# Modine Manufacturing Co: Form 10-Q for the period ended Jun 30, 2009

- Company: [Modine Manufacturing Co](/companies/mod.md) (CIK 67347)
- Form: 10-Q
- Filed: 2009-08-05
- Accepted by EDGAR: Aug 5, 2009, 20:39 ET
- Period: 2009-06-30
- Accession: 0001140361-09-017986
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/67347/000114036109017986/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67347/000114036109017986/

## Management's discussion and analysis

As filed, 45,895 characters.

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

*First Quarter Highlights:* Net sales in the first quarter of fiscal 2010 declined significantly from the first quarter of fiscal 2009 as a result of the weak global economy. The continued instability in the global markets has created a significant downturn in the Company’s vehicular markets. This significant reduction in sales contributed to an underabsorption of fixed overhead costs as excess capacity existed in the manufacturing facilities resulting in a decrease in gross profit. A substantial reduction in selling, general and administrative (SG&A) expenses from the first quarter of fiscal 2009 to the first quarter of fiscal 2010 partially offset this decline in sales and gross profit. This reduction is the result of the execution on the SG&A reduction strategy of our four-point recovery plan, which includes manufacturing realignment, portfolio rationalization, SG&A reduction and capital allocation discipline. Our first quarter fiscal 2010 results include the favorable impact of cost reduction activities recently completed which also lead to significant improvement in our overall results from the fourth quarter of fiscal 2009.

#### CONSOLIDATED RESULTS OF OPERATIONS – CONTINUING OPERATIONS

The following table presents highlights of the consolidated results from continuing operations on a sequential basis from the fourth quarter of fiscal 2009 to the first quarter of fiscal 2010:

*(dollars in millions)*

| For the three months ended | June 30, 2009 $'s | March 31, 2009 $'s |
| --- | ---: | ---: |
| Net sales | **$253.6** | $254.8 |
| Gross margin | **14.1%** | 9.3% |
| Selling, general and administrative expenses | **$38.5** | $40.3 |
| Loss from continuing operations before income taxes | **$(4.6)** | $(37.4) |
| Adjusted EBITDA | **$16.8** | $1.7 |

Net sales were relatively flat from the fourth quarter of fiscal 2009 to the first quarter of fiscal 2010 which we believe provides a good indication that we are seeing signs of stabilization in the markets we serve. Gross margin increased 480 basis points from the fourth quarter of fiscal 2009 which reflects a reduction in direct and indirect costs in our manufacturing facilities as the result of actions taken during fiscal 2009 and lower materials costs. Selling, general and administrative (SG&A) expenses have been on a steady decline over the past year and decreased an additional $1.8 million from the fourth quarter of fiscal 2009 to the first quarter of fiscal 2010 due to our intense focus on lowering our cost structure. During the first quarter of fiscal 2010, we recorded a loss from continuing operations before income taxes of $4.6 million largely due to the low volumes and underabsorption of fixed costs in our manufacturing facilities. However, this loss improved significantly from the fourth quarter of fiscal 2009 due to the favorable gross margin performance and the absence of significant asset impairment charges. Similarly, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) also improved based on the favorable impact of our cost reduction efforts. See Liquidity and Capital Resources for further discussion and the calculation of adjusted EBITDA.

The following table presents consolidated results from continuing operations on a comparative basis for the three months ended June 30, 2009 and 2008:

*(dollars in millions)*

| For the three months ended June 30 | 2009 $'s | % of sales | 2008 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **253.6** | **100.0%** | 437.9 | 100.0% |
| Cost of sales | **217.8** | **85.9%** | 365.0 | 83.4% |
| Gross profit | **35.9** | **14.1%** | 72.9 | 16.6% |
| Selling, general and administrative expenses | **38.5** | **15.2%** | 58.5 | 13.4% |
| Restructuring expense (income) | **1.2** | **0.5%** | (0.1) | 0.0% |
| Impairment of long-lived assets | **1.0** | **0.4%** | 0.1 | 0.0% |
| (Loss) income from operations | **(4.9)** | **-1.9%** | 14.3 | 3.3% |
| Interest expense | **5.5** | **2.2%** | 2.6 | 0.6% |
| Other income - net | **(5.7)** | **-2.2%** | (1.8) | -0.4% |
| (Loss) earnings from continuing operations before income taxes | **(4.6)** | **-1.8%** | 13.4 | 3.1% |
| Provision for income taxes | **1.0** | **0.4%** | 6.8 | 1.6% |
| (Loss) earnings from continuing operations | **(5.6)** | **-2.2%** | 6.6 | 1.5% |

First quarter net sales of $253.6 million were 42.1 percent lower than the $437.9 million reported in the first quarter of last year. The decrease in revenues was driven by overall sales volume declines as a result of the weak global economy. Automotive and medium/heavy duty truck sales declined approximately 39.5 percent and 41.4 percent, respectively, compared to the first quarter of fiscal 2009. Foreign currency exchange rate changes also contributed to 13.6 percent of the decrease. Significant sales volume decreases were experienced throughout all of the segments of our business.

During the first quarter of fiscal 2010, gross margin of 14.1 percent was down from 16.6 percent for last year’s first quarter. The decrease in gross margin reflects the underabsorption of fixed costs in our manufacturing facilities based on the depressed sales volumes and a shift in our product mix toward lower margin products in Europe.

SG&A expenses decreased $20.0 million from the first quarter of fiscal 2009 to the first quarter of fiscal 2010. The decrease in SG&A expenses is primarily the result of recent cost reduction actions, including a workforce reduction at the Corporate headquarters in Racine, Wisconsin and throughout the European facilities including the European headquarters in Bonlanden, Germany.

Loss from operations of $4.9 million for the first quarter of fiscal 2010 is down $19.2 million from income from operations of $14.3 million for the first quarter of fiscal 2009, primarily driven by the decreased sales volumes and the resulting decline in gross profit, partially offset by the SG&A cost savings.

Interest expense increased $2.9 million over the comparable quarter, primarily driven by increased outstanding borrowings and an increase in interest rates in conjunction with debt refinancing during fiscal 2009.

Other income increased $3.9 million from the prior year’s first quarter. This increase was partially related to foreign currency exchange gains on inter-company loans denominated in a foreign currency. In addition, we sold our 50 percent ownership of Anhui Jianghaui Mando Climate Control Co. Ltd. resulting in a gain of $1.5 million during the first quarter of fiscal 2010.

