form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D. C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

or

o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 1-1373

MODINE MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
 
WISCONSIN
 
39-0482000
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
1500 DeKoven Avenue, Racine, Wisconsin
 
53403
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code (262) 636-1200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ                                                                                                 Accelerated Filer o

Non-accelerated Filer o (Do not check if a smaller reporting company)    Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No þ

The number of shares outstanding of the registrant's common stock, $0.625 par value, was 32,273,672 at August 5, 2008.
 


 
 

 
 
MODINE MANUFACTURING COMPANY
INDEX
 
PART I. 
1
Item 1. 
1
Item 2. 
25
Item 3. 
34
Item 4. 
38
PART II. 
39
Item 1.
39
Item 2.
39
Item 4. 
40
Item 6. 
41
SIGNATURE
42



PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
 
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended June 30, 2008 and 2007
(In thousands, except per share amounts)
 (Unaudited)
 
   
Three months ended June 30
 
   
2008
   
2007
 
Net sales
  $ 499,719     $ 444,236  
Cost of sales
    421,419       373,881  
Gross profit
    78,300       70,355  
Selling, general and administrative expenses
    62,822       56,361  
Restructuring income
    (52 )     (240 )
Impairment of long-lived assets
    134       -  
Income from operations
    15,396       14,234  
Interest expense
    3,126       2,775  
Other income – net
    (2,172 )     (3,249 )
Earnings from continuing operations before income taxes
    14,442       14,708  
Provision for income taxes
    7,679       3,961  
Earnings from continuing operations
    6,763       10,747  
Earnings from discontinued operations (net of income taxes)
    175       254  
Gain on sale of discontinued operations (net of income taxes)
    849       -  
Net earnings
  $ 7,787     $ 11,001  
 
               
Earnings per share of common stock – basic:
               
Continuing operations
  $ 0.21     $ 0.33  
Earnings from discontinued operations
    -       0.01  
Gain on sale of discontinued operations
    0.03       -  
Net earnings – basic
  $ 0.24     $ 0.34  
 
               
Earnings per share of common stock – diluted:
               
Continuing operations
  $ 0.21     $ 0.33  
Earnings from discontinued operations
    -       0.01  
Gain on sale of discontinued operations
    0.03       -  
Net earnings – diluted
  $ 0.24     $ 0.34  
                 
Dividends per share
  $ 0.100     $ 0.175  

The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
 
1


MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
June 30, 2008 and March 31, 2008
(In thousands, except per share amounts)
(Unaudited)
 
   
June 30, 2008
   
March 31, 2008
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 45,072     $ 38,595  
Short term investments
    2,373       2,909  
Trade receivables, less allowance for doubtful accounts of $1,741 and $2,218
    288,318       294,935  
Inventories
    136,694       125,499  
Assets held for sale
    -       6,871  
Deferred income taxes and other current assets
    72,254       64,482  
Total current assets
    544,711       533,291  
Noncurrent assets:
               
Property, plant and equipment – net
    541,108       540,536  
Investment in affiliates
    21,764       23,692  
Goodwill
    46,196       44,832  
Intangible assets – net
    9,851       10,485  
Assets held for sale
    -       5,522  
Other noncurrent assets
    10,868       9,925  
Total noncurrent assets
    629,787       634,992  
Total assets
  $ 1,174,498     $ 1,168,283  
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Short-term debt
  $ 11     $ 4,352  
Long-term debt – current portion
    381       248  
Accounts payable
    201,822       193,228  
Accrued compensation and employee benefits
    71,510       68,885  
Income taxes
    10,732       16,562  
Liabilities of business held for sale
    -       3,093  
Accrued expenses and other current liabilities
    52,059       52,546  
Total current liabilities
    336,515       338,914  
Noncurrent liabilities:
               
Long-term debt
    229,122       227,013  
Deferred income taxes
    23,735       23,634  
Pensions
    33,650       34,142  
Postretirement benefits
    26,370       26,669  
Liabilities of business held for sale
    -       166  
Other noncurrent liabilities
    33,699       34,627  
Total noncurrent liabilities
    346,576       346,251  
Total liabilities
    683,091       685,165  
Commitments and contingencies (See Note 20)
               
Shareholders' equity:
               
Preferred stock, $0.025 par value, authorized 16,000 shares, issued - none
    -       -  
Common stock, $0.625 par value, authorized 80,000 shares, issued 32,788 shares, respectively
    20,492       20,492  
Additional paid-in capital
    70,089       69,346  
Retained earnings
    350,529       345,966  
Accumulated other comprehensive income
    64,380       61,058  
Treasury stock at cost: 526 and 495 shares
    (13,788 )     (13,303 )
Deferred compensation trust
    (295 )     (441 )
Total shareholders' equity
    491,407       483,118  
Total liabilities and shareholders' equity
  $ 1,174,498     $ 1,168,283  

The notes to unaudited condensed consolidated financial statements are an integral part of these statements.

2

 
MODINE MANUFACTURING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended June 30, 2008 and 2007
(In thousands)
(Unaudited)
 
   
Three months ended June 30
 
   
2008
   
2007
 
             
Cash flows from operating activities:
           
Net earnings
  $ 7,787     $ 11,001  
Adjustments to reconcile net earnings with net cash provided by (used for) operating activities:
               
Depreciation and amortization
    19,587       19,385  
Other – net
    (913 )     (4,225 )
Net changes in operating assets and liabilities, excluding dispositions
    (11,343 )     (32,979 )
Net cash provided by (used for) operating activities
    15,118       (6,818 )
 
               
Cash flows from investing activities:
               
Expenditures for property, plant and equipment
    (24,149 )     (14,423 )
Proceeds from dispositions of assets
    10,801       3,320  
Settlement of derivative contracts
    657       1,322  
Other – net
    2,968       232  
Net cash used for investing activities
    (9,723 )     (9,549 )
 
               
Cash flows from financing activities:
               
Short-term debt – net
    (4,215 )     (4,601 )
Additions to long-term debt
    13,191       34,606  
Reductions of long-term debt
    (11,533 )     (14,661 )
Book overdrafts
    7,243       (2,296 )
Repurchase of common stock, treasury and retirement
    (486 )     (412 )
Cash dividends paid
    (3,224 )     (5,671 )
Other – net
    5       25  
Net cash provided by financing activities
    981       6,990  
 
               
Effect of exchange rate changes on cash
    101       484  
Net increase (decrease) in cash and cash equivalents
    6,477       (8,893 )
 
               
Cash and cash equivalents at beginning of period
    38,595       26,207  
Cash and cash equivalents at end of period
  $ 45,072     $ 17,314  

The notes to unaudited condensed consolidated financial statements are an integral part of these statements.

3

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
Note 1: Overview

The accompanying condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles (GAAP) in the United States and such principles were applied on a basis consistent with the preparation of the consolidated financial statements in Modine Manufacturing Company’s (Modine or the Company) Annual Report on Form 10-K for the year ended March 31, 2008 filed with the Securities and Exchange Commission.  The financial statements include all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods.  Results for the first three months of fiscal 2009 are not necessarily indicative of the results to be expected for the full year.

The March 31, 2008 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  In addition, certain notes and other information have been condensed or omitted from these interim financial statements.  Therefore, such statements should be read in conjunction with the consolidated financial statements and related notes contained in Modine's Annual Report on Form 10-K for the year ended March 31, 2008.

