UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
(Mark
One)
[P] QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
quarterly period ended September
26, 2006
or
[
] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from ____________ to ____________
Commission
file number 1-1373
MODINE
MANUFACTURING COMPANY
(Exact
name of registrant as specified in its charter)
WISCONSIN
(State
or other jurisdiction of incorporation or organization)
|
39-0482000
(I.R.S.
Employer Identification No.)
|
|
|
1500
DeKoven Avenue, Racine, Wisconsin
(Address
of principal executive offices)
|
53403
(Zip
Code)
|
Registrant's
telephone number, including area code (262)
636-1200
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 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
[P]
No
[ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filer [P
] Accelerated
Filer [ ] Non-accelerated
Filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [P]
The
number of shares outstanding of the registrant's common stock, $0.625 par
value,
was 32,763,068 at November 2, 2006.
MODINE
MANUFACTURING COMPANY
INDEX
|
Page
No.
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
Item
1. Financial Statements
|
|
Consolidated
Balance Sheets - September 26, 2006 and March 31, 2006
|
|
Consolidated
Statements of Earnings -
|
|
For
the Three and Six Months Ended September 26, 2006 and 2005
|
|
Condensed
Consolidated Statements of Cash Flows -
|
|
For
the Six Months Ended September 26, 2006 and 2005
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
|
|
Item
2. Management's Discussion and Analysis
|
|
of
Financial Condition and Results of Operations
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
|
|
|
Item
4. Controls and Procedures
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
Item
1. Legal Proceedings
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
|
|
|
Item
6. Exhibits
|
|
|
|
Signature
|
|
PART
I . FINANCIAL INFORMATION.
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
1. Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MODINE
MANUFACTURING COMPANY
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
September
26, 2006 and March 31, 2006
|
|
|
|
|
|
|
|
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
September
26, 2006
|
March
31, 2006
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
18,426
|
|
|
|
|
$
|
30,798
|
|
Short
term investments
|
|
|
|
|
|
2,612
|
|
|
|
|
|
-
|
|
Trade
receivables, less allowance for doubtful accounts of $1,828 and
$1,511
|
|
|
|
|
|
253,208
|
|
|
|
|
|
254,681
|
|
Inventories
|
|
|
|
|
|
122,653
|
|
|
|
|
|
90,227
|
|
Deferred
income taxes and other current assets
|
|
|
|
|
|
49,687
|
|
|
|
|
|
36,489
|
|
Total
current assets
|
|
|
|
|
|
446,586
|
|
|
|
|
|
412,195
|
|
Noncurrent
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment – net
|
|
|
|
|
|
505,971
|
|
|
|
|
|
467,600
|
|
Investment
in affiliates
|
|
|
|
|
|
17,157
|
|
|
|
|
|
41,728
|
|
Goodwill
|
|
|
|
|
|
65,744
|
|
|
|
|
|
52,256
|
|
Other
intangible assets – net
|
|
|
|
|
|
13,884
|
|
|
|
|
|
12,735
|
|
Prepaid
pension costs
|
|
|
|
|
|
57,881
|
|
|
|
|
|
59,894
|
|
Other
noncurrent assets
|
|
|
|
|
|
17,686
|
|
|
|
|
|
5,687
|
|
Total
noncurrent assets
|
|
|
|
|
|
678,323
|
|
|
|
|
|
639,900
|
|
Total
assets
|
|
|
|
|
$
|
1,124,909
|
|
|
|
|
$
|
1,052,095
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
|
|
|
$
|
8,317
|
|
|
|
|
$
|
5,983
|
|
Long-term
debt – current portion
|
|
|
|
|
|
733
|
|
|
|
|
|
125
|
|
Accounts
payable
|
|
|
|
|
|
177,093
|
|
|
|
|
|
187,048
|
|
Accrued
compensation and employee benefits
|
|
|
|
|
|
69,026
|
|
|
|
|
|
56,835
|
|
Income
taxes
|
|
|
|
|
|
8,067
|
|
|
|
|
|
13,169
|
|
Accrued
expenses and other current liabilities
|
|
|
|
|
|
40,298
|
|
|
|
|
|
31,789
|
|
Total
current liabilities
|
|
|
|
|
|
303,534
|
|
|
|
|
|
294,949
|
|
Noncurrent
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
|
|
|
178,269
|
|
|
|
|
|
151,706
|
|
Deferred
income taxes
|
|
|
|
|
|
42,886
|
|
|
|
|
|
38,424
|
|
Pensions
|
|
|
|
|
|
31,568
|
|
|
|
|
|
28,933
|
|
Postretirement
benefits
|
|
|
|
|
|
20,499
|
|
|
|
|
|
20,085
|
|
Other
noncurrent liabilities
|
|
|
|
|
|
25,660
|
|
|
|
|
|
12,573
|
|
Total
noncurrent liabilities
|
|
|
|
|
|
298,882
|
|
|
|
|
|
251,721
|
|
Total
liabilities
|
|
|
|
|
|
602,416
|
|
|
|
|
|
546,670
|
|
Commitments
and contingencies (See Notes 16 & 19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 32,806 and 33,210 shares
|
|
|
|
|
|
20,482
|
|
|
|
|
|
20,756
|
|
Additional
paid-in capital
|
|
|
|
|
|
55,348
|
|
|
|
|
|
52,459
|
|
Retained
earnings (see Note 1)
|
|
|
|
|
|
438,082
|
|
|
|
|
|
433,405
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
21,141
|
|
|
|
|
|
10,017
|
|
Treasury
stock at cost: 424 and 404 shares
|
|
|
|
|
|
(11,714
|
)
|
|
|
|
|
(11,212
|
)
|
Deferred
compensation trust
|
|
|
|
|
|
(846
|
)
|
|
|
|
|
-
|
|
Total
shareholders' equity
|
|
|
|
|
|
522,493
|
|
|
|
|
|
505,425
|
|
Total
liabilities and shareholders' equity
|
|
|
|
|
$
|
1,124,909
|
|
|
|
|
$
|
1,052,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
notes to unaudited condensed consolidated financial statements
are an
integral part of these statements.
|
|
|
MODINE
MANUFACTURING COMPANY
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF EARNINGS
|
|
|
|
|
|
|
|
|
|
For
the three and six months ended September 26, 2006 and 2005
|
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
September 26
|
Six
months ended
September 26
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
sales
|
|
$
|
437,512
|
|
$
|
404,152
|
|
$
|
867,905
|
|
$
|
800,990
|
|
Cost
of sales
|
|
|
369,001
|
|
|
324,366
|
|
|
723,298
|
|
|
640,932
|
|
Gross
profit
|
|
|
68,511
|
|
|
79,786
|
|
|
144,607
|
|
|
160,058
|
|
Selling,
general, and administrative expenses
|
|
|
61,010
|
|
|
56,651
|
|
|
116,072
|
|
|
107,204
|
|
Restructuring
charges
|
|
|
1,375
|
|
|
-
|
|
|
2,225
|
|
|
-
|
|
Income
from operations
|
|
|
6,126
|
|
|
23,135
|
|
|
26,310
|
|
|
52,854
|
|
Interest
expense
|
|
|
(2,417
|
)
|
|
(1,837
|
)
|
|
(4,427
|
)
|
|
(3,381
|
)
|
Other
income – net
|
|
|
1,382
|
|
|
607
|
|
|
2,891
|
|
|
3,278
|
|
Earnings
from continuing operations before income taxes
|
|
|
5,091
|
|
|
21,905
|
|
|
24,774
|
|
|
52,751
|
|
(Benefit
from) provision for income taxes
|
|
|
(7,278
|
)
|
|
7,583
|
|
|
(3,892
|
)
|
|
17,731
|
|
Earnings
from continuing operations
|
|
|
12,369
|
|
|
14,322
|
|
|
28,666
|
|
|
35,020
|
|
Earnings
from discontinued operations (net of income taxes)
|
|
|
-
|
|
|
404
|
|
|
-
|
|
|
457
|
|
Loss
on spin off of discontinued operations
|
|
|
-
|
|
|
(54,068
|
)
|
|
-
|
|
|
(54,068
|
)
|
Cumulative
effect of accounting change (net of income taxes)
|
|
|
-
|
|
|
-
|
|
|
70
|
|
|
-
|
|
Net
earnings (loss)
|
|
$
|
12,369
|
|
$
|
(39,342
|
)
|
$
|
28,736
|
|
$
|
(18,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share of common stock – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.38
|
|
$
|
0.42
|
|
$
|
0.89
|
|
$
|
1.02
|
|
Earnings
from discontinued operations
|
|
|
-
|
|
|
0.01
|
|
|
-
|
|
|
0.01
|
|
Loss
on spin off of discontinued operations
|
|
|
-
|
|
|
(1.57
|
)
|
|
-
|
|
|
(1.57
|
)
|
Cumulative
effect of accounting change
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
earnings (loss) – basic
|
|
$
|
0.38
|
|
$
|
(1.14
|
)
|
$
|
0.89
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share of common stock – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.38
|
|
$
|
0.41
|
|
$
|
0.89
|
|
$
|
1.01
|
|
Earnings
from discontinued operations
|
|
|
-
|
|
|
0.01
|
|
|
-
|
|
|
0.01
|
|
Loss
on spin off of discontinued operations
|
|
|
-
|
|
|
(1.56
|
)
|
|
-
|
|
|
(1.56
|
)
|
Cumulative
effect of accounting change
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
earnings (loss) – diluted
|
|
$
|
0.38
|
|
$
|
(1.14
|
)
|
$
|
0.89
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per share
|
|
$
|
0.175
|
|
$
|
0.175
|
|
$
|
0.350
|
|
$
|
0.350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
notes to unaudited condensed consolidated financial statements
are an
integral part of these
statements.
|
MODINE
MANUFACTURING COMPANY
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
For
the six months ended September 26, 2006 and 2005
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Six
months ended September 26
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
earnings (loss)
|
|
$
|
28,736
|
|
$
|
(18,591
|
)
|
Adjustments
to reconcile net earnings (loss) with net cash
|
|
|
|
|
|
|
|
provided by
operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
34,965
|
|
|
36,145
|
|
Loss
on spin off of Aftermarket business
|
|
|
-
|
|
|
54,068
|
|
Other
– net
|
|
|
(6,440
|
)
|
|
1,523
|
|
Net
changes in operating assets and liabilities, excluding
|
|
|
|
|
|
|
|
acquisitions
and dispositions
|
|
|
(23,496
|
)
|
|
(23,153
|
)
|
Net
cash provided by operating activities
|
|
|
33,765
|
|
|
49,992
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Expenditures
for property, plant and equipment
|
|
|
(38,958
|
)
|
|
(30,136
|
)
|
Acquisitions,
net of cash acquired
|
|
|
(11,096
|
)
|
|
(37,491
|
)
|
Spin
off of Aftermarket business
|
|
|
-
|
|
|
(3,725
|
)
|
Proceeds
from dispositions of assets
|
|
|
19
|
|
|
-
|
|
Other
– net
|
|
|
146
|
|
|
198
|
|
Net
cash used for investing activities
|
|
|
(49,889
|
)
|
|
(71,154
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Short-term
debt
|
|
|
1,951
|
|
|
-
|
|
Additions
to long-term debt
|
|
|
82,600
|
|
|
78,000
|
|
Reductions
of long-term debt
|
|
|
(59,951
|
)
|
|
(18,000
|
)
|
Bank
overdrafts
|
|
|
2,483
|
|
|
4,526
|
|
Proceeds
from exercise of stock options
|
|
|
1,175
|
|
|
8,597
|
|
Repurchase
of common stock, treasury and retirement
|
|
|
(12,580
|
)
|
|
(24,261
|
)
|
Cash
dividends paid
|
|
|
(11,351
|
)
|
|
(12,140
|
)
|
Settlement
of derivative contracts
|
|
|
(128
|
)
|
|
(1,794
|
)
|
Excess
tax benefits from stock-based compensation
|
|
|
202
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
4,401
|
|
|
34,928
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(649
|
)
|
|
(2,393
|
)
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(12,372
|
)
|
|
11,373
|
|
Cash
and cash equivalents at beginning of period
|
|
|
30,798
|
|
|
55,091
|
|
Cash
and cash equivalents at end of period
|
|
$
|
18,426
|
|
$
|
66,464
|
|
|
|
|
|
|
|
|
|
The
notes to unaudited condensed consolidated financial statements
are an
integral part of these statements.
|
|
|
|
|
|
|
|
MODINE
MANUFACTURING COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per-share amounts)
Note
1: General
The
accompanying condensed consolidated financial statements were prepared in
conformity with generally accepted accounting principles in the United States
and such principles were applied on a basis consistent with the preparation
of
the consolidated financial statements in Modine Manufacturing Company’s (Modine
or the Company) Annual Report on Form 10-K for the year ended March 31, 2006
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 2007 are not necessarily indicative
of the results to be expected for the full year.
The
March
31, 2006 consolidated balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles in the United States. In addition, 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
Annual
Report on Form 10-K for the year ended March 31, 2006.
On
July
22, 2005, the Company spun off its Aftermarket business on a tax-free basis
and
merged it with Transpro, Inc. As a result of this spin off, the condensed
consolidated financial statements and related notes have been restated to
present the results of the Aftermarket business as a discontinued operation.
Accordingly, the operating results of the Aftermarket business have been
included in earnings from discontinued operations, (net of income taxes)
in the
consolidated statement of earnings for the three and six months ended September
26, 2005.
In
the
second quarter of fiscal 2006, the Company recorded, as a result of the spin
off
transaction, a non-cash charge to earnings of $54.1 million. The amount of
the
non-cash charge was comprised of the following: $50.4 million to reflect
the
difference between the value which Modine shareholders received in the new
company of $51.3 million, a function of the stock price of Transpro at the
closing, and the $101.7 million in asset carrying value of Modine’s Aftermarket
business; $3.2 million of foreign currency translation loss recognized at
the
date of the transaction; and $0.5 million of estimated unreimbursed transaction
expense.
Note
2: Significant Accounting Policies
Tooling
costs: Modine
accounts for pre-production tooling costs as a component of property, plant
and
equipment - net when the Company owns title to the tooling, and amortizes
the
capitalized cost to cost of sales over the life of the related program. At
September 26, 2006 and 2005, the company-owned tooling totaled $16,274 and
$13,332, respectively. In certain instances, the Company makes an upfront
payment for customer-owned tooling costs, and subsequently receives a
reimbursement from the customer for the upfront payment. The Company accounts
for these upfront, customer-owned tooling costs as a receivable when the
customer has guaranteed reimbursement to the Company. No significant
arrangements exist where customer-owned tooling costs were not accompanied
by
guaranteed reimbursement. At September 26, 2006 and 2005, the receivable
related
to customer-owned tooling totaled $7,360 and $12,200, respectively.
Stock-based
compensation:
Effective April 1, 2006, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 123(R), “Share-Based Payment,” Modine began to record
compensation expense under the “fair-value-based” method of accounting for stock
options and restricted awards granted to employees and directors. The effect
of
this change, from the “intrinsic-value-based method” previously used by the
Company, on the results for the three and six months ended September 26,
2006
are as follows:
|
|
Three
months ended September 26, 2006
|
|
|
|
|
|
|
Impact
on
|
|
|
|
Fair
|
|
Intrinsic
|
|
earnings
from
|
|
|
|
value
|
|
value
|
|
adoption
of
|
|
|
|
method
|
|
method
|
|
SFAS
No. 123(R)
|
|
Stock-based
compensation expense effect on:
|
|
|
|
|
|
|
|
Income
from continuing operations before taxes
|
|
|
($1,255
|
)
|
|
($734
|
)
|
|
($521
|
)
|
Income
from continuing operations
|
|
|
($768
|
)
|
|
($449
|
)
|
|
($319
|
)
|
Net
earnings
|
|
|
($768
|
)
|
|
($449
|
)
|
|
($319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share effect:
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
($0.02
|
)
|
|
($0.01
|
)
|
|
($0.01
|
)
|
Diluted
earnings per share
|
|
|
($0.02
|
)
|
|
($0.01
|
)
|
|
($0.01
|
)
|
|
|
Six
months ended September 26, 2006
|
|
|
|
|
|
|
Impact
on
|
|
|
|
Fair
|
|
Intrinsic
|
|
earnings
from
|
|
|
|
value
|
|
value
|
|
adoption
of
|
|
|
|
method
|
|
method
|
|
SFAS
No. 123(R)
|
|
Stock-based
compensation expense effect on:
|
|
|
|
|
|
|
|
Income
from continuing operations before taxes
|
|
|
($2,452
|
)
|
|
($1,173
|
)
|
|
($1,279
|
)
|
Income
from continuing operations
|
|
|
($1,500
|
)
|
|
($718
|
)
|
|
($782
|
)
|
Net
earnings
|
|
|
($1,500
|
)
|
|
($718
|
)
|
|
($782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share effect:
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
($0.05
|
)
|
|
($0.02
|
)
|
|
($0.03
|
)
|
Diluted
earnings per share
|
|
|
($0.05
|
)
|
|
($0.02
|
)
|
|
($0.03
|
)
|
The
Company adopted SFAS No. 123(R) using the “modified prospective method” and, as
a result, financial results for periods prior to fiscal 2007 were not restated
for this accounting change. The modified prospective method requires
compensation cost to be recognized beginning on the effective date for (a)
all
new share-based awards granted after the effective date and to previously
issued
awards that are modified, repurchased or cancelled after that date and for
(b)
outstanding share-based awards on the effective date that are unvested because
the requisite service period has not been completed. Compensation cost recorded
on the unvested awards ((b) above) is based on the grant-date fair value
determined under SFAS No. 123 and previously reported in the Company’s pro forma
disclosures. Stock-based compensation expense is recognized using the
straight-line attribution method and remains unchanged from the method used
in
prior years except for the requirement under SFAS No. 123(R) to estimate
forfeitures rather than record them as they occur. This expense has not been
allocated to the various segments, but is reflected in corporate as
administrative expense.
Prior
to
the adoption of SFAS No. 123(R), the Company presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash
flows
in the consolidated statement of cash flows. SFAS No. 123(R) requires the
cash
flow resulting from the tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits) to be classified as financing
cash flows. The excess tax benefits realized for the tax deductions from
option
exercises and stock award vesting for the three and six months ended September
26, 2006 were $27 and $202, respectively. During the three months ended
September 26, 2006 and 2005, the Company recognized total income tax benefits
related to stock-based compensation awards of $488 and $469, respectively.
During the six months ended September 26, 2006 and 2005, the Company recognized
total income tax benefits related to stock-based compensation awards of $953
and
$700, respectively.
Prior
to
fiscal 2007, the Company had adopted SFAS No. 148 “Accounting for Stock-Based
Compensation - Transition and Disclosure,” requiring SFAS No. 123 pro forma
disclosure recognizing compensation expense for stock options under the
fair-value based method. The pro forma net income and net income per share
of
common stock for the three and six months ended September 26, 2005 would
have
been as follows:
|
|
Three
months
|
|
Six
months
|
|
|
|
ended
|
|
ended
|
|
|
|
September
26, 2005
|
|
September
26, 2005
|
|
|
|
|
|
|
|
Earnings
from continuing operations, as reported
|
|
$
|
14,322
|
|
$
|
35,020
|
|
Compensation
expense for stock awards as reported, net of tax
|
|
|
1,198
|
|
|
1,777
|
|
Stock
compensation expense under fair value method, net of tax
|
|
|
(1,198
|
)
|
|
(1,993
|
)
|
Earnings
from continuing operations, pro forma
|
|
$
|
14,322
|
|
$
|
34,804
|
|
|
|
|
|
|
|
|
|
Net
loss, as reported
|
|
$
|
(39,342
|
)
|
$
|
(18,591
|
)
|
Compensation
expense for stock awards as reported, net of tax
|
|
|
1,210
|
|
|
1,804
|
|
Stock
compensation expense under fair value method, net of tax
|
|
|
(1,210
|
)
|
|
(2,020
|
)
|
Net
loss, pro forma
|
|
$
|
(39,342
|
)
|
$
|
(18,807
|
)
|
|
|
|
|
|
|
|
|
Net
earnings per share from continuing operations (basic), as
reported
|
|
$
|
0.42
|
|
$
|
1.02
|
|
Net
earnings per share from continuing operations (basic), pro
forma
|
|
$
|
0.42
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
Net
loss per share (basic), as reported
|
|
$
|
(1.14
|
)
|
$
|
(0.54
|
)
|
Net
loss per share (basic), pro forma
|
|
$
|
(1.14
|
)
|
$
|
(0.55
|
)
|
|
|
|
|
|
|
|
|
Net
earnings per share from continuing operations (diluted), as
reported
|
|
$
|
0.41
|
|
$
|
1.01
|
|
Net
earnings per share from continuing operations (diluted), pro
forma
|
|
$
|
0.41
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
Net
loss per share (diluted), as reported
|
|
$
|
(1.14
|
)
|
$
|
(0.54
|
)
|
Net
loss per share (diluted), pro forma
|
|
$
|
(1.14
|
)
|
$
|
(0.54
|
)
|
See
Note
4 for additional information on the Company’s stock based compensation
plans.
