form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
 
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

or

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

For the transition period from ____________ to ____________

Commission file number 1-1373

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ    No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer o   Accelerated Filer þ
   
Non-accelerated Filer o (Do not check if a smaller reporting company)  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The number of shares outstanding of the registrant's common stock, $0.625 par value, was 47,198,088 at November 1, 2012.
 


 
 

 
 
MODINE MANUFACTURING COMPANY
INDEX
 
   
PART I.  FINANCIAL INFORMATION
1
1
21
31
31
PART II.  OTHER INFORMATION
32
32
Item 6.  Exhibits.
33
34
 
 
 


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements.

MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 2012 and 2011
(In thousands, except per share amounts)
(Unaudited)

   
Three months ended
September 30
   
Six months ended
September 30
 
   
2012
   
2011
   
2012
   
2011
 
Net sales
  $ 339,922     $ 397,290     $ 690,298     $ 815,153  
Cost of sales
    287,326       334,916       586,117       682,977  
Gross profit
    52,596       62,374       104,181       132,176  
Selling, general and administrative expenses
    41,318       50,176       84,472       99,720  
Impairment charges
    16,748       -       16,748       -  
Restructuring and repositioning expenses
    1,317       -       5,877       -  
(Loss) income from operations
    (6,787 )     12,198       (2,916 )     32,456  
Interest expense
    3,370       3,297       6,409       6,287  
Other (income) expense – net
    (139 )     6,223       (305 )     5,884  
(Loss) earnings from continuing operations before income taxes
    (10,018 )     2,678       (9,020 )     20,285  
Provision for income taxes
    1,830       1,678       3,883       6,719  
(Loss) earnings from continuing operations
    (11,848 )     1,000       (12,903 )     13,566  
(Loss) earnings from discontinued operations (net of income taxes)
    (105 )     373       72       373  
Net (loss) earnings
    (11,953 )     1,373       (12,831 )     13,939  
Less: Net earnings attributable to noncontrolling interest
    267       38       568       29  
Net (loss) earnings attributable to Modine
  $ (12,220 )   $ 1,335     $ (13,399 )   $ 13,910  
                                 
(Loss) earnings per share from continuing operations attributable to Modine shareholders:
                               
Basic
  $ (0.26 )   $ 0.02     $ (0.29 )   $ 0.29  
Diluted
  $ (0.26 )   $ 0.02     $ (0.29 )   $ 0.29  
                                 
Net (loss) earnings per share attributable to Modine shareholders:
                               
Basic
  $ (0.26 )   $ 0.03     $ (0.29 )   $ 0.30  
Diluted
  $ (0.26 )   $ 0.03     $ (0.29 )   $ 0.30  
                                 
Weighted average shares outstanding:
                               
Basic
    46,584       46,477       46,565       46,419  
Diluted
    46,584       46,858       46,565       46,919  

The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
 
 
1

 
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended September 30, 2012 and 2011
(In thousands)
(Unaudited)

   
Three months ended
September 30
   
Six months ended
September 30
 
   
2012
   
2011
   
2012
   
2011
 
Net (loss) earnings
  $ (11,953 )   $ 1,373     $ (12,831 )   $ 13,939  
Other comprehensive income (loss), net of tax:
                               
Foreign currency translation
    5,134       (30,926 )     (13,831 )     (23,264 )
Cash flow hedges
    991       (3,462 )     1,715       (5,574 )
Change in benefit plan adjustment
    825       1,670       1,824       3,223  
Total other comprehensive income (loss)
    6,950       (32,718 )     (10,292 )     (25,615 )
                                 
Comprehensive loss
    (5,003 )     (31,345 )     (23,123 )     (11,676 )
Comprehensive income attributable to noncontrolling interest
    267       38       568       29  
Comprehensive loss attributable to Modine
  $ (5,270 )   $ (31,383 )   $ (23,691 )   $ (11,705 )

The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
 
 
2

 
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, 2012 and March 31, 2012
(In thousands, except per share amounts)
(Unaudited)

   
September 30, 2012
   
March 31, 2012
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 29,620     $ 31,445  
Trade receivables, less allowance for doubtful accounts of $1,011 and $809
    177,788       216,103  
Inventories
    121,585       120,819  
Other current assets
    71,498       59,164  
Total current assets
    400,491       427,531  
Property, plant and equipment – net
    372,077       412,059  
Investment in affiliate
    4,000       3,728  
Goodwill
    29,527       29,933  
Intangible assets – net
    8,903       5,805  
Other noncurrent assets
    17,490       14,405  
Total assets
  $ 832,488     $ 893,461  
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Short-term debt
  $ 19,750     $ 21,296  
Long-term debt – current portion
    737       1,093  
Accounts payable
    130,187       156,907  
Accrued compensation and employee benefits
    48,408       50,643  
Other current liabilities
    66,169       67,612  
Total current liabilities
    265,251       297,551  
Long-term debt
    142,566       141,892  
Deferred income taxes
    11,943       12,297  
Pensions
    87,445       94,091  
Postretirement benefits
    6,557       6,426  
Other noncurrent liabilities
    14,263       15,072  
Total liabilities
    528,025       567,329  
Commitments and contingencies (See Note 18)
               
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 47,720 and 47,361 shares, respectively
    29,825       29,600  
Additional paid-in capital
    169,629       168,290  
Retained earnings
    218,429       231,828  
Accumulated other comprehensive loss
    (100,598 )     (90,306 )
Treasury stock at cost: 617 and 594 shares, respectively
    (14,648 )     (14,505 )
Total Modine shareholders' equity
    302,637       324,907  
Noncontrolling interest
    1,826       1,225  
Total equity
    304,463       326,132  
Total liabilities and equity
  $ 832,488     $ 893,461  

The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
 
 
3


MODINE MANUFACTURING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 2012 and 2011
(In thousands)
(Unaudited)

   
Six months ended September 30
 
   
2012
   
2011
 
             
Cash flows from operating activities:
           
Net (loss) earnings
  $ (12,831 )   $ 13,939  
Adjustments to reconcile net (loss) earnings with net cash provided by operating activities:
               
