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 September 30, 2011

or

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

For the transition period from ____________ to ____________

Commission file number 1-1373

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o
 
Indicate by check mark whether the registrant 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 þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
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 46,727,495 at October 28, 2011.
 


 
 

 
 
MODINE MANUFACTURING COMPANY
INDEX

PART I.  FINANCIAL INFORMATION
1
 
1
 
24
 
34
 
34
PART II.  OTHER INFORMATION
36
 
36
 
36
 
36
 
Item 6.  Exhibits.
36
SIGNATURE
37

 
 


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements.
 
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 2011 and 2010
(In thousands, except per share amounts)
(Unaudited)

   
Three months ended
September 30
   
Six months ended
September 30
 
   
2011
   
2010
   
2011
   
2010
 
Net sales
  $ 397,290     $ 345,902     $ 815,153     $ 691,434  
Cost of sales
    335,271       290,133       683,703       576,689  
Gross profit
    62,019       55,769       131,450       114,745  
Selling, general and administrative expenses
    50,075       46,718       99,513       88,918  
Income from operations
    11,944       9,051       31,937       25,827  
Interest expense
    3,297       23,529       6,287       27,637  
Other expense (income) – net
    6,027       (5,610 )     5,885       (2,012 )
Earnings (loss) from continuing operations before income taxes
    2,620       (8,868 )     19,765       202  
Provision for income taxes
    1,995       4,822       6,024       8,866  
Earnings (loss) from continuing operations
    625       (13,690 )     13,741       (8,664 )
Earnings (loss) from discontinued operations (net of income taxes)
    389       (2,900 )     389       (2,932 )
Loss on sale of discontinued operations (net of income taxes)
    (16 )     (70 )     (16 )     (76 )
Net earnings (loss)
    998       (16,660 )     14,114       (11,672 )
Less: Net earnings attributable to noncontrolling interest
    38       -       29       -  
Net earnings (loss) attributable to Modine
  $ 960     $ (16,660 )   $ 14,085     $ (11,672 )
                                 
Earnings (loss) from continuing operations attributable to Modine
                               
common shareholders:
                               
Basic
  $ 0.01     $ (0.30 )   $ 0.29     $ (0.19 )
Diluted
  $ 0.01     $ (0.30 )   $ 0.29     $ (0.19 )
                                 
Net earnings (loss) attributable to Modine common shareholders:
                               
Basic
  $ 0.02     $ (0.36 )   $ 0.30     $ (0.25 )
Diluted
  $ 0.02     $ (0.36 )   $ 0.30     $ (0.25 )
 
The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
 
 
1

 
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, 2011 and March 31, 2011
(In thousands, except per share amounts)
(Unaudited)

   
September 30, 2011
   
March 31, 2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 30,217     $ 32,930  
Trade receivables, less allowance for doubtful accounts of $562 and $754
    210,350       219,189  
Inventories
    135,214       122,629  
Deferred income taxes and other current assets
    58,114       52,877  
Total current assets
    433,895       427,625  
Noncurrent assets:
               
Property, plant and equipment – net
    411,979       430,295  
Investment in affiliates
    3,655       3,863  
Goodwill
    29,545       31,572  
Intangible assets – net
    6,009       6,533  
Other noncurrent assets
    15,382       17,051  
Total noncurrent assets
    466,570       489,314  
Total assets
  $ 900,465     $ 916,939  
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Short-term debt
  $ 10,900     $ 8,825  
Long-term debt – current portion
    1,042       262  
Accounts payable
    167,324       177,549  
Accrued compensation and employee benefits
    51,063       63,163  
Income taxes
    7,578       3,739  
Accrued expenses and other current liabilities
    62,545       63,003  
Total current liabilities
    300,452       316,541  
Noncurrent liabilities:
               
Long-term debt
    159,365       138,582  
Deferred income taxes
    9,719       9,988  
Pensions
    54,372       62,926  
Postretirement benefits
    6,084       5,967  
Other noncurrent liabilities
    16,178       19,983  
Total noncurrent liabilities
    245,718       237,446  
Total liabilities
    546,170       553,987  
Commitments and contingencies (See Note 19)
               
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 47,310 and 47,105 shares
    29,569       29,440  
Additional paid-in capital
    169,255       166,359  
Retained earnings
    217,771       203,686  
Accumulated other comprehensive loss
    (48,708 )     (22,533 )
Treasury stock at cost: 589 and 559 shares, respectively
    (14,461 )     (14,000 )
Total Modine shareholders' equity
    353,426       362,952  
Noncontrolling interest
    869       -  
Total equity
    354,295       362,952  
Total liabilities and equity
  $ 900,465     $ 916,939  

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 six months ended September 30, 2011 and 2010
(In thousands)
(Unaudited)
 
   
Six months ended September 30
 
   
2011
   
2010
 
             
Cash flows from operating activities:
           
Net earnings (loss)
  $ 14,114     $ (11,672 )
Adjustments to reconcile net earnings (loss) with net cash provided by
               
Depreciation and amortization
    29,154       28,095  
Other – net
    6,876       7,115  
Net changes in operating assets and liabilities,excluding dispositions
    (46,988 )     (39,402 )
Net cash provided by (used for) operating activities
    3,156       (15,864 )
                 
Cash flows from investing activities:
               
Expenditures for property, plant and equipment
    (32,532 )     (20,199 )
Proceeds from dispositions of assets
    1,273       4,647  
Settlement of derivative contracts
    142       (183 )
Other – net
    379       3,746  
Net cash used for investing activities
    (30,738 )     (11,989 )
                 
Cash flows from financing activities:
               
Short-term debt – net
    2,264       3,273  
Borrowings of long-term debt
    82,749       218,963  
Repayments of long-term debt
    (59,680 )     (194,277 )
Capital contribution by noncontrolling interest in joint venture
    936       -  
Book overdrafts
    -       (407 )
Other – net
    (15 )     15  
Net cash provided by financing activities
    26,254       27,567  
                 
Effect of exchange rate changes on cash
    (1,385 )     72  
Net decrease in cash and cash equivalents
    (2,713 )     (214 )
                 
Cash and cash equivalents at beginning of period
    32,930       43,657  
Cash and cash equivalents at end of period
  $ 30,217     $ 43,443  
 
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: General

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 by Modine Manufacturing Company (Modine or the Company) for the year ended March 31, 2011.  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 six months of fiscal 2012 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, 2011.

