EXHIBIT 13
MANAGEMENT'S DISCUSSION & ANALYSIS OF OPERATIONS
------------------------------------------------
Modine Manufacturing Company's fiscal-2000 sales rose 2.5 percent
to $1.14 billion. The increases came mainly from the North American
aftermarket and truck markets, and from the European automotive
markets. Excluding the impact of changes in currency-exchange rates,
worldwide consolidated sales were five-percent higher than the prior
year.
Earnings for the fiscal year were negatively affected by
increased aftermarket distribution costs and price pressures, new-
plant startup costs, and the strong U.S. dollar.
In fiscal 2000, 45 percent of sales were outside the United
States. Net sales from international operations were 34 percent
of the total, and exports from the United States were 11 percent
of total revenues.
In the Distributed Products segment, worldwide sales were up 10
percent, primarily from a full year's operation of a North American
aftermarket acquisition compared with six months in the prior year.
The Distributed Products segment provides heat-transfer products
primarily for the North American vehicular replacement market and
the building-HVAC&R (heating, ventilating, air-conditioning, &
refrigeration) market.
The Original Equipment (North America) segment was down slightly.
There was a small gain from the European Operations segment, which
provides products from business units in Europe primarily to European
original-equipment manufacturers (OEMs) of on- and off-highway vehicles,
industrial-equipment manufacturers, and the vehicular replacement market.
In both segments, sales to original-equipment manufacturers of heavy and
medium trucks were up but sales to off-highway-equipment OEM customers
declined substantially.
See Note 19 to the consolidated financial statements for more
details of segment and geographic information.
Modine's fiscal 2000 revenues from its top ten customers,
including their multiple brands and models, were 45.9 percent of
total sales. All were less than 10 percent of total revenues.
Overall, Modine continues to have a highly diversified customer
base, which helps minimize the effect of various business cycles.
FISCAL-YEAR SALES BY MARKET
---------------------------
OEM passenger-car and light-truck market: In fiscal 2000,
----------------------------------------
25 percent of Modine's sales were to worldwide original-equipment
manufacturers of passenger cars and light trucks. This market
along with the aftermarket represent the customer markets with
the largest sales for Modine. More than three-fourths of Modine's
sales in this market are generated from European customers. The
company continues to forge stronger relationships with large,
European customers such as BMW and Volkswagen. Modine serves them
<PAGE>
there and in their operations in other parts of the world - from
North America to South Africa, Malaysia, and Egypt.
Also, Modine constructed a new plant in Pontevico, Italy, to add
appropriate capacity for additional business from Fiat and others.
The Toledo, Ohio, assembly plant, which was built to serve the new
Daimler/Chrysler Jeep business, is complete and will be operational
the summer of 2000. This facility will assemble automotive engine-
cooling modules with components from several Modine facilities in
the United States and Europe. The North American partnership with
Daimler/Chrysler is helping to establish a stronger relationship
between Modine's European operations and that customer.
Modine began construction of a technical center in Europe,
similar to the state-of-the-art facility in Racine that began
full operations last fall. The centers will help to validate new
technologies and bring additional and incremental business
programs to this and other market segments.
Modine's work in this market helped win a "Best of the Best"
award for suppliers of engine power-train systems from Automotive
Industries magazine in July 1999.
OEM heavy- and medium-truck market: Sales to this market
----------------------------------
increased 11 percent from the previous year to make up 19 percent
of Modine's total revenues for fiscal 2000. Once again, Modine's
sales to heavy-truck OEMs in North America substantially
surpassed the prior year's records, due both to marketshare gains
and to increased demand for commercial vehicles. The outlook for
fiscal 2001, in the North American heavy-truck market, appears to
be softening. However, early indications show that the medium-
truck and bus market will remain strong.
In Germany, the company finalized relocation of an aluminum plant
from the Bernhausen facility to Kirchentellinsfurt. This new
plant makes radiators for trucks and has been fully operational
since the fall of 1999.
Globally, Modine continues to take on additional responsibility
to offer its customers improved product designs, better delivery
and warranty policies, and fully integrated systems for their
vehicles instead of just components to fill their engine
envelopes. Future changes by North American truck manufacturers
will probably include adoption of aluminum radiators, much like
in Europe. Modine will continue to work with these customers to
validate the conversion for their heavy-truck cooling systems.
In an effort to help its truck customers comply with ever-
increasing North American and European governmental emissions
standards, Modine has made substantial research and development
investments to supply exhaust-gas-recirculation coolers. These
coolers, as discussed earlier in this report, will help to reduce
emissions for diesel engines. The technology demands for this
component are especially stringent because of the corrosive
nature of exhaust gas. Modine has begun some production of this
entirely new product category in Europe and will do so in North
America later in fiscal 2001.
<PAGE>
OEM industrial market: This market includes various engine
---------------------
customers as well as those that manufacture generator sets,
refrigeration equipment, compressors, lift trucks, and other
applications. Modine's revenues for fiscal 2000 were
approximately the same as the previous year, constituting about
12 percent of total sales. A large portion of the revenues in
this market is from sales to manufacturers of engines, some of
which are destined for use in the truck market.
OEM off-highway market: The global agricultural- and
----------------------
construction-equipment markets continued to struggle in fiscal
2000. Within Modine, sales to this market dropped 25 percent from
the year before, as demand continued to contract due to low grain
prices and to lagging equipment-export markets worldwide. Sales to
off-highway-equipment customers were nine percent of total revenues
in fiscal 2000. The company sees the global marketplace in this area
continuing to consolidate in the new fiscal year. Modine continues to
offer cutting-edge technology and testing capabilities for its
customers and is poised for growth when the market bounces back.
Vehicle aftermarket: Modine's sales in this market grew
-------------------
14 percent over the prior year to become 26 percent of total
consolidated sales. The growth resulted mainly from six
additional months of sales in fiscal 2000 from the purchase of
Core Holdings in the southeastern United States during the second
half of fiscal 1999. The acquisition added automotive air-
conditioning parts to Modine's aftermarket product line and
increased the number of U.S. sales branches. In order to increase
the sales potential in Europe, Modine opened a new sales and
service center in Daventry, United Kingdom, in the fall of 1999.
The company continues to face pricing competition from
competitors, which it offsets, to some degree, by emphasizing -
with a lifetime, limited warranty - the high quality of the
aftermarket products it offers.
Building-HVAC market: Revenues from the building-HVAC (heating,
--------------------
ventilating, and air-conditioning) market were basically flat
year over year, remaining at approximately seven percent of the
company's total revenues. The popularity of the Hot Dawg low-
profile, gas-fired, unit heater continues to remain strong. A
targeted, niche marketing campaign led to significant sales for
the product in fiscal 2000. Sales and profitability for this
market continue to drive new and improved products, exhibited in
the rollout of the new WeatherHawk rooftop, duct furnace. Also,
Modine has recently secured the business of the first PF product
application in the building-HVAC market. The company remains
confident that the success of this first application will breed
further success in the industry.
SALES BY PRODUCT LINE
---------------------
Modine's customers continue to demand more modular assemblies
and complete heat-transfer systems. To help respond to the needs of
these customers, Modine has invested in state-of-the-art technical
<PAGE>
centers to serve customers on two continents. The technical centers
facilitate the development of new technology that Modine produces
for the heat-transfer industry.
Total modules & complete heat-transfer packages: Modine is
-----------------------------------------------
shifting from being a component supplier to being a module or system
supplier. This allows the company to be more involved in the initial
design stages of our partners. The product category grew six percent
over the year before. It made up 22 percent of total revenues.
Radiators: Sales of radiators and radiator cores were nearly
---------
even with the previous year, making up about 31 percent of Modine's
total revenues for fiscal 2000. Increased sales of complete
replacement radiators in the aftermarket offset a decline in
sales of radiator cores, continuing a trend from recent years.
Oil coolers: The oil cooler component product-line - for cooling
-----------
engine and transmission oil as well as certain fuels - had sales that
were flat year-over-year, remaining at about 16 percent of total sales.
Donut oil-cooler sales were up once again. The Donut product line, which
now includes an aluminum version, is a sophisticated, compact cooler
often used in high-performance automobiles, particularly in Europe. It
remains a specialty that has gained Modine much respect in the worldwide
industry.
Vehicular air-conditioning parts & systems: There was a six-percent
------------------------------------------
increase in sales of vehicular air-conditioning parts, which made up
12 percent of the company's total revenues. The increase in fiscal 2000
was due mainly to the air-parts area within the vehicular aftermarket,
resulting from the integration of a full year's sales from the Core
Holdings acquisition that Modine made halfway through fiscal 1999.
Charge-air coolers: Sales of charge-air coolers grew seven
------------------
percent over the year before and constituted nine percent of Modine's
total revenues for fiscal 2000. This product line's growth has been
aided lately by record sales in the truck industry as well as by
emissions regulations that affect most trucks and even automobiles,
especially in Europe, where there is a larger portion of diesel vehicles.
Building-HVAC: Sales to the building-HVAC product line were
-------------
relatively flat for fiscal 2000, coming in at seven percent of total
company revenues. The outlook for fiscal 2001 looks promising. Among
other activities, Modine will be introducing the new WeatherHawk rooftop
product line, which is a redesign of current duct-furnace and make-up air
units.
CAPITAL EXPENDITURES
--------------------
Capital expenditures of $90.1 million in fiscal 2000 were similar
to the prior year. Significant expenditures included those for: the
installation and implementation of SAP financial software in the United
States, major computing platform migration from Unisys mainframe to
<PAGE>
HP/UNIX in the United States, replacement of two corporate airplanes,
Racine Technical Center wind tunnel, European Technical Center,
expansions of Modine's European facilities, process improvements,
tooling for new products, and the addition of processing equipment
at a number of facilities. Capital expenditures were financed primarily
from cash generated internally, as well as some external borrowings.
Outstanding commitments for capital expenditures at March 31,
2000, were approximately $36.3 million. Most of the commitments relate
to the European Technical Center, European plant expansions and
conversions, the Racine Technical Center, new Chrysler Jeep programs,
a new International Truck and Engine program, process improvements,
tooling for new products, and various new equipment. Approximately
$17.5 million of the outstanding commitment amount covers the European
Technical Center, facility expansions, improvements, equipment upgrades,
and new equipment for the European locations. A year earlier, there were
outstanding commitments of $38.6 million.
RESEARCH AND DEVELOPMENT
------------------------
Modine's investment in research and development of $20.5 million
was 12 percent over the year before. The company's investments in
creating new technology have shown a 12-percent compound annual
growth rate over the last ten years. The 1,130 worldwide patents
that Modine held at March 31, 2000, represented a six-percent
increase from the prior year. Modine's research activities relate
to the development of new products, processes, and services, or
the improvement of existing products, processes, and services.
QUALITY IMPROVEMENT
-------------------
Modine keeps focused on continuous quality improvement through
several corporate quality initiatives. These initiatives include:
implementing one common, global, quality-management system; assuring
design, product, and process consistency; measuring and improving key
quality indicators; and recognizing quality achievement.
The global quality-management system is being implemented at all
sites to help ensure that customers receive the same, high-quality
products and services worldwide. It also minimizes the risks associated
with unacceptable product quality and serves to exceed customer
expectations - one of Modine's guiding principles.
Continuous quality improvement is measured by eleven quality
indicators that include customer satisfaction, quality costs, and
supplier performance. Executive management encourages and rewards
continuous quality improvement throughout the company.
