form10q.htm


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

For the quarterly period ended December 31, 2008

or

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

For the transition period from ____________ to ____________

Commission file number 1-1373

MODINE MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)

WISCONSIN
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 R     No £

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer R
 
Accelerated Filer £
     
Non-accelerated Filer £ (Do not check if a smaller reporting company)
 
Smaller Reporting Company £

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

The number of shares outstanding of the registrant's common stock, $0.625 par value, was 32,798,926 at February 9, 2009.
 


 
 

 

MODINE MANUFACTURING COMPANY
INDEX


PART I.
 
FINANCIAL INFORMATION
1
Item 1.
 
1
Item 2.
 
36
Item 3.
 
52
Item 4.
 
57
PART II.
 
OTHER INFORMATION
58
Item 1.
 
58
Item 1A.
 
58
Item 2.
 
60
Item 6.
 
61
62

 
 

 
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements.

MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 2008 and 2007
(In thousands, except per share amounts)
(Unaudited)

   
Three months ended
December 31
   
Nine months ended
December 31
 
   
2008
   
2007
   
2008
   
2007
 
Net sales
  $ 365,201     $ 480,579     $ 1,298,183     $ 1,353,472  
Cost of sales
    323,288       410,941       1,123,031       1,151,695  
Gross profit
    41,913       69,638       175,152       201,777  
Selling, general and administrative expenses
    47,032       61,365       171,455       172,334  
Restructuring expense (income)
    25,311       (3 )     28,130       (322 )
Impairment of goodwill and long-lived assets
    27,342       31,455       30,507       31,455  
Loss from operations
    (57,772 )     (23,179 )     (54,940 )     (1,690 )
Interest expense
    4,216       3,475       10,452       9,180  
Other expense (income) – net
    1,656       (2,778 )     494       (7,327 )
Loss from continuing operations before income taxes
    (63,644 )     (23,876 )     (65,886 )     (3,543 )
(Benefit from) provision for income taxes
    (7,166 )     31,083       (2,107 )     30,443  
Loss from continuing operations
    (56,478 )     (54,959 )     (63,779 )     (33,986 )
Earnings from discontinued operations (net of income taxes)
    52       149       217       535  
Gain on sale of discontinued operations (net of income taxes)
    369       -       2,066       -  
Net loss
  $ (56,057 )   $ (54,810 )   $ (61,496 )   $ (33,451 )
                                 
Loss per share of common stock – basic:
                               
Continuing operations
  $ (1.76 )   $ (1.72 )   $ (1.99 )   $ (1.06 )
Earnings from discontinued operations
    -       0.01       0.01       0.02  
Gain on sale of discontinued operations
    0.01       -       0.06       -  
Net loss – basic
  $ (1.75 )   $ (1.71 )   $ (1.92 )   $ (1.04 )
                                 
Loss per share of common stock – diluted:
                               
Continuing operations
  $ (1.76 )   $ (1.72 )   $ (1.99 )   $ (1.06 )
Earnings from discontinued operations
    -       0.01       0.01       0.02  
Gain on sale of discontinued operations
    0.01       -       0.06       -  
Net loss – diluted
  $ (1.75 )   $ (1.71 )   $ (1.92 )   $ (1.04 )
                                 
Dividends per share
  $ 0.100     $ 0.175     $ 0.300     $ 0.525  

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

 
1

 
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and March 31, 2008
(In thousands, except per share amounts)
(Unaudited)

   
December 31, 2008
   
March 31, 2008
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 72,854     $ 38,595  
Short term investments
    1,666       2,909  
Trade receivables, less allowance for doubtful accounts of $1,918 and $2,218
    170,827       294,935  
Inventories
    118,682       125,499  
Assets held for sale
    -       6,871  
Deferred income taxes and other current assets
    74,040       64,482  
Total current assets
    438,069       533,291  
Noncurrent assets:
               
Property, plant and equipment – net
    484,309       540,536  
Investment in affiliates
    20,459       23,692  
Goodwill
    25,876       44,832  
Intangible assets – net
    7,335       10,485  
Assets held for sale
    -       5,522  
Other noncurrent assets
    13,178       9,925  
Total noncurrent assets
    551,157       634,992  
Total assets
  $ 989,226     $ 1,168,283  
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Short-term debt
  $ 6,732     $ 4,352  
Long-term debt – current portion
    249       248  
Accounts payable
    147,325       193,228  
Accrued compensation and employee benefits
    85,511       68,885  
Income taxes
    2,822       16,562  
Liabilities of business held for sale
    -       3,093  
Accrued expenses and other current liabilities
    60,684       52,546  
Total current liabilities
    303,323       338,914  
Noncurrent liabilities:
               
Long-term debt
    253,598       227,013  
Deferred income taxes
    15,587       23,634  
Pensions
    29,074       33,962  
Postretirement benefits
    7,695       26,669  
Liabilities of business held for sale
    -       166  
Other noncurrent liabilities
    32,293       34,807  
Total noncurrent liabilities
    338,247       346,251  
Total liabilities
    641,570       685,165  
Commitments and contingencies (See Note 21)
               
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 32,802 and 32,788 shares
    20,501       20,492  
Additional paid-in capital
    72,620       69,346  
Retained earnings
    274,786       345,966  
Accumulated other comprehensive (loss) income
    (6,119 )     61,058  
Treasury stock at cost: 534 and 495 shares
    (13,863 )     (13,303 )
Deferred compensation trust
    (269 )     (441 )
Total shareholders' equity
    347,656       483,118  
Total liabilities and shareholders' equity
  $ 989,226     $ 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 nine months ended December 31, 2008 and 2007
(In thousands)
(Unaudited)

