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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 June 26, 2002
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-1373
------
MODINE MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
WISCONSIN 39-0482000
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 DeKoven Avenue, Racine, Wisconsin 53403-2552
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (262) 636-1200
--------------
NOT APPLICABLE
--------------------------------------------------------------
(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 August 2, 2002
------------------------------ -----------------------------
Common Stock, $0.625 Par Value 33,638,402
MODINE MANUFACTURING COMPANY
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 26 and March 31, 2002 3
Consolidated Statements of Earnings -
For the Three Months Ended
June 26, 2002 and 2001 4
Consolidated Condensed Statements of
Cash Flows - For the Three Months Ended
June 26, 2002 and 2001 5
Notes to Consolidated Condensed Financial
Statements 6-13
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 14-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 18
Item 4. Submission of Matters to a Vote
of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19-21
Signatures 22
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)
June 26, 2002 and March 31, 2002
(Unaudited)
June 26, 2002 March 31, 2002
------------- --------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 86,196 $ 75,402
Trade receivables, less allowance for
doubtful accounts of $2,678 and $3,217 171,958 162,462
Inventories 125,161 121,663
Deferred income taxes and other current 40,685 46,443
assets -------- --------
Total current assets 424,000 405,970
-------- --------
Noncurrent assets:
Property, plant, and equipment -- net 344,062 340,388
Investment in affiliates 25,137 24,981
Goodwill -- net 53,726 52,969
Other intangible assets - net 1,997 2,085
Deferred charges and other noncurrent
assets 78,270 76,651
-------- --------
Total noncurrent assets 503,192 497,074
-------- --------
Total assets $927,192 $903,044
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term debt $ 591 $ 726
Long-term debt -- current portion 2,804 10,030
Accounts payable 80,048 80,112
Accrued compensation and employee benefits 48,736 46,797
Income taxes 5,989 4,799
Accrued expenses and other current
liabilities 33,983 29,040
-------- --------
Total current liabilities 172,151 171,504
-------- --------
Noncurrent liabilities:
Long-term debt 147,385 139,654
Deferred income taxes 35,689 35,127
Other noncurrent liabilities 42,451 40,760
-------- --------
Total noncurrent liabilities 225,525 215,541
-------- --------
Total liabilities 397,676 387,045
-------- --------
Shareholders' equity:
Preferred stock, $0.025 par value,
authorized 16,000 shares, issued - none - -
Common stock, $0.625 par value,
authorized 80,000 shares, issued
33,903 and 33,743 shares, respectively 21,189 21,089 21,089
Additional paid-in capital 21,927 19,166
Retained earnings 524,895 518,900
Accumulated other comprehensive loss (29,005) (33,494)
Treasury stock at cost: 272 and 272
shares, respectively (7,034) (6,976)
Restricted stock - unamortized value (2,456) (2,686)
-------- --------
Total shareholders' equity 529,516 515,999
-------- --------
Total liabilities and
shareholders' equity $927,192 $903,044
======== ========
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended June 26, 2002 and 2001
(In thousands, except per-share amounts)
(Unaudited)
Three months ended June 26
--------------------------
2002 2001
---- ----
Net sales $272,620 $279,452
Cost of sales 203,740 206,668
-------- --------
Gross profit 68,880 72,784
Selling, general, and administrative expenses 53,306 56,521
Restructuring charges/(income) (309) -
-------- --------
Income from operations 15,883 16,263
Interest expense (1,665) (2,065)
Other income --net 1,744 2,716
-------- --------
Earnings before income taxes 15,962 16,914
Provision for income taxes 5,577 6,696
-------- --------
Net earnings $ 10,385 $ 10,218
======== ========
Net earnings per share of common stock
- Basic $0.31 $0.31
- Assuming dilution $0.31 $0.31
======== ========
Dividends per share $0.125 $0.25
======== ========
Weighted average shares - basic 33,583 32,884
Weighted average shares - assuming dilution 33,842 33,198
======== ========
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
For the Three Months Ended June 26, 2002 and 2001
(Unaudited)
Three months ended June 26
--------------------------
2002 2001
-------- --------
Net cash provided by operating activities $28,790 $30,184
Cash flows from investing activities:
Expenditures for property, plant, and equipment (8,273) (13,212)
Proceeds from dispositions of assets 24 516
Other -- net (270) 357
------- -------
Net cash (used for) investing activities (8,519) (12,339)
Cash flows from financing activities:
(Decrease)in short-term debt -- net (188) (24,171)
Additions to long-term debt 65,196 32,567
Reductions of long-term debt (72,539) (11,724)
Issuance of common stock, including treasury
stock 3,170 2,660
Purchase of treasury stock (913) (362)
Cash dividends paid (4,203) (8,222)
------- -------
Net cash (used for) financing activities (9,477) (9,252)
------- -------
Net increase in cash and cash
equivalents 10,794 8,593
Cash and cash equivalents at beginning of
period 75,402 21,744
------- -------
Cash and cash equivalents at end of period $86,196 $30,337
======= =======
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
1. Significant accounting policies.
On April 1, 2002, the Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets." This Statement develops a single comprehensive
accounting model for impairment and disposal of long-lived
assets and discontinued operations. This adoption did not
have a material impact on our net earnings or financial
position.
