(in millions) | | Year Ended March 31, 2016 Compared with Year Ended March 31, 2015: Fiscal 2016 net sales decreased $143 million, or 10 percent, from the prior year, primarily due to lower sales in our Americas and Europe segments. Sales volume increases in our Europe segment were more than offset by a $76 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2016 sales were negatively affected by a $110 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar. Gross profit decreased $23 million to $224 million in fiscal 2016, yet gross margin of 16.5 percent was consistent with the prior year. The decrease in gross profit was primarily due to a $14 million unfavorable impact of foreign currency exchange rate changes, $9 million of pension settlement losses, and lower sales volume in the Americas segment, partially offset by lower material costs, improved production efficiencies, and cost-savings initiatives. Fiscal 2016 SG&A expenses increased $21 million from the prior year. The increase was primarily due to $33 million of pension settlement losses and the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in the prior year, partially offset by ongoing cost-control initiatives and a $10 million favorable impact of foreign currency exchange rate changes. Restructuring expenses increased $12 million in fiscal 2016 compared with the prior year, primarily due to severance expenses in the Europe and Americas segments and equipment transfer costs related to plant consolidation activities in the Americas segment. In fiscal 2016, we recorded a $10 million impairment charge to write down the carrying value of a manufacturing facility in Germany to fair value. In fiscal 2015, we recorded a goodwill impairment charge of $8 million in Brazil and recognized a gain of $3 million from the sale of a wind tunnel in Germany. The operating loss of $8 million in fiscal 2016 represents a $61 million decline from $53 million of operating income in the prior year. This decline was primarily due to $42 million of pension settlement losses, lower gross profit, higher restructuring expenses, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by ongoing cost-control initiatives. Other income during fiscal 2016 includes a $10 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire in fiscal 2014. Our benefit for income taxes was $9 million in fiscal 2016, compared with a provision for income taxes of $19 million in fiscal 2015. This $28 million change was primarily due to $16 million of income tax benefits related to pension settlement losses in the current year, a decrease in pre-tax operating earnings, and a $3 million income tax benefit related to the reversal of a deferred tax asset valuation allowance in the current year.
Year Ended March 31, 2015 Compared with Year Ended March 31, 2014:
Fiscal 2015 net sales increased $18 million, or 1 percent, from fiscal 2014,the prior year, primarily due to sales increases in our Building HVAC Asia, and North AmericaAsia segments, partially offset by lower sales in our South AmericaAmericas segment, as economic conditions in Brazil were weak, and in our Europe segment, where sales increases were more than offset by a $35 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2015 sales were negatively affected by a $43 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar during the year.dollar.
Gross profit increased $9 million to $247 million in fiscal 2015 and gross margin increased 40 basis points to 16.5 percent, primarily due to sales volume improvements and lower warranty costs.
Fiscal 2015 SG&A expenses in fiscal 2015 increased $2 million to $184 million compared withfrom the prior year, primarily due to increased engineering and development costs and SG&A expenses at our Barkell business, which we acquired in the fourth quarter of fiscal 2014, partially offset by $5 million of recoveries from business interruption insurance during fiscal 2015 related to the Airedale fire.
Restructuring expenses decreased $11 million in fiscal 2015 compared with the prior year, primarily due to lower restructuring costs in Germany,our Europe segment, partially offset by higher severance-related costsseverance expenses in South America.our Americas segment.
DuringIn fiscal 2015, we sold a wind tunnel in Germany that we no longer considered to be a core asset, and recognized a gain of $3 million. In addition, we recorded a goodwill impairment charge of $8 million in our South America segment during fiscal 2015.related to Brazil. In fiscal 2014, we recorded $3 million of impairment charges, primarily related to restructuring actions in our Europe segment.
Operating income of $53 million in fiscal 2015 increased $16 million compared with fiscal 2014.the prior year. This improvement was primarily due to higher gross profit on increased sales volume, lower restructuring expenses, and the gain on the sale of the wind tunnel, partially offset by higher impairment charges and slightly higher SG&A expenses.
Our provision for income taxes was $19 million in fiscal 2015, compared with a benefit from income taxes of $108 million in fiscal 2014. The provision for taxes in the U.S. totaled $9 million in fiscal 2015, compared with a significant benefit for taxes in fiscal 2014, which resulted primarily from the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $10 million and $11 million in fiscal 2015 and 2014, respectively. Earnings from discontinued operations of $1 million in fiscal 2015 related to a gain associated with the final collection of proceeds from the fiscal 2009 sale of our Electronic Cooling business.
Year Ended March 31, 2014 Compared with Year Ended March 31, 2013:
In fiscal 2014, net sales increased $102 million, or 7 percent, from fiscal 2013, primarily due to an $86 million sales increase in our Europe segment, driven by sales volume improvements within the commercial vehicle and automotive markets. In addition, sales in our Asia, Building HVAC and North America segments increased year over year. Our South America segment sales decreased, however, primarily due to unfavorable foreign currency exchange rate changes.
Gross profit increased $29 million to $238 million in fiscal 2014 from the prior year and gross margin increased 90 basis points to 16.1 percent, primarily due to higher sales volume and favorable material costs.
SG&A expenses in fiscal 2014 increased $16 million to $182 million from fiscal 2013, primarily due to higher compensation-related expenses, the reversal of a $2 million acquisition-related liability that reduced SG&A expenses in the prior year, and $1 million of costs directly related to the Airedale fire, partially offset by lower professional service expenses.
Restructuring expenses were $16 million and $17 million in fiscal 2014 and 2013, respectively, primarily due to employee severance costs related to restructuring activities within our Europe segment. In addition, we recorded impairment charges during fiscal 2014 and 2013 of $3 million and $26 million, respectively, primarily related to our restructuring actions in the Europe segment.
Operating income of $37 million during fiscal 2014 represented a $38 million improvement compared with fiscal 2013. This improvement was primarily due to higher gross profit on increased sales volume and favorable material costs and lower impairment charges, partially offset by higher SG&A expenses.
Our benefit for income taxes was $108 million in fiscal 2014 compared with a provision for income taxes of $10 million in fiscal 2013. The large benefit for income taxes in fiscal 2014 was primarily due to the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $11 million and $10 million in fiscal 2014 and 2013, respectively.
Segment Results of Operations
During fiscal 2015, we changed the name of our Commercial Products segment to Building HVAC in order to better reflect the nature of the segment’s product lines. There were no changes to the operations or reported financial results of the segment as a result.
Effective April 1, 2015,2016, we combined our North America and South America segments into the Americas segment to streamline operations, with the objective of streamlining our operations to gain synergies and improve our cost structure. Beginning forAs a result, we recast the prior-period segment financial information to conform to the current-period presentation. There was no impact to our consolidated financial statements as a result.
Americas | | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 586 | | | | 100.0 | % | | $ | 667 | | | | 100.0 | % | | $ | 688 | | | | 100.0 | % | Cost of sales | | | 486 | | | | 82.9 | % | | | 558 | | | | 83.7 | % | | | 574 | | | | 83.4 | % | Gross profit | | | 100 | | | | 17.1 | % | | | 109 | | | | 16.3 | % | | | 114 | | | | 16.6 | % | Selling, general and administrative expenses | | | 55 | | | | 9.4 | % | | | 65 | | | | 9.7 | % | | | 62 | | | | 9.0 | % | Restructuring expenses | | | 9 | | | | 1.5 | % | | | 3 | | | | 0.4 | % | | | 1 | | | | 0.2 | % | Impairment charges | | | - | | | | - | | | | 8 | | | | 1.2 | % | | | 1 | | | | 0.2 | % | Operating income | | $ | 36 | | | | 6.2 | % | | $ | 33 | | | | 5.0 | % | | $ | 50 | | | | 7.2 | % |
Americas net sales decreased $81 million, or 12 percent, in fiscal 2016 we will report financial results forcompared with the new Americas operating segment, which will includeprior year. Sales were lower in both North America and South America. North America | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 574 | | | | 100.0 | % | | $ | 569 | | | | 100.0 | % | | $ | 565 | | | | 100.0 | % | Cost of sales | | | 477 | | | | 83.1 | % | | | 475 | | | | 83.6 | % | | | 484 | | | | 85.6 | % | Gross profit | | | 97 | | | | 16.9 | % | | | 94 | | | | 16.4 | % | | | 81 | | | | 14.4 | % | Selling, general and administrative expenses | | | 50 | | | | 8.7 | % | | | 50 | | | | 8.6 | % | | | 40 | | | | 7.2 | % | Restructuring expenses | | | 1 | | | | 0.2 | % | | | 1 | | | | 0.2 | % | | | - | | | | - | | Impairment charges | | | - | | | | - | | | | 1 | | | | 0.2 | % | | | 2 | | | | 0.3 | % | Operating income | | $ | 46 | | | | 8.0 | % | | $ | 42 | | | | 7.4 | % | | $ | 39 | | | | 6.9 | % |
foreign currency exchange rate changes. Sales in North America net sales increased $5decreased $43 million, or 1 percent, from fiscal 2014 to fiscal 2015, and increased $4 million, or 1 percent, from fiscal 2013 to fiscal 2014. The fiscal 2015 sales increase was primarily due to lower sales volume to off-highway and commercial vehicle customers, partially offset by higher sales volume to automotive customers. Sales volume to all markets in Brazil also declined during fiscal 2016, as economic conditions in Brazil remained weak. Sales decreased $21 million, or 3 percent, in fiscal 2015 compared with fiscal 2014, primarily due to lower sales in Brazil and a $9 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in North America, where higher sales volume to commercial vehicle customers were partially offset by decreased sales volume to off-highway customers as economic conditions in that market remained relatively weak. The fiscal 2014 sales increase, compared with fiscal 2013, was primarily due to higher sales volume to automotive and commercial vehicle customers, partially offset by decreasedlower sales volume to off-highway customers.
Gross profit decreased $9 million, yet gross margin increased 5080 basis points to 16.917.1 percent in fiscal 2016. The decrease in gross profit was primarily due to lower sales volume, a $3 million unfavorable impact of foreign currency exchange rate changes, and $2 million of environmental charges for investigative work related to a previously-owned manufacturing facility, partially offset by lower material costs, cost savings from the McHenry, Illinois manufacturing facility closure, and improved production efficiencies. Gross profit decreased $5 million and gross margin decreased 30 basis points to 16.3 percent in fiscal 2015 compared with fiscal 2014, primarily due to lower sales volume in Brazil, partially offset by lower warranty costs and sales volume improvements partially offset by unfavorable sales mix. The gross margin increasein North America.
Fiscal 2016 SG&A expenses decreased $10 million from fiscal 2013 to fiscal 2014 wasthe prior year, primarily due to lower material costs.
ongoing cost-control initiatives, the absence of a $3 million charge for a legal matter in Brazil in the prior year, and a $3 million favorable impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $50increased $3 million during fiscal 2015 were consistent with fiscal 2014. The $10 million increase in SG&A expenses in fiscal 2014 wasfrom the prior year, primarily due to higher compensation-related expenses and increased engineering and development costs.the $3 million charge for the legal matter in fiscal 2015.
During fiscal 2014, we approved a plan to close our McHenry, Illinois manufacturing facility and are currently in the process of transferring the facility’s production to other North America segment manufacturing facilities, which we expect to complete within the first six months of fiscal 2016. We recorded $1 million of restructuring expenses during fiscal 2015, primarily related to equipment transfer costs incurred to relocate McHenry’s product lines to other manufacturing facilities. In fiscal 2014, as a result of the planned closure,2016, we recorded $1$9 million of restructuring expenses, primarily related to severance expenses associated with a voluntary retirement program in the U.S., and the planned closure of our Washington, Iowa manufacturing facility, which we expect to complete during fiscal 2017, and equipment transfer costs and $1related to plant consolidation activities in North America. In fiscal 2015, we recorded $3 million of assetrestructuring expenses, primarily related to severance expenses in Brazil, to better align our cost structure with the market conditions in Brazil, and equipment transfer costs related to the closure of our McHenry, Illinois manufacturing facility, which we completed during fiscal 2016. We also recorded an $8 million goodwill impairment charges.charge during fiscal 2015, primarily due to a decline in the financial outlook for Brazil.
Operating income in fiscal 2015 of $46 million increased $4 million from $42$36 million in fiscal 2014, primarily due to2016 increased gross profit. Fiscal 2014 operating income improved $3 million compared with fiscal 2013,the prior year, primarily due to increased gross profit,lower SG&A expenses and the absence of the goodwill impairment charge in the prior year, partially offset by lower gross profit and higher restructuring expenses. Operating income of $33 million in fiscal 2015 decreased $17 million compared with the prior year, primarily due to the goodwill impairment charge, lower gross profit, and higher SG&A and restructuring expenses. 2627
Europe | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % | | $ | 498 | | | | 100.0 | % | Cost of sales | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % | | | 437 | | | | 87.7 | % | Gross profit | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % | | | 61 | | | | 12.3 | % | Selling, general and administrative expenses | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % | | | 45 | | | | 9.1 | % | Restructuring expenses | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % | | | 17 | | | | 3.4 | % | Impairment charges | | | - | | | | - | | | | 2 | | | | 0.3 | % | | | 24 | | | | 4.8 | % | Gain on sale of wind tunnel | | | (3 | ) | | | -0.6 | % | | | - | | | | - | | | | - | | | | - | | Operating income (loss) | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % | | $ | (25 | ) | | | -5.0 | % |
Europe
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 524 | | | | 100.0 | % | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % | Cost of sales | | | 456 | | | | 87.0 | % | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % | Gross profit | | | 68 | | | | 13.0 | % | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % | Selling, general and administrative expenses | | | 39 | | | | 7.4 | % | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % | Restructuring expenses | | | 6 | | | | 1.2 | % | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % | Impairment charges | | | 10 | | | | 1.9 | % | | | - | | | | - | | | | 2 | | | | 0.3 | % | Gain on sale of wind tunnel | | | - | | | | - | | | | (3 | ) | | | -0.6 | % | | | - | | | | - | | Operating income | | $ | 13 | | | | 2.5 | % | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % |
Europe net sales decreased $54 million, or 9 percent, in fiscal 2016 compared with the prior year, primarily due to a $76 million unfavorable impact of foreign currency exchange rate changes and lower sales volume to off-highway customers, partially offset by increased sales volume to commercial vehicle and automotive customers. Sales decreased $6 million, or 1 percent, fromin fiscal 2014 to2015 compared with fiscal 2015,2014, primarily due to a $35 million unfavorable impact of foreign currency exchange rate changes and lower tooling sales, partially offset by increased sales volume to commercial vehicle and automotive customers.
Gross profit decreased $1 million, yet gross margin increased 110 basis points to 13.0 percent in fiscal 2016. The $86 million, or 17 percent,gross margin increase in sales from fiscal 2013 to fiscal 2014 was primarily due to increasedhigher sales volume to commercial vehicle customers, higher tooling sales, and a $23lower material costs. In addition, gross profit was negatively impacted by $9 million favorable impact offrom foreign currency exchange rate changes.
Gross In fiscal 2015, gross margin decreased 20 basis points to 11.9 percent incompared with fiscal 2015,2014, primarily due to unfavorable sales mix, production inefficiencies caused by increased volume at certain manufacturing facilities and plant consolidation activities, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by the absence of $4 million of accelerated depreciation recorded in the prior yearfiscal 2014 for production equipment that is no longer used and lower warranty costs. Gross profit increased $10
Fiscal 2016 SG&A expenses decreased $5 million while gross margin declined 20 basis points to 12.1 percent in fiscal 2014 compared with fiscal 2013. This decrease in gross margin wasfrom the prior year, primarily due to a $5$6 million favorable customer pricing settlement in the prior year, $4 millionimpact of accelerated depreciation in fiscal 2014, and higher warranty costs, partially offset by higher sales volume, favorable sales mix, and lower material costs.
foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $44 million were consistent with the prior year, as higher engineering and development costs were offset by a favorable impact of foreign currency exchange rate changes. SG&A expenses decreased $1
In fiscal 2016, we recorded $6 million from fiscal 2013 to fiscal 2014, primarily due to the favorable impact of restructuring actionsexpenses, primarily related to severance expenses. In addition, we recorded a $10 million asset impairment charge. These restructuring expenses and lower engineering and development costs, partially offset by higher compensation-related expenses.
Duringimpairment charge primarily related to a manufacturing facility in Germany, which was generating pre-tax losses, resulting in management deciding to exit a certain product line in the future. In fiscal 2015, we recorded $2 million of restructuring expenses, primarily due to plant consolidation activities, as we substantially completed the combination of two manufacturing facilities in Germany into one, more competitive manufacturing operation. Also during fiscal 2015,and we sold a wind tunnel that we no longer considered to be a core asset for cash proceeds of $6 million, which resulted in a gain of $3 million. DuringIn fiscal 2014, and fiscal 2013, we recorded $15 million and $17 million, respectively, of restructuring expenses, primarily related to employee severance costs. Alsoexpenses, and $2 million of asset impairment charges.
Operating income of $13 million in fiscal 20142016 decreased $13 million compared with the prior year, primarily due to an increase in restructuring expenses and 2013 we recorded asset impairment charges totaling $2and the absence of a $3 million and $24 million, respectively, primarily related to several facilities that we have sold or expect to sell.
gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&A expenses. Operating income of $26 million in fiscal 2015 increased $16 million compared with fiscal 2014,the prior year, primarily due to a reduction in restructuring expenses and impairment charges and the gain from selling the wind tunnel. Operating income of $10 million in fiscal 2014 improved $35 million compared with fiscal 2013, primarily due to lower asset impairment charges and increased sales volume, which drove higher gross profit. 2728
South America | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 94 | | | | 100.0 | % | | $ | 123 | | | | 100.0 | % | | $ | 134 | | | | 100.0 | % | Cost of sales | | | 82 | | | | 87.2 | % | | | 102 | | | | 83.1 | % | | | 111 | | | | 83.2 | % | Gross profit | | | 12 | | | | 12.8 | % | | | 21 | | | | 16.9 | % | | | 23 | | | | 16.8 | % | Selling, general and administrative expenses | | | 14 | | | | 15.9 | % | | | 13 | | | | 10.8 | % | | | 12 | | | | 8.4 | % | Restructuring expenses | | | 2 | | | | 1.6 | % | | | - | | | | - | | | | - | | | | - | | Impairment charges | | | 8 | | | | 8.4 | % | | | - | | | | - | | | | - | | | | - | | Operating (loss) income | | $ | (12 | ) | | | -13.1 | % | | $ | 8 | | | | 6.1 | % | | $ | 11 | | | | 8.4 | % |
South America | | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 79 | | | | 100.0 | % | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % | Cost of sales | | | 67 | | | | 84.5 | % | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % | Gross profit | | | 12 | | | | 15.5 | % | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % | Selling, general and administrative expenses | | | 11 | | | | 14.5 | % | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % | Operating income (loss) | | $ | 1 | | | | 1.0 | % | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % |
Asia net sales decreased $29$2 million, or 243 percent, in fiscal 20152016 compared with fiscal 2014,the prior year, primarily due to lower sales volume to commercial vehicle, off-highway customers in China and automotive customers, as economic conditions in Brazil were generally weak in fiscal 2015,Korea and a $9 million unfavorable impact of foreign currency exchange rate changes, primarily due to the strengthening of the U.S. dollar versus the Brazilian real. Sales decreased $11 million, or 8 percent, in fiscal 2014 compared with fiscal 2013, primarily due to a $14$4 million unfavorable impact of foreign currency exchange rate changes, partially offset by increasedhigher sales volume to commercial vehicle customers.
Gross profit decreased $9 million and gross margin decreased to 12.8 percentautomotive customers in fiscal 2015 compared with the prior year, primarily due to lower sales volume. Gross profit decreased $2 million from fiscal 2013 to fiscal 2014, primarily due to a $2 million unfavorable impact of foreign currency exchange rate changes.
SG&A expenses in fiscal 2015 increased $1 million compared with fiscal 2014, primarily due to a $3 million charge for a legal matter in Brazil (see Note 19 of the Notes to Consolidated Financial Statements for more information), partially offset by the favorable impact of cost control measures and a $1 million favorable impact of foreign currency exchange rate changes. SG&A expenses increased $1 million from fiscal 2013 to fiscal 2014, primarily due to the reversal of a $2 million acquisition-related liability in fiscal 2013 and higher compensation-related expenses in fiscal 2014, partially offset by a $2 million favorable impact of foreign currency exchange rate changes.
During fiscal 2015, we recorded $2 million of restructuring expenses for employee severance-related costs to reduce headcount and better align our cost structure with the market conditions in Brazil. We also recorded an $8 million goodwill impairment charge during fiscal 2015, which was primarily caused by a decline in the financial outlook for the South America segment.
The $12 million operating loss in fiscal 2015 represented a $20 million decline compared with the prior year and was primarily due to lower gross profit on lower sales volume and the goodwill impairment charge. Operating income decreased $3 million from fiscal 2013 to fiscal 2014, primarily due to lower gross profit on lower sales volumeChina and increased SG&A expenses.
Asia | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % | | $ | 60 | | | | 100.0 | % | Cost of sales | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % | | | 58 | | | | 97.2 | % | Gross profit | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % | | | 2 | | | | 2.8 | % | Selling, general and administrative expenses | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % | | | 11 | | | | 17.6 | % | Operating income (loss) | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % | | $ | (9 | ) | | | -14.8 | % |
Asia netoverall sales in India. Sales increased $9 million, or 13 percent, in fiscal 2015 compared with fiscal 2014, primarily due to new automotive program launches in China and higherincreased overall sales across all markets in India, partially offset by lower sales volume within theto off-highway markets in China and Korea. Salescustomers.
Gross margin increased $12 million, or 20130 basis points to 15.5 percent in fiscal 20142016 compared with fiscal 2013,the prior year, primarily due to higherfavorable sales volume in the automotive and off-highway markets. mix. Gross profit increased $3 million and gross margin increased 170 basis points to 14.2 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume. Gross profit increased $7
Fiscal 2016 SG&A expenses decreased $1 million and gross margin increased to 12.5 percent in fiscal 2014 compared with fiscal 2013,from the prior year, primarily due to higher sales volume.
cost-control initiatives, partially offset by acquisition-related costs associated with a joint venture that we formed in fiscal 2016. See Note 3 to the Notes to Consolidated Financial Statements for additional information on this joint venture. Fiscal 2015 SG&A expenses in fiscal 2015 were consistent with the prior year, yet decreased as a percentage of sales. SG&A expenses increased
Operating income of $1 million in fiscal 20142016 increased $1 million compared with fiscal 2013, yet decreased slightly as a percentage of sales.
the prior year, primarily due to lower SG&A expenses. Operating income of less than $1 million in fiscal 2015 represented a $3 million improvement compared with the operating loss in the prior year, and was primarily due to higher gross profit on increased sales volume. The $3 million operating loss in fiscal 2014 represented a $6 million improvement from fiscal 2013, primarily due to higher gross profit.
Building HVAC | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % | | $ | 139 | | | | 100.0 | % | Cost of sales | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % | | | 98 | | | | 70.7 | % | Gross profit | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % | | | 41 | | | | 29.3 | % | Selling, general and administrative expenses | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % | | | 31 | | | | 22.1 | % | Operating income | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % | | $ | 10 | | | | 7.2 | % |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 181 | | | | 100.0 | % | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % | Cost of sales | | | 127 | | | | 70.1 | % | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % | Gross profit | | | 54 | | | | 29.9 | % | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % | Selling, general and administrative expenses | | | 39 | | | | 21.6 | % | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % | Restructuring expenses | | | 1 | | | | 0.6 | % | | | - | | | | - | | | | - | | | | - | | Operating income | | $ | 14 | | | | 7.7 | % | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % |
Building HVAC net sales decreased $5 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to a $6 million unfavorable impact of foreign currency exchange rate changes and lower sales at our businesses in the U.K., as unfavorable currency conditions resulted in increased competition from other mainland European suppliers, partially offset by increased ventilation product sales in North America. Sales increased $40 million, or 27 percent, in fiscal 2015 compared with the prior year,fiscal 2014, primarily due to a $23 million increase in sales at our Airedale businessbusinesses in the U.K. and increased heating product sales in North America, as we experienced anothera strong heating season in fiscal 2015. The sales increase at Airedalein the U.K. was primarily due to a $13 million increase in sales at Barkell, which we acquired in the fourth quarter of fiscal 2014, and the continuing recovery from the Airedale fire, which caused a temporary halt in production during the prior fiscal year. In
Gross profit decreased $2 million in fiscal 2014, despite2016 compared with the negative impact of the Airedale fire, sales increased $7 million, or 5 percent,prior year, primarily due to increased heating product salesa $1 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased 10 basis points to 29.9 percent in North America.
fiscal 2016 compared with the prior year. Gross profit increased $13 million and gross margin improved 40 basis points to 30.0 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume. Fiscal 2016 SG&A expenses increased $2 million from the prior year, primarily due to higher sales volume. Gross profit increased $2the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in fiscal 2014 compared with the prior year, primarily due topartially offset by lower engineering and development costs and a $1 million favorable sales mix.
impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses increased $3 million or 9 percent, in fiscal 2015 compared withfrom the prior year, primarily due to additional costs from Barkell and increased expenses associated with higher sales levels, partially offset by $5 million ofthe recoveries from business interruption insurance for the Airedale fire. SG&A expenses increased $3 million, or 10 percent, in
In fiscal 2014 compared with fiscal 2013, primarily due to higher compensation-related expenses,2016, we recorded $1 million of non-recoverable costs directlyrestructuring expenses, primarily related to the Airedale fire, and increased acquisition-related expenses for Barkell.severance expenses.
Operating income of $19$14 million increased $10in fiscal 2016 decreased $5 million compared with the prior year, primarily due to lower gross profit and higher SG&A expenses. Operating income of $19 million in fiscal 2015 increased $10 million compared with the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses. Operating income decreased $1 million from fiscal 2013 to fiscal 2014, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at March 31, 20152016 of $71$69 million, and an available borrowing capacity of $216$207 million under lines of credit provided by banks in the United States and abroad. Due to the timing of insurance proceeds related to the Airedale fire, our cash and cash equivalents at March 31, 2015 include approximately $13 million of advances from our insurance provider that will be spent for recovery and reconstruction costs. Given our extensive international operations, significant amounts$49 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds would be subject to U.S. tax if repatriated. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.
During fiscal 2016, our Board of Directors approved a $50 million share repurchase program, which expires in November 2016. We repurchased $7 million of shares under this program in fiscal 2016. Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 2016 was $72 million, an increase of $8 million from $64 million in the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital, including lower incentive compensation payments during fiscal 2016 and the timing of value-added tax payments. Net cash provided by operating activities in fiscal 2015 was $64 million, a decrease of $41 million from $105 million in the prior year. This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, including higher incentive compensation payments during fiscal 2015 related to fiscal 2014 performance, and the timing of customer-owned tooling reimbursements. Net cash provided by operating activities in fiscal 2014 was $105 million, an increase of $56 million from $49 million in the prior year. The increase in operating cash flows resulted from an increase in gross profit, partially offset by higher SG&A expenses, and improvements in working capital as compared with fiscal 2013.
We expect to be reimbursed by our insurance provider for substantially all losses and expenses directly related to the fire at our Airedale manufacturing facility, including substantially all costs to reconstruct the facility. The expected timing of cash recoveries from our insurance provider is such that we do not expect the fire will have a significant adverse effect on our liquidity.
Capital Expenditures
Capital expenditures of $58$63 million during fiscal 20152016 increased $5 million compared with fiscal 2014.2015. In fiscal 2015,2016, our capital spending primarily occurred in the North AmericaAmericas and Europe segments, which totaled $26$27 million and $22$25 million, respectively. Capital projects in fiscal 20152016 included tooling and equipment purchases in conjunction with program launchesnew and renewal programs with customers, as well as a building expansion at our Nuevo Laredo manufacturing facility in the North America segment.customers.
At March 31, 2015,2016, our capital expenditure commitments totaled $16$21 million. Significant commitments included tooling and equipment expenditures for new and renewal programs with customers in North Americathe Americas and Europe.Europe segments.
Dividends
We did not pay dividends in fiscal 2016, 2015, 2014, or 2013.2014. We currently do not intend to pay dividends in fiscal 2016.2017.
Debt
Our total debt outstanding decreased $16increased $14 million to $149$163 million at March 31, 20152016, compared with the prior year, as our debt repayments exceeded our borrowings.primarily due to borrowings in China and Mexico for capital investments. See Note 16 of the Notes to Consolidated Financial Statements for furtheradditional information regarding our debt agreements.
Our debt agreements require us to maintain compliance with various covenants. Under our primary debt agreements in the U.S., we are subject to a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a certain portion of our cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
Our leverage ratio for the four fiscal quarters ended March 31, 20152016 was 1.2, which was below the maximum permitted ratio of 3.25. Our interest expense coverage ratio for the four fiscal quarters ended March 31, 20152016 was 10.3,10.5, which exceeded the minimum requirement of 3.0. We were in compliance with our debt covenants as of March 31, 20152016 and expect to remain in compliance during fiscal 20162017 and beyond. In the event of an acquisition, our leverage ratio may be temporarily raised for several quarters, per the terms of our debt agreements.
Pension Obligations
Our net pension liabilities totaled $111 million for plans in the U.S. and at certain foreign subsidiaries as of March 31, 2015. We contributed $7 million to these plans in fiscal 2015 and expect to contribute approximately $8 million to our pension plans during fiscal 2016. In May 2015, we approved a program to offer a voluntary, lump-sum pension payout to certain eligible former employees who participate in our U.S. pension plan. If the lump-sum payout is elected by the participant, the payout would effectively settle our pension obligation with that participant, thereby eliminating the risk of future changes in our pension obligation for that participant. As a result of this program, we expect to record a settlement loss of approximately $20-30 million in the second quarter of fiscal 2016, based on estimated participation rates and estimated actuarial assumptions. This settlement loss would represent the accelerated recognition of unamortized actuarial losses associated with our pension liabilities. The lump-sum settlements will be paid from plan assets and will not impact our operating cash flow.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
| | March 31, 2015 | | | March 31, 2016 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 125.2 | | | $ | 0.2 | | | $ | 24.0 | | | $ | 32.0 | | | $ | 69.0 | | | $ | 125.4 | | | $ | 8.0 | | | $ | 32.2 | | | $ | 85.2 | | | $ | - | | Interest associated with long-term debt | | | 38.8 | | | | 8.5 | | | | 16.1 | | | | 11.9 | | | | 2.3 | | | | 30.3 | | | | 8.5 | | | | 14.1 | | | | 7.7 | | | | - | | Capital lease obligations | | | 4.9 | | | | 0.3 | | | | 0.6 | | | | 0.6 | | | | 3.4 | | | | 8.6 | | | | 0.5 | | | | 0.8 | | | | 0.8 | | | | 6.5 | | Operating lease obligations | | | 49.9 | | | | 8.2 | | | | 10.0 | | | | 7.8 | | | | 23.9 | | | | 53.5 | | | | 8.1 | | | | 10.4 | | | | 8.7 | | | | 26.3 | | Capital expenditure commitments | | | 15.5 | | | | 13.0 | | | | 2.5 | | | | - | | | | - | | | | 20.5 | | | | 20.0 | | | | 0.5 | | | | - | | | | - | | Other long-term obligations | | | 10.9 | | | | 1.6 | | | | 3.2 | | | | 2.6 | | | | 3.5 | | | | 3.6 | | | | 1.7 | | | | 1.2 | | | | 0.7 | | | | - | | Total contractual obligations | | $ | 245.2 | | | $ | 31.8 | | | $ | 56.4 | | | $ | 54.9 | | | $ | 102.1 | | | $ | 241.9 | | | $ | 46.8 | | | $ | 59.2 | | | $ | 103.1 | | | $ | 32.8 | |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $121$129 million as of March 31, 2015.2016. We are unable to determine the ultimate timing of payments for these liabilities; therefore, we have excluded these amounts from the contractual obligations table above.
We have a contractual commitmentexpect to rebuild the leased Airedale facility, which suffered significant destruction from a firecontribute $8 million to our U.S. pension plans during fiscal 2014. We maintain insurance coverage and believe reimbursement for reconstruction costs is probable. The estimated costs associated with the reconstruction of the Airedale facility of $48 million have been excluded from the contractual obligations table above. See Note 2 of the Notes to Consolidated Financial Statements for further information.2017.
Critical Accounting Policies
The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements. Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements. The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements. In addition, recently issued accounting pronouncements that could significantly impact our financial statements are included in Note 1 of the Notes to Consolidated Financial Statements. Revenue Recognition
We recognize revenue, including agreed-upon commodity price increases or decreases,prices, when the risks and rewards of ownership are transferred to our customers, which generally occurs upon shipment. Revenue is recorded net of applicable provisions for sales rebates, volume incentives, and returns and allowances. At the time of revenue recognition, we also record estimates for bad debt expense and warranty expense. We base these estimates on historical experience, current business trends, and current economic conditions. PriceWe recognize price increases that are agreed upon in advance are recognized as revenue when the products are shipped to our customers. Impairment of Long-Lived Assets
We perform impairment evaluations of long-lived assets, including property, plant and equipment, intangible assets and equity investments, whenever business conditions or events indicate that those assets may be impaired. We consider factors such as operating losses, declining financial outlooks and market conditions, when evaluating the necessity for an impairment analysis. When the estimated futurenet asset values exceed undiscounted cash flows expected to be generated by the assets are less than the carrying value of the long-lived assets, or the decline in value is considered to be “other than temporary,” we write down the assets are written down to fair market value and arecord an impairment charge is recorded to current operations. We estimate fair market value in various ways depending on the nature of the assets under review. Fair value is generally based on appraised value, estimated salvage value, or selling prices under negotiation, or estimated cancellation charges, as applicable. The most significant long-lived assets that we have evaluated for impairment areindicators were property, plant and equipment, which totaled $322$339 million at March 31, 2015.2016. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment. We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility. This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy. When such indicators are present, we perform an impairment evaluation by comparing the estimated future undiscounted cash flows expectedevaluation. During fiscal 2016, we recorded a $10 million impairment charge related to be generated in thea manufacturing facility in Germany. See Note 6 of the Notes to the net book value of the long-lived assets within that facility. We estimate the undiscounted cash flows based on the expected future cash flows to be generated by the manufacturing facility over its remaining useful life. When the estimated future undiscounted cash flows are less than the net book value of the long-lived assets, we write such assets down to fair value, which we generally estimate based upon appraisals or estimated salvage value.Consolidated Financial Statements for additional information.
Impairment of Goodwill
We perform goodwill impairment tests annually, as of March 31, unless business events or other conditions exist that require a more frequent evaluation. At March 31, 2016, our goodwill totaled $16 million, primarily related to our Building HVAC segment. We consider factors such as operating losses, declining financial and market outlooks and market capitalization when evaluating the necessity for an interim impairment analysis. Goodwill is tested for impairment at a reporting unit level, which we have determined to be at the operating segment level. Our first step in this test is to compare the fair value of the reporting unit to its carrying value. We determine the fair value of a reporting unit based upon the present value of estimated future cash flows. If the fair value of the reporting unit exceeds the carrying value of the unit’s net assets, goodwill of that reporting unit is not impaired and further testing is not required. If the carrying value of the reporting unit’s net assets exceeds the fair value of the unit, then we perform the second step of the impairment test to determine the implied fair value of the reporting unit’s goodwill and any impairment charge. In estimating the implied fair value of goodwill for a reporting unit, we assign the fair value to the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of the reporting unit goodwill over its implied fair value is recorded as an impairment charge. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rate, business trends and market conditions. TheWe determine the expected future revenue growth rates and operating profit margins are determined after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for country-specific risks where appropriate.
We conducted our annual assessment for goodwill impairment during the fourth quarter of fiscal 20152016 by applying a fair value-based test. The South Americatest and determined the fair value of our reporting units carrying valuesubstantially exceeded its fair value; therefore, we performed the second step of the goodwill impairment test, as described above. As a result, we determined our South America reporting unit’s goodwill was fully impaired and recorded an $8 million goodwill impairment charge. As fiscal 2015 progressed, we experienced relatively weak financial results for our South America reporting unit. During the fourth quarter of fiscal 2015, our outlook for the markets served by our South America reporting unit, primarily in Brazil, shifted from a view that the markets may begin to recover to a view that the market downturn may be more prolonged. The economic weakness in Brazil has negatively affected our expected future cash flows for the South America segment. Our impairment analysis assumed a discount rate of 22 percent, which corresponds to our cost of capital adjusted for a higher expectation of future inflation and uncertainty in the Brazilian economy, and future revenue growth and operating profit margins based upon our current outlook for the South America reporting unit.their respective book values.
Warranty Costs
We estimate costs related to product warranties and accrue for such costs at the time of the sale, within cost of sales. We estimate warranty costs based upon the best information available, which includes statistical and analytical analysis of both historical and current claim data. We monitor and adjust original estimatesour warranty accruals, which totaled $8 million at March 31, 2016, if we expect futureit is probable that expected claims will differ from the initialprevious estimates. 32
Tooling Costs
We capitalize production tooling costs incurred in the manufacture of products for customer programs as a component of property, plant and equipment, net of any customer reimbursements, when we retain title to the tooling. We depreciate these capitalized costs in cost of sales over the estimated life of the asset, which is generally three years. For customer-owned tooling costs incurred, we record a receivable when the customer has guaranteed reimbursement to us. Reimbursement typically occurs prior to the start of production, but this can vary by program and by customer. We do not have any significant customer arrangements under which customer-owned tooling costs were not accompanied by guaranteed reimbursements.
Assets Held for Sale
Assets are considered to be held for sale when management approves and commits to a formal plan to actively market the asset for sale, at a sales price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, the sale of the asset is expected to be completed within one year, and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, we record the carrying value of the asset at the lower of its carrying value or estimated fair value, less costs to sell. We cease recording depreciation expense at the time of designation as held for sale.
Pension Obligations
TheOur calculation of the expense and liabilities of our pension plans is dependent upon various assumptions. At March 31, 2016, our pension liabilities totaled $120 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality rate tables. We basedbase our selection of assumptions on historical trends and economic and market conditions at the time of valuation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods. These differences impact future pension expenses. Currently, participants in our domestic pension plans are not accruing benefits based on their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.
In late calendar 2014, the U.S. Society of Actuaries issued updated mortality and mortality improvement tables, which effectively increased life expectancies. We considered the new mortality tables, along with characteristics of our plan-specific populations, in developing our best estimate of the expected mortality of plan participants for our March 31, 2015 measurement date. The impact of the new mortality assumptions resulted in an increase of approximately $9 million in both our U.S. pension plans’ actuarial loss and pension benefit obligation.
For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our benefit plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in fiscal 20152016 and 20142015 was 8.0 percent. For fiscal 2016,2017, we have also assumed a rate of 8.0 percent. The impact of a 25 basis point decrease in the expected rate of return on assets would result in an increase of $0.5$0.4 million in fiscal 20162017 pension expense.
The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds reset annually on the measurement date of March 31. For fiscal 2015,2016, we used a discount rate of 4.04.1 percent, compared with 4.74.0 percent in fiscal 2014.2015. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows from the affected plans. See Note 17 of the Notes to Consolidated Financial Statements for additional information. A change in the assumed discount rate of 25 basis points would impact our fiscal 20162017 pension expense by less than $0.1 million.
Income Taxes 33
Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. We adjust these amounts to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in certain jurisdictions will not be realized. This determination involves significant judgment. In performing this assessment on a jurisdiction-by-jurisdiction basis, we consider historical and projected financial results along with other pertinent information.
We have not recorded a provision for U.S. income taxes on undistributed earnings from our non-U.S. subsidiaries that we have determined to be permanently reinvested in our foreign operations. If management’s intentions or U.S. tax law changes in the future, there could be a significant negative impact on our provision for income taxes.
See Note 8 of the Notes to Consolidated Financial Statements for additional information regarding income taxes. Other Loss Reserves
We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, self-insurance reserves, uncollectible accounts receivable, recoverability of deferred income taxes, regulatory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. We estimate these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Note 19 of the Notes to Consolidated Financial Statements for additional detailsinformation regarding contingencies and litigation. Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of this report. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| · | Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs, inflation, changes in interest rates, recession and recovery therefrom, restrictions associated with importing and exporting and foreign ownership, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China Western Europe, Russia and North America, and the continued deterioration in and weak forecasts for the Brazilian economy; |
| · | The impact of potential increases in commodity prices, particularlyincluding our ability to successfully manage our exposure to the changingand/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel); |
| · | Our ability to successfully manage commodity risk and/or pass increasing commodity prices on to customers, as well as the inherent lag in timing of such pass-through pricing;arrangements; and |
| · | The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental emissions standards.and/or energy standards and objectives. |
Operational Risks:
| · | The overall health and increasing price-down focus of our original equipment manufacturer customers in light of some remaining economic and market-specific challenges, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; |
| · | Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction pressures from customers, particularly in the face of macro-economic instability; |
| · | Our ability to effectively and efficiently complete the restructuring activities in our North America, Europe, and South America segments and realize expected commercial and operational efficiencies and associated cost reductionssavings and increased competitivenessother benefits associated with our Strengthen, Diversify and profitability as a result;Grow transformational strategy; |
| · | Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims; |
| · | Our ability to obtain and retain profitable business in our Asia segment, and, in particular, in China; |
| · | Unanticipated delays or modifications initiated by major customers with respect to product launches, product applications or requirements; |
| · | Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, particularly in light of some continuing economic challenges in areas of the world in which we and our suppliers operate; |
| · | Complexities and inefficiencies introduced by the September 2013 fire at our Airedale facility in the U.K., including ourOur ability to continue to meet customer demands at temporary locations, to timelyeffectively and efficiently complete restructuring activities in our Europe segment and realize expected cost reductions and effectively deploy insurance proceeds to replace machineryincreased competitiveness and equipment and rebuild the facility with minimal financial impact from the business interruption, and to complete and relocate to the new facility in an efficient, timely manner;profitability as a result; |
| · | Our ability to complete the transition of our Washington, Iowa production to other facilities efficiently and effectively; |
| · | Costs and other effects of the remediation of environmental contamination; |
| · | Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith; |
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; and |
| · | Costs and other effects of unanticipated litigation or claims, and the increasingconstant pressures associated with rising healthcare and insurance costs. |
Strategic Risks:
| · | Our ability to identify and implementexecute appropriate growthopportunities to enable us to achieve our Strengthen, Diversify and diversification strategies thatGrow transformational strategy in order to position us for long-term success. |
Financial Risks:
| · | Our ability to fund our global liquidity requirements efficiently, particularly those in our Asia business segment, and meet our long-term commitments in the event of any unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
| · | The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, British pound, and Indian rupee relative to the U.S. dollar; and |
| · | Our ability to realize the benefits of tax assets in various jurisdictions in which we operate. |
In addition to the risks set forth above, we are subject to other risks and uncertainties as identified in our public filings with the U.S. Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.
ITEM 7A.7A . | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
In the normal course of business, we are subject to market exposure from changes in foreign exchange rates, interest rates, commodity prices, credit risk and economic conditions. Foreign Currency Risk
We are subject to the risk of changes in foreign currency exchange rates due to our operations in foreign countries. We have manufacturing facilities in Brazil, China, India, Mexico, South Africa, and throughout Europe. We also have joint ventures in China, Japan and South Korea. We sell and distribute products throughout the world and also purchase raw materials from foreign countries. As a result, our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which we do business. We attempt to mitigate foreign currency risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the functional currency of the subsidiary engaging in the transaction. Our financial results are principally exposed to changes in exchange rates between the U.S. dollar and the European currencies, primarily the euro, and changes between the U.S. dollar and the Brazilian real.real, and between the euro and the British pound. In fiscal 2016, 2015, 2014, and 2013,2014, more than 50 percent of our sales were generated in countries outside the U.S. A change in foreign exchange rates will positively or negatively affect our sales; however, this impact will be offset, usually to a large degree, with an offsettinga corresponding effect on our expenses. In fiscal 2015,2016, changes in foreign currencies negatively impacted our sales by $43$110 million; however, the impact on our operating income was less than $1only $4 million. Foreign currency exchange risk can be estimated by measuring the impact of a near-term adverse movement of 10 percent in foreign currency exchange rates. If these rates were 10 percent higher or lower during fiscal 2015,2016, there would not have been a material impact on our fiscal 20152016 earnings. We maintain, from time to time, foreign-denominated, long-term debt obligations and long-term intercompany loans that are subject to foreign currency exchange risk. As of March 31, 2015, there were no third-party foreign-denominated, long-term debt obligations or2016, we did not have any long-term intercompany loans for which changes in foreign currency exchange rates would impact our net earnings. From time to time, we enter into currency rate derivative contracts to manage the foreign exchange rate exposure on these types of loans. These derivative instruments are typically not treated as hedges, and accordingly, gains or losses on the derivatives are recorded in other income and expense in the consolidated statements of operations and act to offset any currency movement on the outstanding loans receivable or payable.
Interest Rate Risk
Our interest rate risk policies are designedWe actively seek to reduce the potential volatility of earnings that could arise from changes in interest rates. We generally utilize a mixture of debt maturities and both fixed-rate and floating-rate debt to manage exposure to changes in interest rates. Our domestic revolving credit facility is based on a variable interest rate of London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points, depending on our leverage ratio. We are subject to risk of fluctuations in LIBOR and changes in our leverage ratio, which would affect the variable interest rate on our revolving credit facility and could create variability in interest expense. There were no borrowings outstanding under the revolving credit facility as of March 31, 2015.2016. Based on our outstanding debt with variable interest rates at March 31, 2015,2016, a 100 basis point increase in interest rates would increase our annual interest expense in fiscal 20162017 by less than $1 million.
Commodity Price Risk
We are dependent upon the supply of raw materials and supplies in the production process and, from time to time, enter into firm purchase commitments for aluminum, copper, nickel, and natural gas. We maintain agreements with certain customers to pass through specified raw material price fluctuations in order to mitigate commodity price risk. The majority of these agreements contain provisions in which the pass-through of the price fluctuations can lag behind the actual fluctuations by three months or longer, and typically the arrangements are limited to the underlying material cost based upon the London Metal Exchange.
Credit Risk
Credit risk represents the possibility of loss from a customer's failurecustomer failing to make payment according to contract terms. Our principal credit risk consists of outstanding trade accounts receivable. At March 31, 2015, 472016, 45 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, commercial vehicle, and off-highway markets and are influenced by similar market and general economic factors. In the past, credit losses from our customers have not been significant.
We manage credit risk through a focus on the following:
| · | Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. OurWe consider our holdings in cash and investments were consideredto be stable and secure at March 31, 2015;2016; |
| · | Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer's financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer's financial condition and applicable business news; |
| · | Pension assets – We have retained outside advisors to assist in the management of the assets in our pension plans. In making investment decisions, we utilize an established risk management protocol that focuses on protection of the plan assets against downside risk. We ensure that investments within these plans provide appropriate diversification, the investments are monitored by investment teams, and portfolio managers adhere to the established investment policies. We believe the plan assets are subject to appropriate investment policies and controls; and |
| · | Insurance – We monitor our insurance providers to ensure they have acceptable financial ratings. We have not identified any concerns in this regard based upon our reviews. |
Economic Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate. We sell a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, automotive, off-highway, and building HVAC markets. We operate in diversified markets as a strategy for offsetting the risk associated with a downturn in any of the markets we serve. However, risk associated with market downturns, such as the global downturn experienced in fiscal 2009 and fiscal 2010, is still present.
We monitor economic conditions in the U.S., in our foreign markets and elsewhere. As we expand our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes and the like. We continue to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions.
We pursue new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon our ability to commercialize our investments. Current examples of new and emerging markets for us include those related to waste heat recovery, coils, and the Chinese and Indian markets. Our investment in these areas is subject to the risks associated with business integration, technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
We anticipate that continued recovery from the global recessionwithin some of our geographic and economicend markets, and particularly growth in China may put production pressure on certain suppliers of our raw materials. In particular, there are a limited number of suppliers of aluminum, copper, and steel material. We are exposed to the risk of suppliers of certain raw materials not being able to meet customer demand as they may not increase their output capacity as quickly as customers increase their orders, and of increased prices being charged by raw material suppliers.
In addition, we purchase parts from suppliers that use our tooling to create the parts. In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts. As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require. Even in situations where suppliers are manufacturing parts without the use of our tooling, we face the challenge of obtaining consistently high-quality parts from suppliers that are financially stable. We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate higher-risk supplier situations.
In addition to the above risks on the supply side, we are also exposed to risks associated with demands by our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, but these agreements often contain provisions for future price reductions. In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: We have enteredFrom time to time, we enter into futures contracts from time to time, related to certain forecasted purchases of aluminum and copper. Our strategy wasis to reduce our exposure to changing market prices for future purchases of these commodities. In fiscal 2016, 2015, 2014, and 2013,2014, expenses related to commodity derivative contracts totaled less than $1 million $1 million, and $5 million, respectively.each year. Foreign currency forward contracts: Our foreign exchange risk management strategy uses derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. We have not designated these forward contracts as hedges. Accordingly, we record unrealized gains and losses related to the change in the fair value of the contracts in other income and expense. Gains and losses on these foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
Counterparty risks: We manage counterparty risks by ensuring that counterparties to derivative instruments have credit ratings acceptable to us. At March 31, 2015,2016, all counterparties had a sufficient long-term credit rating. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions, except per share amounts)
| | 2015 | | | 2014 | | | 2013 | | | 2016 | | 2015 | | 2014 | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | | Cost of sales | | | 1,249.9 | | | | 1,239.4 | | | | 1,167.4 | | | | 1,129.0 | | | | 1,249.9 | | | | 1,239.4 | | Gross profit | | | 246.5 | | | | 238.2 | | | | 208.6 | | | | 223.5 | | | | 246.5 | | | | 238.2 | | Selling, general and administrative expenses | | | 184.5 | | | | 181.7 | | | | 166.3 | | | | 204.5 | | | | 184.5 | | | | 181.7 | | Restructuring expenses | | | 4.7 | | | | 16.1 | | | | 17.0 | | | | 16.6 | | | | 4.7 | | | | 16.1 | | Impairment charges | | | 7.8 | | | | 3.2 | | | | 25.9 | | | | 9.9 | | | | 7.8 | | | | 3.2 | | Gain on sale of wind tunnel | | | (3.2 | ) | | | - | | | | - | | | | - | | | | (3.2 | ) | | | - | | Operating income (loss) | | | 52.7 | | | | 37.2 | | | | (0.6 | ) | | Operating (loss) income | | | | (7.5 | ) | | | 52.7 | | | | 37.2 | | Interest expense | | | (11.7 | ) | | | (12.4 | ) | | | (12.6 | ) | | | (11.1 | ) | | | (11.7 | ) | | | (12.4 | ) | Other income (expense) – net | | | 0.2 | | | | (0.8 | ) | | | 0.2 | | | | 8.7 | | | | 0.2 | | | | (0.8 | ) | Earnings (loss) from continuing operations before income taxes | | | 41.2 | | | | 24.0 | | | | (13.0 | ) | | (Provision) benefit for income taxes | | | (19.0 | ) | | | 107.9 | | | | (9.8 | ) | | Earnings (loss) from continuing operations | | | 22.2 | | | | 131.9 | | | | (22.8 | ) | | (Loss) earnings from continuing operations before income taxes | | | | (9.9 | ) | | | 41.2 | | | | 24.0 | | Benefit (provision) for income taxes | | | | 8.9 | | | | (19.0 | ) | | | 107.9 | | (Loss) earnings from continuing operations | | | | (1.0 | ) | | | 22.2 | | | | 131.9 | | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | | | - | | | | 0.6 | | | | - | | Net earnings (loss) | | | 22.8 | | | | 131.9 | | | | (22.8 | ) | | Net (loss) earnings | | | | (1.0 | ) | | | 22.8 | | | | 131.9 | | Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Net earnings (loss) attributable to Modine | | $ | 21.8 | | | $ | 130.4 | | | $ | (24.2 | ) | | Net (loss) earnings attributable to Modine | | | $ | (1.6 | ) | | $ | 21.8 | | | $ | 130.4 | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings (loss) per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | | (Loss) earnings per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | | Basic | | $ | 0.45 | | | $ | 2.75 | | | $ | (0.52 | ) | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | Diluted | | $ | 0.44 | | | $ | 2.72 | | | $ | (0.52 | ) | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | | | | | | | | | | | | | | | | | | | | | | | | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | Net (loss) earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | Basic | | $ | 0.46 | | | $ | 2.75 | | | $ | (0.52 | ) | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | Diluted | | $ | 0.45 | | | $ | 2.72 | | | $ | (0.52 | ) | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | | Basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | | | 47.3 | | | | 47.2 | | | | 46.9 | | Diluted | | | 47.8 | | | | 47.6 | | | | 46.6 | | | | 47.3 | | | | 47.8 | | | | 47.6 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | 2015 | | | 2014 | | | 2013 | | | 2016 | | 2015 | | 2014 | Net earnings (loss) | | $ | 22.8 | | | $ | 131.9 | | | $ | (22.8 | ) | | Net (loss) earnings | | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation | | | (68.2 | ) | | | 9.7 | | | | (17.1 | ) | | | 4.6 | | | | (68.2 | ) | | | 9.7 | | Defined benefit plans, net of income taxes of ($13.2), $9.8 and $0 million | | | (26.7 | ) | | | 13.9 | | | | (23.6 | ) | | Cash flow hedges, net of income taxes of $0, $0.6 and $0 million | | | - | | | | 1.1 | | | | 2.6 | | | Defined benefit plans, net of income taxes of $11.8, ($13.2) and $9.8 million | | | | 19.7 | | | | (26.7 | ) | | | 13.9 | | Cash flow hedges, net of income taxes of $0, $0 and $0.6 million | | | | - | | | | - | | | | 1.1 | | Total other comprehensive income (loss) | | | (94.9 | ) | | | 24.7 | | | | (38.1 | ) | | | 24.3 | | | | (94.9 | ) | | | 24.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | (72.1 | ) | | | 156.6 | | | | (60.9 | ) | | | 23.3 | | | | (72.1 | ) | | | 156.6 | | Comprehensive income attributable to noncontrolling interest | | | (0.8 | ) | | | (1.7 | ) | | | (1.4 | ) | | | (0.5 | ) | | | (0.8 | ) | | | (1.7 | ) | Comprehensive income (loss) attributable to Modine | | $ | (72.9 | ) | | $ | 154.9 | | | $ | (62.3 | ) | | $ | 22.8 | | | $ | (72.9 | ) | | $ | 154.9 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS March 31, 20152016 and 20142015 (In millions, except per share amounts)
| | 2015 | | | 2014 | | | 2016 | | 2015 | ASSETS | | | | | | | | | | | | | Cash and cash equivalents | | $ | 70.5 | | | $ | 87.2 | | | $ | 68.9 | | | $ | 70.5 | | Trade accounts receivable – net | | | 192.9 | | | | 221.1 | | | | 189.1 | | | | 192.9 | | Inventories | | | 107.7 | | | | 116.8 | | | | 111.0 | | | | 107.7 | | Deferred income taxes | | | 13.4 | | | | 13.0 | | | Other current assets | | | 79.7 | | | | 60.7 | | | | 43.5 | | | | 79.7 | | Total current assets | | | 464.2 | | | | 498.8 | | | | 412.5 | | | | 450.8 | | Property, plant and equipment – net | | | 322.1 | | | | 359.6 | | | | 338.6 | | | | 322.1 | | Intangible assets – net | | | 9.9 | | | | 12.4 | | | | 8.2 | | | | 9.9 | | Goodwill | | | 16.2 | | | | 28.7 | | | | 15.8 | | | | 16.2 | | Deferred income taxes | | | 102.7 | | | | 98.6 | | | | 123.1 | | | | 115.4 | | Other noncurrent assets | | | 16.5 | | | | 34.2 | | | | 22.7 | | | | 16.5 | | Total assets | | $ | 931.6 | | | $ | 1,032.3 | | | $ | 920.9 | | | $ | 930.9 | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | | Short-term debt | | $ | 18.6 | | | $ | 32.4 | | | $ | 28.6 | | | $ | 18.6 | | Long-term debt – current portion | | | 0.5 | | | | 0.8 | | | | 8.5 | | | | 0.5 | | Accounts payable | | | 152.0 | | | | 171.1 | | | | 142.4 | | | | 152.0 | | Accrued compensation and employee benefits | | | 56.7 | | | | 70.8 | | | | 58.6 | | | | 56.7 | | Other current liabilities | | | 83.4 | | | | 82.1 | | | | 35.5 | | | | 83.0 | | Total current liabilities | | | 311.2 | | | | 357.2 | | | | 273.6 | | | | 310.8 | | Long-term debt | | | 129.6 | | | | 131.2 | | | | 125.5 | | | | 129.6 | | Deferred income taxes | | | 3.4 | | | | 7.3 | | | | 4.2 | | | | 3.1 | | Pensions | | | 110.4 | | | | 81.0 | | | | 118.6 | | | | 110.4 | | Other noncurrent liabilities | | | 16.4 | | | | 27.0 | | | | 16.3 | | | | 16.4 | | Total liabilities | | | 571.0 | | | | 603.7 | | | | 538.2 | | | | 570.3 | | Commitments and contingencies (see Note 19) | | | | | | | | | | | | | | | | | Shareholders' equity: | | | | | | | | | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 48.6 million and 48.3 million shares | | | 30.4 | | | | 30.2 | | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 49.0 million and 48.6 million shares | | | | 30.6 | | | | 30.4 | | Additional paid-in capital | | | 180.6 | | | | 175.7 | | | | 185.6 | | | | 180.6 | | Retained earnings | | | 359.8 | | | | 338.0 | | | | 358.2 | | | | 359.8 | | Accumulated other comprehensive loss | | | (198.6 | ) | | | (103.9 | ) | | | (174.2 | ) | | | (198.6 | ) | Treasury stock, at cost, 0.7 million shares | | | (16.2 | ) | | | (15.2 | ) | | Treasury stock, at cost, 1.6 million and 0.7 million shares | | | | (24.0 | ) | | | (16.2 | ) | Total Modine shareholders' equity | | | 356.0 | | | | 424.8 | | | | 376.2 | | | | 356.0 | | Noncontrolling interest | | | 4.6 | | | | 3.8 | | | | 6.5 | | | | 4.6 | | Total equity | | | 360.6 | | | | 428.6 | | | | 382.7 | | | | 360.6 | | Total liabilities and equity | | $ | 931.6 | | | $ | 1,032.3 | | | $ | 920.9 | | | $ | 930.9 | |
The notes to consolidated financial statements are an integral part of these statements. 4140
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | 2015 | | | 2014 | | | 2013 | | | 2016 | | 2015 | | 2014 | Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | Net earnings (loss) | | $ | 22.8 | | | $ | 131.9 | | | $ | (22.8 | ) | | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | Net (loss) earnings | | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 51.6 | | | | 58.1 | | | | 55.8 | | | | 50.2 | | | | 51.6 | | | | 58.1 | | Insurance proceeds from Airedale fire | | | 12.9 | | | | 16.9 | | | | - | | | | 5.9 | | | | 12.9 | | | | 16.9 | | Impairment charges | | | | 9.9 | | | | 7.8 | | | | 3.2 | | Gain on sale of wind tunnel | | | | - | | | | (3.2 | ) | | | - | | Pension and postretirement expense | | | 2.3 | | | | 3.2 | | | | 1.9 | | | | 45.1 | | | | 2.3 | | | | 3.2 | | Gain on sale of wind tunnel | | | (3.2 | ) | | | - | | | | - | | | Impairment charges | | | 7.8 | | | | 3.2 | | | | 25.9 | | | Loss from disposition of property, plant and equipment | | | 1.1 | | | | 2.6 | | | | 2.5 | | | | 0.4 | | | | 1.1 | | | | 2.6 | | Deferred income taxes | | | 5.9 | | | | (116.1 | ) | | | 0.6 | | | | (18.8 | ) | | | 5.9 | | | | (116.1 | ) | Stock-based compensation expense | | | 4.0 | | | | 3.6 | | | | 3.1 | | | | 4.9 | | | | 4.0 | | | | 3.6 | | Other – net | | | (0.7 | ) | | | (0.5 | ) | | | 4.1 | | | | (0.3 | ) | | | (0.7 | ) | | | (0.5 | ) | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | | | | | | | | | | | | | Trade accounts receivable | | | (0.1 | ) | | | (18.2 | ) | | | 15.1 | | | | 8.0 | | | | (0.1 | ) | | | (18.2 | ) | Inventories | | | (4.2 | ) | | | (0.1 | ) | | | (0.8 | ) | | | (2.7 | ) | | | (4.2 | ) | | | (0.1 | ) | Accounts payable | | | (2.4 | ) | | | 15.2 | | | | (3.2 | ) | | | (9.9 | ) | | | (2.4 | ) | | | 15.2 | | Accrued compensation and employee benefits | | | (5.3 | ) | | | 17.5 | | | | 1.9 | | | | 0.8 | | | | (5.3 | ) | | | 17.5 | | Other assets | | | (24.5 | ) | | | 2.1 | | | | (6.6 | ) | | | (14.5 | ) | | | (24.5 | ) | | | 2.1 | | Other liabilities | | | (4.5 | ) | | | (14.9 | ) | | | (28.7 | ) | | | (5.6 | ) | | | (4.5 | ) | | | (14.9 | ) | Net cash provided by operating activities | | | 63.5 | | | | 104.5 | | | | 48.8 | | | | 72.4 | | | | 63.5 | | | | 104.5 | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (58.3 | ) | | | (53.1 | ) | | | (49.8 | ) | | | (62.8 | ) | | | (58.3 | ) | | | (53.1 | ) | Insurance proceeds from Airedale fire | | | 12.2 | | | | 20.7 | | | | - | | | | 27.4 | | | | 12.2 | | | | 20.7 | | Costs to replace building and equipment damaged in Airedale fire | | | (16.7 | ) | | | (4.2 | ) | | | - | | | | (41.7 | ) | | | (16.7 | ) | | | (4.2 | ) | Acquisitions – net of cash acquired | | | | (1.4 | ) | | | - | | | | (7.8 | ) | Proceeds from dispositions of assets | | | 7.6 | | | | 2.9 | | | | 0.4 | | | | 0.4 | | | | 7.6 | | | | 2.9 | | Purchases of short-term investments | | | (5.2 | ) | | | - | | | | - | | | | (2.7 | ) | | | (5.2 | ) | | | - | | Proceeds from maturities of short-term investments | | | 2.4 | | | | - | | | | - | | | | 2.1 | | | | 2.4 | | | | - | | Acquisitions – net of cash acquired | | | - | | | | (7.8 | ) | | | (4.9 | ) | | Other – net | | | 0.8 | | | | - | | | | (1.6 | ) | | | 0.9 | | | | 0.8 | | | | - | | Net cash used for investing activities | | | (57.2 | ) | | | (41.5 | ) | | | (55.9 | ) | | | (77.8 | ) | | | (57.2 | ) | | | (41.5 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings of debt | | | 36.4 | | | | 152.6 | | | | 166.7 | | | | 38.0 | | | | 36.4 | | | | 152.6 | | Repayments of debt | | | (50.9 | ) | | | (152.4 | ) | | | (167.1 | ) | | | (27.1 | ) | | | (50.9 | ) | | | (152.4 | ) | Purchases of treasury stock under share repurchase program | | | | (6.9 | ) | | | - | | | | - | | Financing fees paid | | | (0.1 | ) | | | (0.9 | ) | | | - | | | | - | | | | (0.1 | ) | | | (0.9 | ) | Dividend paid to noncontrolling interest | | | - | | | | (0.5 | ) | | | - | | | | (0.9 | ) | | | - | | | | (0.5 | ) | Other – net | | | - | | | | (0.3 | ) | | | 0.7 | | | | (0.4 | ) | | | - | | | | (0.3 | ) | Net cash (used for) provided by financing activities | | | (14.6 | ) | | | (1.5 | ) | | | 0.3 | | | Net cash provided by (used for) financing activities | | | | 2.7 | | | | (14.6 | ) | | | (1.5 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (8.4 | ) | | | 1.9 | | | | (0.8 | ) | | | 1.1 | | | | (8.4 | ) | | | 1.9 | | Net (decrease) increase in cash and cash equivalents | | | (16.7 | ) | | | 63.4 | | | | (7.6 | ) | | | (1.6 | ) | | | (16.7 | ) | | | 63.4 | | Cash and cash equivalents - beginning of year | | | 87.2 | | | | 23.8 | | | | 31.4 | | | | 70.5 | | | | 87.2 | | | | 23.8 | | Cash and cash equivalents - end of year | | $ | 70.5 | | | $ | 87.2 | | | $ | 23.8 | | | $ | 68.9 | | | $ | 70.5 | | | $ | 87.2 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | Common stock | | | Additional paid-in capital | | | Retained earnings | | | Accumulated other comprehensive loss | | | Treasury stock, at cost | | | Non- | | | Total | | | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other comprehensive | | | Treasury stock, at | | | Non- controlling | | | Total | | | Shares | | | Amount | | | | | | | | | | | | | | | Shares | | | Amount | | | capital | | | earnings | | | loss | | | cost | | | interest | | | | | Balance, March 31, 2012 | | | 47.4 | | | $ | 29.6 | | | $ | 168.3 | | | $ | 231.8 | | | $ | (90.3 | ) | | $ | (14.5 | ) | | $ | 1.2 | | | $ | 326.1 | | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (24.2 | ) | | | - | | | | - | | | | - | | | | (24.2 | ) | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | - | | | | (38.1 | ) | | Stock options and awards including related tax benefits | | | 0.4 | | | | 0.3 | | | | (0.2 | ) | | | - | | | | - | | | | - | | | | - | | | | 0.1 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.1 | ) | | | - | | | | (0.1 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 3.1 | | | | - | | | | - | | | | - | | | | - | | | | 3.1 | | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.4 | | | | 1.4 | | | Balance, March 31, 2013 | | | 47.8 | | | | 29.9 | | | | 171.2 | | | | 207.6 | | | | (128.4 | ) | | | (14.6 | ) | | | 2.6 | | | | 268.3 | | | | 47.8 | | | $ | 29.9 | | | $ | 171.2 | | | $ | 207.6 | | | $ | (128.4 | ) | | $ | (14.6 | ) | | $ | 2.6 | | | $ | 268.3 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | | Stock options and awards including related tax benefits | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | | Balance, March 31, 2014 | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) | Stock options and awards including related tax benefits | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | | Balance, March 31, 2015 | | | 48.6 | | | $ | 30.4 | | | $ | 180.6 | | | $ | 359.8 | | | $ | (198.6 | ) | | $ | (16.2 | ) | | $ | 4.6 | | | $ | 360.6 | | | | 48.6 | | | | 30.4 | | | | 180.6 | | | | 359.8 | | | | (198.6 | ) | | | (16.2 | ) | | | 4.6 | | | | 360.6 | | Net loss attributable to Modine | | | | - | | | | - | | | | - | | | | (1.6 | ) | | | - | | | | - | | | | - | | | | (1.6 | ) | Other comprehensive income | | | | - | | | | - | | | | - | | | | - | | | | 24.4 | | | | - | | | | (0.1 | ) | | | 24.3 | | Stock options and awards including related tax benefits | | | | 0.4 | | | | 0.2 | | | | 0.1 | | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | Purchase of treasury stock | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7.8 | ) | | | - | | | | (7.8 | ) | Stock-based compensation expense | | | | - | | | | - | | | | 4.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.9 | | Contribution by noncontrolling interest | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2.3 | | | | 2.3 | | Dividend paid to noncontrolling interest | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | Net earnings attributable to noncontrolling interest | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.6 | | | | 0.6 | | Balance, March 31, 2016 | | | | 49.0 | | | $ | 30.6 | | | $ | 185.6 | | | $ | 358.2 | | | $ | (174.2 | ) | | $ | (24.0 | ) | | $ | 6.5 | | | $ | 382.7 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 1: | Significant Accounting Policies |
Nature of operations: Modine Manufacturing Company (“Modine” or the “Company”) specializes in thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets. The Company is a leading global developer, manufacturer and marketer of heat exchangers and systems for use in on-highway and off-highway original equipment manufacturer (“OEM”) vehicular applications, and a wide array of building, industrial and refrigeration markets. ProductThe Company’s product lines include radiators and radiator cores, condensers, oil coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation (“EGR”) coolers, and building heating, ventilating and air conditioning (“HVAC”) equipment.equipment, and coils.
Basis of presentation: The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States. These principles require management to make certain estimates and assumptions in determining assets, liabilities, revenue, expenses and related disclosures. Actual amounts could differ materially from those estimates.
Consolidation principles: The consolidated financial statements include the accounts of Modine Manufacturing Company and its majority-owned or Modine-controlled subsidiaries. The Company eliminates intercompany transactions and balances in consolidation.
The Company accounts for investments in non-consolidated affiliated companies in which its ownership is 20 percent or more using the equity method. The Company states these investments at cost, plus or minus a proportionate share of undistributed net income (loss). The Company includes Modine’s share of the affiliatesaffiliate’s net income (loss) in other income and expense. See Note 12 for further discussion.additional information.
Discontinued operations: During fiscal 2009, the Company sold its Electronics Cooling business. The buyer financed a portion of the selling price by issuing promissory notes payable to Modine. During fiscal 2015, the Company received $1.5 million from the buyer, which represented the final payment on the promissory notes. The Company had previously recorded a reserve against a portion of the promissory notes due to collectability concerns. As a result, the Company recorded a gain of $0.9 million ($0.6 million after income taxes) during fiscal 2015.
Assets held for sale: The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the assets for sale at a price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell.sell, within other noncurrent assets. The Company ceases to record depreciation expense at the time of designation as held for sale.
Revenue recognition: The Company recognizes sales revenue, including agreed upon commodity price increases or decreases,prices, when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product and risk of loss have transferred to the customer, persuasive evidence of an arrangement exists, and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The Company makes appropriate provisions for uncollectible accounts receivable based on historical data or specific customer economic data. The Company records sales discounts, which are offered for prompt payment by certain customers, as a reduction to net sales.
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 20152016 and 2014,2015, Company-owned tooling totaled $18.7$18.8 million and $28.6$18.7 million, respectively. In certain instances, the Company makes upfront payments for customer-owned tooling costs, and subsequently receives reimbursement from customers for the upfront payments. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 20152016 and 2014,2015, cost reimbursement receivables related to customer-owned tooling totaled $11.6$8.5 million and $10.3$11.6 million, respectively.
Warranty: The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. The Company records warranty expense based upon historical and current claims data or based onupon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 15 for further discussion.additional information. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its OEM customers in cost of sales, and related amounts billed to these customers in net sales. The Company records shipping and handling costs incurred upon the shipment of products to its HVAC and aftermarket customers in selling, general and administrative (“SG&A”) expenses. For the years ended March 31, 2016, 2015, 2014, and 2013, these2014, shipping and handling costs recorded in SG&A expenses were $2.5 million, $4.9 million, $4.0 million, and $4.3$4.0 million, respectively.
Research and development: The Company expenses research and development costs as incurred within SG&A expenses. For the years ended March 31, 2016, 2015, 2014, and 2013,2014, research and development costs charged to operations totaled $61.1 million, $62.0 million, $61.7 million, and $68.4$61.7 million, respectively.
Translation of foreign currencies: The Company translates assets and liabilities of foreign subsidiaries and equity investments into U.S. dollars at the period-end exchange rates, and translates income and expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders' equity. The Company includes foreign currency transaction gains or losses in the statement of operations within other income and expense.
Derivative instruments: The Company enters into derivative financial instruments from time to time to manage certain financial risks. The Company enters into futures contracts to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. These instruments are used to manage financial risks and are not speculative. See Note 18 for further discussion.additional information.
Income taxes: The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. See Note 8 for further discussion.additional information.
Earnings per share: The Company calculates basic earnings per share based upon the weighted averageweighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. Restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company. Therefore, these restricted stock awards are included in computing earnings per share pursuant to the two-class method. See Note 9 for further discussion.additional information.
Cash and cash equivalents: The Company considers all highly liquidhighly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the amount of those un-presented checks is included in accounts payable.
Short-term investments: The Company invests in time deposits with original maturities of more than three months but no more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2016 and 2015, the Company’s short-term investments totaled $3.3 million and $2.8 million, respectively.
Deferred compensation trust: The Company maintains a deferred compensation trust to fund future obligations under its non-qualified deferred compensation plan. The trust’s investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Trade accounts receivable: The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company recorded an allowance for doubtful accounts $1.0of $0.5 million and $1.1$1.0 million at March 31, 2016 and 2015, and 2014, respectively, representsrepresenting its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable without recourse to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During the years ended March 31, 2016, 2015, 2014, and 2013,2014, the Company sold, without recourse, $71.3 million, $87.0 million, $82.4 million, and $99.1$82.4 million of accounts receivable to accelerate cash receipts. During each of the years ended March 31, 2016, 2015, 2014, and 2013,2014, the Company recorded a loss on the sale of accounts receivables of $0.3 million in the consolidated statements of operations. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost on a first-in, first-out basis or weighted average basis, or marketand net realizable value.
Property, plant and equipment: The Company statesrecords property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful life of the asset. The Company charges maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations.
Goodwill: The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company recognizes an impairment loss if the book value of goodwill exceeds the fair value. The Company performed theits goodwill impairment test as of March 31, 2015 and as a2016, which did not result recordedin an impairment charge of $7.8 million related to its South America segment.charge. See Note 14 for further discussion.additional information.
Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment and writes them down to fair value when facts andwhenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the assets may not be recoverable through estimated future undiscounted cash flows. If an impairment has occurred, the Company writes down the asset toexceeds its estimated fair value and recognizes the impairment loss as a charge against current operations.value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets. See Note 6 for further discussion.additional information.
Environmental expenditures:liabilities: The Company capitalizesrecords liabilities for environmental expenditures that qualify as property, plantassessments and equipment or substantially increaseremediation efforts in the economic value or extend the useful life of an asset. The Company expenses all other expenditures as incurred. If a loss arising from environmental mattersperiod which its responsibility is probable and the costs can be reasonably estimated,estimated. To the Company records an accrual forextent that the amountrequired remediation procedures change, or additional contamination is identified, the Company’s estimate of the estimated loss.environmental liabilities may change. See Note 19 for further discussion.additional information.
Self-insurance reserves: The Company retains a portion of the financial risk for various insurance coverage, including property, general liability, workers compensation, and employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to operations. The Company reviews and updates the evaluationamount of insurance claims and the reasonableness of the relatedits insurance-related reserves on a quarterly basis.
Stock-based compensation: The Company recognizes stock-based compensation using the fair value method. Accordingly, compensation expense for stock options, restricted stock and performance-based stock awards is calculated based upon the fair value of the instruments at the time of grant, and is recognized as expense over the respective vesting periods. See Note 5 for further discussion.
Out of period adjustments: During the second quarter of fiscal 2014, the Company recorded a customer pricing adjustment that related to prior fiscal years. The impact of this error to the second quarter of fiscal 2014 decreased pre-tax earnings by $0.6 million ($0.5 million after-tax). During the first quarter of fiscal 2013, the Company identified an error related to certain commodity hedges that should have been deemed ineffective in the fourth quarter of fiscal 2012, which overstated pre-tax earnings by $0.5 million in the first quarter of fiscal 2013. The Company does not believe that these errors were material to its financial statements for fiscal 2014 or 2013.additional information.
New accounting guidance: In May 2014,March 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify several aspects of accounting for share-based payment transactions, including the income tax consequences. This guidance is effective for the Company’s first quarter of fiscal 2018. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance. Upon adoption of this new guidance, the Company will be required to recognize most leases on its balance sheet. This guidance is effective for the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In November 2015, the FASB issued new guidance, as part of its simplification initiative, that requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The Company adopted this guidance, on a retrospective basis, for its fiscal year ending March 31, 2016. As a result, the Company reclassified approximately $13.0 million of deferred tax assets from current assets to noncurrent assets as of March 31, 2015 to conform to the current-period presentation. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about revenue arising from contracts with customers. This new guidance is effective for the Company’s first quarter of fiscal 2018 at the earliest.2019. The Company is currently evaluating the impact the newthis guidance will have on its consolidated financial statements. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Supplemental cash flow information:
| | Years ended March 31, | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | | 2016 | | | 2015 | | | 2014 | | Interest paid | | $ | 10.3 | | | $ | 12.6 | | | $ | 11.6 | | | $ | 10.7 | | | $ | 10.3 | | | $ | 12.6 | | Income taxes paid | | | 15.9 | | | | 11.4 | | | | 12.4 | | | | 10.1 | | | | 15.9 | | | | 11.4 | |
Note 2: | Airedale Facility Fire |
On September 6, 2013, a fire caused significant destruction to the Company’s Airedale manufacturing facility and offices in Rawdon (Leeds), United Kingdom. The Company reports Airedale’s financial results within the Building HVAC segment (previously known as Commercial Products).segment. There were no injuries caused by the fire. The Rawdon facility, which wasis leased, was used to manufacture cooling products and solutions for a variety of applications, including data centers, clean rooms, retail, leisure and process cooling. The fire caused a temporary manufacturing suspensionCompany suspended operations at the Rawdon site;site as a result of the fire; however, the Companyit transferred its operations to temporary facilities and is in the process of rebuildingwhile it rebuilt the leased facility. The Company expects to completecompleted the reconstruction and return its operationsrelocation to the Rawdon sitefacility in late fiscal 2016.
The Company maintainsCompany’s insurance coverage forcovered damage to the leased facility, equipment, inventory, and other assets, as well as business interruption and lost profits, and recovery-related expenses caused by the fire. TheSince the date of the fire, the Company believes that reimbursementhas received cumulative cash proceeds of $96.0 million from its insurance provider is probable for substantially allcovered losses, and has recorded losses and costs directly attributablecaused by the fire in the same statement of operations line as the related insurance recovery. In fiscal 2016, the Company recorded a $9.5 million gain within other income related to an insurance settlement for equipment losses. This gain represents the replacement assets’ cost in excess of the carrying value of the equipment at the time it was destroyed by the fire. During fiscal 2015, the Company recorded $4.6 million of recoveries from business interruption insurance relating to fiscal 2015 and 2014 lost profits within SG&A expenses. Since the date of the fire, the Company has received cumulative cash proceeds of $62.7 million from its insurance provider for covered losses. In addition, the Company has written-off inventory of $4.7 million and equipment with a net book value of $1.4 million and incurred costs directly attributable to the fire totaling $22.0 million. The Company has recorded these losses and costs, which totaled $28.1 million, in the same statement of operations line as the related insurance recovery.
The terms of the Rawdon lease agreement obligateobligated the Company to rebuild the damaged facility. Through March 31, 2015,Upon completion of the rebuilt facility in fiscal 2016, the Company has capitalized reconstruction costs of $21.2 million,fulfilled this obligation and has recorded this asset on the consolidated balance sheet within other current assets. The Company currently estimates costs of reconstruction will total $48.0 million; accordingly, we recorded a $48.0 million other current liability as of March 31, 2015. As of March 31, 2015, we recorded an $18.0 million receivable from the Company’s insurance provider within other current assets, which represented covered losses to date in excess of cumulative cash proceeds received. As of March 31, 2014,removed both the liability to rebuild the facility was $45.0 million ($37.0 million withinand the capitalized reconstruction costs from its consolidated balance sheet. As of March 31, 2015, the other current liabilitiesliability to rebuild the facility was $48.0 million and $8.0 million within other noncurrent liabilities), and the receivablecurrent assets related to receivables from the Company’s insurance provider was $25.4 million ($18.4 million within other current assets and $7.0 million within other noncurrent assets).capitalized reconstructions costs totaled $39.2 million.
On January 29, 2016, the Company formed a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co. Ltd. of Yangzhou, China, of which it owns 67%, and the joint venture partner, Jiangsu Puxin Heat Exchange System Co., Ltd, owns 33%. This joint venture, which is reported in the Asia segment, will expedite the Company’s introduction of stainless steel heat exchangers for the light-, medium-, and heavy-duty commercial vehicle markets in China. The Company contributed cash of $1.4 million, with additional cash consideration of $0.5 million payable after six months subject to the sellers’ indemnification obligations under the agreement, and equipment and other assets totaling $2.3 million. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in acquired equipment and other long-lived assets totaling $1.5 million and working capital net assets of $0.8 million. The Company controls the primary management decisions and revenue-generating activities of the joint venture, and, therefore, the financial results of the joint venture are included in the Company’s consolidated financial statements.
On February 28, 2014, the Company acquired 100 percent of the shares of Barkell Limited of Consett, United Kingdom for cash consideration of $7.8 million, net of cash acquired. This acquisition provides Modine with an expanded product offering into the air handling market within the Building HVAC segment. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in intangible assets for acquired technology and customer relationships totaling $4.7 million; property, plant and equipment of $2.0 million; and working capital net assets of $1.1 million. Acquired technology consists of a fully developed product line and technical processes, and the customer relationships represent established sales channel and customer relationships. The Company is amortizing these acquired intangible assets over ten years.
On July 25, 2012, the Company completed the acquisition46
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The results of operations of these acquired businesses are included in the Company’s consolidated statements of operations since the dates of acquisition. The Company did not present pro forma financial information as the effectseffect of these acquisitions areis not material to theits results of operations or financial position. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2007, the Company acquired the remaining 50 percent of Radiadores Visconde Ltda. The purchase agreement included a $2.0 million note, which was payable subject to the resolution of certain obligations of the sellers. During fiscal 2013, the Company and the sellers reached a final resolution under which the Company is not obligated to pay the note to the sellers. As a result, the Company recorded a $2.0 million reduction to SG&A expenses in the South America segment during fiscal 2013.
Note 4: | Fair Value Measurements |
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
| ·● | Level 1 – Quoted prices for identical instruments in active markets. |
| ·● | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
| ·● | Level 3 – Model-derived valuations in which one or more significant inputs are not observable. |
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, fair value is based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash and cash equivalents, short-term investments, trade accounts receivable, and accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. The Company holds trading securities in a deferred compensation trust to fund obligations under Modine’s non-qualified deferred compensation plan. The securities’ fair values, which are recorded as other noncurrent assets, are determined based on quoted prices from active markets and classified within Level 1 of the valuation hierarchy. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. The fair values of the Company’s trading securities and deferred compensation obligations each totaled $3.0$3.2 million and $2.6$3.0 million at March 31, 20152016 and 2014,2015, respectively. The fair value of the Company’s long-term debt is disclosed in Note 16.
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2015 | | | March 31, 2016 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 8.1 | | | $ | - | | | $ | 8.1 | | | $ | - | | | $ | 5.8 | | | $ | 5.8 | | Common stocks | | | 40.5 | | | | 2.2 | | | | - | | | | 42.7 | | | | 23.7 | | | | 1.3 | | | | 25.0 | | Corporate bonds | | | - | | | | 23.5 | | | | - | | | | 23.5 | | | | - | | | | 8.4 | | | | 8.4 | | Pooled equity funds | | | 69.0 | | | | 11.4 | | | | - | | | | 80.4 | | | | 48.7 | | | | 7.3 | | | | 56.0 | | Pooled fixed-income funds | | | 15.5 | | | | - | | | | - | | | | 15.5 | | | | 26.3 | | | | - | | | | 26.3 | | U.S. government and agency securities | | | - | | | | 39.8 | | | | - | | | | 39.8 | | | | - | | | | 18.4 | | | | 18.4 | | Other | | | 0.7 | | | | 6.3 | | | | - | | | | 7.0 | | | | 0.4 | | | | 1.2 | | | | 1.6 | | Total | | $ | 125.7 | | | $ | 91.3 | | | $ | - | | | $ | 217.0 | | | $ | 99.1 | | | $ | 42.4 | | | $ | 141.5 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
| | March 31, 2014 | | | March 31, 2015 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 11.3 | | | $ | - | | | $ | 11.3 | | | $ | - | | | $ | 8.1 | | | $ | 8.1 | | Common stocks | | | 40.1 | | | | 2.1 | | | | - | | | | 42.2 | | | | 40.5 | | | | 2.2 | | | | 42.7 | | Corporate bonds | | | - | | | | 21.3 | | | | - | | | | 21.3 | | | | - | | | | 23.5 | | | | 23.5 | | Pooled equity funds | | | 68.9 | | | | 11.9 | | | | - | | | | 80.8 | | | | 69.0 | | | | 11.4 | | | | 80.4 | | Pooled fixed-income funds | | | 14.1 | | | | - | | | | - | | | | 14.1 | | | | 15.5 | | | | - | | | | 15.5 | | U.S. government and agency securities | | | - | | | | 37.0 | | | | - | | | | 37.0 | | | | - | | | | 39.8 | | | | 39.8 | | Other | | | 1.6 | | | | 5.4 | | | | - | | | | 7.0 | | | | 0.7 | | | | 6.3 | | | | 7.0 | | Total | | $ | 124.7 | | | $ | 89.0 | | | $ | - | | | $ | 213.7 | | | $ | 125.7 | | | $ | 91.3 | | | $ | 217.0 | |
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of common stocks, pooled equity funds and pooled fixed-income funds based on quoted prices from active markets and classifyclassified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain common stocks, corporate bonds, pooled equity funds and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 2016 and 2015, the Company held no Level 3 assets within its pension plans.
Assets held for sale: The Company valued assets held for sale based on Level 3 market-based valuation inputs. The carrying value of assets held for sale totaled $3.2$8.5 million and $11.6$3.2 million at March 31, 20152016 and 2014,2015, respectively. See Note 6 for further discussion.additional information.
Note 5: | Stock-Based Compensation |
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and executives that consists of restricted stock and stock option componentsoptions granted for retention and performance, (2) a discretionary equity program for management and other key employees, and (3) stock optionsawards and/or stock awardsoptions for non-employee directors. The Company’s Board of Directors and the Officer Nomination and Compensation Committee, as applicable, have discretionary authority to set the terms of the awards of stock under the Company’s Amended and Restated 2008 Incentive Compensation Plan (“Plan”). At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2015,2016, approximately 4.03.3 million shares authorized under the Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $4.9 million, $4.0 million, $3.6 million, and $3.1$3.6 million in fiscal 2016, 2015, 2014, and 2013,2014, respectively.
Stock Options: The Company recorded $0.9 million, $0.8$0.9 million, and $1.1$0.8 million of compensation expense related to stock options in fiscal 2016, 2015, 2014, and 2013,2014, respectively. The fair value of stock options that vested during fiscal 2016, 2015, 2014, and 20132014 was $0.9 million, $0.8$0.9 million, and $1.3$0.8 million, respectively. As of March 31, 2015,2016, the total compensation expense not yet recognized related to non-vested stock options was $1.7$2.0 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.72.5 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:
| | 2015 | | | 2014 | | | 2013 | | Weighted average fair value of options | | $ | 10.21 | | | $ | 7.76 | | | $ | 4.26 | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 2.1 | % | | | 1.3 | % | | | 0.9 | % | Expected volatility of the Company's stock | | | 76.1 | % | | | 88.7 | % | | | 87.4 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| | 2016 | | 2015 | | 2014 | Weighted-average fair value of options | | $ | 7.11 | | | $ | 10.21 | | | $ | 7.76 | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 1.9 | % | | | 2.1 | % | | | 1.3 | % | Expected volatility of the Company's stock | | | 66.9 | % | | | 76.1 | % | | | 88.7 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of the common stock on the date of grant. The risk-free interest rate was based on yields of U.S. Treasury zero-coupon issues with a term corresponding to the expected life of the options. The expected volatility assumption was based on changes in the Company’s historical common stock prices over the same time frame as the expected life of the awards. The expected dividend yield is zero as the Company currently does not anticipate paying dividends over the expected life of the options. The expected lives of the awards are based on historical patterns and the terms of the options. Outstanding options granted during fiscal 2015 and fiscal 2014 vest 25 percent annually for four years. All outstanding options granted prior to fiscal 2014 vested 25 percent on the grant date and 25 percent annually thereafter for the subsequent three years. The Company used a pre-vesting forfeiture rate of 2.5 percent for these periods as an estimate of expected forfeitures prior to completing the required service period.
A summary of stock option activity for fiscal 20152016 was as follows:
| | Shares | | | Weighted average exercise price | | | Weighted average remaining contractual term (years) | | | Aggregate intrinsic value | | | Shares | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.6 | | | $ | 13.15 | | | | | | | | | | 1.5 | | | $ | 11.99 | | | | | | | | Granted | | | 0.1 | | | | 14.94 | | | | | | | | | | 0.2 | | | | 11.39 | | | | | | | | Exercised | | | (0.1 | ) | | | 8.71 | | | | | | | | | | (0.1 | ) | | | 5.82 | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 29.41 | | | | | | | | | | (0.1 | ) | | | 27.33 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 11.99 | | | | 5.3 | | | $ | 5.7 | | | | 1.5 | | | $ | 10.82 | | | | 5.3 | | | $ | 3.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2015 | | | 1.2 | | | $ | 12.13 | | | | 4.5 | | | $ | 4.9 | | | Exercisable, March 31, 2016 | | | | 1.1 | | | $ | 10.41 | | | | 4.3 | | | $ | 3.0 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20152016 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the fair value of Modine’s common shares.
Additional information related to stock options exercised during fiscal 2016, 2015, 2014, and 20132014 was as follows:
| | 2015 | | | 2014 | | | 2013 | | | 2016 | | | 2015 | | | 2014 | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 1.1 | | | $ | 0.1 | | | $ | 0.4 | | | $ | 0.4 | | | $ | 1.1 | | Proceeds from stock options exercised | | $ | 0.6 | | | $ | 1.1 | | | $ | 0.1 | | | $ | 0.5 | | | $ | 0.6 | | | $ | 1.1 | |
Restricted Stock: The Company recorded $3.5 million, $2.8 million, $2.2 million, and $1.8$2.2 million of compensation expense related to restricted stock in fiscal 2016, 2015, 2014 and 2013,2014, respectively. The fair value of restricted stock awards that vested during fiscal 2016, 2015, and 2014 and 2013 was $3.4 million, $2.3 million, $1.6 million, and $1.3$1.6 million, respectively. At March 31, 2015,2016, the Company had $4.6$4.7 million of total unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.52.4 years. The Company values restricted stock awards using the closing market value of its common shares on the date of grant. The restricted stock awards vest 25 percent annually for four years, with the exception of awards to non-employee directors, which fully vest upon grant.
A summary of restricted stock activity for fiscal 20152016 was as follows:
| | Shares | | | Weighted average price | | Non-vested balance, beginning | | | 0.6 | | | $ | 8.66 | | Granted | | | 0.3 | | | | 14.92 | | Vested | | | (0.2 | ) | | | 9.73 | | Non-vested balance, ending | | | 0.7 | | | $ | 10.68 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | Shares | | Weighted- average price | Non-vested balance, beginning | | | 0.7 | | | $ | 10.68 | | Granted | | | 0.3 | | | | 11.18 | | Vested | | | (0.4 | ) | | | 10.01 | | Non-vested balance, ending | | | 0.6 | | | $ | 11.29 | |
Restricted Stock – Performance-Based Shares: The Company recorded $0.5 million, $0.3 million $0.6 million and $0.2$0.6 million of compensation expense related to performance-based stock awards in fiscal 2016, 2015, 2014 and 2013,2014, respectively. At March 31, 2015,2016, the Company had $1.6$1.2 million of total unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be recognized over a weighted-average period of 1.81.7 years. The Company values performance-based stock awards using the closing market value of its common shares aton the date of grant. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shares are earned under the performance portion of the restricted stock award program based upon the attainment of certain financial goals over a three-year period and are awarded atafter the end of that three-year performance period, if the performance targets have been achieved. A new performance period may begin each fiscal year; therefore, multiple performance periods, with distinct goals, may operate simultaneously.
The performance componentcomponents of the programprograms initiated in fiscal 2016 and fiscal 2015 waswere based upon both a target three-year average consolidated return on average capital employed (“ROACE”) and a target three-year average annual revenue growth at the end of thea three-year performance period, coveringcommencing with the fiscal 2015 through fiscal 2017.year of grant. For the program initiated in fiscal 2014, the performance award was based upon a target three-year average ROACE, three-year average annual revenue growth, and Asia segment operating income at the end of the three-year performance period. For the program initiated in fiscal 2013, the performance award was based upon a target three-year average consolidated ROACE, cumulative revenue over the three-year performance period and Europe ROACE at the end of the three-year performance period.
Note 6: Note 6: | Restructuring Activities |
During fiscal 2016, the Company offered a voluntary retirement program to certain U.S. salaried employees. The program was offered as part of the Company’s Strengthen, Diversify and Grow transformational initiative and supports the objective of reducing operational and SG&A cost structures.
Also during fiscal 2016, the Company announced a plan to close its Washington, Iowa manufacturing facility and is in the process of transferring the facility’s production to other Americas segment manufacturing facilities, which it expects to complete by the end of fiscal 2017. In addition, the Company completed the transfer of production from its McHenry, Illinois manufacturing facility to other Americas segment manufacturing facilities. These restructuring activities reflect the Company’s focus on operating scale manufacturing facilities to improve overall competitiveness and profitability.
During fiscal 2015, the Company implementedinitiated a headcount reduction plan for its Brazil manufacturing facility within its South AmericaAmericas segment. The headcount reductions were in response to the economic slowdown in Brazil and reflect the Company’s objective to maintain profitability in the segmentthis business despite lower sales volume.
During fiscal 2014,In addition, the Company approved a plancontinues to close its McHenry, Illinois manufacturing facility, reflecting its focus on operating scale manufacturing facilities to improve overall competitiveness and profitability. The Company is in the process of transferring the facility’s production to other existing North America segment manufacturing facilities.
During fiscal 2013, the Company initiatedexecute restructuring activities within its Europe segment. TheThese restructuring activities have included implementing headcount reductions, exiting certain non-core product lines based upon Modine’s global product strategy, reducing manufacturing costs, consolidating production facilities, implementing headcount reductions, and disposing of and selling certain underperforming or non-strategic assets. The Company designed these activities were designed to align the cost structure of the segment with its strategic focus on the commercial vehicle, off-highway, automotive component, and engine product markets, while improving gross margin and return on average capital employed.
Restructuring and repositioning expenses for fiscal 2015, 2014, and 2013 were as follows:
| | Years ended March 31, | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | | 2016 | | | 2015 | | | 2014 | | Employee severance and related benefits | | $ | 1.2 | | | $ | 14.8 | | | $ | 14.9 | | | $ | 12.8 | | | $ | 1.2 | | | $ | 14.8 | | Accelerated depreciation | | | - | | | | 4.3 | | | | - | | | | - | | | | - | | | | 4.3 | | Other restructuring and repositioning expenses | | | 3.5 | | | | 1.3 | | | | 2.1 | | | | 3.8 | | | | 3.5 | | | | 1.3 | | Total | | $ | 4.7 | | | $ | 20.4 | | | $ | 17.0 | | | $ | 16.6 | | | $ | 4.7 | | | $ | 20.4 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
During fiscal 2016, 2015, 2014, and 2013,2014, the Company recorded $16.6 million, $4.7 million, $16.1 million and $17.0$16.1 million, respectively, of restructuring and repositioning expenses as restructuring expenses in the consolidated statement of operations. During fiscal 2014, the Company recorded $4.3 million of restructuring and repositioning expenses within cost of sales in the consolidated statement of operations. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
| | Years ended March 31, | | | Years ended March 31, | | | 2015 | | | 2014 | | | 2016 | | 2015 | Beginning balance | | $ | 19.4 | | | $ | 11.6 | | | $ | 9.9 | | | $ | 19.4 | | Additions | | | 1.2 | | | | 14.8 | | | | 12.8 | | | | 1.2 | | Payments | | | (7.3 | ) | | | (7.8 | ) | | | (8.5 | ) | | | (7.3 | ) | Effect of exchange rate changes | | | (3.4 | ) | | | 0.8 | | | | 0.5 | | | | (3.4 | ) | Ending balance | | $ | 9.9 | | | $ | 19.4 | | | $ | 14.7 | | | $ | 9.9 | |
During fiscal 2016, the Company identified potential impairment indicators related to a manufacturing facility in Germany, including pre-tax losses and its strategic decision to exit a certain product line in the future. In response, the Company performed an impairment evaluation and recorded an asset impairment charge of $9.9 million within its Europe segment to write down the manufacturing facility’s long-lived assets to fair value. The Company determined fair value using Level 3 inputs, primarily consisting of a facility appraisal, which considered the market rental value, and estimated scrap values, which considered the specialized nature of the machinery and equipment.
During fiscal 2014, the Company recorded asset impairment charges totaling $3.2 million, including $2.0 million within its Europe segment, primarily due to a manufacturing facility in Germany that the Company plans to close,has closed, and $1.2 million within its North AmericaAmericas segment, related to the planned closure of its McHenry, Illinois manufacturing facility. During fiscal 2013, the Company recorded asset impairment charges of $24.1 and $1.8 million within its Europe and North America segments, respectively, to reduce the carrying values of certain facilities held for sale to their estimated fair values, less costs to sell.
During fiscal 2015, the Company sold a wind tunnel within its Europe segment which was previously reported as an asset held for sale, for cash proceeds of $5.8 million and recognized a gain of $3.2 million. Also during fiscal 2015, the Company reclassified $4.7 million of its assets held for sale to property, plant and equipment, related to a facility in the Europe segment that is no longer being actively marketed for sale. At March 31, 20152016 and 2014,2015, assets held for sale of $3.2$8.5 million and $11.6$3.2 million, respectively, were included in other noncurrent assets and consisted of facilities that the Company is marketing for sale.
In April 2015, the Company announced its intent to close its Washington, Iowa manufacturing facility within the North America segment. As a result of the planned closure, the Company expects to incur approximately $2.0 million of employee severance-related costs during fiscal 2016 and additional restructuring and repositioning expenses during the closure period, as production is transferred to other facilities within the North America segment.
Note 7: | Other Income and Expense |
Other income and expense consisted of the following:
| | Years ended March 31, | | | Years ended March 31, | | | 2015 | | | 2014 | | | 2013 | | | 2016 | | 2015 | | 2014 | Equity in earnings of non-consolidated affiliate | | $ | 0.6 | | | $ | 0.7 | | | $ | 0.3 | | | $ | 0.1 | | | $ | 0.6 | | | $ | 0.7 | | Interest income | | | 0.5 | | | | 0.5 | | | | 0.9 | | | | 0.4 | | | | 0.5 | | | | 0.5 | | Foreign currency transactions(a) | | | (0.9 | ) | | | (2.0 | ) | | | (1.1 | ) | | | (1.3 | ) | | | (0.9 | ) | | | (2.0 | ) | Other non-operating income - net | | | - | | | | - | | | | 0.1 | | | Gain from insurance recovery (b) | | | | 9.5 | | | | - | | | | - | | Total other income (expense) - net | | $ | 0.2 | | | $ | (0.8 | ) | | $ | 0.2 | | | $ | 8.7 | | | $ | 0.2 | | | $ | (0.8 | ) |
Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency denominated
| (a) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on foreign currency exchange contracts. |
| (b) | During fiscal 2016, the Company settled an insurance claim related to machinery and equipment destroyed in a fire at its Airedale facility and recorded a gain of $9.5 million. See Note 2 for additional information. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The U.S. and foreign components of earnings (loss) from continuing operations before income taxes and the provision (benefit)or benefit for income taxes consisted of the following:
| | Years ended March 31, | | | Years ended March 31, | | | 2015 | | | 2014 | | | 2013 | | | 2016 | | 2015 | | 2014 | Components of earnings (loss) from continuing operations before income taxes: | | | | | | | | | | | Components of (loss) earnings from continuing operations before income taxes: | | | | | | | | | | | United States | | $ | 31.1 | | | $ | 14.1 | | | $ | 10.2 | | | $ | (15.4 | ) | | $ | 31.1 | | | $ | 14.1 | | Foreign | | | 10.1 | | | | 9.9 | | | | (23.2 | ) | | | 5.5 | | | | 10.1 | | | | 9.9 | | Total earnings (loss) from continuing operations before income taxes | | $ | 41.2 | | | $ | 24.0 | | | $ | (13.0 | ) | | Total (loss) earnings from continuing operations before income taxes | | | $ | (9.9 | ) | | $ | 41.2 | | | $ | 24.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | Income tax expense (benefit): | | | | | | | | | | | | | | Income tax (benefit) expense: | | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | | | | | | | | | | | | | Current | | $ | 0.4 | | | $ | (2.0 | ) | | $ | 2.6 | | | $ | 0.1 | | | $ | 0.4 | | | $ | (2.0 | ) | Deferred | | | 7.1 | | | | (95.8 | ) | | | (2.6 | ) | | | (13.0 | ) | | | 7.1 | | | | (95.8 | ) | State: | | | | | | | | | | | | | | | | | | | | | | | | | Current | | | - | | | | 0.2 | | | | 0.2 | | | | 0.2 | | | | - | | | | 0.2 | | Deferred | | | 1.1 | | | | (21.4 | ) | | | (0.2 | ) | | | (2.5 | ) | | | 1.1 | | | | (21.4 | ) | Foreign: | | | | | | | | | | | | | | | | | | | | | | | | | Current | | | 12.7 | | | | 10.0 | | | | 6.4 | | | | 9.6 | | | | 12.7 | | | | 10.0 | | Deferred | | | (2.3 | ) | | | 1.1 | | | | 3.4 | | | | (3.3 | ) | | | (2.3 | ) | | | 1.1 | | Total income tax expense (benefit) | | $ | 19.0 | | | $ | (107.9 | ) | | $ | 9.8 | | | Total income tax (benefit) expense | | | $ | (8.9 | ) | | $ | 19.0 | | | $ | (107.9 | ) |
The Company allocates income tax expense among continuing operations, discontinued operations, and other comprehensive income. The Company applies accounting for income taxes by tax jurisdiction, and in periods in which there is a loss from continuing operations before income taxes and pre-tax income in other categories (e.g., discontinued operations or other comprehensive income), it first allocates income tax expense to the other sources of income, and records a related tax benefit in continuing operations.