The provision for income taxes decreased $5.8 million to $1.0 million in the first quarter of fiscal 2010 from $6.8 million in the first quarter of fiscal 2009. In addition, the effective income tax rate decreased to 22.0 percent from 50.9 percent over this same period. During the first quarter of fiscal 2009, the Company recorded tax valuation allowance charges of $4.8 million against net deferred tax assets in the U.S. and there was no similar charge during the first quarter of fiscal 2010, which was the primary factor contributing to the higher provision for income taxes in the prior year.

Loss from continuing operations of $5.6 million for the first quarter of fiscal 2010 represents a $12.2 million decrease from earnings from continuing operations of $6.6 million for the first quarter of fiscal 2009. In addition, diluted loss per share from continuing operations of $0.18 decreased $0.38 from diluted earnings per share from continuing operations of $0.20 for this same period last year. The decrease in sales volumes was the primary driver of this decrease.

DISCONTINUED OPERATIONS

During fiscal 2009, we announced the intended divestiture of our South Korean-based heating, ventilating and air conditioning (HVAC) business. It was determined during the fourth quarter of fiscal 2009 that this business should be presented as held for sale and as a discontinued operation in the consolidated financial statements.

The following table presents the quarterly results of the South Korean HVAC business reported through the third quarter of fiscal 2009, which will be separately presented as a component of (loss) earnings from discontinued operations in future quarterly filings (amounts in thousands):

|  | Fiscal 2009 Quarter Ended June 30 | Sept. 30 | Dec. 31 |
| --- | ---: | ---: | ---: |
| Net sales | $61,847 | $42,776 | $39,622 |
| Cost of sales and other expenses | 60,814 | 44,292 | 39,489 |
| Earnings (loss) before income taxes | 1,033 | (1,516) | 133 |
| Provision for (benefit from) income taxes | 854 | (359) | 100 |
| Earnings (loss) from discontinued operations - South Korea | $179 | $(1,157) | $33 |

As a result of separately classifying the South Korean HVAC business as a discontinued operation, our previously reported earnings (loss) from continuing operations is revised as follows:

|  | Fiscal 2009 Quarter Ended June 30 | Sept. 30 | Dec. 31 |
| --- | ---: | ---: | ---: |
| Earnings (loss) from continuing operations as previously reported | $6,763 | $(14,064) | $(56,478) |
| Earnings (loss) from discontinued operations - South Korea | 179 | (1,157) | 33 |
| Earnings (loss) from continuing operations - revised | $6,584 | $(12,907) | $(56,511) |

SEGMENT RESULTS OF OPERATIONS

### Original Equipment - Asia

*(dollars in millions)*

| For the three months ended June 30 | 2009 $'s | % of sales | 2008 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **6.3** | **100.0%** | 5.6 | 100.0% |
| Cost of sales | **6.6** | **104.8%** | 5.2 | 92.9% |
| Gross profit | **(0.3)** | **-4.8%** | 0.4 | 7.1% |
| Selling, general and administrative expenses | **1.3** | **20.6%** | 2.3 | 41.1% |
| Loss from continuing operations | **(1.6)** | **-25.4%** | (1.9) | -33.9% |

The Original Equipment – Asia segment is currently in the expansion phase. Net sales increased $0.7 million from the first quarter of fiscal 2009 to the first quarter of fiscal 2010 due to a growing presence in the region and the completion of construction on a new facility. The new manufacturing facility in Chennai, India began production in the second quarter of fiscal 2009 and is currently in low volume production. The negative gross margin is related to this start-up facility. SG&A expenses decreased $1.0 million from the first quarter of fiscal 2009 to the first quarter of fiscal 2010 due to cost reduction efforts within this region.

### Original Equipment - Europe

*(dollars in millions)*

| For the three months ended June 30 | 2009 $'s | % of sales | 2008 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **105.3** | **100.0%** | 217.1 | 100.0% |
| Cost of sales | **91.8** | **87.2%** | 175.4 | 80.8% |
| Gross profit | **13.5** | **12.8%** | 41.7 | 19.2% |
| Selling, general and administrative expenses | **10.9** | **10.4%** | 14.8 | 6.8% |
| Restructuring expense | **0.2** | **0.2%** | - | - |
| Impairment of long-lived assets | **0.2** | **0.2%** | - | - |
| Income from continuing operations | **2.2** | **2.1%** | 26.9 | 12.4% |

Original Equipment – Europe net sales decreased $111.8 million from the first quarter of fiscal 2009 to the first quarter of fiscal 2010, driven by a $96.6 million decline in underlying vehicular sales volumes and a $15.2 million unfavorable impact of foreign currency exchange rate changes. Gross profit decreased $28.2 million from the first quarter of fiscal 2009 to the first quarter of fiscal 2010 and gross margin decreased 640 basis points to 12.8 percent from 19.2 percent over this same period. The decline in gross margin is largely related to the underabsorption of fixed manufacturing costs with the declining sales volumes and changing mix of products toward lower margin business. SG&A expenses decreased $3.9 million from the first quarter of fiscal 2009 to the first quarter of fiscal 2010 which is the result of the positive impact of SG&A cost reduction efforts. A long-lived asset impairment charge of $0.2 million was recorded related to an investment in affiliate with an “other than temporary” decline in value. Income from operations decreased $24.7 million, primarily due to the significant decline in sales volumes.

### Original Equipment - North America

*(dollars in millions)*

| For the three months ended June 30 | 2009 $'s | % of sales | 2008 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **88.2** | **100.0%** | 133.2 | 100.0% |
| Cost of sales | **78.0** | **88.4%** | 125.3 | 94.1% |
| Gross profit | **10.2** | **11.6%** | 7.9 | 5.9% |
| Selling, general and administrative expenses | **8.7** | **9.9%** | 17.1 | 12.8% |
| Restructuring expense | **0.1** | **0.1%** | - | - |
| Impairment of long-lived assets | **0.8** | **0.9%** | 0.1 | 0.1% |
| Income (loss) from continuing operations | **0.6** | **0.7%** | (9.3) | -7.0% |

