Company Quick10K Filing
Modine Manufacturing
Price10.99 EPS1
Shares51 P/E20
MCap562 P/FCF11
Net Debt291 EBIT71
TEV852 TEV/EBIT12
TTM 2019-09-30, in MM, except price, ratios
10-K 2020-03-31 Filed 2020-05-29
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8-K 2020-06-17
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8-K 2018-05-23
8-K 2018-01-30

MOD 10K Annual Report

Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Note 1: Significant Accounting Policies
Note 2: Revenue Recognition
Note 3: Fair Value Measurements
Note 4: Stock - Based Compensation
Note 5: Restructuring Activities
Note 6: Other Income and Expense
Note 7: Income Taxes
Note 8: Earnings per Share
Note 9: Cash, Cash Equivalents and Restricted Cash
Note 10: Inventories
Note 11: Property, Plant and Equipment
Note 12: Investment in Affiliate
Note 13: Intangible Assets
Note 14: Goodwill
Note 15: Product Warranties and Other Commitments
Note 16: Leases
Note 17: Indebtedness
Note 18: Pension and Employee Benefit Plans
Note 19: Derivative Instruments
Note 20: Risks, Uncertainties, Contingencies and Litigation
Note 21: Accumulated Other Comprehensive Loss
Note 22: Segment and Geographic Information
Note 23: Quarterly Financial Data (Unaudited)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accountant Fees and Services.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
Item 16. Form 10 - K Summary.
EX-4.14 exhibit4_14.htm
EX-21 exhibit21.htm
EX-23 exhibit23.htm
EX-31.1 exhibit31_1.htm
EX-31.2 exhibit31_2.htm
EX-32.1 exhibit32_1.htm
EX-32.2 exhibit32_2.htm

Modine Manufacturing Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
1.71.41.00.70.30.02012201420172020
Assets, Equity
0.60.50.30.20.0-0.12012201420172020
Rev, G Profit, Net Income
0.40.20.1-0.1-0.2-0.42012201420172020
Ops, Inv, Fin



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, 2020

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’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 every Interactive Data File required to be submitted 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 such files).
Yes    No





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer 
Accelerated Filer
   
Non-accelerated Filer
Smaller reporting company
   
 
Emerging growth company

If an emerging growth company, indicate by check mark 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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

Approximately 97 percent of the outstanding shares are held by non-affiliates.  The aggregate market value of these shares was approximately $562 million based upon the market price of $11.37 per share on September 30, 2019, 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’s common stock, $0.625 par value, was 50,823,290 at May 22, 2020.

An Exhibit Index appears at pages 82-85 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 2020 Annual
Meeting of Shareholders
Part III of Form 10-K
(Items 10, 11, 12, 13, 14)





MODINE MANUFACTURING COMPANY
TABLE OF CONTENTS

PART I
   
     
 
ITEM 1.
1
       
 
ITEM 1A.
10
       
 
ITEM 1B.
17
       
 
ITEM 2.
18
       
 
ITEM 3.
19
       
 
ITEM 4.
19
       
   
20
       
PART II
   
     
 
ITEM 5.
21
       
 
ITEM 6.
23
       
 
ITEM 7.
24
       
 
ITEM 7A.
38
       
 
ITEM 8.
42
       
 
ITEM 9.
78
       
 
ITEM 9A.
78
       
 
ITEM 9B.
78
       
PART III
   
     
 
ITEM 10.
79
       
 
ITEM 11.
79
       
 
ITEM 12.
79
       
 
ITEM 13.
79
       
 
ITEM 14.
80
       
PART IV
   
     
 
ITEM 15.
80
       
 
ITEM 16.
80
   
81
   
82
   
86




(This page intentionally left blank.)




PART I

ITEM 1.
BUSINESS.

Modine Manufacturing Company specializes in providing innovative thermal management 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- and off-highway original equipment manufacturer (“OEM”) vehicular applications.  In addition, we are a global leader in thermal management technology and solutions for sale into a wide array of commercial, industrial, and 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.  Our primary customers across the globe include:

Automobile, truck, bus, and specialty vehicle OEMs;
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 HVAC&R industries.  Our products and systems 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, 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.  The 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 hold a competitive position in the marketplace as thermal management experts.

During fiscal 2020, we continued to employ our Strengthen, Diversify and Grow (“SDG”) strategy in order to transform Modine into a more diversified industrial thermal-management company.  We launched our SDG strategy over four years ago to establish a more global, product-based organizational structure and a strategic framework for our company.  This strategic framework continues to provide benefits and has helped us to quickly implement cost-saving measures in response to lower end-market demand.  We faced various challenges in fiscal 2020, including weakness in key vehicular end markets that began in the middle of our fiscal year.  In addition, the outbreak of the novel coronavirus (“COVID-19”), which was declared a pandemic by the World Health Organization in March 2020, negatively impacted our business, beginning in the fourth quarter in our Asian and European markets.  Both the vehicular market weakness and the impacts of the COVID-19 pandemic placed significant strain on our previously-announced evaluation of strategic alternatives for the automotive business within our Vehicular Thermal Solutions (“VTS”) segment.  As a result, we have paused this process until economic conditions improve.  We remain committed, however, to exiting the automotive business in a manner that is in the best interest of our shareholders.

1

Globally, the COVID-19 pandemic has created significant volatility in the economy and end market demand, and has led to facility closures and supply chain disruption.  Our business, along with many other businesses globally, is susceptible to impacts from COVID-19.  We suspended production at certain manufacturing facilities in China, India, Italy, Spain, Germany, the Netherlands, Austria, Hungary, the U.S., Mexico and Brazil due to local government requirements or customer shutdowns and are operating other facilities in the U.S. and abroad at reduced capacity levels.  Although the temporarily-closed facilities have since reopened, many are operating at a significantly reduced volume because of low customer demand.  Beginning largely in April 2020 and in an effort to mitigate the negative impacts of COVID-19, we have taken actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization.  In addition, we are reducing operating and administrative expenses, including travel and entertainment expenditures, and lowering the annual compensation paid to the Board of Directors.  We are also focused on reducing capital expenditures by delaying certain projects and the purchase of some program-related equipment and tooling.  We are committed to the health and safety of our employees and have implemented steps to mitigate risk in our manufacturing operations and administrative offices.  We are also committed to meeting our customers’ needs and will work to overcome any supply chain disruptions that may arise to deliver quality products and services to our customers in a timely manner.

