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 June 26, 2007
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 32,897,352 at July 27, 2007.
MODINE
MANUFACTURING COMPANY
INDEX
PART
I. FINANCIAL INFORMATION
|
1
|
Item
1. Financial Statements
|
1
|
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
19
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
27
|
Item
4. Controls and Procedures
|
30
|
PART
II. OTHER INFORMATION
|
30
|
Item
1. Legal Proceedings
|
30
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
31
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
32
|
Item
6. Exhibits
|
33
|
SIGNATURE
|
34
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
MODINE
MANUFACTURING COMPANY
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF EARNINGS
|
|
|
|
|
|
|
For
the three months ended June 26, 2007 and 2006
|
|
|
|
|
|
|
(In
thousands, except per
share amounts)
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 26
|
|
|
2007
|
|
|
2006
|
|
Net
sales
|
|
$ |
444,073
|
|
|
$ |
421,918
|
|
Cost
of sales
|
|
|
373,103
|
|
|
|
343,884
|
|
Gross
profit
|
|
|
70,970
|
|
|
|
78,034
|
|
Selling,
general, and administrative expenses
|
|
|
54,962
|
|
|
|
53,059
|
|
Restructuring
(income) charges
|
|
|
(240 |
) |
|
|
90
|
|
Income
from operations
|
|
|
16,248
|
|
|
|
24,885
|
|
Interest
expense
|
|
|
(2,789 |
) |
|
|
(2,010 |
) |
Other
income – net
|
|
|
4,129
|
|
|
|
1,539
|
|
Earnings
from continuing operations before income taxes
|
|
|
17,588
|
|
|
|
24,414
|
|
Provision
for income taxes
|
|
|
5,192
|
|
|
|
3,513
|
|
Earnings
from continuing operations
|
|
|
12,396
|
|
|
|
20,901
|
|
Earnings
(loss) from discontinued operations (net of income taxes)
|
|
|
254
|
|
|
|
(4,604 |
) |
Cumulative
effect of accounting change (net of income taxes)
|
|
|
-
|
|
|
|
70
|
|
Net
earnings
|
|
$ |
12,650
|
|
|
$ |
16,367
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share of common stock – basic:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.39
|
|
|
$ |
0.65
|
|
Earnings
(loss) from discontinued operations
|
|
|
-
|
|
|
|
(0.14 |
) |
Cumulative
effect of accounting change
|
|
|
-
|
|
|
|
-
|
|
Net
earnings – basic
|
|
$ |
0.39
|
|
|
$ |
0.51
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share of common stock – diluted:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.39
|
|
|
$ |
0.65
|
|
Earnings
(loss) from discontinued operations
|
|
|
-
|
|
|
|
(0.14 |
) |
Cumulative
effect of accounting change
|
|
|
-
|
|
|
|
-
|
|
Net
earnings – diluted
|
|
$ |
0.39
|
|
|
$ |
0.51
|
|
|
|
|
|
|
|
|
|
|
Dividends
per share
|
|
$ |
0.175
|
|
|
$ |
0.175
|
|
|
|
|
|
|
|
|
|
|
The
notes to unaudited condensed consolidated financial statements
are an
integral part of these statements.
|
|
MODINE
MANUFACTURING COMPANY
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
June
26, 2007 and March 31, 2007
|
|
|
|
|
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
June
26, 2007
|
|
|
March
31, 2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
22,636
|
|
|
$ |
21,227
|
|
Short
term investments
|
|
|
3,050
|
|
|
|
3,001
|
|
Trade
receivables, less allowance for doubtful accounts of $1,585 and
$1,512
|
|
|
269,808
|
|
|
|
248,493
|
|
Inventories
|
|
|
116,647
|
|
|
|
108,217
|
|
Assets
held for sale
|
|
|
8,661
|
|
|
|
9,256
|
|
Deferred
income taxes and other current assets
|
|
|
80,397
|
|
|
|
66,663
|
|
Total
current assets
|
|
|
501,199
|
|
|
|
456,857
|
|
Noncurrent
assets:
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment – net
|
|
|
514,097
|
|
|
|
514,949
|
|
Investment
in affiliates
|
|
|
19,352
|
|
|
|
18,794
|
|
Goodwill
|
|
|
65,762
|
|
|
|
64,284
|
|
Intangible
assets – net
|
|
|
11,169
|
|
|
|
11,137
|
|
Assets
held for sale
|
|
|
5,935
|
|
|
|
9,281
|
|
Other
noncurrent assets
|
|
|
29,740
|
|
|
|
26,271
|
|
Total
noncurrent assets
|
|
|
646,055
|
|
|
|
644,716
|
|
Total
assets
|
|
$ |
1,147,254
|
|
|
$ |
1,101,573
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
-
|
|
|
$ |
344
|
|
Long-term
debt – current portion
|
|
|
3,156
|
|
|
|
3,149
|
|
Accounts
payable
|
|
|
195,262
|
|
|
|
194,734
|
|
Accrued
compensation and employee benefits
|
|
|
63,209
|
|
|
|
58,977
|
|
Income
taxes
|
|
|
8,161
|
|
|
|
14,358
|
|
Liabilities
of business held for sale
|
|
|
3,530
|
|
|
|
3,478
|
|
Accrued
expenses and other current liabilities
|
|
|
36,564
|
|
|
|
32,913
|
|
Total
current liabilities
|
|
|
309,882
|
|
|
|
307,953
|
|
Noncurrent
liabilities:
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
195,843
|
|
|
|
175,856
|
|
Deferred
income taxes
|
|
|
19,749
|
|
|
|
18,291
|
|
Pensions
|
|
|
48,319
|
|
|
|
48,847
|
|
Postretirement
benefits
|
|
|
27,921
|
|
|
|
27,960
|
|
Liabilities
of business held for sale
|
|
|
95
|
|
|
|
94
|
|
Other
noncurrent liabilities
|
|
|
38,949
|
|
|
|
29,305
|
|
Total
noncurrent liabilities
|
|
|
330,876
|
|
|
|
300,353
|
|
Total
liabilities
|
|
|
640,758
|
|
|
|
608,306
|
|
Commitments
and contingencies (See Note 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 32,872 shares, respectively
|
|
|
20,545
|
|
|
|
20,545
|
|
Additional
paid-in capital
|
|
|
62,874
|
|
|
|
61,240
|
|
Retained
earnings
|
|
|
444,721
|
|
|
|
439,318
|
|
Accumulated
other comprehensive loss
|
|
|
(7,852 |
) |
|
|
(14,779 |
) |
Treasury
stock at cost: 470 and 453 shares
|
|
|
(12,880 |
) |
|
|
(12,468 |
) |
Deferred
compensation trust
|
|
|
(912 |
) |
|
|
(589 |
) |
Total
shareholders' equity
|
|
|
506,496
|
|
|
|
493,267
|
|
Total
liabilities and shareholders' equity
|
|
$ |
1,147,254
|
|
|
$ |
1,101,573
|
|
|
|
|
|
|
|
|
|
|
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 three months ended June 26, 2007 and 2006
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Three
months ended June 26
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
12,650
|
|
|
$ |
16,367
|
|
Adjustments
to reconcile net earnings with net cash (used for)
|
|
|
|
|
|
|
|
|
provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
19,225
|
|
|
|
17,285
|
|
Other
– net
|
|
|
(4,225 |
) |
|
|
(119 |
) |
Net
changes in operating assets and liabilities, excluding
|
|
|
|
|
|
|
|
|
acquisitions
and dispositions
|
|
|
(28,895 |
) |
|
|
(27,444 |
) |
Net
cash (used for) provided by operating activities
|
|
|
(1,245 |
) |
|
|
6,089
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Expenditures
for property, plant and equipment
|
|
|
(13,974 |
) |
|
|
(18,081 |
) |
Acquisitions,
net of cash acquired
|
|
|
-
|
|
|
|
(10,950 |
) |
Proceeds
from dispositions of assets
|
|
|
3,320
|
|
|
|
18
|
|
Settlement
of derivative contracts
|
|
|
1,322
|
|
|
|
-
|
|
Other
– net
|
|
|
232
|
|
|
|
2
|
|
Net
cash used for investing activities
|
|
|
(9,100 |
) |
|
|
(29,011 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
|
(454 |
) |
|
|
(790 |
) |
Additions
to long-term debt
|
|
|
34,606
|
|
|
|
56,000
|
|
Reductions
of long-term debt
|
|
|
(14,661 |
) |
|
|
(32,457 |
) |
Book
overdrafts
|
|
|
(2,296 |
) |
|
|
(1,418 |
) |
Repurchase
of common stock, treasury and retirement
|
|
|
(412 |
) |
|
|
(8,703 |
) |
Cash
dividends paid
|
|
|
(5,671 |
) |
|
|
(5,687 |
) |
Other
– net
|
|
|
25
|
|
|
|
(114 |
) |
Net
cash provided by financing activities
|
|
|
11,137
|
|
|
|
6,831
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
617
|
|
|
|
(429 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
1,409
|
|
|
|
(16,520 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
21,227
|
|
|
|
30,798
|
|
Cash
and cash equivalents at end of period
|
|
$ |
22,636
|
|
|
$ |
14,278
|
|
|
|
|
|
|
|
|
|
|
The
notes to unaudited condensed consolidated financial statements
are an
integral part of these statements.
|
|
MODINE
MANUFACTURING COMPANY
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(In
thousands, except per share amounts)
(unaudited)
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, 2007
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 three months of fiscal 2008 are not
necessarily indicative of the results to be expected for the full
year.
The
March
31, 2007 consolidated balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles (GAAP) 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,
2007.
Note
2: Significant Accounting Policies
Discontinued
operations and assets held for sale: The Company considers
businesses to be held for sale when management approves and commits to a
formal
plan to actively market a business for sale. Upon designation as held
for sale, the carrying value of the assets of the business are recorded at
the
lower of their carrying value or their estimated fair value, less costs to
sell. The Company ceases to record depreciation expense at the time
of designation as held for sale. Results of operations of a business
classified as held for sale are reported as discontinued operations when
(a) the
operations and cash flows of the business will be eliminated from ongoing
operations as a result of the sale and (b) the Company will not have any
significant continuing involvement in the operations of the business after
the
sale. During the three months ended June 26, 2007, the Company
classified the Electronics Cooling business as held for sale and as a
discontinued operation. See Note 12 for further
discussion.