   
Nine months ended December 31
 
   
2008
   
2007
 
             
Cash flows from operating activities:
           
Net loss
  $ (61,496 )   $ (33,451 )
Adjustments to reconcile net loss with net cash provided by operating activities:
               
Depreciation and amortization
    55,875       59,030  
Impairment of goodwill and long-lived assets
    30,507       31,455  
Deferred income taxes
    (23,732 )     19,754  
Other – net
    8,267       (9,322 )
Net changes in operating assets and liabilities, excluding dispositions
    70,843       (6,965 )
Net cash provided by operating activities
    80,264       60,501  
                 
Cash flows from investing activities:
               
Expenditures for property, plant and equipment
    (79,538 )     (58,984 )
Proceeds from dispositions of assets
    15,174       8,734  
Settlement of derivative contracts
    (263 )     (1,286 )
Other – net
    3,225       63  
Net cash used for investing activities
    (61,402 )     (51,473 )
                 
Cash flows from financing activities:
               
Short-term debt – net
    2,600       (5,209 )
Additions to long-term debt
    62,580       98,884  
Reductions of long-term debt
    (34,261 )     (41,679 )
Book overdrafts
    (856 )     (5,283 )
Proceeds from exercise of stock options
    18       686  
Repurchase of common stock, treasury and retirement
    (560 )     (7,396 )
Cash dividends paid
    (9,678 )     (16,972 )
Net cash provided by financing activities
    19,843       23,031  
                 
Effect of exchange rate changes on cash
    (4,446 )     3,318  
Net increase in cash and cash equivalents
    34,259       35,377  
                 
Cash and cash equivalents at beginning of period
    38,595       26,207  
Cash and cash equivalents at end of period
  $ 72,854     $ 61,584  

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 nine 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.

Loss from continuing operations: During the three months ended December 31, 2008, the Company reported a loss from continuing operations of $56,478.  The loss in the current quarter is the result of the following factors:

 
·
Sales volumes declined significantly as a result of the weakening global economy.  The instability in the global financial and economic markets has created a significant downturn in the Company’s vehicular markets, particularly within Europe;
 
·
The underabsorption of fixed costs in the Company’s manufacturing facilities as the result of declining sales volumes, as well as a shift in product mix toward lower margin business in the Original Equipment – Europe segment, contributed to a decline in gross margin;
 
·
Impairment charges of $27,342 were recorded in the third quarter of fiscal 2009 primarily within the Original Equipment – Europe and Original Equipment – North America segments.  The Original Equipment – Europe segment reported a significant decline in its current fiscal year results as compared to the prior year.  Original Equipment – Europe’s net sales decreased $76,836, or 40.5 percent from the three months ended December 31, 2007 to the three months ended December 31, 2008.  In addition, Original Equipment – Europe reported a loss from operations of $43,351 for the three months ended December 31, 2008 as compared to income from operations of $20,971 reported for the three months ended December 31, 2007.  In addition to this current fiscal year reduction in performance in the Original Equipment – Europe segment, the Company reduced its outlook for this business in the third quarter of fiscal 2009.  Due to the combination of the decreased fiscal 2009 net sales and profitability and the reduced outlook for this business, the Company recognized a goodwill impairment charge of $9,005 during the third quarter of fiscal 2009.  This represents an impairment for the full amount of goodwill recorded with the Original Equipment – Europe segment.  In addition the Company performed an impairment review of the segment’s long-lived assets during the third quarter of fiscal 2009, which resulted in an impairment charge of $10,562 for certain manufacturing facilities with projected cash flows unable to support their asset base.  The Company also performed an impairment review of the Original Equipment – North America long-lived assets during the third quarter of fiscal 2009 due to the continued underperformance of this segment, which resulted in an impairment charge of $7,775 for a facility with projected cash flows unable to support its asset base, for assets related to a cancelled program and a program which was not able to support its asset base;
 
·
Restructuring and repositioning charges totaling $27,201 were recorded in the third quarter of fiscal 2009 primarily relating to a workforce reduction affecting 25 percent of the workforce in the Company’s Racine, Wisconsin headquarters and a planned workforce reduction throughout the European facilities including the European headquarters in Bonlanden, Germany;

 
4


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

 
·
The licensing of Modine-specific fuel cell technology to Bloom Energy and transition services for an up-front fee of $12,689.  The transition services will include the sale of products through December 2009.  The total up-front compensation received will be recognized as revenue over the 15-month term of these agreements as technology, products and services are provided to Bloom Energy, with $8,673 of revenue recognized related to the licensing during the third quarter of fiscal 2009; and
 
·
Tax valuation allowance charges of $6,961 were recorded against net deferred tax assets in the U.S. and South Korea as the Company continues to assess that it is more likely than not that these assets will not be realized in the future.

During the three months ended December 31, 2007, the Company reported a loss from continuing operations of $54,959.  The Company recorded asset impairment charges of $31,455 within the Original Equipment – North America and Original Equipment – Europe segments.  A goodwill impairment charge of $23,769 was recorded in the Original Equipment – North America segment due to a declining outlook in this segment and a long-lived asset impairment charge of $3,011 was recorded related to assets in the Original Equipment – North America segment for a program which was not able to support its asset base in the third quarter of fiscal 2008.  In addition, a long-lived asset impairment charge of $4,675 was recorded within the Original Equipment – Europe segment related to assets in the Tübingen, Germany manufacturing facility based on the Company’s intention to close this facility.  The Company made a determination during the third quarter of fiscal 2008 that it was more likely than not that the U.S. deferred tax assets would not be realized and recorded a valuation allowance of $40,435 against the net U.S. deferred tax assets.