To conform with the Emerging Issues Task Force of the
FASB concensus on Issue 00-14 "Accounting for Certain Sales
Incetives," sales discounts, which were allowed for prompt
payment of invoices by customers, have been recorded in the
current year as a reduction to sales. Prior year first
quarter operating results shown on the consolidated
statement of earnings have been restated to give effect to
this reclassification. There was no effect on net earnings
as a result of this reclassification.
2. Restructuring and plant closures.
In the third quarter of fiscal 2002, Modine initiated a
restructuring plan to reduce costs and increase future
operating efficiency by consolidating a portion of its
operations. This restructuring plan includes the closure of
three manufacturing plants in North America located in
LaPorte, Indiana; Knoxville, Tennessee; and St. Paul,
Minnesota. The manufacturing facilities located in LaPorte
and Knoxville currently produce products for customers in the
Company's heavy-duty and industrial markets. The facility
located in St. Paul, which has ceased production, manufactured
products for the Company's HVAC market. Modine is relocating
the production of the majority of the products previously made
in these facilities to other Company locations. The Company
is, however, ceasing the production of air turnover units,
building evaporator units, and indirect fired heating units
previously produced at the St. Paul facility and is also
rationalizing certain customer relationships as part of the
restructuring process. Separate personnel reductions were
also initiated as part of the restructuring plan at three
other U. S. facilities, located in Harrodsburg, Kentucky;
Trenton, Missouri; and the Company's corporate headquarters in
Racine, Wisconsin. Included in the European portion of the
restructuring plan is a plant closure taking place in
Bernhausen, Germany and personnel reductions at the Company's
manufacturing facility in Granada, Spain. Modine will be
discontinuing the assembly of air conditioning equipment,
previously performed at the Bernhausen facility for off-
highway equipment manufacturers, as part of the restructuring.
Personnel reductions and the final phase-out of the above
named manufacturing facilities have occurred, or are expected
to occur, over the next six months.
Anticipated staff reductions, as estimated at the end of the
fourth quarter, were determined to be approximately 330
employees. The planned reductions included 264 employees in
the U.S. and 66 employees in Europe. In the first quarter of
fiscal 2003, this estimate was revised downward by 31 employees
in the U.S. These 31 employees were relocated to other Company
facilities or left the Company prior to receiving separation
benefits. As a result, the remaining accrual relating to
termination costs was reduced by $278,000 in the U.S. Of the
total number of employees affected, 99 employees were terminated
as of the end of the first quarter of fiscal 2003 and, thus far,
have received benefit payments of $1,028,000.
In addition to the costs of terminating employees, the other
principal costs of the restructuring plan accrued at March 31,
2002 were estimated at $1,526,000. These costs primarily
consist of post-closing operating expenses for the facilities
and other disposal and cleanup costs related to the shut down
of the facilities. During the first quarter of fiscal 2003,
cash payments of $78,000 were made and the accrual was reduced
by $31,000.
The following table displays the components of the accrued
restructuring liability:
(In thousands)
---------------------------------------------------------------------
2002
---------------------------------------------------------------------
Termination Benefits:
Balance at March 31, 2002 $4,042
Adjustments (278)
Payments (125)
---------------------------------------------------------------------
Balance at June 26, 2002 $3,639
---------------------------------------------------------------------
Other Restructuring Charges:
Balance at March 31, 2002 $1,526
Adjustments (31)
Payments (78)
---------------------------------------------------------------------
Balance at June 26, 2002 $1,417
---------------------------------------------------------------------
In addition to the restructuring costs, other closure-related
and business rationalization costs recorded during the quarter
included $778,000 in accelerated depreciation in conjunction
with the reduction of the useful lives of some of the assets
at the facilities to be closed. Furthermore, a positive
adjustment of $78,000 was made relating to a revised estimate
of pension curtailment expense. Additional obsolete inventory
expenses of $101,000 and miscellaneous shut-down related costs
of $214,000 were incurred by the North American facilities.