Depreciation and amortization
    28,189       29,154  
Impairment charges
    16,748       -  
Other – net
    6,235       6,379  
Net changes in operating assets and liabilities
    (11,579 )     (46,315 )
Net cash provided by operating activities
    26,762       3,157  
                 
Cash flows from investing activities:
               
Expenditures for property, plant and equipment
    (20,717 )     (32,532 )
Acquisition, net of cash acquired
    (4,938 )     -  
Other – net
    (1,621 )     1,794  
Net cash used for investing activities
    (27,276 )     (30,738 )
                 
Cash flows from financing activities:
               
Short-term debt – net
    (1,354 )     2,264  
Borrowings of long-term debt
    59,541       82,749  
Repayments of long-term debt
    (59,000 )     (59,680 )
Other – net
    (28 )     921  
Net cash (used for) provided by financing activities
    (841 )     26,254  
                 
Effect of exchange rate changes on cash
    (470 )     (1,385 )
Net decrease in cash and cash equivalents
    (1,825 )     (2,712 )
                 
Cash and cash equivalents at beginning of period
    31,445       32,930  
Cash and cash equivalents at end of period
  $ 29,620     $ 30,218  

The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
 
 
4

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

Note 1: General

The accompanying condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles (GAAP) in the United States applied on a basis consistent with those principles used in the preparation of the annual consolidated financial statements of Modine Manufacturing Company (Modine or the Company) for the fiscal year ended March 31, 2012.  The financial statements include all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods.  Results for the first six months of fiscal 2013 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, 2012.

Note 2: Significant Accounting Policies

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, 2012, the quarterly results for fiscal 2012 have been revised as a result of errors identified during fiscal 2012 that were not considered material individually or in the aggregate to previously issued financial statements but were considered significant to the quarters in which they were identified.  For the three months ended September 30, 2011, cost of sales decreased $355, gross profit increased $355, selling, general and administrative expenses increased $101, other expense – net increased $197, provision for income taxes decreased $318 and earnings from continuing operations increased $375 as a result of the revisions.  Diluted earnings per share from continuing operations and diluted net earnings per share increased $0.01 for the three months ended September 30, 2011 as a result of these revisions.  For the six months ended September 30, 2011, cost of sales decreased $726, gross profit increased $726, selling, general and administrative expenses increased $207, provision for income taxes increased $694 and earnings from continuing operations decreased $175 as a result of the revisions.  Diluted earnings per share from continuing operations and diluted net earnings per share were unchanged for the six months ended September 30, 2011 as a result of these revisions.

Out of period adjustment:  During the first quarter of fiscal 2013, the Company identified an error related to certain commodity hedges that should have been deemed ineffective in the fourth quarter of fiscal 2012, which understated pre-tax earnings by $542 in the fourth quarter of fiscal 2012, and overstated pre-tax earnings by this same amount in the first quarter of fiscal 2013.  This amount was not considered material to the financial statements of either the fourth quarter of fiscal 2012 or the first six months of fiscal 2013.

New accounting pronouncements:  In June 2011, the Financial Accounting Standards Board (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.  The Company adopted this guidance beginning in the first quarter of fiscal 2013 with the two consecutive statement approach.

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 amendment is effective for the Company’s upcoming fiscal 2013 goodwill impairment test.  The Company is assessing this new guidance and does not anticipate any impact on its consolidated financial statements from the adoption of this amendment.
 
 
5

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

Note 3: Employee Benefit Plans

During the three months ended September 30, 2012 and 2011, the Company recorded compensation expense of $1,414 and $655, respectively, related to its 401(k) defined contribution plans. During the six months ended September 30, 2012 and 2011, the Company recorded compensation expense of $3,044 and $1,885, respectively, related to its 401(k) defined contribution plans.

During the three months ended September 30, 2012 and 2011, the Company elected to contribute $2,600 and $2,150, respectively, to its U.S. pension plans.   During the six months ended September 30, 2012 and 2011, the Company elected to contribute $4,750 and $7,200, respectively, to its U.S. pension plans.

Costs for Modine's pension and postretirement benefit plans include the following components:

   
Three months ended
September 30
   
Six months ended
September 30
 
   
Pension
   
Postretirement
   
Pension
   
Postretirement
 
   
2012
   
2011
   
2012
   
2011
   
2012
   
2011
   
2012
   
2011
 
Service cost
  $ 157     $ 425     $ 12     $ 9     $ 298     $ 851     $ 23     $ 21  
Interest cost
    3,385       3,502       80       89       6,726       7,007       154       173  
Expected return on plan assets
    (4,023 )     (3,848 )     -       -       (8,054 )     (7,696 )     -       -  
Amortization of:
                                                               
Unrecognized net loss (gain)
    1,238       1,995       (6 )     -       2,493       3,990       (6 )     (12 )
Unrecognized prior service credit
    -       -       (372 )     (416 )     -       -       (744 )     (831 )
Net periodic benefit cost (income)
  $ 757     $ 2,074     $ (286 )   $ (318 )   $ 1,463     $ 4,152     $ (573 )   $ (649 )
 
Note 4: Stock-Based Compensation

Stock-based compensation consists of stock options, restricted stock granted for retention and performance and discretionary unrestricted stock.  Compensation cost is calculated based on the fair value of the instrument at the time of grant, and is recognized as expense over the vesting period of the stock-based instrument.  Modine recognized stock-based compensation cost of $672 and $1,738 for the three months ended September 30, 2012 and 2011, respectively.  Modine recognized stock-based compensation cost of $1,564 and $2,578 for the six months ended September 30, 2012 and 2011, respectively.  The performance component of awards granted under the long-term incentive plan during the first quarter of fiscal 2013 is based on consolidated target return on average capital employed (ROACE) (weighted at 50 percent), cumulative revenue over the three year performance period (weighted at 25 percent), and a target European ROACE at the end of the three year performance period (weighted at 25 percent).  The Company currently considers the attainment of the consolidated ROACE and European ROACE components to be probable.  ROACE is defined as operating income adjusted to exclude unusual, non-recurring or extraordinary non-cash charges and cash restructuring and repositioning charges, multiplied by 70 percent to account for an assumed 30 percent income tax rate, and further adjusted to exclude earnings (or losses) attributable to minority shareholders; divided by total debt plus shareholders’ equity.  Cumulative revenue is the Company’s net sales over the performance period.  European ROACE is defined as the Europe segment operating income, less research and development charges to the Company’s corporate expenses, adjusted to exclude unusual, non-recurring or extraordinary non-cash charges and cash restructuring and repositioning charges, multiplied by 70 percent to account for an assumed 30 percent income tax rate; divided by Europe segment total assets, less cash and cash equivalents and Europe segment total liabilities, excluding debt.
 
