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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 September 26, 2002
------------------
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 (I.R.S. Employer
incorporation 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 7, 2002
------------------------------ -------------------------------
Common Stock, $0.625 Par Value 33,638,932
MODINE MANUFACTURING COMPANY
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 26 and March 31, 2002 3
Consolidated Statements of Earnings -
For the Three Months Ended
September 26, 2002 and 2001 and
For the Six Months Ended September 26,
2002 and 2001 4
Consolidated Condensed Statements of
Cash Flows - For the Six Months
Ended September 26, 2002 and 2001 5
Notes to Consolidated Condensed Financial
Statements 6-19
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 20-25
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 25-27
Item 4. Disclosure Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28-29
Item 2. Changes in Securities and Use of Proceeds 29
Item 6. Exhibits and Reports on Form 8-K 29-30
Signatures 31
Section 302 Certifications 31-33
PART I Financial Information.
Item 1. Financial Statements
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)
September 26, 2002 and March 31, 2002
(Unaudited)
September 26, 2002 March 31, 2002
------------------ --------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 81,054 $ 75,402
Trade receivables, less allowance for
doubtful accounts of $3,025 and $3,217 157,655 162,462
Inventories 116,999 121,663
Deferred income taxes and other current
assets 38,809 46,443
-------- --------
Total current assets 394,517 405,970
-------- --------
Noncurrent assets:
Property, plant, and equipment -- net 346,121 340,388
Investment in affiliates 23,786 24,981
Goodwill -- net 30,935 52,969
Other intangible assets - net 1,844 2,085
Deferred charges and other noncurrent assets 79,325 76,651
-------- --------
Total noncurrent assets 482,011 497,074
-------- --------
Total assets $876,528 $903,044
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term debt $ 220 $ 726
Long-term debt -- current portion 12,679 10,030
Accounts payable 78,465 80,112
Accrued compensation and employee benefits 46,225 46,797
Income taxes 4,874 4,799
Accrued expenses and other current
liabilities 38,734 29,040
-------- --------
Total current liabilities 181,197 171,504
-------- --------
Noncurrent liabilities:
Long-term debt 97,869 139,654
Deferred income taxes 36,406 35,127
Other noncurrent liabilities 44,446 40,760
-------- --------
Total noncurrent liabilities 178,721 215,541
-------- --------
Total liabilities 359,918 387,045
-------- --------
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 33,910 and 33,743
shares, respectively 21,193 21,089
Additional paid-in capital 22,017 19,166
Retained earnings 504,833 518,900
Accumulated other comprehensive loss (22,163) (33,494)
Treasury stock at cost: 272 shares (7,044) (6,976)
Restricted stock - unamortized value (2,226) (2,686)
-------- --------
Total shareholders' equity 516,610 515,999
-------- --------
Total liabilities and shareholders'
equity $876,528 $903,044
======== ========
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended September 26, 2002 and 2001
For the six months ended September 26, 2002 and 2001
(In thousands, except per-share amounts)
(Unaudited)
Three months ended Six months ended
------------------------ ---------------------
September 26 September 26
------------------------ ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net Sales $275,558 $268,070 $548,178 $547,524
Cost of sales 207,794 204,151 411,534 410,819
-------- -------- -------- --------
Gross profit 67,764 63,919 136,644 136,705
Selling, general, and administrative expenses 58,367 55,053 111,673 111,574
Restructuring (income)/charges (1,082) - (1,391) -
-------- -------- -------- --------
Income from operations 10,479 8,866 26,362 25,131
Interest expense (1,480) (2,142) (3,145) (4,207)
Other income -- net 574 4,700 2,318 7,414
-------- -------- -------- --------
Earnings before income taxes and cumulative
effect of accounting change 9,573 11,424 25,535 28,338
Provision for income taxes 3,303 4,595 8,880 11,291
-------- -------- -------- --------
Earnings before cumulative effect of accounting change 6,270 6,829 16,655 17,047
Cumulative effect of change in accounting for:
Goodwill impairment (net of $1,136 income tax benefit) - - (21,692) -
-------- -------- -------- --------
Net earnings/(loss) $ 6,270 $ 6,829 $ (5,037) $ 17,047
======== ======== ======== ========
Net earnings/(loss) per share of common stock - basic
Before cumulative effect of accounting change $0.19 $0.21 $0.50 $0.52
Cumulative effect of accounting change - - (0.65) -
-------- -------- -------- --------
Net earnings/(loss) - basic $0.19 $0.21 ($0.15) $0.52
======== ======== ======== ========
Net earnings/(loss) per share of common stock -
assuming dilution
Before cumulative effect of accounting change $0.19 $0.20 $0.49 $0.51
Cumulative effect of accounting change - - (0.64) -
-------- -------- -------- --------
Net earnings/(loss) - assuming dilution $0.19 $0.20 ($0.15) $0.51
======== ======== ======== ========
Dividends per share $0.125 $0.25 $0.25 $0.50
======== ======== ======== ========
Weighted average shares -- basic 33,637 33,041 33,610 32,962
Weighted average shares -- assuming dilution 33,714 33,394 33,778 33,296
======== ======== ======== ========
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
For the Six Months Ended September 26, 2002 and 2001
(Unaudited)
Six months ended September 26
-----------------------------
2002 2001
-------- --------
Net cash provided by operating activities $ 76,727 $ 69,550
Cash flows from investing activities:
Expenditures for property, plant, and equipment (17,715) (25,134)
Proceeds from sale of business 1,529 -
Proceeds from dispositions of assets 183 1,591
Other -- net (38) 217
-------- --------
Net cash (used for) investing activities (16,041) (23,326)
Cash flows from financing activities:
(Decrease)in short-term debt -- net (602) (26,620)
Additions to long-term debt 65,196 42,178
Reductions of long-term debt (113,146) (38,249)
Issuance of common stock, including treasury stock 3,298 6,722
Purchase of treasury stock (952) (757)
Cash dividends paid (8,828) (16,497)
-------- --------
Net cash (used for) financing activities (55,034) (33,223)
-------- --------
Net increase in cash and cash equivalents 5,652 13,001
Cash and cash equivalents at beginning of period 75,402 21,744
-------- --------
Cash and cash equivalents at end of period $ 81,054 $ 34,745
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
1. General
-------
The accompanying consolidated financial statements, which have not
been audited by independent accountants, were prepared in
conformity with generally accepted accounting principles and such
principles were applied on a basis consistent, except for
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 periods. Results for the first six months of fiscal 2003
are not necessarily indicative of the results to be expected for
the full year.
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.
2. Significant accounting policies
-------------------------------
Sales Discounts -
---------------
To conform with the Emerging Issues Task Force of the FASB
consensus on Issue 00-14 "Accounting for Certain Sales
Incentives," 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 second
quarter and six months 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.
