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, 1998 ----------------- 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 incorporation (I.R.S. Employer 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 (414) 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 5, 1999 ------------------------------ ------------------------------- Common Stock, $0.625 Par Value 29,509,029
MODINE MANUFACTURING COMPANY INDEX Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - December 26 and March 31, 1998 3 Consolidated Statements of Earnings - For the Three Months Ended December 26, 1998 and 1997 and the Nine Months Ended December 26, 1998 and 1997 4 Consolidated Statements of Cash Flows - For the Nine Months Ended December 26, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10 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 21
<TABLE> MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS December 26, 1998 and March 31, 1998 (In thousands, except per-share amounts) (Unaudited) <CAPTION> December 26, 1998 March 31,1998 ----------------- ------------- <S> <C> <C> ASSETS - ------ Current assets: Cash and cash equivalents $ 36,231 $ 36,410 Trade receivables, less allowance for doubtful accounts of $3,994 and $4,585 174,548 162,177 Inventories 160,208 152,674 Deferred income taxes and other current assets 39,859 41,922 -------- -------- Total current assets 410,846 393,183 -------- -------- Other assets: Property, plant, and equipment -- net 296,659 248,253 Investment in affiliates 36,120 8,376 Goodwill and other intangible assets -- net 82,928 59,355 Deferred charges and other noncurrent assets 52,639 49,857 -------- -------- Total other assets 468,346 365,841 -------- -------- Total assets $879,192 $759,024 ======== ======== <CAPTION> LIABILITIES AND SHAREHOLDERS' INVESTMENT - ---------------------------------------- <S> <C> <C> Current liabilities: Short-term debt $ 44,269 $ 20,878 Long-term debt -- current portion 8,264 2,835 Accounts payable 79,700 84,345 Accrued compensation and employee benefits 47,611 48,081 Income taxes 15,843 10,073 Accrued expenses and other current liabilities 28,068 26,516 -------- -------- Total current liabilities 223,755 192,728 -------- -------- Other liabilities: Long-term debt 148,239 89,587 Deferred income taxes 13,732 14,258 Other noncurrent liabilities 41,758 39,976 -------- -------- Total other liabilities 203,729 143,821 -------- -------- Total liabilities 427,484 336,549 -------- --------
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 13,318 12,384 Retained earnings 457,899 423,001 Foreign currency translation adjustment (6,614) (8,102) Treasury stock at cost: 872 and 678 shares, respectively (29,753) (20,977) Restricted stock - unamortized value (2,106) (2,795) -------- -------- Total shareholders' investment $451,708 $422,475 -------- -------- Total liabilities and shareholders' investment $879,192 $759,024 ======== ======== <FN> (See accompanying notes to consolidated financial statements.) </TABLE>
<TABLE> MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF EARNINGS For the three months ended December 26, 1998 and 1997 For the nine months ended December 26, 1998 and 1997 (In thousands, except per-share amounts) (Unaudited) <CAPTION> Three months ended Nine months ended -------------------- -------------------- December 26 December 26 -------------------- -------------------- 1998 1997 1998 1997 -------------------- -------------------- <S> <C> <C> <C> <C> Net Sales $284,355 $267,699 $830,420 $785,428 Cost of sales 207,242 192,114 598,891 559,513 -------- -------- -------- -------- Gross profit 77,113 75,585 231,529 225,915 Selling, general, and administrative expenses 51,020 45,015 145,022 135,839 -------- -------- -------- -------- Income from operations 26,093 30,570 86,507 90,076 Non-operating income 4,852 1,918 12,041 5,993 Interest expense (1,718) (842) (3,743) (2,950) Non-operating expense (1,265) (1,634) (4,515) (4,859) -------- -------- -------- -------- Earnings before income taxes 27,962 30,012 90,290 88,260 Provision for income taxes 10,621 12,176 33,788 34,010 -------- -------- -------- -------- Net earnings $ 17,341 $ 17,836 $ 56,502 $ 54,250 ======== ======== ======== ======== Net earnings per share of common stock - Basic $0.59 $0.60 $1.91 $1.82 - Assuming dilution $0.58 $0.59 $1.88 $1.79 ======== ======== ======== ======== Dividends per share $0.21 $0.19 $0.63 $0.57 ======== ======== ======== ======== Weighted average