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 December 31, 2010

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
(State or other jurisdiction of incorporation or organization)
39-0482000
(I.R.S. Employer Identification No.)
   
1500 DeKoven Avenue, Racine, Wisconsin
(Address of principal executive offices)
53403
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o    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.

Large Accelerated Filer o
 
Accelerated Filer þ
     
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 46,535,527 at February 4, 2011.
 


 
 

 

MODINE MANUFACTURING COMPANY
INDEX


1
Item 1.
1
Item 2.
27
Item 3.
39
Item 4.
44
44
Item 1.
44
Item 1A. 
44
Item 6.
44
45

 
 

 
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements.

MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 2010 and 2009
(In thousands, except per share amounts)
(Unaudited)

   
Three months ended
December 31
   
Nine months ended
December 31
 
   
2010
   
2009
   
2010
   
2009
 
Net sales
  $ 360,043     $ 302,390     $ 1,051,114     $ 838,320  
Cost of sales
    302,948       254,674       877,718       712,380  
Gross profit
    57,095       47,716       173,396       125,940  
Selling, general and administrative expenses
    45,971       40,672       133,011       116,236  
Restructuring (income) expense
    (28 )     1,056       13       (907 )
Impairment of long-lived assets
    1,274       273       2,500       5,116  
Income from operations
    9,878       5,715       37,872       5,495  
Interest expense
    2,602       3,793       30,239       18,895  
Other income – net
    (179 )     (441 )     (2,191 )     (7,122 )
Earnings (loss) from continuing operations before income taxes
    7,455       2,363       9,824       (6,278 )
Provision for income taxes
    1,431       238       10,158       2,125  
Earnings (loss) from continuing operations
    6,024       2,125       (334 )     (8,403 )
Earnings (loss) from discontinued operations (net of income taxes)
    -       2,084       (2,932 )     (8,348 )
Loss on sale of discontinued operations (net of income taxes)
    (34 )     (430 )     (110 )     (430 )
Net earnings (loss)
  $ 5,990     $ 3,779     $ (3,376 )   $ (17,181 )
                                 
Earnings (loss) from continuing operations per common share:
                               
Basic
  $ 0.13     $ 0.05     $ (0.01 )   $ (0.23 )
Diluted
  $ 0.13     $ 0.05     $ (0.01 )   $ (0.23 )
                                 
Net earnings (loss) per common share:
                               
Basic
  $ 0.13     $ 0.08     $ (0.07 )   $ (0.46 )
Diluted
  $ 0.13     $ 0.08     $ (0.07 )   $ (0.46 )

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

 
1


MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and March 31, 2010
(In thousands, except per share amounts)
(Unaudited)

   
December 31, 2010
   
March 31, 2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 40,415     $ 43,657  
Short term investments
    2,652       1,239  
Trade receivables, less allowance for doubtful accounts of $1,952 and $2,831
    174,453       167,745  
Inventories
    117,998       99,559  
Deferred income taxes and other current assets
    51,725       43,242  
Total current assets
    387,243       355,442  
Noncurrent assets:
               
Property, plant and equipment – net
    404,237       418,616  
Investment in affiliates
    3,643       3,079  
Goodwill
    30,929       29,552  
Intangible assets – net
    6,575       6,888  
Assets held for sale
    2,450       9,870  
Other noncurrent assets
    12,781       16,805  
Total noncurrent assets
    460,615       484,810  
Total assets
  $ 847,858     $ 840,252  
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Short-term debt
  $ 6,133     $ 3,011  
Long-term debt – current portion
    60       234  
Accounts payable
    130,511       142,209  
Accrued compensation and employee benefits
    65,703       66,268  
Income taxes
    10,722       7,527  
Accrued expenses and other current liabilities
    62,059       52,151  
Total current liabilities
    275,188       271,400  
Noncurrent liabilities:
               
Long-term debt
    145,427       135,952  
Deferred income taxes
    10,685       10,830  
Pensions
    58,877       74,270  
Postretirement benefits
    7,428       8,007  
Other noncurrent liabilities
    19,483       15,707  
Total noncurrent liabilities
    241,900       244,766  
Total liabilities
    517,088       516,166  
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 47,080 and 46,815 shares
    29,425       29,260  
Additional paid-in capital
    165,223       159,854  
Retained earnings
    195,045       198,421  
Accumulated other comprehensive loss
    (45,001 )     (49,183 )
Treasury stock at cost: 554 shares
    (13,922 )     (13,922 )
Deferred compensation trust
    -       (344 )
Total shareholders' equity
    330,770       324,086  
Total liabilities and shareholders' equity
  $ 847,858     $ 840,252  

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, 2010 and 2009
(In thousands)
(Unaudited)

   
Nine months ended December 31
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Net loss
  $ (3,376 )   $ (17,181 )
Adjustments to reconcile net loss with net cash provided by operating activities:
               
Depreciation and amortization
    42,493       49,625  
Impairment of long-lived assets
    2,500       12,763  
Other – net
    4,169       (581 )
Net changes in operating assets and liabilities, excluding dispositions
    (47,206 )     5,244  
Net cash (used for) provided by operating activities
    (1,420 )     49,870  
                 
Cash flows from investing activities:
               
Expenditures for property, plant and equipment
    (31,119 )     (41,449 )
Proceeds from dispositions of assets
    3,577       8,130  
Proceeds from sale of assets held for sale and discontinued operations
    8,841       11,249  
Settlement of derivative contracts
    (48 )     (6,544 )
Other – net
    3,709       4,024  
Net cash used for investing activities
    (15,040 )     (24,590 )
                 
Cash flows from financing activities:
               
Short-term debt – net
    2,919       (5,043 )
Borrowings of long-term debt
    229,699       50,884  
Repayments of long-term debt
    (220,026 )     (165,549 )
Book overdrafts
    (407 )     (1,071 )
Issuance of common stock
    -       93,025  
Other – net
    950       (724 )
Net cash provided by (used for) financing activities
    13,135       (28,478 )
                 
Effect of exchange rate changes on cash
    83       3,823  
Net (decrease) increase in cash and cash equivalents
    (3,242 )     625  
                 
Cash and cash equivalents at beginning of period
    43,657       43,536  
Cash and cash equivalents at end of period
  $ 40,415     $ 44,161  

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 applied on a basis consistent with those principles used in the preparation of the annual consolidated financial statements of Modine Manufacturing Company (Modine or the Company) for the year ended March 31, 2010.  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 2011 are not necessarily indicative of the results to be expected for the full year.

These financial statements should be read in conjunction with the consolidated financial statements and related notes in Modine’s Annual Report on Form 10-K for the year ended March 31, 2010.

