form10q.htm
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549


FORM 10-Q
(Mark One)

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

For the quarterly period ended December 31, 2009

or

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

For the transition period from ____________ to ____________

Commission file number 1-1373

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

WISCONSIN
39-0482000
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
1500 DeKoven Avenue, Racine, Wisconsin
53403
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code (262) 636-1200

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

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 £    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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer £
Accelerated Filer T
   
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 T

The number of shares outstanding of the registrant's common stock, $0.625 par value, was 46,261,554 at February 2, 2010.
 
 
 
 

MODINE MANUFACTURING COMPANY
INDEX


1
1
28
45
49
50
50
50
52

 

PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements.


MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 2009 and 2008
(In thousands, except per share amounts)
(Unaudited)

   
Three months ended
December 31
    
Nine months ended
December 31
  
   
2009
    
2008
    
2009
    
2008
  
Net sales
   $ 302,390     $ 325,578     $ 838,320     $ 1,153,937  
Cost of sales
     254,674       287,673       712,380       990,551  
Gross profit
     47,716       37,905       125,940       163,386  
Selling, general and administrative expenses
     40,672       43,268       116,236       159,278  
Restructuring expense (income)
     1,056       25,311       (907 )     28,130  
Impairment of goodwill and long-lived assets
     273       27,342       5,116       30,507  
Income (loss) from operations
     5,715       (58,016 )     5,495       (54,529 )
Interest expense
     3,793       4,048       18,895       9,593  
Other (income) expense – net
     (441 )     1,712       (7,122 )     1,414  
Earnings (loss) from continuing operations before income taxes
     2,363       (63,776 )     (6,278 )     (65,536 )
Provision for (benefit from) income taxes
     238       (7,265 )     2,125       (2,702 )
Earnings (loss) from continuing operations
     2,125       (56,511 )     (8,403 )     (62,834 )
Earnings (loss) from discontinued operations (net of income taxes)
     2,084       85       (8,348 )     (728 )
(Loss) gain on sale of discontinued operations (net of income taxes)
     (430 )     369       (430 )     2,066  
Net earnings (loss)
   $ 3,779     $ (56,057 )   $ (17,181 )   $ (61,496 )
                                 
Earnings (loss) from continuing operations per common share:
                                
Basic
   $ 0.05     $ (1.76 )   $ (0.23 )   $ (1.96 )
Diluted
   $ 0.05     $ (1.76 )   $ (0.23 )   $ (1.96 )
                                 
Net earnings (loss) per common share:
                                
Basic
   $ 0.08     $ (1.75 )   $ (0.46 )   $ (1.92 )
Diluted
   $ 0.08     $ (1.75 )   $ (0.46 )   $ (1.92 )
                                 
                                 
Dividends per share
   $ -     $ 0.10     $ -     $ 0.30  

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

1

MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and March 31, 2009
(In thousands, except per share amounts)
(Unaudited)

   
December 31, 2009
    
March 31, 2009
  
ASSETS
            
Current assets:
            
Cash and cash equivalents
   $ 44,161     $ 43,536  
Short term investments
     1,140       1,189  
Trade receivables, less allowance for doubtful accounts of $2,279 and $2,831
     130,495       122,266  
Inventories
     92,159       88,077  
Assets held for sale
     -       29,173  
Deferred income taxes and other current assets
     45,122       41,610  
Total current assets
     313,077       325,851  
Noncurrent assets:
                
Property, plant and equipment – net
     442,974       426,565  
Investment in affiliates
     2,969       11,268  
Goodwill
     30,784       25,639  
Intangible assets – net
     7,347       7,041  
Assets held for sale
     -       34,328  
Other noncurrent assets
     19,993       21,440  
Total noncurrent assets
     504,067       526,281  
Total assets
   $ 817,144     $ 852,132  
LIABILITIES AND SHAREHOLDERS' EQUITY
                
Current liabilities:
                
Short-term debt
   $ 520     $ 5,036  
Long-term debt – current portion
     160       196  
Accounts payable
     106,478       94,506  
Accrued compensation and employee benefits
     56,252       67,328  
Income taxes
     4,056       4,838  
Liabilities of business held for sale
     -       28,018  
Accrued expenses and other current liabilities
     49,306       51,111  
Total current liabilities
     216,772       251,033  
Noncurrent liabilities:
                
Long-term debt
     131,020       243,982  
Deferred income taxes
     11,123       9,979  
Pensions
     69,303       67,367  
Postretirement benefits
     8,921       9,558  
Liabilities of business held for sale
     -       12,181  
Other noncurrent liabilities
     15,951       14,195  
Total noncurrent liabilities
     236,318       357,262  
Total liabilities
     453,090       608,295  
Commitments and contingencies (See Note 20)
                
Shareholders' equity:
                
Preferred stock, $0.025 par value, authorized 16,000 shares, issued - none
     -       -  
Common stock, $0.625 par value, authorized 80,000 shares, issued 46,814 and 32,790 shares
     29,258       20,494  
Additional paid-in capital
     159,470       72,800  
Retained earnings
     210,520       227,687  
Accumulated other comprehensive loss
     (20,925 )     (62,894 )
Treasury stock at cost: 554 and 549 shares
     (13,922 )     (13,897 )
Deferred compensation trust
     (347 )     (353 )
Total shareholders' equity
     364,054       243,837  
Total liabilities and shareholders' equity
   $ 817,144     $ 852,132  

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

2

MODINE MANUFACTURING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31, 2009 and 2008
(In thousands)
(Unaudited)

   
Nine months ended December 31
  
   
2009
    
2008
  
             
Cash flows from operating activities:
            
Net loss
   $ (17,181 )   $ (61,496 )
Adjustments to reconcile net loss with net cash provided by operating activities:
                
Depreciation and amortization
     49,625       55,875  
Impairment of long-lived assets
     12,763       30,507  
Deferred income taxes
     (2,113 )     (23,732 )
Other – net
     1,532       8,267  
Net changes in operating assets and liabilities, excluding dispositions
     5,244       70,843  
Net cash provided by operating activities
     49,870       80,264  
                 
Cash flows from investing activities:
                
Expenditures for property, plant and equipment
     (41,449 )     (79,538 )
Proceeds from dispositions of assets
     8,130       4,972  
Proceeds from sale of discontinued operations
     11,249       10,202  
Settlement of derivative contracts
     (6,544 )     (263 )
Other – net
     4,024       3,225  
Net cash used for investing activities
     (24,590 )     (61,402 )
                 