shares -- basic 29,548 29,720 29,603 29,762 Weighted average shares -- diluted 29,992 30,316 30,075 30,297 ======== ======== ======== ======== <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, 1998 and 1997 (Unaudited) <CAPTION> Nine months ended December 26 ----------------------------- 1998 1997 ---------- ---------- <S> <C> <C> Net cash provided by operating activities $ 89,925 $ 72,160 Cash flows from investing activities: Expenditures for property, plant, and equipment (68,988) (52,668) Acquisitions, excluding cash acquired (19,826) - Investments in affiliates (17,085) - Proceeds from dispositions of property, plant, and equipment 315 1,883 Other -- net (170) (91) -------- -------- Net cash (used for) investing activities (105,754) (50,876) Cash flows from financing activities: Increase in short-term debt -- net 22,895 11,158 Additions to long-term debt 45,773 15,179 Reductions of long-term debt (22,631) (27,273) Issuance of common stock, including treasury stock 3,012 3,364 Purchase of treasury stock (14,765) (11,480) Cash dividends paid (18,634) (16,960) -------- -------- Net cash provided by/(used for) financing activities 15,650 (26,012) -------- -------- Net (decrease) in cash and cash equivalents (179) (4,728) Cash and cash equivalents at beginning of period 36,410 34,822 -------- -------- Cash and cash equivalents at end of period $ 36,231 $ 30,094 ======== ======== <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, 1998 March 31, 1998 ------------------------------------------------------------- Raw materials $ 36,458 $ 41,164 Work in process 41,197 41,231 Finished goods 82,553 70,279 -------- -------- Total inventories $160,208 $152,674 ======== ======== 2. Property, plant, and equipment is composed of: (In Thousands) ------------------------------------------------------------- December 26, 1998 March 31, 1998 ------------------------------------------------------------- Gross property, plant & equipment $586,225 $510,868 Less accumulated depreciation (289,566) (262,615) -------- -------- Net property, plant & equipment $296,659 $248,253 ======== ======== 3. Intangible assets include: (In Thousands) ------------------------------------------------------------- December 26, 1998 March 31, 1998 Goodwill and other intangible assets $106,114 $76,505 Less accumulated amortization (23,186) (17,150) -------- ------- Net goodwill and other intangible assets $ 82,928 $59,355 ======== ======= 4. Recent developments concerning legal proceedings reported in the Company's Form 10-K report for the year ended March 31, 1998, are updated in Part II, Other Information, Item 1,
Legal Proceedings. While the outcome of these proceedings is uncertain, in the opinion of the Company's management, any liabilities that may result from such proceedings are not reasonably likely to have a material effect on the Company's liquidity, financial condition, or results of operations. 5. The computation of basic and diluted earnings per share is as follows: (In thousands, except per-share amounts) ---------------------------------------------------------------------- Three months Nine months ended ended December 26 December 26 ---------------------------------------------------------------------- 1998 1997 1998 1997 ---------------------------------------------------------------------- Net earnings per share of ------------------------- common stock: ------------ - Basic $0.59 $0.60 $1.91 $1.82 - Assuming dilution $0.58 $0.59 $1.88 $1.79 Numerator: ---------- Income available to common shareholders $17,341 $17,836 $56,502 $54,250 Denominator: ------------ Weighted average shares outstanding - Basic 29,548 29,720 29,603 29,762 Effect of dilutive securities - options* 444 596 472 535 ------- ------- ------- ------- Weighted average shares outstanding - Assuming dilution 29,992 30,316 30,075 30,297 * 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 $33.68 $34.42 $33.61 $31.81 Number of shares 297 None 297 45 6. On August 6, 1998, the Company completed the acquisition of a 50% interest in Radiadores (Visconde) Ltda., a Brazilian heat transfer company. The investment included cash and a promissory note. The investment is accounted for using the equity method. The company's share of the results of operations is currently included in the consolidated financial statements using a two-month delay. The Company anticipates that the results will be reported using a one- month delay by the end of the fourth quarter.
