Edgar Filing: MODINE MANUFACTURING CO

form10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2011

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

For the transition period from ____________ to ____________

Commission file number 1-1373

MODINE MANUFACTURING COMPANY

(Exact name of registrant as specified in its charter)

WISCONSIN		39-0482000
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1500 DeKoven Avenue, Racine, Wisconsin		53403
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes R No ¨

Indicate by check mark whether the registrant 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 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨	Accelerated Filer R

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 ¨ NoR

The number of shares outstanding of the registrant's common stock, $0.625 par value, was 46,726,830 at February 1, 2012.

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.	24
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.	34
	Item 4. Controls and Procedures.	35
PART II. OTHER INFORMATION		36
	Item 1. Legal Proceedings.	36
	Item 5. Other Information	36
	Item 6. Exhibits.	36
SIGNATURE		37

Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

MODINE MANUFACTURING COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and nine months ended December 31, 2011 and 2010

(In thousands, except per share amounts)

(Unaudited)

	Three months ended December 31					Nine months ended December 31
	2011		2010			2011		2010
Net sales	$	373,282	$	360,043		$	1,188,435	$	1,051,477
Cost of sales		313,539		303,496			997,242		880,185
Gross profit		59,743		56,547			191,193		171,292
Selling, general and administrative expenses		43,523		47,405			143,036		136,323
Income from operations		16,220		9,142			48,157		34,969
Interest expense		2,893		2,602			9,180		30,239
Other expense (income) – net		1,667		(179	)		7,552		(2,191	)
Earnings from continuing operations before income taxes		11,660		6,719			31,425		6,921
Provision for income taxes		3,618		1,134			9,642		10,000
Earnings (loss) from continuing operations		8,042		5,585			21,783		(3,079	)
Earnings (loss) from discontinued operations (net of income taxes)		364		(34	)		737		(3,042	)
Net earnings (loss)		8,406		5,551			22,520		(6,121	)
Less: Net earnings attributable to noncontrolling interest		110		-			139		-
Net earnings (loss) attributable to Modine	$	8,296	$	5,551		$	22,381	$	(6,121	)

Earnings (loss) from continuing operations attributable to Modine common shareholders:
Basic	$	0.17	$	0.12		$	0.46	$	(0.07	)
Diluted	$	0.17	$	0.12		$	0.46	$	(0.07	)

Net earnings (loss) attributable to Modine common shareholders:
Basic	$	0.18	$	0.12		$	0.48	$	(0.13	)
Diluted	$	0.18	$	0.12		$	0.48	$	(0.13	)

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

Index

MODINE MANUFACTURING COMPANY

CONSOLIDATED BALANCE SHEETS

December 31, 2011 and March 31, 2011

(In thousands, except per share amounts)

(Unaudited)

	December 31, 2011			March 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	26,098		$	32,930
Trade receivables, less allowance for doubtful accounts of $575 and $754		185,867			219,189
Inventories		129,526			122,629
Deferred income taxes and other current assets		56,448			52,877
Total current assets		397,939			427,625
Noncurrent assets:
Property, plant and equipment – net		397,176			430,295
Investment in affiliates		3,813			3,863
Goodwill		29,236			31,572
Intangible assets – net		5,850			6,533
Other noncurrent assets		13,818			17,051
Total noncurrent assets		449,893			489,314
Total assets	$	847,832		$	916,939
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt	$	15,901		$	8,825
Long-term debt – current portion		61			262
Accounts payable		132,587			177,549
Accrued compensation and employee benefits		43,376			63,163
Income taxes		7,485			3,739
Accrued expenses and other current liabilities		60,930			63,003
Total current liabilities		260,340			316,541
Noncurrent liabilities:
Long-term debt		149,550			138,582
Deferred income taxes		10,774			9,988
Pensions		51,604			62,926
Postretirement benefits		6,003			5,967
Other noncurrent liabilities		14,548			19,983
Total noncurrent liabilities		232,479			237,446
Total liabilities		492,819			553,987
Commitments and contingencies (See Note 19)
Shareholders' equity:
Preferred stock, $0.025 par value, authorized 16,000 shares, issued - none		-			-
Common stock, $0.625 par value, authorized 80,000 shares, issued 47,310 and 47,105 shares		29,569			29,440
Additional paid-in capital		170,195			166,359
Retained earnings		226,067			203,686
Accumulated other comprehensive loss		(57,353	)		(22,533	)
Treasury stock at cost: 589 and 559 shares, respectively		(14,461	)		(14,000	)
Total Modine shareholders' equity		354,017			362,952
Noncontrolling interest		996			-
Total equity		355,013			362,952
Total liabilities and shareholders' equity	$	847,832		$	916,939

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 nine months ended December 31, 2011 and 2010

(In thousands)

(Unaudited)

	Nine months ended December 31
	2011			2010

Cash flows from operating activities:
Net earnings (loss)	$	22,520		$	(6,121	)
Adjustments to reconcile net earnings (loss) with net cash provided by(used for) operating activities:
Depreciation and amortization		43,368			42,127
Other – net		17,102			7,398
Net changes in operating assets and liabilities, excluding dispositions		(64,687	)		(44,824	)
Net cash provided by (used for) operating activities		18,303			(1,420	)

Cash flows from investing activities:
Expenditures for property, plant and equipment		(45,262	)		(31,119	)
Proceeds from dispositions of assets		1,281			12,418
Settlement of derivative contracts		(1,762	)		(48	)
Other – net		610			3,709
Net cash used for investing activities		(45,133	)		(15,040	)

Cash flows from financing activities:
Short-term debt – net		4,511			2,919
Borrowings of long-term debt		108,398			229,699
Repayments of long-term debt		(92,528	)		(220,026	)
Capital contribution by noncontrolling interest in joint venture		936			-
Book overdrafts		-			(407	)
Other – net		(13	)		950
Net cash provided by financing activities		21,304			13,135

Effect of exchange rate changes on cash		(1,306	)		83
Net decrease in cash and cash equivalents		(6,832	)		(3,242	)

Cash and cash equivalents at beginning of period		32,930			43,657
Cash and cash equivalents at end of period	$	26,098		$	40,415

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 applied on a basis consistent with those principles used in the preparation of the annual consolidated financial statements by Modine Manufacturing Company (Modine or the Company) for the year ended March 31, 2011. The financial statements include all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods. Results for the first nine months of fiscal 2012 are not necessarily indicative of the results to be expected for the full year.