Sales Incentives -
----------------
The Company offers a number of sales incentive programs to
its customers. These programs include volume incentives,
sales rebates and advertising and marketing allowances. The
programs are based upon varying criteria that are tailored to
a particular market or customer base. These sales incentives
may be netted directly against sales at the time of invoicing,
as in case of volume discounts applicable at the time of the
customer order, or in the case of sales rebates, recorded as
a reduction to revenue on a monthly basis with a liability
recognized in "accrued expenses and other current liabilities."
Sales rebate accruals are established based upon actual or
historical sales volume, depending upon the program, and the
purchase of qualifying products, or may be based upon a fixed
percentage of sales as defined in certain customer agreements.
These accruals are reviewed periodically and adjusted if
necessary. In addition, the Company also offers advertising
and marketing allowances which are characteristically reported
as selling, general and administrative expenses. In general,
customers under these programs are required to attain specified
volume levels and/or submit proof of mutually beneficial
advertising programs or marketing efforts such as trade show
participation, in order to qualify for payment under these
programs.
Warranty -
--------
Modine provides product warranties for specific product lines
and accrues for estimated future warranty costs in the period
in which the sale is recorded. Warranty expense is generally
provided based upon historical and current claim data. Accruals
are recorded as current liabilities under the caption "accrued
expenses and other current liabilities."
Revenue Recognition Under Licensing Arrangements (Royalty Payments) -
-------------------------------------------------------------------
Revenues under various licensing agreements are recognized when
earned except in those cases where collection is uncertain, or
the amount cannot reasonably be estimated until formal accounting
reports are received from the licensee as provided for under the
provisions of the licensing agreement. Licensing revenue is
recorded in the consolidated statement of earnings under the
caption "other income - net" except in those cases where the
Company received lump-sum patent settlements related to past
infringement of Modine's PF technology. These payments were
recorded under the "patent settlements" caption in the
consolidated statements of earnings in fiscal 2002 and 2001.
New Accounting Pronouncements -
-----------------------------
Impairment or Disposal of Long-Lived Assets -
-------------------------------------------
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.
Liability Recognition for Certain Employee Termination Benefits
---------------------------------------------------------------
and Other Costs to Exit an Activity (including Certain Costs
------------------------------------------------------------
Incurred in a Restructuring) -
----------------------------
In June 2002, the FASB issued SFAS No. 146 "Accounting for Exit
or Disposal Activities." SFAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting
of costs that are associated with exit and disposal activities,
including restructuring activities that are accounted for
pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." The scope of SFAS No. 146 also includes
(1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees
who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred compensation
contract. SFAS No. 146 will be effective for exit or
disposal activities that are initiated at the Company
after December 31, 2002.
3. Other income -- net
-------------------
(In thousands)
----------------------------------------------------------------------
Three months ended Six months ended
September 26 September 26
------------------ ----------------
2002 2001 2002 2001
----------------- ----------------
Royalty income $ 697 $ 840 $ 754 $1,894
Sale of property, equipment,
and business (2,220) 1,939 (2,213) 2,561
Equity in earnings of non-
consolidated affiliates 706 739 1,235 1,313
Interest income 422 230 641 433
Other non-operating income 969 952 1,901 1,213
------ ------ ------ ------
Total $ 574 $4,700 $2,318 $7,414
====== ====== ====== ======
4. Earnings Per Share
The computational 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
- ----------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------
Net earnings/(loss) per share of common stock basic:
----------------------------------------------------
Before cumulative effect of accounting change $0.19 $0.21 $ 0.50 $0.52
Cumulative effect of accounting change - - (0.65) -
----- ----- ------ -----
Net earnings/(loss) - basic $0.19 $0.21 ($0.15) $0.52
Net earnings/(loss) per share of common stock - diluted:
--------------------------------------------------------
Before cumulative effect of accounting change $0.19 $0.20 $ 0.49 $0.51
Cumulative effect of accounting change - - (0.64) -
----- ----- ------ -----
Net earnings/(loss) - assuming dilution $0.19 $0.20 ($0.15) $0.51
Numerator:
---------
Before cumulative effect of accounting change $6,270 $6,829 $16,655 $17,047
Cumulative effect of accounting change - - (21,692) -
------ ------ ------- -------
Earnings/(loss) available to common shareholders $6,270 $6,829 ($5,037) $17,047
Denominator:
-----------
Weighted average shares outstanding - basic 33,637 33,041 33,610 32,962
Effect of dilutive securities - options* 77 353 168 334
------ ------ ------ ------
Weighted average shares outstanding - assuming
dilution 33,714 33,394 33,778 33,296
- ----------------------------------------------------------------------------------------------------
*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 $21.55 $28.31 $24.63 $27.70
Number of shares 2,522 1,093 1,769 1,207
5. Comprehensive Earnings
----------------------
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, 2002 and 2001, respectively,
were $13,298 and $10,332 for three months, and $6,294 and $8,470
for six months.
6. Inventory
---------
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, 2002 March 31, 2002
--------------------------------------------------------------
Raw materials $ 24,146 $ 25,370
Work in process 30,192 31,673
Finished goods 62,661 64,620
-------- --------
Total inventories $116,999 $121,663
======== ========
7. Property, Plant, and Equipment
------------------------------
(In thousands)
---------------------------------------------------------------------
September 26, 2002 March 31, 2002
---------------------------------------------------------------------
Gross, property,
plant & equipment $732,882 $702,895
Less accumulated depreciation (386,761) (362,507)
-------- --------
Net property,
plant & equipment $346,121 $340,388
======== ========
8. Divestitures
------------
In fiscal 2002, the Company adopted a plan to close or sell its
wholly-owned Canadian aftermarket subsidiary reported as part of
the Company's Distributed Products segment. In connection with
the plan, the Company determined that the carrying values of
some of the underlying assets exceeded their fair values.
Consequently, the Company recorded an impairment loss of
$1,851,000, which represents the excess of the carrying values
of the assets over the estimated fair values, less costs to
sell. An impairment loss of $1,572,000, representing fixed
assets and inventory, was charged to cost of sales and $279,000,
representing a write-off of goodwill on the subsidiary's books,
was charged to selling, general and administrative expense.
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
$1.9 million and resulted in a $1.7 million pre-tax loss that
was charged to other income - net during the second quarter of
fiscal 2003. This pre-tax loss consisted of cumulative currency
translation recorded from the time of Modine's original
investment in Canada and other losses that were realized upon
the sale. The final sales price and loss recorded on the sale of
business are subject to final settlement with the purchaser.
On October 30, 2002, under a previously announced restructuring
plan, Modine completed the sale of its facility located in
Knoxville, Tennessee. The Knoxville facility was part of the
restructuring plan (see Note 9) previously announced in the third
quarter of fiscal 2002, to reduce costs and increase future
operating efficiency by consolidating a portion of the Company's
operations. The cash sales price of the transaction totaled
approximately $2.5 million and the Company anticipates that a small
gain from the sale will be recorded during the third quarter of
fiscal 2003.