Accounting
standards changes and new accounting pronouncements: In June 2006, the
Financial Accounting Standards Board (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 Statement of Financial Accounting Standards
(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 adopted FIN
48 as of April 1, 2007 which resulted in the recognition of an additional
liability of $1,548 for previously unrecognized tax benefits, with a
corresponding adjustment to retained earnings. See Note 6 for
further discussion.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement,” which
addresses how companies should measure fair value when 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 Statement
Nos. 87, 88, 106 and 132(R). The Company adopted the recognition and
disclosure requirements of SFAS No. 158 as of March 31, 2007 which did not
have
an adverse impact on existing loan covenants. SFAS No. 158 also
requires that employers measure plan assets and the Company’s obligations as of
the date of their year-end financial statements beginning with the Company’s
fiscal year ending March 31, 2009. The Company will adopt the
year-end measurement date for its pension and postretirement plans in fiscal
2008 using the prospective method.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – including an Amendment of SFAS No.
115” (SFAS No. 159), which permits an entity to measure many financial assets
and financial liabilities at fair value that are not currently required to
be
measured at fair value. Entities that elect the fair value option
will report unrealized gains and losses in earnings at each subsequent reporting
date. The fair value option may be elected on an
instrument-by-instrument basis, with few exceptions. SFAS No. 159
amends previous guidance to extend the use of the fair value option to
available-for-sale and held-to-maturity securities. The Statement
also establishes presentation and disclosure requirements to help financial
statement users understand the effect on the election. SFAS No. 159
is effective as of the beginning of the first quarter of fiscal
2009. Management is currently assessing the potential impact of this
standard on the Company’s consolidated financial statements.
Note
3: Employee Benefit Plans
Modine’s
contributions to the defined contribution employee benefit plans for the
three
months ended June 26, 2007 and 2006 were $1,836 and $2,033,
respectively.
Costs
for
Modine's pension and postretirement benefit plans for the three months ended
June 26, 2007 and 2006 include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
plans
|
|
|
Postretirement
plans
|
|
For
the three months ended June 26,
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$ |
788
|
|
|
$ |
1,106
|
|
|
$ |
83
|
|
|
$ |
97
|
|
Interest
cost
|
|
|
3,808
|
|
|
|
3,787
|
|
|
|
447
|
|
|
|
482
|
|
Expected
return on plan assets
|
|
|
(4,699 |
) |
|
|
(4,764 |
) |
|
|
-
|
|
|
|
-
|
|
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
net loss
|
|
|
1,548
|
|
|
|
1,428
|
|
|
|
122
|
|
|
|
128
|
|
Unrecognized
prior service cost
|
|
|
(24 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Unrecognized
net asset
|
|
|
(7 |
) |
|
|
(7 |
) |
|
|
-
|
|
|
|
-
|
|
Net
periodic benefit cost
|
|
$ |
1,414
|
|
|
$ |
1,550
|
|
|
$ |
652
|
|
|
$ |
707
|
|
Note
4: Stock-Based Compensation
Modine
adopted SFAS No. 123(R) effective April 1, 2006. SFAS No. 123(R)
requires that the cost of stock-based compensation be recognized in the
financial statements based on the grant date fair value of the
award. Stock-based compensation consists of stock options and
restricted stock granted for retention and performance. Upon
adoption, management made an estimate (based upon historical rates) of expected
forfeitures and recognized 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. Modine recognized
stock-based compensation cost of $1,355 and $1,197 for the three months ended
June 26, 2007 and 2006, respectively. No expense has been recorded
relative to the earnings per share portion of the performance award based
upon
current projections of probable attainment of this portion of the
award.
The
following table presents by type the fair market value of stock-based
compensation awards granted during the three months ended June 26, 2007 and
2006:
|
|
Three months ended June 26,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
Number
|
|
|
Fair
Value
|
|
|
Number
|
|
|
Fair
Value
|
|
Type
of award
|
|
Granted
|
|
|
Per
Award
|
|
|
Granted
|
|
|
Per
Award
|
|
Common
stock options
|
|
|
0.3
|
|
|
$ |
5.30
|
|
|
|
-
|
|
|
$ |
-
|
|
Restricted
common stock - retention
|
|
|
-
|
|
|
$ |
-
|
|
|
|
-
|
|
|
$ |
-
|
|
Restricted
common stock - performance
|
|
|
79.9
|
|
|
$ |
23.60
|
|
|
|
66.7
|
|
|
$ |
29.75
|
|
(Total
shareholder return - portion only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying table sets forth the assumptions used in determining the fair
value
for the options and performance awards:
|
|
Three months ended June 26,
|
|
|
|
2007
|
|
2006
|
|
|
|
Options
|
|
|
Performance
Awards
|
|
|
Performance
Awards
|
|
Expected
life of awards in years
|
|
|
5
|
|
|
|
3
|
|
|
|
3
|
|
Risk-free
interest rate
|
|
|
4.58 |
% |
|
|
4.57 |
% |
|
|
4.96 |
% |
Expected
volatility of the Company's stock
|
|
|
28.51 |
% |
|
|
29.60 |
% |
|
|
31.40 |
% |
Expected
dividend yield on the Company's stock
|
|
|
3.32 |
% |
|
|
2.88 |
% |
|
|
2.19 |
% |
Expected
forfeiture rate
|
|
|
1.50 |
% |
|
|
1.50 |
% |
|
|
1.50 |
% |
As
of
June 26, 2007, the total remaining unrecognized compensation cost related
to the
non-vested stock-based compensation awards which will be amortized over the
weighted average remaining service periods is as follows:
Type
of award
|
|
Unrecognized
Compenstion Costs
|
|
|
Weighted
Average Remaining Service Period in Years
|
|
Common
stock options
|
|
$ |
17
|
|
|
|
0.3
|
|
Restricted
common stock - retention
|
|
|
5,951
|
|
|
|
2.7
|
|
Restricted
common stock - performance
|
|
|
3,185
|
|
|
|
2.4
|
|
Total
|
|
$ |
9,153
|
|
|
|
2.6
|
|
Note
5: Other Income – Net
Other
income – net was comprised of the following:
|
Three
months ended June 26
|
|
2007
|
|
2006
|
Equity
in earnings of non-consolidated affiliates
|
$ 687
|
|
$ 1,035
|
Interest
income
|
242
|
|
284
|
Foreign
currency transactions
|
3,138
|
|
45
|
Other
non-operating income - net
|
62
|
|
175
|
Total
other income - net
|
$ 4,129
|
|
$ 1,539
|
Foreign
currency transactions for the three months ended June 26, 2007 is primarily
comprised of foreign currency transaction gains on inter-company loans
denominated in a foreign currency in Brazil. See Note 14 for further
discussion.
Note
6: Income Taxes
During
the three months ended June 26, 2007 and 2006, the Company’s effective income
tax rate attributable to earnings from continuing operations before income
taxes
was 29.5 percent and 14.4 percent, respectively. During the first
quarter of fiscal 2008, the Company recorded income tax expense of $736 (4.2
percent impact on effective tax rate) which related to the prior fiscal
year. This net adjustment was made in the first quarter of fiscal
2008 as it was deemed insignificant to the reported results of operations
for
fiscal 2007 and estimated results for fiscal 2008. This adjustment
was offset by a decrease in foreign income taxes resulting from a favorable
mix
between foreign and domestic income as well as among foreign jurisdictions
and a
favorable impact relating to a research and development
credit. During the first quarter of fiscal 2007, the Company recorded
an approximate $3,600 tax benefit related to the utilization of net operating
losses in Brazil that were previously unavailable.
The
following is a reconciliation of the effective tax rate for the three months
ended June 26, 2007 and 2006:
|
|
Three
months ended June 26
|
|
|
|
2007
|
|
|
2006
|
|
Statutory
federal tax
|
|
|
35.0 |
% |
|
|
35.0 |
% |
Taxes
on non-U.S. earnings and losses
|
|
|
(7.6 |
) |
|
|
(4.7 |
) |
Research
and development tax credit
|
|
|
(2.1 |
) |
|
|
-
|
|
Stock
options
|
|
|
3.3
|
|
|
|
-
|
|
Net
operating losses in Brazil
|
|
|
-
|
|
|
|
(14.6 |
) |
Other
|
|
|
0.9
|
|
|
|
(1.3 |
) |
Effective
tax rate
|
|
|
29.5 |
% |
|
|
14.4 |
% |
After
adoption of FIN 48 on April 1, 2007, the Company’s total gross liability for
unrecognized tax benefits was $8,587. The amount of unrecognized tax
benefits that, if recognized, would affect the effective tax rate is
$5,757. Included in this amount are $541 of accrued penalties and
$770 of accrued interest.
The
Company recognizes accrued interest and penalties related to unrecognized
tax
benefits as a component of income tax expense. During the three
months ended June 26, 2007, the Company recorded interest and penalties of
$59. There is no material change to the amount of unrecognized tax
benefits during the three months ended June 26, 2007. The Company
does not expect a significant increase or decrease in the total amount of
unrecognized tax benefits during the remainder of fiscal 2008.
The
Company files income tax returns, including returns for its subsidiaries,
with
federal, state, local and foreign taxing jurisdictions. The following
tax years remain subject to examination by the respective major tax
jurisdictions:
Austria
Fiscal 2000 – 2007
Brazil Fiscal
2002 – 2006
Germany
Fiscal 2000 – 2007
Korea Fiscal
2004 – 2007
United
States Fiscal
2004 – 2007
Note
7: Earnings Per Share
The
computational components of basic and diluted earnings per share are summarized
as follows:
|
|
Three
months ended June 26
|
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$ |
12,396
|
|
|
$ |
20,901
|
|
Earnings
(loss) from discontinued operations
|
|
|
254
|
|
|
|
(4,604 |
) |
Cumulative
effect of accounting change
|
|
|
-
|
|
|
|
70
|
|
Net
earnings
|
|
$ |
12,650
|
|
|
$ |
16,367
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
32,112
|
|
|
|
32,213
|
|
Effect
of dilutive securities
|
|
|
57
|
|
|
|
133
|
|
Weighted
average shares outstanding – diluted
|
|
|
32,169
|
|
|
|
32,346
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share of common stock – basic:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.39
|
|
|
$ |
0.65
|
|
Earnings
(loss) from discontinued operations
|
|
|
-
|
|
|
|
(0.14 |
) |
Cumulative
effect of accounting change
|
|
|
-
|
|
|
|
-
|
|
Net
earnings – basic
|
|
$ |
0.39
|
|
|
$ |
0.51
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share of common stock – diluted:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.39
|
|
|
$ |
0.65
|
|
Earnings
(loss) from discontinued operations
|
|
|
-
|
|
|
|
(0.14 |
) |
Cumulative
effect of accounting change
|
|
|
-
|
|
|
|
-
|
|
Net
earnings – diluted
|
|
$ |
0.39
|
|
|
$ |
0.51
|
|
The
calculation of diluted earnings per share excluded 1,822 and 1,512 stock
options
for the three months ended June 26, 2007 and 2006, respectively, as these
stock
options were anti-dilutive. The calculation of diluted earnings per
share also excludes 210 and 277 restricted stock awards for the three months
ended June 26, 2007 and 2006, respectively, as these awards were
anti-dilutive.