Our top five customers are in the automotive, commercial vehicle, and off-highway markets and our ten largest customers accounted for 45 percent of our fiscal 2020 sales.  In fiscal 2020, 59 percent of our total sales were generated from customers outside of the U.S., with 52 percent of total sales generated by foreign operations and 7 percent generated by exports from the U.S.  In fiscal 2019, 58 percent of our total sales were generated from customers outside of the U.S., with 52 percent of total sales generated by foreign operations and 6 percent generated by exports from the U.S.  In fiscal 2018, 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.

During fiscal 2020, our consolidated net sales were $1.98 billion, an 11 percent decrease from $2.21 billion in fiscal 2019.  This decrease was primarily due to lower sales in our VTS and Commercial and Industrial Solutions (“CIS”) segments, partially offset by higher sales in our Building HVAC Systems (“BHVAC”) segment.  Our operating income of $38 million in fiscal 2020 decreased $72 million compared with the prior year, primarily due to lower earnings in the VTS and CIS segments and separation and project costs associated with our review of strategic alternatives for the automotive business, partially offset by higher earnings in the BHVAC segment.

In response to the lower market demand and in an effort to optimize our cost structure and improve the efficiency of our operations, we have engaged in various restructuring activities.  As a result, we recorded restructuring expenses of $12 million and $10 million during fiscal 2020 and 2019, respectively, primarily related to severance expenses resulting from targeted headcount reductions.

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 2020
   
Fiscal 2019
 
Commercial HVAC&R
   
32
%
   
30
%
Automotive
   
26
%
   
25
%
Commercial vehicle
   
16
%
   
18
%
Off-highway
   
13
%
   
14
%
Data center cooling
   
8
%
   
8
%
Industrial cooling
   
2
%
   
2
%
Other
   
3
%
   
3
%

2

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 have 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.  Many 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.

Business Segments

Each of our operating segments is managed by a vice president and has separate financial results reviewed by our chief operating decision maker (“CODM.”)  These results are used by management in evaluating the performance of each business segment and in making decisions on the allocation of resources amongst our various businesses.  Financial information for our operating segments is included in Note 22 of the Notes to Consolidated Financial Statements.

Effective April 1, 2020, we began managing our automotive business separate from the VTS segment.  We are managing the automotive business as a separate segment as we target the sale or eventual exit of the businesses in this segment.  In light of the ongoing COVID-19 pandemic, we have paused this process, but we intend to resume once we determine that market conditions will support our effort to maximize the value of the automotive business.  Beginning for fiscal 2021, we will report the financial results of the automotive business as the Automotive segment.  The remaining portion of the previous VTS segment will be named the Heavy-Duty Equipment segment and will include the heavy-duty commercial vehicle and off-highway businesses.

Our Vehicular Business

Vehicular Thermal Solutions Segment

The continued globalization of our vehicular 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 vehicular markets (U.S., Mexico, Brazil, Europe, India, China, and South Korea) and as a global organization with the expertise to solve technical challenges.  We are recognized for having strong technical support in all regions, an extensive product portfolio, and the ability to provide 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, Denso Corporation, Mahle, Tata Toyo, TitanX, T. Rad Co. Ltd., UFI Filters, Valeo SA, 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 lower-cost countries or lower-cost sourcing initiatives.  In addition, competitors from some lower-cost regions are beginning to expand into new geographical markets.

The following summarizes the primary markets served by our VTS segment:

Automotive

Market Overview – The global automotive markets declined during fiscal 2020.  While we expect longer-term growth of the automotive market will be supported by the tightening of emissions standards, in-vehicle technology enhancements and growth in emerging markets, we expect the global automotive markets will experience declines in fiscal 2021.  The COVID-19 pandemic is adversely impacting these markets; the duration and severity of the impacts of COVID-19 are currently uncertain.

We have seen increased development activity in the automotive market on electric and hybrid powertrains with global automotive OEMs, their powertrain suppliers, and a number of start-up companies specializing in electric vehicles.  We are actively involved in developing and manufacturing solutions for these alternative powertrains.  At the same time, we remain focused on programs for traditional internal combustion engines, which we believe will remain the primary automotive powertrain for years to come.

3

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); and 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 2020, the North American commercial vehicle markets experienced declines, the most severe of which was within the heavy-duty truck market.  In South America, the commercial vehicle market was relatively flat in fiscal 2020.  In Europe and India, the commercial vehicle market experienced slight declines in fiscal 2020.  We expect the global commercial vehicle markets will decline in fiscal 2021.  The COVID-19 pandemic has lowered customer demand in these markets; the duration and severity of the impacts of COVID-19 are currently uncertain.

Beyond the COVID-19 pandemic, trends influencing the commercial and specialty vehicle markets include a desire by global commercial vehicle manufacturers to standardize U.S., Canadian, and Eurozone emissions regulations and the adoption of higher standards, which are more comparable to Euro 6, in China and India.  Global standardization would lead to further development opportunities for Modine.  Additionally, truck and bus manufacturers are evaluating alternative powertrains and fuels, including electrification, waste heat recovery, and other technologies aimed at improving vehicle efficiency, all of which could present opportunities for us.  These trends are driving the advancement of product development worldwide and are creating demand for incremental improvements to thermal transfer products.  We are active in these developments with numerous customers, and believe we are well positioned to 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 cooling (transmission and retarder oil coolers and power steering coolers); and battery thermal management systems.

Customers – Commercial, medium- and heavy-duty truck and engine manufacturers; and bus and specialty vehicle manufacturers.

Primary Competitors – Mahle; TitanX; T. Rad Co. Ltd.; BorgWarner; and Tata Toyo.

Off-Highway

Market Overview – The global off-highway markets experienced declines during fiscal 2020.  In North America, production of U.S. agricultural, construction, and mining machinery decreased in fiscal 2020 compared with the prior year.  In South America, the off-highway markets experienced modest growth in fiscal 2020.  In Europe, construction and agricultural equipment markets experienced slight declines in fiscal 2020.  In Asia, the excavator markets experienced moderate declines during fiscal 2020.  We expect the global off-highway markets will decline in fiscal 2021.  The COVID-19 pandemic has lowered customer demand in the off-highway markets; the duration and severity of the impacts of COVID-19 are currently uncertain.

Products – Powertrain cooling (engine cooling modules, radiators, condensers, charge air coolers, fuel coolers and oil coolers); auxiliary cooling (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.

4

Our Industrial Businesses

Commercial and Industrial Solutions Segment

Market Overview – The primary markets served by our CIS segment experienced slight declines during fiscal 2020.  We expect these markets will decline further in fiscal 2021.  The COVID-19 pandemic is negatively impacting these markets; the duration and severity of the impacts of COVID-19 are currently uncertain.