Income tax expense attributable to earnings (loss) from continuing operations before income taxes differed from the amounts computed by applying the statutory U.S. federal income tax rate as a result of the following:
| | Years ended March 31, | | | Years ended March 31, | | | 2015 | | | 2014 | | | 2013 | | | 2016 | | 2015 | | 2014 | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 2.4 | | | | 2.1 | | | | (1.3 | ) | | | 11.5 | | | | 2.4 | | | | 2.1 | | Taxes on non-U.S. earnings and losses | | | (4.9 | ) | | | (3.8 | ) | | | (23.8 | ) | | | 26.4 | | | | (4.9 | ) | | | (3.8 | ) | Valuation allowance | | | 8.3 | | | | (471.7 | ) | | | (59.3 | ) | | | (20.9 | ) | | | 8.3 | | | | (471.7 | ) | Tax credits | | | (6.1 | ) | | | (7.1 | ) | | | 37.0 | | | | 20.5 | | | | (6.1 | ) | | | (7.1 | ) | Compensation | | | 1.0 | | | | 0.4 | | | | (13.0 | ) | | | (3.7 | ) | | | 1.0 | | | | 0.4 | | Tax rate or law changes | | | 1.2 | | | | (9.2 | ) | | | 0.9 | | | | 1.3 | | | | 1.2 | | | | (9.2 | ) | Uncertain tax positions net of settlements | | | 2.2 | | | | 0.4 | | | | (41.9 | ) | | Brazil interest on equity | | | - | | | | (1.7 | ) | | | 3.2 | | | Uncertain tax positions, net of settlements | | | | (4.3 | ) | | | 2.2 | | | | 0.4 | | Dividend repatriation | | | 2.4 | | | | 5.8 | | | | (11.4 | ) | | | 16.0 | | | | 2.4 | | | | 5.8 | | Other | | | 4.6 | | | | 0.2 | | | | (0.8 | ) | | | 8.1 | | | | 4.6 | | | | (1.5 | ) | Effective tax rate | | | 46.1 | % | | | (449.6 | %) | | | (75.4 | %) | | | 89.9 | % | | | 46.1 | % | | | (449.6 | %) |
The Company recorded an additional valuation allowance of $5.0 million, $2.6 million and $12.3 million in fiscal 2016, 2015, and 2014, respectively, against net deferred tax assets in certain foreign jurisdictions after determining it was more likely than not that the net deferred tax assets in these jurisdictions will not be realized. The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions going forward until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2016 and 2014, the Company concluded it no longer needed a valuation allowance on certain U.S. deferred tax assets after determining it was more likely than not they would be realized. As a result, the Company recorded a $119.2 million reversalreversals of its deferred tax asset valuation allowance.allowance of $3.0 million and $119.2 million in fiscal 2016 and 2014, respectively. Also during fiscal 2014, the Company recorded income tax benefits totaling $2.2 million related to foreign tax law changes. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | March 31, | | | March 31, | | | 2015 | | | 2014 | | | 2016 | | 2015 | Deferred tax assets: | | | | | | | | | | | | | Accounts receivable | | $ | 0.3 | | | $ | 0.2 | | | $ | 0.1 | | | $ | 0.3 | | Inventories | | | 3.8 | | | | 4.1 | | | | 3.6 | | | | 3.8 | | Plant and equipment | | | 0.8 | | | | 2.4 | | | | 4.3 | | | | 0.8 | | Pension and employee benefits | | | 50.5 | | | | 39.1 | | | | 52.6 | | | | 50.5 | | Net operating loss, capital loss, and credit carryforwards | | | 105.0 | | | | 122.4 | | | | 109.4 | | | | 105.0 | | Other, principally accrued liabilities | | | 6.8 | | | | 10.3 | | | | 6.9 | | | | 6.8 | | Total gross deferred tax assets | | | 167.2 | | | | 178.5 | | | | 176.9 | | | | 167.2 | | Less: valuation allowance | | | (48.0 | ) | | | (61.2 | ) | | | (50.8 | ) | | | (48.0 | ) | Net deferred tax assets | | | 119.2 | | | | 117.3 | | | | 126.1 | | | | 119.2 | | | | | | | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | | | | | | | Plant and equipment | | | | 5.5 | | | | 5.3 | | Goodwill | | | 0.6 | | | | 4.2 | | | | 0.6 | | | | 0.6 | | Plant and equipment | | | 5.3 | | | | 7.6 | | | Other | | | 1.0 | | | | 1.7 | | | | 1.1 | | | | 1.0 | | Total gross deferred tax liabilities | | | 6.9 | | | | 13.5 | | | | 7.2 | | | | 6.9 | | Net deferred tax asset | | $ | 112.3 | | | $ | 103.8 | | | $ | 118.9 | | | $ | 112.3 | |
Deferred tax assets and liabilities are reported inAs of March 31, 2016, the Company adopted new accounting guidance, which requires that all deferred taxes be presented as non-current on the consolidated balance sheets as follows:sheets. See Note 1 for additional information.
| | March 31, | | | | 2015 | | | 2014 | | Current deferred tax asset | | $ | 13.4 | | | $ | 13.0 | | Noncurrent deferred tax asset | | | 102.7 | | | | 98.6 | | Current deferred tax liability (other current liabilities) | | | (0.4 | ) | | | (0.5 | ) | Noncurrent deferred tax liability | | | (3.4 | ) | | | (7.3 | ) | Total | | $ | 112.3 | | | $ | 103.8 | |
Unrecognized tax benefits were as follows:
| | Years ended March 31, | | | Years ended March 31, | | | 2015 | | | 2014 | | | 2016 | | 2015 | Beginning balance | | $ | 2.1 | | | $ | 9.0 | | | $ | 5.6 | | | $ | 2.1 | | Gross increases - tax positions in prior period | | | 3.1 | | | | 2.5 | | | | - | | | | 3.1 | | Gross decreases - tax positions in prior period | | | - | | | | (7.0 | ) | | | (0.1 | ) | | | - | | Gross increases - tax positions in current period | | | 0.4 | | | | 0.1 | | | | 0.4 | | | | 0.4 | | Settlements | | | - | | | | (1.9 | ) | | Lapse of statute of limitations | | | - | | | | (0.8 | ) | | Effect of exchange rate changes | | | - | | | | 0.2 | | | Ending balance | | $ | 5.6 | | | $ | 2.1 | | | $ | 5.9 | | | $ | 5.6 | |
The Company’s liability for unrecognized tax benefits as of March 31, 20152016 was $5.6$5.9 million, and if recognized, $3.0$3.5 million would have an effective tax rate impact.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. At March 31, 20152016 and 2014,2015, accrued interest and penalties were not significant. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2015,2016, the Company was under income tax examination in a number of foreign jurisdictions. The Company does not anticipate a significant change in unrecognized tax benefits during the next twelve months.
The following tax years remain subject to examination for the Company’s major tax jurisdictions:
Austria | Fiscal 2012 - 20142015 | Brazil | Calendar 20102011 - 20142015 | Germany | Fiscal 20112012 - 20142015 | United States | Fiscal 2012 – 20142013 - 2015 |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
At March 31, 2015,2016, the Company had foreign tax credit carry forwards of $1.8 million that, if not utilized against domestic taxes, will expire in fiscal 2016 and 2017. The Company also had federal and state research and development tax credits of $20.9$23.3 million that, if not utilized against domestic taxes, will expire between fiscal 2018 and 2035.2036. The Company also had various state and local tax loss carry forwards of $186.0$190.8 million that, if not utilized against state apportioned taxable income, will expire at various times during fiscal 20162017 through 2034.2036. In addition, the Company had tax loss carry forwards of $304.6$330.7 million in various tax jurisdictions throughout the world. Certain of the carry forwards in the U.S. and many in foreign jurisdictions are offset by a valuation allowance. If not utilized against taxable income, $159.3$156.9 million of these tax losses will expire at various times during fiscal 20162017 through 2035, and $145.3$173.8 million, mainly related to India,Germany, Austria and Germany,India, will not expire due to an unlimited carry-forward period.
At March 31, 2015,2016, the Company provided $0.8$1.1 million of tax on undistributed earnings for certain subsidiaries not considered permanently reinvested. Undistributed earnings totaling $442.0$491.0 million are considered permanently reinvested in the Company’s remaining foreign operations, and no provision has been made for any taxes that would be payable upon the distribution of such earnings. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 9: | Earnings Per Share |
The components of basic and diluted earnings per share arewere as follows:
| | Years ended March 31, | | | Years ended March 31, | | | 2015 | | | 2014 | | | 2013 | | | 2016 | | 2015 | | 2014 | Basic: | | | | | | | | | | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 22.2 | | | $ | 131.9 | | | $ | (22.8 | ) | | (Loss) earnings from continuing operations | | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | Less: Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (1.7 | ) | | | - | | | | - | | | | (0.2 | ) | | | (1.7 | ) | Earnings (loss) from continuing operations available to Modine shareholders | | | 21.0 | | | | 128.7 | | | | (24.2 | ) | | (Loss) earnings from continuing operations available to Modine shareholders | | | | (1.6 | ) | | | 21.0 | | | | 128.7 | | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | | | - | | | | 0.6 | | | | - | | Net earnings (loss) available to Modine shareholders | | $ | 21.6 | | | $ | 128.7 | | | $ | (24.2 | ) | | Net (loss) earnings available to Modine shareholders | | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 128.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average shares outstanding - basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | | Weighted-average shares outstanding - basic | | | | 47.3 | | | | 47.2 | | | | 46.9 | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.45 | | | $ | 2.75 | | | $ | (0.52 | ) | | (Loss) earnings per share - continuing operations | | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | Earnings per share - discontinued operations | | | 0.01 | | | | - | | | | - | | | | - | | | | 0.01 | | | | - | | Net earnings (loss) per share - basic | | $ | 0.46 | | | $ | 2.75 | | | $ | (0.52 | ) | | Net (loss) earnings per share - basic | | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | | | | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 22.2 | | | $ | 131.9 | | | $ | (22.8 | ) | | (Loss) earnings from continuing operations | | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | Less: Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (0.9 | ) | | | - | | | | - | | | | (0.2 | ) | | | (0.9 | ) | Earnings (loss) from continuing operations available to Modine shareholders | | | 21.0 | | | | 129.5 | | | | (24.2 | ) | | (Loss) earnings from continuing operations available to Modine shareholders | | | | (1.6 | ) | | | 21.0 | | | | 129.5 | | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | | | - | | | | 0.6 | | | | - | | Net earnings (loss) available to Modine shareholders | | $ | 21.6 | | | $ | 129.5 | | | $ | (24.2 | ) | | Net (loss) earnings available to Modine shareholders | | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 129.5 | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average shares outstanding - basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | | Weighted-average shares outstanding - basic | | | | 47.3 | | | | 47.2 | | | | 46.9 | | Effect of dilutive securities | | | 0.6 | | | | 0.7 | | | | - | | | | - | | | | 0.6 | | | | 0.7 | | Weighted average shares outstanding - diluted | | | 47.8 | | | | 47.6 | | | | 46.6 | | | Weighted-average shares outstanding - diluted | | | | 47.3 | | | | 47.8 | | | | 47.6 | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.44 | | | $ | 2.72 | | | $ | (0.52 | ) | | (Loss) earnings per share - continuing operations | | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | Earnings per share - discontinued operations | | | 0.01 | | | | - | | | | - | | | | - | | | | 0.01 | | | | - | | Net earnings (loss) per share - diluted | | $ | 0.45 | | | $ | 2.72 | | | $ | (0.52 | ) | | Net (loss) earnings per share - diluted | | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | |
For the years ended March 31, 2016, 2015, 2014, and 2013,2014, the calculation of diluted earnings per share excluded 0.8 million, 0.6 million, 0.8 million, and 1.10.8 million stock options, respectively, because they were anti-dilutive. For the year ended March 31, 2013,2016, the total number of potential dilutive securities was 0.30.4 million. However, these securities were not included in the computation of diluted net loss per share since to do so would decrease the loss per share.
Inventories consisted of the following:
| | March 31, | | | | 2015 | | | 2014 | | Raw materials and work in process | | $ | 80.7 | | | $ | 89.2 | | Finished goods | | | 27.0 | | | | 27.6 | | Total inventories | | $ | 107.7 | | | $ | 116.8 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | March 31, | | | 2016 | | 2015 | Raw materials and work in process | | $ | 79.5 | | | $ | 80.7 | | Finished goods | | | 31.5 | | | | 27.0 | | Total inventories | | $ | 111.0 | | | $ | 107.7 | |
Note 11: Note11: | Property, Plant and Equipment |
Property, plant and equipment, including depreciable lives, consisted of the following:
| | March 31, | | | March 31, | | | 2015 | | | 2014 | | | 2016 | | 2015 | Land | | $ | 8.2 | | | $ | 10.4 | | | $ | 7.2 | | | $ | 8.2 | | Buildings and improvements (10-40 years) | | | 221.0 | | | | 228.1 | | | | 221.3 | | | | 221.0 | | Machinery and equipment (3-12 years) | | | 652.0 | | | | 715.1 | | | | 694.3 | | | | 652.0 | | Office equipment (3-10 years) | | | 81.9 | | | | 89.5 | | | | 84.1 | | | | 81.9 | | Construction in progress | | | 31.7 | | | | 35.5 | | | | 36.7 | | | | 31.7 | | | | | 994.8 | | | | 1,078.6 | | | | 1,043.6 | | | | 994.8 | | Less: accumulated depreciation | | | (672.7 | ) | | | (719.0 | ) | | | (705.0 | ) | | | (672.7 | ) | Net property, plant and equipment | | $ | 322.1 | | | $ | 359.6 | | | $ | 338.6 | | | $ | 322.1 | |
Depreciation expense totaled $48.6 million, $50.0 million $57.3 million and $55.1$57.3 million for the years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. Gains and losses related to the disposal of property, plant and equipment are recorded in SG&A expenses. Total losses related to the disposal of property, plant and equipment were $0.4 million, $1.1 million $2.6 million and $2.5$2.6 million for the years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively.
Note 12: Note 12: | Investment in Affiliate |
The Company’s investment in its non-consolidated affiliate is accounted for under the equity method. The Company has a 50 percent ownership of Nikkei Heat Exchanger Company, Ltd. (“NEX”). At both March 31, 20152016 and 2014,2015, the Company included the investment in NEX of $3.2 million and $3.4 million, respectively, in other noncurrent assets. At March 31, 2015,2016, the investment in NEX is equal to the Company's investment in the underlying assets.
The Company reports the results of operations for NEX in the consolidated financial statements using a one-month reporting delay. The Company reports equity in earnings from non-consolidated affiliates within other income and expense in the consolidated statements of operations. The Company’s share of NEX’s earnings for the years ended March 31, 2016, 2015, and 2014 and 2013 was $0.1 million, $0.6 million $0.7 million and $0.3$0.7 million, respectively. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Intangible assets consisted of the following:
| | March 31, 2015 | | | March 31, 2014 | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | | $ | 10.1 | | | $ | (5.7 | ) | | $ | 4.4 | | Acquired technology | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | | | 5.8 | | | | (0.2 | ) | | | 5.6 | | Customer relationships | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | | | 2.4 | | | | - | | | | 2.4 | | Total intangible assets | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | | | $ | 18.3 | | | $ | (5.9 | ) | | $ | 12.4 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | March 31, 2016 | | | March 31, 2015 | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 8.9 | | | $ | (6.3 | ) | | $ | 2.6 | | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | Acquired technology | | | 5.5 | | | | (1.5 | ) | | | 4.0 | | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | Customer relationships | | | 2.0 | | | | (0.4 | ) | | | 1.6 | | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | Total intangible assets | | $ | 16.4 | | | $ | (8.2 | ) | | $ | 8.2 | | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | |
The Company recorded $1.6 million, $0.8$1.6 million and $0.7$0.8 million of amortization expense during fiscal 2016, 2015 2014 and 2013,2014, respectively. Estimated future amortization expense is as follows:
Fiscal Year | | Estimated Amortization Expense | | | Estimated Amortization Expense | | 2016 | | $ | 1.6 | | | 2017 | | | 1.6 | | | $ | 1.6 | | 2018 | | | 1.6 | | | | 1.6 | | 2019 | | | 1.5 | | | | 1.5 | | 2020 | | | 1.4 | | | | 1.3 | | 2021 & Beyond | | | 2.2 | | | 2021 | | | | 0.8 | | 2022 & Beyond | | | | 1.4 | |
Changes in the carrying amount of goodwill, by segment and in the aggregate, were as follows:
| | South America | | | Asia | | | Building HVAC | | | Total | | | Americas | | Asia | | Building HVAC | | Total | Balance, March 31, 2013 | | $ | 12.2 | | | $ | 0.5 | | | $ | 16.0 | | | $ | 28.7 | | | Effect of exchange rate changes | | | (1.3 | ) | | | - | | | | 1.3 | | | | - | | | Balance, March 31, 2014 | | | 10.9 | | | | 0.5 | | | | 17.3 | | | | 28.7 | | | $ | 10.9 | | | $ | 0.5 | | | $ | 17.3 | | | $ | 28.7 | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | Balance, March 31, 2015 | | $ | - | | | $ | 0.5 | | | $ | 15.7 | | | $ | 16.2 | | | | - | | | | 0.5 | | | | 15.7 | | | | 16.2 | | Effect of exchange rate changes | | | | - | | | | - | | | | (0.4 | ) | | | (0.4 | ) | Balance, March 31, 2016 | | | $ | - | | | $ | 0.5 | | | $ | 15.3 | | | $ | 15.8 | |
The Company assesses goodwill for impairment annually, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. The Company conducted its annual assessment for goodwill impairment during the fourth quarter of fiscal 20152016 by applying a fair value-based test. Thetest and determined that the fair value of its reporting units exceeded their respective book values. In fiscal 2015, the Company determined its South America reporting unit’s goodwill was fully impaired and recorded a $7.8 million goodwill impairment charge as a result.within the Americas segment in connection with its annual assessment. The impairment charge was primarily caused by a decline in the financial outlook for the South America reporting unit. During the fourth quarter of fiscal 2015, the Company’s outlook for the markets served by its South America reporting unit, primarily in Brazil, shifted from a view that the markets may begin to recover to a view that the market downturn may be more prolonged. The economic weakness in Brazil has negatively affected the Company’s expected future cash flows for the South America segment. The fair value of the Company’s remaining reporting units exceeded their respective book values.Brazil.
As ofAt both March 31, 2016 and 2015, accumulated goodwill impairment losses within the South America segment totaled $7.8 million. As of March 31, 2015 and 2014, accumulated goodwill impairment losses totaled $23.8$31.6 million and $8.7 million within the North AmericaAmericas and Europe segments, respectively.
Note 15: Note 15: | Product Warranties, Operating Leases, and Other Commitments |
Product warranties: Modine provides product warranties for various product lines, withMost of the Company’s products are covered under a warranty periods generallyperiod ranging from one to five years. The Company accruesrecords a liability for estimated futureproduct warranty costs inobligations at the period in whichtime of sale to a customer based upon historical warranty experience. In addition, the sale is recorded. The Company bases warranty expense estimates on the best information available using analytical and statistical analysis of both historical and current claim data. The Company adjusts these expensesits warranty accruals if it becomes probable that expected claims will differ from initial estimates recorded at the time of sale.estimates. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | Years ended March 31, | | | 2015 | | | 2014 | | | 2016 | | 2015 | Beginning balance | | $ | 14.0 | | | $ | 12.6 | | | $ | 10.4 | | | $ | 14.0 | | Accruals for warranties issued | | | 5.8 | | | | 6.0 | | | Accruals related to pre-existing warranties | | | 1.5 | | | | 8.3 | | | Warranties recorded at time of sale | | | | 5.7 | | | | 5.8 | | Adjustments to pre-existing warranties | | | | (1.1 | ) | | | 1.5 | | Settlements | | | (9.2 | ) | | | (13.0 | ) | | | (6.7 | ) | | | (9.2 | ) | Effect of exchange rate changes | | | (1.7 | ) | | | 0.1 | | | | - | | | | (1.7 | ) | Ending balance | | $ | 10.4 | | | $ | 14.0 | | | $ | 8.3 | | | $ | 10.4 | |
Operating leases: The Company leases various facilities and equipment under operating leases. Rental expense for these leases totaled $11.9 million in fiscal 2016, and $11.5 million in both fiscal 2015 and 2014, and $11.3 million in fiscal 2013.2014.
Future minimum rental commitments at March 31, 20152016 under non-cancelable operating leases were as follows:
Fiscal Year | | | | | | | 2016 | | $ | 8.2 | | | 2017 | | | 5.7 | | | $ | 8.1 | | 2018 | | | 4.3 | | | | 5.6 | | 2019 | | | 3.8 | | | | 4.8 | | 2020 | | | 4.0 | | | | 4.6 | | 2021 and beyond | | | 23.9 | | | 2021 | | | | 4.1 | | 2022 and beyond | | | | 26.3 | | Total | | $ | 49.9 | | | $ | 53.5 | |
Indemnification agreements: From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years. In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 20152016 is not material.
Commitments: At March 31, 2015,2016, the Company had capital expenditure commitments of $15.5$20.5 million. Significant commitments include tooling and equipment expenditures for new and renewal programs with customers in North Americathe Americas and Europe.Europe segments. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
The Company has a commitment to rebuild the leased Airedale facility, which suffered significant destruction from a fire during fiscal 2014. The Company maintains insurance coverage and believes reimbursement for substantially all losses and costs directly attributable to the fire is probable. See Note 2 for additional information.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Long-term debt was comprised of the following:
| | Fiscal year of maturity | | | March 31, 2015 | | | March 31, 2014 | | | Fiscal year of maturity | | | March 31, 2016 | | March 31, 2015 | | | | | | | | | | | | | | | | | | | | Foreign credit agreements | | 2016 | | | $ | 0.2 | | | $ | 0.5 | | | | 2018-2020 | | | $ | 0.4 | | | $ | 0.2 | | 6.8% Senior Notes | | 2017-2021 | | | | 125.0 | | | | 125.0 | | | | 2017-2021 | | | | 125.0 | | | | 125.0 | | Revolving credit facility | | 2019 | | | | - | | | | - | | | | 2019 | | | | - | | | | - | | | | | | | | 125.2 | | | | 125.5 | | | | | | | | 125.4 | | | | 125.2 | | Capital lease obligations | | 2016-2030 | | | | 4.9 | | | | 6.5 | | | Other (a) | | | | 2017-2030 | | | | 8.6 | | | | 4.9 | | | | | | | | 130.1 | | | | 132.0 | | | | | | | | 134.0 | | | | 130.1 | | Less: current portion | | | | | | (0.5 | ) | | | (0.8 | ) | | | | | | | (8.5 | ) | | | (0.5 | ) | Total long-term debt | | | | | $ | 129.6 | | | $ | 131.2 | | | | | | | $ | 125.5 | | | $ | 129.6 | |
| (a) | Other long-term debt includes capital lease obligations and other financing-type obligations. |
The Company maintains a $175.0 million domestic revolving credit facility, which expires in August 2018. Borrowings under the credit agreement bear interest at a variable rate based on the London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points (1.6(1.8 percent at March 31, 2015)2016) depending upon the Company’s leverage ratio, as defined below. At March 31, 20152016 and 2014,2015, no borrowings were outstanding under the revolving credit facility.
The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 2016 and 2015 and 2014 of $18.6$28.6 million and $32.4$18.6 million, respectively. At March 31, 2015,2016, the Company’s foreign unused lines of credit totaled $41.0$32.0 million. In aggregate, the Company had total available lines of credit of $216.0$207.0 million at March 31, 2015.2016.
Provisions in the Company’s revolving credit facility, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided a lienliens on substantially all domestic assets. The Company is also subject to a leverage ratio covenant, which requires the Company to limit its consolidated indebtedness, less a portion of the Company’s cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”), and an interest expense coverage ratio, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. The Company was in compliance with its debt covenants as of March 31, 2015.2016.
Long-term debt matures as follows:
Fiscal Year | | | | | | | 2016 | | $ | 0.5 | | | 2017 | | | 8.3 | | | $ | 8.5 | | 2018 | | | 16.3 | | | | 16.5 | | 2019 | | | 16.3 | | | | 16.5 | | 2020 | | | 16.3 | | | | 16.6 | | 2021 & beyond | | | 72.4 | | | 2021 | | | | 69.4 | | 2022 & beyond | | | | 6.5 | | Total | | $ | 130.1 | | | $ | 134.0 | |
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. At March 31, 20152016 and 2014,2015, the carrying value of Modine’s long-term debt approximated fair value, with the exception of the Senior Notes, which had a fair value of approximately $141.0$139.0 million and $140.0$141.0 million, respectively. The fair value of the Senior Notes is categorized as Level 2 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 17: Note 17: | Pension and Employee Benefit Plans |
Defined Contribution Employee Benefit Plans:
The Company maintains domestic 401(k) plans that allow employees to contribute a portion of their salary to help save for retirement. The Company matched 50 percent of employee contributions, up to 5 percent of employee compensation, during fiscal 2016, 2015, 2014, and 2013.2014. The Company also makes annual employer contributions into active employee accounts based upon a percentage of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary. The Company’s expense for defined contribution employee benefit plans during fiscal 2016, 2015, and 2014 and 2013 was $4.6 million, $5.9 million, $8.3 million, and $4.1$8.3 million, respectively. The decreasedecreasing trend in expense infrom fiscal 2015, as compared with the prior fiscal year,2014 was primarily due to lower discretionary employer contributions.
In addition, the Company maintains a non-qualified deferred compensation plan for eligible employees, and various foreignnon-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans:
Certain foreignnon-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.
Defined Benefit Employee Benefit Plans:
Pension plans: The Company has amaintains non-contributory defined benefit pension planplans that coverscover most of its domestic employees hired on or before December 31, 2003. The benefits provided are based primarily on years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based on a monthly retirement benefit amount. Domestic salaried employees hired after December 31, 2003 are not covered under anya defined benefit plan. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company’s foreign subsidiariesCompany also have legacy defined benefit plans coveringwhich cover a smallsmaller number of active employees.employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany and Austria and are closed to new participants.
The Company contributions ofcontributed $6.7 million, $5.9 million, and $8.0 million and $9.2 million to its U.S. pension plans during fiscal 2016, 2015, and 2014, and 2013, respectively,respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company completed a voluntary lump-sum payout program offered to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer. During fiscal 2016, a total of $65.3 million was paid from pension plan assets for lump-sum payouts, which reduced the Company’s pension obligation by the same amount. In connection with these lump-sum payouts, the Company recorded $42.1 million of non-cash settlement losses related to the accelerated recognition of unamortized actuarial losses previously recorded on the consolidated balance sheets within accumulated other comprehensive loss. During fiscal 2016, the Company recorded $33.3 million and $8.8 million of settlement losses as SG&A expenses and cost of sales, respectively, within the consolidated statements of operations.
Postretirement plans: The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans during fiscal 2016, 2015, and 2014 and 2013 was $0.3 million, $0.1 million, $1.0 million, and $1.1$1.0 million, respectively.
Measurement Date: The Company uses March 31 as the measurement date for its pension and postretirement plans. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s pension plans, for the fiscal years ended March 31, 20152016 and 20142015 were as follows:
| | 2015 | | | 2014 | | | 2016 | | 2015 | Change in benefit obligation: | | | | | | | | | | | | | Benefit obligation at beginning of year | | $ | 295.7 | | | $ | 309.6 | | | $ | 328.2 | | | $ | 295.7 | | Service cost | | | 0.5 | | | | 0.6 | | | | 0.6 | | | | 0.5 | | Interest cost | | | 13.0 | | | | 13.0 | | | | 11.2 | | | | 13.0 | | Actuarial loss (gain) | | | 40.6 | | | | (10.8 | ) | | Actuarial (gain) loss | | | | (2.8 | ) | | | 40.6 | | Benefits paid(a) | | | (14.6 | ) | | | (18.6 | ) | | | (78.1 | ) | | | (14.6 | ) | Effect of exchange rate changes | | | (7.0 | ) | | | 1.9 | | | | 1.9 | | | | (7.0 | ) | Benefit obligation at end of year | | $ | 328.2 | | | $ | 295.7 | | | $ | 261.0 | | | $ | 328.2 | | | | | | | | | | | | | | | | | | | Change in plan assets: | | | | | | | | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 213.7 | | | $ | 200.6 | | | $ | 217.0 | | | $ | 213.7 | | Actual return on plan assets | | | 10.8 | | | | 22.2 | | | | (5.3 | ) | | | 10.8 | | Benefits paid(a) | | | (14.6 | ) | | | (18.6 | ) | | | (78.1 | ) | | | (14.6 | ) | Employer contributions | | | 7.1 | | | | 9.5 | | | | 7.9 | | | | 7.1 | | Fair value of plan assets at end of year | | $ | 217.0 | | | $ | 213.7 | | | $ | 141.5 | | | $ | 217.0 | | Funded status at end of year | | $ | (111.2 | ) | | $ | (82.0 | ) | | $ | (119.5 | ) | | $ | (111.2 | ) | | | | | | | | | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | | | | | | | | | Current liability | | $ | (0.8 | ) | | $ | (1.0 | ) | | $ | (0.9 | ) | | $ | (0.8 | ) | Noncurrent liability | | | (110.4 | ) | | | (81.0 | ) | | | (118.6 | ) | | | (110.4 | ) | | | $ | (111.2 | ) | | $ | (82.0 | ) | | $ | (119.5 | ) | | $ | (111.2 | ) |
| (a) | In fiscal 2016, $65.3 million was paid from plan assets in connection with lump-sum payouts. |
The accumulated benefit obligation for pension plans was $325.5$257.9 million and $293.0$325.5 million as of March 31, 20152016 and 2014,2015, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $192.3$162.0 million and $153.4$192.3 million as of March 31, 20152016 and 2014,2015, respectively.
Costs for the Company’s pension plans included the following components for the fiscal years ended March 31, 2016, 2015, 2014, and 2013:2014:
| | 2015 | | | 2014 | | | 2013 | | | 2016 | | 2015 | | 2014 | Components of net periodic benefit cost: | | | | | | | | | | | | | | | | | | | Service cost | | $ | 0.5 | | | $ | 0.6 | | | $ | 0.6 | | | $ | 0.6 | | | $ | 0.5 | | | $ | 0.6 | | Interest cost | | | 13.0 | | | | 13.0 | | | | 13.5 | | | | 11.2 | | | | 13.0 | | | | 13.0 | | Expected return on plan assets | | | (16.7 | ) | | | (15.7 | ) | | | (16.1 | ) | | | (14.9 | ) | | | (16.7 | ) | | | (15.7 | ) | Amortization of net actuarial loss | | | 5.5 | | | | 6.3 | | | | 5.0 | | | | 6.4 | | | | 5.5 | | | | 6.3 | | Settlements (a) | | | | 42.1 | | | | - | | | | - | | Net periodic benefit cost | | $ | 2.3 | | | $ | 4.2 | | | $ | 3.0 | | | $ | 45.4 | | | $ | 2.3 | | | $ | 4.2 | | | | | | | | | | | | | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 46.4 | | | $ | (17.3 | ) | | $ | 27.0 | | | $ | 17.5 | | | $ | 46.4 | | | $ | (17.3 | ) | Amortization of net actuarial loss | | | (5.5 | ) | | | (6.3 | ) | | | (5.0 | ) | | Total recognized in other comprehensive loss (income) | | $ | 40.9 | | | $ | (23.6 | ) | | $ | 22.0 | | | Amortization of net actuarial loss (a) | | | | (48.5 | ) | | | (5.5 | ) | | | (6.3 | ) | Total recognized in other comprehensive (income) loss | | | $ | (31.0 | ) | | $ | 40.9 | | | $ | (23.6 | ) |
| (a) | During fiscal 2016, in connection with lump-sum payouts to pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company estimates $7.2$5.6 million of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2016. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)2017.
The Company used a discount rate of 4.0%4.1% and 4.7%4.0% as of March 31, 20152016 and 2014,2015, respectively, in determining its benefit obligations under its U.S. pension plans. The Company used a discount rate of 1.3%1.8% and 3.0%1.3% as of March 31, 20152016 and 2014,2015, respectively, in determining its benefit obligations under its foreignnon-U.S. pension plans. The Company used a discount rate of 4.7%4.3%, 4.4%4.7%, and 4.9%4.4% to determine its costs under its U.S. pension plans for the fiscal years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. The Company used a discount rate of 3.0%1.3%, 3.5%3.0%, and 5.0%3.5% to determine its costs under its foreignnon-U.S. pension plans for the fiscal years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. AThe Company used a similar process was used to determine the discount rate for the Company’s foreignits non-U.S. pension obligationsobligations.
Plan assets in the U.S. defined benefit plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted averageweighted-average asset allocations at the measurement dates of March 31, 20152016 and 20142015 were as follows:
| | Target allocation | | | Plan assets | | | Target allocation | | Plan assets | | | | | | 2015 | | | 2014 | | | | | | 2016 | | 2015 | Equity securities | | | 55 | % | | | 55 | % | | | 57 | % | | | 55 | % | | | 56 | % | | | 55 | % | Debt securities | | | 38 | % | | | 36 | % | | | 37 | % | | | 38 | % | | | 36 | % | | | 36 | % | Alternative assets | | | 5 | % | | | 5 | % | | | 5 | % | | | 5 | % | | | 4 | % | | | 5 | % | Cash | | | 2 | % | | | 4 | % | | | 1 | % | | | 2 | % | | | 4 | % | | | 4 | % | | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 20152016 and 2014,2015, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term return of plan assets, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2016, 2015, 2014 and 20132014 U.S. pension plan expense, the expected rate of return on plan assets was 8.0 percent. For fiscal 20162017 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 8.0 percent.
The Company’s funding policy for domestic qualifiedits U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. The Company expects to make contributions of $6.7$8.1 million to these plans during fiscal 2016.2017.
Estimated pension benefit payments for the next ten fiscal years are as follows:
Fiscal Year | | Estimated pension benefit payments | | | Estimated Pension Benefit Payments | | 2016 | | $ | 15.1 | | | 2017 | | | 15.7 | | | $ | 14.5 | | 2018 | | | 16.9 | | | | 15.2 | | 2019 | | | 17.2 | | | | 15.3 | | 2020 | | | 18.0 | | | | 15.8 | | 2021-2025 | | | 94.0 | | | 2021 | | | | 16.1 | | 2022-2026 | | | | 79.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 18: Note 18: | Derivative Instruments |
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated, and is effective, as a hedge, and, if so, on the nature of the hedging activity. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Commodity Derivatives: The Company has, from time to time, enteredperiodically enters into futures contracts related to certain forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts wasis to reduce its exposure to changing market prices for future purchases of these commodities. The Company has not designated commodity contracts entered into in fiscal 2013, 2014, 2015, and 20152016 for hedge accounting. Accordingly, unrealized gains and losses on thosethese contracts are recorded within cost of sales. The Company designated contracts entered into prior to fiscal 2013 for hedge accounting. Accordingly, the amounts recorded in accumulated other comprehensive loss (“AOCI”) related to those contracts remained in AOCI until the underlying commodity purchases impacted earnings.
Foreign exchange contracts: The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. The Company has not designated these contracts for hedge accounting. Accordingly, unrealized gains and losses related to changes in fair value are recorded in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| | Balance Sheet Location | | March 31, 2015 | | | March 31, 2014 | | Balance Sheet Location | | March 31, 2016 | | | March 31, 2015 | | Foreign exchange contracts | | Other current liabilities | | $ | 0.3 | | | $ | 0.2 | | Other current assets | | $ | 0.1 | | | $ | - | | Foreign exchange contracts | | Other current liabilities | | | - | | | | 0.3 | | Commodity derivatives | | Other current liabilities | | | 0.1 | | | | 0.1 | | Other current liabilities | | | 0.1 | | | | 0.1 | | Commodity derivatives | | Other noncurrent liabilities | | | - | | | | 0.1 | | |
The amounts recorded in AOCI and in the consolidated statements of operations for all of the Company’s derivative financial instruments were as follows:
| | March 31, 2015 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss Recognized in Continuing Operations | | Commodity derivatives | | $ | - | | Cost of sales | | $ | - | | | $ | 0.2 | | Foreign exchange contracts | | | - | | Other income (expense) - net | | | - | | | | 1.1 | | Total | | $ | - | | | | $ | - | | | $ | 1.3 | |
| | March 31, 2014 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss Recognized in Continuing Operations | | Commodity derivatives | | $ | - | | Cost of sales | | $ | 0.5 | | | $ | 0.5 | | Total | | $ | - | | | | $ | 0.5 | | | $ | 0.5 | |
| | March 31, 2013 | | Statement of Operations | | Years ended March 31, | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss (Gain) Recognized in Continuing Operations | | Location | | 2016 | | 2015 | | 2014 | Commodity derivatives | | $ | 0.5 | | Cost of sales | | $ | 2.6 | | | $ | 4.6 | | Cost of sales | | $ | (0.7 | ) | | $ | (0.2 | ) | | $ | (0.5 | ) | Foreign exchange contracts | | | - | | Other income (expense) - net | | | - | | | | (0.3 | ) | Other income (expense) - net | | | 0.6 | | | | (1.1 | ) | | | - | | Total | | $ | 0.5 | | | | $ | 2.6 | | | $ | 4.3 | | | Total loss | | | | $ | (0.1 | ) | | $ | (1.3 | ) | | $ | (0.5 | ) |
Note 19: Note 19: | Contingencies and Litigation |
Market risk: The Company sells a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, off-highway, automotive, and commercial heating and air conditioning markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or more of the markets it serves. The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits. However, the risk associated with market downturns, such as the downturn experienced in fiscal 2009 and 2010, is still present. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Credit risk: The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 2016 and 2015, two customers each accounted for ten percent or more of the Company’s total sales. In fiscal 2014, and 2013, one customer accounted for ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers represented 63 percent 56 percent, and 59 percent of total sales in both fiscal 2016 and 2015 2014, and 2013, respectively.56 percent in fiscal 2014. At March 31, 2016 and 2015, and 2014, 4745 percent and 4647 percent, respectively, of the Company's trade accounts receivable were from the Company's top ten customers. These customers operate primarily in the automotive, truck, and heavy equipment markets and are influenced by similar market and general economic factors. Collateral or advanced payments are generally not required, but they may be used in those cases where the Company identifies a substantial credit risk.required. The Company has not experienced significant credit losses to customers in the markets served. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company manages credit risk through its focus on the following:
| ·● | Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; |
| ·● | Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; |
| ·● | Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and |
| ·● | Insurance – ensuring that insurance providers maintain acceptable financial ratings. |
Counterparty risks: The Company manages counterparty risks through its focus on the following:
| ·● | Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; |
| ·● | Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and |
| ·● | Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company. |
Europe value added tax: During fiscal 2012, the Company determined it was not properly applying value added tax (“VAT”) to certain cross-border transactions within the Europe segment and established an accrual of $10.7 million for estimated VAT liabilities, including interest and penalties. During fiscal 2013 and 2014, the Company completed the registration and filing process with the taxing authorities and began making payments to the applicable jurisdictions. During fiscal 2015, 2014, and 2013, the Company recorded reductions to SG&A expenses of $2.0 million, $2.9 million and $1.6 million, respectively, as a result of favorable changes to the estimated VAT obligations.
Environmental: The United States Environmental Protection Agency (“USEPA”) has designated the Company as a potentially responsible party (“PRP”) for remediation of three sites where the Company had involvement.sites. These sites include:are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be material to the Company’s financial position due to Modine’sits relatively small portion of contributed materials. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company has recorded environmental investigation and remediation accruals for groundwater contamination at its manufacturing facility in its wholly-owned subsidiary in Brazil (“Modine Brazil”) and subsurface contamination at its former manufacturing facility in the Netherlands along withand groundwater contamination at its manufacturing facility in Brazil. During fiscal 2016, the Company recorded charges totaling $1.6 million, within cost of sales, to establish an environmental accrual for investigative work related to a previously-owned manufacturing facility in the United States. In addition, the Company has recorded accruals for other lesser environmental matters at certain facilities located in the United States. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $3.8$5.1 million and $5.1$3.8 million at March 31, 20152016 and 2014,2015, respectively. As additional information becomes available, the Company will re-assess any potentialthe liability related to these matters and revise the estimated accrual, if necessary. Based on currently available information, the Company believes the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages. During fiscal 2011, one of the adjacent businesses to the Company’s facility in Brazil filed suit against the Company’s subsidiary in Brazil (“Modine Brazil,Brazil”), seeking remediation and certain other damages as a result of the contamination allegedly attributable to the Company’sits operations. The Company is defending this suit and believes that the ultimate outcome of this matter will not be material.
Brazil antitrust investigation: During the fourth quarter of fiscal 2015, Brazil’s Administrative Council for Economic Defense (CADE) provided formal notice to Modine Brazil of an administrative investigation regarding alleged violations of Brazil’s antitrust regulations by Modine Brazil and certain of its employees during a period of time at least seven years ago. Duringprior to the fourth quarternotice. As of fiscalMarch 31, 2016 and March 31, 2015, the Company recorded a charge ofaccrued $2.8 million and $3.2 million (BRL10.0 million) within SG&A expenses,(BRL 10.0 million at each date), respectively, representing the estimated amount that may be incurred in connection with the management and resolution of this matter. Due to the ongoing nature of the investigation,this matter, the Company cannot provide assurance of theits ultimate resolution of this matter at this time.
Other litigation: In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits or proceedings are not expected to have a material adverse effect on the Company’s consolidated financial statements. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 20: Note 20: | Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | Foreign Currency Translation | | | Cash Flow Hedges | | | Defined Benefit Plans | | | Total | | | Foreign Currency Translation | | Defined Benefit Plans | | Total | Balance, March 31, 2014 | | $ | 27.3 | | | $ | - | | | $ | (131.2 | ) | | $ | (103.9 | ) | | Balance, March 31, 2015 | | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | - | | | | (45.2 | ) | | | (113.2 | ) | | | 4.7 | | | | (16.6 | ) | | | (11.9 | ) | Reclassifications: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | - | | | | 5.4 | | | | 5.4 | | | | - | | | | 48.3 | | | | 48.3 | | Amortization of unrecognized prior service credit (a) | | | - | | | | - | | | | (0.1 | ) | | | (0.1 | ) | | | - | | | | (0.2 | ) | | | (0.2 | ) | Income taxes | | | - | | | | - | | | | 13.2 | | | | 13.2 | | | | - | | | | (11.8 | ) | | | (11.8 | ) | Total other comprehensive loss | | | (68.0 | ) | | | - | | | | (26.7 | ) | | | (94.7 | ) | | | 4.7 | | | | 19.7 | | | | 24.4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | - | | | $ | (157.9 | ) | | $ | (198.6 | ) | | Balance, March 31, 2016 | | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) |
| | Foreign Currency Translation | | | Cash Flow Hedges | | | Defined Benefit Plans | | | Total | | | Foreign Currency Translation | | Defined Benefit Plans | | Total | Balance, March 31, 2013 | | $ | 17.8 | | | $ | (1.1 | ) | | $ | (145.1 | ) | | $ | (128.4 | ) | | Balance, March 31, 2014 | | | $ | 27.3 | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive income before reclassifications | | | 9.5 | | | | - | | | | 18.7 | | | | 28.2 | | | Other comprehensive loss before reclassifications | | | | (68.0 | ) | | | (45.2 | ) | | | (113.2 | ) | Reclassifications: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | - | | | | 6.2 | | | | 6.2 | | | | - | | | | 5.4 | | | | 5.4 | | Amortization of unrecognized prior service credit (a) | | | - | | | | - | | | | (1.2 | ) | | | (1.2 | ) | | | - | | | | (0.1 | ) | | | (0.1 | ) | Commodity derivatives (b) | | | - | | | | 0.5 | | | | - | | | | 0.5 | | | Income taxes | | | - | | | | 0.6 | | | | (9.8 | ) | | | (9.2 | ) | | | - | | | | 13.2 | | | | 13.2 | | Total other comprehensive income | | | 9.5 | | | | 1.1 | | | | 13.9 | | | | 24.5 | | | Total other comprehensive loss | | | | (68.0 | ) | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | - | | | $ | (131.2 | ) | | $ | (103.9 | ) | | Balance, March 31, 2015 | | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) |
| (a) | Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 17 for additional information about the Company’s pension plans. |
| (b) | Reclassifications for commodity derivatives are included in cost of sales. |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 21: Note 21: | Segment and Geographic Information |
The Company’s product lines consist of heat-transfer components and systems. The Company serves the vehicular, industrial, and building heating, ventilating and air conditioning markets. During fiscal 2015,2016, the Company changedcombined its North America and South America segments into the name of its Commercial ProductsAmericas segment to Building HVAC in orderstreamline operations, gain synergies and improve its cost structure. As a result, the Company recast the prior-period segment financial information to better reflect the nature of the segment’s product lines. There were no changesconform to the operations or reportedcurrent-period presentation. There was no impact to the Company’s consolidated financial results of the segmentstatements as a result. Throughout fiscal 2015,2016, the Company’s fivefour operating segments were as follows:
North America:Americas:
Comprised of vehicular and industrial original equipment products in North America and South America, as well as aftermarket products in South America.
Europe: Comprised of vehicular and industrial original equipment products in Europe.
South America:
Comprised of vehicular and industrial original equipment products and aftermarket products in South America.
Asia: Comprised of vehicular and industrial original equipment products in Asia.
Building HVAC: Comprised of building heating, ventilating and air conditioning products throughout the world.
Each operating segment is managed by a vice president or managing director and has separate financial results reviewed by the Company’s chief operating decision maker. These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
Effective April 1, 2015, the Company combined its North America and South America segment operations, with the objective of streamlining its operations to gain synergies and improve its cost structure. Beginning for fiscal 2016, the Company will report financial results for the new Americas operating segment, which will include both North America and South America.
The following is a summary of net sales, gross profit, and operating income by segment:
| | Years ended March 31, | | | Years ended March 31, | Net sales: | | 2015 | | | 2014 | | | 2013 | | | 2016 | | 2015 | | 2014 | North America | | $ | 573.5 | | | $ | 568.7 | | | $ | 564.5 | | | Americas | | | $ | 585.5 | | | $ | 666.9 | | | $ | 688.3 | | Europe | | | 578.2 | | | | 584.4 | | | | 498.0 | | | | 524.1 | | | | 578.2 | | | | 584.4 | | South America | | | 93.9 | | | | 122.7 | | | | 133.8 | | | Asia | | | 81.2 | | | | 71.5 | | | | 59.5 | | | | 79.0 | | | | 81.2 | | | | 71.5 | | Building HVAC | | | 186.3 | | | | 146.5 | | | | 139.3 | | | | 181.4 | | | | 186.3 | | | | 146.5 | | Segment total | | | 1,513.1 | | | | 1,493.8 | | | | 1,395.1 | | | | 1,370.0 | | | | 1,512.6 | | | | 1,490.7 | | Corporate and eliminations | | | (16.7 | ) | | | (16.2 | ) | | | (19.1 | ) | | | (17.5 | ) | | | (16.2 | ) | | | (13.1 | ) | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Gross profit: | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | North America | | $ | 97.0 | | | | 16.9 | % | | $ | 93.5 | | | | 16.4 | % | | $ | 81.4 | | | | 14.4 | % | Europe | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | | | 61.0 | | | | 12.3 | % | South America | | | 12.1 | | | | 12.8 | % | | | 20.8 | | | | 16.9 | % | | | 22.5 | | | | 16.8 | % | Asia | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | | | 1.7 | | | | 2.8 | % | Building HVAC | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | | | 40.8 | | | | 29.3 | % | Segment total | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | | | 207.4 | | | | 14.9 | % | Corporate and eliminations | | | 1.3 | | | | - | | | | 0.8 | | | | - | | | | 1.2 | | | | - | | Gross profit | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % | | $ | 208.6 | | | | 15.2 | % |
67
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Gross profit: | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Americas | | $ | 100.1 | | | | 17.1 | % | | $ | 109.1 | | | | 16.3 | % | | $ | 114.3 | | | | 16.6 | % | Europe | | | 68.1 | | | | 13.0 | % | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | Asia | | | 12.2 | | | | 15.5 | % | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | Building HVAC | | | 54.2 | | | | 29.9 | % | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | Segment total | | | 234.6 | | | | 17.1 | % | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | Corporate and eliminations (a) | | | (11.1 | ) | | | - | | | | 1.3 | | | | - | | | | 0.8 | | | | - | | Gross profit | | $ | 223.5 | | | | 16.5 | % | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | Years ended March 31, | Operating income: | | 2016 | | 2015 | | 2014 | Americas | | $ | 36.2 | | | $ | 33.4 | | | $ | 49.6 | | Europe | | | 13.3 | | | | 25.7 | | | | 9.6 | | Asia | | | 0.8 | | | | 0.3 | | | | (3.3 | ) | Building HVAC | | | 13.9 | | | | 19.1 | | | | 9.4 | | Segment total | | | 64.2 | | | | 78.5 | | | | 65.3 | | Corporate and eliminations (a) | | | (71.7 | ) | | | (25.8 | ) | | | (28.1 | ) | Operating (loss) income | | $ | (7.5 | ) | | $ | 52.7 | | | $ | 37.2 | |
(In millions, except per share amounts)
| | Years ended March 31, | | Operating income: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 45.9 | | | $ | 42.1 | | | $ | 39.2 | | Europe | | | 25.7 | | | | 9.6 | | | | (25.4 | ) | South America | | | (12.3 | ) | | | 7.5 | | | | 11.2 | | Asia | | | 0.3 | | | | (3.3 | ) | | | (8.8 | ) | Building HVAC | | | 19.1 | | | | 9.4 | | | | 10.0 | | Segment total | | | 78.7 | | | | 65.3 | | | | 26.2 | | Corporate and eliminations | | | (26.0 | ) | | | (28.1 | ) | | | (26.8 | ) | Operating income (loss) | | $ | 52.7 | | | $ | 37.2 | | | $ | (0.6 | ) |
| (a) | During fiscal 2016, the Company recorded pension settlement losses of $42.1 million at Corporate, within SG&A expenses ($33.3 million) and cost of sales ($8.8 million). See Note 17 for additional information. |
Inter-segment sales are accounted for based on an established markup over production costs. Net sales for corporate and eliminations primarily represent the elimination of inter-segment sales. The operating loss for corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and also includes a portion of central servicesother costs that are either not directly attributable to an operating segment.segment or not considered when management evaluates segment performance. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of total assets by segment:
| | March 31, | | | March 31, | | | | 2015 | | | 2014 | | | 2016 | | | 2015 | | North America | | $ | 231.8 | | | $ | 218.1 | | | Americas | | | $ | 267.2 | | | $ | 277.7 | | Europe | | | 283.1 | | | | 367.9 | | | | 301.9 | | | | 282.7 | | South America | | | 46.5 | | | | 80.1 | | | Asia | | | 92.4 | | | | 92.8 | | | | 104.0 | | | | 92.2 | | Building HVAC | | | 131.4 | | | | 132.7 | | | Building HVAC (a) | | | | 99.0 | | | | 131.3 | | Corporate and eliminations | | | 146.4 | | | | 140.7 | | | | 148.8 | | | | 147.0 | | Total assets | | $ | 931.6 | | | $ | 1,032.3 | | | $ | 920.9 | | | $ | 930.9 | |
| (a) | As of March 31, 2015, total assets within the Building HVAC segment included $48.0 million of insurance-related assets for the rebuild of the facility damaged by the Airedale fire. See Note 2 for additional information. |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | | Years ended March 31, | | Capital expenditures: | | 2015 | | | 2014 | | | 2013 | | | 2016 | | | 2015 | | | 2014 | | North America | | $ | 25.9 | | | $ | 18.9 | | | $ | 19.0 | | | Americas | | | $ | 26.7 | | | $ | 30.2 | | | $ | 24.6 | | Europe | | | 21.5 | | | | 22.9 | | | | 16.5 | | | | 24.8 | | | | 21.5 | | | | 22.9 | | South America | | | 4.3 | | | | 5.7 | | | | 3.4 | | | Asia | | | 3.8 | | | | 4.6 | | | | 7.8 | | | | 6.2 | | | | 3.8 | | | | 4.6 | | Building HVAC | | | 2.8 | | | | 1.0 | | | | 3.1 | | | | 5.1 | | | | 2.8 | | | | 1.0 | | Total capital expenditures | | $ | 58.3 | | | $ | 53.1 | | | $ | 49.8 | | | $ | 62.8 | | | $ | 58.3 | | | $ | 53.1 | |
| | Years ended March 31, | | | Years ended March 31, | | Depreciation and amortization expense: | | 2015 | | | 2014 | | | 2013 | | | 2016 | | | 2015 | | | 2014 | | North America | | $ | 18.1 | | | $ | 19.3 | | | $ | 20.1 | | | Americas | | | $ | 22.1 | | | $ | 21.3 | | | $ | 22.6 | | Europe | | | 19.8 | | | | 26.6 | | | | 23.4 | | | | 18.0 | | | | 19.8 | | | | 26.6 | | South America | | | 3.2 | | | | 3.3 | | | | 3.7 | | | Asia | | | 7.2 | | | | 6.7 | | | | 6.4 | | | | 6.5 | | | | 7.2 | | | | 6.7 | | Building HVAC | | | 3.3 | | | | 2.2 | | | | 2.2 | | | | 3.6 | | | | 3.3 | | | | 2.2 | | Total depreciation and amortization expense | | $ | 51.6 | | | $ | 58.1 | | | $ | 55.8 | | | $ | 50.2 | | | $ | 51.6 | | | $ | 58.1 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a summary of net sales by geographical area, based upon the location of the selling unit:
| | Years ended March 31, | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | | 2016 | | | 2015 | | | 2014 | | United States | | $ | 669.3 | | | $ | 645.7 | | | $ | 637.4 | | | $ | 627.6 | | | $ | 669.3 | | | $ | 645.7 | | Germany | | | 193.8 | | | | 229.5 | | | | 214.8 | | | | 155.3 | | | | 193.8 | | | | 229.5 | | Hungary | | | 161.0 | | | | 150.3 | | | | 117.6 | | | | 145.9 | | | | 161.0 | | | | 150.3 | | Austria | | | 118.7 | | | | 109.8 | | | | 97.7 | | | | 113.1 | | | | 118.7 | | | | 109.8 | | Brazil | | | 93.2 | | | | 122.0 | | | | 128.8 | | | Other | | | 260.4 | | | | 220.3 | | | | 179.7 | | | | 310.6 | | | | 353.6 | | | | 342.3 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | March 31, | | | | 2015 | | | 2014 | | | 2016 | | | 2015 | | United States | | $ | 105.0 | | | $ | 100.7 | | | $ | 92.5 | | | $ | 92.7 | | Austria | | | | 44.2 | | | | 41.5 | | China | | | | 33.6 | | | | 31.8 | | Germany | | | 66.0 | | | | 81.8 | | | | 32.1 | | | | 47.2 | | Other European countries | | | 79.9 | | | | 100.0 | | | China | | | 36.3 | | | | 38.9 | | | Hungary | | | | 31.4 | | | | 28.9 | | Other | | | 34.9 | | | | 38.2 | | | | 104.8 | | | | 80.0 | | Total property, plant and equipment | | $ | 322.1 | | | $ | 359.6 | | | $ | 338.6 | | | $ | 322.1 | |
The following is a summary of net sales by product type:end market:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Modules/assemblies | | $ | 367.5 | | | $ | 379.9 | | | $ | 358.5 | | Oil coolers | | | 233.0 | | | | 215.4 | | | | 194.1 | | HVAC equipment | | | 199.6 | | | | 159.5 | | | | 151.8 | | EGR coolers | | | 183.5 | | | | 172.5 | | | | 136.1 | | Charge air coolers | | | 148.9 | | | | 157.0 | | | | 161.8 | | Condensers | | | 140.0 | | | | 129.2 | | | | 128.8 | | Radiators | | | 124.8 | | | | 129.0 | | | | 134.4 | | Other | | | 99.1 | | | | 135.1 | | | | 110.5 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Commercial vehicle | | $ | 459.8 | | | $ | 512.5 | | | $ | 477.0 | | Automotive | | | 396.8 | | | | 401.8 | | | | 395.6 | | Off-highway | | | 206.2 | | | | 274.6 | | | | 320.8 | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | Other | | | 108.3 | | | | 121.2 | | | | 137.7 | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
6967
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) Note 22: Note 22: | Quarterly Financial Data (Unaudited) |
Quarterly financial data is summarized below for the years ended March 31, 20152016 and 2014:2015:
| | Fiscal 2015 quarters ended | | | | | | Fiscal 2016 quarters ended | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2015 | | | June | | Sept. | | Dec. | | March | | Fiscal 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | | $ | 346.1 | | | $ | 334.0 | | | $ | 328.7 | | | $ | 343.7 | | | $ | 1,352.5 | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | | | 57.0 | | | | 45.7 | | | | 58.6 | | | | 62.2 | | | | 223.5 | | Earnings (loss) from continuing operations (a) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | | | 5.5 | | | | (22.5 | ) | | | 8.2 | | | | 7.8 | | | | (1.0 | ) | Net earnings (loss) attributable to Modine (a) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | | | 5.1 | | | | (22.5 | ) | | | 8.2 | | | | 7.6 | | | | (1.6 | ) | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | | $ | 0.11 | | | $ | (0.47 | ) | | $ | 0.17 | | | $ | 0.16 | | | $ | (0.03 | ) | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | | | | 0.11 | | | | (0.47 | ) | | | 0.17 | | | | 0.16 | | | | (0.03 | ) |
| | Fiscal 2014 quarters ended | | | | | | Fiscal 2015 quarters ended | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2014 | | | June | | Sept. | | Dec. | | March | | Fiscal 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 375.8 | | | $ | 364.2 | | | $ | 347.0 | | | $ | 390.6 | | | $ | 1,477.6 | | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | Gross profit | | | 61.9 | | | | 57.2 | | | | 56.8 | | | | 62.3 | | | | 238.2 | | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | Earnings (loss) from continuing operations (a) (b) | | | 10.6 | | | | 5.0 | | | | (3.4 | ) | | | 119.7 | | | | 131.9 | | | Net earnings (loss) attributable to Modine (a) (b) | | | 10.0 | | | | 4.6 | | | | (3.6 | ) | | | 119.4 | | | | 130.4 | | | Earnings (loss) from continuing operations (b) | | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | Net earnings (loss) attributable to Modine (b) | | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.21 | | | $ | 0.10 | | | $ | (0.08 | ) | | $ | 2.51 | | | $ | 2.75 | | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | Diluted | | | 0.21 | | | | 0.10 | | | | (0.08 | ) | | | 2.49 | | | | 2.72 | | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| (a) | The quarterly financial data presented above includesDuring fiscal 2016, restructuring expenses totaled $2.6 million, $1.0 million, $1.6 million, and $11.4 million for the quarters ended June 30, 2015, September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 6). During the fourth quarter of fiscal 2016, the Company recorded a $9.9 million asset impairment chargescharge related to restructuring actionsa manufacturing facility in Europe, North America,Germany (see Note 6). During fiscal 2016, non-cash pension settlement losses totaled $39.2 million, $1.1 million, and South America segments. $1.8 million for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 17). During the fourth quarter of fiscal 2016, the Company recorded a $9.5 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire (see Note 2). Also during the fourth quarter of fiscal 2016, the Company reversed a deferred tax asset valuation allowance, and, as a result, recorded an income tax benefit of $3.0 million (see Note 8). |
| (b) | During fiscal 2015, restructuring expenses totaled $0.8 million, $1.0 million, $1.9 million, and $1.0 million for the quarters ended June 30, 2014, September 30, 2014, December 31, 2014, and March 31, 2015, respectively.respectively (see Note 6). During the third quarter of fiscal 2015, the Company sold a wind tunnel within the Europe segment and recognized a gain of $3.2 million.million (see Note 6). During the fourth quarter of fiscal 2015, the Company recorded a $7.8 million goodwill impairment charge related to its South America segment. Also during the fourth quarter of fiscal 2015, the Company recorded(see Note 14) and a $3.2 million charge in its South America segment associated with a legal matter in Brazil. During fiscal 2014, restructuring expenses totaled $0.5 million, $0.6 million, $9.4 million, and $5.6 million for the quarters ended June 30, 2013, September 30, 2013, December 31, 2013, and March 31, 2014, respectively. The Company recorded impairment charges of $2.0 million and $1.2 million during the quarters ended December 31, 2013 and March 31, 2014, respectively. See Notes 6, 14, and 19 for additional information. |
| (b) | The quarter ended March 31, 2014 was benefited by the reversal of U.S. income tax valuation allowances totaling $119.2 million. SeeBrazil (see Note 8 for additional information.19). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Modine Manufacturing Company:
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1), present fairly, in all material respects, the financial position of Modine Manufacturing Company and its subsidiaries at March 31, 20152016 and 2014,2015, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 20152016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2015,2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in fiscal 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP Milwaukee, Wisconsin May 29, 201526, 2016 ITEM 9.
| | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not applicable.
ITEM 9A.
| | CONTROLS AND PROCEDURES. |
Conclusion Regarding Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company's President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded the design and operation of the Company's disclosure controls and procedures were effective as of March 31, 2015.2016.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, and effected by the Company's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2015.2016. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based on this assessment, management concluded that, as of March 31, 2015,2016, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20152016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the fourth quarter of fiscal 20152016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
| | OTHER INFORMATION. |
None. PART III
ITEM 10.10 . | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors. The Company incorporates by reference the information appearing in the Company's Proxy Statement for the 20152016 Annual Meeting of Shareholders to be held on July 23, 201521, 2016 (the “2015“2016 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Executive Officers of the Registrant" in this Form 10-K.
Compliance with Section 16(a) of the Exchange Act. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Code of Ethics. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Ethics.” The Company's Code of Ethics (labeled as the Code of Ethics and Business Conduct) is included on its website, www.modine.com (About Modine link).
Board Committee Charters. The Board of Directors has approved charters for its Audit Committee, Officer Nomination and Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee. These charters are included on the Company’s website, www.modine.com (Investors link).
Audit Committee Financial Expert. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Committees of the Board of Directors – Audit Committee.”
Audit Committee Disclosure. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the captions “Committees of the Board of Directors – Audit Committee” and “Board Meetings and Committees.”
Guidelines on Corporate Governance. The Board of Directors has adopted Guidelines on Corporate Governance. The Company’s Guidelines on Corporate Governance are included on its website, www.modine.com (Investors link).
Security Holder Recommendation of Board Nominees. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
ITEM 11.
| | EXECUTIVE COMPENSATION. |
The information appearing in the 20152016 Annual Meeting Proxy Statement under the captions “Compensation Discussion and Analysis,” “Compensation of Directors,” “Committees of the Board of Directors – Officer Nomination and Compensation Committee: Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” is incorporated herein by reference.
ITEM 12.
| | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The Company incorporates by reference the information relating to stock ownership under the caption “Security Ownership of Certain Beneficial Owners and Management,” and under the caption “Equity Compensation Plan Information,” in the 20152016 Annual Meeting Proxy Statement.
ITEM 13.
| | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The Company incorporates by reference the information contained in the 20152016 Annual Meeting Proxy Statement under the captions “Certain Relationships and Related Transactions” and “Director Independence.”
ITEM 14.
| | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The Company incorporates by reference the information contained in the 20152016 Annual Meeting Proxy Statement under the caption “Independent Auditors’ Fees for Fiscal 20152016 and 2014.2015.” PART IV
ITEM 15.
| | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) (a) | Documents Filed. The following documents are filed as part of this Report: |
| Page in Form 10-K | | | 1. The consolidated financial statements of Modine Manufacturing Company and its subsidiaries filed under Item 8: | | | | Consolidated Statements of Operations for the years ended March 31, 2016, 2015 2014 and 20132014 | 3938 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2016, 2015 2014 and 20132014 | 4039 | Consolidated Balance Sheets at March 31, 20152016 and 20142015 | 4140 | Consolidated Statements of Cash Flows for the years ended March 31, 2016, 2015 2014 and 20132014 | 4241 | Consolidated Statements of Shareholders' Equity for the years ended March 31, 2016, 2015 2014 and 20132014 | 4342 | Notes to Consolidated Financial Statements | 44-7043-68 | Report of Independent Registered Public Accounting Firm | 7169 | | | 2. Financial Statement Schedules.Schedules | | | | The following financial statement schedule should be read in conjunction with the consolidated financial statements set forth in Item 8: | | Schedule II -- Valuation and Qualifying Accounts | 7674 | | | Schedules other than those listed above are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements and the notes thereto. | | | | 3. Exhibits and Exhibit Index. | 77-7975-77 | | | See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number. | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 29, 201526, 2016 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. Burke | | | | Thomas A. Burke, President | | | | and Chief Executive Officer | | | | (Principal Executive Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. Burke | | Thomas A. Burke | May 29, 2015 | President, Chief Executive Officer and Director | | (Principal Executive Officer) | May 26, 2016 | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 29, 2015 | Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | May 26, 2016 | | | /s/ Marsha C. Williams | | Marsha C. Williams Director | May 29, 2015 | Director | 26, 2016 | | | /s/ David J. Anderson | | David J. Anderson Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Charles P. Cooley | | Charles P. Cooley Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Suresh V. Garimella | | Suresh V. Garimella Director | May 29, 2015 | Director | 26, 2016 |
/s/ Larry O. Moore | | Larry O. Moore Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Christopher W. Patterson | | Christopher W. Patterson Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Christine Y. Yan | | Christine Y. Yan Director | May 29, 2015 | Director | 26, 2016 | | | /s/ David G. Bills | | David G. Bills Director | May 29, 2015 | Director | 26, 2016 |
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES (A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | | | | Additions | | | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Deductions | | | Balance at End of Period | | | | | | | | | | | | | | | | | | 2015: Allowance for Doubtful Accounts | | $ | 1.1 | | | $ | 0.4 | | | $ | (0.2 | )(b) | | $ | (0.3 | )(a) | | $ | 1.0 | | Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | )(b) | | $ | - | | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | | | | 2014: Allowance for Doubtful Accounts | | $ | 0.8 | | | $ | 0.6 | | | $ | - | (b) | | $ | (0.3 | )(a) | | $ | 1.1 | | Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | (b) | | $ | - | | | $ | 61.2 | | | | | | | | | | | | | | | | | | | | | | | 2013: Allowance for Doubtful Accounts | | $ | 0.8 | | | $ | 0.5 | | | $ | (0.1 | )(b) | | $ | (0.4 | )(a) | | $ | 0.8 | | Valuation Allowance for Deferred Tax Assets | | $ | 146.8 | | | $ | 7.7 | | | $ | 18.3 | (b) | | $ | - | | | $ | 172.8 | |
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | 2016: Valuation Allowance for Deferred Tax Assets | | $ | 48.0 | | | $ | 1.5 | | | $ | 1.3 | | (a) | | $ | 50.8 | | | | | | | | | | | | | | | | | | | | 2015: Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | ) | (a) | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | 2014: Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | | (a) | | $ | 61.2 | |
Notes: | (a) | Bad debts charged off during the year
|
| (b) | TranslationForeign currency translation and other adjustments |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 20152016 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By Referenced To | | Filed Herewith | | | | | | | | 3.1 | | Amended and Restated Articles of Incorporation, as amended. | | Exhibit 4.2 to Registrant’s Registration Statement on Form S-3 (333-161030) dated August 4, 2009 | | | | | | | | | | 3.2 | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated February 10, 2015 | | | | | | | | | | 4.1 | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 ("2003 10-K") | | | | | | | | | | 4.2 | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto. | | | | | | | | | | 4.3** | | Note Purchase and Private Shelf Agreement (the “Original Note Purchase Agreement”) dated as of August 12, 2010 among the Registrant and the Series A Purchasers named therein of $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020 and $25,000,000 Private Shelf Facility and each Prudential Affiliate (as defined therein) that may become bound by certain provisions thereof. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 12, 2010 8-K (“August 12, 2010 8-K”) | | | | | | | | | | 4.4** | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to August 12, 2010 8-K | | | | | | | | | | 4.5** | | First Amendment to Note Purchase and Private Shelf Agreement and Waiver dated as of March 15, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated March 15, 2012 8-K | | | | | | | | | | 4.6** | | Second Amendment to Note Purchase and Private Shelf Agreement dated as of April 20, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 20, 2012 8-K | | | | | | | | | | 4.7** | | Third Amendment to Note Purchase and Private Shelf Agreement dated as of August 6, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 6, 2012 8-K | | |
4.8** | | Second Amended and Restated Credit Agreement dated as of August 30, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, LC Issuer, Swing Line Lender and as a Lender, and U.S. Bank, N.A. and Wells Fargo Bank, N.A. as Syndication Agents and as Lenders, BMO Harris Bank N.A., as Documentation Agent and as Lender and Associated Bank, N.A., Comerica Bank and Sovereign Bank as Lenders.Lenders | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated August 30, 2013 (“August 30, 2013 8-K”) | | | | | | | | | | 4.9** | | Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Note Purchase Amendment”) dated as of August 30, 2013, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) pursuant to which the Company and the Note Holders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to August 30, 2013 8-K | | | | | | | | | | 4.10** | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to August 30, 2013 8-K | | | | | | | | | | 4.11 | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | 10.1* | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | 10.2* | | Employment Agreement between the Registrant and Thomas A. Burke dated as of June 15, 2007. | | Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 15, 2007 | | | | | | | | | | 10.3* | | Form of Amendment No. 1 to Employment Agreement entered into as of July 1, 2008 with Thomas A. Burke. | | Exhibit 10.1 to Registrant’sRegistrant���s Current Report on Form 8-K dated July 1, 2008 | | | | | | | | | | 10.4* | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke. | | Exhibit 10(f) to Registrant’s Form 10-K for the year ended March 31, 2004 | | | | | | | | | | 10.5* | | Employment Agreement, dated July 1, 2014, between Modine Holding GmbH and Holger Schwab, effective as of July 1, 2015. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2014 | | | | | | | | | | 10.6* | | 2000 Stock Incentive Plan for Non-Employee Directors (Amended and Restated as of March 16, 2005). | | Appendix A to Registrant’s Proxy Statement for the 2005 Annual Meeting dated June 15, 2005 | | | | | | | | | | 10.7* | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant's Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | 10.8*10.7* | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | 10.9*10.8* | | 2007 Incentive Compensation Plan. | | Appendix A to the Registrant's Proxy Statement dated June 18, 2007 | | |
10.10* | | | | | | | 10.9* | | 2008 Incentive Compensation Plan (Amended and Restated effective May 7, 2014). | | Exhibit 10.1 to Registrant's Current Report on Form 8-K dated July 17, 2014 | | |
| 10.10* | | | | | | 10.11* | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Thomas A. Burke. | | Exhibit 10.17 to Registrant's Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | 10.12*10.11* | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | | | | | | | | | 10.12* | | Form of Fiscal 20152016 Modine Performance Stock Award Agreement (Executive Council members). | | | Exhibit 10.1 to Form 10-Q for the first quarter ended June 30, 2015 ("June 30, 2015 10-Q") | X | | | | | | | | | 10.13* | | Form of Fiscal 20152016 Modine Incentive Stock Options Award Agreement (Executive Council members). | | | Exhibit 10.2 to June 30, 2015 10-Q | X | | | | | | | | | 10.14* | | Form of Fiscal 20152016 Modine Restricted Stock Award Agreement (Executive Council members). | | | Exhibit 10.3 to June 30, 2015 10-Q | X | | | | | | | | | 10.15* | | Form of Fiscal 20152016 Modine Non-Qualified Stock Option Award Agreement. | Agreement | | Exhibit 10.4 to June 30, 2015 10-Q | X | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of independent registered public accounting firm. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Instance Document | | | | X | | | | | | | | 101.SCH | | XBRL Taxonomy Extension Schema | | | | X | | | | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | X | | | | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | X | | | | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | X | | | | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | X |
*Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K.
**Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
s | | | % of sales | | | Year Ended March 31, 2016 Compared with Year Ended March 31, 2015: Fiscal 2016 net sales decreased $143 million, or 10 percent, from the prior year, primarily due to lower sales in our Americas and Europe segments. Sales volume increases in our Europe segment were more than offset by a $76 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2016 sales were negatively affected by a $110 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar. Gross profit decreased $23 million to $224 million in fiscal 2016, yet gross margin of 16.5 percent was consistent with the prior year. The decrease in gross profit was primarily due to a $14 million unfavorable impact of foreign currency exchange rate changes, $9 million of pension settlement losses, and lower sales volume in the Americas segment, partially offset by lower material costs, improved production efficiencies, and cost-savings initiatives. Fiscal 2016 SG&A expenses increased $21 million from the prior year. The increase was primarily due to $33 million of pension settlement losses and the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in the prior year, partially offset by ongoing cost-control initiatives and a $10 million favorable impact of foreign currency exchange rate changes. Restructuring expenses increased $12 million in fiscal 2016 compared with the prior year, primarily due to severance expenses in the Europe and Americas segments and equipment transfer costs related to plant consolidation activities in the Americas segment. In fiscal 2016, we recorded a $10 million impairment charge to write down the carrying value of a manufacturing facility in Germany to fair value. In fiscal 2015, we recorded a goodwill impairment charge of $8 million in Brazil and recognized a gain of $3 million from the sale of a wind tunnel in Germany. The operating loss of $8 million in fiscal 2016 represents a $61 million decline from $53 million of operating income in the prior year. This decline was primarily due to $42 million of pension settlement losses, lower gross profit, higher restructuring expenses, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by ongoing cost-control initiatives. Other income during fiscal 2016 includes a $10 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire in fiscal 2014. Our benefit for income taxes was $9 million in fiscal 2016, compared with a provision for income taxes of $19 million in fiscal 2015. This $28 million change was primarily due to $16 million of income tax benefits related to pension settlement losses in the current year, a decrease in pre-tax operating earnings, and a $3 million income tax benefit related to the reversal of a deferred tax asset valuation allowance in the current year.
Year Ended March 31, 2015 Compared with Year Ended March 31, 2014:
Fiscal 2015 net sales increased $18 million, or 1 percent, from fiscal 2014,the prior year, primarily due to sales increases in our Building HVAC Asia, and North AmericaAsia segments, partially offset by lower sales in our South AmericaAmericas segment, as economic conditions in Brazil were weak, and in our Europe segment, where sales increases were more than offset by a $35 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2015 sales were negatively affected by a $43 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar during the year.dollar.
Gross profit increased $9 million to $247 million in fiscal 2015 and gross margin increased 40 basis points to 16.5 percent, primarily due to sales volume improvements and lower warranty costs.
Fiscal 2015 SG&A expenses in fiscal 2015 increased $2 million to $184 million compared withfrom the prior year, primarily due to increased engineering and development costs and SG&A expenses at our Barkell business, which we acquired in the fourth quarter of fiscal 2014, partially offset by $5 million of recoveries from business interruption insurance during fiscal 2015 related to the Airedale fire.
Restructuring expenses decreased $11 million in fiscal 2015 compared with the prior year, primarily due to lower restructuring costs in Germany,our Europe segment, partially offset by higher severance-related costsseverance expenses in South America.our Americas segment.
DuringIn fiscal 2015, we sold a wind tunnel in Germany that we no longer considered to be a core asset, and recognized a gain of $3 million. In addition, we recorded a goodwill impairment charge of $8 million in our South America segment during fiscal 2015.related to Brazil. In fiscal 2014, we recorded $3 million of impairment charges, primarily related to restructuring actions in our Europe segment.
Operating income of $53 million in fiscal 2015 increased $16 million compared with fiscal 2014.the prior year. This improvement was primarily due to higher gross profit on increased sales volume, lower restructuring expenses, and the gain on the sale of the wind tunnel, partially offset by higher impairment charges and slightly higher SG&A expenses.
Our provision for income taxes was $19 million in fiscal 2015, compared with a benefit from income taxes of $108 million in fiscal 2014. The provision for taxes in the U.S. totaled $9 million in fiscal 2015, compared with a significant benefit for taxes in fiscal 2014, which resulted primarily from the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $10 million and $11 million in fiscal 2015 and 2014, respectively. Earnings from discontinued operations of $1 million in fiscal 2015 related to a gain associated with the final collection of proceeds from the fiscal 2009 sale of our Electronic Cooling business.
Year Ended March 31, 2014 Compared with Year Ended March 31, 2013:
In fiscal 2014, net sales increased $102 million, or 7 percent, from fiscal 2013, primarily due to an $86 million sales increase in our Europe segment, driven by sales volume improvements within the commercial vehicle and automotive markets. In addition, sales in our Asia, Building HVAC and North America segments increased year over year. Our South America segment sales decreased, however, primarily due to unfavorable foreign currency exchange rate changes.
Gross profit increased $29 million to $238 million in fiscal 2014 from the prior year and gross margin increased 90 basis points to 16.1 percent, primarily due to higher sales volume and favorable material costs.
SG&A expenses in fiscal 2014 increased $16 million to $182 million from fiscal 2013, primarily due to higher compensation-related expenses, the reversal of a $2 million acquisition-related liability that reduced SG&A expenses in the prior year, and $1 million of costs directly related to the Airedale fire, partially offset by lower professional service expenses.
Restructuring expenses were $16 million and $17 million in fiscal 2014 and 2013, respectively, primarily due to employee severance costs related to restructuring activities within our Europe segment. In addition, we recorded impairment charges during fiscal 2014 and 2013 of $3 million and $26 million, respectively, primarily related to our restructuring actions in the Europe segment.
Operating income of $37 million during fiscal 2014 represented a $38 million improvement compared with fiscal 2013. This improvement was primarily due to higher gross profit on increased sales volume and favorable material costs and lower impairment charges, partially offset by higher SG&A expenses.
Our benefit for income taxes was $108 million in fiscal 2014 compared with a provision for income taxes of $10 million in fiscal 2013. The large benefit for income taxes in fiscal 2014 was primarily due to the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $11 million and $10 million in fiscal 2014 and 2013, respectively.
Segment Results of Operations
During fiscal 2015, we changed the name of our Commercial Products segment to Building HVAC in order to better reflect the nature of the segment’s product lines. There were no changes to the operations or reported financial results of the segment as a result.
Effective April 1, 2015,2016, we combined our North America and South America segments into the Americas segment to streamline operations, with the objective of streamlining our operations to gain synergies and improve our cost structure. Beginning forAs a result, we recast the prior-period segment financial information to conform to the current-period presentation. There was no impact to our consolidated financial statements as a result.
Americas | | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 586 | | | | 100.0 | % | | $ | 667 | | | | 100.0 | % | | $ | 688 | | | | 100.0 | % | Cost of sales | | | 486 | | | | 82.9 | % | | | 558 | | | | 83.7 | % | | | 574 | | | | 83.4 | % | Gross profit | | | 100 | | | | 17.1 | % | | | 109 | | | | 16.3 | % | | | 114 | | | | 16.6 | % | Selling, general and administrative expenses | | | 55 | | | | 9.4 | % | | | 65 | | | | 9.7 | % | | | 62 | | | | 9.0 | % | Restructuring expenses | | | 9 | | | | 1.5 | % | | | 3 | | | | 0.4 | % | | | 1 | | | | 0.2 | % | Impairment charges | | | - | | | | - | | | | 8 | | | | 1.2 | % | | | 1 | | | | 0.2 | % | Operating income | | $ | 36 | | | | 6.2 | % | | $ | 33 | | | | 5.0 | % | | $ | 50 | | | | 7.2 | % |
Americas net sales decreased $81 million, or 12 percent, in fiscal 2016 we will report financial results forcompared with the new Americas operating segment, which will includeprior year. Sales were lower in both North America and South America. North America | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 574 | | | | 100.0 | % | | $ | 569 | | | | 100.0 | % | | $ | 565 | | | | 100.0 | % | Cost of sales | | | 477 | | | | 83.1 | % | | | 475 | | | | 83.6 | % | | | 484 | | | | 85.6 | % | Gross profit | | | 97 | | | | 16.9 | % | | | 94 | | | | 16.4 | % | | | 81 | | | | 14.4 | % | Selling, general and administrative expenses | | | 50 | | | | 8.7 | % | | | 50 | | | | 8.6 | % | | | 40 | | | | 7.2 | % | Restructuring expenses | | | 1 | | | | 0.2 | % | | | 1 | | | | 0.2 | % | | | - | | | | - | | Impairment charges | | | - | | | | - | | | | 1 | | | | 0.2 | % | | | 2 | | | | 0.3 | % | Operating income | | $ | 46 | | | | 8.0 | % | | $ | 42 | | | | 7.4 | % | | $ | 39 | | | | 6.9 | % |
foreign currency exchange rate changes. Sales in North America net sales increased $5decreased $43 million, or 1 percent, from fiscal 2014 to fiscal 2015, and increased $4 million, or 1 percent, from fiscal 2013 to fiscal 2014. The fiscal 2015 sales increase was primarily due to lower sales volume to off-highway and commercial vehicle customers, partially offset by higher sales volume to automotive customers. Sales volume to all markets in Brazil also declined during fiscal 2016, as economic conditions in Brazil remained weak. Sales decreased $21 million, or 3 percent, in fiscal 2015 compared with fiscal 2014, primarily due to lower sales in Brazil and a $9 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in North America, where higher sales volume to commercial vehicle customers were partially offset by decreased sales volume to off-highway customers as economic conditions in that market remained relatively weak. The fiscal 2014 sales increase, compared with fiscal 2013, was primarily due to higher sales volume to automotive and commercial vehicle customers, partially offset by decreasedlower sales volume to off-highway customers.
Gross profit decreased $9 million, yet gross margin increased 5080 basis points to 16.917.1 percent in fiscal 2016. The decrease in gross profit was primarily due to lower sales volume, a $3 million unfavorable impact of foreign currency exchange rate changes, and $2 million of environmental charges for investigative work related to a previously-owned manufacturing facility, partially offset by lower material costs, cost savings from the McHenry, Illinois manufacturing facility closure, and improved production efficiencies. Gross profit decreased $5 million and gross margin decreased 30 basis points to 16.3 percent in fiscal 2015 compared with fiscal 2014, primarily due to lower sales volume in Brazil, partially offset by lower warranty costs and sales volume improvements partially offset by unfavorable sales mix. The gross margin increasein North America.
Fiscal 2016 SG&A expenses decreased $10 million from fiscal 2013 to fiscal 2014 wasthe prior year, primarily due to lower material costs.
ongoing cost-control initiatives, the absence of a $3 million charge for a legal matter in Brazil in the prior year, and a $3 million favorable impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $50increased $3 million during fiscal 2015 were consistent with fiscal 2014. The $10 million increase in SG&A expenses in fiscal 2014 wasfrom the prior year, primarily due to higher compensation-related expenses and increased engineering and development costs.the $3 million charge for the legal matter in fiscal 2015.
During fiscal 2014, we approved a plan to close our McHenry, Illinois manufacturing facility and are currently in the process of transferring the facility’s production to other North America segment manufacturing facilities, which we expect to complete within the first six months of fiscal 2016. We recorded $1 million of restructuring expenses during fiscal 2015, primarily related to equipment transfer costs incurred to relocate McHenry’s product lines to other manufacturing facilities. In fiscal 2014, as a result of the planned closure,2016, we recorded $1$9 million of restructuring expenses, primarily related to severance expenses associated with a voluntary retirement program in the U.S., and the planned closure of our Washington, Iowa manufacturing facility, which we expect to complete during fiscal 2017, and equipment transfer costs and $1related to plant consolidation activities in North America. In fiscal 2015, we recorded $3 million of assetrestructuring expenses, primarily related to severance expenses in Brazil, to better align our cost structure with the market conditions in Brazil, and equipment transfer costs related to the closure of our McHenry, Illinois manufacturing facility, which we completed during fiscal 2016. We also recorded an $8 million goodwill impairment charges.charge during fiscal 2015, primarily due to a decline in the financial outlook for Brazil.
Operating income in fiscal 2015 of $46 million increased $4 million from $42$36 million in fiscal 2014, primarily due to2016 increased gross profit. Fiscal 2014 operating income improved $3 million compared with fiscal 2013,the prior year, primarily due to increased gross profit,lower SG&A expenses and the absence of the goodwill impairment charge in the prior year, partially offset by lower gross profit and higher restructuring expenses. Operating income of $33 million in fiscal 2015 decreased $17 million compared with the prior year, primarily due to the goodwill impairment charge, lower gross profit, and higher SG&A and restructuring expenses. 2627
Europe | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % | | $ | 498 | | | | 100.0 | % | Cost of sales | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % | | | 437 | | | | 87.7 | % | Gross profit | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % | | | 61 | | | | 12.3 | % | Selling, general and administrative expenses | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % | | | 45 | | | | 9.1 | % | Restructuring expenses | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % | | | 17 | | | | 3.4 | % | Impairment charges | | | - | | | | - | | | | 2 | | | | 0.3 | % | | | 24 | | | | 4.8 | % | Gain on sale of wind tunnel | | | (3 | ) | | | -0.6 | % | | | - | | | | - | | | | - | | | | - | | Operating income (loss) | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % | | $ | (25 | ) | | | -5.0 | % |
Europe
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 524 | | | | 100.0 | % | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % | Cost of sales | | | 456 | | | | 87.0 | % | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % | Gross profit | | | 68 | | | | 13.0 | % | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % | Selling, general and administrative expenses | | | 39 | | | | 7.4 | % | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % | Restructuring expenses | | | 6 | | | | 1.2 | % | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % | Impairment charges | | | 10 | | | | 1.9 | % | | | - | | | | - | | | | 2 | | | | 0.3 | % | Gain on sale of wind tunnel | | | - | | | | - | | | | (3 | ) | | | -0.6 | % | | | - | | | | - | | Operating income | | $ | 13 | | | | 2.5 | % | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % |
Europe net sales decreased $54 million, or 9 percent, in fiscal 2016 compared with the prior year, primarily due to a $76 million unfavorable impact of foreign currency exchange rate changes and lower sales volume to off-highway customers, partially offset by increased sales volume to commercial vehicle and automotive customers. Sales decreased $6 million, or 1 percent, fromin fiscal 2014 to2015 compared with fiscal 2015,2014, primarily due to a $35 million unfavorable impact of foreign currency exchange rate changes and lower tooling sales, partially offset by increased sales volume to commercial vehicle and automotive customers.
Gross profit decreased $1 million, yet gross margin increased 110 basis points to 13.0 percent in fiscal 2016. The $86 million, or 17 percent,gross margin increase in sales from fiscal 2013 to fiscal 2014 was primarily due to increasedhigher sales volume to commercial vehicle customers, higher tooling sales, and a $23lower material costs. In addition, gross profit was negatively impacted by $9 million favorable impact offrom foreign currency exchange rate changes.
Gross In fiscal 2015, gross margin decreased 20 basis points to 11.9 percent incompared with fiscal 2015,2014, primarily due to unfavorable sales mix, production inefficiencies caused by increased volume at certain manufacturing facilities and plant consolidation activities, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by the absence of $4 million of accelerated depreciation recorded in the prior yearfiscal 2014 for production equipment that is no longer used and lower warranty costs. Gross profit increased $10
Fiscal 2016 SG&A expenses decreased $5 million while gross margin declined 20 basis points to 12.1 percent in fiscal 2014 compared with fiscal 2013. This decrease in gross margin wasfrom the prior year, primarily due to a $5$6 million favorable customer pricing settlement in the prior year, $4 millionimpact of accelerated depreciation in fiscal 2014, and higher warranty costs, partially offset by higher sales volume, favorable sales mix, and lower material costs.
foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $44 million were consistent with the prior year, as higher engineering and development costs were offset by a favorable impact of foreign currency exchange rate changes. SG&A expenses decreased $1
In fiscal 2016, we recorded $6 million from fiscal 2013 to fiscal 2014, primarily due to the favorable impact of restructuring actionsexpenses, primarily related to severance expenses. In addition, we recorded a $10 million asset impairment charge. These restructuring expenses and lower engineering and development costs, partially offset by higher compensation-related expenses.
Duringimpairment charge primarily related to a manufacturing facility in Germany, which was generating pre-tax losses, resulting in management deciding to exit a certain product line in the future. In fiscal 2015, we recorded $2 million of restructuring expenses, primarily due to plant consolidation activities, as we substantially completed the combination of two manufacturing facilities in Germany into one, more competitive manufacturing operation. Also during fiscal 2015,and we sold a wind tunnel that we no longer considered to be a core asset for cash proceeds of $6 million, which resulted in a gain of $3 million. DuringIn fiscal 2014, and fiscal 2013, we recorded $15 million and $17 million, respectively, of restructuring expenses, primarily related to employee severance costs. Alsoexpenses, and $2 million of asset impairment charges.
Operating income of $13 million in fiscal 20142016 decreased $13 million compared with the prior year, primarily due to an increase in restructuring expenses and 2013 we recorded asset impairment charges totaling $2and the absence of a $3 million and $24 million, respectively, primarily related to several facilities that we have sold or expect to sell.
gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&A expenses. Operating income of $26 million in fiscal 2015 increased $16 million compared with fiscal 2014,the prior year, primarily due to a reduction in restructuring expenses and impairment charges and the gain from selling the wind tunnel. Operating income of $10 million in fiscal 2014 improved $35 million compared with fiscal 2013, primarily due to lower asset impairment charges and increased sales volume, which drove higher gross profit. 2728
South America | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 94 | | | | 100.0 | % | | $ | 123 | | | | 100.0 | % | | $ | 134 | | | | 100.0 | % | Cost of sales | | | 82 | | | | 87.2 | % | | | 102 | | | | 83.1 | % | | | 111 | | | | 83.2 | % | Gross profit | | | 12 | | | | 12.8 | % | | | 21 | | | | 16.9 | % | | | 23 | | | | 16.8 | % | Selling, general and administrative expenses | | | 14 | | | | 15.9 | % | | | 13 | | | | 10.8 | % | | | 12 | | | | 8.4 | % | Restructuring expenses | | | 2 | | | | 1.6 | % | | | - | | | | - | | | | - | | | | - | | Impairment charges | | | 8 | | | | 8.4 | % | | | - | | | | - | | | | - | | | | - | | Operating (loss) income | | $ | (12 | ) | | | -13.1 | % | | $ | 8 | | | | 6.1 | % | | $ | 11 | | | | 8.4 | % |
South America | | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 79 | | | | 100.0 | % | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % | Cost of sales | | | 67 | | | | 84.5 | % | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % | Gross profit | | | 12 | | | | 15.5 | % | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % | Selling, general and administrative expenses | | | 11 | | | | 14.5 | % | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % | Operating income (loss) | | $ | 1 | | | | 1.0 | % | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % |
Asia net sales decreased $29$2 million, or 243 percent, in fiscal 20152016 compared with fiscal 2014,the prior year, primarily due to lower sales volume to commercial vehicle, off-highway customers in China and automotive customers, as economic conditions in Brazil were generally weak in fiscal 2015,Korea and a $9 million unfavorable impact of foreign currency exchange rate changes, primarily due to the strengthening of the U.S. dollar versus the Brazilian real. Sales decreased $11 million, or 8 percent, in fiscal 2014 compared with fiscal 2013, primarily due to a $14$4 million unfavorable impact of foreign currency exchange rate changes, partially offset by increasedhigher sales volume to commercial vehicle customers.
Gross profit decreased $9 million and gross margin decreased to 12.8 percentautomotive customers in fiscal 2015 compared with the prior year, primarily due to lower sales volume. Gross profit decreased $2 million from fiscal 2013 to fiscal 2014, primarily due to a $2 million unfavorable impact of foreign currency exchange rate changes.
SG&A expenses in fiscal 2015 increased $1 million compared with fiscal 2014, primarily due to a $3 million charge for a legal matter in Brazil (see Note 19 of the Notes to Consolidated Financial Statements for more information), partially offset by the favorable impact of cost control measures and a $1 million favorable impact of foreign currency exchange rate changes. SG&A expenses increased $1 million from fiscal 2013 to fiscal 2014, primarily due to the reversal of a $2 million acquisition-related liability in fiscal 2013 and higher compensation-related expenses in fiscal 2014, partially offset by a $2 million favorable impact of foreign currency exchange rate changes.
During fiscal 2015, we recorded $2 million of restructuring expenses for employee severance-related costs to reduce headcount and better align our cost structure with the market conditions in Brazil. We also recorded an $8 million goodwill impairment charge during fiscal 2015, which was primarily caused by a decline in the financial outlook for the South America segment.
The $12 million operating loss in fiscal 2015 represented a $20 million decline compared with the prior year and was primarily due to lower gross profit on lower sales volume and the goodwill impairment charge. Operating income decreased $3 million from fiscal 2013 to fiscal 2014, primarily due to lower gross profit on lower sales volumeChina and increased SG&A expenses.
Asia | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % | | $ | 60 | | | | 100.0 | % | Cost of sales | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % | | | 58 | | | | 97.2 | % | Gross profit | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % | | | 2 | | | | 2.8 | % | Selling, general and administrative expenses | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % | | | 11 | | | | 17.6 | % | Operating income (loss) | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % | | $ | (9 | ) | | | -14.8 | % |
Asia netoverall sales in India. Sales increased $9 million, or 13 percent, in fiscal 2015 compared with fiscal 2014, primarily due to new automotive program launches in China and higherincreased overall sales across all markets in India, partially offset by lower sales volume within theto off-highway markets in China and Korea. Salescustomers.
Gross margin increased $12 million, or 20130 basis points to 15.5 percent in fiscal 20142016 compared with fiscal 2013,the prior year, primarily due to higherfavorable sales volume in the automotive and off-highway markets. mix. Gross profit increased $3 million and gross margin increased 170 basis points to 14.2 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume. Gross profit increased $7
Fiscal 2016 SG&A expenses decreased $1 million and gross margin increased to 12.5 percent in fiscal 2014 compared with fiscal 2013,from the prior year, primarily due to higher sales volume.
cost-control initiatives, partially offset by acquisition-related costs associated with a joint venture that we formed in fiscal 2016. See Note 3 to the Notes to Consolidated Financial Statements for additional information on this joint venture. Fiscal 2015 SG&A expenses in fiscal 2015 were consistent with the prior year, yet decreased as a percentage of sales. SG&A expenses increased
Operating income of $1 million in fiscal 20142016 increased $1 million compared with fiscal 2013, yet decreased slightly as a percentage of sales.
the prior year, primarily due to lower SG&A expenses. Operating income of less than $1 million in fiscal 2015 represented a $3 million improvement compared with the operating loss in the prior year, and was primarily due to higher gross profit on increased sales volume. The $3 million operating loss in fiscal 2014 represented a $6 million improvement from fiscal 2013, primarily due to higher gross profit.
Building HVAC | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % | | $ | 139 | | | | 100.0 | % | Cost of sales | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % | | | 98 | | | | 70.7 | % | Gross profit | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % | | | 41 | | | | 29.3 | % | Selling, general and administrative expenses | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % | | | 31 | | | | 22.1 | % | Operating income | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % | | $ | 10 | | | | 7.2 | % |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 181 | | | | 100.0 | % | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % | Cost of sales | | | 127 | | | | 70.1 | % | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % | Gross profit | | | 54 | | | | 29.9 | % | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % | Selling, general and administrative expenses | | | 39 | | | | 21.6 | % | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % | Restructuring expenses | | | 1 | | | | 0.6 | % | | | - | | | | - | | | | - | | | | - | | Operating income | | $ | 14 | | | | 7.7 | % | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % |
Building HVAC net sales decreased $5 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to a $6 million unfavorable impact of foreign currency exchange rate changes and lower sales at our businesses in the U.K., as unfavorable currency conditions resulted in increased competition from other mainland European suppliers, partially offset by increased ventilation product sales in North America. Sales increased $40 million, or 27 percent, in fiscal 2015 compared with the prior year,fiscal 2014, primarily due to a $23 million increase in sales at our Airedale businessbusinesses in the U.K. and increased heating product sales in North America, as we experienced anothera strong heating season in fiscal 2015. The sales increase at Airedalein the U.K. was primarily due to a $13 million increase in sales at Barkell, which we acquired in the fourth quarter of fiscal 2014, and the continuing recovery from the Airedale fire, which caused a temporary halt in production during the prior fiscal year. In
Gross profit decreased $2 million in fiscal 2014, despite2016 compared with the negative impact of the Airedale fire, sales increased $7 million, or 5 percent,prior year, primarily due to increased heating product salesa $1 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased 10 basis points to 29.9 percent in North America.
fiscal 2016 compared with the prior year. Gross profit increased $13 million and gross margin improved 40 basis points to 30.0 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume. Fiscal 2016 SG&A expenses increased $2 million from the prior year, primarily due to higher sales volume. Gross profit increased $2the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in fiscal 2014 compared with the prior year, primarily due topartially offset by lower engineering and development costs and a $1 million favorable sales mix.
impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses increased $3 million or 9 percent, in fiscal 2015 compared withfrom the prior year, primarily due to additional costs from Barkell and increased expenses associated with higher sales levels, partially offset by $5 million ofthe recoveries from business interruption insurance for the Airedale fire. SG&A expenses increased $3 million, or 10 percent, in
In fiscal 2014 compared with fiscal 2013, primarily due to higher compensation-related expenses,2016, we recorded $1 million of non-recoverable costs directlyrestructuring expenses, primarily related to the Airedale fire, and increased acquisition-related expenses for Barkell.severance expenses.
Operating income of $19$14 million increased $10in fiscal 2016 decreased $5 million compared with the prior year, primarily due to lower gross profit and higher SG&A expenses. Operating income of $19 million in fiscal 2015 increased $10 million compared with the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses. Operating income decreased $1 million from fiscal 2013 to fiscal 2014, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at March 31, 20152016 of $71$69 million, and an available borrowing capacity of $216$207 million under lines of credit provided by banks in the United States and abroad. Due to the timing of insurance proceeds related to the Airedale fire, our cash and cash equivalents at March 31, 2015 include approximately $13 million of advances from our insurance provider that will be spent for recovery and reconstruction costs. Given our extensive international operations, significant amounts$49 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds would be subject to U.S. tax if repatriated. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.
During fiscal 2016, our Board of Directors approved a $50 million share repurchase program, which expires in November 2016. We repurchased $7 million of shares under this program in fiscal 2016. Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 2016 was $72 million, an increase of $8 million from $64 million in the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital, including lower incentive compensation payments during fiscal 2016 and the timing of value-added tax payments. Net cash provided by operating activities in fiscal 2015 was $64 million, a decrease of $41 million from $105 million in the prior year. This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, including higher incentive compensation payments during fiscal 2015 related to fiscal 2014 performance, and the timing of customer-owned tooling reimbursements. Net cash provided by operating activities in fiscal 2014 was $105 million, an increase of $56 million from $49 million in the prior year. The increase in operating cash flows resulted from an increase in gross profit, partially offset by higher SG&A expenses, and improvements in working capital as compared with fiscal 2013.
We expect to be reimbursed by our insurance provider for substantially all losses and expenses directly related to the fire at our Airedale manufacturing facility, including substantially all costs to reconstruct the facility. The expected timing of cash recoveries from our insurance provider is such that we do not expect the fire will have a significant adverse effect on our liquidity.
Capital Expenditures
Capital expenditures of $58$63 million during fiscal 20152016 increased $5 million compared with fiscal 2014.2015. In fiscal 2015,2016, our capital spending primarily occurred in the North AmericaAmericas and Europe segments, which totaled $26$27 million and $22$25 million, respectively. Capital projects in fiscal 20152016 included tooling and equipment purchases in conjunction with program launchesnew and renewal programs with customers, as well as a building expansion at our Nuevo Laredo manufacturing facility in the North America segment.customers.
At March 31, 2015,2016, our capital expenditure commitments totaled $16$21 million. Significant commitments included tooling and equipment expenditures for new and renewal programs with customers in North Americathe Americas and Europe.Europe segments.
Dividends
We did not pay dividends in fiscal 2016, 2015, 2014, or 2013.2014. We currently do not intend to pay dividends in fiscal 2016.2017.
Debt
Our total debt outstanding decreased $16increased $14 million to $149$163 million at March 31, 20152016, compared with the prior year, as our debt repayments exceeded our borrowings.primarily due to borrowings in China and Mexico for capital investments. See Note 16 of the Notes to Consolidated Financial Statements for furtheradditional information regarding our debt agreements.
Our debt agreements require us to maintain compliance with various covenants. Under our primary debt agreements in the U.S., we are subject to a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a certain portion of our cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
Our leverage ratio for the four fiscal quarters ended March 31, 20152016 was 1.2, which was below the maximum permitted ratio of 3.25. Our interest expense coverage ratio for the four fiscal quarters ended March 31, 20152016 was 10.3,10.5, which exceeded the minimum requirement of 3.0. We were in compliance with our debt covenants as of March 31, 20152016 and expect to remain in compliance during fiscal 20162017 and beyond. In the event of an acquisition, our leverage ratio may be temporarily raised for several quarters, per the terms of our debt agreements.