Original Equipment – North America net sales decreased $45.0 million from the first quarter of fiscal 2009 to the first quarter of fiscal 2010, primarily driven by depressed North American truck and off-highway markets. Gross margin increased 570 basis points to 11.6 percent during the first quarter of fiscal 2010 from 5.9 percent during the first quarter of fiscal 2009 due partially to the positive impact of materials pricing. In addition, the first quarter of fiscal 2009 had extensive manufacturing realignment in process which included the closing of operating facilities, transferring and consolidating product lines and launching new product lines which caused operating inefficiencies and adversely impacted gross margin. During the first quarter of fiscal 2010, we implemented certain management reporting changes resulting in the transfer of support department costs originally included in Corporate and administrative into the Original Equipment – North America segment. SG&A expenses for the first quarter of fiscal 2009 were retrospectively adjusted for comparative purposes to reflect $5.2 million of costs previously included in Corporate and administrative. SG&A expenses decreased $8.4 million primarily due to the flow-through impact of fiscal 2009 cost reduction actions and consulting fees incurred in fiscal 2009 in connection with the manufacturing realignment. A long-lived asset impairment charge of $0.8 million was recorded during the first quarter of fiscal 2010 for a program which was not able to support its asset base. Income from continuing operations of $0.6 million for the first quarter of fiscal 2010 increased $9.9 million from a loss from continuing operations of $9.3 million for the first quarter of fiscal 2009 primarily due to the improvement in gross margin and significant reduction in SG&A costs.

### South America

*(dollars in millions)*

| For the three months ended June 30 | 2009 $'s | % of sales | 2008 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **22.6** | **100.0%** | 41.3 | 100.0% |
| Cost of sales | **17.8** | **78.8%** | 32.0 | 77.5% |
| Gross profit | **4.8** | **21.2%** | 9.3 | 22.5% |
| Selling, general and administrative expenses | **3.0** | **13.3%** | 5.1 | 12.3% |
| Restructuring expense | **0.6** | **2.7%** | - | - |
| Income from continuing operations | **1.2** | **5.3%** | 4.2 | 10.2% |

South America net sales decreased $18.7 million from the first quarter of fiscal 2009 to the first quarter of fiscal 2010 due to reduced sales volumes within their commercial vehicle markets and an unfavorable impact on foreign currency exchange rate changes of $5.8 million. Gross margin decreased from 22.5 percent during the first quarter of fiscal 2009 to 21.2 percent in the first quarter of fiscal 2010 due to the impact of the reduced sales volumes. SG&A expenses decreased $2.1 million due to the positive impact of SG&A reduction efforts within this region. Restructuring expense of $0.6 million was recorded during the first quarter of fiscal 2010 related to a workforce reduction within the Brazilian operation. Income from continuing operations decreased $3.0 million based on the reduced sales volumes.

### Commercial Products

*(dollars in millions)*

| For the three months ended June 30 | 2009 $'s | % of sales | 2008 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **34.3** | **100.0%** | 48.9 | 100.0% |
| Cost of sales | **26.1** | **76.1%** | 38.1 | 77.9% |
| Gross profit | **8.2** | **23.9%** | 10.8 | 22.1% |
| Selling, general and administrative expenses | **5.5** | **16.0%** | 6.9 | 14.1% |
| Restructuring expense | **0.3** | **0.9%** | - | - |
| Income from continuing operations | **2.4** | **7.0%** | 3.9 | 8.0% |

Commercial Products net sales decreased $14.6 million from the first quarter of fiscal 2009 to the first quarter of fiscal 2010. This decrease is driven by an overall reduction in sales volumes and a $4.1 million unfavorable impact of foreign currency exchange rate changes. Gross margin increased 180 basis points to 23.9 percent during the first quarter of fiscal 2010 from 22.1 percent during the first quarter of fiscal 2009 as the result of increased costs savings and productivity initiatives. SG&A expenses decreased $1.4 million from the first quarter of fiscal 2009 to the first quarter of fiscal 2010 due to cost reduction efforts. Income from continuing operations decreased $1.5 million to $2.4 million in the first quarter of fiscal 2010 from $3.9 million in the first quarter of fiscal 2009 due to the decline in sales.

### Fuel Cell

*(dollars in millions)*

| For the three months ended June 30 | 2009 $'s | % of sales | 2008 $'s | % of sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | **3.3** | **100.0%** | 1.1 | 100.0% |
| Cost of sales | **1.4** | **42.4%** | 1.0 | 90.9% |
| Gross profit | **1.9** | **57.6%** | 0.1 | 9.1% |
| Selling, general and administrative expenses | **(0.2)** | **-6.1%** | 1.0 | 90.9% |
| Income (loss) from continuing operations | **2.1** | **63.6%** | (0.9) | -81.8% |

Our fuel cell business has focused a significant amount of effort in the development of thermal management products for stand-alone power generation applications. Fuel cell net sales increased $2.2 million from the first quarter of fiscal 2009 to the first quarter of fiscal 2010 due to product sales to Bloom Energy as part of a licensing agreement entered into during fiscal 2009. We are also providing engineering services to Bloom Energy through the transition phase.

#### Misclassification in Fiscal 2009 Consolidated Statement of Operations

During the first quarter of fiscal 2010, the Company identified an error in the classification of an impairment charge recorded on an equity investment during the fourth quarter of fiscal 2009 due to a decline it its value which was other than temporary. This $7.6 million impairment charge was included in the separately titled line “Impairment of goodwill and long-lived assets” on the fiscal 2009 consolidated statement of operations as a component of loss from operations and should have been recorded in other income/expense. As a result, loss from operations should have been $79.1 million versus $86.7 million which was previously disclosed. This misclassification had no impact on the loss from continuing operations or net loss for fiscal 2009. After considering both quantitative and qualitative factors, the Company determined that the misclassification is not material and the presentation on the consolidated statement of operations will be revised in future filings.

#### Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities and borrowings under lines of credit provided by banks in the United States and abroad.

Cash provided by operating activities for the three months ended June 30, 2009 was $8.0 million as compared to $15.1 million for the three months ended June 30, 2008. While operating results decreased year-over-year, these decreases were partially offset by the improvement in our working capital balances. The most significant working capital improvement was in accounts receivable with days sales outstanding improving 7 days to 43 days through the active, customer-supported management of accounts receivable payment terms. Our accounts receivable balance increased $5.9 million from March 31, 2009 to June 30, 2009 due to foreign currency exchange rate changes.