Note 2: Significant Accounting Policies and Change in Accounting Principles

Restricted cash:  At September 30, 2011 and March 31, 2011, the Company had long-term restricted cash of $4,173 and $4,682, respectively, included in other noncurrent assets, consisting of $1,823 and $2,332, respectively, to secure long-term employee compensation arrangements for certain employees in Europe and $2,350 to collateralize insurance liabilities with an insurance carrier in North America.

Joint venture:  During the first quarter of fiscal 2012, the Company completed the formation of its joint venture with OneGene, Inc. to form Modine OneGene Corporation in South Korea.  The Company and OneGene, Inc. made initial capital contributions of 1,000,000 Korean won ($936 U.S. equivalent) each during the first quarter of fiscal 2012.  Modine is considered the primary beneficiary of the joint venture in accordance with applicable consolidation guidance.  Accordingly, the results of Modine OneGene Corporation are consolidated by the Company.

Revision of prior period financial statements:  As described in Note 1 and Note 26 of the Notes to Consolidated Financial Statements in Modine’s Annual Report on Form 10-K for the year ended March 31, 2011, the quarterly results for fiscal 2011 have been revised as a result of errors identified during fiscal 2011 which were not considered material individually or in the aggregate to previously issued financial statements but were considered significant to the quarters in which they were identified.  For the three months ended September 30, 2010, cost of goods sold increased $1,858, selling, general and administrative expenses increased $260, provision for income taxes decreased $190 and earnings from continuing operations decreased $1,928 as a result of the revisions.  For the six months ended September 30, 2010, net sales increased $363, cost of goods sold increased $1,919, gross profit decreased $1,556, selling, general and administrative expenses increased $611, provision for income taxes increased $139 and earnings from continuing operations decreased $2,306 as a result of the revisions.  For the three and six months ended September 30, 2010, diluted earnings per share from continuing operations and diluted net earnings per share decreased $0.04 and $0.05, respectively, as a result of these revisions.

Out of period adjustmentsDuring the three months ended September 30, 2011, the Company identified two items that should have been recorded in the first quarter of fiscal 2012, but were instead corrected in the second quarter of fiscal 2012.  Such errors overstated fiscal 2012 first quarter net income by approximately $438, and related to (1) an understatement of foreign currency transactions gains of $197, included in other expense (income) – net; and (2) an understatement of income tax expense of $635.  The adjustments were not considered material to the financial statements of either the first quarter or second quarter of fiscal 2012.
 
Accounting standards changes and new accounting pronouncements:  In October 2009, the Financial Accounting Standards Board (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 was effective for the Company on a prospective basis on April 1, 2011.  The adoption of this guidance did not have a material impact on the consolidated financial statements.

 
4

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
In June 2011, the FASB issued an amendment to the accounting guidance for the presentation of comprehensive income.  This amendment removes one of the three presentation options for presenting the components of other comprehensive income as part of the statement of changes in shareholders’ equity and requires either a single continuous statement of net income and other comprehensive income or a two consecutive statement approach.  This amendment shall be applied retrospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011.  The Company is currently evaluating the impact of this amendment.

In September 2011, the FASB issued an amendment to the accounting guidance for testing goodwill for impairment.  The amendment provides an option for companies to first use a qualitative approach to test goodwill for impairment if certain conditions are met.  If it is determined to be more likely than not that the fair value of the reporting unit is less than its carrying amount, entities must perform the quantitative analysis of the goodwill impairment test.  The amendments are effective for goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The Company is assessing this new guidance and currently does not anticipate a material impact on the consolidated financial statements.

Note 3: Employee Benefit Plans

During the three months ended September 30, 2011 and 2010, the Company recorded compensation expense of $655 and $739, respectively, related to its defined contribution employee benefit plans. During the six months ended September 30, 2011 and 2010, the Company recorded compensation expense of $1,885 and $2,008, respectively, related to its defined contribution employee benefit plans.

During the three months ended September 30, 2011 and 2010, the Company elected to contribute $2,150 and $1,649, respectively, to its U.S. pension plans.   During the six months ended September 30, 2011 and 2010, the Company elected to contribute $7,200 and $12,099, respectively, to its U.S. pension plans.

Costs for Modine's pension and postretirement benefit plans for the three and six months ended September 30, 2011 and 2010 include the following components:

   
Three months ended
September 30
   
Six months ended
September 30
 
   
Pension
   
Postretirement
   
Pension
   
Postretirement
 
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
Service cost
  $ 425     $ 341     $ 9     $ (3 )   $ 851     $ 950     $ 21     $ 22  
Interest cost
    3,502       3,449       89       55       7,007       6,883       173       168  
Expected return on plan assets
    (3,848 )     (3,944 )     -       -       (7,696 )     (7,612 )     -       -  
Amortization of:
                                                               
Unrecognized net loss (gain)
    1,995       1,811       -       (78 )     3,990       3,834       (12 )     (56 )
Unrecognized prior service cost (credit)
    -       89       (416 )     (298 )     -       178       (831 )     (890 )
Adjustment for settlement
    -       15       -       -       -       15       -       -  
Curtailment gain
    -       -       -       (348 )     -       -       -       (2,075 )
Net periodic benefit cost (income)
  $ 2,074     $ 1,761     $ (318 )   $ (672 )   $ 4,152     $ 4,248     $ (649 )   $ (2,831 )
 