The Company’s debt agreements require it to maintain specified financial ratios and place certain limitations on dividend payments and the acquisition of Modine common stock.  The most restrictive limitations are debt-to-earnings before interest, taxes, depreciation and amortization (EBITDA) of not more than 3.0 to 1.0 ratio and earnings before interest and taxes (EBIT) to interest expense (interest expense coverage ratio) not less than a 2.0 to 1.0 ratio for the quarter ended June 30, 2008, decreasing to a ratio of 1.75 to 1.0 for the second and third quarters of fiscal 2009, increasing to a ratio of 2.25 to 1.0 for the fourth quarter of fiscal 2009 and the first quarter of fiscal 2010, and increasing to a ratio of 2.5 to 1.0 for fiscal quarters ending on or after September 30, 2009.  At June 30, 2008, the Company was in compliance with the debt agreements.  The Company anticipates remaining in compliance on a prospective basis with the limitations and financial ratios based on its current business projections.  In addition, the Company believes that its internally generated operating cash flow and existing cash balances, together with access to available external borrowings, will be sufficient to satisfy future operating, capital expenditure and strategic business opportunity costs.  If the Company is unable to meet the financial covenants and reach suitable resolution of such defaults with the lenders, it could have a material adverse effect on the future results of operations, financial position and liquidity of the Company.

Note 2: Significant Accounting Policies and Change in Accounting Principle

Consolidation principles:  The consolidated financial statements include the accounts of Modine Manufacturing Company and its majority-owned or Modine-controlled subsidiaries.  Material intercompany transactions and balances are eliminated in consolidation.  Prior to April 1, 2008, the operations of most subsidiaries outside the United States were included in the annual and interim consolidated financial statements on a one-month lag in order to facilitate a timely consolidation.

Starting April 1, 2008, the reporting year-end of these foreign operations was changed from February 28 to March 31.  This one-month reporting lag was eliminated as it is no longer required to achieve a timely consolidation due to improvements in the Company’s information technology systems.  In accordance with Emerging Issues Task Force (EITF) Issue No. 06-9, “Reporting a Change in (or the Elimination of) a Previously Existing Difference between the Fiscal Year-End of a Parent Company and That of a Consolidated Entity or between the Reporting Period of an Investor and That of an Equity Method Investee,” the elimination of this previously existing reporting lag is considered a change in accounting principle in accordance with Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections – A Replacement of Accounting Principles Board Opinion No. 20 and SFAS No. 3.”  Changes in accounting principles are to be reported through retrospective application of the new principle to all prior financial statement periods presented.  Accordingly, our financial statements for periods prior to fiscal 2009 have been changed to reflect the period-specific effects of applying this accounting principle.  This change resulted in an increase in retained earnings at March 31, 2008 of $3,476 which includes a cumulative effect of an accounting change of $6,154, net of income tax effect.  The impact of this change in accounting principle to eliminate the one-month reporting lag for foreign subsidiaries is summarized below for the Company’s results of operations and cash flows for the first quarter of fiscal 2008 and the consolidated balance sheet as of the end of fiscal 2008:

4

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
   
Three months ended June 30, 2007
 
   
As Reported
   
Adjustments
   
After Change in Accounting Principle
 
Net sales
  $ 444,073     $ 163     $ 444,236  
Cost of sales
    373,103       778       373,881  
Gross profit
    70,970       (615 )     70,355  
Selling, general and administrative expenses
    54,962       1,399       56,361  
Restructuring income
    (240 )     -       (240 )
Income from operations
    16,248       (2,014 )     14,234  
Interest expense
    2,789       (14 )     2,775  
Other income – net
    (4,129 )     880       (3,249 )
Earnings from continuing operations before income taxes
    17,588       (2,880 )     14,708  
Provision for income taxes
    5,192       (1,231 )     3,961  
Earnings from continuing operations
    12,396       (1,649 )     10,747  
Earnings from discontinued operations (net of income taxes)
    254       -       254  
Net earnings
  $ 12,650     $ (1,649 )   $ 11,001  
                         
Earnings per share of common stock – basic:
                       
Continuing operations
  $ 0.39     $ (0.06 )   $ 0.33  
Earnings from discontinued operations
    -       0.01       0.01  
Net earnings – basic
  $ 0.39     $ (0.05 )   $ 0.34  
 
                       
Earnings per share of common stock – diluted:
                       
Continuing operations
  $ 0.39     $ (0.06 )   $ 0.33  
Earnings from discontinued operations
    -       0.01       0.01  
Net earnings – diluted
  $ 0.39     $ (0.05 )   $ 0.34  
 
5

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)

March 31, 2008
                 
   
As Reported
   
Adjustments
   
After Change in Accounting Principle
 
ASSETS
                 
Current assets:
                 
Cash and cash equivalents
  $ 38,313     $ 282     $ 38,595  
Short term investments
    2,909       -       2,909  
Trade receivables
    287,383       7,552       294,935  
Inventories
    123,395       2,104       125,499  
Assets held for sale
    6,871       -       6,871  
Deferred income taxes and other current assets
    63,281       1,201       64,482  
Total current assets
    522,152       11,139       533,291  
Noncurrent assets:
                       
Property, plant and equipment – net
    533,807       6,729       540,536  
Investment in affiliates
    23,150       542       23,692  
Goodwill
    44,935       (103 )     44,832  
Intangible assets – net
    10,605       (120 )     10,485  
Assets held for sale
    5,522       -       5,522  
Other noncurrent assets
    9,687       238       9,925  
Total noncurrent assets
    627,706       7,286       634,992  
Total assets
  $ 1,149,858     $ 18,425     $ 1,168,283  
LIABILITIES AND SHAREHOLDERS' EQUITY
                       
Current liabilities:
                       
Short-term debt
  $ 11     $ 4,341     $ 4,352  
Long-term debt – current portion
    292       (44 )     248  
Accounts payable
    199,593       (6,365 )     193,228  
Accrued compensation and employee benefits
    65,167       3,718       68,885  
Income taxes
    11,583       4,979       16,562  
Liabilities of business held for sale
    3,093       -       3,093  
Accrued expenses and other current liabilities
    55,661       (3,115 )     52,546  
Total current liabilities
    335,400       3,514       338,914  
Noncurrent liabilities:
                       
Long-term debt
    226,198       815       227,013  
Deferred income taxes
    22,843       791       23,634  
Pensions
    35,095       (953 )     34,142  
Postretirement benefits
    26,669       -       26,669  
Liabilities of business held for sale
    166       -       166  
Other noncurrent liabilities
    35,579       (952 )     34,627  
Total noncurrent liabilities
    346,550       (299 )     346,251  
Total liabilities
    681,950       3,215       685,165  
Shareholders' equity:
                       
Preferred stock
    -       -       -  
Common stock
    20,492       -       20,492  
Additional paid-in capital
    69,346       -       69,346  
Retained earnings
    342,490       3,476       345,966  
Accumulated other comprehensive income
    49,324       11,734       61,058  
Treasury stock
    (13,303 )     -       (13,303 )
Deferred compensation trust
    (441 )     -       (441 )
Total shareholders' equity
    467,908       15,210       483,118  
Total liabilities and shareholders' equity
  $ 1,149,858     $ 18,425     $ 1,168,283  
 
