Form 10-Q for the Third Quarter Ended on 12/26/2006
 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D. C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
 
[P]   QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 26, 2006

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

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

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

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

Large Accelerated Filer [P ] Accelerated Filer [ ] Non-accelerated Filer [ ]

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

The number of shares outstanding of the registrant's common stock, $0.625 par value, was 32,847,830 at January 31, 2007.

 
 

MODINE MANUFACTURING COMPANY
INDEX

 
Page No.
PART I. FINANCIAL INFORMATION
  
   
 Item 1. Financial Statements
  
Consolidated Balance Sheets - December 26, 2006 and March 31, 2006
3
Consolidated Statements of Earnings -
 
For the Three and Nine Months Ended December 26, 2006 and 2005
4
Condensed Consolidated Statements of Cash Flows -
 
For the Nine Months Ended December 26, 2006 and 2005
5
Notes to Condensed Consolidated Financial Statements
6 - 35
   
 Item 2. Management's Discussion and Analysis
 
 of Financial Condition and Results of Operations
36 - 53
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
53 - 57
   
 Item 4. Controls and Procedures
58
   
PART II. OTHER INFORMATION
  
   
Item 1. Legal Proceedings
58 - 59
   
Item 1A. Risk Factors
59 - 60
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
60 - 61
   
Item 6. Exhibits
61 - 62
   
Signature
63


 



PART I . FINANCIAL INFORMATION
                  
                   
Item 1. Financial Statements
                  
                   
MODINE MANUFACTURING COMPANY
                  
CONSOLIDATED BALANCE SHEETS
                  
December 26, 2006 and March 31, 2006
                 
(In thousands, except per share amounts)
                  
(Unaudited)
                  
   
                                           December 26, 2006
                                                      March 31, 2006
ASSETS
                
Current assets:
                          
Cash and cash equivalents
        
$
19,138
        
$
30,798
  
Short term investments
          
2,842
         
-
  
Trade receivables, less allowance for doubtful accounts of $1,822 and $1,511
          
271,091
         
254,681
 
Inventories
          
116,896
         
90,227
 
Deferred income taxes and other current assets
          
56,521
         
36,489
 
Total current assets
          
466,488
         
412,195
 
Noncurrent assets:
                          
Property, plant and equipment – net
          
519,605
         
467,600
 
Investment in affiliates
          
17,037
         
41,728
 
Goodwill
         
66,479
         
52,256
 
Other intangible assets – net
          
13,847
         
12,735
 
Prepaid pension costs
          
57,546
         
59,894
 
Other noncurrent assets
          
25,264
         
5,687
 
Total noncurrent assets
          
699,778
         
639,900
 
Total assets
        
$
1,166,266
        
$
1,052,095
  
LIABILITIES AND SHAREHOLDERS' EQUITY
                          
Current liabilities:
                          
Short-term debt
        
$
3,076
        
$
5,983
  
Long-term debt – current portion
          
146
          
125
  
Accounts payable
          
192,813
          
187,048
  
Accrued compensation and employee benefits
          
68,914
          
56,835
  
Income taxes
          
10,166
          
13,169
  
Accrued expenses and other current liabilities
          
36,693
          
31,789
  
Total current liabilities
          
311,808
          
294,949
  
Noncurrent liabilities:
                          
Long-term debt
         
184,487
          
151,706
  
Deferred income taxes
         
42,473
          
38,424
  
Pensions
          
33,080
          
28,933
  
Postretirement benefits
          
19,939
          
20,085
  
Other noncurrent liabilities
          
26,759
          
12,573
  
Total noncurrent liabilities
          
306,738
          
251,721
  
Total liabilities
          
618,546
          
546,670
  
Commitments and contingencies (See Notes 17 & 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 32,782 and 33,210 shares
          
20,475
         
20,756
 
Additional paid-in capital
         
57,156
         
52,459
 
Retained earnings (see Note 2)
          
447,699
         
433,405
 
Accumulated other comprehensive income
          
35,012
         
10,017
 
Treasury stock at cost: 425 and 404 shares
          
(11,754
)
        
(11,212
)
Deferred compensation trust
          
(868
)
        
-
  
Total shareholders' equity
          
547,720
         
505,425
 
Total liabilities and shareholders' equity
        
$
1,166,266
        
$
1,052,095
  
                           
The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
                          
 
 
 

MODINE MANUFACTURING COMPANY
                  
CONSOLIDATED STATEMENTS OF EARNINGS
                  
For the three and nine months ended December 26, 2006 and 2005
                  
(In thousands, except per share amounts)
                  
(Unaudited)
                  
                   
   
Three months ended December 26
Nine months ended December 26
   
2006
  
2005
  
2006
  
2005
  
Net sales
  
$
467,927
  
$
411,030
  
$
1,335,832
  
$
1,212,020
  
Cost of sales
   
388,963
   
330,818
   
1,112,261
   
971,750
 
Gross profit
    
78,964
   
80,212
   
223,571
   
240,270
 
Selling, general, and administrative expenses
    
60,202
   
57,498
   
176,274
   
164,702
 
Restructuring charges
    
846
   
-
    
3,071
   
-
  
Income from operations
    
17,916
   
22,714
   
44,226
   
75,568
 
Interest expense
   
(2,784
)
  
(2,049
)
  
(7,211
)
  
(5,430
)
Other income – net
    
4,045
   
2,412
   
6,936
   
5,690
 
Earnings from continuing operations before income taxes 
    
19,177
   
23,077
   
43,951
   
75,828
 
Provision for (benefit from) income taxes
    
2,831
   
10,002
   
(1,061
)
  
27,733
 
Earnings from continuing operations
    
16,346
   
13,075
   
45,012
   
48,095
 
Earnings from discontinued operations (net of income taxes)
    
-
   
443
   
-
   
457
 
Loss on spin off of discontinued operations
    
-
   
-
   
-
   
(53,625
)
Cumulative effect of accounting change (net of income taxes)
    
-
   
-
   
70
   
-
 
Net earnings (loss)
  
$
16,346
  
$
13,518
  
$
45,082
  
$
(5,073
)
                           
Earnings (loss) per share of common stock – basic:
                          
Continuing operations
  
$
0.51
  
$
0.39
  
$
1.40
  
$
1.41
  
Earnings from discontinued operations
    
-
   
0.01
   
-
   
0.01
 
Loss on spin off of discontinued operations
    
-
   
-
   
-
   
(1.57
)
Cumulative effect of accounting change
    
-
   
-
   
-
   
-
 
Net earnings (loss) – basic
  
$
0.51
  
$
0.40
  
$
1.40
  
$
(0.15
)
                           
Earnings (loss) per share of common stock – diluted:
                          
 Continuing operations
  
$
0.51
  
$
0.38
  
$
1.40
  
$
1.39
  
Earnings from discontinued operations
    
-
   
0.02
   
-
   
0.01
 
Loss on spin off of discontinued operations
    
-
   
-
   
-
   
(1.55
)
Cumulative effect of accounting change
    
-
   
-
   
-
   
-
 
Net earnings (loss) – diluted
  
$
0.51
  
$
0.40
  
$
1.40
  
$
(0.15
)
                           
Dividends per share
  
$
0.175
  
$
0.175
  
$
0.525
  
$
0.525
  
                           
                           
The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
                          

 


MODINE MANUFACTURING COMPANY
          
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
          
For the nine months ended December 26, 2006 and 2005
          
(In thousands)
          
(Unaudited)
          
   
Nine months ended December 26
  
   
2006
  
2005
  
Cash flows from operating activities:
          
Net earnings (loss)
  
$
45,082
  
$
(5,073
)
Adjustments to reconcile net earnings (loss) with net cash
             
 provided by operating activities:
              
 Depreciation and amortization
    
52,388
   
53,153
 
Loss on spin off of Aftermarket business
    
-
   
53,625
 
 Other – net
    
(9,884
)
  