 
5

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
Note 4: Stock-Based Compensation

Stock-based compensation consists of stock options, restricted stock granted for retention and performance and discretionary unrestricted stock.  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 $1,738 and $944 for the three months ended September 30, 2011 and 2010, respectively.  Modine recognized stock-based compensation costs of $2,578 and $2,516 for the six months ended September 30, 2011 and 2010, respectively.  The performance component of awards granted under the long-term incentive plan during the second quarter of fiscal 2012 is based on a target return on average capital employed (ROACE) and a target improvement in economic profit at the end of the three year performance period.  The Company currently considers the attainment of these performance targets to be probable.  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 in excess of $4,000; divided by the average total debt plus shareholders’ equity.  Economic profit is defined as ROACE minus a fixed weighted average cost of capital, multiplied by total debt plus shareholders’ equity.

The following tables present, by type, the fair market value of stock-based compensation awards granted during the three and six months ended September 30, 2011 and 2010:

   
Three months ended September 30,
 
   
2011
   
2010
 
Type of award
 
Shares
   
Fair Value
Per Award
   
Shares
   
Fair Value
Per Award
 
Common stock options
    112.9     $ 10.45       -     $ -  
Unrestricted common stock
    27.9     $ 14.93       40.8     $ 8.91  
Restricted common stock - retention
    63.2     $ 14.93       -     $ -  
Restricted common stock - performance based
    189.5     $ 14.93       -     $ -  
 
   
Six months ended September 30,
 
   
2011
   
2010
 
Type of award
 
Shares
   
Fair Value
Per Award
   
Shares
   
Fair Value
Per Award
 
Common stock options
    112.9     $ 10.45       303.4     $ 5.96  
Unrestricted common stock
    27.9     $ 14.93       60.3     $ 8.43  
Restricted common stock - retention
    63.2     $ 14.93       97.2     $ 9.26  
Restricted common stock - performance based
    189.5     $ 14.93       291.6     $ 9.26  
 
The accompanying table sets forth the assumptions used in determining the fair value for the options:

   
Six months ended September 30,
 
   
2011
   
2010
 
Expected life of awards in years
    6.3       6.3  
Risk-free interest rate
    1.93 %     2.36 %
Expected volatility of the Company's stock
    79.56 %     77.99 %
Expected dividend yield on the Company's stock
    0.00 %     0.00 %
Expected forfeiture rate
    2.50 %     2.50 %
 
 
6

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
As of September 30, 2011, 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
  $ 1,674       2.1  
Restricted common stock - retention
    1,666       3.0  
Restricted common stock - performance
    3,990       2.1  
Total
  $ 7,330       2.4  
 
Note 5: Other Income (Expense) – Net

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

   
Three months ended
September 30
   
Six months ended
September 30
 
   
2011
   
2010
   
2011
   
2010
 
Equity in (loss) earnings of non-consolidated affiliates
  $ (13 )   $ 26     $ (415 )   $ 225  
Interest income
    206       151       386       321  
Foreign currency transactions
    (6,216 )     5,411       (5,866 )     1,394  
Other non-operating (expense) income - net
    (4 )     22       10       72  
Total other (expense) income - net
  $ (6,027 )   $ 5,610     $ (5,885 )   $ 2,012  
 
Foreign currency transactions for the three and six months ended September 30, 2011 and 2010 were primarily comprised of foreign currency transaction (losses) gains on inter-company loans and other transactions denominated in a foreign currency.

Note 6: Income Taxes

For the three months ended September 30, 2011 and 2010, the Company’s effective income tax rate attributable to earnings (loss) from continuing operations before income taxes was 76.1 percent and 54.4 percent, respectively.

For the six months ended September 30, 2011 and 2010, the Company’s effective tax rate attributable to earnings (loss) from continuing operations before income taxes was 30.5 percent and 4,389.1 percent, respectively.

The most significant factors impacting changes in the effective tax rate for the three and six months ended September 30, 2011 as compared to prior periods were changes in the valuation allowance for certain foreign losses for which no benefit is recognized and the changing mix of foreign and domestic earnings.  During the three months ended September 30, 2011, the Company continued to record a full valuation allowance against its net deferred tax assets located in the U.S. and certain foreign jurisdictions as it is more likely than not that these assets will not be realized based on historical performance.  One of the Company’s Chinese subsidiaries currently has a $687 valuation allowance against its net deferred tax assets as a result of its cumulative loss position; however, it is possible that the valuation allowance may be released later this fiscal year as the subsidiary becomes profitable.

 
7

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
Accounting policies for interim reporting require 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. For the six months ended September 30, 2011, the U.S. taxing jurisdiction had year-to-date pre-tax earnings and is also forecasting pre-tax earnings for the full fiscal year.  As a result, the U.S. taxing jurisdiction is no longer considered on a discrete basis but is included in the overall annual effective tax rate methodology.  The impact of the Company’s operations in Germany, Austria and certain other foreign locations are excluded from the overall effective tax rate methodology and 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.

During fiscal 2005, a German lower court ruling disallowed certain deductions for trade tax purposes.  Based on this ruling, the Company established an uncertain tax position contingency for additional trade tax liability and interest.  During the three months ended September 30, 2011, the German Supreme Court affirmed the lower court finding.  As a result, the uncertain tax position established was reversed and amended tax returns for the fiscal years 2005 through 2010 are being filed resulting in an income tax payable for taxes and interest owed of $2,724.  During the three and six months ended September 30, 2011, a benefit for income taxes of $140 and $101, respectively was recorded based on the finalization of the amended tax returns.