Deferred
compensation trust:
The
Company maintains a deferred compensation trust to fund future obligations
under
its non-qualified deferred compensation plan. The trust’s investments in
third-party debt and equity securities are reflected as short term investments
in the consolidated balance sheet, with changes in fair value reflected as
a
component of earnings. The trust’s investment in Modine stock is reflected as a
reduction of shareholder’s equity in the consolidated balance sheet at its
original stock cost. A deferred compensation obligation is recorded within
liabilities at the fair value of the investments held by the deferred
compensation trust. Any differences between the recorded value of the short
term
investments and Modine stock and the fair value of the deferred compensation
obligation is reflected as an adjustment to earnings.
New
accounting pronouncements: In
November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No.
151, “Inventory Costs - An Amendment of Accounting Research Bulletin No. 43,
Chapter 4,” which clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage). The Company
adopted the provisions of SFAS No. 151 effective for inventory costs incurred
during the first quarter of fiscal 2007. The adoption of this statement did
not
have a material impact on the Company’s financial condition or results of
operations.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets -
An Amendment of APB Opinion No. 29,” which eliminates the exception for
non-monetary exchanges of similar productive assets and replaces it with
a
general exception for exchanges of non-monetary assets that do not have
commercial substance. The Company was required to adopt SFAS No. 153 for
non-monetary asset exchanges occurring in the first quarter of fiscal 2007.
The
adoption of this statement did not have a material impact on the Company’s
financial condition or results of operations.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
A Replacement of APB Opinion No. 20 and FASB Statement No. 3,” which changes the
requirements for the accounting and reporting of a change in accounting
principle. SFAS No. 154 applies to all voluntary changes in accounting
principles and to changes required by an accounting pronouncement in the
unusual
instance that the pronouncement does not include specific transition provisions.
SFAS No. 154 requires retrospective application in prior periods’ financial
statements of changes in accounting principle, unless it is impracticable
to
determine either the period-specific effects or the cumulative effect of
the
change. The Company adopted SFAS No. 154 in the first quarter of fiscal 2007.
The adoption of this statement did not have a material impact on the Company’s
financial condition or results of operations.
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48). This interpretation clarifies the accounting for
uncertainty in income taxes recognized in accordance with SFAS No. 109,
“Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. Under FIN 48,
if a
tax position does not meet a “more-likely-than-not” recognition threshold, the
benefit of that position is not recognized in the financial statements. The
Company is required to adopt FIN 48 in the first quarter of fiscal 2008,
and is
currently assessing the impact of adopting this interpretation.
In
September 2006, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue
No.
06-3,
“How Sales Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross Versus
Net Presentation)”, which requires that a company disclose its accounting policy
for the statement of earnings presentation of taxes assessed by a governmental
authority on a revenue-producing transaction between a seller and a customer.
In
addition, for any taxes reported on a gross basis (included in revenues and
costs), disclosure of the amount of taxes recorded within these categories
is
required. The Company is required to apply this EITF in the fourth quarter
of fiscal 2007 and is currently evaluating the impact of adopting this
pronouncement.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
addresses how companies should measure fair value when they are required
to use
a fair value measure for recognition or disclosure purposes under GAAP. SFAS
No.
157 defines fair value, establishes a framework for measuring fair value
and
expands the disclosures on fair value measurements. The Company is required
to
adopt SFAS No. 157 in the first quarter of fiscal 2009, and is currently
assessing the impact of adopting this pronouncement.
In
September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans,” an amendment of FASB Statements
No. 87, 88, 106 and 132(R). SFAS No. 158 requires companies to recognize
a net
asset or liability to report the funded status of defined benefit pension
and
other postretirement plans on the balance sheet and to recognize changes
in that
funded status in the year in which the changes occur through other comprehensive
income in shareholders’ equity. The Company is required to adopt this aspect of
SFAS No. 158 for the fiscal year ending March 31, 2007. The anticipated impact
of adopting this statement, based on the March 31, 2006 funded status of
our
pension and postretirement plans, would be to increase total liabilities
and
reduce total shareholders’ equity by $116,996. The Company does not anticipate
the adoption of this statement will have an adverse impact on existing loan
covenants. The Statement also requires that employers measure plan assets
and
obligations as of the date of their year-end financial statements beginning
with
the Company’s fiscal year ending March 31, 2009. The Company currently uses
December 31 as the measurement date for its pension and postretirement
plans.
In
September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements”, which provides interpretive
guidance on the consideration of the effects of prior year misstatements
in
quantifying current year misstatements for the purpose of a materiality
assessment. SAB No. 108 is effective for the Company’s fiscal year ending March
31, 2007. The Company has elected early adoption of the provisions of SAB
No. 108 during the second quarter of fiscal 2007. SAB No. 108 established
an
approach that requires quantification of financial statement misstatements
based
on the effects of the misstatements on each of the Company’s financial
statements and the related financial statement disclosures. This model is
commonly referred to as a “dual approach” because it requires quantification of
errors under both the iron curtain and the roll-over methods. SAB No. 108
permits initial adoption of its provisions either by (i) restating prior
financial statements as if the “dual approach” had always been applied; or (ii)
recording the cumulative effect of initially applying the “dual approach” as
adjustments to the carrying values of assets and liabilities as of April
1, 2006
with an offsetting adjustment recorded to the opening balance of retained
earnings. We elected to record the effects of applying SAB No. 108 using
the
cumulative effect transition method. The following table summarizes the
effects at April 1, 2006 of applying the guidance in SAB No.
108:
|
|
Period
in which the
|
|
|
|
|
Misstatement
Originated (1)
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
Adjustment
|
|
|
|
Prior
to
|
|
Year
Ended March 31,
|
|
Recorded
as of
|
|
|
|
April
1, 2004
|
|
2005
|
|
2006
|
|
April
1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets (2)
|
|
$
|
482
|
|
$
|
324
|
|
$
|
732
|
|
$
|
1,538
|
|
Vacation
(3)
|
|
|
-
|
|
|
-
|
|
|
510
|
|
|
510
|
|
Inventory
(4)
|
|
|
-
|
|
|
-
|
|
|
456
|
|
|
456
|
|
Administrative
expenses (5)
|
|
|
-
|
|
|
-
|
|
|
124
|
|
|
124
|
|
Deferred
income taxes (6)
|
|
|
(166
|
)
|
|
(112
|
)
|
|
(575
|
)
|
|
(853
|
)
|
Impact
on net income (7)
|
|
$
|
316
|
|
$
|
212
|
|
$
|
1,247
|
|
|
|
|
Retained
earnings (8)
|
|
|
|
|
|
|
|
|
|
|
$
|
1,775
|
|
(1) |
The
Company has concluded that these errors were immaterial, individually
and
in the aggregate, to all periods prior to April 1, 2006.
|
(2) |
The
Company was not properly accounting for the disposal of fixed assets
within its Original Equipment - Europe segment. As a result of this
error, pretax income was overstated by $482 (cumulatively) in fiscal
years prior to 2005, by $324 in fiscal 2005 and by $732 in fiscal
2006.
The Company recorded a $1,538 reduction of our fixed assets for disposals
not previously recognized as of April 1, 2006 with a corresponding
reduction in retained earnings to correct these
misstatements.
|
(3) |
The
Company was not properly recording its vacation accrual within its
Original Equipment - Asia segment. As a result of this error, pretax
income was overstated by $510 in fiscal 2006. The Company recorded
a $510
increase in our vacation liability as of April 1, 2006 with a
corresponding reduction in retained earnings to correct this
misstatement. This includes $125 which was previously recorded in
the first quarter of fiscal 2007.
|
(4) |
The
Company did not properly recognize a $456 reduction in inventory
at one
operating location within the Original Equipment - Americas segment
which
was identified as a result of a physical inventory performed on September
26, 2006. As a result of this error, pretax income was overstated by
$456 in fiscal 2006. The Company recorded a $456 reduction in our
inventory balance as of April 1, 2006 with a corresponding reduction
in
retained earnings to correct this
misstatement.
|
(5) |
As
a result of a clerical error, the Company improperly capitalized
certain
Corporate administrative charges, consisting primarily of salaries
and
miscellaneous office expenses, within accounts receivable at March
31,
2006. As a result of this error, pretax income was overstated by $124
in fiscal 2006. The Company recorded a $124 reduction in our accounts
receivable balance as of April 1, 2006 with a corresponding reduction
in
retained earnings to correct this
misstatement.
|
(6) |
As
a result of the misstatements previously described, our provision
for
income taxes was overstated by $166 (cumulatively) in fiscal years
prior
to 2005, by $112 in fiscal 2005 and by $575 in fiscal 2006. The Company
recorded an increase in our deferred income tax assets in the amount
of
$853 as of April 1, 2006 with a corresponding increase in retained
earnings to correct these misstatements.
|
(7) |
Represents
the net overstatement of net income for the indicated periods resulting
from these misstatements.
|
(8) |
Represents
the net reduction to retained earnings recorded as of April 1, 2006
to
reflect the initial adoption of SAB No. 108.
While
the amounts above are considered immaterial to prior periods, they
have
been corrected through the cumulative effect adjustment upon adoption
of
SAB No. 108 as recording these amounts in fiscal 2007 as out-of-period
adjustments would have had a material effect on the annual results of
operations for fiscal 2007.
The
following is a rollforward of the retained earnings balance from
March 31,
2006 through September 26, 2006 reflecting the net reduction in
retained
earnings as a result of adopting SAB No. 108:
Retained
earnings, March 31, 2006 $433,405
SAB
No. 108 cumulative effect (1,775)
Net
earnings 28,736
Cash
dividends (11,351)
Stock
repurchase program
(10,933)
Retained
earnings, September 26, 2006 $438,082
Certain
of the adjustments included above also resulted in an error in
the first
quarter of fiscal 2007. This error represented an overstatement
of net
income for the first quarter of fiscal 2007 totaling approximately
$600,
which was corrected in the second quarter of fiscal
2007.
|
Note
3: Employee Benefit Plans
Modine’s
contributions to the defined contribution employee benefit plans for the
three
months ended September 26, 2006 and 2005 were $2,179 and $1,232, respectively.
Modine’s contributions to the defined contribution employee benefit plans for
the six months ended September 26, 2006 and 2005 were $4,212 and $2,215,
respectively.
In
July
2006, the Company announced the closure of its facility in Clinton, Tennessee.
The Company recorded a pension curtailment charge of $700 during the three
months ended September 26, 2006 to reflect the impact of this upcoming closure
on the Clinton Hourly-Paid Employees Retirement Plan.
In
May
2006, the Company offered a voluntary enhanced early retirement program to
certain U.S. employees. This program included an enhanced pension benefit
of
five years of credited service for those employees who accepted the early
retirement program. The Company recorded a charge of $940 during the three
months ended September 26, 2006 to reflect this enhanced pension benefit.
Costs
for
Modine's pension and postretirement benefit plans for the three and six months
ended September 26, 2006 and 2005 include the following:
|
|
Three
months ended
September
26
|
|
Six
months ended
September
26
|
|
|
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Service
cost
|
|
$
|
1,109
|
|
$
|
1,829
|
|
$
|
97
|
|
$
|
93
|
|
$
|
2,215
|
|
$
|
3,824
|
|
$
|
194
|
|
$
|
192
|
|
Interest
cost
|
|
|
3,790
|
|
|
3,159
|
|
|
482
|
|
|
519
|
|
|
7,577
|
|
|
6,608
|
|
|
963
|
|
|
1,067
|
|
Expected
return on plan assets
|
|
|
(4,764
|
)
|
|
(4,184
|
)
|
|
-
|
|
|
-
|
|
|
(9,528
|
)
|
|
(8,745
|
)
|
|
-
|
|
|
-
|
|
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
net loss
|
|
|
1,428
|
|
|
1,088
|
|
|
128
|
|
|
148
|
|
|
2,856
|
|
|
2,272
|
|
|
257
|
|
|
305
|
|
Unrecognized
prior service cost
|
|
|
-
|
|
|
(10
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(21
|
)
|
|
-
|
|
|
-
|
|
Unrecognized
net asset
|
|
|
(7
|
)
|
|
(5
|
)
|
|
-
|
|
|
-
|
|
|
(14
|
)
|
|
(12
|
)
|
|
-
|
|
|
-
|
|
Adjustment
for curtailment
|
|
|
700
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
700
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Enhanced
pension benefit
|
|
|
940
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
940
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
periodic benefit cost
|
|
$
|
3,196
|
|
$
|
1,877
|
|
$
|
707
|
|
$
|
760
|
|
$
|
4,746
|
|
$
|
3,926
|
|
$
|
1,414
|
|
$
|
1,564
|
|
Note
4: Stock Based Compensation
The
Company’s long-term stock-based incentive plans for employees consist of a
discretionary stock option program for top managers and other key employees
and
an officers and key executive program that consists of a stock option component
(20 percent), retention restricted stock component (20 percent) and a
performance stock component (60 percent). The performance component of the
long-term incentive compensation program consists of an earnings per share
measure (weighted at 60 percent) based on a cumulative three year period
and a
total shareholder return measure (TSR) (weighted at 40 percent) compared
to the
performance of the S&P 500 (stock price change and dividends) over the same
three year period. A new performance period begins each fiscal year so multiple
performance periods, with separate goals, operate simultaneously. Stock options
granted under each program have an exercise price equal to the fair market
value
of the common stock on the date of grant and are immediately exercisable
after
one year of service with the Company. Retention restricted stock awards are
granted at fair market value and vest annually over a period of four to five
years depending on the year of grant. The stock granted under the performance
component, once earned, is fully vested and will be granted
immediately.
In
addition to the long-term stock-based incentive plans for employees, stock
options and stock awards may be granted to non-employee directors by the
Officer
Nomination & Compensation Committee (ONC) of the Board of Directors. The
Board or the ONC, as applicable, has the broad discretionary authority to
set
the terms of the awards of stock under the plan. Stock options expire no
later
than 10 years after the grant date and have an exercise price equal to the
fair
market value of the common stock on the date of the grant. Unrestricted stock
awards granted vest immediately.
The
fulfillment of equity based grants is currently being accomplished through
the
issuance of new common shares. Shares being repurchased through the share
repurchase program are being returned to the status of authorized but unissued
shares. Under the Company’s 2002 Incentive Stock Plan and the Amended and
Restated 2000 Stock Incentive Plan for Non-Employee Directors, 1,522 shares
and
234 shares, respectively, are available for the granting of additional options
and awards.
Stock
Options:
All
stock options granted under the plans as described above were vested on April
1,
2006, the date of adoption of SFAS No. 123(R), except those held
by employees who have not completed one year of service. The fair value of
the option awards is estimated on the date of grant using the Black-Scholes
option valuation model that uses the assumptions noted in the following
table:
|
|
Three
months ended
|
Six
months ended
|
|
|
September
26
|
|
September
26
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Expected
life of options - years
|
|
|
N/A
|
|
|
5
|
|
|
N/A
|
|
|
5
|
|
Risk-free
interest rate
|
|
|
N/A
|
|
|
3.69
|
%
|
|
N/A
|
|
|
3.69
|
%
|
Expected
volatility of the Company's stock
|
|
|
N/A
|
|
|
35.75
|
%
|
|
N/A
|
|
|
35.75
|
%
|
Expected
dividend yield on the Company's stock
|
|
|
N/A
|
|
|
2.77
|
%
|
|
N/A
|
|
|
2.77
|
%
|
Expected
forfeiture rate
|
|
|
N/A
|
|
|
0
|
%
|
|
N/A
|
|
|
0
|
%
|
Expected
volatilities are based on the historical volatility of the Company’s stock and
other factors. The Company uses historical data to estimate option exercises
and
employee terminations within the valuation model. The risk-free interest
rate
was based on yields of U.S. zero-coupon issues with a term equal to the expected
life of the option for the week the options were granted. No stock options
were
granted by the Company in the first six months of fiscal 2007. For the three
and
six months ended September 26, 2006, Modine recorded $36 and $161, respectively,
in compensation expense related to stock options which were outstanding but
unvested at the April 2006 adoption date of SFAS No. 123(R) because the
requisite one-year service period had not been completed. No compensation
expense was recorded in the first six months of fiscal 2006 related to stock
options.
The
weighted average fair value of stock options granted in the first quarter
of
fiscal 2006 was $8.64 per option. No options were granted in the second quarter
of fiscal 2006. The total fair value of stock options vesting for the three
and
six months ended September 26, 2006 were $23 and $324, respectively. As of
September 26, 2006, the total compensation expense not yet recognized related
to
non-vested stock options was $33 and the weighted-average period in which
the
expense is expected to be recognized is approximately four months.
A
summary
of the stock option activity for the three and six months ended September
26,
2006 is as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
Weighted
|
|
|
|
remaining
|
|
Aggregate
|
|
|
|
average
|
|
|
|
contractual
|
|
intrinsic
|
|
|
|
option
price
|
|
Options
|
|
years
|
|
value
|
|
Three
months ended September 26, 2006
|
|
|
|
|
|
|
|
|
|
Outstanding
June 26, 2006
|
|
$
|
27.19
|
|
|
2,544
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
22.63
|
|
|
(36
|
)
|
|
|
|
|
|
|
Forfeited
|
|
|
28.01
|
|
|
(126
|
)
|
|
|
|
|
|
|
Outstanding
September 26, 2006
|
|
$
|
27.21
|
|
|
2,382
|
|
|
5.5
|
|
$
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
September 26, 2006
|
|
$
|
27.20
|
|
|
2,369
|
|
|
5.5
|
|
$
|
2,269
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
Weighted
|
|
|
|
remaining
|
|
Aggregate
|
|
|
|
average
|
|
|
|
contractual
|
|
intrinsic
|
|
|
|
option
price
|
|
Options
|
|
years
|
|
value
|
|
Six
months ended September 26, 2006
|
|
|
|
|
|
|
|
|
|
Outstanding
March 31, 2006
|
|
$
|
27.10
|
|
|
2,565
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
20.58
|
|
|
(57
|
)
|
|
|
|
|
|
|
Forfeited
|
|
|
28.01
|
|
|
(126
|
)
|
|
|
|
|
|
|
Outstanding
September 26, 2006
|
|
$
|
27.21
|
|
|
2,382
|
|
|
5.5
|
|
$
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
September 26, 2006
|
|
$
|
27.20
|
|
|
2,369
|
|
|
5.5
|
|
$
|
2,269
|
|
The
aggregate intrinsic value in the table above represents the pre-tax difference
between the closing price of Modine common shares on the last trading day
of the
second quarter of fiscal 2007 over the exercise price of the stock option,
multiplied by the number of options outstanding or exercisable. The aggregate
value shown is not recorded for financial statement purposes under SFAS No.
123(R) and the value will change based upon daily changes in the fair value
of
Modine’s common shares.
Additional
information related to stock options exercised during the three and six months
ended September 26, 2006 and 2005 were as follows:
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
September
26
|
|
September
26
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
value of stock options exercised
|
|
$
|
16
|
|
$
|
3,026
|
|
$
|
157
|
|
$
|
3,380
|
|
Proceeds
from stock options exercised
|
|
$
|
823
|
|
$
|
7,173
|
|
$
|
1,175
|
|
$
|
8,597
|
|
Restricted
Stock:
A
summary of the restricted stock activity for the three and six months ended
September 26, 2006 is as follows:
|
|
Weighted
|
|
Shares
|
|
|
|
average
|
|
subject
to
|
|
|
|
price
|
|
restrictions
|
|
Three
months ended September 26, 2006
|
|
|
|
|
|
Non-vested
at June 26, 2006
|
|
$
|
24.14
|
|
|
372
|
|
Granted
|
|
|
22.93
|
|
|
8
|
|
Vested
|
|
|
25.84
|
|
|
(16
|
)
|
Forfeited
|
|
|
27.21
|
|
|
(14
|
)
|
Non-vested
at September 26, 2006
|
|
$
|
20.34
|
|
|
350
|
|
|
|
Weighted
|
|
Shares
|
|
|
|
average
|
|
subject
to
|
|
|
|
price
|
|
restrictions
|
|
Six
months ended September 26, 2006
|
|
|
|
|
|
Non-vested
at March 31, 2006
|
|
$
|
22.50
|
|
|
433
|
|
Granted
|
|
|
22.93
|
|
|
8
|
|
Vested
|
|
|
26.49
|
|
|
(75
|
)
|
Forfeited
|
|
|
27.45
|
|
|
(16
|
)
|
Non-vested
at September 26, 2006
|
|
$
|
20.34
|
|
|
350
|
|
At
September 26, 2006, Modine had approximately $7,124 of total unrecognized
compensation cost related to non-vested restricted stock. The cost is expected
to be recognized over a weighted average period of 3.1 years.
