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, 2001
------------------
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 6, 2001
----------------------------- -------------------------------
Common Stock, $0.625 Par Value 33,194,479
MODINE MANUFACTURING COMPANY
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 26 and March 31, 2001 3
Consolidated Statements of Earnings -
For the Three Months Ended
September 26, 2001 and 2000
and the Six Months Ended
September 26, 2001 and 2000 4
Consolidated Statements of Cash Flows -
For the Six Months Ended September 26,
2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 22
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
September 26, 2001 and March 31, 2001
(In thousands, except per-share amounts)
(Unaudited)
September 26, 2001 March 31, 2001
ASSETS
------
Current assets:
Cash and cash equivalents $ 34,745 $ 21,744
Trade receivables, less allowance for
doubtful accounts of $3,018 and
$2,459, respectively 181,051 177,972
Inventories 135,252 153,096
Deferred income taxes and other
current assets 35,754 55,248
--------- ---------
Total current assets 386,802 408,060
--------- ---------
Noncurrent assets:
Property, plant, and equipment -- net 365,094 366,854
Investment in affiliates 24,173 26,403
Goodwill and other intangible
assets -- net 61,783 64,886
Deferred charges and other noncurrent
assets 74,747 70,975
--------- ---------
Total noncurrent assets 525,797 529,118
--------- ---------
Total assets $ 912,599 $ 937,178
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
----------------------------------------
Current liabilities:
Short-term debt $ 552 $ 27,281
Long-term debt -- current portion 44,518 17,879
Accounts payable 73,835 80,028
Accrued compensation and employee
benefits 46,191 49,161
Income taxes 7,645 6,590
Accrued expenses and other current
liabilities 32,175 29,071
--------- ---------
Total current liabilities 204,916 210,010
--------- ---------
Other liabilities:
Long-term debt 118,209 137,766
Deferred income taxes 32,559 31,796
Other noncurrent liabilities 39,556 38,909
--------- ---------
Total noncurrent liabilities 190,324 208,471
--------- ---------
Total liabilities 395,240 418,481
--------- ---------
Shareholders' investment:
Preferred stock, $0.025 par value,
authorized 16,000 shares,
issued - none -- --
Common stock, $0.625 par value,
authorized 80,000 shares, issued
33,675 and 33,663 shares 21,047 21,039
Additional paid-in capital 17,942 17,468
Retained earnings 525,979 528,653
Accumulated other comprehensive loss (32,228) (23,651)
Treasury stock at cost: 514 and
812 shares, respectively (12,989) (23,564)
Restricted stock - unamortized value (2,392) (1,248)
--------- ---------
Total shareholders' investment 517,359 518,697
--------- ---------
Total liabilities and
shareholders' investment $ 912,599 $ 937,178
========= =========
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended September 26, 2001 and 2000
For the six months ended September 26, 2001 and 2000
(In thousands, except per-share amounts)
(Unaudited)
Three months ended Six months ended
-------------------- --------------------
September 26 September 26
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net Sales $269,114 $284,056 $549,745 $584,497
Cost of sales 204,151 208,155 410,819 420,709
-------- -------- -------- --------
Gross profit 64,963 75,901 138,926 163,788
Selling, general, and administrative expenses 55,053 60,281 111,574 116,713
-------- -------- -------- --------
Income from operations 9,910 15,620 27,352 47,075
Interest expense (2,142) (2,187) (4,207) (4,479)
Patent settlements -- 15,084 -- 16,959
Other income -- net 3,656 3,952 5,193 4,708
-------- -------- -------- --------
Earnings before income taxes 11,424 32,469 28,338 64,263
Provision for income taxes 4,595 12,106 11,291 24,687
-------- -------- -------- --------
Net earnings $ 6,829 $ 20,363 $ 17,047 $ 39,576
======== ======== ======== ========
Net earnings per share of common stock
- Basic $0.21 $0.63 $0.52 $1.23
- Assuming dilution $0.20 $0.62 $0.51 $1.21
======== ======== ======== ========
Dividends per share $0.25 $0.25 $0.50 $0.50
======== ======== ======== ========
Weighted average shares -- basic 33,041 32,175 32,962 32,171