The Company does not anticipate the gross liability for unrecognized tax benefits to significantly change in 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 six months ended September 30, 2011, the Company has not been notified of any examinations of open tax periods.

Note 7: Earnings Per Share

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

 
8

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
   
Three months ended
September 30
   
Six months ended
September 30
 
   
2011
   
2010
   
2011
   
2010
 
Basic:
                       
Earnings (loss) from continuing operations
  $ 625     $ (13,690 )   $ 13,741     $ (8,664 )
Less: Net earnings attributable to noncontrolling interest
    (38 )     -       (29 )     -  
Earnings (loss) from continuing operations attributable to Modine
    587       (13,690 )     13,712       (8,664 )
Less: Undistributed earnings attributable to unvested shares
    (2 )     -       (52 )     -  
Net earnings (loss) from continuing operations available to Modine common shareholders
    585       (13,690 )     13,660       (8,664 )
Net earnings (loss) from discontinued operations available to Modine common shareholders
    373       (2,970 )     373       (3,008 )
Less: Undistributed earnings attributable to unvested shares
    (1 )     -       (1 )     -  
Net earnings (loss) from discontinued operations available to Modine common shareholders
    372       (2,970 )     372       (3,008 )
Net earnings (loss) available to Modine common shareholders
  $ 957     $ (16,660 )   $ 14,032     $ (11,672 )
                                 
Basic Earnings Per Share:
                               
Weighted average shares outstanding - basic
    46,477       46,067       46,419       46,053  
                                 
Earnings (loss) from continuing operations per common share
  $ 0.01     $ (0.30 )   $ 0.29     $ (0.19 )
Net earnings (loss) from discontinued operations per common share
    0.01       (0.06 )     0.01       (0.06 )
Net earnings (loss) per common share - basic
  $ 0.02     $ (0.36 )   $ 0.30     $ (0.25 )
 
 
9

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
   
Three months ended
September 30
   
Six months ended
September 30
 
   
2011
   
2010
   
2011
   
2010
 
Diluted:
                       
Earnings (loss) from continuing operations
  $ 625     $ (13,690 )   $ 13,741     $ (8,664 )
Less: Net earnings attributable to noncontrolling interest
    (38 )     -       (29 )     -  
Earnings (loss) from continuing operations attributable to Modine
    587       (13,690 )     13,712       (8,664 )
Less: Undistributed earnings attributable to unvested shares
    (2 )     -       (36 )     -  
Net earnings (loss) from continuing operations available to Modine common shareholders
    585       (13,690 )     13,676       (8,664 )
Net earnings (loss) from discontinued operations available to Modine common shareholders
    373       (2,970 )     373       (3,008 )
Less: Undistributed earnings attributable to unvested shares
    (1 )     -       (1 )     -  
Net earnings (loss) from discontinued operations available to Modine common shareholders
    372       (2,970 )     372       (3,008 )
Net earnings (loss) available to Modine common shareholders
  $ 957     $ (16,660 )   $ 14,048     $ (11,672 )
                                 
Diluted Earnings Per Share:
                               
Weighted average shares outstanding - basic
    46,477       46,067       46,419       46,053  
Effect of dilutive securities
    381       -       500       -  
Weighted average shares outstanding - diluted
    46,858       46,067       46,919       46,053  
                                 
Earnings (loss) from continuing operations per common share
  $ 0.01     $ (0.30 )   $ 0.29     $ (0.19 )
Net earnings (loss) from discontinued operations per common share
    0.01       (0.06 )     0.01       (0.06 )
Net earnings (loss) per common share - diluted
  $ 0.02     $ (0.36 )   $ 0.30     $ (0.25 )
 
For the three and six months ended September 30, 2011, the calculation of diluted earnings per share excludes 1,497 stock options and 189 shares of restricted stock as these shares were anti-dilutive.  For the three and six months ended September 30, 2010, the calculation of diluted earnings per share excludes 1,954 stock options and 29 shares of restricted stock as these shares were anti-dilutive.

 
10

 
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 earnings (loss) adjusted by the change in accumulated other comprehensive (loss) income was as follows:

   
Three months ended
September 30
   
Six months ended
September 30
 
   
2011
   
2010
   
2011
   
2010
 
Net earnings (loss) attributable to Modine
  $ 960     $ (16,660 )   $ 14,085     $ (11,672 )
Foreign currency translation
    (31,912 )     26,663       (23,824 )     3,725  
Cash flow hedges
    (3,462 )     2,558       (5,574 )     2,091  
Change in benefit plan adjustment
    1,670       697       3,223       1,108  
Total comprehensive (loss) income
  $ (32,744 )   $ 13,258     $ (12,090 )   $ (4,748 )
 
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 periodic inventory analyses, management believes the amounts shown below are reasonable estimates of raw materials, work in process and finished goods.

   
September 30, 2011
   
March 31, 2011
 
Raw materials and work in process
  $ 103,999     $ 93,306  
Finished goods
    31,215       29,323  
Total inventories
  $ 135,214     $ 122,629  
 
Note 10: Property, Plant and Equipment

Property, plant and equipment consisted of the following:

   
September 30, 2011
   
March 31, 2011
 
Gross property, plant and equipment
  $ 1,089,120     $ 1,102,684  
Less accumulated depreciation
    (677,141 )     (672,389 )
Net property, plant and equipment
  $ 411,979     $ 430,295  
 
A long-lived asset impairment charge of $1,226 was recorded within selling, general and administrative expenses during the three and six months ended September 30, 2010 related to assets in the Original Equipment – Europe segment and the Original Equipment – Asia segment related to a program cancellation.