As
required by SFAS No.123(R), management has made an estimate (based upon
historical rates) of expected forfeitures and is recognizing compensation
costs
for those restricted shares expected to vest. A cumulative adjustment (net
of
income taxes) of $70 was recorded in the first quarter of fiscal 2007, reducing
the compensation expense recognized on non-vested restricted shares.
Restricted
Stock - Performance Based Shares:
In
fiscal 2006, the ONC changed the performance portion of the restricted stock
award program lengthening the time horizon to a three-year period and
establishing two performance measures - an EPS measure and a Total Shareholder
Return (TSR) measure. Awards are earned based on the attainment of corporate
financial goals over a three-year period and are paid at the end of that
three-year performance period if the performance targets have been achieved.
A
new performance period begins each year so multiple performance periods,
with
separate goals, operate simultaneously. For the three and six months ended
September 26, 2006, Modine recorded $283 and $586, respectively, in compensation
expense resulting from the TSR portion of the performance award. No expense
was
recorded relative to the EPS portion of the performance award based upon
current
projections of probable attainment of this portion of the award. The fair
value
of the TSR portion of the award was estimated in fiscal 2007 using a Monte
Carlo
valuation model. In fiscal 2006, the compensation expense recorded was based
upon variable accounting under APB No. 25. Because the fiscal 2006 performance
shares were unvested on the adoption date of SFAS No. 123(R), the Monte Carlo
method was used to determine the fair value for recording compensation expense
in fiscal 2007. The following table sets forth assumptions used to determine
the
fair value for each performance award:
|
|
May
2006
|
|
May
2005
|
|
|
|
Grant
|
|
Grant
|
|
|
|
|
|
|
|
Expected
life of award - years
|
|
|
3
|
|
|
3
|
|
Risk-free
interest rate
|
|
|
4.96
|
%
|
|
3.75
|
%
|
Expected
volatility of the Company's stock
|
|
|
31.40
|
%
|
|
40.70
|
%
|
Expected
dividend yield on the Company's stock
|
|
|
2.19
|
%
|
|
2.13
|
%
|
Expected
forfeiture rate
|
|
|
5.00
|
%
|
|
5.00
|
%
|
At
September 26, 2006, Modine had approximately $2,408 of total unrecognized
compensation cost related to non-vested restricted stock. That cost is expected
to be recognized over a weighted average period of 2.1 years.
Note
5: Other Income - Net
Other
income - net was comprised of the following:
|
|
Three
months ended September
26
|
Six
months ended September
26
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Equity
in earnings of non-consolidated affiliates
|
|
$
|
380
|
|
$
|
1,524
|
|
$
|
1,416
|
|
$
|
2,557
|
|
Interest
income
|
|
|
190
|
|
|
627
|
|
|
479
|
|
|
842
|
|
Foreign
currency transactions
|
|
|
709
|
|
|
(1,703
|
)
|
|
717
|
|
|
(374
|
)
|
Other
non-operating income - net
|
|
|
103
|
|
|
159
|
|
|
279
|
|
|
253
|
|
Total
other income - net
|
|
$
|
1,382
|
|
$
|
607
|
|
$
|
2,891
|
|
$
|
3,278
|
|
Note
6: Income Taxes
The
provision for income taxes from continuing operations for the second quarter
ended September 26, 2006 and 2005 was a benefit of $7,278 and expense of
$7,583,
respectively. During the three months ended September 26, 2006 and 2005,
the
Company’s effective income tax rate attributable to earnings from continuing
operations was (143.0) percent and 34.6 percent, respectively. The effective
tax
rate for the second quarter of fiscal 2007 includes a non-recurring decrease
resulting from an approximate $8,000 U.S. tax benefit that became available
based upon the worthlessness of the stock of the Company’s Taiwan business
upon the closure of this facility. This decrease, together with a decrease
in
foreign and state income taxes resulting from a favorable mix between foreign
and domestic income as well as among foreign jurisdictions, was partially
offset
by an increase in the valuation allowance related to certain foreign tax
loss
carryforwards.
The
provision for income taxes from continuing operations for the six months
ended
September 26, 2006 and 2005 was a benefit of $3,892 and expense of $17,731,
respectively. During the six months ended September 26, 2006 and 2005, the
Company’s effective income tax rate attributable to earnings from continuing
operations was (15.7) percent and 33.6 percent, respectively. The effective
tax
rate for the first six months of fiscal 2007 includes a non-recurring decrease
resulting from the closure of the Company’s Taiwan facility and a decrease
resulting from the recognition of a tax benefit related to net operating
losses
in Brazil that were previously unavailable. These net operating losses became
available in connection with the fiscal 2007 first quarter acquisition of
the
remaining 50% of Radiadores Visconde Ltda. and future tax restructuring of
the
Brazilian operations.
The
following is a reconciliation of the effective tax rate for the three and
six
months ended September 26, 2006 and 2005:
|
|
Three
months ended September
26
|
Six
months ended September
26
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Statutory
federal tax
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State
taxes, net of federal benefit
|
|
|
(11.9
|
)
|
|
(0.4
|
)
|
|
(2.3
|
)
|
|
0.5
|
|
Taxes
on non-U.S. earnings and losses
|
|
|
(15.4
|
)
|
|
0.2
|
|
|
(6.6
|
)
|
|
(3.2
|
)
|
Valuation
allowance
|
|
|
5.2
|
|
|
1.1
|
|
|
6.1
|
|
|
1.9
|
|
Worthless
stock deduction
|
|
|
(156.5
|
)
|
|
-
|
|
|
(32.2
|
)
|
|
-
|
|
Net
operating losses in Brazil
|
|
|
-
|
|
|
-
|
|
|
(14.3
|
)
|
|
-
|
|
Other
|
|
|
0.6
|
|
|
(1.3
|
)
|
|
(1.4
|
)
|
|
(0.6
|
)
|
Effective
tax rate
|
|
|
-143.0
|
%
|
|
34.6
|
%
|
|
-15.7
|
%
|
|
33.6
|
%
|
Note
7: Earnings Per Share
The
computational components of basic and diluted earnings per share are summarized
as follows:
|
|
Three
months ended September
26
|
|
Six
months ended September
26
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
12,369
|
|
$
|
14,322
|
|
$
|
28,666
|
|
$
|
35,020
|
|
Earnings
from discontinued operations
|
|
|
-
|
|
|
404
|
|
|
-
|
|
|
457
|
|
Loss
on spin off of discontinued operations
|
|
|
-
|
|
|
(54,068
|
)
|
|
-
|
|
|
(54,068
|
)
|
Cumulative
effect of accounting change
|
|
|
-
|
|
|
-
|
|
|
70
|
|
|
-
|
|
Net
earnings (loss)
|
|
$
|
12,369
|
|
$
|
(39,342
|
)
|
$
|
28,736
|
|
$
|
(18,591
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
32,171
|
|
|
34,185
|
|
|
32,192
|
|
|
34,257
|
|
Effect
of dilutive securities
|
|
|
59
|
|
|
594
|
|
|
96
|
|
|
448
|
|
Weighted
average shares outstanding – diluted
|
|
|
32,230
|
|
|
34,779
|
|
|
32,288
|
|
|
34,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share of common stock – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.38
|
|
$
|
0.42
|
|
$
|
0.89
|
|
$
|
1.02
|
|
Earnings
from discontinued operations
|
|
|
-
|
|
|
0.01
|
|
|
-
|
|
|
0.01
|
|
Loss
on spin off of discontinued operations
|
|
|
-
|
|
|
(1.57
|
)
|
|
-
|
|
|
(1.57
|
)
|
Cumulative
effect of accounting change
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
earnings (loss) – basic
|
|
$
|
0.38
|
|
$
|
(1.14
|
)
|
$
|
0.89
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share of common stock – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.38
|
|
$
|
0.41
|
|
$
|
0.89
|
|
$
|
1.01
|
|
Earnings
from discontinued operations
|
|
|
-
|
|
|
0.01
|
|
|
-
|
|
|
0.01
|
|
Loss
on spin off of discontinued operations
|
|
|
-
|
|
|
(1.56
|
)
|
|
-
|
|
|
(1.56
|
)
|
Cumulative
effect of accounting change
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
earnings (loss) – diluted
|
|
$
|
0.38
|
|
$
|
(1.14
|
)
|
$
|
0.89
|
|
$
|
(0.54
|
)
|
The
calculation of diluted earnings per share excluded 1,660 and 0 options for
the
three months ended September 26, 2006 and 2005, respectively, and 1,660 and
200
options for the six months ended September 26, 2006 and 2005, respectively,
as
the exercise price of these stock options was greater than the market price
of
the Company’s common stock on September 26, 2006, and were thus anti-dilutive.
The calculation of diluted earnings per share also excludes 222 and 0 restricted
stock awards for the three months ended September 26, 2006 and 2005,
respectively, and 222 and 1,767 restricted stock awards for the six months
ended
September 26, 2006 and 2005 as these awards were anti-dilutive.
Note
8: Comprehensive Earnings
Comprehensive
earnings (loss), which represent net earnings (loss) adjusted by the change
in
accumulated other comprehensive income was as follows:
|
|
Three
months ended September
26
|
Six
months ended September
26
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
earnings (loss)
|
|
$
|
12,369
|
|
$
|
(39,342
|
)
|
$
|
28,736
|
|
$
|
(18,591
|
)
|
Foreign
currency translation
|
|
|
(176
|
)
|
|
3,722
|
|
|
12,394
|
|
|
(14,500
|
)
|
Cash
flow hedges
|
|
|
(879
|
)
|
|
(1,591
|
)
|
|
(1,270
|
)
|
|
(1,794
|
)
|
Total
comprehensive earnings (loss)
|
|
$
|
11,314
|
|
$
|
(37,211
|
)
|
$
|
39,860
|
|
$
|
(34,885
|
)
|
Note
9: Inventories
The
amounts of raw materials, 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 materials, work in process and finished goods.
|
|
September
26, 2006
|
|
March
31, 2006
|
|
Raw
materials
|
|
$
|
55,623
|
|
$
|
39,779
|
|
Work
in process
|
|
|
32,726
|
|
|
29,435
|
|
Finished
goods
|
|
|
34,304
|
|
|
21,013
|
|
Total
inventories
|
|
$
|
122,653
|
|
$
|
90,227
|
|
Note
10: Property, Plant and Equipment
Property,
plant and equipment consisted of the following:
|
|
September
26, 2006
|
|
March
31, 2006
|
|
Gross
property, plant and equipment
|
|
$
|
1,011,862
|
|
$
|
940,319
|
|
Less
accumulated depreciation
|
|
|
(505,891
|
)
|
|
(472,719
|
)
|
Net
property, plant and equipment
|
|
$
|
505,971
|
|
$
|
467,600
|
|
Note
11: Acquisition
Effective
May 4, 2006, Modine acquired the remaining 50 percent of the stock of Radiadores
Visconde Ltda. which it did not already own, for $11,096, net of cash acquired,
and the incurrence of a $2,000 note which is payable in 24 months, for a
total
net purchase price of $13,096. The acquisition was financed through cash
generated through operations and borrowing on the Company’s revolving credit
agreement. The purchase agreement also includes a $4,000 performance payment
which is contingent on the cumulative earnings before interest, taxes,
depreciation and amortization of the business over a 24 month period.
This
50
percent step acquisition was accounted for under the purchase method. Acquired
assets and liabilities assumed were recorded at their respective fair market
values. An intangible asset was recorded at the acquisition date for a tradename
valued at $1,161 which is being amortized over five years. The purchase price
allocation, which is preliminary, based primarily on the finalization of
certain
other intangible valuations, resulted in the fair market values of the assets
and liabilities acquired exceeding the purchase price. Accordingly, the $4,000
contingent performance payment has been recorded as a liability in the purchase
price allocation, reducing the amount by which the fair market values of
the assets and liabilities acquired exceeded the purchase price, and increasing
the total net purchase price to $17,096. The remaining excess by which the
fair
market values of assets and liabilities acquired exceeded the purchase price
has
been allocated as a reduction to the acquired long-lived assets on a pro-rata
basis.
Prior
to
the acquisition, the Company accounted for its initial 50 percent investment
in
Radiadores Visconde Ltda. under the equity method. With the purchase of the
remaining 50 percent, the Company ceased accounting for its investment in
Radiadores Visconde Ltda. under the equity method and began accounting for
its
100 percent ownership on a consolidated basis. The equity investment balance
on
May 4, 2006 totaled $26,650, and was allocated to the book value of the assets
and liabilities previously owned. This resulted in the recognition of goodwill
totaling $11,821 which consists of the excess of the initial 50 percent
investment over the fair value of the assets and liabilities acquired. The
goodwill is not deductible for income tax purposes.
Established
in 1963 and based in Sao Paulo, Brazil, Radiadores Visconde Ltda. provides
thermal management solutions to the automotive, truck, agricultural and
construction equipment, and industrial application markets, as well as the
automotive aftermarket for export and for distribution throughout Brazil.
It
manufactures a wide array of modules and heat exchangers for original equipment
manufacturers including radiators, charge air coolers, and oil coolers.
The
Radiadores Visconde Ltda. acquisition strongly fits into Modine’s geographic
diversification goal of expanding the Company’s manufacturing footprint in
lower-cost, emerging growth areas. This acquisition strengthens the Company
as
it provides an opportunity for Modine to follow its global customers to more
geographic regions. In addition, this acquisition gives the Company the ability
to transfer its global manufacturing and design standards to the Brazilian
market, providing the Company with the opportunity to improve its position
in this market and grow its on-highway and off-highway business. This
acquisition is reported in the Original Equipment-Americas segment. For
financial reporting purposes, Radiadores Visconde Ltda. is included in the
consolidated financial statements using a one-month delay similar to the
Company’s other foreign subsidiaries. Accordingly, the operational results
reported for the first six months of fiscal 2007 include two months of equity
method accounting for the Company’s initial 50 percent ownership prior to the
acquisition, and four months of consolidated activity reflecting the Company’s
100 percent ownership interest.
The
following provides a preliminary allocation of the purchase price, including
allocation of the equity investment balance as of the acquisition
date:
Assets
acquired:
|
|
|
|
Trade
receivables – net
|
|
$
|
15,210
|
|
Inventories
|
|
|
15,982
|
|
Other
current assets
|
|
|
4,569
|
|
Property,
plant and equipment – net
|
|
|
20,415
|
|
Goodwill
(initial 50 percent already owned)
|
|
|
11,821
|
|
Tradename
|
|
|
1,161
|
|
Other
noncurrent assets
|
|
|
161
|
|
Total
assets
|
|
|
69,319
|
|
|
|
|
|
|
Liabilities
assumed:
|
|
|
|
|
Accounts
payable
|
|
|
10,420
|
|
Accrued
compensation
|
|
|
2,788
|
|
Accrued
expenses and other current liabilities
|
|
|
3,549
|
|
Other
noncurrent liabilities
|
|
|
8,816
|
|
Total
liabilities
|
|
|
25,573
|
|
|
|
|
|
|
Net
assets acquired
|
|
|
43,746
|
|
Equity
investment allocated to assets
|
|
|
|
|
acquired
and liabilities assumed
|
|
|
26,650
|
|
Net
purchase price
|
|
|
17,096
|
|
|
|
|
|
|
Recognized
goodwill (purchased 50 percent)
|
|
$
|
---
|
|
For
the
twelve months ended December 31, 2005, Radidores Visconde Ltda.’s net sales were
approximately $66,000, and its net earnings were approximately $4,000 over
this
same period. These results represent 4.2% of the Company’s net sales and 4.5% of
the Company’s net earnings, after adjusting for equity earnings recognized, over
this same twelve-month period of time.
Note
12: Restructuring, Plant Closures and Other Related Costs
In
the
first quarter of fiscal 2007, Modine announced a three year global
competitiveness program intended to reduce costs, accelerate technology
development, and accelerate market and geographic expansion - all intended
to
stimulate growth and profits. The following exit and disposal activities
were
initiated during the first six months of fiscal 2007 under this program.
In
April
2006, the Company announced a plan to relocate its Harrodsburg, Kentucky-based
research and development (R&D) activities, which are reported in the
Corporate and administrative section in the segment disclosure, into its
technology center in Racine, Wisconsin. This was done in conjunction with
the
creation of a product-focused group to support the heating, ventilating,
and air
conditioning (HVAC) equipment needs of the truck and off-highway markets.
The
new group’s R&D activities, along with systems and applications engineering,
will be located in Racine while production will remain in Harrodsburg. In
conjunction with this plan, the Company anticipates incurring one-time
termination benefits of approximately $200, and other closure costs totaling
approximately $800. Total cash expenditures of approximately $900 are
anticipated to be incurred in conjunction with this plan. During the three
and
six months ended September 26, 2006, approximately $200 and $300, respectively,
of one-time termination benefits were charged to earnings related to this
plan.
In
May
2006, the Company announced the closure of its Taiwan facility, which
manufactured high volume heat pipes for the personal computer and laptop
markets
through its electronic cooling business (which is reported in the Other
segment). This closure decision was made to allow the Company to focus its
attention and manufacturing assets to better serve the advanced thermal
solutions segment of the electronics cooling market. Operations ceased at
this
facility in July 2006, and approximately 200 employees have been affected
by the
action that should be completed during the third quarter of fiscal 2007.
During
the three and six months ended September 26, 2006, approximately $0 and $800,
respectively, of one-time termination benefits and contract termination costs
and approximately $500 and $1,300, respectively, of other closure costs were
charged to earnings related to this plan. The Company anticipates incurring
additional other closure costs totaling approximately $400 with the finalization
of this closure in the third quarter of fiscal 2007. Total cash expenditures
of
approximately $1,400 will be incurred in conjunction with this plan, of which
the majority of this has already been paid. Upon completion of this closure
in
the third quarter of fiscal 2007, the Company will have incurred one-time
termination benefits of approximately $500, contract termination costs of
approximately $300, and other closure costs totaling approximately $1,700.
In
May
2006, the Company offered a voluntary enhanced early retirement program
to approximately 200 U.S. salaried employees. The program
was accepted by approximately 50 employees in the U.S.
Retirement dates extend from August 2006 through March 2007. During the
three and six months ended September 26, 2006, charges of approximately $1,500
and $1,900, respectively, were recorded related to employees who accepted
the
early retirement program. Total cash expenditures of approximately $900 are
anticipated to be incurred under this program.
In
July
20, 2006, the Company announced plans to build a new facility adjacent to
its
current Nuevo Laredo, Mexico facility. In addition, the Company announced
the
closing of the Richland, South Carolina plant by consolidating production
into the McHenry, Illinois facility to gain scale efficiencies in its U.S.
manufacturing platform. The Company also announced the closing its facility
in
Clinton, Tennessee, based on the anticipated phase out of certain customer
programs over the 2007-2009 periods. These announcements are anticipated
to
result in approximately $8,000 in pre-tax charges over the closure period,
consisting of approximately $2,500 of employee-related costs, approximately
$1,500 of asset-related costs and approximately $4,000 of other related costs.
During the three and six months ended September 26, 2006, approximately $1,300
of one-time termination benefits, a pension curtailment charge of $700, and
other closure costs of approximately $200 were recorded related to these
plans.
The actions should be completed by the end of fiscal 2009, and will result
in
cash-related expenditures totaling approximately $7,000.
Changes
in the accrued restructuring liability during the three and six months ended
September 26, 2006 were comprised of the following related to the above
described restructuring activities:
Three
Months ended September 26, 2006
|
|
|
|
Termination
Benefits:
|
|
|
|
Balance,
June 27, 2006
|
|
$
|
617
|
|
Additions
|
|
|
1,428
|
|
Adjustments
|
|
|
-
|
|
Payments
|
|
|
(604
|
)
|
Balance,
September 26, 2006
|
|
$
|
1,441
|
|
|
|
|
|
|
Other
Restructuring Charges:
|
|
|
|
|
Balance,
June 27, 2006
|
|
$
|
233
|
|
Additions
|
|
|
-
|
|
Adjustments
|
|
|
(3
|
)
|
Payments
|
|
|
(8
|
)
|
Balance,
September 26, 2006
|
|
$
|
222
|
|
Six
Months Ended September 26, 2006
|
|
|
|
Termination
Benefits:
|
|
|
|
Balance,
April 1, 2006
|
|
$
|
-
|
|
Additions
|
|
|
2,045
|
|
Adjustments
|
|
|
-
|
|
Payments
|
|
|
(604
|
)
|
Balance,
September 26, 2006
|
|
$
|
1,441
|
|
|
|
|
|
|
Other
Restructuring Charges:
|
|
|
|
|
Balance,
April 1, 2006
|
|
$
|
-
|
|
Additions
|
|
|
233
|
|
Adjustments
|
|
|
(3
|
)
|
Payments
|
|
|
(8
|
)
|
Balance,
September 26, 2006
|
|
$
|
222
|
|
The
following is the summary of restructuring and other repositioning costs recorded
related to the programs announced in the three and six months ended September
26, 2006:
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
September
26, 2006
|
|
September
26, 2006
|
|
Restructuring
charges:
|
|
|
|
|
|
|
|
Employee
severance and related benefits
|
|
$
|
1,378
|
|
$
|
1,995
|
|
Contract
termination costs
|
|
|
(3
|
)
|
|
230
|
|
Total
restructuring charges
|
|
|
1,375
|
|
|
2,225
|
|
|
|
|
|
|
|
|
|
Other
repositioning costs:
|
|
|
|
|
|
|
|
Special
termination benefits - early retirement
|
|
|
1,541
|
|
|
1,905
|
|
Accounts
receivable write-off
|
|
|
(194
|
)
|
|
57
|
|
Obsolete
inventory charges
|
|
|
(196
|
)
|
|
172
|
|
Fixed
asset impairments/write-offs
|
|
|
713
|
|
|
713
|
|
Pension
curtailment charge
|
|
|
700
|
|
|
700
|
|
Miscellaneous
other closure costs
|
|
|
605
|
|
|
843
|
|
Total
other repositioning costs
|
|
|
3,169
|
|
|
4,390
|
|
|
|
|
|
|
|
|
|
Total
restructuring and other repositioning costs
|
|
$
|
4,544
|
|
$
|
6,615
|
|
The
total
restructuring and other repositioning costs of $4,544 and $6,615 were recorded
in the consolidated statement of earnings for the three and six months ended
September 26, 2006, respectively, as follows: $1,202 and $2,059 were recorded
as
a component of cost of sales; $1,967 and $2,331 were recorded as a component
of
selling, general and administrative expenses; and $1,375 and $2,225 were
recorded as restructuring charges.