Pension Obligations
Our net pension liabilities totaled $111 million for plans in the U.S. and at certain foreign subsidiaries as of March 31, 2015. We contributed $7 million to these plans in fiscal 2015 and expect to contribute approximately $8 million to our pension plans during fiscal 2016. In May 2015, we approved a program to offer a voluntary, lump-sum pension payout to certain eligible former employees who participate in our U.S. pension plan. If the lump-sum payout is elected by the participant, the payout would effectively settle our pension obligation with that participant, thereby eliminating the risk of future changes in our pension obligation for that participant. As a result of this program, we expect to record a settlement loss of approximately $20-30 million in the second quarter of fiscal 2016, based on estimated participation rates and estimated actuarial assumptions. This settlement loss would represent the accelerated recognition of unamortized actuarial losses associated with our pension liabilities. The lump-sum settlements will be paid from plan assets and will not impact our operating cash flow.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
| | March 31, 2015 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 125.2 | | | $ | 0.2 | | | $ | 24.0 | | | $ | 32.0 | | | $ | 69.0 | | Interest associated with long-term debt | | | 38.8 | | | | 8.5 | | | | 16.1 | | | | 11.9 | | | | 2.3 | | Capital lease obligations | | | 4.9 | | | | 0.3 | | | | 0.6 | | | | 0.6 | | | | 3.4 | | Operating lease obligations | | | 49.9 | | | | 8.2 | | | | 10.0 | | | | 7.8 | | | | 23.9 | | Capital expenditure commitments | | | 15.5 | | | | 13.0 | | | | 2.5 | | | | - | | | | - | | Other long-term obligations | | | 10.9 | | | | 1.6 | | | | 3.2 | | | | 2.6 | | | | 3.5 | | Total contractual obligations | | $ | 245.2 | | | $ | 31.8 | | | $ | 56.4 | | | $ | 54.9 | | | $ | 102.1 | |
| | March 31, 2016 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 125.4 | | | $ | 8.0 | | | $ | 32.2 | | | $ | 85.2 | | | $ | - | | Interest associated with long-term debt | | | 30.3 | | | | 8.5 | | | | 14.1 | | | | 7.7 | | | | - | | Capital lease obligations | | | 8.6 | | | | 0.5 | | | | 0.8 | | | | 0.8 | | | | 6.5 | | Operating lease obligations | | | 53.5 | | | | 8.1 | | | | 10.4 | | | | 8.7 | | | | 26.3 | | Capital expenditure commitments | | | 20.5 | | | | 20.0 | | | | 0.5 | | | | - | | | | - | | Other long-term obligations | | | 3.6 | | | | 1.7 | | | | 1.2 | | | | 0.7 | | | | - | | Total contractual obligations | | $ | 241.9 | | | $ | 46.8 | | | $ | 59.2 | | | $ | 103.1 | | | $ | 32.8 | |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $121$129 million as of March 31, 2015.2016. We are unable to determine the ultimate timing of payments for these liabilities; therefore, we have excluded these amounts from the contractual obligations table above.
We have a contractual commitmentexpect to rebuild the leased Airedale facility, which suffered significant destruction from a firecontribute $8 million to our U.S. pension plans during fiscal 2014. We maintain insurance coverage and believe reimbursement for reconstruction costs is probable. The estimated costs associated with the reconstruction of the Airedale facility of $48 million have been excluded from the contractual obligations table above. See Note 2 of the Notes to Consolidated Financial Statements for further information.2017.
Critical Accounting Policies
The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements. Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements. The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements. In addition, recently issued accounting pronouncements that could significantly impact our financial statements are included in Note 1 of the Notes to Consolidated Financial Statements. Revenue Recognition
We recognize revenue, including agreed-upon commodity price increases or decreases,prices, when the risks and rewards of ownership are transferred to our customers, which generally occurs upon shipment. Revenue is recorded net of applicable provisions for sales rebates, volume incentives, and returns and allowances. At the time of revenue recognition, we also record estimates for bad debt expense and warranty expense. We base these estimates on historical experience, current business trends, and current economic conditions. PriceWe recognize price increases that are agreed upon in advance are recognized as revenue when the products are shipped to our customers. Impairment of Long-Lived Assets
We perform impairment evaluations of long-lived assets, including property, plant and equipment, intangible assets and equity investments, whenever business conditions or events indicate that those assets may be impaired. We consider factors such as operating losses, declining financial outlooks and market conditions, when evaluating the necessity for an impairment analysis. When the estimated futurenet asset values exceed undiscounted cash flows expected to be generated by the assets are less than the carrying value of the long-lived assets, or the decline in value is considered to be “other than temporary,” we write down the assets are written down to fair market value and arecord an impairment charge is recorded to current operations. We estimate fair market value in various ways depending on the nature of the assets under review. Fair value is generally based on appraised value, estimated salvage value, or selling prices under negotiation, or estimated cancellation charges, as applicable. The most significant long-lived assets that we have evaluated for impairment areindicators were property, plant and equipment, which totaled $322$339 million at March 31, 2015.2016. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment. We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility. This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy. When such indicators are present, we perform an impairment evaluation by comparing the estimated future undiscounted cash flows expectedevaluation. During fiscal 2016, we recorded a $10 million impairment charge related to be generated in thea manufacturing facility in Germany. See Note 6 of the Notes to the net book value of the long-lived assets within that facility. We estimate the undiscounted cash flows based on the expected future cash flows to be generated by the manufacturing facility over its remaining useful life. When the estimated future undiscounted cash flows are less than the net book value of the long-lived assets, we write such assets down to fair value, which we generally estimate based upon appraisals or estimated salvage value.Consolidated Financial Statements for additional information.
Impairment of Goodwill
We perform goodwill impairment tests annually, as of March 31, unless business events or other conditions exist that require a more frequent evaluation. At March 31, 2016, our goodwill totaled $16 million, primarily related to our Building HVAC segment. We consider factors such as operating losses, declining financial and market outlooks and market capitalization when evaluating the necessity for an interim impairment analysis. Goodwill is tested for impairment at a reporting unit level, which we have determined to be at the operating segment level. Our first step in this test is to compare the fair value of the reporting unit to its carrying value. We determine the fair value of a reporting unit based upon the present value of estimated future cash flows. If the fair value of the reporting unit exceeds the carrying value of the unit’s net assets, goodwill of that reporting unit is not impaired and further testing is not required. If the carrying value of the reporting unit’s net assets exceeds the fair value of the unit, then we perform the second step of the impairment test to determine the implied fair value of the reporting unit’s goodwill and any impairment charge. In estimating the implied fair value of goodwill for a reporting unit, we assign the fair value to the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of the reporting unit goodwill over its implied fair value is recorded as an impairment charge. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rate, business trends and market conditions. TheWe determine the expected future revenue growth rates and operating profit margins are determined after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for country-specific risks where appropriate.
We conducted our annual assessment for goodwill impairment during the fourth quarter of fiscal 20152016 by applying a fair value-based test. The South Americatest and determined the fair value of our reporting units carrying valuesubstantially exceeded its fair value; therefore, we performed the second step of the goodwill impairment test, as described above. As a result, we determined our South America reporting unit’s goodwill was fully impaired and recorded an $8 million goodwill impairment charge. As fiscal 2015 progressed, we experienced relatively weak financial results for our South America reporting unit. During the fourth quarter of fiscal 2015, our outlook for the markets served by our South America reporting unit, primarily in Brazil, shifted from a view that the markets may begin to recover to a view that the market downturn may be more prolonged. The economic weakness in Brazil has negatively affected our expected future cash flows for the South America segment. Our impairment analysis assumed a discount rate of 22 percent, which corresponds to our cost of capital adjusted for a higher expectation of future inflation and uncertainty in the Brazilian economy, and future revenue growth and operating profit margins based upon our current outlook for the South America reporting unit.their respective book values.
Warranty Costs
We estimate costs related to product warranties and accrue for such costs at the time of the sale, within cost of sales. We estimate warranty costs based upon the best information available, which includes statistical and analytical analysis of both historical and current claim data. We monitor and adjust original estimatesour warranty accruals, which totaled $8 million at March 31, 2016, if we expect futureit is probable that expected claims will differ from the initialprevious estimates. 32
Tooling Costs
We capitalize production tooling costs incurred in the manufacture of products for customer programs as a component of property, plant and equipment, net of any customer reimbursements, when we retain title to the tooling. We depreciate these capitalized costs in cost of sales over the estimated life of the asset, which is generally three years. For customer-owned tooling costs incurred, we record a receivable when the customer has guaranteed reimbursement to us. Reimbursement typically occurs prior to the start of production, but this can vary by program and by customer. We do not have any significant customer arrangements under which customer-owned tooling costs were not accompanied by guaranteed reimbursements.
Assets Held for Sale
Assets are considered to be held for sale when management approves and commits to a formal plan to actively market the asset for sale, at a sales price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, the sale of the asset is expected to be completed within one year, and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, we record the carrying value of the asset at the lower of its carrying value or estimated fair value, less costs to sell. We cease recording depreciation expense at the time of designation as held for sale.
Pension Obligations
TheOur calculation of the expense and liabilities of our pension plans is dependent upon various assumptions. At March 31, 2016, our pension liabilities totaled $120 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality rate tables. We basedbase our selection of assumptions on historical trends and economic and market conditions at the time of valuation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods. These differences impact future pension expenses. Currently, participants in our domestic pension plans are not accruing benefits based on their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.
In late calendar 2014, the U.S. Society of Actuaries issued updated mortality and mortality improvement tables, which effectively increased life expectancies. We considered the new mortality tables, along with characteristics of our plan-specific populations, in developing our best estimate of the expected mortality of plan participants for our March 31, 2015 measurement date. The impact of the new mortality assumptions resulted in an increase of approximately $9 million in both our U.S. pension plans’ actuarial loss and pension benefit obligation.
For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our benefit plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in fiscal 20152016 and 20142015 was 8.0 percent. For fiscal 2016,2017, we have also assumed a rate of 8.0 percent. The impact of a 25 basis point decrease in the expected rate of return on assets would result in an increase of $0.5$0.4 million in fiscal 20162017 pension expense.
The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds reset annually on the measurement date of March 31. For fiscal 2015,2016, we used a discount rate of 4.04.1 percent, compared with 4.74.0 percent in fiscal 2014.2015. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows from the affected plans. See Note 17 of the Notes to Consolidated Financial Statements for additional information. A change in the assumed discount rate of 25 basis points would impact our fiscal 20162017 pension expense by less than $0.1 million.
Income Taxes 33
Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. We adjust these amounts to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in certain jurisdictions will not be realized. This determination involves significant judgment. In performing this assessment on a jurisdiction-by-jurisdiction basis, we consider historical and projected financial results along with other pertinent information.
We have not recorded a provision for U.S. income taxes on undistributed earnings from our non-U.S. subsidiaries that we have determined to be permanently reinvested in our foreign operations. If management’s intentions or U.S. tax law changes in the future, there could be a significant negative impact on our provision for income taxes.
See Note 8 of the Notes to Consolidated Financial Statements for additional information regarding income taxes. Other Loss Reserves
We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, self-insurance reserves, uncollectible accounts receivable, recoverability of deferred income taxes, regulatory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. We estimate these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Note 19 of the Notes to Consolidated Financial Statements for additional detailsinformation regarding contingencies and litigation. Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of this report. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| · | Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs, inflation, changes in interest rates, recession and recovery therefrom, restrictions associated with importing and exporting and foreign ownership, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China Western Europe, Russia and North America, and the continued deterioration in and weak forecasts for the Brazilian economy; |
| · | The impact of potential increases in commodity prices, particularlyincluding our ability to successfully manage our exposure to the changingand/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel); |
| · | Our ability to successfully manage commodity risk and/or pass increasing commodity prices on to customers, as well as the inherent lag in timing of such pass-through pricing;arrangements; and |
| · | The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental emissions standards.and/or energy standards and objectives. |
Operational Risks:
| · | The overall health and increasing price-down focus of our original equipment manufacturer customers in light of some remaining economic and market-specific challenges, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; |
| · | Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction pressures from customers, particularly in the face of macro-economic instability; |
| · | Our ability to effectively and efficiently complete the restructuring activities in our North America, Europe, and South America segments and realize expected commercial and operational efficiencies and associated cost reductionssavings and increased competitivenessother benefits associated with our Strengthen, Diversify and profitability as a result;Grow transformational strategy; |
| · | Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims; |
| · | Our ability to obtain and retain profitable business in our Asia segment, and, in particular, in China; |
| · | Unanticipated delays or modifications initiated by major customers with respect to product launches, product applications or requirements; |
| · | Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, particularly in light of some continuing economic challenges in areas of the world in which we and our suppliers operate; |
| · | Complexities and inefficiencies introduced by the September 2013 fire at our Airedale facility in the U.K., including ourOur ability to continue to meet customer demands at temporary locations, to timelyeffectively and efficiently complete restructuring activities in our Europe segment and realize expected cost reductions and effectively deploy insurance proceeds to replace machineryincreased competitiveness and equipment and rebuild the facility with minimal financial impact from the business interruption, and to complete and relocate to the new facility in an efficient, timely manner;profitability as a result; |
| · | Our ability to complete the transition of our Washington, Iowa production to other facilities efficiently and effectively; |
| · | Costs and other effects of the remediation of environmental contamination; |
| · | Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith; |
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; and |
| · | Costs and other effects of unanticipated litigation or claims, and the increasingconstant pressures associated with rising healthcare and insurance costs. |
Strategic Risks:
| · | Our ability to identify and implementexecute appropriate growthopportunities to enable us to achieve our Strengthen, Diversify and diversification strategies thatGrow transformational strategy in order to position us for long-term success. |
Financial Risks:
| · | Our ability to fund our global liquidity requirements efficiently, particularly those in our Asia business segment, and meet our long-term commitments in the event of any unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
| · | The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, British pound, and Indian rupee relative to the U.S. dollar; and |
| · | Our ability to realize the benefits of tax assets in various jurisdictions in which we operate. |
In addition to the risks set forth above, we are subject to other risks and uncertainties as identified in our public filings with the U.S. Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.
ITEM 7A.7A . | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
In the normal course of business, we are subject to market exposure from changes in foreign exchange rates, interest rates, commodity prices, credit risk and economic conditions. Foreign Currency Risk
We are subject to the risk of changes in foreign currency exchange rates due to our operations in foreign countries. We have manufacturing facilities in Brazil, China, India, Mexico, South Africa, and throughout Europe. We also have joint ventures in China, Japan and South Korea. We sell and distribute products throughout the world and also purchase raw materials from foreign countries. As a result, our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which we do business. We attempt to mitigate foreign currency risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the functional currency of the subsidiary engaging in the transaction. Our financial results are principally exposed to changes in exchange rates between the U.S. dollar and the European currencies, primarily the euro, and changes between the U.S. dollar and the Brazilian real.real, and between the euro and the British pound. In fiscal 2016, 2015, 2014, and 2013,2014, more than 50 percent of our sales were generated in countries outside the U.S. A change in foreign exchange rates will positively or negatively affect our sales; however, this impact will be offset, usually to a large degree, with an offsettinga corresponding effect on our expenses. In fiscal 2015,2016, changes in foreign currencies negatively impacted our sales by $43$110 million; however, the impact on our operating income was less than $1only $4 million. Foreign currency exchange risk can be estimated by measuring the impact of a near-term adverse movement of 10 percent in foreign currency exchange rates. If these rates were 10 percent higher or lower during fiscal 2015,2016, there would not have been a material impact on our fiscal 20152016 earnings. We maintain, from time to time, foreign-denominated, long-term debt obligations and long-term intercompany loans that are subject to foreign currency exchange risk. As of March 31, 2015, there were no third-party foreign-denominated, long-term debt obligations or2016, we did not have any long-term intercompany loans for which changes in foreign currency exchange rates would impact our net earnings. From time to time, we enter into currency rate derivative contracts to manage the foreign exchange rate exposure on these types of loans. These derivative instruments are typically not treated as hedges, and accordingly, gains or losses on the derivatives are recorded in other income and expense in the consolidated statements of operations and act to offset any currency movement on the outstanding loans receivable or payable.
Interest Rate Risk
Our interest rate risk policies are designedWe actively seek to reduce the potential volatility of earnings that could arise from changes in interest rates. We generally utilize a mixture of debt maturities and both fixed-rate and floating-rate debt to manage exposure to changes in interest rates. Our domestic revolving credit facility is based on a variable interest rate of London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points, depending on our leverage ratio. We are subject to risk of fluctuations in LIBOR and changes in our leverage ratio, which would affect the variable interest rate on our revolving credit facility and could create variability in interest expense. There were no borrowings outstanding under the revolving credit facility as of March 31, 2015.2016. Based on our outstanding debt with variable interest rates at March 31, 2015,2016, a 100 basis point increase in interest rates would increase our annual interest expense in fiscal 20162017 by less than $1 million.
Commodity Price Risk
We are dependent upon the supply of raw materials and supplies in the production process and, from time to time, enter into firm purchase commitments for aluminum, copper, nickel, and natural gas. We maintain agreements with certain customers to pass through specified raw material price fluctuations in order to mitigate commodity price risk. The majority of these agreements contain provisions in which the pass-through of the price fluctuations can lag behind the actual fluctuations by three months or longer, and typically the arrangements are limited to the underlying material cost based upon the London Metal Exchange.
Credit Risk
Credit risk represents the possibility of loss from a customer's failurecustomer failing to make payment according to contract terms. Our principal credit risk consists of outstanding trade accounts receivable. At March 31, 2015, 472016, 45 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, commercial vehicle, and off-highway markets and are influenced by similar market and general economic factors. In the past, credit losses from our customers have not been significant.
We manage credit risk through a focus on the following:
| · | Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. OurWe consider our holdings in cash and investments were consideredto be stable and secure at March 31, 2015;2016; |
| · | Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer's financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer's financial condition and applicable business news; |
| · | Pension assets – We have retained outside advisors to assist in the management of the assets in our pension plans. In making investment decisions, we utilize an established risk management protocol that focuses on protection of the plan assets against downside risk. We ensure that investments within these plans provide appropriate diversification, the investments are monitored by investment teams, and portfolio managers adhere to the established investment policies. We believe the plan assets are subject to appropriate investment policies and controls; and |
| · | Insurance – We monitor our insurance providers to ensure they have acceptable financial ratings. We have not identified any concerns in this regard based upon our reviews. |
Economic Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate. We sell a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, automotive, off-highway, and building HVAC markets. We operate in diversified markets as a strategy for offsetting the risk associated with a downturn in any of the markets we serve. However, risk associated with market downturns, such as the global downturn experienced in fiscal 2009 and fiscal 2010, is still present.
We monitor economic conditions in the U.S., in our foreign markets and elsewhere. As we expand our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes and the like. We continue to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions.
We pursue new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon our ability to commercialize our investments. Current examples of new and emerging markets for us include those related to waste heat recovery, coils, and the Chinese and Indian markets. Our investment in these areas is subject to the risks associated with business integration, technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
We anticipate that continued recovery from the global recessionwithin some of our geographic and economicend markets, and particularly growth in China may put production pressure on certain suppliers of our raw materials. In particular, there are a limited number of suppliers of aluminum, copper, and steel material. We are exposed to the risk of suppliers of certain raw materials not being able to meet customer demand as they may not increase their output capacity as quickly as customers increase their orders, and of increased prices being charged by raw material suppliers.
In addition, we purchase parts from suppliers that use our tooling to create the parts. In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts. As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require. Even in situations where suppliers are manufacturing parts without the use of our tooling, we face the challenge of obtaining consistently high-quality parts from suppliers that are financially stable. We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate higher-risk supplier situations.
In addition to the above risks on the supply side, we are also exposed to risks associated with demands by our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, but these agreements often contain provisions for future price reductions. In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: We have enteredFrom time to time, we enter into futures contracts from time to time, related to certain forecasted purchases of aluminum and copper. Our strategy wasis to reduce our exposure to changing market prices for future purchases of these commodities. In fiscal 2016, 2015, 2014, and 2013,2014, expenses related to commodity derivative contracts totaled less than $1 million $1 million, and $5 million, respectively.each year. Foreign currency forward contracts: Our foreign exchange risk management strategy uses derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. We have not designated these forward contracts as hedges. Accordingly, we record unrealized gains and losses related to the change in the fair value of the contracts in other income and expense. Gains and losses on these foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
Counterparty risks: We manage counterparty risks by ensuring that counterparties to derivative instruments have credit ratings acceptable to us. At March 31, 2015,2016, all counterparties had a sufficient long-term credit rating. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions, except per share amounts)
| | 2015 | | | 2014 | | | 2013 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | | Cost of sales | | | 1,249.9 | | | | 1,239.4 | | | | 1,167.4 | | Gross profit | | | 246.5 | | | | 238.2 | | | | 208.6 | | Selling, general and administrative expenses | | | 184.5 | | | | 181.7 | | | | 166.3 | | Restructuring expenses | | | 4.7 | | | | 16.1 | | | | 17.0 | | Impairment charges | | | 7.8 | | | | 3.2 | | | | 25.9 | | Gain on sale of wind tunnel | | | (3.2 | ) | | | - | | | | - | | Operating income (loss) | | | 52.7 | | | | 37.2 | | | | (0.6 | ) | Interest expense | | | (11.7 | ) | | | (12.4 | ) | | | (12.6 | ) | Other income (expense) – net | | | 0.2 | | | | (0.8 | ) | | | 0.2 | | Earnings (loss) from continuing operations before income taxes | | | 41.2 | | | | 24.0 | | | | (13.0 | ) | (Provision) benefit for income taxes | | | (19.0 | ) | | | 107.9 | | | | (9.8 | ) | Earnings (loss) from continuing operations | | | 22.2 | | | | 131.9 | | | | (22.8 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) | | | 22.8 | | | | 131.9 | | | | (22.8 | ) | Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Net earnings (loss) attributable to Modine | | $ | 21.8 | | | $ | 130.4 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Earnings (loss) per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.45 | | | $ | 2.75 | | | $ | (0.52 | ) | Diluted | | $ | 0.44 | | | $ | 2.72 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.46 | | | $ | 2.75 | | | $ | (0.52 | ) | Diluted | | $ | 0.45 | | | $ | 2.72 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | | | Basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | Diluted | | | 47.8 | | | | 47.6 | | | | 46.6 | |
| | 2016 | | 2015 | | 2014 | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | | Cost of sales | | | 1,129.0 | | | | 1,249.9 | | | | 1,239.4 | | Gross profit | | | 223.5 | | | | 246.5 | | | | 238.2 | | Selling, general and administrative expenses | | | 204.5 | | | | 184.5 | | | | 181.7 | | Restructuring expenses | | | 16.6 | | | | 4.7 | | | | 16.1 | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | Operating (loss) income | | | (7.5 | ) | | | 52.7 | | | | 37.2 | | Interest expense | | | (11.1 | ) | | | (11.7 | ) | | | (12.4 | ) | Other income (expense) – net | | | 8.7 | | | | 0.2 | | | | (0.8 | ) | (Loss) earnings from continuing operations before income taxes | | | (9.9 | ) | | | 41.2 | | | | 24.0 | | Benefit (provision) for income taxes | | | 8.9 | | | | (19.0 | ) | | | 107.9 | | (Loss) earnings from continuing operations | | | (1.0 | ) | | | 22.2 | | | | 131.9 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings | | | (1.0 | ) | | | 22.8 | | | | 131.9 | | Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Net (loss) earnings attributable to Modine | | $ | (1.6 | ) | | $ | 21.8 | | | $ | 130.4 | | | | | | | | | | | | | | | (Loss) earnings per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | Diluted | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | | | | | | | | | | | | | | Net (loss) earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | Diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | Basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | Diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | 2015 | | | 2014 | | | 2013 | | Net earnings (loss) | | $ | 22.8 | | | $ | 131.9 | | | $ | (22.8 | ) | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | (68.2 | ) | | | 9.7 | | | | (17.1 | ) | Defined benefit plans, net of income taxes of ($13.2), $9.8 and $0 million | | | (26.7 | ) | | | 13.9 | | | | (23.6 | ) | Cash flow hedges, net of income taxes of $0, $0.6 and $0 million | | | - | | | | 1.1 | | | | 2.6 | | Total other comprehensive income (loss) | | | (94.9 | ) | | | 24.7 | | | | (38.1 | ) | | | | | | | | | | | | | | Comprehensive income (loss) | | | (72.1 | ) | | | 156.6 | | | | (60.9 | ) | Comprehensive income attributable to noncontrolling interest | | | (0.8 | ) | | | (1.7 | ) | | | (1.4 | ) | Comprehensive income (loss) attributable to Modine | | $ | (72.9 | ) | | $ | 154.9 | | | $ | (62.3 | ) |
| | 2016 | | 2015 | | 2014 | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | 4.6 | | | | (68.2 | ) | | | 9.7 | | Defined benefit plans, net of income taxes of $11.8, ($13.2) and $9.8 million | | | 19.7 | | | | (26.7 | ) | | | 13.9 | | Cash flow hedges, net of income taxes of $0, $0 and $0.6 million | | | - | | | | - | | | | 1.1 | | Total other comprehensive income (loss) | | | 24.3 | | | | (94.9 | ) | | | 24.7 | | | | | | | | | | | | | | | Comprehensive income (loss) | | | 23.3 | | | | (72.1 | ) | | | 156.6 | | Comprehensive income attributable to noncontrolling interest | | | (0.5 | ) | | | (0.8 | ) | | | (1.7 | ) | Comprehensive income (loss) attributable to Modine | | $ | 22.8 | | | $ | (72.9 | ) | | $ | 154.9 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS March 31, 20152016 and 20142015 (In millions, except per share amounts)
| | 2015 | | | 2014 | | ASSETS | | | | | | | Cash and cash equivalents | | $ | 70.5 | | | $ | 87.2 | | Trade accounts receivable – net | | | 192.9 | | | | 221.1 | | Inventories | | | 107.7 | | | | 116.8 | | Deferred income taxes | | | 13.4 | | | | 13.0 | | Other current assets | | | 79.7 | | | | 60.7 | | Total current assets | | | 464.2 | | | | 498.8 | | Property, plant and equipment – net | | | 322.1 | | | | 359.6 | | Intangible assets – net | | | 9.9 | | | | 12.4 | | Goodwill | | | 16.2 | | | | 28.7 | | Deferred income taxes | | | 102.7 | | | | 98.6 | | Other noncurrent assets | | | 16.5 | | | | 34.2 | | Total assets | | $ | 931.6 | | | $ | 1,032.3 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | Short-term debt | | $ | 18.6 | | | $ | 32.4 | | Long-term debt – current portion | | | 0.5 | | | | 0.8 | | Accounts payable | | | 152.0 | | | | 171.1 | | Accrued compensation and employee benefits | | | 56.7 | | | | 70.8 | | Other current liabilities | | | 83.4 | | | | 82.1 | | Total current liabilities | | | 311.2 | | | | 357.2 | | Long-term debt | | | 129.6 | | | | 131.2 | | Deferred income taxes | | | 3.4 | | | | 7.3 | | Pensions | | | 110.4 | | | | 81.0 | | Other noncurrent liabilities | | | 16.4 | | | | 27.0 | | Total liabilities | | | 571.0 | | | | 603.7 | | Commitments and contingencies (see Note 19) | | | | | | | | | Shareholders' equity: | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 48.6 million and 48.3 million shares | | | 30.4 | | | | 30.2 | | Additional paid-in capital | | | 180.6 | | | | 175.7 | | Retained earnings | | | 359.8 | | | | 338.0 | | Accumulated other comprehensive loss | | | (198.6 | ) | | | (103.9 | ) | Treasury stock, at cost, 0.7 million shares | | | (16.2 | ) | | | (15.2 | ) | Total Modine shareholders' equity | | | 356.0 | | | | 424.8 | | Noncontrolling interest | | | 4.6 | | | | 3.8 | | Total equity | | | 360.6 | | | | 428.6 | | Total liabilities and equity | | $ | 931.6 | | | $ | 1,032.3 | |
| | 2016 | | 2015 | ASSETS | | | | | | | Cash and cash equivalents | | $ | 68.9 | | | $ | 70.5 | | Trade accounts receivable – net | | | 189.1 | | | | 192.9 | | Inventories | | | 111.0 | | | | 107.7 | | Other current assets | | | 43.5 | | | | 79.7 | | Total current assets | | | 412.5 | | | | 450.8 | | Property, plant and equipment – net | | | 338.6 | | | | 322.1 | | Intangible assets – net | | | 8.2 | | | | 9.9 | | Goodwill | | | 15.8 | | | | 16.2 | | Deferred income taxes | | | 123.1 | | | | 115.4 | | Other noncurrent assets | | | 22.7 | | | | 16.5 | | Total assets | | $ | 920.9 | | | $ | 930.9 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | Short-term debt | | $ | 28.6 | | | $ | 18.6 | | Long-term debt – current portion | | | 8.5 | | | | 0.5 | | Accounts payable | | | 142.4 | | | | 152.0 | | Accrued compensation and employee benefits | | | 58.6 | | | | 56.7 | | Other current liabilities | | | 35.5 | | | | 83.0 | | Total current liabilities | | | 273.6 | | | | 310.8 | | Long-term debt | | | 125.5 | | | | 129.6 | | Deferred income taxes | | | 4.2 | | | | 3.1 | | Pensions | | | 118.6 | | | | 110.4 | | Other noncurrent liabilities | | | 16.3 | | | | 16.4 | | Total liabilities | | | 538.2 | | | | 570.3 | | Commitments and contingencies (see Note 19) | | | | | | | | | Shareholders' equity: | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 49.0 million and 48.6 million shares | | | 30.6 | | | | 30.4 | | Additional paid-in capital | | | 185.6 | | | | 180.6 | | Retained earnings | | | 358.2 | | | | 359.8 | | Accumulated other comprehensive loss | | | (174.2 | ) | | | (198.6 | ) | Treasury stock, at cost, 1.6 million and 0.7 million shares | | | (24.0 | ) | | | (16.2 | ) | Total Modine shareholders' equity | | | 376.2 | | | | 356.0 | | Noncontrolling interest | | | 6.5 | | | | 4.6 | | Total equity | | | 382.7 | | | | 360.6 | | Total liabilities and equity | | $ | 920.9 | | | $ | 930.9 | |
The notes to consolidated financial statements are an integral part of these statements. 4140
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | 2015 | | | 2014 | | | 2013 | | Cash flows from operating activities: | | | | | | | | | | Net earnings (loss) | | $ | 22.8 | | | $ | 131.9 | | | $ | (22.8 | ) | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 51.6 | | | | 58.1 | | | | 55.8 | | Insurance proceeds from Airedale fire | | | 12.9 | | | | 16.9 | | | | - | | Pension and postretirement expense | | | 2.3 | | | | 3.2 | | | | 1.9 | | Gain on sale of wind tunnel | | | (3.2 | ) | | | - | | | | - | | Impairment charges | | | 7.8 | | | | 3.2 | | | | 25.9 | | Loss from disposition of property, plant and equipment | | | 1.1 | | | | 2.6 | | | | 2.5 | | Deferred income taxes | | | 5.9 | | | | (116.1 | ) | | | 0.6 | | Stock-based compensation expense | | | 4.0 | | | | 3.6 | | | | 3.1 | | Other – net | | | (0.7 | ) | | | (0.5 | ) | | | 4.1 | | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | Trade accounts receivable | | | (0.1 | ) | | | (18.2 | ) | | | 15.1 | | Inventories | | | (4.2 | ) | | | (0.1 | ) | | | (0.8 | ) | Accounts payable | | | (2.4 | ) | | | 15.2 | | | | (3.2 | ) | Accrued compensation and employee benefits | | | (5.3 | ) | | | 17.5 | | | | 1.9 | | Other assets | | | (24.5 | ) | | | 2.1 | | | | (6.6 | ) | Other liabilities | | | (4.5 | ) | | | (14.9 | ) | | | (28.7 | ) | Net cash provided by operating activities | | | 63.5 | | | | 104.5 | | | | 48.8 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (58.3 | ) | | | (53.1 | ) | | | (49.8 | ) | Insurance proceeds from Airedale fire | | | 12.2 | | | | 20.7 | | | | - | | Costs to replace building and equipment damaged in Airedale fire | | | (16.7 | ) | | | (4.2 | ) | | | - | | Proceeds from dispositions of assets | | | 7.6 | | | | 2.9 | | | | 0.4 | | Purchases of short-term investments | | | (5.2 | ) | | | - | | | | - | | Proceeds from maturities of short-term investments | | | 2.4 | | | | - | | | | - | | Acquisitions – net of cash acquired | | | - | | | | (7.8 | ) | | | (4.9 | ) | Other – net | | | 0.8 | | | | - | | | | (1.6 | ) | Net cash used for investing activities | | | (57.2 | ) | | | (41.5 | ) | | | (55.9 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 36.4 | | | | 152.6 | | | | 166.7 | | Repayments of debt | | | (50.9 | ) | | | (152.4 | ) | | | (167.1 | ) | Financing fees paid | | | (0.1 | ) | | | (0.9 | ) | | | - | | Dividend paid to noncontrolling interest | | | - | | | | (0.5 | ) | | | - | | Other – net | | | - | | | | (0.3 | ) | | | 0.7 | | Net cash (used for) provided by financing activities | | | (14.6 | ) | | | (1.5 | ) | | | 0.3 | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (8.4 | ) | | | 1.9 | | | | (0.8 | ) | Net (decrease) increase in cash and cash equivalents | | | (16.7 | ) | | | 63.4 | | | | (7.6 | ) | Cash and cash equivalents - beginning of year | | | 87.2 | | | | 23.8 | | | | 31.4 | | Cash and cash equivalents - end of year | | $ | 70.5 | | | $ | 87.2 | | | $ | 23.8 | |
| | 2016 | | 2015 | | 2014 | Cash flows from operating activities: | | | | | | | | | | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 50.2 | | | | 51.6 | | | | 58.1 | | Insurance proceeds from Airedale fire | | | 5.9 | | | | 12.9 | | | | 16.9 | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | Pension and postretirement expense | | | 45.1 | | | | 2.3 | | | | 3.2 | | Loss from disposition of property, plant and equipment | | | 0.4 | | | | 1.1 | | | | 2.6 | | Deferred income taxes | | | (18.8 | ) | | | 5.9 | | | | (116.1 | ) | Stock-based compensation expense | | | 4.9 | | | | 4.0 | | | | 3.6 | | Other – net | | | (0.3 | ) | | | (0.7 | ) | | | (0.5 | ) | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | Trade accounts receivable | | | 8.0 | | | | (0.1 | ) | | | (18.2 | ) | Inventories | | | (2.7 | ) | | | (4.2 | ) | | | (0.1 | ) | Accounts payable | | | (9.9 | ) | | | (2.4 | ) | | | 15.2 | | Accrued compensation and employee benefits | | | 0.8 | | | | (5.3 | ) | | | 17.5 | | Other assets | | | (14.5 | ) | | | (24.5 | ) | | | 2.1 | | Other liabilities | | | (5.6 | ) | | | (4.5 | ) | | | (14.9 | ) | Net cash provided by operating activities | | | 72.4 | | | | 63.5 | | | | 104.5 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (62.8 | ) | | | (58.3 | ) | | | (53.1 | ) | Insurance proceeds from Airedale fire | | | 27.4 | | | | 12.2 | | | | 20.7 | | Costs to replace building and equipment damaged in Airedale fire | | | (41.7 | ) | | | (16.7 | ) | | | (4.2 | ) | Acquisitions – net of cash acquired | | | (1.4 | ) | | | - | | | | (7.8 | ) | Proceeds from dispositions of assets | | | 0.4 | | | | 7.6 | | | | 2.9 | | Purchases of short-term investments | | | (2.7 | ) | | | (5.2 | ) | | | - | | Proceeds from maturities of short-term investments | | | 2.1 | | | | 2.4 | | | | - | | Other – net | | | 0.9 | | | | 0.8 | | | | - | | Net cash used for investing activities | | | (77.8 | ) | | | (57.2 | ) | | | (41.5 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 38.0 | | | | 36.4 | | | | 152.6 | | Repayments of debt | | | (27.1 | ) | | | (50.9 | ) | | | (152.4 | ) | Purchases of treasury stock under share repurchase program | | | (6.9 | ) | | | - | | | | - | | Financing fees paid | | | - | | | | (0.1 | ) | | | (0.9 | ) | Dividend paid to noncontrolling interest | | | (0.9 | ) | | | - | | | | (0.5 | ) | Other – net | | | (0.4 | ) | | | - | | | | (0.3 | ) | Net cash provided by (used for) financing activities | | | 2.7 | | | | (14.6 | ) | | | (1.5 | ) | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | 1.1 | | | | (8.4 | ) | | | 1.9 | | Net (decrease) increase in cash and cash equivalents | | | (1.6 | ) | | | (16.7 | ) | | | 63.4 | | Cash and cash equivalents - beginning of year | | | 70.5 | | | | 87.2 | | | | 23.8 | | Cash and cash equivalents - end of year | | $ | 68.9 | | | $ | 70.5 | | | $ | 87.2 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | Common stock | | | Additional paid-in capital | | | Retained earnings | | | Accumulated other comprehensive loss | | | Treasury stock, at cost | | | Non- | | | Total | | | | Shares | | | Amount | | | | | | | | | | | | | | Balance, March 31, 2012 | | | 47.4 | | | $ | 29.6 | | | $ | 168.3 | | | $ | 231.8 | | | $ | (90.3 | ) | | $ | (14.5 | ) | | $ | 1.2 | | | $ | 326.1 | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (24.2 | ) | | | - | | | | - | | | | - | | | | (24.2 | ) | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | - | | | | (38.1 | ) | Stock options and awards including related tax benefits | | | 0.4 | | | | 0.3 | | | | (0.2 | ) | | | - | | | | - | | | | - | | | | - | | | | 0.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.1 | ) | | | - | | | | (0.1 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.1 | | | | - | | | | - | | | | - | | | | - | | | | 3.1 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.4 | | | | 1.4 | | Balance, March 31, 2013 | | | 47.8 | | | | 29.9 | | | | 171.2 | | | | 207.6 | | | | (128.4 | ) | | | (14.6 | ) | | | 2.6 | | | | 268.3 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | | Stock options and awards including related tax benefits | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | | Balance, March 31, 2014 | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) | Stock options and awards including related tax benefits | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | | Balance, March 31, 2015 | | | 48.6 | | | $ | 30.4 | | | $ | 180.6 | | | $ | 359.8 | | | $ | (198.6 | ) | | $ | (16.2 | ) | | $ | 4.6 | | | $ | 360.6 | |
| | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other comprehensive | | | Treasury stock, at | | | Non- controlling | | | Total | | | Shares | | | Amount | | | capital | | | earnings | | | loss | | | cost | | | interest | | | | | Balance, March 31, 2013 | | | 47.8 | | | $ | 29.9 | | | $ | 171.2 | | | $ | 207.6 | | | $ | (128.4 | ) | | $ | (14.6 | ) | | $ | 2.6 | | | $ | 268.3 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | | Stock options and awards including related tax benefits | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | | Balance, March 31, 2014 | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) | Stock options and awards including related tax benefits | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | | Balance, March 31, 2015 | | | 48.6 | | | | 30.4 | | | | 180.6 | | | | 359.8 | | | | (198.6 | ) | | | (16.2 | ) | | | 4.6 | | | | 360.6 | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (1.6 | ) | | | - | | | | - | | | | - | | | | (1.6 | ) | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.4 | | | | - | | | | (0.1 | ) | | | 24.3 | | Stock options and awards including related tax benefits | | | 0.4 | | | | 0.2 | | | | 0.1 | | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7.8 | ) | | | - | | | | (7.8 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.9 | | Contribution by noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2.3 | | | | 2.3 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.6 | | | | 0.6 | | Balance, March 31, 2016 | | | 49.0 | | | $ | 30.6 | | | $ | 185.6 | | | $ | 358.2 | | | $ | (174.2 | ) | | $ | (24.0 | ) | | $ | 6.5 | | | $ | 382.7 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 1: | Significant Accounting Policies |
Nature of operations: Modine Manufacturing Company (“Modine” or the “Company”) specializes in thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets. The Company is a leading global developer, manufacturer and marketer of heat exchangers and systems for use in on-highway and off-highway original equipment manufacturer (“OEM”) vehicular applications, and a wide array of building, industrial and refrigeration markets. ProductThe Company’s product lines include radiators and radiator cores, condensers, oil coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation (“EGR”) coolers, and building heating, ventilating and air conditioning (“HVAC”) equipment.equipment, and coils.
Basis of presentation: The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States. These principles require management to make certain estimates and assumptions in determining assets, liabilities, revenue, expenses and related disclosures. Actual amounts could differ materially from those estimates.
Consolidation principles: The consolidated financial statements include the accounts of Modine Manufacturing Company and its majority-owned or Modine-controlled subsidiaries. The Company eliminates intercompany transactions and balances in consolidation.
The Company accounts for investments in non-consolidated affiliated companies in which its ownership is 20 percent or more using the equity method. The Company states these investments at cost, plus or minus a proportionate share of undistributed net income (loss). The Company includes Modine’s share of the affiliatesaffiliate’s net income (loss) in other income and expense. See Note 12 for further discussion.additional information.
Discontinued operations: During fiscal 2009, the Company sold its Electronics Cooling business. The buyer financed a portion of the selling price by issuing promissory notes payable to Modine. During fiscal 2015, the Company received $1.5 million from the buyer, which represented the final payment on the promissory notes. The Company had previously recorded a reserve against a portion of the promissory notes due to collectability concerns. As a result, the Company recorded a gain of $0.9 million ($0.6 million after income taxes) during fiscal 2015.
Assets held for sale: The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the assets for sale at a price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell.sell, within other noncurrent assets. The Company ceases to record depreciation expense at the time of designation as held for sale.
Revenue recognition: The Company recognizes sales revenue, including agreed upon commodity price increases or decreases,prices, when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product and risk of loss have transferred to the customer, persuasive evidence of an arrangement exists, and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The Company makes appropriate provisions for uncollectible accounts receivable based on historical data or specific customer economic data. The Company records sales discounts, which are offered for prompt payment by certain customers, as a reduction to net sales.
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 20152016 and 2014,2015, Company-owned tooling totaled $18.7$18.8 million and $28.6$18.7 million, respectively. In certain instances, the Company makes upfront payments for customer-owned tooling costs, and subsequently receives reimbursement from customers for the upfront payments. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 20152016 and 2014,2015, cost reimbursement receivables related to customer-owned tooling totaled $11.6$8.5 million and $10.3$11.6 million, respectively.
Warranty: The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. The Company records warranty expense based upon historical and current claims data or based onupon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 15 for further discussion.additional information. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its OEM customers in cost of sales, and related amounts billed to these customers in net sales. The Company records shipping and handling costs incurred upon the shipment of products to its HVAC and aftermarket customers in selling, general and administrative (“SG&A”) expenses. For the years ended March 31, 2016, 2015, 2014, and 2013, these2014, shipping and handling costs recorded in SG&A expenses were $2.5 million, $4.9 million, $4.0 million, and $4.3$4.0 million, respectively.
Research and development: The Company expenses research and development costs as incurred within SG&A expenses. For the years ended March 31, 2016, 2015, 2014, and 2013,2014, research and development costs charged to operations totaled $61.1 million, $62.0 million, $61.7 million, and $68.4$61.7 million, respectively.
Translation of foreign currencies: The Company translates assets and liabilities of foreign subsidiaries and equity investments into U.S. dollars at the period-end exchange rates, and translates income and expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders' equity. The Company includes foreign currency transaction gains or losses in the statement of operations within other income and expense.
Derivative instruments: The Company enters into derivative financial instruments from time to time to manage certain financial risks. The Company enters into futures contracts to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. These instruments are used to manage financial risks and are not speculative. See Note 18 for further discussion.additional information.
Income taxes: The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. See Note 8 for further discussion.additional information.
Earnings per share: The Company calculates basic earnings per share based upon the weighted averageweighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. Restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company. Therefore, these restricted stock awards are included in computing earnings per share pursuant to the two-class method. See Note 9 for further discussion.additional information.
Cash and cash equivalents: The Company considers all highly liquidhighly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the amount of those un-presented checks is included in accounts payable.
Short-term investments: The Company invests in time deposits with original maturities of more than three months but no more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2016 and 2015, the Company’s short-term investments totaled $3.3 million and $2.8 million, respectively.
Deferred compensation trust: The Company maintains a deferred compensation trust to fund future obligations under its non-qualified deferred compensation plan. The trust’s investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Trade accounts receivable: The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company recorded an allowance for doubtful accounts $1.0of $0.5 million and $1.1$1.0 million at March 31, 2016 and 2015, and 2014, respectively, representsrepresenting its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable without recourse to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During the years ended March 31, 2016, 2015, 2014, and 2013,2014, the Company sold, without recourse, $71.3 million, $87.0 million, $82.4 million, and $99.1$82.4 million of accounts receivable to accelerate cash receipts. During each of the years ended March 31, 2016, 2015, 2014, and 2013,2014, the Company recorded a loss on the sale of accounts receivables of $0.3 million in the consolidated statements of operations. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost on a first-in, first-out basis or weighted average basis, or marketand net realizable value.
Property, plant and equipment: The Company statesrecords property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful life of the asset. The Company charges maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations.
Goodwill: The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company recognizes an impairment loss if the book value of goodwill exceeds the fair value. The Company performed theits goodwill impairment test as of March 31, 2015 and as a2016, which did not result recordedin an impairment charge of $7.8 million related to its South America segment.charge. See Note 14 for further discussion.additional information.
Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment and writes them down to fair value when facts andwhenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the assets may not be recoverable through estimated future undiscounted cash flows. If an impairment has occurred, the Company writes down the asset toexceeds its estimated fair value and recognizes the impairment loss as a charge against current operations.value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets. See Note 6 for further discussion.additional information.
Environmental expenditures:liabilities: The Company capitalizesrecords liabilities for environmental expenditures that qualify as property, plantassessments and equipment or substantially increaseremediation efforts in the economic value or extend the useful life of an asset. The Company expenses all other expenditures as incurred. If a loss arising from environmental mattersperiod which its responsibility is probable and the costs can be reasonably estimated,estimated. To the Company records an accrual forextent that the amountrequired remediation procedures change, or additional contamination is identified, the Company’s estimate of the estimated loss.environmental liabilities may change. See Note 19 for further discussion.additional information.
Self-insurance reserves: The Company retains a portion of the financial risk for various insurance coverage, including property, general liability, workers compensation, and employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to operations. The Company reviews and updates the evaluationamount of insurance claims and the reasonableness of the relatedits insurance-related reserves on a quarterly basis.
Stock-based compensation: The Company recognizes stock-based compensation using the fair value method. Accordingly, compensation expense for stock options, restricted stock and performance-based stock awards is calculated based upon the fair value of the instruments at the time of grant, and is recognized as expense over the respective vesting periods. See Note 5 for further discussion.
Out of period adjustments: During the second quarter of fiscal 2014, the Company recorded a customer pricing adjustment that related to prior fiscal years. The impact of this error to the second quarter of fiscal 2014 decreased pre-tax earnings by $0.6 million ($0.5 million after-tax). During the first quarter of fiscal 2013, the Company identified an error related to certain commodity hedges that should have been deemed ineffective in the fourth quarter of fiscal 2012, which overstated pre-tax earnings by $0.5 million in the first quarter of fiscal 2013. The Company does not believe that these errors were material to its financial statements for fiscal 2014 or 2013.additional information.
New accounting guidance: In May 2014,March 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify several aspects of accounting for share-based payment transactions, including the income tax consequences. This guidance is effective for the Company’s first quarter of fiscal 2018. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance. Upon adoption of this new guidance, the Company will be required to recognize most leases on its balance sheet. This guidance is effective for the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In November 2015, the FASB issued new guidance, as part of its simplification initiative, that requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The Company adopted this guidance, on a retrospective basis, for its fiscal year ending March 31, 2016. As a result, the Company reclassified approximately $13.0 million of deferred tax assets from current assets to noncurrent assets as of March 31, 2015 to conform to the current-period presentation. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about revenue arising from contracts with customers. This new guidance is effective for the Company’s first quarter of fiscal 2018 at the earliest.2019. The Company is currently evaluating the impact the newthis guidance will have on its consolidated financial statements. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Supplemental cash flow information:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Interest paid | | $ | 10.3 | | | $ | 12.6 | | | $ | 11.6 | | Income taxes paid | | | 15.9 | | | | 11.4 | | | | 12.4 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Interest paid | | $ | 10.7 | | | $ | 10.3 | | | $ | 12.6 | | Income taxes paid | | | 10.1 | | | | 15.9 | | | | 11.4 | |
Note 2: | Airedale Facility Fire |
On September 6, 2013, a fire caused significant destruction to the Company’s Airedale manufacturing facility and offices in Rawdon (Leeds), United Kingdom. The Company reports Airedale’s financial results within the Building HVAC segment (previously known as Commercial Products).segment. There were no injuries caused by the fire. The Rawdon facility, which wasis leased, was used to manufacture cooling products and solutions for a variety of applications, including data centers, clean rooms, retail, leisure and process cooling. The fire caused a temporary manufacturing suspensionCompany suspended operations at the Rawdon site;site as a result of the fire; however, the Companyit transferred its operations to temporary facilities and is in the process of rebuildingwhile it rebuilt the leased facility. The Company expects to completecompleted the reconstruction and return its operationsrelocation to the Rawdon sitefacility in late fiscal 2016.
The Company maintainsCompany’s insurance coverage forcovered damage to the leased facility, equipment, inventory, and other assets, as well as business interruption and lost profits, and recovery-related expenses caused by the fire. TheSince the date of the fire, the Company believes that reimbursementhas received cumulative cash proceeds of $96.0 million from its insurance provider is probable for substantially allcovered losses, and has recorded losses and costs directly attributablecaused by the fire in the same statement of operations line as the related insurance recovery. In fiscal 2016, the Company recorded a $9.5 million gain within other income related to an insurance settlement for equipment losses. This gain represents the replacement assets’ cost in excess of the carrying value of the equipment at the time it was destroyed by the fire. During fiscal 2015, the Company recorded $4.6 million of recoveries from business interruption insurance relating to fiscal 2015 and 2014 lost profits within SG&A expenses. Since the date of the fire, the Company has received cumulative cash proceeds of $62.7 million from its insurance provider for covered losses. In addition, the Company has written-off inventory of $4.7 million and equipment with a net book value of $1.4 million and incurred costs directly attributable to the fire totaling $22.0 million. The Company has recorded these losses and costs, which totaled $28.1 million, in the same statement of operations line as the related insurance recovery.
The terms of the Rawdon lease agreement obligateobligated the Company to rebuild the damaged facility. Through March 31, 2015,Upon completion of the rebuilt facility in fiscal 2016, the Company has capitalized reconstruction costs of $21.2 million,fulfilled this obligation and has recorded this asset on the consolidated balance sheet within other current assets. The Company currently estimates costs of reconstruction will total $48.0 million; accordingly, we recorded a $48.0 million other current liability as of March 31, 2015. As of March 31, 2015, we recorded an $18.0 million receivable from the Company’s insurance provider within other current assets, which represented covered losses to date in excess of cumulative cash proceeds received. As of March 31, 2014,removed both the liability to rebuild the facility was $45.0 million ($37.0 million withinand the capitalized reconstruction costs from its consolidated balance sheet. As of March 31, 2015, the other current liabilitiesliability to rebuild the facility was $48.0 million and $8.0 million within other noncurrent liabilities), and the receivablecurrent assets related to receivables from the Company’s insurance provider was $25.4 million ($18.4 million within other current assets and $7.0 million within other noncurrent assets).capitalized reconstructions costs totaled $39.2 million.
On January 29, 2016, the Company formed a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co. Ltd. of Yangzhou, China, of which it owns 67%, and the joint venture partner, Jiangsu Puxin Heat Exchange System Co., Ltd, owns 33%. This joint venture, which is reported in the Asia segment, will expedite the Company’s introduction of stainless steel heat exchangers for the light-, medium-, and heavy-duty commercial vehicle markets in China. The Company contributed cash of $1.4 million, with additional cash consideration of $0.5 million payable after six months subject to the sellers’ indemnification obligations under the agreement, and equipment and other assets totaling $2.3 million. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in acquired equipment and other long-lived assets totaling $1.5 million and working capital net assets of $0.8 million. The Company controls the primary management decisions and revenue-generating activities of the joint venture, and, therefore, the financial results of the joint venture are included in the Company’s consolidated financial statements.
On February 28, 2014, the Company acquired 100 percent of the shares of Barkell Limited of Consett, United Kingdom for cash consideration of $7.8 million, net of cash acquired. This acquisition provides Modine with an expanded product offering into the air handling market within the Building HVAC segment. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in intangible assets for acquired technology and customer relationships totaling $4.7 million; property, plant and equipment of $2.0 million; and working capital net assets of $1.1 million. Acquired technology consists of a fully developed product line and technical processes, and the customer relationships represent established sales channel and customer relationships. The Company is amortizing these acquired intangible assets over ten years.
On July 25, 2012, the Company completed the acquisition46
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The results of operations of these acquired businesses are included in the Company’s consolidated statements of operations since the dates of acquisition. The Company did not present pro forma financial information as the effectseffect of these acquisitions areis not material to theits results of operations or financial position. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2007, the Company acquired the remaining 50 percent of Radiadores Visconde Ltda. The purchase agreement included a $2.0 million note, which was payable subject to the resolution of certain obligations of the sellers. During fiscal 2013, the Company and the sellers reached a final resolution under which the Company is not obligated to pay the note to the sellers. As a result, the Company recorded a $2.0 million reduction to SG&A expenses in the South America segment during fiscal 2013.
Note 4: | Fair Value Measurements |
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
| ·● | Level 1 – Quoted prices for identical instruments in active markets. |
| ·● | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
| ·● | Level 3 – Model-derived valuations in which one or more significant inputs are not observable. |
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, fair value is based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash and cash equivalents, short-term investments, trade accounts receivable, and accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. The Company holds trading securities in a deferred compensation trust to fund obligations under Modine’s non-qualified deferred compensation plan. The securities’ fair values, which are recorded as other noncurrent assets, are determined based on quoted prices from active markets and classified within Level 1 of the valuation hierarchy. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. The fair values of the Company’s trading securities and deferred compensation obligations each totaled $3.0$3.2 million and $2.6$3.0 million at March 31, 20152016 and 2014,2015, respectively. The fair value of the Company’s long-term debt is disclosed in Note 16.
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2015 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 8.1 | | | $ | - | | | $ | 8.1 | | Common stocks | | | 40.5 | | | | 2.2 | | | | - | | | | 42.7 | | Corporate bonds | | | - | | | | 23.5 | | | | - | | | | 23.5 | | Pooled equity funds | | | 69.0 | | | | 11.4 | | | | - | | | | 80.4 | | Pooled fixed-income funds | | | 15.5 | | | | - | | | | - | | | | 15.5 | | U.S. government and agency securities | | | - | | | | 39.8 | | | | - | | | | 39.8 | | Other | | | 0.7 | | | | 6.3 | | | | - | | | | 7.0 | | Total | | $ | 125.7 | | | $ | 91.3 | | | $ | - | | | $ | 217.0 | |
| | March 31, 2016 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 5.8 | | | $ | 5.8 | | Common stocks | | | 23.7 | | | | 1.3 | | | | 25.0 | | Corporate bonds | | | - | | | | 8.4 | | | | 8.4 | | Pooled equity funds | | | 48.7 | | | | 7.3 | | | | 56.0 | | Pooled fixed-income funds | | | 26.3 | | | | - | | | | 26.3 | | U.S. government and agency securities | | | - | | | | 18.4 | | | | 18.4 | | Other | | | 0.4 | | | | 1.2 | | | | 1.6 | | Total | | $ | 99.1 | | | $ | 42.4 | | | $ | 141.5 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
| | March 31, 2014 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 11.3 | | | $ | - | | | $ | 11.3 | | Common stocks | | | 40.1 | | | | 2.1 | | | | - | | | | 42.2 | | Corporate bonds | | | - | | | | 21.3 | | | | - | | | | 21.3 | | Pooled equity funds | | | 68.9 | | | | 11.9 | | | | - | | | | 80.8 | | Pooled fixed-income funds | | | 14.1 | | | | - | | | | - | | | | 14.1 | | U.S. government and agency securities | | | - | | | | 37.0 | | | | - | | | | 37.0 | | Other | | | 1.6 | | | | 5.4 | | | | - | | | | 7.0 | | Total | | $ | 124.7 | | | $ | 89.0 | | | $ | - | | | $ | 213.7 | |
| | March 31, 2015 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 8.1 | | | $ | 8.1 | | Common stocks | | | 40.5 | | | | 2.2 | | | | 42.7 | | Corporate bonds | | | - | | | | 23.5 | | | | 23.5 | | Pooled equity funds | | | 69.0 | | | | 11.4 | | | | 80.4 | | Pooled fixed-income funds | | | 15.5 | | | | - | | | | 15.5 | | U.S. government and agency securities | | | - | | | | 39.8 | | | | 39.8 | | Other | | | 0.7 | | | | 6.3 | | | | 7.0 | | Total | | $ | 125.7 | | | $ | 91.3 | | | $ | 217.0 | |
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of common stocks, pooled equity funds and pooled fixed-income funds based on quoted prices from active markets and classifyclassified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain common stocks, corporate bonds, pooled equity funds and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 2016 and 2015, the Company held no Level 3 assets within its pension plans.
Assets held for sale: The Company valued assets held for sale based on Level 3 market-based valuation inputs. The carrying value of assets held for sale totaled $3.2$8.5 million and $11.6$3.2 million at March 31, 20152016 and 2014,2015, respectively. See Note 6 for further discussion.additional information.
Note 5: | Stock-Based Compensation |
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and executives that consists of restricted stock and stock option componentsoptions granted for retention and performance, (2) a discretionary equity program for management and other key employees, and (3) stock optionsawards and/or stock awardsoptions for non-employee directors. The Company’s Board of Directors and the Officer Nomination and Compensation Committee, as applicable, have discretionary authority to set the terms of the awards of stock under the Company’s Amended and Restated 2008 Incentive Compensation Plan (“Plan”). At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2015,2016, approximately 4.03.3 million shares authorized under the Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $4.9 million, $4.0 million, $3.6 million, and $3.1$3.6 million in fiscal 2016, 2015, 2014, and 2013,2014, respectively.
Stock Options: The Company recorded $0.9 million, $0.8$0.9 million, and $1.1$0.8 million of compensation expense related to stock options in fiscal 2016, 2015, 2014, and 2013,2014, respectively. The fair value of stock options that vested during fiscal 2016, 2015, 2014, and 20132014 was $0.9 million, $0.8$0.9 million, and $1.3$0.8 million, respectively. As of March 31, 2015,2016, the total compensation expense not yet recognized related to non-vested stock options was $1.7$2.0 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.72.5 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:
| | 2015 | | | 2014 | | | 2013 | | Weighted average fair value of options | | $ | 10.21 | | | $ | 7.76 | | | $ | 4.26 | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 2.1 | % | | | 1.3 | % | | | 0.9 | % | Expected volatility of the Company's stock | | | 76.1 | % | | | 88.7 | % | | | 87.4 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| | 2016 | | 2015 | | 2014 | Weighted-average fair value of options | | $ | 7.11 | | | $ | 10.21 | | | $ | 7.76 | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 1.9 | % | | | 2.1 | % | | | 1.3 | % | Expected volatility of the Company's stock | | | 66.9 | % | | | 76.1 | % | | | 88.7 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of the common stock on the date of grant. The risk-free interest rate was based on yields of U.S. Treasury zero-coupon issues with a term corresponding to the expected life of the options. The expected volatility assumption was based on changes in the Company’s historical common stock prices over the same time frame as the expected life of the awards. The expected dividend yield is zero as the Company currently does not anticipate paying dividends over the expected life of the options. The expected lives of the awards are based on historical patterns and the terms of the options. Outstanding options granted during fiscal 2015 and fiscal 2014 vest 25 percent annually for four years. All outstanding options granted prior to fiscal 2014 vested 25 percent on the grant date and 25 percent annually thereafter for the subsequent three years. The Company used a pre-vesting forfeiture rate of 2.5 percent for these periods as an estimate of expected forfeitures prior to completing the required service period.
A summary of stock option activity for fiscal 20152016 was as follows:
| | Shares | | | Weighted average exercise price | | | Weighted average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.6 | | | $ | 13.15 | | | | | | | | Granted | | | 0.1 | | | | 14.94 | | | | | | | | Exercised | | | (0.1 | ) | | | 8.71 | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 29.41 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 11.99 | | | | 5.3 | | | $ | 5.7 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2015 | | | 1.2 | | | $ | 12.13 | | | | 4.5 | | | $ | 4.9 | |
| | Shares | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.5 | | | $ | 11.99 | | | | | | | | Granted | | | 0.2 | | | | 11.39 | | | | | | | | Exercised | | | (0.1 | ) | | | 5.82 | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 27.33 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 10.82 | | | | 5.3 | | | $ | 3.0 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2016 | | | 1.1 | | | $ | 10.41 | | | | 4.3 | | | $ | 3.0 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20152016 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the fair value of Modine’s common shares.
Additional information related to stock options exercised during fiscal 2016, 2015, 2014, and 20132014 was as follows:
| | 2015 | | | 2014 | | | 2013 | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 1.1 | | | $ | 0.1 | | Proceeds from stock options exercised | | $ | 0.6 | | | $ | 1.1 | | | $ | 0.1 | |
| | 2016 | | | 2015 | | | 2014 | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 0.4 | | | $ | 1.1 | | Proceeds from stock options exercised | | $ | 0.5 | | | $ | 0.6 | | | $ | 1.1 | |
Restricted Stock: The Company recorded $3.5 million, $2.8 million, $2.2 million, and $1.8$2.2 million of compensation expense related to restricted stock in fiscal 2016, 2015, 2014 and 2013,2014, respectively. The fair value of restricted stock awards that vested during fiscal 2016, 2015, and 2014 and 2013 was $3.4 million, $2.3 million, $1.6 million, and $1.3$1.6 million, respectively. At March 31, 2015,2016, the Company had $4.6$4.7 million of total unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.52.4 years. The Company values restricted stock awards using the closing market value of its common shares on the date of grant. The restricted stock awards vest 25 percent annually for four years, with the exception of awards to non-employee directors, which fully vest upon grant.
A summary of restricted stock activity for fiscal 20152016 was as follows:
| | Shares | | | Weighted average price | | Non-vested balance, beginning | | | 0.6 | | | $ | 8.66 | | Granted | | | 0.3 | | | | 14.92 | | Vested | | | (0.2 | ) | | | 9.73 | | Non-vested balance, ending | | | 0.7 | | | $ | 10.68 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | Shares | | Weighted- average price | Non-vested balance, beginning | | | 0.7 | | | $ | 10.68 | | Granted | | | 0.3 | | | | 11.18 | | Vested | | | (0.4 | ) | | | 10.01 | | Non-vested balance, ending | | | 0.6 | | | $ | 11.29 | |
Restricted Stock – Performance-Based Shares: The Company recorded $0.5 million, $0.3 million $0.6 million and $0.2$0.6 million of compensation expense related to performance-based stock awards in fiscal 2016, 2015, 2014 and 2013,2014, respectively. At March 31, 2015,2016, the Company had $1.6$1.2 million of total unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be recognized over a weighted-average period of 1.81.7 years. The Company values performance-based stock awards using the closing market value of its common shares aton the date of grant. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shares are earned under the performance portion of the restricted stock award program based upon the attainment of certain financial goals over a three-year period and are awarded atafter the end of that three-year performance period, if the performance targets have been achieved. A new performance period may begin each fiscal year; therefore, multiple performance periods, with distinct goals, may operate simultaneously.
The performance componentcomponents of the programprograms initiated in fiscal 2016 and fiscal 2015 waswere based upon both a target three-year average consolidated return on average capital employed (“ROACE”) and a target three-year average annual revenue growth at the end of thea three-year performance period, coveringcommencing with the fiscal 2015 through fiscal 2017.year of grant. For the program initiated in fiscal 2014, the performance award was based upon a target three-year average ROACE, three-year average annual revenue growth, and Asia segment operating income at the end of the three-year performance period. For the program initiated in fiscal 2013, the performance award was based upon a target three-year average consolidated ROACE, cumulative revenue over the three-year performance period and Europe ROACE at the end of the three-year performance period.
Note 6: Note 6: | Restructuring Activities |
During fiscal 2016, the Company offered a voluntary retirement program to certain U.S. salaried employees. The program was offered as part of the Company’s Strengthen, Diversify and Grow transformational initiative and supports the objective of reducing operational and SG&A cost structures.
Also during fiscal 2016, the Company announced a plan to close its Washington, Iowa manufacturing facility and is in the process of transferring the facility’s production to other Americas segment manufacturing facilities, which it expects to complete by the end of fiscal 2017. In addition, the Company completed the transfer of production from its McHenry, Illinois manufacturing facility to other Americas segment manufacturing facilities. These restructuring activities reflect the Company’s focus on operating scale manufacturing facilities to improve overall competitiveness and profitability.
During fiscal 2015, the Company implementedinitiated a headcount reduction plan for its Brazil manufacturing facility within its South AmericaAmericas segment. The headcount reductions were in response to the economic slowdown in Brazil and reflect the Company’s objective to maintain profitability in the segmentthis business despite lower sales volume.
During fiscal 2014,In addition, the Company approved a plancontinues to close its McHenry, Illinois manufacturing facility, reflecting its focus on operating scale manufacturing facilities to improve overall competitiveness and profitability. The Company is in the process of transferring the facility’s production to other existing North America segment manufacturing facilities.
During fiscal 2013, the Company initiatedexecute restructuring activities within its Europe segment. TheThese restructuring activities have included implementing headcount reductions, exiting certain non-core product lines based upon Modine’s global product strategy, reducing manufacturing costs, consolidating production facilities, implementing headcount reductions, and disposing of and selling certain underperforming or non-strategic assets. The Company designed these activities were designed to align the cost structure of the segment with its strategic focus on the commercial vehicle, off-highway, automotive component, and engine product markets, while improving gross margin and return on average capital employed.
Restructuring and repositioning expenses for fiscal 2015, 2014, and 2013 were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Employee severance and related benefits | | $ | 1.2 | | | $ | 14.8 | | | $ | 14.9 | | Accelerated depreciation | | | - | | | | 4.3 | | | | - | | Other restructuring and repositioning expenses | | | 3.5 | | | | 1.3 | | | | 2.1 | | Total | | $ | 4.7 | | | $ | 20.4 | | | $ | 17.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Employee severance and related benefits | | $ | 12.8 | | | $ | 1.2 | | | $ | 14.8 | | Accelerated depreciation | | | - | | | | - | | | | 4.3 | | Other restructuring and repositioning expenses | | | 3.8 | | | | 3.5 | | | | 1.3 | | Total | | $ | 16.6 | | | $ | 4.7 | | | $ | 20.4 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
During fiscal 2016, 2015, 2014, and 2013,2014, the Company recorded $16.6 million, $4.7 million, $16.1 million and $17.0$16.1 million, respectively, of restructuring and repositioning expenses as restructuring expenses in the consolidated statement of operations. During fiscal 2014, the Company recorded $4.3 million of restructuring and repositioning expenses within cost of sales in the consolidated statement of operations. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 19.4 | | | $ | 11.6 | | Additions | | | 1.2 | | | | 14.8 | | Payments | | | (7.3 | ) | | | (7.8 | ) | Effect of exchange rate changes | | | (3.4 | ) | | | 0.8 | | Ending balance | | $ | 9.9 | | | $ | 19.4 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 9.9 | | | $ | 19.4 | | Additions | | | 12.8 | | | | 1.2 | | Payments | | | (8.5 | ) | | | (7.3 | ) | Effect of exchange rate changes | | | 0.5 | | | | (3.4 | ) | Ending balance | | $ | 14.7 | | | $ | 9.9 | |
During fiscal 2016, the Company identified potential impairment indicators related to a manufacturing facility in Germany, including pre-tax losses and its strategic decision to exit a certain product line in the future. In response, the Company performed an impairment evaluation and recorded an asset impairment charge of $9.9 million within its Europe segment to write down the manufacturing facility’s long-lived assets to fair value. The Company determined fair value using Level 3 inputs, primarily consisting of a facility appraisal, which considered the market rental value, and estimated scrap values, which considered the specialized nature of the machinery and equipment.
During fiscal 2014, the Company recorded asset impairment charges totaling $3.2 million, including $2.0 million within its Europe segment, primarily due to a manufacturing facility in Germany that the Company plans to close,has closed, and $1.2 million within its North AmericaAmericas segment, related to the planned closure of its McHenry, Illinois manufacturing facility. During fiscal 2013, the Company recorded asset impairment charges of $24.1 and $1.8 million within its Europe and North America segments, respectively, to reduce the carrying values of certain facilities held for sale to their estimated fair values, less costs to sell.
During fiscal 2015, the Company sold a wind tunnel within its Europe segment which was previously reported as an asset held for sale, for cash proceeds of $5.8 million and recognized a gain of $3.2 million. Also during fiscal 2015, the Company reclassified $4.7 million of its assets held for sale to property, plant and equipment, related to a facility in the Europe segment that is no longer being actively marketed for sale. At March 31, 20152016 and 2014,2015, assets held for sale of $3.2$8.5 million and $11.6$3.2 million, respectively, were included in other noncurrent assets and consisted of facilities that the Company is marketing for sale.
In April 2015, the Company announced its intent to close its Washington, Iowa manufacturing facility within the North America segment. As a result of the planned closure, the Company expects to incur approximately $2.0 million of employee severance-related costs during fiscal 2016 and additional restructuring and repositioning expenses during the closure period, as production is transferred to other facilities within the North America segment.
Note 7: | Other Income and Expense |
Other income and expense consisted of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Equity in earnings of non-consolidated affiliate | | $ | 0.6 | | | $ | 0.7 | | | $ | 0.3 | | Interest income | | | 0.5 | | | | 0.5 | | | | 0.9 | | Foreign currency transactions | | | (0.9 | ) | | | (2.0 | ) | | | (1.1 | ) | Other non-operating income - net | | | - | | | | - | | | | 0.1 | | Total other income (expense) - net | | $ | 0.2 | | | $ | (0.8 | ) | | $ | 0.2 | |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Equity in earnings of non-consolidated affiliate | | $ | 0.1 | | | $ | 0.6 | | | $ | 0.7 | | Interest income | | | 0.4 | | | | 0.5 | | | | 0.5 | | Foreign currency transactions (a) | | | (1.3 | ) | | | (0.9 | ) | | | (2.0 | ) | Gain from insurance recovery (b) | | | 9.5 | | | | - | | | | - | | Total other income (expense) - net | | $ | 8.7 | | | $ | 0.2 | | | $ | (0.8 | ) |
Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency denominated
| (a) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on foreign currency exchange contracts. |
| (b) | During fiscal 2016, the Company settled an insurance claim related to machinery and equipment destroyed in a fire at its Airedale facility and recorded a gain of $9.5 million. See Note 2 for additional information. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The U.S. and foreign components of earnings (loss) from continuing operations before income taxes and the provision (benefit)or benefit for income taxes consisted of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Components of earnings (loss) from continuing operations before income taxes: | | | | | | | | | | United States | | $ | 31.1 | | | $ | 14.1 | | | $ | 10.2 | | Foreign | | | 10.1 | | | | 9.9 | | | | (23.2 | ) | Total earnings (loss) from continuing operations before income taxes | | $ | 41.2 | | | $ | 24.0 | | | $ | (13.0 | ) | | | | | | | | | | | | | | Income tax expense (benefit): | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | 0.4 | | | $ | (2.0 | ) | | $ | 2.6 | | Deferred | | | 7.1 | | | | (95.8 | ) | | | (2.6 | ) | State: | | | | | | | | | | | | | Current | | | - | | | | 0.2 | | | | 0.2 | | Deferred | | | 1.1 | | | | (21.4 | ) | | | (0.2 | ) | Foreign: | | | | | | | | | | | | | Current | | | 12.7 | | | | 10.0 | | | | 6.4 | | Deferred | | | (2.3 | ) | | | 1.1 | | | | 3.4 | | Total income tax expense (benefit) | | $ | 19.0 | | | $ | (107.9 | ) | | $ | 9.8 | |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Components of (loss) earnings from continuing operations before income taxes: | | | | | | | | | | United States | | $ | (15.4 | ) | | $ | 31.1 | | | $ | 14.1 | | Foreign | | | 5.5 | | | | 10.1 | | | | 9.9 | | Total (loss) earnings from continuing operations before income taxes | | $ | (9.9 | ) | | $ | 41.2 | | | $ | 24.0 | | | | | | | | | | | | | | | Income tax (benefit) expense: | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | 0.1 | | | $ | 0.4 | | | $ | (2.0 | ) | Deferred | | | (13.0 | ) | | | 7.1 | | | | (95.8 | ) | State: | | | | | | | | | | | | | Current | | | 0.2 | | | | - | | | | 0.2 | | Deferred | | | (2.5 | ) | | | 1.1 | | | | (21.4 | ) | Foreign: | | | | | | | | | | | | | Current | | | 9.6 | | | | 12.7 | | | | 10.0 | | Deferred | | | (3.3 | ) | | | (2.3 | ) | | | 1.1 | | Total income tax (benefit) expense | | $ | (8.9 | ) | | $ | 19.0 | | | $ | (107.9 | ) |
The Company allocates income tax expense among continuing operations, discontinued operations, and other comprehensive income. The Company applies accounting for income taxes by tax jurisdiction, and in periods in which there is a loss from continuing operations before income taxes and pre-tax income in other categories (e.g., discontinued operations or other comprehensive income), it first allocates income tax expense to the other sources of income, and records a related tax benefit in continuing operations.
Income tax expense attributable to earnings (loss) from continuing operations before income taxes differed from the amounts computed by applying the statutory U.S. federal income tax rate as a result of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 2.4 | | | | 2.1 | | | | (1.3 | ) | Taxes on non-U.S. earnings and losses | | | (4.9 | ) | | | (3.8 | ) | | | (23.8 | ) | Valuation allowance | | | 8.3 | | | | (471.7 | ) | | | (59.3 | ) | Tax credits | | | (6.1 | ) | | | (7.1 | ) | | | 37.0 | | Compensation | | | 1.0 | | | | 0.4 | | | | (13.0 | ) | Tax rate or law changes | | | 1.2 | | | | (9.2 | ) | | | 0.9 | | Uncertain tax positions net of settlements | | | 2.2 | | | | 0.4 | | | | (41.9 | ) | Brazil interest on equity | | | - | | | | (1.7 | ) | | | 3.2 | | Dividend repatriation | | | 2.4 | | | | 5.8 | | | | (11.4 | ) | Other | | | 4.6 | | | | 0.2 | | | | (0.8 | ) | Effective tax rate | | | 46.1 | % | | | (449.6 | %) | | | (75.4 | %) |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 11.5 | | | | 2.4 | | | | 2.1 | | Taxes on non-U.S. earnings and losses | | | 26.4 | | | | (4.9 | ) | | | (3.8 | ) | Valuation allowance | | | (20.9 | ) | | | 8.3 | | | | (471.7 | ) | Tax credits | | | 20.5 | | | | (6.1 | ) | | | (7.1 | ) | Compensation | | | (3.7 | ) | | | 1.0 | | | | 0.4 | | Tax rate or law changes | | | 1.3 | | | | 1.2 | | | | (9.2 | ) | Uncertain tax positions, net of settlements | | | (4.3 | ) | | | 2.2 | | | | 0.4 | | Dividend repatriation | | | 16.0 | | | | 2.4 | | | | 5.8 | | Other | | | 8.1 | | | | 4.6 | | | | (1.5 | ) | Effective tax rate | | | 89.9 | % | | | 46.1 | % | | | (449.6 | %) |
The Company recorded an additional valuation allowance of $5.0 million, $2.6 million and $12.3 million in fiscal 2016, 2015, and 2014, respectively, against net deferred tax assets in certain foreign jurisdictions after determining it was more likely than not that the net deferred tax assets in these jurisdictions will not be realized. The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions going forward until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2016 and 2014, the Company concluded it no longer needed a valuation allowance on certain U.S. deferred tax assets after determining it was more likely than not they would be realized. As a result, the Company recorded a $119.2 million reversalreversals of its deferred tax asset valuation allowance.allowance of $3.0 million and $119.2 million in fiscal 2016 and 2014, respectively. Also during fiscal 2014, the Company recorded income tax benefits totaling $2.2 million related to foreign tax law changes. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | March 31, | | | | 2015 | | | 2014 | | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.3 | | | $ | 0.2 | | Inventories | | | 3.8 | | | | 4.1 | | Plant and equipment | | | 0.8 | | | | 2.4 | | Pension and employee benefits | | | 50.5 | | | | 39.1 | | Net operating loss, capital loss, and credit carryforwards | | | 105.0 | | | | 122.4 | | Other, principally accrued liabilities | | | 6.8 | | | | 10.3 | | Total gross deferred tax assets | | | 167.2 | | | | 178.5 | | Less: valuation allowance | | | (48.0 | ) | | | (61.2 | ) | Net deferred tax assets | | | 119.2 | | | | 117.3 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Goodwill | | | 0.6 | | | | 4.2 | | Plant and equipment | | | 5.3 | | | | 7.6 | | Other | | | 1.0 | | | | 1.7 | | Total gross deferred tax liabilities | | | 6.9 | | | | 13.5 | | Net deferred tax asset | | $ | 112.3 | | | $ | 103.8 | |
| | March 31, | | | 2016 | | 2015 | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.1 | | | $ | 0.3 | | Inventories | | | 3.6 | | | | 3.8 | | Plant and equipment | | | 4.3 | | | | 0.8 | | Pension and employee benefits | | | 52.6 | | | | 50.5 | | Net operating loss, capital loss, and credit carryforwards | | | 109.4 | | | | 105.0 | | Other, principally accrued liabilities | | | 6.9 | | | | 6.8 | | Total gross deferred tax assets | | | 176.9 | | | | 167.2 | | Less: valuation allowance | | | (50.8 | ) | | | (48.0 | ) | Net deferred tax assets | | | 126.1 | | | | 119.2 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Plant and equipment | | | 5.5 | | | | 5.3 | | Goodwill | | | 0.6 | | | | 0.6 | | Other | | | 1.1 | | | | 1.0 | | Total gross deferred tax liabilities | | | 7.2 | | | | 6.9 | | Net deferred tax asset | | $ | 118.9 | | | $ | 112.3 | |
Deferred tax assets and liabilities are reported inAs of March 31, 2016, the Company adopted new accounting guidance, which requires that all deferred taxes be presented as non-current on the consolidated balance sheets as follows:sheets. See Note 1 for additional information.
| | March 31, | | | | 2015 | | | 2014 | | Current deferred tax asset | | $ | 13.4 | | | $ | 13.0 | | Noncurrent deferred tax asset | | | 102.7 | | | | 98.6 | | Current deferred tax liability (other current liabilities) | | | (0.4 | ) | | | (0.5 | ) | Noncurrent deferred tax liability | | | (3.4 | ) | | | (7.3 | ) | Total | | $ | 112.3 | | | $ | 103.8 | |
Unrecognized tax benefits were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 2.1 | | | $ | 9.0 | | Gross increases - tax positions in prior period | | | 3.1 | | | | 2.5 | | Gross decreases - tax positions in prior period | | | - | | | | (7.0 | ) | Gross increases - tax positions in current period | | | 0.4 | | | | 0.1 | | Settlements | | | - | | | | (1.9 | ) | Lapse of statute of limitations | | | - | | | | (0.8 | ) | Effect of exchange rate changes | | | - | | | | 0.2 | | Ending balance | | $ | 5.6 | | | $ | 2.1 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 5.6 | | | $ | 2.1 | | Gross increases - tax positions in prior period | | | - | | | | 3.1 | | Gross decreases - tax positions in prior period | | | (0.1 | ) | | | - | | Gross increases - tax positions in current period | | | 0.4 | | | | 0.4 | | Ending balance | | $ | 5.9 | | | $ | 5.6 | |
The Company’s liability for unrecognized tax benefits as of March 31, 20152016 was $5.6$5.9 million, and if recognized, $3.0$3.5 million would have an effective tax rate impact.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. At March 31, 20152016 and 2014,2015, accrued interest and penalties were not significant. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2015,2016, the Company was under income tax examination in a number of foreign jurisdictions. The Company does not anticipate a significant change in unrecognized tax benefits during the next twelve months.
The following tax years remain subject to examination for the Company’s major tax jurisdictions:
Austria | Fiscal 2012 - 20142015 | Brazil | Calendar 20102011 - 20142015 | Germany | Fiscal 20112012 - 20142015 | United States | Fiscal 2012 – 20142013 - 2015 |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
At March 31, 2015,2016, the Company had foreign tax credit carry forwards of $1.8 million that, if not utilized against domestic taxes, will expire in fiscal 2016 and 2017. The Company also had federal and state research and development tax credits of $20.9$23.3 million that, if not utilized against domestic taxes, will expire between fiscal 2018 and 2035.2036. The Company also had various state and local tax loss carry forwards of $186.0$190.8 million that, if not utilized against state apportioned taxable income, will expire at various times during fiscal 20162017 through 2034.2036. In addition, the Company had tax loss carry forwards of $304.6$330.7 million in various tax jurisdictions throughout the world. Certain of the carry forwards in the U.S. and many in foreign jurisdictions are offset by a valuation allowance. If not utilized against taxable income, $159.3$156.9 million of these tax losses will expire at various times during fiscal 20162017 through 2035, and $145.3$173.8 million, mainly related to India,Germany, Austria and Germany,India, will not expire due to an unlimited carry-forward period.
At March 31, 2015,2016, the Company provided $0.8$1.1 million of tax on undistributed earnings for certain subsidiaries not considered permanently reinvested. Undistributed earnings totaling $442.0$491.0 million are considered permanently reinvested in the Company’s remaining foreign operations, and no provision has been made for any taxes that would be payable upon the distribution of such earnings. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 9: | Earnings Per Share |
The components of basic and diluted earnings per share arewere as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Basic: | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 22.2 | | | $ | 131.9 | | | $ | (22.8 | ) | Less: Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (1.7 | ) | | | - | | Earnings (loss) from continuing operations available to Modine shareholders | | | 21.0 | | | | 128.7 | | | | (24.2 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) available to Modine shareholders | | $ | 21.6 | | | $ | 128.7 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Weighted average shares outstanding - basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.45 | | | $ | 2.75 | | | $ | (0.52 | ) | Earnings per share - discontinued operations | | | 0.01 | | | | - | | | | - | | Net earnings (loss) per share - basic | | $ | 0.46 | | | $ | 2.75 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 22.2 | | | $ | 131.9 | | | $ | (22.8 | ) | Less: Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (0.9 | ) | | | - | | Earnings (loss) from continuing operations available to Modine shareholders | | | 21.0 | | | | 129.5 | | | | (24.2 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) available to Modine shareholders | | $ | 21.6 | | | $ | 129.5 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Weighted average shares outstanding - basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | Effect of dilutive securities | | | 0.6 | | | | 0.7 | | | | - | | Weighted average shares outstanding - diluted | | | 47.8 | | | | 47.6 | | | | 46.6 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.44 | | | $ | 2.72 | | | $ | (0.52 | ) | Earnings per share - discontinued operations | | | 0.01 | | | | - | | | | - | | Net earnings (loss) per share - diluted | | $ | 0.45 | | | $ | 2.72 | | | $ | (0.52 | ) |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Basic: | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (1.7 | ) | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 128.7 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 128.7 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | Net (loss) earnings per share - basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (0.9 | ) | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 129.5 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 129.5 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | Effect of dilutive securities | | | - | | | | 0.6 | | | | 0.7 | | Weighted-average shares outstanding - diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | Net (loss) earnings per share - diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | |
For the years ended March 31, 2016, 2015, 2014, and 2013,2014, the calculation of diluted earnings per share excluded 0.8 million, 0.6 million, 0.8 million, and 1.10.8 million stock options, respectively, because they were anti-dilutive. For the year ended March 31, 2013,2016, the total number of potential dilutive securities was 0.30.4 million. However, these securities were not included in the computation of diluted net loss per share since to do so would decrease the loss per share.
Inventories consisted of the following:
| | March 31, | | | | 2015 | | | 2014 | | Raw materials and work in process | | $ | 80.7 | | | $ | 89.2 | | Finished goods | | | 27.0 | | | | 27.6 | | Total inventories | | $ | 107.7 | | | $ | 116.8 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | March 31, | | | 2016 | | 2015 | Raw materials and work in process | | $ | 79.5 | | | $ | 80.7 | | Finished goods | | | 31.5 | | | | 27.0 | | Total inventories | | $ | 111.0 | | | $ | 107.7 | |
Note 11: Note11: | Property, Plant and Equipment |
Property, plant and equipment, including depreciable lives, consisted of the following:
| | March 31, | | | | 2015 | | | 2014 | | Land | | $ | 8.2 | | | $ | 10.4 | | Buildings and improvements (10-40 years) | | | 221.0 | | | | 228.1 | | Machinery and equipment (3-12 years) | | | 652.0 | | | | 715.1 | | Office equipment (3-10 years) | | | 81.9 | | | | 89.5 | | Construction in progress | | | 31.7 | | | | 35.5 | | | | | 994.8 | | | | 1,078.6 | | Less: accumulated depreciation | | | (672.7 | ) | | | (719.0 | ) | Net property, plant and equipment | | $ | 322.1 | | | $ | 359.6 | |
| | March 31, | | | 2016 | | 2015 | Land | | $ | 7.2 | | | $ | 8.2 | | Buildings and improvements (10-40 years) | | | 221.3 | | | | 221.0 | | Machinery and equipment (3-12 years) | | | 694.3 | | | | 652.0 | | Office equipment (3-10 years) | | | 84.1 | | | | 81.9 | | Construction in progress | | | 36.7 | | | | 31.7 | | | | | 1,043.6 | | | | 994.8 | | Less: accumulated depreciation | | | (705.0 | ) | | | (672.7 | ) | Net property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
Depreciation expense totaled $48.6 million, $50.0 million $57.3 million and $55.1$57.3 million for the years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. Gains and losses related to the disposal of property, plant and equipment are recorded in SG&A expenses. Total losses related to the disposal of property, plant and equipment were $0.4 million, $1.1 million $2.6 million and $2.5$2.6 million for the years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively.
Note 12: Note 12: | Investment in Affiliate |
The Company’s investment in its non-consolidated affiliate is accounted for under the equity method. The Company has a 50 percent ownership of Nikkei Heat Exchanger Company, Ltd. (“NEX”). At both March 31, 20152016 and 2014,2015, the Company included the investment in NEX of $3.2 million and $3.4 million, respectively, in other noncurrent assets. At March 31, 2015,2016, the investment in NEX is equal to the Company's investment in the underlying assets.
The Company reports the results of operations for NEX in the consolidated financial statements using a one-month reporting delay. The Company reports equity in earnings from non-consolidated affiliates within other income and expense in the consolidated statements of operations. The Company’s share of NEX’s earnings for the years ended March 31, 2016, 2015, and 2014 and 2013 was $0.1 million, $0.6 million $0.7 million and $0.3$0.7 million, respectively. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Intangible assets consisted of the following:
| | March 31, 2015 | | | March 31, 2014 | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | | $ | 10.1 | | | $ | (5.7 | ) | | $ | 4.4 | | Acquired technology | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | | | 5.8 | | | | (0.2 | ) | | | 5.6 | | Customer relationships | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | | | 2.4 | | | | - | | | | 2.4 | | Total intangible assets | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | | | $ | 18.3 | | | $ | (5.9 | ) | | $ | 12.4 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | March 31, 2016 | | | March 31, 2015 | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 8.9 | | | $ | (6.3 | ) | | $ | 2.6 | | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | Acquired technology | | | 5.5 | | | | (1.5 | ) | | | 4.0 | | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | Customer relationships | | | 2.0 | | | | (0.4 | ) | | | 1.6 | | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | Total intangible assets | | $ | 16.4 | | | $ | (8.2 | ) | | $ | 8.2 | | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | |
The Company recorded $1.6 million, $0.8$1.6 million and $0.7$0.8 million of amortization expense during fiscal 2016, 2015 2014 and 2013,2014, respectively. Estimated future amortization expense is as follows:
Fiscal Year | | Estimated Amortization Expense | | 2016 | | $ | 1.6 | | 2017 | | | 1.6 | | 2018 | | | 1.6 | | 2019 | | | 1.5 | | 2020 | | | 1.4 | | 2021 & Beyond | | | 2.2 | |
Fiscal Year | | Estimated Amortization Expense | | 2017 | | $ | 1.6 | | 2018 | | | 1.6 | | 2019 | | | 1.5 | | 2020 | | | 1.3 | | 2021 | | | 0.8 | | 2022 & Beyond | | | 1.4 | |
Changes in the carrying amount of goodwill, by segment and in the aggregate, were as follows:
| | South America | | | Asia | | | Building HVAC | | | Total | | Balance, March 31, 2013 | | $ | 12.2 | | | $ | 0.5 | | | $ | 16.0 | | | $ | 28.7 | | Effect of exchange rate changes | | | (1.3 | ) | | | - | | | | 1.3 | | | | - | | Balance, March 31, 2014 | | | 10.9 | | | | 0.5 | | | | 17.3 | | | | 28.7 | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | Balance, March 31, 2015 | | $ | - | | | $ | 0.5 | | | $ | 15.7 | | | $ | 16.2 | |
| | Americas | | Asia | | Building HVAC | | Total | Balance, March 31, 2014 | | $ | 10.9 | | | $ | 0.5 | | | $ | 17.3 | | | $ | 28.7 | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | Balance, March 31, 2015 | | | - | | | | 0.5 | | | | 15.7 | | | | 16.2 | | Effect of exchange rate changes | | | - | | | | - | | | | (0.4 | ) | | | (0.4 | ) | Balance, March 31, 2016 | | $ | - | | | $ | 0.5 | | | $ | 15.3 | | | $ | 15.8 | |
The Company assesses goodwill for impairment annually, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. The Company conducted its annual assessment for goodwill impairment during the fourth quarter of fiscal 20152016 by applying a fair value-based test. Thetest and determined that the fair value of its reporting units exceeded their respective book values. In fiscal 2015, the Company determined its South America reporting unit’s goodwill was fully impaired and recorded a $7.8 million goodwill impairment charge as a result.within the Americas segment in connection with its annual assessment. The impairment charge was primarily caused by a decline in the financial outlook for the South America reporting unit. During the fourth quarter of fiscal 2015, the Company’s outlook for the markets served by its South America reporting unit, primarily in Brazil, shifted from a view that the markets may begin to recover to a view that the market downturn may be more prolonged. The economic weakness in Brazil has negatively affected the Company’s expected future cash flows for the South America segment. The fair value of the Company’s remaining reporting units exceeded their respective book values.Brazil.
As ofAt both March 31, 2016 and 2015, accumulated goodwill impairment losses within the South America segment totaled $7.8 million. As of March 31, 2015 and 2014, accumulated goodwill impairment losses totaled $23.8$31.6 million and $8.7 million within the North AmericaAmericas and Europe segments, respectively.
Note 15: Note 15: | Product Warranties, Operating Leases, and Other Commitments |
Product warranties: Modine provides product warranties for various product lines, withMost of the Company’s products are covered under a warranty periods generallyperiod ranging from one to five years. The Company accruesrecords a liability for estimated futureproduct warranty costs inobligations at the period in whichtime of sale to a customer based upon historical warranty experience. In addition, the sale is recorded. The Company bases warranty expense estimates on the best information available using analytical and statistical analysis of both historical and current claim data. The Company adjusts these expensesits warranty accruals if it becomes probable that expected claims will differ from initial estimates recorded at the time of sale.estimates. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 14.0 | | | $ | 12.6 | | Accruals for warranties issued | | | 5.8 | | | | 6.0 | | Accruals related to pre-existing warranties | | | 1.5 | | | | 8.3 | | Settlements | | | (9.2 | ) | | | (13.0 | ) | Effect of exchange rate changes | | | (1.7 | ) | | | 0.1 | | Ending balance | | $ | 10.4 | | | $ | 14.0 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 10.4 | | | $ | 14.0 | | Warranties recorded at time of sale | | | 5.7 | | | | 5.8 | | Adjustments to pre-existing warranties | | | (1.1 | ) | | | 1.5 | | Settlements | | | (6.7 | ) | | | (9.2 | ) | Effect of exchange rate changes | | | - | | | | (1.7 | ) | Ending balance | | $ | 8.3 | | | $ | 10.4 | |
Operating leases: The Company leases various facilities and equipment under operating leases. Rental expense for these leases totaled $11.9 million in fiscal 2016, and $11.5 million in both fiscal 2015 and 2014, and $11.3 million in fiscal 2013.2014.
Future minimum rental commitments at March 31, 20152016 under non-cancelable operating leases were as follows:
Fiscal Year | | | | 2016 | | $ | 8.2 | | 2017 | | | 5.7 | | 2018 | | | 4.3 | | 2019 | | | 3.8 | | 2020 | | | 4.0 | | 2021 and beyond | | | 23.9 | | Total | | $ | 49.9 | |
Fiscal Year | | | | 2017 | | $ | 8.1 | | 2018 | | | 5.6 | | 2019 | | | 4.8 | | 2020 | | | 4.6 | | 2021 | | | 4.1 | | 2022 and beyond | | | 26.3 | | Total | | $ | 53.5 | |
Indemnification agreements: From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years. In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 20152016 is not material.
Commitments: At March 31, 2015,2016, the Company had capital expenditure commitments of $15.5$20.5 million. Significant commitments include tooling and equipment expenditures for new and renewal programs with customers in North Americathe Americas and Europe.Europe segments. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
The Company has a commitment to rebuild the leased Airedale facility, which suffered significant destruction from a fire during fiscal 2014. The Company maintains insurance coverage and believes reimbursement for substantially all losses and costs directly attributable to the fire is probable. See Note 2 for additional information.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Long-term debt was comprised of the following:
| | Fiscal year of maturity | | | March 31, 2015 | | | March 31, 2014 | | | | | | | | | | | | Foreign credit agreements | | 2016 | | | $ | 0.2 | | | $ | 0.5 | | 6.8% Senior Notes | | 2017-2021 | | | | 125.0 | | | | 125.0 | | Revolving credit facility | | 2019 | | | | - | | | | - | | | | | | | | 125.2 | | | | 125.5 | | Capital lease obligations | | 2016-2030 | | | | 4.9 | | | | 6.5 | | | | | | | | 130.1 | | | | 132.0 | | Less: current portion | | | | | | (0.5 | ) | | | (0.8 | ) | Total long-term debt | | | | | $ | 129.6 | | | $ | 131.2 | |
| | Fiscal year of maturity | | | March 31, 2016 | | March 31, 2015 | | | | | | | | | | | Foreign credit agreements | | | 2018-2020 | | | $ | 0.4 | | | $ | 0.2 | | 6.8% Senior Notes | | | 2017-2021 | | | | 125.0 | | | | 125.0 | | Revolving credit facility | | | 2019 | | | | - | | | | - | | | | | | | | | 125.4 | | | | 125.2 | | Other (a) | | | 2017-2030 | | | | 8.6 | | | | 4.9 | | | | | | | | | 134.0 | | | | 130.1 | | Less: current portion | | | | | | | (8.5 | ) | | | (0.5 | ) | Total long-term debt | | | | | | $ | 125.5 | | | $ | 129.6 | |
| (a) | Other long-term debt includes capital lease obligations and other financing-type obligations. |
The Company maintains a $175.0 million domestic revolving credit facility, which expires in August 2018. Borrowings under the credit agreement bear interest at a variable rate based on the London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points (1.6(1.8 percent at March 31, 2015)2016) depending upon the Company’s leverage ratio, as defined below. At March 31, 20152016 and 2014,2015, no borrowings were outstanding under the revolving credit facility.
The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 2016 and 2015 and 2014 of $18.6$28.6 million and $32.4$18.6 million, respectively. At March 31, 2015,2016, the Company’s foreign unused lines of credit totaled $41.0$32.0 million. In aggregate, the Company had total available lines of credit of $216.0$207.0 million at March 31, 2015.2016.
Provisions in the Company’s revolving credit facility, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided a lienliens on substantially all domestic assets. The Company is also subject to a leverage ratio covenant, which requires the Company to limit its consolidated indebtedness, less a portion of the Company’s cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”), and an interest expense coverage ratio, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. The Company was in compliance with its debt covenants as of March 31, 2015.2016.
Long-term debt matures as follows:
Fiscal Year | | | | 2016 | | $ | 0.5 | | 2017 | | | 8.3 | | 2018 | | | 16.3 | | 2019 | | | 16.3 | | 2020 | | | 16.3 | | 2021 & beyond | | | 72.4 | | Total | | $ | 130.1 | |
Fiscal Year | | | | 2017 | | $ | 8.5 | | 2018 | | | 16.5 | | 2019 | | | 16.5 | | 2020 | | | 16.6 | | 2021 | | | 69.4 | | 2022 & beyond | | | 6.5 | | Total | | $ | 134.0 | |
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. At March 31, 20152016 and 2014,2015, the carrying value of Modine’s long-term debt approximated fair value, with the exception of the Senior Notes, which had a fair value of approximately $141.0$139.0 million and $140.0$141.0 million, respectively. The fair value of the Senior Notes is categorized as Level 2 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 17: Note 17: | Pension and Employee Benefit Plans |
Defined Contribution Employee Benefit Plans:
The Company maintains domestic 401(k) plans that allow employees to contribute a portion of their salary to help save for retirement. The Company matched 50 percent of employee contributions, up to 5 percent of employee compensation, during fiscal 2016, 2015, 2014, and 2013.2014. The Company also makes annual employer contributions into active employee accounts based upon a percentage of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary. The Company’s expense for defined contribution employee benefit plans during fiscal 2016, 2015, and 2014 and 2013 was $4.6 million, $5.9 million, $8.3 million, and $4.1$8.3 million, respectively. The decreasedecreasing trend in expense infrom fiscal 2015, as compared with the prior fiscal year,2014 was primarily due to lower discretionary employer contributions.
In addition, the Company maintains a non-qualified deferred compensation plan for eligible employees, and various foreignnon-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans:
Certain foreignnon-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.
Defined Benefit Employee Benefit Plans:
Pension plans: The Company has amaintains non-contributory defined benefit pension planplans that coverscover most of its domestic employees hired on or before December 31, 2003. The benefits provided are based primarily on years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based on a monthly retirement benefit amount. Domestic salaried employees hired after December 31, 2003 are not covered under anya defined benefit plan. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company’s foreign subsidiariesCompany also have legacy defined benefit plans coveringwhich cover a smallsmaller number of active employees.employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany and Austria and are closed to new participants.
The Company contributions ofcontributed $6.7 million, $5.9 million, and $8.0 million and $9.2 million to its U.S. pension plans during fiscal 2016, 2015, and 2014, and 2013, respectively,respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company completed a voluntary lump-sum payout program offered to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer. During fiscal 2016, a total of $65.3 million was paid from pension plan assets for lump-sum payouts, which reduced the Company’s pension obligation by the same amount. In connection with these lump-sum payouts, the Company recorded $42.1 million of non-cash settlement losses related to the accelerated recognition of unamortized actuarial losses previously recorded on the consolidated balance sheets within accumulated other comprehensive loss. During fiscal 2016, the Company recorded $33.3 million and $8.8 million of settlement losses as SG&A expenses and cost of sales, respectively, within the consolidated statements of operations.
Postretirement plans: The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans during fiscal 2016, 2015, and 2014 and 2013 was $0.3 million, $0.1 million, $1.0 million, and $1.1$1.0 million, respectively.
Measurement Date: The Company uses March 31 as the measurement date for its pension and postretirement plans. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s pension plans, for the fiscal years ended March 31, 20152016 and 20142015 were as follows:
| | 2015 | | | 2014 | | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 295.7 | | | $ | 309.6 | | Service cost | | | 0.5 | | | | 0.6 | | Interest cost | | | 13.0 | | | | 13.0 | | Actuarial loss (gain) | | | 40.6 | | | | (10.8 | ) | Benefits paid | | | (14.6 | ) | | | (18.6 | ) | Effect of exchange rate changes | | | (7.0 | ) | | | 1.9 | | Benefit obligation at end of year | | $ | 328.2 | | | $ | 295.7 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 213.7 | | | $ | 200.6 | | Actual return on plan assets | | | 10.8 | | | | 22.2 | | Benefits paid | | | (14.6 | ) | | | (18.6 | ) | Employer contributions | | | 7.1 | | | | 9.5 | | Fair value of plan assets at end of year | | $ | 217.0 | | | $ | 213.7 | | Funded status at end of year | | $ | (111.2 | ) | | $ | (82.0 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (0.8 | ) | | $ | (1.0 | ) | Noncurrent liability | | | (110.4 | ) | | | (81.0 | ) | | | $ | (111.2 | ) | | $ | (82.0 | ) |
| | 2016 | | 2015 | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 328.2 | | | $ | 295.7 | | Service cost | | | 0.6 | | | | 0.5 | | Interest cost | | | 11.2 | | | | 13.0 | | Actuarial (gain) loss | | | (2.8 | ) | | | 40.6 | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | Effect of exchange rate changes | | | 1.9 | | | | (7.0 | ) | Benefit obligation at end of year | | $ | 261.0 | | | $ | 328.2 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 217.0 | | | $ | 213.7 | | Actual return on plan assets | | | (5.3 | ) | | | 10.8 | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | Employer contributions | | | 7.9 | | | | 7.1 | | Fair value of plan assets at end of year | | $ | 141.5 | | | $ | 217.0 | | Funded status at end of year | | $ | (119.5 | ) | | $ | (111.2 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (0.9 | ) | | $ | (0.8 | ) | Noncurrent liability | | | (118.6 | ) | | | (110.4 | ) | | | $ | (119.5 | ) | | $ | (111.2 | ) |
| (a) | In fiscal 2016, $65.3 million was paid from plan assets in connection with lump-sum payouts. |
The accumulated benefit obligation for pension plans was $325.5$257.9 million and $293.0$325.5 million as of March 31, 20152016 and 2014,2015, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $192.3$162.0 million and $153.4$192.3 million as of March 31, 20152016 and 2014,2015, respectively.