Note 2: Significant Accounting Policies

Restricted cash:  At December 31, 2010 and March 31, 2010, the Company had long-term restricted cash of $2,208 and $1,926, respectively, included in other noncurrent assets to secure long-term employee compensation arrangements for certain employees in Europe.  At March 31, 2010, the Company had long-term restricted cash of $4,000 included in other noncurrent assets primarily as collateral for unrealized losses on commodity derivatives with JPMorgan Chase Bank, N.A. as the counterparty.  There was no collateral required on commodity derivatives at December 31, 2010.

Assets held for sale:  Assets held for sale totaling $2,450 and $9,870 at December 31, 2010 and March 31, 2010, respectively, represent certain facilities that the Company has closed and is currently marketing for sale.  During the three months ended December 31, 2010, the Company sold one of the facilities previously classified as held for sale for net proceeds of $7,302 and recognized a gain on the sale of $2,232, which has been reflected as a component of selling, general and administrative expenses.  For the nine months ended December 31, 2010, the Company sold three facilities previously classified as held for sale for net proceeds of $8,841 and recognized a gain on the sales of $3,258, which has been reflected as a component of selling, general and administrative expenses.

Environmental expenditures:  The Company capitalizes environmental expenditures related to current operations that qualify as property, plant and equipment or substantially increase the economic value or extend the useful life of an asset.  All other expenditures are expensed as incurred.  Environmental expenditures that relate to an existing condition caused by past operations are expensed.  If a loss arising from environmental matters is probable and can be reasonably 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.

Trade receivables:  The Company enters into accounts receivable factoring programs from time to time to sell accounts receivables without recourse to third-party financial institutions.  Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in the cash flows from operating activities in the consolidated statements of cash flows.  During the three and nine months ended December 31, 2010 the Company sold $17,970 and $23,934 of accounts receivable, respectively.  During the three and nine months ended December 31, 2009, the Company sold $3,340 and $7,839 of accounts receivable, respectively.  During the three and nine months ended December 31, 2010, a loss on the sale of accounts receivables of $98 and $142, respectively, was recorded in the consolidated statements of operations.  During the three and nine months ended December 31, 2009, a loss on the sale of accounts receivables of $26 and $58, respectively, was recorded in the consolidated statements of operations.  This loss represented implicit interest on the transactions.

 
4


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

Out of period adjustments:  During the second quarter of fiscal 2011, the Company identified a $3,292 postretirement curtailment gain related to the closure of the Harrodsburg, Kentucky manufacturing facility, of which $2,944 related to prior periods and $348 related to the second quarter.  The Company recorded $1,217 in the Original Equipment – North America segment during the second quarter of fiscal 2011 for the portion of the postretirement curtailment gain that should have been recorded in the fourth quarter of fiscal 2010.  The Company performed a quantitative analysis of the impact of this adjustment on previously issued financial statements, and further considered qualitative factors including the impact of this adjustment on recent and historical earnings trends and that there was no impact on compensation or covenant compliance.  After considering the collective quantitative and qualitative factors, the Company determined this adjustment was not material to the fiscal 2010 financial statements or the second quarter fiscal 2011 financial statements.  As a result of these adjustments, costs of sales decreased $1,217, pre-tax and post-tax results increased $1,217 and diluted loss per share from continuing operations decreased $0.03 for the nine months ended December 31, 2010.

In addition, during the second quarter of fiscal 2011, the Company determined that $1,727 of the previously mentioned postretirement curtailment gain should have been recorded during the first quarter of fiscal 2011 and identified a $972 gain from a commercial settlement in the Original Equipment – Europe segment that should have been recorded during the first quarter of fiscal 2011.  After considering similar qualitative and quantitative factors to those previously discussed, the Company determined these first quarter adjustments, totaling $2,699, were not material to the previously issued first quarter fiscal 2011 financial statements.  Accordingly, the Company revised its year-to-date results in the quarterly report for the second quarter of fiscal 2011 and will revise the first quarter fiscal 2011 results prospectively in future filings.  The revised first quarter fiscal 2011 results (which are reflected in the results for the nine months ended December 31, 2010) reflect decreased cost of sales of $2,699 million, increased provision for income taxes of $414, increased income from continuing operations of $2,285 and increased diluted earnings per share from continuing operations of $0.05.
 
Accounting standards changes and new accounting pronouncements:  In June 2009, the Financial Accounting Standards Board (FASB) issued guidance on accounting for transfers of financial assets, which requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets.  The guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures.  This guidance is effective for the Company on a prospective basis on or after April 1, 2010 and had no impact on the consolidated financial statements.

In October 2009, the FASB issued updated guidance on revenue arrangements with multiple deliverables, which addresses the unit of accounting for multiple-deliverable arrangements and revises the method by which consideration is allocated among the units of accounting.  The overall consideration is allocated to each deliverable by establishing a selling price for individual deliverables based on a hierarchy of evidence, including vendor-specific objective evidence, other third party evidence of the selling price or the reporting entity’s best estimate of the selling price of individual deliverables in the arrangement.  This guidance is effective for the Company on a prospective basis on or after April 1, 2011.
 
Note 3: Employee Benefit Plans

During the three months ended December 31, 2010 and 2009, the Company recorded compensation expense of $1,076 and $1,057, respectively, related to its defined contribution employee benefit plans.  During the nine months ended December 31, 2010 and 2009, the Company recorded compensation expense of $3,084 and $3,730, respectively, related to its defined contribution employee benefit plans.

 
5


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

During the three and nine months ended December 31, 2010, the Company elected to contribute $2,529 and $14,628, respectively, to its U.S. pension plans.

During the nine months ended December 31, 2009, the Company recorded settlement charges of $281 related to payments made from the Modine Manufacturing Company Supplemental Executive Retirement Plan.

During the nine months ended December 31, 2010, the Company recorded a postretirement curtailment gain of $3,292 related to the closure of the Harrodsburg, Kentucky manufacturing facility.