Cash flows from financing activities:
                
Short-term debt – net
     (5,043 )     2,600  
Borrowings of long-term debt
     50,884       62,580  
Repayments of long-term debt
     (165,549 )     (34,261 )
Book overdrafts
     (1,071 )     (856 )
Issuance of common stock
     93,025       -  
Cash dividends paid
     -       (9,678 )
Other – net
     (724 )     (542 )
Net cash (used for) provided by financing activities
     (28,478 )     19,843  
                 
Effect of exchange rate changes on cash
     3,823       (4,446 )
Net increase in cash and cash equivalents
     625       34,259  
                 
Cash and cash equivalents at beginning of period
     43,536       38,595  
Cash and cash equivalents at end of period
   $ 44,161     $ 72,854  

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

3

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

Note 1: Overview

The accompanying condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles (GAAP) in the United States and such principles were applied on a basis consistent with the preparation of the consolidated financial statements of Modine Manufacturing Company (Modine or the Company) for the year ended March 31, 2009 filed with the Securities and Exchange Commission in the Company’s current report on Form 8-K dated September 15, 2009.  The financial statements include all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods.  Results for the first nine months of fiscal 2010 are not necessarily indicative of the results to be expected for the full year.

The March 31, 2009 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 for the year ended March 31, 2009 contained in Modine's current report on Form 8-K dated September 15, 2009.

Earnings from continuing operations: During the three months ended December 31, 2009, the Company reported earnings from continuing operations of $2,125 which represents a significant improvement from the loss from continuing operations of $56,511 reported for the three months ended December 31, 2008.  The significant improvement in gross margin is the result of the reduction in direct and indirect costs in the manufacturing facilities through cost reduction actions taken during fiscal 2009.  Restructuring charges of $25,311 were recorded in the third quarter of fiscal 2009 primarily related to a workforce reduction affecting 25 percent of the workforce in the Company’s Racine, Wisconsin headquarters and a planned workforce reduction through the European facilities, including the European headquarters in Bonlanden, Germany.  In addition, impairment charges of $27,342 were recorded during the third quarter of fiscal 2009 which consisted of a goodwill impairment charge of $9,005 and long-lived asset impairment charge of $18,337 for certain manufacturing facilities with projected cash flows unable to support their asset bases, for assets related to a cancelled program and a program which was not able to support its asset base.

Liquidity:  The Company’s debt agreements require it to maintain compliance with various covenants.  The most restrictive limitation in fiscal 2010 is a minimum adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) covenant.  Adjusted EBITDA is defined as the Company’s earnings (loss) from continuing operations before interest expense and provision for income taxes, adjusted to exclude unusual, non-recurring or extraordinary non-cash charges and up to $34,000 of cash restructuring and repositioning charges, and further adjusted to add back depreciation and amortization expense.

The following presents the minimum adjusted EBITDA level requirements with which the Company is required to comply through the fourth quarter of fiscal 2010:

For the four consecutive quarters ended December 31, 2009
   $ 1,750  
For the four consecutive quarters ending March 31, 2010
     35,000  

The Company’s financial results exceeded the minimum adjusted EBITDA requirement by approximately $65,000 for the four consecutive quarters ended December 31, 2009.  The Company expects to remain in compliance with this covenant throughout the remainder of fiscal 2010 based on the adjusted EBITDA recorded during the first three quarters of fiscal 2010 and the projected financial results for the remainder of fiscal 2010.

4

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

In addition to the minimum adjusted EBITDA covenant, the Company is not permitted to incur capital expenditures greater than $70,000 for fiscal year 2010 and for all fiscal years thereafter under the terms of the agreements.  The Company expects to remain in compliance with this covenant in fiscal 2010 and beyond.

On September 30, 2009, the Company completed a public offering of 13,800 shares of its common stock, which included 1,800 shares issued pursuant to a fully exercised underwriters’ option to purchase additional shares, at a price of $7.15 per share.  The proceeds of the common stock offering were $93,025 after deducting underwriting discounts, commissions, legal, accounting and printing fees of $5,645.

On December 23, 2009, the Company sold 100 percent of the shares of its South Korea-based heating, ventilating and air conditioning business for net cash proceeds of $11,249.  The proceeds from these events were used to reduce outstanding indebtedness and contributed to a $117,514 reduction of indebtedness since March 31, 2009.

Beginning with the fourth quarter of fiscal 2010, the Company becomes subject to an adjusted EBITDA to interest expense ratio (interest expense coverage ratio) covenant and a debt to adjusted EBITDA (leverage ratio) covenant as follows:

 
Interest Expense Coverage Ratio Covenant (Not Permitted to Be Less Than):
  
Leverage Ratio Covenant (Not Permitted to Be Greater Than):
Fiscal quarter ending March 31, 2010
1.50 to 1.0
  
7.25 to 1.0
Fiscal quarter ending June 30, 2010
2.00 to 1.0
  
5.50 to 1.0
Fiscal quarter ending September 30, 2010
2.50 to 1.0
  
4.75 to 1.0
Fiscal quarter ending December 31, 2010
3.00 to 1.0
  
3.75 to 1.0
Fiscal quarters ending March 31, 2011and June 30, 2011
3.00 to 1.0
  
3.50 to 1.0
All fiscal quarters ending thereafter
3.00 to 1.0
  
3.00 to 1.0

The Company expects to remain in compliance with the interest expense coverage ratio covenant and leverage ratio covenant in the fourth quarter of fiscal 2010 and through the term of the revolving credit facility based on the adjusted EBITDA recorded during the third quarter of fiscal 2010, the projected financial results for the fourth quarter of fiscal 2010 and the significant reduction in the debt balance.

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 restructuring costs incurred under the four-point plan.  The elements of the four-point plan are discussed in Note 20.

Note 2: Significant Accounting Policies

Restricted cash:  At December 31, 2009, the Company had long-term restricted cash of $7,786 included in other noncurrent assets.  This amount primarily collateralizes unrealized losses on commodity derivatives with JPMorgan Chase Bank, N.A. as the counterparty.

Accounting standards changes and new accounting pronouncements:  In December 2007, the Financial Accounting Standards Board (FASB) issued updated guidance on business combinations which retained the underlying concepts that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but 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 transaction and restructuring costs will be expensed rather than treated as an acquisition cost and included in the amount recorded for assets acquired. Additionally, this new guidance amended the goodwill disclosure requirements to require a roll-forward of the gross amount of goodwill and accumulated impairment losses.  This new guidance 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.  The segments for which the Company currently has goodwill have not had any historical impairment charges.  This guidance also amends 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 the new guidance would also apply the provisions of that guidance.  Early adoption was not allowed.  The adoption of this standard did not have an impact on previous acquisitions.