Modine's efforts to continuously improve its quality-management
system resulted in numerous achievements worldwide during the last
fiscal year. Three U.S. sites (Camdenton, Missouri; Jefferson City,
Missouri; and the Commercial Heating, Ventilating, Air Conditioning,
and Refrigeration Division in Racine, Wisconsin) were registered to
ISO-9000. The Nuevo Laredo, Mexico, and Washington, Iowa, plants
earned QS-9000 registration, and the European central administration
and division-support functions earned registration to VDA6.1 in the
last fiscal year. Twenty-nine Modine sites are now registered to
<PAGE>
ISO-9000, QS-9000, or VDA6.1. Five sites (Camdenton, Missouri; Joplin,
Missouri; Nuevo Laredo, Mexico; Trenton, Missouri; and Bernhausen,
Germany) received quality awards from customers.
Modine divisions continue to pursue quality-system registration
to ISO-9000, QS-9000, VDA6.1, and other international or customer
standards to assist in obtaining new business, as well as to be
recognized by current and future customers worldwide.
HEDGING AND FOREIGN-CURRENCY-EXCHANGE CONTRACTS
-----------------------------------------------
On a limited basis, Modine enters into foreign-exchange options
and forward contracts on foreign currencies as hedges against the
impact of currency fluctuations. See Note 14 to the consolidated
financial statements.
ENVIRONMENTAL, HEALTH AND SAFETY
--------------------------------
Modine has a long-standing corporate environmental policy that
demonstrates the company's commitment to the environment and
compliance with all environmental laws and regulations worldwide.
Modine continues to appraise environmental issues and regulatory
compliance with a proactive approach. Expenditures to comply with
these increasingly complex and stringent laws could be significant
in future years but are not expected to have a material impact on the
company's competitive or financial position. If new laws containing
more-stringent requirements are enacted, expenditures may be higher
than the estimates of future environmental costs provided below.
About $1.1 million in capital expenditures related to
environmental projects were made in fiscal 2000. Modine currently
expects expenditures for environmentally related, capital
projects to be about $2.5 million in fiscal 2001.
Environmental expenses charged to current operations, including
remediation costs, totaled about $3.5 million in fiscal 2000. These
expenses include solid-waste disposal and operating and maintenance
costs for air- and water-pollution-control facilities, environmental
compliance activities, and other matters.
Modine accrues for environmental remediation activities relating
to past operations - including those under the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA),
often referred to as "Superfund," and under the Resource
Conservation and Recovery Act (RCRA) - when it is probable that a
liability has been incurred and reasonable estimates can be made.
Modine from time to time receives notices from the Environmental
Protection Agency and state environmental agencies that the company
is a "potentially responsible party" (PRP) under CERCLA and state law.
These notices claim potential liability for remediation costs of
disposal sites that are not company-owned and allegedly contain wastes
attributable to Modine from past operations. Modine's share of
remediation costs at these sites cannot be accurately predicted due
to the large number of PRPs involved. For the six sites currently
known, the company's potential liability will be significantly less
<PAGE>
than the total site remediation cost, because the percentage of
material attributable to Modine is relatively low.
It is likely that Modine will, in the future, incur additional
remediation charges, but such costs are unknown and not determinable
at this time. There are no currently known, unrecorded liabilities
that would have a material effect on the company's consolidated
financial position or results of operations.
The company's safety-management processes are currently driving
changes in the organizational culture. In fiscal 2000, OSHA
(Occupational Safety & Health Administration) recordable injuries
for U.S. plants were reduced by 25 percent and restricted/lost-time
cases were reduced by 19 percent. Modine also finished the year with
incident rates below its Standard Industrial Classification (SIC) code
rates, indicating performance relative to competition. SIC codes used
were 3714 "Motor Vehicle Parts and Accessories" and 34 "Fabricated
Metal Products." Based on data from the Bureau of Labor Statistics in
1998, Modine was under the recordable-incident average in both code
3714 and 34 by 23 percent and 38 percent respectively. It also did
better than the industry standards in the restricted/lost-time category
by 5 percent and 82 percent respectively.
Continuous improvement in health and safety resulted in a 50-
percent reduction in recordable injuries and illnesses over the
past four years. Plant recognition, through a newly launched
program called "Modine Star," will elevate Modine's health and
safety to a level that challenges the best in the industry.
YEAR 2000 REMEDIATION
---------------------
To prepare for the Year 2000 issue, Modine initiated a number of
global projects in early 1997 to identify, evaluate, and implement
changes to its existing, computerized systems for its business. The
total global cost was $9.8 million, with funding provided by cash flows
from operations. The company's preparation paid off, as changes to all
major, data-critical systems were successfully completed by the spring
of 1999. Modine's global operations functioned normally throughout the
entire Year 2000 process. Modine's remediation program comprehensively
addressed its computerized systems, equipment, and facilities as well
as its base of key suppliers to ensure that an adequate pipeline of
material and services would enable Modine to support its customers
without any business interruption to them. Along with the Y2K
remediation, substantial enhancements were made in Modine's overall,
technology infrastructure worldwide, most of which costs were capitalized.
EURO CONVERSION
---------------
The Euro was introduced in Europe on January 1, 1999. Eleven of the
fifteen, member countries of the European Union agreed to adopt the Euro
as their common legal currency on that date. Fixed conversion rates
between these participating countries' existing currencies and the Euro
have been established. The legacy currencies are scheduled to remain
legal tender as denominations of the Euro until at least January 1, 2002,
but not later than July 1, 2002. During this transition period, the parties
may settle transactions using either the Euro or a participating country's
legacy currency.
<PAGE>
Certain of Modine's business functions in Europe introduced Euro-
capability as of January 1, 1999, including systems for making and
receiving certain payments, pricing, and invoicing. Other business
functions and financial reporting are in the process of being converted
to the Euro by the end of the transition period; however, some will be
converted earlier where operationally efficient or cost effective, or
to meet customer requirements. Any delays in the company's ability to
become Euro-compliant, or in its key suppliers and customers to become
Euro-compliant, could result in an interruption of the company's business
activities or operations. The impact, if any, of these interruptions upon
the results of operations, financial condition, and cash flows has not yet
been determined.
FORWARD-LOOKING STATEMENTS
--------------------------
These cautionary statements are being made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995 and
with the intention of obtaining the benefits of the "safe harbor"
provisions of the Act. Investors are cautioned that any forward-
looking statements made by Modine are not guarantees of future
performance and that actual results may differ materially from those
in the forward-looking statements as a result of various factors,
including: customers' integration of products currently being supplied
by the company; the success of Modine or its competitors in obtaining
the business of the customer base; the ability to pass on increased
costs to customers; variations in currency-exchange rates in view of
a large portion of the company's business being nondomestic; labor
relations at Modine, its customers, and its suppliers, which may
affect the continuous supply of product; and the ability to improve
acquisitions' operations.
In making statements about Modine's fiscal-2001 operating results,
management has assumed relatively stable economic conditions in the
United States and worldwide, no unanticipated swings in the business
cycles affecting customer industries, and a reasonable legislative and
regulatory climate in those countries where Modine does business.
Readers are cautioned not to place undue reliance on Modine's
forward-looking statements, which speak only as of the date of
this report's writing.
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS
-----------------------------------------------------------
SALES
-----
For the year ended March 31, 2000, sales of $1.14 billion were
2.5-percent higher than last year's sales of $1.11 billion. Weaker
European currencies had a negative translation effect on fiscal-2000
sales of approximately $28 million compared with the prior year.
Excluding the impact of changes in currency-exchange rates, worldwide-
consolidated sales were five-percent higher than the prior year.
Distributed Products segment sales were up ten percent, primarily
due to a full year's operation of the Core Holdings, Inc., acquisition
made mid-way through fiscal 1999. The European Operations segment
<PAGE>
produced increased sales to the OEM-automotive market while sales to
the off-highway markets declined in conjunction with the worldwide
slowdown in these markets. The Original Equipment segment declined
marginally, as strong sales to the heavy- and medium-truck market
were more than offset by the continuing slowdown in sales to the
construction and agricultural-equipment markets.
Net sales by U.S. facilities accounted for 66 percent of
consolidated revenues for the year ended March 31, 2000, essentially
unchanged from the 67 percent in the prior year. Approximately 17
percent of U.S. production was for export. Net sales of European
Operations improved three percent year-over-year despite the negative
impact of a stronger dollar internationally. Overall, 55 percent of
net sales were to U.S. customers and 45 percent to non-U.S. customers,
reflecting the company's continuing strong global presence.
For the year ended March 31, 1999, sales of $1.11 billion were
seven-percent higher than the previous year's $1.04 billion. Sales
in the Distributed Products segment were up six percent, primarily
due to the Core Holdings, Inc., acquisition made mid-year. Net sales
of the European Operations segment improved 16 percent year-over-year
with improved automotive-OEM sales leading the way. Also influencing
the European sales results were positive currency-translation effects
of approximately $4.0 million compared with the prior year. The
Original Equipment segment was essentially flat, with stronger sales
to the truck market and lower sales to the agricultural-equipment
market.
Sales for the year ended March 31, 1998, were $1.04 billion, up
$41.4 million or four percent from the prior year. Increases were
greatest in the medium- and heavy-truck markets, followed by the
off-highway-equipment market, partially offset by a slight decline in
the car and light-truck market due to currency-translation effects.
With about one-third of Modine's annual sales being in other than U.S.
currency, the stronger dollar again had a negative translation effect
of approximately $45.5 million on fiscal-1998 consolidated sales,
compared with the prior year.
GROSS PROFIT
------------
Fiscal-2000 gross profit of $317.5 million grew by $7.6 million
from the $309.9 million in the previous year while it remained steady
at 28 percent of sales. Improvement recorded in the OE North America
truck market was generally offset by lower gross-profit returns, as a
percent of sales, earned by the company's other operations. Continuing
pricing pressures in the aftermarket and new facility start-ups once
again were major factors affecting profit margins.
Gross profit was 28 percent of sales for fiscal 1999, one
percentage point lower than 1998, primarily due to temporary start-up
inefficiencies at new European production and assembly facilities and
to pricing constraints imposed by certain OEM customers.
For fiscal 1998, gross profit was 29 percent of sales, one
percentage point higher than 1997, primarily due to efficiency
improvements in Europe, the volume effect of the truck market, and
reduced material costs.
<PAGE>
SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSES
----------------------------------------------------
SG&A expenses of $218.5 million in fiscal 2000 grew by $21.8
million, to 19 percent of sales from 18 percent of sales in the
preceding year. Factors influencing the changes were: the full-year
effect of Core Holdings, acquired in fiscal 1999; ongoing litigation
costs to protect Modine patents; increased depreciation as the new
technical center in Racine was put into service; and recent worldwide
upgrades to computer-related business systems.
In fiscal 1999, SG&A expenses of $196.6 million, 18 percent of
sales, were $13.3 million over last year's $183.3 million, yet
remained the same as a percent of sales. Without the mid-year Core
Holdings acquisition, SG&A expenses rose only three percent over the
prior year.
Primarily as a result of sales increases, SG&A expense for fiscal
1998 increased by $6.8 million, or four percent, from the prior year to
$183.3 million. As a percent of sales, however, SG&A remained flat at
18 percent.
INCOME FROM OPERATIONS
----------------------
Income from operations of $99.0 million for fiscal 2000 declined
$14.3 million from the previous year. The 13-percent reduction is
predominantly a result of higher SG&A costs as discussed in the
preceding section.
Income from operations of $113.3 million for fiscal 1999 compares
with $117.5 for the prior period. The four-percent decline was
principally the result of start-up inefficiencies at new production
facilities located in Europe and higher SG&A costs from including the
Core Holdings acquisition for six months of fiscal 1999.
In fiscal 1998, income from operations was $117.5 million, up
$16.6 million or 16 percent from the previous year. European operations,
strong activity in the North American truck market, and lower material
costs account for the majority of this increase.