Costs for the Company’s pension plans included the following components for the fiscal years ended March 31, 2016, 2015, 2014, and 2013:2014:
| | 2015 | | | 2014 | | | 2013 | | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.5 | | | $ | 0.6 | | | $ | 0.6 | | Interest cost | | | 13.0 | | | | 13.0 | | | | 13.5 | | Expected return on plan assets | | | (16.7 | ) | | | (15.7 | ) | | | (16.1 | ) | Amortization of net actuarial loss | | | 5.5 | | | | 6.3 | | | | 5.0 | | Net periodic benefit cost | | $ | 2.3 | | | $ | 4.2 | | | $ | 3.0 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 46.4 | | | $ | (17.3 | ) | | $ | 27.0 | | Amortization of net actuarial loss | | | (5.5 | ) | | | (6.3 | ) | | | (5.0 | ) | Total recognized in other comprehensive loss (income) | | $ | 40.9 | | | $ | (23.6 | ) | | $ | 22.0 | |
| | 2016 | | 2015 | | 2014 | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.6 | | | $ | 0.5 | | | $ | 0.6 | | Interest cost | | | 11.2 | | | | 13.0 | | | | 13.0 | | Expected return on plan assets | | | (14.9 | ) | | | (16.7 | ) | | | (15.7 | ) | Amortization of net actuarial loss | | | 6.4 | | | | 5.5 | | | | 6.3 | | Settlements (a) | | | 42.1 | | | | - | | | | - | | Net periodic benefit cost | | $ | 45.4 | | | $ | 2.3 | | | $ | 4.2 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 17.5 | | | $ | 46.4 | | | $ | (17.3 | ) | Amortization of net actuarial loss (a) | | | (48.5 | ) | | | (5.5 | ) | | | (6.3 | ) | Total recognized in other comprehensive (income) loss | | $ | (31.0 | ) | | $ | 40.9 | | | $ | (23.6 | ) |
| (a) | During fiscal 2016, in connection with lump-sum payouts to pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company estimates $7.2$5.6 million of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2016. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)2017.
The Company used a discount rate of 4.0%4.1% and 4.7%4.0% as of March 31, 20152016 and 2014,2015, respectively, in determining its benefit obligations under its U.S. pension plans. The Company used a discount rate of 1.3%1.8% and 3.0%1.3% as of March 31, 20152016 and 2014,2015, respectively, in determining its benefit obligations under its foreignnon-U.S. pension plans. The Company used a discount rate of 4.7%4.3%, 4.4%4.7%, and 4.9%4.4% to determine its costs under its U.S. pension plans for the fiscal years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. The Company used a discount rate of 3.0%1.3%, 3.5%3.0%, and 5.0%3.5% to determine its costs under its foreignnon-U.S. pension plans for the fiscal years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. AThe Company used a similar process was used to determine the discount rate for the Company’s foreignits non-U.S. pension obligationsobligations.
Plan assets in the U.S. defined benefit plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted averageweighted-average asset allocations at the measurement dates of March 31, 20152016 and 20142015 were as follows:
| | Target allocation | | | Plan assets | | | | | | | 2015 | | | 2014 | | Equity securities | | | 55 | % | | | 55 | % | | | 57 | % | Debt securities | | | 38 | % | | | 36 | % | | | 37 | % | Alternative assets | | | 5 | % | | | 5 | % | | | 5 | % | Cash | | | 2 | % | | | 4 | % | | | 1 | % | | | | 100 | % | | | 100 | % | | | 100 | % |
| | Target allocation | | Plan assets | | | | | | 2016 | | 2015 | Equity securities | | | 55 | % | | | 56 | % | | | 55 | % | Debt securities | | | 38 | % | | | 36 | % | | | 36 | % | Alternative assets | | | 5 | % | | | 4 | % | | | 5 | % | Cash | | | 2 | % | | | 4 | % | | | 4 | % | | | | 100 | % | | | 100 | % | | | 100 | % |
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 20152016 and 2014,2015, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term return of plan assets, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2016, 2015, 2014 and 20132014 U.S. pension plan expense, the expected rate of return on plan assets was 8.0 percent. For fiscal 20162017 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 8.0 percent.
The Company’s funding policy for domestic qualifiedits U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. The Company expects to make contributions of $6.7$8.1 million to these plans during fiscal 2016.2017.
Estimated pension benefit payments for the next ten fiscal years are as follows:
Fiscal Year | | Estimated pension benefit payments | | 2016 | | $ | 15.1 | | 2017 | | | 15.7 | | 2018 | | | 16.9 | | 2019 | | | 17.2 | | 2020 | | | 18.0 | | 2021-2025 | | | 94.0 | |
Fiscal Year | | Estimated Pension Benefit Payments | | 2017 | | $ | 14.5 | | 2018 | | | 15.2 | | 2019 | | | 15.3 | | 2020 | | | 15.8 | | 2021 | | | 16.1 | | 2022-2026 | | | 79.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 18: Note 18: | Derivative Instruments |
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated, and is effective, as a hedge, and, if so, on the nature of the hedging activity. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Commodity Derivatives: The Company has, from time to time, enteredperiodically enters into futures contracts related to certain forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts wasis to reduce its exposure to changing market prices for future purchases of these commodities. The Company has not designated commodity contracts entered into in fiscal 2013, 2014, 2015, and 20152016 for hedge accounting. Accordingly, unrealized gains and losses on thosethese contracts are recorded within cost of sales. The Company designated contracts entered into prior to fiscal 2013 for hedge accounting. Accordingly, the amounts recorded in accumulated other comprehensive loss (“AOCI”) related to those contracts remained in AOCI until the underlying commodity purchases impacted earnings.
Foreign exchange contracts: The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. The Company has not designated these contracts for hedge accounting. Accordingly, unrealized gains and losses related to changes in fair value are recorded in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| | Balance Sheet Location | | March 31, 2015 | | | March 31, 2014 | | Foreign exchange contracts | | Other current liabilities | | $ | 0.3 | | | $ | 0.2 | | Commodity derivatives | | Other current liabilities | | | 0.1 | | | | 0.1 | | Commodity derivatives | | Other noncurrent liabilities | | | - | | | | 0.1 | |
| Balance Sheet Location | | March 31, 2016 | | | March 31, 2015 | | Foreign exchange contracts | Other current assets | | $ | 0.1 | | | $ | - | | Foreign exchange contracts | Other current liabilities | | | - | | | | 0.3 | | Commodity derivatives | Other current liabilities | | | 0.1 | | | | 0.1 | |
The amounts recorded in AOCI and in the consolidated statements of operations for all of the Company’s derivative financial instruments were as follows:
| | March 31, 2015 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss Recognized in Continuing Operations | | Commodity derivatives | | $ | - | | Cost of sales | | $ | - | | | $ | 0.2 | | Foreign exchange contracts | | | - | | Other income (expense) - net | | | - | | | | 1.1 | | Total | | $ | - | | | | $ | - | | | $ | 1.3 | |
| | March 31, 2014 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss Recognized in Continuing Operations | | Commodity derivatives | | $ | - | | Cost of sales | | $ | 0.5 | | | $ | 0.5 | | Total | | $ | - | | | | $ | 0.5 | | | $ | 0.5 | |
| | March 31, 2013 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss (Gain) Recognized in Continuing Operations | | Commodity derivatives | | $ | 0.5 | | Cost of sales | | $ | 2.6 | | | $ | 4.6 | | Foreign exchange contracts | | | - | | Other income (expense) - net | | | - | | | | (0.3 | ) | Total | | $ | 0.5 | | | | $ | 2.6 | | | $ | 4.3 | |
| Statement of Operations | | Years ended March 31, | | Location | | 2016 | | 2015 | | 2014 | Commodity derivatives | Cost of sales | | $ | (0.7 | ) | | $ | (0.2 | ) | | $ | (0.5 | ) | Foreign exchange contracts | Other income (expense) - net | | | 0.6 | | | | (1.1 | ) | | | - | | Total loss | | | $ | (0.1 | ) | | $ | (1.3 | ) | | $ | (0.5 | ) |
Note 19: Note 19: | Contingencies and Litigation |
Market risk: The Company sells a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, off-highway, automotive, and commercial heating and air conditioning markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or more of the markets it serves. The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits. However, the risk associated with market downturns, such as the downturn experienced in fiscal 2009 and 2010, is still present. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Credit risk: The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 2016 and 2015, two customers each accounted for ten percent or more of the Company’s total sales. In fiscal 2014, and 2013, one customer accounted for ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers represented 63 percent 56 percent, and 59 percent of total sales in both fiscal 2016 and 2015 2014, and 2013, respectively.56 percent in fiscal 2014. At March 31, 2016 and 2015, and 2014, 4745 percent and 4647 percent, respectively, of the Company's trade accounts receivable were from the Company's top ten customers. These customers operate primarily in the automotive, truck, and heavy equipment markets and are influenced by similar market and general economic factors. Collateral or advanced payments are generally not required, but they may be used in those cases where the Company identifies a substantial credit risk.required. The Company has not experienced significant credit losses to customers in the markets served. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company manages credit risk through its focus on the following:
| ·● | Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; |
| ·● | Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; |
| ·● | Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and |
| ·● | Insurance – ensuring that insurance providers maintain acceptable financial ratings. |
Counterparty risks: The Company manages counterparty risks through its focus on the following:
| ·● | Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; |
| ·● | Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and |
| ·● | Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company. |
Europe value added tax: During fiscal 2012, the Company determined it was not properly applying value added tax (“VAT”) to certain cross-border transactions within the Europe segment and established an accrual of $10.7 million for estimated VAT liabilities, including interest and penalties. During fiscal 2013 and 2014, the Company completed the registration and filing process with the taxing authorities and began making payments to the applicable jurisdictions. During fiscal 2015, 2014, and 2013, the Company recorded reductions to SG&A expenses of $2.0 million, $2.9 million and $1.6 million, respectively, as a result of favorable changes to the estimated VAT obligations.
Environmental: The United States Environmental Protection Agency (“USEPA”) has designated the Company as a potentially responsible party (“PRP”) for remediation of three sites where the Company had involvement.sites. These sites include:are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be material to the Company’s financial position due to Modine’sits relatively small portion of contributed materials. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company has recorded environmental investigation and remediation accruals for groundwater contamination at its manufacturing facility in its wholly-owned subsidiary in Brazil (“Modine Brazil”) and subsurface contamination at its former manufacturing facility in the Netherlands along withand groundwater contamination at its manufacturing facility in Brazil. During fiscal 2016, the Company recorded charges totaling $1.6 million, within cost of sales, to establish an environmental accrual for investigative work related to a previously-owned manufacturing facility in the United States. In addition, the Company has recorded accruals for other lesser environmental matters at certain facilities located in the United States. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $3.8$5.1 million and $5.1$3.8 million at March 31, 20152016 and 2014,2015, respectively. As additional information becomes available, the Company will re-assess any potentialthe liability related to these matters and revise the estimated accrual, if necessary. Based on currently available information, the Company believes the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages. During fiscal 2011, one of the adjacent businesses to the Company’s facility in Brazil filed suit against the Company’s subsidiary in Brazil (“Modine Brazil,Brazil”), seeking remediation and certain other damages as a result of the contamination allegedly attributable to the Company’sits operations. The Company is defending this suit and believes that the ultimate outcome of this matter will not be material.
Brazil antitrust investigation: During the fourth quarter of fiscal 2015, Brazil’s Administrative Council for Economic Defense (CADE) provided formal notice to Modine Brazil of an administrative investigation regarding alleged violations of Brazil’s antitrust regulations by Modine Brazil and certain of its employees during a period of time at least seven years ago. Duringprior to the fourth quarternotice. As of fiscalMarch 31, 2016 and March 31, 2015, the Company recorded a charge ofaccrued $2.8 million and $3.2 million (BRL10.0 million) within SG&A expenses,(BRL 10.0 million at each date), respectively, representing the estimated amount that may be incurred in connection with the management and resolution of this matter. Due to the ongoing nature of the investigation,this matter, the Company cannot provide assurance of theits ultimate resolution of this matter at this time.
Other litigation: In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits or proceedings are not expected to have a material adverse effect on the Company’s consolidated financial statements. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 20: Note 20: | Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | Foreign Currency Translation | | | Cash Flow Hedges | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | - | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | - | | | | (45.2 | ) | | | (113.2 | ) | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | - | | | | 5.4 | | | | 5.4 | | Amortization of unrecognized prior service credit (a) | | | - | | | | - | | | | (0.1 | ) | | | (0.1 | ) | Income taxes | | | - | | | | - | | | | 13.2 | | | | 13.2 | | Total other comprehensive loss | | | (68.0 | ) | | | - | | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | - | | | $ | (157.9 | ) | | $ | (198.6 | ) |
| | Foreign Currency Translation | | Defined Benefit Plans | | Total | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | 4.7 | | | | (16.6 | ) | | | (11.9 | ) | Reclassifications: | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 48.3 | | | | 48.3 | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.2 | ) | | | (0.2 | ) | Income taxes | | | - | | | | (11.8 | ) | | | (11.8 | ) | Total other comprehensive loss | | | 4.7 | | | | 19.7 | | | | 24.4 | | | | | | | | | | | | | | | Balance, March 31, 2016 | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) |
| | Foreign Currency Translation | | | Cash Flow Hedges | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2013 | | $ | 17.8 | | | $ | (1.1 | ) | | $ | (145.1 | ) | | $ | (128.4 | ) | | | | | | | | | | | | | | | | | | Other comprehensive income before reclassifications | | | 9.5 | | | | - | | | | 18.7 | | | | 28.2 | | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | - | | | | 6.2 | | | | 6.2 | | Amortization of unrecognized prior service credit (a) | | | - | | | | - | | | | (1.2 | ) | | | (1.2 | ) | Commodity derivatives (b) | | | - | | | | 0.5 | | | | - | | | | 0.5 | | Income taxes | | | - | | | | 0.6 | | | | (9.8 | ) | | | (9.2 | ) | Total other comprehensive income | | | 9.5 | | | | 1.1 | | | | 13.9 | | | | 24.5 | | | | | | | | | | | | | | | | | | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | - | | | $ | (131.2 | ) | | $ | (103.9 | ) |
| | Foreign Currency Translation | | Defined Benefit Plans | | Total | Balance, March 31, 2014 | | $ | 27.3 | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | (45.2 | ) | | | (113.2 | ) | Reclassifications: | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | 5.4 | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.1 | ) | | | (0.1 | ) | Income taxes | | | - | | | | 13.2 | | | | 13.2 | | Total other comprehensive loss | | | (68.0 | ) | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) |
| (a) | Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 17 for additional information about the Company’s pension plans. |
| (b) | Reclassifications for commodity derivatives are included in cost of sales. |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 21: Note 21: | Segment and Geographic Information |
The Company’s product lines consist of heat-transfer components and systems. The Company serves the vehicular, industrial, and building heating, ventilating and air conditioning markets. During fiscal 2015,2016, the Company changedcombined its North America and South America segments into the name of its Commercial ProductsAmericas segment to Building HVAC in orderstreamline operations, gain synergies and improve its cost structure. As a result, the Company recast the prior-period segment financial information to better reflect the nature of the segment’s product lines. There were no changesconform to the operations or reportedcurrent-period presentation. There was no impact to the Company’s consolidated financial results of the segmentstatements as a result. Throughout fiscal 2015,2016, the Company’s fivefour operating segments were as follows:
North America:Americas:
Comprised of vehicular and industrial original equipment products in North America and South America, as well as aftermarket products in South America.
Europe: Comprised of vehicular and industrial original equipment products in Europe.
South America:
Comprised of vehicular and industrial original equipment products and aftermarket products in South America.
Asia: Comprised of vehicular and industrial original equipment products in Asia.
Building HVAC: Comprised of building heating, ventilating and air conditioning products throughout the world.
Each operating segment is managed by a vice president or managing director and has separate financial results reviewed by the Company’s chief operating decision maker. These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
Effective April 1, 2015, the Company combined its North America and South America segment operations, with the objective of streamlining its operations to gain synergies and improve its cost structure. Beginning for fiscal 2016, the Company will report financial results for the new Americas operating segment, which will include both North America and South America.
The following is a summary of net sales, gross profit, and operating income by segment:
| | Years ended March 31, | | Net sales: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 573.5 | | | $ | 568.7 | | | $ | 564.5 | | Europe | | | 578.2 | | | | 584.4 | | | | 498.0 | | South America | | | 93.9 | | | | 122.7 | | | | 133.8 | | Asia | | | 81.2 | | | | 71.5 | | | | 59.5 | | Building HVAC | | | 186.3 | | | | 146.5 | | | | 139.3 | | Segment total | | | 1,513.1 | | | | 1,493.8 | | | | 1,395.1 | | Corporate and eliminations | | | (16.7 | ) | | | (16.2 | ) | | | (19.1 | ) | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | Net sales: | | 2016 | | 2015 | | 2014 | Americas | | $ | 585.5 | | | $ | 666.9 | | | $ | 688.3 | | Europe | | | 524.1 | | | | 578.2 | | | | 584.4 | | Asia | | | 79.0 | | | | 81.2 | | | | 71.5 | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | Segment total | | | 1,370.0 | | | | 1,512.6 | | | | 1,490.7 | | Corporate and eliminations | | | (17.5 | ) | | | (16.2 | ) | | | (13.1 | ) | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Gross profit: | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | North America | | $ | 97.0 | | | | 16.9 | % | | $ | 93.5 | | | | 16.4 | % | | $ | 81.4 | | | | 14.4 | % | Europe | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | | | 61.0 | | | | 12.3 | % | South America | | | 12.1 | | | | 12.8 | % | | | 20.8 | | | | 16.9 | % | | | 22.5 | | | | 16.8 | % | Asia | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | | | 1.7 | | | | 2.8 | % | Building HVAC | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | | | 40.8 | | | | 29.3 | % | Segment total | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | | | 207.4 | | | | 14.9 | % | Corporate and eliminations | | | 1.3 | | | | - | | | | 0.8 | | | | - | | | | 1.2 | | | | - | | Gross profit | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % | | $ | 208.6 | | | | 15.2 | % |
67
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Gross profit: | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Americas | | $ | 100.1 | | | | 17.1 | % | | $ | 109.1 | | | | 16.3 | % | | $ | 114.3 | | | | 16.6 | % | Europe | | | 68.1 | | | | 13.0 | % | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | Asia | | | 12.2 | | | | 15.5 | % | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | Building HVAC | | | 54.2 | | | | 29.9 | % | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | Segment total | | | 234.6 | | | | 17.1 | % | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | Corporate and eliminations (a) | | | (11.1 | ) | | | - | | | | 1.3 | | | | - | | | | 0.8 | | | | - | | Gross profit | | $ | 223.5 | | | | 16.5 | % | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | Years ended March 31, | Operating income: | | 2016 | | 2015 | | 2014 | Americas | | $ | 36.2 | | | $ | 33.4 | | | $ | 49.6 | | Europe | | | 13.3 | | | | 25.7 | | | | 9.6 | | Asia | | | 0.8 | | | | 0.3 | | | | (3.3 | ) | Building HVAC | | | 13.9 | | | | 19.1 | | | | 9.4 | | Segment total | | | 64.2 | | | | 78.5 | | | | 65.3 | | Corporate and eliminations (a) | | | (71.7 | ) | | | (25.8 | ) | | | (28.1 | ) | Operating (loss) income | | $ | (7.5 | ) | | $ | 52.7 | | | $ | 37.2 | |
(In millions, except per share amounts)
| | Years ended March 31, | | Operating income: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 45.9 | | | $ | 42.1 | | | $ | 39.2 | | Europe | | | 25.7 | | | | 9.6 | | | | (25.4 | ) | South America | | | (12.3 | ) | | | 7.5 | | | | 11.2 | | Asia | | | 0.3 | | | | (3.3 | ) | | | (8.8 | ) | Building HVAC | | | 19.1 | | | | 9.4 | | | | 10.0 | | Segment total | | | 78.7 | | | | 65.3 | | | | 26.2 | | Corporate and eliminations | | | (26.0 | ) | | | (28.1 | ) | | | (26.8 | ) | Operating income (loss) | | $ | 52.7 | | | $ | 37.2 | | | $ | (0.6 | ) |
| (a) | During fiscal 2016, the Company recorded pension settlement losses of $42.1 million at Corporate, within SG&A expenses ($33.3 million) and cost of sales ($8.8 million). See Note 17 for additional information. |
Inter-segment sales are accounted for based on an established markup over production costs. Net sales for corporate and eliminations primarily represent the elimination of inter-segment sales. The operating loss for corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and also includes a portion of central servicesother costs that are either not directly attributable to an operating segment.segment or not considered when management evaluates segment performance. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of total assets by segment:
| | March 31, | | | | 2015 | | | 2014 | | North America | | $ | 231.8 | | | $ | 218.1 | | Europe | | | 283.1 | | | | 367.9 | | South America | | | 46.5 | | | | 80.1 | | Asia | | | 92.4 | | | | 92.8 | | Building HVAC | | | 131.4 | | | | 132.7 | | Corporate and eliminations | | | 146.4 | | | | 140.7 | | Total assets | | $ | 931.6 | | | $ | 1,032.3 | |
| | March 31, | | | | 2016 | | | 2015 | | Americas | | $ | 267.2 | | | $ | 277.7 | | Europe | | | 301.9 | | | | 282.7 | | Asia | | | 104.0 | | | | 92.2 | | Building HVAC (a) | | | 99.0 | | | | 131.3 | | Corporate and eliminations | | | 148.8 | | | | 147.0 | | Total assets | | $ | 920.9 | | | $ | 930.9 | |
| (a) | As of March 31, 2015, total assets within the Building HVAC segment included $48.0 million of insurance-related assets for the rebuild of the facility damaged by the Airedale fire. See Note 2 for additional information. |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | Capital expenditures: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 25.9 | | | $ | 18.9 | | | $ | 19.0 | | Europe | | | 21.5 | | | | 22.9 | | | | 16.5 | | South America | | | 4.3 | | | | 5.7 | | | | 3.4 | | Asia | | | 3.8 | | | | 4.6 | | | | 7.8 | | Building HVAC | | | 2.8 | | | | 1.0 | | | | 3.1 | | Total capital expenditures | | $ | 58.3 | | | $ | 53.1 | | | $ | 49.8 | |
| | Years ended March 31, | | Capital expenditures: | | 2016 | | | 2015 | | | 2014 | | Americas | | $ | 26.7 | | | $ | 30.2 | | | $ | 24.6 | | Europe | | | 24.8 | | | | 21.5 | | | | 22.9 | | Asia | | | 6.2 | | | | 3.8 | | | | 4.6 | | Building HVAC | | | 5.1 | | | | 2.8 | | | | 1.0 | | Total capital expenditures | | $ | 62.8 | | | $ | 58.3 | | | $ | 53.1 | |
| | Years ended March 31, | | Depreciation and amortization expense: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 18.1 | | | $ | 19.3 | | | $ | 20.1 | | Europe | | | 19.8 | | | | 26.6 | | | | 23.4 | | South America | | | 3.2 | | | | 3.3 | | | | 3.7 | | Asia | | | 7.2 | | | | 6.7 | | | | 6.4 | | Building HVAC | | | 3.3 | | | | 2.2 | | | | 2.2 | | Total depreciation and amortization expense | | $ | 51.6 | | | $ | 58.1 | | | $ | 55.8 | |
| | Years ended March 31, | | Depreciation and amortization expense: | | 2016 | | | 2015 | | | 2014 | | Americas | | $ | 22.1 | | | $ | 21.3 | | | $ | 22.6 | | Europe | | | 18.0 | | | | 19.8 | | | | 26.6 | | Asia | | | 6.5 | | | | 7.2 | | | | 6.7 | | Building HVAC | | | 3.6 | | | | 3.3 | | | | 2.2 | | Total depreciation and amortization expense | | $ | 50.2 | | | $ | 51.6 | | | $ | 58.1 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a summary of net sales by geographical area, based upon the location of the selling unit:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | United States | | $ | 669.3 | | | $ | 645.7 | | | $ | 637.4 | | Germany | | | 193.8 | | | | 229.5 | | | | 214.8 | | Hungary | | | 161.0 | | | | 150.3 | | | | 117.6 | | Austria | | | 118.7 | | | | 109.8 | | | | 97.7 | | Brazil | | | 93.2 | | | | 122.0 | | | | 128.8 | | Other | | | 260.4 | | | | 220.3 | | | | 179.7 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | United States | | $ | 627.6 | | | $ | 669.3 | | | $ | 645.7 | | Germany | | | 155.3 | | | | 193.8 | | | | 229.5 | | Hungary | | | 145.9 | | | | 161.0 | | | | 150.3 | | Austria | | | 113.1 | | | | 118.7 | | | | 109.8 | | Other | | | 310.6 | | | | 353.6 | | | | 342.3 | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | | 2015 | | | 2014 | | United States | | $ | 105.0 | | | $ | 100.7 | | Germany | | | 66.0 | | | | 81.8 | | Other European countries | | | 79.9 | | | | 100.0 | | China | | | 36.3 | | | | 38.9 | | Other | | | 34.9 | | | | 38.2 | | Total property, plant and equipment | | $ | 322.1 | | | $ | 359.6 | |
| | March 31, | | | | 2016 | | | 2015 | | United States | | $ | 92.5 | | | $ | 92.7 | | Austria | | | 44.2 | | | | 41.5 | | China | | | 33.6 | | | | 31.8 | | Germany | | | 32.1 | | | | 47.2 | | Hungary | | | 31.4 | | | | 28.9 | | Other | | | 104.8 | | | | 80.0 | | Total property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
The following is a summary of net sales by product type:end market:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Modules/assemblies | | $ | 367.5 | | | $ | 379.9 | | | $ | 358.5 | | Oil coolers | | | 233.0 | | | | 215.4 | | | | 194.1 | | HVAC equipment | | | 199.6 | | | | 159.5 | | | | 151.8 | | EGR coolers | | | 183.5 | | | | 172.5 | | | | 136.1 | | Charge air coolers | | | 148.9 | | | | 157.0 | | | | 161.8 | | Condensers | | | 140.0 | | | | 129.2 | | | | 128.8 | | Radiators | | | 124.8 | | | | 129.0 | | | | 134.4 | | Other | | | 99.1 | | | | 135.1 | | | | 110.5 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Commercial vehicle | | $ | 459.8 | | | $ | 512.5 | | | $ | 477.0 | | Automotive | | | 396.8 | | | | 401.8 | | | | 395.6 | | Off-highway | | | 206.2 | | | | 274.6 | | | | 320.8 | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | Other | | | 108.3 | | | | 121.2 | | | | 137.7 | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
6967
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) Note 22: Note 22: | Quarterly Financial Data (Unaudited) |
Quarterly financial data is summarized below for the years ended March 31, 20152016 and 2014:2015:
| | Fiscal 2015 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2015 | | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | Earnings (loss) from continuing operations (a) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | Net earnings (loss) attributable to Modine (a) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| | Fiscal 2016 quarters ended | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2016 | | | | | | | | | | | | | | | | | Net sales | | $ | 346.1 | | | $ | 334.0 | | | $ | 328.7 | | | $ | 343.7 | | | $ | 1,352.5 | | Gross profit | | | 57.0 | | | | 45.7 | | | | 58.6 | | | | 62.2 | | | | 223.5 | | Earnings (loss) from continuing operations (a) | | | 5.5 | | | | (22.5 | ) | | | 8.2 | | | | 7.8 | | | | (1.0 | ) | Net earnings (loss) attributable to Modine (a) | | | 5.1 | | | | (22.5 | ) | | | 8.2 | | | | 7.6 | | | | (1.6 | ) | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.11 | | | $ | (0.47 | ) | | $ | 0.17 | | | $ | 0.16 | | | $ | (0.03 | ) | Diluted | | | 0.11 | | | | (0.47 | ) | | | 0.17 | | | | 0.16 | | | | (0.03 | ) |
| | Fiscal 2014 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2014 | | | | | | | | | | | | | | | | | | Net sales | | $ | 375.8 | | | $ | 364.2 | | | $ | 347.0 | | | $ | 390.6 | | | $ | 1,477.6 | | Gross profit | | | 61.9 | | | | 57.2 | | | | 56.8 | | | | 62.3 | | | | 238.2 | | Earnings (loss) from continuing operations (a) (b) | | | 10.6 | | | | 5.0 | | | | (3.4 | ) | | | 119.7 | | | | 131.9 | | Net earnings (loss) attributable to Modine (a) (b) | | | 10.0 | | | | 4.6 | | | | (3.6 | ) | | | 119.4 | | | | 130.4 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.21 | | | $ | 0.10 | | | $ | (0.08 | ) | | $ | 2.51 | | | $ | 2.75 | | Diluted | | | 0.21 | | | | 0.10 | | | | (0.08 | ) | | | 2.49 | | | | 2.72 | |
| | Fiscal 2015 quarters ended | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2015 | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | Earnings (loss) from continuing operations (b) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | Net earnings (loss) attributable to Modine (b) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| (a) | The quarterly financial data presented above includesDuring fiscal 2016, restructuring expenses totaled $2.6 million, $1.0 million, $1.6 million, and $11.4 million for the quarters ended June 30, 2015, September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 6). During the fourth quarter of fiscal 2016, the Company recorded a $9.9 million asset impairment chargescharge related to restructuring actionsa manufacturing facility in Europe, North America,Germany (see Note 6). During fiscal 2016, non-cash pension settlement losses totaled $39.2 million, $1.1 million, and South America segments. $1.8 million for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 17). During the fourth quarter of fiscal 2016, the Company recorded a $9.5 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire (see Note 2). Also during the fourth quarter of fiscal 2016, the Company reversed a deferred tax asset valuation allowance, and, as a result, recorded an income tax benefit of $3.0 million (see Note 8). |
| (b) | During fiscal 2015, restructuring expenses totaled $0.8 million, $1.0 million, $1.9 million, and $1.0 million for the quarters ended June 30, 2014, September 30, 2014, December 31, 2014, and March 31, 2015, respectively.respectively (see Note 6). During the third quarter of fiscal 2015, the Company sold a wind tunnel within the Europe segment and recognized a gain of $3.2 million.million (see Note 6). During the fourth quarter of fiscal 2015, the Company recorded a $7.8 million goodwill impairment charge related to its South America segment. Also during the fourth quarter of fiscal 2015, the Company recorded(see Note 14) and a $3.2 million charge in its South America segment associated with a legal matter in Brazil. During fiscal 2014, restructuring expenses totaled $0.5 million, $0.6 million, $9.4 million, and $5.6 million for the quarters ended June 30, 2013, September 30, 2013, December 31, 2013, and March 31, 2014, respectively. The Company recorded impairment charges of $2.0 million and $1.2 million during the quarters ended December 31, 2013 and March 31, 2014, respectively. See Notes 6, 14, and 19 for additional information. |
| (b) | The quarter ended March 31, 2014 was benefited by the reversal of U.S. income tax valuation allowances totaling $119.2 million. SeeBrazil (see Note 8 for additional information.19). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Modine Manufacturing Company:
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1), present fairly, in all material respects, the financial position of Modine Manufacturing Company and its subsidiaries at March 31, 20152016 and 2014,2015, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 20152016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2015,2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in fiscal 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP Milwaukee, Wisconsin May 29, 201526, 2016 ITEM 9.
| | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not applicable.
ITEM 9A.
| | CONTROLS AND PROCEDURES. |
Conclusion Regarding Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company's President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded the design and operation of the Company's disclosure controls and procedures were effective as of March 31, 2015.2016.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, and effected by the Company's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2015.2016. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based on this assessment, management concluded that, as of March 31, 2015,2016, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20152016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the fourth quarter of fiscal 20152016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
| | OTHER INFORMATION. |
None. PART III
ITEM 10.10 . | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors. The Company incorporates by reference the information appearing in the Company's Proxy Statement for the 20152016 Annual Meeting of Shareholders to be held on July 23, 201521, 2016 (the “2015“2016 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Executive Officers of the Registrant" in this Form 10-K.
Compliance with Section 16(a) of the Exchange Act. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Code of Ethics. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Ethics.” The Company's Code of Ethics (labeled as the Code of Ethics and Business Conduct) is included on its website, www.modine.com (About Modine link).
Board Committee Charters. The Board of Directors has approved charters for its Audit Committee, Officer Nomination and Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee. These charters are included on the Company’s website, www.modine.com (Investors link).
Audit Committee Financial Expert. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Committees of the Board of Directors – Audit Committee.”
Audit Committee Disclosure. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the captions “Committees of the Board of Directors – Audit Committee” and “Board Meetings and Committees.”
Guidelines on Corporate Governance. The Board of Directors has adopted Guidelines on Corporate Governance. The Company’s Guidelines on Corporate Governance are included on its website, www.modine.com (Investors link).
Security Holder Recommendation of Board Nominees. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
ITEM 11.
| | EXECUTIVE COMPENSATION. |
The information appearing in the 20152016 Annual Meeting Proxy Statement under the captions “Compensation Discussion and Analysis,” “Compensation of Directors,” “Committees of the Board of Directors – Officer Nomination and Compensation Committee: Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” is incorporated herein by reference.
ITEM 12.
| | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The Company incorporates by reference the information relating to stock ownership under the caption “Security Ownership of Certain Beneficial Owners and Management,” and under the caption “Equity Compensation Plan Information,” in the 20152016 Annual Meeting Proxy Statement.
ITEM 13.
| | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The Company incorporates by reference the information contained in the 20152016 Annual Meeting Proxy Statement under the captions “Certain Relationships and Related Transactions” and “Director Independence.”
ITEM 14.
| | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The Company incorporates by reference the information contained in the 20152016 Annual Meeting Proxy Statement under the caption “Independent Auditors’ Fees for Fiscal 20152016 and 2014.2015.” PART IV
ITEM 15.
| | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) (a) | Documents Filed. The following documents are filed as part of this Report: |
| Page in Form 10-K | | | 1. The consolidated financial statements of Modine Manufacturing Company and its subsidiaries filed under Item 8: | | | | Consolidated Statements of Operations for the years ended March 31, 2016, 2015 2014 and 20132014 | 3938 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2016, 2015 2014 and 20132014 | 4039 | Consolidated Balance Sheets at March 31, 20152016 and 20142015 | 4140 | Consolidated Statements of Cash Flows for the years ended March 31, 2016, 2015 2014 and 20132014 | 4241 | Consolidated Statements of Shareholders' Equity for the years ended March 31, 2016, 2015 2014 and 20132014 | 4342 | Notes to Consolidated Financial Statements | 44-7043-68 | Report of Independent Registered Public Accounting Firm | 7169 | | | 2. Financial Statement Schedules.Schedules | | | | The following financial statement schedule should be read in conjunction with the consolidated financial statements set forth in Item 8: | | Schedule II -- Valuation and Qualifying Accounts | 7674 | | | Schedules other than those listed above are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements and the notes thereto. | | | | 3. Exhibits and Exhibit Index. | 77-7975-77 | | | See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number. | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 29, 201526, 2016 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. Burke | | | | Thomas A. Burke, President | | | | and Chief Executive Officer | | | | (Principal Executive Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. Burke | | Thomas A. Burke | May 29, 2015 | President, Chief Executive Officer and Director | | (Principal Executive Officer) | May 26, 2016 | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 29, 2015 | Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | May 26, 2016 | | | /s/ Marsha C. Williams | | Marsha C. Williams Director | May 29, 2015 | Director | 26, 2016 | | | /s/ David J. Anderson | | David J. Anderson Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Charles P. Cooley | | Charles P. Cooley Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Suresh V. Garimella | | Suresh V. Garimella Director | May 29, 2015 | Director | 26, 2016 |
/s/ Larry O. Moore | | Larry O. Moore Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Christopher W. Patterson | | Christopher W. Patterson Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Christine Y. Yan | | Christine Y. Yan Director | May 29, 2015 | Director | 26, 2016 | | | /s/ David G. Bills | | David G. Bills Director | May 29, 2015 | Director | 26, 2016 |
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES (A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | | | | Additions | | | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Deductions | | | Balance at End of Period | | | | | | | | | | | | | | | | | | 2015: Allowance for Doubtful Accounts | | $ | 1.1 | | | $ | 0.4 | | | $ | (0.2 | )(b) | | $ | (0.3 | )(a) | | $ | 1.0 | | Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | )(b) | | $ | - | | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | | | | 2014: Allowance for Doubtful Accounts | | $ | 0.8 | | | $ | 0.6 | | | $ | - | (b) | | $ | (0.3 | )(a) | | $ | 1.1 | | Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | (b) | | $ | - | | | $ | 61.2 | | | | | | | | | | | | | | | | | | | | | | | 2013: Allowance for Doubtful Accounts | | $ | 0.8 | | | $ | 0.5 | | | $ | (0.1 | )(b) | | $ | (0.4 | )(a) | | $ | 0.8 | | Valuation Allowance for Deferred Tax Assets | | $ | 146.8 | | | $ | 7.7 | | | $ | 18.3 | (b) | | $ | - | | | $ | 172.8 | |
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | 2016: Valuation Allowance for Deferred Tax Assets | | $ | 48.0 | | | $ | 1.5 | | | $ | 1.3 | | (a) | | $ | 50.8 | | | | | | | | | | | | | | | | | | | | 2015: Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | ) | (a) | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | 2014: Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | | (a) | | $ | 61.2 | |
Notes: | (a) | Bad debts charged off during the year
|
| (b) | TranslationForeign currency translation and other adjustments |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 20152016 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By Referenced To | | Filed Herewith | | | | | | | | 3.1 | | Amended and Restated Articles of Incorporation, as amended. | | Exhibit 4.2 to Registrant’s Registration Statement on Form S-3 (333-161030) dated August 4, 2009 | | | | | | | | | | 3.2 | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated February 10, 2015 | | | | | | | | | | 4.1 | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 ("2003 10-K") | | | | | | | | | | 4.2 | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto. | | | | | | | | | | 4.3** | | Note Purchase and Private Shelf Agreement (the “Original Note Purchase Agreement”) dated as of August 12, 2010 among the Registrant and the Series A Purchasers named therein of $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020 and $25,000,000 Private Shelf Facility and each Prudential Affiliate (as defined therein) that may become bound by certain provisions thereof. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 12, 2010 8-K (“August 12, 2010 8-K”) | | | | | | | | | | 4.4** | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to August 12, 2010 8-K | | | | | | | | | | 4.5** | | First Amendment to Note Purchase and Private Shelf Agreement and Waiver dated as of March 15, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated March 15, 2012 8-K | | | | | | | | | | 4.6** | | Second Amendment to Note Purchase and Private Shelf Agreement dated as of April 20, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 20, 2012 8-K | | | | | | | | | | 4.7** | | Third Amendment to Note Purchase and Private Shelf Agreement dated as of August 6, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 6, 2012 8-K | | |
4.8** | | Second Amended and Restated Credit Agreement dated as of August 30, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, LC Issuer, Swing Line Lender and as a Lender, and U.S. Bank, N.A. and Wells Fargo Bank, N.A. as Syndication Agents and as Lenders, BMO Harris Bank N.A., as Documentation Agent and as Lender and Associated Bank, N.A., Comerica Bank and Sovereign Bank as Lenders.Lenders | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated August 30, 2013 (“August 30, 2013 8-K”) | | | | | | | | | | 4.9** | | Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Note Purchase Amendment”) dated as of August 30, 2013, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) pursuant to which the Company and the Note Holders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to August 30, 2013 8-K | | | | | | | | | | 4.10** | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to August 30, 2013 8-K | | | | | | | | | | 4.11 | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | 10.1* | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | 10.2* | | Employment Agreement between the Registrant and Thomas A. Burke dated as of June 15, 2007. | | Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 15, 2007 | | | | | | | | | | 10.3* | | Form of Amendment No. 1 to Employment Agreement entered into as of July 1, 2008 with Thomas A. Burke. | | Exhibit 10.1 to Registrant’sRegistrant���s Current Report on Form 8-K dated July 1, 2008 | | | | | | | | | | 10.4* | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke. | | Exhibit 10(f) to Registrant’s Form 10-K for the year ended March 31, 2004 | | | | | | | | | | 10.5* | | Employment Agreement, dated July 1, 2014, between Modine Holding GmbH and Holger Schwab, effective as of July 1, 2015. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2014 | | | | | | | | | | 10.6* | | 2000 Stock Incentive Plan for Non-Employee Directors (Amended and Restated as of March 16, 2005). | | Appendix A to Registrant’s Proxy Statement for the 2005 Annual Meeting dated June 15, 2005 | | | | | | | | | | 10.7* | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant's Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | 10.8*10.7* | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | 10.9*10.8* | | 2007 Incentive Compensation Plan. | | Appendix A to the Registrant's Proxy Statement dated June 18, 2007 | | |
10.10* | | | | | | | 10.9* | | 2008 Incentive Compensation Plan (Amended and Restated effective May 7, 2014). | | Exhibit 10.1 to Registrant's Current Report on Form 8-K dated July 17, 2014 | | |
| 10.10* | | | | | | 10.11* | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Thomas A. Burke. | | Exhibit 10.17 to Registrant's Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | 10.12*10.11* | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | | | | | | | | | 10.12* | | Form of Fiscal 20152016 Modine Performance Stock Award Agreement (Executive Council members). | | | Exhibit 10.1 to Form 10-Q for the first quarter ended June 30, 2015 ("June 30, 2015 10-Q") | X | | | | | | | | | 10.13* | | Form of Fiscal 20152016 Modine Incentive Stock Options Award Agreement (Executive Council members). | | | Exhibit 10.2 to June 30, 2015 10-Q | X | | | | | | | | | 10.14* | | Form of Fiscal 20152016 Modine Restricted Stock Award Agreement (Executive Council members). | | | Exhibit 10.3 to June 30, 2015 10-Q | X | | | | | | | | | 10.15* | | Form of Fiscal 20152016 Modine Non-Qualified Stock Option Award Agreement. | Agreement | | Exhibit 10.4 to June 30, 2015 10-Q | X | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of independent registered public accounting firm. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Instance Document | | | | X | | | | | | | | 101.SCH | | XBRL Taxonomy Extension Schema | | | | X | | | | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | X | | | | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | X | | | | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | X | | | | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | X |
*Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K.
**Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
s | | | % of sales | | | Year Ended March 31, 2016 Compared with Year Ended March 31, 2015: Fiscal 2016 net sales decreased $143 million, or 10 percent, from the prior year, primarily due to lower sales in our Americas and Europe segments. Sales volume increases in our Europe segment were more than offset by a $76 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2016 sales were negatively affected by a $110 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar. Gross profit decreased $23 million to $224 million in fiscal 2016, yet gross margin of 16.5 percent was consistent with the prior year. The decrease in gross profit was primarily due to a $14 million unfavorable impact of foreign currency exchange rate changes, $9 million of pension settlement losses, and lower sales volume in the Americas segment, partially offset by lower material costs, improved production efficiencies, and cost-savings initiatives. Fiscal 2016 SG&A expenses increased $21 million from the prior year. The increase was primarily due to $33 million of pension settlement losses and the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in the prior year, partially offset by ongoing cost-control initiatives and a $10 million favorable impact of foreign currency exchange rate changes. Restructuring expenses increased $12 million in fiscal 2016 compared with the prior year, primarily due to severance expenses in the Europe and Americas segments and equipment transfer costs related to plant consolidation activities in the Americas segment. In fiscal 2016, we recorded a $10 million impairment charge to write down the carrying value of a manufacturing facility in Germany to fair value. In fiscal 2015, we recorded a goodwill impairment charge of $8 million in Brazil and recognized a gain of $3 million from the sale of a wind tunnel in Germany. The operating loss of $8 million in fiscal 2016 represents a $61 million decline from $53 million of operating income in the prior year. This decline was primarily due to $42 million of pension settlement losses, lower gross profit, higher restructuring expenses, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by ongoing cost-control initiatives. Other income during fiscal 2016 includes a $10 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire in fiscal 2014. Our benefit for income taxes was $9 million in fiscal 2016, compared with a provision for income taxes of $19 million in fiscal 2015. This $28 million change was primarily due to $16 million of income tax benefits related to pension settlement losses in the current year, a decrease in pre-tax operating earnings, and a $3 million income tax benefit related to the reversal of a deferred tax asset valuation allowance in the current year.
Year Ended March 31, 2015 Compared with Year Ended March 31, 2014:
Fiscal 2015 net sales increased $18 million, or 1 percent, from fiscal 2014,the prior year, primarily due to sales increases in our Building HVAC Asia, and North AmericaAsia segments, partially offset by lower sales in our South AmericaAmericas segment, as economic conditions in Brazil were weak, and in our Europe segment, where sales increases were more than offset by a $35 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2015 sales were negatively affected by a $43 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar during the year.dollar.
Gross profit increased $9 million to $247 million in fiscal 2015 and gross margin increased 40 basis points to 16.5 percent, primarily due to sales volume improvements and lower warranty costs.
Fiscal 2015 SG&A expenses in fiscal 2015 increased $2 million to $184 million compared withfrom the prior year, primarily due to increased engineering and development costs and SG&A expenses at our Barkell business, which we acquired in the fourth quarter of fiscal 2014, partially offset by $5 million of recoveries from business interruption insurance during fiscal 2015 related to the Airedale fire.
Restructuring expenses decreased $11 million in fiscal 2015 compared with the prior year, primarily due to lower restructuring costs in Germany,our Europe segment, partially offset by higher severance-related costsseverance expenses in South America.our Americas segment.
DuringIn fiscal 2015, we sold a wind tunnel in Germany that we no longer considered to be a core asset, and recognized a gain of $3 million. In addition, we recorded a goodwill impairment charge of $8 million in our South America segment during fiscal 2015.related to Brazil. In fiscal 2014, we recorded $3 million of impairment charges, primarily related to restructuring actions in our Europe segment.
Operating income of $53 million in fiscal 2015 increased $16 million compared with fiscal 2014.the prior year. This improvement was primarily due to higher gross profit on increased sales volume, lower restructuring expenses, and the gain on the sale of the wind tunnel, partially offset by higher impairment charges and slightly higher SG&A expenses.
Our provision for income taxes was $19 million in fiscal 2015, compared with a benefit from income taxes of $108 million in fiscal 2014. The provision for taxes in the U.S. totaled $9 million in fiscal 2015, compared with a significant benefit for taxes in fiscal 2014, which resulted primarily from the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $10 million and $11 million in fiscal 2015 and 2014, respectively. Earnings from discontinued operations of $1 million in fiscal 2015 related to a gain associated with the final collection of proceeds from the fiscal 2009 sale of our Electronic Cooling business.
Year Ended March 31, 2014 Compared with Year Ended March 31, 2013:
In fiscal 2014, net sales increased $102 million, or 7 percent, from fiscal 2013, primarily due to an $86 million sales increase in our Europe segment, driven by sales volume improvements within the commercial vehicle and automotive markets. In addition, sales in our Asia, Building HVAC and North America segments increased year over year. Our South America segment sales decreased, however, primarily due to unfavorable foreign currency exchange rate changes.
Gross profit increased $29 million to $238 million in fiscal 2014 from the prior year and gross margin increased 90 basis points to 16.1 percent, primarily due to higher sales volume and favorable material costs.
SG&A expenses in fiscal 2014 increased $16 million to $182 million from fiscal 2013, primarily due to higher compensation-related expenses, the reversal of a $2 million acquisition-related liability that reduced SG&A expenses in the prior year, and $1 million of costs directly related to the Airedale fire, partially offset by lower professional service expenses.
Restructuring expenses were $16 million and $17 million in fiscal 2014 and 2013, respectively, primarily due to employee severance costs related to restructuring activities within our Europe segment. In addition, we recorded impairment charges during fiscal 2014 and 2013 of $3 million and $26 million, respectively, primarily related to our restructuring actions in the Europe segment.
Operating income of $37 million during fiscal 2014 represented a $38 million improvement compared with fiscal 2013. This improvement was primarily due to higher gross profit on increased sales volume and favorable material costs and lower impairment charges, partially offset by higher SG&A expenses.
Our benefit for income taxes was $108 million in fiscal 2014 compared with a provision for income taxes of $10 million in fiscal 2013. The large benefit for income taxes in fiscal 2014 was primarily due to the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $11 million and $10 million in fiscal 2014 and 2013, respectively.
Segment Results of Operations
During fiscal 2015, we changed the name of our Commercial Products segment to Building HVAC in order to better reflect the nature of the segment’s product lines. There were no changes to the operations or reported financial results of the segment as a result.
Effective April 1, 2015,2016, we combined our North America and South America segments into the Americas segment to streamline operations, with the objective of streamlining our operations to gain synergies and improve our cost structure. Beginning forAs a result, we recast the prior-period segment financial information to conform to the current-period presentation. There was no impact to our consolidated financial statements as a result.
Americas | | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 586 | | | | 100.0 | % | | $ | 667 | | | | 100.0 | % | | $ | 688 | | | | 100.0 | % | Cost of sales | | | 486 | | | | 82.9 | % | | | 558 | | | | 83.7 | % | | | 574 | | | | 83.4 | % | Gross profit | | | 100 | | | | 17.1 | % | | | 109 | | | | 16.3 | % | | | 114 | | | | 16.6 | % | Selling, general and administrative expenses | | | 55 | | | | 9.4 | % | | | 65 | | | | 9.7 | % | | | 62 | | | | 9.0 | % | Restructuring expenses | | | 9 | | | | 1.5 | % | | | 3 | | | | 0.4 | % | | | 1 | | | | 0.2 | % | Impairment charges | | | - | | | | - | | | | 8 | | | | 1.2 | % | | | 1 | | | | 0.2 | % | Operating income | | $ | 36 | | | | 6.2 | % | | $ | 33 | | | | 5.0 | % | | $ | 50 | | | | 7.2 | % |
Americas net sales decreased $81 million, or 12 percent, in fiscal 2016 we will report financial results forcompared with the new Americas operating segment, which will includeprior year. Sales were lower in both North America and South America. North America | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 574 | | | | 100.0 | % | | $ | 569 | | | | 100.0 | % | | $ | 565 | | | | 100.0 | % | Cost of sales | | | 477 | | | | 83.1 | % | | | 475 | | | | 83.6 | % | | | 484 | | | | 85.6 | % | Gross profit | | | 97 | | | | 16.9 | % | | | 94 | | | | 16.4 | % | | | 81 | | | | 14.4 | % | Selling, general and administrative expenses | | | 50 | | | | 8.7 | % | | | 50 | | | | 8.6 | % | | | 40 | | | | 7.2 | % | Restructuring expenses | | | 1 | | | | 0.2 | % | | | 1 | | | | 0.2 | % | | | - | | | | - | | Impairment charges | | | - | | | | - | | | | 1 | | | | 0.2 | % | | | 2 | | | | 0.3 | % | Operating income | | $ | 46 | | | | 8.0 | % | | $ | 42 | | | | 7.4 | % | | $ | 39 | | | | 6.9 | % |
foreign currency exchange rate changes. Sales in North America net sales increased $5decreased $43 million, or 1 percent, from fiscal 2014 to fiscal 2015, and increased $4 million, or 1 percent, from fiscal 2013 to fiscal 2014. The fiscal 2015 sales increase was primarily due to lower sales volume to off-highway and commercial vehicle customers, partially offset by higher sales volume to automotive customers. Sales volume to all markets in Brazil also declined during fiscal 2016, as economic conditions in Brazil remained weak. Sales decreased $21 million, or 3 percent, in fiscal 2015 compared with fiscal 2014, primarily due to lower sales in Brazil and a $9 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in North America, where higher sales volume to commercial vehicle customers were partially offset by decreased sales volume to off-highway customers as economic conditions in that market remained relatively weak. The fiscal 2014 sales increase, compared with fiscal 2013, was primarily due to higher sales volume to automotive and commercial vehicle customers, partially offset by decreasedlower sales volume to off-highway customers.
Gross profit decreased $9 million, yet gross margin increased 5080 basis points to 16.917.1 percent in fiscal 2016. The decrease in gross profit was primarily due to lower sales volume, a $3 million unfavorable impact of foreign currency exchange rate changes, and $2 million of environmental charges for investigative work related to a previously-owned manufacturing facility, partially offset by lower material costs, cost savings from the McHenry, Illinois manufacturing facility closure, and improved production efficiencies. Gross profit decreased $5 million and gross margin decreased 30 basis points to 16.3 percent in fiscal 2015 compared with fiscal 2014, primarily due to lower sales volume in Brazil, partially offset by lower warranty costs and sales volume improvements partially offset by unfavorable sales mix. The gross margin increasein North America.
Fiscal 2016 SG&A expenses decreased $10 million from fiscal 2013 to fiscal 2014 wasthe prior year, primarily due to lower material costs.
ongoing cost-control initiatives, the absence of a $3 million charge for a legal matter in Brazil in the prior year, and a $3 million favorable impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $50increased $3 million during fiscal 2015 were consistent with fiscal 2014. The $10 million increase in SG&A expenses in fiscal 2014 wasfrom the prior year, primarily due to higher compensation-related expenses and increased engineering and development costs.the $3 million charge for the legal matter in fiscal 2015.
During fiscal 2014, we approved a plan to close our McHenry, Illinois manufacturing facility and are currently in the process of transferring the facility’s production to other North America segment manufacturing facilities, which we expect to complete within the first six months of fiscal 2016. We recorded $1 million of restructuring expenses during fiscal 2015, primarily related to equipment transfer costs incurred to relocate McHenry’s product lines to other manufacturing facilities. In fiscal 2014, as a result of the planned closure,2016, we recorded $1$9 million of restructuring expenses, primarily related to severance expenses associated with a voluntary retirement program in the U.S., and the planned closure of our Washington, Iowa manufacturing facility, which we expect to complete during fiscal 2017, and equipment transfer costs and $1related to plant consolidation activities in North America. In fiscal 2015, we recorded $3 million of assetrestructuring expenses, primarily related to severance expenses in Brazil, to better align our cost structure with the market conditions in Brazil, and equipment transfer costs related to the closure of our McHenry, Illinois manufacturing facility, which we completed during fiscal 2016. We also recorded an $8 million goodwill impairment charges.charge during fiscal 2015, primarily due to a decline in the financial outlook for Brazil.
Operating income in fiscal 2015 of $46 million increased $4 million from $42$36 million in fiscal 2014, primarily due to2016 increased gross profit. Fiscal 2014 operating income improved $3 million compared with fiscal 2013,the prior year, primarily due to increased gross profit,lower SG&A expenses and the absence of the goodwill impairment charge in the prior year, partially offset by lower gross profit and higher restructuring expenses. Operating income of $33 million in fiscal 2015 decreased $17 million compared with the prior year, primarily due to the goodwill impairment charge, lower gross profit, and higher SG&A and restructuring expenses. 2627
Europe | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % | | $ | 498 | | | | 100.0 | % | Cost of sales | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % | | | 437 | | | | 87.7 | % | Gross profit | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % | | | 61 | | | | 12.3 | % | Selling, general and administrative expenses | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % | | | 45 | | | | 9.1 | % | Restructuring expenses | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % | | | 17 | | | | 3.4 | % | Impairment charges | | | - | | | | - | | | | 2 | | | | 0.3 | % | | | 24 | | | | 4.8 | % | Gain on sale of wind tunnel | | | (3 | ) | | | -0.6 | % | | | - | | | | - | | | | - | | | | - | | Operating income (loss) | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % | | $ | (25 | ) | | | -5.0 | % |
Europe
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 524 | | | | 100.0 | % | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % | Cost of sales | | | 456 | | | | 87.0 | % | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % | Gross profit | | | 68 | | | | 13.0 | % | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % | Selling, general and administrative expenses | | | 39 | | | | 7.4 | % | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % | Restructuring expenses | | | 6 | | | | 1.2 | % | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % | Impairment charges | | | 10 | | | | 1.9 | % | | | - | | | | - | | | | 2 | | | | 0.3 | % | Gain on sale of wind tunnel | | | - | | | | - | | | | (3 | ) | | | -0.6 | % | | | - | | | | - | | Operating income | | $ | 13 | | | | 2.5 | % | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % |
Europe net sales decreased $54 million, or 9 percent, in fiscal 2016 compared with the prior year, primarily due to a $76 million unfavorable impact of foreign currency exchange rate changes and lower sales volume to off-highway customers, partially offset by increased sales volume to commercial vehicle and automotive customers. Sales decreased $6 million, or 1 percent, fromin fiscal 2014 to2015 compared with fiscal 2015,2014, primarily due to a $35 million unfavorable impact of foreign currency exchange rate changes and lower tooling sales, partially offset by increased sales volume to commercial vehicle and automotive customers.
Gross profit decreased $1 million, yet gross margin increased 110 basis points to 13.0 percent in fiscal 2016. The $86 million, or 17 percent,gross margin increase in sales from fiscal 2013 to fiscal 2014 was primarily due to increasedhigher sales volume to commercial vehicle customers, higher tooling sales, and a $23lower material costs. In addition, gross profit was negatively impacted by $9 million favorable impact offrom foreign currency exchange rate changes.
Gross In fiscal 2015, gross margin decreased 20 basis points to 11.9 percent incompared with fiscal 2015,2014, primarily due to unfavorable sales mix, production inefficiencies caused by increased volume at certain manufacturing facilities and plant consolidation activities, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by the absence of $4 million of accelerated depreciation recorded in the prior yearfiscal 2014 for production equipment that is no longer used and lower warranty costs. Gross profit increased $10
Fiscal 2016 SG&A expenses decreased $5 million while gross margin declined 20 basis points to 12.1 percent in fiscal 2014 compared with fiscal 2013. This decrease in gross margin wasfrom the prior year, primarily due to a $5$6 million favorable customer pricing settlement in the prior year, $4 millionimpact of accelerated depreciation in fiscal 2014, and higher warranty costs, partially offset by higher sales volume, favorable sales mix, and lower material costs.
foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $44 million were consistent with the prior year, as higher engineering and development costs were offset by a favorable impact of foreign currency exchange rate changes. SG&A expenses decreased $1
In fiscal 2016, we recorded $6 million from fiscal 2013 to fiscal 2014, primarily due to the favorable impact of restructuring actionsexpenses, primarily related to severance expenses. In addition, we recorded a $10 million asset impairment charge. These restructuring expenses and lower engineering and development costs, partially offset by higher compensation-related expenses.
Duringimpairment charge primarily related to a manufacturing facility in Germany, which was generating pre-tax losses, resulting in management deciding to exit a certain product line in the future. In fiscal 2015, we recorded $2 million of restructuring expenses, primarily due to plant consolidation activities, as we substantially completed the combination of two manufacturing facilities in Germany into one, more competitive manufacturing operation. Also during fiscal 2015,and we sold a wind tunnel that we no longer considered to be a core asset for cash proceeds of $6 million, which resulted in a gain of $3 million. DuringIn fiscal 2014, and fiscal 2013, we recorded $15 million and $17 million, respectively, of restructuring expenses, primarily related to employee severance costs. Alsoexpenses, and $2 million of asset impairment charges.
Operating income of $13 million in fiscal 20142016 decreased $13 million compared with the prior year, primarily due to an increase in restructuring expenses and 2013 we recorded asset impairment charges totaling $2and the absence of a $3 million and $24 million, respectively, primarily related to several facilities that we have sold or expect to sell.
gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&A expenses. Operating income of $26 million in fiscal 2015 increased $16 million compared with fiscal 2014,the prior year, primarily due to a reduction in restructuring expenses and impairment charges and the gain from selling the wind tunnel. Operating income of $10 million in fiscal 2014 improved $35 million compared with fiscal 2013, primarily due to lower asset impairment charges and increased sales volume, which drove higher gross profit. 2728
South America | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 94 | | | | 100.0 | % | | $ | 123 | | | | 100.0 | % | | $ | 134 | | | | 100.0 | % | Cost of sales | | | 82 | | | | 87.2 | % | | | 102 | | | | 83.1 | % | | | 111 | | | | 83.2 | % | Gross profit | | | 12 | | | | 12.8 | % | | | 21 | | | | 16.9 | % | | | 23 | | | | 16.8 | % | Selling, general and administrative expenses | | | 14 | | | | 15.9 | % | | | 13 | | | | 10.8 | % | | | 12 | | | | 8.4 | % | Restructuring expenses | | | 2 | | | | 1.6 | % | | | - | | | | - | | | | - | | | | - | | Impairment charges | | | 8 | | | | 8.4 | % | | | - | | | | - | | | | - | | | | - | | Operating (loss) income | | $ | (12 | ) | | | -13.1 | % | | $ | 8 | | | | 6.1 | % | | $ | 11 | | | | 8.4 | % |
South America | | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 79 | | | | 100.0 | % | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % | Cost of sales | | | 67 | | | | 84.5 | % | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % | Gross profit | | | 12 | | | | 15.5 | % | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % | Selling, general and administrative expenses | | | 11 | | | | 14.5 | % | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % | Operating income (loss) | | $ | 1 | | | | 1.0 | % | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % |
Asia net sales decreased $29$2 million, or 243 percent, in fiscal 20152016 compared with fiscal 2014,the prior year, primarily due to lower sales volume to commercial vehicle, off-highway customers in China and automotive customers, as economic conditions in Brazil were generally weak in fiscal 2015,Korea and a $9 million unfavorable impact of foreign currency exchange rate changes, primarily due to the strengthening of the U.S. dollar versus the Brazilian real. Sales decreased $11 million, or 8 percent, in fiscal 2014 compared with fiscal 2013, primarily due to a $14$4 million unfavorable impact of foreign currency exchange rate changes, partially offset by increasedhigher sales volume to commercial vehicle customers.
Gross profit decreased $9 million and gross margin decreased to 12.8 percentautomotive customers in fiscal 2015 compared with the prior year, primarily due to lower sales volume. Gross profit decreased $2 million from fiscal 2013 to fiscal 2014, primarily due to a $2 million unfavorable impact of foreign currency exchange rate changes.
SG&A expenses in fiscal 2015 increased $1 million compared with fiscal 2014, primarily due to a $3 million charge for a legal matter in Brazil (see Note 19 of the Notes to Consolidated Financial Statements for more information), partially offset by the favorable impact of cost control measures and a $1 million favorable impact of foreign currency exchange rate changes. SG&A expenses increased $1 million from fiscal 2013 to fiscal 2014, primarily due to the reversal of a $2 million acquisition-related liability in fiscal 2013 and higher compensation-related expenses in fiscal 2014, partially offset by a $2 million favorable impact of foreign currency exchange rate changes.
During fiscal 2015, we recorded $2 million of restructuring expenses for employee severance-related costs to reduce headcount and better align our cost structure with the market conditions in Brazil. We also recorded an $8 million goodwill impairment charge during fiscal 2015, which was primarily caused by a decline in the financial outlook for the South America segment.
The $12 million operating loss in fiscal 2015 represented a $20 million decline compared with the prior year and was primarily due to lower gross profit on lower sales volume and the goodwill impairment charge. Operating income decreased $3 million from fiscal 2013 to fiscal 2014, primarily due to lower gross profit on lower sales volumeChina and increased SG&A expenses.
Asia | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % | | $ | 60 | | | | 100.0 | % | Cost of sales | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % | | | 58 | | | | 97.2 | % | Gross profit | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % | | | 2 | | | | 2.8 | % | Selling, general and administrative expenses | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % | | | 11 | | | | 17.6 | % | Operating income (loss) | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % | | $ | (9 | ) | | | -14.8 | % |
Asia netoverall sales in India. Sales increased $9 million, or 13 percent, in fiscal 2015 compared with fiscal 2014, primarily due to new automotive program launches in China and higherincreased overall sales across all markets in India, partially offset by lower sales volume within theto off-highway markets in China and Korea. Salescustomers.
Gross margin increased $12 million, or 20130 basis points to 15.5 percent in fiscal 20142016 compared with fiscal 2013,the prior year, primarily due to higherfavorable sales volume in the automotive and off-highway markets. mix. Gross profit increased $3 million and gross margin increased 170 basis points to 14.2 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume. Gross profit increased $7
Fiscal 2016 SG&A expenses decreased $1 million and gross margin increased to 12.5 percent in fiscal 2014 compared with fiscal 2013,from the prior year, primarily due to higher sales volume.
cost-control initiatives, partially offset by acquisition-related costs associated with a joint venture that we formed in fiscal 2016. See Note 3 to the Notes to Consolidated Financial Statements for additional information on this joint venture. Fiscal 2015 SG&A expenses in fiscal 2015 were consistent with the prior year, yet decreased as a percentage of sales. SG&A expenses increased
Operating income of $1 million in fiscal 20142016 increased $1 million compared with fiscal 2013, yet decreased slightly as a percentage of sales.
the prior year, primarily due to lower SG&A expenses. Operating income of less than $1 million in fiscal 2015 represented a $3 million improvement compared with the operating loss in the prior year, and was primarily due to higher gross profit on increased sales volume. The $3 million operating loss in fiscal 2014 represented a $6 million improvement from fiscal 2013, primarily due to higher gross profit.
Building HVAC | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % | | $ | 139 | | | | 100.0 | % | Cost of sales | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % | | | 98 | | | | 70.7 | % | Gross profit | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % | | | 41 | | | | 29.3 | % | Selling, general and administrative expenses | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % | | | 31 | | | | 22.1 | % | Operating income | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % | | $ | 10 | | | | 7.2 | % |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 181 | | | | 100.0 | % | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % | Cost of sales | | | 127 | | | | 70.1 | % | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % | Gross profit | | | 54 | | | | 29.9 | % | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % | Selling, general and administrative expenses | | | 39 | | | | 21.6 | % | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % | Restructuring expenses | | | 1 | | | | 0.6 | % | | | - | | | | - | | | | - | | | | - | | Operating income | | $ | 14 | | | | 7.7 | % | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % |
Building HVAC net sales decreased $5 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to a $6 million unfavorable impact of foreign currency exchange rate changes and lower sales at our businesses in the U.K., as unfavorable currency conditions resulted in increased competition from other mainland European suppliers, partially offset by increased ventilation product sales in North America. Sales increased $40 million, or 27 percent, in fiscal 2015 compared with the prior year,fiscal 2014, primarily due to a $23 million increase in sales at our Airedale businessbusinesses in the U.K. and increased heating product sales in North America, as we experienced anothera strong heating season in fiscal 2015. The sales increase at Airedalein the U.K. was primarily due to a $13 million increase in sales at Barkell, which we acquired in the fourth quarter of fiscal 2014, and the continuing recovery from the Airedale fire, which caused a temporary halt in production during the prior fiscal year. In
Gross profit decreased $2 million in fiscal 2014, despite2016 compared with the negative impact of the Airedale fire, sales increased $7 million, or 5 percent,prior year, primarily due to increased heating product salesa $1 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased 10 basis points to 29.9 percent in North America.
fiscal 2016 compared with the prior year. Gross profit increased $13 million and gross margin improved 40 basis points to 30.0 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume. Fiscal 2016 SG&A expenses increased $2 million from the prior year, primarily due to higher sales volume. Gross profit increased $2the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in fiscal 2014 compared with the prior year, primarily due topartially offset by lower engineering and development costs and a $1 million favorable sales mix.
impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses increased $3 million or 9 percent, in fiscal 2015 compared withfrom the prior year, primarily due to additional costs from Barkell and increased expenses associated with higher sales levels, partially offset by $5 million ofthe recoveries from business interruption insurance for the Airedale fire. SG&A expenses increased $3 million, or 10 percent, in
In fiscal 2014 compared with fiscal 2013, primarily due to higher compensation-related expenses,2016, we recorded $1 million of non-recoverable costs directlyrestructuring expenses, primarily related to the Airedale fire, and increased acquisition-related expenses for Barkell.severance expenses.
Operating income of $19$14 million increased $10in fiscal 2016 decreased $5 million compared with the prior year, primarily due to lower gross profit and higher SG&A expenses. Operating income of $19 million in fiscal 2015 increased $10 million compared with the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses. Operating income decreased $1 million from fiscal 2013 to fiscal 2014, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at March 31, 20152016 of $71$69 million, and an available borrowing capacity of $216$207 million under lines of credit provided by banks in the United States and abroad. Due to the timing of insurance proceeds related to the Airedale fire, our cash and cash equivalents at March 31, 2015 include approximately $13 million of advances from our insurance provider that will be spent for recovery and reconstruction costs. Given our extensive international operations, significant amounts$49 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds would be subject to U.S. tax if repatriated. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.
During fiscal 2016, our Board of Directors approved a $50 million share repurchase program, which expires in November 2016. We repurchased $7 million of shares under this program in fiscal 2016. Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 2016 was $72 million, an increase of $8 million from $64 million in the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital, including lower incentive compensation payments during fiscal 2016 and the timing of value-added tax payments. Net cash provided by operating activities in fiscal 2015 was $64 million, a decrease of $41 million from $105 million in the prior year. This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, including higher incentive compensation payments during fiscal 2015 related to fiscal 2014 performance, and the timing of customer-owned tooling reimbursements. Net cash provided by operating activities in fiscal 2014 was $105 million, an increase of $56 million from $49 million in the prior year. The increase in operating cash flows resulted from an increase in gross profit, partially offset by higher SG&A expenses, and improvements in working capital as compared with fiscal 2013.
We expect to be reimbursed by our insurance provider for substantially all losses and expenses directly related to the fire at our Airedale manufacturing facility, including substantially all costs to reconstruct the facility. The expected timing of cash recoveries from our insurance provider is such that we do not expect the fire will have a significant adverse effect on our liquidity.
Capital Expenditures
Capital expenditures of $58$63 million during fiscal 20152016 increased $5 million compared with fiscal 2014.2015. In fiscal 2015,2016, our capital spending primarily occurred in the North AmericaAmericas and Europe segments, which totaled $26$27 million and $22$25 million, respectively. Capital projects in fiscal 20152016 included tooling and equipment purchases in conjunction with program launchesnew and renewal programs with customers, as well as a building expansion at our Nuevo Laredo manufacturing facility in the North America segment.customers.
At March 31, 2015,2016, our capital expenditure commitments totaled $16$21 million. Significant commitments included tooling and equipment expenditures for new and renewal programs with customers in North Americathe Americas and Europe.Europe segments.
Dividends
We did not pay dividends in fiscal 2016, 2015, 2014, or 2013.2014. We currently do not intend to pay dividends in fiscal 2016.2017.
Debt
Our total debt outstanding decreased $16increased $14 million to $149$163 million at March 31, 20152016, compared with the prior year, as our debt repayments exceeded our borrowings.primarily due to borrowings in China and Mexico for capital investments. See Note 16 of the Notes to Consolidated Financial Statements for furtheradditional information regarding our debt agreements.
Our debt agreements require us to maintain compliance with various covenants. Under our primary debt agreements in the U.S., we are subject to a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a certain portion of our cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
Our leverage ratio for the four fiscal quarters ended March 31, 20152016 was 1.2, which was below the maximum permitted ratio of 3.25. Our interest expense coverage ratio for the four fiscal quarters ended March 31, 20152016 was 10.3,10.5, which exceeded the minimum requirement of 3.0. We were in compliance with our debt covenants as of March 31, 20152016 and expect to remain in compliance during fiscal 20162017 and beyond. In the event of an acquisition, our leverage ratio may be temporarily raised for several quarters, per the terms of our debt agreements.
Pension Obligations
Our net pension liabilities totaled $111 million for plans in the U.S. and at certain foreign subsidiaries as of March 31, 2015. We contributed $7 million to these plans in fiscal 2015 and expect to contribute approximately $8 million to our pension plans during fiscal 2016. In May 2015, we approved a program to offer a voluntary, lump-sum pension payout to certain eligible former employees who participate in our U.S. pension plan. If the lump-sum payout is elected by the participant, the payout would effectively settle our pension obligation with that participant, thereby eliminating the risk of future changes in our pension obligation for that participant. As a result of this program, we expect to record a settlement loss of approximately $20-30 million in the second quarter of fiscal 2016, based on estimated participation rates and estimated actuarial assumptions. This settlement loss would represent the accelerated recognition of unamortized actuarial losses associated with our pension liabilities. The lump-sum settlements will be paid from plan assets and will not impact our operating cash flow.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
| | March 31, 2015 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 125.2 | | | $ | 0.2 | | | $ | 24.0 | | | $ | 32.0 | | | $ | 69.0 | | Interest associated with long-term debt | | | 38.8 | | | | 8.5 | | | | 16.1 | | | | 11.9 | | | | 2.3 | | Capital lease obligations | | | 4.9 | | | | 0.3 | | | | 0.6 | | | | 0.6 | | | | 3.4 | | Operating lease obligations | | | 49.9 | | | | 8.2 | | | | 10.0 | | | | 7.8 | | | | 23.9 | | Capital expenditure commitments | | | 15.5 | | | | 13.0 | | | | 2.5 | | | | - | | | | - | | Other long-term obligations | | | 10.9 | | | | 1.6 | | | | 3.2 | | | | 2.6 | | | | 3.5 | | Total contractual obligations | | $ | 245.2 | | | $ | 31.8 | | | $ | 56.4 | | | $ | 54.9 | | | $ | 102.1 | |
| | March 31, 2016 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 125.4 | | | $ | 8.0 | | | $ | 32.2 | | | $ | 85.2 | | | $ | - | | Interest associated with long-term debt | | | 30.3 | | | | 8.5 | | | | 14.1 | | | | 7.7 | | | | - | | Capital lease obligations | | | 8.6 | | | | 0.5 | | | | 0.8 | | | | 0.8 | | | | 6.5 | | Operating lease obligations | | | 53.5 | | | | 8.1 | | | | 10.4 | | | | 8.7 | | | | 26.3 | | Capital expenditure commitments | | | 20.5 | | | | 20.0 | | | | 0.5 | | | | - | | | | - | | Other long-term obligations | | | 3.6 | | | | 1.7 | | | | 1.2 | | | | 0.7 | | | | - | | Total contractual obligations | | $ | 241.9 | | | $ | 46.8 | | | $ | 59.2 | | | $ | 103.1 | | | $ | 32.8 | |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $121$129 million as of March 31, 2015.2016. We are unable to determine the ultimate timing of payments for these liabilities; therefore, we have excluded these amounts from the contractual obligations table above.
We have a contractual commitmentexpect to rebuild the leased Airedale facility, which suffered significant destruction from a firecontribute $8 million to our U.S. pension plans during fiscal 2014. We maintain insurance coverage and believe reimbursement for reconstruction costs is probable. The estimated costs associated with the reconstruction of the Airedale facility of $48 million have been excluded from the contractual obligations table above. See Note 2 of the Notes to Consolidated Financial Statements for further information.2017.
Critical Accounting Policies
The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements. Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements. The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements. In addition, recently issued accounting pronouncements that could significantly impact our financial statements are included in Note 1 of the Notes to Consolidated Financial Statements. Revenue Recognition
We recognize revenue, including agreed-upon commodity price increases or decreases,prices, when the risks and rewards of ownership are transferred to our customers, which generally occurs upon shipment. Revenue is recorded net of applicable provisions for sales rebates, volume incentives, and returns and allowances. At the time of revenue recognition, we also record estimates for bad debt expense and warranty expense. We base these estimates on historical experience, current business trends, and current economic conditions. PriceWe recognize price increases that are agreed upon in advance are recognized as revenue when the products are shipped to our customers. Impairment of Long-Lived Assets
We perform impairment evaluations of long-lived assets, including property, plant and equipment, intangible assets and equity investments, whenever business conditions or events indicate that those assets may be impaired. We consider factors such as operating losses, declining financial outlooks and market conditions, when evaluating the necessity for an impairment analysis. When the estimated futurenet asset values exceed undiscounted cash flows expected to be generated by the assets are less than the carrying value of the long-lived assets, or the decline in value is considered to be “other than temporary,” we write down the assets are written down to fair market value and arecord an impairment charge is recorded to current operations. We estimate fair market value in various ways depending on the nature of the assets under review. Fair value is generally based on appraised value, estimated salvage value, or selling prices under negotiation, or estimated cancellation charges, as applicable. The most significant long-lived assets that we have evaluated for impairment areindicators were property, plant and equipment, which totaled $322$339 million at March 31, 2015.2016. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment. We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility. This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy. When such indicators are present, we perform an impairment evaluation by comparing the estimated future undiscounted cash flows expectedevaluation. During fiscal 2016, we recorded a $10 million impairment charge related to be generated in thea manufacturing facility in Germany. See Note 6 of the Notes to the net book value of the long-lived assets within that facility. We estimate the undiscounted cash flows based on the expected future cash flows to be generated by the manufacturing facility over its remaining useful life. When the estimated future undiscounted cash flows are less than the net book value of the long-lived assets, we write such assets down to fair value, which we generally estimate based upon appraisals or estimated salvage value.Consolidated Financial Statements for additional information.
Impairment of Goodwill
We perform goodwill impairment tests annually, as of March 31, unless business events or other conditions exist that require a more frequent evaluation. At March 31, 2016, our goodwill totaled $16 million, primarily related to our Building HVAC segment. We consider factors such as operating losses, declining financial and market outlooks and market capitalization when evaluating the necessity for an interim impairment analysis. Goodwill is tested for impairment at a reporting unit level, which we have determined to be at the operating segment level. Our first step in this test is to compare the fair value of the reporting unit to its carrying value. We determine the fair value of a reporting unit based upon the present value of estimated future cash flows. If the fair value of the reporting unit exceeds the carrying value of the unit’s net assets, goodwill of that reporting unit is not impaired and further testing is not required. If the carrying value of the reporting unit’s net assets exceeds the fair value of the unit, then we perform the second step of the impairment test to determine the implied fair value of the reporting unit’s goodwill and any impairment charge. In estimating the implied fair value of goodwill for a reporting unit, we assign the fair value to the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of the reporting unit goodwill over its implied fair value is recorded as an impairment charge. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rate, business trends and market conditions. TheWe determine the expected future revenue growth rates and operating profit margins are determined after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for country-specific risks where appropriate.
We conducted our annual assessment for goodwill impairment during the fourth quarter of fiscal 20152016 by applying a fair value-based test. The South Americatest and determined the fair value of our reporting units carrying valuesubstantially exceeded its fair value; therefore, we performed the second step of the goodwill impairment test, as described above. As a result, we determined our South America reporting unit’s goodwill was fully impaired and recorded an $8 million goodwill impairment charge. As fiscal 2015 progressed, we experienced relatively weak financial results for our South America reporting unit. During the fourth quarter of fiscal 2015, our outlook for the markets served by our South America reporting unit, primarily in Brazil, shifted from a view that the markets may begin to recover to a view that the market downturn may be more prolonged. The economic weakness in Brazil has negatively affected our expected future cash flows for the South America segment. Our impairment analysis assumed a discount rate of 22 percent, which corresponds to our cost of capital adjusted for a higher expectation of future inflation and uncertainty in the Brazilian economy, and future revenue growth and operating profit margins based upon our current outlook for the South America reporting unit.their respective book values.
Warranty Costs
We estimate costs related to product warranties and accrue for such costs at the time of the sale, within cost of sales. We estimate warranty costs based upon the best information available, which includes statistical and analytical analysis of both historical and current claim data. We monitor and adjust original estimatesour warranty accruals, which totaled $8 million at March 31, 2016, if we expect futureit is probable that expected claims will differ from the initialprevious estimates. 32
Tooling Costs
We capitalize production tooling costs incurred in the manufacture of products for customer programs as a component of property, plant and equipment, net of any customer reimbursements, when we retain title to the tooling. We depreciate these capitalized costs in cost of sales over the estimated life of the asset, which is generally three years. For customer-owned tooling costs incurred, we record a receivable when the customer has guaranteed reimbursement to us. Reimbursement typically occurs prior to the start of production, but this can vary by program and by customer. We do not have any significant customer arrangements under which customer-owned tooling costs were not accompanied by guaranteed reimbursements.
Assets Held for Sale
Assets are considered to be held for sale when management approves and commits to a formal plan to actively market the asset for sale, at a sales price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, the sale of the asset is expected to be completed within one year, and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, we record the carrying value of the asset at the lower of its carrying value or estimated fair value, less costs to sell. We cease recording depreciation expense at the time of designation as held for sale.
Pension Obligations
TheOur calculation of the expense and liabilities of our pension plans is dependent upon various assumptions. At March 31, 2016, our pension liabilities totaled $120 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality rate tables. We basedbase our selection of assumptions on historical trends and economic and market conditions at the time of valuation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods. These differences impact future pension expenses. Currently, participants in our domestic pension plans are not accruing benefits based on their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.
In late calendar 2014, the U.S. Society of Actuaries issued updated mortality and mortality improvement tables, which effectively increased life expectancies. We considered the new mortality tables, along with characteristics of our plan-specific populations, in developing our best estimate of the expected mortality of plan participants for our March 31, 2015 measurement date. The impact of the new mortality assumptions resulted in an increase of approximately $9 million in both our U.S. pension plans’ actuarial loss and pension benefit obligation.
For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our benefit plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in fiscal 20152016 and 20142015 was 8.0 percent. For fiscal 2016,2017, we have also assumed a rate of 8.0 percent. The impact of a 25 basis point decrease in the expected rate of return on assets would result in an increase of $0.5$0.4 million in fiscal 20162017 pension expense.
The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds reset annually on the measurement date of March 31. For fiscal 2015,2016, we used a discount rate of 4.04.1 percent, compared with 4.74.0 percent in fiscal 2014.2015. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows from the affected plans. See Note 17 of the Notes to Consolidated Financial Statements for additional information. A change in the assumed discount rate of 25 basis points would impact our fiscal 20162017 pension expense by less than $0.1 million.
Income Taxes 33
Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. We adjust these amounts to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in certain jurisdictions will not be realized. This determination involves significant judgment. In performing this assessment on a jurisdiction-by-jurisdiction basis, we consider historical and projected financial results along with other pertinent information.
We have not recorded a provision for U.S. income taxes on undistributed earnings from our non-U.S. subsidiaries that we have determined to be permanently reinvested in our foreign operations. If management’s intentions or U.S. tax law changes in the future, there could be a significant negative impact on our provision for income taxes.
See Note 8 of the Notes to Consolidated Financial Statements for additional information regarding income taxes. Other Loss Reserves
We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, self-insurance reserves, uncollectible accounts receivable, recoverability of deferred income taxes, regulatory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. We estimate these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Note 19 of the Notes to Consolidated Financial Statements for additional detailsinformation regarding contingencies and litigation. Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of this report. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| · | Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs, inflation, changes in interest rates, recession and recovery therefrom, restrictions associated with importing and exporting and foreign ownership, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China Western Europe, Russia and North America, and the continued deterioration in and weak forecasts for the Brazilian economy; |
| · | The impact of potential increases in commodity prices, particularlyincluding our ability to successfully manage our exposure to the changingand/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel); |
| · | Our ability to successfully manage commodity risk and/or pass increasing commodity prices on to customers, as well as the inherent lag in timing of such pass-through pricing;arrangements; and |
| · | The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental emissions standards.and/or energy standards and objectives. |
Operational Risks:
| · | The overall health and increasing price-down focus of our original equipment manufacturer customers in light of some remaining economic and market-specific challenges, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; |
| · | Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction pressures from customers, particularly in the face of macro-economic instability; |
| · | Our ability to effectively and efficiently complete the restructuring activities in our North America, Europe, and South America segments and realize expected commercial and operational efficiencies and associated cost reductionssavings and increased competitivenessother benefits associated with our Strengthen, Diversify and profitability as a result;Grow transformational strategy; |
| · | Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims; |
| · | Our ability to obtain and retain profitable business in our Asia segment, and, in particular, in China; |
| · | Unanticipated delays or modifications initiated by major customers with respect to product launches, product applications or requirements; |
| · | Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, particularly in light of some continuing economic challenges in areas of the world in which we and our suppliers operate; |
| · | Complexities and inefficiencies introduced by the September 2013 fire at our Airedale facility in the U.K., including ourOur ability to continue to meet customer demands at temporary locations, to timelyeffectively and efficiently complete restructuring activities in our Europe segment and realize expected cost reductions and effectively deploy insurance proceeds to replace machineryincreased competitiveness and equipment and rebuild the facility with minimal financial impact from the business interruption, and to complete and relocate to the new facility in an efficient, timely manner;profitability as a result; |
| · | Our ability to complete the transition of our Washington, Iowa production to other facilities efficiently and effectively; |
| · | Costs and other effects of the remediation of environmental contamination; |
| · | Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith; |
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; and |
| · | Costs and other effects of unanticipated litigation or claims, and the increasingconstant pressures associated with rising healthcare and insurance costs. |
Strategic Risks:
| · | Our ability to identify and implementexecute appropriate growthopportunities to enable us to achieve our Strengthen, Diversify and diversification strategies thatGrow transformational strategy in order to position us for long-term success. |
Financial Risks:
| · | Our ability to fund our global liquidity requirements efficiently, particularly those in our Asia business segment, and meet our long-term commitments in the event of any unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
| · | The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, British pound, and Indian rupee relative to the U.S. dollar; and |
| · | Our ability to realize the benefits of tax assets in various jurisdictions in which we operate. |
In addition to the risks set forth above, we are subject to other risks and uncertainties as identified in our public filings with the U.S. Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.
ITEM 7A.7A . | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
In the normal course of business, we are subject to market exposure from changes in foreign exchange rates, interest rates, commodity prices, credit risk and economic conditions. Foreign Currency Risk
We are subject to the risk of changes in foreign currency exchange rates due to our operations in foreign countries. We have manufacturing facilities in Brazil, China, India, Mexico, South Africa, and throughout Europe. We also have joint ventures in China, Japan and South Korea. We sell and distribute products throughout the world and also purchase raw materials from foreign countries. As a result, our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which we do business. We attempt to mitigate foreign currency risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the functional currency of the subsidiary engaging in the transaction. Our financial results are principally exposed to changes in exchange rates between the U.S. dollar and the European currencies, primarily the euro, and changes between the U.S. dollar and the Brazilian real.real, and between the euro and the British pound. In fiscal 2016, 2015, 2014, and 2013,2014, more than 50 percent of our sales were generated in countries outside the U.S. A change in foreign exchange rates will positively or negatively affect our sales; however, this impact will be offset, usually to a large degree, with an offsettinga corresponding effect on our expenses. In fiscal 2015,2016, changes in foreign currencies negatively impacted our sales by $43$110 million; however, the impact on our operating income was less than $1only $4 million. Foreign currency exchange risk can be estimated by measuring the impact of a near-term adverse movement of 10 percent in foreign currency exchange rates. If these rates were 10 percent higher or lower during fiscal 2015,2016, there would not have been a material impact on our fiscal 20152016 earnings. We maintain, from time to time, foreign-denominated, long-term debt obligations and long-term intercompany loans that are subject to foreign currency exchange risk. As of March 31, 2015, there were no third-party foreign-denominated, long-term debt obligations or2016, we did not have any long-term intercompany loans for which changes in foreign currency exchange rates would impact our net earnings. From time to time, we enter into currency rate derivative contracts to manage the foreign exchange rate exposure on these types of loans. These derivative instruments are typically not treated as hedges, and accordingly, gains or losses on the derivatives are recorded in other income and expense in the consolidated statements of operations and act to offset any currency movement on the outstanding loans receivable or payable.
Interest Rate Risk
Our interest rate risk policies are designedWe actively seek to reduce the potential volatility of earnings that could arise from changes in interest rates. We generally utilize a mixture of debt maturities and both fixed-rate and floating-rate debt to manage exposure to changes in interest rates. Our domestic revolving credit facility is based on a variable interest rate of London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points, depending on our leverage ratio. We are subject to risk of fluctuations in LIBOR and changes in our leverage ratio, which would affect the variable interest rate on our revolving credit facility and could create variability in interest expense. There were no borrowings outstanding under the revolving credit facility as of March 31, 2015.2016. Based on our outstanding debt with variable interest rates at March 31, 2015,2016, a 100 basis point increase in interest rates would increase our annual interest expense in fiscal 20162017 by less than $1 million.
Commodity Price Risk
We are dependent upon the supply of raw materials and supplies in the production process and, from time to time, enter into firm purchase commitments for aluminum, copper, nickel, and natural gas. We maintain agreements with certain customers to pass through specified raw material price fluctuations in order to mitigate commodity price risk. The majority of these agreements contain provisions in which the pass-through of the price fluctuations can lag behind the actual fluctuations by three months or longer, and typically the arrangements are limited to the underlying material cost based upon the London Metal Exchange.
Credit Risk
Credit risk represents the possibility of loss from a customer's failurecustomer failing to make payment according to contract terms. Our principal credit risk consists of outstanding trade accounts receivable. At March 31, 2015, 472016, 45 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, commercial vehicle, and off-highway markets and are influenced by similar market and general economic factors. In the past, credit losses from our customers have not been significant.
We manage credit risk through a focus on the following:
| · | Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. OurWe consider our holdings in cash and investments were consideredto be stable and secure at March 31, 2015;2016; |
| · | Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer's financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer's financial condition and applicable business news; |
| · | Pension assets – We have retained outside advisors to assist in the management of the assets in our pension plans. In making investment decisions, we utilize an established risk management protocol that focuses on protection of the plan assets against downside risk. We ensure that investments within these plans provide appropriate diversification, the investments are monitored by investment teams, and portfolio managers adhere to the established investment policies. We believe the plan assets are subject to appropriate investment policies and controls; and |
| · | Insurance – We monitor our insurance providers to ensure they have acceptable financial ratings. We have not identified any concerns in this regard based upon our reviews. |
Economic Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate. We sell a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, automotive, off-highway, and building HVAC markets. We operate in diversified markets as a strategy for offsetting the risk associated with a downturn in any of the markets we serve. However, risk associated with market downturns, such as the global downturn experienced in fiscal 2009 and fiscal 2010, is still present.
We monitor economic conditions in the U.S., in our foreign markets and elsewhere. As we expand our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes and the like. We continue to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions.
We pursue new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon our ability to commercialize our investments. Current examples of new and emerging markets for us include those related to waste heat recovery, coils, and the Chinese and Indian markets. Our investment in these areas is subject to the risks associated with business integration, technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
We anticipate that continued recovery from the global recessionwithin some of our geographic and economicend markets, and particularly growth in China may put production pressure on certain suppliers of our raw materials. In particular, there are a limited number of suppliers of aluminum, copper, and steel material. We are exposed to the risk of suppliers of certain raw materials not being able to meet customer demand as they may not increase their output capacity as quickly as customers increase their orders, and of increased prices being charged by raw material suppliers.
In addition, we purchase parts from suppliers that use our tooling to create the parts. In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts. As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require. Even in situations where suppliers are manufacturing parts without the use of our tooling, we face the challenge of obtaining consistently high-quality parts from suppliers that are financially stable. We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate higher-risk supplier situations.
In addition to the above risks on the supply side, we are also exposed to risks associated with demands by our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, but these agreements often contain provisions for future price reductions. In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: We have enteredFrom time to time, we enter into futures contracts from time to time, related to certain forecasted purchases of aluminum and copper. Our strategy wasis to reduce our exposure to changing market prices for future purchases of these commodities. In fiscal 2016, 2015, 2014, and 2013,2014, expenses related to commodity derivative contracts totaled less than $1 million $1 million, and $5 million, respectively.each year. Foreign currency forward contracts: Our foreign exchange risk management strategy uses derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. We have not designated these forward contracts as hedges. Accordingly, we record unrealized gains and losses related to the change in the fair value of the contracts in other income and expense. Gains and losses on these foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
Counterparty risks: We manage counterparty risks by ensuring that counterparties to derivative instruments have credit ratings acceptable to us. At March 31, 2015,2016, all counterparties had a sufficient long-term credit rating. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions, except per share amounts)
| | 2015 | | | 2014 | | | 2013 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | | Cost of sales | | | 1,249.9 | | | | 1,239.4 | | | | 1,167.4 | | Gross profit | | | 246.5 | | | | 238.2 | | | | 208.6 | | Selling, general and administrative expenses | | | 184.5 | | | | 181.7 | | | | 166.3 | | Restructuring expenses | | | 4.7 | | | | 16.1 | | | | 17.0 | | Impairment charges | | | 7.8 | | | | 3.2 | | | | 25.9 | | Gain on sale of wind tunnel | | | (3.2 | ) | | | - | | | | - | | Operating income (loss) | | | 52.7 | | | | 37.2 | | | | (0.6 | ) | Interest expense | | | (11.7 | ) | | | (12.4 | ) | | | (12.6 | ) | Other income (expense) – net | | | 0.2 | | | | (0.8 | ) | | | 0.2 | | Earnings (loss) from continuing operations before income taxes | | | 41.2 | | | | 24.0 | | | | (13.0 | ) | (Provision) benefit for income taxes | | | (19.0 | ) | | | 107.9 | | | | (9.8 | ) | Earnings (loss) from continuing operations | | | 22.2 | | | | 131.9 | | | | (22.8 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) | | | 22.8 | | | | 131.9 | | | | (22.8 | ) | Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Net earnings (loss) attributable to Modine | | $ | 21.8 | | | $ | 130.4 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Earnings (loss) per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.45 | | | $ | 2.75 | | | $ | (0.52 | ) | Diluted | | $ | 0.44 | | | $ | 2.72 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.46 | | | $ | 2.75 | | | $ | (0.52 | ) | Diluted | | $ | 0.45 | | | $ | 2.72 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | | | Basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | Diluted | | | 47.8 | | | | 47.6 | | | | 46.6 | |
| | 2016 | | 2015 | | 2014 | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | | Cost of sales | | | 1,129.0 | | | | 1,249.9 | | | | 1,239.4 | | Gross profit | | | 223.5 | | | | 246.5 | | | | 238.2 | | Selling, general and administrative expenses | | | 204.5 | | | | 184.5 | | | | 181.7 | | Restructuring expenses | | | 16.6 | | | | 4.7 | | | | 16.1 | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | Operating (loss) income | | | (7.5 | ) | | | 52.7 | | | | 37.2 | | Interest expense | | | (11.1 | ) | | | (11.7 | ) | | | (12.4 | ) | Other income (expense) – net | | | 8.7 | | | | 0.2 | | | | (0.8 | ) | (Loss) earnings from continuing operations before income taxes | | | (9.9 | ) | | | 41.2 | | | | 24.0 | | Benefit (provision) for income taxes | | | 8.9 | | | | (19.0 | ) | | | 107.9 | | (Loss) earnings from continuing operations | | | (1.0 | ) | | | 22.2 | | | | 131.9 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings | | | (1.0 | ) | | | 22.8 | | | | 131.9 | | Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Net (loss) earnings attributable to Modine | | $ | (1.6 | ) | | $ | 21.8 | | | $ | 130.4 | | | | | | | | | | | | | | | (Loss) earnings per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | Diluted | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | | | | | | | | | | | | | | Net (loss) earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | Diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | Basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | Diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | 2015 | | | 2014 | | | 2013 | | Net earnings (loss) | | $ | 22.8 | | | $ | 131.9 | | | $ | (22.8 | ) | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | (68.2 | ) | | | 9.7 | | | | (17.1 | ) | Defined benefit plans, net of income taxes of ($13.2), $9.8 and $0 million | | | (26.7 | ) | | | 13.9 | | | | (23.6 | ) | Cash flow hedges, net of income taxes of $0, $0.6 and $0 million | | | - | | | | 1.1 | | | | 2.6 | | Total other comprehensive income (loss) | | | (94.9 | ) | | | 24.7 | | | | (38.1 | ) | | | | | | | | | | | | | | Comprehensive income (loss) | | | (72.1 | ) | | | 156.6 | | | | (60.9 | ) | Comprehensive income attributable to noncontrolling interest | | | (0.8 | ) | | | (1.7 | ) | | | (1.4 | ) | Comprehensive income (loss) attributable to Modine | | $ | (72.9 | ) | | $ | 154.9 | | | $ | (62.3 | ) |
| | 2016 | | 2015 | | 2014 | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | 4.6 | | | | (68.2 | ) | | | 9.7 | | Defined benefit plans, net of income taxes of $11.8, ($13.2) and $9.8 million | | | 19.7 | | | | (26.7 | ) | | | 13.9 | | Cash flow hedges, net of income taxes of $0, $0 and $0.6 million | | | - | | | | - | | | | 1.1 | | Total other comprehensive income (loss) | | | 24.3 | | | | (94.9 | ) | | | 24.7 | | | | | | | | | | | | | | | Comprehensive income (loss) | | | 23.3 | | | | (72.1 | ) | | | 156.6 | | Comprehensive income attributable to noncontrolling interest | | | (0.5 | ) | | | (0.8 | ) | | | (1.7 | ) | Comprehensive income (loss) attributable to Modine | | $ | 22.8 | | | $ | (72.9 | ) | | $ | 154.9 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS March 31, 20152016 and 20142015 (In millions, except per share amounts)
| | 2015 | | | 2014 | | ASSETS | | | | | | | Cash and cash equivalents | | $ | 70.5 | | | $ | 87.2 | | Trade accounts receivable – net | | | 192.9 | | | | 221.1 | | Inventories | | | 107.7 | | | | 116.8 | | Deferred income taxes | | | 13.4 | | | | 13.0 | | Other current assets | | | 79.7 | | | | 60.7 | | Total current assets | | | 464.2 | | | | 498.8 | | Property, plant and equipment – net | | | 322.1 | | | | 359.6 | | Intangible assets – net | | | 9.9 | | | | 12.4 | | Goodwill | | | 16.2 | | | | 28.7 | | Deferred income taxes | | | 102.7 | | | | 98.6 | | Other noncurrent assets | | | 16.5 | | | | 34.2 | | Total assets | | $ | 931.6 | | | $ | 1,032.3 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | Short-term debt | | $ | 18.6 | | | $ | 32.4 | | Long-term debt – current portion | | | 0.5 | | | | 0.8 | | Accounts payable | | | 152.0 | | | | 171.1 | | Accrued compensation and employee benefits | | | 56.7 | | | | 70.8 | | Other current liabilities | | | 83.4 | | | | 82.1 | | Total current liabilities | | | 311.2 | | | | 357.2 | | Long-term debt | | | 129.6 | | | | 131.2 | | Deferred income taxes | | | 3.4 | | | | 7.3 | | Pensions | | | 110.4 | | | | 81.0 | | Other noncurrent liabilities | | | 16.4 | | | | 27.0 | | Total liabilities | | | 571.0 | | | | 603.7 | | Commitments and contingencies (see Note 19) | | | | | | | | | Shareholders' equity: | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 48.6 million and 48.3 million shares | | | 30.4 | | | | 30.2 | | Additional paid-in capital | | | 180.6 | | | | 175.7 | | Retained earnings | | | 359.8 | | | | 338.0 | | Accumulated other comprehensive loss | | | (198.6 | ) | | | (103.9 | ) | Treasury stock, at cost, 0.7 million shares | | | (16.2 | ) | | | (15.2 | ) | Total Modine shareholders' equity | | | 356.0 | | | | 424.8 | | Noncontrolling interest | | | 4.6 | | | | 3.8 | | Total equity | | | 360.6 | | | | 428.6 | | Total liabilities and equity | | $ | 931.6 | | | $ | 1,032.3 | |
| | 2016 | | 2015 | ASSETS | | | | | | | Cash and cash equivalents | | $ | 68.9 | | | $ | 70.5 | | Trade accounts receivable – net | | | 189.1 | | | | 192.9 | | Inventories | | | 111.0 | | | | 107.7 | | Other current assets | | | 43.5 | | | | 79.7 | | Total current assets | | | 412.5 | | | | 450.8 | | Property, plant and equipment – net | | | 338.6 | | | | 322.1 | | Intangible assets – net | | | 8.2 | | | | 9.9 | | Goodwill | | | 15.8 | | | | 16.2 | | Deferred income taxes | | | 123.1 | | | | 115.4 | | Other noncurrent assets | | | 22.7 | | | | 16.5 | | Total assets | | $ | 920.9 | | | $ | 930.9 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | Short-term debt | | $ | 28.6 | | | $ | 18.6 | | Long-term debt – current portion | | | 8.5 | | | | 0.5 | | Accounts payable | | | 142.4 | | | | 152.0 | | Accrued compensation and employee benefits | | | 58.6 | | | | 56.7 | | Other current liabilities | | | 35.5 | | | | 83.0 | | Total current liabilities | | | 273.6 | | | | 310.8 | | Long-term debt | | | 125.5 | | | | 129.6 | | Deferred income taxes | | | 4.2 | | | | 3.1 | | Pensions | | | 118.6 | | | | 110.4 | | Other noncurrent liabilities | | | 16.3 | | | | 16.4 | | Total liabilities | | | 538.2 | | | | 570.3 | | Commitments and contingencies (see Note 19) | | | | | | | | | Shareholders' equity: | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 49.0 million and 48.6 million shares | | | 30.6 | | | | 30.4 | | Additional paid-in capital | | | 185.6 | | | | 180.6 | | Retained earnings | | | 358.2 | | | | 359.8 | | Accumulated other comprehensive loss | | | (174.2 | ) | | | (198.6 | ) | Treasury stock, at cost, 1.6 million and 0.7 million shares | | | (24.0 | ) | | | (16.2 | ) | Total Modine shareholders' equity | | | 376.2 | | | | 356.0 | | Noncontrolling interest | | | 6.5 | | | | 4.6 | | Total equity | | | 382.7 | | | | 360.6 | | Total liabilities and equity | | $ | 920.9 | | | $ | 930.9 | |
The notes to consolidated financial statements are an integral part of these statements. 4140
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | 2015 | | | 2014 | | | 2013 | | Cash flows from operating activities: | | | | | | | | | | Net earnings (loss) | | $ | 22.8 | | | $ | 131.9 | | | $ | (22.8 | ) | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 51.6 | | | | 58.1 | | | | 55.8 | | Insurance proceeds from Airedale fire | | | 12.9 | | | | 16.9 | | | | - | | Pension and postretirement expense | | | 2.3 | | | | 3.2 | | | | 1.9 | | Gain on sale of wind tunnel | | | (3.2 | ) | | | - | | | | - | | Impairment charges | | | 7.8 | | | | 3.2 | | | | 25.9 | | Loss from disposition of property, plant and equipment | | | 1.1 | | | | 2.6 | | | | 2.5 | | Deferred income taxes | | | 5.9 | | | | (116.1 | ) | | | 0.6 | | Stock-based compensation expense | | | 4.0 | | | | 3.6 | | | | 3.1 | | Other – net | | | (0.7 | ) | | | (0.5 | ) | | | 4.1 | | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | Trade accounts receivable | | | (0.1 | ) | | | (18.2 | ) | | | 15.1 | | Inventories | | | (4.2 | ) | | | (0.1 | ) | | | (0.8 | ) | Accounts payable | | | (2.4 | ) | | | 15.2 | | | | (3.2 | ) | Accrued compensation and employee benefits | | | (5.3 | ) | | | 17.5 | | | | 1.9 | | Other assets | | | (24.5 | ) | | | 2.1 | | | | (6.6 | ) | Other liabilities | | | (4.5 | ) | | | (14.9 | ) | | | (28.7 | ) | Net cash provided by operating activities | | | 63.5 | | | | 104.5 | | | | 48.8 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (58.3 | ) | | | (53.1 | ) | | | (49.8 | ) | Insurance proceeds from Airedale fire | | | 12.2 | | | | 20.7 | | | | - | | Costs to replace building and equipment damaged in Airedale fire | | | (16.7 | ) | | | (4.2 | ) | | | - | | Proceeds from dispositions of assets | | | 7.6 | | | | 2.9 | | | | 0.4 | | Purchases of short-term investments | | | (5.2 | ) | | | - | | | | - | | Proceeds from maturities of short-term investments | | | 2.4 | | | | - | | | | - | | Acquisitions – net of cash acquired | | | - | | | | (7.8 | ) | | | (4.9 | ) | Other – net | | | 0.8 | | | | - | | | | (1.6 | ) | Net cash used for investing activities | | | (57.2 | ) | | | (41.5 | ) | | | (55.9 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 36.4 | | | | 152.6 | | | | 166.7 | | Repayments of debt | | | (50.9 | ) | | | (152.4 | ) | | | (167.1 | ) | Financing fees paid | | | (0.1 | ) | | | (0.9 | ) | | | - | | Dividend paid to noncontrolling interest | | | - | | | | (0.5 | ) | | | - | | Other – net | | | - | | | | (0.3 | ) | | | 0.7 | | Net cash (used for) provided by financing activities | | | (14.6 | ) | | | (1.5 | ) | | | 0.3 | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (8.4 | ) | | | 1.9 | | | | (0.8 | ) | Net (decrease) increase in cash and cash equivalents | | | (16.7 | ) | | | 63.4 | | | | (7.6 | ) | Cash and cash equivalents - beginning of year | | | 87.2 | | | | 23.8 | | | | 31.4 | | Cash and cash equivalents - end of year | | $ | 70.5 | | | $ | 87.2 | | | $ | 23.8 | |
| | 2016 | | 2015 | | 2014 | Cash flows from operating activities: | | | | | | | | | | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 50.2 | | | | 51.6 | | | | 58.1 | | Insurance proceeds from Airedale fire | | | 5.9 | | | | 12.9 | | | | 16.9 | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | Pension and postretirement expense | | | 45.1 | | | | 2.3 | | | | 3.2 | | Loss from disposition of property, plant and equipment | | | 0.4 | | | | 1.1 | | | | 2.6 | | Deferred income taxes | | | (18.8 | ) | | | 5.9 | | | | (116.1 | ) | Stock-based compensation expense | | | 4.9 | | | | 4.0 | | | | 3.6 | | Other – net | | | (0.3 | ) | | | (0.7 | ) | | | (0.5 | ) | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | Trade accounts receivable | | | 8.0 | | | | (0.1 | ) | | | (18.2 | ) | Inventories | | | (2.7 | ) | | | (4.2 | ) | | | (0.1 | ) | Accounts payable | | | (9.9 | ) | | | (2.4 | ) | | | 15.2 | | Accrued compensation and employee benefits | | | 0.8 | | | | (5.3 | ) | | | 17.5 | | Other assets | | | (14.5 | ) | | | (24.5 | ) | | | 2.1 | | Other liabilities | | | (5.6 | ) | | | (4.5 | ) | | | (14.9 | ) | Net cash provided by operating activities | | | 72.4 | | | | 63.5 | | | | 104.5 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (62.8 | ) | | | (58.3 | ) | | | (53.1 | ) | Insurance proceeds from Airedale fire | | | 27.4 | | | | 12.2 | | | | 20.7 | | Costs to replace building and equipment damaged in Airedale fire | | | (41.7 | ) | | | (16.7 | ) | | | (4.2 | ) | Acquisitions – net of cash acquired | | | (1.4 | ) | | | - | | | | (7.8 | ) | Proceeds from dispositions of assets | | | 0.4 | | | | 7.6 | | | | 2.9 | | Purchases of short-term investments | | | (2.7 | ) | | | (5.2 | ) | | | - | | Proceeds from maturities of short-term investments | | | 2.1 | | | | 2.4 | | | | - | | Other – net | | | 0.9 | | | | 0.8 | | | | - | | Net cash used for investing activities | | | (77.8 | ) | | | (57.2 | ) | | | (41.5 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 38.0 | | | | 36.4 | | | | 152.6 | | Repayments of debt | | | (27.1 | ) | | | (50.9 | ) | | | (152.4 | ) | Purchases of treasury stock under share repurchase program | | | (6.9 | ) | | | - | | | | - | | Financing fees paid | | | - | | | | (0.1 | ) | | | (0.9 | ) | Dividend paid to noncontrolling interest | | | (0.9 | ) | | | - | | | | (0.5 | ) | Other – net | | | (0.4 | ) | | | - | | | | (0.3 | ) | Net cash provided by (used for) financing activities | | | 2.7 | | | | (14.6 | ) | | | (1.5 | ) | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | 1.1 | | | | (8.4 | ) | | | 1.9 | | Net (decrease) increase in cash and cash equivalents | | | (1.6 | ) | | | (16.7 | ) | | | 63.4 | | Cash and cash equivalents - beginning of year | | | 70.5 | | | | 87.2 | | | | 23.8 | | Cash and cash equivalents - end of year | | $ | 68.9 | | | $ | 70.5 | | | $ | 87.2 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | Common stock | | | Additional paid-in capital | | | Retained earnings | | | Accumulated other comprehensive loss | | | Treasury stock, at cost | | | Non- | | | Total | | | | Shares | | | Amount | | | | | | | | | | | | | | Balance, March 31, 2012 | | | 47.4 | | | $ | 29.6 | | | $ | 168.3 | | | $ | 231.8 | | | $ | (90.3 | ) | | $ | (14.5 | ) | | $ | 1.2 | | | $ | 326.1 | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (24.2 | ) | | | - | | | | - | | | | - | | | | (24.2 | ) | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | - | | | | (38.1 | ) | Stock options and awards including related tax benefits | | | 0.4 | | | | 0.3 | | | | (0.2 | ) | | | - | | | | - | | | | - | | | | - | | | | 0.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.1 | ) | | | - | | | | (0.1 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.1 | | | | - | | | | - | | | | - | | | | - | | | | 3.1 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.4 | | | | 1.4 | | Balance, March 31, 2013 | | | 47.8 | | | | 29.9 | | | | 171.2 | | | | 207.6 | | | | (128.4 | ) | | | (14.6 | ) | | | 2.6 | | | | 268.3 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | | Stock options and awards including related tax benefits | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | | Balance, March 31, 2014 | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) | Stock options and awards including related tax benefits | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | | Balance, March 31, 2015 | | | 48.6 | | | $ | 30.4 | | | $ | 180.6 | | | $ | 359.8 | | | $ | (198.6 | ) | | $ | (16.2 | ) | | $ | 4.6 | | | $ | 360.6 | |
| | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other comprehensive | | | Treasury stock, at | | | Non- controlling | | | Total | | | Shares | | | Amount | | | capital | | | earnings | | | loss | | | cost | | | interest | | | | | Balance, March 31, 2013 | | | 47.8 | | | $ | 29.9 | | | $ | 171.2 | | | $ | 207.6 | | | $ | (128.4 | ) | | $ | (14.6 | ) | | $ | 2.6 | | | $ | 268.3 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | | Stock options and awards including related tax benefits | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | | Balance, March 31, 2014 | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) | Stock options and awards including related tax benefits | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | | Balance, March 31, 2015 | | | 48.6 | | | | 30.4 | | | | 180.6 | | | | 359.8 | | | | (198.6 | ) | | | (16.2 | ) | | | 4.6 | | | | 360.6 | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (1.6 | ) | | | - | | | | - | | | | - | | | | (1.6 | ) | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.4 | | | | - | | | | (0.1 | ) | | | 24.3 | | Stock options and awards including related tax benefits | | | 0.4 | | | | 0.2 | | | | 0.1 | | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7.8 | ) | | | - | | | | (7.8 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.9 | | Contribution by noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2.3 | | | | 2.3 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.6 | | | | 0.6 | | Balance, March 31, 2016 | | | 49.0 | | | $ | 30.6 | | | $ | 185.6 | | | $ | 358.2 | | | $ | (174.2 | ) | | $ | (24.0 | ) | | $ | 6.5 | | | $ | 382.7 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 1: | Significant Accounting Policies |
Nature of operations: Modine Manufacturing Company (“Modine” or the “Company”) specializes in thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets. The Company is a leading global developer, manufacturer and marketer of heat exchangers and systems for use in on-highway and off-highway original equipment manufacturer (“OEM”) vehicular applications, and a wide array of building, industrial and refrigeration markets. ProductThe Company’s product lines include radiators and radiator cores, condensers, oil coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation (“EGR”) coolers, and building heating, ventilating and air conditioning (“HVAC”) equipment.equipment, and coils.