Note
8: Comprehensive Earnings
Comprehensive
earnings, which represents net earnings adjusted by the change in accumulated
other comprehensive income was as follows:
|
|
Three
months ended June 26
|
|
|
|
2007
|
|
|
2006
|
|
Net
earnings
|
|
$ |
12,650
|
|
|
$ |
16,367
|
|
Foreign
currency translation
|
|
|
7,353
|
|
|
|
12,570
|
|
Cash
flow hedges
|
|
|
(1,400 |
) |
|
|
(391 |
) |
Change
in SFAS No. 158 benefit plan adjustment
|
|
|
974
|
|
|
|
-
|
|
Total
comprehensive earnings
|
|
$ |
19,577
|
|
|
$ |
28,546
|
|
Note
9: Inventories
The
amounts of raw material, work in process and finished goods cannot be determined
exactly except by physical inventories. Based on partial interim
physical inventories and percentage relationships at the time of complete
physical inventories, management believes the amounts shown below are reasonable
estimates of raw materials, work in process and finished goods.
|
|
June
26, 2007
|
|
|
March
31, 2007
|
|
Raw
materials and work in process
|
|
$ |
87,945
|
|
|
$ |
79,904
|
|
Finished
goods
|
|
|
28,702
|
|
|
|
28,313
|
|
Total
inventories
|
|
$ |
116,647
|
|
|
$ |
108,217
|
|
|
|
|
|
|
|
|
|
|
Note
10: Property, Plant and Equipment
Property,
plant and equipment consisted of the following:
|
|
June
26, 2007
|
|
|
March
31, 2007
|
|
Gross
property, plant and equipment
|
|
$ |
1,062,211
|
|
|
$ |
1,043,698
|
|
Less
accumulated depreciation
|
|
|
(548,114 |
) |
|
|
(528,749 |
) |
Net
property, plant and equipment
|
|
$ |
514,097
|
|
|
$ |
514,949
|
|
Note
11: Restructuring, Plant Closures and Other Related Costs
In
fiscal
2007, Modine announced a global competitiveness program intended to reduce
costs, accelerate technology development, and accelerate market and geographic
expansion – all intended to stimulate growth and profits. The Company
initiated the following plans: relocated its Harrodsburg, Kentucky-based
research and development activities into its technology center in Racine,
Wisconsin; offered a voluntary enhanced early retirement program in the U.S.;
implemented a reduction in force in the U.S.; and announced various facility
closings within North America.
The
Company has incurred $3,378 of one-time termination benefits, $663 of pension
curtailment charges and $6,852 of other closure costs to-date related to
these
plans. Total additional costs which are anticipated to be incurred
through fiscal 2009 are approximately $7,000; consisting of $200 of
employee-related costs and $6,800 of other-related costs such as equipment
moving costs and miscellaneous facility closing costs. Total
additional cash expenditures of approximately $7,100 are anticipated to be
incurred related to these plans.
The
accrued restructuring liability for the three months ended June 26, 2007
and
2006 was comprised of the following related to the above-described restructuring
activities:
|
|
Three
months ended June 26
|
|
|
|
2007
|
|
|
2006
|
|
Termination
Benefits:
|
|
|
|
|
|
|
Balance,
April 1
|
|
$ |
2,313
|
|
|
$ |
-
|
|
Additions
|
|
|
209
|
|
|
|
90
|
|
Adjustments
|
|
|
(449 |
) |
|
|
-
|
|
Payments
|
|
|
(176 |
) |
|
|
-
|
|
Balance,
June 26
|
|
$ |
1,897
|
|
|
$ |
90
|
|
The
following is the summary of restructuring and other repositioning costs recorded
related to the announced programs during the three months ended June 26,
2007
and 2006:
|
|
Three
months ended June 26
|
|
|
|
2007
|
|
|
2006
|
|
Restructuring
(income) charges:
|
|
|
|
|
|
|
Employee
severance and related benefits
|
|
$ |
(240 |
) |
|
$ |
90
|
|
|
|
|
|
|
|
|
|
|
Other
repositioning costs:
|
|
|
|
|
|
|
|
|
Special
termination benefits - early retirement
|
|
|
-
|
|
|
|
364
|
|
Miscellaneous
other closure costs
|
|
|
450
|
|
|
|
40
|
|
Total
other repositioning costs
|
|
|
450
|
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
Total
restructuring and other repositioning costs
|
|
$ |
210
|
|
|
$ |
494
|
|
The
total
restructuring and other repositioning costs of $210 for the three months
ended
June 26, 2007 was recorded in the consolidated statement of earnings as follows:
$450 was recorded as a component of cost of sales and $240 was recorded as
restructuring income. The Company accrues severance in accordance
with its written plan and procedures. Restructuring income relates to
reversals of severance liabilities due to employee terminations prior to
completion of required retention periods. The total restructuring and
other repositioning costs of $494 for the three months ended June 26, 2006
was
recorded in the consolidated statement of earnings as follows: $40 was recorded
as a component of cost of sales, $364 was recorded as a component of selling,
general and administrative expenses and $90 was recorded as restructuring
charges.
Note
12: Discontinued Operations and Assets Held for Sale
On
May 1,
2007, Modine announced it would explore strategic alternatives for its
Electronics Cooling business. This review resulted in the Company
actively marketing this business for sale at a price and on terms that will
represent a better value for Modine’s shareholders than having the business
continue to operate as a Modine subsidiary. In accordance with the
provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” it was determined that the Electronics Cooling business
should be presented as held for sale and as a discontinued operation in the
consolidated financial statements. The Electronics Cooling business
was formerly presented as part of the Other segment. See Note 18 for
further discussion on segments. The balance sheet amounts of the
Electronics Cooling business have been reclassified to assets and liabilities
of
business held for sale on the consolidated balance sheet, and the operating
results have been separately presented as a discontinued operation in the
consolidated statement of earnings for all periods presented.
At
March
31, 2007, the Richland, South Carolina assets totaled $3,315 and consisted
of
land, building and associated improvements. These assets, which were
recorded in the Original Equipment – North America segment, were classified as
assets held for sale in the consolidated balance sheet at March 31, 2007.
These
assets were sold during the first quarter of fiscal 2008.
The
major
classes of assets and liabilities held for sale at June 26, 2007 and March
31,
2007 included in the consolidated balance sheets were as follows:
|
|
June
26, 2007
|
|
|
March
31, 2007
|
|
Assets
held for sale:
|
|
|
|
|
|
|
Receivables
- net
|
|
$ |
3,974
|
|
|
$ |
3,866
|
|
Inventories
|
|
|
2,952
|
|
|
|
3,695
|
|
Other
current assets
|
|
|
1,735
|
|
|
|
1,695
|
|
Total
current assets held for sale
|
|
|
8,661
|
|
|
|
9,256
|
|
Property,
plant and equipment - net
|
|
|
2,319
|
|
|
|
5,715
|
|
Goodwill
|
|
|
2,782
|
|
|
|
2,745
|
|
Other
noncurrent assets
|
|
|
834
|
|
|
|
821
|
|
Total
nonccurent assets held for sale
|
|
|
5,935
|
|
|
|
9,281
|
|
Total
assets held for sale
|
|
$ |
14,596
|
|
|
$ |
18,537
|
|
|
|
|
|
|
|
|
|
|
Liabilities
of business held for sale:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,683
|
|
|
$ |
1,596
|
|
Accrued
expenses and other current liabilities
|
|
|
1,847
|
|
|
|
1,882
|
|
Total
current liabilities of business held for sale
|
|
|
3,530
|
|
|
|
3,478
|
|
Other
noncurrent liabilities
|
|
|
95
|
|
|
|
94
|
|
Total
liabilities of business held for sale
|
|
$ |
3,625
|
|
|
$ |
3,572
|
|
In
addition, the Electronics Cooling business had cash of $1,398 and $1,239
at June
26, 2007 and March 31, 2007, respectively, that was included in cash and
cash
equivalents on the consolidated balance sheets.