6

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
   
Three months ended June 30, 2007
 
   
As Reported
   
Adjustments
   
After Change in Accounting Principle
 
Cash flows from operating activities:
                 
Net earnings
  $ 12,650     $ (1,649 )   $ 11,001  
Adjustments to reconcile net earnings with net cash used for operating activities:
                       
Depreciation and amortization
    19,225       160       19,385  
Other – net
    (4,225 )     -       (4,225 )
Net changes in operating assets and liabilities
    (28,895 )     (4,084 )     (32,979 )
Net cash used for operating activities
    (1,245 )     (5,573 )     (6,818 )
                         
Cash flows from investing activities:
                       
Expenditures for property, plant and equipment
    (13,974 )     (449 )     (14,423 )
Proceeds from dispositions of assets
    3,320       -       3,320  
Settlement of derivative contracts
    1,322       -       1,322  
Other – net
    232       -       232  
Net cash used for investing activities
    (9,100 )     (449 )     (9,549 )
 
                       
Cash flows from financing activities:
                       
Short-term debt
    (454 )     (4,147 )     (4,601 )
Additions to long-term debt
    34,606       -       34,606  
Reductions of long-term debt
    (14,661 )     -       (14,661 )
Book overdrafts
    (2,296 )     -       (2,296 )
Repurchase of common stock, treasury and retirement
    (412 )     -       (412 )
Cash dividends paid
    (5,671 )     -       (5,671 )
Other – net
    25       -       25  
Net cash provided by financing activities
    11,137       (4,147 )     6,990  
 
                       
Effect of exchange rate changes on cash
    617       (133 )     484  
Net increase (decrease) in cash and cash equivalents
    1,409       (10,302 )     (8,893 )
 
                       
Cash and cash equivalents at beginning of period
    21,227       4,980       26,207  
Cash and cash equivalents at end of period
  $ 22,636     $ (5,322 )   $ 17,314  

In addition, Modine changed the reporting month end of its domestic operations from the 26th day of the month to the last day of the month for each month except March.  The Company’s fiscal year-end will remain March 31st.  The Company has not retrospectively applied this change in accounting principle since it is impracticable to do so as period end closing data as of the end of each month for prior periods is not available.  Management believes the impact to the results of operations, consolidated balance sheets and cash flows to be immaterial for all prior periods.

Accounting standards changes and new accounting pronouncements:  In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value.  SFAS No. 157 also expands financial statement disclosures about fair value measurements.  On February 12, 2008, the FASB issued FASB Staff Position (FSP) 157-2 which delays the effective date of SFAS No. 157 for one year, for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  The Company adopted SFAS No. 157 and FSP 157-2 as of April 1, 2008 which did not have a material impact on the financial statements.  See Note 17 for further discussion.

7

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an Amendment of SFAS No. 115” (SFAS No. 159), which permits an entity to measure many financial assets and financial liabilities at fair value that are not currently required to be measured at fair value.  Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date.  The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions.  SFAS No. 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities.  The Statement also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election.  The Company adopted SFAS No. 159 as of April 1, 2008 and has not elected to measure any financial assets or financial liabilities at fair value which were not previously required to be measured at fair value.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)) which replaces SFAS No. 141, “Business Combination”.  SFAS No. 141(R) retained the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but SFAS No. 141(R) changed the method of applying the acquisition method in a number of significant aspects.  For all business combinations, the entity that acquires the business will record 100 percent of all assets and liabilities of the acquired business, including goodwill, generally at their fair values.  Certain contingent assets and liabilities acquired will be recognized at their fair values on the acquisition date and changes in fair value of certain arrangements will be recognized in earnings until settled.  Acquisition-related transactions and restructuring costs will be expensed rather than treated as an acquisition cost and included in the amount recorded for assets acquired.  SFAS No. 141(R) is effective for the Company on a prospective basis for all business combinations for which the acquisition date is on or after April 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies.  SFAS No. 141(R) amends SFAS No. 109, “Accounting for Income Taxes,” such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that close prior to the effective date of SFAS No. 141(R) would also apply the provisions of SFAS No. 141(R).  Early adoption is not allowed.  Management is currently assessing the potential impact of this standard on the Company’s consolidated financial statements; however, the adoption will not have an impact on previous acquisitions.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB 51.”  SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish new standards that will govern the accounting for and reporting of (1) non-controlling interest in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries.  The Company’s consolidated subsidiaries are wholly owned and as such no minority interests are currently reported in its consolidated financial statements.  Other current ownership interests are reported under the equity method of accounting under investments in affiliates.  SFAS No. 160 is effective for the Company on a prospective basis on or after April 1, 2009 except for the presentation and disclosure requirements, which will be applied retrospectively.  Early adoption is not allowed.   Based upon the Company’s current portfolio of investments in affiliates, the Company does not anticipate that adoption of this standard will have a material impact on the consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities an Amendment of FASB Statement No. 133.”  SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting.  SFAS No. 161 is effective for the Company during the fourth quarter of fiscal 2009.  Early adoption is encouraged.  SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption.  The Company is currently evaluating the impact this statement will have on the financial statement disclosures.

8

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.”  SFAS No. 162 mandates that GAAP hierarchy reside in the accounting literature as opposed to the audit literature.  This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP hierarchy.  SFAS No. 162 will become effective 60 days following U.S. Securities and Exchange Commission approval.  The Company does not anticipate that adoption of this standard will have an impact on the consolidated financial statements.

In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP 03-6-1).  FSP 03-6-1 requires unvested share-based payment awards that contain non-forfeitable rights to dividends to be treated as participating securities and included in the computation of basic earnings per share.  FSP 03-6-1 is effective for the Company during the first quarter of fiscal 2010, and requires all prior-period earnings per share data to be adjusted retrospectively.  Early adoption is not allowed.  While the Company does have unvested retention stock awards that earn non-forfeitable dividends, the adoption of FSP 03-6-1 is not expected to have a material impact on earnings per share.

Note 3: Employee Benefit Plans

Modine’s contributions to the defined contribution employee benefit plans for the three months ended June 30, 2008 and 2007 were $1,847 and $1,839, respectively.

Costs for Modine's pension and postretirement benefit plans for the three months ended June 30, 2008 and 2007 include the following components:

   
Pension plans
   
Postretirement plans
 
For the three months ended June 30,
 
2008
   
2007
   
2008
   
2007
 
Service cost
  $ 700     $ 787     $ 63     $ 83  
Interest cost
    3,492       3,846       464       447  
Expected return on plan assets
    (4,535 )     (4,699 )     -       -  
Amortization of:
                               
 Unrecognized net loss
    853       1,532       94       122  
 Unrecognized prior service cost (benefit)
    74       (24 )     6       -  
 Unrecognized net asset
    -       (7 )     -       -  
Net periodic benefit cost
  $ 584     $ 1,435     $ 627     $ 652  
 
Note 4: Stock-Based Compensation

Stock-based compensation consists of stock options and restricted and unrestricted stock granted for retention and performance. Compensation cost is calculated based on the fair value of the instrument at the time of grant, and is recognized as expense over the vesting period of the stock-based instrument.  Modine recognized stock-based compensation cost of $740 and $1,355 for the three months ended June 30, 2008 and 2007, respectively.  The performance component of the long-term incentive plan includes earnings per share and total shareholder return measures based upon a cumulative three year period.  A new performance period begins each fiscal year so multiple performance periods, with separate goals, are operating simultaneously.  Compensation expense recognized in the three months ended June 30, 2008 includes $291 related to the earnings per share component of the fiscal 2008-09 performance grant based upon probable attainment of the targeted three-year cumulative earnings per share.  Based upon management’s most recent assessment of probable attainment, $458 in compensation expense was reversed relative to the earnings per share component of the fiscal 2007-08 plan in the first quarter of fiscal 2008-09. In the three months ended June 30, 2007, no expense had been recorded by the Company relative to any of earnings per share components of the performance grants.