Weighted average shares -- assuming dilution 33,394 32,900 33,296 32,842
======== ======== ======== ========
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Six Months Ended September 26, 2001 and 2000
(Unaudited)
Six months ended September 26
-----------------------------
2001 2000
-------- --------
Net cash provided by operating activities $ 69,550 $ 85,157
Cash flows from investing activities:
Expenditures for property, plant, and
equipment (25,134) (39,175)
Acquisitions, net of cash acquired -- 249
Return of capital and investment in affiliates -- 343
Proceeds from dispositions of property,
plant, and equipment 1,591 133
Other -- net 217 130
-------- --------
Net cash used for investing activities (23,326) (38,320)
Cash flows from financing activities:
(Decrease)\increase in short-term debt -- net (26,620) 951
Additions to long-term debt 42,178 2,386
Reductions of long-term debt (38,249) (47,046)
Issuance of common stock, including
treasury stock 6,722 1,811
Purchase of treasury stock (757) (2,753)
Cash dividends paid (16,497) (14,639)
-------- --------
Net cash used for financing activities (33,223) (59,290)
-------- --------
Net increase/(decrease) in cash and cash
equivalents 13,001 (12,453)
Cash and cash equivalents at beginning
of period 21,744 31,242
-------- --------
Cash and cash equivalents at end of period $ 34,745 $ 18,789
======== ========
(See accompanying notes to consolidated financial statements.)
MODINE MANUFACTURING COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
1. On October 17, 2001, management announced that Modine will
take a $14 million to $18 million pretax restructuring charge in
the third quarter of fiscal 2002 to reduce excess manufacturing
capacity. This restructuring will include the closure and
consolidation of six production facilities. Management expects
the restructuring action to produce approximately $12 million in
pretax annual savings, once fully in place.
2. The Board of Directors also announced at the October 17,
2001 meeting, its intention to reduce Modine's next quarterly
dividend, which will be declared on January 16, 2002, to 12.5
cents per share. This represents a 50% reduction from the
previous quarterly rate of 25 cents per share.
3. On April 27, 2001, Modine Manufacturing Company (Modine)
acquired Thermacore International, Inc. (Thermacore) in a
business combination accounted for as a pooling of interests.
Thermacore, which provides advanced cooling solutions for
customers in the electronics and telecommunications industries,
became a wholly owned subsidiary of Modine through the initial
exchange of approximately 3.3 million shares of Modine common
stock for all of the outstanding common and preferred stock of
Thermacore International, Inc. In addition, approximately 0.3
million shares of Modine common stock were allocated to cover
outstanding Thermacore stock options which were converted to
Modine stock options as part of the transaction. The accompanying
financial statements are based upon the assumption that the
companies were combined for the first six months of fiscal 2002,
and the financial statements of prior periods have been restated
to give effect to the combination.
Prior to the date of the combination, there were no business
transactions between Modine and Thermacore. No significant
adjustments have been made to conform the accounting
policies of the combining companies. No adjustments to
retained earnings were required to conform Thermacore to
Modine's March 31st year-end.
Summarized results of operations of the separate companies
for the period prior to acquisition, April 1, 2001 through
April 27, 2001, and included in the current fiscal year's
operations are as follows:
(Unaudited in 000's)
-----------------------------
Modine Thermacore
------ ----------
Net sales $86,065 $3,496
Net earnings (loss) 3,368 (1,655)
Included in the operating results shown for April are
$351,000 and $2,468,000 in pre-tax acquisition costs recorded
for Modine and Thermacore, respectively.
Following is a reconciliation of the amounts of net sales
and net earnings previously reported for the second quarter
and six-month period ended September 26, 2000 with the
restated amounts.