5

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

In December 2007, the FASB issued new accounting guidance on consolidations which established new standards that will govern the accounting for and reporting of (1) non-controlling interests in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries.  The Company’s consolidated subsidiaries are wholly owned and, as such, no non-controlling 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.  This new guidance was 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 was not allowed.   The adoption of this standard did not have an impact on the consolidated financial statements.

In April 2009, the FASB issued new accounting guidance which requires the disclosure about fair value of financial instruments in interim reporting periods of publicly traded companies similar to the disclosures that were previously only required in annual financial statements.  The provisions of this new guidance were effective April 1, 2009 and amend only the disclosure requirements about fair value of financial instruments in interim periods.  Therefore, the adoption of this guidance had no impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued new accounting guidance on subsequent events which addresses the types and timing of events that should be reported in the financial statements for events occurring between the balance sheet date and the date the financial statements are issued or available to be issued.  This guidance was effective for the Company on June 30, 2009.  The Company reviewed events for inclusion in the financial statements through February 8, 2010, the date that the accompanying financial statements were issued.  The adoption of this guidance did not impact the Company’s financial position or results of operations.

In August 2009, the FASB issued a new accounting standards update on fair value measurements and disclosures that applies to the fair value measurement of liabilities.  This update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, companies are required to measure the fair value of the liability using one or both of the following techniques:  (i) the quoted price of an identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique (e.g., a market approach or income approach) including a technique based on the amount an entity would pay to transfer the identical liability, or a technique based on the amount an entity would receive to enter into an identical liability.  This update was effective for the Company during the third quarter of fiscal 2010, and had no impact on the consolidated financial statements.

6

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

Note 3: Employee Benefit Plans

During the three months ended December 31, 2009 and 2008, the Company recorded compensation expense (income) of $702 and $(194), respectively, related to its defined contribution employee benefit plans.  During the nine months ended December 31, 2009 and 2008, the Company recorded compensation expense of $2,764 and $3,303, respectively, related to its defined contribution employee benefit plans.

In September 2008, the Company announced that effective January 1, 2009, the Modine Manufacturing Company Group Insurance Plan – Retiree Medical Plan was being modified to eliminate coverage for retired participants who 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 income (loss), net of income taxes of $5,305, and will be amortized to earnings over the future service life of active participants.

During the nine months ended December 31, 2009 and 2008, the Company recorded settlement charges of $281 and $280, respectively, related to payments made from the Modine Manufacturing Company Supplemental Executive Retirement Plan.

Costs for Modine's pension and postretirement benefit plans for the three and nine months ended December 31, 2009 and 2008 include the following components:

   
Three months ended
December 31
    
Nine months ended
December 31
  
   
Pension
    
Postretirement
    
Pension
    
Postretirement
  
   
2009
    
2008
    
2009
    
2008
    
2009
    
2008
    
2009
    
2008
  
Service cost (income)
   $ 398     $ 620     $ (9 )   $ 22     $ 1,509     $ 1,879     $ 56     $ 114  
Interest cost
     3,725       3,549       65       179       10,937       10,688       395       947  
Expected return on plan assets
     (3,806 )     (4,254 )     -       -       (11,339 )     (12,762 )     -       -  
Amortization of:
                                                                
Unrecognized net loss (gain)
     752       481       (97 )     38       1,902       1,448       (25 )     104  
Unrecognized prior service cost
     98       92       (592 )     (595 )     280       275       (1,780 )     (784 )
Adjustment for settlement
     -       -       -       -       281       280       -       -  
Net periodic benefit cost (income)
   $ 1,167     $ 488     $ (633 )   $ (356 )   $ 3,570     $ 1,808     $ (1,354 )   $ 381  

Note 4: Stock-Based Compensation

Stock-based compensation consists of stock options and restricted 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 $191 and $472 for the three months ended December 31, 2009 and 2008, respectively.  Modine recognized stock-based compensation cost of $2,336 and $3,266 for the nine months ended December 31, 2009 and 2008, 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.  Based upon management’s assessment of probable attainment, $458 of compensation expense was reversed relative to the earnings per share component of the fiscal 2008 plan in the first quarter of fiscal 2009.

7

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

The following tables present, by type, the fair market value of stock-based compensation awards granted during the nine months ended December 31, 2009 and 2008:

   
Nine months ended December 31,
  
   
2009
    
2008
  
         
Fair Value
          
Fair Value
  
Type of award
  
Shares
    
Per Award
    
Shares
    
Per Award
  
Common stock options
     666.1     $ 3.34       -     $ -  
Restricted common stock - retention
     208.2     $ 5.36       17.1     $ 14.64  
Restricted common stock - performance based upon total shareholder return compared to the S&P 500
     -     $ -       101.8     $ 19.49  
Restricted common stock – performance based upon cumulative earnings per share
     -     $ -       -     $ -  

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

   
Nine months ended December 31,
  
   
2009
    
2008
  
   
Options
    
Performance Awards
  
Expected life of awards in years
     6       3  
Risk-free interest rate
     3.19 %     2.68 %
Expected volatility of the Company's stock
     72.95 %     36.00 %
Expected dividend yield on the Company's stock
     0.00 %     2.50 %
Expected forfeiture rate
     2.50 %     1.50 %

The Company is prohibited from making dividend payments under its current debt agreements resulting in an expected dividend yield of 0.00 percent on the Company’s stock.  The Company’s cash flow objectives for the foreseeable future are funding the business and capital expenditures.

As of December 31, 2009, the total remaining unrecognized compensation cost related to the non-vested stock-based compensation awards that will be amortized over the weighted average remaining service periods is as follows:

Type of award
  
Unrecognized Compenstion Costs
    
Weighted Average Remaining Service Period in Years
  
Common stock options
   $ 1,138       2.4  
Restricted common stock - retention
     1,087       2.5  
Restricted common stock - performance
     418       1.2  
Total
   $ 2,643       2.0  

8

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

Note 5: Other Income (Expense) – Net

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

   
Three months ended
December 31
    
Nine months ended
December 31
  
   
2009
    
2008
    
2009
    
2008
  
Equity (loss) earnings of non-consolidated affiliates
   $ (355 )   $ 699     $ (133 )   $ 2,211  
Interest income
     132       507       449       1,437  
Foreign currency transactions
     558       (2,768 )     5,187       (5,382 )
Other non-operating income (expense) - net
     106       (150 )     1,619       320  
Total other income (expense) - net
   $ 441     $ (1,712 )   $ 7,122     $ (1,414 )

Foreign currency transactions for the three and nine months ended December 31, 2009 and 2008 were primarily comprised of foreign currency transaction gains (losses) on inter-company loans denominated in a foreign currency.