The
following results of the Electronics Cooling business have been presented
as
earnings (loss) from discontinued operations in the consolidated statement
of
earnings:
|
|
Three
months ended June 26
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
7,544
|
|
|
$ |
8,475
|
|
Cost
of sales and other expenses
|
|
|
7,241
|
|
|
|
13,205
|
|
Earnings
(loss) before income taxes
|
|
|
303
|
|
|
|
(4,730 |
) |
Provision
for (benefit from) income taxes
|
|
|
49
|
|
|
|
(126 |
) |
Earnings
(loss) from discontinued operations
|
|
$ |
254
|
|
|
$ |
(4,604 |
) |
Note
13: Goodwill and Intangible Assets
Changes
in the carrying amount of goodwill during the first three months of fiscal
2008,
by segment and in the aggregate, are summarized in the following
table:
|
|
OE
-
|
|
|
OE
-
|
|
|
OE
- North
|
|
|
South
|
|
|
Commercial
|
|
|
|
|
|
|
Asia
|
|
|
Europe
|
|
|
America
|
|
|
America
|
|
|
Products
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2007
|
|
$ |
523
|
|
|
$ |
8,817
|
|
|
$ |
23,769
|
|
|
$ |
11,634
|
|
|
$ |
19,541
|
|
|
$ |
64,284
|
|
Fluctuations
in foreign currency
|
|
|
-
|
|
|
|
148
|
|
|
|
-
|
|
|
|
1,208
|
|
|
|
122
|
|
|
|
1,478
|
|
Balance,
June 26, 2007
|
|
$ |
523
|
|
|
$ |
8,965
|
|
|
$ |
23,769
|
|
|
$ |
12,842
|
|
|
$ |
19,663
|
|
|
$ |
65,762
|
|
Intangible
assets are comprised of the following:
|
|
June
26, 2007
|
|
March
31, 2007
|
|
|
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
|
|
|
$ |
(3,502 |
) |
|
$ |
449
|
|
|
$ |
3,951
|
|
|
$ |
(3,437 |
) |
|
$ |
514
|
|
Trademarks
|
|
|
10,587
|
|
|
|
(1,485 |
) |
|
|
9,102
|
|
|
|
10,523
|
|
|
|
(1,301 |
) |
|
|
9,222
|
|
Other
intangibles
|
|
|
467
|
|
|
|
(194 |
) |
|
|
273
|
|
|
|
423
|
|
|
|
(157 |
) |
|
|
266
|
|
Total
amortized intangible assets
|
|
|
15,005
|
|
|
|
(5,181 |
) |
|
|
9,824
|
|
|
|
14,897
|
|
|
|
(4,895 |
) |
|
|
10,002
|
|
Unamortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradename
|
|
|
1,345
|
|
|
|
-
|
|
|
|
1,345
|
|
|
|
1,135
|
|
|
|
-
|
|
|
|
1,135
|
|
Total
intangible assets
|
|
$ |
16,350
|
|
|
$ |
(5,181 |
) |
|
$ |
11,169
|
|
|
$ |
16,032
|
|
|
$ |
(4,895 |
) |
|
$ |
11,137
|
|
Amortization
expense for the quarters ended June 26, 2007 and 2006 was $313 and $184,
respectively. Total estimated annual amortization expense expected
for the remainder of fiscal year 2008 through 2013 and beyond is as
follows:
Fiscal
Year
|
|
Estimated
Amortization Expense
|
|
Remainder
of 2008
|
|
$ |
793
|
|
2009
|
|
|
1,055
|
|
2010
|
|
|
799
|
|
2011
|
|
|
799
|
|
2012
|
|
|
721
|
|
2013
& Beyond
|
|
|
5,657
|
|
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 June 26, 2007 and March 31, 2007,
approximately 53 percent 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: The Company has certain
foreign-denominated long-term inter-company loans that are sensitive to foreign
exchange rates. At June 26, 2007, the Company had a 28.9 billion won
($31,192 U.S. equivalent), 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 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 that expires on February 29, 2008 to
hedge
the foreign exchange exposure on the entire amount of the loan.
At
June
26, 2007, the Company had inter-company loans totaling $23,041 to its wholly
owned subsidiary, Modine Brazil, with various maturity dates through February
2009. On June 21, 2007, the Company entered into a zero cost collar
to hedge the foreign exchange exposure on the principal amount of the
loan. This collar has an expiration date of March 31,
2008. The Company recognized approximately $3,000 of foreign currency
exchange gains on this inter-company loan during the first quarter of fiscal
2008 prior to entering into the zero cost collar.
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: The Company enters into futures contracts related
to certain of the Company’s forecasted purchases of aluminum. During
fiscal 2007, the Company also entered into futures contracts related to
forecasted purchases of 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 first quarter of fiscal 2008 and 2007, $1,322
and $225, respectively, of income was recorded in the consolidated statements
of
earnings related to the settlement of certain futures contracts. At
June 26, 2007, $1,014 of unrealized losses remain deferred in accumulated
other
comprehensive income (loss), and will be realized as a component of cost
of
sales over the next seven months.
Interest
rate derivatives: 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 December 29, 2005. The
contract was settled on December 1, 2005 with a loss of $1,794. On
October 25, 2006, the Company entered into two forward starting swaps in
anticipation of the $75,000 private placement debt offerings that occurred
on
December 7, 2006. On November 14, 2006, the fixed interest rate on
the private placement borrowing was locked and, accordingly, the Company
terminated and settled the forward starting swaps at a loss of
$1,812. These interest rate derivatives were treated as cash flow
hedges of forecasted transactions. Accordingly, the losses are
reflected as a component of accumulated other comprehensive income (loss)
and
are being amortized to interest expense over the respective lives of the
borrowings.
During
the three months ended June 26, 2007 and 2006, $122 and $27 of expense,
respectively, was recorded in the consolidated statements of earnings related
to
the amortization of the interest rate derivative losses. At June 26,
2007, $1,953 of net unrealized losses remains deferred in accumulated other
comprehensive income (loss).
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 June 26
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Balance,
March 31
|
|
$ |
13,843
|
|
|
$ |
10,893
|
|
Acquisitions
|
|
|
-
|
|
|
|
528
|
|
Accruals
for warranties issued in current period
|
|
|
1,639
|
|
|
|
1,781
|
|
Reversals
related to pre-existing warranties
|
|
|
(105 |
) |
|
|
(2 |
) |
Settlements
made
|
|
|
(2,237 |
) |
|
|
(2,876 |
) |
Effect
of exchange rate changes
|
|
|
267
|
|
|
|
243
|
|
Balance,
June 26
|
|
$ |
13,407
|
|
|
$ |
10,567
|
|
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 agreements at June 26, 2007
was not material.
Commitments:
At June 26, 2007, the Company had capital expenditure commitments of
$33,030. 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 the three months ended June
26,
2007 and 2006. 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. There were no shares purchased under this program during the
three months ended June 26, 2007. During the three months ended June
26, 2006, 290 shares were purchased under this program at an average cost
of
$28.48 per share, or a total of $8,261. 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 shares acquired pursuant to the
programs, and the retired shares are being returned to the status of authorized
but un-issued shares.
Note
18: Segment Information
Modine’s
product lines consist of heat-transfer components and systems. Modine
serves the vehicular; industrial; building heating, ventilating and air
conditioning; and fuel cell original-equipment markets. During the
first quarter of fiscal 2008, the Company implemented certain management
reporting changes which resulted in the following changes in Modine’s reportable
segments:
·
|
The
Brazilian operation was reported in the newly established South
America
segment;
|
·
|
The
Original Equipment – Americas segment was renamed Original Equipment –
North America;
|
·
|
Certain
support departments previously included within Corporate and
administrative were realigned into the Original Equipment – North America
segment;
|
·
|
The
Commercial HVAC&R segment name was changed to Commercial Products;
and
|
·
|
The
Electronics Cooling business, previously reported in the Other
segment,
was presented as a discontinued operation. Therefore, the only
remaining operation within the Other segment is the Fuel Cell business,
which is now reported as a separate
segment.
|
In
conjunction with the above changes, the previously reported segment results
have
been restated for comparative purposes. Based on the above changes,
the Company has six reportable segments, as follows:
Original
Equipment – Asia
Comprised
of vehicular and industrial original equipment products in Asia.
Original
Equipment – Europe
Comprised
of vehicular and industrial original equipment products in Europe.
Original
Equipment – North America
Comprised
of vehicular and industrial original equipment products in North
America.
South
America
Comprised
of vehicular and industrial original equipment products and aftermarket products
in South America.
Commercial
Products
Comprised
of building heating, ventilating and air conditioning products throughout
the
world.
Fuel
Cell
Comprised
of global fuel cell products.
Each
Modine segment is managed at the regional vice-president or managing director
level and has separate financial results reviewed by the Company’s chief
operating decision makers. These results are used by management in
evaluating the performance of each business segment, and in making decisions
on
the allocation of resources among the Company’s various
businesses. The segment results include certain allocations of
Corporate selling, general and administrative expenses, and the significant
accounting policies of the segments are the same as those of Modine as a
whole. In addition, the segment data is presented on a continuing
operations basis, except where noted.
The
following is a summary of net sales, earnings (loss) from continuing operations
and total assets by segment:
Quarter
ended June 26,
|
|
2007
|
|
|
2006
|
|
Sales
:
|
|
|
|
|
|
|
Original
Equipment - Asia
|
|
$ |
71,166
|
|
|
$ |
55,933
|
|
Original
Equipment - Europe
|
|
|
177,406
|
|
|
|
147,186
|
|
Original
Equipment - North America
|
|
|
128,150
|
|
|
|
172,178
|
|
South
America
|
|
|
28,611
|
|
|
|
7,958
|
|
Commercial
Products
|
|
|
44,275
|
|
|
|
39,359
|
|
Fuel
Cell
|
|
|
439
|
|
|
|
917
|
|
Segment
sales
|
|
|
450,047
|
|
|
|
423,531
|
|
Corporate
and administrative
|
|
|
1,301
|
|
|
|
1,053
|
|
Eliminations
|
|
|
(7,275 |
) |
|
|
(2,666 |
) |
Sales
from continuing operations
|
|
$ |
444,073
|
|
|
$ |
421,918
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings (loss):
|
|
|
|
|
|
|
|
|
Original
Equipment - Asia
|
|
$ |
895
|
|
|
$ |
1,007
|
|
Original
Equipment - Europe
|
|
|
23,968
|
|
|
|
19,188
|
|
Original
Equipment - North America
|
|
|
1,043
|
|
|
|
18,132
|
|
South
America
|
|
|
2,267
|
|
|
|
515
|
|
Commercial
Products
|
|
|
1,647
|
|
|
|
1,750
|
|
Fuel
Cell
|
|
|
(651 |
) |
|
|
(39 |
) |
Segment
earnings
|
|
|
29,169
|
|
|
|
40,553
|
|
Corporate
and administrative
|
|
|
(12,962 |
) |
|
|
(15,688 |
) |
Eliminations
|
|
|
41
|
|
|
|
20
|
|
Other
items not allocated to segments
|
|
|
1,340
|
|
|
|
(471 |
) |
Earnings
from continuing operations
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
$ |
17,588
|
|
|
$ |
24,414
|
|
|
|
June
26, 2007
|
|
|
March
31, 2007
|
|
Assets:
|
|
|
|
|
|
|
Original
Equipment - Asia
|
|
$ |
175,797
|
|
|
$ |
163,836
|
|
Original
Equipment - Europe
|
|
|
391,631
|
|
|
|
369,374
|
|
Original
Equipment - North America
|
|
|
249,142
|
|
|
|
244,942
|
|
South
America
|
|
|
87,091
|
|
|
|
76,367
|
|
Commercial
Products
|
|
|
101,580
|
|
|
|
97,619
|
|
Fuel
Cell
|
|
|
1,001
|
|
|
|
1,007
|
|
Corporate
and administrative
|
|
|
145,535
|
|
|
|
148,425
|
|
Assets
held for sale
|
|
|
14,596
|
|
|
|
18,537
|
|
Eliminations
|
|
|
(19,119 |
) |
|
|
(18,534 |
) |
Total
assets
|
|
$ |
1,147,254
|
|
|
$ |
1,101,573
|
|
Note
19: Contingencies and Litigation
Environmental:
At present, the United States Environmental Protection Agency has
designated the Company as a potentially responsible party for remediation
of
four waste disposal sites with which the Company may have had direct or indirect
involvement. The Company's potential liability at these 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. 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
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 based
upon
Modine’s relatively small portion of contributed waste.