Costs for Modine's pension and postretirement benefit plans for the three and nine months ended December 31, 2010 and 2009 include the following components:

   
Three months ended
December 31
   
Nine months ended
December 31
 
   
Pension
   
Postretirement
   
Pension
   
Postretirement
 
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
Service cost (income)
  $ 483     $ 398     $ 11     $ (9 )   $ 1,433     $ 1,509     $ 33     $ 56  
Interest cost
    3,405       3,725       85       65       10,288       10,937       253       395  
Expected return on plan assets
    (3,806 )     (3,806 )     -       -       (11,418 )     (11,339 )     -       -  
Amortization of:
                                                               
Unrecognized net loss (gain)
    1,918       752       (28 )     (97 )     5,752       1,902       (84 )     (25 )
Unrecognized prior service cost (credit)
    89       98       (446 )     (592 )     267       280       (1,336 )     (1,780 )
Adjustment for settlement
    8       -       -       -       23       281       -          
Curtailment gain
    -       -       -       -       -       -       (3,292 )     -  
Net periodic benefit cost (income)
  $ 2,097     $ 1,167     $ (378 )   $ (633 )   $ 6,345     $ 3,570     $ (4,426 )   $ (1,354 )

Note 4: Stock-Based Compensation

Modine recognized stock-based compensation cost of $687 and $191 for the three months ended December 31, 2010 and 2009, respectively.  Modine recognized stock-based compensation cost of $3,203 and $2,336 for the nine months ended December 31, 2010 and 2009, respectively.  The performance component of awards granted under the long-term incentive plan during the first quarter of fiscal 2011 is based on a target compound annual growth rate in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) over a three year period and a target return on average capital employed (ROACE) at the end of the three year period.  The Company currently considers the attainment of these performance targets to be probable.  Adjusted EBITDA is defined as earnings (loss) from continuing operations before interest expense and provision for income taxes, adjusted to exclude unusual, non-recurring or extraordinary non-cash charges and cash restructuring and repositioning charges and further adjusted to add back depreciation and amortization expense.  ROACE is defined as net earnings adding back after tax interest expense and adjusted to exclude unusual, non-recurring or extraordinary non-cash charges and cash restructuring and repositioning charges; divided by the average total debt plus shareholders’ equity.  No performance shares were granted during fiscal 2010.

The following tables present, by type, the fair market value of stock-based compensation awards granted during the nine months ended December 31, 2010 and 2009:

 
6


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

   
Nine months ended December 31,
 
   
2010
   
2009
 
Type of award
 
Shares
   
Fair Value Per Award
   
Shares
   
Fair Value Per Award
 
Common stock options
    303.4     $ 5.96       666.1     $ 3.34  
Unrestricted common stock
    60.3     $ 8.43       54.4     $ 6.69  
Restricted common stock - retention
    97.2     $ 9.26       153.8     $ 5.01  
Restricted common stock - performance based upon cumulative growth of adjusted EBITDA
    175.0     $ 9.26       -     $ -  
Restricted common stock - performance   based upon ROACE
    116.6     $ 9.26       -     $ -  

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

   
Nine months ended December 31,
 
   
2010
   
2009
 
   
Options
   
Performance Awards
 
Expected life of awards in years
    6.3       6.0  
Risk-free interest rate
    2.36 %     3.19 %
Expected volatility of the Company's stock
    77.99 %     72.95 %
Expected dividend yield on the Company's stock
    0.00 %     0.00 %
Expected forfeiture rate
    2.50 %     2.50 %

The Company was prohibited from making dividend payments under its debt agreements at the time of the awards resulting in an expected dividend yield of 0.00 percent on the Company’s stock.

As of December 31, 2010, the total remaining unrecognized compensation cost related to the non-vested stock-based compensation awards that 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
  $ 1,386       2.0  
Restricted common stock - retention
    1,320       2.8  
Restricted common stock - performance
    2,071       2.2  
Total
  $ 4,777       2.3  

Note 5: Other Income – Net

Other income – net was comprised of the following:

 
7


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
 
   
2010
   
2009
   
2010
   
2009
 
Equity earnings (loss) of non-consolidated affiliates
  $ 92     $ (355 )   $ 317     $ (133 )
Interest income
    195       132       516       449  
Foreign currency transactions
    (130 )     558       1,264       5,187  
Other non-operating income - net
    22       106       94       1,619  
Total other income - net
  $ 179     $ 441     $ 2,191     $ 7,122  

Foreign currency transactions for the three and nine months ended December 31, 2010 and 2009 were primarily comprised of foreign currency transaction gains (losses) on inter-company loans denominated in a foreign currency.

During the nine months ended December 31, 2009, the Company sold its 50 percent ownership of Anhui Jianghaui Mando Climate Control Co. Ltd. for $4,860, resulting in a gain of $1,465 included in other non-operating income – net.

Note 6: Income Taxes

For the three months ended December 31, 2010 and 2009, the Company’s effective income tax rate attributable to earnings from continuing operations before income taxes was 19.2 percent and 10.1 percent, respectively.  During the third quarter of fiscal 2011, the Company recorded an increase in the valuation allowance of $60, predominantly against net foreign 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 2010, the Company recorded a $3,775 valuation allowance primarily related to its net U.S. deferred tax assets.

For the nine months ended December 31, 2010 and 2009, the Company’s effective income tax rate attributable to earnings (loss) from continuing operations before income taxes was 103.3 percent and 33.8 percent, respectively.  During the nine months ended December 31, 2010, the Company recorded an increase in the valuation allowance of $10,741, predominantly against net 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 nine months ended December 31, 2009, the Company recorded a $6,177 valuation allowance primarily related to its net U.S. deferred tax assets.

Certain of the Company’s foreign operations generated earnings from continuing operations before income taxes during the three and nine months ended December 31, 2010, which resulted in a foreign income tax provision within these tax jurisdictions.  The foreign income tax provision results in an overall income tax expense from continuing operations despite pre-tax domestic losses from continuing operations.  For the three months ended December 31, 2010, the effective tax rate was favorably impacted by the implementation of a tax planning action, interest on equity, which allows our Brazilian operation to deduct as interest expense, subject to withholding tax, payments based on net equity made by the operation to its parent provided certain criteria are met.  This combined with year-over-year changes in the valuation allowance and the changing mix of foreign earnings and domestic losses, are the most significant factors impacting changes in the effective tax rate for the three and nine months ended December 31, 2010 and 2009.

The Company allocates income tax expense between continuing operations, discontinued operations and other comprehensive income by tax jurisdiction.  In periods in which there is a loss from continuing operations before income taxes and pre-tax income in another category (e.g., discontinued operations or other comprehensive income), income tax expense is first allocated to the other sources of income, with a related tax benefit recorded in continuing operations.  For the three and nine months ended December 31, 2010, Modine allocated $425 of income tax expense to the income components in other comprehensive income with an offsetting tax benefit in continuing operations, which reduced the effective tax rate by 6.2 percent and 4.6 percent respectively.