Visconde employs approximately 750 people at facilities in San Paulo. It produces heat-exchanger components, assemblies, and modules primarily for the aftermarket, but also for sale to original-equipment customers in the truck, engine, agricultural-tractor, hydraulic-system, compressor, marine, construction-equipment, power-generator, and industrial markets. On October 8, 1998, the Company completed the acquisition of Core Holdings, Inc. of Orlando, Florida, an aftermarket wholesale distributor specializing in complete lines of vehicular engine-cooling and air-conditioning systems products. The acquisition purchase price was $24.3 million. The transaction was financed with cash, existing short-term borrowing facilities and $3.9 million of promissory notes to the seller. The investment is accounted for using the purchase method. Goodwill created by the acquisition is $22.5 million and is being amortized on a straight-line basis over 15 years. The results of operations are included in the consolidated financial statements for the quarter since the effective date of the acquisition. Core Holdings had sales of $54.1 million in 1997. Its 350 employees operate out of more than 50 locations throughout the southeastern United States. Core Holdings also ships its full line of air-conditioning parts to warehouse distributors in other geographic markets. It distributes primarily to radiator shops, air-conditioning shops, specialty repair shops and garages. In addition, it manufactures air-conditioning parts at a plant in Texas. The investments do not have a material effect on the consolidated results of operations and, accordingly, pro- forma financial information is not presented. 7. On April 1, 1998, the Company adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income," which became effective for interim and annual financial statement periods in fiscal years beginning after December 15, 1997. This pronouncement established new standards for reporting comprehensive income and its components; however, the adoption of SFAS No. 130 has had no impact on the Company's net income or shareholders' equity. For the Company, the difference between net income as historically reported in the statements of consolidated income, and comprehensive income, is foreign currency translation recorded in shareholders' equity. Comprehensive earnings for the periods ended December 26, 1998 and 1997, respectively, were $19,459 thousand and $17,765 thousand for the three months and $57,990 thousand and $50,765 thousand for the nine months. 8. On June 15, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses, depends on the intended use of the derivative and its resulting designation. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company will adopt SFAS 133 beginning April 1, 2000. Adoption of this statement is not expected to have a material effect on earnings or financial position. 9. 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 the Company's March 31, 1998 Annual Report filed with the Securities and Exchange Commission. The financial information furnished includes all normal recurring accrual adjustments which are, in the opinion of Management, necessary for a fair statement of results for the interim period. Results for the first nine months of fiscal 1999 are not necessarily indicative of the results to be expected for the full year. 10. 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, such statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company's 1998 Annual Report to stockholders which statements and notes were incorporated by reference in the Company's Form 10-K Report for the year ended March 31, 1998.
