SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 26, 2000 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-1373 ------ MODINE MANUFACTURING COMPANY (Exact name of registrant as specified in its charter) WISCONSIN 39-0482000 -------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1500 DeKoven Avenue, Racine, Wisconsin 53403-2552 ------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (262) 636-1200 ----------------- NOT APPLICABLE ------------------------------------------------------------------- (Former name or former address, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at February 6, 2001 ------------------------------ ------------------------------- Common Stock, $0.625 Par Value 29,395,511
MODINE MANUFACTURING COMPANY INDEX Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - December 26 and March 31, 2000 3 Consolidated Statements of Earnings - For the Three Months Ended December 26, 2000 and 1999 and the Nine Months Ended December 26, 2000 and 1999 4 Consolidated Statements of Cash Flows - For the Nine Months Ended December 26, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 20
<TABLE> MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS December 26, 2000 and March 31, 2000 (In thousands, except per-share amounts) (Unaudited) <CAPTION> December 26, 2000 March 31, 2000 ----------------- -------------- <S> <C> <C> ASSETS - ------ Current assets: Cash and cash equivalents $ 19,855 $ 31,070 Trade receivables, less allowance for doubtful accounts of $4,225 and $4,436, respectively 158,986 182,724 Inventories 148,391 168,597 Deferred income taxes and other current assets 36,913 47,164 --------- --------- Total current assets 364,145 429,555 --------- --------- Noncurrent assets: Property, plant, and equipment -- net 350,989 337,987 Investment in affiliates 26,954 28,440 Goodwill and other intangible assets -- net 64,606 70,339 Deferred charges and other noncurrent assets 68,616 64,786 --------- --------- Total noncurrent assets 511,165 501,552 --------- --------- Total assets $ 875,310 $ 931,107 ========= ========= <CAPTION> LIABILITIES AND SHAREHOLDERS' INVESTMENT <S> <C> <C> Current liabilities: Short-term debt $ 8,766 $ 6,319 Long-term debt -- current portion 17,233 3,128 Accounts payable 70,297 84,893 Accrued compensation and employee benefits 46,618 46,479 Income taxes 7,438 7,336 Accrued expenses and other current liabilities 33,569 27,322 --------- --------- Total current liabilities 183,921 175,477 --------- --------- Other liabilities: Long-term debt 137,547 211,112 Deferred income taxes 25,293 24,536 Other noncurrent liabilities 39,281 39,740 --------- --------- Total noncurrent liabilities 202,121 275,388 --------- --------- Total liabilities 386,042 450,865 --------- ---------
Shareholders' investment: Preferred stock, $0.025 par value, authorized 16,000 shares, issued - none - - Common stock, $0.625 par value, authorized 80,000 shares, issued 30,342 shares 18,964 18,964 Additional paid-in capital 13,990 13,573 Retained earnings 522,760 505,522 Accumulated other comprehensive loss (34,912) (21,629) Treasury stock at cost: 987 and 1,081 shares, respectively (30,147) (34,394) Restricted stock - unamortized value (1,387) (1,794) --------- --------- Total shareholders' investment 489,268 480,242 --------- --------- Total liabilities and shareholders' investment $ 875,310 $ 931,107 ========= ========= <FN> (See accompanying notes to consolidated financial statements.) </TABLE>
<TABLE> MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF EARNINGS For the three months ended December 26, 2000 and 1999 For the nine months ended December 26, 2000 and 1999 (In thousands, except per-share amounts) (Unaudited) <CAPTION> Three months ended Nine months ended ------------------------ ------------------------ December 26 December 26 ------------------------ ------------------------ 2000 1999 2000 1999 ---------- ----------- ---------- ----------- <S> <C> <C> <C> <C> Net Sales $ 252,346 $ 283,520 $ 808,605 $ 854,058 Cost of sales 186,884 205,184 589,545 614,169 --------- -------- --------- --------- Gross profit 65,462 78,336 219,060 239,889 Selling, general, and administrative expenses 53,507 57,016 164,449 163,467 --------- -------- --------- --------- Income from operations 11,955 21,320 54,611 76,422 Interest expense (1,758) (2,490) (5,929) (6,004) Patent settlements - - 16,959 1,000 Other income -- net 1,012 772 5,566 3,367 --------- -------- --------- --------- Earnings before income taxes 11,209 19,602 71,207 74,785 Provision for income taxes 5,100 3,407 28,118 23,985 --------- -------- --------- --------- Net earnings $ 6,109 $ 16,195 $ 43,089 $ 50,800 ========= ========= ========= ========= Net earnings per share of common stock - Basic $0.21 $0.55 $1.47 $1.72 - Assuming dilution $0.20 $0.55 $1.46 $1.71 ========= ========= ========= ========= Dividends per share $0.25 $0.23 $0.75 $0.69 ========= ========= ========= ========= Weighted average shares -- basic 29,486 29,494 29,275 29,519 Weighted average shares -- assuming dilution 29,809 29,657 29,426 29,781 ========= ========= ========= ========= <FN> (See accompanying notes to consolidated financial statements.) </TABLE>