9. 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 facility located in St.
Paul, which has ceased production, manufactured products for the
Company's HVAC market. In the second quarter, the manufacturing
facilities located in LaPorte and Knoxville produced products for
customers in the Company's heavy-duty and industrial markets.
Subsequent to the second quarter, the Knoxville facility was sold
and ceased production. Modine has relocated the production of the
majority of the products previously made in these three 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 three months.
Anticipated staff reductions, as estimated at the end of the
fourth quarter fiscal 2002, were approximately 330 employees. The
planned reductions included 264 employees in the U.S. and 66
employees in Europe. In the first six months 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
$353,000 in the U.S. Of the total number of employees affected,
177 employees were terminated as of the end of the second quarter
of fiscal 2003 and, thus far, have received benefit payments of
$1,799,000. The balance in the reserve for termination benefits
at September 26, 2002 is $2,821,000.
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. Upon reconsideration of the
remaining "other" restructuring liabilities recorded during the
third quarter of fiscal 2002, it was determined that $1,007,000
did not meet the requirements of an incremental cost and thus
should not have been accrued as part of the EITF 94-3
restructuring charge taken in the third quarter of fiscal 2002 and
should instead have been expensed as incurred. As a result,
$1,007,000 was reversed during the second quarter of fiscal 2003
in addition to the $31,000 accrual adjustment taken in the first
quarter of fiscal 2003. During the first six months of fiscal
2003, cash payments of $47,000 were made. The remaining $413,000
liability consists of lease cancellation charges and disposal costs
of obsolete assets.
The following table displays the components of the accrued
restructuring liability:
(In thousands)
------------------------------------------------------------------
Amount
------------------------------------------------------------------
Termination Benefits:
Balance at March 31, 2002 $4,042
Reclassification from other restructuring charges 28
Adjustments (353)
Payments (896)
------------------------------------------------------------------
Balance at September 26, 2002 $2,821
------------------------------------------------------------------
Other Restructuring Charges:
Balance at March 31, 2002 $1,526
Reclassification to termination benefits (28)
Adjustments (1,038)
Payments (47)
------------------------------------------------------------------
Balance at September 26, 2002 $ 413
------------------------------------------------------------------
In addition to the restructuring costs, other closure-related and
business rationalization costs recorded during the first six
months included $973,000 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 $275,000 and miscellaneous shut-down related costs of
$517,000 were incurred by the North American facilities. All
closure-related and business rationalization costs incurred
during fiscal 2003 have been recognized as expense in the cost of
sales line of the income statement.
Asset impairments and obsolete inventory charges recorded in fiscal
2002 were associated with the proposed sale or closure of the
Company's Canadian operations, the write-down of the unitary air-
conditioning product line marketed by the Company's HVAC division
and the announced closure of the Company's Knoxville, Tennessee;
LaPorte, Indiana; and St. Paul, Minnesota facilities.
The asset impairments recorded in fiscal 2002 at the Company's
Canadian facility in accordance with the provisions under FAS 121
were determined by referencing both a fair market offer to buy the
operations by an unrelated party and the estimated net proceeds
from closing the facility and selling the assets. Based on these
analyses it was determined that the book value of the Canadian
operations exceeded the fair market offer to buy the business.
The Company compared the outstanding offer to purchase the
business, less the costs to sell, to the book value and recorded
an impairment charge equal to the difference between the two
amounts. Goodwill and fixed assets of $279,000 and $804,000
were written-off, respectively, and the value of the inventory
held was reduced by $768,000. The impairment charge would have
been virtually identical if the Company had utilized the
estimated proceeds from closing the facility and selling the
assets.
The other fixed asset impairment recorded in fiscal 2002 in the
amount of $221,000 was the result of exiting a previously
manufactured product-line by the Company's HVAC division. A
determination was made by the division's management that these
assets could not be utilized at another manufacturing facility.
In addition, $455,000 of inventory related to the discontinued
product-line was identified as obsolete by management.
The remaining inventory obsolescence charges of $515,000 recorded
in fiscal 2002 related to the announced restructuring that
included the shutdowns of the Company's Knoxville, Tennessee;
Laporte, Indiana; and St. Paul Minnesota manufacturing facilities.
Management at each of the facilities conducted a thorough analysis
of the inventory on hand and determined that the products were
being either discontinued or that the cost of transportation to
and storage at another facility would be cost prohibitive.
The following table provides a summary of restructuring and one-time
closure/business rationalization costs recorded related to the program
announced in the third quarter of fiscal 2002:
(In thousands)
------------------------------------------------------------------------
Recorded Cumulative
as of Current Charge as of
March 31, Year September 26,
2002 Activity 2002
------------------------------------------------------------------------
Restructuring Charges:
Employee severance and
related benefits $ 4,971 $ (353) $ 4,618
Goodwill impairment 1,043 - 1,043
Post-closing operating
expenses 845 (845) -
Other disposal costs 681 (193) 488
------- -------- -------
Total restructuring costs 7,540 (1,391) 6,149
------- -------- -------
Other Closure Costs:
Asset impairments 2,072 - 2,072
Depreciation (change in
useful lives) 1,397 973 2,370
Pension curtailment costs 881 (78) 803
Obsolete inventory charges 970 275 1,245
Miscellaneous other closure
costs 110 517 627
------- -------- -------
Total other closure costs 5,430 1,687 7,117
------------------------------------------------------------------------
Total restructuring and other
closure costs $12,970 $ 296 $13,266
------------------------------------------------------------------------
Other closure costs were recorded on the financial statements as
follows:
(In thousands)
------------------------------------------------------------------------
Fiscal Fiscal
2002 2003 Total
------------------------------------------------------------------------
Cost of Sales $4,828 $1,687 $6,515
Selling, general and administrative 381 - 381
Other income - net 221 - 221
------------------------------------------------------------------------
Total $5,430 $1,687 $7,117
------------------------------------------------------------------------
10. Goodwill and Intangible Assets
------------------------------
In June 2001, the Financial Accounting Standards Board issued SFAS
No.142 "Goodwill and Other Intangible Assets." With the adoption of
SFAS No.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 SFAS No. 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:
thousands, except per-share amounts)
-------------------------------------------------------------------------
Three months ended Six months ended
September 26 September 26
-------------------------------------------------------------------------
2002 2001 2002 2001
-------------------------------------------------------------------------
Reported net income $ 6,270 $ 6,829 $(5,037) $ 17,047
Add-back goodwill amortization,
net of tax - 1,103 - 2,210
------- ------- ------- --------
Adjusted net income $ 6,270 $ 7,932 $(5,037) $ 19,257
======= ======= ======= ========
Reported basic earnings per share $ .19 $ .21 $ (.15) $ .52
Add-back goodwill amortization - .03 - .06
------- ------- ------- --------
Adjusted basic earnings per share $ .19 $ .24 $ (.15) $ .58
======= ======= ======= ========
Reported diluted earnings per share $ .19 $ .20 $ (.15) $ .51
Add-back goodwill amortization - .04 - .07
------- ------- ------- --------
Adjusted diluted earnings per share $ .19 $ .24 $ (.15) $ .58
======= ======= ======= ========
In accordance with the provisions of SFAS No.142, the Company
recently tested its goodwill for impairment in all of its reporting
units. It was determined that the aftermarket reporting unit's
carrying amount exceeded its fair value, which was estimated based
on the present value of expected future cash flows. This resulted
in a $21.7 million (net of a $1.1 million income tax benefit) non-
cash write-off of goodwill in the aftermarket reporting unit. The
charge was accounted for as a cumulative effect of an accounting
change, retroactive to the first quarter of the current fiscal
year. Modine reviewed the carrying value assigned to goodwill in
the aftermarket reporting unit with respect to market conditions
and expectations of future operating performance. These factors
indicated that a permanent impairment in value existed in the
respective business. Modine's goodwill impairment charge was
calculated based on an independent valuation of the underlying
business. The goodwill impairment charge does not impact the
company's cash flow, liquidity or compliance with financial
covenants.
