SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 26, 2001 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-1373 ------ 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 November 6, 2001 ----------------------------- ------------------------------- Common Stock, $0.625 Par Value 33,194,479
MODINE MANUFACTURING COMPANY INDEX Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 26 and March 31, 2001 3 Consolidated Statements of Earnings - For the Three Months Ended September 26, 2001 and 2000 and the Six Months Ended September 26, 2001 and 2000 4 Consolidated Statements of Cash Flows - For the Six Months Ended September 26, 2001 and 2000 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 22
<TABLE> MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS September 26, 2001 and March 31, 2001 (In thousands, except per-share amounts) (Unaudited) <CAPTION> September 26, 2001 March 31, 2001 <S> <C> <C> ASSETS ------ Current assets: Cash and cash equivalents $ 34,745 $ 21,744 Trade receivables, less allowance for doubtful accounts of $3,018 and $2,459, respectively 181,051 177,972 Inventories 135,252 153,096 Deferred income taxes and other current assets 35,754 55,248 --------- --------- Total current assets 386,802 408,060 --------- --------- Noncurrent assets: Property, plant, and equipment -- net 365,094 366,854 Investment in affiliates 24,173 26,403 Goodwill and other intangible assets -- net 61,783 64,886 Deferred charges and other noncurrent assets 74,747 70,975 --------- --------- Total noncurrent assets 525,797 529,118 --------- --------- Total assets $ 912,599 $ 937,178 ========= ========= <CAPTION> LIABILITIES AND SHAREHOLDERS' INVESTMENT ---------------------------------------- <S> <C> <C> Current liabilities: Short-term debt $ 552 $ 27,281 Long-term debt -- current portion 44,518 17,879 Accounts payable 73,835 80,028 Accrued compensation and employee benefits 46,191 49,161 Income taxes 7,645 6,590 Accrued expenses and other current liabilities 32,175 29,071 --------- --------- Total current liabilities 204,916 210,010 --------- --------- Other liabilities: Long-term debt 118,209 137,766 Deferred income taxes 32,559 31,796 Other noncurrent liabilities 39,556 38,909 --------- --------- Total noncurrent liabilities 190,324 208,471 --------- --------- Total liabilities 395,240 418,481 --------- ---------
Shareholders' investment: Preferred stock, $0.025 par value, authorized 16,000 shares, issued - none -- -- Common stock, $0.625 par value, authorized 80,000 shares, issued 33,675 and 33,663 shares 21,047 21,039 Additional paid-in capital 17,942 17,468 Retained earnings 525,979 528,653 Accumulated other comprehensive loss (32,228) (23,651) Treasury stock at cost: 514 and 812 shares, respectively (12,989) (23,564) Restricted stock - unamortized value (2,392) (1,248) --------- --------- Total shareholders' investment 517,359 518,697 --------- --------- Total liabilities and shareholders' investment $ 912,599 $ 937,178 ========= ========= <FN> (See accompanying notes to consolidated financial statements.) </TABLE>
<TABLE> MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF EARNINGS For the three months ended September 26, 2001 and 2000 For the six months ended September 26, 2001 and 2000 (In thousands, except per-share amounts) (Unaudited) <CAPTION> Three months ended Six months ended -------------------- -------------------- September 26 September 26 -------------------- -------------------- 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net Sales $269,114 $284,056 $549,745 $584,497 Cost of sales 204,151 208,155 410,819 420,709 -------- -------- -------- -------- Gross profit 64,963 75,901 138,926 163,788 Selling, general, and administrative expenses 55,053 60,281 111,574 116,713 -------- -------- -------- -------- Income from operations 9,910 15,620 27,352 47,075 Interest expense (2,142) (2,187) (4,207) (4,479) Patent settlements -- 15,084 -- 16,959 Other income -- net 3,656 3,952 5,193 4,708 -------- -------- -------- -------- Earnings before income taxes 11,424 32,469 28,338 64,263 Provision for income taxes 4,595 12,106 11,291 24,687 -------- -------- -------- -------- Net earnings $ 6,829 $ 20,363 $ 17,047 $ 39,576 ======== ======== ======== ======== Net earnings per share of common stock - Basic $0.21 $0.63 $0.52 $1.23 - Assuming dilution $0.20 $0.62 $0.51 $1.21 ======== ======== ======== ======== Dividends per share $0.25 $0.25 $0.50 $0.50 ======== ======== ======== ======== Weighted average shares -- basic 33,041 32,175 32,962 32,171 Weighted average shares -- assuming dilution 33,394 32,900 33,296 32,842 ======== ======== ======== ======== <FN> (See accompanying notes to consolidated financial statements.) </TABLE>
