UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 20162019
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission file number 1-1373
MODINE MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
WISCONSIN | | 39-0482000 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1500 DeKoven Avenue, Racine, Wisconsin | | 53403 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant'sRegistrant’s telephone number, including area code (262) 636‑1200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
| Common Stock, $0.625 par value | MOD | New York Stock Exchange |
Securities Registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☐☑ | Accelerated Filer ☑☐ |
| | |
Non-accelerated Filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☐ |
| |
| Emerging growth company ☐ |
If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☑
Approximately 9697 percent of the outstanding shares are held by non-affiliates. The aggregate market value of these shares was approximately $365$733 million based upon the market price of $7.87$14.90 per share on September 30, 2015,28, 2018, the last business day of our most recently completed second fiscal quarter. Shares of common stock held by each executive officer and director and by each person known to beneficially own more than 10 percent of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of the registrant'sregistrant’s common stock, $0.625 par value, was 47,426,52950,726,269 at May 23, 2016.17, 2019.
An Exhibit Index appears at pages 75-7781-83 herein.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the parts of this Form 10‑K designated to the right of the document listed.
Incorporated Document | Location in Form 10-K |
| | |
Proxy Statement for the 20162019 Annual Meeting of Shareholders | Part III of Form 10-K |
Meeting of Shareholders | (Items 10, 11, 12, 13, 14) |
MODINE MANUFACTURING COMPANY
TABLE OF CONTENTS
| PART I |
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| | ITEM 1. | | 1 |
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| | ITEM 1A. | | 109 |
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| | ITEM 1B. | | 1516 |
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| | ITEM 2. | | 1516 |
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| | ITEM 3. | | 1617 |
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| | ITEM 4. | | 1617 |
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| | | | 1618 |
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| PART II |
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| | ITEM 5.5 | | 1819 |
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| | ITEM 6. | | 20 |
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| | ITEM 7. | | 2021 |
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| | ITEM 7A. | | 35 |
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| | ITEM 8. | | 38 |
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| | ITEM 9. | | 7077 |
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| | ITEM 9A. | | 7077 |
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| | ITEM 9B. | | 7077 |
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| PART III |
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| | ITEM 10. | | 7178 |
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| | ITEM 11. | | 7178 |
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| | ITEM 12. | | 7178 |
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| | ITEM 13. | | 7178 |
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| | ITEM 14. | | 7178 |
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| PART IV |
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| ITEM 15. | | 79 |
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| | ITEM 15.16. | | 72 |
| | | 7379 |
| | | | 7480 |
| | | | 7581 |
| | | 84 |
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PART I
Modine Manufacturing Company specializes in providing innovative thermal management solutions.solutions to diversified global markets and customers. We are a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on-highwayon- and off-highway original equipment manufacturer (“OEM”) vehicular applications,applications. In addition, we are a global leader in thermal management technology and solutions for sale into a wide array of building,commercial, industrial, and refrigeration markets. Our products include radiators and radiator cores, condensers, oil coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation (“EGR”) coolers, building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. Our primary product groups include i) powertrain cooling and engine cooling; ii) coils, coolers, and coatings; and iii) heating, ventilation and air conditioning (“HVAC”) equipment, and coils.conditioning. Our primary customers across the globe are:include:
- Automobile, truck, bus, and specialty vehicle OEMs;- Agricultural, industrial and construction equipment
| − | Automobile, truck, bus, and specialty vehicle OEMs; |
- Heating, ventilation and cooling OEMs;- Construction architects and contractors;
| − | Agricultural, industrial and construction equipment OEMs; |
| − | Commercial and industrial equipment OEMs; |
| − | Heating, ventilation and cooling OEMs; |
| − | Construction architects and contractors; and |
| − | Wholesalers of heating equipment. |
We focus our development efforts on solutions that meet the ever-increasing heat transfer needs of OEMs and other customers within the automobile, commercial vehicle, construction, agricultural, industrial and commercial HVAC&R industries. Our products and systems typically are aimed at solving complex heat transfer challenges requiring effective thermal management. Typical customer and market demands include products and systems that are lighter weight, more compact, more efficient and more durable to meet customer standards as they work to ensure compliance with increasingly stringent global emissions, fuel economy and energy efficiency requirements. Our heritage provides a depth and breadth of expertise in thermal management, which, when combined with our global manufacturing presence, standardized processes, and state-of-the-art technical resources, enables us to rapidly bring highly valued,highly-valued, customized solutions to our customers.
History
Modine was incorporated under the laws of the State of Wisconsin on June 23, 1916 by its founder, Arthur B. Modine. Mr. Modine’s “Turbotube” radiators became standard equipment on the famous Ford Motor Company Model T. When he died at the age of 95, A.B. Modine had personally been granted more than 120 U.S. patents for his heat transfer innovations. On the cusp of our 100th year in business, theThe standard of innovation exemplified by A.B. Modine remains the cornerstone of Modine today.
Terms and Year References
When we use the terms “Modine,” “we,” “us,” the “Company,” or “our” in this report, unless the context otherwise requires, we are referring to Modine Manufacturing Company. Our fiscal year ends on March 31 and, accordingly, all references to a particular year mean the fiscal year ended March 31 of that year, unless indicated otherwise.
Business Strategy and Results
Modine pursues market leadership by being a customer-focused, global company delivering exceptional quality, innovation and value. We focus onwill grow our core business of thermal management leadershipwith superior technical solutions in systems, products and highly engineered product and service innovations for diversified, global markets and customers. We create value by focusing on customer partnerships and providing innovative solutions for our customers' thermal management challenges using cost-effective designs and material technology.services – coupled with a cost competitive structure.
During fiscal 2016,2019, we launchedcontinued to employ our Strengthen, Diversify and Grow strategic transformation(“SDG”) strategy in order to positiontransform Modine into a more diversified industrial thermal-management company. We launched our business for long-term success. We aimSDG strategy over three years ago to strengthen our business by, among other things, i) right-sizing our cost structure and ii) implementingestablish a more global, product-based organizationorganizational structure and a strategic framework for our company. Both our Commercial and Industrial Solutions (“CIS”) and Building HVAC Systems (“BHVAC”) segments experienced significant sales and earnings growth this year, which we directly attribute to capture synergiesour SDG initiatives to further diversify and grow these higher margin business segments. In addition, in January 2019, we announced our strategic review of alternatives for our automotive business within our Vehicular Thermal Solutions (“VTS”) segment. Since this announcement, we have made significant progress in our evaluation and, while we are continuing to explore various alternatives, we currently believe that a sale of the automotive business is the most likely path forward to optimize the VTS segment’s profitability and reprioritize capital investments across our core business, effectively meet the needsall of our globalbusinesses. We believe our SDG strategy will continue to keep us grounded, thriving, and transforming to optimize the value we offer our customers and improveto provide the highest returns for our speed to market. In addition, we aim to diversify through expanding our non-vehicular businesses, and grow through both organic and inorganic opportunities.shareholders.
Our top five customers are in threefour different markets – automotive, commercial vehicle, off-highway, and off-highwaydata center cooling – and our ten largest customers accounted for 6350 percent of both our fiscal 2016 and 20152019 sales. In fiscal 2016, 632019, 58 percent of our total sales were generated from customers outside of the U.S., with 5452 percent of total sales generated by foreign operations and 96 percent generated by exports from the U.S. In fiscal 2015, 642018, 61 percent of our total sales were generated from customers outside of the U.S., with 56 percent of total sales generated by foreign operations and 5 percent generated by exports from the U.S. In fiscal 2017, 62 percent of our total sales were generated from customers outside of the U.S., with 55 percent of total sales generated by foreign operations and 9 percent generated by exports from the U.S. In fiscal 2014, 66 percent of our total sales were generated from customers outside of the U.S., with 56 percent of total sales generated by foreign operations and 107 percent generated by exports from the U.S.
During fiscal 2016,2019, our consolidated net sales were $1.35$2.21 billion, a 105 percent decreaseincrease from $1.50$2.10 billion in fiscal 2015. The decrease from fiscal 20152018. This increase was primarily due to ahigher sales in each of our operating segments. Our operating income of $110 million unfavorable impact of foreign currency exchange rate changes associated with the strengthening of the U.S. dollar and lower sales volume to off-highway customers due to market weakness. During fiscal 2016, we completed a voluntary lump-sum payout program offered to certain eligible former employees participating in our U.S. pension plans. See Note 17 of the Notes to Consolidated Financial Statements for additional information. As a result of lump-sum payouts during fiscal 2016, we recorded $42 million of non-cash pension settlement losses to costs of sales ($9 million) and selling, general, and administrative (“SG&A”) expenses ($33 million). Gross profit decreased $23 million to $224 million in fiscal 20162019 increased $18 million compared with the prior year, primarily due to higher earnings in the pension settlement lossesCIS and an unfavorable impact from changesBHVAC segments, partially offset by lower earnings in foreign currency exchange rates. SG&A expenses increased to $205 million in fiscal 2016, compared with $184 million in fiscal 2015, primarily due to the pension settlement losses.VTS segment.
In continued support of our SDG initiatives and in an effort to optimize our cost structure and improve the efficiency of our operations, we have engaged in various restructuring activities in recent years, including in fiscal 2016, in support of our Strengthen, Diversify and Grow strategic platform.activities. As a result, we recorded $17$10 million of restructuring expenses during fiscal 2016. In addition, we recorded a $10 million asset impairment charge2019, primarily related to a manufacturing facility in Germany. See Note 6 of the Notes to Consolidated Financial Statements for additional information.
Also during fiscal 2016, we recorded a $10 million gain within other income related to an insurance settlement for equipment lossesseverance expenses resulting from a fire at a manufacturing facilitytargeted headcount reductions in Europe and the U.K. See Note 2 ofAmericas within the Notes to Consolidated Financial Statements for additional information.
Our operating loss was $8 million in fiscal 2016, which compares to operating income of $53 million in the prior year. This decline in earnings was primarily due to $42 million of pension settlement losses, higher restructuring expenses, and an unfavorable impact from changes in foreign currency exchange rates.
A key metric by which we measure our performance is return on average capital employed (“ROACE”). We define ROACE as operating income, less restructuring expenses, impairment charges, certain other adjustments, income tax at a 30 percent rate, and earnings attributable to noncontrolling interest; divided by the average of debt plus Modine shareholders’ equity. We have established a long-term goal of achieving ROACE of 15 percent. Our ROACE improved 60 basis points in fiscal 2016 to 8.4 percent compared with 7.8 percent in fiscal 2015. The increase in ROACE in fiscal 2016 primarily resulted from a decrease in the shareholders’ equity component of capital employed. This decrease in shareholders’ equity was primarily attributable to $68 million of foreign currency translation losses, most of which occurred in late fiscal 2015.
ROACE is not a measure derived under generally accepted accounting principles (“GAAP”) and should not be considered as a substitute for any measure derived in accordance with GAAP. We believe that ROACE provides investors with helpful information about our performance, our ability to provide an acceptable return on capital, and our ability to fund future growth. This measure may not be comparable with similar measures presented by other companies. The following schedule provides a reconciliation of ROACE to the most directly comparable financial measures calculated and presented in accordance with GAAP:
| (in millions) | | Fiscal 2016 | | Fiscal 2015 |
| Operating (loss) income | | $ | (7.5 | ) | | $ | 52.7 | |
| Restructuring expenses | | | 16.6 | | | | 4.7 | |
| Impairment charges | | | 9.9 | | | | 7.8 | |
| Pension settlement losses | | | 42.1 | | | | - | |
| Other adjustments (a) | | | 2.1 | | | | - | |
| Subtotal | | | 63.2 | | | | 65.2 | |
| Tax applied at 30% rate | | | (19.0 | ) | | | (19.6 | ) |
| Noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) |
| Operating income - adjusted | | $ | 43.6 | | | $ | 44.6 | |
| | | | | | | | | |
| Average capital employed (see calculation below) | | $ | 519.7 | | | $ | 570.5 | |
| | | | | | | | | |
| ROACE | | | 8.4 | % | | | 7.8 | % |
| | | | | | | | | |
| Capital employed (debt + Modine shareholders' equity): | | | | | | | | |
| Beginning of fiscal year | | $ | 504.7 | | | $ | 589.2 | |
| June 30 | | | 522.9 | | | | 604.5 | |
| September 30 | | | 512.5 | | | | 582.0 | |
| December 31 | | | 519.7 | | | | 572.0 | |
| End of fiscal year | | | 538.8 | | | | 504.7 | |
| Average capital employed (b) | | $ | 519.7 | | | $ | 570.5 | |
| (a) | In fiscal 2016, other adjustments primarily consisted of environmental charges related to a previously-owned manufacturing facility. In fiscal 2015, other adjustments consisted of a $3 million charge associated with a legal matter in Brazil and a $3 million gain on the sale of a wind tunnel in Germany. |
| (b) | Average capital employed represents the sum of capital employed for the five most recent quarter-end dates, divided by five. |
VTS segment.
Markets
We sell products to multiple end markets. The following is a summary of our primary end markets, categorized as a percentage of our net sales:
| | | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2019 | | | Fiscal 2018 | |
| Commercial HVAC&R | | | | 30 | % | | | 31 | % |
| Automotive | | | | 25 | % | | | 25 | % |
| Commercial vehicle | | | 34 | % | | | 34 | % | | | 18 | % | | | 18 | % |
| Automotive | | | 29 | % | | | 27 | % | |
| Off-highway | | | 15 | % | | | 18 | % | | | 14 | % | | | 13 | % |
| Building HVAC | | | 13 | % | | | 12 | % | |
| Data center cooling | | | | 8 | % | | | 7 | % |
| Industrial cooling | | | | 2 | % | | | 3 | % |
| Other | | | 9 | % | | | 9 | % | | | 3 | % | | | 3 | % |
Competitive Position
We compete with many manufacturers of heat transfer and HVAC&R products, some of which are divisions of larger companies. The markets for our products continue to be very dynamic. Our traditional OEM customers are faced with dramatically increased international competition and have expanded their global manufacturing footprints to compete in local markets. In addition, consolidation within the supply base and vertical integration havehas introduced new or restructured competitors to our markets. Some of these market changes have caused us to experience competition from suppliers in other parts of the world that enjoy economic advantages such as lower labor costs, lower healthcare costs, and lower tax rates. As a result, we have expanded and continue to expand our geographic footprint, in part to provide more flexibility to serve our customers around the globe. OurMany of our customers also continue to ask us, as well as their other primary suppliers, to provide research and development (“R&D”), design, and validation support for new potential projects. This combined work effort often results in stronger customer relationships and more partnership opportunities for us. It can also introduce risk, to the extent that these requests may require the reallocation of resources at times when actual business awards are pending.
Business Segments
We have assigned specific operations toEach of our operating segments based principally on defined markets and geographic locations. Each operating segment is managed by a vice president and has separate financial results reviewed by our chief operating decision maker. These results are used by management in evaluating the performance of each business segment and in making decisions on the allocation of resources amongamongst our various businesses. During fiscal 2016,Effective April 1, 2018, we combinedformed the VTS segment by combining our North America and South America segments into the Americas segment to streamline operations, gain synergies and improve our cost structure. There was no impact to our consolidated financial statements as a result. Financial information related to our operating segments is included in Note 21 of the Notes to Consolidated Financial Statements.
Americas, Europe, and Asia Segmentsoperations to enable us to operate as a more global, product-based organization. We also merged our Americas coils business into the CIS segment to accelerate operational improvements and organizational efficiencies.
Our Vehicular Business
VTS Segment
The continued globalization of our OEMvehicular customer base requires us to manage our strategic approach, product offerings and the competitive environment on a global basis. This trend offers significant opportunities for us with our market positioning, including our presence in key globalvehicular markets (U.S., Mexico, Brazil, Europe, Brazil,India, China, India, South Korea, Japan, and Mexico)Japan) and a global product-based organization with the expertise to solve technical challenges. We are recognized for having strong technical support in all regions, an extensive product breadth,portfolio, and the ability to supportprovide global standard designs for our customers. Many vehicular OEMs continue to expect cost reductions from suppliers while requiring a consistent level of quality. In addition, these OEMs seek new technology solutions at low prices for their thermal management needs. In general, this creates challenges for us and the entire supply base, but also provides an opportunity for suppliers, like Modine, who develop innovative solutions at a competitive cost.
Each of our main vehicular competitors, AKG Group, BorgWarner, Dana Corporation, Delphi Corporation, Denso Corporation, Mahle, Behr, Tata Toyo, TitanX, T. Rad Co. Ltd., UFI Filters, Valeo SA, Visteon Corporation,Hanon Systems, and Zhejiang Yinlun Machinery Co. Ltd., have a multi-regional or worldwide presence. Increasingly, we face heightened competition as these competitors expand their product offerings and manufacturing footprints through expansion into low-costlower-cost countries or low-costlower-cost sourcing initiatives. In addition, competitors from some low-costlower-cost regions are beginning to expand into new geographic OEMgeographical markets.
The Americas, Europe, and Asia segments represent our original equipment segments and serve the commercial vehicle, automotive, and off-highway markets. In addition, our Americas segment provides custom-designed heat exchangers, utilizing microchannel, heat recovery, and round tube plate fin coils, to the commercial refrigeration, residential heating, and commercial heating and air conditioning markets. The Americas segment also serves Brazil’s automotive and commercial vehicle aftermarkets. The following summarizes the primary markets served by our original equipment segments:VTS segment:
Automotive
Market Overview – The automotive market declined during fiscal 2019. In fiscal 2020, we expect the global automotive markets will be relatively flat. We expect longer-term growth of this market to be supported by changes in global fuel efficiency standards, in-vehicle technology enhancements and growth in emerging markets. We are seeing increased activity in the automotive market on electric and hybrid powertrains. Global automotive OEMs and their powertrain suppliers are engaged in significant development activities for these alternative powertrains. In addition, a number of start-up companies specializing in electric vehicles are working to establish themselves in the marketplace, which creates new business dynamics and opportunities. We are actively involved in developing and manufacturing solutions for these alternative powertrains with several traditional and start-up OEMs. At the same time, we remain focused on programs for traditional internal combustion engines which will remain as the primary automotive powertrain for years to come. We expect our global automotive production to increase in fiscal 2020, particularly driven by maturing program volumes in China and new program launches in North America, Europe, and Asia.
Products – Powertrain cooling (engine cooling assemblies, radiators, condensers and charge air coolers); auxiliary cooling (power steering coolers and transmission oil coolers); component assemblies; radiators for special applications; on-engine cooling (exhaust gas recirculation (“EGR”) coolers, engine oil coolers, fuel coolers, charge air coolers and intake air coolers); chillers and cooling plates for battery thermal management.
Customers – Automobile, light truck, motorcycle, and power sports vehicle and engine manufacturers.
Primary Competitors – Mahle; Dana Corporation; UFI Filters; Denso Corporation; Hanon Systems; BorgWarner; Valeo SA; and Zhejiang Yinlun Machinery Co., Ltd.
Commercial Vehicle
Market Overview – During fiscal 2016,2019, the North AmericaAmerican commercial vehicle market remained relatively flat compared withexperienced substantial growth, particularly within the prior year. Weheavy-duty truck market. In fiscal 2020, however, we expect this marketboth medium-duty and heavy-duty truck markets will weaken in fiscal 2017, particularly the market for heavy-duty trucks. Slow economic growth conditions and soft freight fundamentals suggest uneven demand in fiscal 2017; this, coupled with an expectation of continued governmental focus on emissions reductions and fuel efficiency improvements, is causing uncertainty for truck fleets.decline. In South America, the commercial vehicle market has experienced significant volume declinescontinued to recover in the past two fiscal years, and2019; we expect this market towill remain depressed instrong, particularly for heavy-duty trucks, during fiscal 2017.2020. In Europe, the commercial vehicle market experienced moderatemodest growth in fiscal 2016, and2019; we expect this trend to continuemarket will experience slight declines in fiscal 2017. In Asia, we anticipate continued market growth during fiscal 2017.
Other trends influencing2020. We expect the commercial vehicle market in India will be flat or slightly down in fiscal 2020, compared with fiscal 2019.
Trends influencing the commercial and specialty vehicle markets include a calldesire by global commercial vehicle manufacturers to standardize U.S., Canadian, and Eurozone emission regulations.emissions regulations and the adoption of higher standards, which are more comparable to Euro 6, in China and India. Global standardization would likely lead to further consolidation of our customer basedevelopment opportunities for Modine. Additionally, truck and competitors, as they leverage higher volumes, consolidate development costs, and rationalize distribution channels. Additionally, truckbus manufacturers are evaluating alternative powertrains and fuels, including electrification, waste heat recovery, and other technologies aimed to improveat improving vehicle efficiency, all of which could present opportunities for us.
OEMs continue to expect greater supplier support and seek new technology solutions at lower prices for their thermal management needs. In general, this creates a challenge to us and the entire supply base, but also provides an opportunity for suppliers, like Modine, who develop innovative solutions at a competitive cost. Global standardization, fuel economy, and emissions regulations These trends are driving the advancement of product development worldwide and are creating demand for incremental improvements to thermal transfer products thatproducts. We are active in these developments with several customers, and believe we are well positioned to support.support these changes.
Products – Powertrain cooling (engine cooling modules, radiators, charge air coolers, condensers, oil coolers, fan shrouds, and surge tanks); on-engine cooling (EGR coolers, engine oil coolers, fuel coolers, charge air coolers and intake air coolers); and auxiliary coolerscooling (transmission and retarder oil coolers and power steering coolers).; battery thermal management systems.
Customers – Commercial, medium- and heavy-duty truck and engine manufacturers; and bus and specialty vehicle manufacturers.
Primary Competitors – Mahle Behr;Mahle; TitanX; T. Rad Co. Ltd.; BorgWarner; and Tata Toyo.
AutomotiveOff-Highway
Market Overview – The global automotive market improved in most regionsoff-highway markets experienced moderate growth during fiscal 2016. We2019 and we expect this trend to continue during fiscal 2020. Production of U.S. agricultural, construction, and mining machinery increased in fiscal 2017, supported by favorable oil prices and monetary policies. The automotive market is gradually beginning to move away from traditional internal combustion engines towards alternative powertrains, such as electric, hybrid, and fuel cell. This shift is expected to increase2019 compared with the thermal management requirements for these vehicles, and we are capitalizing on this trend by applying our base heat transfer components to new applications.prior year. We expect our global automotive market production to increasemodest growth in the North American off-highway markets in fiscal 2017, with modest market improvements in North America and Europe and stronger improvement in Asia.
Products – Powertrain cooling (engine cooling assemblies, radiators, condensers and charge air coolers); auxiliary cooling (power steering coolers and transmission oil coolers); component assemblies; radiators for special applications; on-engine cooling (EGR coolers, engine oil coolers, fuel coolers, charge air coolers and intake air coolers); and battery cooling (layered core battery chillers).
Customers – Automobile, light truck, and power sports vehicle and engine manufacturers.
Primary Competitors – Mahle Behr; Dana Corporation; Delphi Corporation; Denso Corporation; Visteon Corporation; BorgWarner; and Valeo SA.
Off-Highway
Market Overview – Many global off-highway markets declined during fiscal 2016. The construction market was mixed in fiscal 2016, as some regions began to show signs of improvement during the year while others remained depressed. The U.S. agricultural market remains under pressure from low commodity prices and associated demand, a trend that we expect to continue in fiscal 2017. We expect this market will continue to be negatively impacted by higher used equipment inventories, which could suppress new equipment sales, and the uncertain interest rate environment. The mining equipment markets are showing little signs of improving in fiscal 2017, especially in the U.S. Many mining equipment buyers continued to cut capital investment plans in fiscal 2016, as the market progressed through a multiple-year cycle of demand declines.2020. The European construction and agricultural equipment markets experienced modest improvementgrowth in fiscal 2016 as Eurozone economic conditions slowly improved, aided by monetary stimulus efforts. We2019; we expect modest growth in these markets will be flat or slightly down inagain during fiscal 2017.2020. In South America, we anticipate continued declines in the agricultural marketoff-highway markets experienced strong growth in fiscal 2017.2019 and we expect moderate growth in fiscal 2020. In Asia, the construction market experienced moderate growth during fiscal 2019, and we expect further growth in the China and Korea excavator markets to stabilize, as these markets have progressed through a multiple-year cycle of declining demand since the construction peak in fiscal 2011.2020.
Products – Powertrain cooling (engine cooling modules, radiators, condensers, charge air coolers, fuel coolers and oil coolers); auxiliary coolerscooling (power steering coolers and transmission oil coolers); and on-engine cooling (EGR coolers, engine oil coolers, fuel coolers, charge air coolers and intake air coolers).
Customers – Construction, agricultural, and mining equipment and engine manufacturers, and industrial manufacturers of material handling equipment, generator sets and compressors.
Primary Competitors – Adams Thermal Systems Inc.; AKG Group; Denso Corporation; Zhejiang Yinlun Machinery Co., Ltd.; ThermaSys Corp.; Doowon; Donghwan; T. Rad Co. Ltd.; Mahle Industrial Thermal Systems; KALE OTO RADYATÖR; and RAAL.
Our Industrial Businesses
Commercial and Industrial Solutions Segment
Market Overview – The primary HVAC&R markets served by our CIS segment experienced moderate growth during fiscal 2019 and we expect continued growth during fiscal 2020. We anticipate growth in the global commercial and residential air conditioning markets driven by an expansion of reliable energy sources and increases in income levels in China, India, and other developing countries. Demand for efficient HVAC&R systems is driven by more stringent energy efficiency regulations and the need for higher-efficiency buildings. Also in regard to the commercial air conditioning markets, we expect growth in the global precision air conditioning market driven by increasing heat density in data centers resulting from rising levels of data traffic and storage requirements, coupled with the overall expansion of the underlying data center market. In addition, regulatory bodies are imposing stricter guidelines aimed to reduce carbon footprint, which is driving data centers to adopt the latest precision cooling solutions. We expect growth in the global refrigeration markets, particularly in China and India. We also expect increasing urbanization, changing food consumption trends and increasing global trade will drive investments in refrigeration infrastructure. The global industrial power sector is characterized by the continuing demand for electricity as a preferred source of energy, climate change initiatives to minimize environmental impacts, growth and industrialization in emerging markets, and grid upgrades and refurbishments in more mature markets.
Products – Coils (heat-exchanger and microchannel); coolers (unit coolers, remote condensers, fluid coolers, transformer oil coolers and brine coolers); and coatings to protect against corrosion.
Customers – Commercial and industrial equipment manufacturers; distributors, contractors, and consumers in a variety of commercial and industrial applications, including commercial and mobile air conditioning, refrigeration, and precision and industrial cooling.
Primary Competitors– Kelvion Holding GmbH; Alfa-Laval AB; LU-VE S.p.A; Lennox International, Inc.; Super Radiator Coils; DunAn Precision Manufacturing, Inc.; and Guntner GmbH & Co. KG.
Building HVAC Systems Segment
Market Overview – After two consecutive years of strong growth, the–The North AmericaAmerican heating market contracted slightlyexpanded in fiscal 2016, primarily2019 due to warmer-than-normaloverall positive economic conditions, but was also supported by the increased length of the winter temperatures.season in our key geographic markets. We expectare planning for modest improvement in the North AmericaAmerican heating market in fiscal 2017.2020. We also anticipate increased market demand for our data center cooling, ventilation and geothermal heat pump products to increase in fiscal 2017.2020, as we expand our product offering in this market. In addition to North America, we also serve heating, ventilating, and air conditioning (“HVAC”) markets in the United Kingdom, mainland Europe, the Middle East, Far East and Africa. We expect continued growth in demand for data and connected devices, coupled with increasing requirements for energy-efficient and green solutions, will continue to drive increased demand for our data center cooling products and, in particular, our high-density and free-cooling solutions. Likewise, we expect improvement in commercial investment, construction marketsmarket activity, and energy efficiency legislation to drive increased demand for our ventilation and geothermalair conditioning products. We anticipate that recent European legislation, designed to increase equipment efficiency and reduce the use of high global warming potential refrigerants, will result in customer buying pattern shifts over the next couple years, and may increase market volatility in the short-term, as HVAC equipment providers shift products towards more efficient and environmentally-friendly alternatives. With regard to Brexit, we are committed to being as prepared as possible to ensure continuity of service and supply to our customers.
Products – Unit heaters (gas-fired, hydronic, electric and oil-fired); duct furnaces (indoor and outdoor); infrared units (high- and low-intensity); hydronic products (commercial fin-tube radiation, cabinet unit heaters, and convectors); roof-mounted direct- and indirect-fired makeup air units; commercial packaged rooftop ventilation units; unit ventilators; single packaged vertical units; geothermal and water-source heat pumps; precision air conditioning units for data center applications; air-handling units; chillers; ceiling cassettes; hybrid fan coils; and condensing units. Aftersales includes spare parts, maintenance service and control solutions from existing plant equipment and new building management controls and systems.
Customers – Mechanical contractors; HVAC wholesalers; installers; and end users in a variety of commercial and industrial applications, including banking and finance, data center management, education, hospitality, telecommunications, entertainment arenas, hotels, restaurants, hospitals, warehousing, manufacturing, and food and beverage processing.
Primary Competitors – Lennox International Inc. (ADP); CES (Reznor)Reznor (Nortek Global HVAC); MestekSterling (Mestek Inc. (Sterling)); Vertiv (formerly Emerson Electric Company (Liebert)); Stulz; Schneider Electric (APC / Uniflair); Johnson Controls, Inc. (York); Daikin (McQuay International); System Air (ChangeAir); Ingersoll Rand Inc. (Trane); Bard Manufacturing; and Aaon, Inc.
Geographical Areas
We maintain administrative organizations in fourall key geographical regions – North America, South America, Europe, and Asia – to facilitate customer support, development and testing, and other administrative functions. We operate in the following countries:
North America | South America | Europe | Asia/Pacific | Middle East/Africa |
| | | | | |
| United States | Brazil | Austria | China | United Arab Emirates |
| Mexico | | GermanyBelgium | India | South Africa |
| | | HungaryGermany | Japan | |
| | | ItalyHungary | South Korea | |
| | Italy | | |
| | | Netherlands | | |
| | | RussiaSerbia | | |
| | Spain | | |
| | Sweden | | |
| | | United Kingdom | | |
Our non-U.S. subsidiaries and affiliates manufacture and sell a number of vehicular and commercial, industrial and building HVAC and industrial&R products similar to those produced in the U.S. In addition to normal business risks, operations outside the U.S. are subject to other risks such as changing political, economic and social environments, changing governmental laws, taxes and regulations, foreign currency volatility, and market fluctuations.
Exports
Export sales from the U.S. to foreign countries, as a percentage of consolidated net sales, were 96 percent, in both fiscal 20165 percent and 2015 and 107 percent in fiscal 2014.2019, 2018 and 2017, respectively.
We believe our international presence has positionedpositions us to share profitably in the anticipated long-term growth of the global vehicular and commercial, industrial and building HVAC&R markets. We are committed to increasing our involvement and investment in international markets in the years ahead.
Foreign and Domestic Operations
Financial information relating to our foreign and domestic operations is included in Note 21 of the Notes to Consolidated Financial Statements.
Customer Dependence
Our ten largest customers, certain of which are conglomerates or otherwise affiliated, accounted for 6350 percent of our consolidated net sales in fiscal 2016. These customers, listed alphabetically, were: BMW; Caterpillar; Daimler AG (including Daimler Trucks, Mercedes- Benz, Mitsubishi Fuso Trucks, Thomas Buses and Western Star Trucks); Deere & Company; Denso Corporation; FCA Italy S.p.A. (including Chrysler, CNH, Fiat, Iveco, and VM Motori); Ford Motor Co.; Navistar; Volkswagen AG (including Audi, MAN, Porsche, and Scania); and Volvo.2019. In both fiscal 2016 and 2015,2019, 2018, 2017, Daimler AG and Volkswagen AG each accounted for 10 percent or more of our sales. In fiscal 2014,
Our top customers operate primarily in the automotive, commercial vehicle, off-highway, data center cooling and commercial air conditioning markets. Our top customers, listed alphabetically, include: Carrier, Caterpillar; Daimler AG was the only(including Daimler Trucks, Detroit Diesel, Mercedes-Benz, and Western Star Trucks); Deere & Company; FCA N.V. (including Chrysler, CNH, Fiat, Iveco, and VM Motori); Ingersoll Rand Inc. (Trane); Navistar (including MWM International); Volkswagen AG (including Audi, MAN, Porsche, and Scania); and AB Volvo (including Mack Trucks and Renault Trucks). In addition, our CIS segment includes significant sales generated from a single global technology customer that accounted for 10(14 percent or more of our sales.CIS segment sales in fiscal 2019) with which we are party to confidentiality agreements. Generally, we supply products to our customers on the basis of individual purchase orders received from them. When it is in the mutual interest of Modine and our customers, we utilize long-term sales agreements to minimize investment risks and provide the customer with a proven source of competitively-priced products. These contracts are typically three to five years in duration and may include provisions that adjust sales prices in the future.duration.
Backlog of Orders
Our operating segments maintain their own inventories and production schedules. We believe that our current production capacity is capable of handling the sales volume expected in fiscal 20172020 and beyond.
Raw Materials
We purchase aluminum, nickel and steel from several domestic and foreign suppliers. In general, we do not rely on any one supplier for these materials, which are, for the most part, available from numerous sources in quantities required by us. The supply of copper and brass material is highly concentrated between two global suppliers.suppliers, with other suppliers qualified and supplying lesser amounts to mitigate risk. We normallytypically do not experience raw material shortages and believe that our suppliers’ production of these metals will be adequate throughout the next fiscal year. We typically adjust metals pricing with our raw material suppliers on a monthly basis and our major fabricated component suppliers on a quarterly basis. When possible, we have made material pass-through arrangements with key customers,included provisions within our long-term customer contracts which allow us to pass material costadjust customer prices, on a prospective basis, based upon increases and decreases to our customers.in the cost of key raw materials. When utilized,applicable, however, these pass-through arrangementscontract provisions are typically limited to the underlying cost of the material based upon the London Metal Exchange, and do not include related premiums or fabrication costs. In addition, there can often be a three-month to one-year lag between the time of the material price increase or decrease anduntil the time that we adjust the price with our customer.
Patents
We own or license numerous patents related to our products and operations. These patents and licenses have been obtained over a period of years and expire at various times. Because we have many product lines, we believe that our business as a whole is not materially dependent upon any particular patent or license, or any particular group of patents or licenses. We consider each of our patents, trademarks and licenses to be of value and aggressively defend our rights throughout the world against infringement. We have been granted and/or acquired more than 2,2002,500 patents worldwide over the life of our company.
Research and Development
We remain committed to our vision of creating value through technology and innovation. We focus our engineering and R&D efforts on solutions that meet challenging heat transfer needs of OEMs and other customers within the automotive, powersports, commercial vehicle, automotive, construction, agricultural, and commercial, industrial, and building HVAC&R markets. Our products and systems are typicallyoften aimed at solving difficult and complex heat transfer challenges requiring advanced thermal management. Typical market demands are for products and systems that are lighter weight, more compact, more efficient and more durable to meet customer standards as customers work to ensure compliance with increasingly stringent global emissions and energy efficiency requirements. Our heritage includes a depth and breadth of expertise in thermal management that, combined with our global manufacturing presence, standardized processes, and state-of-the-art technical resources, enables us to rapidly bring customized solutions to our customers.
R&D expenditures, including certain application engineering costs for specific customer solutions, totaled $61$70 million, $66 million, and $64 million in fiscal 20162019, 2018, and $62 million in both fiscal 2015 and 2014.2017, respectively. Over the last three years, R&D expenditures have been between 43 and 5 percent of our consolidated net sales. This level of investment reflects our continued commitment to R&D in an ever-changing market.marketplace. To achieve efficiencies and lower development costs, our R&D groups work closely with our customers on special projects and system designs. Projects include next generation aluminum radiators,EGR technology, oil coolers, charge air coolers, refrigerant heat exchangers, and waste heat recoverybattery thermal management systems for the automotive, commercial vehicle, agriculturalagriculture, construction, and construction markets;residential and EGR technology,commercial energy storage markets, which enable our customers to efficiently meet tighter regulatorymore stringent emission and energy efficiency standards. Most of our current R&D activities are focused on internal development in the areas of powertrain cooling, engine cooling, building HVAC, and coilscommercial and industrial thermal management products. We also collaborate with several industry, university, and government-sponsored research organizations that conduct research and provide data on technical topics of interest to us for practical applications in the markets we serve. We continue to identify, evaluate and engage in external research projects that complement our strategic internal research initiatives in order to further leverage our significant thermal technology expertise and capability.capabilities.
Quality Improvement
Globally, we drive quality improvement by maintaining the Global Modine Management System, applying the Modine Operating System, and executing the Modine Quality Strategy.
Through our global Qualityintegrated and process-oriented Global Modine Management System, (“QMS”),the majority of our manufacturing facilities in our Americas, Europe and Asia segmentsadministrative offices are registered to ISO 9001:200820015 or ISO/TSIATF 16949:20092016 standards, helping to ensure that our customers receive high quality products and services from every facility.services. While customer expectations for performance, quality and service continue to rise, our QMSGlobal Modine Management System has allowed us to drive improvements in quality performance and has enabled the ongoing delivery of products, service and value that meet or exceed customer expectations.
The global QMSOur Global Modine Management System operates within the context of theour Modine Operating System, (“MOS”), which focuses on well-defined improvement principles and leadership behaviors to engage our teams in facilitating rapid improvements.
We drive sustainable and systematic continuous improvement throughout all functional areas and operating segments of the organizationour company by utilizing the principles, processes and behaviors that are core to these systems.
To ensure future quality, we established the Modine Quality Strategy, which focuses on people, process, performance, tools and methods and the Global Modine Management System.
Environmental, Health and Safety Matters
We are committed to preventing pollution, eliminating waste and reducing environmental risks. Ourrisks and we have established specific environmental improvement targets and objectives for fiscal 2020. The majority of our facilities maintain Environmental Management System (“EMS”) certification to the international ISO14001 standard through independent third-party audits. All
During fiscal 2018, we launched a global initiative to reduce both our energy and water usage by 5 percent by fiscal 2020. Each of our locations have established specific environmental improvement targetsfacilities around the world is actively engaged in support of this initiative, and objectives forwe are currently on pace to meet our energy and water usage goals in fiscal 2020. Examples of steps being taken to meet these goals include the upcoming fiscal year.installation of more efficient LED lighting systems, the replacement of inefficient boilers and air compressors, improved building HVAC management systems, increased industrial water recycling, and the installation of water-saving faucets.
In fiscal 2016, our carbon emissions, resulting from our on-site use of natural gas and propane and from our use of electricity generated by off-site sources, decreased 6 percent compared with the prior year, representing our lowest emissions level over the past five years. We will continue to identify and implement carbon reduction opportunities when feasible over the upcoming fiscal year.
During fiscal 2016, our water consumption was relatively flat compared with fiscal 2015. Over the past five years, we have realized a cumulative 31 percent decrease in our water usage, using approximately 38 million fewer gallons in fiscal 2016 than in fiscal 2011. As in previous years, we continue to systematically identify opportunities and implement measures to reduce waste and conserve natural resources within the EMS structure.
Manufacturing by-products consisting of solid wastes and volatile organic air emissions were relatively flat year-over-year. We are actively pursuing alternative manufacturing processes that use more environmentally-friendly materials.
Our commitment to environmental stewardship is reflected in our reporting of chemical releases, as monitored by the United States Environmental Protection Agency's Toxic Chemical Release Inventory program. Our U.S. locations decreased their reported chemical releases by 98 percent over the 10-year period from 2004 to 2014. This long-term improvement is the result of manufacturing efficiencies and a transition to more environmentally-friendly manufacturing technologies and raw materials.
Our product portfolio reflects our sense of environmental responsibility. We continue our developmentto develop and refinement ofrefine environmentally-friendly product lines, including oil, fuel, and EGR coolers for gas and diesel applications, light-weight and high-performance powertrain cooling heat exchangers for both combustion and electric vehicle, air cooled refrigerant and liquid heat exchangers used in residential, commercial, and industrial applications, and our Advanced Cooling Systemadvanced cooling system technology. These products provide increased fuel economies, and enable combustion technologies that reduce harmful gas emissions.emissions for vehicles, and provide energy efficient solutions for building and stationary applications. In our CIS segment, we are moving towards smaller diameter tubing across many of our product lines, which has not only made our products more energy efficient, but has enabled our customers to use less refrigerants in order to reduce their global warming potential. Our Building HVAC productBHVAC segment offerings including the Airedale SchoolMate geothermal heat pump;include the EffinityTM, a condensing gas-fired unit heater with industry-leading efficiencies; and the AtherionTM Commercial Packaged Ventilation System,System; the Airedale SchoolMate® with a water source heat pump; and the Airedale Chiller product line-up, ecodesign compliant with European standards. These products are helping commercial, industrial and residential users achieve high energy efficiencies and reduce utility costs. Our geothermal products feature innovative heat pump technologies, providing energy savings and reduced carbon emissions in both heating and cooling seasons.
Obligations for remedial activities may arise at our facilities due to past practices, or as a result of a property purchase or sale. These expenditures most often relate to sites where past operations followed practices that were considered acceptable under then-existing regulations, but now require investigative and/or remedial work to ensure appropriate environmental protection or where we are a successor to the obligations of prior owners and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. Two of our currently-owned manufacturing facilities and three formerly-owned properties have been identified as requiring soil and/or groundwater remediation. Environmental liabilities for investigative work and remediation at sites in the United States, Brazil,U.S. and the Netherlandsabroad totaled $5$19 million at March 31, 2016.2019.
We recorded a fiscal 2016 globalhave consistently out-performed the private-industry Recordable Incident Rate (“RIR” as defined by OSHA) of 1.63, which was unchanged compared with our RIR in fiscal 2015. Our long-term safety performance, as indicated by RIR, improved 20 percent over the past five years. We have consistently out-performed the private-industry RIR average for the manufacturing sector, which by comparison was 4.03.5 in 2014.
For2017. During fiscal 2019, we recorded an RIR of 1.29, which was lower than our U.S. locations, annual workers’ compensation claims reportedprior year rate of 1.42. Since our acquisition of the Luvata HTS business in fiscal 2016 decreased for the second consecutive year, representing a 70 percent improvement over the past five years.2017, we have been implementing our behavior-based safety program at CIS segment locations. We attribute these lower claimsbelieve our safety program, now in place at all CIS segment locations, has contributed to the continued strengthening of our safety culture.
decrease in the RIR in fiscal 2019. Our behavior-based safety program is a proactive global effort under which we seekproactively seeks to correct at-risk behaviors andwhile positively reinforcereinforcing safe behaviors. Building further on behavior-based safety, we introduced process stream safety to our Americas segment facilities this past fiscal year. This in-depth evaluation and correction of workplace conditions further engages employees to eliminate safety risks. Our focus on behavior-based safety and process stream safety are part of our long-term commitment to strengthen our safety culture.
