsel and Secretary