Edgar Filing: MODINE MANUFACTURING CO

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

£ 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 R No £

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

Large Accelerated Filer R	Accelerated Filer £

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

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

The number of shares outstanding of the registrant's common stock, $0.625 par value, was 32,802,071 at November 4, 2008.

MODINE MANUFACTURING COMPANY

INDEX

PART I. FINANCIAL INFORMATION		1
Item 1.	Financial Statements.	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	48
Item 4.	Controls and Procedures.	53
PART II. OTHER INFORMATION		54
Item 1.	Legal Proceedings.	54
Item 1A.	Risk Factors.	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	61
Item 4.	Submission of Matters to a Vote of Security Holders.	62
Item 6.	Exhibits.	62
SIGNATURE		63

Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

MODINE MANUFACTURING COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and six months ended September 30, 2008 and 2007

(In thousands, except per share amounts)

(Unaudited)

	Three months ended September 30						Six months ended September 30
	2008			2007			2008			2007
Net sales	$	433,263		$	428,657		$	932,982		$	872,893
Cost of sales		378,324			366,718			799,743			740,754
Gross profit		54,939			61,939			133,239			132,139
Selling, general and administrative expenses		61,601			54,763			124,423			110,969
Restructuring expense (income)		2,871			(79	)		2,819			(319	)
Impairment of long-lived assets		3,031			-			3,165			-
(Loss) income from operations		(12,564	)		7,255			2,832			21,489
Interest expense		3,110			2,930			6,236			5,705
Other expense (income) – net		1,010			(1,300	)		(1,162	)		(4,549	)
(Loss) earnings from continuing operations before income taxes		(16,684	)		5,625			(2,242	)		20,333
(Benefit from) provision for income taxes		(2,620	)		(4,601	)		5,059			(640	)
(Loss) earnings from continuing operations		(14,064	)		10,226			(7,301	)		20,973
(Loss) earnings from discontinued operations (net of income taxes)		(10	)		132			165			386
Gain on sale of discontinued operations (net of income taxes)		848			-			1,697			-
Net (loss) earnings	$	(13,226	)	$	10,358		$	(5,439	)	$	21,359

(Loss) earnings per share of common stock – basic:
Continuing operations	$	(0.44	)	$	0.32		$	(0.23	)	$	0.66
(Loss) earnings from discontinued operations		-			-			0.01			0.01
Gain on sale of discontinued operations		0.03			-			0.05			-
Net (loss) earnings – basic	$	(0.41	)	$	0.32		$	(0.17	)	$	0.67

(Loss) earnings per share of common stock – diluted:
Continuing operations	$	(0.44	)	$	0.32		$	(0.23	)	$	0.65
(Loss) earnings from discontinued operations		-			-			0.01			0.01
Gain on sale of discontinued operations		0.03			-			0.05			-
Net (loss) earnings – diluted	$	(0.41	)	$	0.32		$	(0.17	)	$	0.66

Dividends per share	$	0.100		$	0.175		$	0.200		$	0.350

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

Index

MODINE MANUFACTURING COMPANY

CONSOLIDATED BALANCE SHEETS

September 30, 2008 and March 31, 2008

(In thousands, except per share amounts)

(Unaudited)