Employees
We employed approximately 7,10012,200 persons worldwide as of March 31, 2016.2019.
Seasonal Nature of Business
Our overall operating performance is generally not subject to a significant degree of seasonality, as sales to OEM customers are dependent upon market demand for new vehicles. However, our second fiscal quarter production schedules are typically impacted by customer summer shut downs and our third fiscal quarter is affected by holiday schedules. Additionally, our Building HVAC segment experiencesCIS and BHVAC segments experience some seasonality, as demand for HVAC&R products can be affected by heating and cooling seasons, weather patterns, construction, and other factors. Generally,We expect sales volume within our CIS segment to be higher during our first two fiscal quarters due to the Building HVACconstruction seasons in the northern hemisphere. Sales volume within the BHVAC segment is generally stronger in our second and third fiscal quarters, corresponding with demand for heating products.
Working Capital
We manufacture products for the original equipment marketsmajority of customers in our VTS and CIS segments on an as-ordered basis, which makes large inventories of finished products unnecessary. In Brazil, within our Building HVACVTS segment, we maintain varying levels of finished goods inventory due to seasonal demand and certain sales programs. In these areas, we make use of extended payment terms, not to exceed 90 days, for our Building HVAC customers on a limited basis. In Brazil, within our Americas segment, we maintain higher levels of aftermarket product inventory in order to timely meet customer needs in the Brazilian automotive and commercial vehicle aftermarkets. In our BHVAC segment, we maintain varying levels of finished goods inventory due to seasonal demand and certain sales programs. We dohave not experienceexperienced a significant number of returned products within any of our operating segments.
Available Information
Through our website, www.modine.com (Investors link), we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, other Securities Exchange Act reports and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Our reports are also available free of charge on the SEC’s website, www.sec.gov. Also available free of charge on our website are the following corporate governance documents:documents, among others:
| -− | Code of Ethics and Business Conduct, which is applicable to all Modine directors and employees, including the principal executive officer, the principal financial officer, and the principal accounting officer; |
| -− | Corporate Governance Guidelines; |
| -− | Audit Committee Charter; |
| -− | Officer Nomination and Compensation Committee Charter; |
| -− | Corporate Governance and Nominating Committee Charter; and |
| -− | Technology Committee Charter. |
All of the reports and corporate governance documents referenced above and other materials relating to corporate governance may also be obtained without charge by contacting Corporate Secretary, Modine Manufacturing Company, 1500 DeKoven Avenue, Racine, Wisconsin 53403-2552. We do not intend to incorporate our internet website and the information contained therein or incorporated therein into this annual report on Form 10-K.
In the ordinary course of our business, we face various market, operational, strategic, and financial risks. These risks could have an impact on our business, financial condition, and results of operations. Our most significant risks are set forth below and elsewhere in this Annual Report on Form 10-K.
Our Enterprise Risk Management (“ERM”) process seeks to identify and address significant risks. We believe that risk-taking is an inherent aspect of operating a global business and, in particular, one focused on growth and cost-competitiveness. Our goal is to proactively manage risks in a structured approach in conjunction with strategic planning, with the intent to preserve and enhance shareowner value. However, the risks set forth below and elsewhere in this report, as well as other risks currently unknown or deemed immaterial at the date of this report, could adversely affect us and cause our financial results to vary materially from recent or anticipated future results.
Customer and Supplier Matters
Our vehicular customers continually seek price reductions from us. These price reductions adversely affect our results of operations.
We face continuous price-reduction pressure from our vehicular OEM customers. Virtually all of these OEMs impose aggressive price-reduction initiatives upon their suppliers, even if contrary to contractual terms, and we expect such actions to continue in the future. In response, we must continually reduce our operating costs in order to maintain profit margins that are acceptable to us. We have taken, and will continue to take, steps to reduce our operating costs to offset customer price reductions; however, price reductions adversely affect our profit margins and are expected to do so in the future. In addition, we must balance our ongoing need to reduce operating costs against any potential compromise in the high quality of our products and our ability to provide the highest standard of service to our customers. If we are unable to avoid price reductions for our customers, or if we are unable to offset price reductions through improved operating efficiencies and manufacturing processes, sourcing alternatives, technology enhancements and other cost reduction initiatives, our results of operations could be adversely affected.
Fluctuations in costs of materials (including aluminum, copper, steel and stainless steel (nickel), other raw materials, purchased component inventory and energy) could place significant pressure on our results of operations.
Increases in the costs of raw materials and other purchased component inventory, which may be impacted by a variety of factors, including changes in trade laws and tariffs, could have a significant adverse effect on our results of operations. We have sought to alleviate this risk by including provisions within our long-term customer contracts which allow us to adjust customer prices, on a prospective basis, based upon increases and decreases in the cost of key raw materials. However, where these contract provisions are applicable, there can often be a three-month to one-year lag until the time of the price adjustment. To further mitigate our exposure, from time to time we enter into forward contracts to hedge a portion of our forecasted aluminum and copper purchases. However, these hedges may only partially offset increases in material costs, and significant increases could have an adverse effect on our results of operations.
We could be adversely affected if we experience shortages of components or materials from our suppliers.
In an effort to manage and reduce our cost of purchased goods and services, we, like many suppliers and customers, have been consolidating our supply base. As a result, we are dependent upon limited sources of supply for certain components used in the manufacture of our products. We select our suppliers based upon total value (including price, delivery and quality), taking into consideration their production capacities, financial condition and willingness and ability to meet our demand. In some cases, it can take several months or longer to find a supplier due to qualification requirements. However, strong demand, the potential effects of trade laws and tariffs, capacity constraints, financial instability, or other circumstances experienced by our suppliers could result in shortages or delays in their supply of product to us, or a significant price increase resulting in our need to resource. If we were to experience a significant or prolonged shortage of critical components or materials from any of our suppliers and could not procure the components or materials from other sources, we would be unable to meet our production schedules and we would miss product delivery dates, which would adversely affect our sales, results of operations and customer relationships.
Our net sales and profitability could be adversely affected from business which currently accountslosses or declines with major customers.
Deterioration of a business relationship with a major customer could cause our sales and profitability to suffer. Generally speaking, this risk is highest in our vehicular business segments, where a large portion of sales are attributable to a relatively small number of customers. We principally compete for approximately 81new vehicular business both during the initial development of new models and upon the redesign of existing models by our major customers. New model development generally begins two to five years prior to marketing such models to the public. The failure to obtain new business on new models or to retain or increase business on redesigned existing models could adversely affect our business and financial results. In addition, as a result of the relatively long lead times required for many of our complex vehicular components, it may be difficult in the short term for us to obtain new sales to replace any unexpected decline in sales of existing products. We may incur significant expense in preparing to meet anticipated customer requirements that may not be recovered. The loss of a major customer, the loss of business with respect to one or more of the vehicle models that use our vehicular products, or a significant decline in the production levels of such vehicles could have an adverse effect on our business, results of operations and financial condition.
Our CIS segment includes significant sales generated from a single global technology customer (14 percent of our netCIS segment sales) with which we are party to confidentiality agreements. Sales to this customer have historically fluctuated significantly from one quarter or fiscal year to the next. While we expect to be able to manage troughs and take advantage of peaks in these sales islevels, to the extent we are unable to predict and mitigate lower sales levels or respond in a timely fashion to higher sales levels, the results of operations for the CIS segment could be adversely affected.
We are dependent upon the health of the customers and markets we serve.
We are highly susceptible to unfavorable trends in the markets we serve as our customers’ sales and production levels are affected by general economic conditions, including access to credit, the price of fuel and electricity, employment levels and trends, interest rates, labor relations issues, regulatory requirements, trade agreements and other market factors, as well as by customer-specific issues. Any significant decline in production levels for current and future customers could result in asset impairment charges and a reduction in our sales, thereby adversely impacting our results of operations and financial condition.
Our OEM customers continually seek price reductions from us. These price reductions adversely affect our results of operations and financial condition.
We face continuous price-reduction pressure from our OEM customers. Virtually all OEMs impose aggressive price-reduction initiatives upon their suppliers, and we expect such actions to continue in the future. In response, we must reduce our operating costs in order to maintain profitability. We have taken, and will continue to take, steps to reduce our operating costs to offsetContinual customer price reductions; however, price reductions adversely affect our profit margins and are expected to do so in the future. If we are unable to avoid price reductions for our customers, or if we are unable to offset price reductions through improved operating efficiencies and manufacturing processes, sourcing alternatives, technology enhancements and other cost reduction initiatives, our results of operations and financial condition could be adversely affected.
If we were to lose business with a major OEM customer, our net sales and profitability could be adversely affected.
Deterioration of a business relationship with a major OEM customer could cause our sales and profitability to suffer. We principally compete for new business both during the initial development of new models and upon the redesign of existing models by our major customers. New model development generally begins two to five years prior to marketing such models to the public. The failure to obtain new business on new models or to retain or increase business on redesigned existing models could adversely affect our business and financial results. In addition, as a result of the relatively long lead times required for many of our complex components, it may be difficult in the short-term for us to obtain new sales to replace any unexpected decline in the sales of existing products. We may incur significant expense in preparing to meet anticipated customer requirements that may not be recovered. The loss of a major OEM customer, the loss of business with respect to one or more of the vehicle models that use our products, or a significant decline in the production levels of such vehicles could have an adverse effect on our business, results of operations and financial condition.
We could be adversely affected if we experience shortages of components or materials from our suppliers.
In an effort to manage and reduce our cost of purchased goods and services, we, like many suppliers and customers, have been consolidating our supply base. As a result, we are dependent upon limited sources of supply for certain components used in the manufacture of our products. We select our suppliers based on total value (including price, delivery and quality), taking into consideration their production capacities, financial condition and ability to meet our demand. In some cases, it can take several months or longer to find a supplier due to qualification requirements. However, strong demand, capacity limitations, financial instability, or other problems experienced by our suppliers could result in shortages or delays in their supply of product to us. If we were to experience a significant or prolonged shortage of critical components or materials from any of our suppliers and could not procure the components or materials from other sources, we would be unable to meet our production schedules and miss product delivery dates, which would adversely affect our sales, results of operations and customer relationships.
Fluctuations in costs of materials (including aluminum, steel, copper, nickel, other raw materials and energy) could place significant pressure on our results of operations.
Increases in the costs of materials could have a significant effect on our results of operations and on those of others in our industry. We have sought to alleviate this risk by including material pass-through provisions in our customer contracts when possible. Under these arrangements, we can pass certain material cost increases and decreases to our customers. However, where these pass-through arrangements are utilized, there can often be a three-month to one-year lag between the time of the material increase or decrease and the time of the pass-through. To further mitigate our exposure, we have, from time to time, entered into forward contracts to hedge a portion of our forecasted aluminum and copper purchases. However, these hedges may only partially offset increases in material costs, and significant increases could have an adverse effect on our results of operations.
The continual pressure to absorb costs adversely affects our profitability.
OEM customersCustomers often request that we pay for design, engineering and tooling costs that are incurred prior to the start of production and recover these costs through amortization in the piece price of the product. Some of these costs cannot be capitalized, which adversely affects our profitability until the programs for which they have been incurred are launched. If a given program is not launched, or is launched with significantly lower volumes than planned, we may not be able to recover the design, engineering and tooling costs from our customers, further adversely affecting our profitability.results of operations.
Competitive Environment
We face strong competition.
The competitive environment continues to be dynamic as many of our traditional OEM customers, faced with intense international competition, have expanded their sourcing of components. As a result, we have experiencedexperience competition from suppliers in other parts of the world that enjoy economic advantages, such as lower labor costs, lower health care costs, lower tax rates, lower costs associated with legal compliance, and, in some cases, export or raw materials subsidies. In addition, consolidation and vertical integration within the supply base have introduced new or restructured competitors to our markets. Increased competition could adversely affect our business and our results of operations.
Exposure to Foreign Currencies
As a global company, we are subject to foreign currency rate fluctuations, which may affect our financial results.
Although our financial results are reported in U.S. dollars, a significant portion of our sales and operating costs are realized in foreign currencies, including the euro, British pound, Brazilian real and others.currencies. Our sales and profitability are affected by movements of the U.S. dollar against foreign currencies in which we generate sales and incur expenses. To the extent that we are unable to match sales in foreign currencies with costs paid in the same currency, exchange rate fluctuations in any such currency could have an adverse effect on our financial results. During times of a strengthening U.S. dollar, our reported sales and earnings from our international operations will be lower because the applicable local currency will be translated into fewer U.S. dollars. In certain instances, currency rate fluctuations may create pricing pressure relative to competitors quoting in different currencies, which could result in our products becoming less competitive. Significant long-term fluctuations in relative currency values in particular a significant change in the relative values of the U.S. dollar, euro, British pound or Brazilian real, could have an adverse effect on our results of operations and financial condition.
Challenges of Maintaining a Competitive Cost Structure
We may be unable to maintain competitive cost structures within our business.
As part of the “Strengthen” objective of our Strengthen, Diversify and Grow transformational strategy, we are transitioning to a more global, product-based organization. We have engaged in various restructuring activities in our AmericasVTS, CIS and EuropeBHVAC segments in effortsorder to optimize our manufacturing footprint and cost structure. These restructuring activities include the consolidation of manufacturing facilities in North America and Europe, as well ashave included targeted headcount reductions that will support our objective of reducing operational and SG&A cost structures.structures and the consolidation and/or closure of manufacturing facilities in North America and Europe. In addition, we are focusedcontinue to focus on reducing costs for materials and services through targeted adjustments and negotiations with our supply base. Our successful execution of these initiatives, and our ability to identify and execute future opportunities to optimize our cost structures, is critical to enable us to establish a cost environment that will increase and sustain our long-term competitiveness. Any failure to do so could, in turn, adversely affect our results of operations and financial condition.
Challenges of ProductProgram Launches
We are in the midst of launchingcontinue to launch a significant number of new programs at our facilities across the world. The success of these launches is critical to our business.
We design technologically advanced products, and the processes required to produce these products can be difficult and complex. We commit significant time and financial resources to ensure the successful launch of new products and programs. Due to our high level of launch activity, in each ofparticularly within our segments,VTS segment, we must appropriately manage these launches and deploy our operational and administrative resources to take advantage of thisthe resulting increase in our business. If we do not successfully launch thenew products and programs, we may lose market share or damage relationships with our customers, which could negatively affect our business. In addition, any failure in our manufacturing strategy for these new products or programs could result in productionoperating inefficiencies or asset impairment charges.
Complexities of Global Presence
We are subject to risks related to our international operations.
We have manufacturing and technical facilities located in North America, South America, Europe, Asia, and Africa.Asia. In fiscal 2016, 542019, 53 percent of our sales were generated from non-U.S. operations. Consequently, our global operations are subject to complex international laws and regulations and numerous risks and uncertainties, including changes in monetary and fiscal policies, including those related to tax and trade, cross-border trade restrictions or prohibitions, import or other charges or taxes, fluctuations in foreign currency exchange and interest rates, limitations on the repatriation of funds, changing economic conditions, unreliable intellectual property protection and legal systems, insufficient infrastructures, social unrest, political instability and disputes (including, for example, the uncertainty related to the proposed withdrawal of the United Kingdom from the European Union, commonly referred to as “Brexit”), incompatible business practices, and international terrorism. Changes in policies or laws governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we either manufacture products, such as Mexico, or buy raw materials, such as China, could have a material adverse effect on our results of operations. In addition, compliance with multiple and often conflicting laws and regulations of various countries is burdensome and expensive.
Embargoes or sanctions imposed by the U.S. government or those abroad that restrict or prohibit sales to or purchases from specific persons or countries or based upon product classification may expose us to potential criminal and civil sanctions to the extent that we are alleged or found to be in violation, whether intentional or unintentional. We cannot predict future regulatory requirements to which our business operations may be subject or the manner in which existing laws might be administered or interpreted.
In addition, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other similar anti-corruption laws generally prohibit companies and their intermediaries from making payments to improperly influence foreign government officials or other persons for the purpose of obtaining or retaining business. In recent years, there has been a substantial increase in the global enforcement of anti-corruption laws. In the event that we believe our employees or agents may have violated applicable anti-corruption laws, or if we are subject to allegations of any such violations, we may have to expend significant time and financial resources towards the investigation and remediation of the matter, which could disrupt our business and result in a material adverse effect on our financial condition, results of operations and reputation.
Reliance upon Technology Advantage
If we cannot differentiate ourselves from our competitors with our technology, our existing and potential customers may seek lower prices and our sales and earnings may be adversely affected.
Price, quality, delivery, technological innovation, and application engineering development are the primary elements of competition in our markets. If we fail to keep pace with technological changes and cannot differentiate ourselves from our competitors with our technology or fail to provide high quality, innovative products and services that both meet or exceed customer expectations and address their ever-evolving needs, we may experience price erosion, lower sales, and lower profit margins. Significant technological developments by our competitors or others also could adversely affect our business and results of operations.
Developments or assertions by or against us relating to intellectual property rights could adversely affect our business.
We own significant intellectual property, including a large number of patents, trademarks, copyrights and trade secrets. Our intellectual property plays an important role in maintaining our competitive position in a number of the markets we serve. As we expand our operations in jurisdictions where the enforcement of intellectual property rights is less robust, the risk of others duplicating our proprietary technologies increases, despite our efforts to protect them. Developments or assertions by or against us relating to intellectual property rights could adversely affect our business and results of operations.
Information Technology (IT) Systems
We may be adversely affected by any substantial disruption in, or material breach of, our information technologyIT systems.
Our operationsWe are dependent upon our information technologyIT infrastructure, including network, hardware, and software systems, which encompass all ofto conduct our major business functions. business. Despite network and other cybersecurity measures we have in place, our IT systems could be disrupted or we could experience a security breach from computer viruses, break-ins or similar disruptions. A substantial disruption in our information technologyIT systems for a prolonged time period, or a material breach of our information security,IT systems, could result in delays in receiving inventory and supplies or filling customer orders, and/or the release of otherwise confidential information, including personal information that is protected by the General Data Protection Regulation, adversely affecting our customer service and relationships as well as our reputation. We recognizereputation, and could lead to significant remediation expenses and litigation risks. Our systems, and the volume of cyber attacks is increasing; therefore, we employ commercially practical efforts to avoid such attacks, regardless of source, and provide reasonable assurance that we can appropriately mitigate an attack, should it occur. Each year, we evaluate our threat profile and our countermeasures in a continuing effort to maintain the integritysystems of our systems and data. In addition, our systems mightservice providers or others, could be breached, damaged or interrupted by cyber-attacks or other man-made intentional or unintentional events, or by natural disasters or man-madeoccurrences, many of which may, despite our best efforts, be beyond our ability to effectively detect, anticipate or control. Any such events (caused by us, by our service providers or others). Suchand the related delays, problems or costs could have a material adverse effect on our business, financial condition, results of operations and reputation.
Claims and Litigation
We may incur material losses and costs as a result of warranty and product liability claims and litigation or other legal proceedings.
In the event our products fail to perform as expected, we are exposed to warranty and product liability claims and may be required to participate in a recall or other field campaign of such products. Many of our OEM customers have extended warranty protection for their vehicles, putting pressure on the supply base to extend warranty coverage as well. If our customers demand higher warranty-related cost recoveries, or if our products fail to perform as expected, it could have a material adverse impact on our results of operations and financial condition. We are also involved in various legal proceedings from time to time incidental to our business. If any such proceeding has a negative result, it could adversely affect our business and results of operations.
Environmental, Health and Safety Regulations
We could be adversely impacted by the costs of environmental, health and safety regulations.
Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. The operation of our manufacturing facilities entails risks in these areas and there can be no assurance we will avoid material costs or liabilities relating to such matters. Our financial responsibility to clean up contaminated property may extend to previously ownedpreviously-owned or used property, properties owned by unrelated companies, as well as properties we currently own and use, regardless of whether the contamination is attributable to prior owners. In addition, potentially significant expenditures could be required in order to comply with evolving environmental, health and safety laws, regulations or other requirements that may be adopted or imposed in the future.
Claims and Litigation
We may incur material losses and costs as a result of warranty and product liability claims and litigation or other legal proceedings.
In the event our products fail to perform as expected, we are exposed to warranty and product liability claims and may be required to participate in a recall or other field campaign of such products. Many of our vehicular customers offer extended warranty protection for their vehicles and put pressure on their supply base to extend warranty coverage as well. If our customers demand higher warranty-related cost recoveries, or if our products fail to perform as expected, it could have a material adverse impact on our results of operations and financial condition. We are also involved in various legal proceedings from time to time incidental to our business. If any such proceeding has a negative result, it could adversely affect our business, results of operations and financial condition.
Attracting and Retaining Talent
Our continued success is dependent on being able to attract, develop and retain qualified personnel.
Our ability to sustain and grow our business requires us to hire, develop, and retain skilled and diverse personnel in managerial, leadership and administrative functions. We depend significantly on the engagement of our employees and their skills, experience and industry knowledge to support our objectives and initiatives. Difficulty attracting, developing, and retaining qualified personnel, particularly in light of tightening global labor markets, could adversely affect our business, results of operations and financial condition.
Strategic Business Evaluation
The optimization of our VTS segment’s future profitability depends, in part, upon the success of our evaluation of strategic alternatives for our automotive business.
As previously disclosed, we are evaluating strategic alternatives for our automotive business within our VTS segment. The goal of this evaluation is to identify the most successful path forward for the automotive business to optimize the value we offer customers and also provide the highest return for our shareholders. We currently believe a sale of the automotive business is the most likely path forward. There can be no assurance that the evaluation of any strategic alternative, including the potential sale of or continued investment in our automotive business, will result in a consummated transaction or the consummation of another alternative. If our evaluation process does not result in the successful consummation of a strategic alternative, or if we are otherwise unable through such consummation to realize our goal for the automotive business, we may not be able to optimize the profitability of our VTS segment, which could adversely affect our results of operations and financial condition.
Growth Strategies
Inability to identify and execute on inorganic- and organic-growthgrowth opportunities may adversely impact our business and operating results.
As part of the “Grow” objective of our Strengthen, Diversify and Grow transformational strategy, weWe expect to aggressivelycontinue to pursue acquisitions in “industrial” markets and expand our market share in high-growth engine and powertrain cooling areas through focused research and development activities and commercial pursuits.markets. There can be no assurance we will be able to identify attractive acquisition targets and/or organic growth opportunities. If we are unable to successfully complete such transactions and execute on organic opportunities in the future, our growth may be limited. In addition, recent and future acquisitions will require integration of operations, sales and marketing, information technology, finance, and administrative functions. If we are unable to successfully integrate acquisitions and operate these businesses profitably, we may not achieve the financial or operational success expected from the acquisitions.
Liquidity and Access to Cash
Our indebtedness may limit our use of cash flow to support operating, development and investment activities, and failure to comply with our debt covenants could adversely affect our liquidity and financial results.
As of March 31, 2019, we had total outstanding indebtedness of $450 million. Our indebtedness and related debt service obligations i) require that significant cash flow from operations be used for principal and interest payments, which reduces the funds we have available for other business purposes; ii) limit our flexibility in planning for or reacting to changes in our business and market conditions; and iii) expose us to interest rate risk, since the majority of our debt obligations carry variable interest rates. If we are unable to maintain our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) within our target range of 1.5 to 2.5, or if we are unable to move cash globally to enable debt repayments in a tax-efficient manner, our results of operations and financial condition could be adversely affected.
The proposed phase out of the London Interbank Offer Rate (“LIBOR”) could have an adverse effect on our business
Our revolving credit facility and current term loans utilize LIBOR to set the interest rate on outstanding borrowings. In July 2017, the Financial Conduct Authority, a regulator of financial service firms in the U.K., announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. Currently, there is no definitive information or consensus regarding the future utilization of LIBOR or of any particular alternative reference rates. As a result, it is not possible to predict the effect of these changes, other reforms, or the establishment of alternative reference rates, but the potential phase out of LIBOR could adversely affect our access to the capital markets and cost of funding.
Market trends and regulatory requirements may require additional funding for our pension plans.
We have several defined benefit pension plans that cover mostin the U.S., all of our domestic employees hired on or before December 31, 2003.which are frozen to new participants. Our funding policy for these plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. Our domestic plans have an unfunded balanceliability of $90$67 million. During fiscal 2017,2020, we anticipate making funding contributions totaling approximately $8$3 million related to these domestic plans. Funding requirements for our defined benefit plans are dependent upon, among other things, interest rates, underlying asset returns, mortality rate tables, and the impact of legislative or regulatory changes. Should changes in actuarial assumptions or other factors result in the requirement of significant additional funding contributions, our liquidity positionfinancial condition could be adversely affected.
Goodwill and Intangible Assets
Our balance sheet includes significant amounts of goodwill and intangible assets. An impairment of a significant portion of these assets would adversely affect our financial results.
Our balance sheet includes goodwill and intangible assets totaling $285 million at March 31, 2019. We perform goodwill impairment tests annually, as of March 31, or more frequently if appropriate. In addition, we review intangible assets for impairment whenever business conditions or other events indicate that the assets may be impaired. If we determine the carrying value of an asset is impaired, we write down the asset to fair value and record an impairment charge to current operations. An impairment of a significant portion of goodwill or intangible assets could have a material adverse effect on our financial results.
Income Taxes
We may be subject to additional income tax expense or exposure duebecome subject to negative or unexpectedadditional tax consequences.exposure.
Unfavorable changes in the financial outlook of our operations in certain jurisdictions could lead to adverse changes in our valuation allowance assertions for our deferred tax assets. Additionally, the subjectivity of or changes in tax laws and regulations in jurisdictions where we have significant operations could materially affect our results of operations. WeIn addition, we are subject to tax audits by governmental authorities in each taxing jurisdiction in which we operate. Unfavorable or unexpected outcomes from one or more such tax audits could adversely affect our results of operations and financial position.condition.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes broad and complex changes to the U.S. tax code, including, but not limited to (i) a reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018, and (ii) a transition tax on certain unrepatriated earnings of foreign subsidiaries. We completed our accounting for the Tax Act during fiscal 2019; see Note 8 of the Notes to Consolidated Financial Statements for more information. Additional impacts from the Tax Act could result if there are changes in interpretations or applications of the Tax Act’s provisions or if supplementary regulatory guidance is issued.
| UNRESOLVED STAFF COMMENTSCOMMENTS.. |
None.
We operate manufacturing facilities in the U.S. and multiple foreign countries. Our world headquarters, including general offices and laboratory, experimental and tooling facilities, is located in Racine, Wisconsin. We have additional technical support functions located in Grenada, Mississippi; Guadalajara, Spain; Bonlanden, Germany; Söderköping, Sweden; Pocenia, Italy; Sao Paulo, Brazil; Leeds, United Kingdom; Changzhou, China; and Chennai, India.
The following table sets forth information regarding our principal properties as of March 31, 2016.2019. Properties with less than 20,000 square feet of building space have been omitted from this table.
| Location of Facility | Building Space | Primary Use | Owned or Leased |
| VTS Segment |
Americas Segment | North and South America |
| Lawrenceburg, TN | 553,800554,000 sq. ft. | Manufacturing | 143,800 Owned;
144,000 Owned |
| 410,000 Leased | |
| Nuevo Laredo, Mexico | 465,800466,000 sq. ft. | Manufacturing | 399,200 Owned;
66,600399,000 Owned
|
| 67,000 Leased | |
| Sao Paulo, Brazil | 342,900375,000 sq. ft. | Manufacturing & technology center | Owned | |
| Jefferson City, MO | 220,000202,000 sq. ft. | Manufacturing | 162,000 Owned; 58,000 Leased
| Owned |
Washington, IA | 165,400 sq. ft. | Manufacturing | 148,800 Owned;
16,60040,000 Leased
| |
McHenry, IL | 164,700 sq. ft. | Manufacturing (closed) | Owned | |
| Trenton, MO | 159,900160,000 sq. ft. | Manufacturing | Owned | |
| Joplin, MO | 139,500140,000 sq. ft. | Manufacturing | Owned | |
| Laredo, TX | 45,00092,000 sq. ft. | Warehouse | Leased | |
| | | | |
Europe Segment | |
| Bonlanden, Germany | 205,300205,000 sq. ft. | Administrative & technology center | Owned | |
| Kottingbrunn, Austria | 220,600221,000 sq. ft. | Manufacturing | Owned |
| Pontevico, Italy | 167,000 sq. ft. | Manufacturing | Owned |
| Mezökövesd, Hungary | 154,000246,000 sq. ft. | Manufacturing | Owned |
| Pliezhausen, Germany | 126,000 sq. ft. | Manufacturing | 48,000 Owned |
Pontevico, Italy78,000 Leased |
| Uden, Netherlands | 150,700107,000 sq. ft. | Manufacturing | 74,000 Owned |
| 33,000 Leased |
| Neuenkirchen, Germany | 76,000 sq. ft. | Manufacturing | Owned | |
Pliezhausen, GermanyGyöngyös, Hungary | 125,90058,000 sq. ft. | Manufacturing | 48,400 Owned;
77,500 Leased
|
| |
Wackersdorf, Germany | 109,800 sq. ft. | Assembly | Owned | Asia |
Kirchentellinsfurt, GermanyChangzhou, China | 107,600 sq. ft. | Manufacturing (closed) | Owned | |
Uden, Netherlands | 89,600 sq. ft. | Manufacturing | 60,600 Owned;
29,000 Leased
| |
Neuenkirchen, Germany | 76,400255,000 sq. ft. | Manufacturing | Owned | |
Gyöngyös, Hungary | 58,300 sq. ft. | Manufacturing | Leased | |
| | | | |
Asia Segment | |
| Chennai, India | 118,100122,000 sq. ft. | Manufacturing | Owned | |
| Yangzhou, China | 115,800 sq ft. | Manufacturing (Joint Venture) | Leased | |
Changzhou, China | 107,600 sq. ft. | Manufacturing | Owned | |
Shanghai, China | 80,300 sq. ft. | Manufacturing | Leased | |
Cheonan, South Korea | 46,300116,000 sq. ft. | Manufacturing (Joint Venture) | Leased |
| Shanghai, China | 80,000 sq. ft. | Manufacturing | Leased |
| Cheonan, South Korea | 46,000 sq. ft. | Manufacturing (Joint Venture) | Leased |
| Location of Facility | Building Space | Primary Use | Owned or Leased |
| CIS Segment |
| North America |
| Grenada, MS | 809,000 sq. ft. | Administrative, manufacturing & technology center | Leased |
| Grenada, MS | 220,000 sq. ft. | Manufacturing | Owned |
| Grenada, MS | 190,000 sq. ft. | Manufacturing | Leased |
| Juarez, Mexico | 326,000 sq. ft. | Manufacturing | Leased |
| Jacksonville, TX | 55,000 sq. ft. | Manufacturing | Owned |
| Temecula, CA | 33,000 sq. ft. | Manufacturing | Leased |
| Louisville, KY | 28,000 sq. ft. | Manufacturing | Leased |
| Tampa, FL | 23,000 sq. ft. | Manufacturing | Leased |
| Ramos Arizpe, Mexico | 59,000 sq. ft. | Manufacturing | Leased |
| |
| Europe |
| Pocenia, Italy | 449,000 sq. ft. | Administrative, manufacturing & technology center | Owned |
| Guadalajara, Spain | 482,000 sq. ft. | Manufacturing | Owned |
| Söderköping, Sweden | 216,000 sq. ft. | Manufacturing | Owned |
| Amaro, Italy | 196,000 sq. ft. | Manufacturing | Leased |
| Kötschach-Mauthen, Austria | 195,000 sq. ft. | Manufacturing | Owned (closed) |
| San Vito, Italy | 131,000 sq. ft. | Manufacturing | Owned |
| Sremska Mitrovica, Serbia | 128,000 sq. ft. | Manufacturing | Leased |
| Padova, Italy | 78,000 sq. ft. | Manufacturing | Leased |
| |
Building HVACAsia |
| Zhongshan, China | 143,000 sq. ft. | Manufacturing | Leased |
| Wuxi, China | 99,000 sq. ft. | Manufacturing | Leased |
|
| BHVAC Segment |
| North America |
| Buena Vista, VA | 197,000 sq. ft. | Manufacturing | Owned |
| Lexington, VA | 104,000 sq. ft. | Warehouse | Owned |
| West Kingston, RI | 93,000 sq. ft. | Manufacturing | Owned |
| |
| Europe |
| Leeds, United Kingdom | 246,500247,000 sq. ft. | Administrative & manufacturing | Leased | (a) |
Leeds, United Kingdom | 104,400 sq. ft. | Administrative & manufacturing | Leased (temporary) | (a) |
Leeds, United Kingdom | 55,700 sq. ft. | Manufacturing | Leased (temporary) | (a) |
Leeds, United Kingdom | 27,200 sq. ft. | Warehouse | Leased (temporary) | (a) |
| Consett, United Kingdom | 30,00038,000 sq. ft. | Administrative & manufacturingManufacturing | Owned | |
| Consett, United Kingdom | 20,000 sq. ft. | Manufacturing | Leased | |
Buena Vista, VA | 197,000 sq. ft. | Manufacturing | Owned | |
Lexington, VA | 104,000 sq. ft. | Warehouse | Owned | |
West Kingston, RI | 92,800 sq. ft. | Manufacturing | Owned | |
| | | | |
| Corporate Headquarters | |
| Racine, WI | 458,000 sq. ft. | Headquarters & technology center | Owned | |
| (a) | Our Leeds, United Kingdom facility suffered significant destruction as a result of a fire during fiscal 2014. While the damaged facility was being rebuilt, we transferred operations to other temporarily-leased facilities in Leeds, United Kingdom, which are included in the table above. These temporary leases expire in early fiscal 2017. See Note 2 of the Notes to Consolidated Financial Statements for further information. |
We consider our plants and equipment to be well maintained and suitable for their purposes. We review our manufacturing capacity periodically and make the determination as to our need to expand or, conversely, rationalize our facilities as necessary to meet changing market conditions and our needs.
| ITEM 3. | LEGAL PROCEEDINGS. |
The information required hereunder is incorporated by reference from Note 1920 of the Notes to Consolidated Financial Statements.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT.OFFICERS.
The following sets forth the name, age (as of March 31, 2016)2019), recent business experience and certain other information relative to each executive officer of the Company.
| Name | | Age | | Position |
Scott L. Bowser | Brian J. Agen | | 5150 | | Vice President, of Asia and Global Procurement (May 2015Human Resources (October 2012 – Present); Regional Vice President – Asia (July 2012 – May 2015); Regional Vice President – Americas (March 2009 – July 2012); Managing Director – Modine Brazil (April 2006 – March 2009); General Sales Manager – Truck Division (January 2002 – March 2006); Plant Manager at the Company’s Pemberville, OH plant (1998 – 2001). |
| | | | | | |
| Dennis P. Appel | | 44 | | Vice President, Commercial and Industrial Solutions (December 2016 – Present). Prior to joining Modine, Mr. Appel held a variety of leadership positions with Luvata HTS in the U.S., Europe and Asia, including most recently, President of Luvata HTS. |
| | | | | |
| Scott L. Bowser | | 54 | | Vice President, Chief Operating Officer (January 2019 – Present); previously Vice President, Global Operations and Vice President of Asia and Global Procurement for the Company. |
| | | | | |
| Thomas A. Burke | | 5861 | | President and Chief Executive Officer (April 2008 – Present); Executive Vice President and Chief Operating Officer (July 2006 – March 2008); and Executive Vice President (May 2005 – July 2006). |
| | | | | | |
Margaret C. Kelsey | Joel T. Casterton | | 5147 | | Vice President, Legal and Corporate Communications, General Counsel and Secretary (April 2014Vehicular Thermal Solutions (January 2018 – Present); Vice President, General Counsel and Secretary (November 2008previously Director – March 2014); Vice President Corporate Strategy and Business Development (May 2008 – October 2008); Vice President - Finance, Corporate Treasury and Business Development (January 2007 – April 2008); Corporate TreasurerGlobal Program Management & Assistant Secretary (January 2006 – December 2006); Senior Counsel & Assistant Secretary (April 2002 – December 2005); Senior Counsel (April 2001 – March 2002).Quality for the Company. |
| | | | | | |
| Michael B. Lucareli | | 4750 | | Vice President, Finance and Chief Financial Officer (October 2011 – Present); Vice President, Finance, Chief Financial Officer and Treasurer (July 2010 – October 2011); Vice President, Finance and Corporate Treasurer (May 2008 – July 2010); Managing Director Financial Operations (November 2006 – May 2008); Director, Financial Operations and Analysis (May 2004 – October 2006); Director, Business Development and Strategic Planning (November 2002 – May 2004); and Business Development and Investor Relations Manager (1999 – October 2002). |
Thomas F. Marry | | 55 | | Executive Vice President and Chief Operating Officer (February 2012 – Present); Executive Vice President – Europe, Asia and Commercial Products Group (May 2011 – February 2012); Regional Vice President – Asia and Commercial Products Group (November 2007 – May 2011); Managing Director – Powertrain Cooling Products (October 2006 – October 2007); General Manager – Truck Division (2003 – 2006); Director – Engine Products Group (2001 – 2003); Manager – Sales, Marketing and Product Development (1999 – 2001); Marketing Manager (1998 – 1999). |
| | | | | | |
| Matthew J. McBurney | | 4649 | | Vice President, Strategic Planning and Development (November 2017 – Present); previously Vice President, Luvata HTS Integration for the Company and Vice President, Building HVAC (May 2011 – Present); Director, Commercial Products Group (CPG) – North America (June 2007 – May 2011); Business and Product Development Manager – CPG (November 2006 – June 2007); Business Development Manager – CPG (May 2006 – October 2006); Plant Superintendent atfor the Company’s Richland, SC plant (November 2003 – May 2006); Program Manager - Automotive (March 2000 – November 2003). In addition, from 1992 through 2000, Mr. McBurney held various engineering positions at the Company. |
| | | | | | |
Holger Schwab | Scott A. Miller | | 5154 | | Regional Vice President, – Europe (July 2012Building HVAC (September 2016 – Present). Prior to joining Modine, Mr. Schwab held various leadership positions at Valeo in; previously Managing Director – Global Operations and Operations Director of the Building HVAC and North America and Europe and at Thermal Werke.business units for the Company. |
| | | | | | |
| Sylvia A. Stein | | 52 | | Vice President, General Counsel and Corporate Secretary (January 2018 – Present). Prior to joining Modine, Ms. Stein served as the Associate General Counsel, Marketing & Regulatory at the Kraft Heinz Foods Company and was Chief Counsel, Cheese & Dairy and Grocery Business Units for Kraft Foods Group, Inc. / Kraft Foods Global, Inc. |
| | | | | |
| Scott D. Wollenberg | | 4750 | | Vice President – Chief Technology Officer (July 2016 – Present); previously Regional Vice President – Americas (February 2016 – Present); Regional Vice President – North America (July 2012 – January 2016); Chief Technology Officer (July 2011 – May 2013); Vice President – Global Research and Engineering (May 2010 – June 2011). In addition, from 1992 through 2010, Mr. Wollenberg held various engineering and product management positions atfor the Company. |
Executive Officer positions are designated in our Bylaws and the persons holding these positions are elected annually by the Board, generally at its first meeting after the annual meeting of shareholders in July of each year. In addition, the Officer Nomination and Compensation Committee of the Board may recommend and the Board of Directors approvesmay approve promotions and other actions with regard to executive officers at any time during the fiscal year.
There are no family relationships among the executive officers and directors. All of the executive officers of Modine have been employed by us in various capacities during the last five years with the exception of Mr. Schwab,Appel, who joined Modine in July 2012.December 2016 and Ms. Stein, who joined in January 2018, whose business experience during the last five years is provided above.
There are no arrangements or understandings between any of the executive officers and any other person pursuant to which he or she was elected an officer of Modine.
PART II
| ITEM 5. | MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Our common stock is listed on the New York Stock Exchange. Our trading symbol is MOD. The table below shows the range of high and low closing sales prices for our common stock for fiscal 2016 and 2015. As of March 31, 2016,2019, shareholders of record numbered 2,828.2,338.
| | | Fiscal 2016 | | | Fiscal 2015 | |
| Quarter | | High | | | Low | | | High | | | Low | |
| First | | $ | 13.50 | | | $ | 10.60 | | | $ | 17.51 | | | $ | 13.46 | |
| Second | | | 10.79 | | | | 7.85 | | | | 16.15 | | | | 11.87 | |
| Third | | | 9.62 | | | | 7.91 | | | | 13.96 | | | | 11.25 | |
| Fourth | | | 11.23 | | | | 6.01 | | | | 13.82 | | | | 12.11 | |
We did not pay dividends during fiscal 20162019 or 2015.2018. Under our debt agreements, we are permitted to pay dividends on our common stock, subject to certain restrictions based onupon the calculation of debt covenants, as further described under “Liquidity and Capital Resources” under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. We currently do not intend to pay dividends in fiscal 2017.2020.
We did not purchase shares of common stock during the fourth quarter of fiscal 2019.