The following table provides a summary of restructuring and
one-time closure/business rationalization costs recorded related
to the program announced in the third year of fiscal 2002:
(In thousands)
------------------------------------------------------------------------
Balance Amount Balance
March 31, 2002 Incurred June 26, 2002
------------------------------------------------------------------------
Restructuring Charges:
Employee severance and
related benefits $ 4,971 $ (278) $ 4,693
Goodwill impairment 1,043 - 1,043
Post-closing operating
expenses 845 (24) 821
Other disposal costs 681 (7) 674
------- ------- -------
Total restructuring costs 7,540 (309) 7,231
------- ------- -------
Other Closure Costs:
Asset impairments 2,072 - 2,072
Depreciation (change in
useful lives) 1,397 778 2,175
Pension curtailment costs 881 (78) 803
Obsolete inventory charges 970 101 1,071
Miscellaneous other
closure costs 110 214 324
------- ------- -------
Total other closure costs 5,430 1,015 6,445
------------------------------------------------------------------------
Total restructuring and
other closure costs $12,970 $ 706 $13,676
------------------------------------------------------------------------
3. Raw material, work in progress and finished goods.
The amounts of raw material, work in process and finished goods
cannot be determined exactly except by physical inventories.
Based on partial interim physical inventories and percentage
relationships at the time of complete physical inventories,
management believes the amounts shown below are reasonable
estimates of raw material, work in process and finished
goods.
(In thousands)
----------------------------------------------------------------
June 26, 2002 March 31, 2002
----------------------------------------------------------------
Raw materials $ 24,909 $ 25,370
Work in process 31,269 31,673
Finished goods 68,983 64,620
-------- --------
Total inventories $125,161 $121,663
======== ========
4. Property, Plant, and Equipment.
(In thousands)
-------------------------------------------------------------------
June 26, 2002 March 31, 2002
-------------------------------------------------------------------
Gross, property,
plant & equipment $722,975 $702,895
Less accumulated
depreciation (378,913) (362,507)
-------- --------
Net property,
plant & equipment $344,062 $340,388
======== ========
5. Segment data.
(In thousands)
-------------------------------------------------------------------
Quarter ended June 26, 2002 2001
-------------------------------------------------------------------
Sales :
Original Equipment $ 118,617 $ 112,288
Distributed Products 90,676 101,175
European Operations 77,076 83,975
-------------------------------------------------------------------
Segment sales 286,369 297,438
Eliminations (13,749) (17,986)
-------------------------------------------------------------------
Total net sales $ 272,620 $ 279,452
-------------------------------------------------------------------
Operating income:
Original Equipment $ 20,103 $ 17,878
Distributed Products 4,927 4,002
European Operations 7,245 9,579
-------------------------------------------------------------------
Segment operating income 32,275 31,459
Corporate & administrative
expenses (16,391) (15,195)
Eliminations (1) (1)
Other items not allocated
to segments 79 651
-------------------------------------------------------------------
Earnings before income taxes $ 15,962 $ 16,914
-------------------------------------------------------------------
(In thousands)
-------------------------------------------------------------------
June 26, March 31,
Period ending 2002 2002
-------------------------------------------------------------------
Assets:
Original Equipment $ 225,491 $ 231,553
Distributed Products 232,918 224,973
European Operations 224,634 212,131
Corporate & Administrative 263,360 251,685
Eliminations (19,211) (17,298)
-------------------------------------------------------------------
Total assets $ 927,192 $ 903,044
-------------------------------------------------------------------
With the adoption of SFAS 142, goodwill related to specific
operating segments has been reallocated from the corporate &
administrative segment in the current period and the prior
period has been restated for comparison purposes. A total of
$25,064,000 of net goodwill was reassigned from the corporate
& administration segment, of which $20,344,000 was transferred
to the Original Equipment segment, $2,706,000 was transferred
to the Distributed Products segment, and $2,014,000 was
transferred to the European Operations segment.
6. The computational components of basic and diluted earnings
per share are as follows:
(In thousands, except per-share amounts)
-----------------------------------------------------------------------
Three months ended June 26
2002 2001
-----------------------------------------------------------------------
Net earnings per share of common stock:
--------------------------------------
- basic $0.31 $0.31
- assuming dilution $0.31 $0.31
Numerator:
---------
Income available to common shareholders $10,385 $10,218
Denominator:
-----------
Weighted average shares outstanding -
basic 33,583 32,884
Effect of dilutive securities - options* 259 314
------- -------
Weighted average shares outstanding -
assuming dilution 33,842 33,198
-----------------------------------------------------------------------
* 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 $27.07 $26.47
Number of shares 1,210 1,179
7. Comprehensive earnings/(loss), which represents net earnings
adjusted by the change in foreign-currency translation and
minimum pension liability recorded in shareholders' equity
for the 3 months ended June 26, 2002 and 2001, were
$14,874,000 and $(1,862,000) respectively.