 
6

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

The following tables present the fair market value of stock-based compensation awards granted during the three and six months ended September 30, 2012 and 2011:

   
Three months ended September 30,
 
   
2012
   
2011
 
         
Fair Value
         
Fair Value
 
   
Shares
   
Per Award
   
Shares
   
Per Award
 
Stock options
    5     $ 5.58       141     $ 10.45  
Unrestricted stock
    -       -       28     $ 14.93  
Restricted stock - retention
    15     $ 6.93       63     $ 14.93  
Restricted stock - performance based
    -       -       190     $ 14.93  

   
Six months ended September 30,
 
   
2012
   
2011
 
         
Fair Value
         
Fair Value
 
   
Shares
   
Per Award
   
Shares
   
Per Award
 
Stock options
    243     $ 4.26       141     $ 10.45  
Unrestricted stock
    -       -       28     $ 14.93  
Restricted stock - retention
    368     $ 5.80       63     $ 14.93  
Restricted stock - performance based
    353     $ 5.75       190     $ 14.93  

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

   
Six months ended September 30,
 
   
2012
   
2011
 
Expected life of awards in years
    6.3       6.3  
Risk-free interest rate
    0.86 %     1.93 %
Expected volatility of the Company's stock
    87.35 %     79.56 %
Expected dividend yield on the Company's stock
    0.0 %     0.0 %

As of September 30, 2012, the total remaining unrecognized compensation cost related to the non-vested stock-based compensation awards, which will be amortized over the weighted average remaining service periods, was as follows:

   
Unrecognized
Compensation
Cost
   
Weighted Average
Remaining Service
Period in Years
 
Stock options
  $ 1,403       2.1  
Restricted stock - retention
    3,341       3.2  
Restricted stock - performance
    1,717       2.3  
Total
  $ 6,461       2.7  

 
7

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

Note 5: Other Income (Expense) – Net

Other income (expense) was comprised of the following:

   
Three months ended
September 30
   
Six months ended
September 30
 
   
2012
   
2011
   
2012
   
2011
 
Equity in (loss) earnings of non-consolidated affiliate
  $ (40 )   $ (13 )   $ 133     $ (415 )
Interest income
    120       206       325       386  
Foreign currency transactions
    25       (6,412 )     (227 )     (5,865 )
Other non-operating income (expense) - net
    34       (4 )     74       10  
Total other income (expense) - net
  $ 139     $ (6,223 )   $ 305     $ (5,884 )

Foreign currency transactions for the three and six months ended September 30, 2012 and 2011 were primarily comprised of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency denominated assets and liabilities, including inter-company loans and transactions denominated in a foreign currency.

Note 6: Income Taxes

For the three months ended September 30, 2012 and 2011, the Company’s provision for income taxes was $1,830 and $1,678, respectively.  For the six months ended September 30, 2012 and 2011, the Company’s provision for income taxes was $3,883 and $6,719, respectively.

During the three months ended September 30, 2012, the Company continued to record a full valuation allowance against its net deferred tax assets in the U.S., Germany and certain other foreign jurisdictions as it is more likely than not that these assets will not be realized based on historical performance.  The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions going forward until the need for a valuation allowance is eliminated.  The need for a valuation allowance will be eliminated when the Company determines it is more likely than not that the deferred tax assets will be realized.  It is possible that by the end of fiscal 2013 or in fiscal 2014, the U.S. taxing jurisdiction will no longer be in a cumulative three year loss position thereby removing significant negative evidence concerning the valuation allowance.  The Company will continue to evaluate all positive and negative evidence to determine the propriety of the valuation allowance against the net deferred tax assets of this jurisdiction.

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 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 impacts of certain significant, unusual or infrequently occurring items are recorded in the period in which they occur. For the six months ended September 30, 2012, 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 continues to no longer be 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.  The income tax provision or benefit for the Company’s other foreign operations are recorded under the overall effective tax rate methodology.

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.  A tax audit in Germany, covering fiscal years 2006 through 2010, commenced during the first quarter of fiscal 2013 and is in its early stages.  The Company has not been notified of any other tax examinations covering open periods.
 
 
8

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

Note 7: Earnings Per Share

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

   
Three months ended
September 30
   
Six months ended
September 30
 
   
2012
   
2011
   
2012
   
2011
 
Basic Earnings Per Share:
                       
(Loss) earnings from continuing operations
  $ (11,848 )   $ 1,000     $ (12,903 )   $ 13,566  
Less: Net earnings attributable to noncontrolling interest
    (267 )     (38 )     (568 )     (29 )
(Loss) earnings from continuing operations attributable to  Modine
    (12,115 )     962       (13,471 )     13,537  
Less: Undistributed earnings attributable to unvested shares
    -       (3 )     -       (51 )
Net (loss) earnings from continuing operations available to  Modine shareholders
    (12,115 )     959       (13,471 )     13,486  
Net (loss) earnings from discontinued operations
    (105 )     373       72       373  
Less: Undistributed earnings attributable to unvested shares
    -       (1 )     (1 )     (1 )
Net (loss) earnings from discontinued operations available to  Modine shareholders
    (105 )     372       71       372  
Net (loss) earnings available to Modine shareholders
  $ (12,220 )   $ 1,331     $ (13,400 )   $ 13,858  
                                 