Basis of presentation: The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States. These principles require management to make certain estimates and assumptions in determining assets, liabilities, revenue, expenses and related disclosures. Actual amounts could differ materially from those estimates.
Consolidation principles: The consolidated financial statements include the accounts of Modine Manufacturing Company and its majority-owned or Modine-controlled subsidiaries. The Company eliminates intercompany transactions and balances in consolidation.
The Company accounts for investments in non-consolidated affiliated companies in which its ownership is 20 percent or more using the equity method. The Company states these investments at cost, plus or minus a proportionate share of undistributed net income (loss). The Company includes Modine’s share of the affiliatesaffiliate’s net income (loss) in other income and expense. See Note 12 for further discussion.additional information.
Discontinued operations: During fiscal 2009, the Company sold its Electronics Cooling business. The buyer financed a portion of the selling price by issuing promissory notes payable to Modine. During fiscal 2015, the Company received $1.5 million from the buyer, which represented the final payment on the promissory notes. The Company had previously recorded a reserve against a portion of the promissory notes due to collectability concerns. As a result, the Company recorded a gain of $0.9 million ($0.6 million after income taxes) during fiscal 2015.
Assets held for sale: The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the assets for sale at a price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell.sell, within other noncurrent assets. The Company ceases to record depreciation expense at the time of designation as held for sale.
Revenue recognition: The Company recognizes sales revenue, including agreed upon commodity price increases or decreases,prices, when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product and risk of loss have transferred to the customer, persuasive evidence of an arrangement exists, and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The Company makes appropriate provisions for uncollectible accounts receivable based on historical data or specific customer economic data. The Company records sales discounts, which are offered for prompt payment by certain customers, as a reduction to net sales.
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 20152016 and 2014,2015, Company-owned tooling totaled $18.7$18.8 million and $28.6$18.7 million, respectively. In certain instances, the Company makes upfront payments for customer-owned tooling costs, and subsequently receives reimbursement from customers for the upfront payments. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 20152016 and 2014,2015, cost reimbursement receivables related to customer-owned tooling totaled $11.6$8.5 million and $10.3$11.6 million, respectively.
Warranty: The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. The Company records warranty expense based upon historical and current claims data or based onupon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 15 for further discussion.additional information. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its OEM customers in cost of sales, and related amounts billed to these customers in net sales. The Company records shipping and handling costs incurred upon the shipment of products to its HVAC and aftermarket customers in selling, general and administrative (“SG&A”) expenses. For the years ended March 31, 2016, 2015, 2014, and 2013, these2014, shipping and handling costs recorded in SG&A expenses were $2.5 million, $4.9 million, $4.0 million, and $4.3$4.0 million, respectively.
Research and development: The Company expenses research and development costs as incurred within SG&A expenses. For the years ended March 31, 2016, 2015, 2014, and 2013,2014, research and development costs charged to operations totaled $61.1 million, $62.0 million, $61.7 million, and $68.4$61.7 million, respectively.
Translation of foreign currencies: The Company translates assets and liabilities of foreign subsidiaries and equity investments into U.S. dollars at the period-end exchange rates, and translates income and expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders' equity. The Company includes foreign currency transaction gains or losses in the statement of operations within other income and expense.
Derivative instruments: The Company enters into derivative financial instruments from time to time to manage certain financial risks. The Company enters into futures contracts to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. These instruments are used to manage financial risks and are not speculative. See Note 18 for further discussion.additional information.
Income taxes: The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. See Note 8 for further discussion.additional information.
Earnings per share: The Company calculates basic earnings per share based upon the weighted averageweighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. Restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company. Therefore, these restricted stock awards are included in computing earnings per share pursuant to the two-class method. See Note 9 for further discussion.additional information.
Cash and cash equivalents: The Company considers all highly liquidhighly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the amount of those un-presented checks is included in accounts payable.
Short-term investments: The Company invests in time deposits with original maturities of more than three months but no more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2016 and 2015, the Company’s short-term investments totaled $3.3 million and $2.8 million, respectively.
Deferred compensation trust: The Company maintains a deferred compensation trust to fund future obligations under its non-qualified deferred compensation plan. The trust’s investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Trade accounts receivable: The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company recorded an allowance for doubtful accounts $1.0of $0.5 million and $1.1$1.0 million at March 31, 2016 and 2015, and 2014, respectively, representsrepresenting its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable without recourse to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During the years ended March 31, 2016, 2015, 2014, and 2013,2014, the Company sold, without recourse, $71.3 million, $87.0 million, $82.4 million, and $99.1$82.4 million of accounts receivable to accelerate cash receipts. During each of the years ended March 31, 2016, 2015, 2014, and 2013,2014, the Company recorded a loss on the sale of accounts receivables of $0.3 million in the consolidated statements of operations. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost on a first-in, first-out basis or weighted average basis, or marketand net realizable value.
Property, plant and equipment: The Company statesrecords property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful life of the asset. The Company charges maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations.
Goodwill: The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company recognizes an impairment loss if the book value of goodwill exceeds the fair value. The Company performed theits goodwill impairment test as of March 31, 2015 and as a2016, which did not result recordedin an impairment charge of $7.8 million related to its South America segment.charge. See Note 14 for further discussion.additional information.
Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment and writes them down to fair value when facts andwhenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the assets may not be recoverable through estimated future undiscounted cash flows. If an impairment has occurred, the Company writes down the asset toexceeds its estimated fair value and recognizes the impairment loss as a charge against current operations.value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets. See Note 6 for further discussion.additional information.
Environmental expenditures:liabilities: The Company capitalizesrecords liabilities for environmental expenditures that qualify as property, plantassessments and equipment or substantially increaseremediation efforts in the economic value or extend the useful life of an asset. The Company expenses all other expenditures as incurred. If a loss arising from environmental mattersperiod which its responsibility is probable and the costs can be reasonably estimated,estimated. To the Company records an accrual forextent that the amountrequired remediation procedures change, or additional contamination is identified, the Company’s estimate of the estimated loss.environmental liabilities may change. See Note 19 for further discussion.additional information.
Self-insurance reserves: The Company retains a portion of the financial risk for various insurance coverage, including property, general liability, workers compensation, and employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to operations. The Company reviews and updates the evaluationamount of insurance claims and the reasonableness of the relatedits insurance-related reserves on a quarterly basis.
Stock-based compensation: The Company recognizes stock-based compensation using the fair value method. Accordingly, compensation expense for stock options, restricted stock and performance-based stock awards is calculated based upon the fair value of the instruments at the time of grant, and is recognized as expense over the respective vesting periods. See Note 5 for further discussion.
Out of period adjustments: During the second quarter of fiscal 2014, the Company recorded a customer pricing adjustment that related to prior fiscal years. The impact of this error to the second quarter of fiscal 2014 decreased pre-tax earnings by $0.6 million ($0.5 million after-tax). During the first quarter of fiscal 2013, the Company identified an error related to certain commodity hedges that should have been deemed ineffective in the fourth quarter of fiscal 2012, which overstated pre-tax earnings by $0.5 million in the first quarter of fiscal 2013. The Company does not believe that these errors were material to its financial statements for fiscal 2014 or 2013.additional information.
New accounting guidance: In May 2014,March 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify several aspects of accounting for share-based payment transactions, including the income tax consequences. This guidance is effective for the Company’s first quarter of fiscal 2018. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance. Upon adoption of this new guidance, the Company will be required to recognize most leases on its balance sheet. This guidance is effective for the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In November 2015, the FASB issued new guidance, as part of its simplification initiative, that requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The Company adopted this guidance, on a retrospective basis, for its fiscal year ending March 31, 2016. As a result, the Company reclassified approximately $13.0 million of deferred tax assets from current assets to noncurrent assets as of March 31, 2015 to conform to the current-period presentation. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about revenue arising from contracts with customers. This new guidance is effective for the Company’s first quarter of fiscal 2018 at the earliest.2019. The Company is currently evaluating the impact the newthis guidance will have on its consolidated financial statements. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Supplemental cash flow information:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Interest paid | | $ | 10.3 | | | $ | 12.6 | | | $ | 11.6 | | Income taxes paid | | | 15.9 | | | | 11.4 | | | | 12.4 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Interest paid | | $ | 10.7 | | | $ | 10.3 | | | $ | 12.6 | | Income taxes paid | | | 10.1 | | | | 15.9 | | | | 11.4 | |
Note 2: | Airedale Facility Fire |
On September 6, 2013, a fire caused significant destruction to the Company’s Airedale manufacturing facility and offices in Rawdon (Leeds), United Kingdom. The Company reports Airedale’s financial results within the Building HVAC segment (previously known as Commercial Products).segment. There were no injuries caused by the fire. The Rawdon facility, which wasis leased, was used to manufacture cooling products and solutions for a variety of applications, including data centers, clean rooms, retail, leisure and process cooling. The fire caused a temporary manufacturing suspensionCompany suspended operations at the Rawdon site;site as a result of the fire; however, the Companyit transferred its operations to temporary facilities and is in the process of rebuildingwhile it rebuilt the leased facility. The Company expects to completecompleted the reconstruction and return its operationsrelocation to the Rawdon sitefacility in late fiscal 2016.
The Company maintainsCompany’s insurance coverage forcovered damage to the leased facility, equipment, inventory, and other assets, as well as business interruption and lost profits, and recovery-related expenses caused by the fire. TheSince the date of the fire, the Company believes that reimbursementhas received cumulative cash proceeds of $96.0 million from its insurance provider is probable for substantially allcovered losses, and has recorded losses and costs directly attributablecaused by the fire in the same statement of operations line as the related insurance recovery. In fiscal 2016, the Company recorded a $9.5 million gain within other income related to an insurance settlement for equipment losses. This gain represents the replacement assets’ cost in excess of the carrying value of the equipment at the time it was destroyed by the fire. During fiscal 2015, the Company recorded $4.6 million of recoveries from business interruption insurance relating to fiscal 2015 and 2014 lost profits within SG&A expenses. Since the date of the fire, the Company has received cumulative cash proceeds of $62.7 million from its insurance provider for covered losses. In addition, the Company has written-off inventory of $4.7 million and equipment with a net book value of $1.4 million and incurred costs directly attributable to the fire totaling $22.0 million. The Company has recorded these losses and costs, which totaled $28.1 million, in the same statement of operations line as the related insurance recovery.
The terms of the Rawdon lease agreement obligateobligated the Company to rebuild the damaged facility. Through March 31, 2015,Upon completion of the rebuilt facility in fiscal 2016, the Company has capitalized reconstruction costs of $21.2 million,fulfilled this obligation and has recorded this asset on the consolidated balance sheet within other current assets. The Company currently estimates costs of reconstruction will total $48.0 million; accordingly, we recorded a $48.0 million other current liability as of March 31, 2015. As of March 31, 2015, we recorded an $18.0 million receivable from the Company’s insurance provider within other current assets, which represented covered losses to date in excess of cumulative cash proceeds received. As of March 31, 2014,removed both the liability to rebuild the facility was $45.0 million ($37.0 million withinand the capitalized reconstruction costs from its consolidated balance sheet. As of March 31, 2015, the other current liabilitiesliability to rebuild the facility was $48.0 million and $8.0 million within other noncurrent liabilities), and the receivablecurrent assets related to receivables from the Company’s insurance provider was $25.4 million ($18.4 million within other current assets and $7.0 million within other noncurrent assets).capitalized reconstructions costs totaled $39.2 million.
On January 29, 2016, the Company formed a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co. Ltd. of Yangzhou, China, of which it owns 67%, and the joint venture partner, Jiangsu Puxin Heat Exchange System Co., Ltd, owns 33%. This joint venture, which is reported in the Asia segment, will expedite the Company’s introduction of stainless steel heat exchangers for the light-, medium-, and heavy-duty commercial vehicle markets in China. The Company contributed cash of $1.4 million, with additional cash consideration of $0.5 million payable after six months subject to the sellers’ indemnification obligations under the agreement, and equipment and other assets totaling $2.3 million. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in acquired equipment and other long-lived assets totaling $1.5 million and working capital net assets of $0.8 million. The Company controls the primary management decisions and revenue-generating activities of the joint venture, and, therefore, the financial results of the joint venture are included in the Company’s consolidated financial statements.
On February 28, 2014, the Company acquired 100 percent of the shares of Barkell Limited of Consett, United Kingdom for cash consideration of $7.8 million, net of cash acquired. This acquisition provides Modine with an expanded product offering into the air handling market within the Building HVAC segment. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in intangible assets for acquired technology and customer relationships totaling $4.7 million; property, plant and equipment of $2.0 million; and working capital net assets of $1.1 million. Acquired technology consists of a fully developed product line and technical processes, and the customer relationships represent established sales channel and customer relationships. The Company is amortizing these acquired intangible assets over ten years.
On July 25, 2012, the Company completed the acquisition46
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The results of operations of these acquired businesses are included in the Company’s consolidated statements of operations since the dates of acquisition. The Company did not present pro forma financial information as the effectseffect of these acquisitions areis not material to theits results of operations or financial position. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2007, the Company acquired the remaining 50 percent of Radiadores Visconde Ltda. The purchase agreement included a $2.0 million note, which was payable subject to the resolution of certain obligations of the sellers. During fiscal 2013, the Company and the sellers reached a final resolution under which the Company is not obligated to pay the note to the sellers. As a result, the Company recorded a $2.0 million reduction to SG&A expenses in the South America segment during fiscal 2013.
Note 4: | Fair Value Measurements |
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
| ·● | Level 1 – Quoted prices for identical instruments in active markets. |
| ·● | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
| ·● | Level 3 – Model-derived valuations in which one or more significant inputs are not observable. |
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, fair value is based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash and cash equivalents, short-term investments, trade accounts receivable, and accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. The Company holds trading securities in a deferred compensation trust to fund obligations under Modine’s non-qualified deferred compensation plan. The securities’ fair values, which are recorded as other noncurrent assets, are determined based on quoted prices from active markets and classified within Level 1 of the valuation hierarchy. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. The fair values of the Company’s trading securities and deferred compensation obligations each totaled $3.0$3.2 million and $2.6$3.0 million at March 31, 20152016 and 2014,2015, respectively. The fair value of the Company’s long-term debt is disclosed in Note 16.
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2015 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 8.1 | | | $ | - | | | $ | 8.1 | | Common stocks | | | 40.5 | | | | 2.2 | | | | - | | | | 42.7 | | Corporate bonds | | | - | | | | 23.5 | | | | - | | | | 23.5 | | Pooled equity funds | | | 69.0 | | | | 11.4 | | | | - | | | | 80.4 | | Pooled fixed-income funds | | | 15.5 | | | | - | | | | - | | | | 15.5 | | U.S. government and agency securities | | | - | | | | 39.8 | | | | - | | | | 39.8 | | Other | | | 0.7 | | | | 6.3 | | | | - | | | | 7.0 | | Total | | $ | 125.7 | | | $ | 91.3 | | | $ | - | | | $ | 217.0 | |
| | March 31, 2016 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 5.8 | | | $ | 5.8 | | Common stocks | | | 23.7 | | | | 1.3 | | | | 25.0 | | Corporate bonds | | | - | | | | 8.4 | | | | 8.4 | | Pooled equity funds | | | 48.7 | | | | 7.3 | | | | 56.0 | | Pooled fixed-income funds | | | 26.3 | | | | - | | | | 26.3 | | U.S. government and agency securities | | | - | | | | 18.4 | | | | 18.4 | | Other | | | 0.4 | | | | 1.2 | | | | 1.6 | | Total | | $ | 99.1 | | | $ | 42.4 | | | $ | 141.5 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
| | March 31, 2014 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 11.3 | | | $ | - | | | $ | 11.3 | | Common stocks | | | 40.1 | | | | 2.1 | | | | - | | | | 42.2 | | Corporate bonds | | | - | | | | 21.3 | | | | - | | | | 21.3 | | Pooled equity funds | | | 68.9 | | | | 11.9 | | | | - | | | | 80.8 | | Pooled fixed-income funds | | | 14.1 | | | | - | | | | - | | | | 14.1 | | U.S. government and agency securities | | | - | | | | 37.0 | | | | - | | | | 37.0 | | Other | | | 1.6 | | | | 5.4 | | | | - | | | | 7.0 | | Total | | $ | 124.7 | | | $ | 89.0 | | | $ | - | | | $ | 213.7 | |
| | March 31, 2015 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 8.1 | | | $ | 8.1 | | Common stocks | | | 40.5 | | | | 2.2 | | | | 42.7 | | Corporate bonds | | | - | | | | 23.5 | | | | 23.5 | | Pooled equity funds | | | 69.0 | | | | 11.4 | | | | 80.4 | | Pooled fixed-income funds | | | 15.5 | | | | - | | | | 15.5 | | U.S. government and agency securities | | | - | | | | 39.8 | | | | 39.8 | | Other | | | 0.7 | | | | 6.3 | | | | 7.0 | | Total | | $ | 125.7 | | | $ | 91.3 | | | $ | 217.0 | |
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of common stocks, pooled equity funds and pooled fixed-income funds based on quoted prices from active markets and classifyclassified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain common stocks, corporate bonds, pooled equity funds and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 2016 and 2015, the Company held no Level 3 assets within its pension plans.
Assets held for sale: The Company valued assets held for sale based on Level 3 market-based valuation inputs. The carrying value of assets held for sale totaled $3.2$8.5 million and $11.6$3.2 million at March 31, 20152016 and 2014,2015, respectively. See Note 6 for further discussion.additional information.
Note 5: | Stock-Based Compensation |
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and executives that consists of restricted stock and stock option componentsoptions granted for retention and performance, (2) a discretionary equity program for management and other key employees, and (3) stock optionsawards and/or stock awardsoptions for non-employee directors. The Company’s Board of Directors and the Officer Nomination and Compensation Committee, as applicable, have discretionary authority to set the terms of the awards of stock under the Company’s Amended and Restated 2008 Incentive Compensation Plan (“Plan”). At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2015,2016, approximately 4.03.3 million shares authorized under the Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $4.9 million, $4.0 million, $3.6 million, and $3.1$3.6 million in fiscal 2016, 2015, 2014, and 2013,2014, respectively.
Stock Options: The Company recorded $0.9 million, $0.8$0.9 million, and $1.1$0.8 million of compensation expense related to stock options in fiscal 2016, 2015, 2014, and 2013,2014, respectively. The fair value of stock options that vested during fiscal 2016, 2015, 2014, and 20132014 was $0.9 million, $0.8$0.9 million, and $1.3$0.8 million, respectively. As of March 31, 2015,2016, the total compensation expense not yet recognized related to non-vested stock options was $1.7$2.0 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.72.5 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:
| | 2015 | | | 2014 | | | 2013 | | Weighted average fair value of options | | $ | 10.21 | | | $ | 7.76 | | | $ | 4.26 | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 2.1 | % | | | 1.3 | % | | | 0.9 | % | Expected volatility of the Company's stock | | | 76.1 | % | | | 88.7 | % | | | 87.4 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| | 2016 | | 2015 | | 2014 | Weighted-average fair value of options | | $ | 7.11 | | | $ | 10.21 | | | $ | 7.76 | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 1.9 | % | | | 2.1 | % | | | 1.3 | % | Expected volatility of the Company's stock | | | 66.9 | % | | | 76.1 | % | | | 88.7 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of the common stock on the date of grant. The risk-free interest rate was based on yields of U.S. Treasury zero-coupon issues with a term corresponding to the expected life of the options. The expected volatility assumption was based on changes in the Company’s historical common stock prices over the same time frame as the expected life of the awards. The expected dividend yield is zero as the Company currently does not anticipate paying dividends over the expected life of the options. The expected lives of the awards are based on historical patterns and the terms of the options. Outstanding options granted during fiscal 2015 and fiscal 2014 vest 25 percent annually for four years. All outstanding options granted prior to fiscal 2014 vested 25 percent on the grant date and 25 percent annually thereafter for the subsequent three years. The Company used a pre-vesting forfeiture rate of 2.5 percent for these periods as an estimate of expected forfeitures prior to completing the required service period.
A summary of stock option activity for fiscal 20152016 was as follows:
| | Shares | | | Weighted average exercise price | | | Weighted average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.6 | | | $ | 13.15 | | | | | | | | Granted | | | 0.1 | | | | 14.94 | | | | | | | | Exercised | | | (0.1 | ) | | | 8.71 | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 29.41 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 11.99 | | | | 5.3 | | | $ | 5.7 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2015 | | | 1.2 | | | $ | 12.13 | | | | 4.5 | | | $ | 4.9 | |
| | Shares | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.5 | | | $ | 11.99 | | | | | | | | Granted | | | 0.2 | | | | 11.39 | | | | | | | | Exercised | | | (0.1 | ) | | | 5.82 | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 27.33 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 10.82 | | | | 5.3 | | | $ | 3.0 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2016 | | | 1.1 | | | $ | 10.41 | | | | 4.3 | | | $ | 3.0 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20152016 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the fair value of Modine’s common shares.
Additional information related to stock options exercised during fiscal 2016, 2015, 2014, and 20132014 was as follows:
| | 2015 | | | 2014 | | | 2013 | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 1.1 | | | $ | 0.1 | | Proceeds from stock options exercised | | $ | 0.6 | | | $ | 1.1 | | | $ | 0.1 | |
| | 2016 | | | 2015 | | | 2014 | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 0.4 | | | $ | 1.1 | | Proceeds from stock options exercised | | $ | 0.5 | | | $ | 0.6 | | | $ | 1.1 | |
Restricted Stock: The Company recorded $3.5 million, $2.8 million, $2.2 million, and $1.8$2.2 million of compensation expense related to restricted stock in fiscal 2016, 2015, 2014 and 2013,2014, respectively. The fair value of restricted stock awards that vested during fiscal 2016, 2015, and 2014 and 2013 was $3.4 million, $2.3 million, $1.6 million, and $1.3$1.6 million, respectively. At March 31, 2015,2016, the Company had $4.6$4.7 million of total unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.52.4 years. The Company values restricted stock awards using the closing market value of its common shares on the date of grant. The restricted stock awards vest 25 percent annually for four years, with the exception of awards to non-employee directors, which fully vest upon grant.
A summary of restricted stock activity for fiscal 20152016 was as follows:
| | Shares | | | Weighted average price | | Non-vested balance, beginning | | | 0.6 | | | $ | 8.66 | | Granted | | | 0.3 | | | | 14.92 | | Vested | | | (0.2 | ) | | | 9.73 | | Non-vested balance, ending | | | 0.7 | | | $ | 10.68 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | Shares | | Weighted- average price | Non-vested balance, beginning | | | 0.7 | | | $ | 10.68 | | Granted | | | 0.3 | | | | 11.18 | | Vested | | | (0.4 | ) | | | 10.01 | | Non-vested balance, ending | | | 0.6 | | | $ | 11.29 | |
Restricted Stock – Performance-Based Shares: The Company recorded $0.5 million, $0.3 million $0.6 million and $0.2$0.6 million of compensation expense related to performance-based stock awards in fiscal 2016, 2015, 2014 and 2013,2014, respectively. At March 31, 2015,2016, the Company had $1.6$1.2 million of total unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be recognized over a weighted-average period of 1.81.7 years. The Company values performance-based stock awards using the closing market value of its common shares aton the date of grant. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shares are earned under the performance portion of the restricted stock award program based upon the attainment of certain financial goals over a three-year period and are awarded atafter the end of that three-year performance period, if the performance targets have been achieved. A new performance period may begin each fiscal year; therefore, multiple performance periods, with distinct goals, may operate simultaneously.
The performance componentcomponents of the programprograms initiated in fiscal 2016 and fiscal 2015 waswere based upon both a target three-year average consolidated return on average capital employed (“ROACE”) and a target three-year average annual revenue growth at the end of thea three-year performance period, coveringcommencing with the fiscal 2015 through fiscal 2017.year of grant. For the program initiated in fiscal 2014, the performance award was based upon a target three-year average ROACE, three-year average annual revenue growth, and Asia segment operating income at the end of the three-year performance period. For the program initiated in fiscal 2013, the performance award was based upon a target three-year average consolidated ROACE, cumulative revenue over the three-year performance period and Europe ROACE at the end of the three-year performance period.
Note 6: Note 6: | Restructuring Activities |
During fiscal 2016, the Company offered a voluntary retirement program to certain U.S. salaried employees. The program was offered as part of the Company’s Strengthen, Diversify and Grow transformational initiative and supports the objective of reducing operational and SG&A cost structures.
Also during fiscal 2016, the Company announced a plan to close its Washington, Iowa manufacturing facility and is in the process of transferring the facility’s production to other Americas segment manufacturing facilities, which it expects to complete by the end of fiscal 2017. In addition, the Company completed the transfer of production from its McHenry, Illinois manufacturing facility to other Americas segment manufacturing facilities. These restructuring activities reflect the Company’s focus on operating scale manufacturing facilities to improve overall competitiveness and profitability.
During fiscal 2015, the Company implementedinitiated a headcount reduction plan for its Brazil manufacturing facility within its South AmericaAmericas segment. The headcount reductions were in response to the economic slowdown in Brazil and reflect the Company’s objective to maintain profitability in the segmentthis business despite lower sales volume.
During fiscal 2014,In addition, the Company approved a plancontinues to close its McHenry, Illinois manufacturing facility, reflecting its focus on operating scale manufacturing facilities to improve overall competitiveness and profitability. The Company is in the process of transferring the facility’s production to other existing North America segment manufacturing facilities.
During fiscal 2013, the Company initiatedexecute restructuring activities within its Europe segment. TheThese restructuring activities have included implementing headcount reductions, exiting certain non-core product lines based upon Modine’s global product strategy, reducing manufacturing costs, consolidating production facilities, implementing headcount reductions, and disposing of and selling certain underperforming or non-strategic assets. The Company designed these activities were designed to align the cost structure of the segment with its strategic focus on the commercial vehicle, off-highway, automotive component, and engine product markets, while improving gross margin and return on average capital employed.
Restructuring and repositioning expenses for fiscal 2015, 2014, and 2013 were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Employee severance and related benefits | | $ | 1.2 | | | $ | 14.8 | | | $ | 14.9 | | Accelerated depreciation | | | - | | | | 4.3 | | | | - | | Other restructuring and repositioning expenses | | | 3.5 | | | | 1.3 | | | | 2.1 | | Total | | $ | 4.7 | | | $ | 20.4 | | | $ | 17.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Employee severance and related benefits | | $ | 12.8 | | | $ | 1.2 | | | $ | 14.8 | | Accelerated depreciation | | | - | | | | - | | | | 4.3 | | Other restructuring and repositioning expenses | | | 3.8 | | | | 3.5 | | | | 1.3 | | Total | | $ | 16.6 | | | $ | 4.7 | | | $ | 20.4 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
During fiscal 2016, 2015, 2014, and 2013,2014, the Company recorded $16.6 million, $4.7 million, $16.1 million and $17.0$16.1 million, respectively, of restructuring and repositioning expenses as restructuring expenses in the consolidated statement of operations. During fiscal 2014, the Company recorded $4.3 million of restructuring and repositioning expenses within cost of sales in the consolidated statement of operations. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 19.4 | | | $ | 11.6 | | Additions | | | 1.2 | | | | 14.8 | | Payments | | | (7.3 | ) | | | (7.8 | ) | Effect of exchange rate changes | | | (3.4 | ) | | | 0.8 | | Ending balance | | $ | 9.9 | | | $ | 19.4 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 9.9 | | | $ | 19.4 | | Additions | | | 12.8 | | | | 1.2 | | Payments | | | (8.5 | ) | | | (7.3 | ) | Effect of exchange rate changes | | | 0.5 | | | | (3.4 | ) | Ending balance | | $ | 14.7 | | | $ | 9.9 | |
During fiscal 2016, the Company identified potential impairment indicators related to a manufacturing facility in Germany, including pre-tax losses and its strategic decision to exit a certain product line in the future. In response, the Company performed an impairment evaluation and recorded an asset impairment charge of $9.9 million within its Europe segment to write down the manufacturing facility’s long-lived assets to fair value. The Company determined fair value using Level 3 inputs, primarily consisting of a facility appraisal, which considered the market rental value, and estimated scrap values, which considered the specialized nature of the machinery and equipment.
During fiscal 2014, the Company recorded asset impairment charges totaling $3.2 million, including $2.0 million within its Europe segment, primarily due to a manufacturing facility in Germany that the Company plans to close,has closed, and $1.2 million within its North AmericaAmericas segment, related to the planned closure of its McHenry, Illinois manufacturing facility. During fiscal 2013, the Company recorded asset impairment charges of $24.1 and $1.8 million within its Europe and North America segments, respectively, to reduce the carrying values of certain facilities held for sale to their estimated fair values, less costs to sell.
During fiscal 2015, the Company sold a wind tunnel within its Europe segment which was previously reported as an asset held for sale, for cash proceeds of $5.8 million and recognized a gain of $3.2 million. Also during fiscal 2015, the Company reclassified $4.7 million of its assets held for sale to property, plant and equipment, related to a facility in the Europe segment that is no longer being actively marketed for sale. At March 31, 20152016 and 2014,2015, assets held for sale of $3.2$8.5 million and $11.6$3.2 million, respectively, were included in other noncurrent assets and consisted of facilities that the Company is marketing for sale.
In April 2015, the Company announced its intent to close its Washington, Iowa manufacturing facility within the North America segment. As a result of the planned closure, the Company expects to incur approximately $2.0 million of employee severance-related costs during fiscal 2016 and additional restructuring and repositioning expenses during the closure period, as production is transferred to other facilities within the North America segment.
Note 7: | Other Income and Expense |
Other income and expense consisted of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Equity in earnings of non-consolidated affiliate | | $ | 0.6 | | | $ | 0.7 | | | $ | 0.3 | | Interest income | | | 0.5 | | | | 0.5 | | | | 0.9 | | Foreign currency transactions | | | (0.9 | ) | | | (2.0 | ) | | | (1.1 | ) | Other non-operating income - net | | | - | | | | - | | | | 0.1 | | Total other income (expense) - net | | $ | 0.2 | | | $ | (0.8 | ) | | $ | 0.2 | |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Equity in earnings of non-consolidated affiliate | | $ | 0.1 | | | $ | 0.6 | | | $ | 0.7 | | Interest income | | | 0.4 | | | | 0.5 | | | | 0.5 | | Foreign currency transactions (a) | | | (1.3 | ) | | | (0.9 | ) | | | (2.0 | ) | Gain from insurance recovery (b) | | | 9.5 | | | | - | | | | - | | Total other income (expense) - net | | $ | 8.7 | | | $ | 0.2 | | | $ | (0.8 | ) |
Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency denominated
| (a) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on foreign currency exchange contracts. |
| (b) | During fiscal 2016, the Company settled an insurance claim related to machinery and equipment destroyed in a fire at its Airedale facility and recorded a gain of $9.5 million. See Note 2 for additional information. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The U.S. and foreign components of earnings (loss) from continuing operations before income taxes and the provision (benefit)or benefit for income taxes consisted of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Components of earnings (loss) from continuing operations before income taxes: | | | | | | | | | | United States | | $ | 31.1 | | | $ | 14.1 | | | $ | 10.2 | | Foreign | | | 10.1 | | | | 9.9 | | | | (23.2 | ) | Total earnings (loss) from continuing operations before income taxes | | $ | 41.2 | | | $ | 24.0 | | | $ | (13.0 | ) | | | | | | | | | | | | | | Income tax expense (benefit): | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | 0.4 | | | $ | (2.0 | ) | | $ | 2.6 | | Deferred | | | 7.1 | | | | (95.8 | ) | | | (2.6 | ) | State: | | | | | | | | | | | | | Current | | | - | | | | 0.2 | | | | 0.2 | | Deferred | | | 1.1 | | | | (21.4 | ) | | | (0.2 | ) | Foreign: | | | | | | | | | | | | | Current | | | 12.7 | | | | 10.0 | | | | 6.4 | | Deferred | | | (2.3 | ) | | | 1.1 | | | | 3.4 | | Total income tax expense (benefit) | | $ | 19.0 | | | $ | (107.9 | ) | | $ | 9.8 | |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Components of (loss) earnings from continuing operations before income taxes: | | | | | | | | | | United States | | $ | (15.4 | ) | | $ | 31.1 | | | $ | 14.1 | | Foreign | | | 5.5 | | | | 10.1 | | | | 9.9 | | Total (loss) earnings from continuing operations before income taxes | | $ | (9.9 | ) | | $ | 41.2 | | | $ | 24.0 | | | | | | | | | | | | | | | Income tax (benefit) expense: | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | 0.1 | | | $ | 0.4 | | | $ | (2.0 | ) | Deferred | | | (13.0 | ) | | | 7.1 | | | | (95.8 | ) | State: | | | | | | | | | | | | | Current | | | 0.2 | | | | - | | | | 0.2 | | Deferred | | | (2.5 | ) | | | 1.1 | | | | (21.4 | ) | Foreign: | | | | | | | | | | | | | Current | | | 9.6 | | | | 12.7 | | | | 10.0 | | Deferred | | | (3.3 | ) | | | (2.3 | ) | | | 1.1 | | Total income tax (benefit) expense | | $ | (8.9 | ) | | $ | 19.0 | | | $ | (107.9 | ) |
The Company allocates income tax expense among continuing operations, discontinued operations, and other comprehensive income. The Company applies accounting for income taxes by tax jurisdiction, and in periods in which there is a loss from continuing operations before income taxes and pre-tax income in other categories (e.g., discontinued operations or other comprehensive income), it first allocates income tax expense to the other sources of income, and records a related tax benefit in continuing operations.
Income tax expense attributable to earnings (loss) from continuing operations before income taxes differed from the amounts computed by applying the statutory U.S. federal income tax rate as a result of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 2.4 | | | | 2.1 | | | | (1.3 | ) | Taxes on non-U.S. earnings and losses | | | (4.9 | ) | | | (3.8 | ) | | | (23.8 | ) | Valuation allowance | | | 8.3 | | | | (471.7 | ) | | | (59.3 | ) | Tax credits | | | (6.1 | ) | | | (7.1 | ) | | | 37.0 | | Compensation | | | 1.0 | | | | 0.4 | | | | (13.0 | ) | Tax rate or law changes | | | 1.2 | | | | (9.2 | ) | | | 0.9 | | Uncertain tax positions net of settlements | | | 2.2 | | | | 0.4 | | | | (41.9 | ) | Brazil interest on equity | | | - | | | | (1.7 | ) | | | 3.2 | | Dividend repatriation | | | 2.4 | | | | 5.8 | | | | (11.4 | ) | Other | | | 4.6 | | | | 0.2 | | | | (0.8 | ) | Effective tax rate | | | 46.1 | % | | | (449.6 | %) | | | (75.4 | %) |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 11.5 | | | | 2.4 | | | | 2.1 | | Taxes on non-U.S. earnings and losses | | | 26.4 | | | | (4.9 | ) | | | (3.8 | ) | Valuation allowance | | | (20.9 | ) | | | 8.3 | | | | (471.7 | ) | Tax credits | | | 20.5 | | | | (6.1 | ) | | | (7.1 | ) | Compensation | | | (3.7 | ) | | | 1.0 | | | | 0.4 | | Tax rate or law changes | | | 1.3 | | | | 1.2 | | | | (9.2 | ) | Uncertain tax positions, net of settlements | | | (4.3 | ) | | | 2.2 | | | | 0.4 | | Dividend repatriation | | | 16.0 | | | | 2.4 | | | | 5.8 | | Other | | | 8.1 | | | | 4.6 | | | | (1.5 | ) | Effective tax rate | | | 89.9 | % | | | 46.1 | % | | | (449.6 | %) |
The Company recorded an additional valuation allowance of $5.0 million, $2.6 million and $12.3 million in fiscal 2016, 2015, and 2014, respectively, against net deferred tax assets in certain foreign jurisdictions after determining it was more likely than not that the net deferred tax assets in these jurisdictions will not be realized. The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions going forward until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2016 and 2014, the Company concluded it no longer needed a valuation allowance on certain U.S. deferred tax assets after determining it was more likely than not they would be realized. As a result, the Company recorded a $119.2 million reversalreversals of its deferred tax asset valuation allowance.allowance of $3.0 million and $119.2 million in fiscal 2016 and 2014, respectively. Also during fiscal 2014, the Company recorded income tax benefits totaling $2.2 million related to foreign tax law changes. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | March 31, | | | | 2015 | | | 2014 | | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.3 | | | $ | 0.2 | | Inventories | | | 3.8 | | | | 4.1 | | Plant and equipment | | | 0.8 | | | | 2.4 | | Pension and employee benefits | | | 50.5 | | | | 39.1 | | Net operating loss, capital loss, and credit carryforwards | | | 105.0 | | | | 122.4 | | Other, principally accrued liabilities | | | 6.8 | | | | 10.3 | | Total gross deferred tax assets | | | 167.2 | | | | 178.5 | | Less: valuation allowance | | | (48.0 | ) | | | (61.2 | ) | Net deferred tax assets | | | 119.2 | | | | 117.3 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Goodwill | | | 0.6 | | | | 4.2 | | Plant and equipment | | | 5.3 | | | | 7.6 | | Other | | | 1.0 | | | | 1.7 | | Total gross deferred tax liabilities | | | 6.9 | | | | 13.5 | | Net deferred tax asset | | $ | 112.3 | | | $ | 103.8 | |
| | March 31, | | | 2016 | | 2015 | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.1 | | | $ | 0.3 | | Inventories | | | 3.6 | | | | 3.8 | | Plant and equipment | | | 4.3 | | | | 0.8 | | Pension and employee benefits | | | 52.6 | | | | 50.5 | | Net operating loss, capital loss, and credit carryforwards | | | 109.4 | | | | 105.0 | | Other, principally accrued liabilities | | | 6.9 | | | | 6.8 | | Total gross deferred tax assets | | | 176.9 | | | | 167.2 | | Less: valuation allowance | | | (50.8 | ) | | | (48.0 | ) | Net deferred tax assets | | | 126.1 | | | | 119.2 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Plant and equipment | | | 5.5 | | | | 5.3 | | Goodwill | | | 0.6 | | | | 0.6 | | Other | | | 1.1 | | | | 1.0 | | Total gross deferred tax liabilities | | | 7.2 | | | | 6.9 | | Net deferred tax asset | | $ | 118.9 | | | $ | 112.3 | |
Deferred tax assets and liabilities are reported inAs of March 31, 2016, the Company adopted new accounting guidance, which requires that all deferred taxes be presented as non-current on the consolidated balance sheets as follows:sheets. See Note 1 for additional information.
| | March 31, | | | | 2015 | | | 2014 | | Current deferred tax asset | | $ | 13.4 | | | $ | 13.0 | | Noncurrent deferred tax asset | | | 102.7 | | | | 98.6 | | Current deferred tax liability (other current liabilities) | | | (0.4 | ) | | | (0.5 | ) | Noncurrent deferred tax liability | | | (3.4 | ) | | | (7.3 | ) | Total | | $ | 112.3 | | | $ | 103.8 | |
Unrecognized tax benefits were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 2.1 | | | $ | 9.0 | | Gross increases - tax positions in prior period | | | 3.1 | | | | 2.5 | | Gross decreases - tax positions in prior period | | | - | | | | (7.0 | ) | Gross increases - tax positions in current period | | | 0.4 | | | | 0.1 | | Settlements | | | - | | | | (1.9 | ) | Lapse of statute of limitations | | | - | | | | (0.8 | ) | Effect of exchange rate changes | | | - | | | | 0.2 | | Ending balance | | $ | 5.6 | | | $ | 2.1 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 5.6 | | | $ | 2.1 | | Gross increases - tax positions in prior period | | | - | | | | 3.1 | | Gross decreases - tax positions in prior period | | | (0.1 | ) | | | - | | Gross increases - tax positions in current period | | | 0.4 | | | | 0.4 | | Ending balance | | $ | 5.9 | | | $ | 5.6 | |
The Company’s liability for unrecognized tax benefits as of March 31, 20152016 was $5.6$5.9 million, and if recognized, $3.0$3.5 million would have an effective tax rate impact.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. At March 31, 20152016 and 2014,2015, accrued interest and penalties were not significant. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2015,2016, the Company was under income tax examination in a number of foreign jurisdictions. The Company does not anticipate a significant change in unrecognized tax benefits during the next twelve months.
The following tax years remain subject to examination for the Company’s major tax jurisdictions:
Austria | Fiscal 2012 - 20142015 | Brazil | Calendar 20102011 - 20142015 | Germany | Fiscal 20112012 - 20142015 | United States | Fiscal 2012 – 20142013 - 2015 |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
At March 31, 2015,2016, the Company had foreign tax credit carry forwards of $1.8 million that, if not utilized against domestic taxes, will expire in fiscal 2016 and 2017. The Company also had federal and state research and development tax credits of $20.9$23.3 million that, if not utilized against domestic taxes, will expire between fiscal 2018 and 2035.2036. The Company also had various state and local tax loss carry forwards of $186.0$190.8 million that, if not utilized against state apportioned taxable income, will expire at various times during fiscal 20162017 through 2034.2036. In addition, the Company had tax loss carry forwards of $304.6$330.7 million in various tax jurisdictions throughout the world. Certain of the carry forwards in the U.S. and many in foreign jurisdictions are offset by a valuation allowance. If not utilized against taxable income, $159.3$156.9 million of these tax losses will expire at various times during fiscal 20162017 through 2035, and $145.3$173.8 million, mainly related to India,Germany, Austria and Germany,India, will not expire due to an unlimited carry-forward period.
At March 31, 2015,2016, the Company provided $0.8$1.1 million of tax on undistributed earnings for certain subsidiaries not considered permanently reinvested. Undistributed earnings totaling $442.0$491.0 million are considered permanently reinvested in the Company’s remaining foreign operations, and no provision has been made for any taxes that would be payable upon the distribution of such earnings. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 9: | Earnings Per Share |
The components of basic and diluted earnings per share arewere as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Basic: | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 22.2 | | | $ | 131.9 | | | $ | (22.8 | ) | Less: Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (1.7 | ) | | | - | | Earnings (loss) from continuing operations available to Modine shareholders | | | 21.0 | | | | 128.7 | | | | (24.2 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) available to Modine shareholders | | $ | 21.6 | | | $ | 128.7 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Weighted average shares outstanding - basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.45 | | | $ | 2.75 | | | $ | (0.52 | ) | Earnings per share - discontinued operations | | | 0.01 | | | | - | | | | - | | Net earnings (loss) per share - basic | | $ | 0.46 | | | $ | 2.75 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 22.2 | | | $ | 131.9 | | | $ | (22.8 | ) | Less: Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (0.9 | ) | | | - | | Earnings (loss) from continuing operations available to Modine shareholders | | | 21.0 | | | | 129.5 | | | | (24.2 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) available to Modine shareholders | | $ | 21.6 | | | $ | 129.5 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Weighted average shares outstanding - basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | Effect of dilutive securities | | | 0.6 | | | | 0.7 | | | | - | | Weighted average shares outstanding - diluted | | | 47.8 | | | | 47.6 | | | | 46.6 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.44 | | | $ | 2.72 | | | $ | (0.52 | ) | Earnings per share - discontinued operations | | | 0.01 | | | | - | | | | - | | Net earnings (loss) per share - diluted | | $ | 0.45 | | | $ | 2.72 | | | $ | (0.52 | ) |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Basic: | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (1.7 | ) | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 128.7 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 128.7 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | Net (loss) earnings per share - basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (0.9 | ) | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 129.5 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 129.5 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | Effect of dilutive securities | | | - | | | | 0.6 | | | | 0.7 | | Weighted-average shares outstanding - diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | Net (loss) earnings per share - diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | |
For the years ended March 31, 2016, 2015, 2014, and 2013,2014, the calculation of diluted earnings per share excluded 0.8 million, 0.6 million, 0.8 million, and 1.10.8 million stock options, respectively, because they were anti-dilutive. For the year ended March 31, 2013,2016, the total number of potential dilutive securities was 0.30.4 million. However, these securities were not included in the computation of diluted net loss per share since to do so would decrease the loss per share.
Inventories consisted of the following:
| | March 31, | | | | 2015 | | | 2014 | | Raw materials and work in process | | $ | 80.7 | | | $ | 89.2 | | Finished goods | | | 27.0 | | | | 27.6 | | Total inventories | | $ | 107.7 | | | $ | 116.8 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | March 31, | | | 2016 | | 2015 | Raw materials and work in process | | $ | 79.5 | | | $ | 80.7 | | Finished goods | | | 31.5 | | | | 27.0 | | Total inventories | | $ | 111.0 | | | $ | 107.7 | |
Note 11: Note11: | Property, Plant and Equipment |
Property, plant and equipment, including depreciable lives, consisted of the following:
| | March 31, | | | | 2015 | | | 2014 | | Land | | $ | 8.2 | | | $ | 10.4 | | Buildings and improvements (10-40 years) | | | 221.0 | | | | 228.1 | | Machinery and equipment (3-12 years) | | | 652.0 | | | | 715.1 | | Office equipment (3-10 years) | | | 81.9 | | | | 89.5 | | Construction in progress | | | 31.7 | | | | 35.5 | | | | | 994.8 | | | | 1,078.6 | | Less: accumulated depreciation | | | (672.7 | ) | | | (719.0 | ) | Net property, plant and equipment | | $ | 322.1 | | | $ | 359.6 | |
| | March 31, | | | 2016 | | 2015 | Land | | $ | 7.2 | | | $ | 8.2 | | Buildings and improvements (10-40 years) | | | 221.3 | | | | 221.0 | | Machinery and equipment (3-12 years) | | | 694.3 | | | | 652.0 | | Office equipment (3-10 years) | | | 84.1 | | | | 81.9 | | Construction in progress | | | 36.7 | | | | 31.7 | | | | | 1,043.6 | | | | 994.8 | | Less: accumulated depreciation | | | (705.0 | ) | | | (672.7 | ) | Net property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
Depreciation expense totaled $48.6 million, $50.0 million $57.3 million and $55.1$57.3 million for the years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. Gains and losses related to the disposal of property, plant and equipment are recorded in SG&A expenses. Total losses related to the disposal of property, plant and equipment were $0.4 million, $1.1 million $2.6 million and $2.5$2.6 million for the years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively.
Note 12: Note 12: | Investment in Affiliate |
The Company’s investment in its non-consolidated affiliate is accounted for under the equity method. The Company has a 50 percent ownership of Nikkei Heat Exchanger Company, Ltd. (“NEX”). At both March 31, 20152016 and 2014,2015, the Company included the investment in NEX of $3.2 million and $3.4 million, respectively, in other noncurrent assets. At March 31, 2015,2016, the investment in NEX is equal to the Company's investment in the underlying assets.
The Company reports the results of operations for NEX in the consolidated financial statements using a one-month reporting delay. The Company reports equity in earnings from non-consolidated affiliates within other income and expense in the consolidated statements of operations. The Company’s share of NEX’s earnings for the years ended March 31, 2016, 2015, and 2014 and 2013 was $0.1 million, $0.6 million $0.7 million and $0.3$0.7 million, respectively. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Intangible assets consisted of the following:
| | March 31, 2015 | | | March 31, 2014 | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | | $ | 10.1 | | | $ | (5.7 | ) | | $ | 4.4 | | Acquired technology | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | | | 5.8 | | | | (0.2 | ) | | | 5.6 | | Customer relationships | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | | | 2.4 | | | | - | | | | 2.4 | | Total intangible assets | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | | | $ | 18.3 | | | $ | (5.9 | ) | | $ | 12.4 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | March 31, 2016 | | | March 31, 2015 | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 8.9 | | | $ | (6.3 | ) | | $ | 2.6 | | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | Acquired technology | | | 5.5 | | | | (1.5 | ) | | | 4.0 | | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | Customer relationships | | | 2.0 | | | | (0.4 | ) | | | 1.6 | | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | Total intangible assets | | $ | 16.4 | | | $ | (8.2 | ) | | $ | 8.2 | | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | |
The Company recorded $1.6 million, $0.8$1.6 million and $0.7$0.8 million of amortization expense during fiscal 2016, 2015 2014 and 2013,2014, respectively. Estimated future amortization expense is as follows:
Fiscal Year | | Estimated Amortization Expense | | 2016 | | $ | 1.6 | | 2017 | | | 1.6 | | 2018 | | | 1.6 | | 2019 | | | 1.5 | | 2020 | | | 1.4 | | 2021 & Beyond | | | 2.2 | |
Fiscal Year | | Estimated Amortization Expense | | 2017 | | $ | 1.6 | | 2018 | | | 1.6 | | 2019 | | | 1.5 | | 2020 | | | 1.3 | | 2021 | | | 0.8 | | 2022 & Beyond | | | 1.4 | |
Changes in the carrying amount of goodwill, by segment and in the aggregate, were as follows:
| | South America | | | Asia | | | Building HVAC | | | Total | | Balance, March 31, 2013 | | $ | 12.2 | | | $ | 0.5 | | | $ | 16.0 | | | $ | 28.7 | | Effect of exchange rate changes | | | (1.3 | ) | | | - | | | | 1.3 | | | | - | | Balance, March 31, 2014 | | | 10.9 | | | | 0.5 | | | | 17.3 | | | | 28.7 | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | Balance, March 31, 2015 | | $ | - | | | $ | 0.5 | | | $ | 15.7 | | | $ | 16.2 | |
| | Americas | | Asia | | Building HVAC | | Total | Balance, March 31, 2014 | | $ | 10.9 | | | $ | 0.5 | | | $ | 17.3 | | | $ | 28.7 | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | Balance, March 31, 2015 | | | - | | | | 0.5 | | | | 15.7 | | | | 16.2 | | Effect of exchange rate changes | | | - | | | | - | | | | (0.4 | ) | | | (0.4 | ) | Balance, March 31, 2016 | | $ | - | | | $ | 0.5 | | | $ | 15.3 | | | $ | 15.8 | |
The Company assesses goodwill for impairment annually, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. The Company conducted its annual assessment for goodwill impairment during the fourth quarter of fiscal 20152016 by applying a fair value-based test. Thetest and determined that the fair value of its reporting units exceeded their respective book values. In fiscal 2015, the Company determined its South America reporting unit’s goodwill was fully impaired and recorded a $7.8 million goodwill impairment charge as a result.within the Americas segment in connection with its annual assessment. The impairment charge was primarily caused by a decline in the financial outlook for the South America reporting unit. During the fourth quarter of fiscal 2015, the Company’s outlook for the markets served by its South America reporting unit, primarily in Brazil, shifted from a view that the markets may begin to recover to a view that the market downturn may be more prolonged. The economic weakness in Brazil has negatively affected the Company’s expected future cash flows for the South America segment. The fair value of the Company’s remaining reporting units exceeded their respective book values.Brazil.
As ofAt both March 31, 2016 and 2015, accumulated goodwill impairment losses within the South America segment totaled $7.8 million. As of March 31, 2015 and 2014, accumulated goodwill impairment losses totaled $23.8$31.6 million and $8.7 million within the North AmericaAmericas and Europe segments, respectively.
Note 15: Note 15: | Product Warranties, Operating Leases, and Other Commitments |
Product warranties: Modine provides product warranties for various product lines, withMost of the Company’s products are covered under a warranty periods generallyperiod ranging from one to five years. The Company accruesrecords a liability for estimated futureproduct warranty costs inobligations at the period in whichtime of sale to a customer based upon historical warranty experience. In addition, the sale is recorded. The Company bases warranty expense estimates on the best information available using analytical and statistical analysis of both historical and current claim data. The Company adjusts these expensesits warranty accruals if it becomes probable that expected claims will differ from initial estimates recorded at the time of sale.estimates. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 14.0 | | | $ | 12.6 | | Accruals for warranties issued | | | 5.8 | | | | 6.0 | | Accruals related to pre-existing warranties | | | 1.5 | | | | 8.3 | | Settlements | | | (9.2 | ) | | | (13.0 | ) | Effect of exchange rate changes | | | (1.7 | ) | | | 0.1 | | Ending balance | | $ | 10.4 | | | $ | 14.0 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 10.4 | | | $ | 14.0 | | Warranties recorded at time of sale | | | 5.7 | | | | 5.8 | | Adjustments to pre-existing warranties | | | (1.1 | ) | | | 1.5 | | Settlements | | | (6.7 | ) | | | (9.2 | ) | Effect of exchange rate changes | | | - | | | | (1.7 | ) | Ending balance | | $ | 8.3 | | | $ | 10.4 | |
Operating leases: The Company leases various facilities and equipment under operating leases. Rental expense for these leases totaled $11.9 million in fiscal 2016, and $11.5 million in both fiscal 2015 and 2014, and $11.3 million in fiscal 2013.2014.
Future minimum rental commitments at March 31, 20152016 under non-cancelable operating leases were as follows:
Fiscal Year | | | | 2016 | | $ | 8.2 | | 2017 | | | 5.7 | | 2018 | | | 4.3 | | 2019 | | | 3.8 | | 2020 | | | 4.0 | | 2021 and beyond | | | 23.9 | | Total | | $ | 49.9 | |
Fiscal Year | | | | 2017 | | $ | 8.1 | | 2018 | | | 5.6 | | 2019 | | | 4.8 | | 2020 | | | 4.6 | | 2021 | | | 4.1 | | 2022 and beyond | | | 26.3 | | Total | | $ | 53.5 | |
Indemnification agreements: From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years. In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 20152016 is not material.
Commitments: At March 31, 2015,2016, the Company had capital expenditure commitments of $15.5$20.5 million. Significant commitments include tooling and equipment expenditures for new and renewal programs with customers in North Americathe Americas and Europe.Europe segments. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
The Company has a commitment to rebuild the leased Airedale facility, which suffered significant destruction from a fire during fiscal 2014. The Company maintains insurance coverage and believes reimbursement for substantially all losses and costs directly attributable to the fire is probable. See Note 2 for additional information.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Long-term debt was comprised of the following:
| | Fiscal year of maturity | | | March 31, 2015 | | | March 31, 2014 | | | | | | | | | | | | Foreign credit agreements | | 2016 | | | $ | 0.2 | | | $ | 0.5 | | 6.8% Senior Notes | | 2017-2021 | | | | 125.0 | | | | 125.0 | | Revolving credit facility | | 2019 | | | | - | | | | - | | | | | | | | 125.2 | | | | 125.5 | | Capital lease obligations | | 2016-2030 | | | | 4.9 | | | | 6.5 | | | | | | | | 130.1 | | | | 132.0 | | Less: current portion | | | | | | (0.5 | ) | | | (0.8 | ) | Total long-term debt | | | | | $ | 129.6 | | | $ | 131.2 | |
| | Fiscal year of maturity | | | March 31, 2016 | | March 31, 2015 | | | | | | | | | | | Foreign credit agreements | | | 2018-2020 | | | $ | 0.4 | | | $ | 0.2 | | 6.8% Senior Notes | | | 2017-2021 | | | | 125.0 | | | | 125.0 | | Revolving credit facility | | | 2019 | | | | - | | | | - | | | | | | | | | 125.4 | | | | 125.2 | | Other (a) | | | 2017-2030 | | | | 8.6 | | | | 4.9 | | | | | | | | | 134.0 | | | | 130.1 | | Less: current portion | | | | | | | (8.5 | ) | | | (0.5 | ) | Total long-term debt | | | | | | $ | 125.5 | | | $ | 129.6 | |
| (a) | Other long-term debt includes capital lease obligations and other financing-type obligations. |
The Company maintains a $175.0 million domestic revolving credit facility, which expires in August 2018. Borrowings under the credit agreement bear interest at a variable rate based on the London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points (1.6(1.8 percent at March 31, 2015)2016) depending upon the Company’s leverage ratio, as defined below. At March 31, 20152016 and 2014,2015, no borrowings were outstanding under the revolving credit facility.
The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 2016 and 2015 and 2014 of $18.6$28.6 million and $32.4$18.6 million, respectively. At March 31, 2015,2016, the Company’s foreign unused lines of credit totaled $41.0$32.0 million. In aggregate, the Company had total available lines of credit of $216.0$207.0 million at March 31, 2015.2016.
Provisions in the Company’s revolving credit facility, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided a lienliens on substantially all domestic assets. The Company is also subject to a leverage ratio covenant, which requires the Company to limit its consolidated indebtedness, less a portion of the Company’s cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”), and an interest expense coverage ratio, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. The Company was in compliance with its debt covenants as of March 31, 2015.2016.
Long-term debt matures as follows:
Fiscal Year | | | | 2016 | | $ | 0.5 | | 2017 | | | 8.3 | | 2018 | | | 16.3 | | 2019 | | | 16.3 | | 2020 | | | 16.3 | | 2021 & beyond | | | 72.4 | | Total | | $ | 130.1 | |
Fiscal Year | | | | 2017 | | $ | 8.5 | | 2018 | | | 16.5 | | 2019 | | | 16.5 | | 2020 | | | 16.6 | | 2021 | | | 69.4 | | 2022 & beyond | | | 6.5 | | Total | | $ | 134.0 | |
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. At March 31, 20152016 and 2014,2015, the carrying value of Modine’s long-term debt approximated fair value, with the exception of the Senior Notes, which had a fair value of approximately $141.0$139.0 million and $140.0$141.0 million, respectively. The fair value of the Senior Notes is categorized as Level 2 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 17: Note 17: | Pension and Employee Benefit Plans |
Defined Contribution Employee Benefit Plans:
The Company maintains domestic 401(k) plans that allow employees to contribute a portion of their salary to help save for retirement. The Company matched 50 percent of employee contributions, up to 5 percent of employee compensation, during fiscal 2016, 2015, 2014, and 2013.2014. The Company also makes annual employer contributions into active employee accounts based upon a percentage of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary. The Company’s expense for defined contribution employee benefit plans during fiscal 2016, 2015, and 2014 and 2013 was $4.6 million, $5.9 million, $8.3 million, and $4.1$8.3 million, respectively. The decreasedecreasing trend in expense infrom fiscal 2015, as compared with the prior fiscal year,2014 was primarily due to lower discretionary employer contributions.
In addition, the Company maintains a non-qualified deferred compensation plan for eligible employees, and various foreignnon-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans:
Certain foreignnon-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.
Defined Benefit Employee Benefit Plans:
Pension plans: The Company has amaintains non-contributory defined benefit pension planplans that coverscover most of its domestic employees hired on or before December 31, 2003. The benefits provided are based primarily on years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based on a monthly retirement benefit amount. Domestic salaried employees hired after December 31, 2003 are not covered under anya defined benefit plan. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company’s foreign subsidiariesCompany also have legacy defined benefit plans coveringwhich cover a smallsmaller number of active employees.employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany and Austria and are closed to new participants.
The Company contributions ofcontributed $6.7 million, $5.9 million, and $8.0 million and $9.2 million to its U.S. pension plans during fiscal 2016, 2015, and 2014, and 2013, respectively,respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company completed a voluntary lump-sum payout program offered to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer. During fiscal 2016, a total of $65.3 million was paid from pension plan assets for lump-sum payouts, which reduced the Company’s pension obligation by the same amount. In connection with these lump-sum payouts, the Company recorded $42.1 million of non-cash settlement losses related to the accelerated recognition of unamortized actuarial losses previously recorded on the consolidated balance sheets within accumulated other comprehensive loss. During fiscal 2016, the Company recorded $33.3 million and $8.8 million of settlement losses as SG&A expenses and cost of sales, respectively, within the consolidated statements of operations.
Postretirement plans: The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans during fiscal 2016, 2015, and 2014 and 2013 was $0.3 million, $0.1 million, $1.0 million, and $1.1$1.0 million, respectively.
Measurement Date: The Company uses March 31 as the measurement date for its pension and postretirement plans. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s pension plans, for the fiscal years ended March 31, 20152016 and 20142015 were as follows:
| | 2015 | | | 2014 | | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 295.7 | | | $ | 309.6 | | Service cost | | | 0.5 | | | | 0.6 | | Interest cost | | | 13.0 | | | | 13.0 | | Actuarial loss (gain) | | | 40.6 | | | | (10.8 | ) | Benefits paid | | | (14.6 | ) | | | (18.6 | ) | Effect of exchange rate changes | | | (7.0 | ) | | | 1.9 | | Benefit obligation at end of year | | $ | 328.2 | | | $ | 295.7 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 213.7 | | | $ | 200.6 | | Actual return on plan assets | | | 10.8 | | | | 22.2 | | Benefits paid | | | (14.6 | ) | | | (18.6 | ) | Employer contributions | | | 7.1 | | | | 9.5 | | Fair value of plan assets at end of year | | $ | 217.0 | | | $ | 213.7 | | Funded status at end of year | | $ | (111.2 | ) | | $ | (82.0 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (0.8 | ) | | $ | (1.0 | ) | Noncurrent liability | | | (110.4 | ) | | | (81.0 | ) | | | $ | (111.2 | ) | | $ | (82.0 | ) |
| | 2016 | | 2015 | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 328.2 | | | $ | 295.7 | | Service cost | | | 0.6 | | | | 0.5 | | Interest cost | | | 11.2 | | | | 13.0 | | Actuarial (gain) loss | | | (2.8 | ) | | | 40.6 | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | Effect of exchange rate changes | | | 1.9 | | | | (7.0 | ) | Benefit obligation at end of year | | $ | 261.0 | | | $ | 328.2 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 217.0 | | | $ | 213.7 | | Actual return on plan assets | | | (5.3 | ) | | | 10.8 | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | Employer contributions | | | 7.9 | | | | 7.1 | | Fair value of plan assets at end of year | | $ | 141.5 | | | $ | 217.0 | | Funded status at end of year | | $ | (119.5 | ) | | $ | (111.2 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (0.9 | ) | | $ | (0.8 | ) | Noncurrent liability | | | (118.6 | ) | | | (110.4 | ) | | | $ | (119.5 | ) | | $ | (111.2 | ) |
| (a) | In fiscal 2016, $65.3 million was paid from plan assets in connection with lump-sum payouts. |
The accumulated benefit obligation for pension plans was $325.5$257.9 million and $293.0$325.5 million as of March 31, 20152016 and 2014,2015, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $192.3$162.0 million and $153.4$192.3 million as of March 31, 20152016 and 2014,2015, respectively.
Costs for the Company’s pension plans included the following components for the fiscal years ended March 31, 2016, 2015, 2014, and 2013:2014:
| | 2015 | | | 2014 | | | 2013 | | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.5 | | | $ | 0.6 | | | $ | 0.6 | | Interest cost | | | 13.0 | | | | 13.0 | | | | 13.5 | | Expected return on plan assets | | | (16.7 | ) | | | (15.7 | ) | | | (16.1 | ) | Amortization of net actuarial loss | | | 5.5 | | | | 6.3 | | | | 5.0 | | Net periodic benefit cost | | $ | 2.3 | | | $ | 4.2 | | | $ | 3.0 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 46.4 | | | $ | (17.3 | ) | | $ | 27.0 | | Amortization of net actuarial loss | | | (5.5 | ) | | | (6.3 | ) | | | (5.0 | ) | Total recognized in other comprehensive loss (income) | | $ | 40.9 | | | $ | (23.6 | ) | | $ | 22.0 | |
| | 2016 | | 2015 | | 2014 | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.6 | | | $ | 0.5 | | | $ | 0.6 | | Interest cost | | | 11.2 | | | | 13.0 | | | | 13.0 | | Expected return on plan assets | | | (14.9 | ) | | | (16.7 | ) | | | (15.7 | ) | Amortization of net actuarial loss | | | 6.4 | | | | 5.5 | | | | 6.3 | | Settlements (a) | | | 42.1 | | | | - | | | | - | | Net periodic benefit cost | | $ | 45.4 | | | $ | 2.3 | | | $ | 4.2 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 17.5 | | | $ | 46.4 | | | $ | (17.3 | ) | Amortization of net actuarial loss (a) | | | (48.5 | ) | | | (5.5 | ) | | | (6.3 | ) | Total recognized in other comprehensive (income) loss | | $ | (31.0 | ) | | $ | 40.9 | | | $ | (23.6 | ) |
| (a) | During fiscal 2016, in connection with lump-sum payouts to pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company estimates $7.2$5.6 million of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2016. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)2017.
The Company used a discount rate of 4.0%4.1% and 4.7%4.0% as of March 31, 20152016 and 2014,2015, respectively, in determining its benefit obligations under its U.S. pension plans. The Company used a discount rate of 1.3%1.8% and 3.0%1.3% as of March 31, 20152016 and 2014,2015, respectively, in determining its benefit obligations under its foreignnon-U.S. pension plans. The Company used a discount rate of 4.7%4.3%, 4.4%4.7%, and 4.9%4.4% to determine its costs under its U.S. pension plans for the fiscal years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. The Company used a discount rate of 3.0%1.3%, 3.5%3.0%, and 5.0%3.5% to determine its costs under its foreignnon-U.S. pension plans for the fiscal years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. AThe Company used a similar process was used to determine the discount rate for the Company’s foreignits non-U.S. pension obligationsobligations.
Plan assets in the U.S. defined benefit plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted averageweighted-average asset allocations at the measurement dates of March 31, 20152016 and 20142015 were as follows:
| | Target allocation | | | Plan assets | | | | | | | 2015 | | | 2014 | | Equity securities | | | 55 | % | | | 55 | % | | | 57 | % | Debt securities | | | 38 | % | | | 36 | % | | | 37 | % | Alternative assets | | | 5 | % | | | 5 | % | | | 5 | % | Cash | | | 2 | % | | | 4 | % | | | 1 | % | | | | 100 | % | | | 100 | % | | | 100 | % |
| | Target allocation | | Plan assets | | | | | | 2016 | | 2015 | Equity securities | | | 55 | % | | | 56 | % | | | 55 | % | Debt securities | | | 38 | % | | | 36 | % | | | 36 | % | Alternative assets | | | 5 | % | | | 4 | % | | | 5 | % | Cash | | | 2 | % | | | 4 | % | | | 4 | % | | | | 100 | % | | | 100 | % | | | 100 | % |
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 20152016 and 2014,2015, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term return of plan assets, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2016, 2015, 2014 and 20132014 U.S. pension plan expense, the expected rate of return on plan assets was 8.0 percent. For fiscal 20162017 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 8.0 percent.
The Company’s funding policy for domestic qualifiedits U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. The Company expects to make contributions of $6.7$8.1 million to these plans during fiscal 2016.2017.
Estimated pension benefit payments for the next ten fiscal years are as follows:
Fiscal Year | | Estimated pension benefit payments | | 2016 | | $ | 15.1 | | 2017 | | | 15.7 | | 2018 | | | 16.9 | | 2019 | | | 17.2 | | 2020 | | | 18.0 | | 2021-2025 | | | 94.0 | |
Fiscal Year | | Estimated Pension Benefit Payments | | 2017 | | $ | 14.5 | | 2018 | | | 15.2 | | 2019 | | | 15.3 | | 2020 | | | 15.8 | | 2021 | | | 16.1 | | 2022-2026 | | | 79.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 18: Note 18: | Derivative Instruments |
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated, and is effective, as a hedge, and, if so, on the nature of the hedging activity. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Commodity Derivatives: The Company has, from time to time, enteredperiodically enters into futures contracts related to certain forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts wasis to reduce its exposure to changing market prices for future purchases of these commodities. The Company has not designated commodity contracts entered into in fiscal 2013, 2014, 2015, and 20152016 for hedge accounting. Accordingly, unrealized gains and losses on thosethese contracts are recorded within cost of sales. The Company designated contracts entered into prior to fiscal 2013 for hedge accounting. Accordingly, the amounts recorded in accumulated other comprehensive loss (“AOCI”) related to those contracts remained in AOCI until the underlying commodity purchases impacted earnings.
Foreign exchange contracts: The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. The Company has not designated these contracts for hedge accounting. Accordingly, unrealized gains and losses related to changes in fair value are recorded in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| | Balance Sheet Location | | March 31, 2015 | | | March 31, 2014 | | Foreign exchange contracts | | Other current liabilities | | $ | 0.3 | | | $ | 0.2 | | Commodity derivatives | | Other current liabilities | | | 0.1 | | | | 0.1 | | Commodity derivatives | | Other noncurrent liabilities | | | - | | | | 0.1 | |
| Balance Sheet Location | | March 31, 2016 | | | March 31, 2015 | | Foreign exchange contracts | Other current assets | | $ | 0.1 | | | $ | - | | Foreign exchange contracts | Other current liabilities | | | - | | | | 0.3 | | Commodity derivatives | Other current liabilities | | | 0.1 | | | | 0.1 | |
The amounts recorded in AOCI and in the consolidated statements of operations for all of the Company’s derivative financial instruments were as follows:
| | March 31, 2015 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss Recognized in Continuing Operations | | Commodity derivatives | | $ | - | | Cost of sales | | $ | - | | | $ | 0.2 | | Foreign exchange contracts | | | - | | Other income (expense) - net | | | - | | | | 1.1 | | Total | | $ | - | | | | $ | - | | | $ | 1.3 | |
| | March 31, 2014 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss Recognized in Continuing Operations | | Commodity derivatives | | $ | - | | Cost of sales | | $ | 0.5 | | | $ | 0.5 | | Total | | $ | - | | | | $ | 0.5 | | | $ | 0.5 | |
| | March 31, 2013 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss (Gain) Recognized in Continuing Operations | | Commodity derivatives | | $ | 0.5 | | Cost of sales | | $ | 2.6 | | | $ | 4.6 | | Foreign exchange contracts | | | - | | Other income (expense) - net | | | - | | | | (0.3 | ) | Total | | $ | 0.5 | | | | $ | 2.6 | | | $ | 4.3 | |
| Statement of Operations | | Years ended March 31, | | Location | | 2016 | | 2015 | | 2014 | Commodity derivatives | Cost of sales | | $ | (0.7 | ) | | $ | (0.2 | ) | | $ | (0.5 | ) | Foreign exchange contracts | Other income (expense) - net | | | 0.6 | | | | (1.1 | ) | | | - | | Total loss | | | $ | (0.1 | ) | | $ | (1.3 | ) | | $ | (0.5 | ) |
Note 19: Note 19: | Contingencies and Litigation |
Market risk: The Company sells a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, off-highway, automotive, and commercial heating and air conditioning markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or more of the markets it serves. The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits. However, the risk associated with market downturns, such as the downturn experienced in fiscal 2009 and 2010, is still present. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Credit risk: The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 2016 and 2015, two customers each accounted for ten percent or more of the Company’s total sales. In fiscal 2014, and 2013, one customer accounted for ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers represented 63 percent 56 percent, and 59 percent of total sales in both fiscal 2016 and 2015 2014, and 2013, respectively.56 percent in fiscal 2014. At March 31, 2016 and 2015, and 2014, 4745 percent and 4647 percent, respectively, of the Company's trade accounts receivable were from the Company's top ten customers. These customers operate primarily in the automotive, truck, and heavy equipment markets and are influenced by similar market and general economic factors. Collateral or advanced payments are generally not required, but they may be used in those cases where the Company identifies a substantial credit risk.required. The Company has not experienced significant credit losses to customers in the markets served. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company manages credit risk through its focus on the following:
| ·● | Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; |
| ·● | Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; |
| ·● | Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and |
| ·● | Insurance – ensuring that insurance providers maintain acceptable financial ratings. |
Counterparty risks: The Company manages counterparty risks through its focus on the following:
| ·● | Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; |
| ·● | Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and |
| ·● | Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company. |
Europe value added tax: During fiscal 2012, the Company determined it was not properly applying value added tax (“VAT”) to certain cross-border transactions within the Europe segment and established an accrual of $10.7 million for estimated VAT liabilities, including interest and penalties. During fiscal 2013 and 2014, the Company completed the registration and filing process with the taxing authorities and began making payments to the applicable jurisdictions. During fiscal 2015, 2014, and 2013, the Company recorded reductions to SG&A expenses of $2.0 million, $2.9 million and $1.6 million, respectively, as a result of favorable changes to the estimated VAT obligations.
Environmental: The United States Environmental Protection Agency (“USEPA”) has designated the Company as a potentially responsible party (“PRP”) for remediation of three sites where the Company had involvement.sites. These sites include:are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be material to the Company’s financial position due to Modine’sits relatively small portion of contributed materials. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company has recorded environmental investigation and remediation accruals for groundwater contamination at its manufacturing facility in its wholly-owned subsidiary in Brazil (“Modine Brazil”) and subsurface contamination at its former manufacturing facility in the Netherlands along withand groundwater contamination at its manufacturing facility in Brazil. During fiscal 2016, the Company recorded charges totaling $1.6 million, within cost of sales, to establish an environmental accrual for investigative work related to a previously-owned manufacturing facility in the United States. In addition, the Company has recorded accruals for other lesser environmental matters at certain facilities located in the United States. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $3.8$5.1 million and $5.1$3.8 million at March 31, 20152016 and 2014,2015, respectively. As additional information becomes available, the Company will re-assess any potentialthe liability related to these matters and revise the estimated accrual, if necessary. Based on currently available information, the Company believes the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages. During fiscal 2011, one of the adjacent businesses to the Company’s facility in Brazil filed suit against the Company’s subsidiary in Brazil (“Modine Brazil,Brazil”), seeking remediation and certain other damages as a result of the contamination allegedly attributable to the Company’sits operations. The Company is defending this suit and believes that the ultimate outcome of this matter will not be material.
Brazil antitrust investigation: During the fourth quarter of fiscal 2015, Brazil’s Administrative Council for Economic Defense (CADE) provided formal notice to Modine Brazil of an administrative investigation regarding alleged violations of Brazil’s antitrust regulations by Modine Brazil and certain of its employees during a period of time at least seven years ago. Duringprior to the fourth quarternotice. As of fiscalMarch 31, 2016 and March 31, 2015, the Company recorded a charge ofaccrued $2.8 million and $3.2 million (BRL10.0 million) within SG&A expenses,(BRL 10.0 million at each date), respectively, representing the estimated amount that may be incurred in connection with the management and resolution of this matter. Due to the ongoing nature of the investigation,this matter, the Company cannot provide assurance of theits ultimate resolution of this matter at this time.
Other litigation: In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits or proceedings are not expected to have a material adverse effect on the Company’s consolidated financial statements. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 20: Note 20: | Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | Foreign Currency Translation | | | Cash Flow Hedges | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | - | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | - | | | | (45.2 | ) | | | (113.2 | ) | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | - | | | | 5.4 | | | | 5.4 | | Amortization of unrecognized prior service credit (a) | | | - | | | | - | | | | (0.1 | ) | | | (0.1 | ) | Income taxes | | | - | | | | - | | | | 13.2 | | | | 13.2 | | Total other comprehensive loss | | | (68.0 | ) | | | - | | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | - | | | $ | (157.9 | ) | | $ | (198.6 | ) |
| | Foreign Currency Translation | | Defined Benefit Plans | | Total | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | 4.7 | | | | (16.6 | ) | | | (11.9 | ) | Reclassifications: | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 48.3 | | | | 48.3 | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.2 | ) | | | (0.2 | ) | Income taxes | | | - | | | | (11.8 | ) | | | (11.8 | ) | Total other comprehensive loss | | | 4.7 | | | | 19.7 | | | | 24.4 | | | | | | | | | | | | | | | Balance, March 31, 2016 | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) |
| | Foreign Currency Translation | | | Cash Flow Hedges | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2013 | | $ | 17.8 | | | $ | (1.1 | ) | | $ | (145.1 | ) | | $ | (128.4 | ) | | | | | | | | | | | | | | | | | | Other comprehensive income before reclassifications | | | 9.5 | | | | - | | | | 18.7 | | | | 28.2 | | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | - | | | | 6.2 | | | | 6.2 | | Amortization of unrecognized prior service credit (a) | | | - | | | | - | | | | (1.2 | ) | | | (1.2 | ) | Commodity derivatives (b) | | | - | | | | 0.5 | | | | - | | | | 0.5 | | Income taxes | | | - | | | | 0.6 | | | | (9.8 | ) | | | (9.2 | ) | Total other comprehensive income | | | 9.5 | | | | 1.1 | | | | 13.9 | | | | 24.5 | | | | | | | | | | | | | | | | | | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | - | | | $ | (131.2 | ) | | $ | (103.9 | ) |
| | Foreign Currency Translation | | Defined Benefit Plans | | Total | Balance, March 31, 2014 | | $ | 27.3 | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | (45.2 | ) | | | (113.2 | ) | Reclassifications: | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | 5.4 | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.1 | ) | | | (0.1 | ) | Income taxes | | | - | | | | 13.2 | | | | 13.2 | | Total other comprehensive loss | | | (68.0 | ) | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) |
| (a) | Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 17 for additional information about the Company’s pension plans. |
| (b) | Reclassifications for commodity derivatives are included in cost of sales. |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 21: Note 21: | Segment and Geographic Information |
The Company’s product lines consist of heat-transfer components and systems. The Company serves the vehicular, industrial, and building heating, ventilating and air conditioning markets. During fiscal 2015,2016, the Company changedcombined its North America and South America segments into the name of its Commercial ProductsAmericas segment to Building HVAC in orderstreamline operations, gain synergies and improve its cost structure. As a result, the Company recast the prior-period segment financial information to better reflect the nature of the segment’s product lines. There were no changesconform to the operations or reportedcurrent-period presentation. There was no impact to the Company’s consolidated financial results of the segmentstatements as a result. Throughout fiscal 2015,2016, the Company’s fivefour operating segments were as follows:
North America:Americas:
Comprised of vehicular and industrial original equipment products in North America and South America, as well as aftermarket products in South America.
Europe: Comprised of vehicular and industrial original equipment products in Europe.
South America:
Comprised of vehicular and industrial original equipment products and aftermarket products in South America.
Asia: Comprised of vehicular and industrial original equipment products in Asia.
Building HVAC: Comprised of building heating, ventilating and air conditioning products throughout the world.
Each operating segment is managed by a vice president or managing director and has separate financial results reviewed by the Company’s chief operating decision maker. These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
Effective April 1, 2015, the Company combined its North America and South America segment operations, with the objective of streamlining its operations to gain synergies and improve its cost structure. Beginning for fiscal 2016, the Company will report financial results for the new Americas operating segment, which will include both North America and South America.
The following is a summary of net sales, gross profit, and operating income by segment:
| | Years ended March 31, | | Net sales: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 573.5 | | | $ | 568.7 | | | $ | 564.5 | | Europe | | | 578.2 | | | | 584.4 | | | | 498.0 | | South America | | | 93.9 | | | | 122.7 | | | | 133.8 | | Asia | | | 81.2 | | | | 71.5 | | | | 59.5 | | Building HVAC | | | 186.3 | | | | 146.5 | | | | 139.3 | | Segment total | | | 1,513.1 | | | | 1,493.8 | | | | 1,395.1 | | Corporate and eliminations | | | (16.7 | ) | | | (16.2 | ) | | | (19.1 | ) | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | Net sales: | | 2016 | | 2015 | | 2014 | Americas | | $ | 585.5 | | | $ | 666.9 | | | $ | 688.3 | | Europe | | | 524.1 | | | | 578.2 | | | | 584.4 | | Asia | | | 79.0 | | | | 81.2 | | | | 71.5 | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | Segment total | | | 1,370.0 | | | | 1,512.6 | | | | 1,490.7 | | Corporate and eliminations | | | (17.5 | ) | | | (16.2 | ) | | | (13.1 | ) | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Gross profit: | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | North America | | $ | 97.0 | | | | 16.9 | % | | $ | 93.5 | | | | 16.4 | % | | $ | 81.4 | | | | 14.4 | % | Europe | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | | | 61.0 | | | | 12.3 | % | South America | | | 12.1 | | | | 12.8 | % | | | 20.8 | | | | 16.9 | % | | | 22.5 | | | | 16.8 | % | Asia | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | | | 1.7 | | | | 2.8 | % | Building HVAC | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | | | 40.8 | | | | 29.3 | % | Segment total | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | | | 207.4 | | | | 14.9 | % | Corporate and eliminations | | | 1.3 | | | | - | | | | 0.8 | | | | - | | | | 1.2 | | | | - | | Gross profit | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % | | $ | 208.6 | | | | 15.2 | % |
67
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Gross profit: | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Americas | | $ | 100.1 | | | | 17.1 | % | | $ | 109.1 | | | | 16.3 | % | | $ | 114.3 | | | | 16.6 | % | Europe | | | 68.1 | | | | 13.0 | % | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | Asia | | | 12.2 | | | | 15.5 | % | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | Building HVAC | | | 54.2 | | | | 29.9 | % | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | Segment total | | | 234.6 | | | | 17.1 | % | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | Corporate and eliminations (a) | | | (11.1 | ) | | | - | | | | 1.3 | | | | - | | | | 0.8 | | | | - | | Gross profit | | $ | 223.5 | | | | 16.5 | % | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | Years ended March 31, | Operating income: | | 2016 | | 2015 | | 2014 | Americas | | $ | 36.2 | | | $ | 33.4 | | | $ | 49.6 | | Europe | | | 13.3 | | | | 25.7 | | | | 9.6 | | Asia | | | 0.8 | | | | 0.3 | | | | (3.3 | ) | Building HVAC | | | 13.9 | | | | 19.1 | | | | 9.4 | | Segment total | | | 64.2 | | | | 78.5 | | | | 65.3 | | Corporate and eliminations (a) | | | (71.7 | ) | | | (25.8 | ) | | | (28.1 | ) | Operating (loss) income | | $ | (7.5 | ) | | $ | 52.7 | | | $ | 37.2 | |
(In millions, except per share amounts)
| | Years ended March 31, | | Operating income: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 45.9 | | | $ | 42.1 | | | $ | 39.2 | | Europe | | | 25.7 | | | | 9.6 | | | | (25.4 | ) | South America | | | (12.3 | ) | | | 7.5 | | | | 11.2 | | Asia | | | 0.3 | | | | (3.3 | ) | | | (8.8 | ) | Building HVAC | | | 19.1 | | | | 9.4 | | | | 10.0 | | Segment total | | | 78.7 | | | | 65.3 | | | | 26.2 | | Corporate and eliminations | | | (26.0 | ) | | | (28.1 | ) | | | (26.8 | ) | Operating income (loss) | | $ | 52.7 | | | $ | 37.2 | | | $ | (0.6 | ) |
| (a) | During fiscal 2016, the Company recorded pension settlement losses of $42.1 million at Corporate, within SG&A expenses ($33.3 million) and cost of sales ($8.8 million). See Note 17 for additional information. |
Inter-segment sales are accounted for based on an established markup over production costs. Net sales for corporate and eliminations primarily represent the elimination of inter-segment sales. The operating loss for corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and also includes a portion of central servicesother costs that are either not directly attributable to an operating segment.segment or not considered when management evaluates segment performance. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of total assets by segment:
| | March 31, | | | | 2015 | | | 2014 | | North America | | $ | 231.8 | | | $ | 218.1 | | Europe | | | 283.1 | | | | 367.9 | | South America | | | 46.5 | | | | 80.1 | | Asia | | | 92.4 | | | | 92.8 | | Building HVAC | | | 131.4 | | | | 132.7 | | Corporate and eliminations | | | 146.4 | | | | 140.7 | | Total assets | | $ | 931.6 | | | $ | 1,032.3 | |
| | March 31, | | | | 2016 | | | 2015 | | Americas | | $ | 267.2 | | | $ | 277.7 | | Europe | | | 301.9 | | | | 282.7 | | Asia | | | 104.0 | | | | 92.2 | | Building HVAC (a) | | | 99.0 | | | | 131.3 | | Corporate and eliminations | | | 148.8 | | | | 147.0 | | Total assets | | $ | 920.9 | | | $ | 930.9 | |
| (a) | As of March 31, 2015, total assets within the Building HVAC segment included $48.0 million of insurance-related assets for the rebuild of the facility damaged by the Airedale fire. See Note 2 for additional information. |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | Capital expenditures: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 25.9 | | | $ | 18.9 | | | $ | 19.0 | | Europe | | | 21.5 | | | | 22.9 | | | | 16.5 | | South America | | | 4.3 | | | | 5.7 | | | | 3.4 | | Asia | | | 3.8 | | | | 4.6 | | | | 7.8 | | Building HVAC | | | 2.8 | | | | 1.0 | | | | 3.1 | | Total capital expenditures | | $ | 58.3 | | | $ | 53.1 | | | $ | 49.8 | |
| | Years ended March 31, | | Capital expenditures: | | 2016 | | | 2015 | | | 2014 | | Americas | | $ | 26.7 | | | $ | 30.2 | | | $ | 24.6 | | Europe | | | 24.8 | | | | 21.5 | | | | 22.9 | | Asia | | | 6.2 | | | | 3.8 | | | | 4.6 | | Building HVAC | | | 5.1 | | | | 2.8 | | | | 1.0 | | Total capital expenditures | | $ | 62.8 | | | $ | 58.3 | | | $ | 53.1 | |
| | Years ended March 31, | | Depreciation and amortization expense: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 18.1 | | | $ | 19.3 | | | $ | 20.1 | | Europe | | | 19.8 | | | | 26.6 | | | | 23.4 | | South America | | | 3.2 | | | | 3.3 | | | | 3.7 | | Asia | | | 7.2 | | | | 6.7 | | | | 6.4 | | Building HVAC | | | 3.3 | | | | 2.2 | | | | 2.2 | | Total depreciation and amortization expense | | $ | 51.6 | | | $ | 58.1 | | | $ | 55.8 | |
| | Years ended March 31, | | Depreciation and amortization expense: | | 2016 | | | 2015 | | | 2014 | | Americas | | $ | 22.1 | | | $ | 21.3 | | | $ | 22.6 | | Europe | | | 18.0 | | | | 19.8 | | | | 26.6 | | Asia | | | 6.5 | | | | 7.2 | | | | 6.7 | | Building HVAC | | | 3.6 | | | | 3.3 | | | | 2.2 | | Total depreciation and amortization expense | | $ | 50.2 | | | $ | 51.6 | | | $ | 58.1 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a summary of net sales by geographical area, based upon the location of the selling unit:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | United States | | $ | 669.3 | | | $ | 645.7 | | | $ | 637.4 | | Germany | | | 193.8 | | | | 229.5 | | | | 214.8 | | Hungary | | | 161.0 | | | | 150.3 | | | | 117.6 | | Austria | | | 118.7 | | | | 109.8 | | | | 97.7 | | Brazil | | | 93.2 | | | | 122.0 | | | | 128.8 | | Other | | | 260.4 | | | | 220.3 | | | | 179.7 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | United States | | $ | 627.6 | | | $ | 669.3 | | | $ | 645.7 | | Germany | | | 155.3 | | | | 193.8 | | | | 229.5 | | Hungary | | | 145.9 | | | | 161.0 | | | | 150.3 | | Austria | | | 113.1 | | | | 118.7 | | | | 109.8 | | Other | | | 310.6 | | | | 353.6 | | | | 342.3 | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | | 2015 | | | 2014 | | United States | | $ | 105.0 | | | $ | 100.7 | | Germany | | | 66.0 | | | | 81.8 | | Other European countries | | | 79.9 | | | | 100.0 | | China | | | 36.3 | | | | 38.9 | | Other | | | 34.9 | | | | 38.2 | | Total property, plant and equipment | | $ | 322.1 | | | $ | 359.6 | |
| | March 31, | | | | 2016 | | | 2015 | | United States | | $ | 92.5 | | | $ | 92.7 | | Austria | | | 44.2 | | | | 41.5 | | China | | | 33.6 | | | | 31.8 | | Germany | | | 32.1 | | | | 47.2 | | Hungary | | | 31.4 | | | | 28.9 | | Other | | | 104.8 | | | | 80.0 | | Total property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
The following is a summary of net sales by product type:end market:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Modules/assemblies | | $ | 367.5 | | | $ | 379.9 | | | $ | 358.5 | | Oil coolers | | | 233.0 | | | | 215.4 | | | | 194.1 | | HVAC equipment | | | 199.6 | | | | 159.5 | | | | 151.8 | | EGR coolers | | | 183.5 | | | | 172.5 | | | | 136.1 | | Charge air coolers | | | 148.9 | | | | 157.0 | | | | 161.8 | | Condensers | | | 140.0 | | | | 129.2 | | | | 128.8 | | Radiators | | | 124.8 | | | | 129.0 | | | | 134.4 | | Other | | | 99.1 | | | | 135.1 | | | | 110.5 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Commercial vehicle | | $ | 459.8 | | | $ | 512.5 | | | $ | 477.0 | | Automotive | | | 396.8 | | | | 401.8 | | | | 395.6 | | Off-highway | | | 206.2 | | | | 274.6 | | | | 320.8 | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | Other | | | 108.3 | | | | 121.2 | | | | 137.7 | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
6967
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) Note 22: Note 22: | Quarterly Financial Data (Unaudited) |
Quarterly financial data is summarized below for the years ended March 31, 20152016 and 2014:2015:
| | Fiscal 2015 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2015 | | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | Earnings (loss) from continuing operations (a) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | Net earnings (loss) attributable to Modine (a) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| | Fiscal 2016 quarters ended | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2016 | | | | | | | | | | | | | | | | | Net sales | | $ | 346.1 | | | $ | 334.0 | | | $ | 328.7 | | | $ | 343.7 | | | $ | 1,352.5 | | Gross profit | | | 57.0 | | | | 45.7 | | | | 58.6 | | | | 62.2 | | | | 223.5 | | Earnings (loss) from continuing operations (a) | | | 5.5 | | | | (22.5 | ) | | | 8.2 | | | | 7.8 | | | | (1.0 | ) | Net earnings (loss) attributable to Modine (a) | | | 5.1 | | | | (22.5 | ) | | | 8.2 | | | | 7.6 | | | | (1.6 | ) | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.11 | | | $ | (0.47 | ) | | $ | 0.17 | | | $ | 0.16 | | | $ | (0.03 | ) | Diluted | | | 0.11 | | | | (0.47 | ) | | | 0.17 | | | | 0.16 | | | | (0.03 | ) |
| | Fiscal 2014 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2014 | | | | | | | | | | | | | | | | | | Net sales | | $ | 375.8 | | | $ | 364.2 | | | $ | 347.0 | | | $ | 390.6 | | | $ | 1,477.6 | | Gross profit | | | 61.9 | | | | 57.2 | | | | 56.8 | | | | 62.3 | | | | 238.2 | | Earnings (loss) from continuing operations (a) (b) | | | 10.6 | | | | 5.0 | | | | (3.4 | ) | | | 119.7 | | | | 131.9 | | Net earnings (loss) attributable to Modine (a) (b) | | | 10.0 | | | | 4.6 | | | | (3.6 | ) | | | 119.4 | | | | 130.4 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.21 | | | $ | 0.10 | | | $ | (0.08 | ) | | $ | 2.51 | | | $ | 2.75 | | Diluted | | | 0.21 | | | | 0.10 | | | | (0.08 | ) | | | 2.49 | | | | 2.72 | |
| | Fiscal 2015 quarters ended | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2015 | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | Earnings (loss) from continuing operations (b) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | Net earnings (loss) attributable to Modine (b) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| (a) | The quarterly financial data presented above includesDuring fiscal 2016, restructuring expenses totaled $2.6 million, $1.0 million, $1.6 million, and $11.4 million for the quarters ended June 30, 2015, September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 6). During the fourth quarter of fiscal 2016, the Company recorded a $9.9 million asset impairment chargescharge related to restructuring actionsa manufacturing facility in Europe, North America,Germany (see Note 6). During fiscal 2016, non-cash pension settlement losses totaled $39.2 million, $1.1 million, and South America segments. $1.8 million for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 17). During the fourth quarter of fiscal 2016, the Company recorded a $9.5 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire (see Note 2). Also during the fourth quarter of fiscal 2016, the Company reversed a deferred tax asset valuation allowance, and, as a result, recorded an income tax benefit of $3.0 million (see Note 8). |
| (b) | During fiscal 2015, restructuring expenses totaled $0.8 million, $1.0 million, $1.9 million, and $1.0 million for the quarters ended June 30, 2014, September 30, 2014, December 31, 2014, and March 31, 2015, respectively.respectively (see Note 6). During the third quarter of fiscal 2015, the Company sold a wind tunnel within the Europe segment and recognized a gain of $3.2 million.million (see Note 6). During the fourth quarter of fiscal 2015, the Company recorded a $7.8 million goodwill impairment charge related to its South America segment. Also during the fourth quarter of fiscal 2015, the Company recorded(see Note 14) and a $3.2 million charge in its South America segment associated with a legal matter in Brazil. During fiscal 2014, restructuring expenses totaled $0.5 million, $0.6 million, $9.4 million, and $5.6 million for the quarters ended June 30, 2013, September 30, 2013, December 31, 2013, and March 31, 2014, respectively. The Company recorded impairment charges of $2.0 million and $1.2 million during the quarters ended December 31, 2013 and March 31, 2014, respectively. See Notes 6, 14, and 19 for additional information. |
| (b) | The quarter ended March 31, 2014 was benefited by the reversal of U.S. income tax valuation allowances totaling $119.2 million. SeeBrazil (see Note 8 for additional information.19). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Modine Manufacturing Company:
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1), present fairly, in all material respects, the financial position of Modine Manufacturing Company and its subsidiaries at March 31, 20152016 and 2014,2015, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 20152016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2015,2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in fiscal 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP Milwaukee, Wisconsin May 29, 201526, 2016 ITEM 9.
| | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not applicable.