 
8


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

The following is a reconciliation of the effective tax rate for the three and nine months ended December 31, 2010:

   
Three months ended December 31, 2010
 
   
Domestic
   
Foreign
   
Total
   
%
 
                         
(Loss) earnings from continuing operations before income taxes
  $ (328 )   $ 7,783     $ 7,455        
                               
(Benefit from) provision for income taxes at federal statutory rate
  $ (115 )   $ 2,724     $ 2,609       35.0 %
State taxes, net of federal benefit
    45       -       45       0.6  
Taxes on non-U.S. earnings and losses and foreign rate differentials
    -       (781 )     (781 )     (10.5 )
Valuation allowance
    (919 )     979       60       0.8  
Interest on equity
    859       (1,731 )     (872 )     (11.7 )
Other, net
    560       (190 )     370       5.0  
Provision for income taxes
  $ 430     $ 1,001     $ 1,431       19.2 %
                                 
   
Nine months ended December 31, 2010
 
   
Domestic
   
Foreign
   
Total
   
%
 
                                 
(Loss) earnings from continuing operations before income taxes
  $ (21,980 )   $ 31,804     $ 9,824          
                                 
(Benefit from) provision for income taxes at federal statutory rate
  $ (7,693 )   $ 11,131     $ 3,438       35.0 %
State taxes, net of federal benefit
    (989 )     -       (989 )     (10.1 )
Taxes on non-U.S. earnings and losses and foreign rate differentials
    -       (3,080 )     (3,080 )     (31.4 )
Valuation allowance
    7,134       3,607       10,741       109.3  
Interest on equity
    859       (1,731 )     (872 )     (8.9 )
Other, net
    1,050       (130 )     920       9.4  
Provision for income taxes
  $ 361     $ 9,797     $ 10,158       103.3 %

Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with its 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.  The impact of the Company’s operations in the U.S., Germany, Austria and certain other foreign locations are recorded discretely based upon year-to-date results as these operations anticipate net operating losses for the year for which no tax benefit can be recognized.  The income taxes for the Company’s other foreign operations continue to be estimated under the overall effective tax rate methodology.

 
9


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

Unrecognized tax benefits decreased $66 and increased $493 during the three and nine months ended December 31, 2010, respectively, primarily due to current period activity and foreign currency fluctuation.  The Company does not expect any significant increase or decrease in the total amount of unrecognized tax benefits within the next twelve months other than that which will result from the expiration of the applicable statutes of limitation.

The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world.  During the three months ended December 31, 2010, the Company was not engaged in any routine examinations by any federal taxing authority.

As further discussed in Note 12, the South Korean business and retained aftermarket environmental liability in the Netherlands are presented as discontinued operations in the comparative consolidated financial statements.  The loss from discontinued operations has been presented net of income tax expense of $0 and $445 for the three months ended December 31, 2010 and 2009, respectively, and $0 and $538 for the nine months ended December 31, 2010 and 2009, 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
 
   
2010
   
2009
   
2010
   
2009
 
Basic:
                       
Earnings (loss) from continuing operations
  $ 6,024     $ 2,125     $ (334 )   $ (8,403 )
Less: Undistributed earnings attributable to unvested shares
    (28 )     (9 )     -       -  
Net earnings (loss) from continuing operations available to common shareholders
    5,996       2,116       (334 )     (8,403 )
Discontinued operations:
                               
Net (loss) earnings from discontinued operations, net of taxes
    (34 )     1,654       (3,042 )     (8,778 )
Less:  Undistributed earnings attributable to unvested shares
    -       (7 )     -       -  
Net (loss) earnings from discontinued operations availabe to common shareholders
    (34 )     1,647       (3,042 )     (8,778 )
Net earnings (loss) available to common shareholders
  $ 5,962     $ 3,763     $ (3,376 )   $ (17,181 )
                                 
Basic Earnings Per Share:
                               
Weighted average shares outstanding - basic
    46,235       45,941       46,114       37,066  
                                 
Earnings (loss) from continuing operations per common share
  $ 0.13     $ 0.05     $ (0.01 )   $ (0.23 )
Net (loss) earnings from discontinued operations per common share
    -       0.03       (0.06 )     (0.23 )
Net earnings (loss) per common share - basic
  $ 0.13     $ 0.08     $ (0.07 )   $ (0.46 )

 
10


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
 
   
2010
   
2009
   
2010
   
2009
 
Diluted:
                       
Earnings (loss) from continuing operations
  $ 6,024     $ 2,125     $ (334 )   $ (8,403 )
Less: Undistributed earnings attributable to unvested shares
    (13 )     (7 )     -       -  
Net earnings (loss) from continuing operations available to common shareholders
    6,011       2,118       (334 )     (8,403 )
Discontinued operations:
                               
Net (loss) earnings from discontinued operations, net of taxes
    (34 )     1,654       (3,042 )     (8,778 )
Less:  Undistributed earnings attributable to unvested shares
    -       (5 )     -       -  
Net (loss) earnings from discontinued operations availabe to common shareholders
    (34 )     1,649       (3,042 )     (8,778 )
Net earnings (loss) available to common shareholders
  $ 5,977     $ 3,767     $ (3,376 )   $ (17,181 )
                                 
Diluted Earnings Per Share:
                               
Weighted average shares outstanding - basic
    46,235       45,941       46,114       37,066  
Effect of dilutive securities
    657       303       -       -  
Weighted average shares outstanding - diluted
    46,892       46,244       46,114       37,066  
                                 
Earnings (loss) from continuing operations per common share
  $ 0.13     $ 0.05     $ (0.01 )   $ (0.23 )
Net earnings (loss) from discontinued operations per common share
    -       0.03       (0.06 )     (0.23 )
Net earnings (loss) per common share - diluted
  $ 0.13     $ 0.08     $ (0.07 )   $ (0.46 )

For the three months ended December 31, 2010, the calculation of diluted earnings per share excludes 1,474 stock options as these shares were anti-dilutive.  For the nine months ended December 31, 2010, the calculation of diluted earnings per share excludes 1,811 stock options and 24 restricted stock awards as these shares were anti-dilutive.  For the three and nine months ended December 31, 2009, the calculation of diluted earnings per share excludes 2,257 and 2,822 stock options, respectively, as these shares were anti-dilutive.

 
11


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

Note 8: Comprehensive Income

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

   
Three months ended
December 31
   
Nine months ended
December 31
 
   
2010
   
2009
   
2010
   
2009
 
Net earnings (loss)
  $ 5,990     $ 3,779     $ (3,376 )   $ (17,181 )
Foreign currency translation
    (3,117 )     (4,757 )     582       36,362  
Cash flow hedges
    81       1,385       2,172       5,843  
Change in benefit plan adjustment
    1,383       6       1,428       (236 )
Total comprehensive income
  $ 4,337     $ 413     $ 806     $ 24,788  

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, 2010
   
March 31, 2010
 
Raw materials and work in process
  $ 89,500     $ 71,329  
Finished goods
    28,498       28,230  
Total inventories
  $ 117,998     $ 99,559  

Note 10: Property, Plant and Equipment

Property, plant and equipment consisted of the following:

   
December 31, 2010
   
March 31, 2010
 
Gross property, plant and equipment
  $ 1,049,134     $ 1,056,096  
Less accumulated depreciation
    (644,897 )     (637,480 )
Net property, plant and equipment
  $ 404,237     $ 418,616  

A long-lived asset impairment charge of $1,274 was recorded during the three months ended December 31, 2010.  This impairment charge included $975 related to facilities held for sale in the Original Equipment – North America segment to reduce their carrying value to the estimated fair value less costs to sell.