In response to the near-term adverse conditions facing the Company and recent business performance, the Company continues to execute on the strategies of its four-point recovery plan, which include manufacturing realignment, portfolio rationalization, selling, general and administrative expense (SG&A) reduction, and capital allocation discipline.  The Company also has intensified its focus on maximizing cash flow.  The Company has initiated the following actions through the four-point recovery plan designed to attain a more competitive cost base, improve the Company’s longer term competitiveness and more effectively capitalize on growth opportunities in its thermal management markets:

 
·
The closure of three manufacturing facilities in North America and one in Europe, which are expected to be closed by the end of fiscal 2011;
 
·
Reduction in SG&A through the realignment of the regional and corporate headquarters’ organizational structure, including the reduction in workforce described above;
 
·
A targeted reduction of direct costs in the Company’s manufacturing facilities proportional to recent volume declines;
 
·
A 20 percent reduction of indirect costs in the Company’s manufacturing facilities in North America, with a similar planned reduction in the Company’s European manufacturing facilities;
 
·
Tightened controls on capital spending which allocates capital spending to the segments and programs that will provide the highest return on the Company’s investment.  Capital spending will be limited to $65,000 in fiscal 2010, which is significantly below the Company’s recent historical rates;
 
·
A more rigid working capital focus through the active management of accounts receivables and inventory;
 
·
The intended divestiture of the Company’s South Korean-based vehicular heating, ventilation and air conditioning (HVAC) business;
 
·
Elimination of post-retirement medical benefits for Medicare eligible participants; and

 
5


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

 
·
The ramp-up of production at the newly constructed manufacturing plants in Austria, China, Hungary, India and Mexico.  The Company has sufficient liquidity available to ramp-up production within these facilities.

Liquidity:  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 quarter-end debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of not more than a 3.0 to 1.0 ratio (leverage ratio) and earnings before interest and taxes (EBIT) to interest expense of not less than a 1.75 to 1.0 ratio for the third quarter of fiscal 2009 (interest expense coverage ratio), as such terms are used in the debt agreements.  As a result of the significant downturn in the Company’s vehicular markets and resulting loss reported for the three months ended December 31, 2008, the Company was not in compliance with the interest expense coverage and leverage ratio covenants at December 31, 2008, which constituted defaults under the debt agreements.

On February 17, 2009, the Company entered into amendment and waiver agreements with its primary lenders and holders of notes which waived the interest expense coverage and leverage ratio defaults which existed at December 31, 2008.  In addition, various amendments were made to the existing debt agreements, including the following:

 
·
The Company is providing to its primary lenders and holders of notes a blanket lien on all domestic assets, certain of the Company’s domestic subsidiaries are guaranteeing the Company’s outstanding borrowings, and 65% of the Company’s and debt guarantors’ stock in foreign subsidiaries is pledged;
 
·
The existing quarterly leverage ratio and interest expense coverage ratio covenants are temporarily replaced by a minimum adjusted EBITDA level for the fourth quarter of fiscal 2009 and each quarter during fiscal 2010, with amended leverage and interest expense coverage ratio covenants  becoming effective for the fourth quarter of fiscal 2010; and
 
·
Various other restrictive covenants are added, including a limit on capital expenditures, restriction on dividend payments and acquisitions, limitation on other indebtedness outside the existing revolving credit facility and Senior Notes, and limitation on cash balances held by the Company.

See Note 15 for further discussion of these amendments.

The Company agreed to an increase in interest rates of 300 basis points for the revolving credit facility, and an increase in interest rates averaging 473 basis points for the Senior Notes.  The Company incurred fees of $3,054 to its creditors in conjunction with these amendments.  These fees will be capitalized and amortized over the life of the applicable agreements.

The following presents the minimum adjusted EBITDA level requirements which the Company will be required to comply with beginning in the fourth quarter of fiscal 2009:

For the quarter ended March 31, 2009
  $ (25,000 )
For the two consecutive quarters ended June 30, 2009
    (22,000 )
For the three consecutive quarters ended September 30, 2009
    (14,000 )
For the four consecutive quarters ended December 31, 2009
    1,750  
For the four consecutive quarters ended March 31, 2010
    35,000  

The Company will closely evaluate its on-going ability to remain in compliance with these quarterly minimum adjusted EBITDA levels.  Recent adverse trends in the global financial and economic markets have contributed to a rapid decline in revenues in the Company’s vehicular markets.  These downward trends are expected to continue to adversely affect the Company’s financial results in the fourth quarter of fiscal 2009 and throughout fiscal 2010.  These trends make it increasingly difficult for the Company to project its operating results and may influence its ability to remain in compliance with the minimum adjusted EBITDA levels over the next year.  In contemplation of the uncertainty that exists around the severity and duration of the global recession, the minimum adjusted EBITDA level requirements were established with a range of approximately $10,000 to $20,000 of cumulative cushion at each quarter end to allow for variability in our projected results.  The Company believes that this cushion is sufficient and that it will be able to maintain compliance with the minimum adjusted EBITDA levels through the end of fiscal 2010.  If the Company is unable to meet the financial covenants, its ability to access available lines of credit could be limited, its liquidity could be adversely affected and its debt obligations could be accelerated.  These could have a material adverse effect on the future results of operations, financial position and liquidity of the Company.