	September 30, 2008			March 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	62,690		$	38,595
Short term investments		2,140			2,909
Trade receivables, less allowance for doubtful accounts of $1,850 and $2,218		238,267			294,935
Inventories		130,039			125,499
Assets held for sale		-			6,871
Deferred income taxes and other current assets		61,362			64,482
Total current assets		494,498			533,291
Noncurrent assets:
Property, plant and equipment – net		499,600			540,536
Investment in affiliates		20,533			23,692
Goodwill		40,410			44,832
Intangible assets – net		8,730			10,485
Assets held for sale		-			5,522
Other noncurrent assets		11,635			9,925
Total noncurrent assets		580,908			634,992
Total assets	$	1,075,406		$	1,168,283
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt	$	839		$	4,352
Long-term debt – current portion		284			248
Accounts payable		172,138			193,228
Accrued compensation and employee benefits		69,957			68,885
Income taxes		5,026			16,562
Liabilities of business held for sale		-			3,093
Accrued expenses and other current liabilities		51,807			52,546
Total current liabilities		300,051			338,914
Noncurrent liabilities:
Long-term debt		254,620			227,013
Deferred income taxes		21,616			23,634
Pensions		29,556			34,142
Postretirement benefits		7,952			26,669
Liabilities of business held for sale		-			166
Other noncurrent liabilities		31,267			34,627
Total noncurrent liabilities		345,011			346,251
Total liabilities		645,062			685,165
Commitments and contingencies (See Note 21)
Shareholders' equity:
Preferred stock, $0.025 par value, authorized 16,000 shares, issued - none		-			-
Common stock, $0.625 par value, authorized 80,000 shares, issued 32,802 and 32,788 shares		20,501			20,492
Additional paid-in capital		72,148			69,346
Retained earnings		334,070			345,966
Accumulated other comprehensive income		17,742			61,058
Treasury stock at cost: 528 and 495 shares		(13,817	)		(13,303	)
Deferred compensation trust		(300	)		(441	)
Total shareholders' equity		430,344			483,118
Total liabilities and shareholders' equity	$	1,075,406		$	1,168,283

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

Index

MODINE MANUFACTURING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended September 30, 2008 and 2007

(In thousands)

(Unaudited)

	Six months ended September 30
	2008			2007

Cash flows from operating activities:
Net (loss) earnings	$	(5,439	)	$	21,359
Adjustments to reconcile net (loss) earnings with net cash provided by operating activities:
Depreciation and amortization		38,705			38,663
Other – net		(3,048	)		(18,522	)
Net changes in operating assets and liabilities, excluding dispositions		10,038			(18,817	)
Net cash provided by operating activities		40,256			22,683

Cash flows from investing activities:
Expenditures for property, plant and equipment		(46,207	)		(36,394	)
Proceeds from dispositions of assets		10,638			8,435
Settlement of derivative contracts		599			194
Other – net		3,145			241
Net cash used for investing activities		(31,825	)		(27,524	)

Cash flows from financing activities:
Short-term debt – net		(3,289	)		(710	)
Additions to long-term debt		46,812			65,047
Reductions of long-term debt		(18,235	)		(40,049	)
Book overdrafts		2,959			7,071
Proceeds from exercise of stock options		18			664
Repurchase of common stock, treasury and retirement		(514	)		(5,962	)
Cash dividends paid		(6,451	)		(11,337	)
Other – net		-			101
Net cash provided by financing activities		21,300			14,825

Effect of exchange rate changes on cash		(5,636	)		2,143
Net increase in cash and cash equivalents		24,095			12,127

Cash and cash equivalents at beginning of period		38,595			26,207
Cash and cash equivalents at end of period	$	62,690		$	38,334

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

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

Note 1: Overview

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

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

Loss from continuing operations: During the three months ended September 30, 2008, the Company reported a loss from continuing operations of $16,684 which represents a significant reduction from the earnings from continuing operations of $5,625 reported for the three months ended September 30, 2007. The decline in the current quarter results compared to the prior year is related to the following adverse factors:

The recent dramatic events in the global financial markets have created a significant downturn in the Company’s vehicular markets, especially within Europe and North America;

Sales volumes were adversely impacted by strike-related activities at a key customer in Asia, as well as the slower-than-anticipated recovery in the North American truck market subsequent to the January 1, 2007 emissions law changes;

The declining sales revenues and resulting underabsorption of fixed costs in the Company’s manufacturing facilities, as well as a shift in product mix toward lower margin business in the Original Equipment – Europe segment, contributed to a decline in gross margin;