PERFORMANCE GRAPH
The following graph compares the cumulative five-year total return on our common stock with similar returns on the Russell 2000 Index and the Standard & Poor’s (S&P) MidCap 400 Industrials Index. The graph assumes a $100 investment and reinvestment of dividends.
| | | | | | Indexed Returns | |
| | | Initial Investment | | | Years ended March 31, | |
| Company / Index | | March 31, 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | |
| Modine Manufacturing Company | | $ | 100 | | | $ | 54.71 | | | $ | 56.38 | | | $ | 90.77 | | | $ | 83.46 | | | $ | 68.22 | |
| Russell 2000 Index | | | 100 | | | | 99.82 | | | | 116.09 | | | | 145.00 | | | | 156.90 | | | | 141.59 | |
| S&P MidCap 400 Industrials Index | | | 100 | | | | 102.77 | | | | 127.93 | | | | 158.01 | | | | 168.47 | | | | 164.16 | |
ISSUER PURCHASES OF EQUITY SECURITIES
During fiscal 2016, our Board of Directors approved a $50.0 million share repurchase program, which expires in November 2016. During fiscal 2016, we repurchased $6.9 million of shares under this program. Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.
| | | | | | Indexed Returns | |
| | | Initial Investment | | | Years ended March 31, | |
| Company / Index | | March 31, 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | |
| Modine Manufacturing Company | | $ | 100 | | | $ | 91.95 | | | $ | 75.15 | | | $ | 83.28 | | | $ | 144.37 | | | $ | 94.68 | |
| Russell 2000 Index | | | 100 | | | | 108.21 | | | | 97.65 | | | | 123.25 | | | | 137.79 | | | | 140.61 | |
| S&P MidCap 400 Industrials Index | | | 100 | | | | 106.62 | | | | 103.89 | | | | 129.45 | | | | 150.75 | | | | 152.62 | |
The following describes our purchases of common stock during the fourth quarter of fiscal 2016:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
| January 1 – January 31, 2016 | 9,318 (a) | $6.28 | ——— | $47,921,782 |
| | | | | |
| February 1 – February 29, 2016 | 413,831 | $8.69 | 413,831 | $44,326,469 |
| | | | | |
| March 1 – March 31, 2016 | 120,000 | $9.86 | 120,000 | $43,143,608 |
| | | | | |
| Total | 543,149 | $8.90 | 533,831 | |
| (a) | Consists of shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards. The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy the person’s tax withholding obligations that arise upon the termination of restrictions. These shares are held as treasury shares. |
| ITEM 6. | SELECTED FINANCIAL DATA. |
The following data should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this report.
| | | Years ended March 31, |
| (in millions, except per share amounts) | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | | | | | | | | | | | | | | | |
| Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | | | $ | 1,577.2 | |
| (Loss) earnings from continuing operations | | | (1.0 | ) | | | 22.2 | | | | 131.9 | | | | (22.8 | ) | | | 38.0 | |
| Total assets (a) | | | 920.9 | | | | 930.9 | | | | 1,030.2 | | | | 816.1 | | | | 886.2 | |
| Long-term debt - excluding current portion | | | 125.5 | | | | 129.6 | | | | 131.2 | | | | 132.5 | | | | 141.9 | |
| Net cash provided by operating activities | | | 72.4 | | | | 63.5 | | | | 104.5 | | | | 48.8 | | | | 45.8 | |
| Expenditures for property, plant and equipment | | | 62.8 | | | | 58.3 | | | | 53.1 | | | | 49.8 | | | | 64.4 | |
| (Loss) earnings per share from continuing operations - basic: | | | (0.03 | ) | | | 0.45 | | | | 2.75 | | | | (0.52 | ) | | | 0.81 | |
| (Loss) earnings per share from continuing operations - diluted: | | | (0.03 | ) | | | 0.44 | | | | 2.72 | | | | (0.52 | ) | | | 0.80 | |
| (a) | We adopted new deferred income tax accounting guidance for our fiscal year ended March 31, 2016. The prior periods presented include the effects of our retrospective application of the guidance to conform to the current-period presentation. As a result, total assets for the years ended March 31, 2012 through 2015 decreased $7.3 million, $2.7 million, $2.1 million, and $0.7 million, respectively. See Note 1 of the Notes to Consolidated Financial Statements for additional information on this new accounting guidance. |
| | | Years ended March 31, | |
| (in millions, except per share amounts) | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | |
| Net sales | | $ | 2,213 | | | $ | 2,103 | | | $ | 1,503 | | | $ | 1,353 | | | $ | 1,496 | |
| Operating income | | | 110 | | | | 92 | | | | 42 | | | | 37 | | | | 54 | |
| Net earnings (loss) | | | 86 | | | | 24 | | | | 15 | | | | (1 | ) | | | 23 | |
| Total assets | | | 1,538 | | | | 1,573 | | | | 1,450 | | | | 921 | | | | 931 | |
| Long-term debt - excluding current portion | | | 335 | | | | 386 | | | | 406 | | | | 126 | | | | 130 | |
| Net cash provided by operating activities | | | 103 | | | | 124 | | | | 42 | | | | 72 | | | | 64 | |
| Expenditures for property, plant and equipment | | | 74 | | | | 71 | | | | 64 | | | | 63 | | | | 58 | |
| Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 1.67 | | | $ | 0.44 | | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.46 | |
| Diluted | | | 1.65 | | | | 0.43 | | | | 0.29 | | | | (0.03 | ) | | | 0.45 | |
The following factors impact the comparability of the selected financial data presented above:
| · | During fiscal 2016, we recorded $42.1 million of non-cash pension settlement losses. See Note 17 of the Notes to Consolidated Financial Statements for additional information. |
On November 30, 2016, we acquired Luvata HTS for total consideration of $388 million, net of cash acquired. Since the date of acquisition, we’ve consolidated financial results from this business within our CIS segment. During fiscal 2019, 2018 and 2017, CIS segment net sales were $708 million, $676 million, and $232 million, respectively. This transaction and the related debt financing also resulted in increases in total assets and long-term debt. During fiscal 2018 and 2017, we recorded $4 million and $15 million, respectively, of costs directly related to the acquisition and integration of Luvata HTS. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding this acquisition.
| · | During fiscal 2016, 2015, 2014, and 2013, we incurred $16.6 million, $4.7 million, $16.1 million and $17.0 million, respectively, of restructuring expenses. See Note 6 of the Notes to Consolidated Financial Statements for additional information. |
During fiscal 2019, 2018, 2017, 2016, and 2015, we incurred $10 million, $16 million, $11 million, $17 million, and $5 million, respectively, of restructuring expenses. See Note 6 of the Notes to Consolidated Financial Statements for additional information.
| · | During fiscal 2016, 2015, 2014, 2013, and 2012, we recorded impairment charges of $9.9 million, $7.8 million, $3.2 million, $25.9 million, and $2.5 million, respectively. See Note 6 and Note 14 of the Notes to Consolidated Financial Statements for additional information. |
During fiscal 2018, 2016, and 2015, we recorded impairment charges of $3 million, $10 million, and $8 million, respectively. See Notes 6 and 14 of the Notes to Consolidated Financial Statements for additional information.
| · | During fiscal 2016, we recorded a $9.5 million gain related to an insurance settlement for equipment losses. See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
During fiscal 2018, we recorded provisional income tax charges totaling $38 million as a result of U.S. tax legislation enacted in December 2017 commonly referred to as the Tax Act. During fiscal 2019, we recorded income tax benefits totaling $22 million related to the Tax Act and the recognition of foreign tax credits. See Note 8 of the Notes to Consolidated Financial Statements for additional information.
| · | During fiscal 2016 and 2014, we reversed $3.0 million and $119.2 million, respectively, of deferred tax asset valuation allowances. See Note 8 of the Notes to Consolidated Financial Statements for additional information. |
During fiscal 2016, we recorded $42 million of non-cash pension settlement losses associated with a voluntary lump-sum payout program offered to certain eligible former employees and a $10 million gain related to an insurance settlement for equipment losses associated with a fire at our Airedale manufacturing facility in the U.K in September 2013.
| ITEM 7. | MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
Overview
Founded in 1916, Modine Manufacturing Company is a worldwideglobal leader in thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets. We operate on five continents, in 1619 countries, and employ approximately 7,10012,200 persons worldwide.
Our primary product groups include i) powertrain cooling and engine cooling; ii) coils, coolers, and coatings; and iii) heating, ventilation and air conditioning. Our products are used in light-, medium-on- and heavy-duty vehicles,off-highway original-equipment vehicular applications. In addition, we provide our thermal management technology and solutions to a wide array of commercial, industrial, and building heating, ventilation andventilating, air conditioning, (“HVAC”) equipment,and refrigeration systems and off-highway and industrial equipment. Our broad product offerings include radiators and radiator cores, condensers, oil coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation (“EGR”) coolers, building HVAC equipment, and coils.
Company Strategy
During fiscal 2016, weWe launched our Strengthen, DiversifySDG strategy over three years ago to establish a more global, product-based organizational structure and Growa strategic transformationframework for our company. We’re proud of our achievements to date under SDG’s core guiding principles. We’ve successfully acquired and integrated the Luvata HTS business, now operating within our CIS segment. The CIS segment has propelled our organization forward toward our vision of becoming a leading global diversified industrial thermal management company. This acquisition succeeded in better diversifying our product portfolio and improving our cash flow. We’ve also taken actions to strengthen our business and lower our operating and SG&A cost structures, including restructuring actions, which have encompassed plant consolidation activities, targeted headcount reductions, and product line transfers, and global procurement initiatives to reduce costs for materials and services. Reflecting on these achievements, we believe that Modine is stronger than ever.
As we look ahead, we aim to build upon our SDG strategy by pursuing opportunities that best align with our vision for the future and secure our position as a global diversified industrial thermal management company. We have made significant progress in executing our multi-year strategy to establish meaningful positions in markets where we can deliver consistent, profitable growth. We regularly review our product portfolio and the end markets we serve to ensure we have the right mix of business to build and move Modine forward. We recently announced that we are evaluating strategic alternatives for our automotive business within our VTS segment in order to positionoptimize the segment’s profitability and reprioritize capital investments across all of our business for long-term success. Our main objectives under this platform include:
| · | Strengthen:businesses. We believe our SDG strategy will strengthen our business by right-sizing our cost structure by, among other things, implementing a more global, product-based organization. We believe this new organization will allow us to capture synergies among our vehicular, Building HVAC, and coils businesses and improve our speed to market. We aim to optimize our manufacturing footprint and drive cost reductions throughout our business, including reducing costs for materials and services through adjustments and negotiations with our supply base. |
| · | Diversify: We will invest significant financial and human resources in our industrial businesses, which includes our Building HVAC segment and our coils business. Our objective is to create a more balanced exposure to our end markets and decrease our customer concentration, while achieving better market recognition for these businesses. |
| · | Grow: We are focused on aggressively pursuing acquisitions in industrial markets and expanding our market share in high-growth engine and powertrain cooling areas. |
Our Strengthen, Diversify and Grow objectives are harmonized with, and designed to lead us toward, the following established Enduring Goals, which continue to guidekeep us grounded, thriving, and transforming to optimize the value we offer our day-to-day actions:
| · | Growthcustomers and to provide the highest returns for our shareholders.: To grow our business and achieve a 10 percent average annual revenue growth rate; |
| · | Return on Capital: To attain a 15 percent consolidated return on average capital employed (“ROACE”), which helps ensure selectiveness of growth opportunities and avoidance of low-margin or value-destroying business; |
| · | Diversification: To build a more diversified business model in order to be less vulnerable to market cyclicality and commercial pressures; and |
| · | Fastest improving: To become the fastest improving company in our industry by building on our culture of trust and continuous improvement. |
Development of New Products and Technology
Our ability to develop new products and technologies based upon our building block strategy for new and emerging markets is one of our competitive strengths. Under this strategy, we focus on creating core technologies that can form the basis for multiple products and product lines.lines across multiple business segments. Each of our business segments have a strong heritage of new product development, and our entire global technology organization benefits from mutual strengths. We own twofour global, state-of-the-art technology centers, dedicated to the development and testing of products and technologies. The centers are located in Racine, Wisconsin, Grenada, Mississippi, Pocenia, Italy and Bonlanden, Germany. Our reputation for providing high quality products and technologies has been a Company strength valued by our customers.
We continue to benefit from relationships with customers that recognize the value of having us participate directly in product design, development and validation processes. This has resulted, and we expect it to continue to result, in strong, long-term customer relationships with companies that value partnerships with their suppliers.
Strategic Planning and Corporate Development
We employ both short-term (one(one-to-three year) and longer-term (five-to-seven year) strategic planning processes, which enable us to continually assess our opportunities, competitive threats, and economic market challenges.
We devote significant resources to global strategic planning and development activities to strengthen our competitive position. Our objectives include leveragingWe expect to continue to pursue organic- and external-growth opportunities, particularly to grow our strong balance sheet positionglobal, market leading positions in our industrial businesses and continue to build a more balanced portfolio of thermal management productson the momentum and services, reduce exposure to market cycles withinsuccess recently experienced by our vehicular business,CIS and decrease customer concentration. To accomplish these objectives, we are actively pursuing higher-margin organic- and inorganic-growth opportunities, primarily in the building HVAC and coils markets. We will also continue to focus significant attention on growing strategically important aspects of our vehicular business. During fiscal 2016, we formed and assumed the controlling share of a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co., Ltd., in China. We expect this joint venture will, among other benefits, expedite our introduction of stainless steel heat exchangers for commercial vehicle markets in China.
Operational and Financial Discipline
We operate in a dynamic, global marketplace; therefore, we manage our business with a disciplined focus on increasing productivity and reducing waste. The competitivenessnature of the global marketplace requires us to move toward a greater manufacturing scale in order to create a more competitive cost base. In order to optimize our cost structure and improve efficiency of our operations, we have engaged inexecuted restructuring activities in our Americas, Europe,VTS and Building HVACCIS segments and at Corporate.during recent years. In addition, as costs for materials and purchased parts may rise from time to time due to increases in commodity markets, we seek low-cost country sourcing, when appropriate, and enter into contracts with some of our customers that provide for rising costs to be passed through to themcommodity price adjustments, on a lag basis.
We follow a rigorous financial process for investment and returns, intended to enable increased profitability and cash flows over the long term. We place particular emphasis on working capital improvement and prioritization of our capital investments.
Our executive management incentive compensation (annual cash incentive) plan for fiscal 20162019 was based upon consolidated ROACE and operating income growth.growth and a cash flow margin metric. These performance goals drive alignment of management and shareholders’ interests in both our asset management decisionsearnings growth and earnings growthcash flow targets. In addition, we provide a long-term incentive compensation plan for officers and certain key employees to attract, retain, and motivate employees who directly impact the long-term performance of our company. The plan is comprised of stock awards, stock options, restricted stock, and performance-based stock awards. The performance-based stock awards for the fiscal 20162019 through 20182021 performance period are based upon three-year average consolidated ROACE anda target three-year average annual revenue growth.
To aid in management’s focusgrowth and a target three-year average consolidated cash flow return on guiding our long-term strategies, we pursue our Enduring Goals set forth earlier. These long-term goals serve as a constant reminder to the management team when making strategic decisions as stewards of our company.invested capital.
Segment Information – Strategy, Market Conditions and Trends
Each of our operating segments is managed by a vice president and has separate strategic and financial plans, and financial results, all of which are reviewed by our chief operating decision maker. These plans and results are used by management to evaluate the performance of each segment and to make decisions on the allocation of resources. Effective April 1, 2018, we merged our Americas coils business into the CIS segment to accelerate operational improvements and organizational efficiencies and formed the VTS segment by combining our Americas, Europe, and Asia operations to enable us to operate as a more global, product-based organization.
Americas (43Vehicular Thermal Solutions (59 percent of fiscal 20162019 net sales)
Our AmericasVTS segment provides thermal managementpowertrain and engine cooling products, including, but not limited to, radiators, charge air coolers, condensers, oil coolers, EGR coolers, and fuel coolers, to OEMs in the automotive, commercial vehicle, off-highway, and automotiveoff-highway markets in North America, South America, Europe, and South America. Commercial vehicle markets served include Class 3-8 trucks, school and transit buses and other specialty vehicles. Automotive markets served include automobiles, light trucks, and power sports (e.g. motorcycles and all-terrain vehicles). Off-highway markets served include agricultural, construction, mining, and power generation equipment.Asia. In addition, the Americasour VTS segment provides coils products to the commercial refrigeration, residential heating, commercial heating, and air conditioning markets and also serves Brazil’s automotive and commercial vehicle aftermarkets.
Sales volume in the AmericasVTS segment declinedincreased during fiscal 20162019, as compared with the prior year, primarily due to softening inhigher sales to certain key end markets. Market declines in the North America commercial vehicle and off-highway markets were partially offset by modest improvement in the automotive market, which remained relatively strong throughout fiscal 2016. Market declines across Brazil’s OEM markets were accompanied by relatively flat aftermarket sales. Our fiscal 2017 market outlook is mixed. We expect the North America commercial vehicle market to continue to decline, especially for Class 8 trucks. We anticipate all other OEM markets in North America and BrazilAsia. In North America, we benefited from a substantial recovery in the off-highway market and experienced sales volume increases to remainautomotive customers, despite a relatively flat automotive market. The North American commercial vehicle market experienced significant growth during the year; however, our sales growth to commercial vehicle customers lagged behind the overall market trend, primarily due to the planned wind-down of certain commercial vehicle programs. In Asia, we benefited from growth of the off-highway markets in China and Korea and maturing automotive program volumes in China. In order to meet growing regional demand, we expanded our manufacturing capacity in Changzhou, China during fiscal 2017. We anticipate modest growth2019. Tariffs unfavorably impacted our VTS segment’s financial results during fiscal 2019, both directly and indirectly. Impacts of tariffs on our raw material costs included the direct cost of tariffs on certain imported items from China; rising prices from domestic sources, as certain suppliers leveraged tariffs to impose cost increases; and resourcing costs, as certain domestic suppliers have chosen to exit supplying certain products altogether due to capacity constraints resulting from increased demand. The unfavorable impacts of tariffs were partially offset by the implementation of strict cost control in Brazil aftermarket sales in fiscal 2017. In general, we expect our markets will be constrained by slow global economic growth in the coming years. We will, however, target higher-growth markets that we expect to benefit from rising efficiency standards, including the U.S. automotive and coils markets, which are influenced by fuel economy and building HVAC efficiency and air quality standards, respectively.other areas.
Looking forward to fiscal 2020, we anticipate varied levels of growth in our key end markets. To meet increased demand in Asia, we will complete our expansion of manufacturing capacity in our locations near Chennai, India and Yangzhou, China. We expect the global automotive markets will be relatively flat. In regard to the global commercial vehicle markets, we expect a decline in North America, Europe and Asia and growth in South America. We expect our commercial vehicle sales will decrease compared with fiscal 2019, primarily due to the planned wind-downs of certain programs in Europe and North America. However, we expect growth in our commercial vehicle business in China, primarily due to increasing production of Euro 6 engines that have additional Modine content. In regard to global off-highway markets, we anticipate modest growth in the majority of both construction and agricultural markets.
As recently announced, we are evaluating strategic alternatives for our automotive business. A primary objective of our evaluation is optimizing our VTS segment’s profitability profile. The automotive market exhibits different industry dynamics, growth trajectories, and strategic opportunities, as compared with the commercial vehicle and off-highway markets we serve, and generally requires higher capital investment from its supply base. While we are continuing to explore various alternatives to best serve our customers and provide the greatest return for our shareholders, we currently believe a sale of the automotive business is the most likely path forward. We remain firmly committed to the commercial vehicle and off-highway markets and making the necessary investments to ensure our global business is successful.
Commercial and Industrial Solutions (32 percent of fiscal 2019 net sales)
Our AmericasCIS segment provides a broad offering of thermal management products to the HVAC&R markets, including solutions tailored to indoor and mobile climates, food storage and transport-refrigeration, and industrial processes. CIS’s primary product groups include coils, coolers, and coatings. Our coils products include custom-designed condensers, evaporators, round-tube solutions, as well as steam and water/fluid coils. Our coolers include commercial refrigeration units, which are used across the food supply chain as well as for precision climate control for other applications such as data centers, and other types such as carbon dioxide and ammonia unit coolers, remote condensers, transformer oil coolers, and brine coolers. In addition, we offer proprietary coating solutions for corrosion protection, prolonging the life of heat-transfer equipment.
During fiscal 2019, CIS experienced above-market sales growth, primarily driven by strong market dynamics. The data center cooling and commercial refrigeration markets both yielded stronger than expected demand. In order to meet growing and regional demand, we expanded our manufacturing capacity in both Serbia and Mexico. We expect modest growth in each of the CIS markets we serve during fiscal 2020.
Looking forward, we will continue to focuswork on growthmanufacturing strategies to ensure we are offering competitive solutions and operating in regions with the markets where its productsmost cost-effective footprint. Additionally, we aim to capitalize on opportunities arising from energy and manufacturing footprint create a competitive advantage. Our product strategy includesenvironmental regulations; we believe we are well-positioned to be the usepartner of standard “building blocks”choice to shorten development timesprovide our customers innovative commercial and improve competitiveness. We are focusing on improving our operating leverage through manufacturing improvements and a lower fixed-cost structure. This includes launching new programs efficiently, as well as improving the utilization of our manufacturing footprint. During fiscal 2016, we completed the transfer of production from our McHenry, Illinois manufacturing facility to other facilities within North America. In addition, we announced a plan to close our Washington, Iowa manufacturing facility and are in the process of transferring the facility’s production to other manufacturing facilities within this segment, which we expect to complete in late fiscal 2017. Our cost-reduction efforts, including the McHenry closure and various cost-saving initiatives in Brazil, have allowed us to improve our profitability despite the challenging market environment.industrial thermal management solutions.
Europe (38Building HVAC Systems (9 percent of fiscal 20162019 net sales)
Our Europe segment provides powertrain and engine cooling systems, as well as vehicular climate control components, to OEM end markets, including the automotive, commercial vehicle, and off-highway markets. These systems include cooling modules, radiators, charge air coolers, oil cooling products, EGR products, retarder and transmission cooling components, and HVAC condensers.
Overall, economic conditions in Europe showed moderate growth during fiscal 2016, as compared with the prior year. Sales to the commercial vehicle market experienced moderate growth, primarily driven by a further Euro 6 ramp-up, as compared with the prior year. The premium automotive market experienced relatively strong growth during fiscal 2016, while the off-highway market remained relatively flat. Sales volume growth, primarily within the automotive and commercial vehicle markets, was more than offset by an unfavorable impact of foreign currency exchange rate changes, primarily due to the strengthening of the U.S. dollar versus the euro. During fiscal 2016, we recorded a $10 million asset impairment charge related to a manufacturing facility in Germany, which was generating pre-tax losses, resulting in management deciding to exit a certain product line in the future.
Our Europe segment is focused on continuous improvements, low-cost country sourcing and manufacturing footprint, and cost containment. We expect continued price-reduction pressure from our customers, along with increased global customer service expectations and competition from competitors operating in low-cost countries. Our objective with our restructuring activities in Europe continues to be improving segment ROACE and strengthening overall competitiveness. As a result of our restructuring activities, we believe our Europe segment is well-positioned for improved long-term financial results, driven by our strong customer reputation for technology, service, and program management.
Asia (6 percent of fiscal 2016 net sales)
Our Asia segment provides powertrain cooling systems and engine products to customers in the commercial vehicle, off-highway, and automotive markets.
During fiscal 2016, Asia segment sales volume decreased slightly, primarily due to lower sales to off-highway customers in China and Korea, partially offset by an increase in automotive sales and new program launches. Our manufacturing facility in Shanghai, China is continuing to ramp up production of aluminum oil coolers, and the production level at our manufacturing facility in Chennai, India has increased. We expect this trend to continue in fiscal 2017. Our technology, performance, quality, and reputation have enabled us to win new engine products business in Asia. Emissions standards in China and India have generally lagged behind those in North America and Europe. As a result, some local on- and off-highway powertrain cooling customers focus on price more than technology. Due to the evolution of emission standards, we expect to benefit from additional powertrain and engine cooling opportunities; however, we expect the Asia markets to remain price-focused in the near term. In January 2016, we assumed the controlling share of a newly-formed joint venture, Modine Puxin Thermal Systems (Jiangsu) Co., Ltd., in China. We expect this joint venture will expedite our introduction of stainless steel heat exchangers for the commercial vehicle market in China and expand opportunities for our EGR coolers in China as well.
Our strategy in this segment is to accelerate sales growth and achieve sustained profitability. Our focus is on securing new business and further diversifying our product offering and customer base, while controlling costs and increasing our asset utilization and manufacturing capabilities. We believe we are well positioned for growth and new programs in the future.
Building HVAC (13 percent of fiscal 2016 net sales)
Our Building HVACBHVAC segment manufactures and distributes a variety of original equipment and aftersales HVAC products, primarily for commercial buildings and related applications in North America, the United Kingdom, mainland Europe, the Middle East, Asia, and Africa. We sell and distribute our heating, ventilation and cooling products through various channels towholesalers, distributors, consulting engineers, contractors and building owners for applications such as warehouses, repair garages, greenhouses, residential garages, schools, data centers, manufacturing facilities, hotels, hospitals, restaurants, stadiums, and retail stores. Our heating products include gas (natural and propane), electric, oil and hydronic unit heaters, low-intensitylow- and high-intensity infrared, and large roof-mounted direct- and indirect-fired makeup air units. Our ventilation products include single-packaged vertical units and unit ventilators used in school room applications, air-handling equipment, and rooftop packaged ventilation units used in a variety of commercial building applications. Our cooling products include precision air conditioning units used primarily for data center cooling applications, air- and water-cooled chillers, and ceiling cassettes, and geothermal heat pump products which are also used in a variety of commercial building applications.
Economic conditions, such as demand for new commercial construction, building renovations, including HVAC replacement, growth in data centers and school renovations, and higher efficiency requirements, are growth drivers for our building HVAC products. InDuring fiscal 2016,2019, sales volume forimproved across all of our North America product platforms, including heating, ventilation, products improved with demand.air conditioning, and aftersales. Our North America heatingU.K. business experienced sales volume remained relatively flat, as compared withimprovements in air conditioning equipment and aftersales. In fiscal 2019, we made the prior year. During fiscal 2016,strategic decision to sell our Airedale business in South Africa and, as a result, recorded a $2 million loss on the U.K. relocated into its new facility, which was rebuilt after a fire destroyed it in fiscal 2014. During fiscal 2016, unfavorable currency conditions negatively impacted sales at our Airedale U.K. business and resulted in increased competition from other mainland European suppliers.sale.
We expect continued growth in each of the HVAC markets we serve during fiscal 2017, although at varied rates.2020. The markets that we serve are heavily impacted by construction activity, building regulations, and owner/occupant comfort requirements. Growth rates in these markets have strengthened recently shown some strength, as manufacturing, housing, and business investment have increased. We also anticipate modestcontinue to increase. In fiscal 2020, we expect sales growth in our BHVAC segment through the North America heatingintroduction of new and unique products for the markets we serve and focused market during fiscal 2017. Our Building HVAC segment has grown through strategic acquisitions in recent years, such as Barkell, a manufacturer of custom air handling units located in the U.K., which we acquired in late fiscal 2014. We will continue to pursue acquisitions in line with the growth objective of our Strengthen, Diversify and Grow strategic transformation.share gains.
Consolidated Results of Operations
During fiscalOn November 30, 2016, we announcedacquired Luvata HTS for consideration totaling $415.6 million ($388.2 million, net of cash acquired). This business is a leading global supplier of coils, coolers and coatings to the heating, ventilation, air conditioning, and refrigeration industry. We’ve consolidated financial results from this business within our new Strengthen, Diversify and Grow strategic transformational framework. Guided by this framework, we have commenced initiatives to, among other things, achieve global procurement savings and efficiencies, optimize our manufacturing footprint, implement a new global organizational structure, and reduce personnel costs. We also formed and assumedCIS segment since the controlling shareacquisition date; accordingly, fiscal 2017 included four months of a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co., Ltd., in China with Jiangsu Puxin Heat Exchange System Co., Ltd., in order to increase sales of certain products in China.
Fiscal 2016 net sales decreased $143 million, or 10 percent,financial results from the prior year, primarily dueacquired business.
On January 29, 2019, we announced that we are evaluating strategic alternatives for our automotive business within our VTS segment. Our primary objectives include optimizing the VTS segment’s profitability and reprioritizing capital investments across all of our businesses. While we are continuing to explore various alternatives, we currently believe a $110 million unfavorable impact of foreign currency exchange rate changes associated with the strengtheningsale of the U.S. dollar, and lower sales volumeautomotive business is the most likely path forward. We expect to off-highway customers, partially offset by higher sales volumecomplete our evaluation in fiscal 2020 to automotive customers. During fiscal 2016,determine what actions we completed a voluntary lump-sum payout program offered to certain eligible former employees participating in our U.S. pension plans. See Note 17 of the Notes to Consolidated Financial Statements for additional information. Asmay take as a result, of lump-sum payouts during the fiscal year, we recorded $42 million of non-cash pension settlement losses to costs of sales ($9 million) and SG&A expenses ($33 million). During fiscal 2016, we recorded $17 million of restructuring expenses for activities, including Strengthen, Diversify and Grow initiatives, intended to optimize our cost structure and improve the efficiency of our operations. We also recorded a $10 million asset impairment charge related to a manufacturing facility in Germany. During fiscal 2016, our operating loss was $8 million, compared with operating income of $53 million in the prior year. In addition, we recorded a $10 million gain within other income related to an insurance settlement for equipment losses resulting from the Airedale fire in fiscal 2014.if any.
Fiscal 20152019 net sales increased $18$110 million, or 15 percent, from the prior year, primarily due to higher sales in each of our operating segments. Gross profit increased $9 million, yet gross margin declined 50 basis points to 16.5 percent, as the benefit from higher sales volume to building HVAC, commercial vehicle, and automotive customers, partiallywas more than offset by lower sales volume to off-highway customersunfavorable material costs, including the impacts of tariffs, and temporary operating inefficiencies largely resulting from increased volumes and new program launches at certain facilities. SG&A expenses decreased $2 million, or 70 basis points as a $43 million unfavorable impactpercentage of foreign currency exchange rate changes associated with the strengthening of the U.S. dollar.sales. During fiscal 2015,2019, we recorded $5$10 million of restructuring expenses, and an $8primarily related to targeted headcount reductions within the VTS segment. Fiscal 2019 operating income increased $18 million goodwill impairment charge in Brazil. Alsoto $110 million. The impacts of our accounting for the Tax Act significantly impacted our $5 million income tax benefit in fiscal 2015, we sold a wind tunnel, which resulted in a gain2019, as compared with an income tax provision of $3 million. Operating income of $53$40 million in the prior year. As a result of the higher operating income and the impact of income taxes, our fiscal 2015 increased $162019 net earnings of $86 million improved $62 million compared with the prior year.
Fiscal 2018 net sales increased $600 million, or 40 percent, from the prior year, primarily due to $444 million of additional sales from our CIS segment and higher sales in our other operating segments. We owned the Luvata HTS business (CIS segment) for four months in fiscal 2017. Gross profit increased $103 million, including $66 million of additional contribution from our CIS segment. SG&A expenses increased $43 million, primarily due to a $39 million increase in SG&A expenses in our CIS segment. During fiscal 2018, we recorded $16 million of restructuring expenses, primarily related to a facility closure in our CIS segment and targeted headcount reductions in our VTS segment. Fiscal 2018 operating income increased $50 million to $92 million. Our fiscal 2018 net earnings of $24 million increased $9 million compared with the prior year, primarily due to the $50 million increase in operating income, partially offset by $38 million of provisional income tax charges associated with the Tax Act and higher interest expense.
The following table presents our consolidated financial results on a comparative basis for the fiscal years ended March 31, 2016, 2015,2019, 2018, and 2014.2017.
| | | Years ended March 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | |
| Net sales | | $ | 2,213 | | | | 100.0 | % | | $ | 2,103 | | | | 100.0 | % | | $ | 1,503 | | | | 100.0 | % |
| Cost of sales | | | 1,847 | | | | 83.5 | % | | | 1,747 | | | | 83.0 | % | | | 1,249 | | | | 83.1 | % |
| Gross profit | | | 366 | | | | 16.5 | % | | | 357 | | | | 17.0 | % | | | 254 | | | | 16.9 | % |
| Selling, general and administrative expenses | | | 244 | | | | 11.0 | % | | | 246 | | | | 11.7 | % | | | 203 | | | | 13.5 | % |
| Restructuring expenses | | | 10 | | | | 0.4 | % | | | 16 | | | | 0.8 | % | | | 11 | | | | 0.7 | % |
| Impairment charges | | | - | | | | - | | | | 3 | | | | 0.1 | % | | | - | | | | - | |
| Loss (gain) on sale of assets | | | 2 | | | | 0.1 | % | | | - | | | | - | | | | (2 | ) | | | -0.1 | % |
| Operating income | | | 110 | | | | 5.0 | % | | | 92 | | | | 4.4 | % | | | 42 | | | | 2.8 | % |
| Interest expense | | | (25 | ) | | | -1.1 | % | | | (26 | ) | | | -1.2 | % | | | (17 | ) | | | -1.1 | % |
| Other expense - net | | | (4 | ) | | | -0.2 | % | | | (3 | ) | | | -0.2 | % | | | (4 | ) | | | -0.3 | % |
| Earnings before income taxes | | | 81 | | | | 3.7 | % | | | 63 | | | | 3.0 | % | | | 21 | | | | 1.4 | % |
| Benefit (provision) for income taxes | | | 5 | | | | 0.2 | % | | | (40 | ) | | | -1.9 | % | | | (6 | ) | | | -0.4 | % |
| Net earnings | | $ | 86 | | | | 3.9 | % | | $ | 24 | | | | 1.1 | % | | $ | 15 | | | | 1.0 | % |
| | | Years ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales |
| Net sales | | $ | 1,353 | | | | 100.0 | % | | $ | 1,496 | | | | 100.0 | % | | $ | 1,478 | | | | 100.0 | % |
| Cost of sales | | | 1,129 | | | | 83.5 | % | | | 1,249 | | | | 83.5 | % | | | 1,240 | | | | 83.9 | % |
| Gross profit | | | 224 | | | | 16.5 | % | | | 247 | | | | 16.5 | % | | | 238 | | | | 16.1 | % |
| Selling, general and administrative expenses | | | 205 | | | | 15.2 | % | | | 184 | | | | 12.3 | % | | | 182 | | | | 12.3 | % |
| Restructuring expenses | | | 17 | | | | 1.2 | % | | | 5 | | | | 0.3 | % | | | 16 | | | | 1.1 | % |
| Impairment charges | | | 10 | | | | 0.7 | % | | | 8 | | | | 0.5 | % | | | 3 | | | | 0.2 | % |
| Gain on sale of wind tunnel | | | - | | | | - | | | | (3 | ) | | | -0.2 | % | | | - | | | | - | |
| Operating (loss) income | | | (8 | ) | | | -0.6 | % | | | 53 | | | | 3.6 | % | | | 37 | | | | 2.5 | % |
| Interest expense | | | (11 | ) | | | -0.8 | % | | | (12 | ) | | | -0.8 | % | | | (12 | ) | | | -0.8 | % |
| Other income (expense) – net | | | 9 | | | | 0.6 | % | | | - | | | | - | | | | (1 | ) | | | -0.1 | % |
| (Loss) earnings from continuing operations before income taxes | | | (10 | ) | | | -0.7 | % | | | 41 | | | | 2.8 | % | | | 24 | | | | 1.6 | % |
| Benefit (provision) for income taxes | | | 9 | | | | 0.6 | % | | | (19 | ) | | | -1.3 | % | | | 108 | | | | 7.3 | % |
| (Loss) earnings from continuing operations | | $ | (1 | ) | | | -0.1 | % | | $ | 22 | | | | 1.5 | % | | $ | 132 | | | | 8.9 | % |
Year Ended March 31, 20162019 Compared with Year Ended March 31, 2015:2018:
Fiscal 20162019 net sales decreased $143increased $110 million, or 105 percent, from the prior year, primarily due to lowerhigher sales in each of our Americas and Europe segments. Sales volume increases in our Europe segment were more thanoperating segments, partially offset by a $76$28 million unfavorable impact of foreign currency exchange rate changes.
Fiscal 2019 gross profit increased $9 million from the prior year, yet gross margin declined 50 basis points to 16.5 percent. The decline in gross margin was primarily due to unfavorable material costs, including the direct and indirect impacts of tariffs, and temporary operating inefficiencies largely related to increased volumes and multiple new program launches in our VTS segment, partially offset by higher sales volume. In total,addition, gross profit was unfavorably impacted by $4 million from foreign currency exchange rate changes.
Fiscal 2019 SG&A expenses of $244 million decreased $2 million, or 70 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primarily due to lower integration costs associated with our fiscalNovember 2016 sales were negatively affected byacquisition of the Luvata HTS business and a $110$3 million unfavorablefavorable impact of foreign currency exchange rate changes, partially offset by higher third-party strategic advisory costs recorded at Corporate and higher environmental charges within our VTS segment. During fiscal 2019, we recorded $7 million of costs, primarily consisting of third-party consulting fees, related to our evaluation of strategic alternatives for our VTS segment’s automotive business.
Fiscal 2019 restructuring expenses of $10 million decreased $6 million compared with the prior year, primarily due to lower severance-related expenses associated with the strengtheningfiscal 2018 closure of a manufacturing facility in Gailtal, Austria within the U.S. dollar.CIS segment.
Gross profit decreased $23 million to $224During fiscal 2019, we sold our South African business within the BHVAC segment and, as a result, recorded a loss of $2 million.
Operating income of $110 million in fiscal 2016, yet gross margin of 16.5 percent was consistent2019 increased $18 million compared with the prior year. year, primarily due to higher earnings in the CIS and BHVAC segments, partially offset by lower earnings in the VTS segment.
The decreasebenefit for income taxes was $5 million in gross profitfiscal 2019, compared with a provision for income taxes of $40 million in fiscal 2018. The $45 million change was primarily due to a $14 million unfavorable impact of foreign currency exchange rate changes, $9 million of pension settlement losses, and lower sales volume in the Americas segment, partially offset by lower material costs, improved production efficiencies, and cost-savings initiatives.
Fiscal 2016 SG&A expenses increased $21 million from the prior year. The increase was primarily due to $33 million of pension settlement losses and the absence of $5 million of recoveries from business interruption insuranceour accounting for the Airedale fire receivedimpacts of the Tax Act. As a result of the Tax Act, we recorded provisional income tax charges totaling $38 million in the prior year, compared with income tax benefits totaling $8 million in the current year. In addition, we recorded income tax benefits totaling $17 million in the current year resulting from the recognition of tax assets for foreign tax credits and other attributes, partially offset by ongoing cost-control initiativesthe absence of a $9 million benefit from a development tax credit in Hungary recorded in the prior year and changes in the mix of operating earnings. See Note 8 of the Notes to Consolidated Financial Statements for additional information.
Year Ended March 31, 2018 Compared with Year Ended March 31, 2017:
Fiscal 2018 net sales increased $600 million, or 40 percent, from the prior year, primarily due to $444 million of additional sales from our CIS segment, which included sales from the acquired Luvata HTS business that we owned for four months of fiscal 2017, higher sales in each of our other operating segments, and a $10$55 million favorable impact of foreign currency exchange rate changes.
Restructuring expensesFiscal 2018 gross profit of $357 million increased $12$103 million in fiscal 2016 compared withfrom the prior year, primarily due to severance expenses$66 million of additional gross profit from our CIS segment and higher gross profit in our VTS and BHVAC segments. Gross profit was favorably impacted by $9 million from foreign currency exchange rate changes. Gross margin improved 10 basis points to 17.0 percent, primarily due to higher sales volume, savings resulting from cost-reduction initiatives, improved operating efficiencies, and the absence of a $4 million inventory purchase accounting adjustment recorded in the Europeprior year, partially offset by unfavorable material costs and Americas segmentsincremental depreciation and equipment transfer costs related to plant consolidation activities in the Americas segment.amortization expense resulting from purchase accounting for Luvata HTS.
In fiscal 2016, we recorded a $10Fiscal 2018 SG&A expenses of $246 million impairment charge to write down the carrying value of a manufacturing facility in Germany to fair value. In fiscal 2015, we recorded a goodwill impairment charge of $8 million in Brazil and recognized a gain of $3increased $43 million from the sale of a wind tunnel in Germany.
The operating loss of $8 million in fiscal 2016 represents a $61 million decline from $53 million of operating income in the prior year. This decline wasyear, primarily due to $42a $39 million increase in SG&A expenses in our CIS segment, $4 million of pension settlement losses, lower gross profit,strategy consulting fees incurred during fiscal 2018, higher restructuringcompensation-related expenses, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by ongoing cost-control initiatives.
Other income during fiscal 2016 includes a $10 million gainlower costs incurred related to an insurance settlementthe acquisition of Luvata HTS. SG&A expenses, as a percentage of net sales, decreased 180 basis points compared with the prior year.
Restructuring expenses of $16 million in fiscal 2018 increased $5 million compared with the prior year, primarily due to severance-related expenses in the CIS segment related to the closure of a manufacturing facility in Austria.
During fiscal 2018, we recorded impairment charges totaling $3 million related to the closure of the CIS manufacturing facility in Austria and the discontinuance of a product line in our BHVAC segment.
During fiscal 2017, we sold three manufacturing facilities within our VTS segment, two of which were previously closed, and recognized net gains totaling $2 million.
Operating income of $92 million in fiscal 2018 increased $50 million compared with the prior year, primarily due to $18 million of additional operating income contributed by our CIS segment and higher earnings in the VTS and BHVAC segments.
Fiscal 2018 interest expense increased $9 million compared with the prior year, primarily due to debt issued to finance a significant portion of our acquisition of Luvata HTS.
The provision for equipment lossesincome taxes was $40 million and $6 million in fiscal 2018 and 2017, respectively. The $34 million increase was primarily due to $38 million of provisional charges recorded in fiscal 2018 related to the Tax Act and increased operating earnings, partially offset by income tax benefits totaling $14 million resulting from i) a development tax credit in Hungary ($9 million); ii) the Airedale firereversal of a portion of the valuation allowance in fiscal 2014.a foreign jurisdiction ($3 million); and iii) a reduction of unrecognized tax benefits resulting from a lapse in statutes of limitations ($2 million), and the absence of a $2 million provision recorded in the prior year to establish a valuation allowance in a separate foreign jurisdiction.
Our benefitSegment Results of Operations
Since the date we acquired Luvata HTS (November 30, 2016), we have included financial results of this acquired business within our CIS segment. Effective April 1, 2018, we merged our Americas coils business into the CIS segment to accelerate operational improvements and organizational efficiencies and formed the VTS segment by combining our Americas, Europe, and Asia operations to enable us to operate as a more global, product-based organization. We began reporting financial results for income taxes was $9 millionour new segments beginning in fiscal 2016, compared with a provision2019. Segment financial information for income taxes of $19 million in fiscal 2015. This $28 million change was primarily due2018 and 2017 has been recast to $16 million of income tax benefits related to pension settlement losses in the current year, a decrease in pre-tax operating earnings, and a $3 million income tax benefit relatedconform to the reversal of a deferred tax asset valuation allowance in the current year.fiscal 2019 presentation.
| VTS | | | |
| | | Years ended March 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | |
| Net sales | | $ | 1,352 | | | | 100.0 | % | | $ | 1,296 | | | | 100.0 | % | | $ | 1,152 | | | | 100.0 | % |
| Cost of sales | | | 1,165 | | | | 86.2 | % | | | 1,095 | | | | 84.5 | % | | | 970 | | | | 84.2 | % |
| Gross profit | | | 187 | | | | 13.8 | % | | | 201 | | | | 15.5 | % | | | 182 | | | | 15.8 | % |
| Selling, general and administrative expenses | | | 113 | | | | 8.3 | % | | | 110 | | | | 8.4 | % | | | 106 | | | | 9.2 | % |
| Restructuring expenses | | | 9 | | | | 0.7 | % | | | 7 | | | | 0.6 | % | | | 10 | | | | 0.9 | % |
| Gain on sale of assets | | | - | | | | - | | | | - | | | | - | | | | (2 | ) | | | -0.2 | % |
| Operating income | | $ | 65 | | | | 4.8 | % | | $ | 84 | | | | 6.5 | % | | $ | 68 | | | | 5.9 | % |
Year Ended March 31, 20152019 Compared with Year Ended March 31, 2014:2018:
Fiscal 2015VTS net sales increased $18$56 million, or 14 percent, fromin fiscal 2019 compared with the prior year, primarily due to higher sales increasesvolume to off-highway and automotive customers in our Building HVACNorth America and Asia, segments, partially offset by lower sales volume to customers in our Americas segment, as economic conditions in Brazil were weak,Europe and in our Europe segment, where sales increases were more than offset by a $35$21 million unfavorable impact of foreign currency exchange rate changes. Gross profit decreased $14 million and gross margin declined 170 basis points to 13.8 percent. The decline in gross margin was primarily due to unfavorable material costs, including the impacts of tariffs, and temporary operating inefficiencies largely related to increased volumes and new program launches at certain manufacturing facilities, partially offset by higher sales volume. In total, our fiscal 2015 sales were negatively affectedaddition, foreign currency exchange rate changes had an unfavorable $3 million impact on gross profit. SG&A expenses increased $3 million compared with the prior year, yet decreased 10 basis points as a percentage of sales. The increase in SG&A expenses primarily resulted from higher environmental charges related to previously-owned manufacturing facilities in the U.S. and higher compensation-related expenses, partially offset by a $43$2 million unfavorablefavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar.