INTEREST EXPENSE
----------------
In fiscal 2000, interest expense rose $2.7 million from the previous
year to $8.5 million. Financing of technical center construction in the
U.S. and Europe, expansion of European facilities, debt assumed and
incurred in conjunction with a prior-year acquisition, and equity
investments in joint ventures made in the prior year were the primary
reasons for the growth in interest expense. Higher interest rates also
influenced the increase.
Interest expense of $5.7 million in fiscal 1999 increased $1.7
million over fiscal 1998. The increase is the result of borrowing
to provide financing for an acquisition, equity investments in
joint ventures, and construction projects in Europe and North
America. The increased borrowing was partially offset by improved
borrowing rates.
<PAGE>
Fiscal-1998 interest expense was $4.0 million, down $1.0 million
or 19 percent from the prior year. Lower interest rates caused this
reduction.
OTHER INCOME, NET
-----------------
Other income in fiscal 2000 of $4.8 million declined by $5.7
million from the previous fiscal-year's total of $10.5 million,
which included a large royalty settlement and also a gain
relative to the earlier sale of a facility in Michigan.
In fiscal 1999, other income of $10.5 million was $8.0 million
over the prior period. Patent royalty income, including the royalty
settlement, increased $3.7 million, combined with $3.9 million
recognized on the earlier sale of a non-strategic, copper-tubing
facility in Michigan.
Other income for fiscal 1998 was $2.5 million, which was $0.6
million more than 1997. This increase was due, primarily, to
increases in royalty income.
PROVISION FOR INCOME TAXES
--------------------------
For fiscal 2000, the effective tax rate declined 6.0 percentage
points to 31.4 percent. Foreign-tax-rate differentials and
implementation of a tax strategy that allowed the company to release
the tax-valuation allowance relating to a net-operating-loss carry-
forward at a foreign subsidiary were the main factors contributing
to the change.
The 37.4-percent effective tax rate for fiscal 1999 compares with
a 37.5-percent rate for fiscal-year 1998. Higher state taxes, net
of federal benefit, were more than offset by reduced taxation on
non-U.S. earnings and losses and other changes.
The effective tax rate for fiscal 1998 was 37.5 percent, up
2.7 percentage points from fiscal 1997, due primarily to higher tax
rates on increased foreign earnings. Also, use of tax losses
carried forward in prior years in certain European operations
resulted in an increased tax rate in fiscal 1998.
NET EARNINGS
------------
Net earnings declined 12 percent in fiscal 2000 to $65.4 million
($2.20 per diluted share) from $73.9 million ($2.46 per diluted share).
Return on average shareholder's investment (ROI) was 14 percent. As a
percent of sales, net earnings dipped to 6 percent of sales in fiscal
2000. Increased aftermarket distribution costs and pricing pressures,
new-plant start-up costs, and the adverse effect of a stronger U.S.
dollar on international results were the major factors leading to
lower earnings.
For the year ended March 31, 1999, net earnings were $73.9
million ($2.46 per diluted share), a $1.4-million or two-percent
improvement over the prior year's $72.5 million ($2.39 per
<PAGE>
diluted share). Net earnings were seven percent of sales, the
same as the prior year, and a 17 percent ROI.
Net earnings in fiscal 1998 were $72.5 million, representing
seven percent of sales and an 18-percent ROI. This was an
increase of $8.7 million over fiscal 1997. Improved European
operations, higher North American truck-market sales, and lower
material costs were the major causes of this improvement.
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per-share amounts)
<CAPTION>
-----------------------------------------------------------------------------
For the years ended March 31 2000 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,139,269 $1,111,447 $1,040,418
Cost of sales 821,779 801,520 739,619
----------------------------------------
Gross profit 317,490 309,927 300,799
Selling, general, and
administrative expenses 218,452 196,636 183,323
----------------------------------------
Income from operations 99,038 113,291 117,476
Interest expense (8,467) (5,722) (4,010)
Other income - net 4,760 10,501 2,506
----------------------------------------
Earnings before income taxes 95,331 118,070 115,972
Provision for income taxes 29,928 44,127 43,501
----------------------------------------
Net earnings $ 65,403 $ 73,943 $ 72,471
========================================
Net earnings per share of
common stock:
Basic $2.22 $2.50 $2.44
Assuming dilution $2.20 $2.46 $2.39
----------------------------------------
<FN>
The notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
MANAGEMENT'S DISCUSSION OF FINANCIAL POSITION
---------------------------------------------
CURRENT ASSETS
--------------
Cash and cash equivalents decreased by $18.1 million to $31.1
million. Details of the sources and uses of funds can be found in
the accompanying statement of cash flows.
<PAGE>
Trade receivables, net of allowances for doubtful accounts, at
$182.7 million, were essentially unchanged from the prior year.
Inventories declined by $10.4 million to $168.6 million with
the majority of the change attributable to the off-highway market.
The inventory turnover rate remained constant at 4.8 turns for the
year.
Deferred income taxes and other current assets grew by $5.1
million to $47.2 million. A higher level of unbilled customer
tooling was the main factor contributing to the increase.
The current ratio of 2.4-to-1 increased by 33 percent from
last year's 1.8-to-1. The primary factor responsible for the
change was the replacement of short-term debt with new long-term
borrowing arrangements in Europe and the United States.
NONCURRENT ASSETS
-----------------
Net property, plant, and equipment of $338.0 million increased
by $34.2 million due primarily to capital expenditures of $90.1
million. Continuing production- and test-facility expansions in
Europe, equipment purchases for a new assembly facility in the United
States, and preparation for the introduction of new customer programs
over the next several years were the major factors contributing to
the growth in fixed assets.
Investment in affiliates of $28.4 million increased $4.1 million
in the current year, due chiefly to earnings and a favorable
currency-translation impact recognized from Modine's 50-percent
equity investment in Radiadores Visconde, Ltda., in Brazil.
Intangible assets of $70.3 million were $10.1 million lower than
last year, largely as a result of amortization and the impact of
foreign-currency translation.
Deferred charges and other noncurrent assets of $64.8 million
increased $10.6 million over the prior period, primarily a result
of a $5.4-million increase to the surplus in the company's over-
funded pension plans and of a $4.8-million increase in deferred
tax assets resulting from release of a tax-valuation allowance
recorded the year before.
CURRENT LIABILITIES
-------------------
Short-term debt and the current portion of long-term debt,
totaling $9.4 million, decreased by $64.3 million. Proceeds from
a new, long-term, $60-million, multi-currency, revolving-credit
agreement and a new, $53.0-million, Euro-denominated, credit
agreement were applied, in part, to lower outstanding short-term
debt.
Accounts payable decreased by $12.6 million to $84.9 million.
Lower inventory levels, variations in the level of overall purchasing
activity, and the favorable impact from foreign-currency translation
were the main factors leading to the reduction.
<PAGE>
NONCURRENT LIABILITIES
----------------------
Long-term debt increased by $67.3 million to $211.1 million at
year-end. New long-term-credit facilities totaling $113.0 million
were used to finance ongoing capital expenditures, to repay bank
debt with less-favorable interest rates, and to reduce short-term
debt as discussed above.
As a percent of shareholders' investment, long-term debt was
44.0 percent. Total debt to equity was 45.9 percent, down 2.1
percentage points from fiscal 1999.
SHAREHOLDERS' INVESTMENT
------------------------
Total shareholders' investment of $480.2 million increased
$27.0 million over the prior period. The major change was from
retained earnings, which benefited from net earnings of $65.4
million (less dividends paid of $27.1 million).
Accumulated other comprehensive loss of $21.6 million
increased $3.3 million over the prior year. The most significant
component was the foreign-currency translation adjustment, which
increased $3.1 million. The Euro, which weakened against the dollar
during the year, more than offset translation gains recorded on
the company's equity investment in its Brazilian affiliate and
reductions in the dollar value of loans outstanding denominated
in foreign currencies.
During fiscal 2000, $12.1 million was expended to acquire
459,000 treasury shares, 300,000 shares of which were repurchased
for $7.6 million under a buy-back program announced in October,
while $5.9 million of treasury stock (195,000 shares) was used to
satisfy requirements for stock options, stock awards, and
employee stock-purchase plans. The number of shares of common
stock outstanding at year-end dropped to 29,261,000 shares.
During fiscal 1999, $15.2 million was expended to acquire
418,000 treasury shares, while $8.0 million of treasury stock
(279,000 shares) was used to satisfy requirements for stock
options, stock awards, and employee stock-purchase plans. The
number of shares of common stock outstanding at year-end was
29,525,000 shares.
During fiscal 1998, $17.0 million was expended to acquire
523,000 treasury shares, while 354,000 shares were used to satisfy
requirements for stock options, stock awards, and employee stock-
purchase plans. The number of shares of common stock outstanding
at year-end was 29,664,000.
Book value per share increased by $1.06 during fiscal 2000 to
$16.41, a 9.6-percent compound annual growth rate for the last
five years.
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)
<CAPTION>
--------------------------------------------------------------------------
March 31 2000 1999
--------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
--------------
Cash and cash equivalents $ 31,070 $ 49,163
Trade receivables, less allowance for doubtful
accounts of $4,436 and $3,749 182,724 182,910
Inventories 168,597 178,949
Deferred income taxes and other current assets 47,164 42,074
----------------------
Total current assets 429,555 453,096
----------------------
Noncurrent assets:
-----------------
Property, plant, and equipment - net 337,987 303,764
Investment in affiliates 28,440 24,327
Goodwill and other intangible assets - net 70,339 80,411
Deferred charges and other noncurrent assets 64,786 54,141
----------------------
Total noncurrent assets 501,552 462,643
----------------------
Total assets $931,107 $915,739
======================
Liabilities and shareholders' investment
Current liabilities:
-------------------
Short-term debt $ 6,319 $ 68,998
Long-term debt - current portion 3,128 4,766
Accounts payable 84,893 97,443
Accrued compensation and employee benefits 46,479 48,869
Income taxes 7,336 9,694
Accrued expenses and other current liabilities 27,322 26,825
----------------------
Total current liabilities 175,477 256,595
----------------------
Noncurrent liabilities:
----------------------
Long-term debt 211,112 143,838
Deferred income taxes 24,536 20,533
Other noncurrent liabilities 39,740 41,554
----------------------
Total noncurrent liabilities 275,388 205,925
----------------------
Total liabilities 450,865 462,520
----------------------
<PAGE>
<S> <C> <C>
Shareholders' investment:
------------------------
Preferred stock, $0.025 par value, authorized
16,000 shares, issued - none -- --
Common stock, $0.625 par value, authorized
80,000 shares, issued 30,342 shares 18,964 18,964
Additional paid-in capital 13,573 13,543
Retained earnings 505,522 469,142
Accumulated other comprehensive loss (21,629) (18,341)
Treasury stock at cost: 1,081 and 817
common shares (34,394) (28,198)
Restricted stock - unamortized value (1,794) (1,891)
----------------------
Total shareholders' investment 480,242 453,219
----------------------
Total liabilities and shareholders'
investment $931,107 $915,739
======================
<FN>
The notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
MANAGEMENT'S DISCUSSION OF CASH FLOWS
-------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES
-----------------------------------------
Net cash provided by operating activities in fiscal 2000 was
$91.2 million, down $14.0 million from the prior year. Major items
contributing to the overall change were lower earnings, a noncash
adjustment for deferred income taxes that moved in the opposite
direction from the previous year, and working-capital demands that
were higher in fiscal 2000, which were partially offset by higher
noncash depreciation and amortization adjustments.