<TABLE> MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Six Months Ended September 26, 2001 and 2000 (Unaudited) <CAPTION> Six months ended September 26 ----------------------------- 2001 2000 -------- -------- <S> <C> <C> Net cash provided by operating activities $ 69,550 $ 85,157 Cash flows from investing activities: Expenditures for property, plant, and equipment (25,134) (39,175) Acquisitions, net of cash acquired -- 249 Return of capital and investment in affiliates -- 343 Proceeds from dispositions of property, plant, and equipment 1,591 133 Other -- net 217 130 -------- -------- Net cash used for investing activities (23,326) (38,320) Cash flows from financing activities: (Decrease)\increase in short-term debt -- net (26,620) 951 Additions to long-term debt 42,178 2,386 Reductions of long-term debt (38,249) (47,046) Issuance of common stock, including treasury stock 6,722 1,811 Purchase of treasury stock (757) (2,753) Cash dividends paid (16,497) (14,639) -------- -------- Net cash used for financing activities (33,223) (59,290) -------- -------- Net increase/(decrease) in cash and cash equivalents 13,001 (12,453) Cash and cash equivalents at beginning of period 21,744 31,242 -------- -------- Cash and cash equivalents at end of period $ 34,745 $ 18,789 ======== ======== <FN> (See accompanying notes to consolidated financial statements.) </TABLE>
MODINE MANUFACTURING COMPANY ---------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ 1. On October 17, 2001, management announced that Modine will take a $14 million to $18 million pretax restructuring charge in the third quarter of fiscal 2002 to reduce excess manufacturing capacity. This restructuring will include the closure and consolidation of six production facilities. Management expects the restructuring action to produce approximately $12 million in pretax annual savings, once fully in place. 2. The Board of Directors also announced at the October 17, 2001 meeting, its intention to reduce Modine's next quarterly dividend, which will be declared on January 16, 2002, to 12.5 cents per share. This represents a 50% reduction from the previous quarterly rate of 25 cents per share. 3. On April 27, 2001, Modine Manufacturing Company (Modine) acquired Thermacore International, Inc. (Thermacore) in a business combination accounted for as a pooling of interests. Thermacore, which provides advanced cooling solutions for customers in the electronics and telecommunications industries, became a wholly owned subsidiary of Modine through the initial exchange of approximately 3.3 million shares of Modine common stock for all of the outstanding common and preferred stock of Thermacore International, Inc. In addition, approximately 0.3 million shares of Modine common stock were allocated to cover outstanding Thermacore stock options which were converted to Modine stock options as part of the transaction. The accompanying financial statements are based upon the assumption that the companies were combined for the first six months of fiscal 2002, and the financial statements of prior periods have been restated to give effect to the combination. Prior to the date of the combination, there were no business transactions between Modine and Thermacore. No significant adjustments have been made to conform the accounting policies of the combining companies. No adjustments to retained earnings were required to conform Thermacore to Modine's March 31st year-end. Summarized results of operations of the separate companies for the period prior to acquisition, April 1, 2001 through April 27, 2001, and included in the current fiscal year's operations are as follows: (Unaudited in 000's) ----------------------------- Modine Thermacore ------ ---------- Net sales $86,065 $3,496 Net earnings (loss) 3,368 (1,655) Included in the operating results shown for April are $351,000 and $2,468,000 in pre-tax acquisition costs recorded for Modine and Thermacore, respectively.
Following is a reconciliation of the amounts of net sales and net earnings previously reported for the second quarter and six-month period ended September 26, 2000 with the restated amounts. (Unaudited in 000's) (Unaudited in 000's) Three months ended Six months ended September 26, 2000 September 26, 2000 -------------------- -------------------- Net sales Modine $269,775 $556,259 Thermacore 14,281 28,238 -------- -------- Combined $284,056 $584,497 ======== ======== Net earnings Modine $ 19,018 $ 36,980 Thermacore 1,345 2,596 -------- -------- Combined $ 20,363 $ 39,576 ======== ======== 4. Raw Material, Work-in-Progress and Finished Goods. The amounts of raw material, work in process and finished goods cannot be determined exactly except by physical inventories. Based on partial interim physical inventories and percentage relationships at the time of complete physical inventories, Management believes the amounts shown below are reasonable estimates of raw material, work in process and finished goods. (in thousands) ------------------------------------------------------------- September 26, 2001 March 31, 2001 ------------------------------------------------------------- Raw materials $ 30,982 $ 32,774 Work in process 35,243 37,321 Finished goods 69,027 83,001 -------- -------- Total inventories $135,252 $153,096 ======== ======== 5. Property, Plant, and Equipment. (in thousands) ------------------------------------------------------------- September 26, 2001 March 31, 2001 ------------------------------------------------------------- Gross property, plant & equipment $716,689 $697,063 Less accumulated depreciation (351,595) (330,209) -------- -------- Net property, plant & equipment $365,094 $366,854 ======== ========