With the adoption of SFAS No.142, goodwill related to specific
operating segments has been reallocated from the corporate &
administrative assets as of the first of the fiscal year and the
prior period has been restated for comparison purposes.
Changes in the carrying amount of goodwill during fiscal 2003, by
segment and in the aggregate are summarized in the following table:
(In thousands)
-------------------------------------------------------------------------
Original Distributed European
Equipment Products Operations Total
-------------------------------------------------------------------------
Balance, March 31, 2002 $20,344 $ 26,884 $ 5,741 $52,969
Impairment losses - (22,828) - (22,828)
Fluctuations in foreign
currency - (24) 818 794
------- -------- ------- -------
Balance, September 26, 2002 $20,344 $ 4,032 $ 6,559 $30,935
======= ======== ======= =======
Additional disclosures related to acquired intangible assets are as
follows:
(In thousands)
-------------------------------------------------------------------------
September 26, 2002 March 31, 2002
---------------------- ----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
---------------------- ----------------------
Amortized Intangible
Assets:
Patents and product
technology 3,951 2,257 3,951 2,126
Non-compete agreements 2,132 2,065 2,182 2,007
Other intangibles 118 118 201 189
------ ------ ------ ------
Total 6,201 4,440 6,334 4,322
Unamortized Intangible
Assets:
Pension Asset 83 - 73 -
------ ------ ------ ------
Total intangible
assets $6,284 $4,440 $6,407 $4,322
====== ====== ====== ======
The aggregate amortization expense for the first six months ended
September 26, 2002 and September 26, 2001 were $193,000 and
$393,000, respectively. 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
11. Financial Instruments
---------------------
Concentrations of Credit Risk
-----------------------------
The Company invests excess cash in investment quality short-term
liquid debt instruments. Such investments are made only in
instruments issued by high quality institutions. Financial
instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of accounts
receivable. The Company sells a broad range of products that
provide thermal solutions to a diverse group of customers
operating throughout the world. At September 26, 2002, March 31,
2002 and March 31, 2001, approximately 48%, 49% and 43%,
respectively, of the Company's trade accounts receivables were
from the Company's top ten individual customers. These customers
operate primarily in the automotive, truck, and heavy equipment
markets and are influenced by many of the same market and general
economic factors. To reduce the credit risk, the Company performs
periodic credit evaluations of each customer and actively monitors
their financial condition and developing business news.
Collateral or advanced payments are generally not required, but
may be used in those cases where a substantial credit risk is
identified. Credit losses to customers operating in the markets
served by the Company have not been material. For the last 3
fiscal years, total bad debt write-offs have been well below 1% of
outstanding trade receivable balances at year-end.
12. Foreign Exchange Contracts/Derivatives/Hedges
---------------------------------------------
Modine maintains a foreign risk-management strategy that uses
derivative and non-derivative instruments in a limited way to
protect assets and obligations already held by Modine and to
protect its cash flows. 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 six months 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 Modine's joint venture
in Japan are managed partially through foreign-currency-denominated
debt agreements entered into by the parent. For the second quarter
and six months ended September 26, 2002, $0.3 million in gains and
$5.6 million of net losses, respectively, related to the foreign-
currency-denominated debt agreements were included in the
cumulative translation adjustment.
13. Segment data
------------
(In thousands)
--------------------------------------------------------------------
Quarter ended September 26, 2002 2001
--------------------------------------------------------------------
Sales:
Original Equipment $115,128 $108,689
Distributed Products 96,038 106,326
European Operations 79,740 67,617
--------------------------------------------------------------------
Segment sales 290,906 282,632
Eliminations (15,348) (14,562)
--------------------------------------------------------------------
Total net sales $275,558 $268,070
--------------------------------------------------------------------
Operating income:
Original Equipment $ 18,666 $ 14,509
Distributed Products 2,019 7,041
European Operations 5,848 2,510
--------------------------------------------------------------------
Segment operating income 26,533 24,060
Corporate & administrative expenses (16,098) (15,257)
Eliminations 44 63
Other items not allocated to segments (906) 2,558
--------------------------------------------------------------------
Earnings before income taxes and
cumulative effect of
accounting change $ 9,573 $ 11,424
--------------------------------------------------------------------
(In thousands)
--------------------------------------------------------------------
Six Months ended September 26, 2002 2001
--------------------------------------------------------------------
Sales:
Original Equipment $233,745 $220,977
Distributed Products 186,714 207,501
European Operations 156,816 151,592
--------------------------------------------------------------------
Segment sales 577,275 580,070
Eliminations (29,097) (32,546)
--------------------------------------------------------------------
Total net sales $548,178 $547,524
--------------------------------------------------------------------
Operating income:
Original Equipment $ 38,769 $ 32,387
Distributed Products 6,946 11,043
European Operations 13,094 12,089
--------------------------------------------------------------------
Segment operating income 58,809 55,519
Corporate & administrative expenses (32,489) (30,452)
Eliminations 42 64
Other items not allocated to segments (827) 3,207
--------------------------------------------------------------------
Earnings before income taxes and
cumulative effect of accounting
change $ 25,535 $ 28,338
--------------------------------------------------------------------
(In thousands)
--------------------------------------------------------------------
September 26, March 31,
Period ending 2002 2002
--------------------------------------------------------------------
Assets:
Original Equipment $ 216,948 $ 231,553
Distributed Products 194,910 224,973
European Operations 239,204 212,131
Corporate & Administrative 244,943 251,685
Eliminations (19,477) (17,298)
--------------------------------------------------------------------
Total assets $ 876,528 $ 903,044
--------------------------------------------------------------------
With the adoption of SFAS No.142, goodwill related to specific
operating segments was reallocated from the corporate &
administrative assets at the beginning of the fiscal year 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.