Net cash provided by operating activities in fiscal 1999 was
$105.2 million, up $2.2 million from the prior year as a result
of higher earnings and positive noncash adjustments in deferred
income taxes and in depreciation and amortization. These
increases were offset in part as working-capital requirements
grew from increased sales volume and the post-acquisition impact
of the U.S. aftermarket expansion.
Net cash from operating activities in fiscal 1998 was $102.9
million, up $2.7 million from the prior year mainly as a result
of higher earnings. Working-capital requirements grew as a result
of the increased sales volume.
The company believes that cash, earnings, and borrowing capacity
will continue to provide adequate support for the cash needs of its
operations and long-term credit requirements, including capital
expenditures and debt maturities.
<PAGE>
CAPITAL EXPENDITURES
--------------------
Capital expenditures for fiscal 2000 were $90.1 million,
slightly lower than prior year, and include: the on-going
construction and equipment costs of new technical centers in North
America and Europe, production and administrative facility expansion
in Europe, replacement of two corporate aircraft, the migration to a
new computer platform and implementation of new systems software in
North America, and the costs associated with equipment and tooling
for new customer programs.
Capital expenditures for fiscal 1999 were $90.9 million, $10.2
million higher than in fiscal 1998, reflecting: construction and
equipment costs associated with the Racine Technical Center,
continuing expansion and upgrading of our European production
facilities, and tooling and equipment purchases at existing
facilities in North America and Europe.
Capital expenditures for fiscal 1998 were $80.7 million,
$26.2 million higher than in fiscal 1997, reflecting: construction
of Racine Technical Center, upgrading and expanding European
facilities, and process improvements at North American plants.
ACQUISITIONS AND INVESTMENTS IN AFFILIATES
------------------------------------------
During fiscal 2000, Modine made an additional $2.7-million
investment in Daikin-Modine, Inc. Total investment in the 50-percent-
owned joint venture is $4.2 million. See note 10 to the consolidated
financial statements for further detail.
During fiscal 1999, Modine acquired Core Holdings, Inc., of
Orlando Florida, an aftermarket wholesale distributor. The cash
cost of the acquisition was $19.8 million, net of cash acquired,
and promissory notes to the sellers of $3.9 million. Investments
in affiliates during the year consisted of the purchase of a 50-
percent interest in Radiadores Visconde, Ltda., a Brazilian heat-
transfer company based in S<o Paulo, Brazil, for $16.2 million in
cash and a $10.0-million promissory note to the sellers. Modine
also formed a new joint-venture company with Daikin Industries,
Ltd. Investments made in fiscal 1999 in Daikin-Modine, Inc.,
totaled $1.5 million. See note 10 to the consolidated financial
statements for further detail.
During fiscal 1998, Modine acquired 100 percent of the assets
of Sun Technology Corporation in Michigan, a manufacturer of infrared
heaters. The cash cost of the acquisition was $2.6 million, net of
cash acquired and a promissory note to the seller for $0.3 million.
See note 10 to the consolidated financial statements for further
detail.
CHANGES IN DEBT: SHORT- AND LONG-TERM
-------------------------------------
In fiscal 2000, company debt increased $21.4 million, primarily
to support working-capital and capital-expenditure requirements.
During the year, Modine entered into a 50.8-million-Euro ($53-
million) term loan. Proceeds were used to pay down short-term,
<PAGE>
European, bank debt. The company also entered into a long-term,
$60-million, multi-currency, revolving-credit agreement that was
used to replace short-term debt.
Overall, company debt increased by $72.0 million in fiscal
1999. New borrowings include short- and long-term debt used to
provide financing for acquisitions, equity investments in
affiliates, and construction projects in Europe and North America.
Reductions in long-term debt resulted from refinancing existing
bank debt in Europe with governmental loans and prepayment of an
industrial revenue bond in the United States.
In fiscal 1998, company debt increased by $17.1 million. New
borrowings included short-term debt to provide financing for
construction projects in Europe and North America. Also, maturing
debt was refinanced with long-term borrowing.
TREASURY STOCK
--------------
Treasury stock activity is detailed in Management's discussion
of financial position and Note 16 to the consolidated financial
statements.
DIVIDENDS PAID
--------------
Dividends for fiscal 2000 totaled $27.1 million, or 92 cents
per share. This represented an increase of eight cents per share
over the previous year. Dividends in fiscal 1999 and 1998 were
$24.8 and $22.6 million, respectively, representing rates of
84 and 76 cents per share, respectively, and those dividends
increased eight cents per share each year over the previous
year.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
------------------------------------------------------------------------------
For the years ended March 31 2000 1999 1998
------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
------------------------------------
Net earnings $ 65,403 $ 73,943 $ 72,471
Adjustments to reconcile net earnings with
cash provided by operating activities:
Depreciation and amortization 48,822 44,182 41,767
Pensions (2,686) (2,465) (2,256)
Loss from disposition of property, plant,
and equipment 582 123 837
Deferred income taxes (2,235) 5,652 (91)
Provision for losses on accounts receivable 734 (855) 497
Undistributed earnings of affiliates, net
of dividends received 800 841 679
Other - net 163 1,577 2,884
----------------------------
111,583 122,998 116,788
----------------------------
Change in operating assets and liabilities
excluding acquisitions:
Trade receivables (9,147) (15,100) (16,526)
Inventories 4,799 (6,789) (13,236)
Deferred income taxes and other current
assets (5,909) 4,661 (2,781)
Accounts payable (8,674) 4,819 13,855
Accrued compensation and employee benefits (2,936) (715) 3,724
Income taxes (1,257) (2,234) 3,081
Accrued expenses and other current
liabilities 2,743 (2,469) (1,977)
----------------------------
Net cash provided by operating activities 91,202 105,171 102,928
----------------------------
Cash flows from investing activities:
------------------------------------
Expenditures for property, plant, and
equipment (90,147) (90,860) (80,682)
Acquisitions, net of cash acquired -- (19,826) (2,604)
Proceeds from dispositions of assets 2,140 524 1,927
Investments in affiliates (2,700) (17,687) --
Increase in deferred charges and other
noncurrent assets (2,537) (895) (1,003)
Other - net (56) (150) (200)
----------------------------
Net cash used for investing activities (93,300) (128,894) (82,562)
<PAGE>
<S> <C> <C> <C>
Cash flows from financing activities:
------------------------------------
(Decrease)/increase in short-term debt - net (60,569) 48,112 18,597
Additions to long-term debt 129,818 46,810 27,102
Reductions of long-term debt (47,837) (22,924) (28,607)
Issuance of common stock, including
treasury stock 2,965 5,054 4,567
Purchase of treasury stock (12,102) (15,203) (16,990)
Cash dividends paid (27,102) (24,832) (22,605)
----------------------------
Net cash (used for)/provided by financing
activities (14,827) 37,017 (17,936)
----------------------------
Effect of exchange-rate changes on cash (1,168) (541) (842)
----------------------------
Net (decrease)/increase in cash and cash
equivalents (18,093) 12,753 1,588
Cash and cash equivalents at beginning of year 49,163 36,410 34,822
----------------------------
Cash and cash equivalents at end of year $ 31,070 $ 49,163 $ 36,410
============================
Cash paid during the year for:
Interest, net of amounts capitalized $ 8,297 $ 4,948 $ 4,434
Income taxes $ 33,314 $ 37,071 $ 37,715
----------------------------
<FN>
The notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(In thousands, except per-share amounts)
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Accumulated Restricted
For the years Additional other stock-
ended March 31, Common paid-in Retained comprehensive Treasury unamortized
2000, 1999, 1998 stock capital earnings income/(loss) stock value Total
----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 $18,964 $ 9,760 $378,740 $ (3,016) $(14,949) $(3,811) $385,688
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings -- -- 72,471 -- -- -- 72,471
Other comprehensive (loss):
Foreign-currency translation -- -- -- (5,086) -- -- (5,086)
Total comprehensive income -- -- -- -- -- -- 67,385
Cash dividends, $0.76 per share -- -- (22,605) -- -- -- (22,605)
Purchase of treasury stock -- -- -- -- (16,990) -- (16,990)
Stock options and awards
including related tax benefits -- 2,583 (5,585) -- 10,736 (798) 6,936
Employee stock-purchase and
-ownership plans -- 41 (20) -- 226 -- 247
Amortization of deferred
compensation under
restricted stock plans -- -- -- -- -- 1,814 1,814
----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 18,964 12,384 423,001 (8,102) (20,977) (2,795) 422,475
----------------------------------------------------------------------------------------------------------------------
Net earnings -- -- 73,943 -- -- -- 73,943
Other comprehensive (loss):
Foreign-currency translation -- -- -- (9,831) -- -- (9,831)
Minimum pension liability
(net of tax benefit of
$260) -- -- -- (408) -- -- (408)
Total comprehensive income -- -- -- -- -- -- 63,704
Cash dividends, $0.84 per share -- -- (24,832) -- -- -- (24,832)
Purchase of treasury stock -- -- -- -- (15,203) -- (15,203)
Stock options and awards
including related tax benefits -- 882 (2,970) -- 6,165 (11) 4,066
Employee stock-purchase and
-ownership plans -- 277 -- -- 1,817 -- 2,094
Amortization of deferred
compensation under
restricted stock plans -- -- -- -- -- 915 915
----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 18,964 13,543 469,142 (18,341) (28,198) (1,891) 453,219
----------------------------------------------------------------------------------------------------------------------
<PAGE>
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings -- -- 65,403 -- -- -- 65,403
Other comprehensive (loss):
Foreign-currency translation -- -- -- (3,144) -- -- (3,144)
Minimum pension liability
(net of tax benefit of $5) -- -- -- (144) -- -- (144)
Total comprehensive income -- -- -- -- -- -- 62,115
Cash dividends, $0.92 per share -- -- (27,102) -- -- -- (27,102)
Purchase of treasury stock -- -- -- -- (12,102) -- (12,102)
Stock options and awards
including related tax benefits -- 28 (1,798) -- 3,719 (975) 974
Employee stock-purchase and
-ownership plans -- 2 (123) -- 2,187 -- 2,066
Amortization of deferred
compensation under
restricted stock plans -- -- -- -- -- 1,072 1,072
----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 $18,964 $13,573 $505,522 $(21,629) $(34,394) $(1,794) $480,242
----------------------------------------------------------------------------------------------------------------------
<FN>
The notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Significant accounting policies
-----------------------------------------
Nature of operations: Modine Manufacturing Company (Modine) is
--------------------
a leading global developer, manufacturer, and marketer of heat
exchangers and systems for use in on-highway and off-highway OEM
(original-equipment-manufacturer) vehicular applications and for
sale to the automotive aftermarket (as replacement parts) and to
a wide array of building markets. Product lines include radiators
and radiator cores, vehicular air- conditioning, oil coolers,
charge-air coolers, heat-transfer and heat-storage packages and
modules, and building-HVAC (heating, ventilating, and air-
conditioning) equipment.
Basis of presentation: The financial statements are prepared
---------------------
in conformity with generally accepted accounting principles in the
United States. These principles require management to make
certain estimates and assumptions in determining Modine's assets,
liabilities, revenue, expenses, and related disclosures. Actual
amounts could differ from those estimates.
Consolidation principles: The consolidated financial statements
------------------------
include the accounts of Modine Manufacturing Company and its
majority-owned subsidiaries. Material intercompany transactions
and balances are eliminated in consolidation. Operations of
subsidiaries outside the United States and Canada are included
for periods ending one month prior to Modine's year end in order
to ensure timely preparation of the consolidated financial
<PAGE>
statements. Investments in affiliated companies in which
ownership exceeds 20 percent are accounted for by the equity
method. The investments are stated at cost plus or minus a
proportionate share of the undistributed net income (loss).