During the six months ended September 30, 2009, the Company sold its 50 percent ownership of Anhui Jianghaui Mando Climate Control Co. Ltd. for $4,860, resulting in a gain of $1,465 included in other non-operating income (expense) – net.

Note 6: Income Taxes

For the three months ended December 31, 2009 and 2008, the Company’s effective income tax rate attributable to earnings (loss) from continuing operations before income taxes was 10.1 percent and -11.4 percent, respectively.  During the three months ended December 31, 2009, the Company continued to record an increase in the valuation allowance of $3,775 predominantly against net U.S. deferred tax assets as it is more likely than not that these assets will not be realized based on historical performance.  During the three months ended December 31, 2008, the Company recorded an $8,514 valuation allowance primarily related to its net U.S. deferred tax assets.

For the nine months ended December 31, 2009 and 2008, the Company’s effective income tax rate attributable to loss from continuing operations before income taxes was 33.8 percent and -4.1 percent, respectively.  During the nine months ended December 31, 2009, the Company continued to record an increase in the valuation allowance of $6,177 predominantly against net U.S. deferred tax assets as it is more likely than not that these assets will not be realized based on historical performance.  During the nine months ended December 31, 2008, the Company recorded a $17,835 valuation allowance primarily related to its net U.S. deferred tax assets.

Certain of the Company’s foreign operations generated earnings from continuing operations before income taxes during the three and nine months ended December 31, 2009, which resulted in a foreign income tax provision within these tax jurisdictions.  The foreign income tax provision more than offsets the income tax benefit recognized on the domestic loss from continuing operations before income taxes, which resulted in a consolidated provision for income taxes despite the consolidated loss from continuing operations before income taxes for the nine months ended December 31, 2009.  The changing mix of foreign earnings and domestic losses, combined with year-over-year changes in the valuation allowance, are the most significant factors impacting changes in the effective tax rate for the three and nine months ended December 31, 2009 and 2008.

The Company allocates income tax expense between continuing operations, and all other financial statement components by tax jurisdiction.  In the periods in which there is a loss from continuing operations before income taxes and pre-tax income in another category (e.g., discontinued operations or other comprehensive income), income tax expense is first allocated to the other sources of income, with a related tax benefit recorded in continuing operations.  For the three and nine months ended December 31, 2009, the Company allocated income tax expense to the gain component in other comprehensive income with an offsetting tax benefit in continuing operations.

9

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

The following is a reconciliation of the effective tax rate for the three and nine months ended December 31, 2009:

   
Three months ended December 31, 2009
  
   
Domestic
    
Foreign
    
Total
    
%
  
                         
Earnings (loss) from continuing operations before income taxes
   $ (5,814 )   $ 8,177     $ 2,363        
                               
Provision for (benefit from) income taxes at federal statutory rate
   $ (2,035 )   $ 2,862     $ 827       35.0 %
Taxes on non-U.S. earnings and losses and foreign rate differentials
     (3,473 )     (651 )     (4,124 )     (174.5 )
Valuation allowance
     4,363       (588 )     3,775       159.8  
Other, net
     466       (706 )     (240 )     (10.2 )
Provision for (benefit from) income taxes
   $ (679 )   $ 917     $ 238       10.1 %


   
Nine months ended December 31, 2009
  
   
Domestic
    
Foreign
    
Total
    
%
  
                         
(Loss) earnings from continuing operations before income taxes
   $ (30,533 )   $ 24,255     $ (6,278 )      
                               
(Benefit from) provision for income taxes at federal statutory rate
   $ (10,686 )   $ 8,489     $ (2,197 )     (35.0 %)
Taxes on non-U.S. earnings and losses and foreign rate differentials
             (3,063 )     (3,063 )     (48.8 )
Valuation allowance
     6,845       (668 )     6,177       98.4  
Other, net
     1,333       (125 )     1,208       19.2  
Provision for (benefit from) income taxes
   $ (2,508 )   $ 4,633     $ 2,125       33.8 %

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.  The impact of the Company’s operations in the U.S., Germany, Italy and certain other foreign locations should be removed 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.

10

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

The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world.  During the three months ended December 31, 2009, the Company was not engaged in any routine income tax examinations by any federal taxing authority.  As of the third quarter of fiscal 2010, the Company continues to be in the early stages of a state income tax examination. There was a decrease in unrecognized tax benefits of $854 during the third quarter of fiscal 2010 due to a lapse in the applicable statute of limitations.  The Company does not expect any significant increase or decrease in the total amount of unrecognized tax benefits within the next twelve months other than that which will result from the expiration of the applicable statute of limitations.

As further discussed in Note 12, the South Korean business, retained aftermarket environmental liability in the Netherlands and the Electronics Cooling business are presented as discontinued operations in the comparative consolidated financial statements.  The loss from discontinued operations has been presented net of income tax expense of $445 and $99 for the three months ended December 31, 2009 and 2008, respectively, and $538 and $670 for the nine months ended December 31, 2009 and 2008, respectively.  For the three and nine months ended December 31, 2009, the loss on sale of discontinued operations for the South Korean business has been presented net of income tax (benefit) expense of $0.  For the three and nine months ended December 31, 2008, the gain on sale of discontinued operations for the Electronics Cooling business has been presented net of income tax (benefit) expense of $(369) and $400, respectively.

Note 7: Earnings Per Share

Effective April 1, 2009, the Company adopted new guidance issued by the FASB that requires unvested share-based payment awards that contain non-forfeitable rights to dividends (whether paid or unpaid) to be treated as participating securities and included in the computation of basic earnings per share.  The new guidance requires retrospective application; accordingly, prior periods have been retrospectively adjusted.  Because the Company’s unvested restricted share awards do not contractually participate in its losses, the Company has not allocated such losses to the unvested restricted share awards in computing basic earnings per share, using the two-class method, for fiscal 2009.  The adoption of this guidance had no impact on the Company’s basic and diluted earnings per share for the three and nine months ended December 31, 2008.