8. In June 2001, the Financial Accounting Standards Board
issued SFAS No.142 "Goodwill and Other Intangible Assets."
With the adoption of SFAS 142, goodwill is no longer subject
to amortization over its estimated useful life. Instead,
goodwill will be subject to at least an annual assessment
for impairment by applying a fair-value-based test.
Similarly, goodwill associated with equity method
investments is no longer amortized. Equity-method goodwill
is not, however, subject to the new impairment rules; the
impairment guidance in existing pronouncements for equity-
method investments will continue to apply. The provisions
of Statement 142 are to be applied with fiscal years
beginning after December 15, 2001. Modine adopted SFAS No.
142 beginning April 1, 2002. A reconciliation of reported
net income adjusted to reflect the adoption of SFAS No. 142
is provided below:
(In thousands)
-------------------------------------------------------------------
Three months ended June 26
2002 2001
-------------------------------------------------------------------
Reported net income $ 10,385 $ 10,218
Add-back goodwill amortization,
net of tax - 1,107
-------- --------
Adjusted net income $ 10,385 $ 11,325
======== ========
Reported basic earnings per share $ .31 $ .31
Add-back goodwill amortization - .03
-------- --------
Adjusted basic earnings per share $ .31 $ .34
======== ========
Reported diluted earnings per share $ .31 $ .31
Add-back goodwill amortization - .03
-------- --------
Adjusted diluted earnings per share $ .31 $ .34
======== ========
We expect to complete the annual testing for impairment by
the end of the second quarter of the current fiscal year.
The impact, if any, resulting from goodwill impairment
testing is not known at this time.
With the adoption of SFAS 142, goodwill related to specific
operating segments has been reallocated from the corporate &
administrative segment in the current period and the prior
period has been restated for comparison purposes.
Goodwill by operating segment is as follows:
(In thousands)
---------------------------------------------------------------
June 26, 2002 March 31, 2002
Original Equipment $ 20,344 $ 20,344
Distributed Products 27,052 26,884
European Operations 6,330 5,741
--------- ---------
Total $ 53,726 $ 52,969
========= =========
Changes in the segments' goodwill balances are the result of
fluctuations in foreign currency exchange rates.
Additional disclosures related to acquired intangible assets
are as follows:
(In thousands)
-----------------------------------------------------------------------------------------------
June 26, 2002 March 31, 2002
Gross Carrying Accumulated Gross Carrying Accumulated
Value Amortization Value Amortization
-----------------------------------------------------------------------------------------------
Amortized Intangible Assets:
Patents and product technology 3,951 2,192 3,951 2,126
Non-compete agreements 2,182 2,022 2,182 2,007
Other intangibles 118 118 201 189
------ ------ ------ ------
Total 6,251 4,332 6,334 4,322
Unamortized Intangible Assets:
Pension Asset 78 - 73 -
------ ------ ------ ------
Total intangible assets $6,329 $4,332 $6,407 $4,322
====== ====== ====== ======
The aggregate amortization expense for the first quarter
ended June 26, 2002, was $85,000. Total estimated annual
amortization expense expected for the fiscal years 2003
through 2007 are as follows:
Estimated
Amortization
Fiscal Expense
Year (In thousands)
------ --------------
2003 $357
2004 296
2005 263
2006 263
2007 263
9. Modine maintains a foreign risk-management strategy that
uses derivative instruments in a limited way to protect
assets and obligations already held by Modine and to
protect its cashflows. Derivative instruments are not
used for the purpose of generating income or speculative
activity. Leverage derivatives are prohibited by Company
policy. Modine's principal derivative/hedging activity
in the first quarter of fiscal 2003 consisted of the
following:
Hedges of Net Investments in Foreign Subsidiaries
-------------------------------------------------
The Company has a number of investments in wholly-owned
foreign subsidiaries and non-consolidated foreign joint
ventures. The net assets of these subsidiaries are exposed
to currency exchange-rate volatility. The Company uses non-
derivative financial instruments to hedge this exposure.
The currency exposure related to the net assets of Modine's
European subsidiaries and its joint venture in Japan are
managed partially through foreign-currency-denominated debt
agreements entered into by the parent. For the quarter
ended June 26, 2002, $5.9 million of net losses related to
the foreign-currency-denominated debt agreements were
included in the cumulative translation adjustment.