Assets held for sale of $2,450 at September 30, 2011 and March 31, 2011, respectively, included in noncurrent assets, consist of certain facilities that the Company has closed within the Original Equipment – North America segment.  The Company is currently marketing the facilities held for sale.  During the six months ended September 30, 2010, the Company sold two held for sale facilities in the Original Equipment – North America segment for aggregate net proceeds of $1,539, and recognized a gain on these sales of $1,026 within selling, general and administrative expenses.

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 were 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 the fourth quarter of fiscal 2012.

 
11

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
Since the commencement of these plant closures and previous workforce reductions, the Company has incurred $33,251 of termination charges and $21,715 of other closure costs, in the aggregate.  Further additional costs of approximately $1,000 are anticipated to be incurred through fiscal 2012, consisting of equipment moving costs and miscellaneous facility closing costs.  Total additional cash expenditures of approximately $2,100 are anticipated to be incurred related to these closures.

Changes in the accrued restructuring liability for the three and six months ended September 30, 2011 and 2010 were comprised of the following, related to the above-described restructuring activities:

   
Three months ended September 30
 
   
2011
   
2010
 
Termination Benefits:
           
Balance, July 1
  $ 1,176     $ 3,373  
Additions
    -       13  
Adjustments
    (65 )     (53 )
Effect of exchange rate changes
    (6 )     64  
Payments
    (41 )     (881 )
Balance, September 30
  $ 1,064     $ 2,516  
 
   
Six months ended September 30
 
      2011       2010  
Termination Benefits:
               
Balance, April 1
  $ 1,301     $ 4,740  
Additions
    -       94  
Adjustments
    (122 )     (53 )
Effect of exchange rate changes
    (2 )     (2 )
Payments
    (113 )     (2,263 )
Balance, September 30
  $ 1,064     $ 2,516  
 
 
12

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
The following is the summary of restructuring and other repositioning costs recorded relative to the above-described programs during the three and six months ended September 30, 2011 and 2010:
 
   
Three months ended
September 30
   
Six months ended
September 30
 
   
2011
   
2010
   
2011
   
2010
 
Restructuring (income) expense:
                       
Employee severance and related benefits
  $ (65 )   $ (40 )   $ (122 )   $ 41  
                                 
Other repositioning costs:
                               
Postretirement curtailment gain
    -       (348 )     -       (2,075 )
Miscellaneous other closure costs
    12       1,359       147       2,992  
Total other repositioning costs
    12       1,011       147       917  
Total restructuring and other repositioning (income) expense
  $ (53 )   $ 971     $ 25     $ 958  
 
For the three and six months ended September 30, 2011, respectively, total restructuring and other repositioning income of $53, and total restructuring and other repositioning expense of $25, respectively, was recorded in the consolidated statements of operations as a component of cost of sales.  The total restructuring and other repositioning expense of $971 and $958 was recorded in the consolidated statements of operations for the three and six months ended September 30, 2010, respectively, as follows: $1,011 and $917 were recorded as a component of cost of sales, $40 was recorded as restructuring income, and $41 was recorded as restructuring expense within selling, general and administrative 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.

Note 12: Goodwill and Intangible Assets

Changes in the carrying amount of goodwill during the first six months of fiscal 2012, by segment and in the aggregate, are summarized in the following table:

   
OE -
Asia
   
South
America
   
Commercial
Products
   
Total
 
                         
Balance, March 31, 2011
  $ 520     $ 15,109     $ 15,943     $ 31,572  
Fluctuations in foreign currency
    (1 )     (1,616 )     (410 )     (2,027 )
Balance, September 30, 2011
  $ 519     $ 13,493     $ 15,533     $ 29,545  
 
 
13

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
Intangible assets are comprised of the following:
 
   
September 30, 2011
   
March 31, 2011
 
   
Gross
Carrying
Value
   
Accumulated Amortization
   
Net
Intangible Assets
   
Gross
Carrying
Value
   
Accumulated Amortization
   
Net
Intangible Assets
 
                                     
Amortized intangible assets:
                                   
Trademarks
    8,893       (3,804 )     5,089       9,077       (3,580 )     5,497  
Other intangibles
    402       (402 )     -       444       (444 )     -  
Total amortized intangible assets
    9,295       (4,206 )     5,089       9,521       (4,024 )     5,497  
Unamortized intangible assets:
                                               
Tradename
    920       -       920       1,036       -       1,036  
Total intangible assets
  $ 10,215     $ (4,206 )   $ 6,009     $ 10,557     $ (4,024 )   $ 6,533  
 
Amortization expense for the three months ended September 30, 2011 and 2010 was $152 and $166, respectively, and for the six months ended September 30, 2011 and 2010 was $311 and $327, respectively.  Total estimated annual amortization expense expected for the remainder of fiscal year 2012 through 2017 and beyond is as follows:

Fiscal
Year
 
Estimated Amortization Expense
 
       
Remainder of 2012
  $ 296  
2013
    593  
2014
    593  
2015
    593  
2016
    593  
2017 & Beyond
    2,421  

Note 13: Indebtedness

The Company has $125,000 outstanding on 6.83 percent Senior Notes, maturing on August 12, 2020.  As of September 30, 2011, the Company also had $20,000 outstanding under its $145,000 domestic revolving credit facility, which expires in August 2014.  At March 31, 2011, the Company had $6,500 outstanding on this domestic revolving credit facility.

During the three months ended September 30, 2010, the Company entered into the current $125,000 Senior Notes; the proceeds of which were used to repay the then existing Senior Notes.  The Company recognized a loss of $17,866 on early extinguishment of debt as a component of interest expense, which included the prepayment penalty of $16,570 and $1,296 of unamortized debt issuance costs.

Provisions contained in the Company’s revolving credit facility and Senior Note agreements require the Company to maintain compliance with various covenants.  The Company was in compliance with its covenants as of September 30, 2011.