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 relate to facilities where past operations followed
practices and procedures that were considered acceptable under then existing
regulations, but will now require investigative and/or remedial work to ensure
sufficient environmental protection. These accruals totaled $1,119
and $1,214 at June 26, 2007 and March 31, 2007, respectively, and are recorded
in accrued expenses and other current liabilities and other noncurrent
liabilities. The environmental accruals established by the Company do
not reflect any possible insurance recoveries.
Other
Litigation: The Company, along with Rohm & Haas Company and
Morton International, is named as a defendant in eighteen separate personal
injury actions that were filed in the Philadelphia Court of Common Pleas
(“PCCP”) and in a class action matter that was filed in the United States
District Court, Eastern District of Pennsylvania. The 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 discovery
stage 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
June
2004, the Servicio de Administracion Tributaria in Nuevo Laredo, Mexico,
where
the Company operates a plant in its Commercial Products segment, notified
the
Company of a tax assessment of 10,193 pesos (approximately $946) 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
Nullity Tax Action with the Federal Tax Court (Tribunal Federal de Justicia
Fiscal y Adminstrativa) in Monterrey, Mexico, and received a favorable ruling
(which is appealable) from the Federal Tax Court subsequent to the end of
the
first quarter of fiscal 2008. The Company has accrued $183 at June
26, 2007 which includes an estimate of the tariffs the Company may eventually
owe upon settlement of the case.
In
the
normal course of business, Modine and its subsidiaries are named as defendants
in various lawsuits and enforcement proceedings by private parties, the
Occupational Safety and Health Administration, the Environmental Protection
Agency, other governmental agencies and others in which claims, such as personal
injury, property damage, 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 June 26, 2007 refers to the first quarter of fiscal 2008. Our
subsidiaries located outside of the United States primarily report results
with
a one month lag.
First
Quarter Highlights: Net sales in the first quarter of fiscal
2008 were $444.1 million, representing a 5.3 percent increase from the first
quarter of fiscal 2007. The growth in revenues was driven by foreign
currency exchange rate changes and strength in Europe, Asia and South America
sales volumes. These strong volumes were partially offset by reduced
North American sales volumes based on decreased build rates in the heavy
duty
truck market following the January 1, 2007 emissions law
changes. Earnings from continuing operations decreased $8.5 million
from the first quarter of fiscal 2007 driven by changes in our product mix
toward lower margin products with the reduction in North American heavy duty
truck volumes and a decrease in gross margin related to higher copper, aluminum
and steel prices. The Company is starting to experience some
preliminary signs of material costs stabilizing with recent decreases in
nickel
prices. Earnings from continuing operations was positively impacted
in the first quarter of fiscal 2007 by the recognition of a $3.6 million
income
tax benefit related to Brazilian net operating losses that were previously
unavailable to the Company, but which became available in conjunction with
the
acquisition of the remaining 50 percent of Modine Brazil effective May 4,
2006. During the first quarter of fiscal 2008, the Electronics
Cooling business was classified as a discontinued operation, and has been
excluded from the results of continuing operations.
CONSOLIDATED
RESULTS OF OPERATIONS – CONTINUING OPERATIONS
The
following table presents consolidated results from continuing operations
on a
comparative basis for the three months ended June 26, 2007 and
2006:
For
the three months ended June 26
|
|
2007
|
|
2006
|
(dollars
in millions)
|
|
$'s
|
|
|
%
of sales
|
|
|
$'s
|
|
|
%
of sales
|
|
Net
sales
|
|
|
444.1
|
|
|
|
100.0 |
% |
|
|
421.9
|
|
|
|
100.0 |
% |
Cost
of sales
|
|
|
373.1
|
|
|
|
84.0 |
% |
|
|
343.9
|
|
|
|
81.5 |
% |
Gross
profit
|
|
|
71.0
|
|
|
|
16.0 |
% |
|
|
78.0
|
|
|
|
18.5 |
% |
Selling,
general and administrative expenses
|
|
|
55.0
|
|
|
|
12.4 |
% |
|
|
53.1
|
|
|
|
12.6 |
% |
Restructuring
income
|
|
|
(0.2 |
) |
|
|
0.0 |
% |
|
|
-
|
|
|
|
-
|
|
Income
from operations
|
|
|
16.2
|
|
|
|
3.6 |
% |
|
|
24.9
|
|
|
|
5.9 |
% |
Interest
expense
|
|
|
(2.8 |
) |
|
|
-0.6 |
% |
|
|
(2.0 |
) |
|
|
-0.5 |
% |
Other
income - net
|
|
|
4.2
|
|
|
|
0.9 |
% |
|
|
1.5
|
|
|
|
0.4 |
% |
Earnings
from continuing operations before income taxes
|
|
|
17.6
|
|
|
|
4.0 |
% |
|
|
24.4
|
|
|
|
5.8 |
% |
Provision
for income taxes
|
|
|
5.2
|
|
|
|
1.2 |
% |
|
|
3.5
|
|
|
|
0.8 |
% |
Earnings
from continuing operations
|
|
|
12.4
|
|
|
|
2.8 |
% |
|
|
20.9
|
|
|
|
5.0 |
% |
First
quarter net sales of $444.1 million were 5.3 percent higher than the $421.9
million reported in the first quarter of last year. The increase in
revenues was driven by foreign currency exchange rate changes as well as
a shift
in the sales mix. Foreign currency exchange rate changes contributed
to 4.3 percent of the increase, while underlying sales increases contributed
to
1.0 percent of the increase. Significant sales volume increases
experienced in Europe, Asia and South America were offset by the decline
in
product demand based on decreased build rates in the North American heavy
duty
truck market.
During
the first quarter of fiscal 2008, gross margin decreased 250 basis points
from
18.5 percent for last year’s first quarter to 16.0 percent this
year. The decrease in gross margin is related to continued higher
costs for material purchases which we were only partially able to recover
from
our customers. In addition, our product mix shifted toward lower
margin products in Europe and North America during the first quarter of fiscal
2008, which also contributed to the decline in gross margin. Customer
price decreases were largely offset by favorable operating performance in
our
manufacturing facilities during the first quarter of fiscal 2008.
Selling,
general and administrative (SG&A) expenses increased $1.9 million from the
first quarter of fiscal 2007 to the first quarter of fiscal 2008. The
increase in SG&A expenses is primarily related to $1.4 million of higher
costs due to the impact of foreign currency exchange rate changes, and $2.5
million of incremental costs related to the May 2007 acquisition of the
remaining 50 percent of Modine Brazil. These increases were partially
offset by $2.0 million of decreases driven by on-going SG&A reduction
efforts.
Income
from operations decreased $8.7 million from the first quarter of fiscal 2007
to
the first quarter of fiscal 2008, primarily driven by the reduced gross profit
based on the changing product mix and increases in commodity
prices.
Interest
expense increased $0.8 million over the comparable quarters, primarily driven
by
the increase in our outstanding borrowings related to increased working capital
requirements and capital expenditures during the first quarter of fiscal
2008.
Other
income increased $2.7 million from the prior year’s first
quarter. This increase is primarily related to $3.0 million of
foreign currency exchange gains on $23.0 million of inter-company loans with
our
wholly-owned subsidiary, Modine Brazil. On June 21, 2007, we entered
into a zero cost collar to hedge the foreign exchange exposure on these
inter-company loans on a prospective basis.
The
provision for income taxes increased $1.7 million to $5.2 million in the
first
quarter of fiscal 2008 from $3.5 million in the first quarter of fiscal
2007. In addition, the effective income tax rate increased to 29.5
percent from 14.4 percent over this same period. During the first
quarter of fiscal 2008, the Company recorded income tax expense of $0.7 million
which related to the prior fiscal year and was deemed insignificant to the
reported results of operations for fiscal 2007 and estimated results for
fiscal
2008. 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
acquisition of Modine Brazil and tax restructuring of the Brazilian
operations.
Earnings
from continuing operations decreased $8.5 million from the first quarter
of
fiscal 2007 to the first quarter of fiscal 2008. In addition, diluted
earnings per share from continuing operations decreased $0.26 to $0.39 per
share
from $0.65 per share over this same period. The decrease in operating
income was the primary driver of this decrease.
DISCONTINUED
OPERATIONS
During
the first quarter of fiscal 2008, we announced the intention to explore
strategic alternatives for our Electronics Cooling
business. Subsequent to this announcement, a number of actions were
initiated to begin the marketing process for this business. In
conjunction with these actions, $14.6 million of assets and $3.6 million
of
liabilities for this business have been presented as held for sale in the
consolidated balance sheets during the first quarter of fiscal
2008. In addition, the Electronics Cooling business has been
presented as a discontinued operation. As a result of this
presentation, the net earnings (loss) related to this business of $0.3 million
and ($4.6 million) for the three months ended June 26, 2007 and 2006,
respectively, have been separately presented in the consolidated statements
of
earnings as a component of earnings (loss) from discontinued operations (net
of
income taxes). The improvement in the quarterly earnings of this
business was related to the July 2006 closure of the Taiwan business which
historically operated with losses, as well as significant operating improvements
in both gross margin and SG&A at the remaining locations of the Electronics
Cooling business.