(Unaudited in 000's) (Unaudited in 000's)
Three months ended Six months ended
September 26, 2000 September 26, 2000
-------------------- --------------------
Net sales
Modine $269,775 $556,259
Thermacore 14,281 28,238
-------- --------
Combined $284,056 $584,497
======== ========
Net earnings
Modine $ 19,018 $ 36,980
Thermacore 1,345 2,596
-------- --------
Combined $ 20,363 $ 39,576
======== ========
4. 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)
-------------------------------------------------------------
September 26, 2001 March 31, 2001
-------------------------------------------------------------
Raw materials $ 30,982 $ 32,774
Work in process 35,243 37,321
Finished goods 69,027 83,001
-------- --------
Total inventories $135,252 $153,096
======== ========
5. Property, Plant, and Equipment.
(in thousands)
-------------------------------------------------------------
September 26, 2001 March 31, 2001
-------------------------------------------------------------
Gross property,
plant & equipment $716,689 $697,063
Less accumulated
depreciation (351,595) (330,209)
-------- --------
Net property,
plant & equipment $365,094 $366,854
======== ========
6. Intangible assets.
(in thousands)
-------------------------------------------------------------
September 26, 2001 March 31, 2001
-------------------------------------------------------------
Goodwill $ 89,796 $ 90,361
Patents and product
technology 6,901 6,901
Other intangibles 2,927 2,925
Less accumulated
amortization (37,841) (35,301)
-------- --------
Net intangible assets $ 61,783 $ 64,886
======== ========
7. Segment data:
(In thousands)
--------------------------------------------------------------
Quarter ended September 26, 2001 2000
---- ----
Sales:
Original Equipment $108,690 $111,757
Distributed Products 106,988 119,414
European Operations 67,997 70,938
--------------------------------------------------------------
Segment sales 283,675 302,109
Eliminations (14,561) (18,053)
--------------------------------------------------------------
Total net sales $269,114 $284,056
--------------------------------------------------------------
Operating income:
Original Equipment $ 14,510 $ 16,703
Distributed Products 7,703 10,312
European Operations 2,893 6,524
--------------------------------------------------------------
Segment operating income 25,106 33,539
Corporate & administrative
expenses (15,258) (17,960)
Eliminations 62 41
Other items not allocated
to segments 1,514 16,849
--------------------------------------------------------------
Earnings before income taxes $ 11,424 $ 32,469
--------------------------------------------------------------
(In thousands)
--------------------------------------------------------------
Six Months ended September 26, 2001 2000
---- ----
Sales:
Original Equipment $220,978 $241,061
Distributed Products 208,775 228,588
European Operations 152,534 152,936
--------------------------------------------------------------
Segment sales 582,287 622,585
Eliminations (32,542) (38,088)
--------------------------------------------------------------
Total net sales $549,745 $584,497
--------------------------------------------------------------
Operating income:
Original Equipment $ 32,388 $ 44,127
Distributed Products 12,317 19,679
European Operations 13,033 16,730
--------------------------------------------------------------
Segment operating income 57,738 80,536
Corporate & administrative
expenses (30,448) (33,514)
Eliminations 62 53
Other items not allocated
to segments 986 17,188
--------------------------------------------------------------
Earnings before income taxes $ 28,338 $ 64,263
--------------------------------------------------------------
In the first quarter of fiscal 2002, Modine acquired
Thermacore International, Inc. in a business combination
accounted for as a pooling of interests. Sales and operating
income results for the periods presented above have been
restated to include Thermacore in the Distributed Products
segment. Included in the reported results for Thermacore in
the September 2001 quarter and six-month period are $0.1
million and $2.7 million, respectively, of acquisition costs.
In addition to the Thermacore acquisition, management also
introduced other changes in the current year to the segment
reporting structure. Two changes made in the first quarter
of the current fiscal year that affected operating results
previously reported in the September 2000 quarter and
six-month period were the relocation of the Goch, Germany
facility previously reported in the Original Equipment
segment to the European Operations segment and the Emporia,
Kansas facility previously reported in the Distributed
Products segment to the Original Equipment segment. These
revisions were made to align the plants with the current
management reporting structure. Sales and operating income
presented for the September 2000 quarter and six-month period
have been restated to reflect the realignment of these two
manufacturing facilities. Other less significant changes
also made in the beginning of the current year that affected
Corporate and administrative expenses reported in the
September 2001 quarter and six-month period were the
relocation of the Fuel Cell group to the Original Equipment
segment and the relocation of the Engine Products staff to
Corporate from the Original Equipment segment. Sales and
operating income data presented for the September 2000 quarter
and six-month period were not restated for these two changes
due to their insignificance.