At June 30, 2009, we had capital expenditure commitments of $36.2 million. Significant commitments include tooling and equipment expenditures for new and renewal platforms with new and current customers in Europe and North America. Capital expenditure commitments also include facility construction costs for our new facility in Austria, where demand for refrigerant components and systems has outgrown our existing capacity. This facility is expected to open in mid-fiscal 2010. Our capital spending is limited under our amended credit agreements to $65.0 million for fiscal 2010 and $70.0 million for all fiscal years thereafter under the terms of the agreements.

Outstanding indebtedness increased $3.4 million to $252.6 million at June 30, 2009 from the March 31, 2009 balance of $249.2 million. Meanwhile, our cash balances decreased $19.8 million from $43.5 million at March 31, 2009 to $23.7 million at June 30, 2009 as we funded current business activities.

At June 30, 2009, we had $65.0 million available for future borrowings under the revolving credit facility. In addition to this revolving credit facility, unused lines of credit also exist in Europe and Brazil totaling $32.3 million at June 30, 2009. In the aggregate, total available lines of credit of $97.3 million exist at June 30, 2009. On May 15, 2009, Modine Holding GmbH and Modine Europe GmbH, each a subsidiary of the Company, entered into a Credit Facility Agreement with an available line of 15.0 million euro ($21.0 million U.S. equivalent). Under the terms of our U.S. revolving credit facility, the availability under that facility has been reduced by $15.0 million upon entering into the new foreign credit facility. The availability of these funds is subject to our ability to remain in compliance with the financial covenants and limitations in our respective debt agreements.

We believe that our internally generated operating cash flows, working capital management efforts, asset disposition opportunities and existing cash balances, together with access to available external borrowings, will be sufficient to satisfy future operating costs and capital expenditures.

#### Debt Covenants

Our debt agreements require us to maintain compliance with various covenants. The most restrictive limitation through the third quarter of fiscal 2010 is a minimum adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) covenant. Adjusted EBITDA is defined as our (loss) earnings from continuing operations before interest expense and provision for income taxes, adjusted to exclude unusual, non-recurring or extraordinary non-cash charges and up to $14.0 million of cash restructuring and repositioning charges, and further adjusted to add back depreciation and amortization expense. Adjusted EBITDA does not represent, and should not be considered, an alternative to loss (earnings) from continuing operations as determined by generally accepted accounting principles (GAAP), and our calculation may not be comparable to similarly titled measures reported by other companies.

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

|  |  |
| --- | --- |
| For the two consecutive quarters ended June 30, 2009 | $ (22.0) million |
| For the three consecutive quarters ended September 30, 2009 | (14.0) million |
| For the four consecutive quarters ended December 31, 2009 | 1.8 million |
| For the four consecutive quarters ended March 31, 2010 | 35.0 million |

Our adjusted EBITDA for the two consecutive quarters ended June 30, 2009 was $18.5 million which exceeded the minimum adjusted EBITDA requirement by $40.5 million. The following table presents a calculation of adjusted EBITDA:

(dollars in thousands)

|  | Quarter Ended March 31, 2009 | Quarter Ended June 30, 2009 | Total |
| --- | ---: | ---: | ---: |
| Loss from continuing operations | $(40,763) | $(5,642) | $(46,405) |
| Consolidated interest expense | 4,182 | 5,459 | 9,641 |
| Provision for income taxes | 3,346 | 1,016 | 4,362 |
| Depreciation and amortization expense (a) | 15,827 | 15,755 | 31,582 |
| Non-cash charges (b) | 15,610 | (2,036) | 13,574 |
| Restructuring and repositioning charges (c) | 3,515 | 2,263 | 5,778 |
| Adjusted EBITDA | $1,717 | $16,815 | $18,532 |

(a) Depreciation and amortization expense represents total depreciation and amortization from continuing operations less accelerated depreciation which has been included in non-cash charges described in footnote (b) below.

(b) Non-cash charges are comprised of long-lived asset impairments, non-cash restructuring and repositioning charges, exchange gains or losses on inter-company loans and non-cash charges which are unusual, non-recurring or extraordinary, as follows:

(dollars in thousands)

|  | Quarter Ended March 31, 2009 | Quarter Ended June 30, 2009 | Total |
| --- | ---: | ---: | ---: |
| Long-lived asset impairments | $13,228 | $994 | $14,222 |
| Non-cash restructuring and repositioning charges | 894 | 820 | 1,714 |
| Exchange losses on intercompany loans | 968 | (3,345) | (2,377) |
| Provision for uncollectible notes receivable | (404) | (585) | (989) |
| Supplemental executive retirement plan settlement | 924 | 80 | 1,004 |
| Non-cash charges | $15,610 | $(2,036) | $13,574 |

(c) Restructuring and repositioning charges represent cash restructuring and repositioning costs incurred in conjunction with the restructuring activities announced on or after January 31, 2008. See Note 11 of the Notes to Condensed Consolidated Financial Statements for further discussion on these activities.

In addition to the minimum adjusted EBITDA covenant, we are not permitted to incur capital expenditures greater than $65.0 million for fiscal year 2010 and greater than $70.0 million for all fiscal years thereafter. We expect to remain in compliance with this covenant for the remainder of fiscal 2010 and beyond.

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

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

We expect to remain in compliance with the minimum adjusted EBITDA levels through the third quarter of fiscal 2010 as the $40.5 million of excess adjusted EBITDA reported through the first quarter of fiscal 2010 will positively impact the next two quarters based on the cumulative nature of this covenant. We are closely monitoring our expected ability to remain in compliance with the minimum adjusted EBITDA covenant, interest expense coverage ratio covenant and leverage ratio covenant in the fourth quarter of fiscal 2010 based on the sensitivity of these covenants to changes in our future financial results. The economic downturn has made it difficult to project our future financial results based on uncertainty around the extent and timing of the global recession. In contemplation of this uncertainty, we continue to closely monitor our actual monthly results and projected results for fiscal 2010 and have identified potential action items under the four-point recovery plan which we will implement, if needed, to remain in compliance with the financial covenants. We expect to remain in compliance with the minimum adjusted EBITDA covenant, interest expense coverage ratio covenant and leverage ratio covenant in the fourth quarter of fiscal 2010 based on the adjusted EBITDA recorded during the first quarter of fiscal 2010, our projected financial results for the remainder of fiscal 2010 and the additional action items available to us. If we are unable to meet these covenants, our ability to access available lines of credit could be limited, our liquidity could be adversely affected and our debt obligations could be accelerated. These circumstances could have a material adverse effect on our future results of operations, financial position and liquidity.

#### Off-Balance Sheet Arrangements

None.