The
following table presents the quarterly and annual results of the Electronics
Cooling business reported during fiscal 2007 and fiscal 2006, which will
be
separately presented as a component of earnings (loss) from discontinued
operations in future quarterly and annual filings:
|
|
Fiscal
2007 Quarter Ended
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
|
June
|
|
|
Sept.
|
|
|
Dec.
|
|
|
March
|
|
|
Full
Year
|
|
|
Full
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
8,475
|
|
|
$ |
9,929
|
|
|
$ |
9,821
|
|
|
$ |
6,966
|
|
|
$ |
35,191
|
|
|
$ |
33,278
|
|
Cost
of sales and other expenses
|
|
|
13,205
|
|
|
|
11,289
|
|
|
|
9,708
|
|
|
|
6,859
|
|
|
|
41,061
|
|
|
|
45,566
|
|
Earnings
(loss) before income taxes
|
|
|
(4,730 |
) |
|
|
(1,360 |
) |
|
|
113
|
|
|
|
107
|
|
|
|
(5,870 |
) |
|
|
(12,288 |
) |
Provision
for (benefit from) income taxes
|
|
|
(126 |
) |
|
|
(7,936 |
) |
|
|
125
|
|
|
|
(1,274 |
) |
|
|
(9,211 |
) |
|
|
(15 |
) |
Earnings
(loss) from discontinued operations
|
|
$ |
(4,604 |
) |
|
$ |
6,576
|
|
|
$ |
(12 |
) |
|
$ |
1,381
|
|
|
$ |
3,341
|
|
|
$ |
(12,273 |
) |
As
a
result of separately classifying the Electronics Cooling business as a
discontinued operation, the Company’s previously reported earnings from
continuing operations will be revised as follows:
|
|
Fiscal
2007 Quarter Ended
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
|
June
|
|
|
Sept.
|
|
|
Dec.
|
|
|
March
|
|
|
Full
Year
|
|
|
Full
Year
|
|
Earnings
from continuing operations as
previously
reported
|
|
$ |
16,297
|
|
|
$ |
12,369
|
|
|
$ |
16,346
|
|
|
$ |
(2,750 |
) |
|
$ |
42,262
|
|
|
$ |
60,752
|
|
Earnings
(loss) from discontinued operations
|
|
|
(4,604 |
) |
|
|
6,576
|
|
|
|
(12 |
) |
|
|
1,381
|
|
|
|
3,341
|
|
|
|
(12,273 |
) |
Earnings
from continuing operations - revised
|
|
$ |
20,901
|
|
|
$ |
5,793
|
|
|
$ |
16,358
|
|
|
$ |
(4,131 |
) |
|
$ |
38,921
|
|
|
$ |
73,025
|
|
SEGMENT
RESULTS OF OPERATIONS
During
the first quarter of fiscal 2008, we implemented several management reporting
changes in conjunction with the introduction of a global vehicular product-focus
which supports our traditional regional organization structure. As a
result of these changes, a new South America segment was created. The
Original Equipment – Americas segment was renamed the Original Equipment – North
America segment. Certain support departments previously included
within Corporate and administrative were realigned into the Original Equipment
–
North America segment. The Commercial HVAC&R segment was renamed
Commercial Products. The Other segment was renamed the Fuel Cell
segment as the results of the Electronics Cooling business were removed from
this segment and separately presented as a discontinued operation. As
a result of these changes, we have six reportable segments, which are managed
at
the regional vice-president or managing director level, and have separate
financial results reviewed by our chief operating decision
makers. Our previously reported segment results have been restated to
reflect these changes on a comparative basis. We believe this revised
reporting segment structure reinforces the benefits of market, customer and
geographic diversification and product breadth around our core business and
technology platform in thermal management.
Original
Equipment - Asia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended June 26
|
|
2007
|
|
2006
|
(dollars
in millions)
|
|
$'s
|
|
|
%
of sales
|
|
|
$'s
|
|
|
%
of sales
|
|
Net
sales
|
|
|
71.2
|
|
|
|
100.0 |
% |
|
|
55.9
|
|
|
|
100.0 |
% |
Cost
of sales
|
|
|
64.7
|
|
|
|
90.9 |
% |
|
|
50.7
|
|
|
|
90.7 |
% |
Gross
profit
|
|
|
6.5
|
|
|
|
9.1 |
% |
|
|
5.2
|
|
|
|
9.3 |
% |
Selling,
general and administrative expenses
|
|
|
5.6
|
|
|
|
7.9 |
% |
|
|
4.2
|
|
|
|
7.5 |
% |
Income
from continuing operations
|
|
|
0.9
|
|
|
|
1.3 |
% |
|
|
1.0
|
|
|
|
1.8 |
% |
Original
Equipment – Asia net sales increase $15.3 million from the first quarter of
fiscal 2007 to the first quarter of fiscal 2008, driven by increased condenser
and bus air conditioning product sales and general strengthening of the Korea
economy. In addition, foreign currency exchange rate changes
favorably impacted sales by $1.7 million. Gross margin remained
relatively consistent year-over-year at 9.1 percent during the first quarter
of
fiscal 2008 and 9.3 percent during the first quarter of fiscal
2007. Customer pricing pressures were largely offset by manufacturing
performance improvements within this segment. SG&A expenses
increased $1.4 million from the first quarter of fiscal 2007 to the first
quarter of fiscal 2008 due to the ongoing expansion in this region, primarily
with the construction of our new facilities in China and
India. Income from operations of $0.9 million in the first quarter of
fiscal 2008 was consistent with the $1.0 million generated in the same period
last year.
Original
Equipment - Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended June 26
|
|
2007
|
|
2006
|
(dollars
in millions)
|
|
$'s
|
|
|
%
of sales
|
|
|
$'s
|
|
|
%
of sales
|
|
Net
sales
|
|
|
177.4
|
|
|
|
100.0 |
% |
|
|
147.2
|
|
|
|
100.0 |
% |
Cost
of sales
|
|
|
141.6
|
|
|
|
79.8 |
% |
|
|
115.3
|
|
|
|
78.3 |
% |
Gross
profit
|
|
|
35.8
|
|
|
|
20.2 |
% |
|
|
31.9
|
|
|
|
21.7 |
% |
Selling,
general and administrative expenses
|
|
|
11.8
|
|
|
|
6.7 |
% |
|
|
12.7
|
|
|
|
8.6 |
% |
Income
from continuing operations
|
|
|
24.0
|
|
|
|
13.5 |
% |
|
|
19.2
|
|
|
|
13.0 |
% |
Original
Equipment – Europe net sales increased $30.2 million from the first quarter of
fiscal 2007 to the first quarter of fiscal 2008, driven by growth in powertrain
cooling and engine related products in the heavy duty business, condenser
sales,
modest strength in the automotive business and a $14.0 million favorable
impact
of foreign currency exchange rate changes. Gross profit increased
$3.9 million from the first quarter of fiscal 2007 to the first quarter of
fiscal 2008; however, gross margin decreased 150 basis points to 20.2 percent
from 21.7 percent over this same period. The decline in gross margin
was primarily driven by customer pricing pressures, primarily within the
automotive market, which were only partially offset by performance improvements
in our manufacturing facilities. In addition, product mix changes
toward lower margin products also contributed to the decline in gross
margin. SG&A expenses decreased $0.9 million from the first
quarter of fiscal 2007 to the first quarter of fiscal 2008, driven by various
SG&A reduction efforts in process within this segment. Income
from operations increased $4.8 million, primarily due to the increase in
sales
and gross profit, plus the reduction in SG&A expenses.
Original
Equipment - North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended June 26
|
|
2007
|
|
2006
|
(dollars
in millions)
|
|
$'s
|
|
|
%
of sales
|
|
|
$'s
|
|
|
%
of sales
|
|
Net
sales
|
|
|
128.2
|
|
|
|
100.0 |
% |
|
|
172.2
|
|
|
|
100.0 |
% |
Cost
of sales
|
|
|
116.8
|
|
|
|
91.1 |
% |
|
|
143.5
|
|
|
|
83.3 |
% |
Gross
profit
|
|
|
11.4
|
|
|
|
8.9 |
% |
|
|
28.7
|
|
|
|
16.7 |
% |
Selling,
general and administrative expenses
|
|
|
10.6
|
|
|
|
8.3 |
% |
|
|
10.6
|
|
|
|
6.2 |
% |
Restructuring
income
|
|
|
(0.2 |
) |
|
|
-0.2 |
% |
|
|
-
|
|
|
|
0.0 |
% |
Income
from continuing operations
|
|
|
1.0
|
|
|
|
0.8 |
% |
|
|
18.1
|
|
|
|
10.5 |
% |
Original
Equipment – North America net sales decreased $44.0 million from the first
quarter of fiscal 2007 to the first quarter of fiscal 2008, primarily driven
by
a cyclical downturn as a result of pre-buys driven by January 1, 2007 emission
requirement changes in the North American heavy duty truck
market. This market has experienced a nearly 55 percent decline in
build rates following the heavy demand which preceded the emission
changes. Gross margin decreased 780 basis points to 8.9 percent
during the first quarter of fiscal 2008 from 16.7 percent during the first
quarter of fiscal 2007. The decline in gross margin was primarily
driven by the significant decline in sales volumes as well as an increase
in
commodity costs, which we were only able to partially recover from our
customers. Plant inefficiencies related to transferred product lines
from our recently closed Richland, South Carolina facility into our McHenry,
Illinois facility also contributed to the decline in gross
margin. Income from operations decreased $17.1 million, primarily
driven by the decline in gross margin.
South
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended June 26
|
|
2007
|
|
2006
|
(dollars
in millions)
|
|
$'s
|
|
|
%
of sales
|
|
|
$'s
|
|
|
%
of sales
|
|
Net
sales
|
|
|
28.6
|
|
|
|
100.0 |
% |
|
|
8.0
|
|
|
|
100.0 |
% |
Cost
of sales
|
|
|
22.8
|
|
|
|
79.7 |
% |
|
|
6.4
|
|
|
|
80.0 |
% |
Gross
profit
|
|
|
5.8
|
|
|
|
20.3 |
% |
|
|
1.6
|
|
|
|
20.0 |
% |
Selling,
general and administrative expenses
|
|
|
3.5
|
|
|
|
12.2 |
% |
|
|
1.1
|
|
|
|
13.8 |
% |
Income
from continuing operations
|
|
|
2.3
|
|
|
|
8.0 |
% |
|
|
0.5
|
|
|
|
6.2 |
% |
South
America net sales were $28.6 million in the first quarter of fiscal
2008. Modine has a leading position in supplying product to the
Brazilian agricultural market, and the strength of this market, along with
strength in the overall Brazilian economy, contributed to the strong sales
in
the first quarter of fiscal 2008. South America’s results of
operations for the first quarter of fiscal 2007 represented one month of
results
after the May 2007 acquisition of the remaining 50 percent of our Brazilian
joint venture.