(In thousands)
--------------------------------------------------------------
September 26, March 31,
Period ending 2001 2001
--------------------------------------------------------------
Assets:
Original Equipment $225,410 $201,906
Distributed Products 253,823 260,446
European Operations 207,594 214,186
Corporate & Administrative 238,107 274,575
Eliminations (12,335) (13,935)
--------------------------------------------------------------
Total assets $912,599 $937,178
--------------------------------------------------------------
The asset data presented has been restated for March 31, 2001
to reflect the Thermacore acquisition and the segment
relocation of the two manufacturing facilities as previously
discussed.
8. Recent developments concerning legal proceedings reported in
Modine Manufacturing Company ("Modine or Company") Form 10-K
report for the year ended March 31, 2001, are updated in
Part II, Other Information, Item 1, Legal Proceedings. While
the outcome of these proceedings is uncertain, in the opinion
of Modine's management, any liabilities that may result from
such proceedings are not reasonably likely to have a material
effect on Modine's liquidity, financial condition, or results
of operations.
9. The net earnings per share of common stock and computation
components of basic and diluted earnings per share are as
follows:
(In thousands, except per-share amounts)
------------------------------------------------------------------------
Three months ended Six months ended
September 26 September 26
------------------------------------------------------------------------
2001 2000 2001 2000
------------------------------------------------------------------------
Net earnings per share of
-------------------------
common stock:
------------
- basic $0.21 $0.63 $ 0.52 $1.23
- assuming dilution $0.20 $0.62 $ 0.51 $1.21
Numerator:
----------
Income available to common
shareholders $6,829 $20,363 $17,047 $39,576
Denominator:
------------
Weighted average shares
outstanding - basic 33,041 32,175 32,962 32,171
Effect of dilutive
securities - options* 353 725 334 671
------- ------- ------- -------
Weighted average shares
outstanding - assuming dilution 33,394 32,900 33,296 32,842
------------------------------------------------------------------------
*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 $28.31 $28.00 $27.70 $25.26
Number of shares 1,093 1,104 1,207 1,263
10. 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, 2001 and 2000, respectively,
were $10,332 and $18,530 for three months, and $8,470 and $34,157
for six months.
11. In June 2001, the Financial Accounting Standards Board
issued SFAS 141 "Business Combinations" and SFAS 142
"Goodwill and Other Intangible Assets." SFAS 141 requires
that all business combinations initiated after June 30, 2001
be accounted for under the purchase method. 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. In addition,
under the new rules, acquired intangible assets will be
separately recognized if the benefit of the intangible asset
is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed,
rented or exchanged, regardless of the acquirer's intent to
do so. The provisions of Statement 142 must be applied with
fiscal years beginning after December 15, 2001. Modine will
adopt SFAS No. 142 beginning April 1, 2002. Management is
currently assessing the implementation guidance being
provide by the FASB and other regulatory bodies and has not
yet determined the effect, if any, the new rules will have
on the financial position or results of operations. Any
adjustments arising from the initial impairment assessment
would be reported as the cumulative effect of a change in
accounting principle.
12. On April 1, 2001, Modine adopted Statement of Financial
Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" and
Statement of Financial Accounting Standards No. 138
"Accounting For Certain Derivative Instruments and Certain
Hedging Activities." No adjustments to the fiscal 2001-02
financial statements were necessary upon adoption of the new
regulations set forth in SFAS 133 and 138. 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 derivative/hedging activity can be generally
categorized into three main areas:
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 is
managed partially through foreign-currency-denominated debt
agreements entered into by the parent. For the second
quarter and six months ended September 26, 2001, $3.2
million and $4.4 million, respectively, of net gains related
to the foreign-currency-denominated debt agreements were
included in the cumulative translation adjustment.
Foreign-Exchange Contracts Hedging Foreign Denominated Trade
------------------------------------------------------------
Receivables
-----------
The Company routinely exports its products to Europe in
sales transactions, some of which result in foreign-currency-
denominated trade receivables. The Company enters into
foreign exchange contracts, generally with terms of 90 days
or less, to hedge these specific foreign-currency-
denominated trade receivables. These contracts do not
subject Modine to significant risk due to the exchange-rate
movements because gains and losses on these contracts offset
gains and losses on the trade receivables being hedged. As
of September 26, 2001, the company had approximately $1.1
million outstanding in forward foreign-exchange contracts
denominated in Euro.