<TABLE> MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Nine Months Ended December 26, 2000 and 1999 (Unaudited) <CAPTION> Nine months ended December 26 ----------------------------- 2000 1999 ---------- ---------- <S> <C> <C> Net cash provided by operating activities $114,905 $ 59,237 Cash flows from investing activities: Expenditures for property, plant, and equipment (54,671) (73,638) Acquisitions, net of cash acquired 249 - Return of capital/ (investments in affiliates) 467 (2,100) Proceeds from dispositions of property, plant, and equipment 313 288 Other -- net (1,864) (2,249) -------- -------- Net cash used for investing activities (55,506) (77,699) Cash flows from financing activities: Increase in short-term debt -- net 2,959 3,888 Additions to long-term debt 46,602 63,436 Reductions of long-term debt (98,575) (42,643) Issuance of common stock, including treasury stock 4,582 2,675 Purchase of treasury stock (4,228) (6,888) Cash dividends paid (21,954) (20,365) -------- -------- Net cash (used for)/provided by financing activities (70,614) 103 -------- -------- Net decrease in cash and cash equivalents (11,215) (18,359) Cash and cash equivalents at beginning of period 31,070 49,163 -------- -------- Cash and cash equivalents at end of period $ 19,855 $ 30,804 ======== ======== <FN> (See accompanying notes to consolidated financial statements.) </TABLE>
MODINE MANUFACTURING COMPANY ---------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ 1. The amounts of raw material, work in process and finished goods cannot be determined exactly except by physical inventories. Based on partial interim physical inventories and percentage relationships at the time of complete physical inventories, Management believes the amounts shown below are reasonable estimates of raw material, work in process and finished goods. (in thousands) ------------------------------------------------------------------ December 26, 2000 March 31, 2000 ------------------------------------------------------------------ Raw materials $ 32,412 $ 35,872 Work in process 36,260 39,146 Finished goods 79,719 93,579 -------- -------- Total inventories $148,391 $168,597 ======== ======== 2. Property, plant, and equipment is composed of: (in thousands) ------------------------------------------------------------------ December 26, 2000 March 31, 2000 ------------------------------------------------------------------ Gross property, plant & equipment $664,543 $634,170 Less accumulated depreciation (313,554) (296,183) -------- -------- Net property, plant & equipment $350,989 $337,987 ======== ======== 3. Intangible assets include: (in thousands) ------------------------------------------------------------------ December 26, 2000 March 31, 2000 ------------------------------------------------------------------ Goodwill $ 88,370 $ 89,815 Patents and product technology 8,389 8,389 Other intangibles 3,307 3,204 Less accumulated amortization (35,460) (31,069) -------- -------- Net intangible assets $ 64,606 $ 70,339 ======== ========
4. Segment data: (In thousands) ------------------------------------------------------------------ Quarter ended December 26, 2000 1999 -------- -------- Sales: Original Equipment $ 99,813 $120,979 Distributed Products 87,809 95,299 European Operations 73,379 78,640 ------------------------------------------------------------------ Segment sales 261,001 294,918 Eliminations (8,655) (11,398) ------------------------------------------------------------------ Total net sales $252,346 $283,520 ------------------------------------------------------------------ Operating income: Original Equipment $ 13,563 $ 22,257 Distributed Products 5,097 7,086 European Operations 8,732 8,348 ------------------------------------------------------------------ Segment operating income 27,392 37,691 Corporate & administrative expenses (15,479) (16,427) Eliminations 42 52 Other items not allocated to segments (746) (1,714) ----------------------------------------------------------------- Earnings before income taxes $ 11,209 $ 19,602 ----------------------------------------------------------------- (In thousands) ------------------------------------------------------------------ Nine Months ended December 26, 2000 1999 -------- -------- Sales: Original Equipment $323,268 $352,452 Distributed Products 289,851 311,028 European Operations 222,704 223,155 ------------------------------------------------------------------ Segment sales 835,823 886,635 Eliminations (27,218) (32,577) ------------------------------------------------------------------ Total net sales $808,605 $854,058 ------------------------------------------------------------------ Operating income: Original Equipment $ 49,801 $ 66,146 Distributed Products 24,241 34,828 European Operations 26,634 20,860 ------------------------------------------------------------------ Segment operating income 100,676 121,834 Corporate & administrative expenses (46,163) (45,453) Eliminations 98 40 Other items not allocated to segments 16,596 (1,636) ------------------------------------------------------------------ Earnings before income taxes $ 71,207 $ 74,785 ------------------------------------------------------------------