#### Critical Accounting Policies

*Impairment of Goodwill and Indefinite-Lived Intangible Assets:* Impairment tests are conducted at least annually unless business events or other conditions exist which would require a more frequent evaluation. The Company considers factors such as operating losses, declining outlooks and market capitalization when evaluating the necessity for an impairment analysis. The annual review of goodwill and other intangible assets with indefinite lives for impairment is conducted in the third quarter. The recoverability of goodwill and other intangible assets with indefinite lives is determined by estimating the future discounted cash flows of the reporting unit to which the goodwill and other intangible assets with indefinite lives relates. The rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for risk where appropriate. In determining the estimated future cash flows, current and future levels of income are considered as well as business trends and market conditions. To the extent that book value exceeds the fair value, an impairment is recognized. At June 30, 2009 the Company had goodwill of $29.5 million recorded which was primarily comprised of $12.6 million within the South America segment and $16.4 million within the Commercial Products segment. The South America and Commercial Products segments continue to report operating income and forecast strong financial results. The future discounted cash flows of these segments continue to substantially exceed their carrying value indicating that the goodwill recorded in these segments is fully realizable at June 30, 2009. If, in future periods, these segments experience a significant unanticipated economic downturn in the markets in which they operate, this would require an impairment review.

*Impairment of Long-Lived and Amortized Intangible Assets:* The Company performs impairment evaluations of its long-lived assets, including property, plant and equipment, intangible assets with finite lives and equity investments, whenever business conditions or events indicate that those assets may be impaired. The Company considers factors such as operating losses, declining outlooks and market capitalization when evaluating the necessity for an impairment analysis. When the estimated future undiscounted cash flows to be generated by the assets are less than the carrying value of the long-lived assets, or the decline in value is considered to be “other than temporary”, the assets are written down to fair market value and a charge is recorded to current operations. Fair market value is estimated in various ways depending on the nature of the assets under review. This value can be based on appraised value, estimated salvage value, sales price under negotiation or estimated cancellation charges, as applicable. The Company recorded long-lived asset impairment charges of $1.0 million and $0.1 million during the three months ended June 30, 2009 and 2008, respectively.

The most significant long-lived assets that have been subject to impairment evaluations during the three months ended June 30, 2009 and 2008 are the Company’s net property, plant and equipment, which totaled $456.0 million at June 30, 2009. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements, and machinery and equipment. The Company evaluates impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. The Company monitors its manufacturing plant performance to determine whether indicators exist that would require an impairment evaluation for the facility. This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer programs manufactured in the plant, consisting of new program launches, reductions, and phase-outs; and shifting of programs to other facilities under the Company’s manufacturing realignment strategy. When such indicators are present, the Company performs an impairment evaluation by comparing the estimated future undiscounted cash flows expected to be generated in the manufacturing facility to the net book value of the long-lived assets within that facility. The undiscounted cash flows are estimated based on the expected future cash flows to be generated by the manufacturing facility over the remaining useful life of the machinery and equipment within that facility. When the estimated future undiscounted cash flows are less than the net book value of the long-lived assets, such assets are written down to fair market value, which is generally estimated based on appraisals or estimated salvage value.

The Company’s four point recovery plan is designed to attain a more competitive cost base and improve the Company’s longer term competitiveness, and this plan is intended to reduce the risk of potential long-lived asset impairment charges in the future. The manufacturing realignment strategy of this plan is designed to improve the utilization of the Company’s facilities, with fewer facilities, but operating at higher capacities. The portfolio rationalization strategy of this plan is designed to identify products where the Company can earn a sufficient return on its investment, and divest or exit products which do not meet required financial metrics. These strategies have the goal of creating better facility utilization and greater profitability in product mix, which are designed to allow the manufacturing facilities to withstand more significant adverse changes before an impairment charge is necessary.

#### New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)) which replaces SFAS No. 141, “Business Combination”. SFAS No. 141(R) retained the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but SFAS No. 141(R) changed the method of applying the acquisition method in a number of significant aspects. For all business combinations, the entity that acquires the business will record 100 percent of all assets and liabilities of the acquired business, including goodwill, generally at their fair values. Certain contingent assets and liabilities acquired will be recognized at their fair values on the acquisition date and changes in fair value of certain arrangements will be recognized in earnings until settled. Acquisition-related transactions and restructuring costs will be expensed rather than treated as an acquisition cost and included in the amount recorded for assets acquired. SFAS No. 141(R) is effective for us on a prospective basis for all business combinations for which the acquisition date is on or after April 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS No. 141(R) amends SFAS No. 109, “Accounting for Income Taxes,” such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that close prior to the effective date of SFAS No. 141(R) would also apply the provisions of SFAS No. 141(R). Early adoption is not allowed. The adoption of this standard did not have an impact on previous acquisitions.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB 51.” SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish new standards that will govern the accounting for and reporting of (1) non-controlling interests in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. Our consolidated subsidiaries are wholly owned and as such no minority interests are currently reported in our consolidated financial statements. Other current ownership interests are reported under the equity method of accounting under investments in affiliates. SFAS No. 160 is effective for us on a prospective basis on or after April 1, 2009 except for the presentation and disclosure requirements, which will be applied retrospectively. Early adoption is not allowed. The adoption of this standard did not have an impact on our consolidated financial statements.

In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP 03-6-1). FSP 03-6-1 requires unvested share-based payment awards that contain non-forfeitable rights to dividends (whether paid or unpaid) to be treated as participating securities and included in the computation of basic earnings per share. We adopted FSP 03-6-1 as of April 1, 2009 which required all prior-period earnings per share data to be adjusted retrospectively. The adoption of this standard did not have any impact on our earnings per share for the three months ended June 30, 2009 and 2008.

In April 2009, the FASB issued FASB Staff Position FAS 107-1 and Accounting Principles Bulletin 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” (FSP 107-1) which require disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of FSP 107-1 and APB 28-1 were effective April 1, 2009. As FSP 107-1 and APB 28-1 amend only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FAS 107-1 and APB 28-1 had no impact on our consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”, which addresses the types and timing of events that should be reported in the financial statements for events occurring between the balance sheet date and the date the financial statements are issued or available to be issued. SFAS No. 165 was effective for us on June 30, 2009. We have reviewed events for inclusion in the financial statements through August 5, 2009, the date that the accompanying financial statements were issued. The adoption of SFAS No. 165 did not impact our financial position or results of operations.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles.” The FASB Accounting Standards Codification (the “Codification”) will become the single official source of authoritative general accepted accounting principles (GAAP) in the United States superseding all existing non-SEC accounting and reporting standards. After the effective date of the Codification, only one level of authoritative GAAP in the United States will exist and all other literature will be considered non-authoritative. SFAS No.168 is effective for interim and annual periods ending on or after September 15, 2009. The adoption of this standard will not have an effect on our consolidated financial statements, but will impact our financial statement disclosures since all future references to authoritative accounting literature will be referenced in accordance with the Codification.