 
6


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

The Company believes that its internally generated operating cash flows, working capital management efforts, asset disposition opportunities and existing cash balances, together with access to available external borrowings, will be sufficient to satisfy future operating costs and capital expenditures.

Note 2: Significant Accounting Policies and Change in Accounting Principles

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, the Company’s  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 for the three and nine months ended December 31, 2007, the cash flows for the nine months ended December 31, 2007, and the consolidated balance sheet as of the end of fiscal 2008:

 
7


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

   
Three months ended December 31, 2007
   
Nine months ended December 31, 2007
 
   
As Reported
   
Adjustments
   
After
Change in
Accounting
Principle
   
As Reported
   
Adjustments
   
After
Change in
Accounting
Principle
 
Net sales
  $ 495,301     $ (14,722 )   $ 480,579     $ 1,370,868     $ (17,396 )   $ 1,353,472  
Cost of sales
    418,290       (7,349 )     410,941       1,160,171       (8,476 )     1,151,695  
Gross profit
    77,011       (7,373 )     69,638       210,697       (8,920 )     201,777  
Selling, general and administrative expenses
    60,579       786       61,365       171,091       1,243       172,334  
Restructuring income
    (3 )     -       (3 )     (322 )     -       (322 )
Impairment of goodwill and long-lived assets
    31,455       -       31,455       31,455       -       31,455  
(Loss) income from operations
    (15,020 )     (8,159 )     (23,179 )     8,473       (10,163 )     (1,690 )
Interest expense
    3,440       35       3,475       9,194       (14 )     9,180  
Other income – net
    (2,785 )     7       (2,778 )     (7,061 )     (266 )     (7,327 )
(Loss) earnings from continuing operations before income taxes
    (15,675 )     (8,201 )     (23,876 )     6,340       (9,883 )     (3,543 )
Provision for income taxes
    31,824       (741 )     31,083       31,513       (1,070 )     30,443  
Loss from continuing operations
    (47,499 )     (7,460 )     (54,959 )     (25,173 )     (8,813 )     (33,986 )
Earnings from discontinued operations (net of income taxes)
    149       -       149       535       -       535  
Net loss
  $ (47,350 )   $ (7,460 )   $ (54,810 )   $ (24,638 )   $ (8,813 )   $ (33,451 )
                                                 
Loss per share of common stock – basic:
                                               
Continuing operations
  $ (1.49 )   $ (0.23 )   $ (1.72 )   $ (0.79 )   $ (0.27 )   $ (1.06 )
Earnings from discontinued operations
    0.01       -       0.01       0.02       -       0.02  
Net loss – basic
  $ (1.48 )   $ (0.23 )   $ (1.71 )   $ (0.77 )   $ (0.27 )   $ (1.04 )
                                                 
Loss per share of common stock – diluted:
                                               
Continuing operations
  $ (1.49 )   $ (0.23 )   $ (1.72 )   $ (0.79 )   $ (0.27 )   $ (1.06 )
Earnings from discontinued operations
    0.01       -       0.01       0.02       -       0.02  
Net loss – diluted
  $ (1.48 )   $ (0.23 )   $ (1.71 )   $ (0.77 )   $ (0.27 )   $ (1.04 )

 
8

 
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       (1,133 )     33,962  
Postretirement benefits
    26,669       -       26,669  
Liabilities of business held for sale
    166       -       166  
Other noncurrent liabilities
    35,579       (772 )     34,807  
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  

 
9


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

   
Nine months ended December 31, 2007
 
   
As Reported
   
Adjustments
   
After Change
in Accounting
Principle
 
Cash flows from operating activities:
                 
Net loss
  $ (24,638 )   $ (8,813 )   $ (33,451 )
Adjustments to reconcile net loss with net cash provided by operating activities:
                       
Depreciation and amortization
    58,445       585       59,030  
Impairment of goodwill and long-lived assets
    31,455       -       31,455  
Deferred income taxes
    19,754       -       19,754  
Other – net
    (9,322 )     -       (9,322 )
Net changes in operating assets and liabilities
    (29,896 )     22,931       (6,965 )
Net cash provided by operating activities
    45,798       14,703       60,501  
                         
Cash flows from investing activities:
                       
Expenditures for property, plant and equipment
    (58,112 )     (872 )     (58,984 )
Proceeds from dispositions of assets
    8,734       -       8,734  
Settlement of derivative contracts
    (1,286 )     -       (1,286 )
Other – net
    63       -       63  
Net cash used for investing activities
    (50,601 )     (872 )     (51,473 )
                         
Cash flows from financing activities:
                       
Short-term debt
    7,951       (13,160 )     (5,209 )
Additions to long-term debt
    98,884       -       98,884  
Reductions of long-term debt
    (41,672 )     (7 )     (41,679 )
Book overdrafts
    (5,283 )     -       (5,283 )
Proceeds from exercise of stock options
    686       -       686  
Repurchase of common stock, treasury and retirement
    (7,396 )     -       (7,396 )
Cash dividends paid
    (16,972 )     -       (16,972 )
Net cash provided by financing activities
    36,198       (13,167 )     23,031  
                         
Effect of exchange rate changes on cash
    3,104       214       3,318  
Net increase in cash and cash equivalents
    34,499       878       35,377  
                         
Cash and cash equivalents at beginning of period
    21,227       4,980       26,207  
Cash and cash equivalents at end of period
  $ 55,726     $ 5,858     $ 61,584  

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 of these changes on the results of operations, consolidated balance sheets and cash flows to be immaterial for all prior periods.