 
14

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
Modine also maintained credit agreements with foreign banks at September 30, 2011.  The Company has $6,585 outstanding under these credit agreements.  There was no amount outstanding under such credit agreements at March 31, 2011.

At September 30, 2011, the Company had $125,000 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 $35,123. The availability of these funds is subject to the Company’s ability to remain in compliance with the covenants and limitations in the respective debt agreements.

The fair value of long-term debt is estimated by discounting future cash flows at rates offered to the Company for similar debt instruments of comparable maturities.  At September 30, 2011 and March 31, 2011, 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 $109,172 and $121,463 at September 30, 2011 and March 31, 2011, respectively.

At September 30, 2011 and March 31, 2011, the Company had short-term debt of $10,900 and $8,825, respectively, primarily consisting of short-term borrowings at foreign locations.

Note 14: 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 September 30, 2011 and March 31, 2011, approximately 51 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 below one percent of outstanding trade receivable balances for the presented periods.  See Note 19 for further discussion on market, credit and counterparty risks.

Inter-Company Loans Denominated in Foreign Currencies:  The Company has certain foreign-denominated inter-company loans that are sensitive to foreign exchange rates.  The Company had inter-company loans outstanding at September 30, 2011 as follows:

 
·
$17,174 among three loans to its wholly owned subsidiary, Modine Thermal Systems Private Limited (Modine India), with various maturities through December 2015;
 
·
$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;
 
·
$2,008 loan to its wholly owned subsidiary, Modine Holding GmbH, which matures on January 31, 2020;
 
·
$1,300 between two loans to its wholly owned subsidiary, Modine Thermal Systems Korea, with various maturity dates through April 2012; and
 
·
$4,420 receivable with its wholly owned subsidiary, Modine do Brasil Sistemas Termicos Ltda. (Modine Brazil).

 
15

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
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 September 30, 2011.

Note 15: Derivatives/Hedges

Modine uses derivative financial instruments from time to time 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 accumulated other comprehensive (loss) income (AOCI) and recognized as a component of earnings at the same time that the underlying purchases of aluminum and copper impact earnings.

Interest rate derivatives:  In conjunction with the repayment of then existing Senior Notes during the three months ended September 30, 2010, the remaining unamortized balance for the interest rate derivatives of $1,606 was reflected as a component of interest expense.

The fair value of the derivative financial instruments recorded in the consolidated balance sheets as of September 30, 2011 and March 31, 2011 are as follows:

 
Balance Sheet Location
 
September 30, 2011
   
March 31, 2011
 
Derivative instruments designated as cash flow hedges:
             
Commodity derivatives
Deferred income taxes and other current assets
  $ -     $ 929  
Commodity derivatives
Accrued expenses and other current liabilities
    5,408       650  
 
 
16

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
The amounts recorded in AOCI and in the consolidated statement of operations for the three and six months ended September 30, 2011 are as follows:

           
Three months ended September 30, 2011
   
Six months ended September 30, 2011
 
   
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:
                   
Commodityderivatives
  $ 5,239  
Cost of sales
  $ 617     $ 417  
Total
  $ 5,239       $ 617     $ 417  
 
The amounts recorded in AOCI and in the consolidated statement of operations for the three and six months ended September 30, 2010 are as follows:
 
           
Three months ended September 30, 2010
   
Six months ended September 30, 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
  $ 1,681  
Cost of sales
  $ 100     $ 183  
Interest rate derivative
    -  
Interest expense
    1,642       1,751  
Total
  $ 1,681       $ 1,742     $ 1,934  
 
Note 16: Fair Value Measurements

Fair value measurements are classified under the following hierarchy:

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

When available, the Company used quoted market prices to determine fair value and classified such measurements 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.

 
17

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
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.  These short term investments are included in other current assets.

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 September 30, 2011, the assets and liabilities that are measured at fair value on a recurring basis are classified as follows:

   
Level 1
   
Level 2
   
Level 3
   
Total Assets / Liabilities at Fair Value
 
Assets:
                       
Trading securities (short term investments)
  $ 1,538     $ 13     $ -     $ 1,551  
Total assets
  $ 1,538     $ 13     $ -     $ 1,551  
                                 
Liabilities:
                               
Derivative financial instruments
  $ -     $ 5,408     $ -     $ 5,408  
Deferred compensation obligation
    1,539       13       -       1,552  
Total liabilitites
  $ 1,539     $ 5,421     $ -     $ 6,960  
 
 
18

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

At March 31, 2011, the assets and liabilities that are measured at fair value on a recurring basis were classified as follows:
 
   
Level 1
   
Level 2
   
Level 3
   
Total Assets / Liabilities at Fair Value
 
Assets:
                       
Trading securities (short term investments)
  $ 2,707     $ 13     $ -     $ 2,720  
Derivative financial instruments
    -       929       -       929  
Total assets
  $ 2,707     $ 942     $ -     $ 3,649  
                                 
Liabilities:
                               
Derivative financial instruments
  $ -     $ 650     $ -     $ 650  
Deferred compensation obligation
    2,723       -       -       2,723  
Total liabilities
  $ 2,723     $ 650     $ -     $ 3,373  

Note 17: Product Warranties and Other Commitments
 
Changes in the warranty liability were as follows:
 
   
Three months ended September 30
 
   
2011
   
2010
 
             
Balance, July 1
  $ 14,408     $ 12,616  
Accruals for warranties issued in current period
    1,849       1,195  
(Reversals) accruals related to pre-existing warranties
    (624 )     198  
Settlements made
    (2,244 )     (626 )
Effect of exchange rate changes
    (542 )     424  
Balance, September 30
  $ 12,847     $ 13,807  
 
   
Six months ended September 30
 
      2011       2010  
                 
Balance, April 1
  $ 14,681     $ 13,126  
Accruals for warranties issued in current period
    3,398       2,537  
(Reversals) accruals related to pre-existing warranties
    (467 )     55  
Settlements made
    (4,384 )     (1,934 )
Effect of exchange rate changes
    (381 )     23  
Balance, September 30
  $ 12,847     $ 13,807  

Commitments: At September 30, 2011, the Company had capital expenditure commitments of $21,362.  Significant commitments include tooling and equipment expenditures for new and renewal platforms with new and current customers in Europe and North America along with new program launches in Asia.