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 the Company'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 1998-99 with the Third Quarter - ----------------------------------------------------------------- of 1997-98 - ---------- Net sales for the third quarter of fiscal 1998-99 were $284.4 million, up 6.2% from the $267.7 million reported in the third quarter of last year. Quarterly sales increased substantially in Europe as a result of new programs. Currency translation effects had a small positive impact upon year over year sales for the quarter. On a worldwide basis the original-equipment automotive and industrial markets registered the largest sales increases. Domestic aftermarket sales were assisted by the recent acquisition of Core Holdings, Inc. Short-term softening in the agricultural- and construction- equipment market and the European truck market hampered revenue growth in the quarter. Also effecting the quarter were a slow seasonal start in the building-heating market as well as on-going pricing pressures in the North American aftermarket and in Europe. Gross margin decreased 1.1%, as a percentage of sales, over the third quarter of the previous year to 27.1% from 28.2%. Lower gross margins earned in recently opened European production facilities were the main factor leading to the decline. Selling, general and administrative expenses increased 13.3% over last year's third quarter while increasing 1.1% as a percentage of sales. Excluding the recent Core Holdings acquisition, selling, general and administrative expenses grew by only 5.5%, consistent with sales growth and inflation. Operating income decreased 2.2%, as a percentage of sales over last year's third quarter, to 9.2 % from 11.4%. Contributing factors were lower margins earned at newly opened production facilities in Europe and the effect of including the Core acquisition in the quarterly operating results for the first time. Average outstanding debt levels during the quarter increased by approximately $84.6 million, or 84.7%, from the same quarter a year ago while interest expense increased 104%, for the same time
period. The October acquisition of Core Holdings, including higher interest rate debt assumed, and the joint venture purchase and start-up activity reported earlier in the year were the main factors leading to higher borrowing levels and interest expense. Non-operating income in the current quarter, included a gain on the sale of a closed facility in Michigan. The effective tax rate decreased by 2.6% when compared to the same period last year. The largest factor influencing the decrease was a differential in foreign tax rates compared to U.S. rates. Net earnings for the third quarter decreased 2.8% to $17.3 million, or $0.59 basic and $0.58 diluted earnings per share from last year's $17.8 million, or $0.60 basic and $0.59 diluted earnings per share. Annualized return on shareholders' investment, at 15.5% for the quarter, was in management's target range of 15-20%. Comparison of the First Nine Months of 1998-99 with the First - ------------------------------------------------------------- Nine Months of 1997-98 - ---------------------- Net sales for the first nine months of fiscal 1998-99 reached a record $830.4 million, up 5.7% from the $785.4 million reported in the first nine months of last year. Revenues from European operations were up significantly compared with the same period a year ago. Currency translation effects had a minimal impact upon year over year sales. On a worldwide basis the strongest sales increases were to the original-equipment automotive market and to the industrial market. Other major markets registered small increases except for the building-HVAC market which remained down for the year. Gross margin decreased 0.9%, as a percent of sales, over the first nine months of the previous year to 27.9% from 28.8%. Lower gross margins earned in recently opened European production facilities were a contributing factor to the overall decline. Selling, general and administrative expenses increased 6.8% over the first nine months last year while increasing 0.2% as a percentage of sales. Without the recent Core Holdings acquisition, these expenses grew by only 4.2%, consistent with sales growth and inflation. Operating income decreased by 4.0% over the first nine months of the previous year, while decreasing 1.1% as a percentage of sales. Among the contributing factors were lower margins earned at newly opened production facilities in Europe and the effect of including the Core Holdings acquisition in the year-to-date operating results. Average outstanding debt levels during the first nine months increased by approximately $47.1 million, or 46.6%, over the same period a year ago. Corresponding interest expense increased by 26.9%, or $0.8 million, over the same nine-month period, a year ago. An increase in major property, plant and equipment projects