Gross profit increased $9 million to $247 million in fiscal 2015 and gross margin increased 40 basis points to 16.5 percent, primarily due to sales volume improvements and lower warranty costs.
Fiscal 2015 SG&Achanges. Restructuring expenses increased $2 million, from the prior year, primarily due to increased engineeringhigher severance expenses. Operating income decreased $19 million to $65 million, primarily due to lower gross profit and development costshigher SG&A and SG&A expenses at our Barkell business, which we acquired in the fourth quarter of fiscal 2014, partially offset by $5 million of recoveries from business interruption insurance during fiscal 2015 related to the Airedale fire.restructuring expenses.
Restructuring expenses decreased $11Year Ended March 31, 2018 Compared with Year Ended March 31, 2017:
VTS net sales increased $144 million, or 12 percent, in fiscal 20152018 compared with the prior year, primarily due to lower restructuring costs in our Europe segment, partially offset by higher severance expenses in our Americas segment.
In fiscal 2015, we sold a wind tunnel in Germany that we no longer considered to be a core asset, and recognized a gain of $3 million. In addition, we recorded a goodwill impairment charge of $8 million related to Brazil. In fiscal 2014, we recorded $3 million of impairment charges, primarily related to restructuring actions in our Europe segment.
Operating income of $53 million in fiscal 2015 increased $16 million compared with the prior year. This improvement was primarily due to higher gross profit on increased sales volume lower restructuring expenses,to off-highway and the gain on the sale of the wind tunnel, partially offset by higher impairment chargesautomotive customers and slightly higher SG&A expenses.
Our provision for income taxes was $19a $42 million in fiscal 2015, compared with a benefit from income taxes of $108 million in fiscal 2014. The provision for taxes in the U.S. totaled $9 million in fiscal 2015, compared with a significant benefit for taxes in fiscal 2014, which resulted primarily from the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $10 million and $11 million in fiscal 2015 and 2014, respectively.
Earnings from discontinued operations of $1 million in fiscal 2015 related to a gain associated with the final collection of proceeds from the fiscal 2009 sale of our Electronic Cooling business.
Segment Results of Operations
During fiscal 2016, we combined our North America and South America segments into the Americas segment to streamline operations, gain synergies and improve our cost structure. As a result, we recast the prior-period segment financial information to conform to the current-period presentation. There was no impact to our consolidated financial statements as a result.
Americas
| | | Years ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales |
| Net sales | | $ | 586 | | | | 100.0 | % | | $ | 667 | | | | 100.0 | % | | $ | 688 | | | | 100.0 | % |
| Cost of sales | | | 486 | | | | 82.9 | % | | | 558 | | | | 83.7 | % | | | 574 | | | | 83.4 | % |
| Gross profit | | | 100 | | | | 17.1 | % | | | 109 | | | | 16.3 | % | | | 114 | | | | 16.6 | % |
| Selling, general and administrative expenses | | | 55 | | | | 9.4 | % | | | 65 | | | | 9.7 | % | | | 62 | | | | 9.0 | % |
| Restructuring expenses | | | 9 | | | | 1.5 | % | | | 3 | | | | 0.4 | % | | | 1 | | | | 0.2 | % |
| Impairment charges | | | - | | | | - | | | | 8 | | | | 1.2 | % | | | 1 | | | | 0.2 | % |
| Operating income | | $ | 36 | | | | 6.2 | % | | $ | 33 | | | | 5.0 | % | | $ | 50 | | | | 7.2 | % |
Americas net sales decreased $81 million, or 12 percent, in fiscal 2016 compared with the prior year. Sales were lower in both North America and Brazil, including a $25 million unfavorablefavorable impact of foreign currency exchange rate changes. Sales in North America decreased $43Gross profit increased $19 million, primarily due to lowerhigher sales volumevolume. Gross margin declined 30 basis points, primarily due to off-highwayunfavorable material costs, the absence of favorable customer pricing settlements recorded in the prior year, and commercial vehicle customers,higher depreciation expense resulting from recent production capacity investments, partially offset by higher sales volume to automotive customers. Sales volume to all markets in Brazil also declined during fiscal 2016, as economic conditions in Brazil remained weak. Sales decreased $21 million, or 3 percent, in fiscal 2015 compared with fiscal 2014, primarily due to lower sales in Brazil and a $9 million unfavorable impact ofimproved operating efficiencies. In addition, foreign currency exchange rate changes partially offset by higher sales in North America, where higher sales volume to commercial vehicle customers were partially offset by lower sales volume to off-highway customers.
Gross profit decreased $9had a favorable $7 million yetimpact on gross marginprofit. SG&A expenses increased 80 basis points to 17.1 percent in fiscal 2016. The decrease in gross profit was$4 million compared with the prior year, primarily due to lower sales volume, a $3 million unfavorable impact of foreign currency exchange rate changes, higher compensation-related expenses, and $2 million ofhigher environmental charges for investigative work related to a previously-owned manufacturing facility in the U.S., partially offset by lower material costs, cost savings from the McHenry, Illinois manufacturing facility closure,absence of a $2 million charge recorded in the prior year related to a legal matter in Brazil, which has since been settled and improved production efficiencies. Gross profitpaid. As a percentage of sales, SG&A expenses decreased $5 million and gross margin decreased 3080 basis points to 16.3 percent in fiscal 2015 compared with fiscal 2014,8.4 percent. Restructuring expenses decreased $3 million, primarily due to lower sales volume in Brazil, partially offset by lower warranty costsplant consolidation and sales volume improvements in North America.equipment transfer costs. In fiscal 2017, we sold three manufacturing facilities and, as a result, recognized gains totaling $2 million.
Fiscal 2016 SG&A expenses decreased $1027
| CIS | | | |
| | | Years ended March 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | |
| Net sales | | $ | 708 | | | | 100.0 | % | | $ | 676 | | | | 100.0 | % | | $ | 232 | | | | 100.0 | % |
| Cost of sales | | | 593 | | | | 83.8 | % | | | 578 | | | | 85.5 | % | | | 200 | | | | 86.1 | % |
| Gross profit | | | 115 | | | | 16.2 | % | | | 98 | | | | 14.5 | % | | | 32 | | | | 13.9 | % |
| Selling, general and administrative expenses | | | 61 | | | | 8.6 | % | | | 60 | | | | 8.8 | % | | | 21 | | | | 9.2 | % |
| Restructuring expenses | | | - | | | | - | | | | 8 | | | | 1.2 | % | | | - | | | | - | |
| Impairment charges | | | - | | | | 0.1 | % | | | 1 | | | | 0.2 | % | | | - | | | | - | |
| Operating income | | $ | 53 | | | | 7.5 | % | | $ | 29 | | | | 4.2 | % | | $ | 11 | | | | 4.7 | % |
Year Ended March 31, 2019 Compared with Year Ended March 31, 2018:
CIS net sales increased $32 million, fromor 5 percent, in fiscal 2019 compared with the prior year, primarily due to ongoing cost-control initiatives, the absence of a $3 million charge for a legal matter in Brazil in the prior year,higher sales volume to data center and commercial HVAC&R customers, partially offset by lower sales volume to industrial customers and a $3$5 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $17 million and gross margin improved 170 basis points to 16.2 percent, primarily due to higher sales volume and favorable sales mix. SG&A expenses increased $1 million, yet decreased 20 basis points as a percentage of sales. The $1 million increase in SG&A expenses was primarily due to higher compensation-related expenses, including higher commission costs, partially offset by a $1 million favorable impact of foreign currency exchange rate changes. Fiscal 2015 SG&ARestructuring expenses increased $3decreased $8 million, from the prior year, primarily due to the $3 million charge for the legal matter in fiscal 2015.
In fiscal 2016, weabsence of severance-related expenses recorded $9 million of restructuring expenses, primarily related to severance expenses associated with a voluntary retirement program in the U.S., and the planned closure of our Washington, Iowa manufacturing facility, which we expect to complete during fiscal 2017, and equipment transfer costs related to plant consolidation activities in North America. In fiscal 2015, we recorded $3 million of restructuring expenses, primarily related to severance expenses in Brazil, to better align our cost structure with the market conditions in Brazil, and equipment transfer costsprior year related to the closure of our McHenry, Illinoisa manufacturing facility whichin Austria. In fiscal 2018, we completed duringrecorded a $1 million impairment charge related to the closure of the Austrian facility. In fiscal 2016. We also2019, we recorded an $8 million goodwilladditional impairment charge during fiscal 2015,of less than $1 million related to this facility. Operating income of $53 million increased $24 million, primarily due to a decline in the financial outlook for Brazil.higher gross profit and lower restructuring expenses.
Operating incomeYear Ended March 31, 2018 Compared with Year Ended March 31, 2017:
CIS financial results for fiscal 2017 primarily include four months of $36results from the acquired Luvata HTS business. These financial results are not comparable to fiscal 2018, which included a full year of Luvata HTS results.
| BHVAC | | | |
| | | Years ended March 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | |
| Net sales | | $ | 212 | | | | 100.0 | % | | $ | 191 | | | | 100.0 | % | | $ | 172 | | | | 100.0 | % |
| Cost of sales | | | 149 | | | | 70.1 | % | | | 133 | | | | 69.7 | % | | | 124 | | | | 72.2 | % |
| Gross profit | | | 63 | | | | 29.9 | % | | | 58 | | | | 30.3 | % | | | 48 | | | | 27.8 | % |
| Selling, general and administrative expenses | | | 35 | | | | 16.4 | % | | | 36 | | | | 18.8 | % | | | 34 | | | | 19.7 | % |
| Restructuring expenses | | | - | | | | - | | | | - | | | | 0.2 | % | | | 1 | | | | 0.4 | % |
| Impairment charge | | | - | | | | - | | | | 1 | | | | 0.7 | % | | | - | | | | - | |
| Loss on sale of assets | | | 2 | | | | 0.8 | % | | | - | | | | - | | | | - | | | | - | |
| Operating income | | $ | 27 | | | | 12.6 | % | | $ | 20 | | | | 10.6 | % | | $ | 13 | | | | 7.7 | % |
Year Ended March 31, 2019 Compared with Year Ended March 31, 2018:
BHVAC net sales increased $21 million, or 11 percent, in fiscal 2016 increased $3 million2019 compared with the prior year, primarily due to lower SG&A expenses and the absence of the goodwill impairment charge in the prior year, partially offset by lower gross profit and higher restructuring expenses. Operating income of $33 million in fiscal 2015 decreased $17 million compared with the prior year, primarily due to the goodwill impairment charge, lower gross profit, and higher SG&A and restructuring expenses.
Europe
| | | Years ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales |
| Net sales | | $ | 524 | | | | 100.0 | % | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % |
| Cost of sales | | | 456 | | | | 87.0 | % | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % |
| Gross profit | | | 68 | | | | 13.0 | % | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % |
| Selling, general and administrative expenses | | | 39 | | | | 7.4 | % | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % |
| Restructuring expenses | | | 6 | | | | 1.2 | % | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % |
| Impairment charges | | | 10 | | | | 1.9 | % | | | - | | | | - | | | | 2 | | | | 0.3 | % |
| Gain on sale of wind tunnel | | | - | | | | - | | | | (3 | ) | | | -0.6 | % | | | - | | | | - | |
| Operating income | | $ | 13 | | | | 2.5 | % | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % |
Europe net sales decreased $54 million, or 9 percent, in fiscal 2016 compared with the prior year, primarily due to a $76 million unfavorable impact of foreign currency exchange rate changes and lower sales volume to off-highway customers, partially offset by increased sales volume to commercial vehicle and automotive customers. Sales decreased $6 million, or 1 percent, in fiscal 2015 compared with fiscal 2014, primarily due to a $35 million unfavorable impact of foreign currency exchange rate changes and lower tooling sales, partially offset by increased sales volume to commercial vehicle and automotive customers.
Gross profit decreased $1 million, yet gross margin increased 110 basis points to 13.0 percent in fiscal 2016. The gross margin increase was primarily due to higher sales volumeof air conditioning products and lower material costs. In addition, gross profit was negatively impacted by $9 million from foreign currency exchange rate changes. In fiscal 2015, gross margin decreased 20 basis points to 11.9 percent compared with fiscal 2014, primarily due to unfavorable sales mix, production inefficiencies caused by increased volume at certain manufacturing facilitiesparts and plant consolidation activities, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by the absence of $4 million of accelerated depreciation recorded in fiscal 2014 for production equipment that is no longer used and lower warranty costs.
Fiscal 2016 SG&A expenses decreased $5 million from the prior year, primarily due to a $6 million favorable impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $44 million were consistent with the prior year, as higher engineering and development costs were offset by a favorable impact of foreign currency exchange rate changes.
In fiscal 2016, we recorded $6 million of restructuring expenses, primarily related to severance expenses. In addition, we recorded a $10 million asset impairment charge. These restructuring expenses and impairment charge primarily related to a manufacturing facility in Germany, which was generating pre-tax losses, resulting in management deciding to exit a certain product line in the future. In fiscal 2015, we recorded $2 million of restructuring expenses, primarily due to plant consolidation activities, and we sold a wind tunnel for cash proceeds of $6 million, which resulted in a gain of $3 million. In fiscal 2014, we recorded $15 million of restructuring expenses, primarily related to severance expenses, and $2 million of asset impairment charges.
Operating income of $13 million in fiscal 2016 decreased $13 million compared with the prior year, primarily due to an increase in restructuring expenses and impairment charges and the absence of a $3 million gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&A expenses. Operating income of $26 million in fiscal 2015 increased $16 million compared with the prior year, primarily due to a reduction in restructuring expenses and impairment charges and the gain from selling the wind tunnel.
| | | Years ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales |
| Net sales | | $ | 79 | | | | 100.0 | % | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % |
| Cost of sales | | | 67 | | | | 84.5 | % | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % |
| Gross profit | | | 12 | | | | 15.5 | % | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % |
| Selling, general and administrative expenses | | | 11 | | | | 14.5 | % | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % |
| Operating income (loss) | | $ | 1 | | | | 1.0 | % | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % |
Asia net sales decreased $2 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to lower sales volume to off-highway customers in China and Korea and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales volume to automotive customers in China and increased overall sales in India. Sales increased $9 million, or 13 percent, in fiscal 2015 compared with fiscal 2014, primarily due to automotive program launches in China and increased overall sales in India, partially offset by lower sales volume to off-highway customers.
Gross margin increased 130 basis points to 15.5 percent in fiscal 2016 compared with the prior year, primarily due to favorable sales mix. Gross profit increased $3 million and gross margin increased 170 basis points to 14.2 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume.
Fiscal 2016 SG&A expenses decreased $1 million from the prior year, primarily due to cost-control initiatives, partially offset by acquisition-related costs associated with a joint venture that we formed in fiscal 2016. See Note 3 to the Notes to Consolidated Financial Statements for additional information on this joint venture. Fiscal 2015 SG&A expenses were consistent with the prior year, yet decreased as a percentage of sales.
Operating income of $1 million in fiscal 2016 increased $1 million compared with the prior year, primarily due to lower SG&A expenses. Operating income of less than $1 million in fiscal 2015 represented a $3 million improvement compared with the operating loss in the prior year, and was primarily due to higher gross profit on increased sales volume.
| | | Years ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales |
| Net sales | | $ | 181 | | | | 100.0 | % | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % |
| Cost of sales | | | 127 | | | | 70.1 | % | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % |
| Gross profit | | | 54 | | | | 29.9 | % | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % |
| Selling, general and administrative expenses | | | 39 | | | | 21.6 | % | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % |
| Restructuring expenses | | | 1 | | | | 0.6 | % | | | - | | | | - | | | | - | | | | - | |
| Operating income | | $ | 14 | | | | 7.7 | % | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % |
Building HVAC net sales decreased $5 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to a $6 million unfavorable impact of foreign currency exchange rate changes and lower sales at our businesses in the U.K., as unfavorable currency conditions resulted in increased competition from other mainland European suppliers, partially offset by increased ventilation product sales in North America. Sales increased $40 million, or 27 percent, in fiscal 2015 compared with fiscal 2014, primarily due to a $23 million increase in sales at our businessescontrols in the U.K. and increased heating product salesproducts in North America, as we experienced a strong heating season in fiscal 2015. The sales increase in the U.K. was primarily due to a $13 million increase in sales at Barkell, which we acquired in the fourth quarter of fiscal 2014, and the continuing recovery from the Airedale fire, which caused a temporary halt in production during the prior fiscal year.
Gross profit decreased $2 million in fiscal 2016 compared with the prior year, primarily due topartially offset by a $1 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $5 million, yet gross margin decreased 10declined 40 basis points to 29.9 percentpercent. This slight decline in fiscal 2016gross margin primarily resulted from unfavorable material costs and sales mix, partially offset by higher sales volume. SG&A expenses decreased $1 million compared with the prior year. Gross profit increased $13 millionyear and gross margin improved 40decreased 240 basis points as a percentage of sales, primarily due to 30.0 percentcost-control initiatives. During fiscal 2019, we completed the sale of our business in fiscal 2015 compared with fiscal 2014,South Africa, and, as a result, recorded a loss of $2 million. Operating income of $27 million increased $7 million, primarily due to higher sales volume.gross profit.
Fiscal 2016 SG&A expensesYear Ended March 31, 2018 Compared with Year Ended March 31, 2017:
BHVAC net sales increased $2$19 million, fromor 11 percent, in fiscal 2018 compared with the prior year, primarily due to the absence of $5 million of recoveries from business interruption insurance for the Airedale fire receivedhigher heating and ventilation product sales in the prior year, partially offset by lower engineering and development costsNorth America and a $1 million favorable impact of foreign currency exchange rate changes. Fiscal 2015Gross profit increased $10 million and gross margin improved 250 basis points to 30.3 percent, primarily due to higher sales volume and improved operating efficiencies in the U.K. SG&A expenses increased $3$2 million, from the prior year, primarily due to additionalhigher commission costs resulting from Barkell and increasedhigher sales. As a percentage of sales, SG&A expenses associated with higher sales levels, partially offset by the recoveries from business interruption insurance for the Airedale fire.
In fiscal 2016, we recordeddecreased 90 basis points. Restructuring expenses decreased $1 million, primarily due to the absence of restructuringseverance expenses primarily related to severance expenses.
recorded in the prior year. During fiscal 2018, we discontinued a geothermal product line and, as a result, recorded a $1 million impairment charge for intangible assets we no longer use. Operating income of $14$20 million in fiscal 2016 decreased $5increased $7 million, compared with the prior year, primarily due to lower gross profit and higher SG&A expenses. Operating income of $19 million in fiscal 2015 increased $10 million compared with the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses.profit.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents atas of March 31, 20162019 of $69$42 million, and an available borrowing capacity of $207$124 million under lines ofour revolving credit provided by banks in the United States and abroad.facility. Given our extensive international operations, $49approximately $35 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds wouldmay be subject to U.S. taxforeign withholding taxes if repatriated. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.
During fiscal 2016, our Board of Directors approved a $50 million share repurchase program, which expires in November 2016. We repurchased $7 million of shares under this program in fiscal 2016. Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 20162019 was $72 million, an increase of $8 million from $64 million in the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital, including lower incentive compensation payments during fiscal 2016 and the timing of value-added tax payments.
Net cash provided by operating activities in fiscal 2015 was $64$103 million, a decrease of $41$21 million from $105$124 million in the prior year. This decrease in operating cash flow primarily resulted from unfavorable changes in working capital, partially offset by the favorable impact of stronger earnings. The unfavorable changes in working capital, as compared with the prior year, included higher incentive compensation and other employee benefit payments and higher inventory levels associated with higher sales levels.
Net cash provided by operating activities in fiscal 2018 was $124 million, an increase of $82 million from $42 million in fiscal 2017. This increase in operating cash flow primarily due to unfavorableresulted from an increase in operating earnings, including additional contributions from our CIS segment, lower payments for costs associated with the acquisition and integration of Luvata HTS and restructuring expenses in the current year, and favorable net changes in working capital, including higher incentive compensation payments during fiscal 2015 related to fiscal 2014 performance, and the timing of customer-owned tooling reimbursements.capital.
Capital Expenditures
Capital expenditures of $63$74 million during fiscal 20162019 increased $5$3 million compared with fiscal 2015. In fiscal 2016,2018, primarily due to higher capital expenditures in our CIS segment, including investments to expand manufacturing capacity in Serbia and Mexico. Similar to prior years, our capital spending in fiscal 2019 primarily occurred in the Americas and Europe segments,VTS segment, which totaled $27$56 million, and $25 million, respectively. Capital projects in fiscal 2016 included tooling and equipment purchases in conjunction with new and renewal programs with customers.
customers, as well as investments to expand manufacturing capacity in China and Hungary. At March 31, 2016,2019, our capital expenditure commitments totaled $21$24 million. Significant commitments included tooling and equipment expenditures for new and renewal programs with customers in the AmericasAsia, North America, and Europe segments.within the VTS segment.
Dividends
We did not pay dividends in fiscal 2016, 2015, or 2014. We currently do not intend to pay dividends in fiscal 2017.
Debt
Our total debt outstanding increased $14decreased $30 million to $163$450 million at March 31, 2016,2019 compared with the prior year, primarily due to borrowings in China and Mexico for capital investments.repayments of debt during fiscal 2019. See Note 1617 of the Notes to Consolidated Financial Statements for additional information regarding our debtcredit agreements.
Our debt agreements require us to maintain compliance with various covenants. UnderAs defined in the credit agreement, the term loans may require prepayments in the event our annual excess cash flow exceeds defined levels, depending upon our leverage ratio, or in the event of certain asset sales. In addition, under our primary debt agreements in the U.S., we are subject to a leverage ratio covenant,covenants, the most restrictive of which requires us to limit our consolidated indebtedness, less a certain portion of our cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
Our As of March 31, 2019, our leverage ratio for the four fiscal quarters ended March 31, 2016 was 1.2, which was below the maximum permitted ratio of 3.25. Ourand interest expense coverage ratio for the four fiscal quarters ended March 31, 2016 was 10.5, which exceeded the minimum requirement of 3.0.were 2.1 and 9.0, respectively. We were in compliance with our debt covenants as of March 31, 20162019 and expect to remain in compliance during fiscal 20172020 and beyond. In the event
29
Off-Balance Sheet Arrangements
None.
Contractual Obligations
| | | March 31, 2019 | |
| (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | |
| | | | | | | | | | | | | | | | |
| Long-term debt | | $ | 377.7 | | | $ | 48.2 | | | $ | 287.8 | | | $ | 16.7 | | | $ | 25.0 | |
| Interest associated with long-term debt | | | 40.9 | | | | 16.0 | | | | 18.3 | | | | 4.1 | | | | 2.5 | |
| Operating lease obligations | | | 70.4 | | | | 14.2 | | | | 21.5 | | | | 11.8 | | | | 22.9 | |
| Capital expenditure commitments | | | 23.6 | | | | 23.6 | | | | - | | | | - | | | | - | |
| Other long-term obligations (a) | | | 13.3 | | | | 1.4 | | | | 2.1 | | | | 2.0 | | | | 7.8 | |
| Total contractual obligations | | $ | 525.9 | | | $ | 103.4 | | | $ | 329.7 | | | $ | 34.6 | | | $ | 58.2 | |
| | | March 31, 2016 | |
| (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | |
| | | | | | | | | | | | | | | | |
| Long-term debt | | $ | 125.4 | | | $ | 8.0 | | | $ | 32.2 | | | $ | 85.2 | | | $ | - | |
| Interest associated with long-term debt | | | 30.3 | | | | 8.5 | | | | 14.1 | | | | 7.7 | | | | - | |
| Capital lease obligations | | | 8.6 | | | | 0.5 | | | | 0.8 | | | | 0.8 | | | | 6.5 | |
| Operating lease obligations | | | 53.5 | | | | 8.1 | | | | 10.4 | | | | 8.7 | | | | 26.3 | |
| Capital expenditure commitments | | | 20.5 | | | | 20.0 | | | | 0.5 | | | | - | | | | - | |
| Other long-term obligations | | | 3.6 | | | | 1.7 | | | | 1.2 | | | | 0.7 | | | | - | |
| Total contractual obligations | | $ | 241.9 | | | $ | 46.8 | | | $ | 59.2 | | | $ | 103.1 | | | $ | 32.8 | |
| (a) | Includes capital lease obligations and other long-term obligations. |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $129$119 million as of March 31, 2016.2019. We are unable to determine the ultimate timing of payments for these liabilities; therefore, we have excluded these amounts from the contractual obligations table above. We expect to contribute $8$3 million to our U.S. pension plans during fiscal 2017.2020.
Critical Accounting Policies
The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements. Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements. The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements. In addition, recently issued accounting pronouncements that could significantly impact our financial statementsstatement are includeddisclosed in Note 1 of the Notes to Consolidated Financial Statements.
Revenue Recognition
WeIn fiscal 2019, we adopted new revenue recognition accounting guidance. See Note 1 of the Notes to Consolidated Financial Statements for additional information. In accordance with this new accounting guidance, we recognize revenue including agreed-upon commodity prices, when the risksbased upon consideration specified in a contract and rewards of ownership are transferredas we satisfy performance obligations by transferring control over our products to our customers, which generally occursmay be at a point in time or over time. The majority of our revenue is recognized at a point in time, based upon shipment. Revenue is recorded netshipment terms. A limited number of applicable provisionsour customer contracts provide an enforceable right to payment for sales rebates, volume incentives,performance completed to date. For these contracts, we recognize revenue over time based upon our estimated progress towards the satisfaction of the contract’s performance obligations. We record an allowance for doubtful accounts for estimated uncollectible receivables and returns and allowances. Atwe accrue for estimated warranty costs at the time of revenue recognition, we also record estimates for bad debt expense and warranty expense.sale. We base these estimates onupon historical experience, current business trends, and current economic conditions.
Acquisitions
From time to time, we make strategic acquisitions that have a material impact on our consolidated results of operations or financial position. We recognizeallocate the purchase price increases thatof acquired businesses to the identifiable tangible and intangible assets acquired and liabilities assumed in the transaction based upon their estimated fair values as of the acquisition date. We determine the estimated fair values using information available to us and engage third-party valuation specialists when necessary. The estimates we use to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. While we use our best estimates and assumptions, our estimates are agreed upon in advance as revenue wheninherently uncertain and subject to refinement. As a result, during the productsmeasurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are shippedrecorded to our customers.
consolidated statement of operations. We also estimate the useful lives of intangible assets to determine the amount of amortization expense to record in future periods. We periodically review the estimated useful lives assigned to our intangible assets to determine whether such estimated useful lives continue to be appropriate.
Impairment of Long-Lived Assets
We perform impairment evaluations of long-lived assets, including property, plant and equipment, intangible assets and equity investments, whenever business conditions or events indicate that those assets may be impaired. We consider factors such as operating losses, declining financial outlooks and market conditions, when evaluating the necessity for an impairment analysis. When the net asset values exceed undiscounted cash flows expected to be generated by the assets, or the decline in value is considered to be “other than temporary,” we write down the assets to fair value and record an impairment charge to current operations. We estimate fair value in various ways depending on the nature of the assets under review.underlying assets. Fair value is generally based onupon appraised value, estimated salvage value, or selling prices under negotiation, as applicable.
The most significant long-lived assets we evaluated for impairment indicators were property, plant and equipment and intangible assets, which totaled $339$485 million and $116 million, respectively, at March 31, 2016.2019. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment. Our most significant intangible assets evaluated are customer relationships, trade names, and acquired technology, the majority of which are related to our CIS segment. We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. We monitor manufacturing plant financial 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 products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy. When such indicators are present, we perform an impairment evaluation. During fiscal 2016, we recorded a $10 million impairment charge related to a manufacturing facility in Germany. See Note 6 of the Notes to the Consolidated Financial Statements for additional information.
Impairment of Goodwill
We perform goodwill impairment tests annually, as of March 31, unless business events or other conditions exist that require a more frequent evaluation. At March 31, 2016, our goodwill totaled $16 million, primarily related to our Building HVAC segment. We consider factors such as operating losses, declining financial and market outlooks, and market capitalization when evaluating the necessity for an interim impairment analysis. Goodwill is testedWe test goodwill for impairment at a reporting unit level,level. Reporting units resulting from recent acquisitions generally represent the highest risk of impairment, which we have determined to be attypically decreases as the businesses are integrated into the Company and positioned for future operating segment level. Our first step in thisand financial performance. We test is to comparegoodwill for impairment by comparing the fair value of theeach reporting unit towith its carrying value. We determine the fair value of a reporting unit based upon the present value of estimated future cash flows. If the fair value of thea reporting unit exceeds the carrying value of the reporting unit’s net assets, goodwill of that reporting unit is not impaired and further testing is not required. Ifimpaired. However, if the carrying value of the reporting unit’s net assets exceeds theits fair value, ofwe would conclude goodwill is impaired and would record an impairment charge equal to the unit, then we perform the second step of the impairment test to determine the implied fair value ofamount that the reporting unit’s goodwill and any impairment charge. In estimating the implied fair value of goodwill for a reporting unit, we assign the fair value to the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of the reporting unit goodwill overexceeds its implied fair value is recorded as an impairment charge.value. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rate, business trends and market conditions. We determine the expected future revenue growth rates and operating profit margins after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for country-specific risks where appropriate.
At March 31, 2019, our goodwill totaled $169 million, primarily related to our CIS and BHVAC segments. Each of these segments is comprised of two reporting units. We conducted our annual assessment for goodwill impairment tests during the fourth quarter of fiscal 20162019 by applying a fair value-based test and determined the fair value of each of our reporting units substantially exceeded theirthe respective book values.value.
Warranty Costs
We estimate costs related to product warranties and accrue for such costs at the time of the sale, within cost of sales. We estimate warranty costs based upon the best information available, which includes statistical and analytical analysis of both historical and current claim data. We monitor and adjust our warranty accruals, which totaled $8$9 million at March 31, 2016,2019, if it is probable that expected claims will differ from previous estimates.
Pension Obligations
Our calculation of the expense and liabilities of our pension plans is dependent upon various assumptions. At March 31, 2016,2019, our pension liabilities totaled $120$104 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality rate tables. We base our selection of assumptions on historical trends and economic and market conditions at the time of valuation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods. These differences impact future pension expenses. Currently, participants in our domestic pension plans are not accruing benefits based onupon their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.
For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our benefit plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in both fiscal 20162019 and 20152018 was 8.07.5 percent. For fiscal 2017,2020, we have also assumed a rate of 8.07.5 percent. The impactA change of a 25 basis point decreasepoints in the expected rate of return on assets would result in an increase ofimpact our fiscal 2020 pension expense by $0.4 million in fiscal 2017 pension expense.million.
The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds on the measurement date of March 31. For fiscal 2016,2019 and 2018, for purposes of determining pension expense, we used a discount rate of 4.0 and 4.1 percent, compared with 4.0 percent in fiscal 2015.respectively. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows from the affectedour plans. See Note 1718 of the Notes to Consolidated Financial Statements for additional information. A change in the assumed discount rate of 25 basis points would impact our fiscal 20172020 pension expense by less than $0.1$1 million.
Income Taxes
We operate in numerous taxing jurisdictions andjurisdictions; therefore, we are therefore subject to regular examinations by federal, state and non-U.S. taxing authorities. Due to the application of complex and sometimes ambiguous tax laws and rulings in the jurisdictions in which we do business, there is an inherent level of uncertainty within our worldwide tax provisions. Despite our belief that our tax return positions are consistent with applicable tax laws, it is possible that taxing authorities could challenge certain positions.
The Tax Act was enacted in December 2017 and included numerous changes to existing U.S. tax regulations, including U.S. corporate tax rates, business deductions, and taxes on income in foreign jurisdictions. We completed our accounting for the impacts of the Tax Act during fiscal 2019. Additional impacts from the Tax Act could result if there are changes in interpretations or applications of the Tax Act’s provisions or if supplementary regulatory guidance is issued.
Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. We adjust these amounts to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in certain jurisdictionsa particular jurisdiction will not be realized. This determination involves significant judgment. In performing this assessment on a jurisdiction-by-jurisdiction basis, we consider historical and projected financial results along with other pertinent information.
We have not recorded a provision for U.S. income taxes on undistributed earnings from our non-U.S. subsidiaries that we have determined to be permanently reinvested in our foreign operations. If management’s intentions or U.S. tax law changes in the future, there could be a significant negative impact on our provision for income taxes.
See Note 8 of the Notes to Consolidated Financial Statements for additional information regarding income taxes.
Other Loss Reserves
We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, self-insurance reserves, uncollectible accounts receivable, regulatory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. We estimate these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Note 1920 of the Notes to Consolidated Financial Statements for additional information regarding contingencies and litigation.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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 this report.report and identified in our other public filings with the U.S. Securities and Exchange Commission. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| · | Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs, inflation, changes in interest rates, recession and recovery therefrom, restrictions associated with importing and exporting and foreign ownership, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China and North America, and the continued deterioration in and weak forecasts for the Brazilian economy; |
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs (and any potential trade war resulting from tariffs or retaliatory actions), inflation, changes in interest rates, recession and recovery therefrom, restrictions and uncertainty associated with cross-border trade, and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, that have been or may be implemented in the United States or by its trade partners, as well as continuing uncertainty regarding the timing and the short- and long-term implications of “Brexit”;
| · | The impact of potential increases in commodity prices, including our ability to successfully manage our exposure and/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel) on to customers, as well as the inherent lag in timing of such pass-through arrangements; and |
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums or fabrication costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs and the behavior of our suppliers. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
| · | The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives. |
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
| · | The overall health and increasing price-down focus of our original equipment manufacturer customers in light of economic and market-specific challenges, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; |
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
| · | Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction pressures from customers, particularly in the face of macro-economic instability; |
Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
| · | Our ability to effectively and efficiently realize expected commercial and operational efficiencies and associated cost savings and other benefits associated with our Strengthen, Diversify and Grow transformational strategy; |
Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;
Unanticipated product or manufacturing difficulties or operating inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims;
| · | Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims; |
Unanticipated delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| · | Our ability to obtain and retain profitable business in our Asia segment, and, in particular, in China; |
Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;
| · | Unanticipated delays or modifications initiated by major customers with respect to product launches, product applications or requirements; |
Our ability to effectively and efficiently complete restructuring activities and realize the anticipated benefits of those activities;
| · | Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, particularly in light of some continuing economic challenges in areas of the world in which we and our suppliers operate; |
Costs and other effects of the investigation and remediation of environmental contamination; particularly when related to the actions or inactions of others and/or facilities over which we have no control;
Our ability to recruit and maintain talent, including personnel in managerial, leadership and administrative functions, in light of tightening global labor markets;
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
The constant and increasing pressures associated with healthcare and associated insurance costs; and
Costs and other effects of unanticipated litigation, claims, or other obligations.
Strategic Risks:
Our ability to successfully take advantage of our increased presence in the “industrial” markets, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our VTS business;
The success of our evaluation of strategic alternatives for our automotive business within our VTS segment in optimizing the segment’s future profitability;
Our ability to identify and execute additional growth and diversification opportunities in order to position us for long-term success; and
The potential expense, disruption or other impacts that could result from unanticipated actions by activist shareholders.
Financial Risks:
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of an unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
| · | Our ability to effectively and efficiently complete restructuring activities in our Europe segment and realize expected cost reductions and increased competitiveness and profitability as a result; |
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;
| · | Our ability to complete the transition of our Washington, Iowa production to other facilities efficiently and effectively; |
Our ability to maintain our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) in our target range of 1.5 to 2.5 in an efficient manner;
| · | Costs and other effects of the remediation of environmental contamination; |
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
| · | Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith; |
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; and |
| · | Costs and other effects of unanticipated litigation or claims, and the constant pressures associated with healthcare and insurance costs. |
Strategic Risks:
| · | Our ability to identify and execute appropriate opportunities to enable us to achieve our Strengthen, Diversify and Grow transformational strategy in order to position us for long-term success. |
Financial Risks:
| · | Our ability to fund our global liquidity requirements efficiently, particularly those in our Asia business segment, and meet our long-term commitments in the event of any unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
| · | The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, British pound, and Indian rupee relative to the U.S. dollar; and |
| · | Our ability to realize the benefits of tax assets in various jurisdictions in whichForward-looking statements are as of the date of this report; we operate. |
In addition to the risks set forth above, we are subject to other risks and uncertainties as identified in our public filings with the U.S. Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
In the normal course of business, we are subject to market exposure from changes in foreign currency exchange rates, interest rates, commodity prices, credit risk and economic conditions.
Foreign Currency Risk
We are subject to the risk of changes in foreign currency exchange rates due to our operations in foreign countries. We have manufacturing facilities in Brazil, China, India, Mexico, South Africa, and throughout Europe. We also have joint ventures in China, Japan and South Korea. We sell and distribute products throughout the world and also purchase raw materials from suppliers in foreign countries. As a result, our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which we do business. WeWhenever possible, we attempt to mitigate foreign currency risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the functional currency of the subsidiaryentity engaging in the transaction. OurIn addition, for certain transactions that are denominated in a currency other than the engaging entity’s functional currency, we may enter into foreign currency derivative contracts to further manage our foreign currency risk. In fiscal 2019, we recorded a net loss of $1 million within our statement of operations related to foreign currency derivative contracts. In addition, our consolidated financial results are principally exposed toimpacted by the translation of revenue and expenses in foreign currencies into U.S. dollars. These translation impacts are primarily affected by changes in exchange rates between the U.S. dollar and European currencies, primarily the euro, and changes between the U.S. dollar and the Brazilian real, and between the euro and the British pound.real. In fiscal 2016, 2015, and 2014,2019, more than 50 percent of our sales were generated in countries outside the U.S. A change in foreign currency exchange rates will positively or negatively affect our sales; however, this impact will be offset, usually to a large degree, with a corresponding effect on our cost of sales and other expenses. In fiscal 2016,2019, changes in foreign currencies negativelycurrency exchange rates unfavorably impacted our sales by $110$28 million; however, the impact on our operating income was only $4less than $1 million. Foreign currency exchange rate risk can be estimated by measuring the impact of a near-term adverse movement of 10 percent in foreign currency exchange rates. If these rates were 10 percent higher or lower during fiscal 2016,2019, there would not have been a material impact on our fiscal 20162019 earnings.
We maintain from time to time, foreign-denominated, long-termforeign currency-denominated debt obligations and long-term intercompany loans that are subject to foreign currency exchange risk. As of March 31, 2016, we did not have any long-termWe seek to mitigate this risk through maintaining offsetting positions between external and intercompany loans for which changes in foreign currency exchange rates would impact our net earnings.loans; however, Fromfrom time to time, we also enter into foreign currency rate derivative contracts to manage the foreigncurrency exchange rate exposure on these types of loans.exposure. These derivative instruments are typically not treatedaccounted for as hedges, and accordingly, gains or losses on the derivatives are recorded in other income and expense in the consolidated statements of operations and act totypically offset anythe foreign currency movementchanges on the outstanding loans receivable or payable.loans.
Interest Rate Risk
We actively seek to reduce the potential volatility of earnings that could arise from changes in interest rates. We generally utilize a mixture of debt maturities and both fixed-rate and floating-ratevariable-rate debt to manage exposure to changes in interest rates. Our domesticInterest on both our term loans and borrowings under our primary multi-currency revolving credit facility is based onupon a variable interest rate, of London Interbank Offered Rate (“LIBOR”)primarily either LIBOR or EURIBOR, plus 125137.5 to 225250 basis points, depending on our leverage ratio. We are subject to risk of fluctuations in LIBOR and EURIBOR and changes in our leverage ratio, which would affect the variable interest rate on our term loans and revolving credit facility and could create variability in interest expense. There were noAs of March 31, 2019, our outstanding borrowings outstanding underon variable-rate term loans and the revolving credit facility as of March 31, 2016.totaled $238 million and $47 million, respectively. Based onupon our outstanding debt with variable interest rates at March 31, 2016,2019, a 100 basis point increase in interest rates would increase our annual interest expense in fiscal 20172020 by less than $1approximately $3 million.
Commodity Price Risk
We are dependent upon the supply of raw materials and supplies in theour production processprocesses and, from time to time, enter into firm purchase commitments for aluminum, copper, nickel, and natural gas. We maintain agreements with certainCommodity price risk is most prevalent to our vehicular businesses, which provide customized production and service parts to customers to pass through specified raw material price fluctuations inunder multi-year programs. In order to mitigate commodity price risk. The majority ofrisk specific to these agreements containlong-term sales programs, we maintain contract provisions in which the pass-through of thewith certain customers that allow us to prospectively adjust prices based upon raw material price fluctuations canfluctuations. These prospective price adjustments generally lag behind the actual raw material price fluctuations by three months or longer, and typically the arrangementscontract provisions are limited to the underlying material cost based upon the London Metal Exchange.Exchange and exclude additional cost elements, such as related premiums and fabrication. For our industrial businesses, we predominantly seek to mitigate commodity price risk by adjusting product pricing in response to any applicable price increases.
Credit Risk
Credit risk represents the possibility of loss from a customer failing to make payment according to contract terms. Our principal credit risk consists of outstanding trade accounts receivable. At March 31, 2016, 452019, 38 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, commercial vehicle, off-highway, data center cooling and off-highwaycommercial air conditioning markets and are influenced by similar market and general economic factors. In the past, credit losses from our customers have not been significant.
We manage credit risk through a focus on the following:
| · | Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. We consider our holdings in cash and investments to be stable and secure at March 31, 2019; – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. We consider our holdings in cash and investments to be stable and secure at March 31, 2016; |
| · | Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer's financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer's financial condition and applicable business news; |
| · | Pension assets – We have retained outside advisors to assist in the management of the assets in our pension plans. In making investment decisions, we utilize an established risk management protocol that focuses on protection of the plan assets against downside risk. We ensure that investments within these plans provide appropriate diversification, the investments are monitored by investment teams, and portfolio managers adhere to the established investment policies. We believe the plan assets are subject to appropriate investment policies and controls; and |
| · | Insurance – We monitor our insurance providers to ensure they have acceptable financial ratings. We have not identified any concerns in this regard based upon our reviews. |
36Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer’s financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer’s financial condition and applicable business news;
Insurance – We monitor our insurance providers to ensure they maintain financial ratings that are acceptable to us. We have not identified any concerns in this regard based upon our reviews.