9

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
The following tables present, by type, the fair market value of stock-based compensation awards granted during the three months ended June 30, 2008 and 2007:

   
Three months ended June 30,
 
   
2008
   
2007
 
   
Number
   
Fair Value
   
Number
   
Fair Value
 
Type of award
 
Granted
   
Per Award
   
Granted
   
Per Award
 
Common stock options
    -     $ -       0.3     $ 5.30  
Restricted common stock - retention
    3.6     $ 16.84       -     $ -  
Restricted common stock - performance based upon total shareholder return compared to the S&P 500
    101.8     $ 19.49       79.9     $ 23.60  
Restricted common stock - performance based upon cumulative earnings per share
    209.2     $ 16.66       -     $ -  
 
The accompanying table sets forth the assumptions used in determining the fair value for the options and performance awards:

   
Three months ended June 30,
 
   
2008
   
2007
 
   
Performance Awards
   
Options
   
Performance Awards
 
Expected life of awards in years
    3       5       3  
Risk-free interest rate
    2.68 %     4.58 %     4.57 %
Expected volatility of the Company's stock
    36.00 %     28.51 %     29.60 %
Expected dividend yield on the Company's stock
    2.50 %     3.32 %     2.88 %
Expected forfeiture rate
    1.50 %     1.50 %     1.50 %

As of June 30, 2008, the total remaining unrecognized compensation cost related to the non-vested stock-based compensation awards which will be amortized over the weighted average remaining service periods is as follows:

10

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
Type of award
 
Unrecognized
Compenstion Costs
   
Weighted Average Remaining Service Period in Years
 
Common stock options
  $ 93       2.3  
Restricted common stock - retention
    3,586       2.3  
Restricted common stock - performance
    6,331       2.5  
Total
  $ 10,010       2.4  

Note 5: Other Income – Net

Other income – net was comprised of the following:

   
Three months ended June 30
 
   
2008
   
2007
 
Equity in earnings of non-consolidated affiliates
  $ 889     $ 689  
Interest income
    512       276  
Foreign currency transactions
    456       2,096  
Other non-operating income - net
    315       188  
Total other income - net
  $ 2,172     $ 3,249  

Note 6: Income Taxes

During the three months ended June 30, 2008 and 2007, the Company’s effective income tax rate attributable to earnings from continuing operations before income taxes was 53.2 percent and 26.9 percent, respectively.  During the first quarter of fiscal 2009, the Company recorded a valuation allowance of $5,327 against the net South Korean and U.S. deferred tax assets as it is more likely than not that these assets will not be realized based on historical performance.  The increase in the effective tax rate from the prior year primarily relates to the above-referenced valuation allowance charge offset by favorable foreign tax rate differentials.

Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” requires the Company to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate.  Under this effective tax rate methodology, the Company applies an estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter.  The tax impact of certain significant, unusual or infrequently occurring items must be recorded in the interim period in which they occur.  Circumstances may arise which make it difficult for the Company to determine a reasonable estimate of its annual effective tax rate for the fiscal year.  This is particularly true when small variations in the projected earnings or losses could result in a significant fluctuation in the estimate annual effective tax rate.  In accordance with FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods,” the Company has determined that a reliable estimate of its annual income tax rate cannot be made, and that the impact of the Company’s operations in the U.S. and South Korea should be removed from the effective tax rate methodology and recorded discretely in the first quarter of fiscal 2009 based upon year-to-date results.  The quarterly income tax for the Company’s other foreign operations continue to be estimated under the effective tax rate methodology.

The following is a reconciliation of the provision for income taxes and effective tax rates for the three months ended June 30, 2008:

11

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)

   
Domestic
   
Foreign
   
Total
   
%
 
                         
(Loss) earnings from continuing operations before income taxes
  $ (17,150 )   $ 31,592     $ 14,442        
                               
(Benefit from) provision for income taxes at federal statutory rate
  $ (6,002 )   $ 11,057     $ 5,055       35.0 %
State taxes, net of federal benefit
    (525 )     -       (525 )     (3.6 )
Taxes on non-U.S. earnings and losses
    -       (2,237 )     (2,237 )     (15.5 )
Valuation allowance
    4,755       572       5,327       36.9  
Other, net
    (78 )     137       59       0.4  
(Benefit from) provision for income taxes
  $ (1,850 )   $ 9,529     $ 7,679       53.2 %

The Company is currently under routine examination by taxing authorities in the U.S. and certain foreign countries.  The examinations are in various stages of audit by the applicable taxing authorities.  Based on the outcome of these examinations, it is reasonably possible that the related unrecognized tax benefits for tax positions taken regarding previously filed tax returns will materially change from those recorded as liabilities for uncertain tax positions in our financial statements.  These examinations may be resolved within the next twelve months, but at this time it is not possible to estimate the amount of impact of any such changes to the previously recorded uncertain tax positions.

As further discussed in Note 13, the Company completed the sale of its Electronics Cooling business during the first quarter of fiscal 2009.  Both the gain on sale and earnings from discontinued operations have been shown separately in the consolidated statements of earnings.  As a result, the gain on sale and the earnings from discontinued operations have been presented net of income tax expense of $1,583 and $78, respectively, for the three months ended June 30, 2008, and the earnings from discontinued operations have been presented net of income tax expense of $49 for the three months ended June 30, 2007.

Note 7: Earnings Per Share

The computational components of basic and diluted earnings per share are summarized as follows:

12

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)

   
Three months ended June 30
 
   
2008
   
2007
 
Numerator:
           
Earnings from continuing operations
  $ 6,763     $ 10,747  
Earnings from discontinued operations
    175       254  
Gain on sale of discontinued operations
    849       -  
Net earnings
  $ 7,787     $ 11,001  
Denominator:
               
Weighted average shares outstanding – basic
    32,039       32,112  
Effect of dilutive securities
    82       57  
Weighted average shares outstanding – diluted
    32,121       32,169  
 
               
Net earnings per share of common stock – basic:
               
Continuing operations
  $ 0.21     $ 0.33  
Earnings from discontinued operations
    -       0.01  
Gain on sale of discontinued operations
    0.03       -  
Net earnings – basic
  $ 0.24     $ 0.34  
                 
Net earnings per share of common stock – diluted:
               
Continuing operations
  $ 0.21     $ 0.33  
Earnings from discontinued operations
    -       0.01  
Gain on sale of discontinued operations
    0.03       -  
Net earnings – diluted
  $ 0.24     $ 0.34  

For the three months ended June 30, 2008, the calculation of diluted earnings per share excludes 2,258 stock options and 108 restricted stock awards as these shares were anti-dilutive.  For the three months ended June 30, 2007, the calculation of diluted earnings per share excluded 1,822 stock options and 210 restricted stock awards as these shares were anti-dilutive.