Weighted average shares outstanding - basic
    46,584       46,477       46,565       46,419  
                                 
(Loss) earnings from continuing operations per share
  $ (0.26 )   $ 0.02     $ (0.29 )   $ 0.29  
Net earnings from discontinued operations per share
    -       0.01       -       0.01  
Net (loss) earnings per share - basic
  $ (0.26 )   $ 0.03     $ (0.29 )   $ 0.30  

 
9

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

   
Three months ended
September 30
   
Six months ended
September 30
 
   
2012
   
2011
   
2012
   
2011
 
Diluted Earnings Per Share:
                       
(Loss) earnings from continuing operations
  $ (11,848 )   $ 1,000     $ (12,903 )   $ 13,566  
Less: Net earnings attributable to noncontrolling interest
    (267 )     (38 )     (568 )     (29 )
(Loss) earnings from continuing operations attributable to Modine
    (12,115 )     962       (13,471 )     13,537  
Less: Undistributed earnings attributable to unvested shares
    -       (4 )     -       (35 )
Net (loss) earnings from continuing operations available to Modine shareholders
    (12,115 )     958       (13,471 )     13,502  
Net (loss) earnings from discontinued operations
    (105 )     373       72       373  
Less: Undistributed earnings attributable to unvested shares
    -       (1 )     (1 )     (1 )
Net (loss) earnings from discontinued operations available to Modine shareholders
    (105 )     372       71       372  
Net (loss) earnings available to Modine shareholders
  $ (12,220 )   $ 1,330     $ (13,400 )   $ 13,874  
                                 
Weighted average shares outstanding - basic
    46,584       46,477       46,565       46,419  
Effect of dilutive securities
    -       381       -       500  
Weighted average shares outstanding - diluted
    46,584       46,858       46,565       46,919  
                                 
(Loss) earnings from continuing operations per share
  $ (0.26 )   $ 0.02     $ (0.29 )   $ 0.29  
Net earnings from discontinued operations per share
    -       0.01       -       0.01  
Net (loss) earnings per share - diluted
  $ (0.26 )   $ 0.03     $ (0.29 )   $ 0.30  

For the three and six months ended September 30, 2012, the total number of potential dilutive securities was 228 and 282, respectively.  However, these securities were not included in the computation of diluted net loss per share for the three and six months ended September 30, 2012, since to do so would decrease the loss per share.  For the three and six months ended September 30, 2012, 1,273 shares issuable upon the exercise of stock options were anti-dilutive and excluded from the calculation of diluted earnings per share.  In addition, for the three and six months ended September 30, 2012, 146 and 131, respectively of restricted stock awards were anti-dilutive and were also excluded from the calculation of diluted earnings per share.  For the three and six months ended September 30, 2011, 1,497 shares issuable upon the exercise of stock options and 189 shares of restricted stock awards were anti-dilutive and were excluded from the calculation of diluted earnings per share.

Note 8: Inventories

Inventories consisted of the following:

   
September 30, 2012
   
March 31, 2012
 
Raw materials and work in process
  $ 86,994     $ 88,632  
Finished goods
    34,591       32,187  
Total inventories
  $ 121,585     $ 120,819  

 
10

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

Note 9: Property, Plant and Equipment

Property, plant and equipment consisted of the following:

   
September 30, 2012
   
March 31, 2012
 
Gross property, plant and equipment
  $ 1,034,224     $ 1,092,703  
Accumulated depreciation
    (662,147 )     (680,644 )
Net property, plant and equipment
  $ 372,077     $ 412,059  

Note 10: Acquisitions

On July 25, 2012, the Company completed the acquisition of Geofinity Manufacturing of Surrey, British Columbia for cash consideration of $4,938, net of cash acquired.  This acquisition, which is included in the Commercial Products segment, provides Modine with a product line of innovative geothermal heat pumps in both water-to-water and water-to-air models.  Acquired assets and liabilities assumed were recorded at their respective fair values.  The purchase price allocation resulted in acquired technology of $3,477, working capital net assets of $678 and goodwill of $783.  Acquired technology consists of a fully developed product line, technical processes and intellectual property and is being amortized over ten years.

During fiscal 2007, the Company acquired the remaining 50 percent of Radiadores Visconde Ltda.  The purchase agreement included a $2,000 note which was payable subject to the resolution of certain obligations of the sellers.  During the second quarter of fiscal 2013, the Company and the sellers reached a final resolution under which the Company is not obligated to pay the note to the seller.  As a result, the Company recorded a $2,000 reduction to selling, general and administrative expenses in the South America segment during the second quarter of fiscal 2013.

Note 11: Impairment and Restructuring Charges

During the first quarter of fiscal 2013, the Company announced its intention to restructure its Europe segment.  The Company expects actions will include exiting certain non-core product lines based on its global product strategy, reducing manufacturing costs, implementing headcount reductions, and disposing of or selling certain assets.  The restructuring is designed to align the cost structure of the segment with the segment’s strategic focus on the commercial vehicle, off-highway and engine product markets, while improving gross margin and return on average capital employed.

Since the commencement of the Europe segment restructuring, the Company has recorded $15,756 of asset impairment charges, $5,616 of employee severance costs and $261 of repositioning expenses.  The Company currently anticipates incurring additional restructuring and repositioning costs of approximately $10,000, with the majority of these costs being incurred through fiscal 2014.  Total future cash expenditures of approximately $15,000 are anticipated to be incurred related to this restructuring plan.
 