Note
13: Goodwill and Intangible Assets
Changes
in the carrying amount of goodwill during the first six months of fiscal
2007,
by segment and in the aggregate, are summarized in the following
table:
|
|
OE-
|
|
OE-
|
|
OE-
|
|
Commercial
|
|
|
|
|
|
|
|
Americas
|
|
Asia
|
|
Europe
|
|
HVAC&R
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2006
|
|
$
|
23,769
|
|
$
|
522
|
|
$
|
7,942
|
|
$
|
17,565
|
|
$
|
2,458
|
|
$
|
52,256
|
|
Acquisitions
|
|
|
11,821
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,821
|
|
Fluctuations
in foreign currency
|
|
|
(208
|
)
|
|
-
|
|
|
593
|
|
|
1,365
|
|
|
(83
|
)
|
|
1,667
|
|
Balance,
September 26, 2006
|
|
$
|
35,382
|
|
$
|
522
|
|
$
|
8,535
|
|
$
|
18,930
|
|
$
|
2,375
|
|
$
|
65,744
|
|
Intangible
assets are comprised of the following:
|
|
September
26, 2006
|
March
31, 2006
|
|
|
Gross
|
|
|
|
Net
|
|
Gross
|
|
|
|
Net
|
|
|
|
Carrying
|
|
Accumulated
|
|
Intangible
|
|
Carrying
|
|
Accumulated
|
|
Intangible
|
|
|
|
Value
|
|
Amortization
|
|
Assets
|
|
Value
|
|
Amortization
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
and product technology
|
|
$
|
3,951
|
|
$
|
(3,306
|
)
|
$
|
645
|
|
$
|
3,951
|
|
$
|
(3,175
|
)
|
$
|
776
|
|
Trademarks
|
|
|
10,257
|
|
|
(928
|
)
|
|
9,329
|
|
|
9,679
|
|
|
(552
|
)
|
|
9,127
|
|
Other
intangibles
|
|
|
1,264
|
|
|
(186
|
)
|
|
1,078
|
|
|
111
|
|
|
(111
|
)
|
|
-
|
|
Total
amortized intangible assets
|
|
|
15,472
|
|
|
(4,420
|
)
|
|
11,052
|
|
|
13,741
|
|
|
(3,838
|
)
|
|
9,903
|
|
Unamortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
asset
|
|
|
2,832
|
|
|
-
|
|
|
2,832
|
|
|
2,832
|
|
|
-
|
|
|
2,832
|
|
Total
intangible assets
|
|
$
|
18,304
|
|
$
|
(4,420
|
)
|
$
|
13,884
|
|
$
|
16,573
|
|
$
|
(3,838
|
)
|
$
|
12,735
|
|
The
aggregate amortization expense for the three months ended September 26, 2006
and
2005 were $354 and $267, respectively. The aggregate amortization expense
for
the six months ended September 26, 2006 and 2005 were $538 and $408,
respectively. Total estimated annual amortization expense expected for the
remainder of fiscal year 2007 through 2012 and beyond is as
follows:
|
Estimated
|
Fiscal
|
Amortization
|
Year
|
Expense
|
|
|
Remainder
of 2007
|
$588
|
2008
|
1,169
|
2009
|
1,167
|
2010
|
911
|
2011
|
911
|
2012
& Beyond
|
6,306
|
Note
14: 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, 2006 and March 31, 2006, approximately 49 percent and 58 percent,
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 all influenced by many
of
the same market and general economic factors. To reduce credit risk, the
Company
performs periodic customer credit evaluations and actively monitors their
financial condition and developing business news. The Company does not generally
require collateral or advanced payments from its customers, but does so 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. Total
bad
debt write-offs have been well below 1% of outstanding trade receivable balances
for the presented periods.
Inter-Company
Loans Denominated in Foreign Currencies: In
addition to the external borrowing, the Company has certain foreign-denominated
long-term inter-company loans that are sensitive to foreign exchange rates.
At
September 26, 2006, the Company had a 28.9 billion won ($30,605), 8-yr loan
to
its wholly owned subsidiary, Modine Korea, LLC, which matures on August 31,
2012. On April 6, 2005, the Company entered into a zero cost collar to hedge
the
foreign exchange exposure on the entire amount of the Modine Korea, LLC loan.
This collar was settled on August 29, 2006 for a loss of $1,139. On August
29,
2006, the Company entered into a new zero cost collar which expires on February
29, 2008 to hedge the foreign exchange exposure on the entire amount of the
Modine Korea, LLC loan.
Note
15: Foreign Exchange Contracts/Derivatives/Hedges
Modine
uses derivative financial instruments in a limited way as a tool to manage
certain financial risks. Their use is restricted primarily to hedging assets
and
obligations already held by Modine, and they are used to protect cash flows
rather than generate income or engage in speculative activity. Leveraged
derivatives are prohibited by Company policy.
Commodity
Derivatives:
During
the first quarter of fiscal 2007, the Company entered into futures contracts
related to certain of the Company’s forecasted purchases of aluminum and natural
gas. The Company’s strategy in entering into these contracts is to reduce its
exposure to changing purchase prices for future purchase of these commodities.
These contracts have been designated as cash flow hedges by the Company.
Accordingly, unrealized gains and losses on these contracts are deferred
as a
component of other comprehensive income, and recognized as a component of
earnings at the same time that the underlying purchases of aluminum and natural
gas impact earnings. During the three and six months ended September 26,
2006,
$353 and $128 of expense, respectively, was recorded in the consolidated
statement of earnings related to the settlement of certain futures contracts.
At
September 26, 2006, $1,325 of unrealized losses remains deferred in other
comprehensive income, and will be realized as a component of cost of sales
over
the next eight months.
Interest
Rate Derivative: On
August
5, 2005, the Company entered into a one-month forward ten-year treasury interest
rate lock in anticipation of a private placement borrowing which occurred
on
September 29, 2005. The derivative instrument was treated as a cash flow
hedge
of a benchmark interest rate. The contract was settled on September 1, 2005
with
a loss of $1,794. The loss was reflected as a component of accumulated other
comprehensive income (loss) and is being amortized to interest expense over
the
ten-year life of the private placement borrowing. During the three and six
months ended September 26, 2006, $28 and $55 of expense, respectively, was
recorded in the consolidated statement of earnings. At September 26, 2006,
$987
of unrealized losses remains deferred in other comprehensive income.
Note
16: Product Warranties and Other Commitments
Product
warranties: Modine
provides product warranties for its assorted product lines with warranty
periods
generally ranging from one to ten years. The Company accrues for
estimated future warranty costs in the period in which the sale is recorded,
and
warranty expense estimates are forecasted based on the best information
available using analytical and statistical analysis of both historical and
current claim data. These expenses are adjusted when it becomes probable
that
expected claims will differ from initial estimates recorded at the time of
the
sale.
Changes
in the warranty liability were as follows:
|
|
Three
months ended September 26
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Balance,
June 26
|
|
$
|
10,567
|
|
$
|
13,666
|
|
Acquisitions
|
|
|
-
|
|
|
141
|
|
Accruals
for warranties issued in current period
|
|
|
2,283
|
|
|
2,225
|
|
Accruals
related to pre-existing warranties
|
|
|
(4
|
)
|
|
(1,631
|
)
|
Settlements
made
|
|
|
(2,536
|
)
|
|
(2,405
|
)
|
Effect
of exchange-rate changes on the warranty liability
|
|
|
(77
|
)
|
|
(11
|
)
|
Balance,
September 26
|
|
$
|
10,233
|
|
$
|
11,985
|
|
|
|
Six
months ended September 26
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Balance,
March 31
|
|
$
|
10,893
|
|
$
|
14,885
|
|
Acquisitions
|
|
|
527
|
|
|
380
|
|
Accruals
for warranties issued in current period
|
|
|
4,073
|
|
|
4,766
|
|
Accruals
related to pre-existing warranties
|
|
|
(12
|
)
|
|
(3,163
|
)
|
Settlements
made
|
|
|
(5,412
|
)
|
|
(4,435
|
)
|
Effect
of exchange-rate changes on the warranty liability
|
|
|
164
|
|
|
(448
|
)
|
Balance,
September 26
|
|
$
|
10,233
|
|
$
|
11,985
|
|
Indemnification
agreements:
From
time to time, the Company provides indemnification agreements related to
the
sale or purchase of an entity or facility. These indemnification agreements
cover customary representations and warranties typically provided in conjunction
with the transactions, including income, sales, excise or other tax matters,
environmental matters and other third-party claims. The indemnification periods
provided generally range from less than one year to fifteen years. The Company
obtains insurance coverage for certain indemnification matters, as considered
appropriate based on the nature of the indemnification matter or length of
indemnification period. The fair value of the Company’s outstanding
indemnification obligations at September 26, 2006 is not
material.
Commitments:
At
September 26, 2006, the Company had capital expenditure commitments of $32,336.
Significant commitments include tooling and equipment expenditures for new
and
renewal platforms with new and current customers in both Europe and North
America. The Company utilizes consignment inventory arrangements with certain
vendors in the normal course of business, whereby the suppliers maintain
certain
inventory stock at the Company’s facilities or at other outside facilities. In
these cases, the Company has arrangements with the vendor to use the material
within a specific period of time.
Note
17: Share Repurchase Program
During
fiscal 2006, the Company announced two common share repurchase programs approved
by the Board of Directors. The first program, announced on May 18, 2005,
was a
dual purpose program authorizing the repurchase of five percent of the Company’s
outstanding common stock, as well as the indefinite buy-back of additional
shares to offset dilution from Modine’s incentive stock plans. The five percent
portion of this program was completed in fiscal 2006, while the anti-dilution
portion of this program continues to be available to the Company. No shares
were
repurchased under the anti-dilution portion of this program during fiscal
2007.
On January 26, 2006, the Company announced a second share repurchase program,
which authorized the repurchase of up to ten percent of the Company’s
outstanding shares over an 18-month period of time. During the three months
ended September 26, 2006, 164 shares were purchased under this program at
an
average cost of $23.25 per share, or a total of $3,806. During the six months
ended September 26, 2006, 454 shares were purchased under this program at
an
average cost of $26.60 per share, or a total of $12,067. The repurchases
were
made from time to time at current prices through solicited and unsolicited
transactions in the open market or in privately negotiated or other
transactions. The Company is retiring any shares acquired pursuant to these
programs, and the retired shares are returned to the status of authorized
but un-issued shares.
The
Company continues to evaluate the potential for future purchases under these
authorized programs based on our cash generating capabilities and indebtedness
capacity, while balancing our key cash priorities of investment in the business
for growth, acquisitions and dividends.
Note
18: Segment Information
In
the
current year, four months of the Radiadores Visconde Ltda. acquisition results
are included in the Original Equipment - Americas segment. In the prior year,
four months of the Airedale acquisition results are included in Commercial
HVAC&R segment.
|
|
Three
months ended
|
Six
months ended
|
|
|
September
26
|
September
26
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Sales
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
Equipment – Americas
|
|
$
|
200,327
|
|
$
|
172,607
|
|
$
|
380,463
|
|
$
|
337,537
|
|
Original
Equipment – Asia
|
|
|
42,018
|
|
|
49,722
|
|
|
97,951
|
|
|
107,549
|
|
Original
Equipment – Europe
|
|
|
135,669
|
|
|
128,740
|
|
|
282,855
|
|
|
268,733
|
|
Commercial
HVAC&R
|
|
|
49,953
|
|
|
46,093
|
|
|
89,312
|
|
|
74,549
|
|
Other
|
|
|
10,422
|
|
|
8,201
|
|
|
19,814
|
|
|
14,989
|
|
Segment
sales
|
|
|
438,389
|
|
|
405,363
|
|
|
870,395
|
|
|
803,357
|
|
Corporate
and administrative
|
|
|
1,344
|
|
|
774
|
|
|
2,397
|
|
|
1,567
|
|
Eliminations
|
|
|
(2,221
|
)
|
|
(1,985
|
)
|
|
(4,887
|
)
|
|
(3,934
|
)
|
Sales
from continuing operations
|
|
$
|
437,512
|
|
$
|
404,152
|
|
$
|
867,905
|
|
$
|
800,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
Equipment – Americas
|
|
$
|
15,040
|
|
$
|
22,919
|
|
$
|
34,587
|
|
$
|
43,845
|
|
Original
Equipment – Asia
|
|
|
(3,733
|
)
|
|
(687
|
)
|
|
(2,726
|
)
|
|
1,874
|
|
Original
Equipment – Europe
|
|
|
14,492
|
|
|
16,954
|
|
|
33,681
|
|
|
37,969
|
|
Commercial
HVAC&R
|
|
|
2,747
|
|
|
4,207
|
|
|
4,496
|
|
|
6,430
|
|
Other
|
|
|
(2,294
|
)
|
|
(3,232
|
)
|
|
(7,311
|
)
|
|
(7,284
|
)
|
Segment
earnings
|
|
|
26,252
|
|
|
40,161
|
|
|
62,727
|
|
|
82,834
|
|
Corporate
and administrative
|
|
|
(20,075
|
)
|
|
(17,443
|
)
|
|
(36,386
|
)
|
|
(30,427
|
)
|
Eliminations
|
|
|
(51
|
)
|
|
27
|
|
|
(31
|
)
|
|
57
|
|
Other
items not allocated to segments
|
|
|
(1,035
|
)
|
|
(840
|
)
|
|
(1,536
|
)
|
|
287
|
|
Earnings
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
$
|
5,091
|
|
$
|
21,905
|
|
$
|
24,774
|
|
$
|
52,751
|
|
September
26, 2006
|
March
31, 2006
|
|
Assets:
|
|
|
|
|
|
|
|
Original
Equipment – Americas
|
|
$
|
339,565
|
|
$
|
259,438
|
|
Original
Equipment – Asia
|
|
|
135,713
|
|
|
155,596
|
|
Original
Equipment – Europe
|
|
|
344,776
|
|
|
335,508
|
|
Commercial
HVAC&R
|
|
|
110,103
|
|
|
94,108
|
|
Other
|
|
|
19,406
|
|
|
21,752
|
|
Corporate
and administrative
|
|
|
186,291
|
|
|
194,271
|
|
Eliminations
|
|
|
(10,945
|
)
|
|
(8,578
|
)
|
Total
assets
|
|
$
|
1,124,909
|
|
$
|
1,052,095
|
|
Note
19: Contingencies and Litigation
Environmental:
At
present, the
United States Environmental Protection Agency (USEPA) has designated the
Company
as a potentially responsible party (PRP) for remediation of four waste disposal
sites with which the Company may have had direct or indirect involvement.
These
sites are as follows: Elgin Salvage (Illinois); H.O.D. Landfill (Illinois);
Alburn Incinerator, Inc./Lake Calumet Cluster (Illinois); and Dixie Barrel
and
Drum (Tennessee). The Company's potential liability at these four sites is
significantly less than the total site remediation costs because the percentage
of material attributable to Modine is relatively low. 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
1986,
Modine executed a Consent Decree involving other PRPs and the Illinois EPA
and
paid a nominal amount for its allocated share (0.1%) of the Alburn Incinerator,
Inc. remediation costs. The USEPA signed a Covenant Not to Sue in conjunction
with the Consent Decree, but reserved its right to "seek additional relief"
for
any additional costs incurred by the United States at the site. In 2003,
Modine
received a Notice from the USEPA requesting Modine's participation as a PRP
for
the performance of additional activities required to restore the Alburn
Incinerator Inc. /Lake Calumet Cluster site. Modine signed various PRP
participation agreements in 2003 and 2004 to satisfy these obligations. In
2005,
the USEPA accepted the PRP Group's Good Faith Offer demonstrating the Group's
qualifications and willingness to negotiate with the USEPA to conduct or
finance
the Remedial Investigation/Feasibility Study at the site. Since
that time, the USEPA and the Illinois EPA have elected to pursue physical
site
remediation activities independently of the PRP group involvement. The USEPA
will pursue cost recovery from the PRPs for these activities upon their
completion. Modine expects future closure of the site through the execution
of a
settlement agreement and payment of allocated costs in a de minimis
amount.
In
2004,
Modine received a Request for Information from the USEPA concerning the Dixie
Barrel & Drum Superfund Site in Knoxville, Tennessee. Modine responded to
the USEPA indicating that it arranged for Dixie Barrel & Drum to accept
empty drums for reclamation purposes from the then-owned Knoxville, Tennessee
location and possibly from Modine's Clinton, Tennessee location. Modine,
however, did not use Dixie Barrel & Drum for the purposes of disposal or
treatment of any hazardous materials or wastes. Modine has not received any
communications from either governmental entities of PRP groups in regard
to this
site since October 2004.
There
has
been no correspondence from site PRP groups or any government entities
concerning either the H.O.D. or Elgin Salvage sites since April 1999 and
January
1998, respectively.
In
1999,
Modine entered into a de minimis settlement agreement with the Indiana
Department of Environmental Management (IDEM) for the remediation of Operable
Unit #1 at the Four County Landfill in Fulton County, Indiana. Modine received
a
letter from IDEM in July 2006 informing Modine that remediation of second
area
known as Operable Unit #2 was completed and that IDEM was pursuing cost recovery
for this work from identified PRPs. Modine signed a de minimis settlement
agreement in August 2006 and made a de minimis payment to satisfy its
obligations for this second phase of site closure. Modine does not anticipate
any further expenses with regard to this site.
The
Company accrues costs associated with environmental matters, on an undiscounted
basis, when they become probable and reasonably estimated. Costs anticipated
for
the settlement of the currently active sites indicated above cannot be
reasonably defined at this time and have not been accrued. The costs to Modine,
however, are not expected to be material at these sites.
The
Company has also recorded other environmental cleanup and remediation expense
accruals for certain facilities located in the United States and The
Netherlands. These accruals totaled $1,019 and $1,102 at September 26, 2006
and
March 31, 2006, respectively, and are recorded in accrued expenses and other
current liabilities and other noncurrent liabilities.
Employee
Agreements:
The
Company has employment agreements with certain key employees that provide
for
compensation and certain other benefits. In addition, the Company has agreements
with its officers and other key employees that provide 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 $5,682 and $11,812 depending on
incentive payment calculations and other factors which are not determinable
until the actual event occurs.
Other
Litigation:
In June
2004, the Servicio de Administracion Tributaria in Nuevo Laredo, Mexico,
where
the Company operates a plant in its Commercial HVAC&R division, notified the
Company of a tax assessment of 10,193 pesos (approximately $913) based primarily
on the administrative authority’s belief that the Company (i) imported goods not
covered by the Maquila program and (ii) that it imported goods under a different
tariff classification than the ones approved. The Company filed a Motion
for
Reclassification with the Local Office of Legal Affairs in Nuevo Laredo which
was rejected on January 19, 2004. The Company filed a Nullity Tax Action
with
the Federal Tax Court (Tribunal Federal de Justicia Fiscal y Adminstrativa)
in
Monterrey, Mexico. The Company believes it has strong reasonable arguments
to
mount a good defense and obtain a favorable result before the Federal Tax
Court.
The Company has accrued $183 which includes an estimate of the tariffs the
Company believes it may eventually owe upon settlement of the case and legal
costs.