1,230
 
Net changes in operating assets and liabilities, excluding
              
acquisitions and dispositions
    
(20,074
)
  
(5,387
)
Net cash provided by operating activities
    
67,512
   
97,548
 
               
Cash flows from investing activities:
              
Expenditures for property, plant and equipment
    
(60,412
)
  
(49,604
)
Acquisitions, net of cash acquired
    
(11,096
)
  
(38,162
)
Spin off of Aftermarket business
   
-
   
(6,300
)
Proceeds from purchase price settlement
    
2,900
   
-
 
Proceeds from dispositions of assets
    
24
   
40
 
Other – net
    
(884
)
  
379
 
Net cash used for investing activities
    
(69,468
)
  
(93,647
)
               
Cash flows from financing activities:
              
Short-term debt
    
(3,424
)
  
-
  
Additions to long-term debt
   
191,600
   
246,717
 
Reductions of long-term debt
   
(163,906
)
  
(204,017
)
Bank overdrafts
    
(2,124
)
  
5,486
 
Proceeds from exercise of stock options
   
1,670
   
11,788
 
Repurchase of common stock, treasury and retirement
    
(13,811
)
  
(61,314
)
Cash dividends paid
   
(17,010
)
  
(18,082
)
Settlement of derivative contracts
    
(1,887
)
  
(1,794
)
Excess tax benefits from stock-based compensation
    
242
   
-
  
Net cash used for financing activities
    
(8,650
)
  
(21,216
)
               
Effect of exchange rate changes on cash
    
(1,054
)
  
(4,639
)
Net decrease in cash and cash equivalents
    
(11,660
)
  
(21,954
)
Cash and cash equivalents at beginning of period
    
30,798
   
55,091
 
Cash and cash equivalents at end of period
  
$
19,138
  
$
33,137
  
               
The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
             

 
 

Note 1: General

The accompanying condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States and such principles were applied on a basis consistent with the preparation of the consolidated financial statements in Modine Manufacturing Company’s (Modine or the Company) Annual Report on Form 10-K for the year ended March 31, 2006 filed with the Securities and Exchange Commission. The financial information furnished includes 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 2007 are not necessarily indicative of the results to be expected for the full year.

The March 31, 2006 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States. In addition, certain notes and other information have been condensed or omitted from these interim financial statements. Therefore, such statements should be read in conjunction with the consolidated financial statements and related notes contained in Modine's Annual Report on Form 10-K for the year ended March 31, 2006.

On July 22, 2005, the Company spun off its Aftermarket business on a tax-free basis and merged it with Transpro, Inc. As a result of this spin off, the condensed consolidated financial statements and related notes have been restated to present the results of the Aftermarket business as a discontinued operation. Accordingly, the operating results of the Aftermarket business have been included in earnings from discontinued operations, (net of income taxes) in the consolidated statement of earnings for the three and nine months ended December 26, 2005.

In the second quarter of fiscal 2006, the Company recorded, as a result of the spin off transaction, a non-cash charge to earnings of $53,625. The amount of the non-cash charge was comprised of the following components: $50,101 to reflect the difference between the value that Modine shareholders received in the new company of $51,319, a function of the stock price of Transpro at the closing, and the $101,420 in asset carrying value of Modine’s Aftermarket business; and $3,524 of foreign currency translation loss recognized at the date of the transaction.

Note 2: Significant Accounting Policies

Tooling costs: Modine accounts for pre-production tooling costs as a component of property, plant and equipment - net when the Company owns title to the tooling, and amortizes the capitalized cost to cost of sales over the life of the related program. At December 26, 2006 and 2005, the Company-owned tooling totaled $19,408 and $12,995, respectively. In certain instances, the Company makes an upfront payment for customer-owned tooling costs, and subsequently receives a reimbursement from the customer for the upfront payment. The Company accounts for unbilled customer-owned tooling costs as a receivable when the customer guarantees reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At December 26, 2006 and 2005, the receivable related to customer-owned tooling totaled $7,141 and $1,200, respectively.

Stock-based compensation: Effective April 1, 2006, in accordance with Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” Modine began to record compensation expense under the “fair-value-based” method of accounting for stock options and restricted awards granted to employees and directors. Prior to the adoption of SFAS No. 123(R), the Company was recording compensation expense for restricted awards under the “intrinsic-value-based” method but was not required to record any compensation expense for stock options under the “intrinsic-value-based” method as the grant price of the stock options was equal to the market value of the underlying common stock on the grant date. The effect of this change, from the “intrinsic-value-based method” previously used by the Company to the “fair-value-based” method, on the results for the three and nine months ended December 26, 2006 are as follows:
 
 Three months ended December 26, 2006
  
           
Impact on
 
   
Fair
 
Intrinsic
 
earnings from
 
 
 
value
 
value
 
adoption of
 
 
 
method
 
method
 
SFAS No. 123(R)
 
Stock-based compensation expense effect on:
                    
Earnings from continuing operations before taxes
    
($1,407
)
  
($1,346
)
  
($61
)
Earnings from continuing operations
   
($860
)
  
($823
)
  
($37
)
Net earnings
    
($860
)
  
($823
)
  
($37
)
                     
Earnings per share effect:
                    
Basic earnings per share
    
($0.03
)
  
($0.03
)
  
-
 
Diluted earnings per share
    
($0.03
)
  
($0.03
)
  
-
 

 
   
Nine months ended December 26, 2006
           
Impact on
 
   
Fair
 
Intrinsic
 
earnings from
 
 
 
value
 
value
 
adoption of
 
 
 
method
 
method
 
SFAS No. 123(R)
 
Stock-based compensation expense effect on:
                    
Earnings from continuing operations before taxes
    
($3,859
)
  
($2,519
)
  
($1,340
)
Earnings from continuing operations
   
($2,360
)
  
($1,542
)
  
($818
)
Net earnings
    
($2,360
)
  
($1,542
)
  
($818
)
                     
Earnings per share effect:
                    
Basic earnings per share
    
($0.07
)
  
($0.05
)
  
($0.02
)
Diluted earnings per share
    
($0.07
)
  
($0.05
)
  
($0.02
)
 
 
 
The Company adopted SFAS No. 123(R) using the “modified prospective method” and, as a result, financial results for periods prior to fiscal 2007 were not restated for this accounting change. The modified prospective method requires compensation cost to be recognized beginning on the effective date for (a) all new share-based awards granted after the effective date and to previously issued awards that are modified, repurchased or cancelled after that date and for (b) outstanding share-based awards on the effective date that are unvested because the requisite service period has not been completed. Compensation cost recorded on the unvested awards ((b) above) is based on the grant-date fair value determined under SFAS No. 123 and previously reported in the Company’s pro forma footnote disclosures. Stock-based compensation expense is recognized using the straight-line attribution method and remains unchanged from the method used in prior years except for the requirement under SFAS No. 123(R) to estimate forfeitures rather than record them as they occur. The majority of this expense is reflected in corporate as administrative expense, and has not been allocated to the various segments.

Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the consolidated statement of cash flows. SFAS No. 123(R) requires the cash flow resulting from the tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The excess tax benefits realized for the tax deductions from option exercises and stock award vesting for the three and nine months ended December 26, 2006 were $40 and $242, respectively. During the three months ended December 26, 2006 and 2005, the Company recognized total income tax benefits related to stock-based compensation awards of $546 and $332, respectively. During the nine months ended December 26, 2006 and 2005, the Company recognized total income tax benefits related to stock-based compensation awards of $1,499 and $1,032, respectively.