The decline in gross margin was further impacted by operating inefficiencies experienced in the Original Equipment – North America segment based on the on-going realignment of the manufacturing operations through plant closures and new program launches;

Restructuring and repositioning charges totaled $5,229 related to the Company’s previously announced plans to close manufacturing facilities, as well as a workforce reduction announced during the second quarter of fiscal 2009;

Impairment charges of $3,031 were recorded in the second quarter of fiscal 2009 related to programs and assets which were either no longer in use or unable to support their asset bases;

Foreign exchange losses of $3,176 were recorded on inter-company loans based on the recent substantial strengthening of the U.S. dollar to the Brazilian real and South Korean won during the second quarter of fiscal 2009; and

Tax valuation allowance charges of $4,629 were recorded against net deferred tax assets in the U.S. and South Korea as the Company continues to assess that it is more likely than not that these assets will not be realized in the future.

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

In response to the near-term adverse conditions facing the Company and recent business performance, the Company continues to execute on the strategies of its four-point recovery plan, which includes manufacturing realignment, portfolio rationalization, selling, general and administrative expense reduction, and capital allocation discipline. The Company is proceeding with the following actions through the four-point recovery plan designed to attain a more competitive cost base, improve the Company’s longer term competitiveness and more effectively capitalize on growth opportunities in its thermal management markets:

The closure of three manufacturing facilities in North America and one in Europe, which are expected to be closed by the end of fiscal 2011;

The intended divestiture of the Company’s South Korean-based vehicular heating, ventilation and air conditioning (HVAC) business;

Realignment of the Original Equipment – North America segment organizational structure resulting in early retirements and a reduction in our workforce at the Racine, Wisconsin, headquarters;

Elimination of post-retirement medical benefits for Medicare eligible participants;

The licensing of Modine-specific fuel cell technology to Bloom Energy for a one-time payment of $12 million;

The ramp-up of production at the newly opened manufacturing plants in China, Hungary and Mexico and the preparation for start of production at the new India facility in January 2009; and

Investment in a new facility in Austria, which is expected to open in mid-calendar year 2009 and replace a facility where demand has outgrown existing capacity.

Liquidity: The Company’s unsecured debt agreements require it to maintain specified financial ratios and place certain limitations on dividend payments and the acquisition of Modine common stock. The most restrictive limitations are quarter-end debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of not more than a 3.0 to 1.0 ratio (leverage ratio) and earnings before interest and taxes (EBIT) to interest expense of not less than a 1.75 to 1.0 ratio for the second and third quarters of fiscal 2009, increasing to a ratio of 2.25 to 1.0 for the fourth quarter of fiscal 2009 and the first quarter of fiscal 2010, and increasing to a ratio of 2.5 to 1.0 for fiscal quarters ending on or after September 30, 2009 (interest expense coverage ratio), as such terms are used in the debt agreements. At September 30, 2008, the Company was in compliance with these financial ratios.

The Company closely evaluates its ability to remain in compliance with the interest expense coverage ratio based on the future increases in the required ratio, as well as the sensitivity of this covenant to changes in financial results. Recent adverse trends have put additional pressure on the Company’s ability to remain in compliance with the interest expense coverage ratio, including the following trends:

Significant decline in the global financial markets and ensuing economic uncertainty has contributed to declining revenues in the Company’s European commercial vehicle and automotive markets, and in the Company’s North American commercial vehicle market;

Slower-than-anticipated recovery in the North American commercial vehicle market subsequent to the January 1, 2007 emission requirement changes; and

Manufacturing inefficiencies continued in the Original Equipment – North America segment related to new program launches and product line transfers in conjunction with our previously announced four-point recovery plan.

These downward trends are expected to continue to adversely affect the Company’s financial results in the third and fourth quarters of fiscal 2009. Depending on the severity, duration and timing of the impact of these trends, the Company may need to work with its lenders to seek to obtain a waiver of or amend the interest expense coverage ratio covenant in the near future. In contemplation of this possibility, the Company is developing a contingency plan that it would implement in the event that it is not able to obtain a waiver or amendment of the interest expense coverage ratio covenant with its lenders. The Company believes that it will be able to maintain compliance with the interest expense coverage ratio covenant by either working with its lenders or through implementation of the contingency plan.