14. Shareholders Rights Plan
------------------------
On July 17, 2002, the Board of Directors elected to terminate the
Company's Shareholder Rights Agreement. The plan was terminated by
redeeming the rights that were issued under the Company's 1986
Shareholder Rights Agreement.
The rights were redeemed at a price of $.0125 per right, paid in
cash. The total redemption cost was $420,000. There was one
right attached to each outstanding share of common stock. The
redemption payment was 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 was terminated.
15. Contingencies and Litigation
----------------------------
Environmental -
-------------
The Environmental Protection Agency has designated the Company as
a potentially responsible party ("PRP") for remediation of six
waste disposal sites with which the Company may have had direct
or indirect involvement. These sites are as follows: Elgin
Salvage (Illinois); N.L./Taracorp (Illinois); Third Site
(Indiana); Interstate Lead (Alabama); H.O.D. Landfill (Illinois);
and Four County Landfill (Indiana). These sites are not Company
owned and allegedly contain wastes attributable to Modine from
past operations. These claims are in various stages of
administrative or judicial proceedings and include recovery of
past governmental costs and for future investigations and
remedial actions. In three instances, Modine has not received,
and may never receive, documentation verifying its involvement
and/or its share of waste contributions to the sites.
Additionally, the dollar amounts of the claims have not been
specified. In two instances, Modine has made de minimis payments
to settle the claims and no further costs are currently expected.
At the sixth site, a settlement agreement was signed in January
2002 which included a $119,000 settlement assessment. The
Company accrues costs associated with environmental matters, on
an undiscounted basis, when they become probable and reasonably
estimable. As of September 26, 2002, March 31, 2002 and March
31, 2001, the Company had accrued $119,000, $119,000 and $21,000,
respectively, in "accrued expenses and other current liabilities"
on the consolidated balance sheet to cover cleanup activities,
including remediation and legal costs at the sites identified
above. This accrual does not reflect any possible insurance
recoveries but does reflect a reasonable estimate of cost sharing
at multi-party sites. The September 26, 2002 accrual, related to
the N.L. Taracorp site in Illinois, is expected to be remitted as
soon as a formal request for payment is received from the EPA.
Employee Agreements -
-------------------
The Company has employment agreements with certain key employees
that provide for compensation and certain other benefits. The
agreements also provide for other terms and conditions of
employment including termination payments under certain specific
circumstances such as a material change in control. In the
unlikely event that these agreements were all triggered
simultaneously, the possible contingent payments which would be
required under the employment contracts are estimated to be
between approximately a minimum of $7.0 million and $14.0 million
depending on incentive payment calculations and other factors
which are not determinable until the actual event occurs.
Licensee Royalty Payments -
-------------------------
Based on an unfavorable decision handed down by the Japanese
patent office Board of Appeals in March of 2002, concerning the
validity of the Company's PF patents in Japan, the Company
initially reported at March 31, 2002 that it believed it would no
longer continue to receive royalty payments from certain Japanese
licensees. The Company now believes, based upon further review of
the licensing agreements, that certain Japanese licensees will
continue to make royalty payments until the highest court decision
on the PF patent validity is issued. The Company is currently
holding discussions with the affected parties concerning varying
interpretations of the license agreements. As a result, the
Company believes the reduction to royalty income to be reported in
fiscal 2003 may be less than the $2,900,000 as originally detailed
in Note 22 to the Annual Report.
Other
-----
Other recent developments concerning legal proceedings reported in
the Modine Manufacturing Company Form 10-K report for the year
ended March 31, 2002, are updated in Part II, Other Information,
Item 1, Legal Proceedings.
Item 2. 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 Second Quarter of 2002-03 with the Second Quarter of
- ----------------------------------------------------------------------
2001-02
- -------
Second quarter net sales of $275.6 million were 2.8% higher than the
$268.1 million reported in the second quarter of last year. Sales were
positively impacted by a stronger Euro in relation to the U.S. dollar by
approximately $9.8 million when compared to the same quarter last year.
Revenues from the Original Equipment segment grew by 5.9% from the same
quarter last year. Sales increases in the Original Equipment segment
were positively impacted by increases in its truck and automotive areas.
However, these results were partially offset by a modest decline in
revenues in the off-highway business when compared to the second quarter
of the prior year. Revenues recorded in the European operations segment
increased by 17.9% from one year ago, and were positively impacted by a
stronger Euro in relation to the U.S. dollar. Both the European
automotive and heavy-duty truck markets recorded moderate increases in
revenues in local currency. In the Distributed Products segment,
revenue declined 9.7%. The vehicle aftermarket and electronic cooling
markets served by this segment were the major contributors causing the
decline from one year ago.
Gross profit, as a percentage of sales, was 24.6%. This was a 0.8%
increase as a percentage of sales from the 23.8% earned in the second
quarter of the previous year. Higher gross margins were earned in the
Original Equipment and European Operations segments, while a lower gross
margin was reported in the Distributed Products segment. Improved
margins in the North American and European automotive and truck markets
were offset partially by declines in the aftermarket and electronic
cooling markets in the Distributed Products segment.
Selling, general and administrative expenses of $58.4 million were
increased from the prior year's second quarter of $55.1 million.
Excluding the $1.4 million of pretax goodwill amortization expenses
recorded in the second quarter of the prior year, selling, general and
administrative expenses would have increased $4.7 million or 8.8% over
the same quarter one year ago. The larger items contributing to the
change were expected increases in wages and fringe benefit costs
together with an increase in litigation costs.
Income from operations of $10.5 million increased by $1.6 million, or
18.2% over the same quarter last year. Adjusting for one-time items
discussed below, Modine's pro forma income from operations decreased by
9.9% to $9.4 million from $10.4 million for the same period a year ago.
The Company's actual results in the year-ago period were adjusted for the
pro forma comparison to remove $0.2 million of pre-tax costs associated
with the acquisition of Thermacore International and $1.4 million of pre-
tax goodwill amortization expenses. The current quarter's fiscal 2003
results were favorably impacted by a $1.0 million reversal of November
2001 restructuring charges which, in retrospect, did not meet the criteria
for accrual under EITF 94-3. This income was not included for the
purposes of the pro forma comparison presented above.
Interest expense decreased 30.9%, or $0.7 million, while average
outstanding debt levels decreased $47.5 million, or approximately 28.2%,
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 $4.1 million from the same quarter
one year ago. The current year's quarter included the sale of Modine's
aftermarket operations in Canada, Modine of Canada, Ltd., resulting in a
$1.7 million pre-tax loss which consisted of cumulative currency
translation and other losses that were realized upon the completed sale
of the Canadian operations. The prior year's quarter included the sale
of an aftermarket warehouse facility in Los Angeles resulting in a $0.9
million gain. Profit/(loss) on the sale/disposal of equipment declined
by $1.5 million from the same period one year ago.