resulted in larger amounts of interest being capitalized in the current period which partially offset the increased interest expense resulting from the October acquisition of Core Holdings and the joint venture activity reported earlier in the year. Non-operating income included an amount for past royalties related to worldwide licensing agreements for Modine's patented PF technology and a gain on the sale of a closed facility in Michigan. The effective tax rate decreased by 1.1% when compared to the same period last year. Net earnings for the nine months increased 4.2% to $56.5 million, or $1.91 basic and $1.88 diluted earnings per share from last year's $54.3 million, or $1.82 basic and $1.79 diluted earnings per share. Annualized return on shareholders' investment, at 17.2% for the nine months, was in management's target range of 15-20%. Year 2000 Remediation Program - ----------------------------- General ------- In response to the Year 2000 issue, the Company initiated a number of projects in early 1997 to identify, evaluate, and implement changes to its existing computerized business systems. Each of the projects followed a four phase approach which included inventory, assessment, remediation or replacement, and system integration testing. All of the Year 2000 efforts were carried on globally, and plans, executive sponsorship and funding were put in place to address the effort. A number of the Company's current systems were already Year 2000 compliant and where third party software was being utilized, upgrades to the vendor's Year 2000 compliant versions have been completed or are in process. In addition to business systems, additional programs to ensure supplier continuity and process capability were initiated. All of the above projects are currently being funded through normal operating cash flow. The total cost associated with the required modifications is not expected to be material to the Company's consolidated results of operations and financial position. Business Systems ---------------- In North America, the conversion and remediation effort of the Company's internally developed systems is being addressed by an external party. The external party is also validating the Year 2000 changes with internally prepared tests scripts. Computer hardware and LAN infrastructure is also in the process of being converted to ensure compliance in its business system and desktop operation. The expected Year 2000 costs for North America are $4.5 million of which approximately 80% has been already expended. The systems conversion project is in the last phase, system integration testing, and is being conducted by Modine internal staff. The project is 80% complete, and is scheduled for a second calendar quarter 1999 completion. Recent accomplishments in North America during the quarter include the conversion of
business systems in Mexico and Canada to achieve Year 2000 compliance through a controlled series of system migration and software upgrades. Outside of North America, Year 2000 compliance is being achieved by replacing current applications with SAP, a Year 2000 compliant package of integrated manufacturing and financial software. Also included are hardware migrations, LAN, e-mail and desktop upgrades and replacements. The Year 2000 international cost associated with the project is $4.6 million of which 80% has been expended. The project is progressing and, depending on site, is in various stages of readiness, most of which are completed. Overall, the European project is 80% complete, and scheduled for a third calendar quarter 1999 completion. Suppliers & Customers --------------------- With respect to suppliers, the Company has surveyed its material and service suppliers to determine whether they are actively involved in Year 2000 remediation projects that will ensure that services to Modine will continue without interruption to any of Modine's business processes. The Company has since developed a second, more detailed survey that has been resent to our suppliers to gain better insight into their actual Year 2000 status. To date, 85% of the surveys have been returned, of which 100% have indicated that they are or will be compliant by July 1, 1999. The responses are being used as the basis of developing specific contingency plans for those suppliers who cannot meet our compliance deadline. With our dependency on customers for sales and cash flow, Year 2000 interruptions in our customers' operations could result in reduced sales, increased inventory or receivable levels and cash flow reductions. While these events are possible, our customer base is broad enough to minimize the effects of a single occurrence. Facilities & Embedded Systems ----------------------------- In addition, for non-IT areas, a major effort to assess Modine's production facilities to include embedded systems, is in process and is being conducted by a third party consulting firm specialized in this type of activity. The facilities evaluation was completed in the fourth calendar quarter of 1998. Dependent upon formal risk assessments by facility and corporate teams, recommended actions include testing, repair, replacement, upgrading, and/or retirement of specific systems or components. Modine expects to complete any testing and/or any systems remediation activities by the end of the second calendar quarter of 1999, and development of contingency plans, if needed, by the third calendar quarter of 1999. Cost for the inventory assessment is $300,000. The projected budget for remediations is estimated to be $360,000. Risks & Contingency Planning ---------------------------- The failure to correct a material Year 2000 problem could result in an interruption of the Company's business activities or