With
a
brief dated November 16, 2004, Behr GmbH & Co. KG sued Modine Europe GmbH,
Modine Austria Ges.mbH, and Modine Wackersdorf GmbH in the District Court
in
Mannheim, Federal Republic of Germany claiming infringement of Behr EPO patent
0669506 which covers a “plastic cage” insert for an integrated receiver/dryer
condenser. Behr claims past infringement and current infringement by the
Modine
entities. Behr demands a cease and desist order, legal costs as provided
by law,
sales information and compensation. The amount of compensation due to Behr,
if
any, would be based on lost profits of Behr, profits made by the Modine entities
or a reasonable royalty rate of any integrated receiver/dryer condensers
manufactured or sold by Modine and found to have infringed. In a related
suit in
the Federal Patent Court in Munich, Federal Republic of Germany, the Modine
entities asserted that the Behr patent described above is null and void and,
therefore, Modine had not infringed any intellectual property rights of Behr
in
the production of integrated receiver/dryer condensers based on Modine designs.
Under German law, the determination of patent validity is considered in a
separate legal action from the consideration of infringement. The oral hearing
in the infringement action was held in Mannheim on June 3, 2005. The Mannheim
Court found against Modine on August 19, 2005, finding infringement. Modine
has
filed an appeal. The appeal hearing is expected sometime in late fiscal 2007.
In
the nullity lawsuit related to the infringement of Behr EPO patent 0669506,
the
oral hearing took place in the Federal Patent Court in Munich on May 16,
2006.
The court decided in Modine’s favor in August 2006 invalidating the patent.
Behr, unless successful in an appeal, is no longer able to pursue its patent
infringement claim.
On
April
7, 2006, Modine filed a patent infringement lawsuit in the Federal District
Court in Milwaukee, Wisconsin, claiming infringement by Behr America Inc.
and
Behr Heat Transfer Systems Inc. of a Modine United States patent, 5,228,512,
covering, among other things, a charge air cooler and a method for making
the
same.
Modine
intends to vigorously prosecute the Milwaukee infringement action, defend
the
Mannheim infringement action and pursue the Munich nullity action and, in
the
event of any adverse determination, appeal to a higher court.
The
Company, along with Rohm & Haas Company, Morton International, and Huntsman
Corp. is named as a defendant in twelve separate personal injury actions
that
were filed in the Philadelphia Court of Common Pleas (“PCCP”), the Pennsylvania
state court in Philadelphia, and in a class action matter that was filed
in the
United States District Court, Eastern District of Pennsylvania. The PCCP
cases
involve allegations of personal injury from exposure to solvents that were
allegedly released to groundwater and air for an undetermined period of time.
The federal court action seeks damages for medical monitoring and property
value
diminution for a putative class of residents of a community that are allegedly
at risk for personal injuries as a result of exposure to this same allegedly
contaminated groundwater and air. Plaintiffs’ counsel has threatened to file
further personal injury cases. The Company is in the earliest of stages of
discovery with these cases, and intends to aggressively defend these cases.
As
the potential outcome of these matters is currently uncertain, the Company
has
not recorded a liability in its consolidated financial statements.
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 USEPA, other governmental
agencies and others in which claims, such as personal injury, property damage,
intellectual property or antitrust and trade regulation issues, are asserted
against Modine. Modine is also subject to other liabilities such as product
warranty claims, employee benefits and various taxes that arise in the ordinary
course of its business. Many of the pending damage and, to a lesser degree,
warranty claims are covered by insurance and when appropriate Modine accrues
for
uninsured liabilities. While the outcomes of these matters, including those
discussed above, are uncertain, Modine does not expect that any additional
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.
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
When
we
use the terms “Modine”, “we”, “us”, “Company”, or “our” in this report, unless
the context otherwise requires, we are referring to Modine Manufacturing
Company. Our fiscal year ends on March 31 and, accordingly, all references
to
quarters refer to our fiscal quarters. The quarter ended September 26, 2006
refers to the second fiscal quarter of fiscal 2007. Our subsidiaries located
outside of the United States report results with a one month lag.
Second
Quarter Highlights:
Net
sales in the second quarter of fiscal 2007 were a record $437.5 million,
representing a $33.3 million or 8.3 percent increase from the second quarter
of
fiscal 2006. Acquisitions and foreign currency exchange rate changes drove
$31.1
million of this increase, with underlying sales growth comprising the remaining
$2.2 million, or 0.5 percent of this increase. Sales volumes were positively
impacted by strength in the truck and heavy-duty markets, as well as revenues
from the May 2006 acquisition of the remaining 50 percent of Radiadores Visconde
Ltda. (“RV”) that we did not already own. Earnings from continuing operations
decreased $1.9 million from the second quarter of fiscal 2006. The following
significant factors were the primary drivers of this decrease:
· |
Decrease
in gross margin related to higher copper, aluminum, steel, resin
and
natural gas prices, which are the primary commodities used in our
manufacturing process;
|
· |
Pricing
pressures from customers, primarily within our vehicular
products;
|
· |
Customer
strike in our Original Equipment - Asia segment which significantly
contributed to a decline in volumes within this market;
and
|
· |
Global
repositioning charges of $4.5 million incurred during the second
quarter
of fiscal 2007.
|
Partially
offsetting the above decreases were certain favorable factors realized during
the second quarter of fiscal 2007, including:
· |
Positive
impact of higher sales volumes, including the impact of the May 2006
acquisition of RV;
|
· |
Certain
operating efficiencies realized in our manufacturing facilities;
and
|
· |
Income
tax benefit of $8.0 million that became available based upon the
worthlessness of the stock of our Taiwan business realized upon the
closure of this facility.
|
Year
to Date Highlights:
Net
sales in the first six months of fiscal 2007 were $868 million, representing
an
8.4% increase from the first six months of fiscal 2006. The growth in revenues
was driven by strength in global truck and off highway markets, as well as
incremental sales relating to the May 2005 acquisition of Airedale and the
May
2006 acquisition of RV. Earnings from continuing operations decreased $6.4
million, driven by the decline in gross margin related to higher commodity
prices and customer pricing pressures, as well as $6.6 million of global
repositioning charges incurred during this six month period. Earnings from
continuing operations for the first six months of fiscal 2007 was positively
impacted by $11.6 million of tax benefits, comprised of a $3.6 million benefit
related to the realization of Brazilian net operating losses in the first
quarter and a $8.0 million benefit that became available in the closure of
our
Taiwan business.
Five-Point
Plan: During
the first quarter of fiscal 2007, we announced a five-point global
competitiveness program intended to reduce costs, accelerate technology
development, and accelerate market and geographic expansion - all intended
to
stimulate growth and profits. The goals of this program include the following:
(1) reduce selling, general and administrative (SG&A) expenses by
approximately $20 million, or 10 percent, in the next 12 months, through
a
combination of early retirement programs, internal process improvements,
and
other actions; (2) increase low cost country sourcing through a disciplined
approach to global purchasing; (3) diversify into new markets and regions
through acquisition and internal development; (4) increase focus on technology
development; and (5) reposition the manufacturing footprint with a focus
on low
cost countries.
During
the first quarter of fiscal 2007, we announced three initiatives under our
global competitiveness program. In April 2006, we announced a plan to relocate
the Harrodsburg, Kentucky-based research and development (R&D) activities
into our technology center in Racine, Wisconsin. In May 2006, we announced
the
closure of our Taiwan facility, which manufactured high volume heat pipes
for
the personal computer and laptop markets through our electronics cooling
business (which is reported in the Other segment). This closure decision
was
made to allow the Company to focus its attention and manufacturing assets
to
better serve the advanced thermal solutions segment of the electronics cooling
market. In May 2006, the Company offered a voluntary enhanced early retirement
program to approximately 200 U.S. salaried employees. During the second quarter
of fiscal 2007, we announced additional initiatives under our global
competitiveness program. These initiatives include a business relationship
to
provide components to DENSO Corporation that will result in significant
additional new business starting early in fiscal 2009. As a result of this
relationship, we announced plans to build a $20 million new facility in Nuevo
Laredo, Mexico. This new facility, which is scheduled for completion in April
2008, will serve as a critical element in our business growth strategy, and
allows us to leverage our cost competitive position. We also announced the
closing of our Richland, South Carolina plant and consolidation of production
into our McHenry, Illinois facility to gain scale efficiencies in our U.S.
manufacturing platform. In addition, we announced the closing of our Clinton,
Tennessee facility based on the anticipated phase out of certain programs
over
the 2007-2009 periods. We anticipate incurring total charges of approximately
$13 million related to the completion of these activities consisting of $6
million of employee related costs, $4 million of asset related costs
and $3 million of other related costs. We anticipate incurring $10.4
million in fiscal 2007, of which $2.1 million was recorded in the first quarter
of fiscal 2007, comprised of $0.9 million of restructuring charges (employee
severance and contract termination costs) and $1.2 million of other
repositioning costs; and $4.5 million was recorded in the second quarter
of
fiscal 2007, comprised of $1.4 million of restructuring charges (employee
severance) and $3.1 million of other repositioning costs.
Subsequent
to the end of the second quarter of fiscal 2007, we announced further
initiatives under our global competitiveness program. We announced the creation
of a new strategic product focus with a supporting internal structure for
our
vehicular business units and related administrative groups. This focus will
enable us to respond better to the long-term product needs of our customers
and
further enhance our ability to bring superior technology solutions to global
markets. This change relates to three primary vehicular product
areas:
· |
Powertrain
Cooling Products (covering chassis mounted components and
systems);
|
· |
Engine
Products (covering engine mounted components and systems, including
exhaust gas recirculation coolers); and
|
· |
Passenger
Thermal Management Products (covering passenger HVAC products and
systems).
|
In
addition to creating global vehicular product groups, we will strengthen
our
regional focus on manufacturing operations, sales and select administrative
activities relating to those vehicular market-based units along our current
regional lines - Americas, Europe and Asia Pacific. We will continue to report
our operating results along these regional lines. In addition, we announced
the
creation of a new Commercial Products Group that will combine our Electronics
Cooling and Commercial Heating, Ventilating, Air Conditioning and Refrigeration
(CHVAC&R) divisions on a global basis. This new group will continue to
expand our market presence in the electronics and HVAC markets, while taking
advantage of cost reduction synergies resulting from the combination of the
two
businesses. For the remainder of fiscal 2007, the Electronics Cooling business
will continue to be reported in the Other segment, while the CHVAC&R
business will continue to be reported within its own segment. We also
announced plans to build a new $16 million manufacturing facility in
China that will serve our global customers in that region, provide
opportunities to reach new customers and markets, and provide a low cost
country
sourcing alternative with the ability to develop a scale manufacturing footprint
in Asia. This new facility is expected to be operational early in calendar
2008
and has secured business that will begin production when the plant
opens.
Adoption
of Staff Accounting Bulletin No. 108: In
September 2006, we elected early adoption of Staff Accounting Bulletin
(SAB) No. 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements.” This literature
provides guidance on how to quantify the effects of prior year misstatements.
When we made this election, four misstatements existed that are immaterial
individually and in the aggregate to all fiscal years prior to fiscal 2007.
Accordingly, we elected to record the effects of applying SAB No. 108 using
the
cumulative effect transition method, which results in an adjustment to beginning
retained earnings at April 1, 2006 to correct these errors. Further
information on each of these misstatements is included below:
· |
We
were not properly accounting for the disposal of fixed assets within
our
Original Equipment - Europe segment. As a result of this error, pretax
income was overstated by $0.5 million (cumulatively) in fiscal years
prior
to 2005, by $0.3 million in fiscal 2005 and by $0.7 million in fiscal
2006. We recorded a $1.5 million reduction of our fixed assets for
disposals not previously recognized as of April 1, 2006 to correct
this
misstatement.
|
· |
We
were not properly recording our vacation accrual within our Original
Equipment - Asia segment. As a result of this error, pretax income
was
overstated by $0.5 million in fiscal 2006. We recorded a $0.5 million
increase in our vacation liability as of April 1, 2006 to correct
this
misstatement.
|
· |
We
did not properly recognize a $0.5 reduction in inventory at one operating
location within the Original Equipment - Americas segment which was
identified as a result of a physical inventory performed on September
26,
2006. As a result of this error, pretax income was overstated by
$0.5
million in fiscal 2006. We recorded a $0.5 million reduction in our
inventory balance as of April 1, 2006 to correct this
misstatement.
|
· |
As
a result of a clerical error, we improperly capitalized certain Corporate
administrative charges, consisting primarily of salaries and miscellaneous
office expenses, within accounts receivable at March 31, 2006. As
a result
of this error, pretax income was overstated by $0.1 million in fiscal
2006. We recorded a $0.1 million reduction in our accounts receivable
balance as of April 1, 2006 to correct this
misstatement.
|
The
above
misstatements resulted in an overstatement of net income of $0.3 million
(cumulatively) in fiscal years prior to 2005, $0.2 million in fiscal 2005
and
$1.2 million in fiscal 2006. These misstatements were corrected through a
$1.8
million net reduction to retained earnings on April 1, 2006. In addition,
certain of the above misstatements resulted in an overstatement of net income
in
the first quarter of fiscal 2007 totaling $0.6 million. These
misstatements were corrected in the second quarter of fiscal 2007.
CONSOLIDATED
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
The
following table presents consolidated results from continuing operations
on a
comparative basis for the three and six month periods ended September 26,
2006
and 2005:
|
|
Three
Months ended September 26
|
Six
Months ended September 26
|
|
|
|
2006
|
2005
|
|
2006
|
2005
|
(dollars
in millions)
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
Net
sales
|
|
|
437.5
|
|
|
100.0
|
%
|
|
404.2
|
|
|
100.0
|
%
|
|
867.9
|
|
|
100.0
|
%
|
|
801.0
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
369.0
|
|
|
84.3
|
%
|
|
324.4
|
|
|
80.3
|
%
|
|
723.3
|
|
|
83.3
|
%
|
|
640.9
|
|
|
80.0
|
%
|
Gross
profit
|
|
|
68.5
|
|
|
15.7
|
%
|
|
79.8
|
|
|
19.7
|
%
|
|
144.6
|
|
|
16.7
|
%
|
|
160.1
|
|
|
20.0
|
%
|
Selling,
general and administrative
expenses
|
|
|
61.0
|
|
|
13.9
|
%
|
|
56.7
|
|
|
14.0
|
%
|
|
116.1
|
|
|
13.4
|
%
|
|
107.2
|
|
|
13.4
|
%
|
Restructuring
charges
|
|
|
1.4
|
|
|
0.3
|
%
|
|
-
|
|
|
-
|
|
|
2.2
|
|
|
0.3
|
%
|
|
-
|
|
|
-
|
|
Income
from operations
|
|
|
6.1
|
|
|
1.4
|
%
|
|
23.1
|
|
|
5.7
|
%
|
|
26.3
|
|
|
3.0
|
%
|
|
52.9
|
|
|
6.6
|
%
|
Interest
expense
|
|
|
(2.4
|
)
|
|
-0.5
|
%
|
|
(1.8
|
)
|
|
-0.4
|
%
|
|
(4.4
|
)
|
|
-0.5
|
%
|
|
(3.4
|
)
|
|
-0.4
|
%
|
Other
income - net
|
|
|
1.4
|
|
|
0.3
|
%
|
|
0.6
|
|
|
0.1
|
%
|
|
2.9
|
|
|
0.3
|
%
|
|
3.3
|
|
|
0.4
|
%
|
Earnings
from continuing operations
before
income taxes
|
|
|
5.1
|
|
|
1.2
|
%
|
|
21.9
|
|
|
5.4
|
%
|
|
24.8
|
|
|
2.9
|
%
|
|
52.8
|
|
|
6.6
|
%
|
(Benefit
from) provision for income
taxes
|
|
|
(7.3
|
)
|
|
-1.7
|
%
|
|
7.6
|
|
|
1.9
|
%
|
|
(3.9
|
)
|
|
-0.4
|
%
|
|
17.7
|
|
|
2.2
|
%
|
Earnings
from continuing operations
|
|
|
12.4
|
|
|
2.8
|
%
|
|
14.3
|
|
|
3.5
|
%
|
|
28.7
|
|
|
3.3
|
%
|
|
35.1
|
|
|
4.4
|
%
|
Comparison
of Three Months Ended September 26, 2006 and 2005
Second
quarter net sales of $437.5 million were 8.3 percent higher than the $404.2
million reported in the second quarter of last year. The increase in revenues
was driven by $2.2 million of organic growth, $21.6 million of acquired revenues
in conjunction with the May 2006 RV acquisition, and a $9.5 million increase
related to favorable impact of changing foreign currency exchange rates.
The
increase in organic revenues was partially driven by strong volumes in the
U.S.
truck market and pre-buy activity in anticipation of higher U.S. emissions
standards that will be implemented on January 1, 2007. In addition, the increase
in organic revenues is related to worldwide heavy-duty markets, as construction
and agricultural demand continues to remain strong. Partially offsetting
this
growth in organic revenues is automotive volumes which have decreased in
the
second quarter of fiscal 2007, primarily based on softness in volumes and
growing inventory levels experienced within this market. In addition, revenues
were adversely impacted by a strike at a customer facility in Korea during
the
second quarter.
During
the second quarter of fiscal 2007, gross margin decreased 400 basis points
from
19.7 percent for last year’s second quarter to 15.7 percent this year. The
decrease in gross margin is primarily related to higher costs for material
purchases, customer pricing pressures experienced during the quarter, and
incremental costs incurred in fiscal 2007 under our global competitiveness
program. From the second quarter of fiscal 2006 to the second quarter of
fiscal
2007, the cost of purchased commodities, including aluminum, copper, steel,
resin and natural gas, increased dramatically. For example, our largest
purchased commodity is aluminum, which experienced a 32 percent increase
in
average purchase price over the periods presented, while copper, which is
another significant purchased commodity, experienced a 93 percent increase
in
average purchase price over the periods presented. We have taken measures
to
offset the impact of these significant commodity price increases, including
ongoing negotiations with our customers to pass along certain of these commodity
price increases. In addition, we are currently hedging 60 percent of our
forecasted aluminum purchases to partially limit the variability in future
commodity purchase prices. However, these efforts have only partially offset
the
significant increases experienced in the commodity prices, due in part to
the
contractual lag period which exists with certain customers in passing through
these increased commodity prices. In addition to commodities, we also
experienced continued customer pricing pressures during the quarter, especially
from certain of our original equipment customers. We are attempting to mitigate
these increases by securing future business with these customers as well
as
negotiating price reductions with our suppliers. During the second quarter
of
fiscal 2007, we incurred approximately $1.2 million of charges recorded as
a
component of cost of sales related to our global competitiveness program
which
reduced gross margin by 27 basis points. The remaining $3.3 million of costs
incurred under our global competitiveness program during the second quarter
of
fiscal 2007 were recorded within SG&A and restructuring charges, as further
discussed below.
SG&A
expenses increased $4.3 million from the second quarter of fiscal 2006 to
the
second quarter of fiscal 2007, but remained relatively consistent as a percent
of sales at approximately 14 percent. Approximately $3.2 million of this
increase is related to incremental SG&A expenses incurred in conjunction
with the recent RV acquisition. In addition, approximately $1.9 million of
charges were recorded in the second quarter of fiscal 2007 as a component
of
SG&A expenses related to our global competitiveness program. Partially
offsetting these increases was a $0.8 million decrease in our remaining
SG&A, primarily driven by on-going SG&A reduction efforts under our
global competitiveness program. Specifically, our goal is to reduce annual
SG&A expenses by 10 percent, or approximately $20 million, through a
combination of early retirement programs, internal process improvements,
and
other actions that are targeted to be completed during fiscal 2007. We believe
that our global competitiveness plans are well positioned to achieve this
reduction goal.
Restructuring
charges of $1.4 million in the second quarter of fiscal 2006 related to that
portion of our global competitiveness plan that specifically qualifies for
separate classification on the face of the statement of earnings. Generally,
these costs represented employee severance costs incurred under our global
competitiveness plan during the second quarter of fiscal 2007.
Income
from operations decreased $17.0 million from the second quarter of fiscal
2006
to the second quarter of fiscal 2007, primarily driven by the increase in
commodity prices, customer price down pressures, the customer strike in Korea
and $4.5 million of global competitiveness costs incurred during the quarter.
These decreases were partially offset by the growth in organic volumes and
acquired income related to the RV acquisition.
Interest
expense increased $0.6 million over the comparable quarters, primarily driven
by
the increase in our outstanding borrowings. This increase was driven by $11.1
million of cash paid, net of cash acquired, to fund the acquisition of RV
during
the first quarter of fiscal 2007 as well as stock purchases made during the
recent quarters under our share repurchase program.
Other
income increased $0.8 million from the prior year’s second quarter, primarily
related to an increase in foreign currency transaction gains, partially offset
by a reduction in equity earnings of affiliates. Foreign currency transaction
gains increased as foreign currency losses incurred in fiscal 2006 on
intercompany debt were not similarly incurred in the current fiscal year
as no
similar intercompany borrowings remained outstanding. This is due to the
payment
of the $14.7 million on-demand loan between our wholly owned subsidiaries,
Modine Hungaria Kft. and Modine Holding GmbH, which was outstanding during
the
second quarter of fiscal 2006 before being paid in full on December 15, 2005.