The provision for income taxes in the current quarter was $3.3 million
compared to last years' second quarter expense of $4.6 million. The
effective tax rate of 34.5% was reduced 5.7 percentage points from the
prior year. There were a number of items contributing to the overall
reduction recorded in the quarter. They 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 No.142, tax-deductible dividends paid to the
ESOP in the current year, and the capital loss carryover resulting from
the sale of the Company's Canadian subsidiary.
Net earnings for the quarter of $6.3 million were down slightly when
compared to the same quarter one year ago at $0.19 basic and diluted
earnings per share compared to last year's second quarter net earnings
of $6.8 million, or $0.21 basic earnings per share and $0.20 diluted
earnings per share. Return on average shareholders' equity was 4.7%.
Comparison of the First Six Months of 2002-03 with the First Six Months of
- --------------------------------------------------------------------------
2001-02
- -------
Net sales for the first six months of fiscal 2002-03 were $548.2
million, up 0.1% from the $547.5 million reported in the same period of
last year. Sales were positively impacted by a stronger Euro in relation
to the U.S. dollar by approximately $9.9 million when compared to the
first six months of last year.
Overall, changes in the company's segment sales were mixed for the first
six months of the year. The European Operations segment declined by 2.1%
in local currency from year-ago levels, but finished higher in dollars due
to the favorable currency translation impact of $8.5 million recorded in
the first half of the year. In the Original Equipment segment, sales
improved by 5.8%. Sales increases in the Original Equipment segment were
positively impacted by sales increases primarily in the automotive
market. The Distributed Products segment weakened by 10.0%, with major
factors being a very soft North American aftermarket and the continued
weakness in the computer and telecommunications markets.
Gross profit of 24.9% was down 0.1 percentage points from the first six
months of the previous year. Material, labor and overhead costs, as a
percentage of sales, remained approximately the same as one year ago.
Gross profits, in dollars, grew in the Original Equipment and European
Operations segments by 14% and 15%, respectively, while declining in the
Distributed Products segment by 15%.
Selling, general and administrative expenses of $111.7 million, or 20.4%
of sales, remained essentially unchanged when compared to the first six
months of last year. Excluding the $2.8 million of pretax goodwill
amortization expenses recorded in the first six months of the prior
year, selling, general and administrative expenses would have increased
$2.9 million or 2.7% over the same period one year ago.
Operating income at $26.4 million, or 4.8% of sales, was up 0.2
percentage points from the $25.1 million, or 4.6% of sales, in the first
half of the previous year. Adjusting for one-time items, Modine's pro
forma income from operations decreased 20.0% to $25.0 million from $31.2
million. The Company's actual results in the year-ago period were
adjusted for the pro forma comparison to remove $3.3 million of pre-tax
costs associated with the acquisition of Thermacore International and
$2.8 million of pre-tax goodwill amortization expenses. The current
year's six-month results were adjusted for $1.4 million of restructuring
charges that were reversed back into income in the current year.
Interest expense declined $1.1 million, or just over 25% from the same
six month-period one year ago. Average outstanding debt levels for the
six months declined $40.2 million, or approximately 23%, from the same
period 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 $5.1 million from the same six-
month period one year ago. A $1.4 million reduction in royalty income
related to the unfavorable decision received from the Japanese patent
office Board of Appeals concerning Modine's PF patent technology in
Japan last March, was responsible for a portion of the overall decline
in non-operating income. The Company has received royalty payments from
certain Japanese licensees in the current year and now believes that it
will continue to receive royalty payments from certain Japanese
licensees until the highest court decision on the PF patent validity is
issued. The Company is currently holding discussions with the affected
parties concerning varying interpretations of the license agreement
provisions. As previously discussed, a $1.7 million pre-tax loss was
recorded in the second quarter of fiscal 2003 on the sale of the
Company's wholly-owned Canadian subsidiary. Additionally the current
year's second quarter included a $0.8 million loss on the disposal of
tooling and equipment. In the prior year, the Company had recorded a
$0.9 million gain on the sale of an aftermarket warehouse facility
located in Los Angeles, California.
The effective tax rate on earnings before the cumulative effect of
accounting change of 34.8% declined by 5.0 percentage points from the
39.8% reported in the prior year. The primary reasons for the change
were similar to those reported in the second quarter discussion.
Earnings, before the cumulative effect of the accounting change for
goodwill impairment, were $16.7 million or $0.50 basic and $0.49 diluted
earnings per share for the first six months of the year. The goodwill
charge resulted in a $(0.65) and $(0.64) reduction to basic and diluted
earnings per share, respectively. Net losses for the first six months
of the current year, which include a $21.7 million after-tax charge for
goodwill impairment reported as an accounting change, were $(5.0)
million, or $(0.15) basic and $(0.15) diluted earnings per share. This
compares to net earnings of $17.0 million, or $0.52 basic and $0.51
diluted earnings per share, for the same six-month period the year
before.
Outlook for the Remainder of the Year
- -------------------------------------
For the remainder of the year, Modine continues to expect growth in
automotive sales and performance improvements in its off-highway and
building HVAC areas. However, the company also expects heavy-duty truck
production volumes to decline significantly in the second half of the
year from current production levels. Modine is forecasting little
improvement in the aftermarket, construction, industrial, and
electronics markets. As a result, Modine now expects fiscal 2003
earnings per share, excluding the charge for the accounting change, to
be down modestly from its earlier projection of $1.02 per share. Modine
still expects operating cash flow to remain strong and more than
sufficient to meet all funding requirements. 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 September 26, 2002 and March 31, 2002
- --------------------------------------------------------
Current assets
- --------------
Cash and cash equivalents of $81.1 million increased $5.7 million from
the March 31, 2002 balance. Cash provided by operating activities, the
proceeds from the sale of the Canadian business and other assets and the
issuance of common stock during the six months exceeded capital
expenditures, debt reductions and the dividend payments, including the
redemption of shareholders' rights in the second quarter.
Trade receivables of $157.7 million were down $4.8 million (3%) over
year-end, primarily due to improved collections based on a management
initiative to reduce the number of days sales that remain outstanding.
Inventory levels of $117.0 million decreased by $4.7 million from year-
end. Factors influencing the change were on-going management programs,
particularly in the aftermarket division, to reduce overall inventory
levels, seasonal fluctuations, announced plant closures, pre-builds for
new program launches and a backlog of product deliveries from certain
aftermarket suppliers.
Deferred income taxes and other current assets declined by $7.6 million
from year-end. The largest items contributing to the change were
reductions in prepaid income tax assets, and payment received on a
vendor warranty claim in Europe that reduced other receivables.