Economic Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate. We sell a broad range of products that provide thermal solutions to customers operating primarily in the automotive, commercial vehicle, automotive, off-highway, and commercial, industrial, and building HVAC&R markets. We operate in diversified markets as a strategy for offsetting the risk associated with a downturn in any of the markets we serve. However, risk associated with market downturns such as the global downturn experienced in fiscal 2009 and fiscal 2010, is still present.
We monitor economic conditions in the U.S., in our foreign markets and elsewhere.abroad. As we expand our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes, and the like. We continue to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions.
We pursue new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon our ability to commercialize our investments. Current examples of new and emerging markets for us include those related to waste heat recovery,electric vehicles, coils and the Chinesecoolers in certain markets, and Indian markets.coatings. Our investment in these areas is subject to the risks associated with business integration, technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
We anticipate that recovery within some36
In an effort to manage and reduce our costs, we have been consolidating our supply base. As a result, we are dependent upon limited sources of supply for certain components used in the manufacture of our geographic and end markets, and particularly growth in China may put production pressure on certain suppliers of our raw materials. In particular, there are a limited number of suppliers ofproducts, including aluminum, copper, steel and stainless steel material.(nickel). We are exposed to the risk of suppliers of certain raw materials not being able or willing to meet strong customer demand (including the potential effects of trade laws and tariffs), as they may not increase their output capacity as quickly as customers increase their orders, and of increased prices being charged by raw material suppliers.
In addition, we purchase parts from suppliers that use our tooling to create the parts. In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts. As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require. Even in situations where suppliers are manufacturing parts without the use of our tooling, we face the challenge of obtaining consistently high-quality parts from suppliers that are financially stable. We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate higher-risk supplier situations.
In addition to the above risks on the supply side, we are also exposed to risks associated with demands by our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, but these agreements oftensometimes contain provisions for future price reductions. In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: From time to time, we enter into futuresover-the-counter forward contracts related to certain forecasted purchases of aluminum and copper. Our strategy is to reduce our exposure to changing market prices for future purchases of these commodities. In fiscal 2016, 2015,2019 and 2014, expenses2018, we designated certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, we record unrealized gains and losses related to the change in the fair value of the contracts in other comprehensive income (loss) within shareholders’ equity and subsequently recognize the gains and losses within cost of sales as the underlying inventory is sold. In fiscal 2017, we did not designate commodity forward contracts for hedge accounting. Accordingly, unrealized gains and losses on these contracts were recorded within cost of sales. In fiscal 2019, 2018, and 2017, net gains and losses related to commodity derivativeforward contracts totaledwere less than $1 million in each year.
Foreign currency forward contracts: Our foreign exchange risk management strategy usesWe use derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency exchangeforward contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. We have designated certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, we record unrealized gains and losses related to the change in the fair value of the contracts in other comprehensive income (loss) within shareholders’ equity and subsequently recognize the gains and losses as a component of earnings at the same time and in the same financial statement line that the underlying transactions impact earnings. We have not designated these forward contracts related to foreign currency-denominated assets and liabilities as hedges. Accordingly, for these non-designated contracts, we record unrealized gains and losses related to the change in the fair value of the contracts in other income and expense. Gains and losses on these non-designated foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
Counterparty risks: We manage counterparty risks by ensuring that counterparties to derivative instruments havemaintain credit ratings acceptable to us. At March 31, 2016,2019, all counterparties had a sufficient long-term credit rating.
| FINANCIAL STATEMENTS AND SUPPLEMENTARY DATADATA. |
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 2016, 20152019, 2018 and 20142017
(In millions, except per share amounts)
| | | 2016 | | 2015 | | 2014 | | 2019 | | | 2018 | | | 2017 | |
| Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 2,212.7 | | | $ | 2,103.1 | | | $ | 1,503.0 | |
| Cost of sales | | | 1,129.0 | | | | 1,249.9 | | | | 1,239.4 | | | | 1,847.2 | | | | 1,746.6 | | | | 1,248.6 | |
| Gross profit | | | 223.5 | | | | 246.5 | | | | 238.2 | | | | 365.5 | | | | 356.5 | | | | 254.4 | |
| Selling, general and administrative expenses | | | 204.5 | | | | 184.5 | | | | 181.7 | | | | 244.1 | | | | 245.8 | | | | 203.2 | |
| Restructuring expenses | | | 16.6 | | | | 4.7 | | | | 16.1 | | | | 9.6 | | | | 16.0 | | | | 10.9 | |
| Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | | | 0.4 | | | | 2.5 | | | | - | |
| Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | |
| Operating (loss) income | | | (7.5 | ) | | | 52.7 | | | | 37.2 | | |
| Loss (gain) on sale of assets | | | | 1.7 | | | | - | | | | (2.0 | ) |
| Operating income | | | | 109.7 | | | | 92.2 | | | | 42.3 | |
| Interest expense | | | (11.1 | ) | | | (11.7 | ) | | | (12.4 | ) | | | (24.8 | ) | | | (25.6 | ) | | | (17.2 | ) |
| Other income (expense) – net | | | 8.7 | | | | 0.2 | | | | (0.8 | ) | |
| (Loss) earnings from continuing operations before income taxes | | | (9.9 | ) | | | 41.2 | | | | 24.0 | | |
| Other expense - net | | | | (4.1 | ) | | | (3.3 | ) | | | (4.3 | ) |
| Earnings before income taxes | | | | 80.8 | | | | 63.3 | | | | 20.8 | |
| Benefit (provision) for income taxes | | | 8.9 | | | | (19.0 | ) | | | 107.9 | | | | 5.1 | | | | (39.5 | ) | | | (5.9 | ) |
| (Loss) earnings from continuing operations | | | (1.0 | ) | | | 22.2 | | | | 131.9 | | |
| Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | |
| Net (loss) earnings | | | (1.0 | ) | | | 22.8 | | | | 131.9 | | |
| Net earnings | | | | 85.9 | | | | 23.8 | | | | 14.9 | |
| Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | | | (1.1 | ) | | | (1.6 | ) | | | (0.7 | ) |
| Net (loss) earnings attributable to Modine | | $ | (1.6 | ) | | $ | 21.8 | | | $ | 130.4 | | |
| Net earnings attributable to Modine | | | $ | 84.8 | | | $ | 22.2 | | | $ | 14.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (Loss) earnings per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | |
| Basic | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | |
| Diluted | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | |
| | | | | | | | | | | | | | |
| Net (loss) earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | |
| Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | |
| Basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | | $ | 1.67 | | | $ | 0.44 | | | $ | 0.29 | |
| Diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | | | $ | 1.65 | | | $ | 0.43 | | | $ | 0.29 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted-average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | | 50.5 | | | | 49.9 | | | | 47.8 | |
| Diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | | | | 51.3 | | | | 50.9 | | | | 48.3 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended March 31, 2016, 20152019, 2018 and 20142017
(In millions)
| | | 2016 | | 2015 | | 2014 |
| Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | |
| Other comprehensive income (loss): | | | | | | | | | | | | |
| Foreign currency translation | | | 4.6 | | | | (68.2 | ) | | | 9.7 | |
| Defined benefit plans, net of income taxes of $11.8, ($13.2) and $9.8 million | | | 19.7 | | | | (26.7 | ) | | | 13.9 | |
| Cash flow hedges, net of income taxes of $0, $0 and $0.6 million | | | - | | | | - | | | | 1.1 | |
| Total other comprehensive income (loss) | | | 24.3 | | | | (94.9 | ) | | | 24.7 | |
| | | | | | | | | | | | | |
| Comprehensive income (loss) | | | 23.3 | | | | (72.1 | ) | | | 156.6 | |
| Comprehensive income attributable to noncontrolling interest | | | (0.5 | ) | | | (0.8 | ) | | | (1.7 | ) |
| Comprehensive income (loss) attributable to Modine | | $ | 22.8 | | | $ | (72.9 | ) | | $ | 154.9 | |
| | | 2019 | | | 2018 | | | 2017 | |
| Net earnings | | $ | 85.9 | | | $ | 23.8 | | | $ | 14.9 | |
| Other comprehensive income (loss): | | | | | | | | | | | | |
| Foreign currency translation | | | (37.6 | ) | | | 41.8 | | | | (10.8 | ) |
| Defined benefit plans, net of income taxes of ($0.3), ($0.2) and $1.7 million | | | (1.4 | ) | | | 0.1 | | | | 3.2 | |
| Cash flow hedges, net of income taxes of $0.1, $0.1 and $0 million | | | 0.4 | | | | 0.1 | | | | - | |
| Total other comprehensive income (loss) | | | (38.6 | ) | | | 42.0 | | | | (7.6 | ) |
| | | | | | | | | | | | | |
| Comprehensive income | | | 47.3 | | | | 65.8 | | | | 7.3 | |
| Comprehensive income attributable to noncontrolling interest | | | (0.6 | ) | | | (2.1 | ) | | | (0.7 | ) |
| Comprehensive income attributable to Modine | | $ | 46.7 | | | $ | 63.7 | | | $ | 6.6 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, 20162019 and 20152018
(In millions, except per share amounts)
| | | 2016 | | 2015 | | 2019 | | | 2018 | |
ASSETS | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 68.9 | | | $ | 70.5 | | | $ | 41.7 | | | $ | 39.3 | |
| Trade accounts receivable – net | | | 189.1 | | | | 192.9 | | | | 338.6 | | | | 342.4 | |
| Inventories | | | 111.0 | | | | 107.7 | | | | 200.7 | | | | 191.3 | |
| Other current assets | | | 43.5 | | | | 79.7 | | | | 65.8 | | | | 70.1 | |
| Total current assets | | | 412.5 | | | | 450.8 | | | | 646.8 | | | | 643.1 | |
| Property, plant and equipment – net | | | 338.6 | | | | 322.1 | | | | 484.7 | | | | 504.3 | |
| Intangible assets – net | | | 8.2 | | | | 9.9 | | | | 116.2 | | | | 129.9 | |
| Goodwill | | | 15.8 | | | | 16.2 | | | | 168.5 | | | | 173.8 | |
| Deferred income taxes | | | 123.1 | | | | 115.4 | | | | 97.1 | | | | 96.9 | |
| Other noncurrent assets | | | 22.7 | | | | 16.5 | | | | 24.7 | | | | 25.4 | |
| Total assets | | $ | 920.9 | | | $ | 930.9 | | | $ | 1,538.0 | | | $ | 1,573.4 | |
| | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | |
| Short-term debt | | $ | 28.6 | | | $ | 18.6 | | | $ | 66.0 | | | $ | 53.2 | |
| Long-term debt – current portion | | | 8.5 | | | | 0.5 | | | | 48.6 | | | | 39.9 | |
| Accounts payable | | | 142.4 | | | | 152.0 | | | | 280.9 | | | | 277.9 | |
| Accrued compensation and employee benefits | | | 58.6 | | | | 56.7 | | | | 81.7 | | | | 97.3 | |
| Other current liabilities | | | 35.5 | | | | 83.0 | | | | 39.9 | | | | 47.2 | |
| Total current liabilities | | | 273.6 | | | | 310.8 | | | | 517.1 | | | | 515.5 | |
| Long-term debt | | | 125.5 | | | | 129.6 | | | | 335.1 | | | | 386.3 | |
| Deferred income taxes | | | 4.2 | | | | 3.1 | | | | 8.2 | | | | 9.9 | |
| Pensions | | | 118.6 | | | | 110.4 | | | | 101.7 | | | | 109.6 | |
| Other noncurrent liabilities | | | 16.3 | | | | 16.4 | | | | 34.8 | | | | 53.6 | |
| Total liabilities | | | 538.2 | | | | 570.3 | | | | 996.9 | | | | 1,074.9 | |
| Commitments and contingencies (see Note 19) | | | | | | | | | |
| Shareholders' equity: | | | | | | | | | |
| Commitments and contingencies (see Note 20) | | | | | | | | | |
| Shareholders’ equity: | | | | | | | | | |
| Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | | | - | | | | - | |
| Common stock, $0.625 par value, authorized 80.0 million shares, issued 49.0 million and 48.6 million shares | | | 30.6 | | | | 30.4 | | |
Common stock, $0.625 par value, authorized 80.0 million shares, issued 52.8 million and 52.3 million shares | | | | 33.0 | | | | 32.7 | |
| Additional paid-in capital | | | 185.6 | | | | 180.6 | | | | 238.6 | | | | 229.9 | |
| Retained earnings | | | 358.2 | | | | 359.8 | | | | 472.1 | | | | 394.9 | |
| Accumulated other comprehensive loss | | | (174.2 | ) | | | (198.6 | ) | | | (178.4 | ) | | | (140.3 | ) |
| Treasury stock, at cost, 1.6 million and 0.7 million shares | | | (24.0 | ) | | | (16.2 | ) | |
| Total Modine shareholders' equity | | | 376.2 | | | | 356.0 | | |
| Treasury stock, at cost, 2.1 million and 1.8 million shares | | | | (31.4 | ) | | | (27.1 | ) |
| Total Modine shareholders’ equity | | | | 533.9 | | | | 490.1 | |
| Noncontrolling interest | | | 6.5 | | | | 4.6 | | | | 7.2 | | | | 8.4 | |
| Total equity | | | 382.7 | | | | 360.6 | | | | 541.1 | | | | 498.5 | |
| Total liabilities and equity | | $ | 920.9 | | | $ | 930.9 | | | $ | 1,538.0 | | | $ | 1,573.4 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 2016, 20152019, 2018 and 20142017
(In millions)
| | | 2016 | | 2015 | | 2014 | | 2019 | | | 2018 | | | 2017 | |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
| Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | |
| Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | |
| Net earnings | | | $ | 85.9 | | | $ | 23.8 | | | $ | 14.9 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | | | |
| Depreciation and amortization | | | 50.2 | | | | 51.6 | | | | 58.1 | | | | 76.9 | | | | 76.7 | | | | 58.3 | |
| Insurance proceeds from Airedale fire | | | 5.9 | | | | 12.9 | | | | 16.9 | | |
| Loss (gain) on sale of assets | | | | 1.7 | | | | - | | | | (2.0 | ) |
| Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | | | 0.4 | | | | 2.5 | | | | - | |
| Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | |
| Pension and postretirement expense | | | 45.1 | | | | 2.3 | | | | 3.2 | | |
| Loss from disposition of property, plant and equipment | | | 0.4 | | | | 1.1 | | | | 2.6 | | |
| Stock-based compensation expense | | | | 7.9 | | | | 9.5 | | | | 7.4 | |
| Deferred income taxes | | | (18.8 | ) | | | 5.9 | | | | (116.1 | ) | | | (4.4 | ) | | | 12.1 | | | | (4.6 | ) |
| Stock-based compensation expense | | | 4.9 | | | | 4.0 | | | | 3.6 | | |
| Other – net | | | (0.3 | ) | | | (0.7 | ) | | | (0.5 | ) | | | 5.3 | | | | 9.0 | | | | 3.9 | |
| Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | |
| Changes in operating assets and liabilities, excluding acquisition: | | | | | | | | | | | | | |
| Trade accounts receivable | | | 8.0 | | | | (0.1 | ) | | | (18.2 | ) | | | (15.3 | ) | | | (26.1 | ) | | | (25.7 | ) |
| Inventories | | | (2.7 | ) | | | (4.2 | ) | | | (0.1 | ) | | | (22.0 | ) | | | (12.5 | ) | | | (3.3 | ) |
| Accounts payable | | | (9.9 | ) | | | (2.4 | ) | | | 15.2 | | | | 16.6 | | | | 25.2 | | | | 19.9 | |
| Accrued compensation and employee benefits | | | 0.8 | | | | (5.3 | ) | | | 17.5 | | | | (10.1 | ) | | | 16.4 | | | | (6.5 | ) |
| Other assets | | | (14.5 | ) | | | (24.5 | ) | | | 2.1 | | | | (11.8 | ) | | | (5.0 | ) | | | (2.4 | ) |
| Other liabilities | | | (5.6 | ) | | | (4.5 | ) | | | (14.9 | ) | | | (27.8 | ) | | | (7.4 | ) | | | (18.2 | ) |
| Net cash provided by operating activities | | | 72.4 | | | | 63.5 | | | | 104.5 | | | | 103.3 | | | | 124.2 | | | | 41.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Expenditures for property, plant and equipment | | | (62.8 | ) | | | (58.3 | ) | | | (53.1 | ) | | | (73.9 | ) | | | (71.0 | ) | | | (64.4 | ) |
| Insurance proceeds from Airedale fire | | | 27.4 | | | | 12.2 | | | | 20.7 | | |
| Costs to replace building and equipment damaged in Airedale fire | | | (41.7 | ) | | | (16.7 | ) | | | (4.2 | ) | |
| Acquisitions – net of cash acquired | | | (1.4 | ) | | | - | | | | (7.8 | ) | |
| Acquisition – net of cash acquired | | | | - | | | | - | | | | (364.2 | ) |
| Proceeds from dispositions of assets | | | 0.4 | | | | 7.6 | | | | 2.9 | | | | 0.3 | | | | 0.3 | | | | 5.7 | |
| Proceeds from maturities of short-term investments | | | | 4.9 | | | | 4.8 | | | | 2.2 | |
| Purchases of short-term investments | | | (2.7 | ) | | | (5.2 | ) | | | - | | | | (3.8 | ) | | | (5.5 | ) | | | (3.5 | ) |
| Proceeds from maturities of short-term investments | | | 2.1 | | | | 2.4 | | | | - | | |
| Other – net | | | 0.9 | | | | 0.8 | | | | - | | | | (0.3 | ) | | | (0.2 | ) | | | 2.0 | |
| Net cash used for investing activities | | | (77.8 | ) | | | (57.2 | ) | | | (41.5 | ) | | | (72.8 | ) | | | (71.6 | ) | | | (422.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Borrowings of debt | | | 38.0 | | | | 36.4 | | | | 152.6 | | | | 231.2 | | | | 171.0 | | | | 559.1 | |
| Repayments of debt | | | (27.1 | ) | | | (50.9 | ) | | | (152.4 | ) | | | (251.9 | ) | | | (222.9 | ) | | | (202.4 | ) |
| Purchases of treasury stock under share repurchase program | | | (6.9 | ) | | | - | | | | - | | |
| Dividend paid to noncontrolling interest | | | | (1.8 | ) | | | (0.9 | ) | | | - | |
| Financing fees paid | | | - | | | | (0.1 | ) | | | (0.9 | ) | | | - | | | | - | | | | (8.7 | ) |
| Dividend paid to noncontrolling interest | | | (0.9 | ) | | | - | | | | (0.5 | ) | |
| Other – net | | | (0.4 | ) | | | - | | | | (0.3 | ) | | | (3.4 | ) | | | 2.7 | | | | (0.4 | ) |
| Net cash provided by (used for) financing activities | | | 2.7 | | | | (14.6 | ) | | | (1.5 | ) | |
| Net cash (used for) provided by financing activities | | | | (25.9 | ) | | | (50.1 | ) | | | 347.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Effect of exchange rate changes on cash | | | 1.1 | | | | (8.4 | ) | | | 1.9 | | | | (2.7 | ) | | | 3.0 | | | | (1.7 | ) |
| Net (decrease) increase in cash and cash equivalents | | | (1.6 | ) | | | (16.7 | ) | | | 63.4 | | |
| Cash and cash equivalents - beginning of year | | | 70.5 | | | | 87.2 | | | | 23.8 | | |
| Cash and cash equivalents - end of year | | $ | 68.9 | | | $ | 70.5 | | | $ | 87.2 | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | | | 1.9 | | | | 5.5 | | | | (34.6 | ) |
| Cash, cash equivalents and restricted cash - beginning of year | | | | 40.3 | | | | 34.8 | | | | 69.4 | |
| Cash, cash equivalents and restricted cash - end of year | | | $ | 42.2 | | | $ | 40.3 | | | $ | 34.8 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY
For the years ended March 31, 2016, 20152019, 2018 and 20142017
(In millions)
| | | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other comprehensive | | | Treasury stock, at | | | Non- controlling | | | Total | |
Common stock | | | Additional paid-in capital | | | Retained earnings | | | Accumulated other comprehensive loss | | | Treasury stock, at cost | | | Non-controlling interest | | | Total | |
| | | Shares | | | Amount | | | capital | | | earnings | | | loss | | | cost | | | interest | | | | | Shares | | | Amount |
| Balance, March 31, 2013 | | | 47.8 | | | $ | 29.9 | | | $ | 171.2 | | | $ | 207.6 | | | $ | (128.4 | ) | | $ | (14.6 | ) | | $ | 2.6 | | | $ | 268.3 | | |
| Balance, March 31, 2016 | | | | 49.0 | | | $ | 30.6 | | | $ | 185.6 | | | $ | 358.2 | | | $ | (174.2 | ) | | $ | (24.0 | ) | | $ | 6.5 | | | $ | 382.7 | |
| Net earnings attributable to Modine | | | | - | | | | - | | | | - | | | | 14.2 | | | | - | | | | - | | | | - | | | | 14.2 | |
| Other comprehensive loss | | | | - | | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | (7.6 | ) |
| Shares issued for acquisition of Luvata HTS | | | | 2.2 | | | | 1.4 | | | | 22.9 | | | | - | | | | - | | | | - | | | | - | | | | 24.3 | |
| Stock options and awards including related tax benefits | | | | 0.6 | | | | 0.4 | | | | 0.5 | | | | - | | | | - | | | | - | | | | - | | | | 0.9 | |
| Purchase of treasury stock | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.4 | ) | | | - | | | | (1.4 | ) |
| Stock-based compensation expense | | | | - | | | | - | | | | 7.4 | | | | - | | | | - | | | | - | | | | - | | | | 7.4 | |
| Net earnings attributable to noncontrolling interest | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.7 | | | | 0.7 | |
| Balance, March 31, 2017 | | | | 51.8 | | | | 32.4 | | | | 216.4 | | | | 372.4 | | | | (181.8 | ) | | | (25.4 | ) | | | 7.2 | | | | 421.2 | |
| Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 22.2 | | | | - | | | | - | | | | - | | | | 22.2 | |
| Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | | | | - | | | | - | | | | - | | | | - | | | | 41.5 | | | | - | | | | 0.5 | | | | 42.0 | |
| Stock options and awards including related tax benefits | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | |
| Stock options and awards | | | | 0.5 | | | | 0.3 | | | | 3.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.2 | |
| Purchase of treasury stock | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.7 | ) | | | - | | | | (1.7 | ) |
| Adoption of new accounting guidance (Note 1) | | | | - | | | | - | | | | 0.1 | | | | 0.3 | | | | - | | | | - | | | | - | | | | 0.4 | |
| Stock-based compensation expense | | | | - | | | | - | | | | 9.5 | | | | - | | | | - | | | | - | | | | - | | | | 9.5 | |
| Dividend paid to noncontrolling interest | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) |
| Net earnings attributable to noncontrolling interest | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.6 | | | | 1.6 | |
| Balance, March 31, 2018 | | | | 52.3 | | | | 32.7 | | | | 229.9 | | | | 394.9 | | | | (140.3 | ) | | | (27.1 | ) | | | 8.4 | | | | 498.5 | |
| Adoption of new accounting guidance (Note 1) | | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | - | | | | (7.6 | ) |
| Net earnings attributable to Modine | | | | - | | | | - | | | | - | | | | 84.8 | | | | - | | | | - | | | | - | | | | 84.8 | |
| Other comprehensive loss | | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | (0.5 | ) | | | (38.6 | ) |
| Stock options and awards | | | | 0.5 | | | | 0.3 | | | | 0.8 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | |
| Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4.3 | ) | | | - | | | | (4.3 | ) |
| Stock-based compensation expense | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | 7.9 | | | | - | | | | - | | | | - | | | | - | | | | 7.9 | |
| Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.8 | ) | | | (1.8 | ) |
| Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | | | 1.1 | |
| Balance, March 31, 2014 | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | | |
| Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | |
| Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) | |
| Stock options and awards including related tax benefits | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | |
| Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) | |
| Stock-based compensation expense | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | | |
| Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | | |
| Balance, March 31, 2015 | | | 48.6 | | | | 30.4 | | | | 180.6 | | | | 359.8 | | | | (198.6 | ) | | | (16.2 | ) | | | 4.6 | | | | 360.6 | | |
| Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (1.6 | ) | | | - | | | | - | | | | - | | | | (1.6 | ) | |
| Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.4 | | | | - | | | | (0.1 | ) | | | 24.3 | | |
| Stock options and awards including related tax benefits | | | 0.4 | | | | 0.2 | | | | 0.1 | | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | |
| Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7.8 | ) | | | - | | | | (7.8 | ) | |
| Stock-based compensation expense | | | - | | | | - | | | | 4.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.9 | | |
| Contribution by noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2.3 | | | | 2.3 | | |
| Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | |
| Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.6 | | | | 0.6 | | |
| Balance, March 31, 2016 | | | 49.0 | | | $ | 30.6 | | | $ | 185.6 | | | $ | 358.2 | | | $ | (174.2 | ) | | $ | (24.0 | ) | | $ | 6.5 | | | $ | 382.7 | | |
| Balance, March 31, 2019 | | | | 52.8 | | | $ | 33.0 | | | $ | 238.6 | | | $ | 472.1 | | | $ | (178.4 | ) | | $ | (31.4 | ) | | $ | 7.2 | | | $ | 541.1 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| Note 1: | Significant Accounting Policies |
Nature of operations: Modine Manufacturing Company (“Modine” or the “Company”) specializes in providing innovative thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets.markets and customers. The Company is a leading global developer, manufacturerprovider of engineered heat transfer systems and marketer ofhigh-quality heat exchangers and systemstransfer components for use in on-highwayon- and off-highway original equipment manufacturer (“OEM”) vehicular applications,applications. In addition, the Company is a global leader in thermal management technology and solutions for sale into a wide array of building,commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. The Company’s primary product linesgroups include radiatorsi) powertrain cooling and radiator cores, condensers, oilengine cooling; ii) coils, coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation (“EGR”) coolers, buildingcoatings; and iii) heating, ventilatingventilation and air conditioning (“HVAC”) equipment, and coils.conditioning.
Sale of AIAC Air Conditioning South Africa (Pty) Ltd.: During fiscal 2019, the Company completed the sale of its AIAC Air Conditioning South Africa (Pty) Ltd. business, which was reported within the Building HVAC Systems segment, for a selling price of $0.5 million. As a result of this transaction, the Company recorded a loss of $1.7 million, which included the write-off of accumulated foreign currency translation losses of $0.8 million. The Company reported this loss on the loss on sale of assets line of the consolidated statements of operations. Annual net sales attributable to this disposed business were less than $2.0 million.
Acquisition of Luvata HTS: On November 30, 2016, the Company completed the acquisition of 100 percent of the shares of multiple companies held by Luvata Heat Transfer Solutions II AB, a company incorporated in Sweden. Combined, these acquired companies represented the Luvata Heat Transfer Solutions (“Luvata HTS”) business. See Note 2 for additional information.
Basis of presentation: The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States. These principles require management to make certain estimates and assumptions in determining assets, liabilities, revenue, expenses and related disclosures. Actual amounts could differ materially from those estimates.
Consolidation principles: The consolidated financial statements include the accounts of Modine Manufacturing Company and its majority-owned or Modine-controlled subsidiaries. The Company eliminates intercompany transactions and balances in consolidation.
The Company accounts for investments in non-consolidated affiliated companies in which its ownership is 20 percent or more using the equity method. The Company states these investments at cost, plus or minus a proportionate share of undistributed net income (loss).earnings. The Company includes Modine’s share of the affiliate’s net incomeearnings in other income and expense. See Note 1213 for additional information.
Discontinued operations: During fiscal 2009, the Company sold its Electronics Cooling business. The buyer financed a portion of the selling price by issuing promissory notes payable to Modine. During fiscal 2015, the Company received $1.5 million from the buyer, which represented the final payment on the promissory notes. The Company had previously recorded a reserve against a portion of the promissory notes due to collectability concerns. As a result, the Company recorded a gain of $0.9 million ($0.6 million after income taxes) during fiscal 2015.
Assets held for sale: The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the assets for sale at a price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell, within other noncurrent assets. The Company ceases to record depreciation expense at the time of designation as held for sale.
Revenue recognition: The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, which may be at a point in time or over time. The majority of the Company’s revenue is recognized at a point in time, based upon shipment terms. A portion of the Company’s revenue is recognized over time, based upon estimated progress towards satisfaction of the contractual performance obligations. See Note 3 for additional information.
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its customers in cost of sales, revenue, including agreed upon commodity prices, when it is both earned and realized or realizable. related amounts billed to these customers in net sales.
Trade accounts receivable: The Company’s policy is to recognize revenue when titleCompany records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the product and risk of loss have transferred to the customer, persuasive evidence of an arrangement exists, and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers.original terms. The Company makes appropriate provisionsrecords an allowance for doubtful accounts for estimated uncollectible accounts receivablereceivables based onupon historical dataexperience or specific customer economic data. The Company records sales discounts, whichrecorded an allowance for doubtful accounts of $1.6 million and $2.3 million at March 31, 2019 and 2018, respectively, representing its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable, without recourse, to third-party financial institutions. Sales of accounts receivable are offered for prompt payment by certain customers,reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During fiscal 2019, 2018, and 2017, the Company sold $85.1 million, $65.8 million, and $55.4 million, respectively, of accounts receivable to net sales.accelerate cash receipts. During fiscal 2019, 2018, and 2017, the Company recorded a loss on the sale of accounts receivable of $0.6 million, $0.4 million, and $0.3 million, respectively, in the consolidated statements of operations.
Warranty: The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. The Company records warranty expense, within cost of sales, based upon historical and current claims data or based upon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 16 for additional information.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 20162019 and 2015,2018, Company-owned tooling totaled $18.8$24.2 million and $18.7$22.4 million, respectively. In certain instances, tooling is customer-owned. At the time customer-owned tooling is completed and customer acceptance is obtained, the Company makes upfront payments for customer-ownedrecords tooling revenue and related production costs within net sales and subsequently receives reimbursement from customers forcost of sales, respectively, in the upfront payments.consolidated statements of operations. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 20162019 and 2015,2018, cost reimbursement receivables related to customer-owned tooling totaled $8.5$11.6 million and $11.6$10.7 million, respectively.
Warranty:Stock-based compensation: The Company provides product warrantiesrecognizes stock-based compensation using the fair value method. Accordingly, compensation expense for specific product linesstock options, restricted stock and accrues for estimated future warranty costs in the period in which the saleperformance-based stock awards is recorded. The Company records warranty expensecalculated based upon historicalthe fair value of the instruments at the time of grant, and current claims data or based upon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates.recognized as expense over the respective vesting periods. See Note 155 for additional information.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its OEM customers in cost of sales, and related amounts billed to these customers in net sales. The Company records shipping and handling costs incurred upon the shipment of products to its HVAC customers in selling, general and administrative (“SG&A”) expenses. For the years ended March 31, 2016, 2015, and 2014, shipping and handling costs recorded in SG&A expenses were $2.5 million, $4.9 million, and $4.0 million, respectively.
Research and development: The Company expenses research and development costs as incurred within selling, general and administrative (“SG&A&A”) expenses. For the years ended March 31, 2016, 2015,During fiscal 2019, 2018, and 2014,2017, research and development costs charged to operations totaled $61.1$69.8 million, $62.0$65.8 million, and $61.7$64.4 million, respectively.
Translation of foreign currencies: The Company translates assets and liabilities of foreign subsidiaries and equity investments into U.S. dollars at the period-end exchange rates, and translates income and expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders'shareholders’ equity. The Company includes foreign currency transaction gains or losses in the statement of operations within other income and expense.
Derivative instruments: The Company enters into derivative financial instruments from time to time to manage certain financial risks. The Company enters into futuresforward contracts to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. The Company designates certain derivative financial instruments as cash flow hedges for accounting purposes. These instruments are used to manage financial risks and are not speculative. See Note 1819 for additional information.
Income taxes: The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. See Note 8 for additional information.
Earnings per share: The Company calculates basic earnings per share based upon the weighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. RestrictedCertain outstanding restricted stock awardawards provide recipients havewith a non-forfeitable right to receive dividends declared by the Company. Therefore, these restricted stock awards are included in computing earnings per share pursuant to the two-class method. See Note 9 for additional information.
Cash and cash equivalents: The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the Company reports the amount of those un-presented checks is includedwithin accounts payable in accounts payable.the consolidated balance sheets.
Short-term investments: The Company invests in time deposits with original maturities of more than three months but no more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 20162019 and 2015,2018, the Company’s short-term investments totaled $3.3$4.3 million and $2.8$5.7 million, respectively.
Deferred compensation trust: The Company maintains a deferred compensation trust to fund future obligations under its non-qualified deferred compensation plan. The trust’s investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Trade accounts receivable: The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company recorded an allowance for doubtful accounts of $0.5 million and $1.0 million at March 31, 2016 and 2015, respectively, representing its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable without recourse to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During the years ended March 31, 2016, 2015, and 2014, the Company sold, without recourse, $71.3 million, $87.0 million, and $82.4 million of accounts receivable to accelerate cash receipts. During each of the years ended March 31, 2016, 2015, and 2014, the Company recorded a loss on the sale of accounts receivables of $0.3 million in the consolidated statements of operations.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost and net realizable value.
Property, plant and equipment: The Company records property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful lifelives of the asset.assets. The Company charges maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations. Capital expenditures of $17.9 million, $15.8 million, and $12.5 million were accrued within accounts payable at March 31, 2019, 2018, and 2017, respectively.
Goodwill: The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company performed its goodwill impairment test as of March 31, 2016,2019, which did not result in an impairment charge. See Note 1415 for additional information.
Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the asset exceeds its fair value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets. See Note 6 for additional information.
Environmental liabilities:Assets held for sale: The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the asset for sale at a reasonable price in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records liabilitiesthe carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell, within other noncurrent assets. The Company ceases to record depreciation expense at the time of designation as held for environmental assessmentssale. The carrying value of assets held for sale totaled $1.1 million and remediation efforts in the period which its responsibility is probable$1.7 million at March 31, 2019 and the costs can be reasonably estimated. To the extent that the required remediation procedures change, or additional contamination is identified, the Company’s estimate of environmental liabilities may change. See Note 19 for additional information.2018, respectively.
Deferred compensation trusts: The Company maintains deferred compensation trusts to fund future obligations under its non-qualified deferred compensation plans. The trusts’ investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Self-insurance reserves: The Company retains a portion of the financial risk for variouscertain insurance coverage, including property, general liability, workers compensation, and employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to operations. The Company reviews and updates the amount of its insurance-related reserves on a quarterly basis.
Stock-based compensation:Environmental liabilities: The Company recognizes stock-based compensation usingrecords liabilities for environmental assessments and remediation activities in the fair value method. Accordingly, compensation expense for stock options, restricted stockperiod in which its responsibility is probable and performance-based stock awardsthe costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is calculated based uponprobable. To the fair value ofextent that the instruments atrequired remediation procedures change, or additional contamination is identified, the time of grant, and is recognized as expense over the respective vesting periods.Company’s estimated environmental liabilities may also change. See Note 520 for additional information.
Supplemental cash flow information:
| | | Years ended March 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| Interest paid | | $ | 22.3 | | | $ | 23.4 | | | $ | 15.4 | |
| Income taxes paid | | | 22.2 | | | | 20.1 | | | | 12.7 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
accounting guidance:Accounting Guidance:
Stock-based Compensation
In March 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify several aspects of accounting for share-basedstock-based payment transactions, including the income tax consequences. Thistransactions. The Company adopted this guidance is effective for the Company’sbeginning in its first quarter of fiscal 2018. The Company is currently evaluatingelected to account for forfeitures in the impactperiod in which they occur and recorded a cumulative-effect adjustment to equity. In addition, the Company prospectively adopted the guidance requiring all excess tax benefits or deficiencies to be recognized as income tax expense or benefit when share-based awards are settled. The provisions of this guidance willdid not have a material impact on itsthe Company’s consolidated financial statements.
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance. Upon adoption As a result of adopting this new guidance, the Company will be requiredrecorded a $0.4 million increase to recognize most leases on its balance sheet. This guidance is effective for the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In November 2015, the FASB issued new guidance, as part of its simplification initiative, that requires allboth deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The Company adopted this guidance, on a retrospective basis, for its fiscal year ending March 31, 2016. As a result, the Company reclassified approximately $13.0 million of deferred tax assets from current assets to noncurrent assetsequity as of March 31, 2015 to conform to the current-period presentation.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)April 1, 2017.
Revenue Recognition
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about revenue arising from contracts with customers. The Company adopted this new guidance for fiscal 2019 using the modified-retrospective transition method.
The Company assessed customer contracts and evaluated contractual provisions in light of the new guidance. Through its evaluation process, the Company identified a limited number of customer contracts that provide an enforceable right to payment for customized products, which require revenue recognition prior to the product being shipped to the customer. As a result of its adoption of the new guidance, the Company recorded an increase of $0.7 million to retained earnings as of April 1, 2018, along with related balance sheet reclassifications. The increase to retained earnings represented $3.0 million of net sales that, had the new guidance been in effect, the Company would have recognized as of March 31, 2018. See Note 3 for additional information regarding revenue recognition.
Income Taxes: Intra-Entity Transfers of Assets Other than Inventory
In October 2016, the FASB issued new guidance related to income tax accounting for intercompany asset transfers. This new guidance requires companies to recognize the income tax effects of intercompany asset transfers other than inventory at the transaction date. The income tax effects of these transfers were previously deferred. The Company adopted this new guidance for fiscal 2019 using the modified-retrospective transition method. Upon adoption, the Company recorded a decrease to retained earnings of $8.3 million as of April 1, 2018.
Statement of Cash Flows: Restricted Cash
In November 2016, the FASB issued new guidance that requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending balances presented within the statement of cash flows. The Company adopted this new guidance for fiscal 2019 using the retrospective transition method. As a result, all prior period information has been recast to be comparable to the new presentation requirements. See Note 10 for information regarding the Company’s restricted cash.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued new guidance related to the accounting for certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from tax reform legislation that was enacted in the U.S. in December 2017. This guidance is effective for the Company’s first quarterCompany as of fiscal 2019.April 1, 2019 and provides the option to reclassify stranded income tax effects to retained earnings. The Company is currently evaluating the impacthas determined it will not reclassify stranded income tax effects upon adoption, and therefore, this guidance will have onnot impact its consolidated financial statements.
Supplemental cash flow information:Leases
| | | Years ended March 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Interest paid | | $ | 10.7 | | | $ | 10.3 | | | $ | 12.6 | |
| Income taxes paid | | | 10.1 | | | | 15.9 | | | | 11.4 | |
Note 2: | Airedale Facility Fire |
On September 6, 2013, a fire caused significant destruction toIn February 2016, the Company’s Airedale manufacturing facilityFASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance and offices in Rawdon (Leeds), United Kingdom.requires balance sheet recognition for most leases. The Company reports Airedale’s financial results within the Building HVAC segment. There were no injuries caused by the fire. The Rawdon facility,will adopt this guidance effective April 1, 2019 using a modified-retrospective transition method, under which is leased, was usedit expects to manufacture cooling products and solutions for a variety of applications, including data centers, clean rooms, retail, leisure and process cooling.elect not to adjust comparative periods. The Company suspended operations atintends to elect the Rawdon sitepackage of practical expedients permitted under the new guidance, and, as a result, of the fire; however, it transferred operations to temporary facilities while it rebuilt the leased facility. The Company completed the reconstruction and relocation to the Rawdon facility in fiscal 2016.
The Company’s insurance covered damage to the leased facility, equipment, inventory, and other assets, as well as business interruption and lost profits, and recovery-related expenses caused by the fire. Since the date of the fire, the Company has received cumulative cash proceedsnot reassessed the classification of $96.0 million from its insurance provider for covered losses, and has recorded losses andexisting leases or initial direct costs caused by the fire in the same statement of operations line as the related insurance recovery.thereof, or whether existing contracts contain leases. In fiscal 2016,addition, the Company recorded a $9.5 million gain within other income relatedplans to an insurance settlement for equipment losses. This gain representselect accounting policies to not record short-term leases on the replacement assets’ cost in excess of the carrying value of the equipment at the time it was destroyed by the fire. During fiscal 2015, the Company recorded $4.6 million of recoveries from business interruption insurance relatingbalance sheet and to fiscal 2015not separate lease and 2014 lost profits within SG&A expenses.
The terms of the Rawdon lease agreement obligated the Company to rebuild the damaged facility. Upon completion of the rebuilt facility in fiscal 2016, the Company fulfilled this obligation and removed both the liability to rebuild the facility and the capitalized reconstruction costs from its consolidated balance sheet. As of March 31, 2015, the other current liability to rebuild the facility was $48.0 million and other current assets related to receivables from the Company’s insurance provider and capitalized reconstructions costs totaled $39.2 million.
On January 29, 2016, the Company formed a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co. Ltd. of Yangzhou, China, of which it owns 67%, and the joint venture partner, Jiangsu Puxin Heat Exchange System Co., Ltd, owns 33%. This joint venture, which is reported in the Asia segment, will expedite the Company’s introduction of stainless steel heat exchangers for the light-, medium-, and heavy-duty commercial vehicle markets in China.non-lease components. The Company contributed cash of $1.4 million, with additional cash consideration of $0.5 million payable after six months subjectdoes not intend to elect the sellers’ indemnification obligations under the agreement, and equipment and other assets totaling $2.3 million. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in acquired equipment and other long-lived assets totaling $1.5 million and working capital net assets of $0.8 million. The Company controls the primary management decisions and revenue-generating activities of the joint venture, and, therefore, the financial results of the joint venture are included in the Company’s consolidated financial statements.hindsight practical expedient.
On February 28, 2014, the Company acquired 100 percent of the shares of Barkell Limited of Consett, United Kingdom for cash consideration of $7.8 million, net of cash acquired. This acquisition provides Modine with an expanded product offering into the air handling market within the Building HVAC segment. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in intangible assets for acquired technology and customer relationships totaling $4.7 million; property, plant and equipment of $2.0 million; and working capital net assets of $1.1 million. Acquired technology consists of a fully developed product line and technical processes, and the customer relationships represent established sales channel and customer relationships. The Company is amortizing these acquired intangible assets over ten years.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company has completed its assessment of its global lease portfolio and is in the process of finalizing the testing of its new lease accounting software solution and implementing new processes and controls to account for leases in accordance with the new guidance. The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. In addition, the Company leases certain manufacturing and IT equipment and vehicles. Upon adoption of this new guidance, the Company expects to recognize $60.0 to $70.0 million of right-of-use assets and corresponding lease liabilities on its consolidated balance sheet. The Company does not expect the adoption will have a material impact on its consolidated statements of operations or consolidated statements of cash flows.