10. On July 17, 2002, the Board of Directors elected to
terminate the Company's Shareholder Rights Agreement. The
plan will be terminated by redeeming the rights that were
issued under the Company's 1986 Shareholder Rights Agreement.
The rights will be redeemed at a price of $.0125 per right,
payable in cash. There is currently one right attached to
each outstanding share of common stock. The redemption
payment will be made on September 5, 2002 to shareholders of
record on August 23, 2002. As a result of the redemption,
the rights cannot become exercisable, and the Shareholder
Rights Agreement will be terminated.
11. On July 31, 2002, the Company completed the sale of its
wholly- owned Canadian aftermarket subsidiary, Modine of Canada,
Ltd. The cash sales price of the transaction totaled
approximately $2.0 million and is subject to final settlement.
The transaction is not expected to have a material effect on the
consolidated results of operations or the financial position of
the Company and, accordingly pro-forma financial information
relative to the sale has not been presented.
12. Recent developments concerning legal proceedings reported in
the Modine Manufacturing Company ("Modine or the Company")
Form 10-K report for the year ended March 31, 2002, are
updated in Part II, Other Information, Item 1, Legal
Proceedings.
13. 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, except for the specifically
mentioned reclassifications to conform with the current
year's presentation, with the preparation of the
consolidated financial statements in Modine's March 31, 2002
Annual Report filed with the Securities and Exchange
Commission. The financial information furnished includes
all normal recurring adjustments that are, in the opinion of
Management, necessary for a fair statement of results for
the interim period. Results for the first three months of
fiscal 2003 are not necessarily indicative of the results to
be expected for the full year.
14. Certain notes and other information have been condensed or
omitted from these interim financial statements. Therefore,
such statements should be read in conjunction with the
consolidated financial statements and related notes
contained in Modine's 2002 Annual Report to shareholders,
which statements and notes were incorporated by reference in
Modine's Form 10-K Report for the year ended March 31, 2002.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
The following discussion and analysis provides information that
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 First Quarter of 2002-03 with the First Quarter
- -----------------------------------------------------------------
of 2001-02
- ----------
First quarter net sales of $272.6 million were 2.4% lower than
the $279.5 million reported in the first quarter of last year.
Revenues from the Original Equipment segment grew by 5.6% from
the same quarter last year. Sales increases in the Original
Equipment segment were positively impacted by a modest sales
increase in its off-highway business and strong improvement in
the automotive area due primarily to the impact of new programs.
However, these results were partially offset by reduced revenues
in the truck division when compared to the first quarter of the
prior year. Revenues recorded in the European operations segment
declined by 8.2% from one year ago as a result of softer European
automotive and heavy-duty truck markets. In the Distributed
Products segment, revenue declined 10.4%. The aftermarket and
electronic cooling markets served by this segment were the major
contributors causing the decline from one year ago.
Gross margin, as a percentage of sales, was 25.4%. This was a
0.6% decline as a percentage of sales from the 26.0% earned in
the first quarter of the previous year. Higher gross margins
were seen in the Original Equipment segment, while lower gross
margins were reported in the Distributed Products and European
Operations segments. The major markets experiencing declines
included the electronic cooling and European heavy duty &
industrial markets, which were partially offset by improved
margins in the North American automotive and truck markets.
Selling, general and administrative expenses of $53.3 million
were decreased from the prior year's first quarter of $56.5
million. Without the one-time pre-tax charges of $3.1 million
related to the acquisition of Thermacore International and $1.4
million of pretax goodwill amortization expenses recorded in the
first quarter of the prior year, selling, general and
administrative expenses would have increased $1.3 million or 2.5%
over the same quarter one year ago. The larger items
contributing to the change were anticipated increases in wages
and fringe benefit costs.
Interest expense decreased 19.4%, or $0.4 million, while average
outstanding debt levels decreased $28.6 million, or approximately
16.1%, from the same quarter one year ago. Interest expense
declined at a faster rate than debt levels primarily due to more
favorable interest rates.
Net non-operating income declined by $1.0 million from the same
quarter one year ago. Royalty income was down $1.0 million from
the first quarter last year. As previously announced, royalty
income was down primarily due to an unfavorable decision from the
Japanese patent office Board of Appeals, which resulted in the
discontinuation of royalty payments in Japan related to Modine's
parallel-flow (PFr) technology.
The provision for income taxes in the current quarter was $5.6
million compared to last years' first quarter expense of $6.7
million. The effective tax rate of 34.9% was reduced 4.7
percentage points from the prior year. The major items
contributing to the reduction in the effective tax rate included
non-deductible fees related to Thermacore acquisition costs
recorded in the prior year, the absence of goodwill amortization
expense recorded in the current year due to the adoption of SFAS
142, and tax-deductible dividends paid to the ESOP in the current
year.