Trade receivables and allowance for doubtful accounts:  Trade receivables are recorded at the invoiced amount and do not bear interest if paid according to the original terms.  The allowance for doubtful accounts is Modine’s best estimate of the uncollectible amount contained in the existing trade receivables balance.  The allowance is based on historical write-off experience and specific customer economic data.  The allowance for doubtful accounts is reviewed periodically and adjusted as necessary.  Utilizing age and size based criteria, certain individual accounts are reviewed for collectibility, while all other accounts are reviewed on a pooled basis.  Receivables are charged off against the allowance when it is probable and to the extent that funds will not be collected.  On September 25, 2008, the Company entered into an Accounts Receivable Purchase Agreement whereby one specific customer’s accounts receivable may be sold without recourse to a third-party financial institution on a revolving basis.  During the three and nine months ended December 31, 2008, the Company sold $6,692 and $12,606 of accounts receivable, respectively, to accelerate cash receipts.  In accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, sales of accounts receivable are reflected as a reduction of accounts receivable in the consolidated balance sheets and the proceeds are included in the cash flows from operating activities in the condensed consolidated statements of cash flows.  During the three and nine months ended December 31, 2008, a loss on the sale of accounts receivable of $56 and $124, respectively, was recorded in the consolidated statements of operations.  This loss represented implicit interest on the transactions.

 
10


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

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).  On October 10, 2008, the FASB issued FSP 157-3 which clarifies the application of SFAS No. 157 in a market that is not active.  The company adopted SFAS No. 157, FSP 157-2 and FSP 157-3 as of April 1, 2008 which did not have a material impact on the financial statements.  See Note 18 for further discussion.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an Amendment of SFAS No. 115”, which permits an entity to measure many financial assets and financial liabilities at fair value that are not currently required to be measured at fair value.  Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date.  The fair value option may be elected on an instrument-by-instrument basis, with 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.

 
11


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

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.  The adoption of FSP 03-6-1 will have an impact on earnings per share of $0.01 for the three and nine months ended December 31, 2008.

Note 3: Employee Benefit Plans

Costs (income) from Modine’s contributions to the defined contribution employee benefit plans for the three months ended December 31, 2008 and 2007 were ($194) and $1,908, respectively.  Costs from Modine’s contributions to the defined contribution employee benefit plans for the nine months ended December 31, 2008 and 2007 were $3,303 and $5,642, respectively.  During the three months ended December 31, 2008, the Company’s anticipated contribution percentage for the defined contribution plan was decreased, resulting in income for the period.

 
12


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

In September 2008, the Company announced that effective January 1, 2009, the Modine Manufacturing Company Group Insurance Plan – Retiree Medical Plan is being modified to eliminate coverage for retired participants that are Medicare eligible.  This plan amendment resulted in a $14,283 reduction of the post-retirement benefit obligation, which has been reflected as a component of other comprehensive (loss) income, net of income taxes of $5,305, and will be amortized to earnings over the future service life of active participants.

During the nine months ended December 31, 2008, the Company recorded a settlement charge of $280 related to a settlement payment made from the Modine Manufacturing Company Supplemental Executive Retirement Plan.

In September 2007, the Company announced that effective January 1, 2008, the Modine Manufacturing Company Pension Plan for Non-Union Hourly-Paid Factory and Salaried Employees (Salaried Employee Component) and the Modine Manufacturing Company Supplemental Executive Retirement Plan were modified so that no increases in annual earnings after December 31, 2007 would be included in calculating the average annual earnings portion under the pension plan formula.  The Company recorded a pension curtailment gain of $4,214 during the nine months ended December 31, 2007 to reflect this modification.

Costs for Modine's pension and postretirement benefit plans for the three and nine months ended December 31, 2008 and 2007 include the following components:

   
Three months ended
December 31
   
Nine months ended
December 31
 
   
Pension
   
Postretirement
   
Pension
   
Postretirement
 
   
2008
   
2007
   
2008
   
2007
   
2008
   
2007
   
2008
   
2007
 
Service cost
  $ 620     $ 708     $ 22     $ 41     $ 1,879     $ 2,176     $ 114     $ 207  
Interest cost
    3,549       3,458       179       460       10,688       10,688       947       1,354  
Expected return on plan assets
    (4,254 )     (4,575 )     -       -       (12,762 )     (13,675 )     -       -  
Amortization of:
                                                               
Unrecognized net loss
    481       431       38       139       1,448       2,289       104       383  
Unrecognized prior service cost
    92       123       (595 )     -       275       203       (784 )     -  
Unrecognized net asset
    -       (4 )     -       -       -       (16 )     -       -  
Adjustment for curtailment/settlement
    -       -       -       -       280       (4,214 )     -       -  
Net periodic benefit cost (income)
  $ 488     $ 141     $ (356 )   $ 640     $ 1,808     $ (2,549 )   $ 381     $ 1,944  

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 $472 and $1,541 for the three months ended December 31, 2008 and 2007, respectively.  Modine recognized stock-based compensation cost of $3,266 and $5,215 for the nine months ended December 31, 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.  Based upon management’s assessment of probable attainment, $458 of compensation expense was reversed relative to the earnings per share component of the fiscal 2008 plan in the first quarter of fiscal 2009.  In addition, $856 of compensation expense was reversed relative to the earnings per share component of the fiscal 2009 plan in the third quarter of fiscal 2009.