6. Intangible assets. (in thousands) ------------------------------------------------------------- September 26, 2001 March 31, 2001 ------------------------------------------------------------- Goodwill $ 89,796 $ 90,361 Patents and product technology 6,901 6,901 Other intangibles 2,927 2,925 Less accumulated amortization (37,841) (35,301) -------- -------- Net intangible assets $ 61,783 $ 64,886 ======== ======== 7. Segment data: (In thousands) -------------------------------------------------------------- Quarter ended September 26, 2001 2000 ---- ---- Sales: Original Equipment $108,690 $111,757 Distributed Products 106,988 119,414 European Operations 67,997 70,938 -------------------------------------------------------------- Segment sales 283,675 302,109 Eliminations (14,561) (18,053) -------------------------------------------------------------- Total net sales $269,114 $284,056 -------------------------------------------------------------- Operating income: Original Equipment $ 14,510 $ 16,703 Distributed Products 7,703 10,312 European Operations 2,893 6,524 -------------------------------------------------------------- Segment operating income 25,106 33,539 Corporate & administrative expenses (15,258) (17,960) Eliminations 62 41 Other items not allocated to segments 1,514 16,849 -------------------------------------------------------------- Earnings before income taxes $ 11,424 $ 32,469 --------------------------------------------------------------
(In thousands) -------------------------------------------------------------- Six Months ended September 26, 2001 2000 ---- ---- Sales: Original Equipment $220,978 $241,061 Distributed Products 208,775 228,588 European Operations 152,534 152,936 -------------------------------------------------------------- Segment sales 582,287 622,585 Eliminations (32,542) (38,088) -------------------------------------------------------------- Total net sales $549,745 $584,497 -------------------------------------------------------------- Operating income: Original Equipment $ 32,388 $ 44,127 Distributed Products 12,317 19,679 European Operations 13,033 16,730 -------------------------------------------------------------- Segment operating income 57,738 80,536 Corporate & administrative expenses (30,448) (33,514) Eliminations 62 53 Other items not allocated to segments 986 17,188 -------------------------------------------------------------- Earnings before income taxes $ 28,338 $ 64,263 -------------------------------------------------------------- In the first quarter of fiscal 2002, Modine acquired Thermacore International, Inc. in a business combination accounted for as a pooling of interests. Sales and operating income results for the periods presented above have been restated to include Thermacore in the Distributed Products segment. Included in the reported results for Thermacore in the September 2001 quarter and six-month period are $0.1 million and $2.7 million, respectively, of acquisition costs. In addition to the Thermacore acquisition, management also introduced other changes in the current year to the segment reporting structure. Two changes made in the first quarter of the current fiscal year that affected operating results previously reported in the September 2000 quarter and six-month period were the relocation of the Goch, Germany facility previously reported in the Original Equipment segment to the European Operations segment and the Emporia, Kansas facility previously reported in the Distributed Products segment to the Original Equipment segment. These revisions were made to align the plants with the current management reporting structure. Sales and operating income presented for the September 2000 quarter and six-month period have been restated to reflect the realignment of these two manufacturing facilities. Other less significant changes also made in the beginning of the current year that affected Corporate and administrative expenses reported in the September 2001 quarter and six-month period were the relocation of the Fuel Cell group to the Original Equipment segment and the relocation of the Engine Products staff to
Corporate from the Original Equipment segment. Sales and operating income data presented for the September 2000 quarter and six-month period were not restated for these two changes due to their insignificance. (In thousands) -------------------------------------------------------------- September 26, March 31, Period ending 2001 2001 -------------------------------------------------------------- Assets: Original Equipment $225,410 $201,906 Distributed Products 253,823 260,446 European Operations 207,594 214,186 Corporate & Administrative 238,107 274,575 Eliminations (12,335) (13,935) -------------------------------------------------------------- Total assets $912,599 $937,178 -------------------------------------------------------------- The asset data presented has been restated for March 31, 2001 to reflect the Thermacore acquisition and the segment relocation of the two manufacturing facilities as previously discussed. 8. Recent developments concerning legal proceedings reported in Modine Manufacturing Company ("Modine or Company") Form 10-K report for the year ended March 31, 2001, are updated in Part II, Other Information, Item 1, Legal Proceedings. While the outcome of these proceedings is uncertain, in the opinion of Modine's management, any liabilities that may result from such proceedings are not reasonably likely to have a material effect on Modine's liquidity, financial condition, or results of operations.