ITEM 9A.
| | CONTROLS AND PROCEDURES. |
Conclusion Regarding Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company's President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded the design and operation of the Company's disclosure controls and procedures were effective as of March 31, 2015.2016.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, and effected by the Company's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2015.2016. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based on this assessment, management concluded that, as of March 31, 2015,2016, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20152016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the fourth quarter of fiscal 20152016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
| | OTHER INFORMATION. |
None. PART III
ITEM 10.10 . | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors. The Company incorporates by reference the information appearing in the Company's Proxy Statement for the 20152016 Annual Meeting of Shareholders to be held on July 23, 201521, 2016 (the “2015“2016 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Executive Officers of the Registrant" in this Form 10-K.
Compliance with Section 16(a) of the Exchange Act. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Code of Ethics. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Ethics.” The Company's Code of Ethics (labeled as the Code of Ethics and Business Conduct) is included on its website, www.modine.com (About Modine link).
Board Committee Charters. The Board of Directors has approved charters for its Audit Committee, Officer Nomination and Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee. These charters are included on the Company’s website, www.modine.com (Investors link).
Audit Committee Financial Expert. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Committees of the Board of Directors – Audit Committee.”
Audit Committee Disclosure. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the captions “Committees of the Board of Directors – Audit Committee” and “Board Meetings and Committees.”
Guidelines on Corporate Governance. The Board of Directors has adopted Guidelines on Corporate Governance. The Company’s Guidelines on Corporate Governance are included on its website, www.modine.com (Investors link).
Security Holder Recommendation of Board Nominees. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
ITEM 11.
| | EXECUTIVE COMPENSATION. |
The information appearing in the 20152016 Annual Meeting Proxy Statement under the captions “Compensation Discussion and Analysis,” “Compensation of Directors,” “Committees of the Board of Directors – Officer Nomination and Compensation Committee: Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” is incorporated herein by reference.
ITEM 12.
| | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The Company incorporates by reference the information relating to stock ownership under the caption “Security Ownership of Certain Beneficial Owners and Management,” and under the caption “Equity Compensation Plan Information,” in the 20152016 Annual Meeting Proxy Statement.
ITEM 13.
| | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The Company incorporates by reference the information contained in the 20152016 Annual Meeting Proxy Statement under the captions “Certain Relationships and Related Transactions” and “Director Independence.”
ITEM 14.
| | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The Company incorporates by reference the information contained in the 20152016 Annual Meeting Proxy Statement under the caption “Independent Auditors’ Fees for Fiscal 20152016 and 2014.2015.” PART IV
ITEM 15.
| | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) (a) | Documents Filed. The following documents are filed as part of this Report: |
| Page in Form 10-K | | | 1. The consolidated financial statements of Modine Manufacturing Company and its subsidiaries filed under Item 8: | | | | Consolidated Statements of Operations for the years ended March 31, 2016, 2015 2014 and 20132014 | 3938 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2016, 2015 2014 and 20132014 | 4039 | Consolidated Balance Sheets at March 31, 20152016 and 20142015 | 4140 | Consolidated Statements of Cash Flows for the years ended March 31, 2016, 2015 2014 and 20132014 | 4241 | Consolidated Statements of Shareholders' Equity for the years ended March 31, 2016, 2015 2014 and 20132014 | 4342 | Notes to Consolidated Financial Statements | 44-7043-68 | Report of Independent Registered Public Accounting Firm | 7169 | | | 2. Financial Statement Schedules.Schedules | | | | The following financial statement schedule should be read in conjunction with the consolidated financial statements set forth in Item 8: | | Schedule II -- Valuation and Qualifying Accounts | 7674 | | | Schedules other than those listed above are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements and the notes thereto. | | | | 3. Exhibits and Exhibit Index. | 77-7975-77 | | | See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number. | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 29, 201526, 2016 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. Burke | | | | Thomas A. Burke, President | | | | and Chief Executive Officer | | | | (Principal Executive Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. Burke | | Thomas A. Burke | May 29, 2015 | President, Chief Executive Officer and Director | | (Principal Executive Officer) | May 26, 2016 | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 29, 2015 | Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | May 26, 2016 | | | /s/ Marsha C. Williams | | Marsha C. Williams Director | May 29, 2015 | Director | 26, 2016 | | | /s/ David J. Anderson | | David J. Anderson Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Charles P. Cooley | | Charles P. Cooley Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Suresh V. Garimella | | Suresh V. Garimella Director | May 29, 2015 | Director | 26, 2016 |
/s/ Larry O. Moore | | Larry O. Moore Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Christopher W. Patterson | | Christopher W. Patterson Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Christine Y. Yan | | Christine Y. Yan Director | May 29, 2015 | Director | 26, 2016 | | | /s/ David G. Bills | | David G. Bills Director | May 29, 2015 | Director | 26, 2016 |
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES (A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | | | | Additions | | | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Deductions | | | Balance at End of Period | | | | | | | | | | | | | | | | | | 2015: Allowance for Doubtful Accounts | | $ | 1.1 | | | $ | 0.4 | | | $ | (0.2 | )(b) | | $ | (0.3 | )(a) | | $ | 1.0 | | Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | )(b) | | $ | - | | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | | | | 2014: Allowance for Doubtful Accounts | | $ | 0.8 | | | $ | 0.6 | | | $ | - | (b) | | $ | (0.3 | )(a) | | $ | 1.1 | | Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | (b) | | $ | - | | | $ | 61.2 | | | | | | | | | | | | | | | | | | | | | | | 2013: Allowance for Doubtful Accounts | | $ | 0.8 | | | $ | 0.5 | | | $ | (0.1 | )(b) | | $ | (0.4 | )(a) | | $ | 0.8 | | Valuation Allowance for Deferred Tax Assets | | $ | 146.8 | | | $ | 7.7 | | | $ | 18.3 | (b) | | $ | - | | | $ | 172.8 | |
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | 2016: Valuation Allowance for Deferred Tax Assets | | $ | 48.0 | | | $ | 1.5 | | | $ | 1.3 | | (a) | | $ | 50.8 | | | | | | | | | | | | | | | | | | | | 2015: Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | ) | (a) | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | 2014: Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | | (a) | | $ | 61.2 | |
Notes: | (a) | Bad debts charged off during the year
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| (b) | TranslationForeign currency translation and other adjustments |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 20152016 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By Referenced To | | Filed Herewith | | | | | | | | 3.1 | | Amended and Restated Articles of Incorporation, as amended. | | Exhibit 4.2 to Registrant’s Registration Statement on Form S-3 (333-161030) dated August 4, 2009 | | | | | | | | | | 3.2 | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated February 10, 2015 | | | | | | | | | | 4.1 | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 ("2003 10-K") | | | | | | | | | | 4.2 | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto. | | | | | | | | | | 4.3** | | Note Purchase and Private Shelf Agreement (the “Original Note Purchase Agreement”) dated as of August 12, 2010 among the Registrant and the Series A Purchasers named therein of $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020 and $25,000,000 Private Shelf Facility and each Prudential Affiliate (as defined therein) that may become bound by certain provisions thereof. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 12, 2010 8-K (“August 12, 2010 8-K”) | | | | | | | | | | 4.4** | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to August 12, 2010 8-K | | | | | | | | | | 4.5** | | First Amendment to Note Purchase and Private Shelf Agreement and Waiver dated as of March 15, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated March 15, 2012 8-K | | | | | | | | | | 4.6** | | Second Amendment to Note Purchase and Private Shelf Agreement dated as of April 20, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 20, 2012 8-K | | | | | | | | | | 4.7** | | Third Amendment to Note Purchase and Private Shelf Agreement dated as of August 6, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 6, 2012 8-K | | |
4.8** | | Second Amended and Restated Credit Agreement dated as of August 30, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, LC Issuer, Swing Line Lender and as a Lender, and U.S. Bank, N.A. and Wells Fargo Bank, N.A. as Syndication Agents and as Lenders, BMO Harris Bank N.A., as Documentation Agent and as Lender and Associated Bank, N.A., Comerica Bank and Sovereign Bank as Lenders.Lenders | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated August 30, 2013 (“August 30, 2013 8-K”) | | | | | | | | | | 4.9** | | Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Note Purchase Amendment”) dated as of August 30, 2013, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) pursuant to which the Company and the Note Holders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to August 30, 2013 8-K | | | | | | | | | | 4.10** | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to August 30, 2013 8-K | | | | | | | | | | 4.11 | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | 10.1* | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | 10.2* | | Employment Agreement between the Registrant and Thomas A. Burke dated as of June 15, 2007. | | Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 15, 2007 | | | | | | | | | | 10.3* | | Form of Amendment No. 1 to Employment Agreement entered into as of July 1, 2008 with Thomas A. Burke. | | Exhibit 10.1 to Registrant’sRegistrant���s Current Report on Form 8-K dated July 1, 2008 | | | | | | | | | | 10.4* | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke. | | Exhibit 10(f) to Registrant’s Form 10-K for the year ended March 31, 2004 | | | | | | | | | | 10.5* | | Employment Agreement, dated July 1, 2014, between Modine Holding GmbH and Holger Schwab, effective as of July 1, 2015. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2014 | | | | | | | | | | 10.6* | | 2000 Stock Incentive Plan for Non-Employee Directors (Amended and Restated as of March 16, 2005). | | Appendix A to Registrant’s Proxy Statement for the 2005 Annual Meeting dated June 15, 2005 | | | | | | | | | | 10.7* | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant's Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | 10.8*10.7* | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | 10.9*10.8* | | 2007 Incentive Compensation Plan. | | Appendix A to the Registrant's Proxy Statement dated June 18, 2007 | | |
10.10* | | | | | | | 10.9* | | 2008 Incentive Compensation Plan (Amended and Restated effective May 7, 2014). | | Exhibit 10.1 to Registrant's Current Report on Form 8-K dated July 17, 2014 | | |
| 10.10* | | | | | | 10.11* | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Thomas A. Burke. | | Exhibit 10.17 to Registrant's Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | 10.12*10.11* | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | | | | | | | | | 10.12* | | Form of Fiscal 20152016 Modine Performance Stock Award Agreement (Executive Council members). | | | Exhibit 10.1 to Form 10-Q for the first quarter ended June 30, 2015 ("June 30, 2015 10-Q") | X | | | | | | | | | 10.13* | | Form of Fiscal 20152016 Modine Incentive Stock Options Award Agreement (Executive Council members). | | | Exhibit 10.2 to June 30, 2015 10-Q | X | | | | | | | | | 10.14* | | Form of Fiscal 20152016 Modine Restricted Stock Award Agreement (Executive Council members). | | | Exhibit 10.3 to June 30, 2015 10-Q | X | | | | | | | | | 10.15* | | Form of Fiscal 20152016 Modine Non-Qualified Stock Option Award Agreement. | Agreement | | Exhibit 10.4 to June 30, 2015 10-Q | X | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of independent registered public accounting firm. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Instance Document | | | | X | | | | | | | | 101.SCH | | XBRL Taxonomy Extension Schema | | | | X | | | | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | X | | | | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | X | | | | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | X | | | | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | X |
*Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K.
**Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
s | | | % of sales | | | Year Ended March 31, 2016 Compared with Year Ended March 31, 2015: Fiscal 2016 net sales decreased $143 million, or 10 percent, from the prior year, primarily due to lower sales in our Americas and Europe segments. Sales volume increases in our Europe segment were more than offset by a $76 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2016 sales were negatively affected by a $110 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar. Gross profit decreased $23 million to $224 million in fiscal 2016, yet gross margin of 16.5 percent was consistent with the prior year. The decrease in gross profit was primarily due to a $14 million unfavorable impact of foreign currency exchange rate changes, $9 million of pension settlement losses, and lower sales volume in the Americas segment, partially offset by lower material costs, improved production efficiencies, and cost-savings initiatives. Fiscal 2016 SG&A expenses increased $21 million from the prior year. The increase was primarily due to $33 million of pension settlement losses and the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in the prior year, partially offset by ongoing cost-control initiatives and a $10 million favorable impact of foreign currency exchange rate changes. Restructuring expenses increased $12 million in fiscal 2016 compared with the prior year, primarily due to severance expenses in the Europe and Americas segments and equipment transfer costs related to plant consolidation activities in the Americas segment. In fiscal 2016, we recorded a $10 million impairment charge to write down the carrying value of a manufacturing facility in Germany to fair value. In fiscal 2015, we recorded a goodwill impairment charge of $8 million in Brazil and recognized a gain of $3 million from the sale of a wind tunnel in Germany. The operating loss of $8 million in fiscal 2016 represents a $61 million decline from $53 million of operating income in the prior year. This decline was primarily due to $42 million of pension settlement losses, lower gross profit, higher restructuring expenses, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by ongoing cost-control initiatives. Other income during fiscal 2016 includes a $10 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire in fiscal 2014. Our benefit for income taxes was $9 million in fiscal 2016, compared with a provision for income taxes of $19 million in fiscal 2015. This $28 million change was primarily due to $16 million of income tax benefits related to pension settlement losses in the current year, a decrease in pre-tax operating earnings, and a $3 million income tax benefit related to the reversal of a deferred tax asset valuation allowance in the current year.
Year Ended March 31, 2015 Compared with Year Ended March 31, 2014:
Fiscal 2015 net sales increased $18 million, or 1 percent, from fiscal 2014,the prior year, primarily due to sales increases in our Building HVAC Asia, and North AmericaAsia segments, partially offset by lower sales in our South AmericaAmericas segment, as economic conditions in Brazil were weak, and in our Europe segment, where sales increases were more than offset by a $35 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2015 sales were negatively affected by a $43 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar during the year.dollar.
Gross profit increased $9 million to $247 million in fiscal 2015 and gross margin increased 40 basis points to 16.5 percent, primarily due to sales volume improvements and lower warranty costs.
Fiscal 2015 SG&A expenses in fiscal 2015 increased $2 million to $184 million compared withfrom the prior year, primarily due to increased engineering and development costs and SG&A expenses at our Barkell business, which we acquired in the fourth quarter of fiscal 2014, partially offset by $5 million of recoveries from business interruption insurance during fiscal 2015 related to the Airedale fire.
Restructuring expenses decreased $11 million in fiscal 2015 compared with the prior year, primarily due to lower restructuring costs in Germany,our Europe segment, partially offset by higher severance-related costsseverance expenses in South America.our Americas segment.
DuringIn fiscal 2015, we sold a wind tunnel in Germany that we no longer considered to be a core asset, and recognized a gain of $3 million. In addition, we recorded a goodwill impairment charge of $8 million in our South America segment during fiscal 2015.related to Brazil. In fiscal 2014, we recorded $3 million of impairment charges, primarily related to restructuring actions in our Europe segment.
Operating income of $53 million in fiscal 2015 increased $16 million compared with fiscal 2014.the prior year. This improvement was primarily due to higher gross profit on increased sales volume, lower restructuring expenses, and the gain on the sale of the wind tunnel, partially offset by higher impairment charges and slightly higher SG&A expenses.
Our provision for income taxes was $19 million in fiscal 2015, compared with a benefit from income taxes of $108 million in fiscal 2014. The provision for taxes in the U.S. totaled $9 million in fiscal 2015, compared with a significant benefit for taxes in fiscal 2014, which resulted primarily from the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $10 million and $11 million in fiscal 2015 and 2014, respectively. Earnings from discontinued operations of $1 million in fiscal 2015 related to a gain associated with the final collection of proceeds from the fiscal 2009 sale of our Electronic Cooling business.
Year Ended March 31, 2014 Compared with Year Ended March 31, 2013:
In fiscal 2014, net sales increased $102 million, or 7 percent, from fiscal 2013, primarily due to an $86 million sales increase in our Europe segment, driven by sales volume improvements within the commercial vehicle and automotive markets. In addition, sales in our Asia, Building HVAC and North America segments increased year over year. Our South America segment sales decreased, however, primarily due to unfavorable foreign currency exchange rate changes.
Gross profit increased $29 million to $238 million in fiscal 2014 from the prior year and gross margin increased 90 basis points to 16.1 percent, primarily due to higher sales volume and favorable material costs.
SG&A expenses in fiscal 2014 increased $16 million to $182 million from fiscal 2013, primarily due to higher compensation-related expenses, the reversal of a $2 million acquisition-related liability that reduced SG&A expenses in the prior year, and $1 million of costs directly related to the Airedale fire, partially offset by lower professional service expenses.
Restructuring expenses were $16 million and $17 million in fiscal 2014 and 2013, respectively, primarily due to employee severance costs related to restructuring activities within our Europe segment. In addition, we recorded impairment charges during fiscal 2014 and 2013 of $3 million and $26 million, respectively, primarily related to our restructuring actions in the Europe segment.
Operating income of $37 million during fiscal 2014 represented a $38 million improvement compared with fiscal 2013. This improvement was primarily due to higher gross profit on increased sales volume and favorable material costs and lower impairment charges, partially offset by higher SG&A expenses.
Our benefit for income taxes was $108 million in fiscal 2014 compared with a provision for income taxes of $10 million in fiscal 2013. The large benefit for income taxes in fiscal 2014 was primarily due to the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $11 million and $10 million in fiscal 2014 and 2013, respectively.
Segment Results of Operations
During fiscal 2015, we changed the name of our Commercial Products segment to Building HVAC in order to better reflect the nature of the segment’s product lines. There were no changes to the operations or reported financial results of the segment as a result.
Effective April 1, 2015,2016, we combined our North America and South America segments into the Americas segment to streamline operations, with the objective of streamlining our operations to gain synergies and improve our cost structure. Beginning forAs a result, we recast the prior-period segment financial information to conform to the current-period presentation. There was no impact to our consolidated financial statements as a result.
Americas | | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 586 | | | | 100.0 | % | | $ | 667 | | | | 100.0 | % | | $ | 688 | | | | 100.0 | % | Cost of sales | | | 486 | | | | 82.9 | % | | | 558 | | | | 83.7 | % | | | 574 | | | | 83.4 | % | Gross profit | | | 100 | | | | 17.1 | % | | | 109 | | | | 16.3 | % | | | 114 | | | | 16.6 | % | Selling, general and administrative expenses | | | 55 | | | | 9.4 | % | | | 65 | | | | 9.7 | % | | | 62 | | | | 9.0 | % | Restructuring expenses | | | 9 | | | | 1.5 | % | | | 3 | | | | 0.4 | % | | | 1 | | | | 0.2 | % | Impairment charges | | | - | | | | - | | | | 8 | | | | 1.2 | % | | | 1 | | | | 0.2 | % | Operating income | | $ | 36 | | | | 6.2 | % | | $ | 33 | | | | 5.0 | % | | $ | 50 | | | | 7.2 | % |
Americas net sales decreased $81 million, or 12 percent, in fiscal 2016 we will report financial results forcompared with the new Americas operating segment, which will includeprior year. Sales were lower in both North America and South America. North America | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 574 | | | | 100.0 | % | | $ | 569 | | | | 100.0 | % | | $ | 565 | | | | 100.0 | % | Cost of sales | | | 477 | | | | 83.1 | % | | | 475 | | | | 83.6 | % | | | 484 | | | | 85.6 | % | Gross profit | | | 97 | | | | 16.9 | % | | | 94 | | | | 16.4 | % | | | 81 | | | | 14.4 | % | Selling, general and administrative expenses | | | 50 | | | | 8.7 | % | | | 50 | | | | 8.6 | % | | | 40 | | | | 7.2 | % | Restructuring expenses | | | 1 | | | | 0.2 | % | | | 1 | | | | 0.2 | % | | | - | | | | - | | Impairment charges | | | - | | | | - | | | | 1 | | | | 0.2 | % | | | 2 | | | | 0.3 | % | Operating income | | $ | 46 | | | | 8.0 | % | | $ | 42 | | | | 7.4 | % | | $ | 39 | | | | 6.9 | % |
foreign currency exchange rate changes. Sales in North America net sales increased $5decreased $43 million, or 1 percent, from fiscal 2014 to fiscal 2015, and increased $4 million, or 1 percent, from fiscal 2013 to fiscal 2014. The fiscal 2015 sales increase was primarily due to lower sales volume to off-highway and commercial vehicle customers, partially offset by higher sales volume to automotive customers. Sales volume to all markets in Brazil also declined during fiscal 2016, as economic conditions in Brazil remained weak. Sales decreased $21 million, or 3 percent, in fiscal 2015 compared with fiscal 2014, primarily due to lower sales in Brazil and a $9 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in North America, where higher sales volume to commercial vehicle customers were partially offset by decreased sales volume to off-highway customers as economic conditions in that market remained relatively weak. The fiscal 2014 sales increase, compared with fiscal 2013, was primarily due to higher sales volume to automotive and commercial vehicle customers, partially offset by decreasedlower sales volume to off-highway customers.
Gross profit decreased $9 million, yet gross margin increased 5080 basis points to 16.917.1 percent in fiscal 2016. The decrease in gross profit was primarily due to lower sales volume, a $3 million unfavorable impact of foreign currency exchange rate changes, and $2 million of environmental charges for investigative work related to a previously-owned manufacturing facility, partially offset by lower material costs, cost savings from the McHenry, Illinois manufacturing facility closure, and improved production efficiencies. Gross profit decreased $5 million and gross margin decreased 30 basis points to 16.3 percent in fiscal 2015 compared with fiscal 2014, primarily due to lower sales volume in Brazil, partially offset by lower warranty costs and sales volume improvements partially offset by unfavorable sales mix. The gross margin increasein North America.
Fiscal 2016 SG&A expenses decreased $10 million from fiscal 2013 to fiscal 2014 wasthe prior year, primarily due to lower material costs.
ongoing cost-control initiatives, the absence of a $3 million charge for a legal matter in Brazil in the prior year, and a $3 million favorable impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $50increased $3 million during fiscal 2015 were consistent with fiscal 2014. The $10 million increase in SG&A expenses in fiscal 2014 wasfrom the prior year, primarily due to higher compensation-related expenses and increased engineering and development costs.the $3 million charge for the legal matter in fiscal 2015.
During fiscal 2014, we approved a plan to close our McHenry, Illinois manufacturing facility and are currently in the process of transferring the facility’s production to other North America segment manufacturing facilities, which we expect to complete within the first six months of fiscal 2016. We recorded $1 million of restructuring expenses during fiscal 2015, primarily related to equipment transfer costs incurred to relocate McHenry’s product lines to other manufacturing facilities. In fiscal 2014, as a result of the planned closure,2016, we recorded $1$9 million of restructuring expenses, primarily related to severance expenses associated with a voluntary retirement program in the U.S., and the planned closure of our Washington, Iowa manufacturing facility, which we expect to complete during fiscal 2017, and equipment transfer costs and $1related to plant consolidation activities in North America. In fiscal 2015, we recorded $3 million of assetrestructuring expenses, primarily related to severance expenses in Brazil, to better align our cost structure with the market conditions in Brazil, and equipment transfer costs related to the closure of our McHenry, Illinois manufacturing facility, which we completed during fiscal 2016. We also recorded an $8 million goodwill impairment charges.charge during fiscal 2015, primarily due to a decline in the financial outlook for Brazil.
Operating income in fiscal 2015 of $46 million increased $4 million from $42$36 million in fiscal 2014, primarily due to2016 increased gross profit. Fiscal 2014 operating income improved $3 million compared with fiscal 2013,the prior year, primarily due to increased gross profit,lower SG&A expenses and the absence of the goodwill impairment charge in the prior year, partially offset by lower gross profit and higher restructuring expenses. Operating income of $33 million in fiscal 2015 decreased $17 million compared with the prior year, primarily due to the goodwill impairment charge, lower gross profit, and higher SG&A and restructuring expenses. 2627
Europe | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % | | $ | 498 | | | | 100.0 | % | Cost of sales | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % | | | 437 | | | | 87.7 | % | Gross profit | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % | | | 61 | | | | 12.3 | % | Selling, general and administrative expenses | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % | | | 45 | | | | 9.1 | % | Restructuring expenses | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % | | | 17 | | | | 3.4 | % | Impairment charges | | | - | | | | - | | | | 2 | | | | 0.3 | % | | | 24 | | | | 4.8 | % | Gain on sale of wind tunnel | | | (3 | ) | | | -0.6 | % | | | - | | | | - | | | | - | | | | - | | Operating income (loss) | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % | | $ | (25 | ) | | | -5.0 | % |
Europe
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 524 | | | | 100.0 | % | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % | Cost of sales | | | 456 | | | | 87.0 | % | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % | Gross profit | | | 68 | | | | 13.0 | % | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % | Selling, general and administrative expenses | | | 39 | | | | 7.4 | % | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % | Restructuring expenses | | | 6 | | | | 1.2 | % | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % | Impairment charges | | | 10 | | | | 1.9 | % | | | - | | | | - | | | | 2 | | | | 0.3 | % | Gain on sale of wind tunnel | | | - | | | | - | | | | (3 | ) | | | -0.6 | % | | | - | | | | - | | Operating income | | $ | 13 | | | | 2.5 | % | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % |
Europe net sales decreased $54 million, or 9 percent, in fiscal 2016 compared with the prior year, primarily due to a $76 million unfavorable impact of foreign currency exchange rate changes and lower sales volume to off-highway customers, partially offset by increased sales volume to commercial vehicle and automotive customers. Sales decreased $6 million, or 1 percent, fromin fiscal 2014 to2015 compared with fiscal 2015,2014, primarily due to a $35 million unfavorable impact of foreign currency exchange rate changes and lower tooling sales, partially offset by increased sales volume to commercial vehicle and automotive customers.
Gross profit decreased $1 million, yet gross margin increased 110 basis points to 13.0 percent in fiscal 2016. The $86 million, or 17 percent,gross margin increase in sales from fiscal 2013 to fiscal 2014 was primarily due to increasedhigher sales volume to commercial vehicle customers, higher tooling sales, and a $23lower material costs. In addition, gross profit was negatively impacted by $9 million favorable impact offrom foreign currency exchange rate changes.
Gross In fiscal 2015, gross margin decreased 20 basis points to 11.9 percent incompared with fiscal 2015,2014, primarily due to unfavorable sales mix, production inefficiencies caused by increased volume at certain manufacturing facilities and plant consolidation activities, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by the absence of $4 million of accelerated depreciation recorded in the prior yearfiscal 2014 for production equipment that is no longer used and lower warranty costs. Gross profit increased $10
Fiscal 2016 SG&A expenses decreased $5 million while gross margin declined 20 basis points to 12.1 percent in fiscal 2014 compared with fiscal 2013. This decrease in gross margin wasfrom the prior year, primarily due to a $5$6 million favorable customer pricing settlement in the prior year, $4 millionimpact of accelerated depreciation in fiscal 2014, and higher warranty costs, partially offset by higher sales volume, favorable sales mix, and lower material costs.
foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $44 million were consistent with the prior year, as higher engineering and development costs were offset by a favorable impact of foreign currency exchange rate changes. SG&A expenses decreased $1
In fiscal 2016, we recorded $6 million from fiscal 2013 to fiscal 2014, primarily due to the favorable impact of restructuring actionsexpenses, primarily related to severance expenses. In addition, we recorded a $10 million asset impairment charge. These restructuring expenses and lower engineering and development costs, partially offset by higher compensation-related expenses.
Duringimpairment charge primarily related to a manufacturing facility in Germany, which was generating pre-tax losses, resulting in management deciding to exit a certain product line in the future. In fiscal 2015, we recorded $2 million of restructuring expenses, primarily due to plant consolidation activities, as we substantially completed the combination of two manufacturing facilities in Germany into one, more competitive manufacturing operation. Also during fiscal 2015,and we sold a wind tunnel that we no longer considered to be a core asset for cash proceeds of $6 million, which resulted in a gain of $3 million. DuringIn fiscal 2014, and fiscal 2013, we recorded $15 million and $17 million, respectively, of restructuring expenses, primarily related to employee severance costs. Alsoexpenses, and $2 million of asset impairment charges.
Operating income of $13 million in fiscal 20142016 decreased $13 million compared with the prior year, primarily due to an increase in restructuring expenses and 2013 we recorded asset impairment charges totaling $2and the absence of a $3 million and $24 million, respectively, primarily related to several facilities that we have sold or expect to sell.
gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&A expenses. Operating income of $26 million in fiscal 2015 increased $16 million compared with fiscal 2014,the prior year, primarily due to a reduction in restructuring expenses and impairment charges and the gain from selling the wind tunnel. Operating income of $10 million in fiscal 2014 improved $35 million compared with fiscal 2013, primarily due to lower asset impairment charges and increased sales volume, which drove higher gross profit. 2728
South America | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 94 | | | | 100.0 | % | | $ | 123 | | | | 100.0 | % | | $ | 134 | | | | 100.0 | % | Cost of sales | | | 82 | | | | 87.2 | % | | | 102 | | | | 83.1 | % | | | 111 | | | | 83.2 | % | Gross profit | | | 12 | | | | 12.8 | % | | | 21 | | | | 16.9 | % | | | 23 | | | | 16.8 | % | Selling, general and administrative expenses | | | 14 | | | | 15.9 | % | | | 13 | | | | 10.8 | % | | | 12 | | | | 8.4 | % | Restructuring expenses | | | 2 | | | | 1.6 | % | | | - | | | | - | | | | - | | | | - | | Impairment charges | | | 8 | | | | 8.4 | % | | | - | | | | - | | | | - | | | | - | | Operating (loss) income | | $ | (12 | ) | | | -13.1 | % | | $ | 8 | | | | 6.1 | % | | $ | 11 | | | | 8.4 | % |
South America | | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 79 | | | | 100.0 | % | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % | Cost of sales | | | 67 | | | | 84.5 | % | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % | Gross profit | | | 12 | | | | 15.5 | % | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % | Selling, general and administrative expenses | | | 11 | | | | 14.5 | % | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % | Operating income (loss) | | $ | 1 | | | | 1.0 | % | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % |
Asia net sales decreased $29$2 million, or 243 percent, in fiscal 20152016 compared with fiscal 2014,the prior year, primarily due to lower sales volume to commercial vehicle, off-highway customers in China and automotive customers, as economic conditions in Brazil were generally weak in fiscal 2015,Korea and a $9 million unfavorable impact of foreign currency exchange rate changes, primarily due to the strengthening of the U.S. dollar versus the Brazilian real. Sales decreased $11 million, or 8 percent, in fiscal 2014 compared with fiscal 2013, primarily due to a $14$4 million unfavorable impact of foreign currency exchange rate changes, partially offset by increasedhigher sales volume to commercial vehicle customers.
Gross profit decreased $9 million and gross margin decreased to 12.8 percentautomotive customers in fiscal 2015 compared with the prior year, primarily due to lower sales volume. Gross profit decreased $2 million from fiscal 2013 to fiscal 2014, primarily due to a $2 million unfavorable impact of foreign currency exchange rate changes.
SG&A expenses in fiscal 2015 increased $1 million compared with fiscal 2014, primarily due to a $3 million charge for a legal matter in Brazil (see Note 19 of the Notes to Consolidated Financial Statements for more information), partially offset by the favorable impact of cost control measures and a $1 million favorable impact of foreign currency exchange rate changes. SG&A expenses increased $1 million from fiscal 2013 to fiscal 2014, primarily due to the reversal of a $2 million acquisition-related liability in fiscal 2013 and higher compensation-related expenses in fiscal 2014, partially offset by a $2 million favorable impact of foreign currency exchange rate changes.
During fiscal 2015, we recorded $2 million of restructuring expenses for employee severance-related costs to reduce headcount and better align our cost structure with the market conditions in Brazil. We also recorded an $8 million goodwill impairment charge during fiscal 2015, which was primarily caused by a decline in the financial outlook for the South America segment.
The $12 million operating loss in fiscal 2015 represented a $20 million decline compared with the prior year and was primarily due to lower gross profit on lower sales volume and the goodwill impairment charge. Operating income decreased $3 million from fiscal 2013 to fiscal 2014, primarily due to lower gross profit on lower sales volumeChina and increased SG&A expenses.
Asia | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % | | $ | 60 | | | | 100.0 | % | Cost of sales | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % | | | 58 | | | | 97.2 | % | Gross profit | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % | | | 2 | | | | 2.8 | % | Selling, general and administrative expenses | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % | | | 11 | | | | 17.6 | % | Operating income (loss) | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % | | $ | (9 | ) | | | -14.8 | % |
Asia netoverall sales in India. Sales increased $9 million, or 13 percent, in fiscal 2015 compared with fiscal 2014, primarily due to new automotive program launches in China and higherincreased overall sales across all markets in India, partially offset by lower sales volume within theto off-highway markets in China and Korea. Salescustomers.
Gross margin increased $12 million, or 20130 basis points to 15.5 percent in fiscal 20142016 compared with fiscal 2013,the prior year, primarily due to higherfavorable sales volume in the automotive and off-highway markets. mix. Gross profit increased $3 million and gross margin increased 170 basis points to 14.2 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume. Gross profit increased $7
Fiscal 2016 SG&A expenses decreased $1 million and gross margin increased to 12.5 percent in fiscal 2014 compared with fiscal 2013,from the prior year, primarily due to higher sales volume.
cost-control initiatives, partially offset by acquisition-related costs associated with a joint venture that we formed in fiscal 2016. See Note 3 to the Notes to Consolidated Financial Statements for additional information on this joint venture. Fiscal 2015 SG&A expenses in fiscal 2015 were consistent with the prior year, yet decreased as a percentage of sales. SG&A expenses increased
Operating income of $1 million in fiscal 20142016 increased $1 million compared with fiscal 2013, yet decreased slightly as a percentage of sales.
the prior year, primarily due to lower SG&A expenses. Operating income of less than $1 million in fiscal 2015 represented a $3 million improvement compared with the operating loss in the prior year, and was primarily due to higher gross profit on increased sales volume. The $3 million operating loss in fiscal 2014 represented a $6 million improvement from fiscal 2013, primarily due to higher gross profit.
Building HVAC | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % | | $ | 139 | | | | 100.0 | % | Cost of sales | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % | | | 98 | | | | 70.7 | % | Gross profit | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % | | | 41 | | | | 29.3 | % | Selling, general and administrative expenses | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % | | | 31 | | | | 22.1 | % | Operating income | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % | | $ | 10 | | | | 7.2 | % |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 181 | | | | 100.0 | % | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % | Cost of sales | | | 127 | | | | 70.1 | % | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % | Gross profit | | | 54 | | | | 29.9 | % | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % | Selling, general and administrative expenses | | | 39 | | | | 21.6 | % | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % | Restructuring expenses | | | 1 | | | | 0.6 | % | | | - | | | | - | | | | - | | | | - | | Operating income | | $ | 14 | | | | 7.7 | % | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % |
Building HVAC net sales decreased $5 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to a $6 million unfavorable impact of foreign currency exchange rate changes and lower sales at our businesses in the U.K., as unfavorable currency conditions resulted in increased competition from other mainland European suppliers, partially offset by increased ventilation product sales in North America. Sales increased $40 million, or 27 percent, in fiscal 2015 compared with the prior year,fiscal 2014, primarily due to a $23 million increase in sales at our Airedale businessbusinesses in the U.K. and increased heating product sales in North America, as we experienced anothera strong heating season in fiscal 2015. The sales increase at Airedalein the U.K. was primarily due to a $13 million increase in sales at Barkell, which we acquired in the fourth quarter of fiscal 2014, and the continuing recovery from the Airedale fire, which caused a temporary halt in production during the prior fiscal year. In
Gross profit decreased $2 million in fiscal 2014, despite2016 compared with the negative impact of the Airedale fire, sales increased $7 million, or 5 percent,prior year, primarily due to increased heating product salesa $1 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased 10 basis points to 29.9 percent in North America.
fiscal 2016 compared with the prior year. Gross profit increased $13 million and gross margin improved 40 basis points to 30.0 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume. Fiscal 2016 SG&A expenses increased $2 million from the prior year, primarily due to higher sales volume. Gross profit increased $2the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in fiscal 2014 compared with the prior year, primarily due topartially offset by lower engineering and development costs and a $1 million favorable sales mix.
impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses increased $3 million or 9 percent, in fiscal 2015 compared withfrom the prior year, primarily due to additional costs from Barkell and increased expenses associated with higher sales levels, partially offset by $5 million ofthe recoveries from business interruption insurance for the Airedale fire. SG&A expenses increased $3 million, or 10 percent, in
In fiscal 2014 compared with fiscal 2013, primarily due to higher compensation-related expenses,2016, we recorded $1 million of non-recoverable costs directlyrestructuring expenses, primarily related to the Airedale fire, and increased acquisition-related expenses for Barkell.severance expenses.
Operating income of $19$14 million increased $10in fiscal 2016 decreased $5 million compared with the prior year, primarily due to lower gross profit and higher SG&A expenses. Operating income of $19 million in fiscal 2015 increased $10 million compared with the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses. Operating income decreased $1 million from fiscal 2013 to fiscal 2014, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at March 31, 20152016 of $71$69 million, and an available borrowing capacity of $216$207 million under lines of credit provided by banks in the United States and abroad. Due to the timing of insurance proceeds related to the Airedale fire, our cash and cash equivalents at March 31, 2015 include approximately $13 million of advances from our insurance provider that will be spent for recovery and reconstruction costs. Given our extensive international operations, significant amounts$49 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds would be subject to U.S. tax if repatriated. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.
During fiscal 2016, our Board of Directors approved a $50 million share repurchase program, which expires in November 2016. We repurchased $7 million of shares under this program in fiscal 2016. Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 2016 was $72 million, an increase of $8 million from $64 million in the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital, including lower incentive compensation payments during fiscal 2016 and the timing of value-added tax payments. Net cash provided by operating activities in fiscal 2015 was $64 million, a decrease of $41 million from $105 million in the prior year. This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, including higher incentive compensation payments during fiscal 2015 related to fiscal 2014 performance, and the timing of customer-owned tooling reimbursements. Net cash provided by operating activities in fiscal 2014 was $105 million, an increase of $56 million from $49 million in the prior year. The increase in operating cash flows resulted from an increase in gross profit, partially offset by higher SG&A expenses, and improvements in working capital as compared with fiscal 2013.
We expect to be reimbursed by our insurance provider for substantially all losses and expenses directly related to the fire at our Airedale manufacturing facility, including substantially all costs to reconstruct the facility. The expected timing of cash recoveries from our insurance provider is such that we do not expect the fire will have a significant adverse effect on our liquidity.
Capital Expenditures
Capital expenditures of $58$63 million during fiscal 20152016 increased $5 million compared with fiscal 2014.2015. In fiscal 2015,2016, our capital spending primarily occurred in the North AmericaAmericas and Europe segments, which totaled $26$27 million and $22$25 million, respectively. Capital projects in fiscal 20152016 included tooling and equipment purchases in conjunction with program launchesnew and renewal programs with customers, as well as a building expansion at our Nuevo Laredo manufacturing facility in the North America segment.customers.
At March 31, 2015,2016, our capital expenditure commitments totaled $16$21 million. Significant commitments included tooling and equipment expenditures for new and renewal programs with customers in North Americathe Americas and Europe.Europe segments.
Dividends
We did not pay dividends in fiscal 2016, 2015, 2014, or 2013.2014. We currently do not intend to pay dividends in fiscal 2016.2017.
Debt
Our total debt outstanding decreased $16increased $14 million to $149$163 million at March 31, 20152016, compared with the prior year, as our debt repayments exceeded our borrowings.primarily due to borrowings in China and Mexico for capital investments. See Note 16 of the Notes to Consolidated Financial Statements for furtheradditional information regarding our debt agreements.
Our debt agreements require us to maintain compliance with various covenants. Under our primary debt agreements in the U.S., we are subject to a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a certain portion of our cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
Our leverage ratio for the four fiscal quarters ended March 31, 20152016 was 1.2, which was below the maximum permitted ratio of 3.25. Our interest expense coverage ratio for the four fiscal quarters ended March 31, 20152016 was 10.3,10.5, which exceeded the minimum requirement of 3.0. We were in compliance with our debt covenants as of March 31, 20152016 and expect to remain in compliance during fiscal 20162017 and beyond. In the event of an acquisition, our leverage ratio may be temporarily raised for several quarters, per the terms of our debt agreements.
Pension Obligations
Our net pension liabilities totaled $111 million for plans in the U.S. and at certain foreign subsidiaries as of March 31, 2015. We contributed $7 million to these plans in fiscal 2015 and expect to contribute approximately $8 million to our pension plans during fiscal 2016. In May 2015, we approved a program to offer a voluntary, lump-sum pension payout to certain eligible former employees who participate in our U.S. pension plan. If the lump-sum payout is elected by the participant, the payout would effectively settle our pension obligation with that participant, thereby eliminating the risk of future changes in our pension obligation for that participant. As a result of this program, we expect to record a settlement loss of approximately $20-30 million in the second quarter of fiscal 2016, based on estimated participation rates and estimated actuarial assumptions. This settlement loss would represent the accelerated recognition of unamortized actuarial losses associated with our pension liabilities. The lump-sum settlements will be paid from plan assets and will not impact our operating cash flow.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
| | March 31, 2015 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 125.2 | | | $ | 0.2 | | | $ | 24.0 | | | $ | 32.0 | | | $ | 69.0 | | Interest associated with long-term debt | | | 38.8 | | | | 8.5 | | | | 16.1 | | | | 11.9 | | | | 2.3 | | Capital lease obligations | | | 4.9 | | | | 0.3 | | | | 0.6 | | | | 0.6 | | | | 3.4 | | Operating lease obligations | | | 49.9 | | | | 8.2 | | | | 10.0 | | | | 7.8 | | | | 23.9 | | Capital expenditure commitments | | | 15.5 | | | | 13.0 | | | | 2.5 | | | | - | | | | - | | Other long-term obligations | | | 10.9 | | | | 1.6 | | | | 3.2 | | | | 2.6 | | | | 3.5 | | Total contractual obligations | | $ | 245.2 | | | $ | 31.8 | | | $ | 56.4 | | | $ | 54.9 | | | $ | 102.1 | |
| | March 31, 2016 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 125.4 | | | $ | 8.0 | | | $ | 32.2 | | | $ | 85.2 | | | $ | - | | Interest associated with long-term debt | | | 30.3 | | | | 8.5 | | | | 14.1 | | | | 7.7 | | | | - | | Capital lease obligations | | | 8.6 | | | | 0.5 | | | | 0.8 | | | | 0.8 | | | | 6.5 | | Operating lease obligations | | | 53.5 | | | | 8.1 | | | | 10.4 | | | | 8.7 | | | | 26.3 | | Capital expenditure commitments | | | 20.5 | | | | 20.0 | | | | 0.5 | | | | - | | | | - | | Other long-term obligations | | | 3.6 | | | | 1.7 | | | | 1.2 | | | | 0.7 | | | | - | | Total contractual obligations | | $ | 241.9 | | | $ | 46.8 | | | $ | 59.2 | | | $ | 103.1 | | | $ | 32.8 | |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $121$129 million as of March 31, 2015.2016. We are unable to determine the ultimate timing of payments for these liabilities; therefore, we have excluded these amounts from the contractual obligations table above.
We have a contractual commitmentexpect to rebuild the leased Airedale facility, which suffered significant destruction from a firecontribute $8 million to our U.S. pension plans during fiscal 2014. We maintain insurance coverage and believe reimbursement for reconstruction costs is probable. The estimated costs associated with the reconstruction of the Airedale facility of $48 million have been excluded from the contractual obligations table above. See Note 2 of the Notes to Consolidated Financial Statements for further information.2017.
Critical Accounting Policies
The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements. Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements. The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements. In addition, recently issued accounting pronouncements that could significantly impact our financial statements are included in Note 1 of the Notes to Consolidated Financial Statements. Revenue Recognition
We recognize revenue, including agreed-upon commodity price increases or decreases,prices, when the risks and rewards of ownership are transferred to our customers, which generally occurs upon shipment. Revenue is recorded net of applicable provisions for sales rebates, volume incentives, and returns and allowances. At the time of revenue recognition, we also record estimates for bad debt expense and warranty expense. We base these estimates on historical experience, current business trends, and current economic conditions. PriceWe recognize price increases that are agreed upon in advance are recognized as revenue when the products are shipped to our customers. Impairment of Long-Lived Assets
We perform impairment evaluations of long-lived assets, including property, plant and equipment, intangible assets and equity investments, whenever business conditions or events indicate that those assets may be impaired. We consider factors such as operating losses, declining financial outlooks and market conditions, when evaluating the necessity for an impairment analysis. When the estimated futurenet asset values exceed undiscounted cash flows expected to be generated by the assets are less than the carrying value of the long-lived assets, or the decline in value is considered to be “other than temporary,” we write down the assets are written down to fair market value and arecord an impairment charge is recorded to current operations. We estimate fair market value in various ways depending on the nature of the assets under review. Fair value is generally based on appraised value, estimated salvage value, or selling prices under negotiation, or estimated cancellation charges, as applicable. The most significant long-lived assets that we have evaluated for impairment areindicators were property, plant and equipment, which totaled $322$339 million at March 31, 2015.2016. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment. We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility. This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy. When such indicators are present, we perform an impairment evaluation by comparing the estimated future undiscounted cash flows expectedevaluation. During fiscal 2016, we recorded a $10 million impairment charge related to be generated in thea manufacturing facility in Germany. See Note 6 of the Notes to the net book value of the long-lived assets within that facility. We estimate the undiscounted cash flows based on the expected future cash flows to be generated by the manufacturing facility over its remaining useful life. When the estimated future undiscounted cash flows are less than the net book value of the long-lived assets, we write such assets down to fair value, which we generally estimate based upon appraisals or estimated salvage value.Consolidated Financial Statements for additional information.
Impairment of Goodwill
We perform goodwill impairment tests annually, as of March 31, unless business events or other conditions exist that require a more frequent evaluation. At March 31, 2016, our goodwill totaled $16 million, primarily related to our Building HVAC segment. We consider factors such as operating losses, declining financial and market outlooks and market capitalization when evaluating the necessity for an interim impairment analysis. Goodwill is tested for impairment at a reporting unit level, which we have determined to be at the operating segment level. Our first step in this test is to compare the fair value of the reporting unit to its carrying value. We determine the fair value of a reporting unit based upon the present value of estimated future cash flows. If the fair value of the reporting unit exceeds the carrying value of the unit’s net assets, goodwill of that reporting unit is not impaired and further testing is not required. If the carrying value of the reporting unit’s net assets exceeds the fair value of the unit, then we perform the second step of the impairment test to determine the implied fair value of the reporting unit’s goodwill and any impairment charge. In estimating the implied fair value of goodwill for a reporting unit, we assign the fair value to the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of the reporting unit goodwill over its implied fair value is recorded as an impairment charge. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rate, business trends and market conditions. TheWe determine the expected future revenue growth rates and operating profit margins are determined after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for country-specific risks where appropriate.
We conducted our annual assessment for goodwill impairment during the fourth quarter of fiscal 20152016 by applying a fair value-based test. The South Americatest and determined the fair value of our reporting units carrying valuesubstantially exceeded its fair value; therefore, we performed the second step of the goodwill impairment test, as described above. As a result, we determined our South America reporting unit’s goodwill was fully impaired and recorded an $8 million goodwill impairment charge. As fiscal 2015 progressed, we experienced relatively weak financial results for our South America reporting unit. During the fourth quarter of fiscal 2015, our outlook for the markets served by our South America reporting unit, primarily in Brazil, shifted from a view that the markets may begin to recover to a view that the market downturn may be more prolonged. The economic weakness in Brazil has negatively affected our expected future cash flows for the South America segment. Our impairment analysis assumed a discount rate of 22 percent, which corresponds to our cost of capital adjusted for a higher expectation of future inflation and uncertainty in the Brazilian economy, and future revenue growth and operating profit margins based upon our current outlook for the South America reporting unit.their respective book values.
Warranty Costs
We estimate costs related to product warranties and accrue for such costs at the time of the sale, within cost of sales. We estimate warranty costs based upon the best information available, which includes statistical and analytical analysis of both historical and current claim data. We monitor and adjust original estimatesour warranty accruals, which totaled $8 million at March 31, 2016, if we expect futureit is probable that expected claims will differ from the initialprevious estimates. 32
Tooling Costs
We capitalize production tooling costs incurred in the manufacture of products for customer programs as a component of property, plant and equipment, net of any customer reimbursements, when we retain title to the tooling. We depreciate these capitalized costs in cost of sales over the estimated life of the asset, which is generally three years. For customer-owned tooling costs incurred, we record a receivable when the customer has guaranteed reimbursement to us. Reimbursement typically occurs prior to the start of production, but this can vary by program and by customer. We do not have any significant customer arrangements under which customer-owned tooling costs were not accompanied by guaranteed reimbursements.
Assets Held for Sale
Assets are considered to be held for sale when management approves and commits to a formal plan to actively market the asset for sale, at a sales price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, the sale of the asset is expected to be completed within one year, and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, we record the carrying value of the asset at the lower of its carrying value or estimated fair value, less costs to sell. We cease recording depreciation expense at the time of designation as held for sale.
Pension Obligations
TheOur calculation of the expense and liabilities of our pension plans is dependent upon various assumptions. At March 31, 2016, our pension liabilities totaled $120 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality rate tables. We basedbase our selection of assumptions on historical trends and economic and market conditions at the time of valuation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods. These differences impact future pension expenses. Currently, participants in our domestic pension plans are not accruing benefits based on their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.
In late calendar 2014, the U.S. Society of Actuaries issued updated mortality and mortality improvement tables, which effectively increased life expectancies. We considered the new mortality tables, along with characteristics of our plan-specific populations, in developing our best estimate of the expected mortality of plan participants for our March 31, 2015 measurement date. The impact of the new mortality assumptions resulted in an increase of approximately $9 million in both our U.S. pension plans’ actuarial loss and pension benefit obligation.
For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our benefit plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in fiscal 20152016 and 20142015 was 8.0 percent. For fiscal 2016,2017, we have also assumed a rate of 8.0 percent. The impact of a 25 basis point decrease in the expected rate of return on assets would result in an increase of $0.5$0.4 million in fiscal 20162017 pension expense.
The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds reset annually on the measurement date of March 31. For fiscal 2015,2016, we used a discount rate of 4.04.1 percent, compared with 4.74.0 percent in fiscal 2014.2015. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows from the affected plans. See Note 17 of the Notes to Consolidated Financial Statements for additional information. A change in the assumed discount rate of 25 basis points would impact our fiscal 20162017 pension expense by less than $0.1 million.
Income Taxes 33
Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. We adjust these amounts to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in certain jurisdictions will not be realized. This determination involves significant judgment. In performing this assessment on a jurisdiction-by-jurisdiction basis, we consider historical and projected financial results along with other pertinent information.
We have not recorded a provision for U.S. income taxes on undistributed earnings from our non-U.S. subsidiaries that we have determined to be permanently reinvested in our foreign operations. If management’s intentions or U.S. tax law changes in the future, there could be a significant negative impact on our provision for income taxes.
See Note 8 of the Notes to Consolidated Financial Statements for additional information regarding income taxes. Other Loss Reserves
We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, self-insurance reserves, uncollectible accounts receivable, recoverability of deferred income taxes, regulatory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. We estimate these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Note 19 of the Notes to Consolidated Financial Statements for additional detailsinformation regarding contingencies and litigation. Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of this report. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| · | Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs, inflation, changes in interest rates, recession and recovery therefrom, restrictions associated with importing and exporting and foreign ownership, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China Western Europe, Russia and North America, and the continued deterioration in and weak forecasts for the Brazilian economy; |
| · | The impact of potential increases in commodity prices, particularlyincluding our ability to successfully manage our exposure to the changingand/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel); |
| · | Our ability to successfully manage commodity risk and/or pass increasing commodity prices on to customers, as well as the inherent lag in timing of such pass-through pricing;arrangements; and |
| · | The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental emissions standards.and/or energy standards and objectives. |
Operational Risks:
| · | The overall health and increasing price-down focus of our original equipment manufacturer customers in light of some remaining economic and market-specific challenges, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; |
| · | Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction pressures from customers, particularly in the face of macro-economic instability; |
| · | Our ability to effectively and efficiently complete the restructuring activities in our North America, Europe, and South America segments and realize expected commercial and operational efficiencies and associated cost reductionssavings and increased competitivenessother benefits associated with our Strengthen, Diversify and profitability as a result;Grow transformational strategy; |
| · | Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims; |
| · | Our ability to obtain and retain profitable business in our Asia segment, and, in particular, in China; |
| · | Unanticipated delays or modifications initiated by major customers with respect to product launches, product applications or requirements; |
| · | Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, particularly in light of some continuing economic challenges in areas of the world in which we and our suppliers operate; |
| · | Complexities and inefficiencies introduced by the September 2013 fire at our Airedale facility in the U.K., including ourOur ability to continue to meet customer demands at temporary locations, to timelyeffectively and efficiently complete restructuring activities in our Europe segment and realize expected cost reductions and effectively deploy insurance proceeds to replace machineryincreased competitiveness and equipment and rebuild the facility with minimal financial impact from the business interruption, and to complete and relocate to the new facility in an efficient, timely manner;profitability as a result; |
| · | Our ability to complete the transition of our Washington, Iowa production to other facilities efficiently and effectively; |
| · | Costs and other effects of the remediation of environmental contamination; |
| · | Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith; |
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; and |
| · | Costs and other effects of unanticipated litigation or claims, and the increasingconstant pressures associated with rising healthcare and insurance costs. |
Strategic Risks:
| · | Our ability to identify and implementexecute appropriate growthopportunities to enable us to achieve our Strengthen, Diversify and diversification strategies thatGrow transformational strategy in order to position us for long-term success. |
Financial Risks:
| · | Our ability to fund our global liquidity requirements efficiently, particularly those in our Asia business segment, and meet our long-term commitments in the event of any unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
| · | The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, British pound, and Indian rupee relative to the U.S. dollar; and |
| · | Our ability to realize the benefits of tax assets in various jurisdictions in which we operate. |
In addition to the risks set forth above, we are subject to other risks and uncertainties as identified in our public filings with the U.S. Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.
ITEM 7A.7A . | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
In the normal course of business, we are subject to market exposure from changes in foreign exchange rates, interest rates, commodity prices, credit risk and economic conditions. Foreign Currency Risk
We are subject to the risk of changes in foreign currency exchange rates due to our operations in foreign countries. We have manufacturing facilities in Brazil, China, India, Mexico, South Africa, and throughout Europe. We also have joint ventures in China, Japan and South Korea. We sell and distribute products throughout the world and also purchase raw materials from foreign countries. As a result, our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which we do business. We attempt to mitigate foreign currency risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the functional currency of the subsidiary engaging in the transaction. Our financial results are principally exposed to changes in exchange rates between the U.S. dollar and the European currencies, primarily the euro, and changes between the U.S. dollar and the Brazilian real.real, and between the euro and the British pound. In fiscal 2016, 2015, 2014, and 2013,2014, more than 50 percent of our sales were generated in countries outside the U.S. A change in foreign exchange rates will positively or negatively affect our sales; however, this impact will be offset, usually to a large degree, with an offsettinga corresponding effect on our expenses. In fiscal 2015,2016, changes in foreign currencies negatively impacted our sales by $43$110 million; however, the impact on our operating income was less than $1only $4 million. Foreign currency exchange risk can be estimated by measuring the impact of a near-term adverse movement of 10 percent in foreign currency exchange rates. If these rates were 10 percent higher or lower during fiscal 2015,2016, there would not have been a material impact on our fiscal 20152016 earnings. We maintain, from time to time, foreign-denominated, long-term debt obligations and long-term intercompany loans that are subject to foreign currency exchange risk. As of March 31, 2015, there were no third-party foreign-denominated, long-term debt obligations or2016, we did not have any long-term intercompany loans for which changes in foreign currency exchange rates would impact our net earnings. From time to time, we enter into currency rate derivative contracts to manage the foreign exchange rate exposure on these types of loans. These derivative instruments are typically not treated as hedges, and accordingly, gains or losses on the derivatives are recorded in other income and expense in the consolidated statements of operations and act to offset any currency movement on the outstanding loans receivable or payable.
Interest Rate Risk
Our interest rate risk policies are designedWe actively seek to reduce the potential volatility of earnings that could arise from changes in interest rates. We generally utilize a mixture of debt maturities and both fixed-rate and floating-rate debt to manage exposure to changes in interest rates. Our domestic revolving credit facility is based on a variable interest rate of London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points, depending on our leverage ratio. We are subject to risk of fluctuations in LIBOR and changes in our leverage ratio, which would affect the variable interest rate on our revolving credit facility and could create variability in interest expense. There were no borrowings outstanding under the revolving credit facility as of March 31, 2015.2016. Based on our outstanding debt with variable interest rates at March 31, 2015,2016, a 100 basis point increase in interest rates would increase our annual interest expense in fiscal 20162017 by less than $1 million.
Commodity Price Risk
We are dependent upon the supply of raw materials and supplies in the production process and, from time to time, enter into firm purchase commitments for aluminum, copper, nickel, and natural gas. We maintain agreements with certain customers to pass through specified raw material price fluctuations in order to mitigate commodity price risk. The majority of these agreements contain provisions in which the pass-through of the price fluctuations can lag behind the actual fluctuations by three months or longer, and typically the arrangements are limited to the underlying material cost based upon the London Metal Exchange.
Credit Risk
Credit risk represents the possibility of loss from a customer's failurecustomer failing to make payment according to contract terms. Our principal credit risk consists of outstanding trade accounts receivable. At March 31, 2015, 472016, 45 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, commercial vehicle, and off-highway markets and are influenced by similar market and general economic factors. In the past, credit losses from our customers have not been significant.
We manage credit risk through a focus on the following:
| · | Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. OurWe consider our holdings in cash and investments were consideredto be stable and secure at March 31, 2015;2016; |
| · | Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer's financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer's financial condition and applicable business news; |
| · | Pension assets – We have retained outside advisors to assist in the management of the assets in our pension plans. In making investment decisions, we utilize an established risk management protocol that focuses on protection of the plan assets against downside risk. We ensure that investments within these plans provide appropriate diversification, the investments are monitored by investment teams, and portfolio managers adhere to the established investment policies. We believe the plan assets are subject to appropriate investment policies and controls; and |
| · | Insurance – We monitor our insurance providers to ensure they have acceptable financial ratings. We have not identified any concerns in this regard based upon our reviews. |
Economic Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate. We sell a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, automotive, off-highway, and building HVAC markets. We operate in diversified markets as a strategy for offsetting the risk associated with a downturn in any of the markets we serve. However, risk associated with market downturns, such as the global downturn experienced in fiscal 2009 and fiscal 2010, is still present.
We monitor economic conditions in the U.S., in our foreign markets and elsewhere. As we expand our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes and the like. We continue to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions.
We pursue new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon our ability to commercialize our investments. Current examples of new and emerging markets for us include those related to waste heat recovery, coils, and the Chinese and Indian markets. Our investment in these areas is subject to the risks associated with business integration, technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
We anticipate that continued recovery from the global recessionwithin some of our geographic and economicend markets, and particularly growth in China may put production pressure on certain suppliers of our raw materials. In particular, there are a limited number of suppliers of aluminum, copper, and steel material. We are exposed to the risk of suppliers of certain raw materials not being able to meet customer demand as they may not increase their output capacity as quickly as customers increase their orders, and of increased prices being charged by raw material suppliers.
In addition, we purchase parts from suppliers that use our tooling to create the parts. In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts. As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require. Even in situations where suppliers are manufacturing parts without the use of our tooling, we face the challenge of obtaining consistently high-quality parts from suppliers that are financially stable. We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate higher-risk supplier situations.
In addition to the above risks on the supply side, we are also exposed to risks associated with demands by our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, but these agreements often contain provisions for future price reductions. In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: We have enteredFrom time to time, we enter into futures contracts from time to time, related to certain forecasted purchases of aluminum and copper. Our strategy wasis to reduce our exposure to changing market prices for future purchases of these commodities. In fiscal 2016, 2015, 2014, and 2013,2014, expenses related to commodity derivative contracts totaled less than $1 million $1 million, and $5 million, respectively.each year. Foreign currency forward contracts: Our foreign exchange risk management strategy uses derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. We have not designated these forward contracts as hedges. Accordingly, we record unrealized gains and losses related to the change in the fair value of the contracts in other income and expense. Gains and losses on these foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
Counterparty risks: We manage counterparty risks by ensuring that counterparties to derivative instruments have credit ratings acceptable to us. At March 31, 2015,2016, all counterparties had a sufficient long-term credit rating. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions, except per share amounts)
| | 2015 | | | 2014 | | | 2013 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | | Cost of sales | | | 1,249.9 | | | | 1,239.4 | | | | 1,167.4 | | Gross profit | | | 246.5 | | | | 238.2 | | | | 208.6 | | Selling, general and administrative expenses | | | 184.5 | | | | 181.7 | | | | 166.3 | | Restructuring expenses | | | 4.7 | | | | 16.1 | | | | 17.0 | | Impairment charges | | | 7.8 | | | | 3.2 | | | | 25.9 | | Gain on sale of wind tunnel | | | (3.2 | ) | | | - | | | | - | | Operating income (loss) | | | 52.7 | | | | 37.2 | | | | (0.6 | ) | Interest expense | | | (11.7 | ) | | | (12.4 | ) | | | (12.6 | ) | Other income (expense) – net | | | 0.2 | | | | (0.8 | ) | | | 0.2 | | Earnings (loss) from continuing operations before income taxes | | | 41.2 | | | | 24.0 | | | | (13.0 | ) | (Provision) benefit for income taxes | | | (19.0 | ) | | | 107.9 | | | | (9.8 | ) | Earnings (loss) from continuing operations | | | 22.2 | | | | 131.9 | | | | (22.8 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) | | | 22.8 | | | | 131.9 | | | | (22.8 | ) | Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Net earnings (loss) attributable to Modine | | $ | 21.8 | | | $ | 130.4 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Earnings (loss) per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.45 | | | $ | 2.75 | | | $ | (0.52 | ) | Diluted | | $ | 0.44 | | | $ | 2.72 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.46 | | | $ | 2.75 | | | $ | (0.52 | ) | Diluted | | $ | 0.45 | | | $ | 2.72 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | | | Basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | Diluted | | | 47.8 | | | | 47.6 | | | | 46.6 | |
| | 2016 | | 2015 | | 2014 | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | | Cost of sales | | | 1,129.0 | | | | 1,249.9 | | | | 1,239.4 | | Gross profit | | | 223.5 | | | | 246.5 | | | | 238.2 | | Selling, general and administrative expenses | | | 204.5 | | | | 184.5 | | | | 181.7 | | Restructuring expenses | | | 16.6 | | | | 4.7 | | | | 16.1 | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | Operating (loss) income | | | (7.5 | ) | | | 52.7 | | | | 37.2 | | Interest expense | | | (11.1 | ) | | | (11.7 | ) | | | (12.4 | ) | Other income (expense) – net | | | 8.7 | | | | 0.2 | | | | (0.8 | ) | (Loss) earnings from continuing operations before income taxes | | | (9.9 | ) | | | 41.2 | | | | 24.0 | | Benefit (provision) for income taxes | | | 8.9 | | | | (19.0 | ) | | | 107.9 | | (Loss) earnings from continuing operations | | | (1.0 | ) | | | 22.2 | | | | 131.9 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings | | | (1.0 | ) | | | 22.8 | | | | 131.9 | | Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Net (loss) earnings attributable to Modine | | $ | (1.6 | ) | | $ | 21.8 | | | $ | 130.4 | | | | | | | | | | | | | | | (Loss) earnings per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | Diluted | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | | | | | | | | | | | | | | Net (loss) earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | Diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | Basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | Diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | 2015 | | | 2014 | | | 2013 | | Net earnings (loss) | | $ | 22.8 | | | $ | 131.9 | | | $ | (22.8 | ) | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | (68.2 | ) | | | 9.7 | | | | (17.1 | ) | Defined benefit plans, net of income taxes of ($13.2), $9.8 and $0 million | | | (26.7 | ) | | | 13.9 | | | | (23.6 | ) | Cash flow hedges, net of income taxes of $0, $0.6 and $0 million | | | - | | | | 1.1 | | | | 2.6 | | Total other comprehensive income (loss) | | | (94.9 | ) | | | 24.7 | | | | (38.1 | ) | | | | | | | | | | | | | | Comprehensive income (loss) | | | (72.1 | ) | | | 156.6 | | | | (60.9 | ) | Comprehensive income attributable to noncontrolling interest | | | (0.8 | ) | | | (1.7 | ) | | | (1.4 | ) | Comprehensive income (loss) attributable to Modine | | $ | (72.9 | ) | | $ | 154.9 | | | $ | (62.3 | ) |
| | 2016 | | 2015 | | 2014 | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | 4.6 | | | | (68.2 | ) | | | 9.7 | | Defined benefit plans, net of income taxes of $11.8, ($13.2) and $9.8 million | | | 19.7 | | | | (26.7 | ) | | | 13.9 | | Cash flow hedges, net of income taxes of $0, $0 and $0.6 million | | | - | | | | - | | | | 1.1 | | Total other comprehensive income (loss) | | | 24.3 | | | | (94.9 | ) | | | 24.7 | | | | | | | | | | | | | | | Comprehensive income (loss) | | | 23.3 | | | | (72.1 | ) | | | 156.6 | | Comprehensive income attributable to noncontrolling interest | | | (0.5 | ) | | | (0.8 | ) | | | (1.7 | ) | Comprehensive income (loss) attributable to Modine | | $ | 22.8 | | | $ | (72.9 | ) | | $ | 154.9 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS March 31, 20152016 and 20142015 (In millions, except per share amounts)
| | 2015 | | | 2014 | | ASSETS | | | | | | | Cash and cash equivalents | | $ | 70.5 | | | $ | 87.2 | | Trade accounts receivable – net | | | 192.9 | | | | 221.1 | | Inventories | | | 107.7 | | | | 116.8 | | Deferred income taxes | | | 13.4 | | | | 13.0 | | Other current assets | | | 79.7 | | | | 60.7 | | Total current assets | | | 464.2 | | | | 498.8 | | Property, plant and equipment – net | | | 322.1 | | | | 359.6 | | Intangible assets – net | | | 9.9 | | | | 12.4 | | Goodwill | | | 16.2 | | | | 28.7 | | Deferred income taxes | | | 102.7 | | | | 98.6 | | Other noncurrent assets | | | 16.5 | | | | 34.2 | | Total assets | | $ | 931.6 | | | $ | 1,032.3 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | Short-term debt | | $ | 18.6 | | | $ | 32.4 | | Long-term debt – current portion | | | 0.5 | | | | 0.8 | | Accounts payable | | | 152.0 | | | | 171.1 | | Accrued compensation and employee benefits | | | 56.7 | | | | 70.8 | | Other current liabilities | | | 83.4 | | | | 82.1 | | Total current liabilities | | | 311.2 | | | | 357.2 | | Long-term debt | | | 129.6 | | | | 131.2 | | Deferred income taxes | | | 3.4 | | | | 7.3 | | Pensions | | | 110.4 | | | | 81.0 | | Other noncurrent liabilities | | | 16.4 | | | | 27.0 | | Total liabilities | | | 571.0 | | | | 603.7 | | Commitments and contingencies (see Note 19) | | | | | | | | | Shareholders' equity: | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 48.6 million and 48.3 million shares | | | 30.4 | | | | 30.2 | | Additional paid-in capital | | | 180.6 | | | | 175.7 | | Retained earnings | | | 359.8 | | | | 338.0 | | Accumulated other comprehensive loss | | | (198.6 | ) | | | (103.9 | ) | Treasury stock, at cost, 0.7 million shares | | | (16.2 | ) | | | (15.2 | ) | Total Modine shareholders' equity | | | 356.0 | | | | 424.8 | | Noncontrolling interest | | | 4.6 | | | | 3.8 | | Total equity | | | 360.6 | | | | 428.6 | | Total liabilities and equity | | $ | 931.6 | | | $ | 1,032.3 | |
| | 2016 | | 2015 | ASSETS | | | | | | | Cash and cash equivalents | | $ | 68.9 | | | $ | 70.5 | | Trade accounts receivable – net | | | 189.1 | | | | 192.9 | | Inventories | | | 111.0 | | | | 107.7 | | Other current assets | | | 43.5 | | | | 79.7 | | Total current assets | | | 412.5 | | | | 450.8 | | Property, plant and equipment – net | | | 338.6 | | | | 322.1 | | Intangible assets – net | | | 8.2 | | | | 9.9 | | Goodwill | | | 15.8 | | | | 16.2 | | Deferred income taxes | | | 123.1 | | | | 115.4 | | Other noncurrent assets | | | 22.7 | | | | 16.5 | | Total assets | | $ | 920.9 | | | $ | 930.9 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | Short-term debt | | $ | 28.6 | | | $ | 18.6 | | Long-term debt – current portion | | | 8.5 | | | | 0.5 | | Accounts payable | | | 142.4 | | | | 152.0 | | Accrued compensation and employee benefits | | | 58.6 | | | | 56.7 | | Other current liabilities | | | 35.5 | | | | 83.0 | | Total current liabilities | | | 273.6 | | | | 310.8 | | Long-term debt | | | 125.5 | | | | 129.6 | | Deferred income taxes | | | 4.2 | | | | 3.1 | | Pensions | | | 118.6 | | | | 110.4 | | Other noncurrent liabilities | | | 16.3 | | | | 16.4 | | Total liabilities | | | 538.2 | | | | 570.3 | | Commitments and contingencies (see Note 19) | | | | | | | | | Shareholders' equity: | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 49.0 million and 48.6 million shares | | | 30.6 | | | | 30.4 | | Additional paid-in capital | | | 185.6 | | | | 180.6 | | Retained earnings | | | 358.2 | | | | 359.8 | | Accumulated other comprehensive loss | | | (174.2 | ) | | | (198.6 | ) | Treasury stock, at cost, 1.6 million and 0.7 million shares | | | (24.0 | ) | | | (16.2 | ) | Total Modine shareholders' equity | | | 376.2 | | | | 356.0 | | Noncontrolling interest | | | 6.5 | | | | 4.6 | | Total equity | | | 382.7 | | | | 360.6 | | Total liabilities and equity | | $ | 920.9 | | | $ | 930.9 | |
The notes to consolidated financial statements are an integral part of these statements. 4140
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | 2015 | | | 2014 | | | 2013 | | Cash flows from operating activities: | | | | | | | | | | Net earnings (loss) | | $ | 22.8 | | | $ | 131.9 | | | $ | (22.8 | ) | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 51.6 | | | | 58.1 | | | | 55.8 | | Insurance proceeds from Airedale fire | | | 12.9 | | | | 16.9 | | | | - | | Pension and postretirement expense | | | 2.3 | | | | 3.2 | | | | 1.9 | | Gain on sale of wind tunnel | | | (3.2 | ) | | | - | | | | - | | Impairment charges | | | 7.8 | | | | 3.2 | | | | 25.9 | | Loss from disposition of property, plant and equipment | | | 1.1 | | | | 2.6 | | | | 2.5 | | Deferred income taxes | | | 5.9 | | | | (116.1 | ) | | | 0.6 | | Stock-based compensation expense | | | 4.0 | | | | 3.6 | | | | 3.1 | | Other – net | | | (0.7 | ) | | | (0.5 | ) | | | 4.1 | | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | Trade accounts receivable | | | (0.1 | ) | | | (18.2 | ) | | | 15.1 | | Inventories | | | (4.2 | ) | | | (0.1 | ) | | | (0.8 | ) | Accounts payable | | | (2.4 | ) | | | 15.2 | | | | (3.2 | ) | Accrued compensation and employee benefits | | | (5.3 | ) | | | 17.5 | | | | 1.9 | | Other assets | | | (24.5 | ) | | | 2.1 | | | | (6.6 | ) | Other liabilities | | | (4.5 | ) | | | (14.9 | ) | | | (28.7 | ) | Net cash provided by operating activities | | | 63.5 | | | | 104.5 | | | | 48.8 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (58.3 | ) | | | (53.1 | ) | | | (49.8 | ) | Insurance proceeds from Airedale fire | | | 12.2 | | | | 20.7 | | | | - | | Costs to replace building and equipment damaged in Airedale fire | | | (16.7 | ) | | | (4.2 | ) | | | - | | Proceeds from dispositions of assets | | | 7.6 | | | | 2.9 | | | | 0.4 | | Purchases of short-term investments | | | (5.2 | ) | | | - | | | | - | | Proceeds from maturities of short-term investments | | | 2.4 | | | | - | | | | - | | Acquisitions – net of cash acquired | | | - | | | | (7.8 | ) | | | (4.9 | ) | Other – net | | | 0.8 | | | | - | | | | (1.6 | ) | Net cash used for investing activities | | | (57.2 | ) | | | (41.5 | ) | | | (55.9 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 36.4 | | | | 152.6 | | | | 166.7 | | Repayments of debt | | | (50.9 | ) | | | (152.4 | ) | | | (167.1 | ) | Financing fees paid | | | (0.1 | ) | | | (0.9 | ) | | | - | | Dividend paid to noncontrolling interest | | | - | | | | (0.5 | ) | | | - | | Other – net | | | - | | | | (0.3 | ) | | | 0.7 | | Net cash (used for) provided by financing activities | | | (14.6 | ) | | | (1.5 | ) | | | 0.3 | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (8.4 | ) | | | 1.9 | | | | (0.8 | ) | Net (decrease) increase in cash and cash equivalents | | | (16.7 | ) | | | 63.4 | | | | (7.6 | ) | Cash and cash equivalents - beginning of year | | | 87.2 | | | | 23.8 | | | | 31.4 | | Cash and cash equivalents - end of year | | $ | 70.5 | | | $ | 87.2 | | | $ | 23.8 | |
| | 2016 | | 2015 | | 2014 | Cash flows from operating activities: | | | | | | | | | | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 50.2 | | | | 51.6 | | | | 58.1 | | Insurance proceeds from Airedale fire | | | 5.9 | | | | 12.9 | | | | 16.9 | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | Pension and postretirement expense | | | 45.1 | | | | 2.3 | | | | 3.2 | | Loss from disposition of property, plant and equipment | | | 0.4 | | | | 1.1 | | | | 2.6 | | Deferred income taxes | | | (18.8 | ) | | | 5.9 | | | | (116.1 | ) | Stock-based compensation expense | | | 4.9 | | | | 4.0 | | | | 3.6 | | Other – net | | | (0.3 | ) | | | (0.7 | ) | | | (0.5 | ) | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | Trade accounts receivable | | | 8.0 | | | | (0.1 | ) | | | (18.2 | ) | Inventories | | | (2.7 | ) | | | (4.2 | ) | | | (0.1 | ) | Accounts payable | | | (9.9 | ) | | | (2.4 | ) | | | 15.2 | | Accrued compensation and employee benefits | | | 0.8 | | | | (5.3 | ) | | | 17.5 | | Other assets | | | (14.5 | ) | | | (24.5 | ) | | | 2.1 | | Other liabilities | | | (5.6 | ) | | | (4.5 | ) | | | (14.9 | ) | Net cash provided by operating activities | | | 72.4 | | | | 63.5 | | | | 104.5 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (62.8 | ) | | | (58.3 | ) | | | (53.1 | ) | Insurance proceeds from Airedale fire | | | 27.4 | | | | 12.2 | | | | 20.7 | | Costs to replace building and equipment damaged in Airedale fire | | | (41.7 | ) | | | (16.7 | ) | | | (4.2 | ) | Acquisitions – net of cash acquired | | | (1.4 | ) | | | - | | | | (7.8 | ) | Proceeds from dispositions of assets | | | 0.4 | | | | 7.6 | | | | 2.9 | | Purchases of short-term investments | | | (2.7 | ) | | | (5.2 | ) | | | - | | Proceeds from maturities of short-term investments | | | 2.1 | | | | 2.4 | | | | - | | Other – net | | | 0.9 | | | | 0.8 | | | | - | | Net cash used for investing activities | | | (77.8 | ) | | | (57.2 | ) | | | (41.5 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 38.0 | | | | 36.4 | | | | 152.6 | | Repayments of debt | | | (27.1 | ) | | | (50.9 | ) | | | (152.4 | ) | Purchases of treasury stock under share repurchase program | | | (6.9 | ) | | | - | | | | - | | Financing fees paid | | | - | | | | (0.1 | ) | | | (0.9 | ) | Dividend paid to noncontrolling interest | | | (0.9 | ) | | | - | | | | (0.5 | ) | Other – net | | | (0.4 | ) | | | - | | | | (0.3 | ) | Net cash provided by (used for) financing activities | | | 2.7 | | | | (14.6 | ) | | | (1.5 | ) | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | 1.1 | | | | (8.4 | ) | | | 1.9 | | Net (decrease) increase in cash and cash equivalents | | | (1.6 | ) | | | (16.7 | ) | | | 63.4 | | Cash and cash equivalents - beginning of year | | | 70.5 | | | | 87.2 | | | | 23.8 | | Cash and cash equivalents - end of year | | $ | 68.9 | | | $ | 70.5 | | | $ | 87.2 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | Common stock | | | Additional paid-in capital | | | Retained earnings | | | Accumulated other comprehensive loss | | | Treasury stock, at cost | | | Non- | | | Total | | | | Shares | | | Amount | | | | | | | | | | | | | | Balance, March 31, 2012 | | | 47.4 | | | $ | 29.6 | | | $ | 168.3 | | | $ | 231.8 | | | $ | (90.3 | ) | | $ | (14.5 | ) | | $ | 1.2 | | | $ | 326.1 | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (24.2 | ) | | | - | | | | - | | | | - | | | | (24.2 | ) | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | - | | | | (38.1 | ) | Stock options and awards including related tax benefits | | | 0.4 | | | | 0.3 | | | | (0.2 | ) | | | - | | | | - | | | | - | | | | - | | | | 0.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.1 | ) | | | - | | | | (0.1 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.1 | | | | - | | | | - | | | | - | | | | - | | | | 3.1 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.4 | | | | 1.4 | | Balance, March 31, 2013 | | | 47.8 | | | | 29.9 | | | | 171.2 | | | | 207.6 | | | | (128.4 | ) | | | (14.6 | ) | | | 2.6 | | | | 268.3 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | | Stock options and awards including related tax benefits | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | | Balance, March 31, 2014 | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) | Stock options and awards including related tax benefits | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | | Balance, March 31, 2015 | | | 48.6 | | | $ | 30.4 | | | $ | 180.6 | | | $ | 359.8 | | | $ | (198.6 | ) | | $ | (16.2 | ) | | $ | 4.6 | | | $ | 360.6 | |
| | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other comprehensive | | | Treasury stock, at | | | Non- controlling | | | Total | | | Shares | | | Amount | | | capital | | | earnings | | | loss | | | cost | | | interest | | | | | Balance, March 31, 2013 | | | 47.8 | | | $ | 29.9 | | | $ | 171.2 | | | $ | 207.6 | | | $ | (128.4 | ) | | $ | (14.6 | ) | | $ | 2.6 | | | $ | 268.3 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | | Stock options and awards including related tax benefits | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | | Balance, March 31, 2014 | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) | Stock options and awards including related tax benefits | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | | Balance, March 31, 2015 | | | 48.6 | | | | 30.4 | | | | 180.6 | | | | 359.8 | | | | (198.6 | ) | | | (16.2 | ) | | | 4.6 | | | | 360.6 | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (1.6 | ) | | | - | | | | - | | | | - | | | | (1.6 | ) | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.4 | | | | - | | | | (0.1 | ) | | | 24.3 | | Stock options and awards including related tax benefits | | | 0.4 | | | | 0.2 | | | | 0.1 | | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7.8 | ) | | | - | | | | (7.8 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.9 | | Contribution by noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2.3 | | | | 2.3 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.6 | | | | 0.6 | | Balance, March 31, 2016 | | | 49.0 | | | $ | 30.6 | | | $ | 185.6 | | | $ | 358.2 | | | $ | (174.2 | ) | | $ | (24.0 | ) | | $ | 6.5 | | | $ | 382.7 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 1: | Significant Accounting Policies |
Nature of operations: Modine Manufacturing Company (“Modine” or the “Company”) specializes in thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets. The Company is a leading global developer, manufacturer and marketer of heat exchangers and systems for use in on-highway and off-highway original equipment manufacturer (“OEM”) vehicular applications, and a wide array of building, industrial and refrigeration markets. ProductThe Company’s product lines include radiators and radiator cores, condensers, oil coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation (“EGR”) coolers, and building heating, ventilating and air conditioning (“HVAC”) equipment.equipment, and coils.
Basis of presentation: The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States. These principles require management to make certain estimates and assumptions in determining assets, liabilities, revenue, expenses and related disclosures. Actual amounts could differ materially from those estimates.
Consolidation principles: The consolidated financial statements include the accounts of Modine Manufacturing Company and its majority-owned or Modine-controlled subsidiaries. The Company eliminates intercompany transactions and balances in consolidation.
The Company accounts for investments in non-consolidated affiliated companies in which its ownership is 20 percent or more using the equity method. The Company states these investments at cost, plus or minus a proportionate share of undistributed net income (loss). The Company includes Modine’s share of the affiliatesaffiliate’s net income (loss) in other income and expense. See Note 12 for further discussion.additional information.
Discontinued operations: During fiscal 2009, the Company sold its Electronics Cooling business. The buyer financed a portion of the selling price by issuing promissory notes payable to Modine. During fiscal 2015, the Company received $1.5 million from the buyer, which represented the final payment on the promissory notes. The Company had previously recorded a reserve against a portion of the promissory notes due to collectability concerns. As a result, the Company recorded a gain of $0.9 million ($0.6 million after income taxes) during fiscal 2015.
Assets held for sale: The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the assets for sale at a price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell.sell, within other noncurrent assets. The Company ceases to record depreciation expense at the time of designation as held for sale.
Revenue recognition: The Company recognizes sales revenue, including agreed upon commodity price increases or decreases,prices, when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product and risk of loss have transferred to the customer, persuasive evidence of an arrangement exists, and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The Company makes appropriate provisions for uncollectible accounts receivable based on historical data or specific customer economic data. The Company records sales discounts, which are offered for prompt payment by certain customers, as a reduction to net sales.
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 20152016 and 2014,2015, Company-owned tooling totaled $18.7$18.8 million and $28.6$18.7 million, respectively. In certain instances, the Company makes upfront payments for customer-owned tooling costs, and subsequently receives reimbursement from customers for the upfront payments. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 20152016 and 2014,2015, cost reimbursement receivables related to customer-owned tooling totaled $11.6$8.5 million and $10.3$11.6 million, respectively.
Warranty: The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. The Company records warranty expense based upon historical and current claims data or based onupon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 15 for further discussion.additional information. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its OEM customers in cost of sales, and related amounts billed to these customers in net sales. The Company records shipping and handling costs incurred upon the shipment of products to its HVAC and aftermarket customers in selling, general and administrative (“SG&A”) expenses. For the years ended March 31, 2016, 2015, 2014, and 2013, these2014, shipping and handling costs recorded in SG&A expenses were $2.5 million, $4.9 million, $4.0 million, and $4.3$4.0 million, respectively.
Research and development: The Company expenses research and development costs as incurred within SG&A expenses. For the years ended March 31, 2016, 2015, 2014, and 2013,2014, research and development costs charged to operations totaled $61.1 million, $62.0 million, $61.7 million, and $68.4$61.7 million, respectively.
Translation of foreign currencies: The Company translates assets and liabilities of foreign subsidiaries and equity investments into U.S. dollars at the period-end exchange rates, and translates income and expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders' equity. The Company includes foreign currency transaction gains or losses in the statement of operations within other income and expense.
Derivative instruments: The Company enters into derivative financial instruments from time to time to manage certain financial risks. The Company enters into futures contracts to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. These instruments are used to manage financial risks and are not speculative. See Note 18 for further discussion.additional information.
Income taxes: The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. See Note 8 for further discussion.additional information.
Earnings per share: The Company calculates basic earnings per share based upon the weighted averageweighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. Restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company. Therefore, these restricted stock awards are included in computing earnings per share pursuant to the two-class method. See Note 9 for further discussion.additional information.
Cash and cash equivalents: The Company considers all highly liquidhighly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the amount of those un-presented checks is included in accounts payable.
Short-term investments: The Company invests in time deposits with original maturities of more than three months but no more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2016 and 2015, the Company’s short-term investments totaled $3.3 million and $2.8 million, respectively.
Deferred compensation trust: The Company maintains a deferred compensation trust to fund future obligations under its non-qualified deferred compensation plan. The trust’s investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Trade accounts receivable: The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company recorded an allowance for doubtful accounts $1.0of $0.5 million and $1.1$1.0 million at March 31, 2016 and 2015, and 2014, respectively, representsrepresenting its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable without recourse to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During the years ended March 31, 2016, 2015, 2014, and 2013,2014, the Company sold, without recourse, $71.3 million, $87.0 million, $82.4 million, and $99.1$82.4 million of accounts receivable to accelerate cash receipts. During each of the years ended March 31, 2016, 2015, 2014, and 2013,2014, the Company recorded a loss on the sale of accounts receivables of $0.3 million in the consolidated statements of operations. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost on a first-in, first-out basis or weighted average basis, or marketand net realizable value.
Property, plant and equipment: The Company statesrecords property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful life of the asset. The Company charges maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations.
Goodwill: The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company recognizes an impairment loss if the book value of goodwill exceeds the fair value. The Company performed theits goodwill impairment test as of March 31, 2015 and as a2016, which did not result recordedin an impairment charge of $7.8 million related to its South America segment.charge. See Note 14 for further discussion.additional information.
Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment and writes them down to fair value when facts andwhenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the assets may not be recoverable through estimated future undiscounted cash flows. If an impairment has occurred, the Company writes down the asset toexceeds its estimated fair value and recognizes the impairment loss as a charge against current operations.value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets. See Note 6 for further discussion.additional information.
Environmental expenditures:liabilities: The Company capitalizesrecords liabilities for environmental expenditures that qualify as property, plantassessments and equipment or substantially increaseremediation efforts in the economic value or extend the useful life of an asset. The Company expenses all other expenditures as incurred. If a loss arising from environmental mattersperiod which its responsibility is probable and the costs can be reasonably estimated,estimated. To the Company records an accrual forextent that the amountrequired remediation procedures change, or additional contamination is identified, the Company’s estimate of the estimated loss.environmental liabilities may change. See Note 19 for further discussion.additional information.
Self-insurance reserves: The Company retains a portion of the financial risk for various insurance coverage, including property, general liability, workers compensation, and employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to operations. The Company reviews and updates the evaluationamount of insurance claims and the reasonableness of the relatedits insurance-related reserves on a quarterly basis.
Stock-based compensation: The Company recognizes stock-based compensation using the fair value method. Accordingly, compensation expense for stock options, restricted stock and performance-based stock awards is calculated based upon the fair value of the instruments at the time of grant, and is recognized as expense over the respective vesting periods. See Note 5 for further discussion.
Out of period adjustments: During the second quarter of fiscal 2014, the Company recorded a customer pricing adjustment that related to prior fiscal years. The impact of this error to the second quarter of fiscal 2014 decreased pre-tax earnings by $0.6 million ($0.5 million after-tax). During the first quarter of fiscal 2013, the Company identified an error related to certain commodity hedges that should have been deemed ineffective in the fourth quarter of fiscal 2012, which overstated pre-tax earnings by $0.5 million in the first quarter of fiscal 2013. The Company does not believe that these errors were material to its financial statements for fiscal 2014 or 2013.additional information.
New accounting guidance: In May 2014,March 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify several aspects of accounting for share-based payment transactions, including the income tax consequences. This guidance is effective for the Company’s first quarter of fiscal 2018. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance. Upon adoption of this new guidance, the Company will be required to recognize most leases on its balance sheet. This guidance is effective for the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In November 2015, the FASB issued new guidance, as part of its simplification initiative, that requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The Company adopted this guidance, on a retrospective basis, for its fiscal year ending March 31, 2016. As a result, the Company reclassified approximately $13.0 million of deferred tax assets from current assets to noncurrent assets as of March 31, 2015 to conform to the current-period presentation. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about revenue arising from contracts with customers. This new guidance is effective for the Company’s first quarter of fiscal 2018 at the earliest.2019. The Company is currently evaluating the impact the newthis guidance will have on its consolidated financial statements. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Supplemental cash flow information:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Interest paid | | $ | 10.3 | | | $ | 12.6 | | | $ | 11.6 | | Income taxes paid | | | 15.9 | | | | 11.4 | | | | 12.4 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Interest paid | | $ | 10.7 | | | $ | 10.3 | | | $ | 12.6 | | Income taxes paid | | | 10.1 | | | | 15.9 | | | | 11.4 | |
Note 2: | Airedale Facility Fire |
On September 6, 2013, a fire caused significant destruction to the Company’s Airedale manufacturing facility and offices in Rawdon (Leeds), United Kingdom. The Company reports Airedale’s financial results within the Building HVAC segment (previously known as Commercial Products).segment. There were no injuries caused by the fire. The Rawdon facility, which wasis leased, was used to manufacture cooling products and solutions for a variety of applications, including data centers, clean rooms, retail, leisure and process cooling. The fire caused a temporary manufacturing suspensionCompany suspended operations at the Rawdon site;site as a result of the fire; however, the Companyit transferred its operations to temporary facilities and is in the process of rebuildingwhile it rebuilt the leased facility. The Company expects to completecompleted the reconstruction and return its operationsrelocation to the Rawdon sitefacility in late fiscal 2016.
The Company maintainsCompany’s insurance coverage forcovered damage to the leased facility, equipment, inventory, and other assets, as well as business interruption and lost profits, and recovery-related expenses caused by the fire. TheSince the date of the fire, the Company believes that reimbursementhas received cumulative cash proceeds of $96.0 million from its insurance provider is probable for substantially allcovered losses, and has recorded losses and costs directly attributablecaused by the fire in the same statement of operations line as the related insurance recovery. In fiscal 2016, the Company recorded a $9.5 million gain within other income related to an insurance settlement for equipment losses. This gain represents the replacement assets’ cost in excess of the carrying value of the equipment at the time it was destroyed by the fire. During fiscal 2015, the Company recorded $4.6 million of recoveries from business interruption insurance relating to fiscal 2015 and 2014 lost profits within SG&A expenses. Since the date of the fire, the Company has received cumulative cash proceeds of $62.7 million from its insurance provider for covered losses. In addition, the Company has written-off inventory of $4.7 million and equipment with a net book value of $1.4 million and incurred costs directly attributable to the fire totaling $22.0 million. The Company has recorded these losses and costs, which totaled $28.1 million, in the same statement of operations line as the related insurance recovery.
The terms of the Rawdon lease agreement obligateobligated the Company to rebuild the damaged facility. Through March 31, 2015,Upon completion of the rebuilt facility in fiscal 2016, the Company has capitalized reconstruction costs of $21.2 million,fulfilled this obligation and has recorded this asset on the consolidated balance sheet within other current assets. The Company currently estimates costs of reconstruction will total $48.0 million; accordingly, we recorded a $48.0 million other current liability as of March 31, 2015. As of March 31, 2015, we recorded an $18.0 million receivable from the Company’s insurance provider within other current assets, which represented covered losses to date in excess of cumulative cash proceeds received. As of March 31, 2014,removed both the liability to rebuild the facility was $45.0 million ($37.0 million withinand the capitalized reconstruction costs from its consolidated balance sheet. As of March 31, 2015, the other current liabilitiesliability to rebuild the facility was $48.0 million and $8.0 million within other noncurrent liabilities), and the receivablecurrent assets related to receivables from the Company’s insurance provider was $25.4 million ($18.4 million within other current assets and $7.0 million within other noncurrent assets).capitalized reconstructions costs totaled $39.2 million.
On January 29, 2016, the Company formed a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co. Ltd. of Yangzhou, China, of which it owns 67%, and the joint venture partner, Jiangsu Puxin Heat Exchange System Co., Ltd, owns 33%. This joint venture, which is reported in the Asia segment, will expedite the Company’s introduction of stainless steel heat exchangers for the light-, medium-, and heavy-duty commercial vehicle markets in China. The Company contributed cash of $1.4 million, with additional cash consideration of $0.5 million payable after six months subject to the sellers’ indemnification obligations under the agreement, and equipment and other assets totaling $2.3 million. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in acquired equipment and other long-lived assets totaling $1.5 million and working capital net assets of $0.8 million. The Company controls the primary management decisions and revenue-generating activities of the joint venture, and, therefore, the financial results of the joint venture are included in the Company’s consolidated financial statements.
On February 28, 2014, the Company acquired 100 percent of the shares of Barkell Limited of Consett, United Kingdom for cash consideration of $7.8 million, net of cash acquired. This acquisition provides Modine with an expanded product offering into the air handling market within the Building HVAC segment. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in intangible assets for acquired technology and customer relationships totaling $4.7 million; property, plant and equipment of $2.0 million; and working capital net assets of $1.1 million. Acquired technology consists of a fully developed product line and technical processes, and the customer relationships represent established sales channel and customer relationships. The Company is amortizing these acquired intangible assets over ten years.
On July 25, 2012, the Company completed the acquisition46
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The results of operations of these acquired businesses are included in the Company’s consolidated statements of operations since the dates of acquisition. The Company did not present pro forma financial information as the effectseffect of these acquisitions areis not material to theits results of operations or financial position. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2007, the Company acquired the remaining 50 percent of Radiadores Visconde Ltda. The purchase agreement included a $2.0 million note, which was payable subject to the resolution of certain obligations of the sellers. During fiscal 2013, the Company and the sellers reached a final resolution under which the Company is not obligated to pay the note to the sellers. As a result, the Company recorded a $2.0 million reduction to SG&A expenses in the South America segment during fiscal 2013.
Note 4: | Fair Value Measurements |
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
| ·● | Level 1 – Quoted prices for identical instruments in active markets. |
| ·● | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
| ·● | Level 3 – Model-derived valuations in which one or more significant inputs are not observable. |
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, fair value is based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash and cash equivalents, short-term investments, trade accounts receivable, and accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. The Company holds trading securities in a deferred compensation trust to fund obligations under Modine’s non-qualified deferred compensation plan. The securities’ fair values, which are recorded as other noncurrent assets, are determined based on quoted prices from active markets and classified within Level 1 of the valuation hierarchy. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. The fair values of the Company’s trading securities and deferred compensation obligations each totaled $3.0$3.2 million and $2.6$3.0 million at March 31, 20152016 and 2014,2015, respectively. The fair value of the Company’s long-term debt is disclosed in Note 16.
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2015 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 8.1 | | | $ | - | | | $ | 8.1 | | Common stocks | | | 40.5 | | | | 2.2 | | | | - | | | | 42.7 | | Corporate bonds | | | - | | | | 23.5 | | | | - | | | | 23.5 | | Pooled equity funds | | | 69.0 | | | | 11.4 | | | | - | | | | 80.4 | | Pooled fixed-income funds | | | 15.5 | | | | - | | | | - | | | | 15.5 | | U.S. government and agency securities | | | - | | | | 39.8 | | | | - | | | | 39.8 | | Other | | | 0.7 | | | | 6.3 | | | | - | | | | 7.0 | | Total | | $ | 125.7 | | | $ | 91.3 | | | $ | - | | | $ | 217.0 | |
| | March 31, 2016 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 5.8 | | | $ | 5.8 | | Common stocks | | | 23.7 | | | | 1.3 | | | | 25.0 | | Corporate bonds | | | - | | | | 8.4 | | | | 8.4 | | Pooled equity funds | | | 48.7 | | | | 7.3 | | | | 56.0 | | Pooled fixed-income funds | | | 26.3 | | | | - | | | | 26.3 | | U.S. government and agency securities | | | - | | | | 18.4 | | | | 18.4 | | Other | | | 0.4 | | | | 1.2 | | | | 1.6 | | Total | | $ | 99.1 | | | $ | 42.4 | | | $ | 141.5 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
| | March 31, 2014 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 11.3 | | | $ | - | | | $ | 11.3 | | Common stocks | | | 40.1 | | | | 2.1 | | | | - | | | | 42.2 | | Corporate bonds | | | - | | | | 21.3 | | | | - | | | | 21.3 | | Pooled equity funds | | | 68.9 | | | | 11.9 | | | | - | | | | 80.8 | | Pooled fixed-income funds | | | 14.1 | | | | - | | | | - | | | | 14.1 | | U.S. government and agency securities | | | - | | | | 37.0 | | | | - | | | | 37.0 | | Other | | | 1.6 | | | | 5.4 | | | | - | | | | 7.0 | | Total | | $ | 124.7 | | | $ | 89.0 | | | $ | - | | | $ | 213.7 | |
| | March 31, 2015 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 8.1 | | | $ | 8.1 | | Common stocks | | | 40.5 | | | | 2.2 | | | | 42.7 | | Corporate bonds | | | - | | | | 23.5 | | | | 23.5 | | Pooled equity funds | | | 69.0 | | | | 11.4 | | | | 80.4 | | Pooled fixed-income funds | | | 15.5 | | | | - | | | | 15.5 | | U.S. government and agency securities | | | - | | | | 39.8 | | | | 39.8 | | Other | | | 0.7 | | | | 6.3 | | | | 7.0 | | Total | | $ | 125.7 | | | $ | 91.3 | | | $ | 217.0 | |
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of common stocks, pooled equity funds and pooled fixed-income funds based on quoted prices from active markets and classifyclassified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain common stocks, corporate bonds, pooled equity funds and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 2016 and 2015, the Company held no Level 3 assets within its pension plans.
Assets held for sale: The Company valued assets held for sale based on Level 3 market-based valuation inputs. The carrying value of assets held for sale totaled $3.2$8.5 million and $11.6$3.2 million at March 31, 20152016 and 2014,2015, respectively. See Note 6 for further discussion.additional information.
Note 5: | Stock-Based Compensation |
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and executives that consists of restricted stock and stock option componentsoptions granted for retention and performance, (2) a discretionary equity program for management and other key employees, and (3) stock optionsawards and/or stock awardsoptions for non-employee directors. The Company’s Board of Directors and the Officer Nomination and Compensation Committee, as applicable, have discretionary authority to set the terms of the awards of stock under the Company’s Amended and Restated 2008 Incentive Compensation Plan (“Plan”). At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2015,2016, approximately 4.03.3 million shares authorized under the Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $4.9 million, $4.0 million, $3.6 million, and $3.1$3.6 million in fiscal 2016, 2015, 2014, and 2013,2014, respectively.
Stock Options: The Company recorded $0.9 million, $0.8$0.9 million, and $1.1$0.8 million of compensation expense related to stock options in fiscal 2016, 2015, 2014, and 2013,2014, respectively. The fair value of stock options that vested during fiscal 2016, 2015, 2014, and 20132014 was $0.9 million, $0.8$0.9 million, and $1.3$0.8 million, respectively. As of March 31, 2015,2016, the total compensation expense not yet recognized related to non-vested stock options was $1.7$2.0 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.72.5 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:
| | 2015 | | | 2014 | | | 2013 | | Weighted average fair value of options | | $ | 10.21 | | | $ | 7.76 | | | $ | 4.26 | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 2.1 | % | | | 1.3 | % | | | 0.9 | % | Expected volatility of the Company's stock | | | 76.1 | % | | | 88.7 | % | | | 87.4 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| | 2016 | | 2015 | | 2014 | Weighted-average fair value of options | | $ | 7.11 | | | $ | 10.21 | | | $ | 7.76 | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 1.9 | % | | | 2.1 | % | | | 1.3 | % | Expected volatility of the Company's stock | | | 66.9 | % | | | 76.1 | % | | | 88.7 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of the common stock on the date of grant. The risk-free interest rate was based on yields of U.S. Treasury zero-coupon issues with a term corresponding to the expected life of the options. The expected volatility assumption was based on changes in the Company’s historical common stock prices over the same time frame as the expected life of the awards. The expected dividend yield is zero as the Company currently does not anticipate paying dividends over the expected life of the options. The expected lives of the awards are based on historical patterns and the terms of the options. Outstanding options granted during fiscal 2015 and fiscal 2014 vest 25 percent annually for four years. All outstanding options granted prior to fiscal 2014 vested 25 percent on the grant date and 25 percent annually thereafter for the subsequent three years. The Company used a pre-vesting forfeiture rate of 2.5 percent for these periods as an estimate of expected forfeitures prior to completing the required service period.
A summary of stock option activity for fiscal 20152016 was as follows:
| | Shares | | | Weighted average exercise price | | | Weighted average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.6 | | | $ | 13.15 | | | | | | | | Granted | | | 0.1 | | | | 14.94 | | | | | | | | Exercised | | | (0.1 | ) | | | 8.71 | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 29.41 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 11.99 | | | | 5.3 | | | $ | 5.7 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2015 | | | 1.2 | | | $ | 12.13 | | | | 4.5 | | | $ | 4.9 | |
| | Shares | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.5 | | | $ | 11.99 | | | | | | | | Granted | | | 0.2 | | | | 11.39 | | | | | | | | Exercised | | | (0.1 | ) | | | 5.82 | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 27.33 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 10.82 | | | | 5.3 | | | $ | 3.0 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2016 | | | 1.1 | | | $ | 10.41 | | | | 4.3 | | | $ | 3.0 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20152016 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the fair value of Modine’s common shares.
Additional information related to stock options exercised during fiscal 2016, 2015, 2014, and 20132014 was as follows:
| | 2015 | | | 2014 | | | 2013 | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 1.1 | | | $ | 0.1 | | Proceeds from stock options exercised | | $ | 0.6 | | | $ | 1.1 | | | $ | 0.1 | |
| | 2016 | | | 2015 | | | 2014 | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 0.4 | | | $ | 1.1 | | Proceeds from stock options exercised | | $ | 0.5 | | | $ | 0.6 | | | $ | 1.1 | |
Restricted Stock: The Company recorded $3.5 million, $2.8 million, $2.2 million, and $1.8$2.2 million of compensation expense related to restricted stock in fiscal 2016, 2015, 2014 and 2013,2014, respectively. The fair value of restricted stock awards that vested during fiscal 2016, 2015, and 2014 and 2013 was $3.4 million, $2.3 million, $1.6 million, and $1.3$1.6 million, respectively. At March 31, 2015,2016, the Company had $4.6$4.7 million of total unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.52.4 years. The Company values restricted stock awards using the closing market value of its common shares on the date of grant. The restricted stock awards vest 25 percent annually for four years, with the exception of awards to non-employee directors, which fully vest upon grant.