 
11

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

Restructuring and repositioning expenses relative to the Europe segment restructuring program were as follows:
 
   
Three months ended
September 30
   
Six months ended
September 30
 
   
2012
   
2011
   
2012
   
2011
 
                         
Employee severance and related benefits
  $ 1,114     $ -     $ 5,616     $ -  
Repositioning costs
    203       -       261       -  
Total restructuring and repositioning expenses
  $ 1,317     $ -     $ 5,877     $ -  

Changes in accrued severance were as follows:

   
Three months ended
September 30, 2012
   
Six months ended
September 30, 2012
 
             
Beginning balance
  $ 4,344     $ -  
Additions
    1,114       5,616  
Payments
    (815 )     (966 )
Effect of exchange rate changes
    98       91  
Balance, September 30, 2012
  $ 4,741     $ 4,741  

The Company recorded asset impairment charges of $16,748 during the quarter ended September 30, 2012 to reduce the carrying value of certain facilities held for sale in the North America and Europe segments to their estimated fair value, less costs to sell.  Assets held for sale of $6,646 and $2,450 at September 30, 2012 and March 31, 2012, respectively, included in other noncurrent assets, consist of facilities that the Company is currently marketing for sale.  Upon designation as held for sale, the carrying value of the asset was measured at the lower of its carrying value or its estimated fair value, less costs to sell.

Note 12: Goodwill and Intangible Assets

Changes in the carrying amount of goodwill during the first six months of fiscal 2013 were as follows:

         
South
   
Commercial
       
   
Asia
   
America
   
Products
   
Total
 
                         
Goodwill, March 31, 2012
  $ 520     $ 13,498     $ 15,915     $ 29,933  
Acquisition
    -       -       783       783  
Fluctuations in foreign currency
    -       (1,323 )     134       (1,189 )
Goodwill, September 30, 2012
  $ 520     $ 12,175     $ 16,832     $ 29,527  

 
12

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

Intangible assets were comprised of the following:

   
September 30, 2012
   
March 31, 2012
 
   
Gross
         
Net
   
Gross
         
Net
 
   
Carrying
   
Accumulated
   
Intangible
   
Carrying
   
Accumulated
   
Intangible
 
   
Value
   
Amortization
   
Assets
   
Value
   
Amortization
   
Assets
 
                                     
Tradenames
  $ 9,955     $ (4,511 )   $ 5,444     $ 10,387     $ (4,582 )   $ 5,805  
Acquired technology
    3,477       (18 )     3,459       -       -       -  
Total intangible assets
  $ 13,432     $ (4,529 )   $ 8,903     $ 10,387     $ (4,582 )   $ 5,805  

Amortization expense for the three months ended September 30, 2012 and 2011 was $167 and $152, respectively, and for the six months ended September 30, 2012 and 2011 was $317 and $311, respectively.  Total estimated amortization expense expected for the remainder of fiscal year 2013 through 2018 and beyond is as follows:

   
Estimated
 
Fiscal
 
Amortization
 
Year
 
Expense
 
       
Remainder of 2013
  $ 400  
2014
    795  
2015
    1,111  
2016
    1,208  
2017
    1,266  
2018 & Beyond
    4,123  

Note 13: Indebtedness

The Company has $125,000 outstanding 6.83 percent Senior Notes, maturing on August 12, 2020.  As of September 30, 2012, the Company also had $6,000 outstanding under its $145,000 domestic revolving credit facility, which expires in August 2014.  At March 31, 2012, the Company had $9,000 outstanding on this domestic revolving credit facility.

Provisions contained in the Company’s revolving credit facility and Senior Note agreements require the Company to maintain compliance with various covenants.  The Company was in compliance with its covenants as of September 30, 2012.

Modine also maintains credit agreements with foreign banks with outstanding short-term borrowings at September 30, 2012 and March 31, 2012 of $19,750 and $21,296, respectively.  The foreign unused lines of credit in Europe, Brazil, China and India at September 30, 2012 were $54,000.  Domestic unused lines of credit at September 30, 2012 were $133,000.  In aggregate, the Company had total available lines of credit of $187,000 at September 30, 2012.

The fair value of long-term debt is estimated by discounting the future cash flows at rates offered to the Company for similar debt instruments of comparable maturities.  At September 30, 2012 and March 31, 2012, 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 $142,000 and $139,000 at September 30, 2012 and March 31, 2012, respectively.  The fair value of the Senior Notes is categorized as Level 2 of the fair value hierarchy.  Refer to Note 15 for the definition of a Level 2 fair value measurement.
 
 
13

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

Note 14: Derivatives and Hedging Activities

Modine uses derivative financial instruments from time to time as a tool to manage certain financial risks.  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 designated, and is effective, as a hedge and, if so, on the nature of the hedging activity.

Commodity Derivatives:  The Company has, from time to time, entered into futures contracts related to certain forecasted purchases of aluminum and copper.  The Company’s strategy in entering into these contracts was to reduce its exposure to changing market prices for future purchases of these commodities.  Until the fourth quarter of fiscal 2012, these contracts were designated as cash flow hedges by the Company.  Accordingly, unrealized gains and losses on these contracts were 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.  During the fourth quarter of fiscal 2012, the contracts used for aluminum and copper hedging became ineffective and the Company began recording the unrealized gains and losses within cost of sales.  The amounts recorded in AOCI will remain there until the underlying purchases of aluminum and copper impact earnings.  The Company did not enter into any futures contracts during the second quarter of fiscal 2013.

Foreign exchange contracts:  The Company’s foreign exchange risk management strategy 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 assets and liabilities.  The Company has not designated these contracts for hedge accounting.  Accordingly, unrealized gains and losses related to the change in fair value are recorded in other income and expense.  Gains and losses on these foreign currency contracts are offset by gains and losses recorded within the related assets and liabilities.