9. The net earnings per share of common stock and computation components of basic and diluted earnings per share are as follows: (In thousands, except per-share amounts) ------------------------------------------------------------------------ Three months ended Six months ended September 26 September 26 ------------------------------------------------------------------------ 2001 2000 2001 2000 ------------------------------------------------------------------------ Net earnings per share of ------------------------- common stock: ------------ - basic $0.21 $0.63 $ 0.52 $1.23 - assuming dilution $0.20 $0.62 $ 0.51 $1.21 Numerator: ---------- Income available to common shareholders $6,829 $20,363 $17,047 $39,576 Denominator: ------------ Weighted average shares outstanding - basic 33,041 32,175 32,962 32,171 Effect of dilutive securities - options* 353 725 334 671 ------- ------- ------- ------- Weighted average shares outstanding - assuming dilution 33,394 32,900 33,296 32,842 ------------------------------------------------------------------------ *There were outstanding options to purchase common stock at prices that exceeded the average market price for the income statement period as follows: Average market price per share $28.31 $28.00 $27.70 $25.26 Number of shares 1,093 1,104 1,207 1,263 10. Comprehensive earnings (in thousands), which represents net earnings adjusted by the change in foreign-currency translation and minimum pension liability recorded in shareholders' equity for the periods ended September 26, 2001 and 2000, respectively, were $10,332 and $18,530 for three months, and $8,470 and $34,157 for six months. 11. In June 2001, the Financial Accounting Standards Board issued SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets." SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method. With the adoption of SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. Instead, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. Similarly, goodwill associated with equity method investments is no longer amortized. Equity-method goodwill is not, however, subject to the new impairment rules; the
impairment guidance in existing pronouncements for equity- method investments will continue to apply. In addition, under the new rules, acquired intangible assets will be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer's intent to do so. The provisions of Statement 142 must be applied with fiscal years beginning after December 15, 2001. Modine will adopt SFAS No. 142 beginning April 1, 2002. Management is currently assessing the implementation guidance being provide by the FASB and other regulatory bodies and has not yet determined the effect, if any, the new rules will have on the financial position or results of operations. Any adjustments arising from the initial impairment assessment would be reported as the cumulative effect of a change in accounting principle. 12. On April 1, 2001, Modine adopted Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" and Statement of Financial Accounting Standards No. 138 "Accounting For Certain Derivative Instruments and Certain Hedging Activities." No adjustments to the fiscal 2001-02 financial statements were necessary upon adoption of the new regulations set forth in SFAS 133 and 138. Modine maintains a foreign risk-management strategy that uses derivative instruments in a limited way to protect assets and obligations already held by Modine and to protect its cashflows. Derivative instruments are not used for the purpose of generating income or speculative activity. Leverage derivatives are prohibited by Company policy. Modine's derivative/hedging activity can be generally categorized into three main areas: Hedges of Net Investments in Foreign Subsidiaries ------------------------------------------------- The Company has a number of investments in wholly owned foreign subsidiaries and non-consolidated foreign joint ventures. The net assets of these subsidiaries are exposed to currency exchange-rate volatility. The Company uses non- derivative financial instruments to hedge this exposure. The currency exposure related to the net assets of Modine's European subsidiaries and its joint venture in Japan is managed partially through foreign-currency-denominated debt agreements entered into by the parent. For the second quarter and six months ended September 26, 2001, $3.2 million and $4.4 million, respectively, of net gains related to the foreign-currency-denominated debt agreements were included in the cumulative translation adjustment. Foreign-Exchange Contracts Hedging Foreign Denominated Trade ------------------------------------------------------------ Receivables ----------- The Company routinely exports its products to Europe in sales transactions, some of which result in foreign-currency- denominated trade receivables. The Company enters into foreign exchange contracts, generally with terms of 90 days
or less, to hedge these specific foreign-currency- denominated trade receivables. These contracts do not subject Modine to significant risk due to the exchange-rate movements because gains and losses on these contracts offset gains and losses on the trade receivables being hedged. As of September 26, 2001, the company had approximately $1.1 million outstanding in forward foreign-exchange contracts denominated in Euro. Sales and Purchase Contracts ---------------------------- The Company on a regular basis enters into long-term sales and purchase contracts with vendors and customers that link the prices charged for materials such as copper and aluminum to certain published commodity indices. These transactions are routine in nature and provide no net settlement provision and no market mechanism to facilitate net settlement. As a result management has determined that these transactions fall outside of the provisions of SFAS 133 and 138. Certain subsidiaries have transactions in currencies other than their functional currencies and, from time to time, enter into forward and option contracts to hedge the purchase of inventory or to sell nonfunctional currency receipts. These transactions are infrequent and immaterial to the results of operations and financial condition of the Company. 