Beyond the COVID-19 pandemic, trends influencing the primary CIS markets include refrigerant substitution and energy efficiency requirements, both of which are expected to benefit the commercial HVAC&R markets.  We also expect that future increases in urbanization, changing food consumption trends and increases in global trade will drive investments in refrigeration infrastructure.  Demand for efficient HVAC&R systems is driven by more stringent energy efficiency regulations and the need for higher-efficiency buildings.  Regulatory bodies are imposing stricter guidelines aimed to reduce carbon footprint, which we expect will drive growth in the data center market, as data centers will need to adopt the latest precision cooling solutions.  Lastly, we expect the anticipated reduction in Chinese government investments will negatively impact the industrial cooling market in China.

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 –The North American heating and ventilation market experienced moderate to relatively strong growth in fiscal 2020 due to overall favorable economic conditions and an increased demand from school systems.  Our businesses in the United Kingdom (“U.K.”) serve ventilating, air conditioning (“HVAC”) and data center markets in the U.K., mainland Europe, the Middle East, Far East and Africa.  In fiscal 2020, we saw strong growth within the colocation segment of data centers, offset slightly by a decline in comfort air conditioning markets largely attributable to the uncertainty of the withdrawal of the U.K. from the European Union (“Brexit.”)

With the exception of the data center market, where we are seeing heightened demand in light of increasing reliance on virtual capabilities resulting from stay-at-home edicts, the COVID-19 pandemic is negatively impacting the primary markets served by the BHVAC segment.  The duration and severity of the impacts of COVID-19 on these markets are currently uncertain.  Once markets return to a more normal state, we expect commercial investment, construction market activity, and energy efficiency legislation to drive increased demand in the ventilation and air conditioning markets.  We believe increased clarity regarding Brexit will begin benefitting the U.K. markets.  In addition, we expect an ever-increasing reliance on digital technologies, specifically colocation and cloud usage, to drive growth in the data center markets in the U.K. and Europe.  We also expect that 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 few years, as HVAC equipment providers shift products towards more efficient and environmentally-friendly alternatives.

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; 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 for 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, including colocation and cloud providers, education, hospitality, telecommunications, entertainment arenas, hotels, restaurants, hospitals, warehousing, manufacturing, and food and beverage processing.

Primary Competitors – Lennox International Inc (ADP).; Reznor (Nortek Global HVAC); Sterling (Mestek Inc.); 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; Greenheck (Greenheck and Valent); and Aaon, Inc.

5

Geographical Areas

We maintain administrative organizations in all key geographical regions 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
 
Belgium
India
 
   
Germany
South Korea
 
   
Hungary
   
   
Italy
   
   
Netherlands
   
   
Serbia
   
   
Spain
   
   
Sweden
   
   
United Kingdom
   

Our non-U.S. subsidiaries and affiliates manufacture and sell a number of vehicular and commercial, industrial and building HVAC&R products similar to those produced in the U.S.

Exports

Export sales from the U.S. to foreign countries, as a percentage of consolidated net sales, were 7 percent, 6 percent and 5 percent in fiscal 2020, 2019, and 2018, respectively.

We believe our international presence positions 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.

Customer Dependence

Our ten largest customers, some of which are conglomerates or otherwise affiliated, accounted for 45 percent of our consolidated net sales in fiscal 2020.  In fiscal 2020, Daimler AG accounted for 10 percent or more of our sales.  In fiscal 2019 and 2018, Daimler AG and Volkswagen AG each accounted for 10 percent or more of our sales.

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 (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 (more than 10 percent of CIS segment sales in fiscal 2020) 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.

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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 2021 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 concentrated between two global suppliers, with other suppliers qualified and supplying lesser amounts to mitigate risk.  We typically 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 included 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.  When applicable, however, these contract 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 until 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 2,500 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, construction, agricultural, and commercial, industrial, and building HVAC&R markets.  Our products and systems are often 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 $60 million, $70 million, and $66 million in fiscal 2020, 2019, and 2018, respectively.  As a percentage of our consolidated net sales, we have spent approximately 3 percent on R&D in each of the last three years.  This level of investment reflects our continued commitment to R&D in an ever-changing 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 EGR technology, oil coolers, charge air coolers, refrigerant heat exchangers, and battery thermal management systems for the automotive, commercial vehicle, agriculture, construction, and residential and commercial energy storage markets, which enable our customers to meet more 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 commercial and industrial thermal management products.  We also collaborate with several industry, university, and government-sponsored research organizations that conduct research and provide data on 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 capabilities.

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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 integrated and process-oriented Global Modine Management System, the majority of our manufacturing facilities and administrative offices are registered to ISO 9001:20015 or IATF 16949:2016 standards, helping to ensure that our customers receive high quality products and services.  Modine puts emphasis on monitoring process performance and adherence to meet rising customer expectations for performance, quality and service.

Our Global Modine Management System operates within the context of our Modine Operating System, 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 our company by utilizing the principles, processes and behaviors that are core to these systems.

To ensure future quality, we continue to execute 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 and employ waste management programs to advance our environmental stewardship and minimize our environmental footprint. The majority of our facilities maintain Environmental Management System (“EMS”) certification to the international ISO14001 standard through independent third-party audits.

We are focused on reducing both our energy and water usage and have empowered each of our global facilities to create and carry out action plans that will contribute to our company-wide reduction goals.  Examples of steps being taken to meet these goals include the 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.

We are committed to continuously driving energy efficiency across our product portfolio, reflecting our sense of environmental responsibility.  Our VTS segment products include EGR, oil and charge-air coolers, radiators, air conditioning condensers, battery and oil cooling systems, and charge-air coolers for cars, trucks, motorcycles, and specialty vehicles.  These products allow both internal combustion and electric vehicle systems to run at optimal temperatures, which promotes better fuel efficiency, lower emissions, and improved vehicle lifespans.  We continue to focus on component design and development to improve fuel efficiency and reduce overall energy consumption, while still providing the vehicle performance that our customers expect.  In our CIS and BHVAC segments, we are shifting our product portfolios toward lower-emission propellants and refrigerants that greatly reduce the environmental impact and enhance energy efficiency for our customers’ heating and cooling systems.  In addition, in our BHVAC segment, we are also focusing on reducing energy use by recycling waste heat produced from air conditioning systems.

Obligations for remedial activities may arise at our facilities due to past practices, or as a result of a property purchase or sale.  These obligations 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.  Environmental liabilities for investigative work and remediation at sites in the U.S. and abroad totaled $18 million at March 31, 2020.

We have consistently out-performed the private-industry Recordable Incident Rate (“RIR” as defined by OSHA) average for the manufacturing sector, which was 3.4 in 2018.  During fiscal 2020, we recorded an RIR of 1.14, which was lower than our prior year rate of 1.29.  Our behavior-based safety program proactively seeks to correct at-risk behaviors while positively reinforcing safe behaviors.