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

The Company believes that its internally generated operating cash flows and existing cash balances, together with access to available external borrowings, will be sufficient to satisfy future operating costs, capital expenditures and strategic business opportunities. If the Company is unable to meet the financial covenants, reach suitable resolution with its lenders or implement the contingency plan, its ability to access available lines of credit would be limited, its liquidity would be adversely affected and its debt obligations could be accelerated. These could have a material adverse effect on the future results of operations, financial position and liquidity of the Company.

Note 2: Significant Accounting Policies and Change in Accounting Principles

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

Starting April 1, 2008, the reporting year-end of these foreign operations was changed from February 28 to March 31. This one-month reporting lag was eliminated as it is no longer required to achieve a timely consolidation due to improvements in the Company’s information technology systems. In accordance with Emerging Issues Task Force (EITF) Issue No. 06-9, “Reporting a Change in (or the Elimination of) a Previously Existing Difference between the Fiscal Year-End of a Parent Company and That of a Consolidated Entity or between the Reporting Period of an Investor and That of an Equity Method Investee,” the elimination of this previously existing reporting lag is considered a change in accounting principle in accordance with Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections – A Replacement of Accounting Principles Board Opinion No. 20 and SFAS No. 3.” Changes in accounting principles are to be reported through retrospective application of the new principle to all prior financial statement periods presented. Accordingly, our financial statements for periods prior to fiscal 2009 have been changed to reflect the period-specific effects of applying this accounting principle. This change resulted in an increase in retained earnings at March 31, 2008 of $3,476 which includes a cumulative effect of an accounting change of $6,154, net of income tax effect. The impact of this change in accounting principle to eliminate the one-month reporting lag for foreign subsidiaries is summarized below for the Company’s results of operations for the three and six months ended September 30, 2007, the cash flows for the six months ended September 30, 2007, and the consolidated balance sheet as of the end of fiscal 2008:

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

	Three months ended September 30, 2007									Six months ended September 30, 2007
	As Reported			Adjustments			After Change in Accounting Principle			As Reported			Adjustments			After Change in Accounting Principle
Net sales	$	431,494		$	(2,837	)	$	428,657		$	875,567		$	(2,674	)	$	872,893
Cost of sales		368,778			(2,060	)		366,718			741,881			(1,127	)		740,754
Gross profit		62,716			(777	)		61,939			133,686			(1,547	)		132,139
Selling, general and administrative expenses		55,550			(787	)		54,763			110,512			457			110,969
Restructuring income		(79	)		-			(79	)		(319	)		-			(319	)
Income from operations		7,245			10			7,255			23,493			(2,004	)		21,489
Interest expense		2,965			(35	)		2,930			5,754			(49	)		5,705
Other income – net		(147	)		(1,153	)		(1,300	)		(4,276	)		(273	)		(4,549	)
Earnings from continuing operations before income taxes		4,427			1,198			5,625			22,015			(1,682	)		20,333
Benefit from income taxes		(5,503	)		902			(4,601	)		(311	)		(329	)		(640	)
Earnings from continuing operations		9,930			296			10,226			22,326			(1,353	)		20,973
Earnings from discontinued operations (net of income taxes)		132			-			132			386			-			386
Net earnings	$	10,062		$	296		$	10,358		$	22,712		$	(1,353	)	$	21,359

Earnings per share of common stock – basic:
Continuing operations	$	0.31		$	0.01		$	0.32		$	0.70		$	(0.04	)	$	0.66
Earnings from discontinued operations		-			-			-			0.01			-			0.01
Net earnings – basic	$	0.31		$	0.01		$	0.32		$	0.71		$	(0.04	)	$	0.67