Commercial
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended June 26
|
|
2007
|
|
2006
|
(dollars
in millions)
|
|
$'s
|
|
|
%
of sales
|
|
|
$'s
|
|
|
%
of sales
|
|
Net
sales
|
|
|
44.3
|
|
|
|
100.0 |
% |
|
|
39.4
|
|
|
|
100.0 |
% |
Cost
of sales
|
|
|
35.4
|
|
|
|
79.9 |
% |
|
|
30.7
|
|
|
|
77.9 |
% |
Gross
profit
|
|
|
8.9
|
|
|
|
20.1 |
% |
|
|
8.7
|
|
|
|
22.1 |
% |
Selling,
general and administrative expenses
|
|
|
7.3
|
|
|
|
16.5 |
% |
|
|
6.9
|
|
|
|
17.5 |
% |
Income
from continuing operations
|
|
|
1.6
|
|
|
|
3.6 |
% |
|
|
1.8
|
|
|
|
4.6 |
% |
Commercial
Products net sales increased $4.9 million from the first quarter of fiscal
2007
to the first quarter of fiscal 2008. This increase is primarily
driven by strength in air conditioning sales. Gross margin decreased
200 basis points to 20.1 percent during the first quarter of fiscal 2008
from
22.1 percent during the first quarter of fiscal 2007. A change in
product mix toward lower margin air conditioning products and away from higher
margin heating products was the primary factor leading to the decline in
gross
margin, along with modest commodity price increases for certain component
products within this segment. SG&A expenses increased $0.4
million from the first quarter of fiscal 2007 to the first quarter of fiscal
2008 with the growth in sales volumes, but dropped 100 basis points as a
percentage of sales due to cost reduction efforts. Income from
operations remained relatively consistent at $1.6 million in the first quarter
of fiscal 2008 versus $1.8 million in the first quarter of fiscal
2007.
Fuel
Cell
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended June 26
|
|
2007
|
|
2006
|
(dollars
in millions)
|
|
$'s
|
|
|
%
of sales
|
|
|
$'s
|
|
|
%
of sales
|
|
Net
sales
|
|
|
0.4
|
|
|
|
100.0 |
% |
|
|
0.9
|
|
|
|
100.0 |
% |
Cost
of sales
|
|
|
0.4
|
|
|
|
100.0 |
% |
|
|
0.3
|
|
|
|
33.3 |
% |
Gross
profit
|
|
|
0.0
|
|
|
|
0.0 |
% |
|
|
0.6
|
|
|
|
66.7 |
% |
Selling,
general and administrative expenses
|
|
|
0.7
|
|
|
|
175.0 |
% |
|
|
0.6
|
|
|
|
66.7 |
% |
Loss
from continuing operations
|
|
|
(0.7 |
) |
|
|
-175.0 |
% |
|
|
0.0
|
|
|
|
0.0 |
% |
Fuel
Cell
is in the start-up phase with quarterly sales of less than $1.0
million. The Company is currently partnering with customers such as
Bloom Energy and Ceres Power to provide, in the near future, clean, continuous
power applying fuel cell technology to stand-alone power systems. As
previously reported, fuel cell technology has the long term potential to
contribute up to 10 percent of the Company’s revenues toward the end of the five
year planning period based on customer estimates of volumes.
Outlook
for the Remainder of the Year
Based
on
the favorable sales volumes and higher than expected operating results in
the
first quarter of fiscal 2008, we have improved our outlook for the remainder
of
fiscal 2008. We are projecting fiscal 2008 sales to be consistent to
improved from fiscal 2007 to a range of $1.70 billion to $1.80
billion. In addition, gross margin is expected to be relatively
consistent from 16.2 percent in fiscal 2007 to a range of 16.0 percent to
16.5
percent in fiscal 2008, and operating margin to improve from 2.7 percent
in
fiscal 2007 to a range of 3.1 percent to 3.7 percent in fiscal
2008. These improvements are driven by the expected realization of
benefits related to our repositioning plan to
reduce costs and increase efficiencies in our business. We are also
projecting an improved level of pre-tax results in fiscal 2008 in a range
of $46
million to $52 million. Our outlook for fiscal 2008 includes an
increased tax rate from 13.8 percent in fiscal 2007 to a range of 23 percent
to
27 percent in fiscal 2008 due to the absence of tax benefits like those realized
in fiscal 2007 (Brazil net operating loss and legislation extending the research
and development credit). Based on the above factors, we expect fiscal
2008 earnings from continuing operations to fall within a range of $1.05
to
$1.25 per fully diluted share, versus the $1.21 per fully diluted share reported
from continuing operations in fiscal 2007. As we move to bring
several new plants online, our capital expenditures should increase to a
range
of $85 million to $105 million. We also expect depreciation to
increase to a range of $75 million to $80 million.
In
fiscal
2008 and beyond, we intend to remain focused on our strategies of developing
new
products and technologies, expanding into new markets and geographies and
reducing our costs. These strategies and actions will make us a more cost
competitive, innovative and efficient technology provider to our current
and
future customers. We will continue our repositioning efforts with a
goal of making the Company more efficient. We are implementing programs to
change our manufacturing footprint, reduce our fixed and variable cost structure
and standardize our manufacturing processes and global product
offering. We believe that these strategies and actions will improve
our gross margin to a range of 18 percent to 20 percent and decrease our
SG&A expenses as a percentage of sales to 11.5 percent over the five year
planning period.
Liquidity
and Capital Resources
Cash
outflow from operating activities for the quarter ended June 26, 2007 was
$1.2
million compared to cash provided by operating activities of $6.1 million
one
year ago. The difference was mainly the result of increased working
capital needs with the higher sales volumes and declining year-over-year
financial performance. Working capital of $191.3 million at the end
of the first quarter of fiscal 2008 was higher than the prior year-end balance
of $148.9 million, primarily due to increased receivable balances, inventory
levels and prepaid insurance which is up due to the timing of
payments. Compared with the first quarter of fiscal 2007, inventory
turns decreased from 13.7 to 12.8, which is consistent with the end of fiscal
2007. Days sales outstanding decreased slightly from 56 days in the
first quarter of fiscal 2007 to 55 days in the first quarter of fiscal
2008.
At
June
26, 2007, the Company had capital expenditure commitments of $33.0
million. 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 2008, we are anticipating that our capital
expenditures will exceed our annual depreciation expense due to the construction
of our new facilities in China, Mexico, India and Hungary. The
Company expects to generate greater than $100 million of operating cash flows
during the balance of the fiscal year. Modine believes that its
internally generated operating cash flow and existing cash balances, together
with access to external resources, will be sufficient to satisfy future
operating, capital expenditure and strategic business opportunity
costs.
Debt
Outstanding
debt increased $19.7 million to $199.0 million at June 26, 2007 from the
March
31, 2007 balance of $179.3 million. During the first quarter of fiscal 2008,
additional net borrowings of $20.0 million were made on existing domestic
credit
lines primarily to finance the increase in working capital and capital
expenditures related to construction of plants in Mexico, China, and India.
International debt balances were essentially unchanged during the
quarter.
Consolidated
available lines of credit decreased $20.5 million to $209.0 million since
March
31, 2007. An additional $75.0 million is available on the credit line revolver,
subject to lenders’ approval, bringing the total available up to $284.0 million.
Domestically, Modine's unused lines of credit decreased $20.0 million to
$157.0
million, due to the borrowings mentioned above. Unused lines of credit also
exist in Europe, South Korea and Brazil, and totaled $52.0 million, in aggregate
at June 26, 2007. At June 26, 2007, total debt-to-capital ratio (total debt
plus
shareholders’ equity) was 28.2 percent compared with 26.7 percent at the end of
fiscal 2007.
Off-Balance
Sheet Arrangements
None.
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements,”
which addresses how companies should measure fair value when required to
use a
fair value measure for recognition or disclosure purposes under generally
accepted accounting principles. 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
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – including an Amendment of SFAS No.
115,” which permits an entity to measure many financial assets and financial
liabilities at fair value that are not currently required to be measured
at fair
value. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting
date. The fair value option may be elected on an
instrument-by-instrument basis, with few exceptions. SFAS No. 159
amends previous guidance to extend the use of the fair value option to
available-for-sale and held-to-maturity securities. The Statement
also establishes presentation and disclosure requirements to help financial
statement users understand the effect of the election. SFAS No. 159
is effective as of the beginning of the first quarter of fiscal
2009. Management is currently assessing the potential impact of this
standard on the Company’s consolidated financial statements.
Contractual
Obligations
There
have been no material changes to our contractual relations outside the ordinary
course of business from those disclosed in our Annual Report on Form 10-K
for
the fiscal year ended March 31, 2007. We are currently unable to
determine the impact on our contractual obligations from the ultimate timing
of
settlement of the $8.6 million gross liability for unrecognized tax
benefits.
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:
·
|
Modine’s
ability to react to increasing commodities pricing including its
ability
to pass increasing costs on to customers in a timely
manner;
|
·
|
Modine’s
ability to further cut costs to increase its gross profit margin
and to
maintain and grow its business with fewer
employees;
|
·
|
Modine’s
ability to maintain its market share when its customers are experience
pricing pressures and excess capacity
issues;
|
·
|
Modine’s
ability to increase its gross margin by producing products in low
cost
countries;
|
·
|
Maintenance
of customer relationships while rationalizing business because
Modine must
ensure increased revenues are accompanied by increasing
margins;
|
·
|
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 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 the Commercial Products business, 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;
|
·
|
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;
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, 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, changes
between the dollar and the Korean won and changes between the dollar and
the
Brazilian real. 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
favorable currency translation adjustments recorded for the three months
ended
June 26, 2007 and for the twelve months ended March 31, 2007 were $7.4 million
and $24.9 million, respectively. As of June 26, 2007 and March 31,
2007, the Company's foreign subsidiaries had net current assets (defined
as
current assets less current liabilities) subject to foreign currency translation
risk of $109.0 million and $73.2 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 $10.9 million
and
$7.3 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.
|
|
June
26, 2007
|
|
|
Expected
Maturity Date
|
Long-term
debt in ($000's)
|
|
F2008
|
|
|
F2009
|
|
|
F2010
|
|
|
F2011
|
|
|
F2012
|
|
|
Thereafter
|
|
|
Total
|
|
Fixed
rate (won)
|
|
$ |
115
|
|
|
$ |
207
|
|
|
$ |
197
|
|
|
$ |
219
|
|
|
$ |
243
|
|
|
$ |
1,963
|
|
|
$ |
2,944
|
|
Average
interest rate
|
|
|
3.00 |
% |
|
|
3.00 |
% |
|
|
3.00 |
% |
|
|
3.00 |
% |
|
|
3.00 |
% |
|
|
3.00 |
% |
|
|
|
|
The
Company has from time to time had certain foreign-denominated long-term
inter-company loans that are sensitive to foreign exchange rates. At
June 26, 2007, the Company had a 28.9 billion won ($31.2 million U.S.
equivalent), 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 loan. This collar was settled on August 29, 2006 for a
loss of $1.1 million. On August 29, 2006, the Company entered into a
new zero cost collar that expires on February 29, 2008 to hedge the foreign
exchange exposure on the entire amount of the loan. At June 26, 2007,
the Company also had inter-company loans totaling $23.0 million to its wholly
owned subsidiary, Modine Brazil with various maturity dates through February
2009. On June 21, 2007, the Company entered into a zero cost collar
to hedge the foreign exchange exposure on the principal amount of the
loan. This collar has an expiration date of March 31,
2008. The Company recognized $3.0 million of foreign currency
exchange gains on the inter-company loans to Modine Brazil during the first
quarter of fiscal 2008 prior to entering into the zero cost collar.