The reduction in equity earnings of affiliates is due to the May 2006
acquisition of the remaining 50 percent of RV, where our portion of RV’s
earnings were previously recorded in other income prior to the acquisition
of
the remaining 50 percent of this entity. Subsequent to the acquisition, RV’s
financial results are consolidated into our results of operations, and no
longer
accounted for as equity earnings of affiliates.
The
provision for income taxes decreased $14.9 million to a benefit of $7.3 million
in the second quarter of fiscal 2007 from a provision of $7.6 million in
the
second quarter of fiscal 2006. In addition, the effective income tax rate
decreased to (143) percent from 35 percent over this same period. During
the
second quarter of fiscal 2007, the Company recorded a tax benefit of $8.0
million related to the determination that its investment in the Taiwan business
had become worthless. In addition, the decrease in earnings from continuing
operations and change in mix of taxable income toward foreign jurisdictions
with
lower statutory tax rates also contributed to the decrease in the provision
for
income taxes and effective tax rates.
Earnings
from continuing operations decreased $1.9 million, or 13 percent, from the
second quarter of fiscal 2006 to the second quarter of fiscal 2007. In addition,
diluted earnings per share from continuing operations decreased $0.03 to
$0.38
per share from $0.41 per share over this same period. The decrease in operating
income, partially offset by the benefit from income taxes, were the primary
drivers of these decreases.
Comparison
of Six Months Ended September 26, 2006 and 2005
Fiscal
2007 year to date net sales of $867.9 million were 8.4 percent higher than
the
$801.0 million reported in the same period last year. The $66.9 million increase
in revenues was driven by acquired revenues, including $10.7 million related
to
the May 2005 acquisition of Airedale and $29.5 million related to the May
2006
RV acquisition, $5.4 million increase related to favorable impact of changing
foreign currency exchange rates, and $21.3 million of organic growth. The
increase in organic revenues was primarily driven by strong volumes in the
U.S.
truck market and worldwide heavy-duty markets. Partially offsetting this
growth
in organic revenues is automotive volumes which have decreased in fiscal
2007
based on softness within this market. In addition, revenues were adversely
impacted by a strike at a customer facility in Korea during fiscal
2007.
Fiscal
2007 year to date gross margin decreased to 16.7% from 20.0% over the same
period last year. The decrease in gross margin is primarily related to the
continued higher costs for purchased commodities, and additional customer
pricing pressures which have been experienced throughout fiscal 2007. In
addition, approximately $2.1 million of charges were recorded as a component
of
cost of sales related to our global competitiveness program during the first
half of fiscal 2007 which reduced gross margin by 24 basis points. The remaining
$4.5 million of costs incurred under our global competitiveness program during
the first six months of fiscal 2007 were recorded within SG&A and
restructuring charges, as further discussed below.
Fiscal
2007 year to date SG&A expenses increased $8.9 million over the same period
last year, but remained consistent as a percentage of sales at 13.4 percent.
Approximately $6.2 million of this increase is related to incremental SG&A
expenses incurred in conjunction with the recent RV and Airedale acquisitions.
In addition, approximately $2.3 million of charges were recorded in the first
six months of fiscal 2007 as a component of SG&A expenses related to our
global competitiveness program. After excluding the impact of acquisitions
and
the global competitiveness program, SG&A as a percentage of sales decreased
to 12.4 percent, primarily driven by SG&A reduction efforts under our global
competitiveness program.
Fiscal
2007 year to date restructuring charges totaled $2.2 million and relate to
the
portion of our global competitiveness plan that specifically qualifies for
separate classification on the face of the statement of earnings. Generally,
these costs represented employee severance and contract termination costs
incurred under our global competitiveness plan during the first six months
of
fiscal 2007.
Fiscal
2007 year to date interest expense increased $1.0 million over the same period
last year, primarily driven by the increase in our outstanding borrowings.
The
increase in borrowings was driven by the May 2006 acquisition of RV for $11.1
million, as well as $12.1 million of share repurchases made during the first
six
months of fiscal 2007.
The
provision for income taxes decreased $21.6 million to a benefit of $3.9 million
in the first six months of fiscal 2007 from a provision of $17.7 million
in the
first six months of fiscal 2006. In addition, the effective income tax rate
decreased to (16) percent from 34 percent over this same period. During the
first quarter of fiscal 2007, we recognized a $3.6 million benefit related
to
net operating losses in Brazil that were previously unavailable to us, resulting
in the reduction in the effective income tax rate. This benefit became available
in connection with the recent acquisition of RV and future anticipated tax
restructuring of the Brazilian operations. During the second quarter of fiscal
2007, the Company recorded a tax benefit of $8.0 million related to the
determination that its investment in the Taiwan business had become worthless.
In addition to these two tax deductions, the decrease in earnings from
continuing operations and change in mix of taxable income toward foreign
jurisdictions with lower statutory tax rates also contributed to the decrease
in
the provision for income taxes and effective tax rates.
Earnings
from continuing operations decreased $6.4 million from the first six months
of
fiscal 2006 to the first six months of fiscal 2007. In addition, diluted
earnings per share from continuing operations decreased $0.12 to $0.89 per
share
from $1.01 per share over this same period. The decrease in operating income,
partially offset by the benefit from income taxes, were the primary drivers
of
these decreases.
SEGMENT
RESULTS OF OPERATIONS
Original
Equipment –
Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months ended September 26
|
|
Six
Months ended September 26
|
|
|
2006
|
2005
|
2006
|
2005
|
(dollars
in millions)
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
Net
sales
|
|
|
200.3
|
|
|
100.0
|
%
|
|
172.6
|
|
|
100.0
|
%
|
|
380.5
|
|
|
100.0
|
%
|
|
337.5
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
171.3
|
|
|
85.5
|
%
|
|
139.4
|
|
|
80.8
|
%
|
|
321.0
|
|
|
84.4
|
%
|
|
273.8
|
|
|
81.1
|
%
|
Gross
profit
|
|
|
29.0
|
|
|
14.5
|
%
|
|
33.2
|
|
|
19.2
|
%
|
|
59.5
|
|
|
15.6
|
%
|
|
63.7
|
|
|
18.9
|
%
|
Selling,
general and administrative
expenses
|
|
|
12.6
|
|
|
6.3
|
%
|
|
10.3
|
|
|
6.0
|
%
|
|
23.4
|
|
|
6.1
|
%
|
|
19.9
|
|
|
5.9
|
%
|
Restructuring
charges
|
|
|
1.4
|
|
|
0.7
|
%
|
|
-
|
|
|
-
|
|
|
1.4
|
|
|
0.4
|
%
|
|
-
|
|
|
-
|
|
Income
from operations
|
|
|
15.0
|
|
|
7.5
|
%
|
|
22.9
|
|
|
13.3
|
%
|
|
34.7
|
|
|
9.1
|
%
|
|
43.8
|
|
|
13.0
|
%
|
Comparison
of Three Months Ended September 26, 2006 and 2005
Original Equipment
- Americas net sales increased $27.7 million from the second quarter of fiscal
2006 to the second quarter of fiscal 2007, driven by strength in the truck
market as a result of pre-buying in anticipation of emission restrictions
effective January 1, 2007 and strength in heavy duty and industrial markets,
partially offset by weaker volumes in the North American automotive market.
The
net sales were also positively impacted by $21.6 million of acquired revenues
related to the May 2006 acquisition of the 50 percent interest in RV that
we did
not already own. Gross margin decreased 470 basis points to 14.5 percent
during
the second quarter of fiscal 2007 from 19.2 percent during the second quarter
of
fiscal 2006. The decline in gross margin was primarily driven by the increase
in
commodity costs, as the material component of cost of sales increased from
57
percent during the second quarter of fiscal 2006 to 61 percent in the current
quarter. Customer pricing pressures, primarily within the automotive market,
also contributed to this decrease in gross margin. In addition, $0.8 million
of
costs incurred related to our global competitiveness program contributed
to the
decrease in gross margin. SG&A expenses increased $2.3 million from the
second quarter of fiscal 2006 to the second quarter of fiscal 2007, primarily
driven by $3.2 million of incremental SG&A expenses incurred in relation to
the May 2006 RV acquisition. The restructuring charges incurred during the
second quarter of fiscal 2007 of $1.4 million represents employee severance
recorded in conjunction with the announced closures of the Richland, South
Carolina and Clinton, Tennessee facilities. Original Equipment - Americas
income
from operations decreased $7.9 million, primarily driven by the decline in
gross
margin related to commodity price increases and customer pricing pressures.
RV
was accretive to this segment during the second quarter of fiscal
2007.
Comparison
of Six Months Ended September 26, 2006 and 2005
Original
Equipment - Americas net sales for fiscal 2007 year to date increased $43.0
million from the same period last year, driven by the ongoing strength in
the
truck and heavy duty and industrial markets. In addition, net sales were
also
positively impacted by $29.5 million of acquired revenues related to the
May
2006 RV acquisition. These increases in revenue were partially offset by
reduced
volumes in the North American automotive market. Gross margin decreased 330
basis points to 15.6 percent for fiscal 2007 year to date from 18.9 percent
over
the same period last year. The continued high commodity prices, as well as
customer pricing pressures, are the primary factors driving the decrease
in
gross margin, as well as $0.8 million of costs incurred related to our global
competitiveness program. SG&A expenses increased $3.5 million over the
periods presented. Such increase is primarily attributed to $4.3 million
of
incremental SG&A expenses incurred in relation to the May 2006 RV
acquisition. Income from operations decreased $9.1 million in fiscal 2007
versus
the same period last year, primarily driven by the decline in gross margin
related to commodity price increases and customer pricing pressures, as well
as
$1.4 million of restructuring charges incurred during this period.
Original
Equipment - Asia
|
|
Three
Months ended September 26
|
Six
Months ended September 26
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(dollars
in millions)
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
Net
sales
|
|
|
42.0
|
|
|
100.0
|
%
|
|
49.7
|
|
|
100.0
|
%
|
|
98.0
|
|
|
100.0
|
%
|
|
107.5
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
40.1
|
|
|
95.5
|
%
|
|
45.3
|
|
|
91.1
|
%
|
|
90.8
|
|
|
92.7
|
%
|
|
95.8
|
|
|
89.1
|
%
|
Gross
profit
|
|
|
1.9
|
|
|
4.5
|
%
|
|
4.4
|
|
|
8.9
|
%
|
|
7.2
|
|
|
7.3
|
%
|
|
11.7
|
|
|
10.9
|
%
|
Selling,
general and administrative
expenses
|
|
|
5.7
|
|
|
13.6
|
%
|
|
5.1
|
|
|
10.3
|
%
|
|
9.9
|
|
|
10.1
|
%
|
|
9.9
|
|
|
9.2
|
%
|
Income
(loss) from operations
|
|
|
(3.8
|
)
|
|
-9.0
|
%
|
|
(0.7
|
)
|
|
-1.4
|
%
|
|
(2.7
|
)
|
|
-2.8
|
%
|
|
1.8
|
|
|
1.7
|
%
|
Comparison
of Three Months Ended September 26, 2006 and 2005
Original
Equipment - Asia net sales decreased $7.7 million from the second quarter
of
fiscal 2006 to the second quarter of fiscal 2007. This decrease is primarily
related to a strike at a customer facility during the second quarter of fiscal
2007, and the corresponding reduction in revenues related to this strike.
The
strike has been settled, and higher sales volumes started to be generated
late
in the second quarter of fiscal 2007. Partially offsetting the volume decline
due to the customer strike was the positive impact of exchange rate changes
of
$2.9 million during the second quarter of fiscal 2007. Gross margin decreased
440 basis points to 4.5 percent during the second quarter of fiscal 2007
from
8.9 percent during the second quarter of fiscal 2006. The decline in gross
margin was driven by the lower revenue base during the second quarter, as
well
as customer pricing pressures experienced during the quarter. SG&A expenses
increased $0.6 million from the second quarter of fiscal 2006 to the second
quarter of fiscal 2007. Incremental SG&A expenses were incurred during the
second quarter of fiscal 2007 to expand our infrastructure within the
Asia-Pacific region, including our recent announcement of plans to open a
new
greenfield manufacturing location in China. Original Equipment - Asia income
from operations decreased $3.1 million, primarily driven by the impact of
the
customer strike and customer pricing pressures.
Comparison
of Six Months Ended September 26, 2006 and 2005
Original
Equipment - Asia net sales for fiscal 2007 year to date decreased $9.5 million
from the same period last year. Fiscal 2007 began with some general softness
in
the Korean economy, which contributed to lower sales volumes to start the
year.
Some improvement has taken place in the Korean economy, however, the decline
in
sales continued into the second quarter of fiscal 2007 with the strike at
a
customer facility. Gross margin decreased 360 basis points to 7.3 percent
for fiscal 2007 year to date from 10.9 percent over the same period last
year.
The weak sales volumes, as well as customer pricing pressures, are the primary
factors driving the decrease in gross margin. SG&A expenses remained
consistent at $9.9 million for the periods presented. SG&A improvements were
realized in the first quarter of fiscal 2007 related to an early retirement
program completed in fiscal 2006. However, these improvements were primarily
offset by incremental SG&A expenses incurred during the second quarter of
fiscal 2007 in expanding our infrastructure within the Asia-Pacific region.
Income from operations decreased $4.5 million, primarily driven by the weak
sales volumes and incremental customer pricing pressures experienced during
the
first half of fiscal 2007.
Original
Equipment –
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months ended September 26
|
|
Six
Months ended September 26
|
|
|
2006
|
2005
|
|
2006
|
2005
|
|
(dollars
in millions)
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
Net
sales
|
|
|
135.7
|
|
|
100.0
|
%
|
|
128.7
|
|
|
100.0
|
%
|
|
282.9
|
|
|
100.0
|
%
|
|
268.7
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
109.9
|
|
|
81.0
|
%
|
|
99.6
|
|
|
77.4
|
%
|
|
225.2
|
|
|
79.6
|
%
|
|
204.5
|
|
|
76.1
|
%
|
Gross
profit
|
|
|
25.8
|
|
|
19.0
|
%
|
|
29.1
|
|
|
22.6
|
%
|
|
57.7
|
|
|
20.4
|
%
|
|
64.2
|
|
|
23.9
|
%
|
Selling,
general and administrative
expenses
|
|
|
11.3
|
|
|
8.3
|
%
|
|
12.2
|
|
|
9.5
|
%
|
|
24.0
|
|
|
8.5
|
%
|
|
26.3
|
|
|
9.8
|
%
|
Income
from operations
|
|
|
14.5
|
|
|
10.7
|
%
|
|
16.9
|
|
|
13.1
|
%
|
|
33.7
|
|
|
11.9
|
%
|
|
37.9
|
|
|
14.1
|
%
|
Comparison
of Three Months Ended September 26, 2006 and 2005
Original
Equipment - Europe net sales increased $7.0 million from the second quarter
of
fiscal 2006 to the second quarter of fiscal 2007. This increase is driven
by
strength in the European heavy duty market, as well as the positive impact
of
exchange rate changes of $6.6 million during the second quarter of fiscal
2007.
Gross margin decreased 360 basis points to 19.0 percent during the second
quarter of fiscal 2007 from 22.6 percent during the second quarter of fiscal
2006. The decline in gross margin was driven by the increase in commodity
costs,
as the material component of cost of sales increased from 63.4 percent during
the second quarter of fiscal 2006 to 64.8 percent in the second quarter of
fiscal 2007. In addition, customer pricing pressures, primarily within the
European automotive market, also contributed to this decrease in gross margin.
SG&A expenses decreased $0.9 million from the second quarter of fiscal 2006
to the second quarter of fiscal 2007, driven by various SG&A reduction
efforts in process within this segment. Original Equipment - Europe income
from
operations decreased $2.4 million, primarily driven by the decline in gross
margin related to commodity price increases and customer pricing
pressures.
Comparison
of Six Months Ended September 26, 2006 and 2005
Original
Equipment - Europe net sales for fiscal 2007 year to date increased $14.2
million from the same period last year. Continued strength in the European
heavy
duty market was the primary factor contributing to this increase, as well
as
some modest improvements in the automotive market. Gross margin decreased
350
basis points to 20.4 percent for fiscal 2007 year to date from 23.9 percent
over
the same period last year. The continued high commodity prices, as well as
customer pricing pressures, are the primary factors driving the decrease
in
gross margin. SG&A expenses decreased $2.3 million over the periods
presented, driven by on-going reduction efforts realized throughout fiscal
2007.
Income from operations decreased $4.2 million, primarily driven by the decline
in gross margin based on the factors noted above.
Commercial
HVAC&R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months ended September 26
|
|
Six
Months ended September 26
|
|
|
2006
|
2005
|
|
2006
|
2005
|
|
(dollars
in millions)
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
Net
sales
|
|
|
50.0
|
|
|
100.0
|
%
|
|
46.1
|
|
|
100.0
|
%
|
|
89.3
|
|
|
100.0
|
%
|
|
74.5
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
39.7
|
|
|
79.4
|
%
|
|
34.3
|
|
|
74.4
|
%
|
|
70.4
|
|
|
78.8
|
%
|
|
55.7
|
|
|
74.8
|
%
|
Gross
profit
|
|
|
10.3
|
|
|
20.6
|
%
|
|
11.8
|
|
|
25.6
|
%
|
|
18.9
|
|
|
21.2
|
%
|
|
18.8
|
|
|
25.2
|
%
|
Selling,
general and administrative
expenses
|
|
|
7.5
|
|
|
15.0
|
%
|
|
7.6
|
|
|
16.5
|
%
|
|
14.4
|
|
|
16.1
|
%
|
|
12.4
|
|
|
16.6
|
%
|
Income
from operations
|
|
|
2.8
|
|
|
5.6
|
%
|
|
4.2
|
|
|
9.1
|
%
|
|
4.5
|
|
|
5.0
|
%
|
|
6.4
|
|
|
8.6
|
%
|
Comparison
of Three Months Ended September 26, 2006 and 2005
Commercial
HVAC&R net sales increased $3.9 million from the second quarter of fiscal
2006 to the second quarter of fiscal 2007. This increase is primarily related
to
strong sales within air conditioning products that have been introduced
into the North American market. These products were acquired in the May 2005
acquisition of Airedale, and have been integrated into our existing
manufacturing facilities in North America during the current fiscal year.
The
increase in sales of air conditioning products was partially offset by weaker
sales in heating products driven by high energy prices. Gross margin decreased
500 basis points to 20.6 percent during the second quarter of fiscal 2007
from
25.6 percent during the second quarter of fiscal 2006. The decline in gross
margin was driven by a change in mix toward more air conditioning products,
which have a lower gross margin than our heating products. SG&A expenses
decreased $0.1 million from the second quarter of fiscal 2006 to the second
quarter of fiscal 2007. With the completion of the integration activities
of the
Airedale business during the current fiscal year, we are now starting to
realize
efficiencies with our existing heating products business which is contributing
to lower SG&A expenses. Commercial HVAC&R income from operations
decreased $1.4 million, primarily driven by the decline in gross margin related
to the changing mix of the products sold within this segment.