Earnings per share of common stock – diluted:
Continuing operations	$	0.31		$	0.01		$	0.32		$	0.69		$	(0.04	)	$	0.65
Earnings from discontinued operations		-			-			-			0.01			-			0.01
Net earnings – diluted	$	0.31		$	0.01		$	0.32		$	0.70		$	(0.04	)	$	0.66

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

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

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

	Six months ended September 30, 2007
	As Reported			Adjustments			After Change in Accounting Principle
Cash flows from operating activities:
Net earnings	$	22,712		$	(1,353	)	$	21,359
Adjustments to reconcile net earnings with net cash provided by operating activities:
Depreciation and amortization		38,423			240			38,663
Other – net		(18,522	)		-			(18,522	)
Net changes in operating assets and liabilities		(28,370	)		9,553			(18,817	)
Net cash provided by operating activities		14,243			8,440			22,683

Cash flows from investing activities:
Expenditures for property, plant and equipment		(34,348	)		(2,046	)		(36,394	)
Proceeds from dispositions of assets		8,435			-			8,435
Settlement of derivative contracts		194			-			194
Other – net		241			-			241
Net cash used for investing activities		(25,478	)		(2,046	)		(27,524	)

Cash flows from financing activities:
Short-term debt		8,037			(8,747	)		(710	)
Additions to long-term debt		65,012			35			65,047
Reductions of long-term debt		(38,118	)		(1,931	)		(40,049	)
Book overdrafts		7,071			-			7,071
Proceeds from exercise of stock options		664			-			664
Repurchase of common stock, treasury and retirement		(5,962	)		-			(5,962	)
Cash dividends paid		(11,337	)		-			(11,337	)
Other – net		101			-			101
Net cash provided by financing activities		25,468			(10,643	)		14,825

Effect of exchange rate changes on cash		757			1,386			2,143
Net increase in cash and cash equivalents		14,990			(2,863	)		12,127

Cash and cash equivalents at beginning of period		21,227			4,980			26,207
Cash and cash equivalents at end of period	$	36,217		$	2,117		$	38,334

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

Trade receivables and allowance for doubtful accounts: Trade receivables are recorded at the invoiced amount and do not bear interest if paid according to the original terms. The allowance for doubtful accounts is Modine’s best estimate of the uncollectible amount contained in the existing trade receivables balance. The allowance is based on historical write-off experience and specific customer economic data. The allowance for doubtful accounts is reviewed periodically and adjusted as necessary. Utilizing age and size based criteria, certain individual accounts are reviewed for collectibility, while all other accounts are reviewed on a pooled basis. Receivables are charged off against the allowance when it is probable and to the extent that funds will not be collected. On September 25, 2008, the Company entered into an Accounts Receivable Purchase Agreement whereby one specific customer’s accounts receivable may be sold without recourse to a third-party financial institution on a revolving basis. During the three months ended September 30, 2008, the Company sold $5,914 of accounts receivable to provide additional financing capacity. In compliance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (SFAS 140), sales of accounts receivable are reflected as a reduction of accounts receivable in the consolidated balance sheets and the proceeds are included in the cash flows from operating activities in the condensed consolidated statements of cash flows. During the three and six months ended September 30, 2008, a $68 loss on the sale of accounts receivable was recorded in the consolidated statements of operations. This loss represented implicit interest on the transactions.

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

Accounting standards changes and new accounting pronouncements: In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. SFAS No. 157 also expands financial statement disclosures about fair value measurements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) 157-2 which delays the effective date of SFAS No. 157 for one year, for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted SFAS No. 157 and FSP 157-2 as of April 1, 2008 which did not have a material impact on the financial statements. See Note 18 for further discussion.

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

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

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

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

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

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 mandates that GAAP hierarchy reside in the accounting literature as opposed to the audit literature. This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP hierarchy. SFAS No. 162 will become effective 60 days following U.S. Securities and Exchange Commission approval. The Company does not anticipate that adoption of this standard will have an impact on the consolidated financial statements.