The health and safety of our employees is paramount to us.  In response to the COVID-19 pandemic, we have taken steps at all of our global locations to limit the risk of exposure.  These actions have included increasing the spacing between work stations, rotating or splitting shifts to reduce the number of employees in the plant, providing additional personal protective equipment as necessary, removing chairs from cafeterias to ensure social distancing, providing training on personal hygiene best practices, implementing additional cleansing and sanitizing processes in critical areas, and establishing programs allowing employees to work from home where possible, which are helping to protect both those employees who are working remotely and those who remain in our facilities.

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Employees

We employed approximately 11,300 persons worldwide as of March 31, 2020.

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 CIS 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.  We generally expect sales volume within our CIS segment to be higher during our first and second fiscal quarters due to the construction 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 majority 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 VTS segment, we maintain 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 have not experienced 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, among others:

Code of 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.

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ITEM 1A.
RISK FACTORS.

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 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, while preserving and enhancing shareholder 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.

A.
MARKET RISKS

COVID-19 Pandemic and Future Public Health Crises

The ongoing COVID-19 pandemic, and any future widespread outbreak of an illness or other public health threat, could adversely affect our business, financial position, results of operations and cash flows.

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic.  The spread of COVID-19 and the resulting work and travel restrictions, including international border closings, have disrupted, and may continue to disrupt, global supply chains and have negatively impacted the global economy.  As a result of this pandemic, we have experienced significant impacts on our operations.  We suspended production at many of our manufacturing facilities around the world due to customer shutdowns or local government requirements.  Although the temporarily-closed facilities have since reopened, we are operating many facilities at reduced capacity levels in response to decreased customer orders.

Beginning largely in April 2020 and in an effort to mitigate the negative impacts of COVID-19, we have taken actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization.  Our business operations could be further affected if any of our key management or leadership personnel are incapacitated or if a significant portion of our workforce is unable to work effectively due to illness, quarantines, government actions or similar pandemic-related impediments.  The COVID-19 threat has caused us to modify certain business practices (including employee work locations and limitations on physical participation in meetings) in ways that could be detrimental to our business, including, among others, working remotely and associated cybersecurity risks.

At this time, we are unable to quantify or predict the ultimate impacts on our business, the full extent of which will depend largely on future developments and the length and severity of the pandemic, all of which are unpredictable and outside of our control.  If we, our suppliers, or our customers experience further shutdowns or other significant business disruptions, our ability to conduct business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on our business, financial position, results of operations and cash flows.

Likewise, an outbreak of a disease or public health threat in the future could create economic and financial disruptions and adversely affect our businesses around the world.  Potential impacts of the COVID-19 pandemic and any future epidemics, pandemics, or other health crises include, but are not limited to, (i) staffing shortages if portions of our workforce are unable to work effectively due to illness, quarantines, government actions, facility closures, or other restrictions; (ii) short- or long-term disruptions in our supply chain and our ability to deliver products to our customers; (iii) deterioration in the markets that we or our customers operate in, which may result in lower sales or a lack in the ability to pay; and (iv) significant volatility or negative pressure in the financial markets, which could adversely affect our access to capital and/or financing.

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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, public health crises, such as pandemics and epidemics, including the COVID-19 pandemic, 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 losses 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 businesses, where a large portion of sales are attributable to a relatively small number of customers.  We principally compete for new 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.

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Our CIS segment includes significant sales generated from a single global technology customer (more than 10 percent of CIS 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 levels, 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 or disruptions 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, government-imposed restrictions relating to health crises or other unusual events, 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.

Continual customer pressure to absorb costs adversely affects our profitability.

Customers 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 results of operations.

Competitive Environment

We face strong competition.

The competitive environment continues to be dynamic as many of our customers, faced with intense international competition, have expanded their sourcing of components.  As a result, we experience 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 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.  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 could have an adverse effect on our results of operations and financial condition.

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B.
OPERATIONAL RISKS

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, and Asia.  In fiscal 2020, 52 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, changing economic conditions, public health crises, including the ongoing COVID-19 pandemic, unreliable intellectual property protection and legal systems, insufficient infrastructures, social unrest, political instability and disputes (including, for example, the uncertainty related to the 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.

Challenges of Maintaining a Competitive Cost Structure

We may be unable to maintain competitive cost structures within our business.

We have engaged in various restructuring activities in our VTS, CIS and BHVAC segments in order to optimize our manufacturing footprint and cost structure.  These restructuring activities have included targeted headcount reductions that support our objective of reducing operational and SG&A cost structures and the consolidation and/or closure of manufacturing facilities in North America and Europe.  In addition, we continue 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 Program Launches

We continue 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, particularly within our VTS segment, we must appropriately manage these launches and deploy our operational and administrative resources to take advantage of the resulting increase in our business.  If we do not successfully launch new 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 operating inefficiencies or asset impairment charges, which could adversely affect our results of operations.

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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 a substantial disruption in, or material breach of, our IT systems.

We are dependent upon our IT infrastructure, including network, hardware, and software systems, to conduct our 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 IT systems for a prolonged time period, or a material breach of our 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, and could lead to significant remediation expenses and litigation risks.  Our systems, and the systems of our service 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 occurrences, many of which may, despite our best efforts, be beyond our ability to effectively detect, anticipate or control.  This impact may be heightened by the increased disbursement of our workforce resulting from our own and from government efforts to mitigate the spread of the COVID-19 pandemic.  Any such events and the related delays, problems or costs could have a material adverse effect on our business, financial condition, results of operations and reputation.

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-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.

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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, financial condition and reputation.

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 and results of operations.

C.
STRATEGIC RISKS

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.

We previously announced our evaluation of strategic alternatives for our automotive business within our VTS segment. While we have paused this process in light of the COVD-19 pandemic, we are committed to exiting this business in a manner that is in the best interest of our shareholders and will resume the process when economic conditions improve.  It is possible that our exit strategy may ultimately include a combination of both selling and winding-down or closing portions of the automotive business.  While we have spent considerable resources working towards the separation of the automotive business and preparing for a potential sale, there can be no assurance that the evaluation will result in a consummated transaction.  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 growth opportunities may adversely impact our business and operating results.

We expect to continue to pursue acquisitions in “industrial” 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, 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.

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D.
FINANCIAL RISKS

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, 2020, we had total outstanding indebtedness of $482 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.