operations. Modine's Year 2000 projects were designed and are being implemented to significantly reduce that possibility. Despite the significant efforts to address Year 2000 concerns, the Company could potentially experience disruptions to some of its operations, including those resulting from non-compliant systems used by its suppliers and customers. To alleviate those concerns, Modine is actively involved in developing and implementing contingency plans in the critical areas of the business. We have already issued operational contingency plans to our manufacturing facilities and are continuing to formalize system and supplier contingency plans. The Company will continue that process throughout 1999 whenever the risk appears to be warranted. Euro Conversion - --------------- A single currency called the Euro was introduced in Europe on January 1, 1999. Eleven of the fifteen member countries of the European Union agreed to adopt the Euro as their common legal currency on that date. Fixed conversion rates between these participating countries' existing currencies and the Euro have been established. The legacy currencies are scheduled to remain legal tender as denominations of the Euro until at least January 1, 2002, but not later than July 1, 2002. During this transition period, the parties may settle transactions using either the Euro or a participating country's legacy currency. Certain of Modine's business functions in Europe introduced Euro- capability as of January 1, 1999, including systems for making and receiving certain payments, pricing and invoicing. Other business functions and financial reporting will be converted to the Euro by the end of the transition period, but may be converted earlier where operationally efficient or cost effective, or to meet customer requirements. Any delays in the Company's ability to become Euro compliant, or in its key suppliers and customers to be Euro compliant could result in an interruption of the Company's business activities or operations. The impact, if any, of these interruptions upon the results of operations, financial condition and cash flows has not yet been determined. Outlook for the Remainder of the Year - ------------------------------------- Management expects short-term market factors to result in fiscal 1999 sales growth being close to earlier projections made last summer while earnings are anticipated to increase at a slightly lower percentage. Beginning in calendar year 2000, the Company expects to benefit from significant new business with large customers such as Chrysler and PACCAR. Improved profitability in Germany from new business, efficiency improvements, and a reduced workforce are also anticipated. These forward-looking statements regarding sales and earnings are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. See "Important Factors and Assumptions Regarding Forward-Looking Statements" attached hereto as exhibit 99 and incorporated herein by reference.
FINANCIAL CONDITION - ------------------- Comparison between December 26, 1998 and March 31, 1998 - ------------------------------------------------------- Current Assets - -------------- Cash and cash equivalents decreased by $0.2 million to a total of $36.2 million. The Company's primary sources of liquidity and capital resources were cash provided by operations and the use of available borrowing facilities. Net trade receivables increased $12.4 million, or 7.6%. Approximately $2.4 million of the increase can be attributed to the recent Core Holdings acquisition. The remainder of the overall increase can be attributed to higher sales for the third quarter of fiscal 98-99 in the amount of $29.4 million or 11.5% compared to the sales in the fourth quarter of the prior year. Overall inventory levels increased by $7.5 million. While the acquisition of Core Holdings increased inventories by more than this amount, others factors affecting inventory levels were ongoing management efforts to control inventory levels, changes in sales volumes, exchange rate fluctuations in Europe, process and product line changes at certain manufacturing facilities and a normal seasonal decline in the HVAC division. Deferred income taxes and other current assets decreased $2.1 million. The largest items influencing change were a reduction in unbilled customer tooling, an increase in foreign currency contracts hedging sales in French francs, an increase in receivables from the company's stock plans trustee and the Core Holdings acquisition. Working capital decreased approximately 6.7% to $187.1 million from $200.5 million and the current ratio declined slightly to 1.8 to 1 from 2.0 to 1. A number of categories experienced changes, with the largest item influencing the change being an increase in debt due within one year. Partially offsetting this change were increases in both trade receivables and inventory. The Core Holdings acquisition was also a factor contributing to the overall changes recorded. Property, Plant and Equipment - ----------------------------- Net property, plant and equipment increased $48.4 million to $296.7 million as capital expenditures exceeded depreciation, retirements and foreign currency translation impact. Outstanding material commitments for capital expenditures were $49.6 million at December 26, 1998, compared to $48.1 million at March 31, 1998. The largest commitment of approximately $27.2 million is related to facility expansions, improvements, equipment upgrades, and new equipment for a number of European plants. Another $4.2 million relates to the construction of a new technical center in Racine, Wisconsin. The outstanding commitments will be financed primarily through internally generated cash and external borrowing, as required.