Modine's share of the affiliates' net income (loss) is reflected
in net earnings.
Revenue Recognition: Sales revenue is recognized at the time
-------------------
of product shipment to customers and appropriate provision is made
for uncollectible accounts.
Translation of foreign currencies: Assets and liabilities of
---------------------------------
foreign subsidiaries and equity investments are translated into
U.S. dollars at year-end exchange rates, and income and expense
items are translated at the average exchange rates for the year.
Resulting translation adjustments are reported as an other-
comprehensive-income (loss) item, included in shareholders'
investment. Translation adjustments relating to countries with
highly inflationary economies and foreign-currency transaction
gains or losses are included in net earnings.
Financial instruments: Foreign-exchange options and forward
---------------------
contracts on foreign currencies are entered into by Modine as
hedges against the impact of currency fluctuations on certain
sales and purchase transactions and are not used to engage in
speculation. Gains and losses are recognized when these
instruments are settled.
Income taxes: Deferred tax liabilities and assets are
------------
determined based on the difference between the amounts reported in
the financial statements and the tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the
differences are expected to reverse.
Earnings per share: Basic earnings per share is calculated
------------------
based on the weighted average number of common shares outstanding
during the year, while diluted earnings per share is calculated
based on the dilutive effect of common shares that could be
issued. Also see Note 6.
Cash equivalents: For purposes of the cash flows statement,
----------------
Modine considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Inventories: Inventories are valued at the lower of cost,
-----------
on a first-in, first-out basis, or market value.
Property, plant, and equipment: These assets are stated at
------------------------------
cost. Depreciation is provided using, principally, declining-balance
methods for machinery and equipment, and the straight-line method
for buildings and other assets over their expected useful lives.
<PAGE>
Maintenance and repair costs are charged to earnings as incurred.
Costs of improvements are capitalized. Upon the sale or other
disposition of an asset, the cost and related accumulated
depreciation are removed from the accounts and the gain or loss
is included in net earnings.
Modine monitors events or changes in circumstances for long-
lived assets, which may result in the carrying amount of the assets
exceeding the sum of the expected undiscounted future cash flows
associated with such assets. The measurement of any impairment
losses recognized is based on the difference between the fair
values and the carrying amounts of the assets.
Intangible assets: The excess of cost over fair value of the
-----------------
net assets of businesses acquired is amortized using the straight-
line method primarily over a fifteen-year period. Costs of
acquired patents and product technology are amortized using the
straight-line method over the shorter of their estimated useful
life or 15 years.
Environmental expenditures: Environmental expenditures related
--------------------------
to current operations that qualify as property, plant, and equipment
or that substantially increase the economic value or extend the
useful life of an asset are capitalized and all other expenditures
are expensed as incurred. Environmental expenditures that relate
to an existing condition caused by past operations are expensed.
Liabilities are recorded when environmental assessments and/or
remedial efforts are probable and the costs can be reasonably
estimated.
Stock-based compensation: Stock-based compensation is recognized
------------------------
using the intrinsic value method. Accordingly, compensation cost
for stock options is measured at the excess, if any, of the
quoted market price of Modine stock at the date of the grant over
the amount an employee must pay to acquire the stock. Also see
Note 18.
Accounting principles to be adopted: In 1998, the Financial
-----------------------------------
Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement requires
companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The
accounting for changes in fair value, gains, or losses depends on
the intended use of the derivative and its resulting designation.
The statement, which had its effective date deferred by SFAS No.
137, is now effective for fiscal years beginning after June 15,
2000. Modine will adopt SFAS No. 133 beginning April 1, 2001.
Adoption of this statement is not expected to have a material
effect on Modine's financial position or results of operations.
Reclassifications: Certain prior-year amounts have been
-----------------
reclassified to conform with the current-year presentation.
<PAGE>
NOTE 2 Research and development costs
----------------------------------------
Research and development costs charged to operations totaled
$20,528,000 in fiscal 2000, $18,252,000 in fiscal 1999, and
$16,816,000 in fiscal 1998.
NOTE 3 Pension and other postretirement benefit plans
--------------------------------------------------------
Pensions: Modine has several noncontributory, defined-benefit,
--------
pension plans that cover most of its domestic employees. The benefits
provided are based primarily on years of service and average
compensation for the salaried plans and some hourly plans. Other
hourly plans are based on a monthly retirement benefit amount.
Funding policy for domestic, qualified plans is to contribute
annually not less than the minimum required by applicable law and
regulation, nor more than the maximum amount that can be deducted for
federal income-tax purposes. Plan assets principally consist of equity
and fixed-income securities. As of March 31, 2000 and 1999, the plans,
held 994,000 and 1,420,000 shares, respectively, of Modine common stock.
Modine's foreign subsidiaries have defined-benefit plans and/or
termination indemnity plans covering substantially all of their
eligible employees. The benefits under these plans are based on years
of service and final average compensation levels. Funding is limited to
statutory requirements.
The projected benefit obligation, accumulated benefit obligation,
and fair value of plan assets for the pension plans with accumulated
benefit obligations in excess of plan assets were $15,638,000,
$14,306,000, and $687,000, respectively, as of March 31, 2000, and
$18,220,000, $15,235,000, and $1,178,000, respectively, as of March 31,
1999.
Modine has several defined-contribution plans that cover most of
its domestic employees. These 401(k) and savings plans provide company
matching under various formulas. The cost of Modine's contributions to
the plans (including retirement plans discussed in Note 18) for fiscal
2000, 1999, and 1998 were $7,744,000, $6,831,000, and $6,666,000,
respectively.
Other postretirement plans: Modine and certain of its domestic
--------------------------
subsidiaries provide selected healthcare and life-insurance benefits
for retired employees. Designated employees may become eligible for
those benefits when they retire. These plans are unfunded. Modine
periodically amends the plans, changing the contribution rate of
retirees and the amounts and forms of coverage. An annual limit on
Modine's liability (a "cap") was established for most plans between
fiscal 1994 and fiscal 1996 after original recognition of the liability
in fiscal 1993. It maximizes future costs at 200 percent of Modine's
then-current cost. These changes reduced the accrued obligation and
the reduction is being amortized as a component of the benefit cost.
The change in benefit obligations and plan assets as well as the
funded status of Modine's pension and other postretirement plans
were as follows:
<PAGE>
(In thousands)
----------------------------------------------------------------------------
Pensions Other postretirement
------------------ --------------------
Years ended March 31 2000 1999 2000 1999
----------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at
beginning of year $155,754 $137,090 $ 23,816 $ 22,706
Service cost 5,875 5,567 374 327
Interest cost 10,630 10,299 1,629 1,626
Plan amendments 1,256 344 -- --
Actuarial (gain)/loss (13,237) 7,302 (825) 974
Benefits paid (6,723) (4,945) (2,286) (2,234)
Settlement 166 -- -- --
Contributions by plan
participants -- -- 427 417
Currency-translation
adjustment (1,687) 97 -- --
----------------------------------------------------------------------------
Benefit obligation at
end of year $152,034 $155,754 $ 23,135 $ 23,816
----------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets
at beginning of year $196,396 $188,762 $ -- $ --
Actual return on plan assets 1,808 10,485 -- --
Employer contributions 5,025 2,218 1,859 1,817
Contributions by plan
participants -- -- 427 417
Benefits paid (6,723) (4,945) (2,286) (2,234)
Currency-translation
adjustment (172) (124) -- --
----------------------------------------------------------------------------
Fair value of plan
assets at end of year $196,334 $196,396 $ -- $ --
----------------------------------------------------------------------------
Funded status:
Funded status at end of year $ 44,300 $ 40,642 $(23,135) $(23,816)
Unrecognized net (gain)/loss (3,890) (6,060) (737) 42
Unrecognized prior service cost 3,028 2,306 (2,091) (2,564)
Unrecognized net
transition obligation 487 663 -- --
----------------------------------------------------------------------------
Net amount recognized $ 43,925 $ 37,551 $(25,963) $(26,338)
----------------------------------------------------------------------------
Amounts recognized in the
balance sheet consist of:
Prepaid benefit cost $ 56,974 $ 51,606 $ -- $ --
Accrued benefit liability (14,860) (15,526) (25,963) (26,338)
Intangible asset 994 991 -- --
Accumulated other
comprehensive income 817 480 -- --
----------------------------------------------------------------------------
Net amount recognized $ 43,925 $ 37,551 $(25,963) $(26,338)
----------------------------------------------------------------------------
Costs for Modine's pension and other postretirement benefit plans
include the following components:
<PAGE>
(In thousands)
----------------------------------------------------------------------------
Years ended March 31 2000 1999 1998
----------------------------------------------------------------------------
Pensions:
Components of net periodic
benefit cost (gain):
Service cost $ 5,875 $ 5,567 $ 5,280
Interest cost 10,630 10,299 9,625
Expected return on plan assets (17,567) (16,433) (14,925)
Amortization of:
Unrecognized net loss (gain) 95 (117) 108
Unrecognized prior service cost 380 340 437
Unrecognized net obligation
(asset) 93 213 (288)
Adjustment for settlement 574 -- --
----------------------------------------------------------------------------
Net periodic benefit cost (gain) $ 80 $ (131) $ 237
----------------------------------------------------------------------------
Other postretirement plans:
Components of net periodic
benefit cost:
Service cost $ 374 $ 327 $ 310
Interest cost 1,629 1,626 1,624
Amortization of:
Unrecognized net (gain) (46) (109) (87)
Unrecognized prior service cost (473) (473) (473)
----------------------------------------------------------------------------
Net periodic benefit cost $ 1,484 $ 1,371 $ 1,374
----------------------------------------------------------------------------
The following weighted-average assumptions were used to determine
Modine's obligation under the plans:
----------------------------------------------------------------------------
Years ended March 31 2000 1999
---------------- ---------------
U.S. Foreign U.S. Foreign
plans plans plans plans
----------------------------------------------------------------------------
Pensions:
Discount rate 7.5% 7.4% 7.0% 7.1%
Expected return on plan assets 9.0% 14.4% 9.0% 15.4%
Rate of compensation increase 4.0% 3.1% 4.5% 3.0%
----------------------------------------------------------------------------
Other postretirement plans:
Discount rate 7.5% 7.0%
Rate of compensation increase 4.0% 4.5%
----------------------------------------------------------------------------
With regards to the postretirement plans, for measurement purposes,
a 6.0-percent healthcare-cost trend rate was assumed for fiscal year 2000
for pre-65 benefits and 5.0 percent for post-65 benefits. Pre-65 trend
rates were assumed to decrease to 5.0 percent in fiscal 2001 and remain
at that level thereafter.
Assumed healthcare-cost trend rates affect the amounts reported for
the healthcare plan. A one-percentage-point change in assumed healthcare-
cost trend rates would have the following effects:
<PAGE>
(In thousands)
----------------------------------------------------------------------------
One percentage point
--------------------
Year ended March 31, 2000 increase decrease
----------------------------------------------------------------------------
Effect on total of service and interest cost $ 96 $ (95)
Effect on post-retirement benefit obligation 1,309 (1,244)
----------------------------------------------------------------------------
NOTE 4 Leases
----------------
Modine leases various facilities and equipment. Rental expense under
operating leases totaled $14,817,000 in fiscal 2000, $12,618,000 in fiscal
1999, and $10,912,000 in fiscal 1998.