11

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

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

   
Three months ended
December 31
    
Nine months ended
December 31
  
   
2009
    
2008
    
2009
    
2008
  
Basic:
                        
Earnings (loss) from continuing operations
   $ 2,125     $ (56,511 )   $ (8,403 )   $ (62,834 )
Less: Dividends and undistributed earnings attributable to unvested shares
     (9 )     (18 )     -       (56 )
Net earnings (loss) from continuing operations available to common shareholders
     2,116       (56,529 )     (8,403 )     (62,890 )
Discontinued operations:
                                
Net earnings (loss) from discontinued operations, net of taxes
     1,654       454       (8,778 )     1,338  
Less:  Undistributed earnings attributable to unvested shares
     (7 )     (2 )     -       (8 )
Net earnings (loss) from discontinued operations available to common shareholders
     1,647       452       (8,778 )     1,330  
Net earnings (loss) available to common shareholders
   $ 3,763     $ (56,077 )   $ (17,181 )   $ (61,560 )
                                 
Basic Earnings Per Share:
                                
Weighted average shares outstanding - basic
     45,941       32,093       37,066       32,066  
                                 
Earnings (loss) from continuing operations per common share
   $ 0.05     $ (1.76 )   $ (0.23 )   $ (1.96 )
Net earnings (loss) from discontinued operations per common share
     0.03       0.01       (0.23 )     0.04  
Net earnings (loss) per common share - basic
   $ 0.08     $ (1.75 )   $ (0.46 )   $ (1.92 )
                                 
Diluted:
                                
Earnings (loss) from continuing operations
   $ 2,125     $ (56,511 )   $ (8,403 )   $ (62,834 )
Less: Dividends and undistributed earnings attributable to unvested shares
     (7 )     (18 )     -       (56 )
Net earnings (loss) from continuing operations available to common shareholders
     2,118       (56,529 )     (8,403 )     (62,890 )
Discontinued operations:
                                
Net earnings (loss) from discontinued operations, net of taxes
     1,654       454       (8,778 )     1,338  
Less:  Undistributed earnings attributable to unvested shares
     (5 )     (2 )     -       (8 )
Net earnings (loss) from discontinued operations available to common shareholders
     1,649       452       (8,778 )     1,330  
Net earnings (loss) available to common shareholders
   $ 3,767     $ (56,077 )   $ (17,181 )   $ (61,560 )
                                 
Diluted Earnings Per Share:
                                
Weighted average shares outstanding - basic
     45,941       32,093       37,066       32,066  
Effect of dilutive securities
     303       -       -       -  
Weighted average shares outstanding - diluted
     46,244       32,093       37,066       32,066  
                                 
Earnings (loss) from continuing operations per common share
   $ 0.05     $ (1.76 )   $ (0.23 )   $ (1.96 )
Net earnings (loss) from discontinued operations per common share
     0.03       0.01       (0.23 )     0.04  
Net earnings (loss) per common share - diluted
   $ 0.08     $ (1.75 )   $ (0.46 )   $ (1.92 )

For the three and nine months ended December 31, 2009, the calculation of diluted earnings per share excludes all potentially dilutive shares which includes 2,257 and 2,822, respectively, stock options as these shares were anti-dilutive.  For the three and nine months ended December 31, 2008, the calculation of diluted earnings per share excludes all potentially dilutive shares which includes 2,617 and 2,616 stock options, respectively, as these shares were anti-dilutive.

12

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

Note 8: Comprehensive Income (Loss)

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

   
Three months ended
December 31
    
Nine months ended
December 31
  
   
2009
    
2008
    
2009
    
2008
  
Net earnings (loss)
   $ 3,779     $ (56,057 )   $ (17,181 )   $ (61,496 )
Foreign currency translation
     (4,757 )     (20,415 )     36,362       (70,759 )
Cash flow hedges
     1,385       (7,374 )     5,843       (13,580 )
Change in benefit plan adjustment
     6       3,928       (236 )     8,184  
Post-retirement plan amendment
     -       -       -       8,978  
Total comprehensive income (loss)
   $ 413     $ (79,918 )   $ 24,788     $ (128,673 )

Note 9: Inventories

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

   
December 31, 2009
    
March 31, 2009
  
Raw materials and work in process
   $ 66,002     $ 64,159  
Finished goods
     26,157       23,918  
Total inventories
   $ 92,159     $ 88,077  

Note 10: Property, Plant and Equipment

Property, plant and equipment consisted of the following:

   
December 31, 2009
    
March 31, 2009
  
Gross property, plant and equipment
   $ 1,117,853     $ 1,046,929  
Less accumulated depreciation
     (674,879 )     (620,364 )
Net property, plant and equipment
   $ 442,974     $ 426,565  

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

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

13

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

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

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.  These measures are aimed at realigning the Company’s manufacturing operations, improving profitability and strengthening global competitiveness.  The Tübingen, Germany facility closure was completed at the end of the third quarter of fiscal 2010.  The Pemberville, Ohio closure is anticipated to be completed by the end of fiscal 2010 and the Logansport, Indiana closure is anticipated to be completed in the first quarter of fiscal 2011. The Camdenton, Missouri closure is anticipated to be completed by the end of fiscal 2012.

During fiscal 2009, the Company completed workforce reductions across all business segments.  The completed workforce reductions included approximately a 25 percent reduction of the workforce in the Company’s Racine, Wisconsin headquarters and a significant reduction throughout its European facilities including its European headquarters in Bonlanden, Germany.

On October 22, 2009, the Company announced the closure of its Harrodsburg, Kentucky manufacturing facility.  This closure is anticipated to be completed in the first quarter of fiscal 2011.

Since the commencement of these plant closures and workforce reductions, the Company has incurred $33,420 of termination charges, $1,863 of pension curtailment charges and $15,120 of other closure costs in the aggregate.  The Company also anticipates that it will incur the following additional costs through fiscal 2012 as a result of these closures: $600 of employee-related costs and $4,500 of other costs such as equipment moving costs, accelerated depreciation and miscellaneous facility closing costs.  In addition, the Company anticipates that it will incur additional cash expenditures of approximately $10,000 related to these closures.