The current ratio decreased from 2.4 to 1 to 2.2 to 1. Net working
capital decreased $21.1 million to $213.3 million. Major items
influencing the change were reductions in trade receivables,
inventories, deferred income taxes and other current assets, together
with an increase in the current portion of long-term debt and increased
accrued expenses and other current liabilities. These were offset in
part by higher cash and cash equivalents and lower accounts payable.
Noncurrent assets
- -----------------
Net property, plant and equipment of $346.1 million increased by $5.7
million over year-end. Capital expenditures and foreign currency
translation during the six months 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 $17.0 million at September 26, 2002.
Approximately two-thirds 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 $23.8 million decreased by
$1.2 million from year-end. Equity earnings of affiliates were $1.2
million for the first six months of fiscal 2003. These earnings were
more than offset by $2.4 million in net unfavorable currency translation
effect from the Company's three equity investments. The largest
currency translation change, a $3.5 million reduction in the current
year, occurred at Modine's Brazilian joint venture company, Radiadores
Visconde, Ltda. Smaller favorable currency translation changes occurred
at the Company's other two unconsolidated affiliates in the first six
months of fiscal 2003.
Goodwill decreased by $22.0 million. This decrease was the result of a
$22.8 million transitional impairment loss recorded in the Company's
aftermarket business and fluctuations in foreign currency exchange
rates. Intangible assets decreased by $0.2 which is primarily
amortization expense recorded in the first six months of the current
year.
Deferred charges and other noncurrent assets increased by $2.7 million.
The net increase was primarily the result of continuing recognition of
the surplus in Modine's overfunded pension plans and an increase in long-
term deferred tax assets. The increase in deferred tax assets resulted
mainly from foreign currency translation of balances recorded on
European subsidiaries books.
Current Liabilities
- -------------------
Accounts payable and other current liabilities of $163.4 million were
$7.5 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 $0.1 million from
timing differences in making estimated payments.
Debt
- ----
Outstanding debt decreased $39.6 million to $110.8 million from the
March 2002 balance of $150.4 million. Domestic long-term debt decreased
$34.7 million, which included a $40.0 million paydown on the revolving
credit facility. The remaining change in domestic long-term debt of
$5.3 million was due to the increase in the dollar value of the Euro-
denominated loans. European long-term debt decreased by $4.4 million,
which included payments of $7.6 million offset by $3.2 million in
currency translation due to the stronger Euro in relation to the U.S.
dollar. Total short-term borrowing decreased $0.5 million to $0.2 million.
Consolidated available lines of credit increased $92.7 million to $144.9
million during the first six months, mainly due to the increased
capacity of the new $150.0 million credit facility obtained in April
2002. Domestically, Modine's unused lines of credit were $126.0 million.
Foreign unused lines of credit were $18.9 million. Total debt as a
percentage of shareholders' equity decreased from 29.1% to 21.4%.
Shareholders' Equity
- --------------------
Total shareholders' equity increased by $0.6 million to a total of
$516.6 million. Retained earnings declined by $14.1 million. The
reductions to retained earnings included a $5.0 million net loss (after
the accounting change) reported year-to-date, $8.8 million in dividend
payments, including payments to terminate the shareholders rights plan,
and losses arising from treasury stock transactions totaling $0.3
million. Net favorable foreign currency translation of $11.3 million
was reported as the U.S. dollar weakened against the Euro while the
Brazilian Real weakened against the U. S. dollar during the first six
months. Also favorably impacting shareholders' equity was an increase
in paid-in capital and common stock of $3.0 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.
Environmental
- -------------
Please see Footnote 15 to the Notes to Consolidated Financial Statements
(unaudited) herein.
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 future plans. In addition, the Company believes that it
is positioned to provide necessary financial resources to take advantage
of potential strategic business opportunities that may 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.
Other
- -----
The table shown below contains certain selected financial data for the
last five completed fiscal years.
Selected financial data
- -----------------------
Fiscal Year ended March 31
----------------------------------------------------------
2002(1) 2001(2) 2000 1999(3) 1998
----------------------------------------------------------
Sales (in thousands) $1,074,760 $1,121,399 $1,174,956 $1,136,593 $1,066,115
Net earnings (in
thousands) $23,345 $51,830 $66,332 $75,085 $74,749
Total assets (in
thousands $903,044 $937,171 $955,871 $933,962 $766,035
Long-term debt
(in thousands) $139,654 $137,449 $214,585 $144,124 $89,946
Dividends per share .875 1.00 .92 .84 .76
Net earnings per share
- - Basic .70 1.61 2.05 2.31 2.30
- - Assuming dilution .70 1.58 2.01 2.25 2.24
(1) A restructuring charge reduced net earnings by $5.2 million.
See Note 11 to the 2002 consolidated financial statements in the
Company's fiscal 2002 Annual Report for further details.
(2) Patent royalty settlements added $12.7 million to net earnings.
See Note 22 to the 2002 consolidated financial statements in the
Company's fiscal 2002 Annual Report for further details.
(3) Proceeds from a prior year's non-strategic asset sale and from
patent royalty settlements each added $2.3 million to net earnings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, Modine is subject to market exposure
from changes in foreign exchange rates, interest rates, credit risk,
economic risk and commodity price risk.
Foreign Currency Risk
- ---------------------
Modine is subject to the risk of changes in foreign currency exchange
rates due to its operations in foreign countries. Modine has
manufacturing facilities in Mexico, Taiwan, and throughout Europe. It
also has equity investments in companies located in France, Japan and
Brazil. Modine sells and distributes its products throughout the world.
As a result, the Company's financial results could be significantly
affected by factors such as changes in foreign currency exchange rates
or weak economic conditions in the foreign markets in which the Company
manufactures, distributes and sells it products. The Company's operating
results are primarily exposed to changes in exchange rates between the
U. S. dollar and the European currencies, primarily the Euro. The
Company does not generally hedge operating translation risks because
cash flows from international operations are reinvested locally. Changes
in foreign currency exchange rates for the Company's foreign subsidiaries
reporting in local currencies are generally reported as a component of
shareholders' equity. The Company's other comprehensive loss decreased
by $11.3 million for the six months ended September 26, 2002 and increased
by $9.1 million and $2.3 million for the twelve months ended March 31,
2002 and March 31, 2001, respectively. As of September 26, 2002,
March 31, 2002 and 2001, the company's foreign subsidiaries had net
current assets (defined as current assets less current liabilities)
subject to foreign currency translation risk of $60.5 million, $58.9
million and $62.5 million, respectively. The potential decrease in the
net current assets from a hypothetical 10% adverse change in quoted
foreign currency exchange rates would be approximately $6.1 million,
$5.9 million and $6.3 million, respectively. This sensitivity analysis
presented assumes a parallel shift in foreign currency exchange rates.
Exchange rates rarely move in the same direction. This assumption may
overstate the impact of changing exchange rates on individual assets and
liabilities denominated in a foreign currency.