 
13


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 and nine months ended December 31, 2008 and 2007:

   
Three months ended December 31,
 
   
2008
   
2007
 
Type of award
 
Shares
   
Fair Value Per Award
   
Shares
   
Fair Value Per Award
 
Common stock options
    -     $ -       -     $ -  
Unrestricted common stock - performance
    -     $ -       6.6     $ 27.69  
Restricted common stock - retention
    -     $ -       -     $ -  
Restricted common stock - performance base upon total shareholder return compared to the S&P 500
    -     $ -       -     $ -  
Restricted common stock - performance based upon earnings per share growth
    -     $ -       -     $ -  

   
Nine months ended December 31,
 
   
2008
   
2007
 
         
Fair Value
         
Fair Value
 
Type of award
 
Shares
   
Per Award
   
Shares
   
Per Award
 
Common stock options
    -     $ -       0.3     $ 5.30  
Unrestricted common stock - performance
    -     $ -       6.6     $ 27.69  
Restricted common stock - retention
    17.1     $ 14.64       11.2     $ 28.50  
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 - performanc  based upon earnings per share growth
    -     $ -       149.6     $ 23.25  

The accompanying table sets forth the assumptions used in determining the fair value for the options and performance awards:

   
Three and nine months ended December 31,
 
   
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 %

 
14

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

As of December 31, 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:

Type of award
 
Unrecognized Compenstion Costs
   
Weighted Average Remaining Service Period in Years
 
Common stock options
  $ 63       2.1  
Restricted common stock - retention
    1,851       2.0  
Restricted common stock - performance
    1,941       1.9  
Total
  $ 3,855       1.9  

Note 5: Other (Expense) Income – Net

Other (expense) income – net was comprised of the following:

   
Three months ended
December 31
   
Nine months ended
December 31
 
   
2008
   
2007
   
2008
   
2007
 
Equity earnings of non-consolidated affiliates
  $ 698     $ 1,363     $ 2,211     $ 2,639  
Interest income
    535       661       1,660       1,310  
Foreign currency transactions
    (2,622 )     358       (4,685 )     2,703  
Other non-operating (expense) income - net
    (267 )     396       320       675  
Total other (expense) income - net
  $ (1,656 )   $ 2,778     $ (494 )   $ 7,327  

Foreign currency transactions for the three and nine months ended December 31, 2008 and 2007 were primarily comprised of foreign currency transaction gains (losses) on inter-company loans denominated in a foreign currency in Brazil.

Note 6: Income Taxes

For the three months ended December 31, 2008 and 2007, the Company’s effective income tax rate attributable to loss from continuing operations before income taxes was -11.3 percent and 130.2 percent, respectively.  During the third quarter of fiscal 2009, the Company recorded a valuation allowance of $6,961 primarily 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.  During the third quarter of fiscal 2008, the Company recorded a $40,435 valuation allowance related to its net U.S. deferred tax assets.  The change in the effective tax rate from the prior year primarily stems from a $32,451 decrease in the valuation allowance against net deferred tax assets, which were initially recorded during the third quarter of fiscal 2008, offset by foreign tax rate differentials and goodwill impairments.

For the nine months ended December 31, 2008 and 2007, the Company’s effective income tax rate attributable to loss from continuing operations before income taxes was -3.2 percent and 859.2 percent, respectively.  The decrease in the effective tax rate from the prior year primarily relates to the $23,122 decrease in the valuation allowance against the net U.S. deferred tax assets that was initially recorded during the third quarter of fiscal 2008, offset by the absence of a favorable impact of foreign tax law changes and tax rate differentials.

 
15


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

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 estimated 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 based upon year-to-date results.  The effective tax rate methodology continues to be used for the majority of the Company’s other foreign operations.

The following is a reconciliation of the effective tax rate for the three and nine months ended December 31, 2008:

   
Three months ended December 31, 2008
 
   
Domestic
   
Foreign
   
Total
   
%
 
                         
Loss from continuing operations before income taxes
  $ (14,974 )   $ (48,670 )   $ (63,644 )      
                               
Benefit from income taxes at federal statutory rate
  $ (5,241 )   $ (17,034 )   $ (22,275 )     (35.0 %)
Differential in foreign tax rates and state taxes
    (880 )     4,971       4,091       6.4  
Valuation allowance
    7,984       (1,023 )     6,961       10.9  
Goodwill
    -       2,390       2,390       3.8  
Other, net
    1,555       112       1,667       2.6  
Provision for (benefit from) income taxes
  $ 3,418     $ (10,584 )   $ (7,166 )     (11.3 %)
                                 
   
Nine months ended December 31, 2008
 
   
Domestic
   
Foreign
   
Total
   
%
 
                                 
Loss from continuing operations before income taxes
  $ (59,023 )   $ (6,863 )   $ (65,886 )        
                                 
Benefit from income taxes at federal statutory rate
  $ (20,658 )   $ (2,402 )   $ (23,060 )     (35.0 %)
Differential in foreign tax rates and state taxes
    (1,586 )     1,434       (152 )     (0.2 )
Valuation allowance
    17,313       (395 )     16,918       25.7  
Goodwill
    -       2,390       2,390       3.6  
Other, net
    1,399       398       1,797       2.7  
(Benefit from) provision for income taxes
  $ (3,532 )   $ 1,425     $ (2,107 )     (3.2 %)

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.  During the third quarter of fiscal 2009, the Company concluded the German tax audit of its 2000-2005 income tax returns.  As a result, unrecognized tax benefits were reduced by $576.  Additional 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.