Prior to fiscal 2007, the Company had adopted SFAS No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure,” requiring SFAS No. 123 pro forma disclosure recognizing compensation expense for stock options under the fair-value based method. The pro forma net income and net income per share of common stock for the three and nine months ended December 26, 2005 would have been as follows:


   
Three months
  
Nine months
 
 
 
ended
 
ended
 
 
 
December 26, 2005
 
December 26, 2005
 
           
Earnings from continuing operations, as reported
  
$
13,075
  
$
48,095
  
Compensation expense for stock awards as reported, net of tax
    
854
   
2,631
 
Stock compensation expense under fair value method, net of tax
    
(854
)
  
(2,847
)
Earnings from continuing operations, pro forma
  
$
13,075
  
$
47,879
  
               
Net earnings (loss), as reported
  
$
13,518
  
$
(5,073
)
Compensation expense for stock awards as reported, net of tax
    
854
   
2,658
 
Stock compensation expense under fair value method, net of tax
    
(854
)
  
(2,874
)
Net earnings (loss), pro forma
  
$
13,518
  
$
(5,289
)
               
Net earnings per share from continuing operations (basic), as reported
  
$
0.39
  
$
1.41
  
Net earnings per share from continuing operations (basic), pro forma
  
$
0.39
  
$
1.41
  
               
Net earnings (loss) per share (basic), as reported
  
$
0.40
  
$
(0.15
)
Net earnings (loss) per share (basic), pro forma
  
$
0.40
  
$
(0.16
)
               
Net earnings per share from continuing operations (diluted), as reported
  
$
0.38
  
$
1.39
  
Net earnings per share from continuing operations (diluted), pro forma
  
$
0.38
  
$
1.39
  
               
Net earnings (loss) per share (diluted), as reported
  
$
0.40
  
$
(0.15
)
Net earnings (loss) per share (diluted), pro forma
  
$
0.40
  
$
(0.15
)
 
 
See Note 4 for additional information on the Company’s stock-based compensation plans.

Deferred compensation trust: The Company maintains a deferred compensation trust to fund future obligations under its non-qualified deferred compensation plan. The trust’s investments in third-party debt and equity securities are reflected as short term investments in the consolidated balance sheet, with changes in fair value reflected as a component of earnings. The trust’s investment in Modine stock is reflected as a reduction of shareholder’s equity in the consolidated balance sheet at its original stock cost. A deferred compensation obligation is recorded within liabilities at the fair value of the investments held by the deferred compensation trust. Any differences between the recorded value of the short term investments and Modine stock and the fair value of the deferred compensation obligation is reflected as an adjustment to earnings.

New accounting pronouncements: In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). This interpretation clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN 48, if a tax position does not meet a “more-likely-than-not” recognition threshold, the benefit of that position is not recognized in the financial statements. The Company is required to adopt FIN 48 in the first quarter of fiscal 2008, and is currently performing an assessment of its global tax positions. The Company expects to substantially complete this assessment during the fourth quarter of fiscal 2007, and will disclose the anticipated impact of adopting this standard in the Company’s Form 10-K for the year ended March 31, 2007.

In September 2006, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No.
06-3, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation),” that requires that a company disclose its accounting policy for the statement of earnings presentation of taxes assessed by a governmental authority on a revenue-producing transaction between a seller and a customer. In addition, for any taxes reported on a gross basis (included in revenues and costs), disclosure of the amount of taxes recorded within these categories is required. The Company’s accounting policy is to present the taxes within the scope of this EITF on a net basis. The adoption of EITF 06-3 in the fourth quarter of fiscal 2007 will not result in a change to the Company’s accounting policy and, accordingly, is not anticipated to have a material effect on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which addresses how companies should measure fair value when required to use a fair value measure for recognition or disclosure purposes under GAAP. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. The Company is required to adopt SFAS No. 157 in the first quarter of fiscal 2009, and is currently assessing the impact of adopting this pronouncement.

In September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans,” an amendment of FASB Statement Nos. 87, 88, 106 and 132(R). SFAS No. 158 requires companies to recognize a net asset or liability to report the funded status of defined benefit pension and other postretirement plans on the balance sheet and recognize changes in that funded status in the year in which the changes occur through other comprehensive income in shareholders’ equity. The Company is required to adopt this aspect of SFAS No. 158 for the fiscal year ending March 31, 2007, and prospectively thereafter. The anticipated impact of adopting this statement, based on the March 31, 2006 funded status of our pension and postretirement plans, would be to reduce total assets by $27,233, increase total liabilities by $38,682, and reduce total shareholders’ equity by $65,915, net of an income tax benefit of $35,493. The adoption of this statement will not have an adverse impact on existing loan covenants. SFAS No. 158 also requires that employers measure plan assets and the Company’s obligations as of the date of their year-end financial statements beginning with the Company’s fiscal year ending March 31, 2009. The Company currently uses December 31 as the measurement date for its pension and postretirement plans.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, that provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for the Company’s fiscal year ending March 31, 2007. The Company elected early application of the provisions of SAB No. 108 during the second quarter of fiscal 2007. SAB No. 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the Company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantification of errors under both the iron curtain and the roll-over methods. SAB No. 108 permits initial application of its provisions either by (i) restating prior financial statements as if the “dual approach” had always been applied; or (ii) recording the cumulative effect of initially applying the “dual approach” as adjustments to the carrying values of assets and liabilities as of April 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. We elected to record the effects of applying SAB No. 108 using the cumulative effect transition method. The following table summarizes the effects up to April 1, 2006 of applying the guidance in SAB No. 108:
   
Period in which the
 
 
 
 
 
Misstatement Originated (1)
    
   
Cumulative
          
Adjustment
 
   
Prior to
 
Year Ended March 31,
  
Recorded as of
  
   
April 1, 2004
  
2005
  
2006
  
April 1, 2006
  
                   
Fixed assets (2)
  
$
482
  
$
324
  
$
732
  
$
1,538
  
Vacation (3)
    
-
   
-
   
510
   
510
 
Inventory (4)
    
-
   
-
   
456
   
456
 
Administrative expenses (5)
    
-
   
-
   
124
   
124
 
Deferred income taxes (6)
    
(166
)
  
(112
)
  
(575
)
  
(853
)
Impact on net income (7)
  
$
316
  
$
212
  
$
1,247
    
Retained earnings (8)
                    
$
1,775
  
 
 
 
(1)  
The Company has concluded that these errors were immaterial, individually and in the aggregate, to all periods prior to April 1, 2006.
(2)  
The Company was not properly accounting for the disposal of fixed assets within its Original Equipment - Europe segment. As a result of this error, net income was overstated by $482 (cumulatively) in fiscal years prior to 2005, by $324 in fiscal 2005 and by $732 in fiscal 2006. The Company recorded a $1,538 reduction of our fixed assets for disposals not previously recognized as of April 1, 2006 with a corresponding reduction in retained earnings to correct these misstatements.
(3)  
The Company was not properly recording its vacation accrual within its Original Equipment - Asia segment. As a result of this error, pretax income was overstated by $510 in fiscal 2006. The Company recorded a $510 increase in our vacation liability as of April 1, 2006 with a corresponding reduction in retained earnings to correct this misstatement. This includes $125 which was previously recorded in the first quarter of fiscal 2007.
(4)  
The Company did not properly recognize a $456 reduction in inventory at one operating location within the Original Equipment - Americas segment which was identified as a result of a physical inventory performed on September 26, 2006. As a result of this error, pretax income was overstated by $456 in fiscal 2006. The Company recorded a $456 reduction in our inventory balance as of April 1, 2006 with a corresponding reduction in retained earnings to correct this misstatement.
(5)  
As a result of a clerical error, the Company improperly capitalized certain Corporate administrative charges, consisting primarily of salaries and miscellaneous office expenses, within accounts receivable at March 31, 2006. As a result of this error, pretax income was overstated by $124 in fiscal 2006. The Company recorded a $124 reduction in our accounts receivable balance as of April 1, 2006 with a corresponding reduction in retained earnings to correct this misstatement.
(6)  
As a result of the misstatements previously described, our provision for income taxes was overstated by $166 (cumulatively) in fiscal years prior to 2005, by $112 in fiscal 2005 and by $575 in fiscal 2006. The Company recorded an increase in our deferred income tax assets in the amount of $853 as of April 1, 2006 with a corresponding increase in retained earnings to correct these misstatements.
(7)  
Represents the net overstatement of net income for the indicated periods resulting from these misstatements.
(8)  
Represents the net reduction to retained earnings recorded as of April 1, 2006 to reflect the initial application of SAB No. 108.