A summary of restricted stock activity for fiscal 20152016 was as follows:
| | Shares | | | Weighted average price | | Non-vested balance, beginning | | | 0.6 | | | $ | 8.66 | | Granted | | | 0.3 | | | | 14.92 | | Vested | | | (0.2 | ) | | | 9.73 | | Non-vested balance, ending | | | 0.7 | | | $ | 10.68 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | Shares | | Weighted- average price | Non-vested balance, beginning | | | 0.7 | | | $ | 10.68 | | Granted | | | 0.3 | | | | 11.18 | | Vested | | | (0.4 | ) | | | 10.01 | | Non-vested balance, ending | | | 0.6 | | | $ | 11.29 | |
Restricted Stock – Performance-Based Shares: The Company recorded $0.5 million, $0.3 million $0.6 million and $0.2$0.6 million of compensation expense related to performance-based stock awards in fiscal 2016, 2015, 2014 and 2013,2014, respectively. At March 31, 2015,2016, the Company had $1.6$1.2 million of total unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be recognized over a weighted-average period of 1.81.7 years. The Company values performance-based stock awards using the closing market value of its common shares aton the date of grant. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shares are earned under the performance portion of the restricted stock award program based upon the attainment of certain financial goals over a three-year period and are awarded atafter the end of that three-year performance period, if the performance targets have been achieved. A new performance period may begin each fiscal year; therefore, multiple performance periods, with distinct goals, may operate simultaneously.
The performance componentcomponents of the programprograms initiated in fiscal 2016 and fiscal 2015 waswere based upon both a target three-year average consolidated return on average capital employed (“ROACE”) and a target three-year average annual revenue growth at the end of thea three-year performance period, coveringcommencing with the fiscal 2015 through fiscal 2017.year of grant. For the program initiated in fiscal 2014, the performance award was based upon a target three-year average ROACE, three-year average annual revenue growth, and Asia segment operating income at the end of the three-year performance period. For the program initiated in fiscal 2013, the performance award was based upon a target three-year average consolidated ROACE, cumulative revenue over the three-year performance period and Europe ROACE at the end of the three-year performance period.
Note 6: Note 6: | Restructuring Activities |
During fiscal 2016, the Company offered a voluntary retirement program to certain U.S. salaried employees. The program was offered as part of the Company’s Strengthen, Diversify and Grow transformational initiative and supports the objective of reducing operational and SG&A cost structures.
Also during fiscal 2016, the Company announced a plan to close its Washington, Iowa manufacturing facility and is in the process of transferring the facility’s production to other Americas segment manufacturing facilities, which it expects to complete by the end of fiscal 2017. In addition, the Company completed the transfer of production from its McHenry, Illinois manufacturing facility to other Americas segment manufacturing facilities. These restructuring activities reflect the Company’s focus on operating scale manufacturing facilities to improve overall competitiveness and profitability.
During fiscal 2015, the Company implementedinitiated a headcount reduction plan for its Brazil manufacturing facility within its South AmericaAmericas segment. The headcount reductions were in response to the economic slowdown in Brazil and reflect the Company’s objective to maintain profitability in the segmentthis business despite lower sales volume.
During fiscal 2014,In addition, the Company approved a plancontinues to close its McHenry, Illinois manufacturing facility, reflecting its focus on operating scale manufacturing facilities to improve overall competitiveness and profitability. The Company is in the process of transferring the facility’s production to other existing North America segment manufacturing facilities.
During fiscal 2013, the Company initiatedexecute restructuring activities within its Europe segment. TheThese restructuring activities have included implementing headcount reductions, exiting certain non-core product lines based upon Modine’s global product strategy, reducing manufacturing costs, consolidating production facilities, implementing headcount reductions, and disposing of and selling certain underperforming or non-strategic assets. The Company designed these activities were designed to align the cost structure of the segment with its strategic focus on the commercial vehicle, off-highway, automotive component, and engine product markets, while improving gross margin and return on average capital employed.
Restructuring and repositioning expenses for fiscal 2015, 2014, and 2013 were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Employee severance and related benefits | | $ | 1.2 | | | $ | 14.8 | | | $ | 14.9 | | Accelerated depreciation | | | - | | | | 4.3 | | | | - | | Other restructuring and repositioning expenses | | | 3.5 | | | | 1.3 | | | | 2.1 | | Total | | $ | 4.7 | | | $ | 20.4 | | | $ | 17.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Employee severance and related benefits | | $ | 12.8 | | | $ | 1.2 | | | $ | 14.8 | | Accelerated depreciation | | | - | | | | - | | | | 4.3 | | Other restructuring and repositioning expenses | | | 3.8 | | | | 3.5 | | | | 1.3 | | Total | | $ | 16.6 | | | $ | 4.7 | | | $ | 20.4 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
During fiscal 2016, 2015, 2014, and 2013,2014, the Company recorded $16.6 million, $4.7 million, $16.1 million and $17.0$16.1 million, respectively, of restructuring and repositioning expenses as restructuring expenses in the consolidated statement of operations. During fiscal 2014, the Company recorded $4.3 million of restructuring and repositioning expenses within cost of sales in the consolidated statement of operations. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 19.4 | | | $ | 11.6 | | Additions | | | 1.2 | | | | 14.8 | | Payments | | | (7.3 | ) | | | (7.8 | ) | Effect of exchange rate changes | | | (3.4 | ) | | | 0.8 | | Ending balance | | $ | 9.9 | | | $ | 19.4 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 9.9 | | | $ | 19.4 | | Additions | | | 12.8 | | | | 1.2 | | Payments | | | (8.5 | ) | | | (7.3 | ) | Effect of exchange rate changes | | | 0.5 | | | | (3.4 | ) | Ending balance | | $ | 14.7 | | | $ | 9.9 | |
During fiscal 2016, the Company identified potential impairment indicators related to a manufacturing facility in Germany, including pre-tax losses and its strategic decision to exit a certain product line in the future. In response, the Company performed an impairment evaluation and recorded an asset impairment charge of $9.9 million within its Europe segment to write down the manufacturing facility’s long-lived assets to fair value. The Company determined fair value using Level 3 inputs, primarily consisting of a facility appraisal, which considered the market rental value, and estimated scrap values, which considered the specialized nature of the machinery and equipment.
During fiscal 2014, the Company recorded asset impairment charges totaling $3.2 million, including $2.0 million within its Europe segment, primarily due to a manufacturing facility in Germany that the Company plans to close,has closed, and $1.2 million within its North AmericaAmericas segment, related to the planned closure of its McHenry, Illinois manufacturing facility. During fiscal 2013, the Company recorded asset impairment charges of $24.1 and $1.8 million within its Europe and North America segments, respectively, to reduce the carrying values of certain facilities held for sale to their estimated fair values, less costs to sell.
During fiscal 2015, the Company sold a wind tunnel within its Europe segment which was previously reported as an asset held for sale, for cash proceeds of $5.8 million and recognized a gain of $3.2 million. Also during fiscal 2015, the Company reclassified $4.7 million of its assets held for sale to property, plant and equipment, related to a facility in the Europe segment that is no longer being actively marketed for sale. At March 31, 20152016 and 2014,2015, assets held for sale of $3.2$8.5 million and $11.6$3.2 million, respectively, were included in other noncurrent assets and consisted of facilities that the Company is marketing for sale.
In April 2015, the Company announced its intent to close its Washington, Iowa manufacturing facility within the North America segment. As a result of the planned closure, the Company expects to incur approximately $2.0 million of employee severance-related costs during fiscal 2016 and additional restructuring and repositioning expenses during the closure period, as production is transferred to other facilities within the North America segment.
Note 7: | Other Income and Expense |
Other income and expense consisted of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Equity in earnings of non-consolidated affiliate | | $ | 0.6 | | | $ | 0.7 | | | $ | 0.3 | | Interest income | | | 0.5 | | | | 0.5 | | | | 0.9 | | Foreign currency transactions | | | (0.9 | ) | | | (2.0 | ) | | | (1.1 | ) | Other non-operating income - net | | | - | | | | - | | | | 0.1 | | Total other income (expense) - net | | $ | 0.2 | | | $ | (0.8 | ) | | $ | 0.2 | |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Equity in earnings of non-consolidated affiliate | | $ | 0.1 | | | $ | 0.6 | | | $ | 0.7 | | Interest income | | | 0.4 | | | | 0.5 | | | | 0.5 | | Foreign currency transactions (a) | | | (1.3 | ) | | | (0.9 | ) | | | (2.0 | ) | Gain from insurance recovery (b) | | | 9.5 | | | | - | | | | - | | Total other income (expense) - net | | $ | 8.7 | | | $ | 0.2 | | | $ | (0.8 | ) |
Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency denominated
| (a) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on foreign currency exchange contracts. |
| (b) | During fiscal 2016, the Company settled an insurance claim related to machinery and equipment destroyed in a fire at its Airedale facility and recorded a gain of $9.5 million. See Note 2 for additional information. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The U.S. and foreign components of earnings (loss) from continuing operations before income taxes and the provision (benefit)or benefit for income taxes consisted of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Components of earnings (loss) from continuing operations before income taxes: | | | | | | | | | | United States | | $ | 31.1 | | | $ | 14.1 | | | $ | 10.2 | | Foreign | | | 10.1 | | | | 9.9 | | | | (23.2 | ) | Total earnings (loss) from continuing operations before income taxes | | $ | 41.2 | | | $ | 24.0 | | | $ | (13.0 | ) | | | | | | | | | | | | | | Income tax expense (benefit): | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | 0.4 | | | $ | (2.0 | ) | | $ | 2.6 | | Deferred | | | 7.1 | | | | (95.8 | ) | | | (2.6 | ) | State: | | | | | | | | | | | | | Current | | | - | | | | 0.2 | | | | 0.2 | | Deferred | | | 1.1 | | | | (21.4 | ) | | | (0.2 | ) | Foreign: | | | | | | | | | | | | | Current | | | 12.7 | | | | 10.0 | | | | 6.4 | | Deferred | | | (2.3 | ) | | | 1.1 | | | | 3.4 | | Total income tax expense (benefit) | | $ | 19.0 | | | $ | (107.9 | ) | | $ | 9.8 | |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Components of (loss) earnings from continuing operations before income taxes: | | | | | | | | | | United States | | $ | (15.4 | ) | | $ | 31.1 | | | $ | 14.1 | | Foreign | | | 5.5 | | | | 10.1 | | | | 9.9 | | Total (loss) earnings from continuing operations before income taxes | | $ | (9.9 | ) | | $ | 41.2 | | | $ | 24.0 | | | | | | | | | | | | | | | Income tax (benefit) expense: | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | 0.1 | | | $ | 0.4 | | | $ | (2.0 | ) | Deferred | | | (13.0 | ) | | | 7.1 | | | | (95.8 | ) | State: | | | | | | | | | | | | | Current | | | 0.2 | | | | - | | | | 0.2 | | Deferred | | | (2.5 | ) | | | 1.1 | | | | (21.4 | ) | Foreign: | | | | | | | | | | | | | Current | | | 9.6 | | | | 12.7 | | | | 10.0 | | Deferred | | | (3.3 | ) | | | (2.3 | ) | | | 1.1 | | Total income tax (benefit) expense | | $ | (8.9 | ) | | $ | 19.0 | | | $ | (107.9 | ) |
The Company allocates income tax expense among continuing operations, discontinued operations, and other comprehensive income. The Company applies accounting for income taxes by tax jurisdiction, and in periods in which there is a loss from continuing operations before income taxes and pre-tax income in other categories (e.g., discontinued operations or other comprehensive income), it first allocates income tax expense to the other sources of income, and records a related tax benefit in continuing operations.
Income tax expense attributable to earnings (loss) from continuing operations before income taxes differed from the amounts computed by applying the statutory U.S. federal income tax rate as a result of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 2.4 | | | | 2.1 | | | | (1.3 | ) | Taxes on non-U.S. earnings and losses | | | (4.9 | ) | | | (3.8 | ) | | | (23.8 | ) | Valuation allowance | | | 8.3 | | | | (471.7 | ) | | | (59.3 | ) | Tax credits | | | (6.1 | ) | | | (7.1 | ) | | | 37.0 | | Compensation | | | 1.0 | | | | 0.4 | | | | (13.0 | ) | Tax rate or law changes | | | 1.2 | | | | (9.2 | ) | | | 0.9 | | Uncertain tax positions net of settlements | | | 2.2 | | | | 0.4 | | | | (41.9 | ) | Brazil interest on equity | | | - | | | | (1.7 | ) | | | 3.2 | | Dividend repatriation | | | 2.4 | | | | 5.8 | | | | (11.4 | ) | Other | | | 4.6 | | | | 0.2 | | | | (0.8 | ) | Effective tax rate | | | 46.1 | % | | | (449.6 | %) | | | (75.4 | %) |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 11.5 | | | | 2.4 | | | | 2.1 | | Taxes on non-U.S. earnings and losses | | | 26.4 | | | | (4.9 | ) | | | (3.8 | ) | Valuation allowance | | | (20.9 | ) | | | 8.3 | | | | (471.7 | ) | Tax credits | | | 20.5 | | | | (6.1 | ) | | | (7.1 | ) | Compensation | | | (3.7 | ) | | | 1.0 | | | | 0.4 | | Tax rate or law changes | | | 1.3 | | | | 1.2 | | | | (9.2 | ) | Uncertain tax positions, net of settlements | | | (4.3 | ) | | | 2.2 | | | | 0.4 | | Dividend repatriation | | | 16.0 | | | | 2.4 | | | | 5.8 | | Other | | | 8.1 | | | | 4.6 | | | | (1.5 | ) | Effective tax rate | | | 89.9 | % | | | 46.1 | % | | | (449.6 | %) |
The Company recorded an additional valuation allowance of $5.0 million, $2.6 million and $12.3 million in fiscal 2016, 2015, and 2014, respectively, against net deferred tax assets in certain foreign jurisdictions after determining it was more likely than not that the net deferred tax assets in these jurisdictions will not be realized. The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions going forward until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2016 and 2014, the Company concluded it no longer needed a valuation allowance on certain U.S. deferred tax assets after determining it was more likely than not they would be realized. As a result, the Company recorded a $119.2 million reversalreversals of its deferred tax asset valuation allowance.allowance of $3.0 million and $119.2 million in fiscal 2016 and 2014, respectively. Also during fiscal 2014, the Company recorded income tax benefits totaling $2.2 million related to foreign tax law changes. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | March 31, | | | | 2015 | | | 2014 | | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.3 | | | $ | 0.2 | | Inventories | | | 3.8 | | | | 4.1 | | Plant and equipment | | | 0.8 | | | | 2.4 | | Pension and employee benefits | | | 50.5 | | | | 39.1 | | Net operating loss, capital loss, and credit carryforwards | | | 105.0 | | | | 122.4 | | Other, principally accrued liabilities | | | 6.8 | | | | 10.3 | | Total gross deferred tax assets | | | 167.2 | | | | 178.5 | | Less: valuation allowance | | | (48.0 | ) | | | (61.2 | ) | Net deferred tax assets | | | 119.2 | | | | 117.3 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Goodwill | | | 0.6 | | | | 4.2 | | Plant and equipment | | | 5.3 | | | | 7.6 | | Other | | | 1.0 | | | | 1.7 | | Total gross deferred tax liabilities | | | 6.9 | | | | 13.5 | | Net deferred tax asset | | $ | 112.3 | | | $ | 103.8 | |
| | March 31, | | | 2016 | | 2015 | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.1 | | | $ | 0.3 | | Inventories | | | 3.6 | | | | 3.8 | | Plant and equipment | | | 4.3 | | | | 0.8 | | Pension and employee benefits | | | 52.6 | | | | 50.5 | | Net operating loss, capital loss, and credit carryforwards | | | 109.4 | | | | 105.0 | | Other, principally accrued liabilities | | | 6.9 | | | | 6.8 | | Total gross deferred tax assets | | | 176.9 | | | | 167.2 | | Less: valuation allowance | | | (50.8 | ) | | | (48.0 | ) | Net deferred tax assets | | | 126.1 | | | | 119.2 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Plant and equipment | | | 5.5 | | | | 5.3 | | Goodwill | | | 0.6 | | | | 0.6 | | Other | | | 1.1 | | | | 1.0 | | Total gross deferred tax liabilities | | | 7.2 | | | | 6.9 | | Net deferred tax asset | | $ | 118.9 | | | $ | 112.3 | |
Deferred tax assets and liabilities are reported inAs of March 31, 2016, the Company adopted new accounting guidance, which requires that all deferred taxes be presented as non-current on the consolidated balance sheets as follows:sheets. See Note 1 for additional information.
| | March 31, | | | | 2015 | | | 2014 | | Current deferred tax asset | | $ | 13.4 | | | $ | 13.0 | | Noncurrent deferred tax asset | | | 102.7 | | | | 98.6 | | Current deferred tax liability (other current liabilities) | | | (0.4 | ) | | | (0.5 | ) | Noncurrent deferred tax liability | | | (3.4 | ) | | | (7.3 | ) | Total | | $ | 112.3 | | | $ | 103.8 | |
Unrecognized tax benefits were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 2.1 | | | $ | 9.0 | | Gross increases - tax positions in prior period | | | 3.1 | | | | 2.5 | | Gross decreases - tax positions in prior period | | | - | | | | (7.0 | ) | Gross increases - tax positions in current period | | | 0.4 | | | | 0.1 | | Settlements | | | - | | | | (1.9 | ) | Lapse of statute of limitations | | | - | | | | (0.8 | ) | Effect of exchange rate changes | | | - | | | | 0.2 | | Ending balance | | $ | 5.6 | | | $ | 2.1 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 5.6 | | | $ | 2.1 | | Gross increases - tax positions in prior period | | | - | | | | 3.1 | | Gross decreases - tax positions in prior period | | | (0.1 | ) | | | - | | Gross increases - tax positions in current period | | | 0.4 | | | | 0.4 | | Ending balance | | $ | 5.9 | | | $ | 5.6 | |
The Company’s liability for unrecognized tax benefits as of March 31, 20152016 was $5.6$5.9 million, and if recognized, $3.0$3.5 million would have an effective tax rate impact.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. At March 31, 20152016 and 2014,2015, accrued interest and penalties were not significant. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2015,2016, the Company was under income tax examination in a number of foreign jurisdictions. The Company does not anticipate a significant change in unrecognized tax benefits during the next twelve months.
The following tax years remain subject to examination for the Company’s major tax jurisdictions:
Austria | Fiscal 2012 - 20142015 | Brazil | Calendar 20102011 - 20142015 | Germany | Fiscal 20112012 - 20142015 | United States | Fiscal 2012 – 20142013 - 2015 |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
At March 31, 2015,2016, the Company had foreign tax credit carry forwards of $1.8 million that, if not utilized against domestic taxes, will expire in fiscal 2016 and 2017. The Company also had federal and state research and development tax credits of $20.9$23.3 million that, if not utilized against domestic taxes, will expire between fiscal 2018 and 2035.2036. The Company also had various state and local tax loss carry forwards of $186.0$190.8 million that, if not utilized against state apportioned taxable income, will expire at various times during fiscal 20162017 through 2034.2036. In addition, the Company had tax loss carry forwards of $304.6$330.7 million in various tax jurisdictions throughout the world. Certain of the carry forwards in the U.S. and many in foreign jurisdictions are offset by a valuation allowance. If not utilized against taxable income, $159.3$156.9 million of these tax losses will expire at various times during fiscal 20162017 through 2035, and $145.3$173.8 million, mainly related to India,Germany, Austria and Germany,India, will not expire due to an unlimited carry-forward period.
At March 31, 2015,2016, the Company provided $0.8$1.1 million of tax on undistributed earnings for certain subsidiaries not considered permanently reinvested. Undistributed earnings totaling $442.0$491.0 million are considered permanently reinvested in the Company’s remaining foreign operations, and no provision has been made for any taxes that would be payable upon the distribution of such earnings. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 9: | Earnings Per Share |
The components of basic and diluted earnings per share arewere as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Basic: | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 22.2 | | | $ | 131.9 | | | $ | (22.8 | ) | Less: Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (1.7 | ) | | | - | | Earnings (loss) from continuing operations available to Modine shareholders | | | 21.0 | | | | 128.7 | | | | (24.2 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) available to Modine shareholders | | $ | 21.6 | | | $ | 128.7 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Weighted average shares outstanding - basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.45 | | | $ | 2.75 | | | $ | (0.52 | ) | Earnings per share - discontinued operations | | | 0.01 | | | | - | | | | - | | Net earnings (loss) per share - basic | | $ | 0.46 | | | $ | 2.75 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 22.2 | | | $ | 131.9 | | | $ | (22.8 | ) | Less: Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (0.9 | ) | | | - | | Earnings (loss) from continuing operations available to Modine shareholders | | | 21.0 | | | | 129.5 | | | | (24.2 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) available to Modine shareholders | | $ | 21.6 | | | $ | 129.5 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Weighted average shares outstanding - basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | Effect of dilutive securities | | | 0.6 | | | | 0.7 | | | | - | | Weighted average shares outstanding - diluted | | | 47.8 | | | | 47.6 | | | | 46.6 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.44 | | | $ | 2.72 | | | $ | (0.52 | ) | Earnings per share - discontinued operations | | | 0.01 | | | | - | | | | - | | Net earnings (loss) per share - diluted | | $ | 0.45 | | | $ | 2.72 | | | $ | (0.52 | ) |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Basic: | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (1.7 | ) | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 128.7 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 128.7 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | Net (loss) earnings per share - basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (0.9 | ) | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 129.5 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 129.5 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | Effect of dilutive securities | | | - | | | | 0.6 | | | | 0.7 | | Weighted-average shares outstanding - diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | Net (loss) earnings per share - diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | |
For the years ended March 31, 2016, 2015, 2014, and 2013,2014, the calculation of diluted earnings per share excluded 0.8 million, 0.6 million, 0.8 million, and 1.10.8 million stock options, respectively, because they were anti-dilutive. For the year ended March 31, 2013,2016, the total number of potential dilutive securities was 0.30.4 million. However, these securities were not included in the computation of diluted net loss per share since to do so would decrease the loss per share.
Inventories consisted of the following:
| | March 31, | | | | 2015 | | | 2014 | | Raw materials and work in process | | $ | 80.7 | | | $ | 89.2 | | Finished goods | | | 27.0 | | | | 27.6 | | Total inventories | | $ | 107.7 | | | $ | 116.8 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | March 31, | | | 2016 | | 2015 | Raw materials and work in process | | $ | 79.5 | | | $ | 80.7 | | Finished goods | | | 31.5 | | | | 27.0 | | Total inventories | | $ | 111.0 | | | $ | 107.7 | |
Note 11: Note11: | Property, Plant and Equipment |
Property, plant and equipment, including depreciable lives, consisted of the following:
| | March 31, | | | | 2015 | | | 2014 | | Land | | $ | 8.2 | | | $ | 10.4 | | Buildings and improvements (10-40 years) | | | 221.0 | | | | 228.1 | | Machinery and equipment (3-12 years) | | | 652.0 | | | | 715.1 | | Office equipment (3-10 years) | | | 81.9 | | | | 89.5 | | Construction in progress | | | 31.7 | | | | 35.5 | | | | | 994.8 | | | | 1,078.6 | | Less: accumulated depreciation | | | (672.7 | ) | | | (719.0 | ) | Net property, plant and equipment | | $ | 322.1 | | | $ | 359.6 | |
| | March 31, | | | 2016 | | 2015 | Land | | $ | 7.2 | | | $ | 8.2 | | Buildings and improvements (10-40 years) | | | 221.3 | | | | 221.0 | | Machinery and equipment (3-12 years) | | | 694.3 | | | | 652.0 | | Office equipment (3-10 years) | | | 84.1 | | | | 81.9 | | Construction in progress | | | 36.7 | | | | 31.7 | | | | | 1,043.6 | | | | 994.8 | | Less: accumulated depreciation | | | (705.0 | ) | | | (672.7 | ) | Net property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
Depreciation expense totaled $48.6 million, $50.0 million $57.3 million and $55.1$57.3 million for the years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. Gains and losses related to the disposal of property, plant and equipment are recorded in SG&A expenses. Total losses related to the disposal of property, plant and equipment were $0.4 million, $1.1 million $2.6 million and $2.5$2.6 million for the years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively.
Note 12: Note 12: | Investment in Affiliate |
The Company’s investment in its non-consolidated affiliate is accounted for under the equity method. The Company has a 50 percent ownership of Nikkei Heat Exchanger Company, Ltd. (“NEX”). At both March 31, 20152016 and 2014,2015, the Company included the investment in NEX of $3.2 million and $3.4 million, respectively, in other noncurrent assets. At March 31, 2015,2016, the investment in NEX is equal to the Company's investment in the underlying assets.
The Company reports the results of operations for NEX in the consolidated financial statements using a one-month reporting delay. The Company reports equity in earnings from non-consolidated affiliates within other income and expense in the consolidated statements of operations. The Company’s share of NEX’s earnings for the years ended March 31, 2016, 2015, and 2014 and 2013 was $0.1 million, $0.6 million $0.7 million and $0.3$0.7 million, respectively. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Intangible assets consisted of the following:
| | March 31, 2015 | | | March 31, 2014 | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | | $ | 10.1 | | | $ | (5.7 | ) | | $ | 4.4 | | Acquired technology | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | | | 5.8 | | | | (0.2 | ) | | | 5.6 | | Customer relationships | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | | | 2.4 | | | | - | | | | 2.4 | | Total intangible assets | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | | | $ | 18.3 | | | $ | (5.9 | ) | | $ | 12.4 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | March 31, 2016 | | | March 31, 2015 | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 8.9 | | | $ | (6.3 | ) | | $ | 2.6 | | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | Acquired technology | | | 5.5 | | | | (1.5 | ) | | | 4.0 | | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | Customer relationships | | | 2.0 | | | | (0.4 | ) | | | 1.6 | | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | Total intangible assets | | $ | 16.4 | | | $ | (8.2 | ) | | $ | 8.2 | | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | |
The Company recorded $1.6 million, $0.8$1.6 million and $0.7$0.8 million of amortization expense during fiscal 2016, 2015 2014 and 2013,2014, respectively. Estimated future amortization expense is as follows:
Fiscal Year | | Estimated Amortization Expense | | 2016 | | $ | 1.6 | | 2017 | | | 1.6 | | 2018 | | | 1.6 | | 2019 | | | 1.5 | | 2020 | | | 1.4 | | 2021 & Beyond | | | 2.2 | |
Fiscal Year | | Estimated Amortization Expense | | 2017 | | $ | 1.6 | | 2018 | | | 1.6 | | 2019 | | | 1.5 | | 2020 | | | 1.3 | | 2021 | | | 0.8 | | 2022 & Beyond | | | 1.4 | |
Changes in the carrying amount of goodwill, by segment and in the aggregate, were as follows:
| | South America | | | Asia | | | Building HVAC | | | Total | | Balance, March 31, 2013 | | $ | 12.2 | | | $ | 0.5 | | | $ | 16.0 | | | $ | 28.7 | | Effect of exchange rate changes | | | (1.3 | ) | | | - | | | | 1.3 | | | | - | | Balance, March 31, 2014 | | | 10.9 | | | | 0.5 | | | | 17.3 | | | | 28.7 | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | Balance, March 31, 2015 | | $ | - | | | $ | 0.5 | | | $ | 15.7 | | | $ | 16.2 | |
| | Americas | | Asia | | Building HVAC | | Total | Balance, March 31, 2014 | | $ | 10.9 | | | $ | 0.5 | | | $ | 17.3 | | | $ | 28.7 | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | Balance, March 31, 2015 | | | - | | | | 0.5 | | | | 15.7 | | | | 16.2 | | Effect of exchange rate changes | | | - | | | | - | | | | (0.4 | ) | | | (0.4 | ) | Balance, March 31, 2016 | | $ | - | | | $ | 0.5 | | | $ | 15.3 | | | $ | 15.8 | |
The Company assesses goodwill for impairment annually, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. The Company conducted its annual assessment for goodwill impairment during the fourth quarter of fiscal 20152016 by applying a fair value-based test. Thetest and determined that the fair value of its reporting units exceeded their respective book values. In fiscal 2015, the Company determined its South America reporting unit’s goodwill was fully impaired and recorded a $7.8 million goodwill impairment charge as a result.within the Americas segment in connection with its annual assessment. The impairment charge was primarily caused by a decline in the financial outlook for the South America reporting unit. During the fourth quarter of fiscal 2015, the Company’s outlook for the markets served by its South America reporting unit, primarily in Brazil, shifted from a view that the markets may begin to recover to a view that the market downturn may be more prolonged. The economic weakness in Brazil has negatively affected the Company’s expected future cash flows for the South America segment. The fair value of the Company’s remaining reporting units exceeded their respective book values.Brazil.
As ofAt both March 31, 2016 and 2015, accumulated goodwill impairment losses within the South America segment totaled $7.8 million. As of March 31, 2015 and 2014, accumulated goodwill impairment losses totaled $23.8$31.6 million and $8.7 million within the North AmericaAmericas and Europe segments, respectively.
Note 15: Note 15: | Product Warranties, Operating Leases, and Other Commitments |
Product warranties: Modine provides product warranties for various product lines, withMost of the Company’s products are covered under a warranty periods generallyperiod ranging from one to five years. The Company accruesrecords a liability for estimated futureproduct warranty costs inobligations at the period in whichtime of sale to a customer based upon historical warranty experience. In addition, the sale is recorded. The Company bases warranty expense estimates on the best information available using analytical and statistical analysis of both historical and current claim data. The Company adjusts these expensesits warranty accruals if it becomes probable that expected claims will differ from initial estimates recorded at the time of sale.estimates. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 14.0 | | | $ | 12.6 | | Accruals for warranties issued | | | 5.8 | | | | 6.0 | | Accruals related to pre-existing warranties | | | 1.5 | | | | 8.3 | | Settlements | | | (9.2 | ) | | | (13.0 | ) | Effect of exchange rate changes | | | (1.7 | ) | | | 0.1 | | Ending balance | | $ | 10.4 | | | $ | 14.0 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 10.4 | | | $ | 14.0 | | Warranties recorded at time of sale | | | 5.7 | | | | 5.8 | | Adjustments to pre-existing warranties | | | (1.1 | ) | | | 1.5 | | Settlements | | | (6.7 | ) | | | (9.2 | ) | Effect of exchange rate changes | | | - | | | | (1.7 | ) | Ending balance | | $ | 8.3 | | | $ | 10.4 | |
Operating leases: The Company leases various facilities and equipment under operating leases. Rental expense for these leases totaled $11.9 million in fiscal 2016, and $11.5 million in both fiscal 2015 and 2014, and $11.3 million in fiscal 2013.2014.
Future minimum rental commitments at March 31, 20152016 under non-cancelable operating leases were as follows:
Fiscal Year | | | | 2016 | | $ | 8.2 | | 2017 | | | 5.7 | | 2018 | | | 4.3 | | 2019 | | | 3.8 | | 2020 | | | 4.0 | | 2021 and beyond | | | 23.9 | | Total | | $ | 49.9 | |
Fiscal Year | | | | 2017 | | $ | 8.1 | | 2018 | | | 5.6 | | 2019 | | | 4.8 | | 2020 | | | 4.6 | | 2021 | | | 4.1 | | 2022 and beyond | | | 26.3 | | Total | | $ | 53.5 | |
Indemnification agreements: From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years. In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 20152016 is not material.
Commitments: At March 31, 2015,2016, the Company had capital expenditure commitments of $15.5$20.5 million. Significant commitments include tooling and equipment expenditures for new and renewal programs with customers in North Americathe Americas and Europe.Europe segments. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
The Company has a commitment to rebuild the leased Airedale facility, which suffered significant destruction from a fire during fiscal 2014. The Company maintains insurance coverage and believes reimbursement for substantially all losses and costs directly attributable to the fire is probable. See Note 2 for additional information.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Long-term debt was comprised of the following:
| | Fiscal year of maturity | | | March 31, 2015 | | | March 31, 2014 | | | | | | | | | | | | Foreign credit agreements | | 2016 | | | $ | 0.2 | | | $ | 0.5 | | 6.8% Senior Notes | | 2017-2021 | | | | 125.0 | | | | 125.0 | | Revolving credit facility | | 2019 | | | | - | | | | - | | | | | | | | 125.2 | | | | 125.5 | | Capital lease obligations | | 2016-2030 | | | | 4.9 | | | | 6.5 | | | | | | | | 130.1 | | | | 132.0 | | Less: current portion | | | | | | (0.5 | ) | | | (0.8 | ) | Total long-term debt | | | | | $ | 129.6 | | | $ | 131.2 | |
| | Fiscal year of maturity | | | March 31, 2016 | | March 31, 2015 | | | | | | | | | | | Foreign credit agreements | | | 2018-2020 | | | $ | 0.4 | | | $ | 0.2 | | 6.8% Senior Notes | | | 2017-2021 | | | | 125.0 | | | | 125.0 | | Revolving credit facility | | | 2019 | | | | - | | | | - | | | | | | | | | 125.4 | | | | 125.2 | | Other (a) | | | 2017-2030 | | | | 8.6 | | | | 4.9 | | | | | | | | | 134.0 | | | | 130.1 | | Less: current portion | | | | | | | (8.5 | ) | | | (0.5 | ) | Total long-term debt | | | | | | $ | 125.5 | | | $ | 129.6 | |
| (a) | Other long-term debt includes capital lease obligations and other financing-type obligations. |
The Company maintains a $175.0 million domestic revolving credit facility, which expires in August 2018. Borrowings under the credit agreement bear interest at a variable rate based on the London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points (1.6(1.8 percent at March 31, 2015)2016) depending upon the Company’s leverage ratio, as defined below. At March 31, 20152016 and 2014,2015, no borrowings were outstanding under the revolving credit facility.
The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 2016 and 2015 and 2014 of $18.6$28.6 million and $32.4$18.6 million, respectively. At March 31, 2015,2016, the Company’s foreign unused lines of credit totaled $41.0$32.0 million. In aggregate, the Company had total available lines of credit of $216.0$207.0 million at March 31, 2015.2016.
Provisions in the Company’s revolving credit facility, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided a lienliens on substantially all domestic assets. The Company is also subject to a leverage ratio covenant, which requires the Company to limit its consolidated indebtedness, less a portion of the Company’s cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”), and an interest expense coverage ratio, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. The Company was in compliance with its debt covenants as of March 31, 2015.2016.
Long-term debt matures as follows:
Fiscal Year | | | | 2016 | | $ | 0.5 | | 2017 | | | 8.3 | | 2018 | | | 16.3 | | 2019 | | | 16.3 | | 2020 | | | 16.3 | | 2021 & beyond | | | 72.4 | | Total | | $ | 130.1 | |
Fiscal Year | | | | 2017 | | $ | 8.5 | | 2018 | | | 16.5 | | 2019 | | | 16.5 | | 2020 | | | 16.6 | | 2021 | | | 69.4 | | 2022 & beyond | | | 6.5 | | Total | | $ | 134.0 | |
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. At March 31, 20152016 and 2014,2015, the carrying value of Modine’s long-term debt approximated fair value, with the exception of the Senior Notes, which had a fair value of approximately $141.0$139.0 million and $140.0$141.0 million, respectively. The fair value of the Senior Notes is categorized as Level 2 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 17: Note 17: | Pension and Employee Benefit Plans |
Defined Contribution Employee Benefit Plans:
The Company maintains domestic 401(k) plans that allow employees to contribute a portion of their salary to help save for retirement. The Company matched 50 percent of employee contributions, up to 5 percent of employee compensation, during fiscal 2016, 2015, 2014, and 2013.2014. The Company also makes annual employer contributions into active employee accounts based upon a percentage of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary. The Company’s expense for defined contribution employee benefit plans during fiscal 2016, 2015, and 2014 and 2013 was $4.6 million, $5.9 million, $8.3 million, and $4.1$8.3 million, respectively. The decreasedecreasing trend in expense infrom fiscal 2015, as compared with the prior fiscal year,2014 was primarily due to lower discretionary employer contributions.
In addition, the Company maintains a non-qualified deferred compensation plan for eligible employees, and various foreignnon-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans:
Certain foreignnon-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.
Defined Benefit Employee Benefit Plans:
Pension plans: The Company has amaintains non-contributory defined benefit pension planplans that coverscover most of its domestic employees hired on or before December 31, 2003. The benefits provided are based primarily on years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based on a monthly retirement benefit amount. Domestic salaried employees hired after December 31, 2003 are not covered under anya defined benefit plan. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company’s foreign subsidiariesCompany also have legacy defined benefit plans coveringwhich cover a smallsmaller number of active employees.employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany and Austria and are closed to new participants.
The Company contributions ofcontributed $6.7 million, $5.9 million, and $8.0 million and $9.2 million to its U.S. pension plans during fiscal 2016, 2015, and 2014, and 2013, respectively,respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company completed a voluntary lump-sum payout program offered to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer. During fiscal 2016, a total of $65.3 million was paid from pension plan assets for lump-sum payouts, which reduced the Company’s pension obligation by the same amount. In connection with these lump-sum payouts, the Company recorded $42.1 million of non-cash settlement losses related to the accelerated recognition of unamortized actuarial losses previously recorded on the consolidated balance sheets within accumulated other comprehensive loss. During fiscal 2016, the Company recorded $33.3 million and $8.8 million of settlement losses as SG&A expenses and cost of sales, respectively, within the consolidated statements of operations.
Postretirement plans: The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans during fiscal 2016, 2015, and 2014 and 2013 was $0.3 million, $0.1 million, $1.0 million, and $1.1$1.0 million, respectively.
Measurement Date: The Company uses March 31 as the measurement date for its pension and postretirement plans. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s pension plans, for the fiscal years ended March 31, 20152016 and 20142015 were as follows:
| | 2015 | | | 2014 | | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 295.7 | | | $ | 309.6 | | Service cost | | | 0.5 | | | | 0.6 | | Interest cost | | | 13.0 | | | | 13.0 | | Actuarial loss (gain) | | | 40.6 | | | | (10.8 | ) | Benefits paid | | | (14.6 | ) | | | (18.6 | ) | Effect of exchange rate changes | | | (7.0 | ) | | | 1.9 | | Benefit obligation at end of year | | $ | 328.2 | | | $ | 295.7 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 213.7 | | | $ | 200.6 | | Actual return on plan assets | | | 10.8 | | | | 22.2 | | Benefits paid | | | (14.6 | ) | | | (18.6 | ) | Employer contributions | | | 7.1 | | | | 9.5 | | Fair value of plan assets at end of year | | $ | 217.0 | | | $ | 213.7 | | Funded status at end of year | | $ | (111.2 | ) | | $ | (82.0 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (0.8 | ) | | $ | (1.0 | ) | Noncurrent liability | | | (110.4 | ) | | | (81.0 | ) | | | $ | (111.2 | ) | | $ | (82.0 | ) |
| | 2016 | | 2015 | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 328.2 | | | $ | 295.7 | | Service cost | | | 0.6 | | | | 0.5 | | Interest cost | | | 11.2 | | | | 13.0 | | Actuarial (gain) loss | | | (2.8 | ) | | | 40.6 | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | Effect of exchange rate changes | | | 1.9 | | | | (7.0 | ) | Benefit obligation at end of year | | $ | 261.0 | | | $ | 328.2 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 217.0 | | | $ | 213.7 | | Actual return on plan assets | | | (5.3 | ) | | | 10.8 | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | Employer contributions | | | 7.9 | | | | 7.1 | | Fair value of plan assets at end of year | | $ | 141.5 | | | $ | 217.0 | | Funded status at end of year | | $ | (119.5 | ) | | $ | (111.2 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (0.9 | ) | | $ | (0.8 | ) | Noncurrent liability | | | (118.6 | ) | | | (110.4 | ) | | | $ | (119.5 | ) | | $ | (111.2 | ) |
| (a) | In fiscal 2016, $65.3 million was paid from plan assets in connection with lump-sum payouts. |
The accumulated benefit obligation for pension plans was $325.5$257.9 million and $293.0$325.5 million as of March 31, 20152016 and 2014,2015, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $192.3$162.0 million and $153.4$192.3 million as of March 31, 20152016 and 2014,2015, respectively.
Costs for the Company’s pension plans included the following components for the fiscal years ended March 31, 2016, 2015, 2014, and 2013:2014:
| | 2015 | | | 2014 | | | 2013 | | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.5 | | | $ | 0.6 | | | $ | 0.6 | | Interest cost | | | 13.0 | | | | 13.0 | | | | 13.5 | | Expected return on plan assets | | | (16.7 | ) | | | (15.7 | ) | | | (16.1 | ) | Amortization of net actuarial loss | | | 5.5 | | | | 6.3 | | | | 5.0 | | Net periodic benefit cost | | $ | 2.3 | | | $ | 4.2 | | | $ | 3.0 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 46.4 | | | $ | (17.3 | ) | | $ | 27.0 | | Amortization of net actuarial loss | | | (5.5 | ) | | | (6.3 | ) | | | (5.0 | ) | Total recognized in other comprehensive loss (income) | | $ | 40.9 | | | $ | (23.6 | ) | | $ | 22.0 | |
| | 2016 | | 2015 | | 2014 | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.6 | | | $ | 0.5 | | | $ | 0.6 | | Interest cost | | | 11.2 | | | | 13.0 | | | | 13.0 | | Expected return on plan assets | | | (14.9 | ) | | | (16.7 | ) | | | (15.7 | ) | Amortization of net actuarial loss | | | 6.4 | | | | 5.5 | | | | 6.3 | | Settlements (a) | | | 42.1 | | | | - | | | | - | | Net periodic benefit cost | | $ | 45.4 | | | $ | 2.3 | | | $ | 4.2 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 17.5 | | | $ | 46.4 | | | $ | (17.3 | ) | Amortization of net actuarial loss (a) | | | (48.5 | ) | | | (5.5 | ) | | | (6.3 | ) | Total recognized in other comprehensive (income) loss | | $ | (31.0 | ) | | $ | 40.9 | | | $ | (23.6 | ) |
| (a) | During fiscal 2016, in connection with lump-sum payouts to pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company estimates $7.2$5.6 million of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2016. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)2017.
The Company used a discount rate of 4.0%4.1% and 4.7%4.0% as of March 31, 20152016 and 2014,2015, respectively, in determining its benefit obligations under its U.S. pension plans. The Company used a discount rate of 1.3%1.8% and 3.0%1.3% as of March 31, 20152016 and 2014,2015, respectively, in determining its benefit obligations under its foreignnon-U.S. pension plans. The Company used a discount rate of 4.7%4.3%, 4.4%4.7%, and 4.9%4.4% to determine its costs under its U.S. pension plans for the fiscal years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. The Company used a discount rate of 3.0%1.3%, 3.5%3.0%, and 5.0%3.5% to determine its costs under its foreignnon-U.S. pension plans for the fiscal years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. AThe Company used a similar process was used to determine the discount rate for the Company’s foreignits non-U.S. pension obligationsobligations.
Plan assets in the U.S. defined benefit plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted averageweighted-average asset allocations at the measurement dates of March 31, 20152016 and 20142015 were as follows:
| | Target allocation | | | Plan assets | | | | | | | 2015 | | | 2014 | | Equity securities | | | 55 | % | | | 55 | % | | | 57 | % | Debt securities | | | 38 | % | | | 36 | % | | | 37 | % | Alternative assets | | | 5 | % | | | 5 | % | | | 5 | % | Cash | | | 2 | % | | | 4 | % | | | 1 | % | | | | 100 | % | | | 100 | % | | | 100 | % |
| | Target allocation | | Plan assets | | | | | | 2016 | | 2015 | Equity securities | | | 55 | % | | | 56 | % | | | 55 | % | Debt securities | | | 38 | % | | | 36 | % | | | 36 | % | Alternative assets | | | 5 | % | | | 4 | % | | | 5 | % | Cash | | | 2 | % | | | 4 | % | | | 4 | % | | | | 100 | % | | | 100 | % | | | 100 | % |
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 20152016 and 2014,2015, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term return of plan assets, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2016, 2015, 2014 and 20132014 U.S. pension plan expense, the expected rate of return on plan assets was 8.0 percent. For fiscal 20162017 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 8.0 percent.
The Company’s funding policy for domestic qualifiedits U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. The Company expects to make contributions of $6.7$8.1 million to these plans during fiscal 2016.2017.
Estimated pension benefit payments for the next ten fiscal years are as follows:
Fiscal Year | | Estimated pension benefit payments | | 2016 | | $ | 15.1 | | 2017 | | | 15.7 | | 2018 | | | 16.9 | | 2019 | | | 17.2 | | 2020 | | | 18.0 | | 2021-2025 | | | 94.0 | |
Fiscal Year | | Estimated Pension Benefit Payments | | 2017 | | $ | 14.5 | | 2018 | | | 15.2 | | 2019 | | | 15.3 | | 2020 | | | 15.8 | | 2021 | | | 16.1 | | 2022-2026 | | | 79.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 18: Note 18: | Derivative Instruments |
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated, and is effective, as a hedge, and, if so, on the nature of the hedging activity. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Commodity Derivatives: The Company has, from time to time, enteredperiodically enters into futures contracts related to certain forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts wasis to reduce its exposure to changing market prices for future purchases of these commodities. The Company has not designated commodity contracts entered into in fiscal 2013, 2014, 2015, and 20152016 for hedge accounting. Accordingly, unrealized gains and losses on thosethese contracts are recorded within cost of sales. The Company designated contracts entered into prior to fiscal 2013 for hedge accounting. Accordingly, the amounts recorded in accumulated other comprehensive loss (“AOCI”) related to those contracts remained in AOCI until the underlying commodity purchases impacted earnings.
Foreign exchange contracts: The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. The Company has not designated these contracts for hedge accounting. Accordingly, unrealized gains and losses related to changes in fair value are recorded in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| | Balance Sheet Location | | March 31, 2015 | | | March 31, 2014 | | Foreign exchange contracts | | Other current liabilities | | $ | 0.3 | | | $ | 0.2 | | Commodity derivatives | | Other current liabilities | | | 0.1 | | | | 0.1 | | Commodity derivatives | | Other noncurrent liabilities | | | - | | | | 0.1 | |
| Balance Sheet Location | | March 31, 2016 | | | March 31, 2015 | | Foreign exchange contracts | Other current assets | | $ | 0.1 | | | $ | - | | Foreign exchange contracts | Other current liabilities | | | - | | | | 0.3 | | Commodity derivatives | Other current liabilities | | | 0.1 | | | | 0.1 | |
The amounts recorded in AOCI and in the consolidated statements of operations for all of the Company’s derivative financial instruments were as follows:
| | March 31, 2015 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss Recognized in Continuing Operations | | Commodity derivatives | | $ | - | | Cost of sales | | $ | - | | | $ | 0.2 | | Foreign exchange contracts | | | - | | Other income (expense) - net | | | - | | | | 1.1 | | Total | | $ | - | | | | $ | - | | | $ | 1.3 | |
| | March 31, 2014 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss Recognized in Continuing Operations | | Commodity derivatives | | $ | - | | Cost of sales | | $ | 0.5 | | | $ | 0.5 | | Total | | $ | - | | | | $ | 0.5 | | | $ | 0.5 | |
| | March 31, 2013 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss (Gain) Recognized in Continuing Operations | | Commodity derivatives | | $ | 0.5 | | Cost of sales | | $ | 2.6 | | | $ | 4.6 | | Foreign exchange contracts | | | - | | Other income (expense) - net | | | - | | | | (0.3 | ) | Total | | $ | 0.5 | | | | $ | 2.6 | | | $ | 4.3 | |
| Statement of Operations | | Years ended March 31, | | Location | | 2016 | | 2015 | | 2014 | Commodity derivatives | Cost of sales | | $ | (0.7 | ) | | $ | (0.2 | ) | | $ | (0.5 | ) | Foreign exchange contracts | Other income (expense) - net | | | 0.6 | | | | (1.1 | ) | | | - | | Total loss | | | $ | (0.1 | ) | | $ | (1.3 | ) | | $ | (0.5 | ) |
Note 19: Note 19: | Contingencies and Litigation |
Market risk: The Company sells a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, off-highway, automotive, and commercial heating and air conditioning markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or more of the markets it serves. The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits. However, the risk associated with market downturns, such as the downturn experienced in fiscal 2009 and 2010, is still present. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Credit risk: The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 2016 and 2015, two customers each accounted for ten percent or more of the Company’s total sales. In fiscal 2014, and 2013, one customer accounted for ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers represented 63 percent 56 percent, and 59 percent of total sales in both fiscal 2016 and 2015 2014, and 2013, respectively.56 percent in fiscal 2014. At March 31, 2016 and 2015, and 2014, 4745 percent and 4647 percent, respectively, of the Company's trade accounts receivable were from the Company's top ten customers. These customers operate primarily in the automotive, truck, and heavy equipment markets and are influenced by similar market and general economic factors. Collateral or advanced payments are generally not required, but they may be used in those cases where the Company identifies a substantial credit risk.required. The Company has not experienced significant credit losses to customers in the markets served. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company manages credit risk through its focus on the following:
| ·● | Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; |
| ·● | Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; |
| ·● | Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and |
| ·● | Insurance – ensuring that insurance providers maintain acceptable financial ratings. |
Counterparty risks: The Company manages counterparty risks through its focus on the following:
| ·● | Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; |
| ·● | Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and |
| ·● | Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company. |
Europe value added tax: During fiscal 2012, the Company determined it was not properly applying value added tax (“VAT”) to certain cross-border transactions within the Europe segment and established an accrual of $10.7 million for estimated VAT liabilities, including interest and penalties. During fiscal 2013 and 2014, the Company completed the registration and filing process with the taxing authorities and began making payments to the applicable jurisdictions. During fiscal 2015, 2014, and 2013, the Company recorded reductions to SG&A expenses of $2.0 million, $2.9 million and $1.6 million, respectively, as a result of favorable changes to the estimated VAT obligations.
Environmental: The United States Environmental Protection Agency (“USEPA”) has designated the Company as a potentially responsible party (“PRP”) for remediation of three sites where the Company had involvement.sites. These sites include:are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be material to the Company’s financial position due to Modine’sits relatively small portion of contributed materials. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company has recorded environmental investigation and remediation accruals for groundwater contamination at its manufacturing facility in its wholly-owned subsidiary in Brazil (“Modine Brazil”) and subsurface contamination at its former manufacturing facility in the Netherlands along withand groundwater contamination at its manufacturing facility in Brazil. During fiscal 2016, the Company recorded charges totaling $1.6 million, within cost of sales, to establish an environmental accrual for investigative work related to a previously-owned manufacturing facility in the United States. In addition, the Company has recorded accruals for other lesser environmental matters at certain facilities located in the United States. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $3.8$5.1 million and $5.1$3.8 million at March 31, 20152016 and 2014,2015, respectively. As additional information becomes available, the Company will re-assess any potentialthe liability related to these matters and revise the estimated accrual, if necessary. Based on currently available information, the Company believes the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages. During fiscal 2011, one of the adjacent businesses to the Company’s facility in Brazil filed suit against the Company’s subsidiary in Brazil (“Modine Brazil,Brazil”), seeking remediation and certain other damages as a result of the contamination allegedly attributable to the Company’sits operations. The Company is defending this suit and believes that the ultimate outcome of this matter will not be material.
Brazil antitrust investigation: During the fourth quarter of fiscal 2015, Brazil’s Administrative Council for Economic Defense (CADE) provided formal notice to Modine Brazil of an administrative investigation regarding alleged violations of Brazil’s antitrust regulations by Modine Brazil and certain of its employees during a period of time at least seven years ago. Duringprior to the fourth quarternotice. As of fiscalMarch 31, 2016 and March 31, 2015, the Company recorded a charge ofaccrued $2.8 million and $3.2 million (BRL10.0 million) within SG&A expenses,(BRL 10.0 million at each date), respectively, representing the estimated amount that may be incurred in connection with the management and resolution of this matter. Due to the ongoing nature of the investigation,this matter, the Company cannot provide assurance of theits ultimate resolution of this matter at this time.
Other litigation: In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits or proceedings are not expected to have a material adverse effect on the Company’s consolidated financial statements. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 20: Note 20: | Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | Foreign Currency Translation | | | Cash Flow Hedges | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | - | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | - | | | | (45.2 | ) | | | (113.2 | ) | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | - | | | | 5.4 | | | | 5.4 | | Amortization of unrecognized prior service credit (a) | | | - | | | | - | | | | (0.1 | ) | | | (0.1 | ) | Income taxes | | | - | | | | - | | | | 13.2 | | | | 13.2 | | Total other comprehensive loss | | | (68.0 | ) | | | - | | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | - | | | $ | (157.9 | ) | | $ | (198.6 | ) |
| | Foreign Currency Translation | | Defined Benefit Plans | | Total | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | 4.7 | | | | (16.6 | ) | | | (11.9 | ) | Reclassifications: | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 48.3 | | | | 48.3 | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.2 | ) | | | (0.2 | ) | Income taxes | | | - | | | | (11.8 | ) | | | (11.8 | ) | Total other comprehensive loss | | | 4.7 | | | | 19.7 | | | | 24.4 | | | | | | | | | | | | | | | Balance, March 31, 2016 | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) |
| | Foreign Currency Translation | | | Cash Flow Hedges | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2013 | | $ | 17.8 | | | $ | (1.1 | ) | | $ | (145.1 | ) | | $ | (128.4 | ) | | | | | | | | | | | | | | | | | | Other comprehensive income before reclassifications | | | 9.5 | | | | - | | | | 18.7 | | | | 28.2 | | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | - | | | | 6.2 | | | | 6.2 | | Amortization of unrecognized prior service credit (a) | | | - | | | | - | | | | (1.2 | ) | | | (1.2 | ) | Commodity derivatives (b) | | | - | | | | 0.5 | | | | - | | | | 0.5 | | Income taxes | | | - | | | | 0.6 | | | | (9.8 | ) | | | (9.2 | ) | Total other comprehensive income | | | 9.5 | | | | 1.1 | | | | 13.9 | | | | 24.5 | | | | | | | | | | | | | | | | | | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | - | | | $ | (131.2 | ) | | $ | (103.9 | ) |
| | Foreign Currency Translation | | Defined Benefit Plans | | Total | Balance, March 31, 2014 | | $ | 27.3 | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | (45.2 | ) | | | (113.2 | ) | Reclassifications: | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | 5.4 | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.1 | ) | | | (0.1 | ) | Income taxes | | | - | | | | 13.2 | | | | 13.2 | | Total other comprehensive loss | | | (68.0 | ) | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) |
| (a) | Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 17 for additional information about the Company’s pension plans. |
| (b) | Reclassifications for commodity derivatives are included in cost of sales. |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 21: Note 21: | Segment and Geographic Information |
The Company’s product lines consist of heat-transfer components and systems. The Company serves the vehicular, industrial, and building heating, ventilating and air conditioning markets. During fiscal 2015,2016, the Company changedcombined its North America and South America segments into the name of its Commercial ProductsAmericas segment to Building HVAC in orderstreamline operations, gain synergies and improve its cost structure. As a result, the Company recast the prior-period segment financial information to better reflect the nature of the segment’s product lines. There were no changesconform to the operations or reportedcurrent-period presentation. There was no impact to the Company’s consolidated financial results of the segmentstatements as a result. Throughout fiscal 2015,2016, the Company’s fivefour operating segments were as follows:
North America:Americas:
Comprised of vehicular and industrial original equipment products in North America and South America, as well as aftermarket products in South America.
Europe: Comprised of vehicular and industrial original equipment products in Europe.
South America:
Comprised of vehicular and industrial original equipment products and aftermarket products in South America.
Asia: Comprised of vehicular and industrial original equipment products in Asia.
Building HVAC: Comprised of building heating, ventilating and air conditioning products throughout the world.
Each operating segment is managed by a vice president or managing director and has separate financial results reviewed by the Company’s chief operating decision maker. These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
Effective April 1, 2015, the Company combined its North America and South America segment operations, with the objective of streamlining its operations to gain synergies and improve its cost structure. Beginning for fiscal 2016, the Company will report financial results for the new Americas operating segment, which will include both North America and South America.
The following is a summary of net sales, gross profit, and operating income by segment:
| | Years ended March 31, | | Net sales: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 573.5 | | | $ | 568.7 | | | $ | 564.5 | | Europe | | | 578.2 | | | | 584.4 | | | | 498.0 | | South America | | | 93.9 | | | | 122.7 | | | | 133.8 | | Asia | | | 81.2 | | | | 71.5 | | | | 59.5 | | Building HVAC | | | 186.3 | | | | 146.5 | | | | 139.3 | | Segment total | | | 1,513.1 | | | | 1,493.8 | | | | 1,395.1 | | Corporate and eliminations | | | (16.7 | ) | | | (16.2 | ) | | | (19.1 | ) | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | Net sales: | | 2016 | | 2015 | | 2014 | Americas | | $ | 585.5 | | | $ | 666.9 | | | $ | 688.3 | | Europe | | | 524.1 | | | | 578.2 | | | | 584.4 | | Asia | | | 79.0 | | | | 81.2 | | | | 71.5 | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | Segment total | | | 1,370.0 | | | | 1,512.6 | | | | 1,490.7 | | Corporate and eliminations | | | (17.5 | ) | | | (16.2 | ) | | | (13.1 | ) | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Gross profit: | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | North America | | $ | 97.0 | | | | 16.9 | % | | $ | 93.5 | | | | 16.4 | % | | $ | 81.4 | | | | 14.4 | % | Europe | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | | | 61.0 | | | | 12.3 | % | South America | | | 12.1 | | | | 12.8 | % | | | 20.8 | | | | 16.9 | % | | | 22.5 | | | | 16.8 | % | Asia | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | | | 1.7 | | | | 2.8 | % | Building HVAC | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | | | 40.8 | | | | 29.3 | % | Segment total | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | | | 207.4 | | | | 14.9 | % | Corporate and eliminations | | | 1.3 | | | | - | | | | 0.8 | | | | - | | | | 1.2 | | | | - | | Gross profit | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % | | $ | 208.6 | | | | 15.2 | % |
67
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Gross profit: | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Americas | | $ | 100.1 | | | | 17.1 | % | | $ | 109.1 | | | | 16.3 | % | | $ | 114.3 | | | | 16.6 | % | Europe | | | 68.1 | | | | 13.0 | % | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | Asia | | | 12.2 | | | | 15.5 | % | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | Building HVAC | | | 54.2 | | | | 29.9 | % | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | Segment total | | | 234.6 | | | | 17.1 | % | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | Corporate and eliminations (a) | | | (11.1 | ) | | | - | | | | 1.3 | | | | - | | | | 0.8 | | | | - | | Gross profit | | $ | 223.5 | | | | 16.5 | % | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | Years ended March 31, | Operating income: | | 2016 | | 2015 | | 2014 | Americas | | $ | 36.2 | | | $ | 33.4 | | | $ | 49.6 | | Europe | | | 13.3 | | | | 25.7 | | | | 9.6 | | Asia | | | 0.8 | | | | 0.3 | | | | (3.3 | ) | Building HVAC | | | 13.9 | | | | 19.1 | | | | 9.4 | | Segment total | | | 64.2 | | | | 78.5 | | | | 65.3 | | Corporate and eliminations (a) | | | (71.7 | ) | | | (25.8 | ) | | | (28.1 | ) | Operating (loss) income | | $ | (7.5 | ) | | $ | 52.7 | | | $ | 37.2 | |
(In millions, except per share amounts)
| | Years ended March 31, | | Operating income: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 45.9 | | | $ | 42.1 | | | $ | 39.2 | | Europe | | | 25.7 | | | | 9.6 | | | | (25.4 | ) | South America | | | (12.3 | ) | | | 7.5 | | | | 11.2 | | Asia | | | 0.3 | | | | (3.3 | ) | | | (8.8 | ) | Building HVAC | | | 19.1 | | | | 9.4 | | | | 10.0 | | Segment total | | | 78.7 | | | | 65.3 | | | | 26.2 | | Corporate and eliminations | | | (26.0 | ) | | | (28.1 | ) | | | (26.8 | ) | Operating income (loss) | | $ | 52.7 | | | $ | 37.2 | | | $ | (0.6 | ) |
| (a) | During fiscal 2016, the Company recorded pension settlement losses of $42.1 million at Corporate, within SG&A expenses ($33.3 million) and cost of sales ($8.8 million). See Note 17 for additional information. |
Inter-segment sales are accounted for based on an established markup over production costs. Net sales for corporate and eliminations primarily represent the elimination of inter-segment sales. The operating loss for corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and also includes a portion of central servicesother costs that are either not directly attributable to an operating segment.segment or not considered when management evaluates segment performance. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of total assets by segment:
| | March 31, | | | | 2015 | | | 2014 | | North America | | $ | 231.8 | | | $ | 218.1 | | Europe | | | 283.1 | | | | 367.9 | | South America | | | 46.5 | | | | 80.1 | | Asia | | | 92.4 | | | | 92.8 | | Building HVAC | | | 131.4 | | | | 132.7 | | Corporate and eliminations | | | 146.4 | | | | 140.7 | | Total assets | | $ | 931.6 | | | $ | 1,032.3 | |
| | March 31, | | | | 2016 | | | 2015 | | Americas | | $ | 267.2 | | | $ | 277.7 | | Europe | | | 301.9 | | | | 282.7 | | Asia | | | 104.0 | | | | 92.2 | | Building HVAC (a) | | | 99.0 | | | | 131.3 | | Corporate and eliminations | | | 148.8 | | | | 147.0 | | Total assets | | $ | 920.9 | | | $ | 930.9 | |
| (a) | As of March 31, 2015, total assets within the Building HVAC segment included $48.0 million of insurance-related assets for the rebuild of the facility damaged by the Airedale fire. See Note 2 for additional information. |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | Capital expenditures: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 25.9 | | | $ | 18.9 | | | $ | 19.0 | | Europe | | | 21.5 | | | | 22.9 | | | | 16.5 | | South America | | | 4.3 | | | | 5.7 | | | | 3.4 | | Asia | | | 3.8 | | | | 4.6 | | | | 7.8 | | Building HVAC | | | 2.8 | | | | 1.0 | | | | 3.1 | | Total capital expenditures | | $ | 58.3 | | | $ | 53.1 | | | $ | 49.8 | |
| | Years ended March 31, | | Capital expenditures: | | 2016 | | | 2015 | | | 2014 | | Americas | | $ | 26.7 | | | $ | 30.2 | | | $ | 24.6 | | Europe | | | 24.8 | | | | 21.5 | | | | 22.9 | | Asia | | | 6.2 | | | | 3.8 | | | | 4.6 | | Building HVAC | | | 5.1 | | | | 2.8 | | | | 1.0 | | Total capital expenditures | | $ | 62.8 | | | $ | 58.3 | | | $ | 53.1 | |
| | Years ended March 31, | | Depreciation and amortization expense: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 18.1 | | | $ | 19.3 | | | $ | 20.1 | | Europe | | | 19.8 | | | | 26.6 | | | | 23.4 | | South America | | | 3.2 | | | | 3.3 | | | | 3.7 | | Asia | | | 7.2 | | | | 6.7 | | | | 6.4 | | Building HVAC | | | 3.3 | | | | 2.2 | | | | 2.2 | | Total depreciation and amortization expense | | $ | 51.6 | | | $ | 58.1 | | | $ | 55.8 | |
| | Years ended March 31, | | Depreciation and amortization expense: | | 2016 | | | 2015 | | | 2014 | | Americas | | $ | 22.1 | | | $ | 21.3 | | | $ | 22.6 | | Europe | | | 18.0 | | | | 19.8 | | | | 26.6 | | Asia | | | 6.5 | | | | 7.2 | | | | 6.7 | | Building HVAC | | | 3.6 | | | | 3.3 | | | | 2.2 | | Total depreciation and amortization expense | | $ | 50.2 | | | $ | 51.6 | | | $ | 58.1 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a summary of net sales by geographical area, based upon the location of the selling unit:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | United States | | $ | 669.3 | | | $ | 645.7 | | | $ | 637.4 | | Germany | | | 193.8 | | | | 229.5 | | | | 214.8 | | Hungary | | | 161.0 | | | | 150.3 | | | | 117.6 | | Austria | | | 118.7 | | | | 109.8 | | | | 97.7 | | Brazil | | | 93.2 | | | | 122.0 | | | | 128.8 | | Other | | | 260.4 | | | | 220.3 | | | | 179.7 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | United States | | $ | 627.6 | | | $ | 669.3 | | | $ | 645.7 | | Germany | | | 155.3 | | | | 193.8 | | | | 229.5 | | Hungary | | | 145.9 | | | | 161.0 | | | | 150.3 | | Austria | | | 113.1 | | | | 118.7 | | | | 109.8 | | Other | | | 310.6 | | | | 353.6 | | | | 342.3 | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | | 2015 | | | 2014 | | United States | | $ | 105.0 | | | $ | 100.7 | | Germany | | | 66.0 | | | | 81.8 | | Other European countries | | | 79.9 | | | | 100.0 | | China | | | 36.3 | | | | 38.9 | | Other | | | 34.9 | | | | 38.2 | | Total property, plant and equipment | | $ | 322.1 | | | $ | 359.6 | |
| | March 31, | | | | 2016 | | | 2015 | | United States | | $ | 92.5 | | | $ | 92.7 | | Austria | | | 44.2 | | | | 41.5 | | China | | | 33.6 | | | | 31.8 | | Germany | | | 32.1 | | | | 47.2 | | Hungary | | | 31.4 | | | | 28.9 | | Other | | | 104.8 | | | | 80.0 | | Total property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
The following is a summary of net sales by product type:end market:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Modules/assemblies | | $ | 367.5 | | | $ | 379.9 | | | $ | 358.5 | | Oil coolers | | | 233.0 | | | | 215.4 | | | | 194.1 | | HVAC equipment | | | 199.6 | | | | 159.5 | | | | 151.8 | | EGR coolers | | | 183.5 | | | | 172.5 | | | | 136.1 | | Charge air coolers | | | 148.9 | | | | 157.0 | | | | 161.8 | | Condensers | | | 140.0 | | | | 129.2 | | | | 128.8 | | Radiators | | | 124.8 | | | | 129.0 | | | | 134.4 | | Other | | | 99.1 | | | | 135.1 | | | | 110.5 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Commercial vehicle | | $ | 459.8 | | | $ | 512.5 | | | $ | 477.0 | | Automotive | | | 396.8 | | | | 401.8 | | | | 395.6 | | Off-highway | | | 206.2 | | | | 274.6 | | | | 320.8 | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | Other | | | 108.3 | | | | 121.2 | | | | 137.7 | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
6967
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) Note 22: Note 22: | Quarterly Financial Data (Unaudited) |
Quarterly financial data is summarized below for the years ended March 31, 20152016 and 2014:2015:
| | Fiscal 2015 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2015 | | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | Earnings (loss) from continuing operations (a) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | Net earnings (loss) attributable to Modine (a) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| | Fiscal 2016 quarters ended | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2016 | | | | | | | | | | | | | | | | | Net sales | | $ | 346.1 | | | $ | 334.0 | | | $ | 328.7 | | | $ | 343.7 | | | $ | 1,352.5 | | Gross profit | | | 57.0 | | | | 45.7 | | | | 58.6 | | | | 62.2 | | | | 223.5 | | Earnings (loss) from continuing operations (a) | | | 5.5 | | | | (22.5 | ) | | | 8.2 | | | | 7.8 | | | | (1.0 | ) | Net earnings (loss) attributable to Modine (a) | | | 5.1 | | | | (22.5 | ) | | | 8.2 | | | | 7.6 | | | | (1.6 | ) | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.11 | | | $ | (0.47 | ) | | $ | 0.17 | | | $ | 0.16 | | | $ | (0.03 | ) | Diluted | | | 0.11 | | | | (0.47 | ) | | | 0.17 | | | | 0.16 | | | | (0.03 | ) |
| | Fiscal 2014 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2014 | | | | | | | | | | | | | | | | | | Net sales | | $ | 375.8 | | | $ | 364.2 | | | $ | 347.0 | | | $ | 390.6 | | | $ | 1,477.6 | | Gross profit | | | 61.9 | | | | 57.2 | | | | 56.8 | | | | 62.3 | | | | 238.2 | | Earnings (loss) from continuing operations (a) (b) | | | 10.6 | | | | 5.0 | | | | (3.4 | ) | | | 119.7 | | | | 131.9 | | Net earnings (loss) attributable to Modine (a) (b) | | | 10.0 | | | | 4.6 | | | | (3.6 | ) | | | 119.4 | | | | 130.4 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.21 | | | $ | 0.10 | | | $ | (0.08 | ) | | $ | 2.51 | | | $ | 2.75 | | Diluted | | | 0.21 | | | | 0.10 | | | | (0.08 | ) | | | 2.49 | | | | 2.72 | |
| | Fiscal 2015 quarters ended | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2015 | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | Earnings (loss) from continuing operations (b) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | Net earnings (loss) attributable to Modine (b) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| (a) | The quarterly financial data presented above includesDuring fiscal 2016, restructuring expenses totaled $2.6 million, $1.0 million, $1.6 million, and $11.4 million for the quarters ended June 30, 2015, September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 6). During the fourth quarter of fiscal 2016, the Company recorded a $9.9 million asset impairment chargescharge related to restructuring actionsa manufacturing facility in Europe, North America,Germany (see Note 6). During fiscal 2016, non-cash pension settlement losses totaled $39.2 million, $1.1 million, and South America segments. $1.8 million for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 17). During the fourth quarter of fiscal 2016, the Company recorded a $9.5 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire (see Note 2). Also during the fourth quarter of fiscal 2016, the Company reversed a deferred tax asset valuation allowance, and, as a result, recorded an income tax benefit of $3.0 million (see Note 8). |
| (b) | During fiscal 2015, restructuring expenses totaled $0.8 million, $1.0 million, $1.9 million, and $1.0 million for the quarters ended June 30, 2014, September 30, 2014, December 31, 2014, and March 31, 2015, respectively.respectively (see Note 6). During the third quarter of fiscal 2015, the Company sold a wind tunnel within the Europe segment and recognized a gain of $3.2 million.million (see Note 6). During the fourth quarter of fiscal 2015, the Company recorded a $7.8 million goodwill impairment charge related to its South America segment. Also during the fourth quarter of fiscal 2015, the Company recorded(see Note 14) and a $3.2 million charge in its South America segment associated with a legal matter in Brazil. During fiscal 2014, restructuring expenses totaled $0.5 million, $0.6 million, $9.4 million, and $5.6 million for the quarters ended June 30, 2013, September 30, 2013, December 31, 2013, and March 31, 2014, respectively. The Company recorded impairment charges of $2.0 million and $1.2 million during the quarters ended December 31, 2013 and March 31, 2014, respectively. See Notes 6, 14, and 19 for additional information. |
| (b) | The quarter ended March 31, 2014 was benefited by the reversal of U.S. income tax valuation allowances totaling $119.2 million. SeeBrazil (see Note 8 for additional information.19). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Modine Manufacturing Company:
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1), present fairly, in all material respects, the financial position of Modine Manufacturing Company and its subsidiaries at March 31, 20152016 and 2014,2015, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 20152016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2015,2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in fiscal 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP Milwaukee, Wisconsin May 29, 201526, 2016 ITEM 9.
| | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not applicable.
ITEM 9A.
| | CONTROLS AND PROCEDURES. |
Conclusion Regarding Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company's President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded the design and operation of the Company's disclosure controls and procedures were effective as of March 31, 2015.2016.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, and effected by the Company's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2015.2016. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based on this assessment, management concluded that, as of March 31, 2015,2016, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20152016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the fourth quarter of fiscal 20152016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
| | OTHER INFORMATION. |
None. PART III
ITEM 10.10 . | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors. The Company incorporates by reference the information appearing in the Company's Proxy Statement for the 20152016 Annual Meeting of Shareholders to be held on July 23, 201521, 2016 (the “2015“2016 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Executive Officers of the Registrant" in this Form 10-K.
Compliance with Section 16(a) of the Exchange Act. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Code of Ethics. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Ethics.” The Company's Code of Ethics (labeled as the Code of Ethics and Business Conduct) is included on its website, www.modine.com (About Modine link).
Board Committee Charters. The Board of Directors has approved charters for its Audit Committee, Officer Nomination and Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee. These charters are included on the Company’s website, www.modine.com (Investors link).
Audit Committee Financial Expert. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Committees of the Board of Directors – Audit Committee.”
Audit Committee Disclosure. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the captions “Committees of the Board of Directors – Audit Committee” and “Board Meetings and Committees.”
Guidelines on Corporate Governance. The Board of Directors has adopted Guidelines on Corporate Governance. The Company’s Guidelines on Corporate Governance are included on its website, www.modine.com (Investors link).
Security Holder Recommendation of Board Nominees. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
ITEM 11.
| | EXECUTIVE COMPENSATION. |
The information appearing in the 20152016 Annual Meeting Proxy Statement under the captions “Compensation Discussion and Analysis,” “Compensation of Directors,” “Committees of the Board of Directors – Officer Nomination and Compensation Committee: Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” is incorporated herein by reference.
ITEM 12.
| | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The Company incorporates by reference the information relating to stock ownership under the caption “Security Ownership of Certain Beneficial Owners and Management,” and under the caption “Equity Compensation Plan Information,” in the 20152016 Annual Meeting Proxy Statement.
ITEM 13.
| | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The Company incorporates by reference the information contained in the 20152016 Annual Meeting Proxy Statement under the captions “Certain Relationships and Related Transactions” and “Director Independence.”
ITEM 14.
| | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The Company incorporates by reference the information contained in the 20152016 Annual Meeting Proxy Statement under the caption “Independent Auditors’ Fees for Fiscal 20152016 and 2014.2015.” PART IV
ITEM 15.
| | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) (a) | Documents Filed. The following documents are filed as part of this Report: |
| Page in Form 10-K | | | 1. The consolidated financial statements of Modine Manufacturing Company and its subsidiaries filed under Item 8: | | | | Consolidated Statements of Operations for the years ended March 31, 2016, 2015 2014 and 20132014 | 3938 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2016, 2015 2014 and 20132014 | 4039 | Consolidated Balance Sheets at March 31, 20152016 and 20142015 | 4140 | Consolidated Statements of Cash Flows for the years ended March 31, 2016, 2015 2014 and 20132014 | 4241 | Consolidated Statements of Shareholders' Equity for the years ended March 31, 2016, 2015 2014 and 20132014 | 4342 | Notes to Consolidated Financial Statements | 44-7043-68 | Report of Independent Registered Public Accounting Firm | 7169 | | | 2. Financial Statement Schedules.Schedules | | | | The following financial statement schedule should be read in conjunction with the consolidated financial statements set forth in Item 8: | | Schedule II -- Valuation and Qualifying Accounts | 7674 | | | Schedules other than those listed above are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements and the notes thereto. | | | | 3. Exhibits and Exhibit Index. | 77-7975-77 | | | See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number. | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 29, 201526, 2016 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. Burke | | | | Thomas A. Burke, President | | | | and Chief Executive Officer | | | | (Principal Executive Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. Burke | | Thomas A. Burke | May 29, 2015 | President, Chief Executive Officer and Director | | (Principal Executive Officer) | May 26, 2016 | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 29, 2015 | Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | May 26, 2016 | | | /s/ Marsha C. Williams | | Marsha C. Williams Director | May 29, 2015 | Director | 26, 2016 | | | /s/ David J. Anderson | | David J. Anderson Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Charles P. Cooley | | Charles P. Cooley Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Suresh V. Garimella | | Suresh V. Garimella Director | May 29, 2015 | Director | 26, 2016 |
/s/ Larry O. Moore | | Larry O. Moore Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Christopher W. Patterson | | Christopher W. Patterson Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Christine Y. Yan | | Christine Y. Yan Director | May 29, 2015 | Director | 26, 2016 | | | /s/ David G. Bills | | David G. Bills Director | May 29, 2015 | Director | 26, 2016 |
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES (A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | | | | Additions | | | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Deductions | | | Balance at End of Period | | | | | | | | | | | | | | | | | | 2015: Allowance for Doubtful Accounts | | $ | 1.1 | | | $ | 0.4 | | | $ | (0.2 | )(b) | | $ | (0.3 | )(a) | | $ | 1.0 | | Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | )(b) | | $ | - | | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | | | | 2014: Allowance for Doubtful Accounts | | $ | 0.8 | | | $ | 0.6 | | | $ | - | (b) | | $ | (0.3 | )(a) | | $ | 1.1 | | Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | (b) | | $ | - | | | $ | 61.2 | | | | | | | | | | | | | | | | | | | | | | | 2013: Allowance for Doubtful Accounts | | $ | 0.8 | | | $ | 0.5 | | | $ | (0.1 | )(b) | | $ | (0.4 | )(a) | | $ | 0.8 | | Valuation Allowance for Deferred Tax Assets | | $ | 146.8 | | | $ | 7.7 | | | $ | 18.3 | (b) | | $ | - | | | $ | 172.8 | |
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | 2016: Valuation Allowance for Deferred Tax Assets | | $ | 48.0 | | | $ | 1.5 | | | $ | 1.3 | | (a) | | $ | 50.8 | | | | | | | | | | | | | | | | | | | | 2015: Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | ) | (a) | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | 2014: Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | | (a) | | $ | 61.2 | |
Notes: | (a) | Bad debts charged off during the year
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| (b) | TranslationForeign currency translation and other adjustments |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 20152016 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By Referenced To | | Filed Herewith | | | | | | | | 3.1 | | Amended and Restated Articles of Incorporation, as amended. | | Exhibit 4.2 to Registrant’s Registration Statement on Form S-3 (333-161030) dated August 4, 2009 | | | | | | | | | | 3.2 | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated February 10, 2015 | | | | | | | | | | 4.1 | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 ("2003 10-K") | | | | | | | | | | 4.2 | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto. | | | | | | | | | | 4.3** | | Note Purchase and Private Shelf Agreement (the “Original Note Purchase Agreement”) dated as of August 12, 2010 among the Registrant and the Series A Purchasers named therein of $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020 and $25,000,000 Private Shelf Facility and each Prudential Affiliate (as defined therein) that may become bound by certain provisions thereof. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 12, 2010 8-K (“August 12, 2010 8-K”) | | | | | | | | | | 4.4** | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to August 12, 2010 8-K | | | | | | | | | | 4.5** | | First Amendment to Note Purchase and Private Shelf Agreement and Waiver dated as of March 15, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated March 15, 2012 8-K | | | | | | | | | | 4.6** | | Second Amendment to Note Purchase and Private Shelf Agreement dated as of April 20, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 20, 2012 8-K | | | | | | | | | | 4.7** | | Third Amendment to Note Purchase and Private Shelf Agreement dated as of August 6, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 6, 2012 8-K | | |
4.8** | | Second Amended and Restated Credit Agreement dated as of August 30, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, LC Issuer, Swing Line Lender and as a Lender, and U.S. Bank, N.A. and Wells Fargo Bank, N.A. as Syndication Agents and as Lenders, BMO Harris Bank N.A., as Documentation Agent and as Lender and Associated Bank, N.A., Comerica Bank and Sovereign Bank as Lenders.Lenders | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated August 30, 2013 (“August 30, 2013 8-K”) | | | | | | | | | | 4.9** | | Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Note Purchase Amendment”) dated as of August 30, 2013, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) pursuant to which the Company and the Note Holders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to August 30, 2013 8-K | | | | | | | | | | 4.10** | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to August 30, 2013 8-K | | | | | | | | | | 4.11 | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | 10.1* | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | 10.2* | | Employment Agreement between the Registrant and Thomas A. Burke dated as of June 15, 2007. | | Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 15, 2007 | | | | | | | | | | 10.3* | | Form of Amendment No. 1 to Employment Agreement entered into as of July 1, 2008 with Thomas A. Burke. | | Exhibit 10.1 to Registrant’sRegistrant���s Current Report on Form 8-K dated July 1, 2008 | | | | | | | | | | 10.4* | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke. | | Exhibit 10(f) to Registrant’s Form 10-K for the year ended March 31, 2004 | | | | | | | | | | 10.5* | | Employment Agreement, dated July 1, 2014, between Modine Holding GmbH and Holger Schwab, effective as of July 1, 2015. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2014 | | | | | | | | | | 10.6* | | 2000 Stock Incentive Plan for Non-Employee Directors (Amended and Restated as of March 16, 2005). | | Appendix A to Registrant’s Proxy Statement for the 2005 Annual Meeting dated June 15, 2005 | | | | | | | | | | 10.7* | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant's Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | 10.8*10.7* | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | 10.9*10.8* | | 2007 Incentive Compensation Plan. | | Appendix A to the Registrant's Proxy Statement dated June 18, 2007 | | |
10.10* | | | | | | | 10.9* | | 2008 Incentive Compensation Plan (Amended and Restated effective May 7, 2014). | | Exhibit 10.1 to Registrant's Current Report on Form 8-K dated July 17, 2014 | | |
| 10.10* | | | | | | 10.11* | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Thomas A. Burke. | | Exhibit 10.17 to Registrant's Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | 10.12*10.11* | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | | | | | | | | | 10.12* | | Form of Fiscal 20152016 Modine Performance Stock Award Agreement (Executive Council members). | | | Exhibit 10.1 to Form 10-Q for the first quarter ended June 30, 2015 ("June 30, 2015 10-Q") | X | | | | | | | | | 10.13* | | Form of Fiscal 20152016 Modine Incentive Stock Options Award Agreement (Executive Council members). | | | Exhibit 10.2 to June 30, 2015 10-Q | X | | | | | | | | | 10.14* | | Form of Fiscal 20152016 Modine Restricted Stock Award Agreement (Executive Council members). | | | Exhibit 10.3 to June 30, 2015 10-Q | X | | | | | | | | | 10.15* | | Form of Fiscal 20152016 Modine Non-Qualified Stock Option Award Agreement. | Agreement | | Exhibit 10.4 to June 30, 2015 10-Q | X | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of independent registered public accounting firm. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Instance Document | | | | X | | | | | | | | 101.SCH | | XBRL Taxonomy Extension Schema | | | | X | | | | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | X | | | | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | X | | | | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | X | | | | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | X |
*Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K.
**Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
s | | | % of sales | | Year Ended March 31, 2016 Compared with Year Ended March 31, 2015: Fiscal 2016 net sales decreased $143 million, or 10 percent, from the prior year, primarily due to lower sales in our Americas and Europe segments. Sales volume increases in our Europe segment were more than offset by a $76 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2016 sales were negatively affected by a $110 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar. Gross profit decreased $23 million to $224 million in fiscal 2016, yet gross margin of 16.5 percent was consistent with the prior year. The decrease in gross profit was primarily due to a $14 million unfavorable impact of foreign currency exchange rate changes, $9 million of pension settlement losses, and lower sales volume in the Americas segment, partially offset by lower material costs, improved production efficiencies, and cost-savings initiatives. Fiscal 2016 SG&A expenses increased $21 million from the prior year. The increase was primarily due to $33 million of pension settlement losses and the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in the prior year, partially offset by ongoing cost-control initiatives and a $10 million favorable impact of foreign currency exchange rate changes. Restructuring expenses increased $12 million in fiscal 2016 compared with the prior year, primarily due to severance expenses in the Europe and Americas segments and equipment transfer costs related to plant consolidation activities in the Americas segment. In fiscal 2016, we recorded a $10 million impairment charge to write down the carrying value of a manufacturing facility in Germany to fair value. In fiscal 2015, we recorded a goodwill impairment charge of $8 million in Brazil and recognized a gain of $3 million from the sale of a wind tunnel in Germany. The operating loss of $8 million in fiscal 2016 represents a $61 million decline from $53 million of operating income in the prior year. This decline was primarily due to $42 million of pension settlement losses, lower gross profit, higher restructuring expenses, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by ongoing cost-control initiatives. Other income during fiscal 2016 includes a $10 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire in fiscal 2014. Our benefit for income taxes was $9 million in fiscal 2016, compared with a provision for income taxes of $19 million in fiscal 2015. This $28 million change was primarily due to $16 million of income tax benefits related to pension settlement losses in the current year, a decrease in pre-tax operating earnings, and a $3 million income tax benefit related to the reversal of a deferred tax asset valuation allowance in the current year.
Year Ended March 31, 2015 Compared with Year Ended March 31, 2014:
Fiscal 2015 net sales increased $18 million, or 1 percent, from fiscal 2014,the prior year, primarily due to sales increases in our Building HVAC Asia, and North AmericaAsia segments, partially offset by lower sales in our South AmericaAmericas segment, as economic conditions in Brazil were weak, and in our Europe segment, where sales increases were more than offset by a $35 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2015 sales were negatively affected by a $43 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar during the year.dollar.
Gross profit increased $9 million to $247 million in fiscal 2015 and gross margin increased 40 basis points to 16.5 percent, primarily due to sales volume improvements and lower warranty costs.
Fiscal 2015 SG&A expenses in fiscal 2015 increased $2 million to $184 million compared withfrom the prior year, primarily due to increased engineering and development costs and SG&A expenses at our Barkell business, which we acquired in the fourth quarter of fiscal 2014, partially offset by $5 million of recoveries from business interruption insurance during fiscal 2015 related to the Airedale fire.
Restructuring expenses decreased $11 million in fiscal 2015 compared with the prior year, primarily due to lower restructuring costs in Germany,our Europe segment, partially offset by higher severance-related costsseverance expenses in South America.our Americas segment.
DuringIn fiscal 2015, we sold a wind tunnel in Germany that we no longer considered to be a core asset, and recognized a gain of $3 million. In addition, we recorded a goodwill impairment charge of $8 million in our South America segment during fiscal 2015.related to Brazil. In fiscal 2014, we recorded $3 million of impairment charges, primarily related to restructuring actions in our Europe segment.
Operating income of $53 million in fiscal 2015 increased $16 million compared with fiscal 2014.the prior year. This improvement was primarily due to higher gross profit on increased sales volume, lower restructuring expenses, and the gain on the sale of the wind tunnel, partially offset by higher impairment charges and slightly higher SG&A expenses.
Our provision for income taxes was $19 million in fiscal 2015, compared with a benefit from income taxes of $108 million in fiscal 2014. The provision for taxes in the U.S. totaled $9 million in fiscal 2015, compared with a significant benefit for taxes in fiscal 2014, which resulted primarily from the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $10 million and $11 million in fiscal 2015 and 2014, respectively. Earnings from discontinued operations of $1 million in fiscal 2015 related to a gain associated with the final collection of proceeds from the fiscal 2009 sale of our Electronic Cooling business.
Year Ended March 31, 2014 Compared with Year Ended March 31, 2013:
In fiscal 2014, net sales increased $102 million, or 7 percent, from fiscal 2013, primarily due to an $86 million sales increase in our Europe segment, driven by sales volume improvements within the commercial vehicle and automotive markets. In addition, sales in our Asia, Building HVAC and North America segments increased year over year. Our South America segment sales decreased, however, primarily due to unfavorable foreign currency exchange rate changes.
Gross profit increased $29 million to $238 million in fiscal 2014 from the prior year and gross margin increased 90 basis points to 16.1 percent, primarily due to higher sales volume and favorable material costs.
SG&A expenses in fiscal 2014 increased $16 million to $182 million from fiscal 2013, primarily due to higher compensation-related expenses, the reversal of a $2 million acquisition-related liability that reduced SG&A expenses in the prior year, and $1 million of costs directly related to the Airedale fire, partially offset by lower professional service expenses.
Restructuring expenses were $16 million and $17 million in fiscal 2014 and 2013, respectively, primarily due to employee severance costs related to restructuring activities within our Europe segment. In addition, we recorded impairment charges during fiscal 2014 and 2013 of $3 million and $26 million, respectively, primarily related to our restructuring actions in the Europe segment.
Operating income of $37 million during fiscal 2014 represented a $38 million improvement compared with fiscal 2013. This improvement was primarily due to higher gross profit on increased sales volume and favorable material costs and lower impairment charges, partially offset by higher SG&A expenses.
Our benefit for income taxes was $108 million in fiscal 2014 compared with a provision for income taxes of $10 million in fiscal 2013. The large benefit for income taxes in fiscal 2014 was primarily due to the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $11 million and $10 million in fiscal 2014 and 2013, respectively.
Segment Results of Operations
During fiscal 2015, we changed the name of our Commercial Products segment to Building HVAC in order to better reflect the nature of the segment’s product lines. There were no changes to the operations or reported financial results of the segment as a result.
Effective April 1, 2015,2016, we combined our North America and South America segments into the Americas segment to streamline operations, with the objective of streamlining our operations to gain synergies and improve our cost structure. Beginning forAs a result, we recast the prior-period segment financial information to conform to the current-period presentation. There was no impact to our consolidated financial statements as a result.
Americas | | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 586 | | | | 100.0 | % | | $ | 667 | | | | 100.0 | % | | $ | 688 | | | | 100.0 | % | Cost of sales | | | 486 | | | | 82.9 | % | | | 558 | | | | 83.7 | % | | | 574 | | | | 83.4 | % | Gross profit | | | 100 | | | | 17.1 | % | | | 109 | | | | 16.3 | % | | | 114 | | | | 16.6 | % | Selling, general and administrative expenses | | | 55 | | | | 9.4 | % | | | 65 | | | | 9.7 | % | | | 62 | | | | 9.0 | % | Restructuring expenses | | | 9 | | | | 1.5 | % | | | 3 | | | | 0.4 | % | | | 1 | | | | 0.2 | % | Impairment charges | | | - | | | | - | | | | 8 | | | | 1.2 | % | | | 1 | | | | 0.2 | % | Operating income | | $ | 36 | | | | 6.2 | % | | $ | 33 | | | | 5.0 | % | | $ | 50 | | | | 7.2 | % |
Americas net sales decreased $81 million, or 12 percent, in fiscal 2016 we will report financial results forcompared with the new Americas operating segment, which will includeprior year. Sales were lower in both North America and South America. North America | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 574 | | | | 100.0 | % | | $ | 569 | | | | 100.0 | % | | $ | 565 | | | | 100.0 | % | Cost of sales | | | 477 | | | | 83.1 | % | | | 475 | | | | 83.6 | % | | | 484 | | | | 85.6 | % | Gross profit | | | 97 | | | | 16.9 | % | | | 94 | | | | 16.4 | % | | | 81 | | | | 14.4 | % | Selling, general and administrative expenses | | | 50 | | | | 8.7 | % | | | 50 | | | | 8.6 | % | | | 40 | | | | 7.2 | % | Restructuring expenses | | | 1 | | | | 0.2 | % | | | 1 | | | | 0.2 | % | | | - | | | | - | | Impairment charges | | | - | | | | - | | | | 1 | | | | 0.2 | % | | | 2 | | | | 0.3 | % | Operating income | | $ | 46 | | | | 8.0 | % | | $ | 42 | | | | 7.4 | % | | $ | 39 | | | | 6.9 | % |
foreign currency exchange rate changes. Sales in North America net sales increased $5decreased $43 million, or 1 percent, from fiscal 2014 to fiscal 2015, and increased $4 million, or 1 percent, from fiscal 2013 to fiscal 2014. The fiscal 2015 sales increase was primarily due to lower sales volume to off-highway and commercial vehicle customers, partially offset by higher sales volume to automotive customers. Sales volume to all markets in Brazil also declined during fiscal 2016, as economic conditions in Brazil remained weak. Sales decreased $21 million, or 3 percent, in fiscal 2015 compared with fiscal 2014, primarily due to lower sales in Brazil and a $9 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in North America, where higher sales volume to commercial vehicle customers were partially offset by decreased sales volume to off-highway customers as economic conditions in that market remained relatively weak. The fiscal 2014 sales increase, compared with fiscal 2013, was primarily due to higher sales volume to automotive and commercial vehicle customers, partially offset by decreasedlower sales volume to off-highway customers.
Gross profit decreased $9 million, yet gross margin increased 5080 basis points to 16.917.1 percent in fiscal 2016. The decrease in gross profit was primarily due to lower sales volume, a $3 million unfavorable impact of foreign currency exchange rate changes, and $2 million of environmental charges for investigative work related to a previously-owned manufacturing facility, partially offset by lower material costs, cost savings from the McHenry, Illinois manufacturing facility closure, and improved production efficiencies. Gross profit decreased $5 million and gross margin decreased 30 basis points to 16.3 percent in fiscal 2015 compared with fiscal 2014, primarily due to lower sales volume in Brazil, partially offset by lower warranty costs and sales volume improvements partially offset by unfavorable sales mix. The gross margin increasein North America.
Fiscal 2016 SG&A expenses decreased $10 million from fiscal 2013 to fiscal 2014 wasthe prior year, primarily due to lower material costs.
ongoing cost-control initiatives, the absence of a $3 million charge for a legal matter in Brazil in the prior year, and a $3 million favorable impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $50increased $3 million during fiscal 2015 were consistent with fiscal 2014. The $10 million increase in SG&A expenses in fiscal 2014 wasfrom the prior year, primarily due to higher compensation-related expenses and increased engineering and development costs.the $3 million charge for the legal matter in fiscal 2015.
During fiscal 2014, we approved a plan to close our McHenry, Illinois manufacturing facility and are currently in the process of transferring the facility’s production to other North America segment manufacturing facilities, which we expect to complete within the first six months of fiscal 2016. We recorded $1 million of restructuring expenses during fiscal 2015, primarily related to equipment transfer costs incurred to relocate McHenry’s product lines to other manufacturing facilities. In fiscal 2014, as a result of the planned closure,2016, we recorded $1$9 million of restructuring expenses, primarily related to severance expenses associated with a voluntary retirement program in the U.S., and the planned closure of our Washington, Iowa manufacturing facility, which we expect to complete during fiscal 2017, and equipment transfer costs and $1related to plant consolidation activities in North America. In fiscal 2015, we recorded $3 million of assetrestructuring expenses, primarily related to severance expenses in Brazil, to better align our cost structure with the market conditions in Brazil, and equipment transfer costs related to the closure of our McHenry, Illinois manufacturing facility, which we completed during fiscal 2016. We also recorded an $8 million goodwill impairment charges.charge during fiscal 2015, primarily due to a decline in the financial outlook for Brazil.
Operating income in fiscal 2015 of $46 million increased $4 million from $42$36 million in fiscal 2014, primarily due to2016 increased gross profit. Fiscal 2014 operating income improved $3 million compared with fiscal 2013,the prior year, primarily due to increased gross profit,lower SG&A expenses and the absence of the goodwill impairment charge in the prior year, partially offset by lower gross profit and higher restructuring expenses. Operating income of $33 million in fiscal 2015 decreased $17 million compared with the prior year, primarily due to the goodwill impairment charge, lower gross profit, and higher SG&A and restructuring expenses. 2627
Europe | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % | | $ | 498 | | | | 100.0 | % | Cost of sales | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % | | | 437 | | | | 87.7 | % | Gross profit | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % | | | 61 | | | | 12.3 | % | Selling, general and administrative expenses | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % | | | 45 | | | | 9.1 | % | Restructuring expenses | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % | | | 17 | | | | 3.4 | % | Impairment charges | | | - | | | | - | | | | 2 | | | | 0.3 | % | | | 24 | | | | 4.8 | % | Gain on sale of wind tunnel | | | (3 | ) | | | -0.6 | % | | | - | | | | - | | | | - | | | | - | | Operating income (loss) | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % | | $ | (25 | ) | | | -5.0 | % |
Europe
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 524 | | | | 100.0 | % | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % | Cost of sales | | | 456 | | | | 87.0 | % | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % | Gross profit | | | 68 | | | | 13.0 | % | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % | Selling, general and administrative expenses | | | 39 | | | | 7.4 | % | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % | Restructuring expenses | | | 6 | | | | 1.2 | % | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % | Impairment charges | | | 10 | | | | 1.9 | % | | | - | | | | - | | | | 2 | | | | 0.3 | % | Gain on sale of wind tunnel | | | - | | | | - | | | | (3 | ) | | | -0.6 | % | | | - | | | | - | | Operating income | | $ | 13 | | | | 2.5 | % | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % |
Europe net sales decreased $54 million, or 9 percent, in fiscal 2016 compared with the prior year, primarily due to a $76 million unfavorable impact of foreign currency exchange rate changes and lower sales volume to off-highway customers, partially offset by increased sales volume to commercial vehicle and automotive customers. Sales decreased $6 million, or 1 percent, fromin fiscal 2014 to2015 compared with fiscal 2015,2014, primarily due to a $35 million unfavorable impact of foreign currency exchange rate changes and lower tooling sales, partially offset by increased sales volume to commercial vehicle and automotive customers.
Gross profit decreased $1 million, yet gross margin increased 110 basis points to 13.0 percent in fiscal 2016. The $86 million, or 17 percent,gross margin increase in sales from fiscal 2013 to fiscal 2014 was primarily due to increasedhigher sales volume to commercial vehicle customers, higher tooling sales, and a $23lower material costs. In addition, gross profit was negatively impacted by $9 million favorable impact offrom foreign currency exchange rate changes.
Gross In fiscal 2015, gross margin decreased 20 basis points to 11.9 percent incompared with fiscal 2015,2014, primarily due to unfavorable sales mix, production inefficiencies caused by increased volume at certain manufacturing facilities and plant consolidation activities, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by the absence of $4 million of accelerated depreciation recorded in the prior yearfiscal 2014 for production equipment that is no longer used and lower warranty costs. Gross profit increased $10
Fiscal 2016 SG&A expenses decreased $5 million while gross margin declined 20 basis points to 12.1 percent in fiscal 2014 compared with fiscal 2013. This decrease in gross margin wasfrom the prior year, primarily due to a $5$6 million favorable customer pricing settlement in the prior year, $4 millionimpact of accelerated depreciation in fiscal 2014, and higher warranty costs, partially offset by higher sales volume, favorable sales mix, and lower material costs.
foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $44 million were consistent with the prior year, as higher engineering and development costs were offset by a favorable impact of foreign currency exchange rate changes. SG&A expenses decreased $1
In fiscal 2016, we recorded $6 million from fiscal 2013 to fiscal 2014, primarily due to the favorable impact of restructuring actionsexpenses, primarily related to severance expenses. In addition, we recorded a $10 million asset impairment charge. These restructuring expenses and lower engineering and development costs, partially offset by higher compensation-related expenses.
Duringimpairment charge primarily related to a manufacturing facility in Germany, which was generating pre-tax losses, resulting in management deciding to exit a certain product line in the future. In fiscal 2015, we recorded $2 million of restructuring expenses, primarily due to plant consolidation activities, as we substantially completed the combination of two manufacturing facilities in Germany into one, more competitive manufacturing operation. Also during fiscal 2015,and we sold a wind tunnel that we no longer considered to be a core asset for cash proceeds of $6 million, which resulted in a gain of $3 million. DuringIn fiscal 2014, and fiscal 2013, we recorded $15 million and $17 million, respectively, of restructuring expenses, primarily related to employee severance costs. Alsoexpenses, and $2 million of asset impairment charges.
Operating income of $13 million in fiscal 20142016 decreased $13 million compared with the prior year, primarily due to an increase in restructuring expenses and 2013 we recorded asset impairment charges totaling $2and the absence of a $3 million and $24 million, respectively, primarily related to several facilities that we have sold or expect to sell.
gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&A expenses. Operating income of $26 million in fiscal 2015 increased $16 million compared with fiscal 2014,the prior year, primarily due to a reduction in restructuring expenses and impairment charges and the gain from selling the wind tunnel. Operating income of $10 million in fiscal 2014 improved $35 million compared with fiscal 2013, primarily due to lower asset impairment charges and increased sales volume, which drove higher gross profit. 2728
South America | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 94 | | | | 100.0 | % | | $ | 123 | | | | 100.0 | % | | $ | 134 | | | | 100.0 | % | Cost of sales | | | 82 | | | | 87.2 | % | | | 102 | | | | 83.1 | % | | | 111 | | | | 83.2 | % | Gross profit | | | 12 | | | | 12.8 | % | | | 21 | | | | 16.9 | % | | | 23 | | | | 16.8 | % | Selling, general and administrative expenses | | | 14 | | | | 15.9 | % | | | 13 | | | | 10.8 | % | | | 12 | | | | 8.4 | % | Restructuring expenses | | | 2 | | | | 1.6 | % | | | - | | | | - | | | | - | | | | - | | Impairment charges | | | 8 | | | | 8.4 | % | | | - | | | | - | | | | - | | | | - | | Operating (loss) income | | $ | (12 | ) | | | -13.1 | % | | $ | 8 | | | | 6.1 | % | | $ | 11 | | | | 8.4 | % |
South America | | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 79 | | | | 100.0 | % | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % | Cost of sales | | | 67 | | | | 84.5 | % | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % | Gross profit | | | 12 | | | | 15.5 | % | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % | Selling, general and administrative expenses | | | 11 | | | | 14.5 | % | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % | Operating income (loss) | | $ | 1 | | | | 1.0 | % | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % |
Asia net sales decreased $29$2 million, or 243 percent, in fiscal 20152016 compared with fiscal 2014,the prior year, primarily due to lower sales volume to commercial vehicle, off-highway customers in China and automotive customers, as economic conditions in Brazil were generally weak in fiscal 2015,Korea and a $9 million unfavorable impact of foreign currency exchange rate changes, primarily due to the strengthening of the U.S. dollar versus the Brazilian real. Sales decreased $11 million, or 8 percent, in fiscal 2014 compared with fiscal 2013, primarily due to a $14$4 million unfavorable impact of foreign currency exchange rate changes, partially offset by increasedhigher sales volume to commercial vehicle customers.
Gross profit decreased $9 million and gross margin decreased to 12.8 percentautomotive customers in fiscal 2015 compared with the prior year, primarily due to lower sales volume. Gross profit decreased $2 million from fiscal 2013 to fiscal 2014, primarily due to a $2 million unfavorable impact of foreign currency exchange rate changes.