Note 8: Comprehensive Earnings

Comprehensive earnings, which represents net earnings adjusted by the change in accumulated other comprehensive income was as follows:

   
Three months ended June 30
 
   
2008
   
2007
 
Net earnings
  $ 7,787     $ 11,001  
Foreign currency translation
    2,825       7,031  
Cash flow hedges
    (143 )     (1,400 )
Change in SFAS No. 158 benefit plan adjustment
    640       974  
Total comprehensive earnings
  $ 11,109     $ 17,606  
 
13

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
Note 9: Inventories

The amounts of raw material, work in process and finished goods cannot be determined exactly except by physical inventories.  Based on partial interim physical inventories and percentage relationships at the time of complete physical inventories, management believes the amounts shown below are reasonable estimates of raw materials, work in process and finished goods.

   
June 30, 2008
   
March 31, 2008
 
Raw materials and work in process
  $ 103,407     $ 96,973  
Finished goods
    33,287       28,526  
Total inventories
  $ 136,694     $ 125,499  

Note 10: Property, Plant and Equipment

Property, plant and equipment consisted of the following:
 
   
June 30, 2008
   
March 31, 2008
 
Gross property, plant and equipment
  $ 1,202,274     $ 1,188,563  
Less accumulated depreciation
    (661,166 )     (648,027 )
Net property, plant and equipment
  $ 541,108     $ 540,536  

An impairment charge of $134 was recorded related to certain assets in the Original Equipment – North America segment during the three months ended June 30, 2008.

Note 11: Acquisitions

During fiscal 2007, the Company acquired the remaining 50 percent of the stock of Radiadores Visconde Ltda. which it did not already own, for $11,096, net of cash acquired, and the incurrence of a $2,000 note which is payable in 24 months, subject to the sellers’ indemnification obligations under the agreement, for a total net purchase price of $13,096. The acquisition was financed using cash generated from operations and borrowing on the Company’s revolving credit agreement.  The purchase agreement also included a $4,000 performance payment contingent on the cumulative earnings before interest, taxes, depreciation and amortization of the business over a 24 month period.  The purchase price allocation resulted in the fair market values of the assets and liabilities acquired exceeding the purchase price.  Accordingly, the $4,000 contingent performance payment was recorded as a liability in the purchase price allocation, reducing the amount by which the fair market values of the assets and liabilities acquired exceeded the purchase price, and increasing the total net purchase price to $17,096.  During the first quarter of fiscal 2009, the 24 month performance period expired, and the contingency was not met.  As a result, this liability was reversed during the three months ended June 30, 2008 with reductions of $5,529 to property, plant and equipment, $532 to intangible assets and $2,061 to deferred income tax liability.  The $2,000 note payable remains recorded as a liability at June 30, 2008 as the sellers’ indemnification obligations are being reviewed by the Company and negotiated with the seller.

Note 12: Restructuring, Plant Closures and Other Related Costs

During fiscal 2008, the Company announced the closure of three U.S. manufacturing plants in Camdenton, Missouri; Pemberville, Ohio; and Logansport, Indiana, along with the Tübingen, Germany facility.  These measures are aimed at realigning the Company’s manufacturing operations, improving profitability and strengthening global competitiveness.  These closures are anticipated to be completed within 18 to 24 months.  The Company completed the closure of its Jackson, Mississippi facility in the first quarter of fiscal 2009.  The Clinton, Tennessee facility is scheduled for closure later in fiscal 2009.

14


MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
The Company has incurred $5,487 of employee termination charges, $2,526 of pension curtailment charges, and $7,435 of other closure costs related to these closures.  Further additional costs which are anticipated to be incurred through fiscal 2010 are approximately $20,000; consisting of $4,000 of employee-related costs and $16,000 of other costs such as equipment moving costs, accelerated depreciation and miscellaneous facility closing costs.  Total additional cash expenditures of approximately $17,000 are anticipated to be incurred related to these closures.

Changes in the accrued restructuring liability for the three months ended June 30, 2008 and 2007 were comprised of the following related to the above described restructuring activities:

   
Three months ended June 30
 
   
2008
   
2007
 
Restructuring Liability:
           
Balance, April 1
  $ 5,161     $ 2,313  
Additions
    187       209  
Adjustments
    (239 )     (449 )
Payments
    (567 )     (176 )
Balance, June 30
  $ 4,542     $ 1,897  

The following is the summary of restructuring and other repositioning costs recorded related to the announced programs during the three months ended June 30, 2008 and 2007:

   
Three months ended June 30
 
   
2008
   
2007
 
Restructuring Income:            
Employee severance and related benefits
  $ (52 )   $ (240 )
                 
Other repositioning costs:                
Consulting fees
    1,257       -  
Miscellaneous other closure costs
    1,459       450  
Total restructuring and other repositioning costs   $ 2,664     $ 210  

The total restructuring and other repositioning costs were recorded in the consolidated statement of earnings for the three months ended June 30, 2008 as follows: $1,459 was recorded as a component of cost of sales; $1,257 was recorded as a component of selling, general and administrative expenses; and $52 was recorded as restructuring income.  The Company accrues severance in accordance with its written plan and procedures.  Restructuring income relates to reversals of severance liabilities due to employee terminations prior to completion of required retention periods.  The total restructuring and other repositioning costs of $210 were recorded in the consolidated statement of earnings for the three months ended June 30, 2007 as follows: $450 was recorded as a component of cost of sales and $240 was recorded as restructuring income.

15

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)

Note 13: Discontinued Operations and Assets Held for Sale

During the first quarter of fiscal 2008, the Company announced it would explore strategic alternatives for its Electronics Cooling business.  In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” it was determined that the Electronics Cooling business should be presented as held for sale and as a discontinued operation in the consolidated financial statements.  The balance sheet amounts of the Electronics Cooling business have been reclassified to assets and liabilities of business held for sale on the consolidated balance sheet, and the operating results have been separately presented as a discontinued operation in the consolidated statement of earnings for all periods presented.  During the first quarter of fiscal 2009, the Company sold substantially all of the assets of its Electronics Cooling business for $13,250, $2,510 of which is in the form of seller financing with subordinated, promissory notes delivered by the buyer, with the remaining sales proceeds of $10,740 received in cash.  Transition expenses of $437 were paid by the Company during the first quarter of fiscal 2009.  The Company recorded a gain on the sale, net of income taxes, of $849.

The major classes of assets and liabilities held for sale at March 31, 2008 included in the consolidated balance sheets were as follows:

   
March 31, 2008
 
Assets held for sale:
     
Receivables - net
  $ 4,371  
Inventories
    2,500  
Total current assets held for sale
    6,871  
Property, plant and equipment - net
    2,735  
Goodwill
    2,781  
Other noncurrent assets
    6  
Total noncurrent assets held for sale
    5,522  
Total assets held for sale
  $ 12,393  
         
Liabilities of business held for sale:
       
Accounts payable
  $ 1,284  
Accrued expenses and other current liabilities
    1,809  
Total current liabilities of business held for sale
    3,093  
Other noncurrent liabilities
    166  
Total liabilities of business held for sale
  $ 3,259  

In addition, the Electronics Cooling business had cash of $1,156 at March 31, 2008, that was included in cash and cash equivalents on the consolidated balance sheets, and the cash balance was not included in the sales transaction.