While the amounts above are considered immaterial to prior periods, they have been corrected through the cumulative effect adjustment upon adoption of SAB No. 108 as recording these amounts in fiscal 2007 as out-of-period adjustment would have had a material effect on the annual results of operations for fiscal 2007.

The following is a rollforward of retained earnings balance from March 31, 2006 through December 26, 2006 reflecting the net reduction in retained earnings as a result of adopting SAB No. 108:


Retained earnings, March 31, 2006
  
$
433,405
  
SAB No. 108 cumulative effect
    
(1,775
)
Net earnings
    
45,082
 
Cash dividends
    
(17,010
)
Stock repurchase program
    
(12,003
)
Retained earnings, December 26, 2006
  
$
447,699
  
 
 
Certain of the adjustments ((4) & (5)) included above also resulted in an error in the first quarter of fiscal 2007. This error represented an overstatement of net income for the first quarter of fiscal 2007 totaling approximately $600, which was corrected in the second quarter of fiscal 2007.

 Note 3: Employee Benefit Plans

Modine’s contributions to the defined contribution employee benefit plans for the three months ended December 26, 2006 and 2005 were $1,919 and $1,209, respectively. Modine’s contributions to the defined contribution employee benefit plans for the nine months ended December 26, 2006 and 2005 were $6,131 and $3,424, respectively.

In July 2006, the Company announced the closure of its facility in Clinton, Tennessee. The Company recorded a pension curtailment charge of $650 during the nine months ended December 26, 2006 to reflect the impact of this upcoming closure of the Clinton Hourly-Paid Employees Retirement Plan.

In May 2006, the Company offered a voluntary enhanced early retirement program to certain U.S. employees. This program generally included an enhanced pension benefit of five years of credited service for those employees who accepted the early retirement program. The Company recorded charges of $964 during the nine months ended December 26, 2006 to reflect this enhanced pension benefit.

Costs for Modine's pension and postretirement benefit plans for the three and nine months ended December 26, 2006 and 2005 include the following components:
 
   
Three months ended
December 26
Nine months ended
December 26
  
   
Pension
      
Postretirement
     
Pension
     
Postretirement
      
   
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
Service cost
  
$
1,076
  
$
2,173
  
$
77
  
$
90
  
$
3,291
  
$
5,997
  
$
271
  
$
282
  
Interest cost
    
3,741
   
3,625
   
386
   
317
   
11,318
   
10,233
   
1,349
   
1,384
 
Expected return on plan assets
    
(4,692
)
  
(4,929
)
  
-
   
-
   
(14,220
)
  
(13,674
)
  
-
   
-
 
Amortization of:
                                                  
Unrecognized net loss (gain)
    
1,415
   
1,109
   
2
   
(2
)
  
4,271
   
3,381
   
259
   
303
 
Unrecognized prior service cost
    
11
   
74
   
-
   
16
   
11
   
53
   
-
   
16
 
Unrecognized net asset
    
(6
)
  
(7
)
  
-
   
-
   
(20
)
  
(19
)
  
-
   
-
 
Adjustment for curtailment
    
(50
)
  
-
   
-
   
-
   
650
   
-
   
-
   
-
 
Enhanced pension benefit
    
24
   
-
   
-
   
-
   
964
         
-
   
-
 
Net periodic benefit cost
  
$
1,519
  
$
2,045
  
$
465
  
$
421
  
$
6,265
  
$
5,971
  
$
1,879
  
$
1,985
  
 
 
The Company made cash contributions in the third quarter of fiscal 2007 of $1,866 to its domestic qualified pension plans and expects to contribute an additional $54 during the remainder of the fiscal year. The Company made cash contributions in the third quarter of fiscal 2006 of $2,774 to its domestic qualified pension plans.

Note 4: Stock Based Compensation

The Company’s long-term stock-based incentive plans for employees consist of a discretionary stock option program for top managers and other key employees and an officers and key executive program that consists of a stock option component (20 percent), retention restricted stock component (20 percent) and a performance stock component (60 percent). The performance component of the long-term incentive compensation program consists of an earnings per share measure (weighted at 60 percent) based on a cumulative three year period and a total shareholder return measure (TSR) (weighted at 40 percent) compared to the performance of the S&P 500 (stock price change and dividends) over the same three year period. A new performance period begins each fiscal year so multiple performance periods, with separate goals, operate simultaneously. Stock options granted under each program have an exercise price equal to the fair market value of the common stock on the date of grant and are immediately exercisable after one year of service with the Company. Retention restricted stock awards are granted at fair market value and vest annually over a period of four to five years depending on the year of grant. The stock granted under the performance component, once earned, is fully vested and will be granted immediately.

In addition to the long-term stock-based incentive plans for employees, stock options and stock awards may be granted to non-employee directors by the Officer Nomination & Compensation Committee (ONC) of the Board of Directors. The Board or the ONC, as applicable, has the broad discretionary authority to set the terms of the awards of stock under the plan. Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of the common stock on the date of the grant. Unrestricted stock awards granted vest immediately.

The fulfillment of equity based grants is currently being accomplished through the issuance of new common shares. Shares being repurchased through the share repurchase program are being returned to the status of authorized but un-issued shares. Under the Company’s 2002 Incentive Stock Plan and the Amended and Restated 2000 Stock Incentive Plan for Non-Employee Directors, 1,521 shares and 233 shares, respectively, are available for the granting of additional options and awards.

Stock Options: All stock options granted under the plans described above were vested on April 1, 2006, the date of adoption of SFAS No. 123(R), except for employees who had not completed one year of service. The fair value of the option awards is estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions for the nine months ended December 26, 2005:
 
 

Expected life of options - years
    
5
  
Risk-free interest rate
    
3.69
%
Expected volatility of the Company's stock
    
35.75
%
Expected dividend yield on the Company's stock
    
2.77
%
Expected forfeiture rate
    
0
%
 
 
Expected volatilities are based on the historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The risk-free interest rate was based on yields of U.S. zero-coupon issues with a term equal to the expected life of the option for the week the options were granted. No stock options were granted by the Company in the first nine months of fiscal 2007. For the three and nine months ended December 26, 2006, Modine recorded $23 and $184, respectively, in compensation expense related to stock options that were outstanding but unvested at the April 2006 adoption date of SFAS No. 123(R) because the requisite one-year service period had not been completed. No compensation expense was recorded in the first nine months of fiscal 2006 related to stock options.

The weighted average fair value of stock options granted in the first quarter of fiscal 2006 was $8.64 per option. No options were granted in the second or third quarters of fiscal 2006. The total fair value of stock options vesting during the three and nine months ended December 26, 2006 was $26 and $350, respectively. As of December 26, 2006, the total compensation expense not yet recognized related to non-vested stock options was $9 and the weighted-average period in which the remaining expense is expected to be recognized is approximately one month.