Net earnings for the quarter of $10.4 million were up slightly
when compared to the same quarter one year ago at $0.31 basic and
diluted earnings per share compared to last year's first quarter
net earnings of $10.2 million, or $0.31 basic and diluted
earnings per share. Return on shareholders' equity was 7.9%.
On a pro forma basis, Modine's net earnings declined 28% to $10.2
million from $14.2 million one year ago. Modine's actual results
for last year were adjusted to remove $3.1 million of pretax
costs associated with the acquisition of Thermacore International
and $1.4 million of pretax goodwill amortization expenses. In
accordance with FAS 142, which was adopted in the current period,
Modine no longer amortizes goodwill. The Company is experiencing
lower than expected severance costs relating to the restructuring
plan announced in October 2001. As a result, Modine's current
quarter results were positively affected by a $0.3 million pretax
adjustment to the Company's restructuring accrual. Excluding
these one-time items, Modine's pro forma earnings per share would
have declined to $0.30 from $0.43 when compared to the first
quarter one year ago.
Outlook for the Remainder of the Year
- -------------------------------------
For the remainder of the fiscal year, management expects
additional growth in the North American automotive sales and
performance improvements in the off-highway and building HVAC
areas. In addition, the heavy-duty truck production volumes are
expected to decline significantly from current production levels
in the second half of the year, driven by a drop-off in pre-buying
activity related to the new emission regulations. This should be
partially offset by the recently announced new business with
Kenworth. Little improvement is forecasted in the construction,
industrial, and electronics markets, and the vehicle aftermarket
fundamentals will remain challenging. As a result, management
expects that fiscal 2003 earning per share will be approximately
in line with the fiscal 2002 pro forma earnings per share results
of $1.02. This estimate includes the $0.88 per share pro forma
results reported in the 2002 annual report, plus a $0.14 per share
income effect related to the elimination of goodwill amortization
in accordance with FAS 142. These forward-looking statements
regarding sales, earnings, and operations are subject to certain
risks and uncertainties that 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 June 26, 2002 and March 31, 2002
- ---------------------------------------------------
Current assets
- --------------
Cash and cash equivalents of $86.2 million increased $10.8
million from the March 31, 2002 balance. Cash provided by
operating activities and the issuance of common stock during the
quarter exceeded capital expenditures, debt reductions and the
quarterly dividend payment.
Trade receivables of $172.0 million were up $9.5 million (6%)
over year-end, primarily due to increased sales volumes, which
were up $19.0 million over the previous quarter.
Inventory levels of $125.2 million increased by $3.5 million from
year-end and decreased $23.9 million from the same time one year
ago. Inventory levels have increased from year-end primarily due
to seasonal builds in the Distributed Products segment and new
program builds in the North American truck market.
Deferred income taxes and other current assets declined by $5.8
million from year-end. The largest items contributing to the
change were reductions in unbilled customer tooling, current
deferred income tax assets, and royalty receivables.
The current ratio increased from 2.4 to 1 to 2.5 to 1. Net
working capital increased $17.4 million to $251.8 million. Major
items influencing the change were higher cash and cash equivalents,
trade receivables, and inventories, together with a reduction in the
current portion of long-term debt. These were offset in part by
lower other current assets, higher accrued compensation and employee
benefits, higher income taxes payable and higher accrued expenses.
Noncurrent assets
- -----------------
Net property, plant and equipment of $344.1 million increased by
$3.7 million over year-end. Capital expenditures and foreign
currency translation during the quarter were higher than
depreciation and retirements. Expenditures for European
technical center facilities, new programs for automotive and
truck OEM customers, process and facility improvements, tooling
for new products and other new equipment purchases were among the
larger capital expenditures. Outstanding commitments for capital
expenditures were $12.7 million at June 26, 2002. Approximately
one-half of the commitments relate to Modine's European
operations. The outstanding commitments will be financed through
a combination of funds generated from operations and third party
borrowing as required.
Investments in unconsolidated affiliates of $25.1 million
increased by $0.2 million from year-end. Increased equity
earnings recorded for the quarter were virtually offset by the
unfavorable currency translation effect on Modine's Brazilian
joint venture company, Radiadores Visconde, Ltda.
Goodwill and intangible assets increased by $0.7 million.
Foreign currency translation was the main item contributing to
the overall change.
Deferred charges and other noncurrent assets increased by $1.6
million. The net increase was primarily the result of continuing
recognition of the surplus in Modine's overfunded pension plans
and higher long-term deferred tax assets.