Our credit and Senior Note agreements contain financial covenants that, among other things, require us to maintain a minimum interest coverage ratio and impose a maximum leverage ratio.  Although we recently amended these agreements to provide additional flexibility in light of risks and uncertainties resulting from the COVID-19 pandemic, our failure to comply with debt covenants could result in an event of default, which, if not cured or waived, could result in us being required to repay these borrowings before their due date.  If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be adversely affected by increased costs and interest rates.

The planned phase out of the London Interbank Offer Rate (“LIBOR”) could have an adverse effect on our financial condition and access to capital.

Our revolving credit facility and current term loans utilize LIBOR to set the interest rate on outstanding borrowings.  The United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer persuade or compel panel banks to submit the rates required to calculate LIBOR.  Currently, there is no definitive information or consensus regarding the future utilization of LIBOR or 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.  Should a suitable replacement for LIBOR not be available, however, the rates under our variable rate indebtedness could increase and access to capital could be limited.

Market trends and regulatory requirements may require additional funding for our pension plans.

Our defined benefit pension plans in the U.S. are frozen to new participants.  Our funding policy 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 liability totaling $98 million.  During fiscal 2021, we anticipate making funding contributions totaling $20 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 assumptions, 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 financial 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 $272 million at March 31, 2020.  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.

16

We use judgment in determining if an indication of impairment exists.  For our annual goodwill impairment tests, we use significant estimates and assumptions, including revenue growth rates and operating profit margins to calculate estimated future cash flows, risk-adjusted discount rates, business trends and market conditions.  We cannot predict the occurrence of future events or circumstances, including lower than forecasted revenues, market trends that fall below our current expectations, actions of key customers, increases in discount rates, and the continued economic uncertainty and impacts associated with the COVID-19 pandemic, which could adversely affect the carrying value of goodwill and intangible assets.  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 become subject to additional tax exposure.

As of March 31, 2020, our net deferred tax assets totaled $97 million.  These deferred tax assets include, among others, net operating loss carryforwards and tax credit carryforwards that may be used in certain tax jurisdictions to offset future taxable income and reduce income taxes payable.  Each quarter, we determine the probability that the deferred tax assets will be realized.  This determination involves judgement and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies.  Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of our operations in certain jurisdictions, could require us to establish further valuation allowances, which could have a material adverse effect on our results of operations and financial condition.

In addition, the subjectivity of or changes in tax laws and regulations in jurisdictions where we have significant operations could materially affect our results of operations and financial condition.  We are also subject to tax audits in each jurisdiction in which we operate.  Unfavorable or unexpected outcomes from one or more tax audits could adversely affect our results of operations and financial condition.

ITEM 1B.
UNRESOLVED STAFF COMMENTS.

None.

17


ITEM 2.
PROPERTIES.

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, 2020.  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
North and South America
Lawrenceburg, TN
554,000 sq. ft.
Manufacturing
144,000 Owned
410,000 Leased
Nuevo Laredo, Mexico
466,000 sq. ft.
Manufacturing
399,000 Owned
67,000 Leased
Sao Paulo, Brazil
375,000 sq. ft.
Manufacturing
Owned
Jefferson City, MO
202,000 sq. ft.
Manufacturing
162,000 Owned
40,000 Leased
Trenton, MO
160,000 sq. ft.
Manufacturing
Owned
Joplin, MO
140,000 sq. ft.
Manufacturing
Owned
Laredo, TX
92,000 sq. ft.
Warehouse
Leased
 
Europe
Bonlanden, Germany
205,000 sq. ft.
Administrative & technology center
Owned
Kottingbrunn, Austria
221,000 sq. ft.
Manufacturing
Owned
Pontevico, Italy
167,000 sq. ft.
Manufacturing
Owned
Mezökövesd, Hungary
246,000 sq. ft.
Manufacturing
Owned
Pliezhausen, Germany
126,000 sq. ft.
Manufacturing
48,000 Owned
78,000 Leased
Uden, Netherlands
107,000 sq. ft.
Manufacturing
74,000 Owned
33,000 Leased
Neuenkirchen, Germany
76,000 sq. ft.
Manufacturing
Owned
Gyöngyös, Hungary
58,000 sq. ft.
Manufacturing
Leased
 
Asia
Changzhou, China
257,000 sq. ft.
Manufacturing
Owned
Chennai, India
154,000 sq. ft.
Manufacturing
Owned
Yangzhou, China
96,000 sq. ft.
Manufacturing (Joint Venture)
Leased
Shanghai, China
80,000 sq. ft.
Manufacturing
Leased
Jincheon, South Korea
46,000 sq. ft.
Manufacturing (Joint Venture)
Leased

18


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
 
Asia
Zhongshan, China
143,000 sq. ft.
Manufacturing
Leased
Wuxi, China
303,000 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
247,000 sq. ft.
Administrative & manufacturing
Leased
Consett, United Kingdom
38,000 sq. ft.
Manufacturing
Owned
Consett, United Kingdom
20,000 sq. ft.
Manufacturing
Leased
 
Corporate Headquarters
Racine, WI
458,000 sq. ft.
Headquarters & technology center
Owned

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 20 of the Notes to Consolidated Financial Statements.

ITEM 4.
MINE SAFETY DISCLOSURES.

Not applicable.

19

INFORMATION ABOUT OUR EXECUTIVE OFFICERS.

The following sets forth the name, age (as of March 31, 2020), recent business experience and certain other information relative to each executive officer of the Company.

Name
 
Age
 
Position
Brian J. Agen
 
51
 
Vice President, Human Resources (October 2012 – Present).
 
Scott L. Bowser
 
55
 
Vice President, Commercial and Industrial Solutions and Chief Operating Officer (September 2019 - Present); previously Vice President, Chief Operating Officer; Vice President, Global Operations; and Vice President of Asia and Global Procurement for the Company.
 
Thomas A. Burke
 
62
 
President and Chief Executive Officer (April 2008 – Present).
 
Joel T. Casterton
 
48
 
Vice President, Vehicular Thermal Solutions (January 2018 – Present); previously Director – Global Program Management & Quality for the Company.
 
Michael B. Lucareli
 
51
 
Vice President, Finance and Chief Financial Officer (October 2011 – Present).
 
Matthew J. McBurney
 
50
 
Vice President, Building HVAC and Corporate Strategy (November 2019 - Present); previously Vice President, Strategic Planning and Development; Vice President, Luvata Integration; and Vice President, Building HVAC for the Company.
 
Scott A. Miller
 
55
 
Vice President, Global Coils and Coolers (November 2019 – Present); previously Vice President, Building HVAC; Managing Director – Global Operations; and Operations Director of the Building HVAC and North America business units for the Company.
 
Sylvia A. Stein
 
53
 
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.
 