Sales and Purchase Contracts
----------------------------
The Company on a regular basis enters into long-term sales
and purchase contracts with vendors and customers that link
the prices charged for materials such as copper and aluminum
to certain published commodity indices. These transactions
are routine in nature and provide no net settlement
provision and no market mechanism to facilitate net
settlement. As a result management has determined that
these transactions fall outside of the provisions of SFAS
133 and 138.
Certain subsidiaries have transactions in currencies other
than their functional currencies and, from time to time,
enter into forward and option contracts to hedge the
purchase of inventory or to sell nonfunctional currency
receipts. These transactions are infrequent and immaterial
to the results of operations and financial condition of the
Company.
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 with the preparation of the consolidated financial
statements in Modine's March 31, 2001 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
presentation of results for the interim period. Results for the
first six months of fiscal 2001 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,
these statements should be read in conjunction with the
consolidated financial statements and related notes
contained in Modine's 2001 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, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
The following discussion and analysis provides information which
Management believes is relevant to an assessment and understanding
of Modine's consolidated results of operations and financial
condition. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
---------------------
Comparison of the Second Quarter of 2001-02 with the Second
-----------------------------------------------------------
Quarter of 2000-01
------------------
Net sales for the second quarter of fiscal 2001-02 were $269.1
million, down 5.3% from the $284.1 million reported in the second
quarter of last year. Sales would have been approximately $5.5
million higher without the impact of a stronger U.S. dollar in
relation to the Euro.
Revenues, in U.S. dollars, across all segments of the company
were lower than the same quarter a year ago. Quarterly results
for the company's European Operations segment improved slightly
in local currency from year ago levels, but finished down 4.1%
due to the adverse currency translation impact of $4.6 million
recorded in the quarter. Revenues recorded in the Original
Equipment segment declined by less than 3% from the same period
last year. Sales to the majority of the markets served by the
Original Equipment segment were down. A number of industry-wide
factors related to a weakening U.S. economy were responsible for
the decline. The North American heavy-truck market remained at
depressed levels, off 50% from recent production volumes. Also a
weakening North American light-vehicle market served to mitigate
the positive effects of new product launches. Demand for
agricultural and construction products remained flat in the
current quarter against the prior year's weak levels. In the
Distributed Products segment, revenues declined by just over 10%.
Automotive aftermarket sales were very weak due to sluggish
demand and pricing pressures related to excess industry capacity
and aggressive new entrants into the market. Declining
construction activity during the quarter hurt the company's
building ventilation and cooling business. Modine's newest
market, electronics cooling, was affected negatively in the
quarter by the rapid downturn that is continuing in the computer
and telecommunications equipment markets.
Gross profit, as a percentage of sales, was 24.1%. This was a
2.6 percentage point decline from the 26.7 % earned in the second
quarter last year. Material costs, as a percentage of sales,
rose by 1.2 percentage points, while labor remained constant, and
the ratio of manufacturing overhead to sales grew by 1.3
percentage points versus the prior period. Overall, gross
margins were down across all segments with European operations
experiencing the largest margin decline from the same quarter a
year ago.
Selling, general and administrative expenses of $55.1 million
declined 8.7%, or $5.2 million, over last year's second quarter
while decreasing to 20.5% from 21.2% as a percentage of sales.
While virtually every expense category registered a decline,
salaries and other compensation together with related fringe
benefits recorded the largest drop from the same period a year
ago.
Operating income at 3.7% of sales was 1.8 percentage points lower
than last year's 5.5%. A weakening U.S. economy, resulting in
lower sales volumes, was a major factor contributing to the
decline.
Interest expense declined slightly from the same quarter a year
ago.
Net non-operating income in the current quarter decreased $15.4
million from the same quarter of the previous year. The current
year's quarter included the sale of an aftermarket warehouse
facility in Los Angeles resulting in a $0.9 million gain. Also
included in non-operating income in the prior year's second
quarter was a patent settlement of $15.1 million.
The effective tax rate increased to 40.2% from 37.3 % when
compared to the same period last year. The largest item
contributing to the increase in the effective tax rate for
the quarter was non-deductible acquisition expenses resulting
from the April Thermacore International, Inc. acquisition.