A summary of the stock option activity for the three and nine months ended December 26, 2006 is as follows:


           
Weighted
 
 
 
 
 
 
 
 
 
average
 
 
 
 
 
Weighted
 
 
 
remaining
 
Aggregate
 
 
 
average
 
 
 
contractual
 
intrinsic
 
 
 
option price
 
Options
 
years
 
value
  
Three months ended December 26, 2006
                  
Outstanding September 26, 2006
 
$
27.21
    
2,382
              
Granted
   
-
   
-
             
Exercised
    
20.76
   
(24
)
            
Forfeited
    
-
   
-
             
Outstanding December 26, 2006
  
$
27.28
    
2,358
    
5.3
  
$
3,137
  
                           
Exercisable December 26, 2006
  
$
27.28
    
2,348
    
5.3
  
$
3,137
  
 
 
 
           
Weighted
 
 
 
 
 
 
 
 
 
average
 
 
 
 
 
Weighted
 
 
 
remaining
 
Aggregate
 
 
 
average
 
 
 
contractual
 
intrinsic
 
 
 
option price
 
Options
 
years
 
value
  
Nine months ended December 26, 2006
                          
Outstanding March 31, 2006
 
$
27.10
    
2,565
              
Granted
   
-
   
-
             
Exercised
    
20.64
   
(81
)
            
Forfeited
    
28.01
   
(126
)
            
Outstanding December 26, 2006
  
$
27.28
    
2,358
    
5.3
  
$
3,137
  
                           
Exercisable December 26, 2006
  
$
27.28
    
2,348
    
5.3
  
$
3,137
  
 
The aggregate intrinsic value in the table above represents the pre-tax difference between the closing price of Modine common shares on the last trading day of the third quarter of fiscal 2007 over the exercise price of the stock option, multiplied by the number of options outstanding or exercisable. The aggregate value shown is not recorded for financial statement purposes under SFAS No. 123(R) and the value will change based upon daily changes in the fair value of Modine’s common shares.

Additional information related to stock options exercised during the three and nine months ended December 26, 2006 and 2005 were as follows:
   
Three months ended
  
Nine months ended
   
December 26
  
December 26
  
   
2006
  
2005
  
2006
  
2005
  
                   
Intrinsic value of stock options exercised
  
$
93
  
$
1,244
  
$
250
  
$
4,624
  
Proceeds from stock options exercised
  
$
495
  
$
3,229
  
$
1,670
  
$
11,788
  
 
Restricted Stock: A summary of the restricted stock activity for the three and nine months ended December 26, 2006 is as follows:
 

   
Weighted
 
Shares
 
 
 
average
 
subject to
 
 
 
price
 
restrictions
  
Three months ended December 26, 2006
          
Non-vested at September 26, 2006
  
$
29.09
    
350
 
Granted
    
24.28
   
6
 
Vested
    
24.28
   
(6
)
Forfeited
    
28.05
   
(5
)
Non-vested at December 26, 2006
  
$
29.11
    
345
 
 
 

   
Weighted
 
Shares
 
 
 
average
 
subject to
 
 
 
price
 
restrictions
 
Nine months ended December 26, 2006
              
Non-vested at March 31, 2006
  
$
29.05
    
433
 
Granted
    
23.50
   
15
 
Vested
    
26.32
   
(82
)
Forfeited
    
27.61
   
(21
)
Non-vested at December 26, 2006
  
$
29.11
    
345
 
 
 
At December 26, 2006, Modine had approximately $6,210 of total unrecognized compensation cost related to non-vested restricted stock. The cost is expected to be recognized over a weighted average period of 2.7 years.

As required by SFAS No.123(R), management has made an estimate (based upon historical rates) of expected forfeitures and is recognizing compensation costs for those restricted shares expected to vest. A cumulative adjustment (net of income taxes) of $70 was recorded in the first quarter of fiscal 2007, reducing the compensation expense recognized on non-vested restricted shares.

Restricted Stock - Performance Based Shares: In fiscal 2006, the ONC changed the performance portion of the restricted stock award program lengthening the time horizon to a three-year period and establishing two performance measures - an EPS measure and a Total Shareholder Return (TSR) measure. Awards are earned based on the attainment of corporate financial goals over a three-year period and are paid at the end of that three-year performance period if the performance targets have been achieved. A new performance period begins each fiscal year so multiple performance periods, with separate goals, operate simultaneously. For the three and nine months ended December 26, 2006, Modine recorded $301 and $887, respectively, in compensation expense resulting from the TSR portion of the performance award. No expense was recorded relative to the EPS portion of the performance award based upon current projections of probable attainment of this portion of the award. The fair value of the TSR portion of the award was estimated in fiscal 2007 using a Monte Carlo valuation model. In fiscal 2006, the compensation expense recorded was based upon variable accounting under APB No. 25. Because the fiscal 2006 performance shares were unvested on the adoption date of SFAS No. 123(R), the Monte Carlo method was used to determine the fair value for recording compensation expense in fiscal 2007. The following table sets forth assumptions used to determine the fair value for each performance award:


   
May 2006
  
May 2005
  
   
Grant
  
Grant
  
           
Expected life of award - years
    
3
    
3
  
Risk-free interest rate
    
4.96
%
  
3.75
%
Expected volatility of the Company's stock
    
31.40
%
  
40.70
%
Expected dividend yield on the Company's stock
    
2.19
%
  
2.13
%
Expected forfeiture rate
    
5.00
%
  
5.00
%
 
 
At December 26, 2006, Modine had approximately $2,130 of total unrecognized compensation cost related to unvested performance based restricted stock. That cost is expected to be recognized over a weighted average period of 1.9 years.

Note 5: Other Income - Net

Other income - net was comprised of the following:
   
Three months ended December 26
Nine months ended December 26
  
   
2006
  
2005
  
2006
  
2005
  
Equity in earnings of non-consolidated affiliates
  
$
302
  
$
1,420
  
$
1,718
  
$
3,977
  
Interest income
    
386
   
474
   
865
   
1,316
 
Foreign currency transactions
    
(78
)
  
422
   
639
   
48
 
Purchase price settlement
    
2,900
   
-
   
2,900
   
-
 
Other non-operating income - net
   
535
   
96
   
814
   
349
 
Total other income - net
 
$
4,045
  
$
2,412
  
$
6,936
  
$
5,690
  
 
 
The purchase price settlement of $2,900 during the three and nine months ended December 26, 2006 relates to the Final Settlement Agreement between Modine and WiniaMando, Inc. effective November 30, 2006. See Note 11 for additional discussion of this settlement.

Note 6: Income Taxes

The provision for income taxes from continuing operations for the three months ended December 26, 2006 and 2005 was $2,831 and $10,002, respectively. During the three months ended December 26, 2006 and 2005, the Company’s effective income tax rate attributable to earnings from continuing operations was 14.8 percent and 43.3 percent, respectively. The effective tax rate for the third quarter of fiscal 2007 includes a decrease of approximately $2,723 resulting from legislation that was passed extending the research and development tax credit retroactively to January 1, 2006. This decrease was coupled with a decrease in foreign and state income taxes resulting from a favorable mix between foreign and domestic income as well as among foreign jurisdictions.

The provision for income taxes from continuing operations for the nine months ended December 26, 2006 and 2005 was a benefit of $1,061 and expense of $27,733, respectively. During the nine months ended December 26, 2006 and 2005, the Company’s effective income tax rate attributable to earnings from continuing operations was (2.4) percent and 36.6 percent, respectively. The effective tax rate for the first nine months of fiscal 2007 includes an approximate $8,000 non-recurring decrease resulting from the closure of the Company’s Taiwan facility, an approximate $3,600 decrease resulting from the recognition of a tax benefit related to net operating losses in Brazil that were previously unavailable, and a $2,723 decrease resulting from the passage of legislation extending the research and development tax credit.