These financial statements should be read in conjunction with the consolidated financial statements and related notes in Modine’s Annual Report on Form 10-K for the year ended March 31, 2011.

Note 2: Significant Accounting Policies

Restricted cash: At December 31, 2011 and March 31, 2011, the Company had long-term restricted cash of $3,883 and $4,682, respectively, included in other noncurrent assets, consisting of $1,533 and $2,332, respectively, to secure long-term employee compensation arrangements for certain employees in Europe and $2,350 to collateralize insurance liabilities with an insurance carrier in North America.

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

Revision of prior period financial statements: As described in Note 1 and Note 26 of the Notes to Consolidated Financial Statements in Modine’s Annual Report on Form 10-K for the year ended March 31, 2011, the quarterly results for fiscal 2011 have been revised as a result of errors identified during fiscal 2011 which were not considered material individually or in the aggregate to previously issued financial statements but were considered significant to the quarters in which they were identified. For the three months ended December 31, 2010, cost of goods sold increased $548, selling, general and administrative expenses increased $188, provision for income taxes decreased $297 and earnings from continuing operations decreased $439 as a result of the revisions. For the nine months ended December 31, 2010, net sales increased $363, cost of goods sold increased $2,467, gross profit decreased $2,104, selling, general and administrative expenses increased $799, provision for income taxes decreased $158 and earnings from continuing operations decreased $2,745 as a result of the revisions. For the three and nine months ended December 31, 2010, diluted earnings per share from continuing operations and diluted net earnings per share decreased $0.01 and $0.06, respectively, as a result of the revisions.

Accounting standards changes and new accounting pronouncements: In October 2009, the Financial Accounting Standards Board (FASB) issued updated guidance on revenue arrangements with multiple deliverables, which addresses the unit of accounting for multiple-deliverable arrangements and revises the method by which consideration is allocated among the units of accounting. The overall consideration is allocated to each deliverable by establishing a selling price for individual deliverables based on a hierarchy of evidence, including vendor-specific objective evidence, other third party evidence of the selling price, or the reporting entity’s best estimate of the selling price of individual deliverables in the arrangement. This guidance was effective for the Company on a prospective basis on April 1, 2011. The adoption of this guidance did not have a material impact on the consolidated financial statements.

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

In June 2011, the FASB issued an amendment to the accounting guidance for the presentation of comprehensive income. This amendment removes one of the three presentation options for presenting the components of other comprehensive income as part of the statement of changes in shareholders’ equity and requires either a single continuous statement of net income and other comprehensive income or a two consecutive statement approach. This amendment shall be applied retrospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The Company is currently evaluating the impact of this amendment.

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

Note 3: Employee Benefit Plans

During the three months ended December 31, 2011 and 2010, the Company recorded compensation expense of $994 and $1,076, respectively, related to its defined contribution employee benefit plans. During the nine months ended December 31, 2011 and 2010, the Company recorded compensation expense of $2,879 and $3,084, respectively, related to its defined contribution employee benefit plans.

During the three months ended December 31, 2011 and 2010, the Company elected to contribute $2,150 and $2,529, respectively, to its U.S. pension plans. During the nine months ended December 31, 2011 and 2010, the Company elected to contribute $9,350 and $14,628, respectively, to its U.S. pension plans.

Costs for Modine's pension and postretirement benefit plans for the three and nine months ended December 31, 2011 and 2010 include the following components:

	Three months ended December 31												Nine months ended December 31
	Pension						Postretirement						Pension						Postretirement
	2011			2010			2011			2010			2011			2010			2011			2010
Service cost	$	419		$	483		$	11		$	11		$	1,270		$	1,433		$	32		$	33
Interest cost		3,486			3,405			87			85			10,493			10,288			260			253
Expected return on plan assets		(3,847	)		(3,806	)		-			-			(11,543	)		(11,418	)		-			-
Amortization of:
Unrecognized net loss (gain)		1,996			1,918			(6	)		(28	)		5,986			5,752			(18	)		(84	)
Unrecognized prior service cost (credit)		-			89			(416	)		(446	)		-			267			(1,247	)		(1,336	)
Adjustment for settlement		-			8			-			-			-			23			-			-
Curtailment gain		-			-			-			-			-			-			-			(2,075	)
Net periodic benefit cost (income)	$	2,054		$	2,097		$	(324	)	$	(378	)	$	6,206		$	6,345		$	(973	)	$	(3,209	)

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

Note 4: Stock-Based Compensation

Stock-based compensation consists of stock options, restricted stock granted for retention and performance and discretionary unrestricted stock. Compensation 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 $941 and $687 for the three months ended December 31, 2011 and 2010, respectively. Modine recognized stock-based compensation cost of $3,519 and $3,203 for the nine months ended December 31, 2011 and 2010, respectively. The performance component of awards granted under the long-term incentive plan during the second quarter of fiscal 2012 is based on a target return on average capital employed (ROACE) and a target improvement in economic profit at the end of the three year performance period. ROACE is defined as net earnings, adding back after-tax interest expense and adjusted to exclude unusual, non-recurring or extraordinary non-cash charges and cash restructuring and repositioning charges in excess of $4,000; divided by the average total debt plus shareholders’ equity. Economic profit is defined as ROACE minus a fixed weighted average cost of capital, multiplied by total debt plus shareholders’ equity.