#### Contractual Obligations

There have been no material changes to our contractual obligations outside the ordinary course of business from those disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009. We are currently unable to determine the impact on our contractual obligations from the ultimate timing of settlement of the gross liability for uncertain tax positions which was $7.1 million as of June 30, 2009.

#### Forward-Looking Statements

This report contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2009. Other risks and uncertainties include, but are not limited to, the following:

- Modine’s ability to remain in compliance with its debt agreements and financial covenants going forward;
- Modine’s ability to fund its liquidity requirements and meet its long-term commitments given the continued decline and disruption in the credit markets due to the global recession;
- The impact the current global economic uncertainty and credit market turmoil is having on Modine, its customers and its suppliers and any worsening of such economic conditions;
- The secondary effects on Modine’s future cash flows and liquidity that may result from the manner in which Modine’s customers and lenders deal with the economic crisis and its consequences;
- Modine’s ability to limit capital spending and/or consummate planned divestitures;
- Modine’s ability to recover the book value of the South Korean business, when divested;
- Modine’s ability to successfully implement restructuring plans and drive cost reductions as a result;
- Modine’s ability to maintain adequate liquidity to carry out restructuring plans while investing for future growth;
- Modine’s ability to satisfactorily service its customers during the implementation and execution of any restructuring plans and/or new product launches;
- Modine’s ability to avoid or limit inefficiencies in the transitioning of products from production facilities to be closed to other existing or new production facilities;
- Modine’s ability to successfully execute its four-point recovery plan;
- Modine’s ability to further cut costs to increase its gross margin and to maintain and grow its business;
- Modine’s impairment of assets resulting from business downturns;
- Modine’s ability to realize future tax benefits;
- Customers’ actual production demand for new products and technologies, including market acceptance of a particular vehicle model or engine;
- Modine’s ability to increase its gross margin, including its ability to produce products in low cost countries;
- Modine’s ability to maintain customer relationships while rationalizing its business;
- Modine’s ability to maintain current programs and compete effectively for new business, including its ability to offset or otherwise address increasing pricing pressures from its competitors and price reductions from its customers;
- Modine’s ability to obtain profitable business at its new facilities in China, Hungary, Mexico, India and Austria and to produce quality products at these facilities from business obtained;
- The effect of the weather on the Commercial Products business, which directly impacts sales;
- Unanticipated problems with suppliers meeting Modine’s time and price demands;
- The impact of environmental laws and regulations on Modine’s business and the business of Modine’s customers, including Modine’s ability to take advantage of opportunities to supply alternative new technologies to meet environmental emissions standards;
- Economic, social and political conditions, changes and challenges in the markets where Modine operates and competes (including currency exchange rate fluctuations, tariffs, inflation, changes in interest rates, recession, and restrictions associated with importing and exporting and foreign ownership);
- Changes in the anticipated sales mix;
- Modine’s association with a particular industry, such as the automobile industry, which could have an adverse effect on Modine’s stock price;
- The nature of the vehicular industry, including the dramatic decline in customer build rates;
- Work stoppages or interference at Modine or Modine’s major customers;
- Unanticipated product or manufacturing difficulties, including unanticipated warranty claims;
- Unanticipated delays or modifications initiated by major customers with respect to product applications or requirements;
- Costs and other effects of unanticipated litigation or claims, and the increasing pressures associated with rising health care and insurance costs; and
- Other risks and uncertainties identified by the Company in public filings with the U.S. Securities and Exchange Commission.

Modine does not assume any obligation to update any forward-looking statements.

## Market risk

As filed, 18,193 characters.

In the normal course of business, Modine is subject to market exposure from changes in foreign exchange rates, interest rates, credit risk, economic risk and commodity price risk.

#### Foreign Currency Risk

Modine is subject to the risk of changes in foreign currency exchange rates due to its operations in foreign countries. Modine has manufacturing facilities in Brazil, China, Mexico, South Africa, India and throughout Europe. It also has equity investments in companies located in France and Japan. Modine sells and distributes its products throughout the world. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company manufactures, distributes and sells its products. The Company's operating results are principally exposed to changes in exchange rates between the dollar and the European currencies, primarily the euro, and changes between the dollar and the Brazilian real. Changes in foreign currency exchange rates for the Company's foreign subsidiaries reporting in local currencies are generally reported as a component of shareholders' equity. For the three months ended June 30, 2009 and 2008, the Company experienced a general weakening of the U.S. dollar to these foreign currencies, which resulted in a favorable currency translation adjustment of $26.8 million and $2.8 million, respectively. At June 30, 2009 and March 31, 2009, the Company's foreign subsidiaries had net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk of $68.8 million and $71.8 million, respectively. The potential decrease in the net current assets from a hypothetical 10 percent adverse change in quoted foreign currency exchange rates would be approximately $6.9 million and $7.2 million, respectively. This sensitivity analysis presented assumes a parallel shift in foreign currency exchange rates. Exchange rates rarely move in the same direction relative to the dollar. This assumption may overstate the impact of changing exchange rates on individual assets and liabilities denominated in a foreign currency.

The Company has, from time to time, certain foreign-denominated, long-term debt obligations and long-term inter-company loans that are sensitive to foreign currency exchange rates. As of June 30, 2009 there were no third party foreign-denominated, long-term debt obligations.

At June 30, 2009, the Company had an inter-company loan totaling $12.2 million with its wholly owned subsidiary, Modine Brazil that matures on May 8, 2011. Modine Brazil paid $2.7 million on this inter-company loan during the first quarter of fiscal 2010.

The Company also has other inter-company loans outstanding at June 30, 2009 as follows:

- $10.6 million loan to its wholly owned subsidiary, Modine Thermal Systems Private Limited (Modine India), that matures on April 30, 2013; and
- $12.0 million between two loans to its wholly owned subsidiary, Modine Thermal Systems (Changzhou) Co. Ltd. (Changzhou, China), with various maturity dates through June 2012.