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

Note 3: Employee Benefit Plans

Modine’s contributions to the defined contribution employee benefit plans for the three months ended September 30, 2008 and 2007 were $1,650 and $1,895, respectively. Modine’s contributions to the defined contribution employee benefit plans for the six months ended September 30, 2008 and 2007 were $3,497 and $3,734, respectively.

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

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

During the three and six months ended September 30, 2008, the Company recorded a settlement charge of $280 related to a settlement payment made from the Modine Manufacturing Company Supplemental Executive Retirement Plan.

In September 2007, the Company announced that effective January 1, 2008, the Modine Manufacturing Company Pension Plan for Non-Union Hourly-Paid Factory and Salaried Employees (Salaried Employee Component) and the Modine Manufacturing Company Supplemental Executive Retirement Plan were modified so that no increases in annual earnings after December 31, 2007 would be included in calculating the average annual earnings portion under the pension plan formula. The Company recorded a pension curtailment gain of $4,214 during the three and six months ended September 30, 2007 to reflect this modification.

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

	Three months ended September 30											Six months ended September 30
	Pension						Postretirement					Pension						Postretirement
	2008			2007			2008			2007		2008			2007			2008			2007
Service cost	$	559		$	681		$	29		$	83	$	1,259		$	1,468		$	92		$	166
Interest cost		3,647			3,384			304			447		7,139			7,230			768			894
Expected return on plan assets		(3,973	)		(4,401	)		-			-		(8,508	)		(9,100	)		-			-
Amortization of:
Unrecognized net loss (gain)		114			326			(28	)		122		967			1,858			66			244
Unrecognized prior service cost		109			104			(195	)		-		183			80			(189	)		-
Unrecognized net asset		-			(5	)		-			-		-			(12	)		-			-
Adjustment for curtailment/settlement		280			(4,214	)		-			-		280			(4,214	)		-			-
Net periodic benefit cost (income)	$	736		$	(4,125	)	$	110		$	652	$	1,320		$	(2,690	)	$	737		$	1,304

Note 4: Stock-Based Compensation

Stock-based compensation consists of stock options and restricted and unrestricted stock granted for retention and performance. Compensation cost is calculated based on the fair value of the instrument at the time of grant, and is recognized as expense over the vesting period of the stock-based instrument. Modine recognized stock-based compensation cost of $2,054 and $2,320 for the three months ended September 30, 2008 and 2007, respectively. Modine recognized stock-based compensation cost of $2,794 and $3,674 for the six months ended September 30, 2008 and 2007, respectively. The performance component of the long-term incentive plan includes earnings per share and total shareholder return measures based upon a cumulative three year period. A new performance period begins each fiscal year so multiple performance periods, with separate goals, are operating simultaneously. Based upon management’s assessment of probable attainment, $458 of compensation expense was reversed relative to the earnings per share component of the fiscal 2007-08 plan in the first quarter of fiscal 2008-09.

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, 2008 and 2007:

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

	Three months ended September 30,
	2008				2007
			Fair Value				Fair Value
Type of award	Shares		Per Award		Shares		Per Award
Common stock options		-	$	-		-	$	-
Restricted common stock - retention		13.5	$	14.06		11.2	$	28.50
Restricted common stock - performance based upon total shareholder return compared to the S&P 500		-	$	-		-	$	-
Restricted common stock - performance based upon earnings per share growth		-	$	-		149.6	$	23.25

	Six months ended September 30,
	2008				2007
			Fair Value				Fair Value
Type of award	Shares		Per Award		Shares		Per Award
Common stock options		-	$	-		0.3	$	5.30
Restricted common stock - retention		17.1	$	14.64		11.2	$	28.50
Restricted common stock - performance based upon total shareholder return compared to the S&P 500		101.8	$	19.49		79.9	$	23.60
Restricted common stock – performance based upon earnings per share growth		209.2	$	16.66		149.6	$	23.25