A long-lived asset impairment charge of $2,500 was recorded during the nine months ended December 31, 2010 related to assets in the Original Equipment – Europe segment and the Original Equipment – Asia segment related to a program cancellation and the Original Equipment – North America segment for facilities held for sale to reduce their carrying value to the estimated fair value less costs to sell.

A long-lived asset impairment charge of $5,116 was recorded during the nine months ended December 31, 2009.  The impairment charge included $4,730 related to assets in the Original Equipment – North America segment for the Harrodsburg, Kentucky manufacturing facility based on the Company’s decision to close this facility and a program that was unable to support its asset base.

 
12


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

Assets held for sale of $2,450 and $9,870 at December 31, 2010 and March 31, 2010, respectively, consist of certain facilities that the Company has closed within the Original Equipment – North America and Original Equipment – Europe segments.  During the three months ended December 31, 2010, the Company sold its Tübingen, Germany facility within the Original Equipment – Europe segment for net proceeds of $7,302 and recognized a gain on sale of $2,232.  For the nine months ended December 31, 2010, the Company sold three held for sale facilities in the Original Equipment – North America and Original Equipment – Europe segments for net proceeds of $8,841 and recognized a gain on these sales of $3,258.  The Company is currently marketing the two remaining facilities for sale in the Original Equipment – North America segment.

Note 11: 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.  During the third quarter of fiscal 2010, the Company announced the closure of its Harrodsburg, Kentucky manufacturing facility.  These measures are aimed at realigning the Company’s manufacturing operations, improving profitability and strengthening global competitiveness.  The Tübingen, Germany and the Pemberville, Ohio facility closures were completed during fiscal 2010.  The Harrodsburg, Kentucky and Logansport, Indiana facility closures were completed in the first quarter and second quarter of fiscal 2011, respectively.  The Camdenton, Missouri closure is anticipated to be completed in fiscal 2012.

Since the commencement of these plant closures and previous workforce reductions, the Company has incurred $33,661 of termination charges and $19,583 of other closure costs, in the aggregate.  Further costs of approximately $4,700 are anticipated to be incurred through fiscal 2012, consisting of equipment moving costs and miscellaneous facility closing costs.  Total additional cash expenditures of approximately $6,600 are anticipated to be incurred related to these closures.

 
13


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

Changes in the accrued restructuring liability for the three and nine months ended December 31, 2010 and 2009 were comprised of the following, related to the above-described restructuring activities:

   
Three months ended December 31
 
   
2010
   
2009
 
Termination Benefits:
           
Balance, September 30
  $ 2,516     $ 8,912  
Additions
    9       909  
Adjustments
    (37 )     147  
Effect of exchange rate changes
    (10 )     (52 )
Payments
    (579 )     (3,630 )
Balance, December 31
  $ 1,899     $ 6,286  
                 
   
Nine months ended December 31
 
      2010       2009  
Termination Benefits:
               
Balance, April 1
  $ 4,740     $ 21,412  
Additions
    103       2,241  
Adjustments
    (90 )     (3,148 )
Effect of exchange rate changes
    (12 )     855  
Payments
    (2,842 )     (15,074 )
Balance, December 31
  $ 1,899     $ 6,286  
 
The following is the summary of restructuring and other repositioning costs recorded relative to the above-described programs during the three and nine months ended December 31, 2010 and 2009:
 
   
Three months ended
December 31
   
Nine months ended
December 31
 
   
2010
   
2009
   
2010
   
2009
 
Restructuring (income) expense:
                       
Employee severance and related benefits
  $ (28 )   $ 1,056     $ 13     $ (907 )
                                 
Other repositioning costs:
                               
Consulting fees
    -       262       -       1,485  
Postretirement curtailment gain
    -       -       (3,292 )     -  
Miscellaneous other closure costs
    565       1,863       3,557       4,119  
Total other repositioning costs
    565       2,125       265       5,604  
Total restructuring and other repositioning expense
  $ 537     $ 3,181     $ 278     $ 4,697  

The total restructuring and other repositioning costs of $537 and $278 were recorded in the consolidated statements of operations for the three and nine months ended December 31, 2010, respectively, as follows: $565 and $265 were recorded as a component of cost of sales and $28 was recorded as restructuring income and $13 was recorded as restructuring expense.  The Company accrues severance in accordance with its written plans, procedures and relevant statutory requirements. Restructuring income relates to reversals of severance liabilities due to employee terminations prior to completion of required retention periods and favorable negotiations of severance packages.  The total restructuring and other repositioning costs of $3,181 and $4,697 were recorded in the consolidated statements of operations for the three and nine months ended December 31, 2009, respectively, as follows: $1,863 and $4,119 were recorded as a component of cost of sales; $262 and $1,485 were recorded as a component of selling, general and administrative expenses; $1,056 was recorded as restructuring expense; and $907 was recorded as restructuring income.  During the second quarter of fiscal 2010, final severance terms were reached including an early retirement option in lieu of severance.

 
14


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

Note 12: Discontinued Operations and Assets Held for Sale

During fiscal 2009, the Company announced the intended divestiture of its South Korean-based vehicular heating, ventilating and air conditioning (HVAC) business and, accordingly, it was determined that the South Korean business should be presented as held for sale and as a discontinued operation in the consolidated financial statements.  The operating results have been separately presented as a discontinued operation in the consolidated statement of operations for all periods presented.  On December 23, 2009, the Company sold 100 percent of the shares of the South Korean-based HVAC business for net cash proceeds of $11,249.  The Company recorded a cumulative loss on sale, net of taxes, of $611 during the third and fourth quarters of fiscal 2010.  During the three and nine months ended December 31, 2010, the Company recognized an additional loss on sale, net of taxes, of $34 and $110, respectively.
 
During the nine months ended December 31, 2010, the Company recorded environmental cleanup and remediation expenses of $2,932, as a component of loss from discontinued operations related to a facility in the Netherlands that was sold as part of the spin off of the Company’s Aftermarket business on July 22, 2005.  During the three and nine months ended December 31, 2009, the Company recorded environmental cleanup and remediation expenses of $170 and $841, respectively, as a component of loss from discontinued operations related to the Netherlands facility.

The following results of the South Korean business and the environmental cleanup and remediation in the Netherlands have been presented as loss from discontinued operations in the consolidated statement of operations:

   
Three months ended
December 31, 2009
   
Nine months ended
December 31, 2009
 
             
Net sales
  $ 54,510     $ 136,762  
Cost of sales and other expenses
    51,981       144,572  
Earnings (loss) before income taxes
    2,529       (7,810 )
Provision for income taxes
    445       538  
Earnings (loss) from discontinued operations
  $ 2,084     $ (8,348 )

During the first quarter of fiscal 2010, the Company recorded a loss of $7,646 on the South Korea asset group to reduce its carrying value to the estimated fair value less costs to sell.