The company has certain foreign denominated long-term debt obligations
that are sensitive to foreign currency exchange rates. The following
table presents the future principal cash flows and weighted average
interest rates by expected maturity dates. The fair value of long-term
debt is estimated by discounting the future cash flows at rates offered
to the company for similar debt instruments of comparable maturities.
The carrying value of the debt approximates fair value.
September 26, 2002
------------------
Expected Maturity Date
-------------------------------------------------
There-
Long-term debt in ($000's) F2003 F2004 F2005 F2006 F2007 after Total
- -------------------------- ----- ----- ----- ------ ----- ------ -----
Fixed rate (Euro) 931 1,862 2,510 51,348 2,510 12,478 71,639
Average interest rate 5.44% 5.46% 5.50% 5.32% 4.07% 4.07%
Fixed rate (GBP) 71 146 154 163 171 530 1,235
Average interest rate 5.25% 5.25% 5.25% 5.25% 5.25% 5.25%
Interest Rate Risk
- ------------------
Modine's interest rate risk policies are designed to reduce the
potential volatility of earnings that could arise from changes in
interest rates. The Company utilizes a mixture of debt maturities
together with both fixed-rate and floating-rate debt to manage its
exposure to interest rate variations related to its borrowings. The
Company has not entered into any interest rate derivative instruments.
The following table presents the future principal cash flows and
weighted average interest rates by expected maturity dates. The fair
value of long-term debt is estimated by discounting the future cash
flows at rates offered to the company for similar debt instruments of
comparable maturities. The carrying value of the debt approximates fair
value.
September 26, 2002
------------------
Expected Maturity Date
--------------------------------------------------
There-
Long-term debt in ($000's) F2003 F2004 F2005 F2006 F2007 after Total
- -------------------------- ----- ------ ----- ------ ----- ------ ------
Fixed rate (U.S.$) 674 10,000 - - - - 10,674
Average interest rate 5.05% 5.00% - - - -
Fixed rate (Euro) 931 1,862 2,510 51,348 2,510 12,478 71,639
Average interest rate 5.44% 5.46% 5.50% 5.32% 4.07% 4.07%
Fixed rate (GBP) 71 146 154 163 171 530 1,235
Average interest rate 5.25% 5.25% 5.25% 5.25% 5.25% 5.25%
Variable rate (U.S.$) - - - 24,000 - 3,000 27,000
Average interest rate - - - 3.17% - 3.76%
Credit Risk
- -----------
Credit risk is the possibility of loss from a customer's failure to
make payment according to contract terms. The Company's principal
credit risk consists of outstanding trade receivables. Prior to
granting credit, each customer is evaluated, taking into consideration
the borrower's financial condition, past payment experience and credit
information. After credit is granted the Company actively monitors the
customer's financial condition and developing business news.
Approximately 48% of the trade receivables balance at September 26,
2002 was concentrated in Company's top ten customers. Credit losses to
customers in markets served by the Company have not been material.
Economic Risk
- -------------
Economic risk is the possibility of loss resulting from economic
instability in certain areas of the world. The Company is currently
monitoring economic conditions in Brazil and the effect of the recent
presidential election on Company's equity investment in it's 50% owned
affiliate. Year-to-date, the exchange rate between the U.S. dollar and
the Brazilian real has declined by more than 50%. The Company will
continue to assess Brazil's economic and political stability to determine
if any future actions or investment write-downs are warranted.
Commodity Price Risk
- --------------------
The Company is dependent upon the supply of certain raw materials in the
production process and has from time to time entered into firm purchase
commitments for copper and aluminum alloy. The company does not use
forward contracts to hedge against changes in certain specific commodity
prices of the purchase commitments outstanding.
Item 4. Disclosure Controls and Procedures
Within the 90 days prior to the date of this report ("Evaluation
Date"), the Company carried out an evaluation, under the supervision
and with the participation of the Company's management, including the
Company's Chairman and Chief Executive Officer and Corporate
Controller and Acting Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and
procedures as defined in Exchange Act Rules 13a-14 and 15d-14. Based
upon that evaluation, the Chairman and Chief Executive Officer and
Corporate Controller and Acting Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company
required to be included in the Company's periodic SEC filings. Since
the Evaluation Date, there have not been any significant changes in
the internal controls of the Company, or in other factors that could
significantly affect these controls subsequent to the Evaluation Date.
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 Denko (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. In March 2002, Modine received
an unfavorable decision from the Japanese patent office Board of
Appeals, and believed and reported that it would 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. In addition, the Company now
believes, based upon further review of the license agreements, that
certain Japanese licensees will continue to make royalty payments until
the highest court decision on the PF patent validity is issued. The
Company is currently holding discussions with the affected parties
concerning varying interpretations of the license agreements. As a
result, the Company believes the reduction to royalty income to be
reported in fiscal 2003 may be less than the $2,900,000 as originally
detailed in Note 22 to the Annual Report, but will not exceed this
amount. 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 had been 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 has been adjourned to January 2003.
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. This
litigation is presently in the discovery phase. There were no
developments during the second quarter.
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, except as otherwise
reported in Note 15 to the Notes to Consolidated Financial Statements
(unaudited) herein.
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 was terminated
by redeeming the rights that were issued under the Company's 1986
Shareholder Rights Agreement. Please see Footnote 14 to the Notes to
Consolidated Financial Statements (unaudited) herein.
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(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
Forwarding-Looking Statements. 34
99.1* Section 906 Certification by Chairman and
Chief Executive Officer 35
99.2* Section 906 Certification by Acting Chief
Financial Officer 36
*Filed herewith.
(b) Reports on Form 8-K:
-------------------
The Company filed two reports on Form 8-K, described as follows:
1. Dated October 17, 2002 to report Second Quarter Results.
2. Dated October 17, 2002 to report the resignation of Senior Vice
President and Chief Financial Officer, E. T. Thomas.
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: R. S. BULLMORE
----------------------------------------
R. S. Bullmore, Corporate Controller and
and Acting Chief Financial Officer
(Principal Financial Officer)
Date: November 7, 2002 By: D. R. ZAKOS
----------------------------------------
D. R. Zakos, Vice President, General
Counsel and Secretary
SECTION 302 CERTIFICATION
I, D. R. Johnson, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Modine
Manufacturing Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could
adversely affect the registrant's ability to record, process, summarize
and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 7, 2002
D. R. JOHNSON
- ------------------------------
D. R. Johnson
Chairman and Chief Executive Officer
SECTION 302 CERTIFICATION
I, R. S. Bullmore, Corporate Controller and Acting Chief Financial
Officer, certify that:
2. I have reviewed this quarterly report on Form 10-Q of Modine
Manufacturing Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent
evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could
adversely affect the registrant's ability to record, process, summarize
and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 7, 2002
R. S. BULLMORE
- ------------------------------
R. S. Bullmore
Corporate Controller and
Acting Chief Financial Officer