At the end of the fourth quarter in fiscal 2000, several changes were introduced in the basis for measuring segment profit or loss. Two changes that affected amounts previously reported for the quarter and nine months ended December 1999 were the relocation of certain goodwill amortization previously recorded at Corporate to the Distributed Products segment and the allocation of Corporate headquarters functions to include only a general building, technical center, and aircraft use allocation. Another modification from classifications originally reported last December was a change to relocate goodwill expense to SG&A expense from other expenses not allocated to a particular segment. Additionally, in the first quarter of fiscal 2001, a change was made by management to relocate the aftermarket business unit of the European Operations segment to the Distributed Products segment. The quarterly and nine-month sales and operating income information presented above has been restated for earlier periods to reflect the effects of these changes. (in thousands) ------------------------------------------------------------------ December 26, March 31, Period ending 2000 2000 ------------------------------------------------------------------ Assets: Original Equipment $241,314 $265,495 Distributed Products 233,109 263,733 European Operations 181,816 189,803 Corporate & Administrative 270,436 264,562 Eliminations (51,365) (52,486) ------------------------------------------------------------------ Total assets $875,310 $931,107 ------------------------------------------------------------------ In the first quarter of fiscal 2001, management relocated the aftermarket business unit of the European Operations segment to the Distributed Products segment. The asset data presented for March 31, 2000 has been restated to reflect the effect of this change. 5. Recent developments concerning legal proceedings reported in Modine Manufacturing Company ("Modine or Company") Form 10-K report for the year ended March 31, 2000, are updated in Part II, Other Information, Item 1, Legal Proceedings. While the outcome of these proceedings is uncertain, in the opinion of Modine's management, any liabilities that may result from such proceedings are not reasonably likely to have a material effect on Modine's liquidity, financial condition, or results of operations.
6. The net earnings per share of common stock and computation components of basic and diluted earnings per share are as follows: (In thousands, except per-share amounts) ----------------------------------------------------------------------- Three months ended Nine months ended December 26 December 26 ----------------------------------------------------------------------- 2000 1999 2000 1999 ----------------------------------------------------------------------- Net earnings per share of common stock: - basic $0.21 $0.55 $1.47 $1.72 - assuming dilution $0.20 $0.55 $1.46 $1.71 Numerator: --------- Income available to common shareholders $6,109 $16,195 $43,089 $50,800 Denominator: ----------- Weighted average shares outstanding - basic 29,486 29,494 29,275 29,519 Effect of dilutive securities - options* 323 163 151 262 Weighted average shares outstanding - assuming dilution 29,809 29,657 29,426 29,781 ----------------------------------------------------------------------- *There were outstanding options to purchase common stock at prices that exceeded the average market price for the income statement period as follows: Average market price per share $25.65 $24.82 $25.37 $27.99 Number of shares 1,263 1,458 1,263 1,149 7. Comprehensive earnings/(loss) (in thousands), which represents net earnings adjusted by the change in foreign-currency translation and minimum pension liability recorded in shareholders' equity for the periods ended December 26, 2000 and 1999, respectively, were $(1,877) and $12,707 for three months, and $29,806 and $47,423 for nine months. 8. In June 2000, Modine purchased for cash the remaining 50- percent share of Daikin-Modine, Inc. from its joint venture partner Daikin Industries, Ltd. Daikin-Modine is not considered material to the financial statements of Modine and, accordingly, pro-forma information is not presented. The operation has been integrated into Modine's Commercial HVAC&R Division and its operating results are being reported on a consolidated basis in the Distributed Products segment from the date of acquisition. 9. On July 14, 2000, Modine reached an agreement with Showa Aluminum Corporation to cross-license each other's patents on PF(r) and SC air-conditioning condensers. As a result of the agreement and another agreement with Mitsubishi Heavy Industries, Modine received in the first