The following is a reconciliation of the effective tax rate for the three and nine months ended December 26, 2006 and 2005:


   
Three months ended December 26
  
Nine months ended December 26
  
   
2006
  
2005
  
2006
  
2005
  
Statutory federal tax
    
35.0
%
  
35.0
%
  
35.0
%
  
35.0
%
State taxes, net of federal benefit
    
(2.1
)
  
0.6
   
(2.2
)
  
0.5
 
Taxes on non-U.S. earnings and losses
    
(4.2
)
  
(4.3
)
  
(5.6
)
  
(3.6
)
Foreign repatriation
    
-
   
8.7
   
-
   
2.7
 
Valuation allowance
    
0.4
   
3.6
   
3.6
   
2.4
 
Research and development tax credit
    
(15.2
)
        
(6.6
)
      
Worthless stock deduction
    
-
   
-
   
(18.1
)
  
-
 
Net operating losses in Brazil
    
-
   
-
   
(8.1
)
  
-
 
Other
    
0.9
   
(0.3
)
  
(0.4
)
  
(0.4
)
Effective tax rate
    
14.8
%
  
43.3
%
  
(2.4
%)
  
36.6
%
 
 
 
Note 7: Earnings Per Share

The computational components of basic and diluted earnings per share are summarized as follows:
 
   
Three months ended December 26
Nine months ended December 26
  
   
2006
  
2005
  
2006
  
2005
  
                   
Numerator:
                  
Earnings from continuing operations
  
$
16,346
  
$
13,075
  
$
45,012
  
$
48,095
  
Earnings from discontinued operations
    
-
   
443
   
-
   
457
 
Loss on spin off of discontinued operations
    
-
   
-
   
-
   
(53,625
)
Cumulative effect of accounting change
    
-
   
-
   
70
   
-
 
Net earnings (loss)
  
$
16,346
  
$
13,518
  
$
45,082
  
$
(5,073
)
Denominator:
                          
Weighted average shares outstanding – basic
    
32,074
   
33,656
   
32,153
   
34,057
 
Effect of dilutive securities
   
84
   
484
   
92
   
460
 
Weighted average shares outstanding – diluted
    
32,158
   
34,140
   
32,245
   
34,517
 
                           
Net earnings (loss) per share of common stock – basic:
                          
Continuing operations
  
$
0.51
  
$
0.39
  
$
1.40
  
$
1.41
  
Earnings from discontinued operations
    
-
   
0.01
   
-
   
0.01
 
Loss on spin off of discontinued operations
    
-
   
-
   
-
   
(1.57
)
Cumulative effect of accounting change
    
-
   
-
   
-
   
-
 
Net earnings (loss) – basic
  
$
0.51
  
$
0.40
  
$
1.40
  
$
(0.15
)
                           
Net earnings (loss) per share of common stock – diluted:
                          
Continuing operations
  
$
0.51
  
$
0.38
  
$
1.40
  
$
1.39
  
Earnings from discontinued operations
    
-
   
0.02
   
-
   
0.01
 
Loss on spin off of discontinued operations
    
-
   
-
   
-
   
(1.55
)
Cumulative effect of accounting change
    
-
   
-
   
-
   
-
 
Net earnings (loss) – diluted
  
$
0.51
  
$
0.40
  
$
1.40
  
$
(0.15
)
 
 
The calculation of diluted earnings per share excluded 1,645 and 0 options for the three months ended December 26, 2006 and 2005, respectively, and 1,645 and 31 options for the nine months ended December 26, 2006 and 2005, respectively, as the exercise price of these stock options was greater than the market price of the Company’s common stock on December 26, 2006, and were thus anti-dilutive. The calculation of diluted earnings per share also excludes 194 and 0 restricted stock awards for the three months ended December 26, 2006 and 2005, respectively, and 194 and 0 restricted stock awards for the nine months ended December 26, 2006 and 2005 as these awards were anti-dilutive.

Note 8: Comprehensive Earnings

Comprehensive earnings (loss), which represent net earnings (loss) adjusted by the change in accumulated other comprehensive income was as follows:
   
Three months ended December 26
  
Nine months ended December 26
  
   
2006
  
2005
  
2006
  
2005
  
Net earnings (loss)
  
$
16,346
  
$
13,518
  
$
45,082
  
$
(5,073
)
Foreign currency translation
    
12,625
   
(13,805
)
  
25,019
   
(28,305
)
Cash flow hedges
    
1,246
   
44
   
(24
)
  
(1,750
)
Minimum pension liability
    
-
   
120
   
-
   
120
 
Total comprehensive earnings (loss)
  
$
30,217
  
$
(123
)
$
70,077
  
$
(35,008
)
 
 
Note 9: Inventories

The amounts of raw material, 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 material, work in process and finished goods.


   
December 26, 2006
  
March 31, 2006
  
Raw materials
 
$
56,106
  
$
39,779
  
Work in process
    
29,137
    
29,435
  
Finished goods
    
31,653
    
21,013
  
Total inventories
  
$
116,896
  
$
90,227
  
 
 
 
Note 10: Property, Plant and Equipment

Property, plant and equipment consisted of the following:


   
December 26, 2006
  
March 31, 2006
  
Gross property, plant and equipment
 
$
1,044,124
  
$
940,319
  
Less accumulated depreciation
    
(524,519
)
  
(472,719
)
Net property, plant and equipment
  
$
519,605
  
$
467,600
  
 
 
 
Note 11: Acquisitions

Effective May 4, 2006, Modine acquired the remaining 50 percent of the stock of Radiadores Visconde Ltda. which it did not already own, for $11,096, net of cash acquired, and the incurrence of a $2,000 note which is payable in 24 months, for a total net purchase price of $13,096. The acquisition was financed using cash generated from operations and borrowing on the Company’s revolving credit agreement. The purchase agreement also includes a $4,000 performance payment which is contingent on the cumulative earnings before interest, taxes, depreciation and amortization of the business over a 24 month period.

This 50 percent step acquisition was accounted for under the purchase method. Acquired assets and liabilities assumed were recorded at their respective fair market values. A preliminary intangible asset was recorded at the acquisition date for a tradename valued at $1,161 which is being amortized over five years. The purchase price allocation, which is preliminary, subject to the finalization of intangible valuations, resulted in the fair market values of the assets and liabilities acquired exceeding the purchase price. Accordingly, the $4,000 contingent performance payment has been recorded as a liability in the purchase price allocation, reducing the amount by which the fair market values of the assets and liabilities acquired exceeded the purchase price, and increasing the total net purchase price to $17,096. The remaining excess by which the fair market values of assets and liabilities acquired exceeded the purchase price has been allocated as a reduction to the acquired long-lived assets on a pro-rata basis.

Prior to the acquisition, the Company accounted for its initial 50 percent investment in Radiadores Visconde Ltda. under the equity method. With the purchase of the remaining 50 percent, the Company ceased accounting for its investment in Radiadores Visconde Ltda. under the equity method and began accounting for its 100 percent ownership on a consolidated basis. The equity investment balance on May 4, 2006 totaled $26,650, and was allocated to the book value of the assets and liabilities previously owned. This resulted in the recognition of goodwill totaling $11,821 which consists of the excess of the initial 50 percent investment over the fair value of the assets and liabilities acquired. The goodwill is not deductible for income tax purposes.

Established in 1963 and based in Sao Paulo, Brazil, Radiadores Visconde Ltda. provides thermal management solutions to the automotive, truck, agricultural and construction equipment, and industrial application markets, as well as the automotive aftermarket for export and for distribution throughout Brazil. It manufactures a wide array of modules and heat exchangers for original equipment manufacturers including radiators, charge air coolers, and oil coolers.

The Radiadores Visconde Ltda. acquisition strongly fits into Modine’s geographic diversification goal of expanding the Company’s manufacturing footprint in lower-cost, emerging growth areas. This acquisition strengthens the Company as it provides an opportunity for Modine to follow its global customers to more geographic regions. In addition, this acquisition gives the Company the ability to transfer its global manufacturing and design standards to the Brazilian market, which provides the Company with the opportunity to improve its position in this market and grow its on-highway and off-highway business. This acquisition is reported in the Original Equipment-Americas segment. For financial reporting purposes, Radiadores Visconde Ltda. is included in the consolidated financial statements using a one-month delay similar to the Company’s other foreign subsidiaries. Accordingly, the operational results reported for the first nine months of fiscal 2007 include two months of equity method accounting for the Company’s initial 50 percent ownership prior to the acquisition, and seven months of consolidated activity reflecting the Company’s 100 percent ownership.
 