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

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

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

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

Type of award	Unrecognized Compenstion Costs		Weighted Average Remaining Service Period in Years
Common stock options	$	73		2.3
Restricted common stock - retention		2,634		2.1
Restricted common stock - performance		5,438		2.2
Total	$	8,145		2.2

Note 5: Other (Expense) Income – Net

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

	Three months ended September 30					Six months ended September 30
	2008			2007		2008			2007
Equity earnings of non-consolidated affiliates	$	624		$	587	$	1,513		$	1,276
Interest income		613			373		1,125			649
Foreign currency transactions		(2,519	)		249		(2,063	)		2,345
Other non-operating income - net		272			91		587			279
Total other (expense) income - net	$	(1,010	)	$	1,300	$	1,162		$	4,549

Foreign currency transactions for the three and six months ended September 30, 2008 and 2007 were primarily comprised of foreign currency transaction gains (losses) on inter-company loans denominated in a foreign currency in Brazil.

Note 6: Income Taxes

For the three months ended September 30, 2008 and 2007, the Company’s effective income tax rate attributable to (loss) earnings from continuing operations before income taxes was -15.7 percent and -81.8 percent, respectively. During the second quarter of fiscal 2009, the Company recorded a valuation allowance of $4,629 primarily against the net South Korean and U.S. deferred tax assets as it is more likely than not that these assets will not be realized based on historical performance. During the second quarter of fiscal 2008, the Company recorded a $2,735 benefit related to the impact of a favorable retroactive income tax law change in Germany which reduced the German income tax rate by 10 percentage points. The change in the effective tax rate from the prior year primarily relates to the impact of the above-referenced valuation allowance charge and the impact of the German tax law change.

For the six months ended September 30, 2008 and 2007, the Company’s effective income tax rate attributable to (loss) earnings from continuing operations before income taxes was 225.6 percent and -3.1 percent, respectively. The increase in the effective tax rate from the prior year primarily relates to the absence of the prior year favorable impact of foreign tax law changes and an increased valuation allowance charge of $9,956 primarily against the net South Korean and U.S. deferred tax assets offset by favorable foreign tax rate differentials.

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

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

The following is a reconciliation of the effective tax rate for the three and six months ended September 30, 2008:

	Three months ended September 30, 2008
	Domestic			Foreign			Total			%

(Loss) earnings from continuing operations before income taxes	$	(26,899	)	$	10,215		$	(16,684	)

(Benefit from) provision for income taxes at federal statutory rate	$	(9,415	)	$	3,575		$	(5,840	)		(35.0	%)
Differential in foreign tax rates and state taxes		(181	)		(1,301	)		(1,482	)		(8.9	)
Valuation allowance		4,573			56			4,629			27.7
Other, net		(77	)		150			73			0.5
(Benefit from) provision for income taxes	$	(5,100	)	$	2,480		$	(2,620	)		(15.7	%)

	Six months ended September 30, 2008
	Domestic			Foreign			Total			%

(Loss) earnings from continuing operations before income taxes	$	(44,049	)	$	41,807		$	(2,242	)

(Benefit from) provision for income taxes at federal statutory rate	$	(15,417	)	$	14,632		$	(785	)		(35.0	%)
Differential in foreign tax rates and state taxes		(706	)		(3,537	)		(4,243	)		(189.3	)
Valuation allowance		9,328			628			9,956			444.1
Other, net		(155	)		286			131			5.8
(Benefit from) provision for income taxes	$	(6,950	)	$	12,009		$	5,059			225.6	%

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

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

As further discussed in Note 13, the Company completed the sale of its Electronics Cooling business during the first quarter of fiscal 2009. Both the gain on sale and earnings from discontinued operations has been shown separately in the consolidated statements of operations. As a result, the gain on sale has been presented net of income tax (benefit) expense of ($814) and $769 for the three and six months ended September 30, 2008, respectively. In addition, the earnings from discontinued operations for the three and six months ended September 30, 2008 have been presented net of income tax (benefit) expense of ($2) and $76, respectively, and the earnings from discontinued operations for the three and six months ended September 30, 2007 have been presented net of income tax expense of $119 and $168, respectively.