The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:

 
Balance Sheet Location
 
September 30, 2012
   
March 31, 2012
 
Derivative instruments designated as cash flow hedges:
             
Commodity derivatives
Other current assets
  $ -     $ 156  
Commodity derivatives
Other current liabilities
    -       924  
                   
Derivative instruments not designated  as cash flow hedges:
                 
Foreign exchange contracts
Other current assets
  $ 205     $ 205  
Commodity derivatives
Other current liabilities
    1,593       2,606  

 
14


MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
The amounts recorded in AOCI and in the consolidated statement of operations for all of the Company’s derivative financial instruments were as follows:

           
Three months ended
   
Six months ended
 
           
September 30, 2012
   
September 30, 2012
 
   
Amount of
Loss
Recognized in
AOCI
 
Location of Loss
Reclassified from
AOCI into
Continuing
Operations
 
Loss Reclassified
from
AOCI into
Continuing
Operations
   
Total (Gain) Loss
Recognized in
Continuing
Operations
   
Loss Reclassified
from
AOCI into
Continuing
Operations
   
Total (Gain) Loss
Recognized in
Continuing
Operations
 
Commodity derivatives
  $ 1,382  
Cost of sales
  $ 991     $ (14 )   $ 1,715     $ 2,725  
Foreign exchange contracts
    -  
Other (income) expense - net
    -       97       -       (339 )
Total
  $ 1,382       $ 991     $ 83     $ 1,715     $ 2,386  

           
Three months ended
   
Six months ended
 
           
September 30, 2011
   
September 30, 2011
 
   
Amount of Loss
Recognized
in AOCI
 
Location of Loss
Reclassified from
AOCI into
Continuing
Operations
 
Amount of Loss
Reclassified from
AOCI into
Continuing
Operations
   
Amount of Loss
Reclassified from
AOCI into
Continuing
Operations
 
Commodity derivatives
  $ 5,239  
Cost of sales
  $ 617     $ 417  
Total
  $ 5,239       $ 617     $ 417  

Note 15: Fair Value Measurements

Fair value measurements are classified under the following hierarchy:

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

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

Trading securities:  The Company’s trading securities, which are included within other current assets on the balance sheet, are a mix of various investments maintained in a deferred compensation trust to fund future obligations under Modine’s non-qualified deferred compensation plan.  The securities’ fair values are the market values from active markets 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 and are classified within Level 2 of the valuation hierarchy.

Derivative financial instruments:  As part of the Company’s risk management strategy, Modine enters into derivative transactions to mitigate certain identified exposures.  The derivative instruments include currency options and commodity derivatives.  These are not exchange traded and are customized over-the-counter derivative transactions.  These derivative exposures are with counterparties that have long-term credit ratings of BBB – or better.
 
 
15

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

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.  The Company estimates the fair value of these derivative instruments based on dealer quotes.  These derivative instruments are classified within Level 2 of the valuation hierarchy.

Deferred compensation obligation:  The fair value of the Company’s deferred compensation obligation is recorded at the fair value of the investments held by the deferred compensation trust.  As described above, the fair values of the related trading securities are the market values from active markets 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 and are classified within Level 2 of the valuation hierarchy.

The carrying values of cash and cash equivalents, trade receivables and accounts payable approximate fair value due to the short-term nature of these instruments.

At September 30, 2012, 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:
                       
Trading securities (short-term investments)
  $ 2,072     $ -     $ -     $ 2,072  
Derivative financial instruments
    -       205       -       205  
Total assets
  $ 2,072     $ 205     $ -     $ 2,277  
                                 
Liabilities:
                               
Derivative financial instruments
  $ -     $ 1,593     $ -     $ 1,593  
Deferred compensation obligation
    2,072       -       -       2,072  
Total liabilities
  $ 2,072     $ 1,593     $ -     $ 3,665  

At March 31, 2012, 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:
                       
Trading securities (short-term investments)
  $ 1,784     $ 12     $ -     $ 1,796  
Derivative financial instruments
    -       361       -       361  
Total assets
  $ 1,784     $ 373     $ -     $ 2,157  
                                 
Liabilities:
                               
Derivative financial instruments
  $ -     $ 3,530     $ -     $ 3,530  
Deferred compensation obligation
    1,823       12       -       1,835  
Total liabilities
  $ 1,823     $ 3,542     $ -     $ 5,365  

Assets held for sale:  In addition to items that are measured at fair value on a recurring basis, assets held for sale and certain other long-lived assets may be measured at fair value on a nonrecurring basis.  These assets have been written down to fair value, based on Level 3 market-based valuation inputs.  The carrying value of assets held for sale totaled $6,646 at September 30, 2012.
 
 
16

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
Note 16: Product Warranties
 
Changes in accrued warranty costs were as follows:

   
Three months ended September 30
 
   
2012
   
2011
 
             
Balance, July 1
  $ 10,521     $ 14,408  
Accruals for warranties issued
    1,385       1,849  
Accruals (reversals) related to pre-existing warranties
    1,689       (624 )
Settlements
    (1,329 )     (2,244 )
Effect of exchange rate changes
    70       (542 )
Balance, September 30
  $ 12,336     $ 12,847  

   
Six months ended September 30
 
   
2012
   
2011
 
             
Balance, April 1
  $ 11,385     $ 14,681  
Accruals for warranties issued
    2,727       3,398  
Accruals (reversals) related to pre-existing warranties
    1,209       (467 )
Settlements
    (2,757 )     (4,384 )
Effect of exchange rate changes
    (228 )     (381 )
Balance, September 30
  $ 12,336     $ 12,847  

Note 17: Segment Information

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

   
Three months ended
September 30
   
Six months ended
September 30
 
   
2012
   
2011
   
2012
   
2011
 
Net sales:
                       
North America
  $ 143,374     $ 148,848     $ 297,000     $ 305,483  
Europe
    118,771       151,988       244,219       318,830  
South America
    34,222       48,095       65,373       96,016  
Asia
    13,818       19,989       29,609       41,254  
Commercial Products
    33,824       35,070       63,965       69,218  
Segment net sales
    344,009       403,990       700,166       830,801  
Corporate and eliminations
    (4,087 )     (6,700 )     (9,868 )     (15,648 )
Net sales
  $ 339,922     $ 397,290     $ 690,298     $ 815,153  
 
 
17

 
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(unaudited)
 
   
Three months ended
September 30
   
Six months ended
September 30
 
   
2012
   
2011
   
2012
   
2011
 
Gross profit:
       