The cumulative effects on the Company’s consolidated balance sheet, as of April 1, 2018, resulting from the adoption of new accounting guidance were as follows:
| | | | | | Adjustments Due to New Accounting Guidance | | | | |
| | | Balance as of March 31, 2018 | | | Revenue Recognition | | | Intra-entity Transfers of Assets | | | Balance as of April 1, 2018 | |
ASSETS | | | | | | | | | | | | |
| Inventories | | $ | 191.3 | | | $ | (2.0 | ) | | $ | - | | | $ | 189.3 | |
| Other current assets | | | 70.1 | | | | 3.0 | | | | (8.3 | ) | | | 64.8 | |
| Deferred income taxes | | | 96.9 | | | | (0.2 | ) | | | - | | | | 96.7 | |
| | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | |
| Deferred income taxes | | $ | 9.9 | | | $ | 0.1 | | | $ | - | | | $ | 10.0 | |
| Retained earnings | | | 394.9 | | | | 0.7 | | | | (8.3 | ) | | | 387.3 | |
Luvata HTS
On November 30, 2016, the Company completed its acquisition of a 100 percent ownership interest in the Luvata HTS business for consideration totaling $415.6 million ($388.2 million, net of cash acquired). The purchase price included 2.2 million Modine common shares, valued at $24.3 million as of November 30, 2016. Operating as Modine’s Commercial and Industrial Solutions (“CIS”) segment, this business is a leading global supplier of coils, coolers and coatings to the heating, ventilation, air conditioning, and refrigeration industry. See Note 22 for a summary of net sales and operating income reported by the CIS segment. In fiscal 2018 and 2017, the Company recorded $4.3 million and $14.8 million, respectively, of costs incurred directly related to the acquisition and integration of Luvata HTS as SG&A expenses within the consolidated statements of operations. The fiscal 2018 costs primarily consisted of incremental costs associated with integration activities, including legal and accounting professional services and severance expenses. The fiscal 2017 costs primarily consisted of transaction advisory and due diligence costs and incremental costs directly associated with integration activities. In addition, during fiscal 2017, the Company charged $4.3 million to cost of sales related to inventory that it wrote-up to fair value upon acquisition.
The Company completed its accounting for the acquisition of Luvata HTS during fiscal 2018 and allocated the purchase price of $415.6 million to the identifiable tangible and intangible assets acquired and the liabilities assumed based upon their estimated fair values as of the acquisition date. The Company allocated the excess of the purchase price over the net assets recognized to goodwill in the amount of $151.9 million, none of which is deductible for income tax purposes. Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition includes Luvata HTS’s workforce and anticipated future cost and revenue synergies.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| Cash and cash equivalents | | $ | 27.4 | |
| Trade accounts receivable | | | 86.1 | |
| Inventories | | | 55.0 | |
| Property, plant and equipment | | | 120.4 | |
| Intangible assets | | | 130.2 | |
| Goodwill | | | 151.9 | |
| Other assets | | | 39.1 | |
| Accounts payable | | | (73.7 | ) |
| Accrued compensation and employee benefits | | | (24.3 | ) |
| Deferred income taxes | | | (39.5 | ) |
| Pensions | | | (14.3 | ) |
| Other liabilities | | | (42.7 | ) |
| Purchase price | | $ | 415.6 | |
The following unaudited supplemental pro forma information presents the Company’s consolidated results of operations as though the acquisition of these acquired businesses are included inLuvata HTS had occurred at the Company’s consolidated statementsbeginning of operations since the dates of acquisition. The Company did not presentfiscal 2016. This pro forma financial information as the effect of these acquisitionsis presented for illustrative purposes only and is not materialconsidered to be indicative of the operating results that would have been achieved had the acquisition been completed as of the date indicated.
| | | Year ended March 31, 2017 | |
| Net sales | | $ | 1,881.6 | |
| Net earnings attributable to Modine | | | 35.8 | |
| Net earnings per share attributable to Modine shareholders: | | | | |
| Basic | | $ | 0.72 | |
| Diluted | | | 0.71 | |
The supplemental pro forma financial information includes adjustments for: (i) annual amortization and depreciation expense totaling approximately $13.0 million for acquired tangible and intangible assets, (ii) estimated annual interest expense of approximately $14.0 million resulting from acquisition-related borrowings, and (iii) the estimated income tax impacts related to the pro forma adjustments, considering the statutory tax rates within the applicable jurisdictions. In addition, the pro forma financial information assumes that both $8.6 million of acquisition-related transaction costs, not including costs for integration-related activities, and $4.3 million of inventory purchase accounting adjustments were incurred during fiscal 2016. The pro forma financial information does not reflect achieved or expected cost or revenue synergies.
| Note 3: | Revenue Recognition |
Effective April 1, 2018, the Company adopted new revenue recognition accounting guidance using the modified-retrospective transition method and, as a result, recorded a cumulative-effect adjustment to increase retained earnings by $0.7 million. The Company’s consolidated financial statements for the fiscal year ended March 31, 2019 reflect the adoption of this new guidance; however, the comparable prior-year periods have not been recast. See Note 1 for additional information regarding the adjustments to the Company’s consolidated balance sheet as of April 1, 2018.
The Company generates revenue from selling innovative thermal management products and solutions to diversified global markets and customers. The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its resultscustomers, which may be at a point in time or over time. The majority of the Company’s revenue is recognized at a point in time, based upon shipment terms. The Company records an allowance for doubtful accounts for estimated uncollectible receivables and accrues for estimated warranty costs at the time of sale. These estimates are based upon historical experience, current business trends, and current economic conditions. The Company accounts for shipping and handling activities as fulfilment costs rather than separate performance obligations, and records shipping and handling costs in cost of sales and related amounts billed to customers in net sales. The Company establishes payment terms with its customers based upon industry and regional practices, which typically do not exceed 90 days. As the Company expects to receive payment from its customers within one year from the time of sale, it disregards the effects of the time value of money in its determination of the transaction price. The Company has not disclosed the value of unsatisfied performance obligations because the revenue associated with customer contracts for which the original expected performance period is greater than one year is immaterial.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Vehicular Thermal Solutions (“VTS”)
The VTS segment principally generates revenue from providing engineered heat transfer systems and components for use in on- and off-highway original equipment. This segment provides powertrain and engine cooling products, including, but not limited to, radiators, charge air coolers, condensers, oil coolers, EGR coolers, and fuel coolers, to original equipment manufacturers (“OEMs”) in the automotive, commercial vehicle, and off-highway markets in the Americas, Europe, and Asia regions. In addition, the VTS segment designs customer-owned tooling for OEMs and also serves Brazil’s automotive and commercial vehicle aftermarkets.
While the VTS segment provides customized production and service parts to customers under multi-year programs, these programs typically do not contain contractually-guaranteed volumes to be purchased by the customer. As a result, individual purchase orders typically represent the quantities ordered by the customer. With the exception of a small number of VTS customers, the terms within the customer agreement, purchase order, or customer-owned tooling contract do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the VTS segment recognizes revenue primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
In regard to VTS customers with contractual cancellation terms that provide an enforceable right to payment for performance completed to date, the Company recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The VTS segment measures progress by evaluating the production status of ordered products not yet shipped to the customer.
For certain customer programs, the Company agrees to provide annual price reductions based upon contract terms. For these scheduled price reductions, the Company evaluates whether the provisions represent a material right to the customer, and if so, defers associated revenue as a result.
At times, the Company makes up-front incentive payments to certain customers related to future sales under multi-year programs. The Company capitalizes these incentive payments, which it expects to recover through future sales, and amortizes the assets as a reduction to revenue when the related products are sold to customers.
Commercial and Industrial Solutions (“CIS”)
The CIS segment principally generates revenue from providing thermal management products, including customized coils and coolers, to the heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets in North America, Europe, and Asia. In addition, the segment applies corrosion protection solutions, which are referred to as coatings, to heat-transfer equipment.
For the sale of coils and coolers, individual customer purchase orders generally represent the Company’s contract with its customers. With the exception of a small number of customers, the applicable customer contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the CIS segment recognizes revenue for its sale of coils and coolers primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For both sales to customers whose contract cancellation terms provide an enforceable right to payment and sales from the coatings businesses, in which the customers control the heat-transfer equipment being enhanced by the coating application, the CIS segment recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The segment measures progress by evaluating the production status towards completion of ordered products or services not yet shipped to its customers.
Building HVAC Systems (“BHVAC”)
The BHVAC segment principally generates revenue from providing a variety of heating, ventilating, and air conditioning products, primarily for commercial buildings and related applications in North America and the U.K., as well as mainland Europe and the Middle East.
Heating products are manufactured in the U.S. and are generally sold to independent distributors, who in turn market the heating products to end customers. Because these products are sold to many different customers without contractual or practical limitations, the BHVAC segment recognizes revenue at the time control is transferred to the customer, generally the independent distributor, based upon shipping terms, which is generally upon shipment.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Disaggregation of Revenue
The table below presents revenue to external customers for each of the Company’s business segments by primary end market, by geographic location and based upon the timing of revenue recognition:
| | | Year ended March 31, 2019 | |
| | | VTS | | | CIS | | | BHVAC | | | Segment Total | |
| Primary end market: | | | | | | | | | | | | |
| Automotive | | $ | 542.8 | | | $ | - | | | $ | - | | | $ | 542.8 | |
| Commercial vehicle | | | 387.6 | | | | - | | | | - | | | | 387.6 | |
| Off-highway | | | 314.1 | | | | - | | | | - | | | | 314.1 | |
| Commercial HVAC&R | | | - | | | | 506.3 | | | | 167.7 | | | | 674.0 | |
| Data center cooling | | | - | | | | 145.7 | | | | 41.3 | | | | 187.0 | |
| Industrial cooling | | | - | | | | 47.8 | | | | - | | | | 47.8 | |
| Other | | | 107.2 | | | | 7.8 | | | | 3.4 | | | | 118.4 | |
| Net sales | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | |
| | | | | | | | | | | | | | | | | |
| Geographic location: | | | | | | | | | | | | | | | | |
| Americas | | $ | 613.7 | | | $ | 413.6 | | | $ | 124.9 | | | $ | 1,152.2 | |
| Europe | | | 538.2 | | | | 244.8 | | | | 87.5 | | | | 870.5 | |
| Asia | | | 199.8 | | | | 49.2 | | | | - | | | | 249.0 | |
| Net sales | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | |
| | | | | | | | | | | | | | | | | |
| Timing of revenue recognition: | | | | | | | | | | | | | | | | |
| Products transferred at a point in time | | $ | 1,308.5 | | | $ | 571.1 | | | $ | 212.4 | | | $ | 2,092.0 | |
| Products transferred over time | | | 43.2 | | | | 136.5 | | | | - | | | | 179.7 | |
| Net sales | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | |
Contract Balances
Contract assets and contract liabilities from contracts with customers were as follows:
| | | March 31, 2019 | | | March 31, 2018 | |
| Contract assets | | $ | 22.6 | | | $ | 13.5 | |
| Contract liabilities | | | 4.0 | | | | 6.8 | |
Contract assets, included within other current assets in the consolidated balance sheets, primarily consist of capitalized costs related to customer-owned tooling contracts, wherein the customer has guaranteed reimbursement, and assets recorded for revenue recognized over time, which represent the Company’s rights to consideration for work completed but not yet billed. The $9.1 million increase in contract assets during fiscal 2019 was primarily related to contract assets totaling $7.4 million as of March 31, 2019 for revenue recognized over time, which were recorded as a result of the Company’s adoption of the new revenue recognition accounting guidance, and customer-owned tooling contracts, under which more costs were capitalized than reimbursed.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $2.8 million decrease in contract liabilities during fiscal 2019 was primarily due to the Company’s satisfaction of performance obligations under customer contracts for which payment had been received in advance.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Impacts of Adopting New Accounting Guidance
The impacts from the adoption of the new revenue recognition guidance to the Company’s consolidated statement of operations or financial position.for the year ended March 31, 2019 and its consolidated balance sheet as of March 31, 2019 were as follows:
| | | Year ended March 31, 2019 | |
| | | As Reported | | | Impact of New
Accounting Guidance | | | Results Without
Impact of New Accounting Guidance | |
| Net sales | | $ | 2,212.7 | | | $ | (4.4 | ) | | $ | 2,208.3 | |
| Net earnings attributable to Modine | | | 84.8 | | | | (2.0 | ) | | | 82.8 | |
| | | | | | | | | | | | | |
| Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | |
| Basic | | $ | 1.67 | | | $ | (0.04 | ) | | $ | 1.63 | |
| Diluted | | | 1.65 | | | | (0.04 | ) | | | 1.61 | |
| | | March 31, 2019 | |
| | | As Reported | | | Impact of New Accounting Guidance | | | Balances Without
Impact of New Accounting Guidance | |
ASSETS | | | | | | | | | |
| Inventories | | $ | 200.7 | | | $ | 3.8 | | | $ | 204.5 | |
| Other current assets | | | 65.8 | | | | (7.4 | ) | | | 58.4 | |
| Deferred income taxes | | | 97.1 | | | | 0.6 | | | | 97.7 | |
| | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | |
| Deferred income taxes | | $ | 8.2 | | | $ | (0.3 | ) | | $ | 7.9 | |
| Retained earnings | | | 472.1 | | | | (2.7 | ) | | | 469.4 | |
| Note 4: | Fair Value Measurements |
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
| ● | Level 1 – Quoted prices for identical instruments in active markets. |
Level 1 – Quoted prices for identical instruments in active markets.
| ● | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
| ● | Level 3 – Model-derived valuations in which one or more significant inputs are not observable. |
Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value is based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, and cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. The Company holds trading securities in a deferred compensation trusttrusts to fund obligations under Modine’scertain non-qualified deferred compensation plan.plans. The securities’ fair values, which are recorded as other noncurrent assets, are determined based onupon quoted prices from active markets and classified within Level 1 of the valuation hierarchy. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. The fair values of the Company’s trading securities and deferred compensation obligations each totaled $3.2$6.0 million and $3.0$5.8 million atas of March 31, 20162019 and 2015,2018, respectively. The fair value of the Company’s long-term debt is disclosed in Note 16.17.
Plan assets related to the Company’s pension plans were classified as follows:
| | | March 31, 2016 | |
| | | Level 1 | | | Level 2 | | | Total | |
| | | | | | | | | | |
| Money market investments | | $ | - | | | $ | 5.8 | | | $ | 5.8 | |
| Common stocks | | | 23.7 | | | | 1.3 | | | | 25.0 | |
| Corporate bonds | | | - | | | | 8.4 | | | | 8.4 | |
| Pooled equity funds | | | 48.7 | | | | 7.3 | | | | 56.0 | |
| Pooled fixed-income funds | | | 26.3 | | | | - | | | | 26.3 | |
| U.S. government and agency securities | | | - | | | | 18.4 | | | | 18.4 | |
| Other | | | 0.4 | | | | 1.2 | | | | 1.6 | |
| Total | | $ | 99.1 | | | $ | 42.4 | | | $ | 141.5 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | | March 31, 2015 | |
| | | Level 1 | | | Level 2 | | | Total | |
| | | | | | | | | | |
| Money market investments | | $ | - | | | $ | 8.1 | | | $ | 8.1 | |
| Common stocks | | | 40.5 | | | | 2.2 | | | | 42.7 | |
| Corporate bonds | | | - | | | | 23.5 | | | | 23.5 | |
| Pooled equity funds | | | 69.0 | | | | 11.4 | | | | 80.4 | |
| Pooled fixed-income funds | | | 15.5 | | | | - | | | | 15.5 | |
| U.S. government and agency securities | | | - | | | | 39.8 | | | | 39.8 | |
| Other | | | 0.7 | | | | 6.3 | | | | 7.0 | |
| Total | | $ | 125.7 | | | $ | 91.3 | | | $ | 217.0 | |
| | | March 31, 2019 | |
| | | Level 1 | | | Level 2 | | | Total | |
| | | | | | | | | | |
| Money market investments | | $ | - | | | $ | 3.9 | | | $ | 3.9 | |
| Corporate bonds | | | - | | | | 9.4 | | | | 9.4 | |
| Pooled equity funds | | | 27.7 | | | | - | | | | 27.7 | |
| U.S. government and agency securities | | | - | | | | 12.3 | | | | 12.3 | |
| Other | | | 0.1 | | | | 0.9 | | | | 1.0 | |
| Fair value excluding investments measured at net asset value | | | 27.8 | | | | 26.5 | | | | 54.3 | |
| Investments measured at net asset value | | | | | | | | | | | 100.8 | |
| Total fair value | | | | | | | | | | $ | 155.1 | |
| | | March 31, 2018 | |
| | | Level 1 | | | Level 2 | | | Total | |
| | | | | | | | | | |
| Money market investments | | $ | - | | | $ | 11.4 | | | $ | 11.4 | |
| Common stocks | | | 9.4 | | | | 2.6 | | | | 12.0 | |
| Corporate bonds | | | - | | | | 9.7 | | | | 9.7 | |
| Pooled equity funds | | | 64.4 | | | | - | | | | 64.4 | |
| Pooled fixed-income funds | | | 27.3 | | | | - | | | | 27.3 | |
| U.S. government and agency securities | | | - | | | | 16.2 | | | | 16.2 | |
| Other | | | 0.2 | | | | 1.7 | | | | 1.9 | |
| Fair value excluding investment measured at net asset value | | | 101.3 | | | | 41.6 | | | | 142.9 | |
| Investment measured at net asset value | | | | | | | | | | | 14.8 | |
| Total fair value | | | | | | | | | | $ | 157.7 | |
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of common stocks, pooled equity funds and pooled fixed-income funds based onupon quoted prices from active markets and classified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain common stocks, corporate bonds pooled equity funds and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 20162019 and 2015,2018, the Company held no Level 3 assets within its pension plans.
Assets heldAs a practical expedient, the Company valued certain investments, including pooled equity, fixed-income and real estate funds, using their net asset value (NAV) per unit, and therefore, has not classified these investments within the fair value hierarchy. The increase in investments valued at NAV in fiscal 2019 was associated with the Company’s revised target asset allocations for sale:its U.S. pension plan; see Note 18 for additional information. The terms and conditions for redemptions vary for the investments valued at NAV. The real estate investment fund may be redeemed at any time with a 90-day notice period. Other investments valued at NAV do not have restrictive redemption frequency or notice period requirements. The Company valued assets held for sale based on Level 3 market-based valuation inputs. The carrying valuedoes not intend to sell or otherwise dispose of assets held for sale totaled $8.5 million and $3.2 millionthese investments at March 31, 2016 and 2015, respectively. See Note 6 for additional information.prices different than the NAV per unit.
| Note 5: | Stock-Based Compensation |
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and other executives that consists of restricted stock andawards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and other key employees, and (3) stock awards and/or stock options for non-employee directors. The Company’s Board of Directors and the Officer Nomination and Compensation Committee, as applicable, have discretionary authority to set the terms of the awards of stockstock-based awards. Grants to employees during fiscal 2019 were issued under the Company’s Amended and Restated 20082017 Incentive Compensation Plan (“Plan”).Plan. At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2016,2019, approximately 3.32.7 million shares authorized under the 2017 Incentive Compensation Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $4.9$7.9 million, $4.0$9.5 million, and $3.6$7.4 million in fiscal 2016, 2015,2019, 2018, and 2014,2017, respectively.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Stock Options: The Company recorded $0.9$1.2 million, $0.9$1.2 million, and $0.8$1.1 million of compensation expense related to stock options in fiscal 2016, 2015,2019, 2018, and 2014,2017, respectively. The fair value of stock options that vested during fiscal 2016, 2015,2019, 2018, and 20142017 was $0.9$1.2 million, $0.9$1.2 million, and $0.8$1.0 million, respectively. As of March 31, 2016,2019, the total compensation expense not yet recognized related to non-vested stock options was $2.0$2.2 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.52.6 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:
| | | 2016 | | 2015 | | 2014 |
| Weighted-average fair value of options | | $ | 7.11 | | | $ | 10.21 | | | $ | 7.76 | |
| Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | |
| Risk-free interest rate | | | 1.9 | % | | | 2.1 | % | | | 1.3 | % |
| Expected volatility of the Company's stock | | | 66.9 | % | | | 76.1 | % | | | 88.7 | % |
| Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | | Years ended March 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| Fair value of options | | $ | 7.81 | | | $ | 7.30 | | | $ | 4.60 | |
| Expected life of awards in years | | | 6.3 | | | | 6.4 | | | | 6.4 | |
| Risk-free interest rate | | | 2.8 | % | | | 1.9 | % | | | 1.4 | % |
| Expected volatility of the Company’s stock | | | 39.7 | % | | | 44.3 | % | | | 45.5 | % |
| Expected dividend yield on the Company’s stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of theModine’s common stock on the date of grant. The risk-free interest rate was based onupon yields of U.S. Treasury zero-coupon issues with a term corresponding to the expected life of the options. The expected volatility assumption was based onupon changes in the Company’s historical common stock prices over the same time frame as the expected life of the awards. The expected dividend yield is zero, as the Company currently does not anticipate paying dividends over the expected life of the options. The expected lives of the awards are based onupon historical patterns and the terms of the options. Outstanding options granted vest 25 percent annually for four years. The Company used a pre-vesting forfeiture rate of 2.5 percent as an estimate of expected forfeitures prior to completing the required service period.
A summary of stock option activity for fiscal 20162019 was as follows:
| | | Shares | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | | Shares | | | Weighted-average
exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | |
| Outstanding, beginning | | | 1.5 | | | $ | 11.99 | | | | | | | | | | 1.2 | | | $ | 11.16 | | | | | | | |
| Granted | | | 0.2 | | | | 11.39 | | | | | | | | | | 0.2 | | | | 17.90 | | | | | | | |
| Exercised | | | (0.1 | ) | | | 5.82 | | | | | | | | | | (0.1 | ) | | | 9.93 | | | | | | | |
| Forfeited or expired | | | (0.1 | ) | | | 27.33 | | | | | | | | | | (0.1 | ) | | | 14.51 | | | | | | | |
| Outstanding, ending | | | 1.5 | | | $ | 10.82 | | | | 5.3 | | | $ | 3.0 | | | | 1.2 | | | $ | 12.24 | | | | 5.5 | | | $ | 3.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercisable, March 31, 2016 | | | 1.1 | | | $ | 10.41 | | | | 4.3 | | | $ | 3.0 | | |
| Exercisable, March 31, 2019 | | | | 0.8 | | | $ | 10.59 | | | | 4.0 | | | $ | 2.9 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20162019 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the fair valueprice of Modine’s common shares.
Additional information related to stock options exercised during fiscal 2016, 2015, and 2014 wasis as follows:
| | | | Years ended March 31, | |
| | | 2016 | | | 2015 | | | 2014 | | | 2019 | | | 2018 | | | 2017 | |
| Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 0.4 | | | $ | 1.1 | | | $ | 0.7 | | | $ | 4.9 | | | $ | 0.5 | |
| Proceeds from stock options exercised | | $ | 0.5 | | | $ | 0.6 | | | $ | 1.1 | | | | 1.1 | | | | 4.3 | | | | 0.9 | |
Restricted Stock: The Company recorded $3.5$4.3 million, $2.8$3.9 million, and $2.2$3.8 million of compensation expense related to restricted stock in fiscal 2016, 2015,2019, 2018, and 2014,2017, respectively. The fair value of restricted stock awards that vested during fiscal 2016, 2015,2019, 2018, and 20142017 was $3.4$4.3 million, $2.3$3.9 million, and $1.6$4.0 million, respectively. At March 31, 2016,2019, the Company had $4.7$5.3 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.42.5 years. The Company values restricted stock awards using the closing market valueprice of its common shares on the date of grant. The restricted stock awards vest 25 percent annually for four years, with the exception of awards to non-employee directors, which fully vest upon grant.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
A summary of restricted stock activity for fiscal 20162019 was as follows:
| | | Shares | | Weighted- average price | | Shares | | | | |
| Non-vested balance, beginning | | | 0.7 | | | $ | 10.68 | | | | 0.6 | | | $ | 12.24 | |
| Granted | | | 0.3 | | | | 11.18 | | | | 0.3 | | | | 17.72 | |
| Vested | | | (0.4 | ) | | | 10.01 | | | | (0.3 | ) | | | 13.75 | |
| Forfeited | | | | (0.1 | ) | | | 15.03 | |
| Non-vested balance, ending | | | 0.6 | | | $ | 11.29 | | | | 0.5 | | | $ | 14.95 | |
Restricted Stock – Performance-Based Shares: The Company recorded $0.5$2.4 million, $0.3$4.4 million, and $0.6$2.5 million of compensation expense related to performance-based stock awards in fiscal 2016, 2015,2019, 2018, and 2014,2017, respectively. At March 31, 2016,2019, the Company had $1.2$2.4 million of total unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be recognized over a weighted-average period of 1.71.5 years. The Company values performance-based stock awards using the closing market valueprice of its common shares on the date of grant.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Shares are earned under the performance portion of the restricted stock award program based upon the attainment of certain financial goals over a three-year period and are awarded after the end of that three-year performance period, if the performance targets have been achieved. A new performance period may begin each fiscal year; therefore, multiple performance periods, with distinct goals, may operate simultaneously.
The performance components of the programsprogram initiated in fiscal 2016 and fiscal 2015 were2019 is based upon both a target three-year average consolidated cash flow return on averageinvested capital employed (“ROACE”) and a target three-year average annual revenue growth at the end of a three-year performance period, commencing with the fiscal year of grant. ForThe performance components of the programprograms initiated in fiscal 2014, the performance award was2018 and 2017 were based upon both a target three-year average ROACE,consolidated return on capital employed and a target three-year average annual revenue growth and Asia segment operating income at the end of thea three-year performance period.
| Note 6: | Restructuring Activities |
During fiscal 2016,2019, restructuring and repositioning expenses primarily resulted from targeted headcount reductions in Europe and the Americas within the VTS segment. These headcount reductions support the Company’s objective to reduce operational and SG&A cost structures at certain locations. In addition, the Company offeredis in process of transferring product lines associated with the merger of its North American coils business into the CIS segment, in order to accelerate operational improvements and organizational efficiencies.
During fiscal 2018, the Company ceased production at its Gailtal, Austria manufacturing facility, primarily to reduce excess capacity and lower manufacturing costs in Europe. As a result of this facility closure, the Company recorded $8.3 million of restructuring expenses within the CIS segment. These restructuring expenses primarily related to employee severance and related benefits. Fiscal 2018 restructuring activities also included plant consolidation activities, targeted headcount reductions, and certain product line transfers in Europe within the VTS segment. In addition, the Company recorded restructuring expenses associated with the discontinuance of its geothermal product line within the BHVAC segment.
During fiscal 2017, the Company completed a voluntary retirement program tofor certain U.S. salaried employees. The program was offered as partemployees and implemented targeted headcount reductions at several locations, both in support of the Company’s Strengthen, Diversify and Grow transformational initiative and supports theits objective of reducingto reduce operational and SG&A cost structures.
Also during fiscal 2016, the Company announced a plan to close its Washington, Iowa manufacturing facility and is in the process of transferring the facility’s production to other Americas segment manufacturing facilities, which it expects to complete by the end of fiscal 2017. In addition,2017, the Company completed the transfer of production from its McHenry, IllinoisWashington, Iowa manufacturing facility, which was closed and sold, to other AmericasVTS segment manufacturing facilities. These restructuring activities reflect the Company’s focus on operating scale manufacturing facilities to improve overall competitiveness and profitability.in North America.
During fiscal 2015, the Company initiated a headcount reduction plan for its Brazil manufacturing facility within its Americas segment. The headcount reductions were in response to the economic slowdown in Brazil and reflect the Company’s objective to maintain profitability in this business despite lower sales volume.54
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
In addition, the Company continues to execute restructuring activities within its Europe segment. These restructuring activities have included implementing headcount reductions, exiting certain non-core product lines based upon Modine’s global product strategy, reducing manufacturing costs, consolidating production facilities, and disposing of and selling certain underperforming or non-strategic assets. The Company designed these activities to align the cost structure of the segment with its strategic focus on the commercial vehicle, off-highway, automotive component, and engine product markets, while improving gross margin and return on average capital employed.
Restructuring and repositioning expenses were as follows:
| | | Years ended March 31, | | | Years ended March 31, | |
| | | 2016 | | | 2015 | | | 2014 | | | 2019 | | | 2018 | | | 2017 | |
| Employee severance and related benefits | | $ | 12.8 | | | $ | 1.2 | | | $ | 14.8 | | | $ | 8.7 | | | $ | 13.0 | | | $ | 5.3 | |
| Accelerated depreciation | | | - | | | | - | | | | 4.3 | | |
| Other restructuring and repositioning expenses | | | 3.8 | | | | 3.5 | | | | 1.3 | | | | 0.9 | | | | 3.0 | | | | 5.6 | |
| Total | | $ | 16.6 | | | $ | 4.7 | | | $ | 20.4 | | | $ | 9.6 | | | $ | 16.0 | | | $ | 10.9 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
During fiscal 2016, 2015, and 2014, the Company recorded $16.6 million, $4.7 million, and $16.1 million, respectively, of restructuring and repositioning expenses as restructuring expenses in the consolidated statement of operations. During fiscal 2014, the Company recorded $4.3 million of restructuring and repositioning expenses within cost of sales in the consolidated statement of operations.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
| | | Years ended March 31, | | Years ended March 31, | |
| | | 2016 | | 2015 | | 2019 | | | 2018 | |
| Beginning balance | | $ | 9.9 | | | $ | 19.4 | | | $ | 11.0 | | | $ | 6.5 | |
| Additions | | | 12.8 | | | | 1.2 | | | | 8.7 | | | | 13.0 | |
| Payments | | | (8.5 | ) | | | (7.3 | ) | | | (9.1 | ) | | | (9.4 | ) |
| Effect of exchange rate changes | | | 0.5 | | | | (3.4 | ) | | | (0.6 | ) | | | 0.9 | |
| Ending balance | | $ | 14.7 | | | $ | 9.9 | | | $ | 10.0 | | | $ | 11.0 | |
During fiscal 2016,2018, the Company identified potential impairment indicators related torecorded a manufacturing facility in Germany, including pre-tax losses and its strategic decision to exit a certain product line in the future. In response, the Company performed an impairment evaluation and recorded an$1.3 million asset impairment charge as a result of $9.9the closure of the CIS Austrian facility. During fiscal 2019, the Company recorded an additional $0.4 million withinasset impairment charge related to this closed facility to reduce its Europe segmentcarrying value to write down the manufacturing facility’s long-lived assets to fair value. The Company determinedits current estimated fair value, using Level 3 inputs, primarily consisting of a facility appraisal, which considered the market rental value, and estimated scrap values, which considered the specialized nature of the machinery and equipment.less costs to sell.
During fiscal 2014, the Company recorded asset impairment charges totaling $3.2 million, including $2.0 million within its Europe segment, primarily due to a manufacturing facility in Germany that the Company has closed, and $1.2 million within its Americas segment, related to the closure of its McHenry, Illinois manufacturing facility.
During fiscal 2015,2017, the Company sold a wind tunnelthree previously-closed manufacturing facilities within its EuropeVTS segment for cash proceeds totaling $5.4 million. As a result of $5.8 million and recognized a gain of $3.2 million. At March 31, 2016 and 2015, assets held for sale of $8.5 million and $3.2 million, respectively, were included in other noncurrent assets and consisted of facilities thatthe facility sales, the Company is marketing for sale.recorded net gains totaling $2.0 million.
| Note 7: | Other Income and Expense |
Other income and expense consisted of the following:
| | | Years ended March 31, | | Years ended March 31, | |
| | | 2016 | | 2015 | | 2014 | | 2019 | | | 2018 | | | 2017 | |
| Equity in earnings of non-consolidated affiliate | | $ | 0.1 | | | $ | 0.6 | | | $ | 0.7 | | | $ | 0.7 | | | $ | 0.2 | | | $ | 0.1 | |
| Interest income | | | 0.4 | | | | 0.5 | | | | 0.5 | | | | 0.4 | | | | 0.4 | | | | 0.4 | |
| Foreign currency transactions (a) | | | (1.3 | ) | | | (0.9 | ) | | | (2.0 | ) | | | (2.3 | ) | | | (0.6 | ) | | | (1.9 | ) |
| Gain from insurance recovery (b) | | | 9.5 | | | | - | | | | - | | |
| Total other income (expense) - net | | $ | 8.7 | | | $ | 0.2 | | | $ | (0.8 | ) | |
| Net periodic benefit cost (b) | | | | (2.9 | ) | | | (3.3 | ) | | | (2.9 | ) |
| Total other expense - net | | | $ | (4.1 | ) | | $ | (3.3 | ) | | $ | (4.3 | ) |
| | (a) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on foreign currency exchange contracts. |
| | (b) | During fiscal 2016,Represents net periodic benefit cost, exclusive of service cost, for the Company settled an insurance claim related to machineryCompany’s pension and equipment destroyed in a fire at its Airedale facility and recorded a gain of $9.5 million. See Note 2 for additional information.postretirement plans. |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The U.S. and foreign components of earnings from continuing operations before income taxes and the provisionbenefit or benefitprovision for income taxes consisted of the following:
| | | Years ended March 31, | | Years ended March 31, | |
| | | 2016 | | 2015 | | 2014 | | 2019 | | | 2018 | | | 2017 | |
| Components of (loss) earnings from continuing operations before income taxes: | | | | | | | | | | |
| Components of earnings (loss) before income taxes: | | | | | | | | | | |
| United States | | $ | (15.4 | ) | | $ | 31.1 | | | $ | 14.1 | | | $ | 22.4 | | | $ | 2.5 | | | $ | (8.6 | ) |
| Foreign | | | 5.5 | | | | 10.1 | | | | 9.9 | | | | 58.4 | | | | 60.8 | | | | 29.4 | |
| Total (loss) earnings from continuing operations before income taxes | | $ | (9.9 | ) | | $ | 41.2 | | | $ | 24.0 | | |
| Total earnings before income taxes | | | $ | 80.8 | | | $ | 63.3 | | | $ | 20.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income tax (benefit) expense: | | | | | | | | | | | | | |
| Income tax (benefit) provision: | | | | | | | | | | | | | |
| Federal: | | | | | | | | | | | | | | | | | | | | | | | | |
| Current | | $ | 0.1 | | | $ | 0.4 | | | $ | (2.0 | ) | | $ | (20.4 | ) | | $ | 11.6 | | | $ | 0.1 | |
| Deferred | | | (13.0 | ) | | | 7.1 | | | | (95.8 | ) | | | (4.2 | ) | | | 23.3 | | | | (3.8 | ) |
| State: | | | | | | | | | | | | | | | | | | | | | | | | |
| Current | | | 0.2 | | | | - | | | | 0.2 | | | | 0.7 | | | | (0.3 | ) | | | 0.3 | |
| Deferred | | | (2.5 | ) | | | 1.1 | | | | (21.4 | ) | | | 1.9 | | | | 2.0 | | | | (0.2 | ) |
| Foreign: | | | | | | | | | | | | | | | | | | | | | | | | |
| Current | | | 9.6 | | | | 12.7 | | | | 10.0 | | | | 19.0 | | | | 16.1 | | | | 10.1 | |
| Deferred | | | (3.3 | ) | | | (2.3 | ) | | | 1.1 | | | | (2.1 | ) | | | (13.2 | ) | | | (0.6 | ) |
| Total income tax (benefit) expense | | $ | (8.9 | ) | | $ | 19.0 | | | $ | (107.9 | ) | |
| Total income tax (benefit) provision | | | $ | (5.1 | ) | | $ | 39.5 | | | $ | 5.9 | |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. Shortly after the Tax Act was enacted, the SEC issued accounting guidance which provided a one-year measurement period during which a company could complete its accounting for the impacts of the Tax Act. To the extent a company’s accounting for certain income tax effects of the Tax Act was incomplete, the company could determine a reasonable estimate for those effects and record a provisional estimate in its financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it was to continue applying the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted.
During fiscal 2018, the Company recorded provisional discrete tax charges totaling $38.0 million related to the Tax Act. The Company adjusted its U.S. deferred tax assets by $19.0 million due to the reduction in the U.S. federal corporate tax rate. This net reduction in deferred tax assets also included the estimated impact on the Company’s net state deferred tax assets. In addition, the Company recorded a $19.0 million charge for the transition tax required under the Tax Act.
During fiscal 2019, the Company completed its accounting for the Tax Act, which resulted in an income tax benefit totaling $7.7 million. The Company determined it will utilize its deferred tax attributes against the transition tax and finalized its fiscal 2018 U.S. federal income tax return. As a result, the Company decreased the provisional charge recorded for the reduction in the U.S. federal corporate tax rate by $9.3 million, since more deferred tax assets were utilized to offset taxable income at a higher fiscal 2018 U.S. federal corporate tax rate. The Company also decreased the transition tax liability to $18.9 million, a reduction of $0.1 million. In addition, the Company recorded a charge of $1.7 million for a reduction to state deferred tax assets.
The Tax Act included a new provision designed to tax global intangible low taxed income (“GILTI”) starting in fiscal 2019. The Company allocateselected to record the tax effects of the GILTI provision as a period expense in the applicable tax year.
The Company’s accounting policy is to allocate the income tax expense among continuing operations, discontinued operations,provision between net earnings and other comprehensive income. The Company applies its accounting for income taxes by tax jurisdiction, and in periods in which there is a loss from continuing operations before income taxes and pre-tax income in other categories (e.g., discontinued operations or other comprehensive income),income, it first allocates the income tax expenseprovision to the other sources ofcomprehensive income, and then records a related tax benefit in continuing operations.the income tax provision.
Income tax expense attributable to earnings from continuing operations before income taxes differed from56
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The reconciliation between the amounts computed by applying the statutory U.S. federal statutory rate and the Company’s effective tax rate was as follows:
| | | Years ended March 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| Statutory federal tax | | | 21.0 | % | | | 31.5 | % | | | 35.0 | % |
| State taxes, net of federal benefit | | | 3.6 | | | | 2.9 | | | | (3.3 | ) |
| Taxes on non-U.S. earnings and losses | | | 3.9 | | | | (3.8 | ) | | | (3.5 | ) |
| Valuation allowances | | | 4.0 | | | | (5.6 | ) | | | 1.2 | |
| Tax credits | | | (26.1 | ) | | | (17.3 | ) | | | (9.0 | ) |
| Compensation | | | (0.1 | ) | | | (0.8 | ) | | | 2.9 | |
| Tax rate or law changes | | | (12.0 | ) | | | 60.1 | | | | (2.5 | ) |
| Uncertain tax positions, net of settlements | | | 0.4 | | | | (0.8 | ) | | | 5.6 | |
| Notional interest deductions | | | (2.5 | ) | | | (3.2 | ) | | | (8.8 | ) |
| Dividend repatriation | | | 1.6 | | | | 0.2 | | | | 7.1 | |
| Other | | | (0.1 | ) | | | (0.8 | ) | | | 3.7 | |
| Effective tax rate | | | (6.3 | %) | | | 62.4 | % | | | 28.4 | % |
During fiscal 2019, the Company recorded income tax ratebenefits totaling $7.7 million related to the Tax Act, as discussed above; recorded income tax benefits totaling $14.5 million as a result of amending previous-year tax returns to recognize foreign tax credits that are expected to be realized based upon future sources of income; and recorded a $2.5 million income tax benefit related to a manufacturing deduction in the following:United States. Also in fiscal 2019, the Company changed its determination of whether it was more likely than not certain deferred tax assets of two separate subsidiaries in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax benefit totaling $1.0 million. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $4.3 million related to other tax jurisdictions and recorded a $2.2 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations.
| | | Years ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
| State taxes, net of federal benefit | | | 11.5 | | | | 2.4 | | | | 2.1 | |
| Taxes on non-U.S. earnings and losses | | | 26.4 | | | | (4.9 | ) | | | (3.8 | ) |
| Valuation allowance | | | (20.9 | ) | | | 8.3 | | | | (471.7 | ) |
| Tax credits | | | 20.5 | | | | (6.1 | ) | | | (7.1 | ) |
| Compensation | | | (3.7 | ) | | | 1.0 | | | | 0.4 | |
| Tax rate or law changes | | | 1.3 | | | | 1.2 | | | | (9.2 | ) |
| Uncertain tax positions, net of settlements | | | (4.3 | ) | | | 2.2 | | | | 0.4 | |
| Dividend repatriation | | | 16.0 | | | | 2.4 | | | | 5.8 | |
| Other | | | 8.1 | | | | 4.6 | | | | (1.5 | ) |
| Effective tax rate | | | 89.9 | % | | | 46.1 | % | | | (449.6 | %) |
TheDuring fiscal 2018, the Company recorded an additionalprovisional charges totaling $38.0 million related to the Tax Act, as discussed above, and recognized a $9.0 million Hungarian development tax credit. Also in fiscal 2018, the Company reversed a portion of the valuation allowance of $5.0 million, $2.6 million and $12.3 million in fiscal 2016, 2015, and 2014, respectively, against neton certain deferred tax assets in certain jurisdictionsa foreign jurisdiction after determining it was more likely than not thatthese assets would be realized, and, as a result, recorded an income tax benefit of $2.8 million. In addition, the netCompany recorded a $1.8 million income tax benefit in fiscal 2018 associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations.
During fiscal 2017, the Company recorded a valuation allowance of $2.0 million on certain deferred tax assets in these jurisdictions willa foreign jurisdiction after determining it was more likely than not the deferred tax assets would not be realized. Also during fiscal 2017, the Company recorded a net reduction of deferred tax asset valuation allowances totaling $1.8 million in other tax jurisdictions.
The Company will continue to provide a valuation allowanceallowances against its net deferred tax assets in each of the applicable jurisdictions going forwardtax jurisdiction until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized.