and second quarter payments totaling $17.0 million representing partial settlement for past infringement of Modine's PF(r) Parallel Flow technology. The agreements settle the companies' respective lawsuits on the subject technology. Contingent royalties of approximately $27 million may be received in about a year, and additional contingent royalties that could meet or exceed that amount may be received over the next eight years. Beyond the initial $17.0 million in payments already received, the future lump-sum payments and running royalties are contingent on confirmation of the validity of Modine's PF(r) technology patents in Japan, Europe, and the United States and on Showa's and Mitsubishi's future sales of the subject condensers. 10. On December 14, 2000, Modine announced an agreement to acquire Thermacore International, Inc. a privately-held corporation based in Lancaster, Pa., that provides advanced thermal solutions for the electronics industry. The total transaction is valued at $110 million, including approximately $93.5 million for Thermacore common stock and Modine's assumption of approximately $16.5 million in Thermacore liabilities. The transaction is expected to be accounted for as a pooling of interests. Under the terms of the Agreement and Plan of Merger (the "Merger Agreement"), the consideration to be paid per share of Thermacore common stock is approximately $26.20 (the "Per Share Consideration"), which was derived by dividing the aggregate consideration to be paid in the Merger by the number of shares of Thermacore Common stock outstanding as of the date of the Merger Agreement, on a fully diluted basis, after giving effect to the conversion of the outstanding Thermacore convertible preferred stock and the exercise of all outstanding options to acquire Thermacore common stock. Under the terms of the Merger Agreement, each share of Thermacore common stock will be converted, in the merger, into that number of shares, or fraction of a share, of Modine common stock equal to the Per Share Consideration divided by the unweighted average of the last-sale prices of Modine's common stock as reported on The Nasdaq Stock Market for the 20 trading days ending on the fifth trading day preceding the effective date of the Merger; provided, however, that that average may not be more than $32.00 nor less than $22.08. Each share of Thermacore convertible preferred stock will be converted into that number of shares of Modine common stock that the holder would have been entitled to receive had such share of convertible preferred stock been converted into Thermacore common stock immediately prior to the merger. Outstanding options to acquire shares of Thermacore common stock will be converted into options to acquire Modine common stock, based on the exchange ratio used in the merger for the exchange of Thermacore common stock. Pending regulatory approval and the approval of Thermacore shareholders, the transaction is expected to close in early 2001.
11. The accompanying consolidated financial statements, which have not been audited by independent certified public accountants, were prepared in conformity with generally accepted accounting principles and such principles were applied on a basis consistent with the preparation of the consolidated financial statements in Modine's March 31, 2000 Annual Report filed with the Securities and Exchange Commission. The financial information furnished includes all normal recurring adjustments that are, in the opinion of Management, necessary for a fair presentation of results for the interim period. Results for the first nine months of fiscal 2001 are not necessarily indicative of the results to be expected for the full year. 12. Certain notes and other information have been condensed or omitted from these interim financial statements which consolidate both domestic and foreign wholly-owned subsidiaries. Therefore, these statements should be read in conjunction with the consolidated financial statements and related notes contained in Modine's 2000 Annual Report to shareholders which were incorporated by reference in Modine's Form 10-K Report for the year ended March 31, 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- The following discussion and analysis provides information which Management believes is relevant to an assessment and understanding of Modine's consolidated results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto. RESULTS OF OPERATIONS - --------------------- Comparison of the Third Quarter of 2000-01 with the Third Quarter - ----------------------------------------------------------------- of 1999-00 - ---------- Net sales for the third quarter of fiscal 2000-2001 were $252.3 million, down 11% from the $283.5 million reported in the third quarter of last year. Sales would have been approximately $19.8 million higher without the impact of a stronger U.S. dollar in relation to the Euro. The quarter's sales results were affected by a number of factors. Revenues in the Distributed Products segment declined by almost 8%. An extremely soft North American aftermarket and the negative currency impact on the segment's operations in Europe were the main factors contributing to the decline. In the Original Equipment segment, mixed results were recorded for the quarter with overall revenues down by over 17%. A sharply lower North American heavy truck market and slowing light-vehicle sales overshadowed improved sales to off-highway customers and