14

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

Changes in the accrued restructuring liability for the three and nine months ended December 31, 2009 and 2008 were comprised of the following, related to the above-described restructuring activities:

   
Three months ended December 31
  
   
2009
    
2008
  
Termination Benefits:
            
Balance, September 30
   $ 8,912     $ 6,283  
Additions
     909       24,927  
Adjustments
     147       (4 )
Effect of exchange rate changes
     (52 )     714  
Payments
     (3,630 )     (620 )
Balance, December 31
   $ 6,286     $ 31,300  


   
Nine months ended December 31
  
   
2009
    
2008
  
Termination Benefits:
            
Balance, April 1
   $ 21,412     $ 5,161  
Additions
     2,241       27,576  
Adjustments
     (3,148 )     (519 )
Effect of exchange rate changes
     855       714  
Payments
     (15,074 )     (1,632 )
Balance, December 31
   $ 6,286     $ 31,300  

The following is the summary of restructuring and other repositioning costs recorded relative to the above-described programs during the three and nine months ended December 31, 2009 and 2008:

   
Three months ended
December 31
    
Nine months ended
December 31
  
   
2009
    
2008
    
2009
    
2008
  
Restructuring expense (income):
                        
Employee severance and related benefits
   $ 1,056     $ 24,923     $ (907 )   $ 27,057  
Non-cash employee related benefits
     -       388       -       1,073  
Total restructuring expense (income)
     1,056       25,311       (907 )     28,130  
                                 
Other repositioning costs:
                                
Consulting fees
     262       720       1,485       3,219  
Miscellaneous other closure costs
     1,863       1,170       4,119       3,745  
Total other repositioning costs
     2,125       1,890       5,604       6,964  
Total restructuring and other repositioning expense
   $ 3,181     $ 27,201     $ 4,697     $ 35,094  

The total restructuring and other repositioning costs of $3,181 and $4,697 were recorded in the consolidated statements of operations for the three and nine months ended December 31, 2009, respectively, as follows: $1,863 and $4,119 were recorded as a component of cost of sales; $262 and $1,485 were recorded as a component of selling, general and administrative expenses; and $1,056 was recorded as restructuring expense and $907 was recorded as restructuring income. The Company accrues severance in accordance with its written plan, procedures and relevant statutory requirements. Restructuring income relates to reversals of severance liabilities due to employee terminations prior to completion of required retention periods and favorable negotiations of severance packages.  During the second quarter of fiscal 2010, final severance terms were reached including an early retirement option in lieu of severance.  The total restructuring and other repositioning costs of $27,201 and $35,094 were recorded in the consolidated statements of operations for the three and nine months ended December 31, 2008, respectively, as follows: $1,597 and $4,172 were recorded as a component of cost of sales; $293 and $2,792 were recorded as a component of selling, general and administrative expenses; and $25,311 and $28,130 were recorded as restructuring expense.

15

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

Note 12: Discontinued Operations and Assets Held for Sale

During fiscal 2009, the Company announced the intended divestiture of the South Korea-based heating, ventilating and air conditioning (HVAC) business.  Based on the accounting for the disposal of long-lived assets, it was determined during the fourth quarter of fiscal 2009 that the South Korean business should be presented as held for sale and as a discontinued operation in the consolidated financial statements.  The South Korean business was formerly presented as part of the Original Equipment – Asia segment.  The balance sheet amounts relating to the South Korean business have been reclassified to assets held for sale and liabilities of business held for sale on the consolidated balance sheet, and the operating results have been separately presented as a discontinued operation in the consolidated statement of operations for all periods presented.  On December 23, 2009, the Company sold 100 percent of the shares of South Korea-based HVAC business for net cash proceeds of $11,249.  The Company recorded a loss on sale, net of taxes, of $430 for the three months ended December 31, 2009.

During the three and nine months ended December 31, 2009, the Company recorded environmental cleanup and remediation expenses of $170 and $841, respectively, as a component of loss from discontinued operations related to a facility in the Netherlands that was sold as part of the spin off of the Company’s Aftermarket business on July 22, 2005.

During the first quarter of fiscal 2009, the Company sold substantially all of the assets of its Electronics Cooling business for $13,149, $2,510 of which is in the form of seller financing with subordinated, promissory notes delivered by the buyer, with the remaining sales proceeds of $10,639 received in cash.   Transaction expenses of $437 were paid by the Company during the first quarter of fiscal 2009. During the third quarter of fiscal 2009, the Company paid $101 based on the finalization of working capital received by the purchaser. The Company recorded a gain on sale, net of income taxes, of $369 and $2,066 for the three and nine months ended December 31, 2008.

16

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

The major classes of assets and liabilities held for sale of the South Korean business at March 31, 2009 included in the consolidated balance sheet as follows:

   
March 31, 2009
  
Assets held for sale:
      
Cash
   $ -  
Receivables - net
     17,533  
Inventories
     9,097  
Other current assets
     2,543  
Total current assets held for sale
     29,173  
Property, plant and equipment - net
     33,500  
Other noncurrent assets
     828  
Total noncurrent assets held for sale
     34,328  
Total assets held for sale
   $ 63,501  
         
Liabilities of business held for sale:
        
Accounts payable
   $ 20,048  
Accrued expenses and other current liabilities
     7,970  
Total current liabilities of business held for sale
     28,018  
Other noncurrent liabilities
     12,181  
Total liabilities of business held for sale
   $ 40,199  

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

   
Three months ended
December 31
    
Nine months ended
December 31
  
   
2009
    
2008
    
2009
    
2008
  
                         
Net sales
   $ 54,510     $ 39,622     $ 136,762     $ 146,566  
Cost of sales and other expenses
     51,981       39,438       144,572       146,624  
Earnings (loss) before income taxes
     2,529       184       (7,810 )     (58 )
Provision for income taxes
     445       99       538       670  
Earnings (loss) from discontinued operations
   $ 2,084     $ 85     $ (8,348 )   $ (728 )

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

17

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

Note 13: Goodwill and Intangible Assets

Changes in the carrying amount of goodwill during the first nine months of fiscal 2010, by segment and in the aggregate, are summarized in the following table:

   
OE -
    
South
    
Commercial
        
   
Asia
    
America
    
Products
    
Total
  
                         
Balance, March 31, 2009
   $ 517     $ 10,632     $ 14,490     $ 25,639  
Fluctuations in foreign currency
     2       3,520       1,623       5,145  
Balance, December 31, 2009
   $ 519     $ 14,152     $ 16,113     $ 30,784  

The Company conducted its annual assessment for goodwill impairment in the third quarter of fiscal 2010 by applying a fair value based test in accordance with accounting for goodwill and other intangible assets. The fair value of the Company’s reporting units with goodwill exceeded their respective book values.  A goodwill impairment charge of $9,005 was recorded in the third quarter of fiscal 2009 in the Original Equipment – Europe segment due to a declining outlook for this segment.