Comparison
of Six Months Ended September 26, 2006 and 2005
Commercial
HVAC&R net sales for fiscal 2007 year to date increased $14.8 million from
the same period last year. This increase is related to $10.7 million of
incremental revenues related to the May 2005 Airedale acquisition, as well
as
the resulting strength in air conditioning sales that have been introduced
into the North American market as a result of this acquisition. Gross margin
decreased 400 basis points to 21.2 percent for fiscal 2007 year to date from
25.2 percent over the same period last year. This decrease is primarily related
to the changing mix of products within this segment toward lower margin air
conditioning products. In addition, modest commodity price increases also
contributed to the decline in margin, although the impact of rising commodity
prices within this segment is not as severe as that noted in our vehicular
product segments. SG&A expenses increased $2.0 million for the periods
presented, primarily related to $1.9 million of incremental SG&A expenses
incurred in the first quarter of fiscal 2007 as a result of the May 2005
Airedale acquisition. With the completion of the integration activities of
the
Airedale business in fiscal 2007, we are starting to see a trend of modest
reductions in our SG&A expenses. Income from operations decreased $1.9
million, primarily related to the decline in gross margin based on the changing
product mix, as well as incremental SG&A expenditures incurred during the
first quarter of fiscal 2007 as we integrated the Airedale business.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months ended September 26
|
|
Six
Months ended September 26
|
|
|
2006
|
2005
|
|
2006
|
2005
|
|
(dollars
in millions)
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
$
|
's
|
|
|
%
of sales
|
|
Net
sales
|
|
|
10.4
|
|
|
100.0
|
%
|
|
8.2
|
|
|
100.0
|
%
|
|
19.8
|
|
|
100.0
|
%
|
|
15.0
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
9.9
|
|
|
95.2
|
%
|
|
7.9
|
|
|
96.3
|
%
|
|
20.6
|
|
|
104.0
|
%
|
|
15.4
|
|
|
102.7
|
%
|
Gross
profit
|
|
|
0.5
|
|
|
4.8
|
%
|
|
0.3
|
|
|
3.7
|
%
|
|
(0.8
|
)
|
|
-4.0
|
%
|
|
(0.4
|
)
|
|
-2.7
|
%
|
Selling,
general and administrative
expenses
|
|
|
2.8
|
|
|
26.9
|
%
|
|
3.5
|
|
|
42.7
|
%
|
|
5.7
|
|
|
28.8
|
%
|
|
6.9
|
|
|
46.0
|
%
|
Restructuring
charges
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.8
|
|
|
4.0
|
%
|
|
-
|
|
|
-
|
|
Income
(loss) from operations
|
|
|
(2.3
|
)
|
|
-22.1
|
%
|
|
(3.2
|
)
|
|
-39.0
|
%
|
|
(7.3
|
)
|
|
-36.9
|
%
|
|
(7.3
|
)
|
|
-48.7
|
%
|
Comparison
of Three Months Ended September 26, 2006 and 2005
The
Other
segment’s net sales increased $2.2 million from the second quarter of fiscal
2006 to the second quarter of fiscal 2007. This segment is comprised of our
electronics cooling business, which continued to show strong component sales
within the United States and United Kingdom markets, and our fuel cell business,
which contributed revenue growth as this business is increasing its development
and delivery of prototype fuel cell heat exchange products. Gross margin
increased 110 basis points to 4.8 percent during the second quarter of fiscal
2007 from 3.7 percent during the second quarter of fiscal 2006. Additionally,
SG&A expenses decreased $0.7 million from the second quarter of fiscal 2006
to the second quarter of fiscal 2007. The combination of the increase in
gross
margin and decrease in SG&A expenses lead to a $0.9 million improvement in
the loss on operations incurred within this segment during the quarters
presented. These improvements were driven by the strength in sales volumes
noted
above. In addition, the closure of the Taiwan facility, which was formerly
part
of the electronics cooling business, also contributed significantly to this
improvement, as this business has historically operated with losses. The
Taiwan
facility ceased operations in July 2006.
Comparison
of Six Months Ended September 26, 2006 and 2005
The
Other
segment’s net sales for fiscal 2007 year to date increased $4.8 million from the
same period last year. Strength in the North American and United Kingdom
electronics cooling markets were noted throughout fiscal 2007, as well as
growth
in our fuel cell business with the increase in development and delivery of
prototype fuel cell heat exchange products. Gross margin decreased 130 basis
points from fiscal 2006 year to date to fiscal 2007 year to date. The decrease
is primarily related to $1.4 million of costs incurred related to the Taiwan
closure during the first six months of fiscal 2007 that have been recorded
as a
component of cost of sales. An additional $0.8 million of costs related to
the
Taiwan closure (primarily employee related costs) were recorded as restructuring
charges during the first six months of fiscal 2007. Loss from operations
remained consistent at a loss of $7.3 million for both periods presented.
The
$2.2 million of costs incurred in fiscal 2007 related to the closure of the
Taiwan facility were largely offset by the positive impact of closing the
Taiwan
facility, as this business has historically operated with losses.
Outlook
for the Remainder of the Year
Fiscal
2007 sales volumes are anticipated to continue to be very strong, consistent
with the trend experienced over the past two years. We are encouraged by
positive influences from new business wins and the development of new technology
platforms. In addition, the accretive acquisition of Radiadores Visconde
Ltda.
will continue to benefit our sales volumes in fiscal 2007. Fiscal 2007 will
have
ongoing challenges at the gross profit and operating income levels, including
continued high commodity prices and pressures primarily from automotive
customers for price-downs on our products. We will continue to pursue material
cost pass-throughs with our customers, negotiate price reductions with our
suppliers, and maintain our hedging strategies to offset some of these pricing
challenges. Fiscal 2007 will be a transition year with the ongoing
implementation of our global competitiveness program. While the implementation
of this program will result in incurring additional short-term expenditures
in
employee, asset, and other related costs, these planned actions will make
us a
more cost competitive, innovative and efficient technology provider in future
years. During fiscal 2007, we anticipate incurring approximately $13 million
of
charges related to our announced plans under our global competitiveness program,
consisting of $6 million of employee related costs, $4 million of
asset related costs and $3 million of other related costs.
Fiscal
2007 sales volumes have benefited from the strength in the North American
truck
market as a result of pre-buying activity in anticipation of emission
restrictions effective January 1, 2007. After the January 1, 2007 emissions
law
change goes into effect, truck volumes are anticipated to decline from current
historical levels. We have partially offset this decline by securing new
business from Freightliner that has significantly increased our share of
the
U.S. truck market, as well as our content per vehicle. We anticipate that
fiscal
2008 sales volumes will be reduced by approximately $50 million as a result
of
this net decline in the North American truck market.
Liquidity
and Capital Resources
Cash
flows from operating activities for the six months ended September 26, 2006
were
$33.8 million compared to $50.0 million one year ago. The differences were
a
result of increased working capital needs, mainly in the area of inventory,
and
declining financial performance. During the first six months of fiscal 2007,
the
Company built inventory levels in advance of the upcoming heating season
for its
HVAC&R business and as part of the strategy to mitigate possible production
disruption from labor negotiations that are ongoing in Korea. Fiscal 2006
had
higher earnings from continuing operations adjusted for non-cash items related
to the Aftermarket spin off.
The
acquisition of the 50 percent of Radiadores Visconde Ltda. the Company did
not
already own in May, 2006, was financed through the utilization of existing
credit lines. The purchase price, net of cash acquired, was $11.1 million,
plus
the incurrence of a $2.0 million note which is payable in 24 months. Also
financed during the first six months of fiscal 2007 were stock repurchases
of
$12.1 million and dividend payments of $11.4 million.
Working
capital of $144.9 million at the end of the second quarter of fiscal 2007
was
higher than the prior year-end balance of $117.2 million, primarily due to
assets capitalized in conjunction with the Company’s acquisition of Radiadores
Visconde and increased working capital needs mentioned above. Compared with
the
prior year-end, inventory turns decreased from 15.4 to 12.8, primarily related
to the impact of the RV acquisition, inventory build-up for strike protection
in
Asia, and the slowing sales volume and corresponding increasing inventory
levels
within the North American automotive market. Days sales outstanding remained
relatively consistent at 54 days in fiscal 2007 versus 55 days in fiscal
2006.
At
September 26, 2006, the Company had capital expenditure commitments of $32.3
million for the remainder of the fiscal year. Significant commitments include
tooling and equipment expenditures for new and renewal platforms with new
and
current customers in both Europe and North America. Generally, we anticipate
our
annual capital expenditures will approximate our annual depreciation expense.
In
fiscal 2007, we are anticipating that our capital expenditures will exceed
our
annual depreciation expense due to the significant number of new platforms
which
are being launched.
The
Company expects cash flow to improve during the balance of the fiscal year
and
to meet its future operating, capital expenditure and strategic business
opportunity costs primarily through a combination of existing cash balances,
cash flows generated from operating activities and borrowings under committed
and uncommitted lines of credit. Modine believes that its internally generated
cash flow, together with access to external resources, will be sufficient
to
satisfy existing commitments and plans.
Debt
Outstanding
debt increased $29.5 million to $187.3 million from the March 31, 2006 balance
of $157.8 million. An increase of $41.0 million in domestic long-term debt
and
an increase of $2.3 million in international short-term debt accounted for
this
change, offset by a decrease of $13.8 million in international long-term
debt.
During the first two quarters of fiscal 2007, additional net borrowings of
$41.0
million were made on existing domestic credit lines primarily to finance
the
Radiadores Visconde Ltda. acquisition and the share repurchase program.
International long-term debt decreased $13.8 million during the first two
quarters as the Company lowered the outstanding debt balance in Europe, which
was partially offset by debt acquired in the Radiadores Visconde purchase.
Consolidated
available lines of credit decreased $28.8 million to $165.6 million since
March
31, 2006. An additional $75.0 million is available on the credit line revolver,
subject to lenders’ approval, bringing the total available up to $240.6 million.
Domestically, Modine's unused lines of credit decreased $41.0 million to
$125.0
million, due to the borrowings mentioned above. Unused lines of credit also
exist in Europe, South Korea and Brazil, and totaled $40.6 million, in aggregate
at September 26, 2006. At September 26, 2006, total debt-to-capital was 26.5
percent compared with 23.8 percent at the end of fiscal 2006.
Off-Balance
Sheet Arrangements
None.
Critical
Accounting Policies
The
following is an updated discussion of certain critical accounting policies
previously included in the Company’s Annual Report on Form 10-K for the year
ended March 31, 2006. All other accounting policies previously disclosed
remain
applicable for fiscal 2007.
Tooling
costs: Pre-production
tooling costs incurred by the Company in manufacturing products under various
customer programs are capitalized as a component of property, plant and
equipment, net of any customer reimbursements, when the Company retains title
to
the tooling. These costs are amortized over the program life or three years,
whichever is shorter, and recorded in cost of sales in the consolidated
statements of earnings. For customer-owned tooling costs incurred by the
Company, a receivable is recorded when the customer has guaranteed reimbursement
to the Company. Customers hold title to the tooling covered under these
reimbursement provisions. The reimbursement period may vary by program and
customer. No significant arrangements existed during the six months ended
September 26, 2006 and 2005 where customer-owned tooling costs were not
accompanied by guaranteed reimbursements.
Revenue
recognition: The
Company recognizes revenue as products are shipped to customers and the risks
and rewards of ownership are transferred to our customers. The revenue is
recorded net of applicable provisions for sales rebates, volume incentives,
and
returns and allowances. At the time of revenue recognition, the Company also
provides an estimate of potential bad debts and warranty expense. The Company
bases these estimates on historical experience, current business trends and
current economic conditions. The Company recognizes revenue from various
licensing agreements 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.
Contractual
commodity price increases may also be included in revenue. Price increases
agreed-upon in advance are recognized as revenue when the products are shipped
to the customers. In certain situations, the price increases are recognized
as
revenue at the time products are shipped in accordance with the contractual
arrangements with customers, but are offset by appropriate provisions for
estimated commodity price increases which may ultimately not be collected.
These
provisions are established based on historical experience, current business
trends and current economic conditions. At September 26, 2006, the Company
had
established $0.8 million of provisions for estimated commodity price increases
which may ultimately not be collected. The Company does not record any revenue
for commodity price increases when the likelihood of collection is uncertain.
New
Accounting
Pronouncements
In
November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No.
151, “Inventory Costs-An Amendment of Accounting Research Bulletin (ARB) No. 43,
Chapter 4,” which clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage). The Company
adopted the provisions of SFAS No. 151 effective for inventory costs incurred
during the first quarter of fiscal 2007. The adoption of this statement did
not
have a material impact on the Company’s financial condition or results of
operations.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary
Assets-An Amendment of APB Opinion No. 29,” which eliminates the exception for
non-monetary exchanges of similar productive assets and replaces it with
a
general exception for exchanges of non-monetary assets that do not have
commercial substance. The Company was required to adopt SFAS No. 153 for
non-monetary asset exchange occurring in the first quarter of fiscal 2007.
The
adoption of this statement did not have a material impact on the Company’s
financial condition or results of operations.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
A Replacement of APB Opinion No. 20 and FASB Statement No. 3,” which changes the
requirements for the accounting and reporting of a change in accounting
principle. SFAS No. 154 applies to all voluntary changes in accounting
principles and to changes required by an accounting pronouncement in the
unusual
instance that the pronouncement does not include specific transition provisions.
SFAS No. 154 requires retrospective application in prior periods’ financial
statements of changes in accounting principle, unless it is impracticable
to
determine either the period-specific effects or the cumulative effect of
the
change. The Company adopted SFAS No. 154 in the first quarter of fiscal 2007.
The adoption of this statement did not have a material impact of the Company’s
financial condition or results of operations.
In
December 2004, the FASB issued a revised SFAS No. 123(R), “Share-Based Payment.”
SFAS No. 123(R) establishes standards for the accounting for transactions
in
which an entity exchanges its equity instruments for goods or services, or
incurs liabilities in exchange for goods and services that are based on the
fair
value of the entity’s equity instruments, focusing primarily on accounting for
transactions in which an entity obtains employee services in share-based
payment
transactions. SFAS No.123(R) requires public entities to measure the cost
of
employee services received in exchange for an award of equity instruments
based
on the grant-date fair value of the award (with limited exceptions) and
recognize the cost over the period during which an employee is required to
provide service in exchange for the award. We adopted SFAS No. 123 (R) in
the
first quarter of fiscal 2007. Under SFAS No. 123(R), the Black-Scholes option
pricing model will be used to determine the grant-date fair value of stock
option awards, and a lattice-based model will be used to determine the
grant-date fair value of performance awards based on external market indexes.
Utilizing these models, we recorded compensation expense of approximately
$1.3
million and $2.5 million during the three and six months ended September
26,
2006, respectively, under the provisions of SFAS No. 123(R), which is $0.5
million and $1.3 million higher than what would have been recognized had
SFAS
No.123(R) not been effective in the second quarter and first six months of
fiscal 2007, respectively. A cumulative catch-up adjustment, net of tax,
of $0.1
million was recorded during the first quarter in conjunction with the adoption
of this literature.
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48). This interpretation clarifies the accounting for
uncertainty in income taxes recognized in accordance with SFAS No. 109,
“Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. Under FIN 48,
if a
tax position does not meet a “more-likely-than-not” recognition threshold, the
benefit of that position is not recognized in the financial statements. The
Company is required to adopt FIN 48 in the first quarter of fiscal 2008,
and is
currently assessing the impact of adopting this interpretation.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
addresses how companies should measure fair value when they are required
to use
a fair value measure for recognition or disclosure purposes under GAAP. SFAS
No.
157 defines fair value, establishes a framework for measuring fair value
and
expands the disclosures on fair value measurements. The Company is required
to
adopt SFAS No. 157 in the first quarter of fiscal 2009, and is currently
assessing the impact of adopting this pronouncement.
In
September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans,” an amendment of FASB Statements
No. 87, 88, 106 and 132(R). SFAS No. 158 requires companies to recognize
a net
asset or liability to report the funded status of defined benefit pension
and
other postretirement plans on the balance sheet and to recognize changes
in that
funded status in the year in which the changes occur through other comprehensive
income in shareholders’ equity. The Company is required to adopt this aspect of
SFAS No. 158 for the fiscal year ending March 31, 2007. The anticipated impact
of adopting this statement, based on the March 31, 2006 funded status of
our
pension and postretirement plans, would be to increase total liabilities
and
reduce total shareholders’ equity by $117.0 million. The Company does not
anticipate the adoption of this statement will have an adverse impact on
the
existing loan covenants. The Statement also requires that employers measure
plan
assets and obligations as of the date of their year-end financial statements
beginning with the Company’s fiscal year ending March 31, 2009. The Company
currently uses December 31 as the measurement date for its pension and
postretirement plans.
In
September 2006, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue
No. 06-3,
“How Sales Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross Versus
Net Presentation)”, which requires that a company disclose its accounting policy
for the statement of earnings presentation of taxes assessed by a governmental
authority on a revenue-producing transaction between a seller and a customer.
In
addition, for any taxes reported on a gross basis (included in revenues and
costs), disclosure of the amount of taxes recorded within these categories
is
required. The Company is required to apply this Issue in the fourth quarter
of
fiscal 2007 and is currently evaluating the impact of adopting this
pronouncement.
In
September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements”, which provides interpretive
guidance on the consideration of the effects of prior year misstatements
in
quantifying current year misstatements for the purpose of a materiality
assessment. SAB No. 108 is effective for the Company’s fiscal year ending March
31, 2007. The Company has elected early adoption of the provisions of SAB
No. 108 during the second quarter of fiscal 2007. SAB No. 108 established
an
approach that requires quantification of financial statement misstatements
based
on the effects of the misstatements on each of the Company’s financial
statements and the related financial statement disclosures. This model is
commonly referred to as a “dual approach” because it requires quantification of
errors under both the iron curtain and the roll-over methods. SAB No. 108
permits initial adoption of its provisions either by (i) restating prior
financial statements as if the “dual approach” had always been applied; or (ii)
recording the cumulative effect of initially applying the “dual approach” as
adjustments to the carrying values of assets and liabilities as of April
1, 2006
with an offsetting adjustment recorded to the opening balance of retained
earnings. We elected to record the effects of applying SAB No. 108 using
the
cumulative effect transition method which resulted in the correction of four
misstatements through a $1.8 million net reduction to retained earnings at
April 1, 2006.
Contractual
Obligations
There
have been no material changes to our contractual obligations outside the
ordinary course of business from those disclosed in our Annual Report on
Form
10-K for the fiscal year ended March 31, 2006.
Forward
Looking Statements
This
report contains statements, including information about future financial
performance, accompanied by phrases such as “believes,” “estimates,” “expects,”
“plans,” “anticipates,” “will,” “intends,” and other similar “forward-looking”
statements, as defined in the Private Securities Litigation Reform Act of
1995.
Modine’s actual results, performance or achievements may differ materially from
those expressed or implied in these statements, because of certain risks
and
uncertainties, including, but not limited to, the following:
•
Customers’ abilities to maintain their market shares and achieve anticipated
growth rates for new products, particularly as they experience pricing pressures
and excess capacity issues;
•
Modine’s ability to maintain current programs and compete effectively for new
business, including our ability to offset or otherwise address increasing
pricing pressures from our competitors and cost-downs from our customers;
•
Modine’s ability to pass increasing costs, particularly raw material costs, on
to our customers in a timely manner and increases in production or material
costs that cannot be recouped in product pricing;
•
Strain
in
relationships with customers as a result of the Company’s aggressive enforcement
of contractual provisions, particularly those concerning passing the cost
of
materials through to the customer;
•
Modine’s ability to consummate and successfully integrate proposed business
development opportunities and not disrupt or overtax its resources in
accomplishing such tasks;
•
The
effect of the weather on Commercial HVAC&R market demand, which directly
impacts sales;
•
Unanticipated problems with suppliers’ abilities to meet Modine’s demands;
•
Customers’ actual production demand for new products and technologies, including
market acceptance of a particular vehicle model or engine;
•
The
impact of environmental laws and regulations on Modine’s business and the
business of Modine’s customers, including Modine’s ability to take advantage of
opportunities to supply alternative new technologies to meet environmental
emissions standards;
•
Economic, social and political conditions, changes and challenges in the
markets
where Modine operates and competes (including currency exchange rates, tariffs,
inflation, changes in interest rates, recession, and restrictions associated
with importing and exporting and foreign ownership);
•
The
cyclical nature of the vehicular industry;
•
Changes
in the anticipated sales mix;
•
Modine’s association with a particular industry, such as the automobile
industry, which could have an adverse effect on Modine’s stock price;
•
Work
stoppages or interference at Modine or Modine’s major customers or suppliers;
•
Unanticipated product or manufacturing difficulties, including unanticipated
warranty claims;
•
Unanticipated delays or modifications initiated by major customers with respect
to product applications or requirements;
•
Costs
and other effects of unanticipated litigation or claims, and the increasing
pressures associated with rising health care and insurance costs and reductions
in pension credit;
•
Ability
of the Company to successfully complete its repositioning efforts and thereby
reduce costs and increase efficiencies; and
•
Other
risks and uncertainties identified by the Company in public filings with
the
U.S. Securities and Exchange Commission.
Modine
does not assume any obligation to update any of these forward-looking
statements.
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 Management
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 Brazil,
Mexico, Taiwan, South Korea, China, South Africa and throughout Europe. It
also
has equity investments in companies located in France, Japan, and China.