Goodwill and Other Intangible Assets - ------------------------------------ Goodwill and other intangible assets, net of accumulated amortization increased $23.6 million. The main factor contributing to the increase was the $21.5 million recorded in conjunction with the Core Holdings acquisition Amortization and foreign currency translations were also factors contributing to the overall change. Deferred Charges and Other Noncurrent Assets - -------------------------------------------- Deferred charges and other noncurrent assets increased $2.8 million. The net increase is primarily the result of continuing recognition of the surplus in the Company's overfunded pension plans. Current Liabilities - ------------------- Accounts payable and various accrued expenses decreased $3.6 million. An increase of $7.0 million from the Core acquisition was offset by normal timing differences in the level of operating activity in other areas of the company. Accrued income taxes increased $5.8 million with Core contributing $1.7 million of the increase with the remainder arising from normal timing differences in making estimated tax payments and federal tax benefits resulting from the exercise of stock options. Debt - ---- Outstanding debt increased by $87.5 million from March 31, 1998. Long-term debt increased by $64.1 million. The major events influencing the change were the purchase of Core Holdings, Inc., headquartered in Miami, the purchase of a 50% interest in Radiadores Visconde located in Brazil, the startup of the newly formed joint venture company, Daikin-Modine, Inc., and capital expenditures in Europe for facility expansion and modernization. Most of the increase in the long-term debt was domestic. During this time, short-term debt increased by $23.4 million. The U.S. portion of short-term debt increased by $19.0 million and the European portion outstanding increased $4.4 million. Consolidated available lines of credit increased by $1.4 million. Domestically, the Company's multi-currency revolver was increased from $25 million to $50 million, and is fully utilized. Foreign unused lines of credit at December 26, 1998 were $14.7 million. Total debt as a percentage of shareholders' equity increased from 26.8% to 44.4%. Shareholders' Investment - ------------------------ Total shareholders' investment increased by $29.2 million to a total of $451.7 million. The net increase came primarily from net earnings of $56.5 million for the first nine months. Dividends paid to shareholders of $18.6 million, net treasury
stock activity of $8.8 million, favorable foreign currency translation impact of $1.5, and other minor changes to the capital accounts also contributed to the change. Other - ----- Subsequent to the end of the third quarter, recent economic events in Brazil led to the devaluation of its currency. As a result of the devaluation and subsequent exchange rate movements, the value of the Company's investment in its recently formed Brazilian joint venture has been affected. Although the devaluation is expected to have a minimal impact on the Company's fourth quarter net earnings, it will unfavorably impact the foreign currency translation adjustment to be reported in shareholders' equity and comprehensive earnings if exchange rates remain at their current levels. PART II. OTHER INFORMATION Item 1. Legal Proceedings. In the normal course of business, the Company 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 the Company. While the outcome of these proceedings is uncertain, in the opinion of the Company's Management and counsel, any liabilities that may result from such proceedings are not reasonably likely to have a material effect on the Company's liquidity, financial condition or results of operations. Many of the pending damage claims are covered by insurance and, in addition, the Company from time to time establishes reserves for uninsured liabilities. The Mitsubishi and Showa Litigation ----------------------------------- In November 1991, the Company filed a lawsuit in the Federal District Court in Milwaukee, Wisconsin against Mitsubishi Motor Sales of America, Inc. and Showa Aluminum Corporation, alleging infringement of the Company's Patent No. 4,998,580 on parallel- flow air-conditioning condensers. The suit seeks an injunction to prohibit continued infringement and accounting for damages, a trebling of such damages for willful infringement, and reimbursement of attorneys' fees. In December of 1991, the Company submitted a complaint to the U. S. International Trade Commission (ITC) requesting that the ITC ban the import and sale of parallel-flow air-conditioning condensers and systems or vehicles that contain them, which are the subject of the aforementioned lawsuit. In August 1997, the ITC issued an Order excluding from U.S. import Showa condensers that infringe Modine Manufacturing Company's parallel-flow patent. The ITC's Order covers condensers, their parts, and certain products including them, such as air-conditioning kits and systems. It directs the U.S. Customs Service to exclude from importation into the United