Note 18: Segment Information

During the first quarter of fiscal 2012, the Company implemented certain management reporting changes resulting in the realignment of the Nuevo Laredo, Mexico facility into the Original Equipment – North America segment from the Commercial Products segment.  The previously reported segment results for the Original Equipment – North America and Commercial Products segments have been retrospectively adjusted for comparative purposes.

 
19

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
The following is a summary of net sales, gross profit, earnings (loss) from continuing operations before income taxes and total assets by segment:

   
Three months ended
September 30
   
Six months ended
September 30
 
   
2011
   
2010
   
2011
   
2010
 
Sales :
                       
Original Equipment - Asia
  $ 19,989     $ 12,732     $ 41,254     $ 24,764  
Original Equipment - Europe
    151,988       124,870       318,830       257,044  
Original Equipment - North America
    148,848       139,733       305,483       281,444  
South America
    48,095       41,241       96,016       78,084  
Commercial Products
    35,070       31,997       69,218       59,746  
Segment sales
    403,990       350,573       830,801       701,082  
Corporate and administrative
    211       369       314       778  
Eliminations
    (6,911 )     (5,040 )     (15,962 )     (10,426 )
Sales from continuing operations
  $ 397,290     $ 345,902     $ 815,153     $ 691,434  
 
   
Three months ended September 30
   
Six months ended September 30
 
   
2011
   
2010
   
2011
   
2010
 
Gross profit:
       
% of
sales
         
% of
sales
         
% of
sales
         
% of
sales
 
Original Equipment - Asia
  $ 1,820       9.1 %   $ 717       5.6 %   $ 4,906       11.9 %   $ 1,856       7.5 %
Original Equipment - Europe
    19,947       13.1 %     15,771       12.6 %     44,969       14.1 %     37,299       14.5 %
Original Equipment - North America
    20,991       14.1 %     19,367       13.9 %     43,603       14.3 %     40,240       14.3 %
South America
    8,851       18.4 %     9,035       21.9 %     17,843       18.6 %     16,451       21.1 %
Commercial Products
    10,261       29.3 %     10,518       32.9 %     19,790       28.6 %     18,090       30.3 %
Segment gross profit
    61,870       15.3 %     55,408       15.8 %     131,111       15.8 %     113,936       16.3 %
Corporate and administrative
    159       -       383       -       328       -       797       -  
Eliminations
    (10 )     -       (22 )     -       11       -       12       -  
Gross profit
  $ 62,019       15.6 %   $ 55,769       16.1 %   $ 131,450       16.1 %   $ 114,745       16.6 %
 
 
20

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
   
Three months ended
September 30
   
Six months ended
September 30
 
   
2011
   
2010
   
2011
   
2010
 
Operating earnings (loss):
                       
Original Equipment - Asia
  $ (750 )   $ (1,241 )   $ 63     $ (1,647 )
Original Equipment - Europe
    8,088       3,052       19,429       14,052  
Original Equipment - North America
    10,899       7,744       21,718       18,285  
South America
    2,687       4,979       5,877       8,790  
Commercial Products
    2,897       4,207       6,268       5,736  
Segment earnings
    23,821       18,741       53,355       45,216  
Corporate and administrative
    (11,725 )     (9,708 )     (21,317 )     (19,418 )
Eliminations
    (152 )     18       (101 )     29  
Other items not allocated to segments
    (9,324 )     (17,919 )     (12,172 )     (25,625 )
Earnings (loss) from continuing
                               
operations before income taxes
  $ 2,620     $ (8,868 )   $ 19,765     $ 202  
 
   
September 30, 2011
   
March 31, 2011
 
Assets:
           
Original Equipment - Asia
  $ 106,718     $ 91,748  
Original Equipment - Europe
    369,389       392,964  
Original Equipment - North America
    236,684       237,423  
South America
    103,118       103,733  
Commercial Products
    67,400       66,301  
Corporate and administrative
    40,860       45,103  
Assets held for sale
    2,450       2,450  
Eliminations
    (26,154 )     (22,783 )
Total assets
  $ 900,465     $ 916,939  

Note 19: 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 commercial vehicle, off-highway, automotive and commercial heating and air conditioning markets.  The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or more of the markets it serves.  The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits.  Successes in new markets are dependent upon the Company’s ability to commercialize its investments.  Current examples of new and emerging markets for Modine include those related to waste heat recovery and expansion into the Chinese and Indian markets.  However, the risk associated with any market downturn, such as the downturn experienced in fiscal 2009 and 2010, is still present.

 
21

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
Credit risk:  The Company manages credit risks through its focus on the following:

 
·
Cash and investments – reviewing cash deposits and short-term investments 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 reasonable diversification, monitoring of investment teams and ensuring that portfolio managers are adhering to the Company’s investment policies and directives, and ensuring that exposure to high risk securities and other similar assets is limited; and
 
·
Insurance – ensuring that insurance providers have acceptable financial ratings to the Company.

Counterparty risks:  The Company manages counterparty risks through its focus on the following:

 
·
Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees;
 
·
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 to the Company.