The following tables present, by type, the fair market value of stock-based compensation awards granted during the nine months ended December 31, 2011 and 2010:

	Nine months ended December 31,
	2011				2010
			Fair Value				Fair Value
Type of award	Shares		Per Award		Shares		Per Award
Common stock options		112.9	$	10.45		303.4	$	5.96
Unrestricted common stock		27.9	$	14.93		60.3	$	8.43
Restricted common stock - retention		63.2	$	14.93		97.2	$	9.26
Restricted common stock - performance based		189.5	$	14.93		291.6	$	9.26

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

	Nine months ended December 31,
	2011			2010
Expected life of awards in years		6.3			6.3
Risk-free interest rate		1.93	%		2.36	%
Expected volatility of the Company's stock		79.56	%		77.99	%
Expected dividend yield on the Company's stock		0.00	%		0.00	%
Expected forfeiture rate		2.50	%		2.50	%

As of December 31, 2011, 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	$	1,504		2.0
Restricted common stock - retention		1,487		2.8
Restricted common stock - performance based		3,511		1.9
Total	$	6,502		2.2

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

Note 5: Other (Expense) Income – Net

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

	Three months ended December 31						Nine months ended December 31
	2011			2010			2011			2010
Equity in earnings (loss) of non-consolidated affiliates	$	206		$	92		$	(209	)	$	317
Interest income		193			195			579			516
Foreign currency transactions		(2,116	)		(130	)		(7,982	)		1,264
Other non-operating income - net		50			22			60			94
Total other (expense) income - net	$	(1,667	)	$	179		$	(7,552	)	$	2,191

Foreign currency transactions for the three and nine months ended December 31, 2011 and 2010 were primarily comprised of foreign currency transaction (losses) gains on inter-company loans and other transactions denominated in foreign currencies.

Note 6: Income Taxes

For the three months ended December 31, 2011 and 2010, the Company’s effective income tax rate attributable to earnings from continuing operations before income taxes was 31.0 percent and 16.9 percent, respectively.

For the nine months ended December 31, 2011 and 2010, the Company’s effective tax rate attributable to earnings from continuing operations before income taxes was 30.7 percent and 144.5 percent, respectively.

The most significant factors impacting changes in the effective tax rate for the three and nine months ended December 31, 2011 as compared to prior periods were changes in the valuation allowance for certain foreign losses for which no benefit is recognized and the changing mix of foreign and domestic earnings. During the three months ended December 31, 2011, the Company continued to record a full valuation allowance against its net deferred tax assets located in the U.S. and certain foreign jurisdictions as it is more likely than not that these assets will not be realized based on historical performance. One of the Company’s Chinese subsidiaries has an $846 valuation allowance against its net deferred tax assets as a result of its cumulative loss position. The potential release of its valuation allowance may occur within the next fiscal year.

Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. Under this effective tax rate methodology, the Company applies an estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter. The tax impact of certain significant, unusual or infrequently occurring items must be recorded in the interim period in which they occur. For the nine months ended December 31, 2011, the U.S. taxing jurisdiction had year-to-date pre-tax earnings and is also forecasting pre-tax earnings for the full fiscal year. As a result, the U.S. taxing jurisdiction is no longer considered on a discrete basis but is included in the overall annual effective tax rate methodology. The impact of the Company’s operations in Germany, Austria and certain other foreign locations continue to be excluded from the overall effective tax rate methodology and recorded discretely based upon year-to-date results as these operations anticipate net operating losses for the year for which no tax benefit can be recognized. The income taxes for the Company’s other foreign operations continue to be estimated under the overall effective tax rate methodology.

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

During fiscal 2005, a German lower court ruling disallowed certain deductions for trade tax purposes. Based on this ruling, the Company established an uncertain tax position contingency for additional trade tax liability and interest. During the second quarter of fiscal 2012, the German Supreme Court affirmed the lower court finding. As a result, the uncertain tax position contingency was reversed and amended tax returns for the fiscal years 2005 through 2010 were filed resulting in an income tax payable for taxes and interest owed of $2,671. During the nine months ended December 31, 2011, a benefit for income taxes of $73 was recorded based on the finalization of the amended tax returns.

The gross liability for unrecognized tax benefits increased during the quarter by $1,650. This had a minimal impact on the effective tax rate as the majority of the liability relates to taxing jurisdictions with a valuation allowance. The Company does not anticipate the gross liability for unrecognized tax benefits to significantly change in the next twelve months other than that which will result from the expiration of the applicable statutes of limitation. The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. During the three months ended December 31, 2011, the Company was notified of a tax audit in Germany commencing in fiscal year 2013 covering fiscal years 2006 through 2010.

Note 7: Earnings Per Share

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

	Three months ended December 31						Nine months ended December 31
	2011			2010			2011			2010
Basic:
Earnings (loss) from continuing operations	$	8,042		$	5,585		$	21,783		$	(3,079	)
Less: Net earnings attributable to noncontrolling interest		(110	)		-			(139	)		-
Earnings (loss) from continuing operations attributable to Modine		7,932			5,585			21,644			(3,079	)
Less: Undistributed earnings attributable to unvested shares		(32	)		(26	)		(84	)		-
Net earnings (loss) from continuing operations available to Modine common shareholders		7,900			5,559			21,560			(3,079	)
Net earnings (loss) from discontinued operations		364			(34	)		737			(3,042	)
Less: Undistributed earnings attributable to unvested shares		(2	)		-			(3	)		-
Net earnings (loss) from discontinued operations available to Modine common shareholders		362			(34	)		734			(3,042	)
Net earnings (loss) available to Modine common shareholders	$	8,262		$	5,525		$	22,294		$	(6,121	)