 
 

The following provides a preliminary allocation of the purchase price, including allocation of the equity investment balance as of the acquisition date:


Assets acquired:
  
Trade receivables – net
$15,210
Inventories
15,982
Other current assets
4,747
Property, plant and equipment – net
19,697
Goodwill (initial 50 percent already owned)
11,821
Tradename
1,161
Other noncurrent assets
161
Total assets
68,779
   
Liabilities assumed:
  
Accounts payable
10,420
Accrued compensation
3,312
Accrued expenses and other current liabilities
3,549
Other noncurrent liabilities
7,752
Total liabilities
25,033
 
 
Net assets acquired
43,746
Equity investment allocated to assets
 
acquired and liabilities assumed
26,650
Net purchase price
17,096
 
  
Recognized goodwill (purchased 50 percent)
$ ---
 
 
For the twelve months ended December 31, 2005, Radiadores Visconde Ltda.’s net sales were approximately $66,000, and its net earnings were approximately $4,000 over this same period. These results represent 4.2% of the Company’s net sales and 4.5% of the Company’s net earnings, after adjusting for equity earnings recognized, over this same twelve-month period.

Effective July 31, 2004, Modine acquired through its wholly owned subsidiary Modine Korea, LLC, the South Korean assets of the Automotive Climate Control Division of WiniaMando Inc. (ACC). Modine Manufacturing Company, through stock purchases, completed the acquisition of the balance of ACC’s operations in China, a wholly owned subsidiary in Shanghai, China and a 50 percent interest in a joint venture in Hefei, China, effective September 3, 2004 and October 15, 2004, respectively. Effective November 30, 2006, Modine and WiniaMando, Inc. entered into a Final Settlement Agreement under which the parties agreed to resolve a number of post-closing claims raised by Modine for $2,900. Modine recognized the settlement amount as income in other income-net in the consolidated statement of earnings for the three and nine months ended December 26, 2006. At December 26, 2006, all claims raised during the post-closing claims process have been resolved and there is no amount remaining in the escrow. Both Modine and WiniaMando, Inc. retained all rights and obligations arising under any continuing lease, service, or other agreement still existing between the parties.

Note 12: Restructuring, Plant Closures and Other Related Costs

In the first quarter of fiscal 2007, Modine announced a five-point global competitiveness program intended to reduce costs, accelerate technology development, and accelerate market and geographic expansion - all intended to stimulate growth and profits. Set forth below are the descriptions of the exit and disposal activities initiated during the first nine months of fiscal 2007 under this program.

In April 2006, the Company announced a plan to relocate its Harrodsburg, Kentucky-based research and development (R&D) activities, which are reported in the Corporate and administrative section in the segment disclosure, to its technology center in Racine, Wisconsin. This was done in conjunction with the creation of a product-focused group to support the passenger thermal management (PTM) needs of the truck and off-highway markets. The new group’s R&D activities, along with systems and applications engineering, are located in Racine while production remains in Harrodsburg. In conjunction with this plan, the Company anticipates incurring one-time termination benefits of $219, and other closure costs of $618. Total cash expenditures of $759 are anticipated to be incurred in conjunction with this plan. During the three and nine months ended December 26, 2006, reversals of $13 and charges of $146, respectively, of one-time termination benefits and charges of $471 and $482, respectively, of other closure costs were charged to earnings related to this plan.

In May 2006, the Company announced the closure of its Taiwan facility that manufactured high volume heat pipes for the personal computer and laptop markets through its electronic cooling business (which is reported in the Other segment). This closure decision was made to allow the Company to focus its attention and manufacturing assets to better serve the advanced thermal solutions segment of the electronics cooling market rather than the commodities segment. Operations ceased at this facility in July 2006, and approximately 200 employees have been affected by the action. During the three and nine months ended December 26, 2006, reversals of $109 and charges of $674, respectively, of one-time termination benefits and contract termination costs and charges of $428 and $1,862, respectively, of other closure costs were charged to earnings related to this plan. No significant further costs are anticipated to be incurred related to this closure. Total cash expenditures of $976 have been incurred in conjunction with this plan.

In May 2006, the Company offered a voluntary enhanced early retirement program in the U.S. that was accepted by approximately 50 employees. Retirement dates extend from August 2006 through March 2007. During the three and nine months ended December 26, 2006, charges of $66 and $1,971, respectively, were recorded related to benefits provided to employees who accepted the early retirement program. Total cash expenditures of $1,024 are anticipated to be incurred under this program.

On July 20, 2006, the Company announced plans to build a new facility adjacent to its current Nuevo Laredo, Mexico facility. In addition, the Company announced the closing of the Richland, South Carolina plant by consolidating production into the McHenry, Illinois facility to gain scale efficiencies in its U.S. manufacturing platform. The Company also announced the closing of its facility in Clinton, Tennessee, based on the anticipated phase out of certain customer programs over the 2007-2009 period. On December 12, 2006, the Company announced the closure of its Toledo, Ohio facility based on the phase out of customer programs in 2007. These announcements are anticipated to result in approximately $7,800 in pre-tax charges over the closure period, consisting of approximately $2,100 of employee-related costs and approximately $5,700 of other-related costs, such as relocation and miscellaneous facility closing costs. During the three and nine months ended December 26, 2006, reversals of $36 and charges of $1,295, respectively, of one-time termination benefits, a pension curtailment reversal of $50 and charges of $650, respectively, and other closure costs of $1,303 and $1,516, respectively, were recorded related to these plans. The actions should be completed by the end of fiscal 2009, and will result in cash-related expenditures totaling approximately $6,200.

In October 2006, the Company announced a reduction in force that affected approximately 50 employees in the U.S. During the three and nine months ended December 26, 2006, one-time termination benefits of $978 were recorded related to this plan. Total cash expenditures of $1,032 are anticipated to be incurred related to this plan.

In addition to the above announced plans, the Company is also completing certain other actions under its global competitiveness program, including selling, general and administrative expense reductions and equipment transfers to better utilize our existing facilities. During the three and nine months ended December 26, 2006, other repositioning costs of $528 and $607 were incurred related to these other actions.

Changes in the accrued restructuring liability during the three and nine months ended December 26, 2006 were comprised of the following related to the above described restructuring activities:


Three Months ended December 26, 2006
      
Termination Benefits:
        
Balance, September 27, 2006
  
$
1,441
  
Additions
    
1,055
 
Adjustments
    
(65
)
Payments
    
(1,136
)
Balance, December 26, 2006
  
$
1,295
  
         
Other Restructuring Charges:
        
Balance, September 27, 2006
  
$
222
  
Additions
    
-
 
Adjustments
    
(143
)
Payments
    
(79
)
Balance, December 26, 2006
  
$
-
  
         
Nine Months Ended December 26, 2006
        
Termination Benefits:
        
Balance, April 1, 2006
  
$
-
  
Additions
    
3,050
 
Adjustments
    
(65
)
Payments
    
(1,690
)
Balance, December 26, 2006
  
$
1,295
  
         
Other Restructuring Charges:
        
Balance, April 1, 2006
  
$
-
  
Additions
    
233
 
Adjustments
    
(146
)
Payments
    
(87
)
Balance, December 26, 2006
  
$
-
  
 
 
The following is the summary of restructuring and other repositioning costs recorded related to the programs announced in the three and nine months ended December 26, 2006:

 

   
Three months ended
 
Nine months ended
 
 
 
December 26, 2006
 
December 26, 2006
  
Restructuring charges:
              
Employee severance and related benefits
  
$
990
  
$
2,985
  
Contract termination costs
    
(144
)
  
86
 
Total restructuring charges
    
846
   
3,071
 
               
Other repositioning costs:
              
Special termination benefits - early retirement
    
66
   
1,971
 
Obsolete inventory charges
    
104
   
276
 
Fixed asset impairments/write-offs
    
1,051
   
1,764
 
Pension curtailment charge
    
(50
)
  
650
 
Miscellaneous other closure costs
    
1,549
   
2,449
 
Total other repositioning costs
    
2,720
   
7,110
 
               
Total restructuring and other repositioning costs
  
$
3,566
  
$
10,181
  
 
 
The total restructuring and other repositioning costs were recorded in the consolidated statement of earnings for the three and nine months ended December 26, 2006, respectively, as follows: $1,669 and $4,130 were recorded as a component of cost of sales; $1,051 and $2,980 were recorded as a component of selling, general and administrative expenses; and $846 and $3,071 were recorded as restructuring charges. 
 