building- HVAC customers. Overall revenues in the European Operations segment declined by less than 7% for the quarter. Improved results in the European off-highway and automotive markets were offset by the negative currency-translation impact recorded in the quarter which lowered European sales results by more than 18%. Gross margin at 25.9%, as a percentage of sales, was down from 27.6% recognized in the third quarter of the previous year. Material costs as a percentage of sales grew by 1.7 percentage points. Labor remained steady as a percentage of sales at 7.9%. Manufacturing overhead also remained essentially unchanged as a percentage of sales despite one-time charges recorded in the quarter to exit an unprofitable product line in Europe. Looking at an analysis on a business segment basis, improvements in the European Operations segment and in the construction and agricultural market of the Original Equipment segment were more than offset by lower margins earned in the truck and automotive markets of the Original Equipment segment and by lower margins in the Distributed Products segment (aftermarket and HVAC). Selling, general and administrative (SG&A) expenses of $53.5 million decreased 6.2% over last year's third quarter despite the one-time severance charges recorded in North America for staff reductions
made in the quarter. As a percentage of sales, selling, general and administrative costs increased to 21.2% from 20.1%. The largest reduction in the quarter was in overall compensation costs resulting from lower management incentive and stock award expenses. Reductions in a number of other cost categories within SG&A expenses also contributed to the $3.5 million decrease shown for the quarter. Operating income at 4.7% of sales was 2.8 percentage points lower than last year. Non-recurring charges for severance and the exiting of an unprofitable product line in Europe accounted for approximately one-half of the decrease in operating income as a percentage of sales. Material costs together with selling, general and administrative expenses declined at a slower rate than sales, also contributing to the decrease shown. Interest expense decreased $0.7 million, or 29%, from the same quarter a year ago while average outstanding debt levels during the quarter decreased 36% from a year ago. Interest expense declined at a slower rate than debt due to increased borrowing rates from a year ago. Net non-operating income in the current quarter increased $0.2 million from the same quarter of the previous year. The effective tax rate of 45.5% increased 28.1 percentage points when compared to the same period last year. A change in tax-loss carryforwards at a foreign subsidiary was one of the main factors contributing to the increase. The carryforward benefit of $4 million was recognized for the first time in the third fiscal quarter last year. A change in the German statutory rate in the third fiscal quarter this year resulted in a $1.0 million charge, effectively reducing a portion of the tax benefit recognized in the prior year. Net earnings for the third quarter of $6.1 million were 62% lower than last year's $16.2 million earned in the third quarter. Earnings per share were $0.21 basic and $0.20 diluted, compared to $0.55 basic and diluted in the prior year. Net earnings in the quarter were negatively impacted by $3.3 million in nonrecurring, pre-tax charges related to exiting an unprofitable product line in Europe and severance charges related to staff reductions in North America. The currency translation effect of a stronger U.S. dollar recorded during the quarter also reduced reported after-tax earnings by $0.04 per diluted share. Comparison of the First Nine Months of 2000-01 with the First - ------------------------------------------------------------- Nine Months of 1999-00 - ---------------------- Net sales for the first nine months of fiscal 2000-2001 were $808.6 million, down 5.3% from the $854.1 million reported in the same period of last year. Sales would have been $44.7 million higher without the impact of a stronger U.S. dollar. Overall changes in the company's segment sales were very similar to those reported for the third quarter. The Distributed Products segment declined by almost 7% with major factors being a very soft
North American aftermarket and the negative currency impact on the segment's European sales. In the Original Equipment segment, sales declined by a little over 8%. Improved results in the North American off-highway markets were offset by reduced demand in the North American heavy-truck and automotive markets. Overall revenues in the European Operations segment were essentially the same as in the prior year. Improved sales volumes in the European automotive and off-highway markets, were negatively impacted by currency translation. Excluding the translation impact, European Operations sales would have grown by more than 16%. Gross margin of 27.1%, as a percent of sales, was down 1.0 percentage point from the first nine months of the previous year. Material costs as a percentage of sales grew by 1.5 percentage points, while overhead declined by 0.5 percentage