Basic Earnings Per Share:
Weighted average shares outstanding - basic		46,533			46,235			46,457			46,114

Earnings (loss) from continuing operations per common share	$	0.17		$	0.12		$	0.46		$	(0.07	)
Net earnings (loss) from discontinued operations per common share		0.01			(0.00	)		0.02			(0.06	)
Net earnings (loss) per common share - basic	$	0.18		$	0.12		$	0.48		$	(0.13	)

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

	Three months ended December 31						Nine months ended December 31
	2011			2010			2011			2010
Diluted:
Earnings (loss) from continuing operations	$	8,042		$	5,585		$	21,783		$	(3,079	)
Less: Net earnings attributable to noncontrolling interest		(110	)		-			(139	)		-
Earnings (loss) from continuing operations attributable to Modine		7,932			5,585			21,644			(3,079	)
Less: Undistributed earnings attributable to unvested shares		(23	)		(12	)		(59	)		-
Net earnings (loss) from continuing operations available to Modine common shareholders		7,909			5,573			21,585			(3,079	)
Net earnings (loss) from discontinued operations		364			(34	)		737			(3,042	)
Less: Undistributed earnings attributable to unvested shares		(1	)		-			(2	)		-
Net earnings (loss) from discontinued operations available to Modine common shareholders		363			(34	)		735			(3,042	)
Net earnings (loss) available to Modine common shareholders	$	8,272		$	5,539		$	22,320		$	(6,121	)

Diluted Earnings Per Share:
Weighted average shares outstanding - basic		46,533			46,235			46,457			46,114
Effect of dilutive securities		295			657			432			-
Weighted average shares outstanding - diluted		46,828			46,892			46,889			46,114

Earnings (loss) from continuing operations per common share	$	0.17		$	0.12		$	0.46		$	(0.07	)
Net earnings (loss) from discontinued operations per common share		0.01			(0.00	)		0.02			(0.06	)
Net earnings (loss) per common share - diluted	$	0.18		$	0.12		$	0.48		$	(0.13	)

For the three and nine months ended December 31, 2011, the calculation of diluted earnings per share excludes 1,367 stock options and 188 restricted stock awards as these shares were anti-dilutive. For the three months ended December 31, 2010, the calculation of diluted earnings per share excludes 1,474 stock options as these were anti-dilutive. For the nine months ended December 31, 2010, the calculation of diluted earnings per share excludes 1,811 stock options and 24 restricted stock awards as these shares were anti-dilutive.

Note 8: Comprehensive (Loss) Income

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

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

	Three months ended December 31						Nine months ended December 31
	2011			2010			2011			2010
Net earnings (loss) attributable to Modine	$	8,296		$	5,551		$	22,381		$	(6,121	)
Foreign currency translation		(10,215	)		(3,134	)		(34,039	)		591
Cash flow hedges		1			81			(5,573	)		2,172
Change in benefit plan adjustment		1,569			1,086			4,792			2,194
Total comprehensive (loss) income	$	(349	)	$	3,584		$	(12,439	)	$	(1,164	)

Note 9: Inventories

Inventories consisted of the following:

	December 31, 2011		March 31, 2011
Raw materials and work in process	$	95,356	$	93,306
Finished goods		34,170		29,323
Total inventories	$	129,526	$	122,629

Note 10: Property, Plant and Equipment

Property, plant and equipment consisted of the following:

	December 31, 2011			March 31, 2011
Gross property, plant and equipment	$	1,077,624		$	1,102,684
Less accumulated depreciation		(680,448	)		(672,389	)
Net property, plant and equipment	$	397,176		$	430,295

During the three and nine months ended December 31, 2011, the Company recorded a loss on disposal of assets of $2,161 in the Original Equipment – Europe segment within selling, general and administrative expenses.

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

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

During the three months ended December 31, 2010, the Company sold its Tübingen, Germany facility within the Original Equipment – Europe segment for net proceeds of $7,302 and recognized a gain on sale of $2,232 within selling, general and administrative expenses. For the nine months ended December 31, 2010, the Company sold three held for sale facilities in the Original Equipment – North America and Original Equipment - Europe segments for net proceeds of $8,841 and recognized a gain on these sales of $3,258 within selling, general and administrative expenses.

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

Assets held for sale of $2,450 at December 31, 2011 and March 31, 2011, respectively, included in noncurrent assets, consist of two facilities that the Company has closed within the Original Equipment – North America segment. The Company is currently marketing the facilities held for sale.

Note 11: Restructuring, Plant Closures and Other Related Costs

During fiscal 2008, the Company announced the closure of three U.S. manufacturing plants in Camdenton, Missouri; Pemberville, Ohio; and Logansport, Indiana, along with the Tübingen, Germany facility. During the third quarter of fiscal 2010, the Company announced the closure of its Harrodsburg, Kentucky manufacturing facility. These measures were aimed at realigning the Company’s manufacturing operations, improving profitability and strengthening global competitiveness. The Tübingen, Germany and the Pemberville, Ohio facility closures were completed during fiscal 2010. The Harrodsburg, Kentucky and Logansport, Indiana facility closures were completed in the first quarter and second quarter of fiscal 2011, respectively. The Camdenton, Missouri closure is anticipated to be completed in early fiscal 2013.

Since the commencement of these plant closures and previous workforce reductions, the Company has incurred $33,275 of termination charges and $22,189 of other closure costs, in the aggregate. Further additional costs of approximately $250 are anticipated to be incurred through early fiscal 2013, consisting of equipment moving costs and miscellaneous facility closing costs. Total additional cash expenditures of approximately $1,200 are anticipated to be incurred related to these closures.