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 may 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 Ms. Stein, who joined in January 2018, whose business experience during the last five years is described 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.

20

PART II

ITEM 5.
MARKET FOR REGISTRANT'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.  As of March 31, 2020, shareholders of record numbered 2,282.

We did not pay dividends during fiscal 2020 or 2019.  Under our credit agreements, we are permitted to pay dividends on our common stock, subject to certain restrictions based upon 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 2021.

The following describes the Company’s purchases of common stock during the fourth quarter of fiscal 2020:

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 (a)
January 1 – January 31, 2020
2,850 (b)
$7.28
———
$46,985,524
         
February 1 – February 29, 2020
16,948 (b)
$8.07
———
$46,985,524
         
March 1 – March 31, 2020
———
———
———
$46,985,524
         
Total
19,798 (b)
$7.95
———
 

(a)
Effective October 30, 2018, the Board of Directors approved a two-year, $50.0 million share repurchase program, which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.

(b)
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 tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

21

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.

graphic

         
Indexed Returns
 
   
Initial Investment
   
Years ended March 31,
 
Company / Index
 
March 31, 2015
   
2016
   
2017
   
2018
   
2019
   
2020
 
Modine Manufacturing Company
 
$
100
   
$
81.74
   
$
90.57
   
$
157.02
   
$
102.97
   
$
24.13
 
Russell 2000 Index
   
100
     
90.24
     
113.90
     
127.33
     
129.94
     
98.77
 
S&P MidCap 400 Industrials Index
   
100
     
97.44
     
121.41
     
141.39
     
143.14
     
116.40
 

22


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)
 
2020
   
2019
   
2018
   
2017
   
2016
 
                               
Net sales
 
$
1,976
   
$
2,213
   
$
2,103
   
$
1,503
   
$
1,353
 
Operating income
   
38
     
110
     
92
     
42
     
37
 
Net (loss) earnings
   
(2
)
   
86
     
24
     
15
     
(1
)
Total assets
   
1,536
     
1,538
     
1,573
     
1,450
     
921
 
Long-term debt - excluding current portion
   
452
     
382
     
407
     
446
     
126
 
Net cash provided by operating activities
   
58
     
103
     
124
     
42
     
72
 
Expenditures for property, plant and equipment
   
71
     
74
     
71
     
64
     
63
 
Net (loss) earnings per share attributable to Modine shareholders:
                                       
Basic
 
$
(0.04
)
 
$
1.67
   
$
0.44
   
$
0.29
   
$
(0.03
)
Diluted
   
(0.04
)
   
1.65
     
0.43
     
0.29
     
(0.03
)

The following factors impact the comparability of the selected financial data presented above:

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 2020, 2019, 2018, and 2017, CIS segment net sales were $624 million, $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.

During fiscal 2020, 2019, 2018, 2017, and 2016, we incurred $12 million, $10 million, $16 million, $11 million, and $17 million, respectively, of restructuring expenses.  See Note 5 of the Notes to Consolidated Financial Statements for additional information.

During fiscal 2020, 2018, and 2016, we recorded asset impairment charges totaling $9 million, $3 million and $10 million, respectively.  See Notes 5, 13, and 14 of the Notes to Consolidated Financial Statements for additional information.

During fiscal 2020 and 2019, the Company recorded $39 million and $7 million, respectively, of costs directly associated with its review of strategic alternatives for the VTS segment's automotive business, including costs to separate and prepare the business for a potential sale.

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 7 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.

23


ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

Founded in 1916, Modine Manufacturing Company is a global leader in thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets.  We operate on five continents, in 17 countries, and employ approximately 11,300 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 on- and 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, ventilating, air conditioning, and refrigeration markets.

Company Strategy

Fiscal 2020 brought challenges, including market weakness in key vehicular end markets and the COVID-19 pandemic, which negatively impacted our businesses, beginning in the fourth quarter in Asia and Europe.  In response to these challenges, we have rapidly implemented cost-savings measures to mitigate the impacts of lower customer demand.  These measures have included, but are not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization.  We are reducing operating and administrative expenses, including travel and entertainment expenditures, and lowering the annual compensation paid to the Board of Directors.  We have also taken steps specifically aimed to preserve cash and maximize our liquidity.  In addition, we are focused on reducing capital expenditures by delaying certain projects and the purchase of some program-related equipment and tooling.

Both the vehicular market weakness and the impacts of the COVID-19 pandemic during fiscal 2020 placed significant strain on our previously-announced evaluation of strategic alternatives for the automotive business.  As a result, we have paused this process until economic conditions improve.  We remain committed, however, to exiting the automotive business in a manner that is in the best interest of our shareholders.

As we steer our business through these uncertain times in light of the COVID-19 pandemic, we are focused on leveraging the advantages we have.  We have made significant strides in becoming an industrial thermal management company and possess superior technology that we can apply to targeted end markets.  We are confident in our Company’s strong foundation, comprised of our effective leadership team, committed workforce, and engaged board of directors.  Through our strong foundation, we believe we can create and maintain shareholder value even in these times of unprecedented uncertainty.

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 form the basis for multiple products and product 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 four 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-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.

24

We devote significant resources to global strategic planning and development activities to strengthen our competitive position.  We expect to continue to pursue organic- and external-growth opportunities, particularly to grow our global, market leading positions in our industrial businesses.  As an example, we recently announced that we are changing how we will go to market to existing and potential new data center customers and are expanding our data center offerings into the North American market.  We are bringing together the full systems capability and established roots of our BHVAC segment in the data center space with the global manufacturing expertise and customer relationships within CIS.  We expect strong growth opportunities in the North American data center market as the industry is growing exponentially in order to keep up with the ever-increasing reliance on digital technologies.

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 nature 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 executed restructuring activities in our VTS and CIS segments during recent years. We have also developed a single focus approach to the data center market by combining the resources and capabilities of our BHVAC and CIS teams.  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 sourcing, when appropriate, and enter into contracts with some of our customers that provide for commodity 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 2020 was based upon consolidated operating income growth and a cash flow margin metric.  These performance goals drive alignment of management and shareholders’ interests in both our earnings growth and cash 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, and performance-based stock awards.  The performance-based stock awards for the fiscal 2020 through 2022 performance period are based upon a target three-year average annual revenue growth and a target three-year average consolidated cash flow return on 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, 2020, we began managing our automotive business separate from the VTS segment as we target the sale or eventual exit of the automotive business.  We will report financial results for the automotive segment beginning in the first quarter of fiscal 2021.

Vehicular Thermal Solutions (58 percent of fiscal 2020 net sales)

Our VTS 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 OEMs in the automotive, commercial vehicle, and off-highway markets in North America, South America, Europe, and Asia.  In addition, our VTS segment also serves Brazil’s automotive and commercial vehicle aftermarkets.