13. The accompanying consolidated financial statements, which have not been audited by independent certified public accountants, were prepared in conformity with generally accepted accounting principles and such principles were applied on a basis consistent with the preparation of the consolidated financial statements in Modine's March 31, 2001 Annual Report filed with the Securities and Exchange Commission. The financial information furnished includes all normal recurring adjustments that are, in the opinion of Management, necessary for a fair presentation of results for the interim period. Results for the first six months of fiscal 2001 are not necessarily indicative of the results to be expected for the full year. 14. Certain notes and other information have been condensed or omitted from these interim financial statements. Therefore, these statements should be read in conjunction with the consolidated financial statements and related notes contained in Modine's 2001 Annual Report to shareholders which statements and notes were incorporated by reference in Modine's Form 10-K Report for the year ended March 31, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- The following discussion and analysis provides information which Management believes is relevant to an assessment and understanding of Modine's consolidated results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto. RESULTS OF OPERATIONS --------------------- Comparison of the Second Quarter of 2001-02 with the Second ----------------------------------------------------------- Quarter of 2000-01 ------------------ Net sales for the second quarter of fiscal 2001-02 were $269.1 million, down 5.3% from the $284.1 million reported in the second quarter of last year. Sales would have been approximately $5.5 million higher without the impact of a stronger U.S. dollar in relation to the Euro. Revenues, in U.S. dollars, across all segments of the company were lower than the same quarter a year ago. Quarterly results for the company's European Operations segment improved slightly in local currency from year ago levels, but finished down 4.1% due to the adverse currency translation impact of $4.6 million recorded in the quarter. Revenues recorded in the Original Equipment segment declined by less than 3% from the same period last year. Sales to the majority of the markets served by the Original Equipment segment were down. A number of industry-wide factors related to a weakening U.S. economy were responsible for the decline. The North American heavy-truck market remained at depressed levels, off 50% from recent production volumes. Also a weakening North American light-vehicle market served to mitigate the positive effects of new product launches. Demand for agricultural and construction products remained flat in the current quarter against the prior year's weak levels. In the Distributed Products segment, revenues declined by just over 10%. Automotive aftermarket sales were very weak due to sluggish demand and pricing pressures related to excess industry capacity and aggressive new entrants into the market. Declining construction activity during the quarter hurt the company's building ventilation and cooling business. Modine's newest market, electronics cooling, was affected negatively in the quarter by the rapid downturn that is continuing in the computer and telecommunications equipment markets. Gross profit, as a percentage of sales, was 24.1%. This was a 2.6 percentage point decline from the 26.7 % earned in the second quarter last year. Material costs, as a percentage of sales, rose by 1.2 percentage points, while labor remained constant, and the ratio of manufacturing overhead to sales grew by 1.3 percentage points versus the prior period. Overall, gross
margins were down across all segments with European operations experiencing the largest margin decline from the same quarter a year ago. Selling, general and administrative expenses of $55.1 million declined 8.7%, or $5.2 million, over last year's second quarter while decreasing to 20.5% from 21.2% as a percentage of sales. While virtually every expense category registered a decline, salaries and other compensation together with related fringe benefits recorded the largest drop from the same period a year ago. Operating income at 3.7% of sales was 1.8 percentage points lower than last year's 5.5%. A weakening U.S. economy, resulting in lower sales volumes, was a major factor contributing to the decline. Interest expense declined slightly from the same quarter a year ago. Net non-operating income in the current quarter decreased $15.4 million from the same quarter of the previous year. The current year's quarter included the sale of an aftermarket warehouse facility in Los Angeles resulting in a $0.9 million gain. Also included in non-operating income in the prior year's second quarter was a patent settlement of $15.1 million. The effective tax rate increased to 40.2% from 37.3 % when compared to the same period last year. The largest item contributing to the increase in the effective tax rate for the quarter was non-deductible acquisition expenses resulting from the April Thermacore International, Inc. acquisition. Net earnings for the second quarter of $6.8 million were 67% lower than last year's $20.4 million earned in the second quarter. Earnings per share were $0.21 basic and $0.20 diluted, compared to $0.63 basic and $0.62 diluted in the prior year. Last year's earnings results were favorably impacted by $15.1 million in pretax patent settlements recorded during the quarter. Comparison of the First Six Months of 2001-02 with the First Six ---------------------------------------------------------------- Months of 2000-01 ----------------- Net sales for the first six months of fiscal 2001-02 were $549.7 million, down 5.9% from the $584.5 million reported in the same period of last year. Sales were negatively impacted by a stronger U.S. dollar in relation to the Euro by approximately $10.6 million. Overall, changes in the company's segment sales were very similar to those reported for the second quarter. European Operations segment improved by 5.6% in local currency from year ago levels, but finished down slightly in dollars due to the adverse currency translation impact of $9.0 million recorded in the first half of the year. In the Original Equipment segment, sales declined by more than 8%. Reduced demand in the North American truck market,