Future minimum rental commitments at March 31, 2000, under
noncancelable operating leases were:
(In thousands)
----------------------------------------------------------------------------
Years ending March 31
----------------------------------------------------------------------------
2001 $8,637 2004 $2,321
2002 5,646 2005 1,703
2003 3,134 2006 and beyond 2,556
----------------------------------------------------------------------------
Total future minimum rental commitments $23,997
----------------------------------------------------------------------------
NOTE 5 Income taxes
----------------------
The U.S. and foreign components of earnings before income taxes
and the income tax expense consist of:
(In thousands)
----------------------------------------------------------------------------
Years ended March 31 2000 1999 1998
----------------------------------------------------------------------------
Components of earnings before
income taxes:
United States $70,114 $ 98,945 $ 83,342
Foreign 25,217 19,125 32,630
----------------------------------------------------------------------------
Total earnings before income taxes $95,331 $118,070 $115,972
----------------------------------------------------------------------------
Income tax expense:
Federal:
Current $20,231 $ 22,983 $ 26,913
Deferred 2,959 4,995 (55)
State:
Current 3,319 4,836 4,008
Deferred 337 497 22
Foreign:
Current 8,746 9,595 12,506
Deferred (5,664) 1,221 107
----------------------------------------------------------------------------
Totals charged to earnings $29,928 $ 44,127 $ 43,501
----------------------------------------------------------------------------
<PAGE>
Income-tax expense attributable to earnings before income taxes
differed from the amounts computed by applying the statutory U.S.
federal income-tax rate as a result of the following:
----------------------------------------------------------------------------
Years ended March 31 2000 1999 1998
----------------------------------------------------------------------------
Statutory federal tax 35.0% 35.0% 35.0%
State taxes, net of federal benefit 2.6 3.0 2.3
Taxes on non-U.S. earnings and losses (7.8) (0.2) 0.2
Other 1.6 (0.4) --
----------------------------------------------------------------------------
Effective tax rate 31.4% 37.4% 37.5%
----------------------------------------------------------------------------
The significant components of deferred income-tax expense
attributable to earnings before income taxes are as follows:
(In thousands)
----------------------------------------------------------------------------
Years ended March 31 2000 1999 1998
----------------------------------------------------------------------------
Pensions $ 1,707 $1,294 $ 1,617
Depreciation 3,622 2,023 1,201
Inventories (575) (148) 432
Employee benefits 679 817 (1,357)
Benefit of tax losses (7,185) (392) (162)
Other (617) 3,119 (1,657)
----------------------------------------------------------------------------
Totals charged to earnings $(2,369) $6,713 $ 74
----------------------------------------------------------------------------
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows:
(In thousands)
----------------------------------------------------------------------------
March 31 2000 1999
---------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable $ 1,366 $ 1,079
Inventories 5,660 4,488
Plant and equipment 937 566
Employee benefits 18,683 19,278
Net operating-loss and tax-credit carry-forwards 9,217 7,553
Other 7,747 6,867
-----------------
Total gross deferred assets 43,610 39,831
Less valuation allowance 856 5,154
-----------------
Net deferred tax assets 42,754 34,677
-----------------
Deferred tax liabilities:
Pension 22,012 20,034
Plant and equipment 14,846 11,046
Other 2,686 2,311
-----------------
Total gross deferred tax liabilities 39,544 33,391
----------------------------------------------------------------------------
Net deferred tax asset $ 3,210 $ 1,286
----------------------------------------------------------------------------
<PAGE>
The valuation allowance for deferred tax assets as of April 1, 1999,
was $5,154,000. The valuation allowance decreased by $4,298,000 during
the year and relates primarily to certain, foreign, net-operating-loss
carryforward activities. The implementation of a tax strategy allowed
Modine to release a tax-valuation allowance relating to the net-operating-
loss carryforward at a foreign subsidiary. Available positive evidence
and projected future earnings of the foreign subsidiary will, more likely
than not, result in the realization of the net-operating-loss carryforward.
At March 31, 2000, the company had tax-loss carryforwards of
$21,628,000 existing in jurisdictions outside of the United States. If
not utilized against taxable income, the tax losses will expire as follows:
(In thousands)
----------------------------------------------------------------------------
Years ending March 31
----------------------------------------------------------------------------
2001 $184 2004 $ 471
2002 387 2005 2,405
2003 -- No expiration date 18,181
----------------------------------------------------------------------------
The undistributed earnings of certain foreign subsidiaries and equity
investment companies totaled $112,084,000 as of March 31, 2000. The earnings
are considered permanently reinvested in foreign operations and, therefore,
no provision has been made for any U.S. taxes.
NOTE 6 Earnings per share
----------------------------
The computational components of basic and diluted earnings per
share are as follows:
(In thousands, except per-share amounts)
----------------------------------------------------------------------------
Years ended March 31 2000 1999 1998
----------------------------------------------------------------------------
Net earnings per share of common stock:
Basic $2.22 $2.50 $2.44
Assuming dilution 2.20 2.46 2.39
Numerator:
Net earnings available to
common shareholders $65,403 $73,943 $72,471
Denominator:
Weighted average shares outstanding - basic 29,471 29,579 29,726
Effect of dilutive securities - options 232 436 563
---------------------------
Weighted average shares
outstanding - assuming dilution 29,703 30,015 30,289
There were outstanding options to
purchase common stock excluded from
the dilutive calculation because
their prices exceeded the average
market price for the earnings
statement periods as follows:
Average market price per share $27.03 $32.57 $32.63
Number of shares 1,169 645 318
----------------------------------------------------------------------------
<PAGE>
NOTE 7 Cash and cash equivalents
-----------------------------------
Under Modine's cash management system, certain cash balances reflect
credit balances to the extent that checks written have not yet been
presented for payment. These credit balances, included in accounts payable,
were approximately $7,699,000, $9,814,000, and $10,002,000 at March 31,
2000, 1999, and 1998, respectively.
All the short-term investments at March 31, 2000, 1999, and 1998,
were of an initial duration of less than three months and were treated
as cash equivalents, which approximate fair value.
NOTE 8 Inventories
---------------------
Inventories include:
(In thousands)
----------------------------------------------------------------------------
March 31 2000 1999
----------------------------------------------------------------------------
Raw materials $ 35,872 $ 40,529
Work in process 39,146 41,863
Finished goods 93,579 96,557
----------------------------------------------------------------------------
Total inventories $168,597 $178,949
----------------------------------------------------------------------------
NOTE 9 Property, plant, and equipment
----------------------------------------
Property, plant, and equipment is composed of:
(In thousands)
----------------------------------------------------------------------------
March 31 Depreciable lives 2000 1999
----------------------------------------------------------------------------
Land -- $ 7,966 $ 7,922
Buildings and improvements 10-40 years 164,449 147,153
Machinery and equipment 3-12 years 336,064 304,659
Office equipment 3-14 years 48,754 40,803
Transportation equipment 3-7 years 14,924 17,817
Construction in progress -- 62,013 76,292
------------------
634,170 594,646
Less accumulated depreciation 296,183 290,882
----------------------------------------------------------------------------
Net property, plant, and equipment $337,987 $303,764
----------------------------------------------------------------------------
Depreciation expense was $39,360,000, $37,411,000, and $35,192,000
for the fiscal years ended 2000, 1999, and 1998, respectively.
NOTE 10 Acquisitions and equity investments
---------------------------------------------
In the first quarter of fiscal 1999, Modine formed a joint-venture
company with Daikin Industries, Ltd. Modine made investments in fiscal
<PAGE>
1999 of $1,500,000 and in fiscal 2000 of $2,700,000. The 50-percent-owned
joint venture, Daikin-Modine, Inc., is manufacturing a new line of
packaged, rooftop, air-conditioning products using state-of-the-art
technology, including Modine's patented PF (parallel flow) heat
exchangers. On April 11, 2000, Modine announced that it reached a
basic agreement with Daikin Industries, Ltd. to purchase their share
of ownership in the joint-venture in June 2000. The operation will be
restructured into Modine's Commercial HVAC&R Division upon completion
of the transaction.
On August 6, 1998, Modine, through its wholly owned Brazilian
subsidiary, purchased a 50-percent interest in Radiadores Visconde,
Ltda., a Brazilian heat-transfer company based in Sao Paulo, Brazil.
Visconde produces heat-exchanger components, assemblies, and modules
primarily for the aftermarket but also for sale to original-equipment
customers in the truck, engine, agricultural-tractor, hydraulic-system,
compressor, marine, construction-equipment, power-generator, and
industrial markets. The purchase price of $26,187,000 was financed
through a combination of cash provided by operations, borrowing under
Modine's revolver, and a promissory note in the amount of $10,000,000
to the sellers. Goodwill recorded as part of the investment was
$17,536,000 and is being amortized on a straight-line basis over
15 years. The investment is being accounted for under the equity
method using a one-month reporting delay.
On October 6, 1998, Modine finalized the acquisition of Core
Holdings, Inc., of Orlando, Florida, an aftermarket wholesale
distributor specializing in complete lines of vehicular engine-
cooling and air-conditioning systems products. The acquisition
purchase price was $24,300,000. The transaction was financed with
cash, existing short-term borrowing facilities, and $3,921,000 of
promissory notes to the sellers. The investment is accounted for
using the purchase method. Goodwill, recognized as a result of
the acquisition, was $25,261,000 and is being amortized on a
straight-line basis over 15 years. The results of operations are
included in the consolidated financial statements since the
effective date of the acquisition.
Details of businesses acquired and equity investment
transactions were as follows:
(In thousands)
----------------------------------------------------------------------------
Year ended March 31 2000 1999
----------------------------------------------------------------------------
Value of assets acquired, including
intangibles, excluding cash acquired
of $543 in fiscal 1999 $ -- $53,620
Liabilities assumed and created -- (43,794)
Equity investment in affiliates 2,700 27,687
----------------------------------------------------------------------------
Net cash paid for acquisitions and
equity investments $2,700 $37,513
----------------------------------------------------------------------------
Effective January 1, 1998, Modine acquired the business, assets,
and certain liabilities of Sun Technology Corporation, located in
Shelby Township, Michigan. Sun Technology manufactured Ray-Tec
<PAGE>
infrared heaters for commercial, industrial, and residential
buildings. The acquisition purchase price of $3,173,000 was paid
for with cash and a promissory note for $320,000. Goodwill
created by the acquisition was $2,226,000 and is being amortized
over 15 years on a straight-line basis. The investment is being
accounted for by the purchase method. The results of operations
are included in the consolidated financial statements since the
date of acquisition.
The investments presented above did not have a material effect
on the consolidated results of operations and, accordingly, pro-
forma information is not presented.
NOTE 11 Intangible assets
---------------------------
Intangible assets include:
(In thousands)
-------------------------------------------------------------------------
March 31 2000 1999
-------------------------------------------------------------------------
Goodwill $ 89,815 $ 92,548
Patents and product technology 8,389 8,389
Other intangibles 3,204 3,326
------------------
101,408 104,263
Less accumulated amortization 31,069 23,852
-------------------------------------------------------------------------
Net intangible assets $ 70,339 $ 80,411
-------------------------------------------------------------------------
Amortization expense for intangible assets was $8,390,000,
$5,856,000, and $4,761,000 for the fiscal years ended 2000, 1999,
and 1998, respectively.