Net earnings for the second quarter of $6.8 million were 67%
lower than last year's $20.4 million earned in the second
quarter. Earnings per share were $0.21 basic and $0.20 diluted,
compared to $0.63 basic and $0.62 diluted in the prior year.
Last year's earnings results were favorably impacted by $15.1
million in pretax patent settlements recorded during the quarter.
Comparison of the First Six Months of 2001-02 with the First Six
----------------------------------------------------------------
Months of 2000-01
-----------------
Net sales for the first six months of fiscal 2001-02 were $549.7
million, down 5.9% from the $584.5 million reported in the same
period of last year. Sales were negatively impacted by a
stronger U.S. dollar in relation to the Euro by approximately
$10.6 million.
Overall, changes in the company's segment sales were very similar
to those reported for the second quarter. European Operations
segment improved by 5.6% in local currency from year ago levels,
but finished down slightly in dollars due to the adverse currency
translation impact of $9.0 million recorded in the first half of
the year. In the Original Equipment segment, sales declined by
more than 8%. Reduced demand in the North American truck market,
a weakening U.S. economy affecting passenger car and light truck
sales, and relatively flat sales in the agricultural and
construction markets contributed to the shortfall recorded in the
first six months. The Distributed Products segment weakened by
almost 9%, with major factors being a very soft North American
aftermarket, declining construction activity affecting the HVAC
market, and the continued weakness in the computer and
telecommunications markets.
Gross profit of 25.3% was down 2.7 percentage points from the
first six months of the previous year. Material costs, as a
percentage of sales, grew by 1.5 percentage points, while labor
declined slightly and the ratio of manufacturing overhead to
sales rose by 1.3 percentage points. Gross profits, in dollars,
were down across all segments of the company reflecting the
weakening worldwide economies.
Selling, general and administrative expenses of $111.6 million
decreased 4.4% over the first six months of last year while
increasing to 20.3% from 20.0%, as a percentage of sales.
Without the one-time pre-tax charges of $3.3 million related to
the Thermacore acquisition, selling, general and administrative
expenses would have registered a 7.2% decline and dropped to
19.7%, as a percentage of sales.
Operating income at 5.0% of sales was down 3.1 percentage points
from the 8.1% in the first half of the previous year. Lower
sales volumes, one-time acquisition costs and negative currency
translation were all factors contributing to the reduction.
Interest expense declined $0.3 million, or just over 6% from the
same six month period a year ago. Average outstanding debt levels
for the six months declined from the same period a year ago. The
reduction in short-term debt used for working capital
requirements was a major factor leading to the reduction in
interest expense.
Net non-operating income, exclusive of the $17.0 million received
in patent settlements in the prior year, rose by 10.3%, or $0.5
million, to $5.2 million. Major items included royalties of $1.9
million, equity earnings of affiliates of $1.3 million, profit on
tooling sales of $1.3 million and profit on the disposal of plant
property and equipment of $1.3 million.
The effective tax rate increased by just over 1.4 percentage
points, when compared to the same period last year. The rate
increase was primarily due to non-deductible expenses incurred as
part of the Thermacore acquisition.
Net earnings for the first six months of the current year were
$17.0 million, or $0.52 basic and $0.51 diluted earnings per
share. This compares to $39.6 million, or $1.23 basic and $1.21
diluted earnings per share, for the same six-month period the
year before. Last year's results included one-time patent
settlements, on a pre-tax basis, of $17.0 million. Annualized
return on shareholders' investment for the current period was
6.6%.
Outlook for the Remainder of the Year
-------------------------------------
The U.S. economy has continued to weaken during the year and
Modine believes that the September 11th terrorist attacks
have created additional elements of uncertainty. Due to the
softening economy, the company anticipates continued weakness
in its key markets. As a result, Modine has updated its
forecast for the remainder of the fiscal year. Modine now
expects fully diluted earnings per share to be in the $0.75
to $0.85 range, excluding any one-time items. Management is
responding to this weakened outlook by reducing excess capacity,
and will take a $14 million to $18 million pretax restructuring
charge in the third quarter of fiscal 2002. This restructuring
will include the closure and consolidation of six production
facilities. Management expects the restructuring action to
produce approximately $12 million in pretax savings, once fully
in place. Management remains optimistic about Modine's long-term
outlook. The company continues to maintain a solid balance sheet
and future growth prospects. Reduced capital expenditures and
additional working capital improvements should continue to
generate strong cash flow. Modine will be well positioned for
growth, once economic conditions improve in its core markets.