Changes in the accrued restructuring liability for the three and nine months ended December 31, 2011 and 2010 were comprised of the following, related to the above-described restructuring activities:

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

	Three months ended December 31
	2011			2010
Termination Benefits:
Balance, October 1	$	1,064		$	2,516
Additions		-			9
Adjustments		24			(37	)
Effect of exchange rate changes		-			(10	)
Payments		(130	)		(579	)
Balance, December 31	$	958		$	1,899

	Nine months ended December 31
	2011			2010
Termination Benefits:
Balance, April 1	$	1,301		$	4,740
Additions		-			103
Adjustments		(98	)		(90	)
Effect of exchange rate changes		(2	)		(12	)
Payments		(243	)		(2,842	)
Balance, December 31	$	958		$	1,899

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, 2011 and 2010:

	Three months ended December 31					Nine months ended December 31
	2011		2010			2011			2010
Restructuring expense (income):
Employee severance and related benefits	$	24	$	(28	)	$	(98	)	$	13

Other repositioning costs:
Postretirement curtailment gain		-		-			-			(2,075	)
Miscellaneous other closure costs		475		565			622			3,557
Total other repositioning costs		475		565			622			1,482
Total restructuring and other repositioning expense	$	499	$	537		$	524		$	1,495

For the three and nine months ended December 31, 2011, total restructuring and other repositioning expense of $499 and $524, respectively, was recorded in the consolidated statements of operations as a component of cost of sales. The total restructuring and other repositioning expense of $537 and $1,495 was recorded in the consolidated statements of operations for the three and nine months ended December 31, 2010, respectively, as follows: $565 and $1,482 were recorded as a component of cost of sales and $28 was recorded as restructuring income and $13 was recorded as restructuring expense within selling, general and administrative expense. The Company accrues severance in accordance with its written plans, procedures and relevant statutory requirements. Restructuring income relates to reversals of severance liabilities due to employee terminations prior to completion of required retention periods.

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

Note 12: Goodwill and Intangible Assets

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

	OE -Asia			South America			Commercial Products			Total

Balance, March 31, 2011	$	520		$	15,109		$	15,943		$	31,572
Fluctuations in foreign currency		(1	)		(1,887	)		(448	)		(2,336	)
Balance, December 31, 2011	$	519		$	13,222		$	15,495		$	29,236

Intangible assets are comprised of the following:

	December 31, 2011							March 31, 2011
	Gross					Net		Gross					Net
	Carrying		Accumulated			Intangible		Carrying		Accumulated			Intangible
	Value		Amortization			Assets		Value		Amortization			Assets

Amortized intangible assets:
Trademarks	$	8,875	$	(3,945	)	$	4,930	$	9,077	$	(3,580	)	$	5,497
Other intangibles		394		(394	)		-		444		(444	)		-
Total amortized intangible assets		9,269		(4,339	)		4,930		9,521		(4,024	)		5,497
Unamortized intangible assets:
Tradename		920		-			920		1,036		-			1,036
Total intangible assets	$	10,189	$	(4,339	)	$	5,850	$	10,557	$	(4,024	)	$	6,533

Amortization expense for the three months ended December 31, 2011 and 2010 was $149 and $168, respectively, and for the nine months ended December 31, 2011 and 2010 was $460 and $495, respectively. Total estimated annual amortization expense expected for the remainder of fiscal year 2012 through 2017 and beyond is as follows:

Fiscal Year	Estimated Amortization Expense

Remainder of 2012	$	129
2013		592
2014		592
2015		592
2016		592
2017 & Beyond		2,433

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

Note 13: Indebtedness

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

During the nine months ended December 31, 2010, the Company entered into the current $125,000 Senior Notes, the proceeds of which were used to repay the then existing Senior Notes. The Company recognized a loss of $17,866 on early extinguishment of debt as a component of interest expense, which included the prepayment penalty of $16,570 and $1,296 of unamortized debt issuance costs.

Provisions contained in the Company’s revolving credit facility and Senior Note agreements require the Company to maintain compliance with various covenants. The Company was in compliance with its covenants as of December 31, 2011.

Modine also maintained credit agreements with foreign banks at December 31, 2011. The Company has $4,628 outstanding under these credit agreements. There was no amount outstanding under such credit agreements at March 31, 2011.

At December 31, 2011, the Company had $133,000 available for future borrowings under the domestic revolving credit facility. In addition to this revolving credit facility, unused lines of credit also exist in Europe, Brazil and China, totaling $46,558.

The fair value of long-term debt is estimated by discounting future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. At December 31, 2011 and March 31, 2011, the carrying value of Modine’s long-term debt approximated fair value, with the exception of the Senior Notes, which had a fair value of approximately $114,800 and $121,463 at December 31, 2011 and March 31, 2011, respectively.

At December 31, 2011 and March 31, 2011, the Company had short-term debt of $15,901 and $8,825, respectively, primarily consisting of short-term borrowings at foreign locations.

Note 14: Financial Instruments

Concentrations of Credit Risk: The Company invests excess cash in investment quality short-term liquid debt instruments. Such investments are made only in instruments issued by high quality institutions. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to a diverse group of customers operating throughout the world. At December 31, 2011 and March 31, 2011, approximately 45 percent and 47 percent, respectively, of the Company's trade accounts receivables were from the Company's top ten individual customers. These customers operate primarily in the automotive, truck and heavy equipment markets and are all influenced by many of the same market and general economic factors. To reduce credit risk, the Company performs periodic customer credit evaluations and actively monitors their financial condition and developing business news. The Company does not generally require collateral or advanced payments from its customers, but does so in those cases where a substantial credit risk is identified. Credit losses to customers operating in the markets served by the Company have not been material. Total bad debt write-offs have been below one percent of outstanding trade receivable balances for the presented periods. See Note 19 for further discussion on market, credit and counterparty risks.