Sales volume in the VTS segment decreased during fiscal 2020, as compared with the prior year.  In particular, sales to commercial vehicle and off-highway customers decreased significantly compared with the prior year, resulting from weakness in the global vehicular markets and the planned wind-down of certain commercial vehicle programs.  In addition, to a lesser extent, sales volume decreased to automotive customers in fiscal 2020.  During fiscal 2020, we recorded asset impairment charges totaling $8 million, primarily related to manufacturing facilities in Austria and Germany that are expected to be negatively impacted by planned wind downs of certain commercial vehicle and automotive programs.

25

We previously announced our evaluation of strategic alternatives for the automotive business.  As a result of the widespread economic impacts of the COVID-19 pandemic, we have paused this process, yet we remain committed to exiting this business in a manner that is in the best interest of our shareholders.  We intend to resume this process once we determine that market conditions will support our effort to maximize the value of our business.  It is possible that our exit strategy may ultimately include a combination of both selling and winding-down or closing portions of the automotive business.  We remain committed to executing on the best strategic alternative for the automotive business in order to both optimize our VTS segment’s financial performance and maximize shareholder value.

Commercial and Industrial Solutions (31 percent of fiscal 2020 net sales)

Our CIS 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, products for precision climate control for other applications such as data center cooling, 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 2020, CIS segment sales volume decreased to both commercial HVAC&R and data center customers.  The lower sales volume to commercial HVAC&R customers was largely attributable to general market weakness.  In particular, the U.S. refrigeration transport market declined compared with the prior year.  The lower data center sales primarily resulted from a significant decline in sales to an individual data center customer in fiscal 2020.  The lower sales to this customer primarily resulted from the customer’s temporary lull in additional investment, after strong capacity expansion in the prior year.

Looking ahead, while the duration and severity of the impacts of COVID-19 on the markets we serve are currently uncertain, our team is focused on improving financial results through manufacturing efficiencies, vertical integration projects and pricing strategies.  We will continue to support our customers with innovative products, such as coils with smaller diameter tubing, to help them meet increasingly-stringent environmental requirements.  Also, we have increased our product offerings that feature low Global Warming Potential refrigerants, which are more environmentally friendly than traditional refrigerants, and will continue to support the transition to natural refrigerants through our comprehensive line of commercial cooler products.  We aim to capitalize on opportunities arising from energy and environmental regulations and believe we are well-positioned to be the partner of choice for our customers.

Building HVAC Systems (11 percent of fiscal 2020 net sales)

Our BHVAC segment manufactures and distributes a variety of original equipment and aftersales HVAC products, primarily for commercial buildings and related applications in North America, the U.K., mainland Europe, the Middle East, Asia, and Africa.  We sell and distribute our heating, ventilation and cooling products through wholesalers, 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- 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, which are 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.  During fiscal 2020, sales increased in North America, primarily driven by increased sales of ventilation and heating products.  These higher sales in North America were partially offset by lower sales in the U.K., primarily due to lower sales of air conditioning and ventilation products.

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We are focused on being a leader in the development of sustainable HVAC solutions for our customers.  As recently announced, we are targeting to expand our data center cooling business into the North American market.  We have established roots in the data center space and plan to leverage our North American presence, including our manufacturing footprint and thermal management expertise, to deploy integrated data center cooling solutions to the U.S. market.  We are seeing heightened demand in the data center markets, particularly in light of the increasing reliance on virtual capabilities resulting from stay-at-home edicts associated with the COVID-19 pandemic.

Consolidated Results of Operations

Fiscal 2020 net sales decreased $237 million, or 11 percent, from the prior year, primarily due to lower sales in our VTS and CIS operating segments, partially offset by higher sales in our BHVAC segment.  Foreign currency exchange rate changes negatively impacted sales in fiscal 2020 by $46 million.  Cost of sales decreased $179 million, or 10 percent, from last year, primarily due to lower sales volume.  Gross profit decreased $58 million and gross margin declined 90 basis points to 15.6 percent.  SG&A expenses increased $6 million, primarily due to separation and project costs associated with our review of strategic alternatives for the VTS segment’s automotive business, which increased approximately $29 million compared with fiscal 2019.  The higher separation and project costs were partially offset by lower-compensation related expenses.  Operating income during fiscal 2020 decreased $72 million to $38 million, primarily due to lower gross profit and higher SG&A expenses.

The COVID-19 pandemic began negatively impacting our business beginning with our Asian and European markets in the fourth quarter of fiscal 2020.  Both weakness in key vehicular markets and the impacts of the COVID-19 pandemic placed significant strain on our previously-announced evaluation of strategic alternatives for the automotive business within the VTS segment.  As a result, we paused this process until economic conditions improve.  We remain committed, however, to exiting the automotive business in a manner that is in the best interest of our shareholders.  Once we resume the process, it is possible that our exit strategy may ultimately include a combination of both selling and winding-down or closing portions of the automotive business.  We have spent considerable time and money separating the automotive business and preparing for a potential sale.  We have dedicated resources to physically separate the automotive manufacturing operations, including resources for IT systems and separate business processes, and have also established new legal entities.  We believe these resource investments are critical to exiting the automotive business.  We remain committed to our strategy of becoming a diversified industrial company and executing on the best strategic alternative for the automotive business in order to both optimize our VTS segment’s financial performance and maximize shareholder value.

As a result of the impacts of the COVID-19 pandemic, we suspended production at certain manufacturing facilities in China, India, Italy, Spain, Germany, the Netherlands, Austria, Hungary, the U.S., Mexico and Brazil due to local government requirements or customer shutdowns and are operating other facilities in the U.S. and abroad at reduced capacity levels.  Although the temporarily-closed facilities have since reopened, many are operating at a significantly reduced volume because of low customer demand.  Beginning largely in April 2020 and in an effort to mitigate the negative impacts of COVID-19 on our financial results, we have taken actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization.  In addition, we are reducing operating and administrative expenses, including travel and entertainment expenditures, and lowering the annual compensation paid to the Board of Directors.  We are also focused on reducing capital expenditures by delaying certain projects and the purchase of some program-related equipment and tooling.

27

The following table presents our consolidated financial results on a comparative basis for fiscal years 2020 and 2019.  A detailed comparison of our consolidated fiscal 2019 and 2018 financial results can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on May 23, 2019.