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

#### Interest Rate Risk

Modine's interest rate risk policies are designed to reduce the potential volatility of earnings that could arise from changes in interest rates. The Company generally utilizes a mixture of debt maturities together with both fixed-rate and floating-rate debt to manage its exposure to interest rate variations related to its borrowings. The domestic revolving credit facility is based on a variable interest rate of London Interbank Offered Rate (LIBOR) plus 475 basis points. The Company is subject to future fluctuations in LIBOR which would affect the variable interest rate on the revolving credit facility and create variability in interest expense. A 100 basis point increase in LIBOR would increase interest expense by $1.0 million for the fiscal year based on the June 30, 2009 revolving credit facility balance. The Company has, from time to time, entered into interest rate derivatives to manage variability in interest rates. These interest rate derivatives were treated as cash flow hedges of forecasted transactions. Accordingly, the losses are reflected as a component of accumulated other comprehensive (loss) income, and are being amortized to interest expense over the respective lives of the borrowings. During the three months ended June 30, 2009 and 2008, $0.1 million of expense was recorded in the consolidated statement of operations related to the amortization of interest rate derivative losses. At June 30, 2009, $1.4 million of net unrealized losses remain deferred in accumulated other comprehensive (loss) income. The following table presents the future principal cash flows and weighted average interest rates by expected maturity dates. The fair value of the long-term debt is estimated by discounting the future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. The book value of the debt approximates fair value, with the exception of the $150.0 million fixed rate notes, which have a fair value of approximately $125.2 million at June 30, 2009.

As of June 30, 2009, long-term debt matures as follows:

| Long-term debt in ($000's) | Expected Maturity Date F2010 | F2011 | F2012 | F2013 | F2014 | Thereafter | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Fixed rate (U.S. dollars) | - | - | $9,375 | $18,750 | $23,438 | $98,437 | $150,000 |
| Average interest rate | - | - | 10.38% | 10.38% | 10.38% | 10.38% | 10.38% |
| Variable rate (U.S. dollars) | - | - | $95,000 | - | - | - | $95,000 |
| Average interest rate | - | - | 5.07% | - | - | - | 5.07% |

#### Credit Risk

Credit risk is the possibility of loss from a customer's failure to make payment according to contract terms. The Company's principal credit risk consists of outstanding trade receivables. Prior to granting credit, each customer is evaluated, taking into consideration the borrower's financial condition, past payment experience and credit information. After credit is granted the Company actively monitors the customer's financial condition and developing business news. Approximately 41 percent of the trade receivables balance at June 30, 2009 was concentrated in the Company's top ten customers. Modine's history of incurring credit losses from customers has not been material, and the Company does not expect that trend to change. However, the current economic uncertainty, especially within the global automotive and commercial vehicle markets, makes it difficult to predict future financial conditions of significant customers within these markets. Deterioration in the financial condition of a significant customer could have a material adverse effect on the Company’s results of operations and liquidity.

The recent adverse events in the global financial markets have also increased credit risks on investments to which Modine is exposed or where Modine has an interest. The Company manages these credit risks through its focus on the following:

- Cash and investments – Cash deposits and short-term investments are reviewed to ensure banks have credit ratings acceptable to the Company and that all short-term investments are maintained in secured or guaranteed instruments. The Company’s holdings in cash and investments were considered stable and secure at June 30, 2009;
- Pension assets – The Company has retained outside advisors to assist in the management of the assets in the Company’s defined benefit plans. In making investment decisions, the Company has been guided by an established risk management protocol under which the focus is on protection of the plan assets against downside risk. The Company monitors investments in its pension plans to ensure that these plans provide good diversification, investment teams and portfolio managers are adhering to the Company’s investment policies and directives, and exposure to high risk securities and other similar assets is limited. The Company believes it has good investment policies and controls and proactive investment advisors. Despite our efforts to protect against downside risk, the assets within these plans have decreased based upon declining market valuations and volatility; and
- Insurance – The Company monitors its insurance providers to ensure that they have acceptable financial ratings, and no concerns have been identified through this review.

#### Economic Risk

Economic risk is the possibility of loss resulting from economic instability in certain areas of the world or significant downturns in markets that the Company supplies. The Company sells a broad range of products that provide thermal solutions to a diverse group of customers operating primarily in the truck, heavy equipment, automotive and commercial heating and air conditioning markets. The recent adverse events in the global financial markets have created a significant downturn in the Company’s vehicular markets and to a lesser extent in its commercial heating and air conditioning markets. The current economic uncertainty makes it difficult to predict future conditions within these markets. A sustained economic downturn in any of these markets could have a material adverse effect on the future results of operations or the Company’s liquidity and potentially result in the impairment of related assets.

The Company is responding to these market conditions through its continued implementation of its four-point recovery plan as follows:

- Manufacturing realignment – aligning the manufacturing footprint to maximize asset utilization and improve the Company’s cost competitive position;
- Portfolio rationalization – identifying products or businesses which should be divested or exited as they do not meet required financial metrics;
- SG&A expense reduction – reducing SG&A expenses and SG&A expenses as a percentage of sales through diligent cost containment actions; and
- Capital allocation discipline – allocating capital spending to operating segments and business programs that will provide the highest return on investment.

The Company continues to monitor economic conditions in the U.S. and elsewhere. As Modine expands its global presence, it also encounters risks imposed by potential trade restrictions, including tariffs, embargoes and the like. The Company continues to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions.

The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon the Company's ability to commercialize its investments. Current examples of new and emerging markets for Modine include those related to exhaust gas recirculation, waste heat recovery and residential fuel cells. Modine's investment in these areas is subject to the risks associated with business integration, technological success, customers' and market acceptance, and Modine's ability to meet the demands of its customers as these markets emerge.

Future recovery from the global recession or continued economic growth in China are expected to put production pressure on certain of the Company's suppliers of raw materials. In particular, there are a limited number of suppliers of copper, steel and aluminum fin stock. The Company is exposed to the risk of supply of certain raw materials not being able to meet customer demand and of increased prices being charged by raw material suppliers.