The following results of the Electronics Cooling business have been presented as earnings from discontinued operations in the consolidated statement of earnings:

16


MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)

   
Period of April 1, 2008
to May 1, 2008
   
Three months ended June 30, 2007
 
             
Net sales
  $ 2,320     $ 7,544  
Cost of sales and other expenses
    2,067       7,241  
Earnings before income taxes
    253       303  
Provision for income taxes
    78       49  
Earnings from discontinued operations
  $ 175     $ 254  

Note 14: Goodwill and Intangible Assets

Changes in the carrying amount of goodwill during the first three months of fiscal 2009, by segment and in the aggregate, are summarized in the following table:

   
OE -
   
OE -
   
South
   
Commercial
       
   
Asia
   
Europe
   
America
   
Products
   
Total
 
                               
Balance, March 31, 2008
  $ 522     $ 10,518     $ 14,066     $ 19,726     $ 44,832  
Fluctuations in foreign currency
    (1 )     (30 )     1,327       68       1,364  
Balance, June 30, 2008
  $ 521     $ 10,488     $ 15,393     $ 19,794     $ 46,196  

Intangible assets are comprised of the following:

   
June 30, 2008
   
March 31, 2008
 
   
Gross
         
Net
   
Gross
         
Net
 
   
Carrying
   
Accumulated
   
Intangible
   
Carrying
   
Accumulated
   
Intangible
 
   
Value
   
Amortization
   
Assets
   
Value
   
Amortization
   
Assets
 
                                     
Amortized intangible assets:
                                   
Patents and product technology
  $ 3,952     $ (3,761 )   $ 191     $ 3,952     $ (3,696 )   $ 256  
Trademarks
    10,635       (2,245 )     8,390       10,605       (2,062 )     8,543  
ther intangibles
    445       (238 )     207       511       (196 )     315  
Total amortized intangible assets
    15,032       (6,244 )     8,788       15,068       (5,954 )     9,114  
Unamortized intangible assets:
                                               
Tradename
    1,063       -       1,063       1,371       -       1,371  
Total intangible assets
  $ 16,095     $ (6,244 )   $ 9,851     $ 16,439     $ (5,954 )   $ 10,485  
 
Amortization expense for the three months ended June 30, 2008 and 2007 was $272 and $306, respectively.  Total estimated annual amortization expense expected for the remainder of fiscal year 2009 through 2014 and beyond is as follows:

17

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)

 
Estimated
Fiscal
Amortization
Year
Expense
   
Remainder of 2009
$807
2010
1,079
2011
821
2012
821
2013
728
2014 & Beyond
4,532

Note 15: Financial Instruments

Concentrations of Credit Risk: The Company invests excess cash in investment quality short-term liquid debt instruments.  Such investments are made only in instruments issued by high quality institutions. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable.  The Company sells a broad range of products that provide thermal solutions to a diverse group of customers operating throughout the world.  At June 30, 2008 and March 31, 2008, approximately 48 percent and 51 percent, respectively, of the Company's trade accounts receivables were from the Company's top ten individual customers.  These customers operate primarily in the automotive, truck and heavy equipment markets and are all influenced by many of the same market and general economic factors.  To reduce credit risk, the Company performs periodic customer credit evaluations and actively monitors their financial condition and developing business news.  The Company does not generally require collateral or advanced payments from its customers, but does so in those cases where a substantial credit risk is identified.  Credit losses to customers operating in the markets served by the Company have not been material.  Total bad debt write-offs have been well below one percent of outstanding trade receivable balances for the presented periods.

Inter-Company Loans Denominated in Foreign Currencies:  The Company has certain foreign-denominated long-term intercompany loans that are sensitive to foreign exchange rates.  At June 30, 2008, the Company had a 19,295,000 won ($18,438 U.S. equivalent), 8-yr loan with its wholly owned subsidiary Modine Korea, LLC that matures on August 31, 2012.  On March 28, 2008, the Company entered into a purchased option contract that expires March 31, 2009 to hedge the foreign exchange exposure on the entire outstanding amount of the Modine Korea, LLC loan.  The derivative instrument is not being treated as a hedge, and accordingly, transaction gains or losses on the derivative instrument are being recorded in other income – net in the consolidated statement of earnings and acts to offset any currency movement on the outstanding loan receivable.  During the first quarter of fiscal 2009, Modine Korea, LLC paid 4,800,000 won ($4,557 U.S. equivalent) on this inter-company loan and the Company correspondingly adjusted the purchased option contract to reflect the payment.

At June 30, 2008, the Company also had two inter-company loans totaling $19,541 with its wholly owned subsidiary, Modine Brazil with various maturity dates through May 2011.  On March 31, 2008, the Company entered into a purchased option contract that expires on April 1, 2009 to hedge the foreign exchange exposure on the larger ($15,000) of the two inter-company loans.  The smaller inter-company loan ($4,541) will be repaid by February 2009 and its foreign exchange exposure will be managed by natural hedges and offsets that exist in the Company’s operations.  The derivative instrument is not being treated as a hedge and, accordingly, transaction gains or losses on the derivative are being recorded in other income – net in the consolidated statement of earnings and acts to offset any currency movement on the outstanding loan receivable.

18

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)

The Company also has other inter-company loans outstanding at June 30, 2008 as follows:
 
·
$1,121 loan to its wholly owned subsidiary, Modine Thermal Systems India, that matures on April 30, 2013;
 
·
$9,150 between two loans to its wholly owned subsidiary, Modine Thermal Systems Co (Changzhou, China), with various maturity dates through June 2012; and
 
·
$1,759 loan to its wholly owned subsidiary, Modine Thermal Systems Shanghai, that matures on January 19, 2009.

These inter-company loans are sensitive to movement in foreign exchange rates, and the Company does not have any derivative instruments to hedge this exposure.
 
Note 16: Foreign Exchange Contracts/Derivatives/Hedges

Modine uses derivative financial instruments in a limited way as a tool to manage certain financial risks.  Their use is restricted primarily to hedging assets and obligations already held by Modine, and they are used to protect cash flows rather than generate income or engage in speculative activity.  Leveraged derivatives are prohibited by Company policy.

Commodity Derivatives:  The Company enters into futures contracts related to certain of the Company’s forecasted purchases of aluminum and natural gas.  The Company’s strategy in entering into these contracts is to reduce its exposure to changing purchase prices for future purchase of these commodities.  These contracts have been designated as cash flow hedges by the Company.  Accordingly, unrealized gains and losses on these contracts are deferred as a component of other comprehensive income, and recognized as a component of earnings at the same time that the underlying purchases of aluminum and natural gas impact earnings.  During the three months ended June 30, 2008 and 2007, $657 and $1,322, respectively, of income was recorded in the consolidated statement of earnings at the same time the underlying transactions impacted earnings.  At June 30, 2008, $1,229 of unrealized losses remain deferred in accumulated other comprehensive income, and will be realized as a component of cost of sales over the next six months.

During the three months ended June 30, 2008, the Company entered into futures contracts related to certain of the Company’s forecasted purchases of copper and nickel.  The Company’s strategy in entering into these contracts is to reduce its exposure to changing purchase prices for future purchases of these commodities.  The Company has not designated these contracts as hedges, therefore, gains and losses on these contracts are recorded directly in the consolidated statements of earnings.  During the three months ended June 30, 2008, $293 of expense was recorded in cost of sales related to these futures contracts.