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

Inter-Company Loans Denominated in Foreign Currencies: The Company has certain foreign-denominated long-term inter-company loans that are sensitive to foreign exchange rates outstanding at December 31, 2011 as follows:

$12,000 between two loans to its wholly owned subsidiary, Modine Thermal Systems (Changzhou) Co. Ltd. (Changzhou, China), with various maturity dates through June 2012;

$1,300 between two loans to its wholly owned subsidiary, Modine Thermal Systems Korea, with various maturity dates through April 2012; and

$1,745 receivable with its wholly owned subsidiary, Modine do Brazil Sistemas Terminos Ltda. (Modine Brazil).

These inter-company loans are sensitive to movement in foreign exchange rates, and the Company does not have any derivative instruments to hedge this exposure at December 31, 2011.

Note 15: Derivatives/Hedges

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

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

Commodity derivatives: The Company enters into futures contracts related to certain of the Company’s forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts is to reduce its exposure to changing purchase prices for future purchases of these commodities. These contracts have been designated as cash flow hedges by the Company. Accordingly, unrealized gains and losses on these contracts are deferred as a component of accumulated other comprehensive (loss) income (AOCI) and recognized as a component of earnings at the same time that the underlying purchases of aluminum and copper impact earnings.

Interest rate derivatives: In conjunction with the repayment of then existing Senior Notes during the nine months ended December 31, 2010, the remaining unamortized balance for interest rate derivatives of $1,606 was reflected as a component of interest expense.

Foreign exchange contracts: The Company maintains a foreign exchange risk management strategy that uses derivative financial instruments in a limited way to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchange contracts to hedge specific foreign currency-denominated transactions and foreign currency-denominated assets and liabilities. The effect of this practice is to minimize the impact of foreign exchange rate movements on the Company’s earnings and projected cash flows. The Company has not designated its forward contracts as hedges. Accordingly, unrealized gains and losses related to the change in fair value are recorded in other expense (income) – net. The Company’s foreign currency exchange contracts do not subject it to significant risk due to exchange rate movements because gains and losses on these contracts are offset by changes due to foreign currency fluctuations of the underlying assets and liabilities.

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

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

	Balance Sheet Location	December 31, 2011		March 31, 2011
Derivative instruments designated as cash flow hedges:
Commodity derivatives	Deferred income taxes and other current assets	$	28	$	929
Commodity derivatives	Accrued expenses and other current liabilities		5,429		650

Derivatives not designated as hedges:
Foreign exchange contracts	Deferred income taxes and other current assets	$	256	$	-

The amounts recorded in AOCI and in the consolidated statement of operations for the three and nine months ended December 31, 2011 are as follows:

				Three months ended December 31, 2011			Nine months ended December 31, 2011
	Amount of Loss Recognized in AOCI		Location of Loss Reclassified from AOCI into Continuing Operations	Amount of Loss Reclassified from AOCI into Continuing Operations			Amount of Loss Reclassified from AOCI into Continuing Operations
Designated derivative instruments:
Commodity derivatives	$	5,239	Cost of sales	$	1,329		$	1,738
Total	$	5,239		$	1,329		$	1,738

				Three months ended December 31, 2011			Nine months ended December 31, 2011
			Location of (Gain) Recognized in Income	Amount of (Gain) Recognized in Income			Amount of (Gain) Recognized in Income
Derivatives not designated:
Foreign exchange contracts			Other expense (income) – net	$	(258	)	$	(258	)
Total				$	(258	)	$	(258	)

The amounts recorded in AOCI and in the consolidated statement of operations for the three and nine months ended December 31, 2010 are as follows:

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

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

Note 16: Fair Value Measurements

Fair value measurements are classified under the following hierarchy:

Level 1 – Quoted prices for identical instruments in active markets.

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

Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

When available, the Company used quoted market prices to determine fair value and 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 the Company’s non-qualified deferred compensation plan. The securities’ fair values are the market values from active markets (such as the New York Stock Exchange (NYSE)) and are classified within Level 1 of the valuation hierarchy. The fair values of money market investments have been determined to approximate their net asset values, with no discounts for credit quality or liquidity restrictions and are classified within Level 2 of the valuation hierarchy. These short term investments are included in other current assets.

Derivative financial instruments

As part of the Company’s risk management strategy, Modine enters into derivative transactions to mitigate certain identified exposures. The derivative instruments include commodity derivatives and foreign currency exchange contracts. 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 those derivatives are sold or transferred on a stand-alone basis. Therefore, derivative assets and liabilities are presented on a gross basis without consideration of master netting arrangements. The Company estimates the fair value of these derivative instruments based on dealer quotes as the dealer is willing to settle at the quoted prices. These derivative instruments are classified within Level 2 of the valuation hierarchy.

Deferred compensation obligation

The fair value of the deferred compensation obligation is recorded at the fair value of the investments held by the deferred compensation trust. As noted above, the fair values are the market values directly from active markets (such as the NYSE) and are classified within Level 1 of the valuation hierarchy. The fair values of money market investments have been determined to approximate their net asset values, with no discounts for credit quality or liquidity restrictions and are classified within Level 2 of the valuation hierarchy.