Modine has created additional growth opportunities by entering
new markets such as the thermal management of fuel cells and
electronics cooling. Forward looking statements about sales,
earnings, and operations in this Outlook involve both risks and
uncertainties, as detailed in Exhibit 99 to this Form 10-Q.
FINANCIAL CONDITION
-------------------
Comparison between September 26, 2001 and March 31, 2001
--------------------------------------------------------
Current assets
--------------
Cash and cash equivalents of $34.7 million were $13.0 million
higher than March 31, 2001. For the first six months of fiscal
2002, cash provided by operating activities, the issuance of
common stock, including treasury stock, and proceeds from the
disposition of property, plant and equipment exceeded capital
expenditures, debt repayments and the quarterly dividend
payments.
Trade receivables of $181.1 million were up $3.1 million
(1.7%).
Overall inventory levels decreased $17.8 million to $135.3
million compared to the prior year-end. A major factor
contributing to the decrease were on-going management
programs, particularly in the aftermarket division, to
reduce overall inventory levels. The continuing decline of
the Euro relative to the dollar also had a downward impact
on inventory values.
Deferred income taxes and other current assets declined by $19.5
million to $35.8 million from year-end. The largest single item
contributing to the change was a reduction in unbilled customer
tooling. Other significant items contributing to the change were
lower prepaid income taxes and deferred tax assets, receipt of a
dividend from the company's joint venture in Japan which was
classified as a receivable at year-end, and a reduction in
receivables arising from stock transactions with employees.
The current ratio was relatively unchanged at 1.9 to 1. Net
working capital decreased $16.2 million. Major balance sheet
items influencing the change were lower deferred income taxes and
other current assets and lower inventories offset in part by
higher cash and cash equivalents, lower accounts payable and
higher trade receivables.
Noncurrent Assets
-----------------
Net property, plant and equipment assets of $365.1 million
declined $1.8 million from year-end. Capital expenditures during
the quarter were lower than depreciation, retirements and foreign
currency translation. Expenditures for European production,
administrative, and 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 $15.8 million at
September 26, 2001. 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 $24.2 million
declined $2.2 million from year-end. The largest item
contributing to the decrease in the first half of fiscal 2002 was
the unfavorable currency translation effect on Modine's Brazilian
joint venture company, Radiadores Visconde, Ltda. Higher equity
earnings partially offset this negative currency translation
effect.
Intangible assets decreased by $3.1 million. Amortization and
foreign currency translation were the main items contributing to
the change.
Deferred charges and other noncurrent assets increased by $3.8
million. The net increase is 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 $152.2 million
were $6.1 million lower than March 2001. Normal timing
differences in the level of operating activity were responsible
for changes in the various components. Accrued income taxes
increased $1.1 million due to timing differences in making
estimated payments.
Debt
----
Outstanding debt decreased by $19.6 million to $163.3 million
from March 31, 2001 balance of $182.9 million. Domestic long-
term debt increased $10.6 million with existing lenders.
Approximately $7.0 million of long-term debt, originally secured
during the construction of the Company's Pontevico, Italy
manufacturing facility, was refinanced in Europe. Overall, long-
term debt in Europe decreased $3.5 million. Total short-term
borrowing decreased $26.7 million to $0.6 million. The
domestic portion of the reduction in short-term debt totaled
$18.5 million and the foreign portion was $8.2 million. Total
debt assumed in the Thermacore acquisition of $14.0 million was
refinanced using current credit lines with an existing lender at
more favorable interest rates.
Consolidated unused lines of credit decreased $18.7 million to
$49.0 million during the quarter. The Company reduced its
available lines with banks by $32.7 million from year-end and
also reduced its actual borrowing on those lines by $14.0
million. Domestically, Modine's unused lines of credit were
$35.6 million. Foreign unused lines of credit were $13.4
million. Total debt as a percentage of shareholders' equity
decreased from 35.3% to 31.6%.