Current Liabilities
- -------------------
Accounts payable and other current liabilities of $162.8 million
were $6.8 million higher than in March 2002. Normal timing
differences in the level of operating activity were responsible
for changes in the various components. Accrued income taxes
increased $1.2 million from timing differences in making
estimated payments.
Debt
- ----
Outstanding debt increased $0.4 million to $150.8 million from
the March 2002 balance of $150.4 million. Domestic long-term
debt increased $5.7 million, of which $5.5 million was due to the
increase in the dollar value of the euro-denominated loans. European
long-term debt decreased by $5.2 million. Total short-term borrowing
decreased $0.1 million to $0.6 million. On April 17, 2002, the
Company borrowed $64.0 million under a new $150.0 million multi-
currency revolving credit facility and used the proceeds to pay
off existing debt. At the same time, Modine terminated credit
facilities with two separate banks.
Consolidated available lines of credit increase $52.9 million to
$105.1 million during the quarter, mainly due to the increased
capacity of the new credit facility. Domestically, Modine's
unused lines of credit were $86.0 million. Foreign unused lines
of credit were $19.1 million. Total debt as a percentage of
shareholders' equity decreased from 29.1% to 28.5%.
Shareholders' Equity
- --------------------
Total shareholders' equity increased by $13.5 million to a total
of $529.5 million. Net income of $10.4 million recorded for the
quarter was partially offset by $4.2 million in dividend payments
to shareholders. Net favorable foreign currency translation of
$4.5 million was reported as the U.S. dollar weakened against the
Euro while the Brazilian Real weakened against the U. S. dollar
during the quarter. Also favorably impacting shareholders' equity
was an increase in paid-in capital and common stock of $2.9 million.
This increase resulted from the issuance of common stock used to
satisfy stock option exercises and employee stock plans requirements.
Also recognized in paid-in capital were the associated tax benefits
resulting from the stock option exercises.
Liquidity
- ---------
Future operating and capital-expenditure needs of the Company are
expected to be generated primarily through a combination of
internally generated funds and external financing arrangements.
The Company believes that its internally generated liquidity,
together with access to external resources, will be sufficient to
satisfy existing commitments and plans. In addition, the Company
believes that it is positioned to provide necessary financial
resources to take advantage of potential strategic business
opportunities that arise within fiscal 2003. In April 2002,
Modine entered into a new $150.0 million multi-currency,
revolving credit facility. Initially, $64.0 million was borrowed
against this new facility and used to pay down existing debt.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of business, Modine and its subsidiaries are
named as defendants in various lawsuits and enforcement
proceedings by private parties, the Occupational Safety and
Health Administration, the Environmental Protection Agency, other
governmental agencies, and others in which claims, such as
personal injury, property damage, or antitrust and trade
regulation issues, are asserted against Modine. Modine is also
subject to other liabilities that arise in the ordinary course of
its business. Many of the pending damage claims are covered by
insurance and when appropriate Modine accrues for uninsured
liabilities. While the outcomes of these matters, including those
discussed below, are uncertain, Modine does not expect that any
unrecorded liabilities that may result from these matters is
reasonably likely to have a material effect on Modine's
liquidity, financial condition or results of operations.
The Mitsubishi and Showa Litigation
-----------------------------------
Over the last 10 years Modine and Showa Aluminum Corporation (and
Mitsubishi Motors in some cases) have instituted various lawsuits and
legal proceedings against each other pertaining to Modine's PF(r)
Parallel Flow Technology and Showa's SC condenser. On July 14, 2000,
Modine and Showa reached a settlement and license agreement. The
Agreement calls for cross-licensing of these technologies between the
parties. As a result of the agreement and another with Mitsubishi Heavy
Industries, Modine received, in the first and second quarters of fiscal
2001, payments totaling $17 million representing partial settlement for
past infringement of Modine's PF technology. Based on an unfavorable
decision from the Japanese patent office Board of Appeals in March
2002, Modine will no longer receive royalty payments in Japan related
to its PF technology. Since July 2000, Modine has been receiving
royalty payments from certain Japanese competitors related to its PF
patents, which expire in 2006. In the twelve months before the
unfavorable decision, royalties from Japanese companies accounted for
approximately $2.9 million of pretax income. In July 2002, the Company
filed notice of its appeal of the March 2002 ruling with the Tokyo High
Court. Over the last 10 years, Modine has been defending its PF
technology in Japan. Modine had estimated a one-time royalty payment of
approximately $29.9 million to cover past infringements if the validity
of its PF patent in Japan was confirmed. Since this ruling does not
effect Modine's royalty income outside of Japan, Modine will continue
to collect royalties for PF products produced in Europe and the United
States where, to date, its patents have been upheld.