 
16


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

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 has been shown separately in the consolidated statements of operations.  As a result, the gain on sale has been presented net of income tax (benefit) expense of ($369) and $400 for the three and nine months ended December 31, 2008, respectively.  In addition, the earnings from discontinued operations for the three and nine months ended December 31, 2008 have been presented net of income tax (benefit) expense of ($1) and $75, respectively, and the earnings from discontinued operations for the three and nine months ended December 31, 2007 have been presented net of income tax expense of $136 and $303, respectively.

Note 7: Earnings Per Share

The computational components of basic and diluted earnings per share are summarized as follows:
 
   
Three months ended
December 31
   
Nine months ended
December 31
 
   
2008
   
2007
   
2008
   
2007
 
                         
Numerator:
                       
Loss from continuing operations
  $ (56,478 )   $ (54,959 )   $ (63,779 )   $ (33,986 )
Earnings from discontinued operations
    52       149       217       535  
Gain on sale of discontinued operations
    369       -       2,066       -  
Net loss
  $ (56,057 )   $ (54,810 )   $ (61,496 )   $ (33,451 )
Denominator:
                               
Weighted average shares outstanding – basic
    32,093       31,936       32,066       32,049  
Effect of dilutive securities
    -       -       -       -  
Weighted average shares outstanding – diluted
    32,093       31,936       32,066       32,049  
                                 
Net loss per share of common stock – basic:
                               
Continuing operations
  $ (1.76 )   $ (1.72 )   $ (1.99 )   $ (1.06 )
Earnings from discontinued operations
    -       0.01       0.01       0.02  
Gain on sale of discontinued operations
    0.01       -       0.06       -  
Net loss – basic
  $ (1.75 )   $ (1.71 )   $ (1.92 )   $ (1.04 )
                                 
Net loss per share of common stock – diluted:
                               
Continuing operations
  $ (1.76 )   $ (1.72 )   $ (1.99 )   $ (1.06 )
Earnings from discontinued operations
    -       0.01       0.01       0.02  
Gain on sale of discontinued operations
    0.01       -       0.06       -  
Net loss – diluted
  $ (1.75 )   $ (1.71 )   $ (1.92 )   $ (1.04 )

For the three and nine months ended December 31, 2008, the calculation of diluted earnings per share excludes all potentially dilutive shares which includes 2,617 and 2,616 stock options, respectively, and 133 restricted stock awards as these shares were anti-dilutive.  For the three and nine months ended December 31, 2007, the calculation of diluted earnings per share excludes all potentially dilutive shares which includes 2,385 stock options, 243 restricted stock awards and 150 performance awards as these shares were anti-dilutive.

 
17


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

Note 8: Comprehensive (Loss) Income

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

   
Three months ended
December 31
   
Nine months ended
December 31
 
   
2008
   
2007
   
2008
   
2007
 
Net loss
  $ (56,057 )   $ (54,810 )   $ (61,496 )   $ (33,451 )
Foreign currency translation
    (20,415 )     11,653       (70,759 )     36,514  
Cash flow hedges
    (7,374 )     862       (13,580 )     (1,365 )
Net investment hedging error
    -       5,626       -       5,626  
Change in SFAS No. 158 benefit plan adjustment
    3,928       396       8,184       20,317  
Post-retirement plan amendment
    -       -       8,978       -  
Total comprehensive (loss) income
  $ (79,918 )   $ (36,273 )   $ (128,673 )   $ 27,641  

From time to time, the Company has managed its currency exposure related to the net assets of its European subsidiaries through euro-denominated borrowings entered into by the parent.  During the third quarter of fiscal 2008, the Company recorded an adjustment to accumulated other comprehensive (loss) income of $5,626 to properly reflect the income tax ramifications of net losses related to the foreign-currency-denominated debt recorded in the cumulative translation adjustment over the past several fiscal years.  This adjustment was made in the third quarter of fiscal 2008 as it was deemed immaterial to the Company’s financial position for that period and all previously reported periods.  This adjustment had no impact on the Company’s net (loss) earnings during the third quarter of fiscal 2008 or any period previously reported.

Note 9: Inventories

The amounts of raw materials, 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.

   
December 31, 2008
   
March 31, 2008
 
Raw materials and work in process
  $ 87,281     $ 96,973  
Finished goods
    31,401       28,526  
Total inventories
  $ 118,682     $ 125,499  

 
18

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

Note 10: Property, Plant and Equipment

Property, plant and equipment consisted of the following:

   
December 31, 2008
   
March 31, 2008
 
Gross property, plant and equipment
  $ 1,145,339     $ 1,188,563  
Less accumulated depreciation
    (661,030 )     (648,027 )
Net property, plant and equipment
  $ 484,309     $ 540,536  

A long-lived asset impairment charge of $18,337 was recorded during the three months ended December 31, 2008.  The impairment charge included $7,775 related to assets in the Original Equipment – North America segment for a facility with projected cash flows unable to support its asset base, for assets related to a cancelled program and a program which was not able to support its asset base.  If future capital expenditures are required for the program which was not able to support its asset base, additional impairment charges may be required in the future.  Also included in the impairment charge was $10,562 related to certain manufacturing facilities in the Original Equipment – Europe segment with projected cash flows unable to support their asset bases.