Note 13: Goodwill and Intangible Assets

Changes in the carrying amount of goodwill during the first nine months of fiscal 2011, by segment and in the aggregate, are summarized in the following table:

 
15


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

   
OE -Asia
   
South America
   
Commercial Products
   
Total
 
                         
Balance, March 31, 2010
  $ 520     $ 13,869     $ 15,163     $ 29,552  
Fluctuations in foreign currency
    -       996       381       1,377  
Balance, December 31, 2010
  $ 520     $ 14,865     $ 15,544     $ 30,929  

The Company conducted its annual assessment for goodwill impairment in the third quarter of fiscal 2011 by applying a fair value based test in accordance with applicable guidance related to the accounting for goodwill and indefinite-lived intangible assets. The fair value of the Company’s reporting units with goodwill exceeded their respective book values.

Intangible assets are comprised of the following:

   
December 31, 2010
   
March 31, 2010
 
   
Gross Carrying Value
   
Accumulated Amortization
   
Net Intangible Assets
   
Gross Carrying Value
   
Accumulated Amortization
   
Net Intangible Assets
 
                                     
Amortized intangible assets:
                                   
Patents and product technology
  $ 3,952     $ (3,952 )   $ -     $ 3,952     $ (3,952 )   $ -  
Trademarks
    8,898       (3,361 )     5,537       8,726       (2,860 )     5,866  
Other intangibles
    435       (418 )     17       416       (337 )     79  
Total amortized intangible assets
    13,285       (7,731 )     5,554       13,094       (7,149 )     5,945  
Unamortized intangible assets:
                                               
Tradename
    1,021       -       1,021       943       -       943  
Total intangible assets
  $ 14,306     $ (7,731 )   $ 6,575     $ 14,037     $ (7,149 )   $ 6,888  

The Company conducted its annual impairment assessment of intangible assets with indefinite lives in the third quarter of fiscal 2011 in accordance with applicable guidance related to the accounting for goodwill and indefinite-lived intangible assets and determined that no impairment charge was necessary.

Amortization expense was $168 and $172 for the three months ended December 31, 2010 and 2009, respectively, and $495 and $505 for the nine months ended December 31, 2010 and 2009, respectively.  Total estimated annual amortization expense expected for the remainder of fiscal year 2011 through 2016 and beyond is as follows:

 
16


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

Fiscal Year
 
Estimated Amortization Expense
     
Remainder of 2011
 
$166
2012
 
593
2013
 
593
2014
 
593
2015
 
593
2016 & Beyond
 
3,016

Note 14: Indebtedness

At March 31, 2010, the Company had $60,726 outstanding on 10.0 percent Senior Notes, maturing on September 29, 2015 (“2015 Notes”), $40,484 outstanding on 10.75 percent Senior Notes maturing on December 7, 2017 (“2017 Notes A”) and $20,242 outstanding on 10.75 percent Senior Notes maturing on December 7, 2017 (“2017 Notes B”).  The Company also had $7,500 outstanding under its $142,110 domestic revolving credit facility, which was due to expire in July 2011.

On August 12, 2010, the Company entered into a four-year, $145,000 Amended and Restated Credit Agreement with six financial institutions led by JPMorgan Chase Bank, N.A.  The credit agreement amended and restated the Company’s then existing three-year, $142,110 revolving credit facility.  The Company has the right to request an increase in the aggregate commitment by up to a maximum additional amount of $50,000 subject to the agreement of JPMorgan Chase Bank, N.A. and the other lenders providing the increase in aggregate commitment.  Interest is based on a variable interest rate of London Interbank Offered Rate (LIBOR) plus 250 to 375 basis points depending upon the Company’s Consolidated Total Debt to Consolidated Adjusted Earnings before Interest, Taxes, Depreciation and Amortization ratio (leverage ratio) for the then four preceding fiscal quarters.  As of December 31, 2010, the Company’s variable interest rate was LIBOR plus 300 basis points, or 3.26 percent.  The Company incurred $1,424 of fees to its creditors in conjunction with the Amended and Restated Credit Agreement, which will be amortized as a component of interest expense over the four-year term of the facility.  At December 31, 2010, $13,500 was outstanding under the revolving credit facility.

On August 12, 2010, the Company also entered into $125,000, 6.83 percent Series A Senior Notes with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) maturing on August 12, 2020 (“2020 Notes”).  The Company will be required to make principal payments of $4,000 quarterly beginning November 12, 2016 on the 2020 Notes.  The Company may also authorize the issuance of additional senior notes in an aggregate principal amount of $25,000 under the Note Purchase Agreement among the Company and the Note Holders pursuant to a currently uncommitted facility.  The Company provided under its revolving credit facility and 2020 Notes a blanket lien on all domestic assets, certain of the Company’s domestic subsidiaries are guaranteeing the Company’s outstanding borrowings, and 65 percent of the Company’s and debt guarantors’ stock in foreign subsidiaries is pledged.

The proceeds from the 2020 Notes were used to repay the outstanding 2015 Notes, 2017 Notes A and 2017 Notes B.  During the nine months ended December 31, 2010, the Company recognized a loss of $17,866 on early extinguishment of debt as a component of interest expense, which includes the prepayment penalty of $16,570 and $1,296 of unamortized debt issuance costs.

 
17


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

Provisions in the Company’s Amended and Restated Credit Agreement and 2020 Notes include customary restrictive covenants.  The Company is subject to an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to interest expense (interest expense coverage ratio) covenant and a leverage ratio covenant.  Adjusted EBITDA is defined as earnings from continuing operations before interest expense and provision for income taxes, adjusted to exclude unusual, non-recurring or extraordinary non-cash charges and up to $40,000 of cash restructuring and repositioning charges, not to exceed $20,000 in any fiscal year, and further adjusted to add back depreciation and amortization.  The Company is required to maintain the interest expense coverage ratio and leverage ratio covenants based on the following ratios:

 
Interest Expense Coverage Ratio Covenant (Not Permitted to Be Less Than):
 
Leverage Ratio Covenant (Not Permitted to Be Greater Than):
Fiscal quarter ending on or after June 30, 2010 but on or before August 12, 2014
3.00 to 1.0
 
3.25 to 1.0
All fiscal quarters ending thereafter
3.00 to 1.0
 
3.00 to 1.0

The Company was in compliance with its covenants as of December 31, 2010.

At December 31, 2010, the Company had $129,250 available for future borrowings under the domestic revolving credit facility.  In addition to this revolving credit facility, unused lines of credit also exist in Europe, Brazil and China, totaling $43,813.  In the aggregate, the Company had total available lines of credit of $173,063 at December 31, 2010.  The availability of these funds is subject to the Company’s ability to remain in compliance with the financial ratios and limitations in the respective debt agreements.