a weakening U.S. economy affecting passenger car and light truck sales, and relatively flat sales in the agricultural and construction markets contributed to the shortfall recorded in the first six months. The Distributed Products segment weakened by almost 9%, with major factors being a very soft North American aftermarket, declining construction activity affecting the HVAC market, and the continued weakness in the computer and telecommunications markets. Gross profit of 25.3% was down 2.7 percentage points from the first six months of the previous year. Material costs, as a percentage of sales, grew by 1.5 percentage points, while labor declined slightly and the ratio of manufacturing overhead to sales rose by 1.3 percentage points. Gross profits, in dollars, were down across all segments of the company reflecting the weakening worldwide economies. Selling, general and administrative expenses of $111.6 million decreased 4.4% over the first six months of last year while increasing to 20.3% from 20.0%, as a percentage of sales. Without the one-time pre-tax charges of $3.3 million related to the Thermacore acquisition, selling, general and administrative expenses would have registered a 7.2% decline and dropped to 19.7%, as a percentage of sales. Operating income at 5.0% of sales was down 3.1 percentage points from the 8.1% in the first half of the previous year. Lower sales volumes, one-time acquisition costs and negative currency translation were all factors contributing to the reduction. Interest expense declined $0.3 million, or just over 6% from the same six month period a year ago. Average outstanding debt levels for the six months declined from the same period a year ago. The reduction in short-term debt used for working capital requirements was a major factor leading to the reduction in interest expense. Net non-operating income, exclusive of the $17.0 million received in patent settlements in the prior year, rose by 10.3%, or $0.5 million, to $5.2 million. Major items included royalties of $1.9 million, equity earnings of affiliates of $1.3 million, profit on tooling sales of $1.3 million and profit on the disposal of plant property and equipment of $1.3 million. The effective tax rate increased by just over 1.4 percentage points, when compared to the same period last year. The rate increase was primarily due to non-deductible expenses incurred as part of the Thermacore acquisition. Net earnings for the first six months of the current year were $17.0 million, or $0.52 basic and $0.51 diluted earnings per share. This compares to $39.6 million, or $1.23 basic and $1.21 diluted earnings per share, for the same six-month period the year before. Last year's results included one-time patent settlements, on a pre-tax basis, of $17.0 million. Annualized return on shareholders' investment for the current period was 6.6%.
Outlook for the Remainder of the Year ------------------------------------- The U.S. economy has continued to weaken during the year and Modine believes that the September 11th terrorist attacks have created additional elements of uncertainty. Due to the softening economy, the company anticipates continued weakness in its key markets. As a result, Modine has updated its forecast for the remainder of the fiscal year. Modine now expects fully diluted earnings per share to be in the $0.75 to $0.85 range, excluding any one-time items. Management is responding to this weakened outlook by reducing excess capacity, and will take a $14 million to $18 million pretax restructuring charge in the third quarter of fiscal 2002. This restructuring will include the closure and consolidation of six production facilities. Management expects the restructuring action to produce approximately $12 million in pretax savings, once fully in place. Management remains optimistic about Modine's long-term outlook. The company continues to maintain a solid balance sheet and future growth prospects. Reduced capital expenditures and additional working capital improvements should continue to generate strong cash flow. Modine will be well positioned for growth, once economic conditions improve in its core markets. Modine has created additional growth opportunities by entering new markets such as the thermal management of fuel cells and electronics cooling. Forward looking statements about sales, earnings, and operations in this Outlook involve both risks and uncertainties, as detailed in Exhibit 99 to this Form 10-Q. FINANCIAL CONDITION ------------------- Comparison between September 26, 2001 and March 31, 2001 -------------------------------------------------------- Current assets -------------- Cash and cash equivalents of $34.7 million were $13.0 million higher than March 31, 2001. For the first six months of fiscal 2002, cash provided by operating activities, the issuance of common stock, including treasury stock, and proceeds from the disposition of property, plant and equipment exceeded capital expenditures, debt repayments and the quarterly dividend payments. Trade receivables of $181.1 million were up $3.1 million (1.7%). Overall inventory levels decreased $17.8 million to $135.3 million compared to the prior year-end. A major factor contributing to the decrease were on-going management programs, particularly in the aftermarket division, to reduce overall inventory levels. The continuing decline of the Euro relative to the dollar also had a downward impact on inventory values.