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 principally exposed to changes
in
exchange rates between the dollar and the European currencies, primarily
the
euro, and changes between the dollar and the Korean won. 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 unfavorable currency translation adjustments recorded for the
three months ended September 26, 2006 and the twelve months ended March 31,
2006
were $0.2 million and $19.1 million, respectively. The Company’s favorable
currency translation adjustment recorded for the six months ended September
26,
2006 was $12.4 million. As of September 26, 2006 and March 31, 2006, the
Company's foreign subsidiaries had net current assets (defined as current
assets
less current liabilities) subject to foreign currency translation risk of
$74.8
million and $57.3 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 $7.5 million and $5.7 million,
respectively. This sensitivity analysis presented assumes a parallel shift
in
foreign currency exchange rates. Exchange rates rarely move in the same
direction relative to the dollar. 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, 2006
|
|
|
Expected
Maturity Date
|
Long-term
debt in ($000's)
|
|
|
F2007
|
|
|
F2008
|
|
|
F2009
|
|
|
F2010
|
|
|
F2011
|
|
|
Thereafter
|
|
|
Total
|
|
Fixed
rate (won)
|
|
$
|
65
|
|
$
|
148
|
|
$
|
168
|
|
$
|
190
|
|
$
|
212
|
|
$
|
2,086
|
|
$
|
2,869
|
|
Average
interest rate
|
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
-
|
|
Fixed
rate (reais)
|
|
|
-
|
|
$
|
71
|
|
$
|
810
|
|
|
-
|
|
$
|
107
|
|
|
-
|
|
$
|
988
|
|
Average
interest rate
|
|
|
-
|
|
|
12.10
|
%
|
|
10.95
|
%
|
|
-
|
|
|
12.10
|
%
|
|
-
|
|
|
-
|
|
Variable
rate (euro)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
21,781
|
|
|
-
|
|
|
-
|
|
$
|
21,781
|
|
Average
interest rate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3.61
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
Variable
rate (reais)
|
|
$
|
41
|
|
$
|
81
|
|
$
|
83
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
205
|
|
Average
interest rate
|
|
|
13.00
|
%
|
|
11.50
|
%
|
|
12.50
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
addition to the external borrowing, the Company has from time to time had
certain foreign-denominated long-term inter-company loans that are sensitive
to
foreign exchange rates. At September 26, 2006, the Company had a 28.9 billion
won ($30.6 million), 8-yr loan to its wholly owned subsidiary, Modine Korea,
LLC. On April 6, 2005, the Company entered into a zero cost collar to hedge
the
foreign exchange exposure on the entire amount of the Modine Korea, LLC loan
which expired on August 29, 2006. On August 29, 2006, the Company entered
into
another zero cost collar to hedge the foreign exchange exposure on the entire
amount of the Modine Korea, LLC loan. This derivative instrument expires
on
February 29, 2008. Prior to December 15, 2005, the Company’s wholly owned German
subsidiary, Modine Holding GmbH, had an 11.1 million euro ($14.7 million),
on-demand loan from its wholly owned subsidiary Modine Hungaria Kft. On December
15, 2005, this loan was paid in full. For the six months ended September
26,
2005, the Company recorded in "other income - net" foreign currency transaction
losses of $0.5 million related to this on-demand loan.
Interest
Rate Risk Management
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
during
the first six months of fiscal 2007. 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, 2006
|
|
Expected
Maturity Date |
Long-term
debt in ($000's)
|
|
|
F2007
|
|
|
F2008
|
|
|
F2009
|
|
|
F2010
|
|
|
F2011
|
|
|
Thereafter
|
|
|
Total
|
|
Fixed
rate (won)
|
|
$
|
65
|
|
$
|
148
|
|
$
|
168
|
|
$
|
190
|
|
$
|
212
|
|
$
|
2,086
|
|
$
|
2,869
|
|
Average
interest rate
|
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
-
|
|
Fixed
rate (reais)
|
|
|
-
|
|
$
|
71
|
|
$
|
810
|
|
|
-
|
|
$
|
107
|
|
|
-
|
|
$
|
988
|
|
Average
interest rate
|
|
|
-
|
|
|
12.10
|
%
|
|
10.95
|
%
|
|
-
|
|
|
12.10
|
%
|
|
-
|
|
|
-
|
|
Fixed
rate (U.S. dollars)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
75,000
|
|
$
|
75,000
|
|
Average
interest rate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4.91
|
%
|
|
-
|
|
Variable
rate (euro)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
21,781
|
|
|
-
|
|
|
-
|
|
$
|
21,781
|
|
Average
interest rate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3.61
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
Variable
rate (reais)
|
|
$
|
41
|
|
$
|
81
|
|
$
|
83
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
205
|
|
Average
interest rate
|
|
|
13.00
|
%
|
|
11.50
|
%
|
|
12.50
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Variable
rate (U.S. dollars)
|
|
|
-
|
|
$
|
3,000
|
|
|
-
|
|
$
|
75,000
|
|
|
-
|
|
|
-
|
|
$
|
78,000
|
|
Average
interest rate
|
|
|
-
|
|
|
3.98
|
%
|
|
-
|
|
|
6.03
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
Credit
Risk Management
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 49 percent of the trade receivables balance at September
26,
2006 was concentrated in the Company's top ten customers. Modine’s history of
incurring credit losses from customers has not been material, and the Company
does not expect that trend to change.
Economic
Risk Management
Economic
risk is the possibility of loss resulting from economic instability in certain
areas of the world or significant downturns in markets that the Company
supplies. For example, traditionally, significant increases in oil prices
have
had an adverse effect on many markets the Company serves. Continued high
oil
prices may negatively impact the economic recovery that the Company is currently
experiencing, particularly in the truck and off-highway markets.
With
respect to international instability, the Company continues to monitor economic
conditions in the United States and elsewhere. In particular, the Company
monitors conditions in Brazil and the effect on the Company's recent acquisition
of the remaining 50% of Radiadores Visconde Ltda. Going forward, the Company
will focus more intently on monitoring economic conditions in low cost countries
as the Company seeks to expand its global manufacturing footprint to various
low
cost areas. As Modine expands its global presence, we also encounter risks
imposed by potential trade restrictions, including tariffs, embargoes and
the
like. We continue to pursue non-speculative opportunities to mitigate these
economic risks, and capitalize, when possible, on changing market
conditions.
The
Company pursues new market opportunities after careful consideration of the
potential associated risks and benefits. Successes in new markets are dependent
upon the Company’s ability to commercialize its investments. Current examples of
new and emerging product markets for Modine include those related to exhaust
gas
recirculation (EGR), CO2,
and
fuel cell technology. In addition, Modine’s Airedale acquisition exposes Modine
to new specialty air conditioning markets. Investment in these areas is subject
to the risks associated with business integration, technological success
and
market acceptance.
The
upturn in the economy and the continued economic growth in China are putting
production pressure on certain of the Company’s suppliers of raw materials. In
particular, there are a limited number of suppliers of steel and aluminum
fin
stock serving a more robust market. As a result, some suppliers are allocating
product among customers, extending lead times or holding supply to the prior
year’s level. The Company is exposed to the risk of supply of certain raw
materials not being able to meet customer demand and
of
increased prices being charged by raw material suppliers. Historically high
commodity pricing, which includes aluminum and copper, is making it increasingly
difficult to pass along the full amount of these increases to our customers
as
our contracts have provided for in the past.
In
addition to the purchase of raw materials, the Company purchases parts from
suppliers that use the Company’s tooling to produce parts. Generally, the
Company does not have duplicate tooling for the manufacture of its purchased
parts. As a result, the Company is exposed to the risk of a supplier of such
parts being unable to provide the quantity or quality of parts that the Company
requires. Even in situations where suppliers are manufacturing parts without
the
use of Company tooling, the Company faces the challenge of obtaining high
quality parts from suppliers.
In
addition to the above risks on the supply side, the Company is also exposed
to
risks associated with demands by its customers for decreases in the price
of the
Company's products. The Company offsets this risk with firm agreements with
its
customers whenever possible.
The
Company operates in diversified markets as a strategy for offsetting the
risk
associated with a downturn in any one or more of the markets it serves, or
a
reduction in the Company's participation in any one or more markets. However,
the risks associated with these market downturns and reductions are still
present.
Commodity
Price Risk Management
The
Company is dependent upon the supply of certain raw materials and supplies
in
the production process and has, from time to time, entered into firm purchase
commitments for copper and aluminum alloy, and natural gas. In fiscal 2007,
the
Company initiated an aluminum hedging strategy by entering into fixed price
contracts to help offset the continuation of rapidly accelerating commodity
prices. In addition, the Company entered into fixed price contracts to hedge
against changes in natural gas over the upcoming winter months. The Company
does
maintain agreements with certain OEM customers to pass through certain material
price fluctuations in order to mitigate the commodity price risk. The majority
of these agreements contain provisions in which the pass through of the price
fluctuations can lag behind the actual fluctuations by a quarter or longer.
Because of the historic highs reached in some commodities, the Company is
dealing with increasing challenges from OEM customers to abide by these
agreements and pay the full amount of the price increases.
Hedging
and Foreign Currency Exchange Contracts
The
Company uses derivative financial instruments in a limited way as a tool
to
manage certain financial risks. Their use is restricted primarily to hedging
assets and obligations already held by Modine, and they are used to protect
cash
flows rather than generate income or engage in speculative activity. Leveraged
derivatives are prohibited by Company policy.
Foreign
exchange contracts: Modine
maintains a foreign exchange risk management strategy that uses derivative
financial instruments in a limited way to mitigate foreign currency exchange
risk. Modine periodically enters into foreign currency exchange contracts
to
hedge specific foreign currency denominated transactions. Generally, these
contracts have terms of 90 or fewer days. The effect of this practice is
to
minimize the impact of foreign exchange rate movements on Modine’s earnings.
Modine’s foreign currency exchange contracts do not subject it to significant
risk due to exchange rate movements because gains and losses on these contracts
offset gains and losses on the assets and liabilities being hedged.
As
of
September 26, 2006, the Company had no outstanding forward foreign exchange
contracts, with the exception of the zero cost collar to hedge the foreign
exchange exposure on the
entire amount of the Modine Korea, LLC loan which is discussed above under
the
section entitled “Foreign Currency Risk”. Non-U.S. dollar financing transactions
through intercompany loans or local borrowings in the corresponding currency
generally are effective as hedges of long-term investments.
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. In certain instances, the
Company uses non-derivative financial instruments to hedge, or offset, this
exposure. The currency exposure related to the net assets of Modine's European
subsidiaries has been managed partially through euro-denominated debt agreements
entered into by the parent. As of September 26, 2006, there were no outstanding
euro-denominated borrowings.
Cash
Flow Hedges: As
further noted above under the section entitled “Commodity Price Risk
Management”, the Company entered into forward contracts for the three and six
months ended September 26, 2006 for approximately 60 percent of our forecasted
purchases of aluminum, and for our forecasted natural gas purchases over
the
winter months of fiscal 2007. These forward contracts have been treated as
cash
flow hedges in the consolidated financial statements.
Item
4. Controls and Procedures
Evaluation
Regarding Disclosure Controls and Procedures
As
of the
end of the period covered by this quarterly report on Form 10-Q, our
management carried out an evaluation, at the direction of the General
Counsel and with the participation of the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the Company’s
disclosure controls and procedures as defined in Securities Exchange Act
Rules
13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of the Company’s disclosure controls and procedures are effective as
of September 26, 2006 in recording, processing, summarizing and reporting,
on a
timely basis, information required to be disclosed by us in the reports that
we
file or submit under the Exchange Act.
Changes
In Internal Control Over Financial Reporting
During
the second quarter of fiscal 2007, there was no change in the Company’s internal
control over financial reporting that materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings.
Recent
Developments
Behr
Patent Infringement Litigation
With
a
brief dated November 16, 2004, Behr GmbH & Co. K.G. sued Modine Europe GmbH,
Modine Austria Ges.mbH, and Modine Wackersdorf GmbH in the District Court
in
Mannheim, Federal Republic of Germany claiming infringement of Behr EPO patent
0669506 which covers a “plastic cage” insert for an integrated receiver/dryer
condenser. Behr claims past infringement and current infringement by the
Modine
entities. Behr demands a cease and desist order, legal costs as provided
by law,
sales information and compensation. The amount of compensation due to Behr,
if
any, would be based on lost profits of Behr, profits made by the Modine entities
or a reasonable royalty rate of any integrated receiver/dryer condensers
manufactured or sold by Modine and found to have infringed. In a related
suit in
the Federal Patent Court in Munich, Federal Republic of Germany, the Modine
entities asserted that the Behr patent described above is null and void
and, therefore, Modine had not infringed any intellectual property rights
of Behr in the production of integrated receiver/dryer condensers based on
Modine designs. Under German law, the determination of patent validity is
considered in a separate legal action from the consideration of infringement.
The oral hearing was held in Mannheim on June 3, 2005. The Mannheim Court
found
against Modine on August 19, 2005, finding infringement. Modine has filed
an
appeal. The appeal hearing is expected sometime in late fiscal 2007.
In
the
nullity lawsuit related to the infringement of Behr EPO patent 0669506, the
oral
hearing took place in the Federal Patent Court in Munich on May 16, 2006.
The
court decided in Modine’s favor in August 2006 invalidating the patent. Behr,
unless successful in an appeal, is no longer able to pursue its patent
infringement claim.
On
April
7, 2006, Modine filed a patent infringement lawsuit in the Federal District
Court in Milwaukee, Wisconsin, claiming infringement by Behr America Inc.
and
Behr Heat Transfer Systems Inc. of a Modine United States patent, 5,228,512,
covering, among other things, a charge air cooler and a method for making
the
same.
Modine
intends to vigorously prosecute the Milwaukee infringement action, defend
the
Mannheim infringement action and pursue the Munich nullity action and, in
the
event of any adverse determination, appeal to a higher court.
Personal
Injury Action
The
Company was named as a defendant, along with Rohm & Haas Company, Morton
International, and Huntsman Corp., in twelve separate personal injury actions
that were recently filed in Philadelphia County, Pennsylvania Court of Common
Please (“PCCP”): Freund v. Rohm and Haas Company, et al., PCCP, May Term 2006,
Case No. 3603; Branham, et al. v. Rohm and Haas Company, et al., PCCP, May
Term
2006, Case No. 3590; Milliman v. Rohm and Haas, et al., PCCP, May Term 2006,
Case No. 3606, Weisenberger, et al. v. Rohm and Haas Company, et al., PCCP,
May
Term 2006, Case No. 3600; Weisheit v. Rohm and Haas, et al., PCCP, May Term
2006, Case No. 3596; Wierschke v. Rohm and Haas, et al., PCCP, May Term 2006,
Case No. 3591; DiBlasi, et al. v. Rohm and Haas Company, et al., PCCP, July
Term
2006, Case No. 2078; Depaepe, et al. v. Rohm and Haas Company, et al., PCCP,
July Term 2006, Case No. 2081;
Nichole
and Johnny Baird, Jr., v. Rohm and Haas Company, et al., PCCP, October Term
2006, Case No. 00972; Karen
Kane, individually and as Administratrix of the Estate of Patrick A. Kane
v.
Rohm and Haas Company, et al., PCCP, October Term 2006, Case No. 000975;
Robert
Hromec Nelson and Barbara Lynn Nelson v. Rohm and Haas Company, et al., PCCP,
October Term 2006, Case No. 000978; and John Carl Stepp v. Rohm and Haas
Company, et al., PCCP, October Term 2006, Case No. 000981.
These
cases allege personal injury due to exposure to certain solvents that were
allegedly released to groundwater and air for an undetermined period of time.
Under similar facts as the PCCP cases but alleging a federal putative class
action, the Company was named as a defendant, along with Rohm & Haas
Company, Morton International, and Huntsman Corp., in the United States District
Court for the Eastern District of Pennsylvania in Gates,
et al. v. Rohm and Haas Company, et al.,
Case No.
06-1743.
The
Company is in the earliest states of discovery with these cases. As such,
it is
premature to provide further analysis concerning these claims. The Company
intends to aggressively defend these cases.
Item
1A. Risk
Factors.
Our
business involves risk. The following information and the information contained
in Item 1A, Risk Factors, of our Form 10-K for the fiscal year ended March
31,
2006 about these risks should be considered carefully together with the
other
information contained in this report. The risks described below and in
the Form
10-K, Item 1A are not the only risks we face. Additional risks not currently
known or deemed immaterial may also result in adverse results for our
business.
Work
stoppages or prolonged strikes at our unionized plants and our inability
to
stabilize on a more permanent basis our relationship with our union in
South
Korea may jeopardize our relationships with our customers.
Our
facility in Asan City, South Korea is a union facility. We negotiate the
agreement with the union annually and have experienced work stoppages and
strikes in the recent past. While these work stoppages and strikes have
not yet
affected our ability to deliver product on a timely basis, if we are unable
to
stabilize our relationship with the union on a more permanent and predictable
basis, our relationships with our customers may be adversely affected.
While our
relationships with the unions in other parts of the world are generally
good,
the existence of a unionized workforce in Europe, Brazil and in some facilities
in the United States does present an element of uncertainty in the ability
of
the Company to effectively and efficiently supply its customers. If the
Company
were to experience a prolonged strike at any of its facilities, the ability
of
the Company to supply product may be adversely affected. If that were the
case,
the Company’s relationship with its customers could be adversely
affected.
We
continue to face high commodity costs (including steel, copper, aluminum,
other
raw materials and energy) that we increasingly cannot recoup in our product
pricing. Increasing
commodity costs continue to have a significant impact on our results, and
those
of others in our industry. We have sought to alleviate the impact of increasing
costs by including a materials pass-through provision in our contracts
with our
customers. However, certain of our customers are increasingly refusing
to honor
those contractual provisions and are not paying the full cost of the materials
increases or are not paying the Company on a timely basis. The continuation
of
this practice would adversely affect our profitability. The Company intends
to
pursue aggressively the customers that are refusing to pay these costs
that are
due the Company. The enforcement of contractual obligations by the Company
may
strain or disrupt our relationships with those customers.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
In
compliance with Item 703 of Regulation S-K, the Company provides the following
summary of its purchases of common stock during its second quarter of fiscal
2007.
ISSUER
PURCHASES OF EQUITY SECURITIES
Period
|
(a)
Total
Number of Shares (or Units) Purchased
|
(b)
Average
Price
Paid
Per
Share
(or
Unit)
|
(c)
Total
Number of Shares (or Units) Purchased as Part of Publicly
Announced
Plans or Programs
|
(d)
Maximum
Number
(or
Approximate
Dollar
Value)
of Shares
(or
Units) that May Yet Be Purchased Under the Plans or
Programs
|
June
27 - July 26, 2006
|
4,630
(1)(2)
|
$23.23
(3)
|
3,700
(1)
|
2,654,069
(4)
|
|
|
|
|
|
July
27 - August 26, 2006
|
84,127
(1)(2)
|
$23.08
(3)
|
82,300
(1)
|
2,571,769
(4)
|
|
|
|
|
|
August
27 - September 26, 2006
|
77,838
(1)(2)
|
$23.43
(3)
|
77,700
(1)
|
2,494,069
(4)
|
|
|
|
|
|
Total
|
166,595
(1)(2)
|
$23.25
(3)
|
163,700
(1)
|
|
(1)
Includes purchases made through the share purchase program announced on January
26, 2006,where the Company may purchase up to an additional 10% of its
outstanding shares over an 18 month period.
(2)
Includes shares purchased from employees of the Company and its subsidiaries
who
received awards of shares of restricted stock. The Company, pursuant to the
1994
Incentive Compensation Plan and the 2002 Incentive Compensation Plan, gives
such
persons the opportunity to turn back to the Company the number of shares
from
the award sufficient to satisfy the person’s tax withholding obligations that
arise upon the periodic termination of restrictions on the shares.
(3)
The
stated price does not include commission paid.
(4)
The
stated figure represents the amount remaining under the 10 percent share
repurchase program. The Company cannot determine the number of shares that
will
be turned back into the Company by holders of restricted stock awards. The
participants also have the option of paying the tax-withholding obligation
described above by cash or check, or by selling shares on the open market.
The
number of shares subject to outstanding stock awards is 350,270, with a value
of
$8,448,512 at September 26, 2006. The tax withholding obligation on such
shares
is approximately 40% of the value of the periodic restricted stock award.
The
restrictions applicable to the stock awards generally lapse 20% per year
over
five years for stock awards granted prior to April 1, 2005 and generally
lapse
25% per year over four years for stock awards granted after April 1, 2005;
provided, however, that certain stock awards vest immediately upon
grant.
Item
4. Submission of Matters to a Vote of Security Holders.
The
Company, a Wisconsin corporation, held its Annual Meeting of Shareholders
on
July 19, 2006. Information on the matters voted upon and the votes cast with
respect to each matter was previously reported in the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 26, 2006.
Item
6. Exhibits.
(a) Exhibits:
The
following exhibits are attached for information only unless specifically
incorporated by reference in this Report:
Exhibit
No.
|
Description
|
Incorporated
Herein By
Referenced
To
|
Filed
Herewith
|
3.1
|
By-Laws,
as amended on October 18, 2006, by the Board of Directors to provide
for
direct registration of shares of the Company's stock and increase
the
number of directors to ten.
|
|
X
|
|
|
|
|
31(a)
|
Certification
of David B. Rayburn, President and Chief Executive Officer, pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
X
|
|
|
|
|
31(b)
|
Certification
of Bradley C. Richardson, Executive Vice President, Finance and
Chief
Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley
Act of
2002.
|
|
X
|
|
|
|
|
32(a)
|
Certification
of David B. Rayburn, President and Chief Executive Officer, pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
X
|
|
|
|
|
32(b)
|
Certification
of Bradley C. Richardson, Executive Vice President, Finance and
Chief
Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley
Act of
2002.
|
|
X
|
SIGNATURE
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:
/s/
Bradley C. Richardson
Bradley
C. Richardson, Executive Vice President, Finance
and
Chief
Financial Officer *
Date:
November 6, 2006
*
Executing as both the principal financial officer and a duly authorized officer
of the Company