point. Improvements in the European Operations segment, despite the one-time charge to manufacturing overhead taken in the third quarter for exiting an unprofitable product line, and improvement shown in the construction and agricultural market of the Original Equipment segment were more than offset by lower margins earned in truck and automotive markets of the Original Equipment segment and by lower margins in the Distributed Products segment (aftermarket and HVAC). Selling, general and administrative expenses, which included one- time severance charges recorded in the third quarter, increased 0.6% to 164.4 million, or $1.0 million over the first nine months of last year while increasing to 20.3% from 19.1% as a percentage of sales. Other significant changes influencing the overall change were higher depreciation expense from capital expenditures made in the past several years, higher research and development costs, on-going litigation costs to protect Modine's patents around the world, and higher statutory and fringe benefits expenses. These increases were offset, in part, by smaller reductions in a number of other expense categories. Operating income at 6.8% of sales, was down 2.1 percentage points from the 8.9% in the first nine months of the previous year. As mentioned above, special third quarter charges for severance related to staff reductions and Modine exiting an unprofitable product line in Europe were two items contributing to the change. Lower sales volumes, higher material costs as a percentage of sales and negative currency translation were also factors contributing to the reduction. Interest expense decreased $0.1 million, or 1.2% over the same nine month period a year ago. Average outstanding debt levels for the nine months declined 19% from the same period a year ago. The debt reduction was influenced, in part, by the decline of the Euro relative to the U.S. dollar in the current year. Despite the overall debt reduction, interest expense remained essentially unchanged due to higher interest rates and lower amounts of capitalized interest. Net non-operating income rose $18.2 million over the prior year as a result of patent settlements received totaling $17.0 million in the current year, a $1.3 million gain related to the sale of a closed facility in Michigan and higher joint venture earnings.
Modine's effective tax rate increased over last's year's first nine months by 7.4 percentage points to 39.5%. A change in tax-loss carryforwards at a foreign subsidiary was one of the main factors contributing to the increase. The carryforward benefit was recognized for the first time in the third fiscal quarter last year. A change in the German statutory rate in the third fiscal quarter of this year resulted in a $1.0 million charge, effectively reducing a portion of the tax benefit recognized in the prior year. Net earnings for the first nine months of the current year were $43.1 million, or $1.47 basic and $1.46 diluted earnings per share. This compares to $50.8 million, or $1.72 basic and $1.71 diluted earnings per share, for the same nine- month period the year before. The impact of a stronger U.S. dollar compared to the prior year lowered reported after-tax earnings by $0.10 per diluted share. Annualized return on shareholders' investment, at 11.9% was below management's target range. Outlook for the Remainder of the Year - ------------------------------------- On November 30, 2000, Modine revised its outlook for the fiscal year ending March 31, 2001. The new forecast estimated annual sales to be 7- to 10-percent lower and earnings 25- to 30 percent below the previous year. The primary factors behind the revised projection included: a sharply lower heavy-truck market; slowing light-vehicle sales plus a delay in the startup of a new business program; continued softness in the North American aftermarket; and protracted weakness in the Euro versus the U.S. dollar. With the exception of the Euro, which recently has strengthened somewhat, there have been no appreciable changes in these external market forces, and Modine anticipates similar market conditions to prevail for the balance of this fiscal year. Forward looking statements about sales, earnings, and operations in this Outlook involve both risks and uncertainties, as detailed in Exhibit 99 to this Form 10-Q. FINANCIAL CONDITION - ------------------- Comparison between December 26, 2000 and March 31, 2000 - ------------------------------------------------------- Current assets - -------------- Cash and cash equivalents of $19.9 million were $11.2 million lower than March 31, 2000. Record operating cash flows of $114.9 million were more than offset for the first nine months by capital expenditures totaling $54.7 million, net debt repayments of $49.0 million and $22.0 million in quarterly dividend payments. Trade receivables of $159.0 million were down $23.7 million (13%) over year-end primarily due to decreased sales volume (down $17.4 million over the previous quarter). A stronger U.S. dollar relative to the Euro also contributed to the reduction in the outstanding balances at the end of the third quarter.