NOTE 12 Deferred charges and other noncurrent assets
------------------------------------------------------
Deferred charges and other noncurrent assets include:
(In thousands)
----------------------------------------------------------------------------
March 31 2000 1999
----------------------------------------------------------------------------
Prepaid pension costs - qualified and
nonqualified plans $57,421 $52,000
Other noncurrent assets 7,365 2,141
----------------------------------------------------------------------------
Total deferred charges and other
noncurrent assets $64,786 $54,141
----------------------------------------------------------------------------
NOTE 13 Indebtedness
----------------------
Long-term debt at March 31, 2000 and 1999, includes:
<PAGE>
(Dollars in thousands)
----------------------------------------------------------------------------
Fiscal
Interest rate at year of
Type of issue March 31, 2000 maturity 2000 1999
----------------------------------------------------------------------------
Denominated in
U.S. dollars:
Fixed rate -
Notes 5.00%-9.00% 2001-2004 $ 13,391 $ 15,825
Weighted average
interest rate 5.31%
Revenue bonds 7.50% 2003 750 1,100
Variable rate -
Note 6.50% 2003 55,000 1,660
Revenue bonds 3.85% 2008 3,000 3,000
Denominated in
foreign currency:
Fixed rate -
Notes and other debt 3.25%-11.00% 2004-2009 13,301 11,784
Weighted average
interest rate 3.92%
Variable rate -
Notes and other debt .30%-7.00% 2002-2010 128,798 115,235
Weighted average
interest rate 3.78%
------------------
214,240 148,604
Less current portion 3,128 4,766
----------------------------------------------------------------------------
Total $211,112 $143,838
----------------------------------------------------------------------------
During the second quarter of fiscal 2000, Modine entered into an
unsecured $53,000,000 term loan denominated in Euros. This loan matures
in August, 2001, with a one-year extension option subject to the lender's
approval. In the fourth quarter of fiscal 2000, Modine entered into an
unsecured $60,000,000 multi-currency revolving credit agreement with a
term of three years. Certain of Modine's financing agreements require
it to maintain specific financial ratios and place certain limitations
on dividend payments and the acquisition of treasury stock. Other loan
agreements give certain existing unsecured lenders security equal to any
future secured borrowing. Modine is in compliance with these covenants at
March 31, 2000.
At March 31, 2000, the carrying value of Modine's long-term debt
approximates fair value.
Long-term debt matures as follows:
---------------------------------------------------------------------------
Years ending March 31 (In thousands)
---------------------------------------------------------------------------
2001 $ 3,128 2004 $12,002
2002 67,931 2005 1,735
2003 100,762 2006 and beyond 28,682
----------------------------------------------------------------------------
<PAGE>
Modine also maintains credit agreements with banks abroad.
The foreign unused lines of credit at March 31, 2000, were
approximately $27,888,000. Domestic unused lines of credit at March 31,
2000, were approximately $5,657,000. A maximum of $79,248,000 in short-
term bank borrowings was outstanding during the year ended March 31,
2000. The weighted average interest rate on short-term borrowings was
4.67 percent at March 31, 2000, and 4.94 percent at March 31, 1999.
Interest expense charged to earnings was as follows:
(In thousands)
----------------------------------------------------------------------------
Years ended March 31 2000 1999 1998
----------------------------------------------------------------------------
Gross interest cost $9,980 $7,538 $4,687
Capitalized interest on major
construction projects (1,513) (1,816) (677)
----------------------------------------------------------------------------
Interest expense $8,467 $5,722 $4,010
----------------------------------------------------------------------------
NOTE 14 Foreign exchange contracts/derivatives
------------------------------------------------
Modine uses derivative financial instruments in a limited way
as a tool to manage its financial risk. Their use is restricted
primarily to hedging assets and obligations already held by Modine
and they are used to protect cash rather than generate income or
engage in speculative activity. Leveraged derivatives are prohibited
by company policy.
Modine from time to time enters into foreign-currency-exchange
contracts, generally with terms of 90 days or less, to hedge specific
foreign-currency-denominated transactions. The effect of this practice
is to minimize the impact of foreign-exchange-rate movements on Modine's
operating income. Modine's foreign-currency-exchange contracts do not
subject it to significant risk due to exchange-rate movements because
gains and losses on these contracts offset gains and losses on the
assets and liabilities being hedged.
As of March 31, 2000 and 1999, the parent company had
approximately $2,549,000 and $3,971,000, respectively, in outstanding
forward foreign-exchange contracts denominated in Euros and French
francs, respectively. The difference between these contracts' values
and the fair value of these instruments in the aggregate was not
material. Certain subsidiaries have transactions in currencies other
than their functional currencies and, from time to time, enter into
forward and option contracts to hedge the purchase of inventory or
to sell nonfunctional currency receipts. Non-U.S. dollar financing
transactions through intercompany loans or local borrowings in the
corresponding currency generally are effective as hedges of long-term
investments. See also Note 13.
NOTE 15 Other noncurrent liabilities
--------------------------------------
Other noncurrent liabilities include:
<PAGE>
(In thousands)
---------------------------------------------------------------------------
March 31 2000 1999
---------------------------------------------------------------------------
Postretirement benefits other
than pensions $23,595 $24,119
Pensions 13,583 14,521
Other 2,562 2,914
---------------------------------------------------------------------------
Total other noncurrent liabilities $39,740 $41,554
---------------------------------------------------------------------------
NOTE 16 Common and treasury stock
-----------------------------------
Following is a summary of common and treasury stock activity.
----------------------------------------------------------------------------
Treasury stock
Common stock at cost
----------------- -------------------
shares amount shares amount
----------------------------------------------------------------------------
Balance March 31, 1997 30,342 $18,964 (509) $(14,949)
----------------------------------------------------------------------------
Purchase of treasury stock -- -- (523) (16,990)
Stock options and awards
including related tax benefits -- -- 346 10,736
Employee stock-purchase
and -ownership plans -- -- 8 226
----------------------------------------------------------------------------
Balance March 31, 1998 30,342 18,964 (678) (20,977)
----------------------------------------------------------------------------
Purchase of treasury stock -- -- (418) (15,203)
Stock options and awards
including related tax benefits -- -- 215 6,165
Employee stock-purchase
and -ownership plans -- -- 64 1,817
----------------------------------------------------------------------------
Balance March 31, 1999 30,342 18,964 (817) (28,198)
----------------------------------------------------------------------------
Purchase of treasury stock -- -- (459) (12,102)
Stock options and awards
including related tax benefits -- -- 124 3,719
Employee stock-purchase
and -ownership plans -- -- 71 2,187
----------------------------------------------------------------------------
Balance March 31, 2000 30,342 $18,964 (1,081) $(34,394)
----------------------------------------------------------------------------
NOTE 17 Shareholder rights plan
---------------------------------
Modine has a shareholder rights plan to protect against coercive
takeover tactics. Under the plan, each share of Modine's common
stock carries one right that entitles the holder to purchase a unit
of 1/100 Preferred Series A Participating Stock at $95.00 per unit.
The rights are not currently exercisable but will become exercisable
10 days after a shareholder has acquired 20 percent or more, or has
<PAGE>
commenced a tender or exchange offer for 30 percent or more, of
Modine's common stock. In the event of certain mergers, sales of
assets, or self-dealing transactions involving a 20-percent-or-more
shareholder, each right not owned by such 20-percent-or-more holder
will be modified so that it will then be exercisable for common
stock having a market value of twice the exercise price of the
right. The rights are redeemable in whole by Modine, at a price
of $0.0125 per right, at any time before 20 percent or more of
Modine's common stock has been acquired. The rights expire on
October 27, 2006, unless previously redeemed.
NOTE 18 Stock-retirement, option, and award plans
---------------------------------------------------
Retirement plans: Modine has adopted several, qualified,
----------------
defined-contribution, stock-purchase plans; 401(k) plans; and a
non-qualified, deferred-compensation plan for certain, designated
employees. The stock-purchase plans permitted employees to make
monthly investments at current market prices based on a specified
percentage of compensation. As of December 31, 1998, the stock-
purchase plans were frozen and no additional contributions were
made. The plans continue to earn dividends, which are reinvested
in Modine common stock. The 401(k) plans and deferred-compensation
plan allow employees to choose among various investment alternatives,
including Modine common stock. Modine matches a portion of the
employees' contribution, primarily in Modine common stock.
Activity in the plans for fiscal 2000, 1999, and 1998 resulted
in the purchase of 487,000, 506,000, and 577,000 shares of Modine
common stock, respectively. These purchases were made from the
employee-pension-plan trusts, private purchases, and treasury
shares. It is anticipated that future purchases will be made from
all three sources at the discretion of the plans' administrative
committees. Costs of Modine's contributions to the plans for fiscal
2000, 1999, and 1998 were $7,288,000, $6,321,000, and $6,179,000,
respectively.
Stock option and award plans: In July of 1985 and 1994,
----------------------------
shareholders approved plans providing for the granting of options
to officers, other key employees, and to non-employee directors
to purchase common stock of Modine. In July of 1999, shareholders
reapproved the 1994 plan. Options granted under the plans, which
vest immediately, are either nonqualified or incentive stock
options and carry a price equal to the market price on the date
of grant. Both incentive stock options and nonqualified stock
options terminate 10 years after date of grant.
The 1985 and 1994 Incentive Stock Plans also provide for the
granting of stock awards. Restricted stock awards were granted
for 39,000, 1,500, and 25,000 shares in fiscal 2000, 1999, and
1998, respectively. Shares are awarded at no cost to the employee
and are placed in escrow until certain employment restrictions
lapse. The value of shares awarded is amortized over the five-to-
six year restriction periods. The amounts charged to operations
in fiscal 2000, 1999, and 1998 were $1,072,000, $915,000, and
$1,814,000, respectively.
<PAGE>
Following is a summary of incentive and nonqualified option
activity under the plans.
----------------------------------------------------------------------------
Shares Weighted-average
in thousands) exercise price per share
----------------------------------------------------------------------------
Outstanding March 31, 1997 2,085 $20.27
----------------------------------------------------------------------------
Granted 318 33.56
Exercised (323) 13.33
----------------------------------------------------------------------------
Outstanding March 31, 1998 2,080 23.38
----------------------------------------------------------------------------
Granted 333 33.36
Exercised (215) 13.77
Forfeitures (18) 27.31
----------------------------------------------------------------------------
Outstanding March 31, 1999 2,180 25.82
----------------------------------------------------------------------------
Granted 343 25.86
Exercised (85) 10.59
----------------------------------------------------------------------------
Outstanding March 31, 2000 2,438 $26.36
----------------------------------------------------------------------------
Options outstanding and exercisable as of March 31, 2000:
----------------------------------------------------------------------------
Weighted- Weighted-average
average exercise price Shares
Range of exercise prices remaining life per share (in thousands)
----------------------------------------------------------------------------
$ 8.75 - 14.99 1.51 $11.56 157
15.00 - 24.99 4.01 20.17 530
25.00 - 34.99 7.20 29.55 1,751
----------------------------------------------------------------------------
Total outstanding and exercisable $26.36 2,438
----------------------------------------------------------------------------
A further 1,480,000 shares were available for the granting of
additional options or awards at March 31, 2000.
Modine continues to account for its stock options using the
intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Since the exercise price of the options that have been
awarded was equal to the market price on the date of the grant, no
compensation expense was required to be recognized. If the fair-value
based method of accounting for the 2000, 1999, and 1998 stock option
grants had been applied in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation," Modine's net earnings and net earnings
per share would have been reduced as summarized below:
<PAGE>
(In thousands, except per-share amounts)
---------------------------------------------------------------------------
Years ended March 31 2000 1999 1998
---------------------------------------------------------------------------
Net earnings as reported $65,403 $73,943 $72,471
Net earnings pro forma 62,855 71,206 69,597
Net earnings per share (basic) as reported $2.22 $2.50 $2.44
Net earnings per share (basic) pro forma 2.13 2.41 2.34
----------------------------------------------------------------------------
The following assumptions were used to compute the fair value of
the option grants in fiscal 2000, 1999, and 1998 using the Black-Scholes
option-pricing model: a risk-free interest rate of 5.82-6.60 percent,
4.53 percent, and 5.43 percent, respectively; stock volatility of
26.9-28.8 percent, 26.3 percent, and 27.0 percent, respectively; a
dividend yield of 2.4-2.5 percent, 2.2 percent, and 2.2 percent,
respectively; and, for each of the three years, an expected option
life of five years.