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, from time-to-time, entered into
interest rate derivates to manage variability in interest
rates. These interest rate derivatives have been treated as cash flow
hedges of forecasted transactions and, accordingly, derivative gains or losses
are reflected as a component of accumulated other comprehensive income (loss)
and are being amortized to interest expense over the respective lives of
the
borrowings. During the three months ended June 26, 2007, $0.1 million
of expense was recorded in the consolidated statement of earnings related
to the
amortization of interest rate derivative losses. At June 26, 2007,
$2.0 million of net unrealized losses remain deferred in accumulated other
comprehensive income (loss). The following table presents the future
principal cash flows and weighted average interest rates by expected maturity
dates (including the foreign denominated long-term debt obligations included
in
the previous table). 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, with the exception of the $150 million fixed
rate
notes, which have a fair value of approximately $140.6 million at June 26,
2007.
|
|
June
26, 2007
|
|
|
Expected
Maturity Date
|
Long-term
debt in ($000's)
|
|
F2008
|
|
|
F2009
|
|
|
F2010
|
|
|
F2011
|
|
|
F2012
|
|
|
Thereafter
|
|
|
Total
|
|
Fixed
rate (won)
|
|
$ |
115
|
|
|
$ |
207
|
|
|
$ |
197
|
|
|
$ |
219
|
|
|
$ |
243
|
|
|
$ |
1,963
|
|
|
$ |
2,944
|
|
Average
interest rate
|
|
|
3.00 |
% |
|
|
3.00 |
% |
|
|
3.00 |
% |
|
|
3.00 |
% |
|
|
3.00 |
% |
|
|
3.00 |
% |
|
|
|
|
Fixed
rate (U.S. dollars)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$ |
150,000
|
|
|
$ |
150,000
|
|
Average
interest rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5.30 |
% |
|
|
|
|
Variable
rate (U.S. dollars)
|
|
$ |
3,000
|
|
|
|
-
|
|
|
$ |
43,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$ |
46,000
|
|
Average
interest rate
|
|
|
4.43 |
% |
|
|
-
|
|
|
|
6.45 |
% |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Credit
Risk Management
Credit
risk is the possibility of loss from a customer’s failure to make payments
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 53 percent of
the trade receivables balance at June 26, 2007 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 Company’s
earnings, particularly in the vehicular markets.
With
respect to international instability, the Company continues to monitor economic
conditions in the United States and elsewhere. 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 next generation powertrain cooling and heat
transfer technology, exhaust gas recirculation, CO2, and
fuel cell
technology. Investment in these areas is subject to the risks
associated with business integration, technological success, customers’ and
market acceptance, and Modine’s ability to meet the demands of its customers as
these markets emerge.
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, copper and nickel, 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 create the part. In many
instances, 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 but these agreements generally carry annual price
down provisions as well.
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, aluminum, and natural gas. The Company
utilizes an aluminum hedging strategy by entering into fixed price contracts
to
help offset changing commodity prices. Subsequent to the end of the
first quarter of fiscal 2008, the Company entered into a collar for certain
forecasted copper purchases, and also entered into a forward contract for
certain forecasted nickel purchases. The Company does maintain
agreements with certain 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 these 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
June 26, 2007, the Company had no outstanding forward foreign exchange
contracts, with the exception of the zero cost collars to hedge the foreign
exchange exposure on the entire amount of the Modine Korea, LLC loan and
the
Modine Brazil loan which are discussed above under the section entitled “Foreign
Currency Risk”. Non-U.S. dollar financing transactions through
inter-company 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.
Commodity
derivatives: As further noted
above under the
section entitled “Commodity Price Risk”, the Company utilizes futures contracts
related to certain of the Company’s forecasted purchases of aluminum, copper and
nickel, and have also utilized futures contracts for natural gas purchases
in
prior years. The Company’s strategy in entering into these contracts
is to reduce its exposure to changing purchase prices for future purchases
of
these commodities. In the first quarter of fiscal 2008, all
outstanding futures contracts relate to forecasted purchases of aluminum,
and
these contracts have been designated as cash flow hedges by the
Company. According, unrealized gains and losses on these contracts
are deferred as a component of accumulated other comprehensive income, and
recognized as a component of earnings at the same time that the underlying
purchases of aluminum impact earnings. During the quarter ended June
26, 2007, $1.3 million of income was recorded in the consolidated statement
of
earnings related to the settlement of certain of these futures
contracts. At June 26, 2007, $1.0 million of unrealized losses remain
deferred in accumulated other comprehensive income, and will be realized
as a
component of cost of sales over the next seven months.
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, the Company
carried out an evaluation, at the direction of the General Counsel and under
the
supervision of the Company’s President and Chief Executive Officer and Executive
Vice President, Finance 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), with the participation of the Company’s
management. Based upon that evaluation, the President and Chief
Executive Officer and Executive Vice President, Finance and Chief Financial
Officer concluded that the design and operation of the Company’s disclosure
controls and procedures are effective as of June 26, 2007.
Changes
In Internal Control Over Financial Reporting
During
the first quarter of fiscal 2008, 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.
Certain
information required hereunder is incorporated by reference from Note 19
of the
Notes to the Consolidated Financial Statements.
Under
the
rules of the Securities and Exchange Commission (SEC), certain environmental
proceedings are not deemed to be ordinary or routine proceedings incidental
to
the Company’s business and are required to be reported in the Company’s annual
and/or quarterly reports. The Company is not currently a party to any
such proceedings.
Personal
Injury Action
During
the first quarter of fiscal 2008, the Company was named as a defendant, along
with Rohm & Haas Company and Morton International, in an additional personal
injury action that was filed in Philadelphia County, Pennsylvania Court of
Common Pleas (“PCCP”), Suchor v. Rohm and Haas Company, et al. PCCP, June Term
2007, Case No. 000541. The Company is also named as a defendant in
seventeen other cases filed in the same court. A listing of these
cases has been previously reported in the Company’s periodic reports filed with
the SEC, including the Company’s Form 10-K for the fiscal year ended March 31,
2007.
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 is a defendant, along with Rohm & Haas Company and
Morton International, 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 discovery stage with these cases, and as a result, it is
premature to provide further analysis concerning these claims. The Company
intends to aggressively defend these cases.
Other
litigation
In
June
2004, the Servicio de Administracion Tributaria in Nuevo Laredo, Mexico,
where
the Company operates a plant in its Commercial Products segment, notified
the
Company of a tax assessment of 10.2 million pesos ($0.9 million) 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
Nullity Tax Action with the Federal Tax Court (Tribunal Federal de Justicia
Fiscal y Adminstrativa) in Monterrey, Mexico, and received a favorable ruling
(which is appealable) from the Federal Tax Court subsequent to the end of
the
first quarter of fiscal 2008. The Company has accrued $0.2 million
which includes an estimate of the tariffs the Company may eventually owe
upon
settlement of the case.
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 first quarter of fiscal
2008.
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
|
|
April
1 – April 26, 2007
|
|
|
——
|
|
|
|
——
|
|
|
|
——
|
|
|
|
2,445,169 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
27 – May 26, 2007
|
|
|
16,664 |
(1) |
|
$ |
22.02 |
(2) |
|
|
——
|
|
|
|
2,445,169 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
27 – June 26, 2007
|
|
|
1,923 |
(1) |
|
$ |
23.51 |
(2) |
|
|
——
|
|
|
|
2,445,169 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,587 |
(1) |
|
$ |
22.18 |
(2) |
|
|
——
|
|
|
|
|
|
(1)
|
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.
|
(2)
|
The
stated price does not include commission
paid.
|
(3)
|
The
stated figure represents the remaining number of shares that
may be
repurchased under the publicly announced share repurchase
programs. The Company does not know at this time the number of
shares that may be purchased under the anti-dilution portion
of this
program. In addition, 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 243,852, with a value
of $5,435,461
at June 26, 2007. The tax withholding obligation on such shares
is approximately 40 percent 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 18, 2007. A quorum was present at the Annual Meeting with
29,876,128 shares out of 32,872,205 (90.88 percent) entitled to cast votes
represented either in person or by proxy.
Election
of Directors
The
shareholders voted to elect Charles P. Cooley, Gary L. Neale and David B.
Rayburn to serve as directors until the 2010 Annual Meeting of Shareholders
and
until their successors are duly elected and qualified. The results of
the vote were as follows:
Director
|
Votes
For
|
Votes
Withheld
|
Charles
P. Cooley
|
29,358,512
|
517,618
|
Gary
L. Neale
|
29,149,037
|
727,093
|
David
B. Rayburn
|
28,993,540
|
882,590
|
Approval
of the 2007 Incentive Compensation Plan
The
shareholders approved the Modine Manufacturing Company 2007 Incentive
Compensation Plan with 19,503,258 votes for the plan, 4,810,911 votes against,
2,511,521 votes abstaining and 3,050,438 broker non-votes.
Ratification
of Independent Registered Public Accounting Firm
The
shareholders ratified PricewaterhouseCoopers LLP as the Company’s independent
registered public accounting firm with 29,639,336 votes for ratification,
210,515 votes against and 26,276 votes abstaining.
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.
|
Exhibit
3.1 to Registrant’s Current Report on Form 8-K dated July 18,
2007
|
|
|
|
|
|
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)
|
|
|
|
|
|
Date:
August 1, 2007
|
By:
|
/s/Bradley
C.
Richardson |
|
|
|
Name:
Bradley
C.
Richardson |
|
|
|
Title:
Executive
Vice
President, Finance and Chief Financial Officer |
|
|
|
|
|
*
Executing as both the principal financial officer and a duly authorized officer
of the Company