In addition to the purchase of raw materials, the Company purchases parts from suppliers that use the Company's tooling to create the part. In most instances, the Company does not have duplicate tooling for the manufacture of its purchased parts. As a result, the Company is exposed to the risk of a supplier of such parts being unable to provide the quantity or quality of parts that the Company requires. Even in situations where suppliers are manufacturing parts without the use of Company tooling, the Company faces the challenge of obtaining high-quality parts from suppliers. The Company has implemented a supplier risk management program that utilizes industry sources to identify and mitigate high risk supplier situations.

In addition to the above risks on the supply side, the Company is also exposed to risks associated with demands by its customers for decreases in the price of the Company's products. The Company attempts to offset this risk with firm agreements with its customers whenever possible but these agreements generally carry annual price down provisions as well.

The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or more of the markets it serves. However, the risks associated with any market downturn, including the current global recession, are still present.

#### Commodity Price Risk

The Company is dependent upon the supply of certain raw materials and supplies in the production process and has, from time to time, entered into firm purchase commitments for copper, aluminum, nickel, and natural gas. The Company has utilized an aluminum hedging strategy from time to time by entering into fixed price contracts to help offset changing commodity prices. The Company does maintain agreements with certain customers to pass through certain material price fluctuations in order to mitigate the commodity price risk. The majority of these agreements contain provisions in which the pass through of the price fluctuations can lag behind the actual fluctuations by a quarter or longer.

#### Hedging and Foreign Currency Exchange Contracts

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

*Commodity Derivatives:* The Company enters into futures contracts from time to time related to certain of the Company’s forecasted purchases of aluminum and natural gas. The Company’s strategy in entering into these contracts is to reduce its exposure to changing purchase prices for future purchases of these commodities. These contracts have been designated as cash flow hedges by the Company. Accordingly, unrealized gains and losses on these contracts are deferred as a component of accumulated other comprehensive (loss) income, and recognized as a component of earnings at the same time that the underlying purchases of aluminum and natural gas impact earnings. During the three months ended June 30, 2009 and 2008, $3.1 million of expense and $0.7 million of income, respectively, was recorded in the consolidated statement of operations related to the settlement of certain futures contracts. At June 30, 2009, $7.6 million of unrealized losses remain deferred in accumulated other comprehensive (loss) income, and will be realized as a component of cost of sales over the next 72 months. During the first quarter of fiscal 2010, the Company did not enter into any new futures contracts for commodities.

The Company has entered into futures contracts from time to time related to certain of the Company’s forecasted purchases of copper and nickel. The Company’s strategy in entering into these contracts was to reduce its exposure to changing purchase prices for future purchases of these commodities. The Company has not designated these contracts as hedges, therefore gains and losses on these contracts were recorded directly in the consolidated statement of operations. For the three months ended June 30, 2008, $0.3 million of expense was recorded in cost of sales related to these futures contracts.

*Foreign exchange contracts:* Modine maintains a foreign exchange risk management strategy that uses derivative financial instruments in a limited way to mitigate foreign currency exchange risk. Modine periodically enters into foreign currency exchange contracts to hedge specific foreign currency denominated transactions. Generally, these contracts have terms of 90 or fewer days. The effect of this practice is to minimize the impact of foreign exchange rate movements on Modine’s earnings. Modine’s foreign currency exchange contracts do not subject it to significant risk due to exchange rate movements because gains and losses on these contracts offset gains and losses on the assets and liabilities being hedged.

As of June 30, 2009, the Company had no outstanding forward foreign exchange contracts. Non-U.S. dollar financing transactions through inter-company loans or local borrowings in the corresponding currency generally are effective as hedges of long-term investments.

The Company has a number of investments in wholly owned foreign subsidiaries and non-consolidated foreign joint ventures. The net assets of these subsidiaries are exposed to currency exchange rate volatility. From time to time, the Company uses non-derivative financial instruments to hedge, or offset, this exposure.

*Interest rate derivatives:* As further noted above under the section entitled “Interest Rate Risk,” the Company has, from time to time, entered into interest rate derivatives to manage the variability in interest rates. These interest rate derivatives have been treated as cash flow hedges of forecasted transactions and, accordingly, derivative gains or losses are reflected as a component of accumulated other comprehensive (loss) income and are amortized to interest expense over the respective lives of the borrowings.

*Counterparty risks:* The Company manages counterparty risks by ensuring that counterparties to derivative instruments have credit rating acceptable to the Company. At June 30, 2009, all counterparties had a sufficient long-term credit rating.

## Controls and procedures

As filed, 2,047 characters.

The Company, a Wisconsin corporation, held its Annual Meeting of Shareholders on July 23, 2009. A quorum was present at the Annual Meeting with 29,375,609 shares out of 32,236,227 (91.1 percent) entitled to cast votes represented either in person or by proxy.

#### Election of Directors

The shareholders voted to elect Frank W. Jones, Dennis J. Kuester and Michael T. Yonker to serve as directors until the 2012 Annual Meeting of Shareholders and until their successors are duly elected and qualified. The results of the vote were as follows:

| Director | Votes For | Votes Withheld |
| --- | ---: | ---: |
| Frank W. Jones | 28,670,436 | 705,175 |
| Dennis J. Kuester | 28,730,644 | 644,966 |
| Michael T. Yonker | 28,645,234 | 730,377 |

Directors whose terms of office continue past the Annual Meeting of Shareholders are Thomas A. Burke, Charles P. Cooley, Gary L. Neale, Frank P. Incropera, Vincent L. Martin, Bradley C. Richardson and Marsha C. Williams.

#### Amendment to the Amended and Restated Articles to Adopt Majority Voting for Election of Directors

The shareholders approved the proposed amendment to the Amended and Restated Articles of Incorporation of Modine Manufacturing Company to provide for a majority voting standard for the election of directors in uncontested elections with 28,536,205 votes for the amendment, 729,247 votes against and 110,157 votes abstaining.

#### Amendment to the Bylaws to Adopt Majority Voting for Election of Directors

The shareholders approved the proposed amendment to the Bylaws of Modine Manufacturing Company to provide for a majority voting standard for the election of directors in uncontested elections with 28,571,170 votes for the amendment, 695,860 votes against and 108,578 votes abstaining.

#### Ratification of Independent Registered Public Accounting Firm

The shareholders ratified the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm with 29,067,277 votes for ratification, 254,651 votes against and 53,680 votes abstaining.

Filed Aug 5, 2009.
Source: SEC EDGAR, the filing index for accession 0001140361-09-017986. Last ingested by Listed: Nov 4, 2026, 20:14 ET. No prices; not investment advice.