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

At December 31, 2011, the assets and liabilities that are measured at fair value on a recurring basis are classified as follows:

	Level 1		Level 2		Level 3		Total Assets / Liabilities at Fair Value
Assets:
Trading securities (short term investments)	$	1,653	$	13	$	-	$	1,666
Derivative financial instruments		-		284		-		284
Total assets	$	1,653	$	297	$	-	$	1,950

Liabilities:
Derivative financial instruments	$	-	$	5,429	$	-	$	5,429
Deferred compensation obligation		1,653		13		-		1,666
Total liabilitites	$	1,653	$	5,442	$	-	$	7,095

At March 31, 2011, the assets and liabilities that are measured at fair value on a recurring basis were classified as follows:

	Level 1		Level 2		Level 3		Total Assets / Liabilities at Fair Value
Assets:
Trading securities (short term investments)	$	2,707	$	13	$	-	$	2,720
Derivative financial instruments		-		929		-		929
Total assets	$	2,707	$	942	$	-	$	3,649

Liabilities:
Derivative financial instruments	$	-	$	650	$	-	$	650
Deferred compensation obligation		2,723		-		-		2,723
Total liabilities	$	2,723	$	650	$	-	$	3,373

Note 17: Product Warranties and Other Commitments

Changes in the warranty liability were as follows:

	Three months ended December 31
	2011			2010

Balance, October 1	$	12,847		$	13,807
Accruals for warranties issued in current period		1,565			1,226
Accruals related to pre-existing warranties		286			31
Settlements made		(1,337	)		(2,918	)
Effect of exchange rate changes		(160	)		(40	)
Balance, December 31	$	13,201		$	12,106

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

	Nine months ended December 31
	2011			2010

Balance, April 1	$	14,681		$	13,126
Accruals for warranties issued in current period		4,963			3,763
(Reversals) accruals related to pre-existing warranties		(181	)		86
Settlements made		(5,721	)		(4,852	)
Effect of exchange rate changes		(541	)		(17	)
Balance, December 31	$	13,201		$	12,106

Commitments: At December 31, 2011, the Company had capital expenditure commitments of $16,160. Significant commitments include tooling and equipment expenditures for new and renewal platforms with new and current customers in Europe and North America along with new program launches in Asia.

Note 18: Segment Information

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

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

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

	Three months ended December 31						Nine months ended December 31
	2011			2010			2011			2010
Sales :
Original Equipment - Asia	$	20,861		$	16,859		$	62,115		$	41,623
Original Equipment - Europe		139,891			139,946			458,721			396,990
Original Equipment - North America		139,201			136,188			444,684			417,632
South America		42,161			36,429			138,177			114,513
Commercial Products		39,326			35,593			108,544			95,339
Segment sales		381,440			365,015			1,212,241			1,066,097
Corporate and administrative		263			379			577			1,157
Eliminations		(8,421	)		(5,351	)		(24,383	)		(15,777	)
Sales from continuing operations	$	373,282		$	360,043		$	1,188,435		$	1,051,477

	Three months ended December 31											Nine months ended December 31
	2011						2010					2011						2010
Gross profit:				% of sales					% of sales						% of sales					% of sales
Original Equipment - Asia	$	1,286			6.2	%	$	1,282		7.6	%	$	6,192			10.0	%	$	3,138		7.5	%
Original Equipment - Europe		18,356			13.1	%		17,454		12.5	%		63,325			13.8	%		54,508		13.7	%
Original Equipment - North America		19,056			13.7	%		18,110		13.3	%		62,659			14.1	%		58,595		14.0	%
South America		7,835			18.6	%		6,960		19.1	%		25,678			18.6	%		23,411		20.4	%
Commercial Products		12,958			33.0	%		12,348		34.7	%		32,748			30.2	%		30,438		31.9	%
Segment gross profit		59,491			15.6	%		56,154		15.4	%		190,602			15.7	%		170,090		16.0	%
Corporate and administrative		272			-			383		-			600			-			1,180		-
Eliminations		(20	)		-			10		-			(9	)		-			22		-
Gross profit	$	59,743			16.0	%	$	56,547		15.7	%	$	191,193			16.1	%	$	171,292		16.3	%

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

	Three months ended December 31						Nine months ended December 31
	2011			2010			2011			2010
Operating earnings (loss):
Original Equipment - Asia	$	(1,488	)	$	(883	)	$	(1,425	)	$	(2,530	)
Original Equipment - Europe		5,791			7,421			25,219			21,473
Original Equipment - North America		10,643			6,140			32,361			24,425
South America		3,951			1,182			9,828			9,972
Commercial Products		5,796			5,458			12,064			11,194
Segment earnings		24,693			19,318			78,047			64,534
Corporate and administrative		(8,448	)		(10,158	)		(29,765	)		(29,576	)
Eliminations		(25	)		(18	)		(125	)		11
Other items not allocated to segments		(4,560	)		(2,423	)		(16,732	)		(28,048	)
Earnings from continuing operations before income taxes	$	11,660		$	6,719		$	31,425		$	6,921

	December 31, 2011			March 31, 2011
Assets:
Original Equipment - Asia	$	104,410		$	91,748
Original Equipment - Europe		335,197			392,964
Original Equipment - North America		221,377			237,423
South America		98,635			103,733
Commercial Products		67,379			66,301
Corporate and administrative		42,767			45,103
Assets held for sale		2,450			2,450
Eliminations		(24,383	)		(22,783	)
Total assets	$	847,832		$	916,939

Note 19: Contingencies and Litigation

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

Credit risk: The Company manages credit risks through its focus on the following:

Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that all short-term investments are maintained in secured or guaranteed instruments;

Index

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

Pension assets – ensuring that investments within these plans provide reasonable diversification, monitoring of investment teams and ensuring that portfolio managers are adhering to the Company’s investment policies and directives, and ensuring that exposure to high risk securities and other similar assets is limited; and

Insurance – ensuring that insurance providers have acceptable financial ratings to the Company.

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

Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees;

Suppliers – implementing a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and

Derivatives – ensuring that counterparties to derivative instruments have acceptable credit ratings to the Company.