States such products manufactured by Showa Aluminum Corporation of Japan and Showa Aluminum Corporation of America. The decision is based on a Modine U.S. patent covering condensers with tube flow path hydraulic diameters less than 0.04822 inches. The Showa companies must certify to Customs officials that any condenser items imported by them do not infringe Modine's parallel-flow patent. The companies must also file annual reports with the ITC regarding their sales of Showa parallel-flow condensers in the United States. In July of 1994, Showa filed a lawsuit against the Company in the Federal District Court in Columbus, Ohio alleging infringement by the Company of Showa's patents pertaining to double circuit condensers and baffles therefor (In June, 1995, the Company filed a motion for partial summary judgment against such lawsuit). In December of 1994, the Company filed another lawsuit against Mitsubishi Motor Sales of America, Inc. and Showa Aluminum Corporation in the Federal District Court in Milwaukee, Wisconsin pertaining to the Company's newly-issued Patent No. 5,372,188 also pertaining to parallel-flow air-conditioning condensers but having tube flow path hydraulic diameters less than 0.070 inches. Both 1994 suits have been stayed pending the outcome of re- examination in the U. S. Patent Office of the patents involved. In October of 1997, Modine has been issued Japanese Patent No. 2,132,321 covering parallel-flow air conditioning condensers having tube flow path hydraulic diameters less than 0.070 inches. In August of 1998, the Company filed a patent infringement suit in Japan against Showa with respect to such patent seeking an injunction and damages. A similar patent has been issued to the Company by the European Patent Office and is currently in the opposition stage. All legal and court costs associated with these cases have been expensed as they were incurred. Other previously reported legal proceedings have been settled or the issues resolved so as to not merit further reporting. Item 5. Other Information. On October 8, 1998, the Company completed the acquisition of Core Holdings, Inc. of Orlando, Florida, an aftermarket wholesale distributor specializing in complete lines of vehicular engine- cooling and air-conditioning systems products. For additional information see footnote 6 to the Notes to Consolidated Financial Statements (Unaudited) herein. Subsequent to the end of the quarter, on January 20, 1999, the Company's Board of Directors elected Marsha Williams to serve as a new director of the corporation, expanding the number of board members to ten. Please see the Company's News Release dated February 8, 1999, attached to this Report Form 10-Q as Exhibit 99(b), for further information. As previously reported, in May of 1986, the Board of Directors authorized the Company to acquire up to 10% per year of the issued and outstanding shares of the common stock of the Company. Pursuant to this authorization, the Company purchases shares of its common stock from time to time as such shares become available on the open market, from the Company's pension plans,
or in private transactions for resale to the employee stock purchase plans and for other corporate purposes. Since December 31, 1996, the Company has purchased at market price a total of 1,058,203 shares, 132,884 shares of which were purchased during the fourth fiscal quarter of 1996-97; 362,427 shares of which were purchased from April 1, 1996 through December 31, 1997; 160,293 shares of which were purchased during the fourth fiscal quarter of 1997-98, and 402,599 shares of which were purchased from April 1, 1998 through December 31, 1998. The Company currently has 833,135 shares (as of February 5, 1999) in its Treasury. 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 - -------------- ---- 3(a) Restated Articles of Incorporation (as amended) (filed by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1994). 3(b)* Restated By-Laws (as amended January 20, 1999). 22 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 exhibit contained within the Registrant's Current Report on Form 8-K dated January 13, 1995). 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 exhibit contained within the Registrant's Current Report on Form 8-K dated January 13, 1995).
Reference Number per Item 601 of Regulation S-K Page - -------------- ---- 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., (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. 27* Financial Data Schedule (electronic transmission only). 99(a)* Important Factors and Assumptions Regarding Forwarding-Looking Statements. 33 99(b)* News Release dated February 8, 1999 regarding new director. 34 *Filed herewith. (b) Reports on Form 8-K: ------------------- The Company filed no Reports on Form 8-K during the quarter ended December 26, 1998.
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: A. D. REID --------------------------------------- A. D. Reid, Vice President, Finance and Chief Financial Officer (Principal Financial Officer) Date: February 8, 1998 By: W. E. PAVLICK --------------------------------------- W. E. Pavlick, Senior Vice President, General Counsel and Secretary