The fair value of the long-term debt is estimated by discounting the future cash flows at rates offered to the Company for similar debt instruments of comparable maturities.  At December 31, 2010 and March 31, 2010, the carrying value of Modine’s long-term debt approximated fair value, with the exception of the senior notes, which had a fair value of approximately $121,074 and $131,960, respectively.

At December 31, 2010 and March 31, 2010, the Company had short-term debt of $6,133 and $3,011, respectively, primarily consisting of short-term borrowings at foreign locations.

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 December 31, 2010 and March 31, 2010, approximately 48 percent and 47 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.  See Note 20 for further discussion on market, credit and counterparty risks.

 
18


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

Inter-Company Loans Denominated in Foreign Currencies:  The Company has certain foreign-denominated long-term inter-company loans that are sensitive to foreign exchange rates.  The Company has inter-company loans outstanding at December 31, 2010 as follows:

 
·
$14,365 loan to its wholly owned subsidiary, Modine Thermal Systems Private Limited (Modine India), that matures on April 30, 2013;
 
·
$12,000 between two loans to its wholly owned subsidiary, Modine Thermal Systems (Changzhou) Co. Ltd. (Changzhou, China), with various maturity dates through June 2012;
 
·
$1,070 loan to its wholly owned subsidiary, Modine U.K. Dollar Limited, that matures on November 30, 2011;
 
·
$26,184 loan to its wholly owned subsidiary, Modine Holding GmbH, that matures on January 31, 2020;
 
·
$5,690 receivable with its wholly owned subsidiary, Modine do Brazil Sistemas Terminos Ltda. (Modine Brazil) related to the interest on equity tax planning action; and
 
·
$300 loan to its wholly owned subsidiary, Modine Thermal Systems Korea, that matures on April 23, 2011.

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 at December 31, 2010.

Note 16: Derivatives/Hedges

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

Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets.  Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instruments depends on whether it has been designed, and is effective, as a hedge and, if so, on the nature of the hedging activity.

Commodity derivatives:  The Company enters into futures contracts related to certain of the Company’s forecasted purchases of aluminum and copper.  The Company’s strategy in entering into these contracts is to reduce its exposure to changing purchase prices for future purchases 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 (loss), and recognized as a component of earnings at the same time that the underlying purchases of aluminum and copper impact earnings.

Interest rate derivatives: 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 that 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 were reflected as a component of accumulated other comprehensive income (loss), and were being amortized to interest expense over the respective lives of the borrowings.  In conjunction with the repayment of the 2015 and 2017 Notes on August 12, 2010, the remaining unamortized balance for these interest rate derivatives of $1,606 was reflected as a component of interest expense.  The Company amortized $462 of the interest rate derivatives in proportion with the mandatory prepayment of the Senior Notes on September 30, 2009 in connection with the Company’s secondary public offering.

 
19


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

The fair value of the derivative financial instruments recorded in the consolidated balance sheets as of December 31, 2010 and March 31, 2010 are as follows:

 
Balance Sheet Location
 
December 31, 2010
   
March 31, 2010
 
Derivative instruments designated as cash flow hedges:
             
Commodity derivatives
Deferred income taxes and other current assets
  $ 422     $ -  
Commodity derivatives
Accrued expenses and other current liabilities
    989       1,243  

The amounts recorded in accumulated other comprehensive income (loss) (AOCI) and in the consolidated statement of operations for the three and nine months ended December 31, 2010 are as follows:

           
Three months ended
December 31, 2010
   
Nine months ended
December 31, 2010
 
   
Amount of Loss Recognized in AOCI
 
Location of Loss Reclassified from
AOCI into Continuing Operations
 
Amount of Loss Reclassified from AOCI into Continuing Operations
   
Amount of Loss Reclassified from AOCI into Continuing Operations
 
Designated derivative instruments:
                   
Commodity derivatives
  $ 1,087  
Cost of sales
  $ (135 )   $ 48  
Interest rate derivative
    -  
Interest expense
    -       1,751  
Total
  $ 1,087       $ (135 )   $ 1,799  

The amounts recorded in AOCI and in the consolidated statement of operations for the three and nine months ended December 31, 2009 are as follows:

           
Three months ended
December 31, 2009
   
Nine months ended
December 31, 2009
 
   
Amount of Loss Recognized in AOCI
 
Location of Loss Reclassified from AOCI into Continuing Operations
 
Amount of Loss Reclassified from AOCI into Continuing Operations
   
Amount of Loss Reclassified from AOCI into Continuing Operations
 
Designated derivative instruments:
                   
Commodity derivatives
  $ 2,131  
Cost of sales
  $ 1,104     $ 5,859  
Interest rate derivative
    713  
Interest expense
    109       744  
Total
  $ 2,844       $ 1,213     $ 6,603  

Note 17: Fair Value Measurements

Fair value measurements are classified under the following hierarchy:

 
20


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

 
·
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 uses quoted market prices to determine fair value and classifies such measurements within 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 the New York Stock Exchange (NYSE)) and are classified within Level 1 of the valuation hierarchy.  The fair values of money market investments have been determined to approximate their net asset values, with no discounts for credit quality or liquidity restrictions and are classified within Level 2 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 commodity derivatives.  These are not exchange traded and are customized over-the-counter derivative transactions.  These derivative exposures are with counterparties that have long-term credit ratings of BBB- or better.

The Company measures fair value 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.

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 the NYSE) and are classified within Level 1 of the valuation hierarchy.  The fair values of money market investments have been determined to approximate their net asset values, with no discounts for credit quality or liquidity restrictions and are classified within Level 2 of the valuation hierarchy.

At December 31, 2010, the assets and liabilities that are measured at fair value on a recurring basis are classified as follows:

 
21


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

   
Level 1
   
Level 2
   
Level 3
   
Total Assets / Liabilities at Fair Value
 
Assets:
                       
Trading securities (short term investments)
  $ 2,639     $ 13     $ -     $ 2,652  
Derivative financial instruments
    -       422       -       422  
Total assets
  $ 2,639     $ 435     $ -     $ 3,074  
                                 
Liabilities:
                               
Derivative financial instruments
  $ -     $ 989     $ -     $ 989  
Deferred compensation obligation
    2,642       13       -       2,655  
Total liabilitites
  $ 2,642     $ 1,002     $ -     $ 3,644  

Note 18: Product Warranties and Other Commitments

Changes in the warranty liability were as follows:

   
Three months ended December 31
 
   
2010
   
2009
 
             
Balance, October 1
  $ 13,807     $ 11,029  
Accruals for warranties issued in current period
    1,226       1,381  
Accruals (reversals) related to pre-existing warranties
    31       (619 )
Settlements made
    (2,918 )     (2,038 )
Effect of exchange rate changes
    (40 )     (37 )
Balance, December 31
  $ 12,106     $ 9,716  

   
Nine months ended December 31
 
   
2010
   
2009
 
             
Balance, April 1
  $ 13,126     $ 9,107  
Accruals for warranties issued in current period
    3,763       4,530  
Accruals related to pre-existing warranties
    86       794  
Settlements made
    (4,852 )     (5,651 )
Effect of exchange rate changes
    (17 )     936  
Balance, December 31
  $ 12,106     $ 9,716  

Commitments: At December 31, 2010, the Company had capital expenditure commitments of $17,577.  Significant commitments include tooling and equipment expenditures for new and renewal platforms with new and current customers in Europe and North America.