 
Note 13: Goodwill and Intangible Assets
 
Changes in the carrying amount of goodwill during the first nine months of fiscal 2007, by segment and in the aggregate, are summarized in the following table:


   
OE-
  
OE-
  
OE-
  
Commercial
          
   
Americas
  
Asia
  
Europe
  
HVAC&R
  
Other
  
Total
  
                           
Balance, March 31, 2006
  
$
23,769
  
$
522
  
$
7,942
  
$
17,565
  
$
2,458
  
$
52,256
  
Acquisitions
    
11,821
   
-
   
-
   
-
   
-
   
11,821
 
Fluctuations in foreign currency
   
(426
)
  
1
   
880
   
1,990
   
(43
)
  
2,402
 
Balance, December 26, 2006
  
$
35,164
  
$
523
  
$
8,822
  
$
19,555
  
$
2,415
  
$
66,479
  
 
 
 
Intangible assets are comprised of the following:
   
December 26, 2006
  
March 31, 2006
  
   
Gross
     
Net
  
Gross
     
Net
  
   
Carrying
  
Accumulated
  
Intangible
  
Carrying
  
Accumulated
  
Intangible
  
   
Value
  
Amortization
  
Assets
  
Value
  
Amortization
  
Assets
  
                           
Amortized intangible assets:
                                      
Patents and product technology
  
$
3,951
  
$
(3,371
)
$
580
  
$
3,951
  
$
(3,175
)
$
776
  
Trademarks
    
10,529
   
(1,126
)
  
9,403
   
9,679
   
(552
)
  
9,127
 
Other intangibles
    
1,314
   
(282
)
  
1,032
   
111
   
(111
)
  
-
 
Total amortized intangible assets
    
15,794
   
(4,779
)
  
11,015
   
13,741
   
(3,838
)
  
9,903
 
Unamortized intangible assets:
                                      
Pension asset
    
2,832
   
-
   
2,832
   
2,832
   
-
   
2,832
 
Total intangible assets
  
$
18,626
  
$
(4,779
)
$
13,847
  
$
16,573
  
$
(3,838
)
$
12,735
  
 
 
The aggregate amortization expense for the three months ended December 26, 2006 and 2005 was $295 and $266, respectively. The aggregate amortization expense for the nine months ended December 26, 2006 and 2005 was $833 and $675, respectively. Total estimated annual amortization expense expected for the remainder of fiscal year 2007 through 2012 and beyond is as follows:
 

   
Estimated
  
Fiscal
  
Amortization
  
Year
  
Expense
  
       
Remainder of 2007
  
$
298
  
2008
    
1,188
  
2009
    
1,186
  
2010
    
930
  
2011
    
930
  
2012 & Beyond
    
6,483
 
 
 
Note 14: Indebtedness

On December 7, 2006, the Company entered into a $50,000, 5.68 percent Series A Senior note and a $25,000, 5.68 percent Series B Senior note with JPMorgan Securities Inc. acting as its agent with respect to placement of the notes. The proceeds from the notes are being used for general corporate purposes, including the repayment of borrowings on existing domestic credit lines. The Series A Senior notes mature on December 7, 2017 and the Series B Senior notes mature on December 7, 2018. The notes contain customary restrictive covenants, including those relating to guarantor subsidiaries; consolidations and mergers; sale of assets; investments, loans, and encumbrances; transactions with affiliates; and Modine’s total debt to EBITDA ratio. In conjunction with this offer, the Company entered into two forward starting swaps to lock the interest rates. See Note 16 for additional disclosure regarding these forward starting swaps.


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 26, 2006 and March 31, 2006, approximately 55 percent and 58 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. 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 1% of outstanding trade receivable balances for the presented periods.

Inter-Company Loans Denominated in Foreign Currencies: In addition to the external borrowing, the Company has certain foreign-denominated long-term inter-company loans that are sensitive to foreign exchange rates. At December 26, 2006, the Company had a 28.9 billion won ($31,073), 8-year loan to its wholly owned subsidiary, Modine Korea, LLC, that matures on August 31, 2012. On April 6, 2005, the Company entered into a zero cost collar to hedge the foreign exchange exposure on the entire amount of the Modine Korea, LLC loan. This collar was settled on August 29, 2006 for a loss of $1,139. On August 29, 2006, the Company entered into a new zero cost collar that expires on February 29, 2008 to hedge the foreign exchange exposure on the entire amount of the Modine Korea, LLC loan.

Note 16: Foreign Exchange Contracts/Derivatives/Hedges

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

Commodity Derivatives: During the first nine months of fiscal 2007, the Company entered 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 purchase 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, and recognized as a component of earnings at the same time that the underlying purchases of aluminum and natural gas impact earnings. During the three and nine months ended December 26, 2006, $53 of income and $75 of expense, respectively, were recorded in the consolidated statement of earnings related to the settlement of certain futures contracts. At December 26, 2006, $1,064 of unrealized gains remains deferred in other comprehensive income, and will be realized as a component of cost of sales over the next five months.

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 December 29, 2005. The derivative instrument was treated as a cash flow hedge of a benchmark interest rate. The contract was settled on December 1, 2005 with a loss of $1,794. The loss was reflected as a component of accumulated other comprehensive income (loss), net of income taxes, and is being amortized to interest expense over the ten-year life of the private placement borrowing.

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 on the private placement borrowing was locked and, accordingly, the Company terminated and settled the forward starting swaps at a loss of $1,812. The forward starting swaps were treated as cash flow hedges of forecasted transactions. The $1,812 loss is reflected as a component of accumulated other comprehensive income (loss), net of income taxes of $634, and is being amortized to interest expense over the respective eleven and twelve year lives of the $50,000 and $25,000 borrowings.

During the three months and nine months ended December 26, 2006, $36 and $91 of expense, respectively, was recorded in the consolidated statements of earnings related to the interest rate derivatives. At December 26, 2006, $2,129 of net unrealized losses on the interest rate derivatives remains deferred in other comprehensive income (loss).

Note 17: 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. 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 analyses 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 for the three and nine months ended December 26, 2006 and 2005 were as follows:


   
Three months ended December 26
   
2006
  
2005
  
           
Balance, September 26
  
$
10,233
  
$
11,985
  
Acquisitions
    
-
   
-
 
Accruals for warranties issued in current period
    
1,688
   
1,667
 
Reversals related to pre-existing warranties
    
(106
)
  
(408
)
Settlements made
    
(2,232
)
  
(2,398
)
Effect of exchange rate changes
    
207
   
(185
)
Balance, December 26
  
$
9,790
  
$
10,661
  

 
   
Nine months ended December 26
   
2006
  
2005
  
           
Balance, March 31
  
$
10,893
  
$
14,885
  
Acquisitions
    
527
   
380
 
Accruals for warranties issued in current period
    
5,761
   
6,433