Note 7: Earnings Per Share

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

	Three months ended September 30					Six months ended September 30
	2008			2007		2008			2007

Numerator:
(Loss) earnings from continuing operations	$	(14,064	)	$	10,226	$	(7,301	)	$	20,973
(Loss) earnings from discontinued operations		(10	)		132		165			386
Gain on sale of discontinued operations		848			-		1,697			-
Net (loss) earnings	$	(13,226	)	$	10,358	$	(5,439	)	$	21,359
Denominator:
Weighted average shares outstanding – basic		32,065			32,099		32,052			32,105
Effect of dilutive securities		-			195		-			126
Weighted average shares outstanding – diluted		32,065			32,294		32,052			32,231

Net (loss) earnings per share of common stock – basic:
Continuing operations	$	(0.44	)	$	0.32	$	(0.23	)	$	0.66
(Loss) earnings from discontinued operations		-			-		0.01			0.01
Gain on sale of discontinued operations		0.03			-		0.05			-
Net (loss) earnings – basic	$	(0.41	)	$	0.32	$	(0.17	)	$	0.67

Net (loss) earnings per share of common stock – diluted:
Continuing operations	$	(0.44	)	$	0.32	$	(0.23	)	$	0.65
(Loss) earnings from discontinued operations		-			-		0.01			0.01
Gain on sale of discontinued operations		0.03			-		0.05			-
Net (loss) earnings – diluted	$	(0.41	)	$	0.32	$	(0.17	)	$	0.66

For the three and six months ended September 30, 2008, the calculation of diluted earnings per share excludes all potentially dilutive shares which includes, 2,621 stock options, 164 restricted stock awards and 401 performance awards as these shares were anti-dilutive. For the three months ended September 30, 2007, the calculation of diluted earnings per share excluded 1,593 stock options and 12 restricted awards as these awards were anti-dilutive. For the six months ended September 30, 2007, 1,615 stock options and 145 restricted stock awards were excluded from the calculation of dilutive earnings per share as these awards were anti-dilutive.

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

Note 8: Comprehensive (Loss) Income

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

	Three months ended September 30						Six months ended September 30
	2008			2007			2008			2007
Net (loss) earnings	$	(13,226	)	$	10,358		$	(5,439	)	$	21,359
Foreign currency translation		(53,169	)		17,830			(50,344	)		24,861
Cash flow hedges		(6,063	)		(827	)		(6,206	)		(2,227	)
Change in SFAS No. 158 benefit plan adjustment		3,616			18,947			4,256			19,921
Post-retirement plan amendment		8,978			-			8,978			-
Total comprehensive (loss) income	$	(59,864	)	$	46,308		$	(48,755	)	$	63,914

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.

	September 30, 2008		March 31, 2008
Raw materials and work in process	$	97,359	$	96,973
Finished goods		32,680		28,526
Total inventories	$	130,039	$	125,499

Note 10: Property, Plant and Equipment

Property, plant and equipment consisted of the following:

	September 30, 2008			March 31, 2008
Gross property, plant and equipment	$	1,138,917		$	1,188,563
Less accumulated depreciation		(639,317	)		(648,027	)
Net property, plant and equipment	$	499,600		$	540,536

An impairment charge of $3,031 was recorded during the three months ended September 30, 2008. The impairment charge included $2,661 related to assets in the Original Equipment – North America segment for a program which was not able to support its asset base and for assets no longer in use. If future capital expenditures are required for the program, which was not able to support its asset base, additional impairment charges may be required in the future. Also included in the impairment charge was $370 related to certain assets in the Commercial Products segment for the cancellation of a product in its development stage.

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

Note 11: Acquisitions

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