Interest rate derivative: On August 5, 2005, the Company entered into a one-month forward ten-year treasury interest rate lock in anticipation of a private placement borrowing which occurred on September 29, 2005.  The contract was settled on September 1, 2005 with a loss of $1,794.  On October 25, 2006, the Company entered into two forward starting swaps in anticipation of the $75,000 private placement debt offering that occurred on December 7, 2006.  On November 14, 2006, the fixed interest rate of the private placement borrowing was locked and, accordingly, the Company terminated and settled the forward starting swaps at a loss of $1,812.  These interest rate derivatives were treated as cash flow hedges of forecasted transactions.  Accordingly, the losses are reflected as a component of accumulated other comprehensive income, and are being amortized to interest expense over the respective lives of the borrowings.

During the three months ended June 30, 2008 and 2007, $52 and $122 of expense, respectively, was recorded in the consolidated statements of earnings related to the amortization of the interest rate derivative losses.  At June 30, 2008, $1,745 of net unrealized losses remains deferred in accumulated other comprehensive income.

19

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
Note 17: Fair Value Measurements

The Company adopted SFAS No. 157, “Fair Value Measurements”, as of April 1, 2008, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value.  SFAS No. 157 also expands financial statement disclosures about fair value measurements.  SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  SFAS No. 157 also specifies a fair value obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions.  In accordance with SFAS No. 157, fair value measurements are classified under the following hierarchy:

 
·
Level 1 – Quoted prices for identical instruments in active markets.
 
·
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.
 
·
Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

When available, the Company used quoted market prices to determine fair value and classified such measurements with Level 1.  In some cases, where market prices are not available, the Company makes use of observable market based inputs to calculate fair value, in which case the measurements are classified within Level 2.  If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves, currency rates, etc.  These measurements are classified within Level 3.

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation.  A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

Trading securities
The Company’s trading securities are a mix of various investments maintained in a deferred compensation trust to fund future obligations under Modine’s non-qualified deferred compensation plan.  The securities’ fair values are the market values from active markets (such as New York Stock Exchange (NYSE)) and are classified within Level 1 of the valuation hierarchy.

Derivative financial instruments
As part of the Company’s risk management strategy, Modine enters into derivative transactions to mitigate certain identified exposures.  The derivative instruments include currency options and commodity derivatives.  These are not exchange traded and are customized over-the-counter derivative transactions.  These derivative exposures are with counter parties that have long-term credit ratings of BBB – or better.

The Company measures fair values assuming that the unit of account is an individual derivative transaction and that derivatives are sold or transferred on a stand-alone basis.  Therefore, derivative assets and liabilities are presented on a gross basis without consideration of master netting arrangements.  The Company estimates the fair value of these derivative instruments based on dealer quotes as the dealer is willing to settle at the quoted prices.  These derivative instruments are classified within Level 2 of the valuation hierarchy.

20

 
\MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)

Deferred compensation obligation
The fair value of the deferred compensation obligation is recorded at the fair value of the investments held by the deferred compensation trust.  As noted above, the fair values are the market values directly from active markets (such as NYSE) and are classified within Level 1 of the valuation hierarchy.

For the three months ended June 30, 2008, the assets and liabilities that are measured at fair value on a recurring basis are classified as follows:

   
Level 1
   
Level 2
   
Level 3
   
Total Assets / Liabilities at Fair Value
 
Assets:
                       
Trading securities (short term investments)
  $ 2,373     $ -     $ -     $ 2,373  
Derivative financial instruments
    -       3,557       -       3,557  
Total assets
  $ 2,373     $ 3,557     $ -     $ 5,930  
                                 
Liabilities:
                               
Derivative financial instruments
  $ -     $ 443     $ -     $ 443  
Deferred compensation obligation
    -       2,654       -       2,654  
Total liabilitites
  $ -     $ 3,097     $ -     $ 3,097  
 
Note 18: Product Warranties and Other Commitments

Product warranties: Modine provides product warranties for its assorted product lines with warranty periods generally ranging from one to ten years, with the majority falling within a two to four year time period.  The Company accrues for estimated future warranty costs in the period in which the sale is recorded, and warranty expense estimates are forecasted based on the best information available using analytical and statistical analysis of both historical and current claim data.  These expenses are adjusted when it becomes probable that expected claims will differ from initial estimates recorded at the time of the sale.

Changes in the warranty liability were as follows:
   
Three months ended June 30
 
   
2008
   
2007
 
Balance, April 1
  $ 15,790     $ 14,152  
Accruals for warranties issued in current period
    1,966       1,379  
(Reversals) accruals related to pre-existing warranties
    (374 )     213  
Settlements made
    (3,877 )     (2,566 )
Effect of exchange rate changes
    10       127  
Balance, June 30
  $ 13,515     $ 13,305  

Commitments: At June 30, 2008, the Company had capital expenditure commitments of $50,013.  Significant commitments include tooling and equipment expenditures for new and renewal platforms with new and current customers in Europe, Asia and North America, along with the expansion in Asia.  The Company also utilizes consignment inventory arrangements with certain vendors in the normal course of business, whereby the suppliers maintain certain inventory stock at the Company’s facilities or at other outside facilities.  In these cases, the Company has arrangements with the vendor to use the material within a specific period of time.

21

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
Note 19: Segment Information

The following is a summary of net sales, earnings (loss) from continuing operations and total assets by segment:

   
Three months ended June 30
 
   
2008
   
2007
 
Sales :
           
Original Equipment - Asia
  $ 65,639     $ 69,893  
Original Equipment - Europe
    217,128       176,801  
Original Equipment - North America
    133,195       128,150  
South America
    41,346       29,394  
Commercial Products
    48,884       45,533  
Fuel Cell
    1,144       439  
Segment sales
    507,336       450,210  
Corporate and administrative
    849       1,301  
Eliminations
    (8,466 )     (7,275 )
Sales from continuing operations
  $ 499,719     $ 444,236  
                 
Operating earnings (loss):
               
Original Equipment - Asia
  $ (754 )   $ 379  
Original Equipment - Europe
    26,856       21,627  
Original Equipment - North America
    (4,197 )     1,043  
South America
    4,190       2,594  
Commercial Products
    3,873       2,165  
Fuel Cell
    (937 )     (651 )
Segment earnings
    29,031       27,157  
Corporate and administrative
    (13,670 )     (12,963 )
Eliminations
    35       40  
Other items not allocated to segments
    (954 )     474  
Earnings from continuing operations before income taxes
  $ 14,442     $ 14,708  

22

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)

   
June 30, 2008
   
March 31, 2008
 
Assets:
           
Original Equipment - Asia
  $ 145,777     $ 159,718  
Original Equipment - Europe
    501,607       489,512  
Original Equipment - North America
    219,049       213,707  
South America
    102,484       99,289  
Commercial Products
    105,786       96,120  
Fuel Cell
    1,817       1,737  
Corporate and administrative
    110,474       118,316  
Assets held for sale
    -       12,393  
Eliminations
    (12,496 )     (22,509 )
Total assets
  $ 1,174,498     $ 1,168,283  

Note 20: Contingencies and Litigation

Market risk:  The Company sells a broad range of products that provide thermal solutions to a diverse group of customers operating primarily in the automotive, truck, heavy equipment and commercial heating and air conditioning markets.  A sustained economic downturn in any of these markets could have a material adverse effect on the future results of operations or the Company’s liquidity.