% of sales
         
% of sales
         
% of sales
         
% of sales
 
North America
  $ 18,499       12.9 %   $ 20,991       14.1 %   $ 42,101       14.2 %   $ 43,603       14.3 %
Europe
    17,808       15.0 %     20,302       13.4 %     32,516       13.3 %     45,696       14.3 %
South America
    5,775       16.9 %     8,851       18.4 %     10,511       16.1 %     17,843       18.6 %
Asia
    23       0.2 %     1,820       9.1 %     440       1.5 %     4,906       11.9 %
Commercial Products
    10,124       29.9 %     10,261       29.3 %     18,021       28.2 %     19,790       28.6 %
Segment gross profit
    52,229       15.2 %     62,225       15.4 %     103,589       14.8 %     131,838       15.9 %
Corporate and eliminations
    367       -       149       -       592       -       338       -  
Gross profit
  $ 52,596       15.5 %   $ 62,374       15.7 %   $ 104,181       15.1 %   $ 132,176       16.2 %

   
Three months ended
September 30
   
Six months ended
September 30
 
   
2012
   
2011
   
2012
   
2011
 
Income (loss) from operations:
                       
North America
  $ 6,844     $ 10,899     $ 20,692     $ 21,718  
Europe
    (9,942 )     8,341       (10,128 )     19,948  
South America
    4,255       2,687       4,962       5,877  
Asia
    (2,335 )     (750 )     (4,597 )     63  
Commercial Products
    2,593       2,897       3,592       6,268  
Segment income from operations
    1,415       24,074       14,521       53,874  
Corporate and eliminations
    (8,202 )     (11,876 )     (17,437 )     (21,418 )
(Loss) income from operations
  $ (6,787 )   $ 12,198     $ (2,916 )   $ 32,456  

   
September 30, 2012
   
March 31, 2012
 
Total assets:
           
North America
  $ 218,485     $ 232,855  
Europe
    335,512       370,824  
South America
    89,922       96,588  
Asia
    94,868       102,567  
Commercial Products
    79,462       68,900  
Corporate and eliminations
    14,239       21,727  
Total assets
  $ 832,488     $ 893,461  

Note 18: 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.
 
 
18

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

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;
 
·
Accounts receivable - performing periodic customer credit evaluations and actively monitoring their financial condition and developing business news;
 
·
Pension assets – ensuring that investments within these plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers are adhering to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and
 
·
Insurance – ensuring that insurance providers have financial ratings acceptable 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 – maintaining 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 credit ratings acceptable to the Company.

European value added tax:  During fiscal 2012, the Company determined that it was not properly applying value added tax (VAT) to various cross border transactions within the Europe segment.  At September 30, 2012 and March 31, 2012, the Company had recorded an estimated liability for VAT exposures of $10,683, which consists of unpaid VAT and estimated interest and penalties that may be levied against the Company by taxing authorities.  The Company is in the process of reporting this matter to the applicable taxing authorities, and cannot provide assurance about the ultimate resolution at this time.  

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.  The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined.  Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs are material due to 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)

The Company actively monitors and addresses environmental matters and has recorded environmental investigation and remediation 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 $5,887 and $6,946 at September 30, 2012 and March 31, 2012, respectively.  During the six months ended September 30, 2012 and 2011, additional reserves of $110 and $934, respectively, were recorded as a component of continuing operations.  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 Company’s operation in Brazil filed suit against Modine’s Brazilian subsidiary seeking remediation and certain other damages as a result of the contamination.  The Company is defending this suit and believes that the ultimate outcome of this matter will not be material.

Other litigation:  In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, the Occupational Safety and Health Administration, USEPA, other governmental agencies and others in which claims are asserted against Modine.  In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits are not expected to have a material adverse effect on the Company’s consolidated financial statements.
 
 
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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 September 30, 2012 refers to the second quarter of fiscal 2013.

Second Quarter Highlights:  Net sales in the second quarter of fiscal 2013 decreased from the second quarter of fiscal 2012 across all of our business segments, driven by weakening end market demand and unfavorable foreign currency exchange rate changes.  Gross margin declined slightly due to reduced sales volume partially offset by better pricing, favorable product mix and lower material costs year over year.  Selling, general and administrative (SG&A) expenses decreased from the second quarter of fiscal 2012 to the second quarter of fiscal 2013 primarily due to lower compensation-related expense, the reversal of an acquisition-related liability in South America and the favorable impact of foreign currency exchange rate changes year over year.  Asset impairment charges of $16.7 million were recorded during the quarter within the Europe and North America segments to reduce the carrying value of assets held for sale to their estimated fair value.  During the second quarter of fiscal 2013, we recorded a loss from continuing operations of $11.8 million, as compared to earnings from continuing operations of $1.0 million in the prior year.

Year-To-Date Highlights:  Net sales in the first six months of fiscal 2013 decreased from the first six months of fiscal 2012 across all of our business segments particularly within the automotive and commercial vehicle markets.  Gross margin decreased due to the lower sales volume.  SG&A expenses decreased year over year, yet remained the same as a percentage of sales.  Asset impairment charges of $16.7 million were recorded during the second quarter within the Europe and North America segments to reduce the carrying value of assets held for sale to their estimated fair value.  European restructuring and repositioning expense of $5.9 million negatively impacted results for the first six months of fiscal 2013.  The European restructuring plan is designed to align the cost structure of the segment with our strategic focus on the commercial vehicle, off-highway, and engine product markets.  As we continue our European restructuring plan, we expect to record additional impairment, restructuring and repositioning expenses in the second half of fiscal 2013 and beyond.  The loss from continuing operations of $12.9 million represents a significant decrease from the earnings from continuing operations of $13.6 million during the prior year.