Deferred income taxes and other current assets declined by $19.5 million to $35.8 million from year-end. The largest single item contributing to the change was a reduction in unbilled customer tooling. Other significant items contributing to the change were lower prepaid income taxes and deferred tax assets, receipt of a dividend from the company's joint venture in Japan which was classified as a receivable at year-end, and a reduction in receivables arising from stock transactions with employees. The current ratio was relatively unchanged at 1.9 to 1. Net working capital decreased $16.2 million. Major balance sheet items influencing the change were lower deferred income taxes and other current assets and lower inventories offset in part by higher cash and cash equivalents, lower accounts payable and higher trade receivables. Noncurrent Assets ----------------- Net property, plant and equipment assets of $365.1 million declined $1.8 million from year-end. Capital expenditures during the quarter were lower than depreciation, retirements and foreign currency translation. Expenditures for European production, administrative, and technical center facilities, new programs for automotive and truck OEM customers, process and facility improvements, tooling for new products and other new equipment purchases were among the larger capital expenditures. Outstanding commitments for capital expenditures were $15.8 million at September 26, 2001. Approximately one-half of the commitments relate to Modine's European operations. The outstanding commitments will be financed through a combination of funds generated from operations and third party borrowing as required. Investments in unconsolidated affiliates of $24.2 million declined $2.2 million from year-end. The largest item contributing to the decrease in the first half of fiscal 2002 was the unfavorable currency translation effect on Modine's Brazilian joint venture company, Radiadores Visconde, Ltda. Higher equity earnings partially offset this negative currency translation effect. Intangible assets decreased by $3.1 million. Amortization and foreign currency translation were the main items contributing to the change. Deferred charges and other noncurrent assets increased by $3.8 million. The net increase is primarily the result of continuing recognition of the surplus in Modine's overfunded pension plans and higher long-term deferred tax assets. Current Liabilities ------------------- Accounts payable and other current liabilities of $152.2 million were $6.1 million lower than March 2001. Normal timing differences in the level of operating activity were responsible for changes in the various components. Accrued income taxes increased $1.1 million due to timing differences in making estimated payments.
Debt ---- Outstanding debt decreased by $19.6 million to $163.3 million from March 31, 2001 balance of $182.9 million. Domestic long- term debt increased $10.6 million with existing lenders. Approximately $7.0 million of long-term debt, originally secured during the construction of the Company's Pontevico, Italy manufacturing facility, was refinanced in Europe. Overall, long- term debt in Europe decreased $3.5 million. Total short-term borrowing decreased $26.7 million to $0.6 million. The domestic portion of the reduction in short-term debt totaled $18.5 million and the foreign portion was $8.2 million. Total debt assumed in the Thermacore acquisition of $14.0 million was refinanced using current credit lines with an existing lender at more favorable interest rates. Consolidated unused lines of credit decreased $18.7 million to $49.0 million during the quarter. The Company reduced its available lines with banks by $32.7 million from year-end and also reduced its actual borrowing on those lines by $14.0 million. Domestically, Modine's unused lines of credit were $35.6 million. Foreign unused lines of credit were $13.4 million. Total debt as a percentage of shareholders' equity decreased from 35.3% to 31.6%. Shareholders' Investment ------------------------ Total shareholders' investment decreased by $1.3 million to a total of $517.4 million. Net earnings of $17.0 million in the first six months of fiscal 2002 were virtually offset by dividends paid to shareholders of $16.5 million. Unfavorable foreign currency translation of $8.6 million was reported as the dollar strengthened against the Euro, and the Brazilian Real declined in value by approximately 25% in the first six months of the fiscal year. A reduction in treasury shares held by the Company resulted in a $10.6 million decrease in treasury stock. A corresponding decrease in retained earnings of $1.8 million to record the losses on the issuance of treasury shares to satisfy stock option exercises and employee stock plan requirements was also recorded in the first half of the year. Liquidity --------- Management believes that the Corporation's ability to generate cash from operations and its borrowing capacity are adequate to fund operating, capital spending and other needs for the foreseeable future. At the October 17, 2001 meeting of the Board of Directors, the Board indicated its intention to reduce the next quarterly dividend, which will be declared in January 2002, by 50% to 12.5 cents per share given the uncertain economic outlook and weakness in Modine's core markets. In making this decision, the Board considered Modine's recent forecast, on-going capital needs, and the dividend policies of comparable companies. This decision affords the Company greater financial flexibility and the opportunity to pursue other measures to increase shareholder value in the future.