Trade Compliance:  During the fourth quarter of fiscal 2011, the Company determined that it was not in compliance with certain trade regulations related to import and export activity between its warehouse in Laredo, Texas and its plant in Nuevo Laredo, Mexico.  The Company believes that the trade regulation issues are limited to operations at the Laredo warehouse and the Nuevo Laredo plant.  As part of the investigation process, the Company has disclosed these trade compliance issues to the appropriate government agencies and will fully cooperate with these agencies in their review, if any.  At March 31, 2011, the Company recorded an estimated liability for the trade regulation issues of $4,528, which consisted of an estimate for unpaid duties, potential interest and penalties which may be levied against the Company by the government agencies.  The Company made a voluntary payment of $2,090 to one government agency during the six months ended September 30, 2011 and the agency subsequently closed the matter, with no expectation of further investigation.  At September 30, 2011, the Company had a reserve of $2,438 for remaining trade compliance regulation issues.  There can be no assurance about the ultimate resolution of these issues at this time, particularly given the involvement of multiple government agencies.

Environmental: At present, the United States Environmental Protection Agency (“USEPA”) has designated the Company as a potentially responsible party (“PRP”) for remediation of seven sites with which the Company had involvement.  These sites include: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana), Casmalia (California), a scrap metal site known as Chemetco (Illinois), Circle Environmental of Dawson (two sites: Dawson, GA and Terrell County, GA), and LWD, Inc. (Kentucky).  In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri).  These sites are not Company-owned and allegedly contain materials attributable to Modine from past operations.  The percentage of material allegedly attributable to Modine is relatively low.  Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions.  Costs anticipated for the remedial settlement of these sites are either not probable or cannot be reasonably determined at this time; however any costs are not believed to be material and have not been accrued based upon Modine’s relatively small portion of contributed materials.
 
 
22

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
The Company actively monitors and addresses environmental issues and has recorded environmental investigation, cleanup and remediation expense accruals for groundwater contamination at its manufacturing facility in Brazil and subsurface contamination at its former manufacturing facility in the Netherlands, along with other minor issues at certain facilities located in the United States.  These expenditures generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then existing regulations, or where the Company is a successor to the obligations of prior owners and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance.  The undiscounted reserves for these environmental matters totaled $7,097 and $7,371 at September 30, 2011 and March 31, 2011, respectively.  Additional reserves of $863 and $934 were recorded as a component of continuing operations during the three and six months ended September 30, 2011, respectively.  The majority of the increase is the result of the development of a formal remediation plan during the three months ended September 30, 2011 for the groundwater contamination issue in Brazil. Reductions to the reserves of $377 and $486 were recorded as a component of earnings from discontinued operations for the three and six months ended September 30, 2011, respectively, related to the former Netherlands facility.  Additional reserves of $2,900 and $2,932 were recorded during the three and six months ended September 30, 2010, respectively, as a component of loss from discontinued operations related to the former Netherlands facility.  Certain of these matters are covered by various insurance policies; however, the Company does not record any insurance recoveries until they are realized or realizable.  As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary.  Based on currently available information, Modine believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the financial position or overall trends in results of operations.  However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages.  During fiscal 2011, one of the neighbors of the operation in Brazil filed suit against Modine’s Brazilian subsidiary seeking remediation and certain other damages as a result of the contamination.  The Company is defending this suit and believes that the ultimate outcome of this matter will not be material.
 
Other litigation:  In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, the Occupational Safety and Health Administration, USEPA, other governmental agencies and others in which claims are asserted against Modine.  At September 30, 2011 and March 31, 2011, the Company did not have an accrual related to any such matters as they were not deemed probable.

 
23

 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
When we use the terms “Modine,” “we,” “us,” the “Company,” or “our” in this report, unless the context otherwise requires, we are referring to Modine Manufacturing Company.  Our fiscal year ends on March 31 and, accordingly, all references to quarters refer to our fiscal quarters.  The quarter ended September 30, 2011 refers to the second quarter of fiscal 2012.

Second Quarter Highlights:  Net sales in the second quarter of fiscal 2012 improved significantly from the second quarter of fiscal 2011 across all of our business segments, particularly within the commercial vehicle markets in Europe, North America and South America, as well as the off-highway market in Asia. Gross margin decreased due to higher material costs year over year.  Selling, general and administrative (SG&A) expenses increased from the second quarter of fiscal 2011 to the second quarter of fiscal 2012, as anticipated, primarily to support growth in Asia and Commercial Products.  During the second quarter of fiscal 2012, we recorded earnings from continuing operations of approximately $0.6 million, which improved significantly over the prior year. Interest expense decreased from the second quarter of fiscal 2011 to the second quarter of fiscal 2012 due to approximately $20.0 million of costs related to the long-term debt refinancing in the prior year.  Other expense in the second quarter of fiscal 2012 includes $6.2 million of losses due to changes in foreign currency exchange rates.

Year-To-Date Highlights:  Net sales in the first six months of fiscal 2012 improved significantly from the first six months of fiscal 2011 across all of our business segments particularly within the commercial vehicle and off-highway markets.  Gross margin decreased due to a postretirement curtailment gain recorded during fiscal 2011 and higher material costs year over year.  SG&A expenses increased year over year, as anticipated, yet decreased as a percentage of sales.  Interest expense decreased significantly due to the absence of costs related to debt refinancing completed in fiscal 2011.  During the first six months of fiscal 2012, we recorded earnings from continuing operations of approximately $13.7 million, which improved significantly over the prior year.

CONSOLIDATED RESULTS OF OPERATIONS – CONTINUING OPERATIONS

The results for the three and six months ended September 30, 2010 have been revised to reflect the correction of errors relating to those periods.  See Note 2 to the Notes to Condensed Consolidated Financial Statements for further discussion.  The following table presents consolidated results from continuing operations on a comparative basis for the three months and six months ended September 30, 2011 and 2010:

 
24


   
Three months ended September 30
   
Six months ended September 30
 
   
2011
   
2010
   
2011
   
2010
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
Net sales
    397.3       100.0 %