A long-lived asset impairment charge of $21,502 was recorded during the nine months ended December 31, 2008.  The impairment charge included $10,570 related to assets in the Original Equipment – North America segment for a facility with projected cash flows unable to support its asset base, a program which is unable to support its asset base and for assets no longer in use.  The impairment charge included $10,562 related to assets in the Original Equipment – Europe segment for certain manufacturing facilities with projected cash flows unable to support their asset bases.  Also included in the impairment charge was $370 related to certain assets in the Commercial Products segment for the cancellation of a product in its development stage.

A long-lived asset impairment charge of $7,686 was recorded during the three months ended December 26, 2007.  The impairment charge included $3,011 related to assets in the Original Equipment – North America segment for a program which was not able to support its asset base.  Also included in the impairment charge was $4,675 related to assets in the Tübingen, Germany manufacturing facility within the Original Equipment – Europe segment based on the Company’s intention to close this facility.

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 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 December 31, 2008 as the sellers’ indemnification obligations are being reviewed by the Company and negotiated with the sellers.

 
19


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

Note 12: Restructuring, Plant Closures and Other Related Costs

During fiscal 2008, the Company announced the closure of three U.S. manufacturing plants and the closure of 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 by the end of fiscal 2011.  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.

In September 2008, the Company announced a workforce reduction that affected approximately 20 employees, including approximately 15 percent of the managerial workforce in the Company’s Racine, Wisconsin, headquarters.

During the third quarter of fiscal 2009, the Company committed to a workforce reduction affecting approximately 140 employees, or approximately 25 percent of the workforce in the Company’s Racine, Wisconsin headquarters.  Modine also began procedures to significantly reduce the workforce throughout its European facilities including its European headquarters in Bonlanden, Germany.

The Company has incurred $33,669 of termination charges, $2,526 of pension curtailment charges and $11,682 of other closure costs related to these plant closures and the workforce reductions.  Further additional costs which are anticipated to be incurred through fiscal 2011 are approximately $17,000, consisting of $3,000 of employee-related costs and $14,000 of other costs such as equipment moving costs, accelerated depreciation and miscellaneous facility closing costs.  Future cash outlays of approximately $43,000 are anticipated related to these closures and workforce reductions.

Changes in the accrued restructuring liability for the three and nine months ended December 31, 2008 and 2007 were comprised of the following related to the above-described restructuring activities:

 
20


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

   
Three months ended December 31
 
   
2008
   
2007
 
Restructuring liability:
           
Balance, October 1
  $ 6,283     $ 1,785  
Additions
    24,927       33  
Adjustments
    (4 )     (36 )
Effect of exchange rate changes
    714       -  
Payments
    (620 )     (137 )
Balance, December 31
  $ 31,300     $ 1,645  
                 
   
Nine months ended December 31
 
      2008       2007  
Restructuring liability:
               
Balance, April 1
  $ 5,161     $ 2,313  
Additions
    27,576       323  
Adjustments
    (519 )     (645 )
Effect of exchange rate changes
    714       -  
Payments
    (1,632 )     (346 )
Balance, December 31
  $ 31,300     $ 1,645  

 
The following is the summary of restructuring and other repositioning costs recorded related to the announced programs during the three and nine months ended December 31, 2008 and 2007:
 
   
Three months ended
December 31
   
Nine months ended
December 31
 
   
2008
   
2007
   
2008
   
2007
 
Restructuring charges (income):
                       
Employee severance and related benefits
  $ 24,923     $ (3 )   $ 27,057     $ (322 )
Non-cash employee related benefits
    388       -       1,073       -  
Total restructuring charges (income)
    25,311       (3 )     28,130       (322 )
                                 
Other repositioning costs:
                               
Consulting fees
    720       -       3,219       -  
Miscellaneous other closure costs
    1,170       1,249       3,745       2,421  
Total other repositioning costs
    1,890       1,249       6,964       2,421  
Total restructuring and other repositioning costs
  $ 27,201     $ 1,246     $ 35,094     $ 2,099  

The total restructuring and other repositioning costs of $27,201 and $35,094 were recorded in the consolidated statements of operations for the three and nine months ended December 31, 2008, respectively, as follows: $1,597 and $4,172 were recorded as a component of cost of sales; $293 and $2,792 were recorded as a component of selling, general and administrative expenses; and $25,311 and $28,130 were recorded as restructuring expense.  The total restructuring and other repositioning costs of $1,246 and $2,099 were recorded in the consolidated statements of operations for the three and nine months ended December 31, 2007, respectively, as follows: $1,249 and $2,421 were recorded as a component of cost of sales and $3 and $322 were recorded as restructuring income.  The Company accrues severance in accordance with its written plan, procedures and relevant statutory requirements.  Restructuring income relates to reversals of severance liabilities due to employee terminations prior to completion of required retention periods.

 
21


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 statements of operations 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.  During the third quarter of fiscal 2009, the Company paid $101 based on the finalization of working capital received by the purchaser.  The Company recorded a gain on the sale, net of income taxes, of $369 and $2,066 for the three and nine months ended December 31, 2008, respectively.

The major classes of assets and liabilities held for sale at March 31, 2008 included in the consolidated balance sheet 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 sheet, and the cash balance was not included in the sale transaction.

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

 
22


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

   
Three months ended
December 31
   
Nine months ended
December 31
 
   
2008
   
2007
   
2008
   
2007