Shareholders' Investment
------------------------
Total shareholders' investment decreased by $1.3 million to a
total of $517.4 million. Net earnings of $17.0 million in the
first six months of fiscal 2002 were virtually offset by
dividends paid to shareholders of $16.5 million. Unfavorable
foreign currency translation of $8.6 million was reported as the
dollar strengthened against the Euro, and the Brazilian Real
declined in value by approximately 25% in the first six months of
the fiscal year. A reduction in treasury shares held by the
Company resulted in a $10.6 million decrease in treasury stock.
A corresponding decrease in retained earnings of $1.8 million to
record the losses on the issuance of treasury shares to satisfy
stock option exercises and employee stock plan requirements was
also recorded in the first half of the year.
Liquidity
---------
Management believes that the Corporation's ability to generate
cash from operations and its borrowing capacity are adequate to
fund operating, capital spending and other needs for the
foreseeable future. At the October 17, 2001 meeting of the Board
of Directors, the Board indicated its intention to reduce the
next quarterly dividend, which will be declared in January 2002,
by 50% to 12.5 cents per share given the uncertain economic
outlook and weakness in Modine's core markets. In making this
decision, the Board considered Modine's recent forecast, on-going
capital needs, and the dividend policies of comparable companies.
This decision affords the Company greater financial flexibility
and the opportunity to pursue other measures to increase
shareholder value in the future.
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.
While the outcome of these proceedings is uncertain, in the opinion
of Modine's Management and counsel, any liabilities that may result
from such proceedings are not reasonably likely to have a material
effect on Modine's liquidity, financial condition or results of
operations. Many of the pending damage claims are covered by
insurance and, in addition, Modine from time to time establishes
reserves for uninsured liabilities.
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 entered
into a 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. Subsequent one-time
payments of approximately $29.9 million are payable to Modine if
the validity of Modine's PF patents in Japan is confirmed. The
patent confirmation proceedings in Japan are expected to be
completed by December 31, 2001. Modine is currently receiving
running royalties of approximately $3.5 to $4.0 million annually
from certain Japanese competitors related to its PF patents in
Japan. This revenue stream, which is expected to continue until
the underlying patents expire in 2006-2008, would cease immediately
if there is an unfavorable decision for Modine in the aforementioned
Japanese confirmation proceedings.
Other Matters
-------------
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.
Other previously reported legal proceedings have been settled or
the issues resolved so as to not merit further reporting.
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.
Item 5. Other Information.
Following the end of the quarter for which this report is filed, the
Company announced a plan to reduce excess capacity and take a $14 to
$18 million pretax restructuring charge in the third quarter of fiscal
2002. The restructuring will include the closure and consolidation of
six production facilities. The Company also announced its intention to
reduce the next quarter's dividend, which will be declared in January
2002, by 50% from the previous quarter's rate. These actions were
reported in a report on Form 8-K filed on October 17, 2001.
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
-------------- ----
4(a) Rights Agreement dated as of October 16,
1986 between the Registrant and First
Chicago Trust Company of New York (Rights
Agent) (filed by reference to the
Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1997).
4(b)(i) Rights Agreement Amendment No. 1 dated as
of January 18, 1995 between the Registrant
and First Chicago Trust Company of New York
(Rights Agent) (filed by reference to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 2000).
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 exhibit
contained within the Registrant's Quarterly
Report on Form 10-Q dated December 26, 1997).
Reference Number
per Item 601 of
Regulation S-K Page
-------------- ----
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. 23
*Filed herewith.
(b) Reports on Form 8-K:
-------------------
The Company filed three Report on Form 8-K, described as follows:
1. Dated July 10, 2001 to report the Condensed Consolidated
Results of Operations for Thermacore and Modine.
2. Dated July 18, 2001 to report the projected earnings for the
coming fiscal year.
3. Dated October 17, 2001, as referenced in Item 5, above, to
report financial results for the quarter ending September
26, 2001, the Company's upcoming restructuring actions and
the Company's intention to reduce the next quarter's
dividend by 50% as compared with the previous quarterly
rate.
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: November 7, 2001 By: D. R. ZAKOS
------------------------------------
D. R. Zakos, Vice President,
General Counsel and Secretary