Environmental:  At present, the United States Environmental Protection Agency (USEPA) has designated the Company as a potentially responsible party (PRP) for remediation of two sites with which the Company had involvement. These sites include Alburn Incinerator, Inc./Lake Calumet Cluster (Illinois), and a scrap metal site, Chemetco (Illinois). These sites are not Company owned and allegedly contain materials attributable to Modine from past operations.  The percentage of material allegedly attributable to Modine is relatively low.  Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and for future investigations and remedial actions. Costs anticipated for the settlement of these currently active sites cannot be reasonably defined at this time and have not been accrued.  The costs to Modine, however, are not expected to be material at those sites based upon Modine’s relatively small portion of contributed materials.

The Company has also recorded other environmental cleanup and remediation expense accruals for certain facilities located in the United States, Brazil, and The Netherlands.  These expenditures relate to facilities where past operations followed practices and procedures that were considered acceptable under then existing regulations, or where the Company is a successor to the obligations of prior owners and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance.

Personal injury actions:  The Company, along with Rohm and Haas Company and Morton International, was named as a defendant in twenty-four separate personal injury actions that were filed in the Philadelphia Court of Common Pleas (“PCCP”), including one case filed at the end of the third quarter of fiscal 2008, and in a potential class action matter filed in the United States District Court, Eastern District of Pennsylvania.  The PCCP cases involve allegations of personal injury from exposure to solvents that were allegedly released to groundwater and air for an undetermined period of time.  The federal court action seeks damages for medical monitoring and property value diminution for a class of residents of a community that are allegedly at risk for personal injuries as a result of exposure to this same allegedly contaminated groundwater and air.  Plaintiffs' counsel threatened to file further personal injury cases.  The Company mediated these cases in December, 2007 and has executed agreements with Plaintiffs’ counsel settling the PCCP cases and the class action.  The Company has been dismissed from the PCCP cases with prejudice and the federal case is pending a final fairness hearing in late August 2008 at which time it is expected that the Company will also be dismissed with prejudice from that case at the conclusion of the final hearing.

23

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)

The Company’s general liability insurers participated in the above-referenced mediation.  The Company has obtained agreements from three of those insurers as to appropriate coverage of defense costs and potential liability payments.  Travelers Indemnity Company (“Travelers”), filed a declaratory judgment action against the Company and the two other insurers, Sentry Insurance, a Mutual Company, and American Motorists Insurance Company, in the Superior Court of Connecticut, Hartford, Connecticut on December 21, 2007.  The Company filed a countervailing action against Travelers in Wisconsin Circuit Court, Milwaukee, Wisconsin, on January 8, 2008.  Both actions were dismissed without prejudice in the fourth quarter upon reaching an agreement with Travelers.

Other litigation:  In June 2004, the Servicio de Administracion Tributaria in Nuevo Laredo, Mexico, where the Company operates a plant in its Commercial Products segment, notified the Company of a tax assessment based primarily on the administrative authority’s belief that the Company (i) imported goods not covered by the Maquila program and (ii) that it imported goods under a different tariff classification than the ones approved.  The Company filed a Nullity Tax Action with the Federal Tax Court (Tribunal Federal de Justicia Fiscal y Adminstrativa) in Monterrey, Mexico, and received a favorable ruling from the Federal Tax Court in the second quarter of fiscal 2008.  The ruling of the Federal Tax Court has been appealed by the Servicio de Administracion Tributaria.  The outcome of the appeal which was decided subsequent to the end of the first quarter of fiscal 2009 was favorable to the Company.

In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, the Occupational Safety and Health Administration, the Environmental Protection Agency, other governmental agencies and others in which claims, such as personal injury, property damage, intellectual property or antitrust and trade regulation issues, are asserted against Modine.

If a loss arising from environmental and other litigation matters is probable and can reasonably be estimated, the Company records the amount of the estimated loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more likely than another.  The undiscounted reserves for these matters totaled $4,405 and $4,320 at June 30, 2008 and March 31, 2008, respectively.  No additional reserves were recorded during the three months ended June 30, 2008 or June 30, 2007.  Many of these matters are covered by various insurance policies; however, the Company does not record any insurance recoveries until these are realized or realizable.  As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary.  Based on currently available information, Modine believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the financial position or overall trends in results of operations.  However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages.  If an unfavorable outcome were to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the outcome occurs.
 
Note 21: Subsequent Event

On July 18, 2008, the Company entered into a three-year, $175,000 Amended and Restated Credit Agreement with seven financial institutions led by JPMorgan Chase Bank, N.A.   The credit agreement amends and restates the Company’s existing five-year, $200,000 revolving credit facility, which had been due to expire in October 2009.  The principal financial covenants of the facility, including leverage and interest coverage, remain unchanged from the covenants to which the Company was subject prior to entering into this agreement.

24


Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations

When we use the terms “Modine”, “we”, “us”, “Company”, or “our” in this report, unless the context otherwise requires, we are referring to Modine Manufacturing Company.  Our fiscal year ends on March 31 and, accordingly, all references to quarters refer to our fiscal quarters.  The quarter ended June 30, 2008 refers to the first quarter of fiscal 2009.  Prior to April 1, 2008, the majority of our subsidiaries outside the United States reported operating results with a one-month lag.  This reporting lag was eliminated during the first quarter of fiscal 2009.  The fiscal 2008 information was revised to reflect this change for comparability.  See Note 2 of the Notes to Condensed Consolidated Financial Statements in Item 1. of this report.

First Quarter Highlights:  Net sales in the first quarter of fiscal 2009 were $500 million, representing a 12 percent increase from the first quarter of fiscal 2008.  The growth in revenues was driven by foreign currency exchange rate changes and strength in the Original Equipment – Europe, South America and Commercial Products segment sales volumes.  These strong volumes were partially offset by continued stress on the North American sales volumes related to ongoing weakness in the North American truck market.  Earnings from continuing operations before income taxes were comparable year-over-year.  Earnings from continuing operations decreased $4 million from the first quarter of fiscal 2008 driven by the increase in the provision for income taxes due to tax valuation allowance charges against deferred tax assets in the U.S. and South Korea.  During the first quarter of fiscal 2009, the Electronics Cooling business was sold resulting in a gain of $1 million.

CONSOLIDATED RESULTS OF OPERATIONS – CONTINUING OPERATIONS

The following table presents consolidated results from continuing operations on a comparative basis for the three months ended June 30, 2008 and 2007:

For the three months ended June 30
 
2008
   
2007
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
 
Net sales
    499.7       100.0 %     444.2       100.0 %
Cost of sales
    421.4       84.3 %     373.9       84.2 %
Gross profit
    78.3       15.7 %     70.3       15.8 %
Selling, general and administrative expenses
    62.8       12.6 %     56.3       12.7 %
Restructuring income
    -       -       (0.2 )     -  
Impairment of long-lived assets
    0.1       0.0 %     -       -  
Income from operations
    15.4       3.1 %     14.2       3.2 %
Interest expense
    3.1       0.6 %     2.7       0.6 %
Other income - net
    (2.1 )     -0.4 %     (3.2 )     -0.7 %
Earnings from continuing operations before income taxes
    14.4       2.9 %     14.7       3.3 %
Provision for income taxes
    7.6       1.5 %     4.0       0.9 %
Earnings from continuing operations
    6.8       1.4 %     10.7       2.4 %