Overall inventory levels decreased $20.2 million to $148.4 million compared to the prior year-end. The largest item contributing to the decrease was a reduction in finished goods in the aftermarket division. Smaller reductions in raw material and work-in-process inventories were recorded in a number of the operating divisions as well. In addition, the decline of the Euro relative to the dollar, a decrease of almost 16%, also had a continuing downward impact on the value of inventory levels. Deferred income taxes and other current assets declined by $10.3 million to $36.9 million compared to last year-end. Lower unbilled tooling to customers recorded in this category and a reduction in other receivables were two of the larger items contributing to the overall change. Working capital of $180.2 million decreased 29% from year-end. The current ratio decreased to 2.0 to 1 from 2.4 to 1. Lower accounts payable were more than offset by lower cash and cash equivalents, trade receivables, inventories, deferred income taxes and other current assets, and higher balances in the current portion of long-term debt and accrued expenses payable. Noncurrent Assets - ----------------- Net property, plant and equipment increased $13.0 million to $351.0 million as capital expenditures exceeded depreciation, retirements and foreign currency translation impact. Current year capital expenditures are 26% below spending levels for the same period last year. Expenditures for the European Technical Center, European plant expansions and conversions, the Racine Technical Center, new Chrysler Jeep programs, a new International Truck and Engine program, a new Caterpillar EGR program, process improvements, tooling for new products and various new equipment were among the items contributing to the $13.0 million increase shown. Outstanding commitments for capital expenditures were $35.0 million at December 26, 2000. Approximately one-half of the commitments relate to Modine's European operations. The outstanding commitments will be financed through a combination of funds generated from continuing operations and third party borrowing as required. Intangible assets decreased by $5.7 million. Amortization and foreign currency translation were the main items contributing to the change. Investments in subsidiaries and affiliates decreased by $1.5 million with foreign currency translation responsible for the majority of the change. Deferred charges and other noncurrent assets increased $3.8 million. The net increase is primarily the result of continuing recognition of the surplus in Modine's overfunded pension plans. Partially offsetting the pension increase was a reduction in long- term deferred tax assets.
Current Liabilities - ------------------- Accounts payable and other current liabilities of $150.5 million were $8.2 million lower than March 2000. A concerted effort to reduce inventory levels resulting in lower payables, and normal timing differences in the level of operating activity were responsible for the decline. Accrued income taxes remained essentially unchanged from March 2000. Debt - ---- Outstanding debt decreased by $57.1 million to $163.5 million from March 31, 2000 balance of $220.6 million. Domestic long- term debt decreased $43.1 million. The reduction was primarily due to a decrease in working capital needs and a large lump-sum patent settlement received in September. Foreign long-term debt decreased $11.6 million. Short-term debt increased $2.4 million, with $2.0 million of the increase taking place domestically. Consolidated available lines of credit increased $7.3 million to $71.9 million during the quarter, bringing the year-to-date increase to $38.3 million. Domestically, Modine's unused lines of credit were $45.7 million. Foreign unused lines of credit were $26.2 million. Total debt as a percentage of shareholders' equity decreased to 33.4% from 45.9%. Shareholders' Investment - ------------------------ Total shareholders' investment increased by $9.0 million to a total of $489.3 million. The net increase came primarily from net earnings of $43.1 million for the first nine months. Offsetting items included an unfavorable foreign currency translation impact of $13.3 million during the period and dividends paid to shareholders of $22.0 million. Treasury stock activity and stock options exercised during the period also influenced the overall change. PART II. OTHER INFORMATION Item 1. Legal Proceedings. In the normal course of business, Modine and its subsidiaries are named as defendants in various lawsuits and enforcement proceedings by private parties, the Occupational Safety and Health Administration, the Environmental Protection Agency, other governmental agencies, and others in which claims, such as personal injury, property damage, or antitrust and trade regulation issues, are asserted against Modine. While the outcome of these proceedings is uncertain, in the opinion of Modine's Management and counsel, any liabilities that may result from such proceedings are not reasonably likely to have a material effect on Modine's liquidity, financial condition or results of operations. Many of the pending damage claims are covered by insurance and, in addition, Modine from time to time establishes reserves for uninsured liabilities.