CONSOLIDATED RESULTS OF OPERATIONS – CONTINUING OPERATIONS

The results for the three and six months ended September 30, 2011 have been revised to reflect the correction of errors that were identified and corrected in the fourth quarter of fiscal 2012.  In addition, the results for the six months ended September 30, 2012 include an out-of-period adjustment in the first quarter related to certain commodity hedges.  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 six months ended September 30, 2012 and 2011:
 
 
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Three months ended September 30
   
Six months ended September 30
 
   
2012
   
2011
   
2012
   
2011
 
(in millions)
  $      
% of sales
    $      
% of sales
    $      
% of sales
    $      
% of sales
 
Net sales
    339.9       100.0 %     397.3       100.0 %     690.3       100.0 %     815.2       100.0 %
Cost of sales
    287.3       84.5 %     334.9       84.3 %     586.1       84.9 %     683.0       83.8 %
Gross profit
    52.6       15.5 %     62.4       15.7 %     104.2       15.1 %     132.2       16.2 %
Selling, general and administrative expenses
    41.3       12.2 %     50.2       12.6 %     84.5       12.2 %     99.7       12.2 %
Impairment charges
    16.7       4.9 %     -       -       16.7       2.4 %     -       -  
Restructuring and repositioning expenses
    1.3       0.4 %     -       -       5.9       0.9 %     -       -  
(Loss) income from operations
    (6.8 )     -2.0 %     12.2       3.1 %     (2.9 )     -0.4 %     32.5       4.0 %
Interest expense
    3.4       1.0 %     3.3       0.8 %     6.4       0.9 %     6.3       0.8 %
Other (income) expense – net
    (0.1 )     0.0 %     6.2       1.6 %     (0.3 )     0.0 %     5.9       0.7 %
(Loss) earnings from continuing operations before income taxes
    (10.0 )     -3.0 %     2.7       0.7 %     (9.0 )     -1.3 %     20.3       2.5 %
Provision for income taxes
    1.8       0.5 %     1.7       0.4 %     3.9       0.6 %     6.7       0.8 %
(Loss) earnings from continuing operations
    (11.8 )     -3.5 %     1.0       0.3 %     (12.9 )     -1.9 %     13.6       1.7 %

Comparison of Three Months Ended September 30, 2012 and 2011

Second quarter net sales of $339.9 million were 14.4 percent lower than the $397.3 million in the second quarter of last year, driven by decreases in overall sales volume due to weakening end market demand, the continued wind down of the non-strategic automotive module business in Europe, along with a $24.3 million unfavorable impact of foreign currency exchange rate changes year over year.  Automotive market sales declined 28 percent compared to the second quarter of fiscal 2012, as we continue the strategic exit of the automotive module business.  Commercial vehicle and off-highway sales decreased 18 percent and 14 percent, respectively, compared to the second quarter of fiscal 2012 as a result of weakened end market conditions.

During the second quarter of fiscal 2013, gross profit decreased $9.8 million from the second quarter of fiscal 2012 due to decreased sales volume and a $2.9 million unfavorable impact of foreign currency exchange rate changes.  Gross margin declined 20 basis points from 15.7 percent in the second quarter of fiscal 2012 to 15.5 percent in the second quarter of fiscal 2013 primarily due to reduced sales volume, partially offset by improved pricing, favorable product mix and lower material costs year over year.

SG&A expenses decreased $8.9 million from the second quarter of fiscal 2012 to the second quarter of fiscal 2013, and decreased as a percentage of sales to 12.2 percent.  The decrease in SG&A expenses was due to lower compensation-related expense, the reversal of an acquisition-related liability of $2.0 million in South America and a $3.2 million favorable impact of foreign currency exchange rate changes year over year.

During the second quarter of fiscal 2013, impairment charges of $16.7 million were recorded to reduce the carrying value of assets held for sale to their estimated fair value with $15.7 million recorded within the Europe segment and $1.0 million recorded within the North America segment.

Restructuring and repositioning expenses of $1.3 million were recorded during the second quarter of fiscal 2013 primarily due to headcount reductions under our restructuring plan in the Europe segment.

Loss from operations of $6.8 million in the second quarter of fiscal 2013 represents a $19.0 million decline from income from operations of $12.2 million in the second quarter of fiscal 2012.  This decrease was due to lower sales volume, $16.7 million of impairment charges and $1.3 million of restructuring and repositioning expenses during the quarter.
 
 
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Other expense improved $6.3 million from $6.2 million in the second quarter of fiscal 2012 to other income of $0.1 million in the second quarter of fiscal 2013.  Second quarter fiscal 2012 included $6.4 million of foreign currency losses on inter-company loans and other transactions denominated in foreign currencies.

During the second quarter of fiscal 2013 and fiscal 2012, the provision for income taxes was $1.8 million and $1.7 million, respectively.  The provision for income taxes in the second quarter of fiscal 2013 was the result of earnings in certain foreign jurisdictions.  The Company continued to record a full valuation allowance against its net deferred tax assets located in the U.S., Germany and certain other foreign jurisdictions as it is more likely than not that these assets will not be realized based on historical performance.  It is possible that by the end of fiscal 2013 or in fiscal 2014, the U.S. taxing jurisdiction will no longer be in a cumulative three year loss position thereby removing significant negative evidence concerning the valuation allowance.  The Company will continue to evaluate all positive and negative evidence to determine the propriety of the valuation allowance against the net deferred tax assets of this jurisdiction.

During the second quarter of fiscal 2013, loss from continuing operations was $11.8 million compared to earnings from continuing operations of $1.0 million in the second quarter of the prior year.  Diluted loss per share of $0.26 represents a decrease of $0.29 from the diluted earnings per share of $0.03 in the prior year.  The losses in the second quarter include $16.7 million of impairment charges and $1.3 million of restructuring and repositioning expenses.

Comparison of Six Months Ended September 30, 2012 and 2011

Fiscal 2013 year-to-date net sales of $690.3 million decreased $124.9 million from the $815.2 million in the same period last year, driven by decreases in overall sales volume, along with a $47.9 million unfavorable impact of foreign currency exchange rate changes year over year.  Automotive and commercial vehicle sales decreased 30 percent and 15 percent, respectively, compared to the first six months of fiscal 2012.

Fiscal 2013 year-to-date gross profit of $104.2 million decreased $28.0 million from the $132.2 million in the same period of fiscal 2012.  Gross margin decreased 110 basis points to 15.1 percent from 16.2 percent in the same period of fiscal 2012.  The decline in gross profit was driven by a decrease in overall sales volume, along with a $5.8 million unfavorable impact of foreign currency exchange rate changes year over year.

Fiscal 2013 year-to-date SG&A expenses decreased $15.2 million from the same period last year yet remained the same as a percentage of sales.  The decrease in SG&am