During fiscal 2016 and 2014, the Company concluded it no longer needed a valuation allowance on certain deferred tax assets after determining it was more likely than not they would be realized. As a result, the Company recorded reversals of its deferred tax asset valuation allowance of $3.0 million and $119.2 million in fiscal 2016 and 2014, respectively. Also during fiscal 2014, the Company recorded income tax benefits totaling $2.2 million related to foreign tax law changes.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | | March 31, |
| | | 2016 | | 2015 |
| Deferred tax assets: | | | | | | |
| Accounts receivable | | $ | 0.1 | | | $ | 0.3 | |
| Inventories | | | 3.6 | | | | 3.8 | |
| Plant and equipment | | | 4.3 | | | | 0.8 | |
| Pension and employee benefits | | | 52.6 | | | | 50.5 | |
| Net operating loss, capital loss, and credit carryforwards | | | 109.4 | | | | 105.0 | |
| Other, principally accrued liabilities | | | 6.9 | | | | 6.8 | |
| Total gross deferred tax assets | | | 176.9 | | | | 167.2 | |
| Less: valuation allowance | | | (50.8 | ) | | | (48.0 | ) |
| Net deferred tax assets | | | 126.1 | | | | 119.2 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Plant and equipment | | | 5.5 | | | | 5.3 | |
| Goodwill | | | 0.6 | | | | 0.6 | |
| Other | | | 1.1 | | | | 1.0 | |
| Total gross deferred tax liabilities | | | 7.2 | | | | 6.9 | |
| Net deferred tax asset | | $ | 118.9 | | | $ | 112.3 | |
As of March 31, 2016, the Company adopted new accounting guidance, which requires that all deferred taxes be presented as non-current on the consolidated balance sheets. See Note 1 for additional information.
| | | March 31, | |
| | | 2019 | | | 2018 | |
| Deferred tax assets: | | | | | | |
| Accounts receivable | | $ | 0.2 | | | $ | 0.3 | |
| Inventories | | | 3.4 | | | | 4.1 | |
| Plant and equipment | | | 1.8 | | | | 2.3 | |
| Pension and employee benefits | | | 32.7 | | | | 36.0 | |
| Net operating and capital losses | | | 73.5 | | | | 102.5 | |
| Credit carryforwards | | | 60.3 | | | | 36.7 | |
| Other, principally accrued liabilities | | | 10.0 | | | | 9.9 | |
| Total gross deferred tax assets | | | 181.9 | | | | 191.8 | |
| Less: valuation allowances | | | (43.4 | ) | | | (48.9 | ) |
| Net deferred tax assets | | | 138.5 | | | | 142.9 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Plant and equipment | | | 15.1 | | | | 17.6 | |
| Goodwill | | | 4.8 | | | | 5.2 | |
| Intangible assets | | | 28.8 | | | | 32.4 | |
| Other | | | 0.9 | | | | 0.7 | |
| Total gross deferred tax liabilities | | | 49.6 | | | | 55.9 | |
| Net deferred tax assets | | $ | 88.9 | | | $ | 87.0 | |
Unrecognized tax benefits were as follows:
| | | Years ended March 31, | | Years ended March 31, | |
| | | 2016 | | 2015 | | 2019 | | | 2018 | |
| Beginning balance | | $ | 5.6 | | | $ | 2.1 | | | $ | 13.6 | | | $ | 14.2 | |
| Gross increases - tax positions in prior period | | | - | | | | 3.1 | | | | 1.6 | | | | 0.8 | |
Gross decreases - tax positions in prior period | | | (0.1 | ) | | | - | | | | (0.2 | ) | | | (1.2 | ) |
| Gross increases - due to acquisition | | | | - | | | | 1.4 | |
| Gross increases - tax positions in current period | | | 0.4 | | | | 0.4 | | | | 1.1 | | | | 0.5 | |
| Settlements | | | | (0.1 | ) | | | (0.3 | ) |
| Lapse of statute of limitations | | | | (2.2 | ) | | | (1.8 | ) |
| Ending balance | | $ | 5.9 | | | $ | 5.6 | | | $ | 13.8 | | | $ | 13.6 | |
| (a) | Fiscal 2018 includes $1.0 million related to the reduction of the U.S. federal corporate tax rate as a result of the Tax Act. |
The Company’s liability for unrecognized tax benefits as of March 31, 20162019 was $5.9$13.8 million, and if recognized, $3.5$12.2 million would have an effective tax rate impact. The Company estimates a $0.2 million decrease in unrecognized tax benefits during fiscal 2020 due to lapses in statutes of limitations and settlements. If recognized, these reductions would not have a significant impact on the Company’s effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal 2019 and 2018, interest and penalties included within income tax expense in the consolidated statements of operations were not significant. At March 31, 20162019 and 2015,2018, accrued interest and penalties were not significant.totaled $1.1 million and $1.0 million, respectively.
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2016,2019, the Company was under income tax examination in a number of foreign jurisdictions. The Company does not anticipate a significant change in unrecognized tax benefits during the next twelve months.
The following tax years remain subject to examination for the Company’s major tax jurisdictions:
Austria | Fiscal 2012 - 2015 |
Brazil | Calendar 2011 - 2015 |
| Germany | Fiscal 20122011 - 2015Fiscal 2018 |
| Italy | Calendar 2014 - Fiscal 2018 |
| United States | Fiscal 20132016 - 2015Fiscal 2018 |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
At March 31, 2016,2019, the Company had federal and state research and development tax credits of $23.3$60.0 million that, if not utilized against domesticU.S. taxes, will expire between fiscal 20182020 and 2036.2039. The Company also had various state and local tax loss carry forwards of $190.8carryforwards totaling $129.5 million that, if not utilized against state apportioned taxable income, will expire at various times duringbetween fiscal 2017 through 2036.2020 and 2039. In addition, the Company had tax loss carry forwards of $330.7and foreign attribute carryforwards totaling $351.6 million in various tax jurisdictions throughout the world. Certain of the carry forwardscarryforwards in the U.S. and many in foreign jurisdictions are offset by a valuation allowance.allowances. If not utilized against taxable income, $156.9$9.7 million of these tax lossescarryforwards will expire at various times duringbetween fiscal 2017 through 2035,2020 and $173.82034, and $341.9 million, mainly related to Germany Austria and India,Italy, will not expire due to an unlimited carry-forwardcarryforward period.
At March 31, 2016,The Company’s practice and intention is to reinvest, with certain insignificant exceptions, the earnings of its non-U.S. subsidiaries outside of the U.S., and therefore, the Company provided $1.1 million of tax on undistributed earningshas not recorded foreign withholding taxes or deferred income taxes for certain subsidiaries not considered permanently reinvested. Undistributed earnings totaling $491.0 million are considered permanently reinvested inthese earnings. The Company has estimated the Company’s remaining foreign operations, and no provision has been made for taxes that would be payable upon the distribution of such earnings. It is not practicable to estimate thenet amount of unrecognized foreign withholding taxestax and deferred tax liabilityliabilities would total approximately $7.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on such earnings.circumstances existing when remittance occurs.
| Note 9: | Earnings Per Share |
The components of basic and diluted earnings per share were as follows:
| | | Years ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Basic: | | | | | | | | | |
| (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | |
| Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) |
| Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (1.7 | ) |
| (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 128.7 | |
| Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | |
| Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 128.7 | |
| | | | | | | | | | | | | |
| Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | |
| | | | | | | | | | | | | |
| Basic Earnings Per Share: | | | | | | | | | | | | |
| (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | |
| Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | |
| Net (loss) earnings per share - basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | |
| | | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | |
| (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | |
| Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) |
| Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (0.9 | ) |
| (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 129.5 | |
| Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | |
| Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 129.5 | |
| | | | | | | | | | | | | |
| Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | |
| Effect of dilutive securities | | | - | | | | 0.6 | | | | 0.7 | |
| Weighted-average shares outstanding - diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | |
| | | | | | | | | | | | | |
| Diluted Earnings Per Share: | | | | | | | | | | | | |
| (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | |
| Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | |
| Net (loss) earnings per share - diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | |
| | | Years ended March 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| Basic Earnings Per Share: | | | | | | | | | |
| Net earnings attributable to Modine | | $ | 84.8 | | | $ | 22.2 | | | $ | 14.2 | |
| Less: Undistributed earnings attributable to unvested shares | | | (0.4 | ) | | | (0.2 | ) | | | (0.2 | ) |
| Net earnings available to Modine shareholders | | $ | 84.4 | | | $ | 22.0 | | | $ | 14.0 | |
| | | | | | | | | | | | | |
| Weighted-average shares outstanding - basic | | | 50.5 | | | | 49.9 | | | | 47.8 | |
| | | | | | | | | | | | | |
| Net earnings per share - basic | | $ | 1.67 | | | $ | 0.44 | | | $ | 0.29 | |
| | | | | | | | | | | | | |
| Diluted Earnings Per Share: | | | | | | | | | | | | |
| Net earnings attributable to Modine | | $ | 84.8 | | | $ | 22.2 | | | $ | 14.2 | |
| Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (0.1 | ) | | | (0.1 | ) |
| Net earnings available to Modine shareholders | | $ | 84.6 | | | $ | 22.1 | | | $ | 14.1 | |
| | | | | | | | | | | | | |
| Weighted-average shares outstanding - basic | | | 50.5 | | | | 49.9 | | | | 47.8 | |
| Effect of dilutive securities | | | 0.8 | | | | 1.0 | | | | 0.5 | |
| Weighted-average shares outstanding - diluted | | | 51.3 | | | | 50.9 | | | | 48.3 | |
| | | | | | | | | | | | | |
| Net earnings per share - diluted | | $ | 1.65 | | | $ | 0.43 | | | $ | 0.29 | |
For the years ended March 31, 2016, 2015,fiscal 2019, 2018 and 2014,2017, the calculation of diluted earnings per share excluded 0.80.4 million, 0.60.2 million, and 0.8 million stock options, respectively, because they were anti-dilutive. For
| Note 10: | Cash, Cash Equivalents and Restricted Cash |
Cash, cash equivalents and restricted cash consisted of the year ended March 31, 2016,following:
| | | March 31, | |
| | | 2019 | | | 2018 | |
| Cash and cash equivalents | | $ | 41.7 | | | $ | 39.3 | |
| Restricted cash | | | 0.5 | | | | 1.0 | |
| Total cash, cash equivalents and restricted cash | | $ | 42.2 | | | $ | 40.3 | |
Restricted cash, which is reported within other noncurrent assets on the total numberconsolidated balance sheets, consists primarily of potential dilutive securities was 0.4 million. However, these securities were not included in the computation of diluted net loss per share since to do so would decrease the loss per share.deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note10:Note 11: | Inventories |
Inventories consisted of the following:
| | | March 31, | | March 31, | |
| | | 2016 | | 2015 | | 2019 | | | 2018 | |
| Raw materials and work in process | | $ | 79.5 | | | $ | 80.7 | | |
| Raw materials | | | $ | 122.8 | | | $ | 114.4 | |
| Work in process | | | | 32.2 | | | | 34.8 | |
| Finished goods | | | 31.5 | | | | 27.0 | | | | 45.7 | | | | 42.1 | |
| Total inventories | | $ | 111.0 | | | $ | 107.7 | | | $ | 200.7 | | | $ | 191.3 | |
Note11:Note 12: | Property, Plant and Equipment |
Property, plant and equipment, including depreciable lives, consisted of the following:
| | | March 31, | | March 31, | |
| | | 2016 | | 2015 | | 2019 | | | 2018 | |
| Land | | $ | 7.2 | | | $ | 8.2 | | | $ | 20.7 | | | $ | 22.6 | |
| Buildings and improvements (10-40 years) | | | 221.3 | | | | 221.0 | | | | 285.9 | | | | 295.6 | |
| Machinery and equipment (3-12 years) | | | 694.3 | | | | 652.0 | | |
| Machinery and equipment (3-15 years) | | | | 848.7 | | | | 840.8 | |
| Office equipment (3-10 years) | | | 84.1 | | | | 81.9 | | | | 92.0 | | | | 93.0 | |
| Construction in progress | | | 36.7 | | | | 31.7 | | | | 57.4 | | | | 50.2 | |
| | | | 1,043.6 | | | | 994.8 | | | | 1,304.7 | | | | 1,302.2 | |
| Less: accumulated depreciation | | | (705.0 | ) | | | (672.7 | ) | | | (820.0 | ) | | | (797.9 | ) |
| Net property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | | | $ | 484.7 | | | $ | 504.3 | |
Depreciation expense totaled $48.6$67.9 million, $50.0$67.0 million, and $57.3$54.2 million for the years ended March 31, 2016, 2015,fiscal 2019, 2018, and 2014,2017, respectively. Gains and losses related to the disposal of property, plant and equipment are recorded inwithin SG&A expenses. TotalFor fiscal 2019, 2018, and 2017, losses related to the disposal of property, plant and equipment weretotaled $0.9 million, $0.7 million, and $0.4 million, $1.1 million and $2.6 million for the years ended March 31, 2016, 2015, and 2014, respectively.
Note 12:13: | Investment in Affiliate |
The Company’s investment in its non-consolidated affiliate is accounted for under the equity method. The Company has aowns 50 percent ownership of Nikkei Heat Exchanger Company, Ltd. (“NEX”). The Company accounts for its investment in this non-consolidated affiliate using the equity method. At both March 31, 20162019 and 2015,2018, the Company included theits investment in NEX of $3.2$3.8 million inand $3.6 million, respectively, within other noncurrent assets.assets on the consolidated balance sheets. At March 31, 2016,2019, the investment in NEX is equal to the Company'sCompany’s investment in the underlying net assets.
The Company reports the results of operations for NEX in the consolidated financial statements using a one-month reporting delay. The Company reportsits equity in earnings from non-consolidated affiliatesNEX within other income and expense in the consolidated statements of operations.operations, using a one-month reporting delay. The Company’s share of NEX’s earnings for the years ended March 31, 2016, 2015,fiscal 2019, 2018, and 20142017 was $0.7 million, $0.2 million, and $0.1 million, $0.6 million and $0.7 million, respectively.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note13:Note 14: | Intangible Assets |
Intangible assets consisted of the following:
| | | March 31, 2016 | | | March 31, 2015 | | | March 31, 2019 | | | March 31, 2018 | |
| | | | | | | | | | | | | | | | | | | | | Gross Value | | | | | | | | | | | | Accumulated Amortization | | | | |
| Customer relationships | | | $ | 61.5 | | | $ | (9.1 | ) | | $ | 52.4 | | | $ | 64.2 | | | $ | (5.7 | ) | | $ | 58.5 | |
| Trade names | | $ | 8.9 | | | $ | (6.3 | ) | | $ | 2.6 | | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | | | 58.9 | | | | (13.5 | ) | | | 45.4 | | | | 60.6 | | | | (10.8 | ) | | | 49.8 | |
| Acquired technology | | | 5.5 | | | | (1.5 | ) | | | 4.0 | | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | | | 23.9 | | | | (5.5 | ) | | | 18.4 | | | | 25.2 | | | | (3.6 | ) | | | 21.6 | |
| Customer relationships | | | 2.0 | | | | (0.4 | ) | | | 1.6 | | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | |
| Total intangible assets | | $ | 16.4 | | | $ | (8.2 | ) | | $ | 8.2 | | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | | | $ | 144.3 | | | $ | (28.1 | ) | | $ | 116.2 | | | $ | 150.0 | | | $ | (20.1 | ) | | $ | 129.9 | |
The Company recorded $1.6$9.0 million, $1.6$9.7 million, and $0.8$4.1 million of amortization expense during fiscal 2016, 20152019, 2018, and 2014,2017, respectively. Estimated futureThe Company estimates that it will record $9.0 million of amortization expense is as follows:in fiscal 2020 and approximately $8.0 million of annual amortization expense in fiscal 2021 through 2024.
| Fiscal Year | | Estimated Amortization Expense | |
| 2017 | | $ | 1.6 | |
| 2018 | | | 1.6 | |
| 2019 | | | 1.5 | |
| 2020 | | | 1.3 | |
| 2021 | | | 0.8 | |
| 2022 & Beyond | | | 1.4 | |
During fiscal 2018, the BHVAC segment discontinued its geothermal product line and, as a result, recorded a $1.2 million impairment for acquired technology intangible assets it will no longer use. Annual revenue for this discontinued product line was less than $1.0 million.
Changes in the carrying amount of goodwill, by segment and in the aggregate, were as follows:
| | | Americas | | Asia | | Building HVAC | | Total |
| Balance, March 31, 2014 | | $ | 10.9 | | | $ | 0.5 | | | $ | 17.3 | | | $ | 28.7 | |
| Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) |
| Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) |
| Balance, March 31, 2015 | | | - | | | | 0.5 | | | | 15.7 | | | | 16.2 | |
| Effect of exchange rate changes | | | - | | | | - | | | | (0.4 | ) | | | (0.4 | ) |
| Balance, March 31, 2016 | | $ | - | | | $ | 0.5 | | | $ | 15.3 | | | $ | 15.8 | |
| | | VTS | | | CIS | | | BHVAC | | | Total | |
| Balance, March 31, 2017 | | $ | 0.5 | | | $ | 150.9 | | | $ | 13.7 | | | $ | 165.1 | |
| Acquired goodwill (a) | | | - | | | | 1.3 | | | | - | | | | 1.3 | |
| Effect of exchange rate changes | | | - | | | | 6.1 | | | | 1.3 | | | | 7.4 | |
| Balance, March 31, 2018 | | | 0.5 | | | | 158.3 | | | | 15.0 | | | | 173.8 | |
| Effect of exchange rate changes | | | - | | | | (4.4 | ) | | | (0.9 | ) | | | (5.3 | ) |
| Balance, March 31, 2019 | | $ | 0.5 | | | $ | 153.9 | | | $ | 14.1 | | | $ | 168.5 | |
| (a) | Represents measurement-period adjustments related to the Company’s acquisition of Luvata HTS. See Note 2 for additional information about this acquisition. |
The Company assesses goodwill for impairment annually, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. The Company conducted its annual assessment for goodwill impairment during the fourth quarter of fiscal 20162019 for the reporting units within its VTS, CIS, and BHVAC segments, by applying a fair value-based test, and determined that the fair value of its reporting units exceeded their respective book values. In fiscal 2015, the Company recorded a $7.8 million goodwill impairment charge within the Americas segment in connection with its annual assessment. The impairment charge was primarily caused by a decline in the financial outlook for Brazil.
At both March 31, 20162019 and 2015,2018, accumulated goodwill impairment losses totaled $31.6 million and $8.7$40.3 million within the Americas and Europe segments, respectively.VTS segment.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 15:16: | Product Warranties, Operating Leases, and Other Commitments |
Product warranties: Most of the Company’s products are covered under a warranty period ranging from one to five years. The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. In addition, the Company adjusts its warranty accruals if it becomes probable that expected claims will differ from initial estimates.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Changes in accrued warranty costs were as follows:
| | | Years ended March 31, | | Years ended March 31, | |
| | | 2016 | | 2015 | | 2019 | | | 2018 | |
| Beginning balance | | $ | 10.4 | | | $ | 14.0 | | | $ | 9.3 | | | $ | 10.0 | |
| Warranties recorded at time of sale | | | 5.7 | | | | 5.8 | | | | 5.5 | | | | 6.7 | |
| Adjustments to pre-existing warranties | | | (1.1 | ) | | | 1.5 | | | | 2.2 | | | | (0.8 | ) |
| Adjustments due to acquisition (a) | | | | - | | | | (1.0 | ) |
| Settlements | | | (6.7 | ) | | | (9.2 | ) | | | (7.3 | ) | | | (6.2 | ) |
| Effect of exchange rate changes | | | - | | | | (1.7 | ) | | | (0.5 | ) | | | 0.6 | |
| Ending balance | | $ | 8.3 | | | $ | 10.4 | | | $ | 9.2 | | | $ | 9.3 | |
| (a) | During fiscal 2018, the Company decreased its liability for product warranties by $1.0 million as a result of measurement-period adjustments made in connection with purchase accounting for the acquisition of Luvata HTS. See Note 2 for additional information about this acquisition. |
Operating leases: The Company leases various facilities and equipment under operating leases. Rental expense for these leases totaled $11.9$19.3 million, $18.5 million, and $12.8 million in fiscal 2016,2019, 2018, and $11.5 million in both fiscal 2015 and 2014.2017, respectively.
Future minimum rental commitments at March 31, 20162019 under non-cancelable operating leases were as follows:
| Fiscal Year | | | | | | |
| 2017 | | $ | 8.1 | | |
| 2018 | | | 5.6 | | |
| 2019 | | | 4.8 | | |
| 2020 | | | 4.6 | | | $ | 14.2 | |
| 2021 | | | 4.1 | | | | 12.4 | |
| 2022 and beyond | | | 26.3 | | |
| 2022 | | | | 9.1 | |
| 2023 | | | | 7.1 | |
| 2024 | | | | 4.7 | |
| 2025 and beyond | | | | 22.9 | |
| Total | | $ | 53.5 | | | $ | 70.4 | |
Indemnification agreements: From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years. In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 2016 is2019 was not material.
Commitments: At March 31, 2016,2019, the Company had capital expenditure commitments of $20.5$23.6 million. Significant commitments include tooling and equipment expenditures for new and renewal programs with customers in the Americas and Europe segments.VTS segment. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Long-term debt was comprisedconsisted of the following:
| | | Fiscal year of maturity | | | March 31, 2016 | | March 31, 2015 | | Fiscal year of maturity | | | March 31, 2019 | | | March 31, 2018 | |
| | | | | | | | | | | | | | | | | | | |
| Foreign credit agreements | | | 2018-2020 | | | $ | 0.4 | | | $ | 0.2 | | |
| Term loans | | | 2022 | | | $ | 238.4 | | | $ | 267.8 | |
| 6.8% Senior Notes | | | 2017-2021 | | | | 125.0 | | | | 125.0 | | | 2021 | | | | 85.0 | | | | 101.0 | |
| Revolving credit facility | | | 2019 | | | | - | | | | - | | |
| | | | | | | | 125.4 | | | | 125.2 | | |
| 5.8% Senior Notes | | | 2027 | | | | 50.0 | | | | 50.0 | |
| Other (a) | | | 2017-2030 | | | | 8.6 | | | | 4.9 | | | - | | | | 14.3 | | | | 12.8 | |
| | | | | | | | 134.0 | | | | 130.1 | | | | | | | | 387.7 | | | | 431.6 | |
| Less: current portion | | | | | | | (8.5 | ) | | | (0.5 | ) | | | | | | | (48.6 | ) | | | (39.9 | ) |
| Less: unamortized debt issuance costs | | Less: unamortized debt issuance costs | | | | (4.0 | ) | | | (5.4 | ) |
| Total long-term debt | | | | | | $ | 125.5 | | | $ | 129.6 | | | | | | | $ | 335.1 | | | $ | 386.3 | |
| | (a) | Other long-term debt includes borrowings by foreign subsidiaries, capital lease obligations and other financing-type obligations. |
Long-term debt matures as follows:
| Fiscal Year | | | |
| 2020 | | $ | 48.6 | |
| 2021 | | | 101.3 | |
| 2022 | | | 187.4 | |
| 2023 | | | 8.8 | |
| 2024 | | | 8.8 | |
| 2025 & beyond | | | 32.8 | |
| Total | | $ | 387.7 | |
The Company maintains a credit agreement with a syndicate of banks that provides for both U.S. dollar- and euro-denominated term loan facilities and a multi-currency $175.0 million domestic revolving credit facility which expiresexpiring in August 2018. Borrowings underNovember 2021. Based upon the terms of the credit agreement and currency denomination, borrowings under both the term loans and revolving credit facility bear interest at a variable rate, based onprimarily either the London Interbank Offered Rate (“LIBOR”) or Euro Interbank Offered Rate (“EURIBOR”), plus 125137.5 to 225250 basis points (1.8 percent at March 31, 2016) depending uponon the Company’s leverage ratio, as defineddescribed below. At March 31, 20162019, the weighted-average interest rates for the outstanding term loans and 2015, no borrowings were outstanding under the revolving credit facility.facility borrowings were 3.3 percent and 3.7 percent, respectively.
At March 31, 2019 and 2018, the Company reported its revolving credit facility borrowings of $47.1 million and $21.3 million, respectively, as short-term debt on the consolidated balance sheets. At March 31, 2019, domestic letters of credit totaled $4.3 million, resulting in available borrowings under the Company’s revolving credit facility of $123.6 million. The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 20162019 and 20152018 of $28.6$18.9 million and $18.6$31.9 million, respectively. At March 31, 2016, the Company’s foreign unused lines of credit totaled $32.0 million. In aggregate, the Company had total available lines of credit of $207.0 million at March 31, 2016.
Provisions in the Company’s revolving credit facility,agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided liens on substantially all domestic assets. In addition, as specified in the credit agreement, the term loans may require prepayments in the event the Company’s annual excess cash flow exceeds defined levels, depending upon the Company’s leverage ratio, or in the event of certain asset sales. The Company is also subject to a leverage ratio covenant,covenants, the most restrictive of which requires the Company to limit its consolidated indebtedness, less a portion of the Company’sits cash balance, both as defined by the credit agreement,agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”), and. The Company is also subject to an interest expense coverage ratio covenant, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. The Company was in compliance with its debt covenants as of March 31, 2016.2019.
Long-term debt matures as follows:63
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| Fiscal Year | | | |
| 2017 | | $ | 8.5 | |
| 2018 | | | 16.5 | |
| 2019 | | | 16.5 | |
| 2020 | | | 16.6 | |
| 2021 | | | 69.4 | |
| 2022 & beyond | | | 6.5 | |
| Total | | $ | 134.0 | |
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. AtAs of March 31, 20162019 and 2015,2018, the carrying value of Modine’sthe Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had aan aggregate fair value of approximately $139.0$137.2 million and $141.0$153.1 million, respectively. The fair value of the Senior NotesCompany’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 17:18: | Pension and Employee Benefit Plans |
Defined Contribution Employee Benefit Plans:
The Company maintains a domestic 401(k) plansplan that allowallows employees to contribute a portion of their salary to help them save for retirement. The Company matched 50 percent ofcurrently matches employee contributions up to 54.5 percent of employeetheir compensation during fiscal 2016, 2015, and 2014. The Company also makes annual employer contributions into active employee accounts based upon a percentage of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary.for participants. The Company’s expense for defined contribution employee benefit plans during fiscal 2016, 2015,2019, 2018, and 20142017 was $4.6$6.4 million, $5.9$5.2 million, and $8.3$4.7 million, respectively. The decreasing trend in expense from fiscal 2014 was primarily due to lower discretionary employer contributions.
In addition, the Company maintains a non-qualified deferred compensation planplans for eligible employees, and various non-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans:
Certain non-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.laws.
Defined Benefit Employee Benefit Plans:
Pension plans: The Company maintains non-contributory defined benefit pension plans that cover eligible domestic employees. These plans are closed to new participants. The primary domestic plans cover most of its domestic employees hired on or before December 31, 2003. The2003 and provide benefits provided are based primarily onupon years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based onupon a monthly retirement benefit amount. Domestic salaried employees hired after December 31, 2003 are not covered under a defined benefit plan. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company also have legacy defined benefit plans which cover a smaller number of active employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany, Austria, and AustriaItaly and are closed to new participants.
The Company contributed $6.7$8.0 million, $5.9$13.4 million, and $8.0$8.1 million to its U.S. pension plans during fiscal 2016, 2015,2019, 2018, and 2014,2017, respectively. In addition, the Company contributed $5.9 million, $2.6 million, and $1.4 million to its non-U.S. pension plans during fiscal 2019, 2018, and 2017, respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company completed a voluntary lump-sum payout program offered to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer. During fiscal 2016, a total of $65.3 million was paid from pension plan assets for lump-sum payouts, which reduced the Company’s pension obligation by the same amount. In connection with these lump-sum payouts, the Company recorded $42.1 million of non-cash settlement losses related to the accelerated recognition of unamortized actuarial losses previously recorded on the consolidated balance sheets within accumulated other comprehensive loss. During fiscal 2016, the Company recorded $33.3 million and $8.8 million of settlement losses as SG&A expenses and cost of sales, respectively, within the consolidated statements of operations.
Postretirement plans: The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans during fiscal 2016, 2015,2019, 2018, and 20142017 was $0.3 million, $0.1$0.2 million, and $1.0$0.3 million, respectively.
Measurement Date:date: The Company uses March 31 as the measurement date for its pension and postretirement plans.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s global pension plans, for the fiscal years ended March 31, 2016 and 2015 were as follows:
| | | | Years ended March 31, | |
| | | 2016 | | 2015 | | 2019 | | | 2018 | |
| Change in benefit obligation: | | | | | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 328.2 | | | $ | 295.7 | | | $ | 273.6 | | | $ | 269.8 | |
| Service cost | | | 0.6 | | | | 0.5 | | | | 0.5 | | | | 0.5 | |
| Interest cost | | | 11.2 | | | | 13.0 | | | | 9.6 | | | | 9.9 | |
| Actuarial (gain) loss | | | (2.8 | ) | | | 40.6 | | |
| Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | |
| Actuarial loss | | | | 1.7 | | | | 4.4 | |
| Benefits paid | | | | (22.8 | ) | | | (16.9 | ) |
| Curtailment gain (a) | | | | - | | | | (0.3 | ) |
| Effect of exchange rate changes | | | 1.9 | | | | (7.0 | ) | | | (3.8 | ) | | | 6.2 | |
| Benefit obligation at end of year | | $ | 261.0 | | | $ | 328.2 | | | $ | 258.8 | | | $ | 273.6 | |
| | | | | | | | | | | | | | | | | |
| Change in plan assets: | | | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 217.0 | | | $ | 213.7 | | | $ | 157.7 | | | $ | 148.2 | |
| Actual return on plan assets | | | (5.3 | ) | | | 10.8 | | | | 6.3 | | | | 10.4 | |
| Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | |
| Benefits paid | | | | (22.8 | ) | | | (16.9 | ) |
| Employer contributions | | | 7.9 | | | | 7.1 | | | | 13.9 | | | | 16.0 | |
| Fair value of plan assets at end of year | | $ | 141.5 | | | $ | 217.0 | | | $ | 155.1 | | | $ | 157.7 | |
| Funded status at end of year | | $ | (119.5 | ) | | $ | (111.2 | ) | | $ | (103.7 | ) | | $ | (115.9 | ) |
| | | | | | | | | | | | | | | | | |
| Amounts recognized in the consolidated balance sheets: | | | | | | | | | | | | | | | | |
| Current liability | | $ | (0.9 | ) | | $ | (0.8 | ) | | $ | (2.0 | ) | | $ | (6.3 | ) |
| Noncurrent liability | | | (118.6 | ) | | | (110.4 | ) | | | (101.7 | ) | | | (109.6 | ) |
| | | $ | (119.5 | ) | | $ | (111.2 | ) | | $ | (103.7 | ) | | $ | (115.9 | ) |
| | (a) | InDuring fiscal 2016, $65.3 million was paid from plan assets2018, the Company recorded a pension curtailment gain associated with the closure of a manufacturing facility in connection with lump-sum payouts.Austria (CIS segment). See Note 6 for additional information regarding the closure of this facility. |
As of March 31, 2019, 2018, and 2017, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $36.5 million, $43.4 million, and $39.3 million respectively. In fiscal 2019, the $6.9 million decrease primarily resulted from employer contributions of $5.9 million for benefits paid to plan participants during the year and the impact of foreign currency exchange rate changes, partially offset by service and interest cost totaling $1.1 million. In fiscal 2018, the $4.1 million increase primarily resulted from the impact of foreign currency exchange rate changes and service and interest cost totaling $1.3 million, partially offset by $2.6 million of benefits paid to plan participants.
The accumulated benefit obligation for pension plans was $257.9$256.9 million and $325.5$271.8 million as of March 31, 20162019 and 2015,2018, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $162.0$159.1 million and $192.3$157.9 million as of March 31, 20162019 and 2015,2018, respectively.
Costs for the Company’s pension plans included the following components for the fiscal years ended March 31, 2016, 2015, and 2014:
| | | 2016 | | 2015 | | 2014 |
| Components of net periodic benefit cost: | | | | | | | | | |
| Service cost | | $ | 0.6 | | | $ | 0.5 | | | $ | 0.6 | |
| Interest cost | | | 11.2 | | | | 13.0 | | | | 13.0 | |
| Expected return on plan assets | | | (14.9 | ) | | | (16.7 | ) | | | (15.7 | ) |
| Amortization of net actuarial loss | | | 6.4 | | | | 5.5 | | | | 6.3 | |
| Settlements (a) | | | 42.1 | | | | - | | | | - | |
| Net periodic benefit cost | | $ | 45.4 | | | $ | 2.3 | | | $ | 4.2 | |
| | | | | | | | | | | | | |
| Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | |
| Net actuarial loss (gain) | | $ | 17.5 | | | $ | 46.4 | | | $ | (17.3 | ) |
| Amortization of net actuarial loss (a) | | | (48.5 | ) | | | (5.5 | ) | | | (6.3 | ) |
| Total recognized in other comprehensive (income) loss | | $ | (31.0 | ) | | $ | 40.9 | | | $ | (23.6 | ) |
| (a) | During fiscal 2016, in connection with lump-sum payouts to pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss. |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Costs for the Company’s global pension plans included the following components:
| | | Years ended March 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| Components of net periodic benefit cost: | | | | | | | | | |
| Service cost | | $ | 0.5 | | | $ | 0.5 | | | $ | 0.6 | |
| Interest cost | | | 9.6 | | | | 9.9 | | | | 9.8 | |
| Expected return on plan assets | | | (12.3 | ) | | | (11.9 | ) | | | (12.3 | ) |
| Amortization of net actuarial loss | | | 5.6 | | | | 5.6 | | | | 5.6 | |
| Settlements (a) | | | 0.2 | | | | 0.3 | | | | - | |
| Curtailment gain (a) | | | - | | | | (0.3 | ) | | | - | |
| Net periodic benefit cost | | $ | 3.6 | | | $ | 4.1 | | | $ | 3.7 | |
| | | | | | | | | | | | | |
Other changes in benefit obligation recognized in other comprehensive income (loss):
| | | | | | | | | | | | |
| Net actuarial loss | | $ | (7.7 | ) | | $ | (5.8 | ) | | $ | (1.0 | ) |
| Amortization of net actuarial loss | | | 5.8 | | | | 5.9 | | | | 5.6 | |
| Total recognized in other comprehensive income (loss) | | $ | (1.9 | ) | | $ | 0.1 | | | $ | 4.6 | |
| (a) | The settlement charges and curtailment gain resulted from activity associated with the Company’s non-U.S. pension plans. |
The Company amortized $5.6 million of net actuarial loss in fiscal 2019, 2018, and 2017. In each of these years, less than $1.0 million of the amortization was attributable to the Company’s non-U.S. pension plans. The Company estimates $5.6$6.0 million of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2017.2020. The fiscal 2020 estimated amortization includes less than $1.0 million related to the Company’s non-U.S. pension plans.
The Company used a discount rate of 4.1% and 4.0% as of both March 31, 20162019 and 2015, respectively, in2018 for determining its benefit obligations under its U.S. pension plans. The Company used a weighted-average discount rate of 1.8%1.4% and 1.3%1.7% as of March 31, 20162019 and 2015,2018, respectively, infor determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 4.3%4.0%, 4.7%4.1%, and 4.4%4.1% to determine its costs under its U.S. pension plans for the fiscal years ended March 31, 2016, 2015,2019, 2018, and 2014,2017, respectively. The Company used a weighted-average discount rate of 1.3%1.9%, 3.0%1.9%, and 3.5%1.7% to determine its costs under its non-U.S. pension plans for the fiscal years ended March 31, 2016, 2015,2019, 2018, and 2014,2017, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. The Company used a similar process to determine the discount rate for its non-U.S. pension obligations.
Plan assets in the Company’s U.S. defined benefitpension plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted-average asset allocations at the measurement dates of March 31, 2016 and 2015 were as follows:
| | | Target allocation | | Plan assets | | March 31, 2019 | | | March 31, 2018 | |
| | | | | | 2016 | | 2015 | | Target allocation | | | Plan assets | | | Target allocation | | | Plan assets | |
| Equity securities | | | 55 | % | | | 56 | % | | | 55 | % | | | 65 | % | | | 66 | % | | | 60 | % | | | 58 | % |
| Debt securities | | | 38 | % | | | 36 | % | | | 36 | % | | | 21 | % | | | 19 | % | | | 38 | % | | | 38 | % |
| Alternative assets | | | 5 | % | | | 4 | % | | | 5 | % | |
| Cash | | | 2 | % | | | 4 | % | | | 4 | % | |
| Real estate investments | | | | 13 | % | | | 12 | % | | | - | | | | - | |
| Cash and cash equivalents | | | | 1 | % | | | 3 | % | | | 2 | % | | | 4 | % |
| | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 20162019 and 2015,2018, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term returngrowth of plan assets,principal, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2016, 2015,2019, 2018, and 20142017 U.S. pension plan expense, the expected rate of return on plan assets was 7.5 percent, 7.5 percent and 8.0 percent.percent, respectively. For fiscal 20172020 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 8.07.5 percent.
The Company’s funding policy for its U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. The Company expects to make contributions of $8.1contribute approximately $3.0 million to these plans during fiscal 2017.2020.
Estimated pension benefit payments for the next ten fiscal years are as follows:
| Fiscal Year | | Estimated Pension Benefit Payments | |
| 2017 | | $ | 14.5 | |
| 2018 | | | 15.2 | |
| 2019 | | | 15.3 | |
| 2020 | | | 15.8 | |
| 2021 | | | 16.1 | |
| 2022-2026 | | | 79.3 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Fiscal Year | | Estimated Pension Benefit Payments | |
| 2020 | | $ | 16.0 | |
| 2021 | | | 16.0 | |
| 2022 | | | 16.4 | |
| 2023 | | | 16.4 | |
| 2024 | | | 16.6 | |
| 2025-2029 | | | 82.0 | |
Note 18:19: | Derivative Instruments |
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated and is effective, as a hedge, and, if so, on the nature of the hedging activity.
Commodity Derivatives:derivatives: The Company periodically enters into futuresover-the-counter forward contracts related to certain forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts is to reduce its exposure to changing market prices for future purchases of these commodities. In fiscal 2019 and 2018, the Company designated certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses within cost of sales as the underlying inventory is sold. The Company hasdid not designateddesignate commodity contracts entered into in fiscal 2014, 2015, and 20162017 for hedge accounting. Accordingly, unrealized gains and losses on thesethose contracts arewere recorded within cost of sales.
Foreign exchange contracts:contracts: The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchangeforward contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. In fiscal 2019 and 2018, the Company designated certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in AOCI within shareholders’ equity and subsequently recognizes the gains and losses as a component of earnings at the same time and in the same financial statement line that the underlying transactions impact earnings. The Company has not designated forward contracts related to foreign currency-denominated assets and liabilities as hedges. Accordingly, for these non-designated contracts, for hedge accounting. Accordingly,the Company records unrealized gains and losses related to changes in fair value are recorded in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| | Balance Sheet Location | | March 31, 2016 | | | March 31, 2015 | | | Balance Sheet Location | | March 31, 2019 | | | March 31, 2018 | |
| Derivatives designated as hedges: | | | | | | | | | |
| Commodity derivatives | | | Other current assets | | $ | 0.6 | | | $ | 0.1 | |
| Commodity derivatives | | | Other current liabilities | | | 0.3 | | | | - | |
| Foreign exchange contracts | | | Other current assets | | | 0.2 | | | | 0.1 | |
| | | | | | | | | | | | |
| Derivatives not designated as hedges: | | | | | | | | | | | |
| Commodity derivatives | | | Other current liabilities | | $ | - | | | $ | 0.2 | |
| Foreign exchange contracts | Other current assets | | $ | 0.1 | | | $ | - | | | Other current assets | | | - | | | | 0.2 | |
| Foreign exchange contracts | Other current liabilities | | | - | | | | 0.3 | | | Other current liabilities | | | 0.5 | | | | 0.6 | |
| Commodity derivatives | Other current liabilities | | | 0.1 | | | | 0.1 | | |
The amounts recorded in the consolidated statements of operations for the Company’sassociated with derivative financial instruments that the Company designated for hedge accounting were as follows:
| | Statement of Operations | | Years ended March 31, | | Gain (loss) recognized in
other comprehensive income | | Statement of Operations | | Gain (loss) reclassified
from AOCI | |
| Location | | 2016 | | 2015 | | 2014 | | 2019 | | | 2018 | | | 2017 | | Location | | 2019 | | | 2018 | | | 2017 | |
| Commodity derivatives | Cost of sales | | $ | (0.7 | ) | | $ | (0.2 | ) | | $ | (0.5 | ) | | $ | (0.3 | ) | | $ | 0.2 | | | $ | - | | Cost of sales | | $ | (0.4 | ) | | $ | - | | | $ | - | |
| Foreign exchange contracts | Other income (expense) - net | | | 0.6 | | | | (1.1 | ) | | | - | | | | (0.4 | ) | | | 0.1 | | | | - | | Net sales | | | (0.4 | ) | | | 0.1 | | | | - | |
| Total loss | | | $ | (0.1 | ) | | $ | (1.3 | ) | | $ | (0.5 | ) | |
| Foreign exchange contracts | | | | 1.0 | | | | - | | | | - | | Cost of sales | | | 0.6 | | | | - | | | | - | |
| Total gains (losses) | | | $ | 0.3 | | | $ | 0.3 | | | $ | - | | | | $ | (0.2 | ) | | $ | 0.1 | | | $ | - | |
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
| | | | | Years ended March 31, | |
| | Statement of Operations Location | | 2019 | | | 2018 | | | 2017 | |
| Commodity derivatives | | Cost of sales | | $ | - | | | $ | 0.4 | | | $ | 0.5 | |
| Foreign exchange contracts | | Net sales | | | (0.7 | ) | | | (0.1 | ) | | | - | |
| Foreign exchange contracts | | Other income (expense) - net | | | (0.3 | ) | | | (0.5 | ) | | | 1.3 | |
| Total gains (losses) | | | | $ | (1.0 | ) | | $ | (0.2 | ) | | $ | 1.8 | |
Note 19:20: | Contingencies and Litigation |
Market risk: Risk
The Company sells a broad range of products that provide thermal solutions to customers operating primarily in the automotive, commercial vehicle, off-highway, automotive, and commercial, heatingindustrial, and air conditioningbuilding HVAC&R markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or more of the markets it serves. The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits. However, the risk associated with market downturns such as the downturn experienced in fiscal 2009 and 2010, is still present.
Credit risk: Risk
The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 20162019, 2018, and 2015,2017, two VTS segment customers each accounted for ten percent or more of the Company’s total sales. In fiscal 2014, one customer accounted for ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers represented 63were 50 percent, 48 percent, and 54 percent of total sales in both fiscal 20162019, 2018, and 2015 and 56 percent in fiscal 2014.2017, respectively. At March 31, 20162019 and 2015, 452018, 38 percent and 4736 percent, respectively, of the Company'sCompany’s trade accounts receivable were due from the Company'sCompany’s top ten customers. These customers operate primarily in the automotive, truck,commercial vehicle, off-highway, data center cooling and heavy equipmentcommercial air conditioning markets, andwhich are influenced by similar market and general economic factors. Collateral or advanced payments are generally not required. The Company has not experienced significant credit losses to customers in the markets served.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company manages credit risk through its focus on the following:
| ● | Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; |
Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments;
| ● | Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; |
Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news;
| ● | Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and |
Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and
| ● | Insurance – ensuring that insurance providers maintain acceptable financial ratings. |
Insurance – ensuring that insurance providers maintain financial ratings that are acceptable to the Company.
Counterparty risks: Risk
The Company manages counterparty risksrisk through its focus on the following:
| ● | Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; |
Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees;
| ● | Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and |
Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and
| ● | Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company. |
Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company.