Trade Compliance: During the fourth quarter of fiscal 2011, the Company determined that it was not in compliance with certain trade regulations related to import and export activity between its warehouse in Laredo, Texas and its plant in Nuevo Laredo, Mexico. The Company believes that the trade regulation issues are limited to operations at the Laredo warehouse and the Nuevo Laredo plant. As part of the investigation process, the Company has disclosed these trade compliance issues to certain government agencies and has fully cooperated with these agencies in their review, if any. At March 31, 2011, the Company had an estimated liability for the trade regulation issues of $4,528, which consisted of an estimate for unpaid duties, potential interest and penalties which may be levied against the Company by the government agencies. The Company made a voluntary payment of $2,090 to one government agency during the nine months ended December 31, 2011 and the agency subsequently closed the matter, with no expectation of further investigation. During the three months ended December 31, 2011, a second government agency closed the matter with no payment required, and the Company reduced the liability by $2,308 within selling, general and administrative expenses. At December 31, 2011, the Company had a reserve of $131 for potential remaining trade compliance regulation issues.

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

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MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(unaudited)

The Company actively monitors and addresses environmental issues and has recorded environmental investigation and remediation expense accruals for groundwater contamination at its manufacturing facility in Brazil and subsurface contamination at its former manufacturing facility in the Netherlands, along with other lesser issues at certain facilities located in the United States. These expenditures generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then existing regulations, or where the Company is a successor to the obligations of prior owners and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The reserves for these environmental matters totaled $6,890 and $7,371 at December 31, 2011 and March 31, 2011, respectively. During the three months ended December 31, 2011, additional reserves of $10 were recorded as a component of continuing operations and reductions to the reserves of $80 were recorded as a component of discontinued operations. During the three months ended December 31, 2010, additional reserves of $1,765 were recorded as a component of continuing operations. During the nine months ended December 31, 2011, additional reserves of $874 were recorded as a component of continuing operations and reductions to the reserves of $566 were recorded as a component of discontinued operations. During the nine months ended December 31, 2010, additional reserves of $1,765 were recorded as a component of continuing operations and additional reserves of $3,005 were recorded as a component of discontinued operations. Certain of these matters are covered by various insurance policies; however, the Company does not record any insurance recoveries until they are realized or realizable. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Based on currently available information, Modine believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the financial position or overall trends in results of operations. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages. During fiscal 2011, one of the adjacent businesses to the operation in Brazil filed suit against Modine’s Brazilian subsidiary seeking remediation and certain other damages as a result of the contamination. The Company is defending this suit and believes that the ultimate outcome of this matter will not be material.

Other litigation: In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, the Occupational Safety and Health Administration, USEPA, other governmental agencies and others in which claims are asserted against the Company. At December 31, 2011 and March 31, 2011, the Company did not have an accrual related to any such matters that were not deemed probable.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

When we use the terms “Modine,” “we,” “us,” the “Company,” or “our” in this report, unless the context otherwise requires, we are referring to Modine Manufacturing Company. Our fiscal year ends on March 31 and, accordingly, all references to quarters refer to our fiscal quarters. The quarter ended December 31, 2011 is the third quarter of fiscal 2012.

Third Quarter Highlights: Net sales in the third quarter of fiscal 2012 improved from the third quarter of fiscal 2011, driven by increases in overall sales volumes within the commercial vehicle and off-highway markets in North America, South America and Asia as well as in our Commercial Products segment. Gross profit improved with these increased sales volumes. Gross margin improved as a result of better fixed cost absorption on the higher sales volumes. Selling, general and administrative (SG&A) expenses decreased from the third quarter of fiscal 2011 to the third quarter of fiscal 2012 primarily due to lower management compensation expense and the reversal of a reserve related to a trade compliance issue that was successfully resolved. Income from operations improved significantly during the third quarter of fiscal 2012, as a result of the increased sales volumes and reduced SG&A expenses. During the third quarter of fiscal 2012, we reported earnings from continuing operations of approximately $8 million.

Year-To-Date Highlights: Net sales in the first nine months of fiscal 2012 increased substantially compared with the first nine months of fiscal 2011 due to an overall sales volume increase, particularly within the commercial vehicle and off-highway markets. Gross profit improved with these increased sales volumes. SG&A expenses increased year over year, primarily resulting from reinvestment in the business. However, SG&A expenses as a percentage of sales decreased as our rate of growth in sales exceeded the rate of growth in SG&A expenses. Income from operations improved as a result of the sales growth and improved gross profit. Interest expense includes costs related to the long-term debt refinancing completed during the second quarter of fiscal 2011. Our income from continuing operations for the first nine months of fiscal 2012 was an improvement of approximately $25 million from a loss from continuing operations for the first nine months of fiscal 2011.

CONSOLIDATED RESULTS OF OPERATIONS – CONTINUING OPERATIONS

The results for the three and nine months ended December 31, 2010 have been revised to reflect the correction of errors relating to those periods. See Note 2 to the Notes to Condensed Consolidated Financial Statements for further discussion. The following table presents consolidated results from continuing operations on a comparative basis for the three and nine months ended December 31, 2011 and 2010:

	Three months ended December 31										Nine months ended December 31
	2011					2010					2011					2010
(dollars in millions)	$'s		% of sales			$'s		% of sales			$'s		% of sales			$'s		% of sales
Net sales		373.3		100.0	%		360.0		100.0	%		1,188.4		100.0	%		1,051.5		100.0	%
Cost of sales		313.6		84.0	%		303.5		84.3	%		997.2		83.9	%		880.2		83.7	%
Gross profit		59.7		16.0	%		56.5		15.7	%		191.2		16.1	%		171.3		16.3	%
Selling, general and administrative expenses		43.5		11.7	%		47.4		13.2	%		143.0		12.0	%		136.3		13.0	%
Income from operations		16.2		4.3	%		9.1		2.5	%		48.2		4.1	%		35.0		3.3	%
Interest expense		2.9		0.8	%		2.6		0.7	%		9.2		0.8	%		30.2		2.9	%
Other expense (income) – net		1.6		0.4