NOTE 19 Segment and geographic information
--------------------------------------------
Modine's product line consists of heat-transfer components and
systems. Modine serves the vehicular, industrial, commercial, and
building-HVAC original-equipment and replacement markets. Modine's
segments, which are organized on the basis of market categories or
geographical responsibility, are as follows: Original Equipment,
which provides heat-transfer products, generally from business units
in North America, to original-equipment manufacturers of on-highway
and off-highway vehicles, as well as to industrial- and commercial-
equipment manufacturers, located primarily in North America;
Distributed Products, which provides heat-transfer products primarily
for the North American vehicular replacement market and the building-
HVAC market, from business units in North America; and European
Operations, which provides heat-transfer products, primarily to
European original-equipment manufacturers of on-highway and
off-highway vehicles, industrial equipment manufacturers, and the
vehicular replacement market from business units in Europe. Modine
has assigned specific business units to a segment based principally
on these defined markets and their geographical location. Each of
Modine's segments is individually managed and has separate financial
results reviewed by its chief, operating decisionmakers. These
results are used by management both in evaluating the performance
of, and in allocating current and future resources to, each of
the segments. Modine evaluates segment performance based on
operating income and the efficient use of long-lived and total
assets. The accounting policies of the segments are the same as
those of Modine as a whole.
Totals presented are inclusive of all adjustments needed to
reconcile to the data provided in Modine's consolidated financial
statements and related notes.
<PAGE>
Segment data:
(In thousands)
---------------------------------------------------------------------------
Years ended March 31 2000 1999 1998
---------------------------------------------------------------------------
Sales:
Original Equipment $ 485,338 $ 491,532 $ 491,128
Distributed Products 351,790 320,320 300,989
European Operations 342,834 334,245 283,751
----------------------------------------
Segment sales 1,179,962 1,146,097 1,075,868
Eliminations (40,693) (34,650) (35,450)
---------------------------------------------------------------------------
Total net sales $1,139,269 $1,111,447 $1,040,418
---------------------------------------------------------------------------
Operating income:
Original Equipment $ 92,292 $ 92,488 $ 85,986
Distributed Products 39,179 49,041 51,004
European Operations 29,817 34,200 39,506
----------------------------------------
Segment operating income 161,288 175,729 176,496
Corporate & administrative
expenses (62,303) (62,546) (58,754)
Eliminations 53 108 (266)
Other items not allocated
to segments (3,707) 4,779 (1,504)
---------------------------------------------------------------------------
Earnings before
income taxes $ 95,331 $ 118,070 $ 115,972
---------------------------------------------------------------------------
Intersegment sales are accounted for based on an established
markup over production costs.
At the end of the fourth quarter in fiscal 2000, several
changes were introduced in the basis for measuring segment profit
or loss. The amortization of goodwill was restored as a charge to
SG&A expenses from other items not allocated to segments. Certain
goodwill amortization previously recorded at Corporate was moved
to the Distributed Products segment. Lastly, the allocation of
Corporate headquarters functions was changed to include only a
general building, technical center, and aircraft use allocation.
These changes were introduced in preparation for using value-based-
management criteria for assessing performance across the various
business units within the segments. The corresponding prior years'
data have been restated to reflect the effects of these changes.
Operating income for the reportable segments excludes all
general corporate and administrative expenses except for certain
expenses allocated for use of the company aircraft, technical
center, and general building use. Functions included in corporate
and administrative expenses include: certain research and
development costs, information technology, quality assurance,
legal, finance, human resources, environmental, amortization of
goodwill from acquisitions that benefit the entire company, and
other general corporate expenses.
<PAGE>
Other items not allocated to segments include interest income
and expenses, royalties, and dividend income.
(In thousands)
---------------------------------------------------------------------------
Years ended March 31 2000 1999 1998
---------------------------------------------------------------------------
Assets:
Original Equipment $265,495 $231,841 $223,222
Distributed Products 216,586 211,171 149,006
European Operations 235,093 237,036 188,214
Corporate & administrative 264,562 249,044 210,010
Eliminations (50,629) (13,353) (11,428)
---------------------------------------------------------------------------
Total assets $931,107 $915,739 $759,024
---------------------------------------------------------------------------
Capital expenditures:
Original Equipment $ 19,714 $ 24,766 $ 24,730
Distributed Products 4,506 5,088 7,068
European Operations 39,744 45,514 25,447
Corporate & administrative 26,272 15,542 23,319
Eliminations (89) (50) 118
---------------------------------------------------------------------------
Total capital expenditures $ 90,147 $ 90,860 $ 80,682
---------------------------------------------------------------------------
Depreciation and amortization expense:
Original Equipment $ 16,270 $ 15,764 $ 14,798
Distributed Products 7,618 6,477 5,064
European Operations 14,106 13,276 11,824
Corporate & administrative 10,955 8,788 10,185
Eliminations (127) (122) (104)
---------------------------------------------------------------------------
Total depreciation and
amortization expense $ 48,822 $ 44,183 $ 41,767
---------------------------------------------------------------------------
In the third and fourth quarters of fiscal 2000, changes
were introduced by management in the basis of measuring segment
assets. Since the third quarter, trade receivables previously
reported as corporate and administrative assets have been
reported directly in the individual segments. Since the fourth
quarter, goodwill and its associated accumulated amortization
previously reported in corporate and administrative assets has
been reported in a segment if the benefit from the acquisition is
directly associated with a single segment. As mentioned earlier,
these changes were introduced in preparation for using value-
based-management criteria for assessing performance within
business units within the three segments.
Corporate assets include: cash and cash equivalents, accounts
and notes receivable, investments in affiliates, intangibles, and
significant long-lived assets. Eliminations consist primarily of
intracompany loans and receivables.
Eliminations of capital expenditures are primarily due to sales
between segments in excess of book value.
<PAGE>
Geographic data:
(In thousands)
---------------------------------------------------------------------------
Years ended March 31 2000 1999 1998
---------------------------------------------------------------------------
Sales to unaffiliated
customers from company
facilities located in:
United States $ 757,074 $ 740,094 $ 719,221
Germany 212,474 221,725 178,855
Other countries 169,721 149,628 142,342
--------------------------------------------------------------------------
Net sales $1,139,269 $1,111,447 $1,040,418
--------------------------------------------------------------------------
Long-lived assets:
United States $ 364,456 $ 344,948 $ 278,959
Germany 71,422 61,258 43,260
Other countries 66,572 61,923 46,651
Eliminations (898) (5,486) (3,029)
--------------------------------------------------------------------------
Total long-lived assets $ 501,552 $ 462,643 $ 365,841
--------------------------------------------------------------------------
Net sales are attributed to countries based on the location of the
selling unit. During the last three fiscal years, no single customer has
accounted for more than ten percent of revenues. Long-lived assets are
primarily physical property, plant, and equipment, but also include
investments, intangibles, and other long-term assets. Eliminations are
primarily intracompany loans and sales of property, plant, and equipment.
NOTE 20 Contingencies and litigation
--------------------------------------
In the normal course of business, Modine and its subsidiaries
have been named as defendants in various lawsuits and enforcement
proceedings in which claims are asserted against Modine by private
parties, the Occupational Safety and Health Administration, the
Environmental Protection Agency, other governmental agencies, and
others. Modine is also subject to other liabilities that arise in
the ordinary course of its business. Based on the information
available, Modine does not expect that any unrecorded liability
related to these matters would have a material effect on the
consolidated financial statements.
In November 1991, Modine filed a lawsuit against Mitsubishi Motor
Sales of America, Inc., and Showa Aluminum Corporation, alleging
infringement of Modine's patent on parallel-flow air-conditioning
condensers. The suit seeks an injunction to prohibit continued
infringement, an accounting for damages, a trebling of such damages
for willful infringement, and reimbursement of attorneys' fees. In
December 1991, Modine submitted a complaint to the U.S. International
Trade Commission (ITC) requesting that the ITC ban the import and sale
of parallel-flow air-conditioning condensers and systems or vehicles
that contain them, which are the subject of the November 1991 lawsuit.
In August 1997, the ITC issued an Order excluding from U.S. import
Showa condensers that infringe Modine Manufacturing Company's
parallel-flow patent. The ITC's Order covers condensers, their parts,
and certain products including them, such as air-conditioning kits
and systems. It directs the U.S. Customs Service to exclude from
<PAGE>
importation into the United States such products manufactured by Showa
Aluminum Corporation of Japan and Showa Aluminum Corporation of America.
The decision is based on a Modine U.S. patent covering condensers with
tube hydraulic diameters less than 0.04822 inches. The Showa companies
must certify to Customs officials that any condenser items imported by
them do not infringe Modine's parallel-flow patent. The Showa companies
must also file annual reports with the ITC regarding their sales of
Showa parallel-flow condensers in the United States. In July of 1994,
Showa filed a lawsuit against Modine alleging infringement by Modine
of certain Showa patents pertaining to condensers. In June 1995,
Modine filed a motion for partial summary judgment against such
lawsuit. In December of 1994, Modine filed another lawsuit against
Mitsubishi and Showa pertaining to a newly issued patent on parallel-
flow air-conditioning condensers. Both 1994 suits have been stayed
pending the outcome of re-examination in the U.S. Patent Office of
the patents involved. In October of 1999, the U.S. Patent Office Board
of Appeals rejected Modine's 1994 PF patent, which rejection is being
appealed to the Court of Appeals for the Federal Circuit. In October
of 1997, Modine was issued a Japanese patent covering parallel-flow
air-conditioning condensers having tube hydraulic diameters less than
0.070 inches. In August of 1998, Modine filed a patent infringement
suit in Japan against Showa with respect to this patent seeking an
injunction and damages. Several patents have been issued to Modine by
the European Patent Office, one having been rejected at the opposition
level, which is being appealed, and a second having been validated at
an opposition hearing. In February 2000, Modine filed a complaint
against Delphi Automotive Systems Corporation in the U.S. District
Court in Milwaukee, Wisconsin, alleging infringement of its PF patent.
All legal and court costs associated with these cases have been expensed
as they were incurred.
NOTE 21 Quarterly financial data (unaudited)
---------------------------------------------
Quarterly financial data are summarized below:
(In thousands, except per-share amounts)
---------------------------------------------------------------------------
Fiscal 2000 quarters ended June Sept. Dec. March
---------------------------------------------------------------------------
Net sales $283,847 $286,691 $283,520 $285,211
Gross profit 81,965 79,588 78,336 77,601
Net earnings 19,509 15,096 16,195 14,603
Net earnings per share
of common stock:
Basic $0.66 $0.51 $0.55 $0.50
Assuming dilution 0.65 0.51 0.55 0.49
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Fiscal 1999 quarters ended June Sept. Dec. March
---------------------------------------------------------------------------
Net sales $273,104 $272,961 $284,355 $281,027
Gross profit 78,458 75,958 77,113 78,398
Net earnings 20,080 19,081 17,341 17,441
Net earnings per share
of common stock:
Basic $0.68 $0.64 $0.59 $0.59
Assuming dilution 0.67 0.63 0.58 0.58
---------------------------------------------------------------------------
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Modine Manufacturing Company
Racine, Wisconsin
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of earnings, cash flows, and
shareholders' investment present fairly, in all material
respects, the financial position of Modine Manufacturing Company
and its subsidiaries at March 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three
years in the period ended March 31, 2000, in conformity with
accounting priniciples generally accepted in the United States.
These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted
our audits of these statements in accordance with auditing
standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
April 26, 2000
<PAGE>