Environmental:Environmental The United States Environmental Protection Agency has designated the Company as a potentially responsible party for remediation of three sites. These sites are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be material to the Company’s financial position due to its relatively small portion of contributed materials.
The Company has recorded environmental investigation and remediation accruals for subsurfacerelated to soil and groundwater contamination at manufacturing facilities in the United States, one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, and groundwater contamination at its manufacturing facility in Brazil. During fiscal 2016, the Company recorded charges totaling $1.6 million, within cost of sales, to establish an environmental accrual for investigative work related to a previously-owned manufacturing facility in the United States. In addition, the Company has recordedalong with accruals for other lesser environmental matters at certain other facilities located in the United States.States and Brazil. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $5.1$18.9 million and $3.8$16.7 million at March 31, 20162019 and 2015,2018, respectively. As additional information becomes available, the Company will re-assess the liabilityliabilities related to these matters and revise the estimated accrual,accruals, if necessary. Based onupon currently available information, the Company believes the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages. During fiscal 2011, one of the adjacent businesses to the Company’s facility in Brazil filed suit against the Company’s subsidiary in Brazil (“Modine Brazil”), seeking remediation and certain other damages as a result of contamination allegedly attributable to its operations. The Company is defending this suit and believes that the ultimate outcome of this matter will not be material.
Brazil antitrust investigation: Other LitigationDuring the fourth quarter of fiscal 2015, Brazil’s Administrative Council for Economic Defense (CADE) provided formal notice to Modine Brazil of an administrative investigation regarding alleged violations of Brazil’s antitrust regulations by Modine Brazil and certain of its employees during a period of time at least seven years prior to the notice. As of March 31, 2016 and March 31, 2015, the Company accrued $2.8 million and $3.2 million (BRL 10.0 million at each date), respectively, representing the estimated amount that may be incurred in connection with the management and resolution of this matter. Due to the ongoing nature of this matter, the Company cannot provide assurance of its ultimate resolution at this time.
Other litigation:In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits or proceedings are not expected to have a material adverse effect on the Company’s consolidated financial statements.position.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 20:21: | Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | | Foreign Currency Translation | | Defined Benefit Plans | | Total |
| Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) |
| | | | | | | | | | | | | |
| Other comprehensive loss before reclassifications | | | 4.7 | | | | (16.6 | ) | | | (11.9 | ) |
| Reclassifications: | | | | | | | | | | | | |
| Amortization of unrecognized net loss (a) | | | - | | | | 48.3 | | | | 48.3 | |
| Amortization of unrecognized prior service credit (a) | | | - | | | | (0.2 | ) | | | (0.2 | ) |
| Income taxes | | | - | | | | (11.8 | ) | | | (11.8 | ) |
| Total other comprehensive loss | | | 4.7 | | | | 19.7 | | | | 24.4 | |
| | | | | | | | | | | | | |
| Balance, March 31, 2016 | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) |
| | | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | |
| Balance, March 31, 2018 | | $ | (5.5 | ) | | $ | (134.9 | ) | | $ | 0.1 | | | $ | (140.3 | ) |
| | | | | | | | | | | | | | | | | |
| Other comprehensive income (loss) before reclassifications | | | (37.9 | ) | | | (7.1 | ) | | | 0.3 | | | | (44.7 | ) |
| Reclassifications: | | | | | | | | | | | | | | | | |
| Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | - | | | | 5.4 | |
| Foreign currency translation losses (b) | | | 0.8 | | | | - | | | | - | | | | 0.8 | |
| Realized losses - net (c) | | | - | | | | - | | | | 0.2 | | | | 0.2 | |
| Income taxes | | | - | | | | 0.3 | | | | (0.1 | ) | | | 0.2 | |
| Total other comprehensive income (loss) | | | (37.1 | ) | | | (1.4 | ) | | | 0.4 | | | | (38.1 | ) |
| | | | | | | | | | | | | | | | | |
| Balance, March 31, 2019 | | $ | (42.6 | ) | | $ | (136.3 | ) | | $ | 0.5 | | | $ | (178.4 | ) |
| | | | | | | | | | | | | | | | | |
| | | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | |
| Balance, March 31, 2017 | | $ | (46.8 | ) | | $ | (135.0 | ) | | $ | - | | | $ | (181.8 | ) |
| | | | | | | | | | | | | | | | | |
| Other comprehensive income (loss) before reclassifications | | | 41.3 | | | | (5.7 | ) | | | 0.3 | | | | 35.9 | |
| Reclassifications: | | | | | | | | | | | | | | | | |
| Amortization of unrecognized net loss (a) | | | - | | | | 5.6 | | | | - | | | | 5.6 | |
| Realized gains - net (c) | | | - | | | | - | | | | (0.1 | ) | | | (0.1 | ) |
| Income taxes | | | - | | | | 0.2 | | | | (0.1 | ) | | | 0.1 | |
| Total other comprehensive income | | | 41.3 | | | | 0.1 | | | | 0.1 | | | | 41.5 | |
| | | | | | | | | | | | | | | | | |
| Balance, March 31, 2018 | | $ | (5.5 | ) | | $ | (134.9 | ) | | $ | 0.1 | | | $ | (140.3 | ) |
| | | Foreign Currency Translation | | Defined Benefit Plans | | Total |
| Balance, March 31, 2014 | | $ | 27.3 | | | $ | (131.2 | ) | | $ | (103.9 | ) |
| | | | | | | | | | | | | |
| Other comprehensive loss before reclassifications | | | (68.0 | ) | | | (45.2 | ) | | | (113.2 | ) |
| Reclassifications: | | | | | | | | | | | | |
| Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | 5.4 | |
| Amortization of unrecognized prior service credit (a) | | | - | | | | (0.1 | ) | | | (0.1 | ) |
| Income taxes | | | - | | | | 13.2 | | | | 13.2 | |
| Total other comprehensive loss | | | (68.0 | ) | | | (26.7 | ) | | | (94.7 | ) |
| | | | | | | | | | | | | |
| Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) |
| | (a) | Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 1718 for additional information about the Company’s pension plans. |
| (b) | As a result of the sale of a business in South Africa during fiscal 2019, the Company wrote-off $0.8 million of accumulated foreign currency translation losses. See Note 1 for additional information about this transaction. |
| (c) | Amounts represent net gains and losses associated with cash flow hedges that were reclassified to net earnings. See Note 19 for additional information regarding derivative instruments. |
Note 21:22: | Segment and Geographic Information |
The Company’s product lines consist of heat-transfer components and systems. The Company serves the vehicular and commercial, industrial, and building heating, ventilating and air conditioningHVAC&R markets. During fiscalIn November 2016, the Company combinedacquired Luvata HTS and, commencing from the acquisition date, has operated and reported results for the acquired business as its North AmericaCIS segment. See Note 2 for additional information regarding the Luvata HTS acquisition.
Effective April 1, 2018, the Company formed the VTS segment by combining its Americas, Europe, and South America segmentsAsia operations to enable it to operate as a more global, product-based organization. The Company also merged its Americas coils business into the AmericasCIS segment to streamline operations, gain synergiesaccelerate operational improvements and improveorganizational efficiencies. The Company began reporting financial results for its cost structure. As a result, the Company recast the prior-period segmentnew segments beginning in fiscal 2019. Segment financial information for fiscal 2018 and 2017 has been recast to conform to the current-periodfiscal 2019 presentation. There was no impact to the Company’s consolidated financial statements as a result. Throughout fiscal 2016, the Company’s four operating segments were as follows:
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Europe:
Comprised ofThe Company’s VTS segment represents its vehicular business and industrial original equipment productsprimarily serves the automotive, commercial vehicle, and off-highway markets. In addition, the VTS segment serves the automotive and commercial vehicle aftermarket in Europe.
Asia:
Comprised of vehicularBrazil. The Company’s CIS segment provides coils, coolers, and industrial original equipment products in Asia.
Building HVAC:
Comprised of buildingcoating solutions to customers throughout the world. The Company’s BHVAC segment provides heating, ventilating and air conditioning products to customers throughout the world.
Each operating segment is managed by a vice president and has separate financial results reviewed by the Company’s chief operating decision maker. These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
The following is a summary of net sales, gross profit, and operating income by segment:
| | | Year ended March 31, 2019 | |
| | | External Sales | | | Inter-segment Sales | | | Total | |
| Net sales: | | | | | | | | | |
| VTS | | $ | 1,298.9 | | | $ | 52.8 | | | $ | 1,351.7 | |
| CIS | | | 704.7 | | | | 2.9 | | | | 707.6 | |
| BHVAC | | | 209.1 | | | | 3.3 | | | | 212.4 | |
| Segment total | | | 2,212.7 | | | | 59.0 | | | | 2,271.7 | |
| Corporate and eliminations | | | - | | | | (59.0 | ) | | | (59.0 | ) |
| Net sales | | $ | 2,212.7 | | | $ | - | | | $ | 2,212.7 | |
| | | | | | | | | | | | | |
| | | Year ended March 31, 2018 | |
| | | External Sales | | | Inter-segment Sales | | | Total | |
| Net sales: | | | | | | | | | | | | |
| VTS | | $ | 1,239.3 | | | $ | 56.4 | | | $ | 1,295.7 | |
| CIS | | | 674.4 | | | | 1.3 | | | | 675.7 | |
| BHVAC | | | 189.4 | | | | 1.8 | | | | 191.2 | |
| Segment total | | | 2,103.1 | | | | 59.5 | | | | 2,162.6 | |
| Corporate and eliminations | | | - | | | | (59.5 | ) | | | (59.5 | ) |
| Net sales | | $ | 2,103.1 | | | $ | - | | | $ | 2,103.1 | |
| | | | | | | | | | | | | |
| | | Year ended March 31, 2017 | |
| | | External Sales | | | Inter-segment Sales | | | Total | |
| Net sales: | | | | | | | | | | | | |
| VTS | | $ | 1,099.9 | | | $ | 52.3 | | | $ | 1,152.2 | |
| CIS | | | 231.5 | | | | 0.3 | | | | 231.8 | |
| BHVAC | | | 171.6 | | | | - | | | | 171.6 | |
| Segment total | | | 1,503.0 | | | | 52.6 | | | | 1,555.6 | |
| Corporate and eliminations | | | - | | | | (52.6 | ) | | | (52.6 | ) |
| Net sales | | $ | 1,503.0 | | | $ | - | | | $ | 1,503.0 | |
| | Years ended March 31, |
| Net sales: | | 2016 | | 2015 | | 2014 |
| Americas | | $ | 585.5 | | | $ | 666.9 | | | $ | 688.3 | |
| Europe | | | 524.1 | | | | 578.2 | | | | 584.4 | |
| Asia | | | 79.0 | | | | 81.2 | | | | 71.5 | |
| Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | |
| Segment total | | | 1,370.0 | | | | 1,512.6 | | | | 1,490.7 | |
| Corporate and eliminations | | | (17.5 | ) | | | (16.2 | ) | | | (13.1 | ) |
| Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
| | | Years ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Gross profit: | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales |
| Americas | | $ | 100.1 | | | | 17.1 | % | | $ | 109.1 | | | | 16.3 | % | | $ | 114.3 | | | | 16.6 | % |
| Europe | | | 68.1 | | | | 13.0 | % | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % |
| Asia | | | 12.2 | | | | 15.5 | % | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % |
| Building HVAC | | | 54.2 | | | | 29.9 | % | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % |
| Segment total | | | 234.6 | | | | 17.1 | % | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % |
| Corporate and eliminations (a) | | | (11.1 | ) | | | - | | | | 1.3 | | | | - | | | | 0.8 | | | | - | |
| Gross profit | | $ | 223.5 | | | | 16.5 | % | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % |
| | | Years ended March 31, |
| Operating income: | | 2016 | | 2015 | | 2014 |
| Americas | | $ | 36.2 | | | $ | 33.4 | | | $ | 49.6 | |
| Europe | | | 13.3 | | | | 25.7 | | | | 9.6 | |
| Asia | | | 0.8 | | | | 0.3 | | | | (3.3 | ) |
| Building HVAC | | | 13.9 | | | | 19.1 | | | | 9.4 | |
| Segment total | | | 64.2 | | | | 78.5 | | | | 65.3 | |
| Corporate and eliminations (a) | | | (71.7 | ) | | | (25.8 | ) | | | (28.1 | ) |
| Operating (loss) income | | $ | (7.5 | ) | | $ | 52.7 | | | $ | 37.2 | |
| (a) | During fiscal 2016, the Company recorded pension settlement losses of $42.1 million at Corporate, within SG&A expenses ($33.3 million) and cost of sales ($8.8 million). See Note 17 for additional information. |
Inter-segment sales are accounted for based onupon an established markup over production costs. Net sales for corporateCorporate and eliminations primarily represent the elimination of inter-segment sales. The operating loss for corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | | Years ended March 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| Gross profit: | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of
sales | |
| VTS | | $ | 186.9 | | | | 13.8 | % | | $ | 201.0 | | | | 15.5 | % | | $ | 182.0 | | | | 15.8 | % |
| CIS | | | 114.9 | | | | 16.2 | % | | | 97.8 | | | | 14.5 | % | | | 32.2 | | | | 13.9 | % |
| BHVAC | | | 63.4 | | | | 29.9 | % | | | 58.0 | | | | 30.3 | % | | | 47.8 | | | | 27.8 | % |
| Segment total | | | 365.2 | | | | 16.1 | % | | | 356.8 | | | | 16.5 | % | | | 262.0 | | | | 16.8 | % |
| Corporate and eliminations (a) | | | 0.3 | | | | - | | | | (0.3 | ) | | | - | | | | (7.6 | ) | | | - | |
| Gross profit | | $ | 365.5 | | | | 16.5 | % | | $ | 356.5 | | | | 17.0 | % | | $ | 254.4 | | | | 16.9 | % |
| | | Years ended March 31, | |
| Operating income: | | 2019 | | | 2018 | | | 2017 | |
| VTS | | $ | 64.8 | | | $ | 84.2 | | | $ | 68.4 | |
| CIS | | | 53.4 | | | | 28.5 | | | | 10.9 | |
| BHVAC | | | 26.9 | | | | 20.3 | | | | 13.2 | |
| Segment total | | | 145.1 | | | | 133.0 | | | | 92.5 | |
| Corporate and eliminations (a) | | | (35.4 | ) | | | (40.8 | ) | | | (50.2 | ) |
| Operating income | | $ | 109.7 | | | $ | 92.2 | | | $ | 42.3 | |
| (a) | During fiscal 2018 and 2017, the Company recorded $4.3 million and $14.8 million, respectively, of costs incurred directly related to the acquisition and integration of Luvata HTS within SG&A expenses at Corporate. During fiscal 2017, the Company recorded $4.3 million in cost of sales related to an inventory purchase accounting adjustment at Corporate, as the impact was excluded from the Company’s measure of segment operating performance. In addition, the operating loss for Corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance. |
The following is a summary of total assets by segment:
| | | March 31, | |
| | | 2016 | | | 2015 | |
| Americas | | $ | 267.2 | | | $ | 277.7 | |
| Europe | | | 301.9 | | | | 282.7 | |
| Asia | | | 104.0 | | | | 92.2 | |
| Building HVAC (a) | | | 99.0 | | | | 131.3 | |
| Corporate and eliminations | | | 148.8 | | | | 147.0 | |
| Total assets | | $ | 920.9 | | | $ | 930.9 | |
| (a) | As of March 31, 2015, total assets within the Building HVAC segment included $48.0 million of insurance-related assets for the rebuild of the facility damaged by the Airedale fire. See Note 2 for additional information. |
| | | March 31, | |
| | | 2019 | | | 2018 | |
| VTS | | $ | 749.9 | | | $ | 754.8 | |
| CIS | | | 604.2 | | | | 630.2 | |
| BHVAC | | | 89.4 | | | | 88.1 | |
| Corporate and eliminations | | | 94.5 | | | | 100.3 | |
| Total assets | | $ | 1,538.0 | | | $ | 1,573.4 | |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | | Years ended March 31, | |
| Capital expenditures: | | 2019 | | | 2018 | | | 2017 | |
| VTS | | $ | 56.2 | | | $ | 61.4 | | | $ | 59.5 | |
| CIS | | | 16.4 | | | | 9.0 | | | | 3.4 | |
| BHVAC | | | 1.3 | | | | 0.6 | | | | 1.5 | |
| Total capital expenditures | | $ | 73.9 | | | $ | 71.0 | | | $ | 64.4 | |
| | | Years ended March 31, | |
| Capital expenditures: | | 2016 | | | 2015 | | | 2014 | |
| Americas | | $ | 26.7 | | | $ | 30.2 | | | $ | 24.6 | |
| Europe | | | 24.8 | | | | 21.5 | | | | 22.9 | |
| Asia | | | 6.2 | | | | 3.8 | | | | 4.6 | |
| Building HVAC | | | 5.1 | | | | 2.8 | | | | 1.0 | |
| Total capital expenditures | | $ | 62.8 | | | $ | 58.3 | | | $ | 53.1 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | | Years ended March 31, | |
| Depreciation and amortization expense: | | 2016 | | | 2015 | | | 2014 | |
| Americas | | $ | 22.1 | | | $ | 21.3 | | | $ | 22.6 | |
| Europe | | | 18.0 | | | | 19.8 | | | | 26.6 | |
| Asia | | | 6.5 | | | | 7.2 | | | | 6.7 | |
| Building HVAC | | | 3.6 | | | | 3.3 | | | | 2.2 | |
| Total depreciation and amortization expense | | $ | 50.2 | | | $ | 51.6 | | | $ | 58.1 | |
| | | Years ended March 31, | |
| Depreciation and amortization expense: | | 2019 | | | 2018 | | | 2017 | |
| VTS | | $ | 49.5 | | | $ | 48.2 | | | $ | 46.2 | |
| CIS | | | 23.9 | | | | 24.3 | | | | 7.9 | |
| BHVAC | | | 3.5 | | | | 4.2 | | | | 4.2 | |
| Total depreciation and amortization expense | | $ | 76.9 | | | $ | 76.7 | | | $ | 58.3 | |
The following is a summary of net sales by geographical area, based upon the location of the selling unit:
| | | Years ended March 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| United States | | $ | 627.6 | | | $ | 669.3 | | | $ | 645.7 | |
| Germany | | | 155.3 | | | | 193.8 | | | | 229.5 | |
| Hungary | | | 145.9 | | | | 161.0 | | | | 150.3 | |
| Austria | | | 113.1 | | | | 118.7 | | | | 109.8 | |
| Other | | | 310.6 | | | | 353.6 | | | | 342.3 | |
| Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | | Years ended March 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| United States | | $ | 1,032.3 | | | $ | 911.4 | | | $ | 657.8 | |
| Italy | | | 217.3 | | | | 211.5 | | | | 94.4 | |
| China | | | 172.1 | | | | 156.0 | | | | 73.7 | |
| Hungary | | | 165.6 | | | | 153.9 | | | | 145.6 | |
| Germany | | | 123.1 | | | | 132.6 | | | | 130.1 | |
| Austria | | | 116.2 | | | | 151.7 | | | | 125.2 | |
| Other | | | 386.1 | | | | 386.0 | | | | 276.2 | |
| Net sales | | $ | 2,212.7 | | | $ | 2,103.1 | | | $ | 1,503.0 | |
The following is a summary of property, plant and equipment by geographical area:
| | | March 31, | | | March 31, | |
| | | 2016 | | | 2015 | | | 2019 | | | 2018 | |
| United States | | $ | 92.5 | | | $ | 92.7 | | | $ | 117.7 | | | $ | 121.5 | |
| China | | | | 57.6 | | | | 49.6 | |
| Mexico | | | | 56.3 | | | | 49.4 | |
| Hungary | | | | 55.3 | | | | 59.3 | |
| Italy | | | | 52.4 | | | | 62.0 | |
| Austria | | | 44.2 | | | | 41.5 | | | | 36.9 | | | | 42.8 | |
| China | | | 33.6 | | | | 31.8 | | |
| Germany | | | 32.1 | | | | 47.2 | | | | 32.8 | | | | 37.2 | |
| Hungary | | | 31.4 | | | | 28.9 | | |
| Other | | | 104.8 | | | | 80.0 | | | | 75.7 | | | | 82.5 | |
| Total property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | | | $ | 484.7 | | | $ | 504.3 | |
The following is a summary of net sales by end market:
| | | Years ended March 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Commercial vehicle | | $ | 459.8 | | | $ | 512.5 | | | $ | 477.0 | |
| Automotive | | | 396.8 | | | | 401.8 | | | | 395.6 | |
| Off-highway | | | 206.2 | | | | 274.6 | | | | 320.8 | |
| Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | |
| Other | | | 108.3 | | | | 121.2 | | | | 137.7 | |
| Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a summary of net sales by end market:
| | | Years ended March 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| Commercial HVAC&R | | $ | 674.0 | | | $ | 648.3 | | | $ | 323.8 | |
| Automotive | | | 542.8 | | | | 526.0 | | | | 461.0 | |
| Commercial vehicle | | | 387.6 | | | | 381.7 | | | | 382.5 | |
| Off-highway | | | 314.1 | | | | 271.2 | | | | 202.8 | |
| Data center cooling | | | 187.0 | | | | 137.6 | | | | 57.1 | |
| Industrial cooling | | | 47.8 | | | | 67.6 | | | | 18.6 | |
| Other | | | 59.4 | | | | 70.7 | | | | 57.2 | |
| Net sales | | $ | 2,212.7 | | | $ | 2,103.1 | | | $ | 1,503.0 | |
Note 22:23: | Quarterly Financial Data (Unaudited) |
QuarterlyThe following is a summary of quarterly financial data is summarized below for the years ended March 31, 2016 and 2015:data:
| | | Fiscal 2016 quarters ended | | | | | Fiscal 2019 quarters ended | | | | |
| | | June | | Sept. | | Dec. | | March | | Fiscal 2016 | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2019 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 346.1 | | | $ | 334.0 | | | $ | 328.7 | | | $ | 343.7 | | | $ | 1,352.5 | | | $ | 566.1 | | | $ | 548.9 | | | $ | 541.0 | | | $ | 556.7 | | | $ | 2,212.7 | |
| Gross profit | | | 57.0 | | | | 45.7 | | | | 58.6 | | | | 62.2 | | | | 223.5 | | | | 94.3 | | | | 87.9 | | | | 91.7 | | | | 91.6 | | | | 365.5 | |
| Earnings (loss) from continuing operations (a) | | | 5.5 | | | | (22.5 | ) | | | 8.2 | | | | 7.8 | | | | (1.0 | ) | |
| Net earnings (loss) attributable to Modine (a) | | | 5.1 | | | | (22.5 | ) | | | 8.2 | | | | 7.6 | | | | (1.6 | ) | |
| Net earnings (a) | | | | 22.5 | | | | 38.7 | | | | 18.3 | | | | 6.4 | | | | 85.9 | |
| Net earnings attributable to Modine (a) | | | | 22.0 | | | | 38.5 | | | | 18.0 | | | | 6.3 | | | | 84.8 | |
| Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | $ | 0.43 | | | $ | 0.76 | | | $ | 0.36 | | | $ | 0.12 | | | $ | 1.67 | |
| Diluted | | | | 0.43 | | | | 0.75 | | | | 0.35 | | | | 0.12 | | | | 1.65 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal 2018 quarters ended | | | | | |
| | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2018 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Net sales | | | $ | 515.5 | | | $ | 508.3 | | | $ | 512.7 | | | $ | 566.6 | | | $ | 2,103.1 | |
| Gross profit | | | | 88.5 | | | | 86.1 | | | | 85.4 | | | | 96.5 | | | | 356.5 | |
| Net earnings (loss) (b) | | | | 17.4 | | | | 16.3 | | | | (27.9 | ) | | | 18.0 | | | | 23.8 | |
| Net earnings (loss) attributable to Modine (b) | | | | 17.0 | | | | 15.9 | | | | (28.3 | ) | | | 17.6 | | | | 22.2 | |
| Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.11 | | | $ | (0.47 | ) | | $ | 0.17 | | | $ | 0.16 | | | $ | (0.03 | ) | | $ | 0.34 | | | $ | 0.32 | | | $ | (0.57 | ) | | $ | 0.35 | | | $ | 0.44 | |
| Diluted | | | 0.11 | | | | (0.47 | ) | | | 0.17 | | | | 0.16 | | | | (0.03 | ) | | | 0.34 | | | | 0.31 | | | | (0.57 | ) | | | 0.34 | | | | 0.43 | |
| | | Fiscal 2015 quarters ended | | | |
| | | June | | Sept. | | Dec. | | March | | Fiscal 2015 |
| | | | | | | | | | | | | | | | |
| Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | |
| Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | |
| Earnings (loss) from continuing operations (b) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | |
| Net earnings (loss) attributable to Modine (b) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | |
| Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | |
| Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| (a) | During fiscal 2016,2019, restructuring expenses totaled $2.6$0.2 million, $1.0 million, $1.6$0.5 million, and $11.4$8.9 million for the quarters ended June 30, 2015, September 30, 2015,2018, December 31, 2015,2018, and March 31, 2016,2019, respectively (see Note 6). During the fourthsecond quarter of fiscal 2016,2019, the Company sold its South African business within the BHVAC segment and, as a result, recorded a loss of $1.7 million (see Note 1). During the third quarter of fiscal 2019, the Company recorded a $9.9$0.4 million asset impairment charge related to a manufacturing facility in GermanyAustria (see Note 6). The Company’s income tax benefit for fiscal 2019 includes net benefits of $24.4 million and net charges of $2.2 million in the second and third quarters, respectively, related to the Tax Act and the recognition of foreign tax credits (see Note 8). During fiscal 2016, non-cash pension settlement losses totaled $39.2 million, $1.1 million, and $1.8 million for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 17). During the fourth quarter of fiscal 2016,2019, the Company recorded a $9.5 million gainadjusted its valuation allowances on deferred tax assets related to an insurance settlement for equipment losses resulting from the Airedale fire (see Note 2). Also during the fourth quarter of fiscal 2016, the Company reversed a deferred tax asset valuation allowance,two separate subsidiaries in China and, as a result, recorded ana $2.0 million income tax benefit of $3.0and a $1.0 million income tax charge in the first and second quarters, respectively (see Note 8). |
| (b) | During fiscal 2015,2018, restructuring expenses totaled $0.8$1.7 million, $1.0$0.4 million, $1.9$9.4 million, and $1.0$4.5 million for the quarters ended June 30, 2014,2017, September 30, 2014,2017, December 31, 2014,2017, and March 31, 2015,2018, respectively (see Note 6). During the third quarter of fiscal 2015,2018, the Company soldrecorded a wind tunnel and recognized$1.3 million asset impairment charge related to a gain of $3.2 millionmanufacturing facility in Austria (see Note 6). During the fourth quarter of fiscal 2015,2018, the Company recorded a $7.8$1.2 million goodwill impairment charge related to intangible assets (see Note 14). The Company recorded income tax charges totaling $35.7 million and a $3.2$2.3 million charge associated with a legal matter in Brazilduring the third and fourth quarters of fiscal 2018, respectively, related to the Tax Act (see Note 19)8). During the fourth quarter of fiscal 2018, the Company reversed a portion of a valuation allowance related to a foreign tax jurisdiction, and, as a result, recorded an income tax benefit of $2.8 million (see Note 8). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors and Shareholders of Modine Manufacturing Company:Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
In our opinion,We have audited the accompanying consolidated financial statements, including the related notes, as listed in the index appearing under Item 15(a)(1), and the financial statement schedule listed in the index appearing under Item 15(a)(2), of Modine Manufacturing Company and its subsidiaries (the “Company”) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Modine Manufacturingthe Company and its subsidiaries atas of March 31, 20162019 and 2015, 2018, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2016 2019 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2016,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the CommitteeCOSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for the income tax effects of Sponsoring Organizationsintra-entity transfers of the Treadway Commission (COSO). assets other than inventory in 2019.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control overOver Financial Reporting appearing under Item 9A.9A. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements on the financial statement schedule, and on the Company'sCompany’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidatedfinancial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidatedfinancial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in fiscal 2016.Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
May 26, 201623, 2019
We have served as the Company’s auditor since 1935.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not applicable.
| ITEM 9A. | CONTROLS AND PROCEDURES. |
Conclusion Regarding Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company'sCompany’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company'sCompany’s disclosure controls and procedures, at a reasonable assurance level, as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company'sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of March 31, 2016.2019.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, and effected by the Company'sCompany’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2016.2019. In making its assessment, of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based onupon this assessment, management concluded that, as of March 31, 2016,2019, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20162019 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the fourth quarter of fiscal 20162019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION. |
None.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors. The Company incorporates by reference the information appearing in the Company'sCompany’s Proxy Statement for the 20162019 Annual Meeting of Shareholders to be held on July 21, 201625, 2019 (the “2016“2019 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Executive Officers of the Registrant"“Information about our Executive Officers” in this Form 10-K.
Compliance with Section 16(a)Code of the Exchange ActConduct. The Company incorporates by reference the information appearing in the 2016 Annual Meeting Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Code of Ethics. The Company incorporates by reference the information appearing in the 20162019 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Ethics.Conduct.” The Company'sCompany’s Code of Ethics (labeled as the Code of Conduct)Conduct is included on its website, www.modine.com (About Modine link). We intend to satisfy our disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers of, any provision of our Code of Conduct that applies to our principal executive, financial and accounting officers and our directors by posting such information on our website.
Board Committee Charters. The Board of Directors has approved charters for its Audit Committee, Officer Nomination and Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee. These charters are included on the Company’s website, www.modine.com (Investors link).
Audit Committee Financial Expert. The Company incorporates by reference the information appearing in the 20162019 Annual Meeting Proxy Statement under the caption “Committees of the Board of Directors – Audit Committee.”
Audit Committee Disclosure. The Company incorporates by reference the information appearing in the 20162019 Annual Meeting Proxy Statement under the captions “Committees of the Board of Directors – Audit Committee” and “Board Meetings and Committees.”
Guidelines on Corporate Governance. The Board of Directors has adopted Guidelines on Corporate Governance. The Company’s Guidelines on Corporate Governance are included on its website, www.modine.com (Investors link).
Security Holder Recommendation of Board Nominees. The Company incorporates by reference the information appearing in the 20162019 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
We do not intend to incorporate our internet website and the information contained therein or incorporated therein into this annual report on Form 10-K.
| ITEM 11. | EXECUTIVE COMPENSATION. |
The information appearing in the 20162019 Annual Meeting Proxy Statement under the captions “Compensation Discussion and Analysis,” “Compensation of Directors,” “Committees of the Board of Directors – Officer Nomination and Compensation Committee: Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” is incorporated herein by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The Company incorporates by reference the information relating to stock ownership under the caption “Security Ownership of Certain Beneficial Owners and Management,” and under the caption “Equity Compensation Plan Information,” in the 20162019 Annual Meeting Proxy Statement.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The Company incorporates by reference the information contained in the 20162019 Annual Meeting Proxy Statement under the captions “Certain Relationships and Related Party Transactions” and “Director Independence.”
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The Company incorporates by reference the information contained in the 20162019 Annual Meeting Proxy Statement under the caption “Independent Auditors’Auditor’s Fees for Fiscal 20162019 and 2015.2018.”
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
| (a) | Documents Filed. The following documents are filed as part of this Report: |
| | Page in Form 10-K |
| | | |
| 1. The consolidated financial statements of Modine Manufacturing Company and its subsidiaries filed under Item 8: | |
| | | |
| Consolidated Statements of Operations for the years ended March 31, 2016, 20152019, 2018 and 20142017 | 38 |
| Consolidated Statements of Comprehensive Income for the years ended March 31, 2016, 20152019, 2018 and 20142017 | 39 |
| Consolidated Balance Sheets at March 31, 20162019 and 20152018 | 40 |
| Consolidated Statements of Cash Flows for the years ended March 31, 2016, 20152019, 2018 and 20142017 | 41 |
| Consolidated Statements of Shareholders'Shareholders’ Equity for the years ended March 31, 2016, 20152019, 2018 and 20142017 | 42 |
| Notes to Consolidated Financial Statements | 43-6843-74 |
| Report of Independent Registered Public Accounting Firm | 6975-76 |
| | | |
| 2. Financial Statement Schedules | |
| | | |
| The following financial statement schedule should be read in conjunction with the consolidated financial statements set forth in Item 8: | |
| Schedule II -- Valuation and Qualifying Accounts | 7480 |
| | | |
| Schedules other than those listed above are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements and the notes thereto. | |
| | | |
| 3. Exhibits and Exhibit Index. | 75-7781-83 |
| | | |
| See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number. | |
| ITEM 16. | FORM 10-K SUMMARY. |
None.
Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 26, 2016 | Modine Manufacturing Company |
| |
| By: | /s/ Thomas A. Burke
|
| | Thomas A. Burke, President |
| | and Chief Executive Officer |
| | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. Burke
Thomas A. Burke
President, Chief Executive Officer and Director
(Principal Executive Officer)
| May 26, 2016
|
| |
/s/ Michael B. Lucareli
Michael B. Lucareli
Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
| May 26, 2016
|
| |
/s/ Marsha C. Williams
Marsha C. Williams
Director
| May 26, 2016
|
| |
/s/ David J. Anderson
David J. Anderson
Director
| May 26, 2016
|
| |
/s/ Charles P. Cooley
Charles P. Cooley
Director
| May 26, 2016
|
| |
/s/ Suresh V. Garimella
Suresh V. Garimella
Director
| May 26, 2016
|
/s/ Larry O. Moore
Larry O. Moore
Director
| May 26, 2016
|
| |
/s/ Christopher W. Patterson
Christopher W. Patterson
Director
| May 26, 2016
|
| |
/s/ Christine Y. Yan
Christine Y. Yan
Director
| May 26, 2016
|
| |
/s/ David G. Bills
David G. Bills
Director
| May 26, 2016
|
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES
(A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2016, 20152019, 2018 and 20142017
(In millions)
| | | | | | Additions | | | | | |
| Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | |
| | | | | | | | | | | | | | |
| 2019: Valuation Allowance for Deferred Tax Assets | | $ | 48.9 | | | $ | (1.6 | ) | | $ | (3.9 | ) | (a) | | $ | 43.4 | |
| | | | | | | | | | | | | | | | | | |
| 2018: Valuation Allowance for Deferred Tax Assets | | $ | 49.6 | | | $ | (6.7 | ) | | $ | 6.0 | | (a) | | $ | 48.9 | |
| | | | | | | | | | | | | | | | | | |
| 2017: Valuation Allowance for Deferred Tax Assets | | $ | 50.8 | | | $ | (0.3 | ) | | $ | (0.9 | ) | (a) | | $ | 49.6 | |
| | | | | | Additions | | | | | |
| Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | |
| | | | | | | | | | | | | | |
| 2016: Valuation Allowance for Deferred Tax Assets | | $ | 48.0 | | | $ | 1.5 | | | $ | 1.3 | | (a) | | $ | 50.8 | |
| | | | | | | | | | | | | | | | | | |
| 2015: Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | ) | (a) | | $ | 48.0 | |
| | | | | | | | | | | | | | | | | | |
| 2014: Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | | (a) | | $ | 61.2 | |
| | (a) | Foreign currency translation and other adjustmentsadjustments. The fiscal 2018 and 2017 amounts also included increases associated with the Company’s acquisition of Luvata HTS. |
MODINE MANUFACTURING COMPANY
(THE “REGISTRANT”)
(COMMISSION FILE NO. 1-1373)
EXHIBIT INDEX
TO
20162019 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By Referenced To | | Filed Herewith |
| | | | | | | |
| | Amended and Restated Articles of Incorporation, as amended. | | Exhibit 4.23.1 to Registrant’s Registration Statement on Form S-3 (333-161030) dated August 4, 200910-K for the fiscal year ended March 31, 2018 | | |
| | | | | | | |
| | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated February 10, 201520, 2019 | | |
| | | | | | | |
| | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 ("(“2003 10-K"10-K”) | | |
| | | | | | | |
| | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto. | | |
| | | | | | | |
| | Note Purchase and Private Shelf Agreement (the “Original Note Purchase Agreement”) dated as of August 12, 2010 among the Registrant and the Series A Purchasers named therein of $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020 and $25,000,000 Private Shelf Facility and each Prudential Affiliate (as defined therein) that may become bound by certain provisions thereof. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 12, 2010 8-K (“August 12, 2010 8-K”) | | |
| | | | | | | |
| | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to August 12, 2010 8-K | | |
| | | | | | | |
| | First Amendment to Note Purchase and Private Shelf Agreement and Waiver dated as of March 15, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated March 15, 2012 8-K | | |
| | | | | | | |
| | Second Amendment to Note Purchase and Private Shelf Agreement dated as of April 20, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 20, 2012 8-K | | |
| | | | | | | |
| | Third Amendment to Note Purchase and Private Shelf Agreement dated as of August 6, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 6, 2012 8-K | | |
| | Second Amended and Restated Credit Agreement dated as of August 30, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, LC Issuer, Swing Line Lender and as a Lender, and U.S. Bank, N.A. and Wells Fargo Bank, N.A. as Syndication Agents and as Lenders, BMO Harris Bank N.A., as Documentation Agent and as Lender and Associated Bank, N.A., Comerica Bank and Sovereign Bank as Lenders | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated August 30, 2013 (“August 30, 2013 8-K”) | | |
| | | | | | | |
| | Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Note Purchase Amendment”) dated as of August 30, 2013, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) pursuant to which the Company and the Note Holders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to August 30, 2013 8-K | | |
| | | | | | | |
| | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to August 30, 2013 8-K | | |
| | | | | | | |
| | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | |
| | | | | | |
| Third Amended and Restated Credit Agreement dated as of November 15, 2016. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated November 15, 2016 (“November 15, 2016 8-K”) | | |
10.1* | | | | | |
| Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 15, 2016. | | Exhibit 4.2 to November 15, 2016 8-K | | |
| | | | | |
| Description of Registrant’s securities | | Amendment No 1. to the Company’s Registration Statement on Form 8-A filed on July 17, 2008 | | |
| | | | | |
| Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | |
| | | | | | | |
| | Employment Agreement between the Registrant and Thomas A. Burke dated as of June 15, 2007. | | Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 15, 2007 | | |
| | | | | | | |
| | Form of Amendment No. 1 to Employment Agreement entered into as of July 1, 2008 with Thomas A. Burke. | | Exhibit 10.1 to Registrant���sRegistrant’s Current Report on Form 8-K dated July 1, 2008 | | |
| | | | | | | |
| | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke. | | Exhibit 10(f) to Registrant’s Form 10-K for the year ended March 31, 2004 | | |
| | | | | | | |
10.5* | | Employment Agreement, dated July 1, 2014, between Modine Holding GmbH and Holger Schwab, effective as of July 1, 2015. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2014 | | |
| | | | | | |
| | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant'sRegistrant’s Form 10-K for the fiscal year ended March 31, 2000 | | |
| | | | | | | |
| | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | |
| | | | | | | |
| | 2007 Incentive Compensation Plan. | | Appendix A to the Registrant's Proxy Statement dated June 18, 2007 | | |
| | | | | | |
10.9* | | 2008 Incentive Compensation Plan (Amended and Restated effective May 7, 2014). | | Exhibit 10.1 to Registrant'sRegistrant’s Current Report on Form 8-K dated July 17, 2014 | | |
| | | | | |
| Form of Fiscal 2019 Modine Performance Stock Award Agreement. | | Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | |
| Form of Fiscal 2019 Modine Incentive Stock Option Award Agreement. | | Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | |
| | | | | |
| Form of Fiscal 2019 Modine Restricted Stock Unit Award Agreement. | | Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | |
| | | | | |
| Form of Fiscal 2019 Modine Non-Qualified Stock Option Award Agreement. | | Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | |
| | | | | |
| Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Thomas A. Burke. | | Exhibit 10.17 to Registrant'sRegistrant’s Form 10-K for the fiscal year ended March 31, 2011 | | |
| | | | | | | |
10.11* | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | |
| | | | | | | |
10.12* | | Form of Fiscal 2016 Modine Performance Stock Award Agreement2017 Incentive Compensation Plan. | | Exhibit 10.1 to Registrant’s Current Report on Form 10-Q for the first quarter ended June 30, 2015 ("June 30, 2015 10-Q")8-K dated July 20, 2017 | | |
| | | | | | | |
10.13* | | Form of Fiscal 20162019 Modine IncentiveNon-Employee Director Restricted Stock OptionsUnit Award AgreementAgreement. | | Exhibit 10.210.1 to JuneRegistrant’s Form 10-Q for the quarter ended September 30, 2015 10-Q2018 | | |
| | | | | | | |
10.14* | | Form of Fiscal 2016 Modine Restricted Stock Award Agreement | | Exhibit 10.3 to June 30, 2015 10-Q | | |
| | | | | | |
10.15* | | Form of Fiscal 2016 Modine Non-Qualified Stock Option Award Agreement | | Exhibit 10.4 to June 30, 2015 10-Q | | |
| | | | | | |
| | List of subsidiaries of the Registrant. | | | | X |
| | | | | | | |
| | Consent of independent registered public accounting firm. | | | | X |
| | | | | | | |
| | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X |
| | | | | | | |
| | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X |
| | | | | | | |
| | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X |
| | | | | | | |
| | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X |
| | | | | | | |
| 101.INS | | Instance Document | | | | X |
| | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema | | | | X |
| | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | X |
| | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | X |
| | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | X |
| | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | X |
* Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K.
** Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: May 23, 2019 | Modine Manufacturing Company |
| | |
| By: | /s/ Thomas A. Burke |
| | Thomas A. Burke, President |
| | and Chief Executive Officer |
| | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. Burke |
|
| Thomas A. Burke | |
| President, Chief Executive Officer and Director | May 23, 2019 |
| (Principal Executive Officer) | |
| |
/s/ Michael B. Lucareli |
|
| Michael B. Lucareli | May 23, 2019 |
| Vice President, Finance and Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | |
| |
/s/ Marsha C. Williams |
|
| Marsha C. Williams | May 23, 2019 |
| Director | |
| |
/s/ David J. Anderson |
|
| David J. Anderson | May 23, 2019 |
| Director | |
| |
/s/ Eric D. Ashleman |
|
| Eric D. Ashleman | May 23, 2019 |
| Director | |
| |
/s/ David G. Bills |
|
| David G. Bills | May 23, 2019 |
| Director | |
| |
/s/ Charles P. Cooley |
|
| Charles P. Cooley | May 23, 2019 |
| Director | |
| |
/s/ Suresh V. Garimella |
|
| Suresh V. Garimella | May 23, 2019 |
| Director | |
| |
/s/ Larry O. Moore |
|
| Larry O. Moore | May 23, 2019 |
| Director | |
| |
/s/ Christopher W. Patterson |
|
| Christopher W. Patterson | May 23, 2019 |
| Director | |
| |
/s/ Christine Y. Yan |
|
| Christine Y. Yan | May 23, 2019 |
| Director | |
84