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. In the normal course of business, Modine and its subsidiaries are named as defendants in various lawsuits and enforcement proceedings by private parties, the Occupational Safety and Health Administration, the Environmental Protection Agency, other governmental agencies, and others in which claims, such as personal injury, property damage, or antitrust and trade regulation issues, are asserted against Modine. While the outcome of these proceedings is uncertain, in the opinion of Modine's Management and counsel, any liabilities that may result from such proceedings are not reasonably likely to have a material effect on Modine's liquidity, financial condition or results of operations. Many of the pending damage claims are covered by insurance and, in addition, Modine from time to time establishes reserves for uninsured liabilities. The Mitsubishi and Showa Litigation ----------------------------------- Over the last 10 years Modine and Showa Aluminum Corporation (and Mitsubishi Motors in some cases) have instituted various lawsuits and legal proceedings against each other pertaining to Modine's PF(r) Parallel Flow Technology and Showa's SC condenser. On July 14, 2000, Modine and Showa reached a settlement and entered into a license agreement. The Agreement calls for cross licensing of these technologies between the parties. As a result of the agreement and another with Mitsubishi Heavy Industries, Modine received, in the first and second quarters of fiscal 2001, payments totaling $17 million representing partial settlement for past infringement of Modine's PF technology. Subsequent one-time payments of approximately $29.9 million are payable to Modine if the validity of Modine's PF patents in Japan is confirmed. The patent confirmation proceedings in Japan are expected to be completed by December 31, 2001. Modine is currently receiving running royalties of approximately $3.5 to $4.0 million annually from certain Japanese competitors related to its PF patents in Japan. This revenue stream, which is expected to continue until the underlying patents expire in 2006-2008, would cease immediately if there is an unfavorable decision for Modine in the aforementioned Japanese confirmation proceedings. Other Matters ------------- In February 2000, Modine filed a complaint against Delphi Automotive Systems Corporation in the U.S. District Court in Milwaukee, Wisconsin, alleging infringement of its PF patent. Other previously reported legal proceedings have been settled or the issues resolved so as to not merit further reporting. Under the rules of the Securities and Exchange Commission, certain environmental proceedings are not deemed to be ordinary or routine proceedings incidental to the Company's business and are required to be reported in the Company's annual and/or quarterly reports. The Company is not currently a party to any such proceedings.
Item 5. Other Information. Following the end of the quarter for which this report is filed, the Company announced a plan to reduce excess capacity and take a $14 to $18 million pretax restructuring charge in the third quarter of fiscal 2002. The restructuring will include the closure and consolidation of six production facilities. The Company also announced its intention to reduce the next quarter's dividend, which will be declared in January 2002, by 50% from the previous quarter's rate. These actions were reported in a report on Form 8-K filed on October 17, 2001. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: The following exhibits are included for information only unless specifically incorporated by reference in this report: Reference Number per Item 601 of Regulation S-K Page -------------- ---- 4(a) Rights Agreement dated as of October 16, 1986 between the Registrant and First Chicago Trust Company of New York (Rights Agent) (filed by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 4(b)(i) Rights Agreement Amendment No. 1 dated as of January 18, 1995 between the Registrant and First Chicago Trust Company of New York (Rights Agent) (filed by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2000). 4(b)(ii) Rights Agreement Amendment No. 2 dated as of January 18, 1995 between the Registrant and First Chicago Trust Company of New York (Rights Agent) (filed by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2000). 4(b)(iii) Rights Agreement Amendment No. 3 dated as of October 15, 1996 between the Registrant and First Chicago Trust Company of New York (Rights Agent) (filed by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2001). 4(b)(iv) Rights Agreement Amendment No. 4 dated as of November 10, 1997 between the Registrant and Norwest Bank Minnesota, N.A., [now known as Wells Fargo Bank Minnesota, N.A.] (Rights Agent) (filed by reference to the exhibit contained within the Registrant's Quarterly Report on Form 10-Q dated December 26, 1997).
Reference Number per Item 601 of Regulation S-K Page -------------- ---- Note: The amount of long-term debt ----- authorized under any instrument defining the rights of holders of long-term debt of the Registrant, other than as noted above, does not exceed ten percent of the total assets of the Registrant and its subsidiaries on a consolidated basis. Therefore, no such instruments are required to be filed as exhibits to this Form. The Registrant agrees to furnish copies of such instruments to the Commission upon request. *99 Important Factors and Assumptions Regarding Forwarding-Looking Statements. 23 *Filed herewith. (b) Reports on Form 8-K: ------------------- The Company filed three Report on Form 8-K, described as follows: 1. Dated July 10, 2001 to report the Condensed Consolidated Results of Operations for Thermacore and Modine. 2. Dated July 18, 2001 to report the projected earnings for the coming fiscal year. 3. Dated October 17, 2001, as referenced in Item 5, above, to report financial results for the quarter ending September 26, 2001, the Company's upcoming restructuring actions and the Company's intention to reduce the next quarter's dividend by 50% as compared with the previous quarterly rate.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MODINE MANUFACTURING COMPANY (Registrant) By: E. T. THOMAS ------------------------------------ E. T. Thomas, Senior Vice President, and Chief Financial Officer (Principal Financial Officer) Date: November 7, 2001 By: D. R. ZAKOS ------------------------------------ D. R. Zakos, Vice President, General Counsel and Secretary