Intangible assets are comprised of the following:

   
December 31, 2009
    
March 31, 2009
  
   
Gross
          
Net
    
Gross
          
Net
  
   
Carrying
    
Accumulated
    
Intangible
    
Carrying
    
Accumulated
    
Intangible
  
   
Value
    
Amortization
    
Assets
    
Value
    
Amortization
    
Assets
  
                                     
Amortized intangible assets:
                                    
Patents and product technology
   $ 3,952     $ (3,952 )   $ -     $ 3,952     $ (3,952 )   $ -  
Trademarks
     9,125       (2,839 )     6,286       8,395       (2,192 )     6,203  
Other intangibles
     428       (333 )     95       352       (204 )     148  
Total amortized intangible assets
     13,505       (7,124 )     6,381       12,699       (6,348 )     6,351  
Unamortized intangible assets:
                                                
Tradename
     966       -       966       690       -       690  
Total intangible assets
   $ 14,471     $ (7,124 )   $ 7,347     $ 13,389     $ (6,348 )   $ 7,041  

The Company conducted its annual impairment assessment of intangible assets with indefinite lives in the third quarter of fiscal 2010 in accordance with accounting for goodwill and other intangible assets and determined that no impairment charge was necessary.

18

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

Amortization expense was $172 and $226 for the three months ended December 31, 2009 and 2008, respectively, and $505 and $742 for the nine months ended December 31, 2009 and 2008, respectively.  Total estimated annual amortization expense expected for the remainder of fiscal year 2010 through 2015 and beyond is as follows:

   
Estimated
Fiscal
  
Amortization
Year
  
Expense
     
Remainder of 2010
  
$170
2011
  
704
2012
  
608
2013
  
608
2014
  
608
2015 & Beyond
  
3,683

Note 14: Indebtedness

The Company has $75,000, 10.0 percent Senior Notes issued in a private placement, maturing on September 29, 2015 (“2015 Notes”), and $50,000, 10.75 percent Senior Notes maturing on December 7, 2017 (“2017 Notes A”) and $25,000, 10.75 percent Senior Notes maturing on December 7, 2017 issued in a second private placement (“2017 Notes B”).  The Company also has a $175,000 revolving credit facility which is due to expire in July 2011.  On May 15, 2009, Modine Holding GmbH and Modine Europe GmbH, each a subsidiary of the Company, entered into a Credit Facility Agreement with an available line of 15,000 euro ($21,475 U.S. equivalent) with Deutsche Bank AG.  The credit facility is available until May 14, 2010 and is secured by the assets of Modine Holding GmbH and its subsidiaries.  Under the terms of the credit agreement, the availability under the domestic revolving credit facility was reduced by $15,000 to $160,000 upon the effective date of the Deutsche Bank AG credit facility.

The Company was required to prepay its outstanding revolving credit facility and Senior Note borrowings with 50% of the net proceeds from the September 30, 2009 common stock offering, resulting in a mandatory prepayment of $46,438.  In conjunction with the mandatory prepayment of the Senior Note borrowings, the Company was required to pay a prepayment penalty of $3,449 to the holders of the Senior Notes.  The availability under the revolving credit facility was reduced by $17,890 to $142,110 for the portion of the mandatory prepayment that was applied to the outstanding revolving credit facility.  In addition to the mandatory prepayment, the Company voluntarily repaid its outstanding revolving credit facility with the remaining proceeds from the common stock offering.

At December 31, 2009, the Company had $60,726 outstanding on the 2015 Notes, $40,484 outstanding on the 2017 Notes A and $20,242 outstanding on the 2017 Notes B.  There was $2,000 outstanding under the revolving credit facility.

At December 31, 2009, the Company had $136,142 available for future borrowings under the revolving credit facility.  In addition to this credit facility, unused lines of credit also exist in Asia, Europe and Brazil, totaling $38,761.  In the aggregate, the Company had total available lines of credit of $174,903 at December 31, 2009.

The Company was in compliance with its debt covenants as of December 31, 2009.

The fair value of long-term debt is estimated by discounting the future cash flows at rates offered to the Company for similar debt instruments of comparable maturities.  At December 31, 2009 and March 31, 2009, the carrying value of Modine’s long-term debt approximated fair value, with the exception of the Senior Notes, which have a fair value of approximately $128,872 and $124,418 at December 31, 2009 and March 31, 2009, respectively.

19

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

Note 15: Financial Instruments

Concentrations of Credit Risk: The Company invests excess cash in investment quality short-term liquid debt instruments.  Such investments are made only in instruments issued by high quality institutions. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable.  The Company sells a broad range of products that provide thermal solutions to a diverse group of customers operating throughout the world.  At December 31, 2009 and March 31, 2009, approximately 43 percent of the Company's trade accounts receivables were from the Company's top ten individual customers.  These customers operate primarily in the automotive, truck and heavy equipment markets and are all influenced by many of the same market and general economic factors.  To reduce credit risk, the Company performs periodic customer credit evaluations and actively monitors their financial condition and developing business news.  The Company does not generally require collateral or advanced payments from its customers, but does so in those cases where a substantial credit risk is identified.  Credit losses to customers operating in the markets served by the Company have not been material.  Total bad debt write-offs have been well below one percent of outstanding trade receivable balances for the presented periods.  See Note 20 for further discussion on market, credit and counterparty risks.

Inter-Company Loans Denominated in Foreign Currencies:  The Company has certain foreign-denominated long-term inter-company loans that are sensitive to foreign exchange rates.  At December 31, 2009, Modine, Inc., a wholly owned subsidiary of the Company, had an inter-company loan totaling $6,915 with its wholly owned subsidiary, Modine do Brasil Sistemas Termicos Ltda. (Modine Brazil), that matures on May 8, 2011.  Modine Brazil paid $1,935 and $7,985 on this inter-company loan during the three and nine months ended December 31, 2009, respectively.

The Company also has other inter-company loans outstanding at December 31, 2009 as follows:
 
·
$11,892 loan to its wholly owned subsidiary, Modine Thermal Systems Private Limited (Modine India), that matures on April 30, 2013; and
 
·
$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.

These inter-company loans are sensitive to movement in foreign exchange rates, and the Company does not have any derivative instruments to hedge this exposure.

Note 16: Foreign Exchange Contracts/Derivatives/Hedges

Modine uses derivative financial instruments 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 natural gas.  The Company’s strategy in entering into these contracts is to reduce its exposure to changing purchase prices for future purchases of these commodities.  These contracts have been designated as cash flow hedges by the Company.  Accordingly, unrealized gains and losses on these contracts are deferred as a component of other comprehensive income (loss), and recognized as a component of earnings at the same time that the underlying purchases of aluminum and natural gas impact earnings.  During the nine months ended December 31, 2009, the Company did not enter into any new futures contracts for commodities.