The Mitsubishi and Showa Litigation ----------------------------------- Over the last 10 years Modine and Showa Aluminum Corporation (and Mitsubishi Motors in some cases) have instituted various lawsuits and legal proceedings against each other pertaining to Modine's PF(r) Parallel Flow technology and Showa's SC condenser. On July 14, 2000, Modine and Showa reached a Settlement Agreement and License with respect to the same. The Agreement calls for cross licensing of the foregoing technologies between the parties with Modine receiving an initial payment of $15.1 million representing partial settlement for past infringement of Modine's PF(r) Parallel Flow technology. Subsequent payments of twice such amount are payable to Modine upon confirmation of the validity of Modine's PF patents in Japan, the United States, and the European Union. Running royalties are applicable to future sales by Showa for the use of Modine's PF technology through the expiration of the corresponding patents in 2006-2008. All legal proceedings between the parties are being dismissed. Other previously reported legal proceedings between the parties have been settled or the issues resolved so as to not merit further reporting. Under the rules of the Securities and Exchange Commission, certain environmental proceedings are not deemed to be ordinary or routine proceedings incidental to the Company's business and are required to be reported in the Company's annual and/or quarterly reports. The Company is not currently a party to any such proceedings. Item 5. Other Information. On October 26, 2000, Ernest T. Thomas was appointed Senior Vice President and Chief Financial Officer. Thomas joined Modine in August 1998 as a Group Vice President with experience in various financial staff and operations positions at previous companies. On December 14, Modine announced its entry into the fastest- growing segment of the electronics-cooling market through the proposed acquisition of Thermacore International, Inc. Thermacore provides customized thermal-management solutions for high-end servers, telecommunications equipment, and other electronics applications. The total transaction of $110 million is expected to be accounted for as a pooling of interests of the two companies. The closing date is anticipated to occur in early 2001. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: -------- The following exhibits are included for information only unless specifically incorporated by reference in this report:
Reference Number per Item 601 of Regulation S-K Page - -------------- ---- 4(a) Rights Agreement dated as of October 16, 1986 between the Registrant and First Chicago Trust Company of New York (Rights Agent) (filed by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 4(b)(i) Rights Agreement Amendment No. 1 dated as of January 18, 1995 between the Registrant and First Chicago Trust Company of New York (Rights Agent) (filed by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2000). 4(b)(ii) Rights Agreement Amendment No. 2 dated as of January 18, 1995 between the Registrant and First Chicago Trust Company of New York (Rights Agent) (filed by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2000). 4(b)(iii) Rights Agreement Amendment No. 3 dated as of October 15, 1996 between the Registrant and First Chicago Trust Company of New York (Rights Agent) (filed by reference to the exhibit contained within the Registrant's Quarterly Report on Form 10-Q dated December 26, 1996). 4(b)(iv) Rights Agreement Amendment No. 4 dated as of November 10, 1997 between the Registrant and Norwest Bank Minnesota, N.A., [now known as Wells Fargo Bank Minnesota, N.A.] (Rights Agent) (filed by reference to the exhibit contained within the Registrant's Quarterly Report on Form 10-Q dated December 26, 1997). Note: The amount of long-term debt authorized ---- under any instrument defining the rights of holders of long-term debt of the Registrant, other than as noted above, does not exceed ten percent of the total assets of the Registrant and its subsidiaries on a consolidated basis. Therefore, no such instruments are required to be filed as exhibits to this Form. The Registrant agrees to furnish copies of such instruments to the Commission upon request. 99* Important Factors and Assumptions Regarding Forwarding-Looking Statements. 21 *Filed herewith.
(b) Reports on Form 8-K: ------------------- The Company filed three (3) Reports on Form 8-K during the quarter ended December 26, 2000. Form 8-K dated October 26, 2000 naming E. T. Thomas Senior Vice President and Chief Financial Officer. Form 8-K dated November 30, 2000 revising sales and earnings outlooks. Form 8-K dated December 13, 2000 announcing Thermacore Agreement and Plan of Merger.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MODINE MANUFACTURING COMPANY (Registrant) By: E. T. THOMAS ------------------------------------- E. T. Thomas, Senior Vice President, and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Date: February 9, 2001 By: W. E. PAVLICK ------------------------------------- W. E. Pavlick, Senior Vice President, General Counsel and Secretary