   
Years ended March 31,
 
   
2020
   
2019
 
(in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
 
Net sales
 
$
1,976
     
100.0
%
 
$
2,213
     
100.0
%
Cost of sales
   
1,668
     
84.4
%
   
1,847
     
83.5
%
Gross profit
   
308
     
15.6
%
   
366
     
16.5
%
Selling, general and administrative expenses
   
250
     
12.6
%
   
244
     
11.0
%
Restructuring expenses
   
12
     
0.6
%
   
10
     
0.4
%
Impairment charges
   
9
     
0.4
%
   
-
     
-
 
(Gain) loss on sale of assets
   
(1
)
   
-
     
2
     
0.1
%
Operating income
   
38
     
1.9
%
   
110
     
5.0
%
Interest expense
   
(23
)
   
-1.1
%
   
(25
)
   
-1.1
%
Other expense - net
   
(5
)
   
-0.2
%
   
(4
)
   
-0.2
%
Earnings before income taxes
   
10
     
0.5
%
   
81
     
3.7
%
(Provision) benefit for income taxes
   
(12
)
   
-0.6
%
   
5
     
0.2
%
Net (loss) earnings
 
$
(2
)
   
-0.1
%
 
$
86
     
3.9
%

Fiscal 2020 net sales of $1,976 million were $237 million, or 11 percent, lower than the prior year, primarily due to lower sales in our VTS and CIS segments and a $46 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in our BHVAC segment.  Sales decreased $175 million and $84 million in our VTS and CIS segments, respectively.  Sales increased $9 million in our BHVAC segment.

Fiscal 2020 cost of sales of $1,668 million decreased $179 million, or 10 percent, primarily due to lower sales volume and a $39 million favorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 90 basis points to 84.4 percent and was negatively impacted by approximately 80 basis points due to higher labor and inflationary costs and, to a lesser extent, by sales mix.  These negative impacts were partially offset by favorable material costs, which impacted costs of sales by approximately 30 basis points.  The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.  In addition, we recorded $3 million of costs at Corporate for program and equipment transfers associated with the separation of the VTS segment’s automotive business in preparation for a potential sale.

As a result of lower sales and higher cost of sales as a percentage of sales, fiscal 2020 gross profit decreased $58 million and gross margin declined 90 basis points to 15.6 percent.

Fiscal 2020 SG&A expenses increased $6 million.  The increase in SG&A was primarily due to separation and project costs recorded at Corporate associated with our review of strategic alternatives for the VTS segment’s automotive business, which increased approximately $29 million.  This increase was partially offset by lower compensation-related expenses, which decreased approximately $13 million, lower environmental charges related to previously-owned manufacturing facilities in the U.S., which decreased approximately $3 million, and a $4 million favorable impact from foreign currency exchange rate changes.

Restructuring expenses totaled $12 million during fiscal 2020 and increased $2 million compared with the prior year.  The fiscal 2020 restructuring expenses primarily consisted of severance expenses related to targeted headcount reductions in the VTS segment and equipment transfer and plant consolidation costs in the CIS segment.  The fiscal 2020 headcount reductions were in response to lower market demand and in support of our objective to reduce operational and SG&A cost structures.  During fiscal 2021, we approved headcount reductions in the VTS and CIS segments and, as a result, we expect to record approximately $4 million of severance expenses during the first quarter of fiscal 2021.

During fiscal 2020, we recorded impairment charges totaling $9 million, primarily related to two manufacturing facilities in the VTS segment.

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Operating income of $38 million during fiscal 2020 decreased $72 million compared with the prior year.  This decrease was primarily due to an increase of $32 million of separation and project costs associated with our review of strategic alternatives for our automotive business and lower earnings in our VTS and CIS segments, which decreased $37 million and $20 million, respectively, partially offset by higher earnings in our BHVAC segment, which increased $9 million.

The provision for income taxes was $12 million in fiscal 2020, compared with a benefit for income taxes of $5 million in fiscal 2019.  The $17 million change was primarily due to the absence of income tax benefits totaling $25 million recorded in the prior year and income tax charges totaling $10 million in the current year, partially offset by lower operating earnings in fiscal 2020.  The $25 million of income tax benefits recorded in fiscal 2019 related to the recognition of tax assets for foreign tax credits and a manufacturing deduction in the U.S. and our accounting for the Tax Act.  The $10 million of income tax charges in fiscal 2020 were comprised of net charges totaling $7 million resulting from adjustments of valuation allowances on certain deferred tax assets in the U.S. and in a foreign jurisdiction and $3 million associated with legal entity restructuring in preparation for a potential sale of our automotive business.  See Note 7 of the Notes to Consolidated Financial Statements for additional information.

Segment Results of Operations

A detailed comparison of our segment financial results for fiscal 2019 and 2018 can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on May 23, 2019.

Effective April 1, 2020, we began managing our automotive business separate from the other businesses within the VTS segment.  We are managing the automotive business as a separate segment as we target the sale or eventual exit of the automotive businesses.  Beginning for fiscal 2021, we will report the financial results for the automotive business as the Automotive segment.  The remaining portion of the previous VTS segment will be named the Heavy-Duty Equipment segment and will include the heavy-duty commercial vehicle and off-highway businesses.

VTS
   
Years ended March 31,
 
   
2020
   
2019
 
(in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
 
Net sales
 
$
1,177
     
100.0
%
 
$
1,352
     
100.0
%
Cost of sales
   
1,032
     
87.7
%
   
1,165
     
86.2
%
Gross profit
   
145
     
12.3
%
   
187
     
13.8
%
Selling, general and administrative expenses
   
100
     
8.5
%
   
113
     
8.3
%
Restructuring expenses
   
10
     
0.8
%
   
9
     
0.7
%
Impairment charges
   
8
     
0.7
%
   
-
     
-
 
Gain on sale of assets
   
(1
)
   
-0.1
%
   
-
     
-
 
Operating income
 
$
28
     
2.3
%
 
$
65
     
4.8
%

VTS net sales decreased $175 million, or 13 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume, a $31 million unfavorable impact of foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs.  Sales to commercial vehicle, off-highway, and automotive customers decreased $64 million, $60 million, and $34 million, respectively.  These sales declines largely result from weakness in global vehicular markets and the planned wind-down of certain commercial vehicle programs.

VTS cost of sales decreased $133 million, or 11 percent, primarily due to lower sales volume and a $26 million favorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.7 percent.  Beyond the unfavorable impact of the lower sales volume, higher labor and inflationary costs and unfavorable customer pricing negatively impacted cost of sales by approximately 90 basis points and 70 basis points, respectively.  Higher depreciation costs, primarily resulting from recent manufacturing capacity expansion in China and Hungary, also negatively impacted cost of sales to a lesser extent.  These negative impacts were partially offset by favorable material costs, which i