20

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

Foreign exchange contracts: Modine maintains a foreign exchange risk management strategy that uses derivative financial instruments in a limited way to mitigate foreign currency exchange risk.  Modine periodically enters into foreign currency exchange contracts to hedge specific foreign currency denominated transactions.  Generally, these contracts have terms of 90 or fewer days.  The effect of this practice is to minimize the impact of foreign exchange rate movements on Modine’s earnings.  Modine’s foreign currency exchange contracts do not subject it to significant risk due to exchange rate movements because gains and losses on these contracts offset gains and losses on the assets and liabilities being hedged.  As of December 31, 2009, the Company had no outstanding forward foreign exchange contracts.

The Company has a number of investments in wholly owned foreign subsidiaries and non-consolidated foreign joint ventures. The net assets of these subsidiaries are exposed to currency exchange rate volatility.  From time to time, the Company uses non-derivative financial instruments to hedge, or offset, this exposure.  As of December 31, 2009, there were no outstanding foreign-denominated borrowings on the parent company’s balance sheet to offset this exposure.

Interest rate derivatives: On August 5, 2005, the Company entered into a one-month forward ten-year treasury interest rate lock in anticipation of a private placement borrowing which occurred on September 29, 2005.  The contract was settled on September 1, 2005 with a loss of $1,794.  On October 25, 2006, the Company entered into two forward starting swaps in anticipation of the $75,000 private placement debt offering that occurred on December 7, 2006.  On November 14, 2006, the fixed interest rate of the private placement borrowing was locked and, accordingly, the Company terminated and settled the forward starting swaps at a loss of $1,812.  These interest rate derivatives were treated as cash flow hedges of forecasted transactions.  Accordingly, the losses are reflected as a component of accumulated other comprehensive income (loss), and are being amortized to interest expense over the respective lives of the borrowings.  The Company amortized $462 of the interest rate derivatives in proportion with the mandatory prepayment of the Senior Notes on September 30, 2009.

The fair value of the derivative financial instruments recorded in the consolidated balance sheets as of December 31, 2009 are as follows:

 
Balance Sheet Location
  
December 31, 2009
  
Derivative instruments designated as cash flow hedges:
        
Commodity derivatives
Accrued expenses and other current liabilities
   $ 1,420  

21

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

The amounts recorded in accumulated other comprehensive income (loss) (AOCI) as of December 31, 2009, and in the consolidated statement of operations for the three and nine months ended December 31, 2009 are as follows:

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

Note 17: Fair Value Measurements

Fair value measurements are classified under the following hierarchy:

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

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

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

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

Derivative financial instruments
As part of the Company’s risk management strategy, Modine enters into derivative transactions to mitigate certain identified exposures.  The derivative instruments include currency options and commodity derivatives.  These are not exchange traded and are customized over-the-counter derivative transactions.  These derivative exposures are with 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.

22

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

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

At December 31, 2009, 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)
   $ 1,139     $ -     $ -     $ 1,139  
Total assets
   $ 1,139     $ -     $ -     $ 1,139  
                                 
Liabilities:
                                
Derivative financial instruments
   $ -     $ 1,420     $ -     $ 1,420  
Deferred compensation obligation
     2,351       -       -       2,351  
Total liabilitites
   $ 2,351     $ 1,420     $ -     $ 3,771  

Note 18: Product Warranties and Other Commitments

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

Changes in the warranty liability were as follows:

   
Three months ended December 31
  
   
2009
    
2008
  
             
Balance, October 1
   $ 11,029     $ 10,534  
Accruals for warranties issued in current period
     1,381       2,005  
Reversals related to pre-existing warranties
     (619 )     (230 )
Settlements made
     (2,038 )     (2,651 )
Effect of exchange rate changes
     (37 )     (32 )
Balance, December 31
   $ 9,716     $ 9,626  

23

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

   
Nine months ended December 31
  
   
2009
    
2008
  
             
Balance, April 1
   $ 9,107     $ 14,459  
Accruals for warranties issued in current period
     4,530       5,545  
Accruals (reversals) related to pre-existing warranties
     794       (770 )
Settlements made
     (5,651 )     (8,405 )
Effect of exchange rate changes
     936       (1,203 )
Balance, December 31
   $ 9,716     $ 9,626  

Commitments: At December 31, 2009, the Company had capital expenditure commitments of $32,768.  Significant commitments include tooling and equipment expenditures for new and renewal platforms with new and current customers in Europe and North America.

Note 19: Segment Information

During the first quarter of fiscal 2010, the Company implemented certain management reporting changes resulting in the transfer of support department costs originally included in Corporate and administrative into the Original Equipment – North America segment.  The previously reported segment results for the Corporate and administrative and the Original Equipment – North America segments have been retrospectively adjusted for comparative purposes.

During the second quarter of fiscal 2010, the Company implemented certain management reporting changes resulting in the realignment of the Fuel Cell segment into the Original Equipment – North America segment.  The previously reported segment results for the Original Equipment – North America segment have been retrospectively adjusted for comparative purposes.

24

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

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

   
Three months ended
December 31
    
Nine months ended
December 31
  
   
2009
    
2008
    
2009
    
2008
  
Sales :
                        
Original Equipment - Asia
   $ 8,934     $ 4,172     $ 22,411     $ 13,221  
Original Equipment - Europe
     126,980       112,935       344,588       499,921  
Original Equipment - North America
     101,296       137,702       293,559       399,641  
South America
     32,254       28,669       82,871       114,787  
Commercial Products
     48,371       48,796       127,956       150,866  
Segment sales
     317,835       332,274       871,385       1,178,436  
Corporate and administrative
     481       897       2,019       2,631  
Eliminations
     (15,926 )     (7,593 )     (35,084 )     (27,130 )
Sales from continuing operations
   $ 302,390     $ 325,578     $ 838,320     $ 1,153,937  
                                 
Operating earnings (loss):
                                
Original Equipment - Asia
   $ (675 )   $ (2,173 )   $ (3,630 )   $ (6,339 )
Original Equipment - Europe
     6,400       (43,351 )     15,757       (6,865 )
Original Equipment - North America
     (541 )     (8,798 )     3,552       (32,980 )
South America
     2,788       1,040       6,296       11,648  
Commercial Products
     7,927       5,178