The Lake Shore Litigation: Lake Shore Radiator, a former independent
- -------------------------
warehouse distributor of Modine's Aftermarket Division, filed a lawsuit
against Modine in the Federal Court in Jacksonville, Florida in July
2000. Lake Shore has alleged that Modine violated certain antitrust
laws, breached portions of its distributor agreement and wrongfully
terminated its relationship with Lake Shore. Modine has answered each
of the allegations in Lake Shore's complaint and denied any liability.
Trial is scheduled to begin in October 2002.
Other: In February 2000, Modine filed a complaint against Delphi
- -----
Automotive Systems Corporation in the U.S. District Court in
Milwaukee, Wisconsin, alleging infringement of its PF patent.
Under the rules of the Securities and Exchange Commission,
certain environmental proceedings are not deemed to be ordinary
or routine proceedings incidental to the Company's business and
are required to be reported in the Company's annual and/or
quarterly reports. The Company is not currently a party to any
such proceedings.
Other previously reported legal proceedings have been settled or
the issues resolved so as to not merit further reporting.
Item 2. Changes in Securities and use of proceeds.
On July 19, 2002 the Company's Board of Directors elected to
terminate the Company's Shareholder Rights Agreement. The plan
will be terminated by redeeming the rights that were issued under
the Company's 1986 Shareholder Rights Agreement. Please see
Footnote 10 to the Notes to Consolidated Financial Statements
(unaudited) herein.
Item 4. Submission of Matters to a Vote of Security Holders
The following are the results of voting by stockholders present
or represented at the Annual Meeting of Stockholders on July 17,
2002:
1. Election of Directors. The following were elected to
---------------------
serve as directors of the Company until 2005 or until their
successors are elected:
Votes For Votes Withheld
-------------- ----------------
Frank P. Incropera 29,262,306.677 958,617.863
Vincent L. Martin 29,242,716.509 978,208.031
Marsha C. Williams 29,216,033.886 1,004,890.654
2. Adoption of the 2002 Incentive Compensation Plan
------------------------------------------------
Votes For Votes Against Abstain
-------------- ------------- -----------
19,495,422.083 7,455,029.562 214,122.895
3. Shareholder Proposal
--------------------
Votes For Votes Against Abstain
-------------- ------------- ----------
20,392,880.393 6,434,360.627 337,333.52
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) (filed by
reference to the Registrant's Annual
Report on Form 10-K for the fiscal year
ended March 31, 2002).
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, 2002).
4(b)(i) Rights Agreement Amendment No. 1 dated as
of January 18, 1995 between the Registrant
and First Chicago Trust Company of New York
(Rights Agent) (filed by reference to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 2000).
Reference Number
per Item 601 of
Regulation S-K Page
- ---------------- ----
4(b)(ii) Rights Agreement Amendment No. 2 dated as
of January 18, 1995 between the Registrant
and First Chicago Trust Company of New York
(Rights Agent) (filed by reference to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 2000).
4(b)(iii) Rights Agreement Amendment No. 3 dated as of
October 15, 1996 between the Registrant and
First Chicago Trust Company of New York
(Rights Agent) (filed by reference to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 2001).
4(b)(iv) Rights Agreement Amendment No. 4 dated as
of November 10, 1997 between the Registrant
and Norwest Bank Minnesota, N.A., [now known
as Wells Fargo Bank Minnesota, N.A.] (Rights
Agent) (filed by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended March 31, 2002).
4(c) Bank One Credit Agreement dated April 17, 2002
(filed by reference to Registrant's Annual
Report on Form 10-K for the fiscal year ended
March 31, 2002).
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.
99* Important Factors and Assumptions Regarding 23
Forwarding-Looking Statements.
99.1* Section 906 Certification by Chairman and Chief 24
Executive Officer.
99.2* Section 906 Certification by Vice President 25
and Chief Financial Officer.
*Filed herewith.
(b) Reports on Form 8-K:
-------------------
The Company filed four reports on Form 8-K, described as follows:
1. Dated March 28, 2002 to report the Japanese Patent Decision.
2. Dated April 1, 2002 regarding promotions of officers.
3. Dated July 17, 2002 to report the projected earnings for the
coming fiscal year.
4. Dated July 19, 2002 to report the redemption of the Share
Rights Plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY
(Registrant)
By: E. T. THOMAS
------------------------------------
E. T. Thomas, Senior Vice President,
and Chief Financial Officer
(Principal Financial Officer)
Date: August 9, 2002 By: D. R. ZAKOS
-------------------------------------
D. R. Zakos, Vice President, General
Counsel and Secretary