Note 19: Segment Information

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

 
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
 
   
2010
   
2009
   
2010
   
2009
 
Sales :
                       
Original Equipment - Asia
  $ 16,859     $ 8,934     $ 41,623     $ 22,411  
Original Equipment - Europe
    139,946       126,980       396,990       344,588  
Original Equipment - North America
    124,505       101,296       379,879       293,559  
South America
    36,429       32,254       114,513       82,871  
Commercial Products
    48,406       48,371       134,799       127,956  
Segment sales
    366,145       317,835       1,067,804       871,385  
Corporate and administrative
    379       481       1,157       2,019  
Eliminations
    (6,481 )     (15,926 )     (17,847 )     (35,084 )
Sales from continuing operations
  $ 360,043     $ 302,390     $ 1,051,114     $ 838,320  

   
Three months ended
December 31
   
Nine months ended
December 31
 
   
2010
   
2009
   
2010
   
2009
 
Gross profit (loss):
       
% of sales
         
% of sales
         
% of sales
         
% of sales
 
Original Equipment - Asia
  $ 1,282       7.6 %   $ 237       2.7 %   $ 3,138       7.5 %   $ (217 )     -1.0 %
Original Equipment - Europe
    17,317       12.4 %     17,650       13.9 %     54,386       13.7 %     45,098       13.1 %
Original Equipment - North America
    16,526       13.3 %     9,067       9.0 %     52,573       13.8 %     32,588       11.1 %
South America
    6,960       19.1 %     6,137       19.0 %     23,411       20.4 %     16,608       20.0 %
Commercial Products
    14,617       30.2 %     15,244       31.5 %     38,685       28.7 %     35,916       28.1 %
Segment gross profit
    56,702       15.5 %     48,335       15.2 %     172,193       16.1 %     129,993       14.9 %
Corporate and administrative
    383       -       (620 )     -       1,180       -       (4,127 )     -  
Eliminations
    10       -       1       -       23       -       74       -  
Gross profit
  $ 57,095       15.9 %   $ 47,716       15.8 %   $ 173,396       16.5 %   $ 125,940       15.0 %

   
Three months ended
December 31
   
Nine months ended
December 31
 
   
2010
   
2009
   
2010
   
2009
 
Operating earnings (loss):
                       
Original Equipment - Asia
  $ (883 )   $ (675 )   $ (2,530 )   $ (3,630 )
Original Equipment - Europe
    7,285       6,400       21,107       15,757  
Original Equipment - North America
    5,504       (541 )     21,585       3,552  
South America
    1,182       2,788       9,972       6,296  
Commercial Products
    6,967       7,927       17,303       16,131  
Segment earnings
    20,055       15,899       67,437       38,106  
Corporate and administrative
    (10,158 )     (10,174 )     (29,576 )     (32,715 )
Eliminations
    (19 )     (10 )     11       104  
Other items not allocated to segments
    (2,423 )     (3,352 )     (28,048 )     (11,773 )
Earnings (loss) from continuing operations before income taxes
  $ 7,455     $ 2,363     $ 9,824     $ (6,278 )

 
23


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

   
December 31, 2010
   
March 31, 2010
 
Assets:
           
Original Equipment - Asia
  $ 88,724     $ 62,952  
Original Equipment - Europe
    353,643       362,202  
Original Equipment - North America
    194,455       216,933  
South America
    93,949       88,240  
Commercial Products
    97,423       78,545  
Corporate and administrative
    36,847       31,539  
Assets held for sale
    2,450       9,870  
Eliminations
    (19,633 )     (10,029 )
Total assets
  $ 847,858     $ 840,252  

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.  The adverse events in the global financial and commercial markets have created a significant downturn in the Company’s vehicular markets and, to a lesser extent, in its commercial heating and air conditioning markets.  The current economic uncertainty makes it difficult to predict future conditions in these markets.  A sustained economic downturn in any of these markets could have a material adverse effect on the Company’s future results of operations or liquidity.  The Company is responding to these market conditions through its continued implementation of its four-point plan as follows:

 
·
Manufacturing realignment – aligning the manufacturing footprint to maximize asset utilization and improve the Company’s cost competitive position;
 
·
Portfolio rationalization – identifying products or businesses that should be divested or exited as they do not meet required financial metrics;
 
·
Selling, general and administrative (SG&A) expense reduction – reducing SG&A expenses and SG&A expenses as a percentage of sales through diligent cost containment actions; and
 
·
Capital allocation discipline – allocating capital spending to operating segments and business programs that will provide the highest return on investment.

Credit risk:  The adverse events in the global financial markets over the past two years have increased credit risks on investments to which Modine is exposed or where Modine has an interest.  The Company manages credit risks through its focus on the following:

 
·
Cash and investments – cash deposits and short-term investments are reviewed to ensure banks have credit ratings acceptable to the Company and that all short-term investments are maintained in secured or guaranteed instruments;
 
·
Pension assets – ensuring that investments within these plans provide appropriate diversification, monitoring to ensure that portfolio managers and investment consultants are adhering to the Company’s investment policies and directives, and to ensure limited exposure to high risk securities and other similar assets; and
 
·
Insurance – ensuring that insurance providers have acceptable financial ratings.

 
24


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

Counterparty risks:  The adverse events in the global financial and economic markets over the past two years have also increased counterparty risks.  The Company manages counterparty risks through its focus on the following:

 
·
Customers – performing thorough review of customer credit reports and accounts receivable aging reports by an internal credit committee;
 
·
Suppliers – implementing a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and
 
·
Derivatives – ensuring that counterparties to derivative instruments have acceptable credit ratings.

Environmental: At present, the United States Environmental Protection Agency (“USEPA”) has designated the Company as a potentially responsible party (“PRP”) for remediation of five sites with which the Company had involvement.  These sites include: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), LWD, Inc. (Kentucky), Circle Environmental of Dawson (two sites: Dawson, GA and Terrell County, GA), and a scrap metal site known as Chemetco (Illinois).  These sites ar