SG&A expenses in fiscal 2015 increased $1 million compared with fiscal 2014, primarily due to a $3 million charge for a legal matter in Brazil (see Note 19 of the Notes to Consolidated Financial Statements for more information), partially offset by the favorable impact of cost control measures and a $1 million favorable impact of foreign currency exchange rate changes. SG&A expenses increased $1 million from fiscal 2013 to fiscal 2014, primarily due to the reversal of a $2 million acquisition-related liability in fiscal 2013 and higher compensation-related expenses in fiscal 2014, partially offset by a $2 million favorable impact of foreign currency exchange rate changes.
During fiscal 2015, we recorded $2 million of restructuring expenses for employee severance-related costs to reduce headcount and better align our cost structure with the market conditions in Brazil. We also recorded an $8 million goodwill impairment charge during fiscal 2015, which was primarily caused by a decline in the financial outlook for the South America segment.
The $12 million operating loss in fiscal 2015 represented a $20 million decline compared with the prior year and was primarily due to lower gross profit on lower sales volume and the goodwill impairment charge. Operating income decreased $3 million from fiscal 2013 to fiscal 2014, primarily due to lower gross profit on lower sales volumeChina and increased SG&A expenses.
Asia | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % | | $ | 60 | | | | 100.0 | % | Cost of sales | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % | | | 58 | | | | 97.2 | % | Gross profit | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % | | | 2 | | | | 2.8 | % | Selling, general and administrative expenses | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % | | | 11 | | | | 17.6 | % | Operating income (loss) | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % | | $ | (9 | ) | | | -14.8 | % |
Asia netoverall sales in India. Sales increased $9 million, or 13 percent, in fiscal 2015 compared with fiscal 2014, primarily due to new automotive program launches in China and higherincreased overall sales across all markets in India, partially offset by lower sales volume within theto off-highway markets in China and Korea. Salescustomers.
Gross margin increased $12 million, or 20130 basis points to 15.5 percent in fiscal 20142016 compared with fiscal 2013,the prior year, primarily due to higherfavorable sales volume in the automotive and off-highway markets. mix. Gross profit increased $3 million and gross margin increased 170 basis points to 14.2 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume. Gross profit increased $7
Fiscal 2016 SG&A expenses decreased $1 million and gross margin increased to 12.5 percent in fiscal 2014 compared with fiscal 2013,from the prior year, primarily due to higher sales volume.
cost-control initiatives, partially offset by acquisition-related costs associated with a joint venture that we formed in fiscal 2016. See Note 3 to the Notes to Consolidated Financial Statements for additional information on this joint venture. Fiscal 2015 SG&A expenses in fiscal 2015 were consistent with the prior year, yet decreased as a percentage of sales. SG&A expenses increased
Operating income of $1 million in fiscal 20142016 increased $1 million compared with fiscal 2013, yet decreased slightly as a percentage of sales.
the prior year, primarily due to lower SG&A expenses. Operating income of less than $1 million in fiscal 2015 represented a $3 million improvement compared with the operating loss in the prior year, and was primarily due to higher gross profit on increased sales volume. The $3 million operating loss in fiscal 2014 represented a $6 million improvement from fiscal 2013, primarily due to higher gross profit.
Building HVAC | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % | | $ | 139 | | | | 100.0 | % | Cost of sales | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % | | | 98 | | | | 70.7 | % | Gross profit | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % | | | 41 | | | | 29.3 | % | Selling, general and administrative expenses | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % | | | 31 | | | | 22.1 | % | Operating income | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % | | $ | 10 | | | | 7.2 | % |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 181 | | | | 100.0 | % | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % | Cost of sales | | | 127 | | | | 70.1 | % | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % | Gross profit | | | 54 | | | | 29.9 | % | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % | Selling, general and administrative expenses | | | 39 | | | | 21.6 | % | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % | Restructuring expenses | | | 1 | | | | 0.6 | % | | | - | | | | - | | | | - | | | | - | | Operating income | | $ | 14 | | | | 7.7 | % | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % |
Building HVAC net sales decreased $5 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to a $6 million unfavorable impact of foreign currency exchange rate changes and lower sales at our businesses in the U.K., as unfavorable currency conditions resulted in increased competition from other mainland European suppliers, partially offset by increased ventilation product sales in North America. Sales increased $40 million, or 27 percent, in fiscal 2015 compared with the prior year,fiscal 2014, primarily due to a $23 million increase in sales at our Airedale businessbusinesses in the U.K. and increased heating product sales in North America, as we experienced anothera strong heating season in fiscal 2015. The sales increase at Airedalein the U.K. was primarily due to a $13 million increase in sales at Barkell, which we acquired in the fourth quarter of fiscal 2014, and the continuing recovery from the Airedale fire, which caused a temporary halt in production during the prior fiscal year. In
Gross profit decreased $2 million in fiscal 2014, despite2016 compared with the negative impact of the Airedale fire, sales increased $7 million, or 5 percent,prior year, primarily due to increased heating product salesa $1 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased 10 basis points to 29.9 percent in North America.
fiscal 2016 compared with the prior year. Gross profit increased $13 million and gross margin improved 40 basis points to 30.0 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume. Fiscal 2016 SG&A expenses increased $2 million from the prior year, primarily due to higher sales volume. Gross profit increased $2the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in fiscal 2014 compared with the prior year, primarily due topartially offset by lower engineering and development costs and a $1 million favorable sales mix.
impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses increased $3 million or 9 percent, in fiscal 2015 compared withfrom the prior year, primarily due to additional costs from Barkell and increased expenses associated with higher sales levels, partially offset by $5 million ofthe recoveries from business interruption insurance for the Airedale fire. SG&A expenses increased $3 million, or 10 percent, in
In fiscal 2014 compared with fiscal 2013, primarily due to higher compensation-related expenses,2016, we recorded $1 million of non-recoverable costs directlyrestructuring expenses, primarily related to the Airedale fire, and increased acquisition-related expenses for Barkell.severance expenses.
Operating income of $19$14 million increased $10in fiscal 2016 decreased $5 million compared with the prior year, primarily due to lower gross profit and higher SG&A expenses. Operating income of $19 million in fiscal 2015 increased $10 million compared with the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses. Operating income decreased $1 million from fiscal 2013 to fiscal 2014, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at March 31, 20152016 of $71$69 million, and an available borrowing capacity of $216$207 million under lines of credit provided by banks in the United States and abroad. Due to the timing of insurance proceeds related to the Airedale fire, our cash and cash equivalents at March 31, 2015 include approximately $13 million of advances from our insurance provider that will be spent for recovery and reconstruction costs. Given our extensive international operations, significant amounts$49 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds would be subject to U.S. tax if repatriated. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.
During fiscal 2016, our Board of Directors approved a $50 million share repurchase program, which expires in November 2016. We repurchased $7 million of shares under this program in fiscal 2016. Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 2016 was $72 million, an increase of $8 million from $64 million in the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital, including lower incentive compensation payments during fiscal 2016 and the timing of value-added tax payments. Net cash provided by operating activities in fiscal 2015 was $64 million, a decrease of $41 million from $105 million in the prior year. This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, including higher incentive compensation payments during fiscal 2015 related to fiscal 2014 performance, and the timing of customer-owned tooling reimbursements. Net cash provided by operating activities in fiscal 2014 was $105 million, an increase of $56 million from $49 million in the prior year. The increase in operating cash flows resulted from an increase in gross profit, partially offset by higher SG&A expenses, and improvements in working capital as compared with fiscal 2013.
We expect to be reimbursed by our insurance provider for substantially all losses and expenses directly related to the fire at our Airedale manufacturing facility, including substantially all costs to reconstruct the facility. The expected timing of cash recoveries from our insurance provider is such that we do not expect the fire will have a significant adverse effect on our liquidity.
Capital Expenditures
Capital expenditures of $58$63 million during fiscal 20152016 increased $5 million compared with fiscal 2014.2015. In fiscal 2015,2016, our capital spending primarily occurred in the North AmericaAmericas and Europe segments, which totaled $26$27 million and $22$25 million, respectively. Capital projects in fiscal 20152016 included tooling and equipment purchases in conjunction with program launchesnew and renewal programs with customers, as well as a building expansion at our Nuevo Laredo manufacturing facility in the North America segment.customers.
At March 31, 2015,2016, our capital expenditure commitments totaled $16$21 million. Significant commitments included tooling and equipment expenditures for new and renewal programs with customers in North Americathe Americas and Europe.Europe segments.
Dividends
We did not pay dividends in fiscal 2016, 2015, 2014, or 2013.2014. We currently do not intend to pay dividends in fiscal 2016.2017.
Debt
Our total debt outstanding decreased $16increased $14 million to $149$163 million at March 31, 20152016, compared with the prior year, as our debt repayments exceeded our borrowings.primarily due to borrowings in China and Mexico for capital investments. See Note 16 of the Notes to Consolidated Financial Statements for furtheradditional information regarding our debt agreements.
Our debt agreements require us to maintain compliance with various covenants. Under our primary debt agreements in the U.S., we are subject to a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a certain portion of our cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
Our leverage ratio for the four fiscal quarters ended March 31, 20152016 was 1.2, which was below the maximum permitted ratio of 3.25. Our interest expense coverage ratio for the four fiscal quarters ended March 31, 20152016 was 10.3,10.5, which exceeded the minimum requirement of 3.0. We were in compliance with our debt covenants as of March 31, 20152016 and expect to remain in compliance during fiscal 20162017 and beyond. In the event of an acquisition, our leverage ratio may be temporarily raised for several quarters, per the terms of our debt agreements.
Pension Obligations
Our net pension liabilities totaled $111 million for plans in the U.S. and at certain foreign subsidiaries as of March 31, 2015. We contributed $7 million to these plans in fiscal 2015 and expect to contribute approximately $8 million to our pension plans during fiscal 2016. In May 2015, we approved a program to offer a voluntary, lump-sum pension payout to certain eligible former employees who participate in our U.S. pension plan. If the lump-sum payout is elected by the participant, the payout would effectively settle our pension obligation with that participant, thereby eliminating the risk of future changes in our pension obligation for that participant. As a result of this program, we expect to record a settlement loss of approximately $20-30 million in the second quarter of fiscal 2016, based on estimated participation rates and estimated actuarial assumptions. This settlement loss would represent the accelerated recognition of unamortized actuarial losses associated with our pension liabilities. The lump-sum settlements will be paid from plan assets and will not impact our operating cash flow.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
| | March 31, 2015 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 125.2 | | | $ | 0.2 | | | $ | 24.0 | | | $ | 32.0 | | | $ | 69.0 | | Interest associated with long-term debt | | | 38.8 | | | | 8.5 | | | | 16.1 | | | | 11.9 | | | | 2.3 | | Capital lease obligations | | | 4.9 | | | | 0.3 | | | | 0.6 | | | | 0.6 | | | | 3.4 | | Operating lease obligations | | | 49.9 | | | | 8.2 | | | | 10.0 | | | | 7.8 | | | | 23.9 | | Capital expenditure commitments | | | 15.5 | | | | 13.0 | | | | 2.5 | | | | - | | | | - | | Other long-term obligations | | | 10.9 | | | | 1.6 | | | | 3.2 | | | | 2.6 | | | | 3.5 | | Total contractual obligations | | $ | 245.2 | | | $ | 31.8 | | | $ | 56.4 | | | $ | 54.9 | | | $ | 102.1 | |
| | March 31, 2016 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 125.4 | | | $ | 8.0 | | | $ | 32.2 | | | $ | 85.2 | | | $ | - | | Interest associated with long-term debt | | | 30.3 | | | | 8.5 | | | | 14.1 | | | | 7.7 | | | | - | | Capital lease obligations | | | 8.6 | | | | 0.5 | | | | 0.8 | | | | 0.8 | | | | 6.5 | | Operating lease obligations | | | 53.5 | | | | 8.1 | | | | 10.4 | | | | 8.7 | | | | 26.3 | | Capital expenditure commitments | | | 20.5 | | | | 20.0 | | | | 0.5 | | | | - | | | | - | | Other long-term obligations | | | 3.6 | | | | 1.7 | | | | 1.2 | | | | 0.7 | | | | - | | Total contractual obligations | | $ | 241.9 | | | $ | 46.8 | | | $ | 59.2 | | | $ | 103.1 | | | $ | 32.8 | |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $121$129 million as of March 31, 2015.2016. We are unable to determine the ultimate timing of payments for these liabilities; therefore, we have excluded these amounts from the contractual obligations table above.
We have a contractual commitmentexpect to rebuild the leased Airedale facility, which suffered significant destruction from a firecontribute $8 million to our U.S. pension plans during fiscal 2014. We maintain insurance coverage and believe reimbursement for reconstruction costs is probable. The estimated costs associated with the reconstruction of the Airedale facility of $48 million have been excluded from the contractual obligations table above. See Note 2 of the Notes to Consolidated Financial Statements for further information.2017.
Critical Accounting Policies
The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements. Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements. The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements. In addition, recently issued accounting pronouncements that could significantly impact our financial statements are included in Note 1 of the Notes to Consolidated Financial Statements. Revenue Recognition
We recognize revenue, including agreed-upon commodity price increases or decreases,prices, when the risks and rewards of ownership are transferred to our customers, which generally occurs upon shipment. Revenue is recorded net of applicable provisions for sales rebates, volume incentives, and returns and allowances. At the time of revenue recognition, we also record estimates for bad debt expense and warranty expense. We base these estimates on historical experience, current business trends, and current economic conditions. PriceWe recognize price increases that are agreed upon in advance are recognized as revenue when the products are shipped to our customers. Impairment of Long-Lived Assets
We perform impairment evaluations of long-lived assets, including property, plant and equipment, intangible assets and equity investments, whenever business conditions or events indicate that those assets may be impaired. We consider factors such as operating losses, declining financial outlooks and market conditions, when evaluating the necessity for an impairment analysis. When the estimated futurenet asset values exceed undiscounted cash flows expected to be generated by the assets are less than the carrying value of the long-lived assets, or the decline in value is considered to be “other than temporary,” we write down the assets are written down to fair market value and arecord an impairment charge is recorded to current operations. We estimate fair market value in various ways depending on the nature of the assets under review. Fair value is generally based on appraised value, estimated salvage value, or selling prices under negotiation, or estimated cancellation charges, as applicable. The most significant long-lived assets that we have evaluated for impairment areindicators were property, plant and equipment, which totaled $322$339 million at March 31, 2015.2016. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment. We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility. This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy. When such indicators are present, we perform an impairment evaluation by comparing the estimated future undiscounted cash flows expectedevaluation. During fiscal 2016, we recorded a $10 million impairment charge related to be generated in thea manufacturing facility in Germany. See Note 6 of the Notes to the net book value of the long-lived assets within that facility. We estimate the undiscounted cash flows based on the expected future cash flows to be generated by the manufacturing facility over its remaining useful life. When the estimated future undiscounted cash flows are less than the net book value of the long-lived assets, we write such assets down to fair value, which we generally estimate based upon appraisals or estimated salvage value.Consolidated Financial Statements for additional information.
Impairment of Goodwill
We perform goodwill impairment tests annually, as of March 31, unless business events or other conditions exist that require a more frequent evaluation. At March 31, 2016, our goodwill totaled $16 million, primarily related to our Building HVAC segment. We consider factors such as operating losses, declining financial and market outlooks and market capitalization when evaluating the necessity for an interim impairment analysis. Goodwill is tested for impairment at a reporting unit level, which we have determined to be at the operating segment level. Our first step in this test is to compare the fair value of the reporting unit to its carrying value. We determine the fair value of a reporting unit based upon the present value of estimated future cash flows. If the fair value of the reporting unit exceeds the carrying value of the unit’s net assets, goodwill of that reporting unit is not impaired and further testing is not required. If the carrying value of the reporting unit’s net assets exceeds the fair value of the unit, then we perform the second step of the impairment test to determine the implied fair value of the reporting unit’s goodwill and any impairment charge. In estimating the implied fair value of goodwill for a reporting unit, we assign the fair value to the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of the reporting unit goodwill over its implied fair value is recorded as an impairment charge. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rate, business trends and market conditions. TheWe determine the expected future revenue growth rates and operating profit margins are determined after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for country-specific risks where appropriate.
We conducted our annual assessment for goodwill impairment during the fourth quarter of fiscal 20152016 by applying a fair value-based test. The South Americatest and determined the fair value of our reporting units carrying valuesubstantially exceeded its fair value; therefore, we performed the second step of the goodwill impairment test, as described above. As a result, we determined our South America reporting unit’s goodwill was fully impaired and recorded an $8 million goodwill impairment charge. As fiscal 2015 progressed, we experienced relatively weak financial results for our South America reporting unit. During the fourth quarter of fiscal 2015, our outlook for the markets served by our South America reporting unit, primarily in Brazil, shifted from a view that the markets may begin to recover to a view that the market downturn may be more prolonged. The economic weakness in Brazil has negatively affected our expected future cash flows for the South America segment. Our impairment analysis assumed a discount rate of 22 percent, which corresponds to our cost of capital adjusted for a higher expectation of future inflation and uncertainty in the Brazilian economy, and future revenue growth and operating profit margins based upon our current outlook for the South America reporting unit.their respective book values.
Warranty Costs
We estimate costs related to product warranties and accrue for such costs at the time of the sale, within cost of sales. We estimate warranty costs based upon the best information available, which includes statistical and analytical analysis of both historical and current claim data. We monitor and adjust original estimatesour warranty accruals, which totaled $8 million at March 31, 2016, if we expect futureit is probable that expected claims will differ from the initialprevious estimates. 32
Tooling Costs
We capitalize production tooling costs incurred in the manufacture of products for customer programs as a component of property, plant and equipment, net of any customer reimbursements, when we retain title to the tooling. We depreciate these capitalized costs in cost of sales over the estimated life of the asset, which is generally three years. For customer-owned tooling costs incurred, we record a receivable when the customer has guaranteed reimbursement to us. Reimbursement typically occurs prior to the start of production, but this can vary by program and by customer. We do not have any significant customer arrangements under which customer-owned tooling costs were not accompanied by guaranteed reimbursements.
Assets Held for Sale
Assets are considered to be held for sale when management approves and commits to a formal plan to actively market the asset for sale, at a sales price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, the sale of the asset is expected to be completed within one year, and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, we record the carrying value of the asset at the lower of its carrying value or estimated fair value, less costs to sell. We cease recording depreciation expense at the time of designation as held for sale.
Pension Obligations
TheOur calculation of the expense and liabilities of our pension plans is dependent upon various assumptions. At March 31, 2016, our pension liabilities totaled $120 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality rate tables. We basedbase our selection of assumptions on historical trends and economic and market conditions at the time of valuation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods. These differences impact future pension expenses. Currently, participants in our domestic pension plans are not accruing benefits based on their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.
In late calendar 2014, the U.S. Society of Actuaries issued updated mortality and mortality improvement tables, which effectively increased life expectancies. We considered the new mortality tables, along with characteristics of our plan-specific populations, in developing our best estimate of the expected mortality of plan participants for our March 31, 2015 measurement date. The impact of the new mortality assumptions resulted in an increase of approximately $9 million in both our U.S. pension plans’ actuarial loss and pension benefit obligation.
For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our benefit plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in fiscal 20152016 and 20142015 was 8.0 percent. For fiscal 2016,2017, we have also assumed a rate of 8.0 percent. The impact of a 25 basis point decrease in the expected rate of return on assets would result in an increase of $0.5$0.4 million in fiscal 20162017 pension expense.
The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds reset annually on the measurement date of March 31. For fiscal 2015,2016, we used a discount rate of 4.04.1 percent, compared with 4.74.0 percent in fiscal 2014.2015. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows from the affected plans. See Note 17 of the Notes to Consolidated Financial Statements for additional information. A change in the assumed discount rate of 25 basis points would impact our fiscal 20162017 pension expense by less than $0.1 million.
Income Taxes 33
Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. We adjust these amounts to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in certain jurisdictions will not be realized. This determination involves significant judgment. In performing this assessment on a jurisdiction-by-jurisdiction basis, we consider historical and projected financial results along with other pertinent information.
We have not recorded a provision for U.S. income taxes on undistributed earnings from our non-U.S. subsidiaries that we have determined to be permanently reinvested in our foreign operations. If management’s intentions or U.S. tax law changes in the future, there could be a significant negative impact on our provision for income taxes.
See Note 8 of the Notes to Consolidated Financial Statements for additional information regarding income taxes. Other Loss Reserves
We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, self-insurance reserves, uncollectible accounts receivable, recoverability of deferred income taxes, regulatory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. We estimate these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Note 19 of the Notes to Consolidated Financial Statements for additional detailsinformation regarding contingencies and litigation. Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of this report. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| · | Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs, inflation, changes in interest rates, recession and recovery therefrom, restrictions associated with importing and exporting and foreign ownership, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China Western Europe, Russia and North America, and the continued deterioration in and weak forecasts for the Brazilian economy; |
| · | The impact of potential increases in commodity prices, particularlyincluding our ability to successfully manage our exposure to the changingand/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel); |
| · | Our ability to successfully manage commodity risk and/or pass increasing commodity prices on to customers, as well as the inherent lag in timing of such pass-through pricing;arrangements; and |
| · | The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental emissions standards.and/or energy standards and objectives. |
Operational Risks:
| · | The overall health and increasing price-down focus of our original equipment manufacturer customers in light of some remaining economic and market-specific challenges, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; |
| · | Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction pressures from customers, particularly in the face of macro-economic instability; |
| · | Our ability to effectively and efficiently complete the restructuring activities in our North America, Europe, and South America segments and realize expected commercial and operational efficiencies and associated cost reductionssavings and increased competitivenessother benefits associated with our Strengthen, Diversify and profitability as a result;Grow transformational strategy; |
| · | Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims; |
| · | Our ability to obtain and retain profitable business in our Asia segment, and, in particular, in China; |
| · | Unanticipated delays or modifications initiated by major customers with respect to product launches, product applications or requirements; |
| · | Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, particularly in light of some continuing economic challenges in areas of the world in which we and our suppliers operate; |
| · | Complexities and inefficiencies introduced by the September 2013 fire at our Airedale facility in the U.K., including ourOur ability to continue to meet customer demands at temporary locations, to timelyeffectively and efficiently complete restructuring activities in our Europe segment and realize expected cost reductions and effectively deploy insurance proceeds to replace machineryincreased competitiveness and equipment and rebuild the facility with minimal financial impact from the business interruption, and to complete and relocate to the new facility in an efficient, timely manner;profitability as a result; |
| · | Our ability to complete the transition of our Washington, Iowa production to other facilities efficiently and effectively; |
| · | Costs and other effects of the remediation of environmental contamination; |
| · | Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith; |
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; and |
| · | Costs and other effects of unanticipated litigation or claims, and the increasingconstant pressures associated with rising healthcare and insurance costs. |
Strategic Risks:
| · | Our ability to identify and implementexecute appropriate growthopportunities to enable us to achieve our Strengthen, Diversify and diversification strategies thatGrow transformational strategy in order to position us for long-term success. |
Financial Risks:
| · | Our ability to fund our global liquidity requirements efficiently, particularly those in our Asia business segment, and meet our long-term commitments in the event of any unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
| · | The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, British pound, and Indian rupee relative to the U.S. dollar; and |
| · | Our ability to realize the benefits of tax assets in various jurisdictions in which we operate. |
In addition to the risks set forth above, we are subject to other risks and uncertainties as identified in our public filings with the U.S. Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.
ITEM 7A.7A . | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
In the normal course of business, we are subject to market exposure from changes in foreign exchange rates, interest rates, commodity prices, credit risk and economic conditions. Foreign Currency Risk
We are subject to the risk of changes in foreign currency exchange rates due to our operations in foreign countries. We have manufacturing facilities in Brazil, China, India, Mexico, South Africa, and throughout Europe. We also have joint ventures in China, Japan and South Korea. We sell and distribute products throughout the world and also purchase raw materials from foreign countries. As a result, our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which we do business. We attempt to mitigate foreign currency risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the functional currency of the subsidiary engaging in the transaction. Our financial results are principally exposed to changes in exchange rates between the U.S. dollar and the European currencies, primarily the euro, and changes between the U.S. dollar and the Brazilian real.real, and between the euro and the British pound. In fiscal 2016, 2015, 2014, and 2013,2014, more than 50 percent of our sales were generated in countries outside the U.S. A change in foreign exchange rates will positively or negatively affect our sales; however, this impact will be offset, usually to a large degree, with an offsettinga corresponding effect on our expenses. In fiscal 2015,2016, changes in foreign currencies negatively impacted our sales by $43$110 million; however, the impact on our operating income was less than $1only $4 million. Foreign currency exchange risk can be estimated by measuring the impact of a near-term adverse movement of 10 percent in foreign currency exchange rates. If these rates were 10 percent higher or lower during fiscal 2015,2016, there would not have been a material impact on our fiscal 20152016 earnings. We maintain, from time to time, foreign-denominated, long-term debt obligations and long-term intercompany loans that are subject to foreign currency exchange risk. As of March 31, 2015, there were no third-party foreign-denominated, long-term debt obligations or2016, we did not have any long-term intercompany loans for which changes in foreign currency exchange rates would impact our net earnings. From time to time, we enter into currency rate derivative contracts to manage the foreign exchange rate exposure on these types of loans. These derivative instruments are typically not treated as hedges, and accordingly, gains or losses on the derivatives are recorded in other income and expense in the consolidated statements of operations and act to offset any currency movement on the outstanding loans receivable or payable.
Interest Rate Risk
Our interest rate risk policies are designedWe actively seek to reduce the potential volatility of earnings that could arise from changes in interest rates. We generally utilize a mixture of debt maturities and both fixed-rate and floating-rate debt to manage exposure to changes in interest rates. Our domestic revolving credit facility is based on a variable interest rate of London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points, depending on our leverage ratio. We are subject to risk of fluctuations in LIBOR and changes in our leverage ratio, which would affect the variable interest rate on our revolving credit facility and could create variability in interest expense. There were no borrowings outstanding under the revolving credit facility as of March 31, 2015.2016. Based on our outstanding debt with variable interest rates at March 31, 2015,2016, a 100 basis point increase in interest rates would increase our annual interest expense in fiscal 20162017 by less than $1 million.
Commodity Price Risk
We are dependent upon the supply of raw materials and supplies in the production process and, from time to time, enter into firm purchase commitments for aluminum, copper, nickel, and natural gas. We maintain agreements with certain customers to pass through specified raw material price fluctuations in order to mitigate commodity price risk. The majority of these agreements contain provisions in which the pass-through of the price fluctuations can lag behind the actual fluctuations by three months or longer, and typically the arrangements are limited to the underlying material cost based upon the London Metal Exchange.
Credit Risk
Credit risk represents the possibility of loss from a customer's failurecustomer failing to make payment according to contract terms. Our principal credit risk consists of outstanding trade accounts receivable. At March 31, 2015, 472016, 45 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, commercial vehicle, and off-highway markets and are influenced by similar market and general economic factors. In the past, credit losses from our customers have not been significant.
We manage credit risk through a focus on the following:
| · | Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. OurWe consider our holdings in cash and investments were consideredto be stable and secure at March 31, 2015;2016; |
| · | Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer's financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer's financial condition and applicable business news; |
| · | Pension assets – We have retained outside advisors to assist in the management of the assets in our pension plans. In making investment decisions, we utilize an established risk management protocol that focuses on protection of the plan assets against downside risk. We ensure that investments within these plans provide appropriate diversification, the investments are monitored by investment teams, and portfolio managers adhere to the established investment policies. We believe the plan assets are subject to appropriate investment policies and controls; and |
| · | Insurance – We monitor our insurance providers to ensure they have acceptable financial ratings. We have not identified any concerns in this regard based upon our reviews. |
Economic Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate. We sell a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, automotive, off-highway, and building HVAC markets. We operate in diversified markets as a strategy for offsetting the risk associated with a downturn in any of the markets we serve. However, risk associated with market downturns, such as the global downturn experienced in fiscal 2009 and fiscal 2010, is still present.
We monitor economic conditions in the U.S., in our foreign markets and elsewhere. As we expand our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes and the like. We continue to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions.
We pursue new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon our ability to commercialize our investments. Current examples of new and emerging markets for us include those related to waste heat recovery, coils, and the Chinese and Indian markets. Our investment in these areas is subject to the risks associated with business integration, technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
We anticipate that continued recovery from the global recessionwithin some of our geographic and economicend markets, and particularly growth in China may put production pressure on certain suppliers of our raw materials. In particular, there are a limited number of suppliers of aluminum, copper, and steel material. We are exposed to the risk of suppliers of certain raw materials not being able to meet customer demand as they may not increase their output capacity as quickly as customers increase their orders, and of increased prices being charged by raw material suppliers.
In addition, we purchase parts from suppliers that use our tooling to create the parts. In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts. As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require. Even in situations where suppliers are manufacturing parts without the use of our tooling, we face the challenge of obtaining consistently high-quality parts from suppliers that are financially stable. We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate higher-risk supplier situations.
In addition to the above risks on the supply side, we are also exposed to risks associated with demands by our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, but these agreements often contain provisions for future price reductions. In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: We have enteredFrom time to time, we enter into futures contracts from time to time, related to certain forecasted purchases of aluminum and copper. Our strategy wasis to reduce our exposure to changing market prices for future purchases of these commodities. In fiscal 2016, 2015, 2014, and 2013,2014, expenses related to commodity derivative contracts totaled less than $1 million $1 million, and $5 million, respectively.each year. Foreign currency forward contracts: Our foreign exchange risk management strategy uses derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. We have not designated these forward contracts as hedges. Accordingly, we record unrealized gains and losses related to the change in the fair value of the contracts in other income and expense. Gains and losses on these foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
Counterparty risks: We manage counterparty risks by ensuring that counterparties to derivative instruments have credit ratings acceptable to us. At March 31, 2015,2016, all counterparties had a sufficient long-term credit rating. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions, except per share amounts)
| | 2015 | | | 2014 | | | 2013 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | | Cost of sales | | | 1,249.9 | | | | 1,239.4 | | | | 1,167.4 | | Gross profit | | | 246.5 | | | | 238.2 | | | | 208.6 | | Selling, general and administrative expenses | | | 184.5 | | | | 181.7 | | | | 166.3 | | Restructuring expenses | | | 4.7 | | | | 16.1 | | | | 17.0 | | Impairment charges | | | 7.8 | | | | 3.2 | | | | 25.9 | | Gain on sale of wind tunnel | | | (3.2 | ) | | | - | | | | - | | Operating income (loss) | | | 52.7 | | | | 37.2 | | | | (0.6 | ) | Interest expense | | | (11.7 | ) | | | (12.4 | ) | | | (12.6 | ) | Other income (expense) – net | | | 0.2 | | | | (0.8 | ) | | | 0.2 | | Earnings (loss) from continuing operations before income taxes | | | 41.2 | | | | 24.0 | | | | (13.0 | ) | (Provision) benefit for income taxes | | | (19.0 | ) | | | 107.9 | | | | (9.8 | ) | Earnings (loss) from continuing operations | | | 22.2 | | | | 131.9 | | | | (22.8 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) | | | 22.8 | | | | 131.9 | | | | (22.8 | ) | Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Net earnings (loss) attributable to Modine | | $ | 21.8 | | | $ | 130.4 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Earnings (loss) per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.45 | | | $ | 2.75 | | | $ | (0.52 | ) | Diluted | | $ | 0.44 | | | $ | 2.72 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.46 | | | $ | 2.75 | | | $ | (0.52 | ) | Diluted | | $ | 0.45 | | | $ | 2.72 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | | | Basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | Diluted | | | 47.8 | | | | 47.6 | | | | 46.6 | |
| | 2016 | | 2015 | | 2014 | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | | Cost of sales | | | 1,129.0 | | | | 1,249.9 | | | | 1,239.4 | | Gross profit | | | 223.5 | | | | 246.5 | | | | 238.2 | | Selling, general and administrative expenses | | | 204.5 | | | | 184.5 | | | | 181.7 | | Restructuring expenses | | | 16.6 | | | | 4.7 | | | | 16.1 | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | Operating (loss) income | | | (7.5 | ) | | | 52.7 | | | | 37.2 | | Interest expense | | | (11.1 | ) | | | (11.7 | ) | | | (12.4 | ) | Other income (expense) – net | | | 8.7 | | | | 0.2 | | | | (0.8 | ) | (Loss) earnings from continuing operations before income taxes | | | (9.9 | ) | | | 41.2 | | | | 24.0 | | Benefit (provision) for income taxes | | | 8.9 | | | | (19.0 | ) | | | 107.9 | | (Loss) earnings from continuing operations | | | (1.0 | ) | | | 22.2 | | | | 131.9 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings | | | (1.0 | ) | | | 22.8 | | | | 131.9 | | Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Net (loss) earnings attributable to Modine | | $ | (1.6 | ) | | $ | 21.8 | | | $ | 130.4 | | | | | | | | | | | | | | | (Loss) earnings per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | Diluted | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | | | | | | | | | | | | | | Net (loss) earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | Diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | Basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | Diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | 2015 | | | 2014 | | | 2013 | | Net earnings (loss) | | $ | 22.8 | | | $ | 131.9 | | | $ | (22.8 | ) | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | (68.2 | ) | | | 9.7 | | | | (17.1 | ) | Defined benefit plans, net of income taxes of ($13.2), $9.8 and $0 million | | | (26.7 | ) | | | 13.9 | | | | (23.6 | ) | Cash flow hedges, net of income taxes of $0, $0.6 and $0 million | | | - | | | | 1.1 | | | | 2.6 | | Total other comprehensive income (loss) | | | (94.9 | ) | | | 24.7 | | | | (38.1 | ) | | | | | | | | | | | | | | Comprehensive income (loss) | | | (72.1 | ) | | | 156.6 | | | | (60.9 | ) | Comprehensive income attributable to noncontrolling interest | | | (0.8 | ) | | | (1.7 | ) | | | (1.4 | ) | Comprehensive income (loss) attributable to Modine | | $ | (72.9 | ) | | $ | 154.9 | | | $ | (62.3 | ) |
| | 2016 | | 2015 | | 2014 | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | 4.6 | | | | (68.2 | ) | | | 9.7 | | Defined benefit plans, net of income taxes of $11.8, ($13.2) and $9.8 million | | | 19.7 | | | | (26.7 | ) | | | 13.9 | | Cash flow hedges, net of income taxes of $0, $0 and $0.6 million | | | - | | | | - | | | | 1.1 | | Total other comprehensive income (loss) | | | 24.3 | | | | (94.9 | ) | | | 24.7 | | | | | | | | | | | | | | | Comprehensive income (loss) | | | 23.3 | | | | (72.1 | ) | | | 156.6 | | Comprehensive income attributable to noncontrolling interest | | | (0.5 | ) | | | (0.8 | ) | | | (1.7 | ) | Comprehensive income (loss) attributable to Modine | | $ | 22.8 | | | $ | (72.9 | ) | | $ | 154.9 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS March 31, 20152016 and 20142015 (In millions, except per share amounts)
| | 2015 | | | 2014 | | ASSETS | | | | | | | Cash and cash equivalents | | $ | 70.5 | | | $ | 87.2 | | Trade accounts receivable – net | | | 192.9 | | | | 221.1 | | Inventories | | | 107.7 | | | | 116.8 | | Deferred income taxes | | | 13.4 | | | | 13.0 | | Other current assets | | | 79.7 | | | | 60.7 | | Total current assets | | | 464.2 | | | | 498.8 | | Property, plant and equipment – net | | | 322.1 | | | | 359.6 | | Intangible assets – net | | | 9.9 | | | | 12.4 | | Goodwill | | | 16.2 | | | | 28.7 | | Deferred income taxes | | | 102.7 | | | | 98.6 | | Other noncurrent assets | | | 16.5 | | | | 34.2 | | Total assets | | $ | 931.6 | | | $ | 1,032.3 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | Short-term debt | | $ | 18.6 | | | $ | 32.4 | | Long-term debt – current portion | | | 0.5 | | | | 0.8 | | Accounts payable | | | 152.0 | | | | 171.1 | | Accrued compensation and employee benefits | | | 56.7 | | | | 70.8 | | Other current liabilities | | | 83.4 | | | | 82.1 | | Total current liabilities | | | 311.2 | | | | 357.2 | | Long-term debt | | | 129.6 | | | | 131.2 | | Deferred income taxes | | | 3.4 | | | | 7.3 | | Pensions | | | 110.4 | | | | 81.0 | | Other noncurrent liabilities | | | 16.4 | | | | 27.0 | | Total liabilities | | | 571.0 | | | | 603.7 | | Commitments and contingencies (see Note 19) | | | | | | | | | Shareholders' equity: | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 48.6 million and 48.3 million shares | | | 30.4 | | | | 30.2 | | Additional paid-in capital | | | 180.6 | | | | 175.7 | | Retained earnings | | | 359.8 | | | | 338.0 | | Accumulated other comprehensive loss | | | (198.6 | ) | | | (103.9 | ) | Treasury stock, at cost, 0.7 million shares | | | (16.2 | ) | | | (15.2 | ) | Total Modine shareholders' equity | | | 356.0 | | | | 424.8 | | Noncontrolling interest | | | 4.6 | | | | 3.8 | | Total equity | | | 360.6 | | | | 428.6 | | Total liabilities and equity | | $ | 931.6 | | | $ | 1,032.3 | |
| | 2016 | | 2015 | ASSETS | | | | | | | Cash and cash equivalents | | $ | 68.9 | | | $ | 70.5 | | Trade accounts receivable – net | | | 189.1 | | | | 192.9 | | Inventories | | | 111.0 | | | | 107.7 | | Other current assets | | | 43.5 | | | | 79.7 | | Total current assets | | | 412.5 | | | | 450.8 | | Property, plant and equipment – net | | | 338.6 | | | | 322.1 | | Intangible assets – net | | | 8.2 | | | | 9.9 | | Goodwill | | | 15.8 | | | | 16.2 | | Deferred income taxes | | | 123.1 | | | | 115.4 | | Other noncurrent assets | | | 22.7 | | | | 16.5 | | Total assets | | $ | 920.9 | | | $ | 930.9 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | Short-term debt | | $ | 28.6 | | | $ | 18.6 | | Long-term debt – current portion | | | 8.5 | | | | 0.5 | | Accounts payable | | | 142.4 | | | | 152.0 | | Accrued compensation and employee benefits | | | 58.6 | | | | 56.7 | | Other current liabilities | | | 35.5 | | | | 83.0 | | Total current liabilities | | | 273.6 | | | | 310.8 | | Long-term debt | | | 125.5 | | | | 129.6 | | Deferred income taxes | | | 4.2 | | | | 3.1 | | Pensions | | | 118.6 | | | | 110.4 | | Other noncurrent liabilities | | | 16.3 | | | | 16.4 | | Total liabilities | | | 538.2 | | | | 570.3 | | Commitments and contingencies (see Note 19) | | | | | | | | | Shareholders' equity: | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 49.0 million and 48.6 million shares | | | 30.6 | | | | 30.4 | | Additional paid-in capital | | | 185.6 | | | | 180.6 | | Retained earnings | | | 358.2 | | | | 359.8 | | Accumulated other comprehensive loss | | | (174.2 | ) | | | (198.6 | ) | Treasury stock, at cost, 1.6 million and 0.7 million shares | | | (24.0 | ) | | | (16.2 | ) | Total Modine shareholders' equity | | | 376.2 | | | | 356.0 | | Noncontrolling interest | | | 6.5 | | | | 4.6 | | Total equity | | | 382.7 | | | | 360.6 | | Total liabilities and equity | | $ | 920.9 | | | $ | 930.9 | |
The notes to consolidated financial statements are an integral part of these statements. 4140
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | 2015 | | | 2014 | | | 2013 | | Cash flows from operating activities: | | | | | | | | | | Net earnings (loss) | | $ | 22.8 | | | $ | 131.9 | | | $ | (22.8 | ) | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 51.6 | | | | 58.1 | | | | 55.8 | | Insurance proceeds from Airedale fire | | | 12.9 | | | | 16.9 | | | | - | | Pension and postretirement expense | | | 2.3 | | | | 3.2 | | | | 1.9 | | Gain on sale of wind tunnel | | | (3.2 | ) | | | - | | | | - | | Impairment charges | | | 7.8 | | | | 3.2 | | | | 25.9 | | Loss from disposition of property, plant and equipment | | | 1.1 | | | | 2.6 | | | | 2.5 | | Deferred income taxes | | | 5.9 | | | | (116.1 | ) | | | 0.6 | | Stock-based compensation expense | | | 4.0 | | | | 3.6 | | | | 3.1 | | Other – net | | | (0.7 | ) | | | (0.5 | ) | | | 4.1 | | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | Trade accounts receivable | | | (0.1 | ) | | | (18.2 | ) | | | 15.1 | | Inventories | | | (4.2 | ) | | | (0.1 | ) | | | (0.8 | ) | Accounts payable | | | (2.4 | ) | | | 15.2 | | | | (3.2 | ) | Accrued compensation and employee benefits | | | (5.3 | ) | | | 17.5 | | | | 1.9 | | Other assets | | | (24.5 | ) | | | 2.1 | | | | (6.6 | ) | Other liabilities | | | (4.5 | ) | | | (14.9 | ) | | | (28.7 | ) | Net cash provided by operating activities | | | 63.5 | | | | 104.5 | | | | 48.8 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (58.3 | ) | | | (53.1 | ) | | | (49.8 | ) | Insurance proceeds from Airedale fire | | | 12.2 | | | | 20.7 | | | | - | | Costs to replace building and equipment damaged in Airedale fire | | | (16.7 | ) | | | (4.2 | ) | | | - | | Proceeds from dispositions of assets | | | 7.6 | | | | 2.9 | | | | 0.4 | | Purchases of short-term investments | | | (5.2 | ) | | | - | | | | - | | Proceeds from maturities of short-term investments | | | 2.4 | | | | - | | | | - | | Acquisitions – net of cash acquired | | | - | | | | (7.8 | ) | | | (4.9 | ) | Other – net | | | 0.8 | | | | - | | | | (1.6 | ) | Net cash used for investing activities | | | (57.2 | ) | | | (41.5 | ) | | | (55.9 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 36.4 | | | | 152.6 | | | | 166.7 | | Repayments of debt | | | (50.9 | ) | | | (152.4 | ) | | | (167.1 | ) | Financing fees paid | | | (0.1 | ) | | | (0.9 | ) | | | - | | Dividend paid to noncontrolling interest | | | - | | | | (0.5 | ) | | | - | | Other – net | | | - | | | | (0.3 | ) | | | 0.7 | | Net cash (used for) provided by financing activities | | | (14.6 | ) | | | (1.5 | ) | | | 0.3 | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (8.4 | ) | | | 1.9 | | | | (0.8 | ) | Net (decrease) increase in cash and cash equivalents | | | (16.7 | ) | | | 63.4 | | | | (7.6 | ) | Cash and cash equivalents - beginning of year | | | 87.2 | | | | 23.8 | | | | 31.4 | | Cash and cash equivalents - end of year | | $ | 70.5 | | | $ | 87.2 | | | $ | 23.8 | |
| | 2016 | | 2015 | | 2014 | Cash flows from operating activities: | | | | | | | | | | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 50.2 | | | | 51.6 | | | | 58.1 | | Insurance proceeds from Airedale fire | | | 5.9 | | | | 12.9 | | | | 16.9 | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | Pension and postretirement expense | | | 45.1 | | | | 2.3 | | | | 3.2 | | Loss from disposition of property, plant and equipment | | | 0.4 | | | | 1.1 | | | | 2.6 | | Deferred income taxes | | | (18.8 | ) | | | 5.9 | | | | (116.1 | ) | Stock-based compensation expense | | | 4.9 | | | | 4.0 | | | | 3.6 | | Other – net | | | (0.3 | ) | | | (0.7 | ) | | | (0.5 | ) | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | Trade accounts receivable | | | 8.0 | | | | (0.1 | ) | | | (18.2 | ) | Inventories | | | (2.7 | ) | | | (4.2 | ) | | | (0.1 | ) | Accounts payable | | | (9.9 | ) | | | (2.4 | ) | | | 15.2 | | Accrued compensation and employee benefits | | | 0.8 | | | | (5.3 | ) | | | 17.5 | | Other assets | | | (14.5 | ) | | | (24.5 | ) | | | 2.1 | | Other liabilities | | | (5.6 | ) | | | (4.5 | ) | | | (14.9 | ) | Net cash provided by operating activities | | | 72.4 | | | | 63.5 | | | | 104.5 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (62.8 | ) | | | (58.3 | ) | | | (53.1 | ) | Insurance proceeds from Airedale fire | | | 27.4 | | | | 12.2 | | | | 20.7 | | Costs to replace building and equipment damaged in Airedale fire | | | (41.7 | ) | | | (16.7 | ) | | | (4.2 | ) | Acquisitions – net of cash acquired | | | (1.4 | ) | | | - | | | | (7.8 | ) | Proceeds from dispositions of assets | | | 0.4 | | | | 7.6 | | | | 2.9 | | Purchases of short-term investments | | | (2.7 | ) | | | (5.2 | ) | | | - | | Proceeds from maturities of short-term investments | | | 2.1 | | | | 2.4 | | | | - | | Other – net | | | 0.9 | | | | 0.8 | | | | - | | Net cash used for investing activities | | | (77.8 | ) | | | (57.2 | ) | | | (41.5 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 38.0 | | | | 36.4 | | | | 152.6 | | Repayments of debt | | | (27.1 | ) | | | (50.9 | ) | | | (152.4 | ) | Purchases of treasury stock under share repurchase program | | | (6.9 | ) | | | - | | | | - | | Financing fees paid | | | - | | | | (0.1 | ) | | | (0.9 | ) | Dividend paid to noncontrolling interest | | | (0.9 | ) | | | - | | | | (0.5 | ) | Other – net | | | (0.4 | ) | | | - | | | | (0.3 | ) | Net cash provided by (used for) financing activities | | | 2.7 | | | | (14.6 | ) | | | (1.5 | ) | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | 1.1 | | | | (8.4 | ) | | | 1.9 | | Net (decrease) increase in cash and cash equivalents | | | (1.6 | ) | | | (16.7 | ) | | | 63.4 | | Cash and cash equivalents - beginning of year | | | 70.5 | | | | 87.2 | | | | 23.8 | | Cash and cash equivalents - end of year | | $ | 68.9 | | | $ | 70.5 | | | $ | 87.2 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | Common stock | | | Additional paid-in capital | | | Retained earnings | | | Accumulated other comprehensive loss | | | Treasury stock, at cost | | | Non- | | | Total | | | | Shares | | | Amount | | | | | | | | | | | | | | Balance, March 31, 2012 | | | 47.4 | | | $ | 29.6 | | | $ | 168.3 | | | $ | 231.8 | | | $ | (90.3 | ) | | $ | (14.5 | ) | | $ | 1.2 | | | $ | 326.1 | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (24.2 | ) | | | - | | | | - | | | | - | | | | (24.2 | ) | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | - | | | | (38.1 | ) | Stock options and awards including related tax benefits | | | 0.4 | | | | 0.3 | | | | (0.2 | ) | | | - | | | | - | | | | - | | | | - | | | | 0.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.1 | ) | | | - | | | | (0.1 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.1 | | | | - | | | | - | | | | - | | | | - | | | | 3.1 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.4 | | | | 1.4 | | Balance, March 31, 2013 | | | 47.8 | | | | 29.9 | | | | 171.2 | | | | 207.6 | | | | (128.4 | ) | | | (14.6 | ) | | | 2.6 | | | | 268.3 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | | Stock options and awards including related tax benefits | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | | Balance, March 31, 2014 | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) | Stock options and awards including related tax benefits | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | | Balance, March 31, 2015 | | | 48.6 | | | $ | 30.4 | | | $ | 180.6 | | | $ | 359.8 | | | $ | (198.6 | ) | | $ | (16.2 | ) | | $ | 4.6 | | | $ | 360.6 | |
| | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other comprehensive | | | Treasury stock, at | | | Non- controlling | | | Total | | | Shares | | | Amount | | | capital | | | earnings | | | loss | | | cost | | | interest | | | | | Balance, March 31, 2013 | | | 47.8 | | | $ | 29.9 | | | $ | 171.2 | | | $ | 207.6 | | | $ | (128.4 | ) | | $ | (14.6 | ) | | $ | 2.6 | | | $ | 268.3 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | | Stock options and awards including related tax benefits | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | | Balance, March 31, 2014 | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) | Stock options and awards including related tax benefits | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | | Balance, March 31, 2015 | | | 48.6 | | | | 30.4 | | | | 180.6 | | | | 359.8 | | | | (198.6 | ) | | | (16.2 | ) | | | 4.6 | | | | 360.6 | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (1.6 | ) | | | - | | | | - | | | | - | | | | (1.6 | ) | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.4 | | | | - | | | | (0.1 | ) | | | 24.3 | | Stock options and awards including related tax benefits | | | 0.4 | | | | 0.2 | | | | 0.1 | | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7.8 | ) | | | - | | | | (7.8 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.9 | | Contribution by noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2.3 | | | | 2.3 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.6 | | | | 0.6 | | Balance, March 31, 2016 | | | 49.0 | | | $ | 30.6 | | | $ | 185.6 | | | $ | 358.2 | | | $ | (174.2 | ) | | $ | (24.0 | ) | | $ | 6.5 | | | $ | 382.7 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 1: | Significant Accounting Policies |
Nature of operations: Modine Manufacturing Company (“Modine” or the “Company”) specializes in thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets. The Company is a leading global developer, manufacturer and marketer of heat exchangers and systems for use in on-highway and off-highway original equipment manufacturer (“OEM”) vehicular applications, and a wide array of building, industrial and refrigeration markets. ProductThe Company’s product lines include radiators and radiator cores, condensers, oil coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation (“EGR”) coolers, and building heating, ventilating and air conditioning (“HVAC”) equipment.equipment, and coils.
Basis of presentation: The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States. These principles require management to make certain estimates and assumptions in determining assets, liabilities, revenue, expenses and related disclosures. Actual amounts could differ materially from those estimates.
Consolidation principles: The consolidated financial statements include the accounts of Modine Manufacturing Company and its majority-owned or Modine-controlled subsidiaries. The Company eliminates intercompany transactions and balances in consolidation.
The Company accounts for investments in non-consolidated affiliated companies in which its ownership is 20 percent or more using the equity method. The Company states these investments at cost, plus or minus a proportionate share of undistributed net income (loss). The Company includes Modine’s share of the affiliatesaffiliate’s net income (loss) in other income and expense. See Note 12 for further discussion.additional information.
Discontinued operations: During fiscal 2009, the Company sold its Electronics Cooling business. The buyer financed a portion of the selling price by issuing promissory notes payable to Modine. During fiscal 2015, the Company received $1.5 million from the buyer, which represented the final payment on the promissory notes. The Company had previously recorded a reserve against a portion of the promissory notes due to collectability concerns. As a result, the Company recorded a gain of $0.9 million ($0.6 million after income taxes) during fiscal 2015.
Assets held for sale: The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the assets for sale at a price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell.sell, within other noncurrent assets. The Company ceases to record depreciation expense at the time of designation as held for sale.
Revenue recognition: The Company recognizes sales revenue, including agreed upon commodity price increases or decreases,prices, when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product and risk of loss have transferred to the customer, persuasive evidence of an arrangement exists, and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The Company makes appropriate provisions for uncollectible accounts receivable based on historical data or specific customer economic data. The Company records sales discounts, which are offered for prompt payment by certain customers, as a reduction to net sales.
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 20152016 and 2014,2015, Company-owned tooling totaled $18.7$18.8 million and $28.6$18.7 million, respectively. In certain instances, the Company makes upfront payments for customer-owned tooling costs, and subsequently receives reimbursement from customers for the upfront payments. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 20152016 and 2014,2015, cost reimbursement receivables related to customer-owned tooling totaled $11.6$8.5 million and $10.3$11.6 million, respectively.
Warranty: The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. The Company records warranty expense based upon historical and current claims data or based onupon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 15 for further discussion.additional information. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its OEM customers in cost of sales, and related amounts billed to these customers in net sales. The Company records shipping and handling costs incurred upon the shipment of products to its HVAC and aftermarket customers in selling, general and administrative (“SG&A”) expenses. For the years ended March 31, 2016, 2015, 2014, and 2013, these2014, shipping and handling costs recorded in SG&A expenses were $2.5 million, $4.9 million, $4.0 million, and $4.3$4.0 million, respectively.
Research and development: The Company expenses research and development costs as incurred within SG&A expenses. For the years ended March 31, 2016, 2015, 2014, and 2013,2014, research and development costs charged to operations totaled $61.1 million, $62.0 million, $61.7 million, and $68.4$61.7 million, respectively.
Translation of foreign currencies: The Company translates assets and liabilities of foreign subsidiaries and equity investments into U.S. dollars at the period-end exchange rates, and translates income and expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders' equity. The Company includes foreign currency transaction gains or losses in the statement of operations within other income and expense.
Derivative instruments: The Company enters into derivative financial instruments from time to time to manage certain financial risks. The Company enters into futures contracts to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. These instruments are used to manage financial risks and are not speculative. See Note 18 for further discussion.additional information.
Income taxes: The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. See Note 8 for further discussion.additional information.
Earnings per share: The Company calculates basic earnings per share based upon the weighted averageweighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. Restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company. Therefore, these restricted stock awards are included in computing earnings per share pursuant to the two-class method. See Note 9 for further discussion.additional information.
Cash and cash equivalents: The Company considers all highly liquidhighly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the amount of those un-presented checks is included in accounts payable.
Short-term investments: The Company invests in time deposits with original maturities of more than three months but no more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2016 and 2015, the Company’s short-term investments totaled $3.3 million and $2.8 million, respectively.
Deferred compensation trust: The Company maintains a deferred compensation trust to fund future obligations under its non-qualified deferred compensation plan. The trust’s investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Trade accounts receivable: The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company recorded an allowance for doubtful accounts $1.0of $0.5 million and $1.1$1.0 million at March 31, 2016 and 2015, and 2014, respectively, representsrepresenting its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable without recourse to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During the years ended March 31, 2016, 2015, 2014, and 2013,2014, the Company sold, without recourse, $71.3 million, $87.0 million, $82.4 million, and $99.1$82.4 million of accounts receivable to accelerate cash receipts. During each of the years ended March 31, 2016, 2015, 2014, and 2013,2014, the Company recorded a loss on the sale of accounts receivables of $0.3 million in the consolidated statements of operations. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost on a first-in, first-out basis or weighted average basis, or marketand net realizable value.
Property, plant and equipment: The Company statesrecords property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful life of the asset. The Company charges maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations.
Goodwill: The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company recognizes an impairment loss if the book value of goodwill exceeds the fair value. The Company performed theits goodwill impairment test as of March 31, 2015 and as a2016, which did not result recordedin an impairment charge of $7.8 million related to its South America segment.charge. See Note 14 for further discussion.additional information.
Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment and writes them down to fair value when facts andwhenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the assets may not be recoverable through estimated future undiscounted cash flows. If an impairment has occurred, the Company writes down the asset toexceeds its estimated fair value and recognizes the impairment loss as a charge against current operations.value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets. See Note 6 for further discussion.additional information.
Environmental expenditures:liabilities: The Company capitalizesrecords liabilities for environmental expenditures that qualify as property, plantassessments and equipment or substantially increaseremediation efforts in the economic value or extend the useful life of an asset. The Company expenses all other expenditures as incurred. If a loss arising from environmental mattersperiod which its responsibility is probable and the costs can be reasonably estimated,estimated. To the Company records an accrual forextent that the amountrequired remediation procedures change, or additional contamination is identified, the Company’s estimate of the estimated loss.environmental liabilities may change. See Note 19 for further discussion.additional information.
Self-insurance reserves: The Company retains a portion of the financial risk for various insurance coverage, including property, general liability, workers compensation, and employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to operations. The Company reviews and updates the evaluationamount of insurance claims and the reasonableness of the relatedits insurance-related reserves on a quarterly basis.
Stock-based compensation: The Company recognizes stock-based compensation using the fair value method. Accordingly, compensation expense for stock options, restricted stock and performance-based stock awards is calculated based upon the fair value of the instruments at the time of grant, and is recognized as expense over the respective vesting periods. See Note 5 for further discussion.
Out of period adjustments: During the second quarter of fiscal 2014, the Company recorded a customer pricing adjustment that related to prior fiscal years. The impact of this error to the second quarter of fiscal 2014 decreased pre-tax earnings by $0.6 million ($0.5 million after-tax). During the first quarter of fiscal 2013, the Company identified an error related to certain commodity hedges that should have been deemed ineffective in the fourth quarter of fiscal 2012, which overstated pre-tax earnings by $0.5 million in the first quarter of fiscal 2013. The Company does not believe that these errors were material to its financial statements for fiscal 2014 or 2013.additional information.
New accounting guidance: In May 2014,March 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify several aspects of accounting for share-based payment transactions, including the income tax consequences. This guidance is effective for the Company’s first quarter of fiscal 2018. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance. Upon adoption of this new guidance, the Company will be required to recognize most leases on its balance sheet. This guidance is effective for the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In November 2015, the FASB issued new guidance, as part of its simplification initiative, that requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The Company adopted this guidance, on a retrospective basis, for its fiscal year ending March 31, 2016. As a result, the Company reclassified approximately $13.0 million of deferred tax assets from current assets to noncurrent assets as of March 31, 2015 to conform to the current-period presentation. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about revenue arising from contracts with customers. This new guidance is effective for the Company’s first quarter of fiscal 2018 at the earliest.2019. The Company is currently evaluating the impact the newthis guidance will have on its consolidated financial statements. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Supplemental cash flow information:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Interest paid | | $ | 10.3 | | | $ | 12.6 | | | $ | 11.6 | | Income taxes paid | | | 15.9 | | | | 11.4 | | | | 12.4 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Interest paid | | $ | 10.7 | | | $ | 10.3 | | | $ | 12.6 | | Income taxes paid | | | 10.1 | | | | 15.9 | | | | 11.4 | |
Note 2: | Airedale Facility Fire |
On September 6, 2013, a fire caused significant destruction to the Company’s Airedale manufacturing facility and offices in Rawdon (Leeds), United Kingdom. The Company reports Airedale’s financial results within the Building HVAC segment (previously known as Commercial Products).segment. There were no injuries caused by the fire. The Rawdon facility, which wasis leased, was used to manufacture cooling products and solutions for a variety of applications, including data centers, clean rooms, retail, leisure and process cooling. The fire caused a temporary manufacturing suspensionCompany suspended operations at the Rawdon site;site as a result of the fire; however, the Companyit transferred its operations to temporary facilities and is in the process of rebuildingwhile it rebuilt the leased facility. The Company expects to completecompleted the reconstruction and return its operationsrelocation to the Rawdon sitefacility in late fiscal 2016.
The Company maintainsCompany’s insurance coverage forcovered damage to the leased facility, equipment, inventory, and other assets, as well as business interruption and lost profits, and recovery-related expenses caused by the fire. TheSince the date of the fire, the Company believes that reimbursementhas received cumulative cash proceeds of $96.0 million from its insurance provider is probable for substantially allcovered losses, and has recorded losses and costs directly attributablecaused by the fire in the same statement of operations line as the related insurance recovery. In fiscal 2016, the Company recorded a $9.5 million gain within other income related to an insurance settlement for equipment losses. This gain represents the replacement assets’ cost in excess of the carrying value of the equipment at the time it was destroyed by the fire. During fiscal 2015, the Company recorded $4.6 million of recoveries from business interruption insurance relating to fiscal 2015 and 2014 lost profits within SG&A expenses. Since the date of the fire, the Company has received cumulative cash proceeds of $62.7 million from its insurance provider for covered losses. In addition, the Company has written-off inventory of $4.7 million and equipment with a net book value of $1.4 million and incurred costs directly attributable to the fire totaling $22.0 million. The Company has recorded these losses and costs, which totaled $28.1 million, in the same statement of operations line as the related insurance recovery.
The terms of the Rawdon lease agreement obligateobligated the Company to rebuild the damaged facility. Through March 31, 2015,Upon completion of the rebuilt facility in fiscal 2016, the Company has capitalized reconstruction costs of $21.2 million,fulfilled this obligation and has recorded this asset on the consolidated balance sheet within other current assets. The Company currently estimates costs of reconstruction will total $48.0 million; accordingly, we recorded a $48.0 million other current liability as of March 31, 2015. As of March 31, 2015, we recorded an $18.0 million receivable from the Company’s insurance provider within other current assets, which represented covered losses to date in excess of cumulative cash proceeds received. As of March 31, 2014,removed both the liability to rebuild the facility was $45.0 million ($37.0 million withinand the capitalized reconstruction costs from its consolidated balance sheet. As of March 31, 2015, the other current liabilitiesliability to rebuild the facility was $48.0 million and $8.0 million within other noncurrent liabilities), and the receivablecurrent assets related to receivables from the Company’s insurance provider was $25.4 million ($18.4 million within other current assets and $7.0 million within other noncurrent assets).capitalized reconstructions costs totaled $39.2 million.
On January 29, 2016, the Company formed a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co. Ltd. of Yangzhou, China, of which it owns 67%, and the joint venture partner, Jiangsu Puxin Heat Exchange System Co., Ltd, owns 33%. This joint venture, which is reported in the Asia segment, will expedite the Company’s introduction of stainless steel heat exchangers for the light-, medium-, and heavy-duty commercial vehicle markets in China. The Company contributed cash of $1.4 million, with additional cash consideration of $0.5 million payable after six months subject to the sellers’ indemnification obligations under the agreement, and equipment and other assets totaling $2.3 million. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in acquired equipment and other long-lived assets totaling $1.5 million and working capital net assets of $0.8 million. The Company controls the primary management decisions and revenue-generating activities of the joint venture, and, therefore, the financial results of the joint venture are included in the Company’s consolidated financial statements.
On February 28, 2014, the Company acquired 100 percent of the shares of Barkell Limited of Consett, United Kingdom for cash consideration of $7.8 million, net of cash acquired. This acquisition provides Modine with an expanded product offering into the air handling market within the Building HVAC segment. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in intangible assets for acquired technology and customer relationships totaling $4.7 million; property, plant and equipment of $2.0 million; and working capital net assets of $1.1 million. Acquired technology consists of a fully developed product line and technical processes, and the customer relationships represent established sales channel and customer relationships. The Company is amortizing these acquired intangible assets over ten years.
On July 25, 2012, the Company completed the acquisition46
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The results of operations of these acquired businesses are included in the Company’s consolidated statements of operations since the dates of acquisition. The Company did not present pro forma financial information as the effectseffect of these acquisitions areis not material to theits results of operations or financial position. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2007, the Company acquired the remaining 50 percent of Radiadores Visconde Ltda. The purchase agreement included a $2.0 million note, which was payable subject to the resolution of certain obligations of the sellers. During fiscal 2013, the Company and the sellers reached a final resolution under which the Company is not obligated to pay the note to the sellers. As a result, the Company recorded a $2.0 million reduction to SG&A expenses in the South America segment during fiscal 2013.
Note 4: | Fair Value Measurements |
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
| ·● | Level 1 – Quoted prices for identical instruments in active markets. |
| ·● | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
| ·● | Level 3 – Model-derived valuations in which one or more significant inputs are not observable. |
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, fair value is based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash and cash equivalents, short-term investments, trade accounts receivable, and accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. The Company holds trading securities in a deferred compensation trust to fund obligations under Modine’s non-qualified deferred compensation plan. The securities’ fair values, which are recorded as other noncurrent assets, are determined based on quoted prices from active markets and classified within Level 1 of the valuation hierarchy. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. The fair values of the Company’s trading securities and deferred compensation obligations each totaled $3.0$3.2 million and $2.6$3.0 million at March 31, 20152016 and 2014,2015, respectively. The fair value of the Company’s long-term debt is disclosed in Note 16.
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2015 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 8.1 | | | $ | - | | | $ | 8.1 | | Common stocks | | | 40.5 | | | | 2.2 | | | | - | | | | 42.7 | | Corporate bonds | | | - | | | | 23.5 | | | | - | | | | 23.5 | | Pooled equity funds | | | 69.0 | | | | 11.4 | | | | - | | | | 80.4 | | Pooled fixed-income funds | | | 15.5 | | | | - | | | | - | | | | 15.5 | | U.S. government and agency securities | | | - | | | | 39.8 | | | | - | | | | 39.8 | | Other | | | 0.7 | | | | 6.3 | | | | - | | | | 7.0 | | Total | | $ | 125.7 | | | $ | 91.3 | | | $ | - | | | $ | 217.0 | |
| | March 31, 2016 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 5.8 | | | $ | 5.8 | | Common stocks | | | 23.7 | | | | 1.3 | | | | 25.0 | | Corporate bonds | | | - | | | | 8.4 | | | | 8.4 | | Pooled equity funds | | | 48.7 | | | | 7.3 | | | | 56.0 | | Pooled fixed-income funds | | | 26.3 | | | | - | | | | 26.3 | | U.S. government and agency securities | | | - | | | | 18.4 | | | | 18.4 | | Other | | | 0.4 | | | | 1.2 | | | | 1.6 | | Total | | $ | 99.1 | | | $ | 42.4 | | | $ | 141.5 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
| | March 31, 2014 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 11.3 | | | $ | - | | | $ | 11.3 | | Common stocks | | | 40.1 | | | | 2.1 | | | | - | | | | 42.2 | | Corporate bonds | | | - | | | | 21.3 | | | | - | | | | 21.3 | | Pooled equity funds | | | 68.9 | | | | 11.9 | | | | - | | | | 80.8 | | Pooled fixed-income funds | | | 14.1 | | | | - | | | | - | | | | 14.1 | | U.S. government and agency securities | | | - | | | | 37.0 | | | | - | | | | 37.0 | | Other | | | 1.6 | | | | 5.4 | | | | - | | | | 7.0 | | Total | | $ | 124.7 | | | $ | 89.0 | | | $ | - | | | $ | 213.7 | |
| | March 31, 2015 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 8.1 | | | $ | 8.1 | | Common stocks | | | 40.5 | | | | 2.2 | | | | 42.7 | | Corporate bonds | | | - | | | | 23.5 | | | | 23.5 | | Pooled equity funds | | | 69.0 | | | | 11.4 | | | | 80.4 | | Pooled fixed-income funds | | | 15.5 | | | | - | | | | 15.5 | | U.S. government and agency securities | | | - | | | | 39.8 | | | | 39.8 | | Other | | | 0.7 | | | | 6.3 | | | | 7.0 | | Total | | $ | 125.7 | | | $ | 91.3 | | | $ | 217.0 | |
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of common stocks, pooled equity funds and pooled fixed-income funds based on quoted prices from active markets and classifyclassified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain common stocks, corporate bonds, pooled equity funds and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 2016 and 2015, the Company held no Level 3 assets within its pension plans.
Assets held for sale: The Company valued assets held for sale based on Level 3 market-based valuation inputs. The carrying value of assets held for sale totaled $3.2$8.5 million and $11.6$3.2 million at March 31, 20152016 and 2014,2015, respectively. See Note 6 for further discussion.additional information.
Note 5: | Stock-Based Compensation |
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and executives that consists of restricted stock and stock option componentsoptions granted for retention and performance, (2) a discretionary equity program for management and other key employees, and (3) stock optionsawards and/or stock awardsoptions for non-employee directors. The Company’s Board of Directors and the Officer Nomination and Compensation Committee, as applicable, have discretionary authority to set the terms of the awards of stock under the Company’s Amended and Restated 2008 Incentive Compensation Plan (“Plan”). At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2015,2016, approximately 4.03.3 million shares authorized under the Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $4.9 million, $4.0 million, $3.6 million, and $3.1$3.6 million in fiscal 2016, 2015, 2014, and 2013,2014, respectively.
Stock Options: The Company recorded $0.9 million, $0.8$0.9 million, and $1.1$0.8 million of compensation expense related to stock options in fiscal 2016, 2015, 2014, and 2013,2014, respectively. The fair value of stock options that vested during fiscal 2016, 2015, 2014, and 20132014 was $0.9 million, $0.8$0.9 million, and $1.3$0.8 million, respectively. As of March 31, 2015,2016, the total compensation expense not yet recognized related to non-vested stock options was $1.7$2.0 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.72.5 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:
| | 2015 | | | 2014 | | | 2013 | | Weighted average fair value of options | | $ | 10.21 | | | $ | 7.76 | | | $ | 4.26 | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 2.1 | % | | | 1.3 | % | | | 0.9 | % | Expected volatility of the Company's stock | | | 76.1 | % | | | 88.7 | % | | | 87.4 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| | 2016 | | 2015 | | 2014 | Weighted-average fair value of options | | $ | 7.11 | | | $ | 10.21 | | | $ | 7.76 | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 1.9 | % | | | 2.1 | % | | | 1.3 | % | Expected volatility of the Company's stock | | | 66.9 | % | | | 76.1 | % | | | 88.7 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of the common stock on the date of grant. The risk-free interest rate was based on yields of U.S. Treasury zero-coupon issues with a term corresponding to the expected life of the options. The expected volatility assumption was based on changes in the Company’s historical common stock prices over the same time frame as the expected life of the awards. The expected dividend yield is zero as the Company currently does not anticipate paying dividends over the expected life of the options. The expected lives of the awards are based on historical patterns and the terms of the options. Outstanding options granted during fiscal 2015 and fiscal 2014 vest 25 percent annually for four years. All outstanding options granted prior to fiscal 2014 vested 25 percent on the grant date and 25 percent annually thereafter for the subsequent three years. The Company used a pre-vesting forfeiture rate of 2.5 percent for these periods as an estimate of expected forfeitures prior to completing the required service period.
A summary of stock option activity for fiscal 20152016 was as follows:
| | Shares | | | Weighted average exercise price | | | Weighted average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.6 | | | $ | 13.15 | | | | | | | | Granted | | | 0.1 | | | | 14.94 | | | | | | | | Exercised | | | (0.1 | ) | | | 8.71 | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 29.41 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 11.99 | | | | 5.3 | | | $ | 5.7 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2015 | | | 1.2 | | | $ | 12.13 | | | | 4.5 | | | $ | 4.9 | |
| | Shares | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.5 | | | $ | 11.99 | | | | | | | | Granted | | | 0.2 | | | | 11.39 | | | | | | | | Exercised | | | (0.1 | ) | | | 5.82 | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 27.33 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 10.82 | | | | 5.3 | | | $ | 3.0 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2016 | | | 1.1 | | | $ | 10.41 | | | | 4.3 | | | $ | 3.0 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20152016 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the fair value of Modine’s common shares.
Additional information related to stock options exercised during fiscal 2016, 2015, 2014, and 20132014 was as follows:
| | 2015 | | | 2014 | | | 2013 | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 1.1 | | | $ | 0.1 | | Proceeds from stock options exercised | | $ | 0.6 | | | $ | 1.1 | | | $ | 0.1 | |
| | 2016 | | | 2015 | | | 2014 | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 0.4 | | | $ | 1.1 | | Proceeds from stock options exercised | | $ | 0.5 | | | $ | 0.6 | | | $ | 1.1 | |
Restricted Stock: The Company recorded $3.5 million, $2.8 million, $2.2 million, and $1.8$2.2 million of compensation expense related to restricted stock in fiscal 2016, 2015, 2014 and 2013,2014, respectively. The fair value of restricted stock awards that vested during fiscal 2016, 2015, and 2014 and 2013 was $3.4 million, $2.3 million, $1.6 million, and $1.3$1.6 million, respectively. At March 31, 2015,2016, the Company had $4.6$4.7 million of total unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.52.4 years. The Company values restricted stock awards using the closing market value of its common shares on the date of grant. The restricted stock awards vest 25 percent annually for four years, with the exception of awards to non-employee directors, which fully vest upon grant.
A summary of restricted stock activity for fiscal 20152016 was as follows:
| | Shares | | | Weighted average price | | Non-vested balance, beginning | | | 0.6 | | | $ | 8.66 | | Granted | | | 0.3 | | | | 14.92 | | Vested | | | (0.2 | ) | | | 9.73 | | Non-vested balance, ending | | | 0.7 | | | $ | 10.68 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | Shares | | Weighted- average price | Non-vested balance, beginning | | | 0.7 | | | $ | 10.68 | | Granted | | | 0.3 | | | | 11.18 | | Vested | | | (0.4 | ) | | | 10.01 | | Non-vested balance, ending | | | 0.6 | | | $ | 11.29 | |
Restricted Stock – Performance-Based Shares: The Company recorded $0.5 million, $0.3 million $0.6 million and $0.2$0.6 million of compensation expense related to performance-based stock awards in fiscal 2016, 2015, 2014 and 2013,2014, respectively. At March 31, 2015,2016, the Company had $1.6$1.2 million of total unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be recognized over a weighted-average period of 1.81.7 years. The Company values performance-based stock awards using the closing market value of its common shares aton the date of grant. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shares are earned under the performance portion of the restricted stock award program based upon the attainment of certain financial goals over a three-year period and are awarded atafter the end of that three-year performance period, if the performance targets have been achieved. A new performance period may begin each fiscal year; therefore, multiple performance periods, with distinct goals, may operate simultaneously.
The performance componentcomponents of the programprograms initiated in fiscal 2016 and fiscal 2015 waswere based upon both a target three-year average consolidated return on average capital employed (“ROACE”) and a target three-year average annual revenue growth at the end of thea three-year performance period, coveringcommencing with the fiscal 2015 through fiscal 2017.year of grant. For the program initiated in fiscal 2014, the performance award was based upon a target three-year average ROACE, three-year average annual revenue growth, and Asia segment operating income at the end of the three-year performance period. For the program initiated in fiscal 2013, the performance award was based upon a target three-year average consolidated ROACE, cumulative revenue over the three-year performance period and Europe ROACE at the end of the three-year performance period.
Note 6: Note 6: | Restructuring Activities |
During fiscal 2016, the Company offered a voluntary retirement program to certain U.S. salaried employees. The program was offered as part of the Company’s Strengthen, Diversify and Grow transformational initiative and supports the objective of reducing operational and SG&A cost structures.
Also during fiscal 2016, the Company announced a plan to close its Washington, Iowa manufacturing facility and is in the process of transferring the facility’s production to other Americas segment manufacturing facilities, which it expects to complete by the end of fiscal 2017. In addition, the Company completed the transfer of production from its McHenry, Illinois manufacturing facility to other Americas segment manufacturing facilities. These restructuring activities reflect the Company’s focus on operating scale manufacturing facilities to improve overall competitiveness and profitability.
During fiscal 2015, the Company implementedinitiated a headcount reduction plan for its Brazil manufacturing facility within its South AmericaAmericas segment. The headcount reductions were in response to the economic slowdown in Brazil and reflect the Company’s objective to maintain profitability in the segmentthis business despite lower sales volume.
During fiscal 2014,In addition, the Company approved a plancontinues to close its McHenry, Illinois manufacturing facility, reflecting its focus on operating scale manufacturing facilities to improve overall competitiveness and profitability. The Company is in the process of transferring the facility’s production to other existing North America segment manufacturing facilities.
During fiscal 2013, the Company initiatedexecute restructuring activities within its Europe segment. TheThese restructuring activities have included implementing headcount reductions, exiting certain non-core product lines based upon Modine’s global product strategy, reducing manufacturing costs, consolidating production facilities, implementing headcount reductions, and disposing of and selling certain underperforming or non-strategic assets. The Company designed these activities were designed to align the cost structure of the segment with its strategic focus on the commercial vehicle, off-highway, automotive component, and engine product markets, while improving gross margin and return on average capital employed.
Restructuring and repositioning expenses for fiscal 2015, 2014, and 2013 were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Employee severance and related benefits | | $ | 1.2 | | | $ | 14.8 | | | $ | 14.9 | | Accelerated depreciation | | | - | | | | 4.3 | | | | - | | Other restructuring and repositioning expenses | | | 3.5 | | | | 1.3 | | | | 2.1 | | Total | | $ | 4.7 | | | $ | 20.4 | | | $ | 17.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Employee severance and related benefits | | $ | 12.8 | | | $ | 1.2 | | | $ | 14.8 | | Accelerated depreciation | | | - | | | | - | | | | 4.3 | | Other restructuring and repositioning expenses | | | 3.8 | | | | 3.5 | | | | 1.3 | | Total | | $ | 16.6 | | | $ | 4.7 | | | $ | 20.4 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
During fiscal 2016, 2015, 2014, and 2013,2014, the Company recorded $16.6 million, $4.7 million, $16.1 million and $17.0$16.1 million, respectively, of restructuring and repositioning expenses as restructuring expenses in the consolidated statement of operations. During fiscal 2014, the Company recorded $4.3 million of restructuring and repositioning expenses within cost of sales in the consolidated statement of operations. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 19.4 | | | $ | 11.6 | | Additions | | | 1.2 | | | | 14.8 | | Payments | | | (7.3 | ) | | | (7.8 | ) | Effect of exchange rate changes | | | (3.4 | ) | | | 0.8 | | Ending balance | | $ | 9.9 | | | $ | 19.4 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 9.9 | | | $ | 19.4 | | Additions | | | 12.8 | | | | 1.2 | | Payments | | | (8.5 | ) | | | (7.3 | ) | Effect of exchange rate changes | | | 0.5 | | | | (3.4 | ) | Ending balance | | $ | 14.7 | | | $ | 9.9 | |
During fiscal 2016, the Company identified potential impairment indicators related to a manufacturing facility in Germany, including pre-tax losses and its strategic decision to exit a certain product line in the future. In response, the Company performed an impairment evaluation and recorded an asset impairment charge of $9.9 million within its Europe segment to write down the manufacturing facility’s long-lived assets to fair value. The Company determined fair value using Level 3 inputs, primarily consisting of a facility appraisal, which considered the market rental value, and estimated scrap values, which considered the specialized nature of the machinery and equipment.
During fiscal 2014, the Company recorded asset impairment charges totaling $3.2 million, including $2.0 million within its Europe segment, primarily due to a manufacturing facility in Germany that the Company plans to close,has closed, and $1.2 million within its North AmericaAmericas segment, related to the planned closure of its McHenry, Illinois manufacturing facility. During fiscal 2013, the Company recorded asset impairment charges of $24.1 and $1.8 million within its Europe and North America segments, respectively, to reduce the carrying values of certain facilities held for sale to their estimated fair values, less costs to sell.
During fiscal 2015, the Company sold a wind tunnel within its Europe segment which was previously reported as an asset held for sale, for cash proceeds of $5.8 million and recognized a gain of $3.2 million. Also during fiscal 2015, the Company reclassified $4.7 million of its assets held for sale to property, plant and equipment, related to a facility in the Europe segment that is no longer being actively marketed for sale. At March 31, 20152016 and 2014,2015, assets held for sale of $3.2$8.5 million and $11.6$3.2 million, respectively, were included in other noncurrent assets and consisted of facilities that the Company is marketing for sale.
In April 2015, the Company announced its intent to close its Washington, Iowa manufacturing facility within the North America segment. As a result of the planned closure, the Company expects to incur approximately $2.0 million of employee severance-related costs during fiscal 2016 and additional restructuring and repositioning expenses during the closure period, as production is transferred to other facilities within the North America segment.
Note 7: | Other Income and Expense |
Other income and expense consisted of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Equity in earnings of non-consolidated affiliate | | $ | 0.6 | | | $ | 0.7 | | | $ | 0.3 | | Interest income | | | 0.5 | | | | 0.5 | | | | 0.9 | | Foreign currency transactions | | | (0.9 | ) | | | (2.0 | ) | | | (1.1 | ) | Other non-operating income - net | | | - | | | | - | | | | 0.1 | | Total other income (expense) - net | | $ | 0.2 | | | $ | (0.8 | ) | | $ | 0.2 | |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Equity in earnings of non-consolidated affiliate | | $ | 0.1 | | | $ | 0.6 | | | $ | 0.7 | | Interest income | | | 0.4 | | | | 0.5 | | | | 0.5 | | Foreign currency transactions (a) | | | (1.3 | ) | | | (0.9 | ) | | | (2.0 | ) | Gain from insurance recovery (b) | | | 9.5 | | | | - | | | | - | | Total other income (expense) - net | | $ | 8.7 | | | $ | 0.2 | | | $ | (0.8 | ) |
Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency denominated
| (a) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on foreign currency exchange contracts. |
| (b) | During fiscal 2016, the Company settled an insurance claim related to machinery and equipment destroyed in a fire at its Airedale facility and recorded a gain of $9.5 million. See Note 2 for additional information. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The U.S. and foreign components of earnings (loss) from continuing operations before income taxes and the provision (benefit)or benefit for income taxes consisted of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Components of earnings (loss) from continuing operations before income taxes: | | | | | | | | | | United States | | $ | 31.1 | | | $ | 14.1 | | | $ | 10.2 | | Foreign | | | 10.1 | | | | 9.9 | | | | (23.2 | ) | Total earnings (loss) from continuing operations before income taxes | | $ | 41.2 | | | $ | 24.0 | | | $ | (13.0 | ) | | | | | | | | | | | | | | Income tax expense (benefit): | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | 0.4 | | | $ | (2.0 | ) | | $ | 2.6 | | Deferred | | | 7.1 | | | | (95.8 | ) | | | (2.6 | ) | State: | | | | | | | | | | | | | Current | | | - | | | | 0.2 | | | | 0.2 | | Deferred | | | 1.1 | | | | (21.4 | ) | | | (0.2 | ) | Foreign: | | | | | | | | | | | | | Current | | | 12.7 | | | | 10.0 | | | | 6.4 | | Deferred | | | (2.3 | ) | | | 1.1 | | | | 3.4 | | Total income tax expense (benefit) | | $ | 19.0 | | | $ | (107.9 | ) | | $ | 9.8 | |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Components of (loss) earnings from continuing operations before income taxes: | | | | | | | | | | United States | | $ | (15.4 | ) | | $ | 31.1 | | | $ | 14.1 | | Foreign | | | 5.5 | | | | 10.1 | | | | 9.9 | | Total (loss) earnings from continuing operations before income taxes | | $ | (9.9 | ) | | $ | 41.2 | | | $ | 24.0 | | | | | | | | | | | | | | | Income tax (benefit) expense: | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | 0.1 | | | $ | 0.4 | | | $ | (2.0 | ) | Deferred | | | (13.0 | ) | | | 7.1 | | | | (95.8 | ) | State: | | | | | | | | | | | | | Current | | | 0.2 | | | | - | | | | 0.2 | | Deferred | | | (2.5 | ) | | | 1.1 | | | | (21.4 | ) | Foreign: | | | | | | | | | | | | | Current | | | 9.6 | | | | 12.7 | | | | 10.0 | | Deferred | | | (3.3 | ) | | | (2.3 | ) | | | 1.1 | | Total income tax (benefit) expense | | $ | (8.9 | ) | | $ | 19.0 | | | $ | (107.9 | ) |
The Company allocates income tax expense among continuing operations, discontinued operations, and other comprehensive income. The Company applies accounting for income taxes by tax jurisdiction, and in periods in which there is a loss from continuing operations before income taxes and pre-tax income in other categories (e.g., discontinued operations or other comprehensive income), it first allocates income tax expense to the other sources of income, and records a related tax benefit in continuing operations.
Income tax expense attributable to earnings (loss) from continuing operations before income taxes differed from the amounts computed by applying the statutory U.S. federal income tax rate as a result of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 2.4 | | | | 2.1 | | | | (1.3 | ) | Taxes on non-U.S. earnings and losses | | | (4.9 | ) | | | (3.8 | ) | | | (23.8 | ) | Valuation allowance | | | 8.3 | | | | (471.7 | ) | | | (59.3 | ) | Tax credits | | | (6.1 | ) | | | (7.1 | ) | | | 37.0 | | Compensation | | | 1.0 | | | | 0.4 | | | | (13.0 | ) | Tax rate or law changes | | | 1.2 | | | | (9.2 | ) | | | 0.9 | | Uncertain tax positions net of settlements | | | 2.2 | | | | 0.4 | | | | (41.9 | ) | Brazil interest on equity | | | - | | | | (1.7 | ) | | | 3.2 | | Dividend repatriation | | | 2.4 | | | | 5.8 | | | | (11.4 | ) | Other | | | 4.6 | | | | 0.2 | | | | (0.8 | ) | Effective tax rate | | | 46.1 | % | | | (449.6 | %) | | | (75.4 | %) |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 11.5 | | | | 2.4 | | | | 2.1 | | Taxes on non-U.S. earnings and losses | | | 26.4 | | | | (4.9 | ) | | | (3.8 | ) | Valuation allowance | | | (20.9 | ) | | | 8.3 | | | | (471.7 | ) | Tax credits | | | 20.5 | | | | (6.1 | ) | | | (7.1 | ) | Compensation | | | (3.7 | ) | | | 1.0 | | | | 0.4 | | Tax rate or law changes | | | 1.3 | | | | 1.2 | | | | (9.2 | ) | Uncertain tax positions, net of settlements | | | (4.3 | ) | | | 2.2 | | | | 0.4 | | Dividend repatriation | | | 16.0 | | | | 2.4 | | | | 5.8 | | Other | | | 8.1 | | | | 4.6 | | | | (1.5 | ) | Effective tax rate | | | 89.9 | % | | | 46.1 | % | | | (449.6 | %) |
The Company recorded an additional valuation allowance of $5.0 million, $2.6 million and $12.3 million in fiscal 2016, 2015, and 2014, respectively, against net deferred tax assets in certain foreign jurisdictions after determining it was more likely than not that the net deferred tax assets in these jurisdictions will not be realized. The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions going forward until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2016 and 2014, the Company concluded it no longer needed a valuation allowance on certain U.S. deferred tax assets after determining it was more likely than not they would be realized. As a result, the Company recorded a $119.2 million reversalreversals of its deferred tax asset valuation allowance.allowance of $3.0 million and $119.2 million in fiscal 2016 and 2014, respectively. Also during fiscal 2014, the Company recorded income tax benefits totaling $2.2 million related to foreign tax law changes. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | March 31, | | | | 2015 | | | 2014 | | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.3 | | | $ | 0.2 | | Inventories | | | 3.8 | | | | 4.1 | | Plant and equipment | | | 0.8 | | | | 2.4 | | Pension and employee benefits | | | 50.5 | | | | 39.1 | | Net operating loss, capital loss, and credit carryforwards | | | 105.0 | | | | 122.4 | | Other, principally accrued liabilities | | | 6.8 | | | | 10.3 | | Total gross deferred tax assets | | | 167.2 | | | | 178.5 | | Less: valuation allowance | | | (48.0 | ) | | | (61.2 | ) | Net deferred tax assets | | | 119.2 | | | | 117.3 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Goodwill | | | 0.6 | | | | 4.2 | | Plant and equipment | | | 5.3 | | | | 7.6 | | Other | | | 1.0 | | | | 1.7 | | Total gross deferred tax liabilities | | | 6.9 | | | | 13.5 | | Net deferred tax asset | | $ | 112.3 | | | $ | 103.8 | |
| | March 31, | | | 2016 | | 2015 | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.1 | | | $ | 0.3 | | Inventories | | | 3.6 | | | | 3.8 | | Plant and equipment | | | 4.3 | | | | 0.8 | | Pension and employee benefits | | | 52.6 | | | | 50.5 | | Net operating loss, capital loss, and credit carryforwards | | | 109.4 | | | | 105.0 | | Other, principally accrued liabilities | | | 6.9 | | | | 6.8 | | Total gross deferred tax assets | | | 176.9 | | | | 167.2 | | Less: valuation allowance | | | (50.8 | ) | | | (48.0 | ) | Net deferred tax assets | | | 126.1 | | | | 119.2 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Plant and equipment | | | 5.5 | | | | 5.3 | | Goodwill | | | 0.6 | | | | 0.6 | | Other | | | 1.1 | | | | 1.0 | | Total gross deferred tax liabilities | | | 7.2 | | | | 6.9 | | Net deferred tax asset | | $ | 118.9 | | | $ | 112.3 | |
Deferred tax assets and liabilities are reported inAs of March 31, 2016, the Company adopted new accounting guidance, which requires that all deferred taxes be presented as non-current on the consolidated balance sheets as follows:sheets. See Note 1 for additional information.
| | March 31, | | | | 2015 | | | 2014 | | Current deferred tax asset | | $ | 13.4 | | | $ | 13.0 | | Noncurrent deferred tax asset | | | 102.7 | | | | 98.6 | | Current deferred tax liability (other current liabilities) | | | (0.4 | ) | | | (0.5 | ) | Noncurrent deferred tax liability | | | (3.4 | ) | | | (7.3 | ) | Total | | $ | 112.3 | | | $ | 103.8 | |
Unrecognized tax benefits were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 2.1 | | | $ | 9.0 | | Gross increases - tax positions in prior period | | | 3.1 | | | | 2.5 | | Gross decreases - tax positions in prior period | | | - | | | | (7.0 | ) | Gross increases - tax positions in current period | | | 0.4 | | | | 0.1 | | Settlements | | | - | | | | (1.9 | ) | Lapse of statute of limitations | | | - | | | | (0.8 | ) | Effect of exchange rate changes | | | - | | | | 0.2 | | Ending balance | | $ | 5.6 | | | $ | 2.1 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 5.6 | | | $ | 2.1 | | Gross increases - tax positions in prior period | | | - | | | | 3.1 | | Gross decreases - tax positions in prior period | | | (0.1 | ) | | | - | | Gross increases - tax positions in current period | | | 0.4 | | | | 0.4 | | Ending balance | | $ | 5.9 | | | $ | 5.6 | |
The Company’s liability for unrecognized tax benefits as of March 31, 20152016 was $5.6$5.9 million, and if recognized, $3.0$3.5 million would have an effective tax rate impact.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. At March 31, 20152016 and 2014,2015, accrued interest and penalties were not significant. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2015,2016, the Company was under income tax examination in a number of foreign jurisdictions. The Company does not anticipate a significant change in unrecognized tax benefits during the next twelve months.
The following tax years remain subject to examination for the Company’s major tax jurisdictions:
Austria | Fiscal 2012 - 20142015 | Brazil | Calendar 20102011 - 20142015 | Germany | Fiscal 20112012 - 20142015 | United States | Fiscal 2012 – 20142013 - 2015 |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
At March 31, 2015,2016, the Company had foreign tax credit carry forwards of $1.8 million that, if not utilized against domestic taxes, will expire in fiscal 2016 and 2017. The Company also had federal and state research and development tax credits of $20.9$23.3 million that, if not utilized against domestic taxes, will expire between fiscal 2018 and 2035.2036. The Company also had various state and local tax loss carry forwards of $186.0$190.8 million that, if not utilized against state apportioned taxable income, will expire at various times during fiscal 20162017 through 2034.2036. In addition, the Company had tax loss carry forwards of $304.6$330.7 million in various tax jurisdictions throughout the world. Certain of the carry forwards in the U.S. and many in foreign jurisdictions are offset by a valuation allowance. If not utilized against taxable income, $159.3$156.9 million of these tax losses will expire at various times during fiscal 20162017 through 2035, and $145.3$173.8 million, mainly related to India,Germany, Austria and Germany,India, will not expire due to an unlimited carry-forward period.
At March 31, 2015,2016, the Company provided $0.8$1.1 million of tax on undistributed earnings for certain subsidiaries not considered permanently reinvested. Undistributed earnings totaling $442.0$491.0 million are considered permanently reinvested in the Company’s remaining foreign operations, and no provision has been made for any taxes that would be payable upon the distribution of such earnings. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 9: | Earnings Per Share |
The components of basic and diluted earnings per share arewere as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Basic: | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 22.2 | | | $ | 131.9 | | | $ | (22.8 | ) | Less: Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (1.7 | ) | | | - | | Earnings (loss) from continuing operations available to Modine shareholders | | | 21.0 | | | | 128.7 | | | | (24.2 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) available to Modine shareholders | | $ | 21.6 | | | $ | 128.7 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Weighted average shares outstanding - basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.45 | | | $ | 2.75 | | | $ | (0.52 | ) | Earnings per share - discontinued operations | | | 0.01 | | | | - | | | | - | | Net earnings (loss) per share - basic | | $ | 0.46 | | | $ | 2.75 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 22.2 | | | $ | 131.9 | | | $ | (22.8 | ) | Less: Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (0.9 | ) | | | - | | Earnings (loss) from continuing operations available to Modine shareholders | | | 21.0 | | | | 129.5 | | | | (24.2 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) available to Modine shareholders | | $ | 21.6 | | | $ | 129.5 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Weighted average shares outstanding - basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | Effect of dilutive securities | | | 0.6 | | | | 0.7 | | | | - | | Weighted average shares outstanding - diluted | | | 47.8 | | | | 47.6 | | | | 46.6 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.44 | | | $ | 2.72 | | | $ | (0.52 | ) | Earnings per share - discontinued operations | | | 0.01 | | | | - | | | | - | | Net earnings (loss) per share - diluted | | $ | 0.45 | | | $ | 2.72 | | | $ | (0.52 | ) |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Basic: | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (1.7 | ) | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 128.7 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 128.7 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | Net (loss) earnings per share - basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (0.9 | ) | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 129.5 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 129.5 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | Effect of dilutive securities | | | - | | | | 0.6 | | | | 0.7 | | Weighted-average shares outstanding - diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | Net (loss) earnings per share - diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | |
For the years ended March 31, 2016, 2015, 2014, and 2013,2014, the calculation of diluted earnings per share excluded 0.8 million, 0.6 million, 0.8 million, and 1.10.8 million stock options, respectively, because they were anti-dilutive. For the year ended March 31, 2013,2016, the total number of potential dilutive securities was 0.30.4 million. However, these securities were not included in the computation of diluted net loss per share since to do so would decrease the loss per share.
Inventories consisted of the following:
| | March 31, | | | | 2015 | | | 2014 | | Raw materials and work in process | | $ | 80.7 | | | $ | 89.2 | | Finished goods | | | 27.0 | | | | 27.6 | | Total inventories | | $ | 107.7 | | | $ | 116.8 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | March 31, | | | 2016 | | 2015 | Raw materials and work in process | | $ | 79.5 | | | $ | 80.7 | | Finished goods | | | 31.5 | | | | 27.0 | | Total inventories | | $ | 111.0 | | | $ | 107.7 | |
Note 11: Note11: | Property, Plant and Equipment |
Property, plant and equipment, including depreciable lives, consisted of the following:
| | March 31, | | | | 2015 | | | 2014 | | Land | | $ | 8.2 | | | $ | 10.4 | | Buildings and improvements (10-40 years) | | | 221.0 | | | | 228.1 | | Machinery and equipment (3-12 years) | | | 652.0 | | | | 715.1 | | Office equipment (3-10 years) | | | 81.9 | | | | 89.5 | | Construction in progress | | | 31.7 | | | | 35.5 | | | | | 994.8 | | | | 1,078.6 | | Less: accumulated depreciation | | | (672.7 | ) | | | (719.0 | ) | Net property, plant and equipment | | $ | 322.1 | | | $ | 359.6 | |
| | March 31, | | | 2016 | | 2015 | Land | | $ | 7.2 | | | $ | 8.2 | | Buildings and improvements (10-40 years) | | | 221.3 | | | | 221.0 | | Machinery and equipment (3-12 years) | | | 694.3 | | | | 652.0 | | Office equipment (3-10 years) | | | 84.1 | | | | 81.9 | | Construction in progress | | | 36.7 | | | | 31.7 | | | | | 1,043.6 | | | | 994.8 | | Less: accumulated depreciation | | | (705.0 | ) | | | (672.7 | ) | Net property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
Depreciation expense totaled $48.6 million, $50.0 million $57.3 million and $55.1$57.3 million for the years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. Gains and losses related to the disposal of property, plant and equipment are recorded in SG&A expenses. Total losses related to the disposal of property, plant and equipment were $0.4 million, $1.1 million $2.6 million and $2.5$2.6 million for the years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively.
Note 12: Note 12: | Investment in Affiliate |
The Company’s investment in its non-consolidated affiliate is accounted for under the equity method. The Company has a 50 percent ownership of Nikkei Heat Exchanger Company, Ltd. (“NEX”). At both March 31, 20152016 and 2014,2015, the Company included the investment in NEX of $3.2 million and $3.4 million, respectively, in other noncurrent assets. At March 31, 2015,2016, the investment in NEX is equal to the Company's investment in the underlying assets.
The Company reports the results of operations for NEX in the consolidated financial statements using a one-month reporting delay. The Company reports equity in earnings from non-consolidated affiliates within other income and expense in the consolidated statements of operations. The Company’s share of NEX’s earnings for the years ended March 31, 2016, 2015, and 2014 and 2013 was $0.1 million, $0.6 million $0.7 million and $0.3$0.7 million, respectively. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Intangible assets consisted of the following:
| | March 31, 2015 | | | March 31, 2014 | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | | $ | 10.1 | | | $ | (5.7 | ) | | $ | 4.4 | | Acquired technology | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | | | 5.8 | | | | (0.2 | ) | | | 5.6 | | Customer relationships | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | | | 2.4 | | | | - | | | | 2.4 | | Total intangible assets | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | | | $ | 18.3 | | | $ | (5.9 | ) | | $ | 12.4 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | March 31, 2016 | | | March 31, 2015 | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 8.9 | | | $ | (6.3 | ) | | $ | 2.6 | | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | Acquired technology | | | 5.5 | | | | (1.5 | ) | | | 4.0 | | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | Customer relationships | | | 2.0 | | | | (0.4 | ) | | | 1.6 | | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | Total intangible assets | | $ | 16.4 | | | $ | (8.2 | ) | | $ | 8.2 | | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | |
The Company recorded $1.6 million, $0.8$1.6 million and $0.7$0.8 million of amortization expense during fiscal 2016, 2015 2014 and 2013,2014, respectively. Estimated future amortization expense is as follows:
Fiscal Year | | Estimated Amortization Expense | | 2016 | | $ | 1.6 | | 2017 | | | 1.6 | | 2018 | | | 1.6 | | 2019 | | | 1.5 | | 2020 | | | 1.4 | | 2021 & Beyond | | | 2.2 | |
Fiscal Year | | Estimated Amortization Expense | | 2017 | | $ | 1.6 | | 2018 | | | 1.6 | | 2019 | | | 1.5 | | 2020 | | | 1.3 | | 2021 | | | 0.8 | | 2022 & Beyond | | | 1.4 | |
Changes in the carrying amount of goodwill, by segment and in the aggregate, were as follows:
| | South America | | | Asia | | | Building HVAC | | | Total | | Balance, March 31, 2013 | | $ | 12.2 | | | $ | 0.5 | | | $ | 16.0 | | | $ | 28.7 | | Effect of exchange rate changes | | | (1.3 | ) | | | - | | | | 1.3 | | | | - | | Balance, March 31, 2014 | | | 10.9 | | | | 0.5 | | | | 17.3 | | | | 28.7 | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | Balance, March 31, 2015 | | $ | - | | | $ | 0.5 | | | $ | 15.7 | | | $ | 16.2 | |
| | Americas | | Asia | | Building HVAC | | Total | Balance, March 31, 2014 | | $ | 10.9 | | | $ | 0.5 | | | $ | 17.3 | | | $ | 28.7 | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | Balance, March 31, 2015 | | | - | | | | 0.5 | | | | 15.7 | | | | 16.2 | | Effect of exchange rate changes | | | - | | | | - | | | | (0.4 | ) | | | (0.4 | ) | Balance, March 31, 2016 | | $ | - | | | $ | 0.5 | | | $ | 15.3 | | | $ | 15.8 | |
The Company assesses goodwill for impairment annually, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. The Company conducted its annual assessment for goodwill impairment during the fourth quarter of fiscal 20152016 by applying a fair value-based test. Thetest and determined that the fair value of its reporting units exceeded their respective book values. In fiscal 2015, the Company determined its South America reporting unit’s goodwill was fully impaired and recorded a $7.8 million goodwill impairment charge as a result.within the Americas segment in connection with its annual assessment. The impairment charge was primarily caused by a decline in the financial outlook for the South America reporting unit. During the fourth quarter of fiscal 2015, the Company’s outlook for the markets served by its South America reporting unit, primarily in Brazil, shifted from a view that the markets may begin to recover to a view that the market downturn may be more prolonged. The economic weakness in Brazil has negatively affected the Company’s expected future cash flows for the South America segment. The fair value of the Company’s remaining reporting units exceeded their respective book values.Brazil.
As ofAt both March 31, 2016 and 2015, accumulated goodwill impairment losses within the South America segment totaled $7.8 million. As of March 31, 2015 and 2014, accumulated goodwill impairment losses totaled $23.8$31.6 million and $8.7 million within the North AmericaAmericas and Europe segments, respectively.
Note 15: Note 15: | Product Warranties, Operating Leases, and Other Commitments |
Product warranties: Modine provides product warranties for various product lines, withMost of the Company’s products are covered under a warranty periods generallyperiod ranging from one to five years. The Company accruesrecords a liability for estimated futureproduct warranty costs inobligations at the period in whichtime of sale to a customer based upon historical warranty experience. In addition, the sale is recorded. The Company bases warranty expense estimates on the best information available using analytical and statistical analysis of both historical and current claim data. The Company adjusts these expensesits warranty accruals if it becomes probable that expected claims will differ from initial estimates recorded at the time of sale.estimates. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 14.0 | | | $ | 12.6 | | Accruals for warranties issued | | | 5.8 | | | | 6.0 | | Accruals related to pre-existing warranties | | | 1.5 | | | | 8.3 | | Settlements | | | (9.2 | ) | | | (13.0 | ) | Effect of exchange rate changes | | | (1.7 | ) | | | 0.1 | | Ending balance | | $ | 10.4 | | | $ | 14.0 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 10.4 | | | $ | 14.0 | | Warranties recorded at time of sale | | | 5.7 | | | | 5.8 | | Adjustments to pre-existing warranties | | | (1.1 | ) | | | 1.5 | | Settlements | | | (6.7 | ) | | | (9.2 | ) | Effect of exchange rate changes | | | - | | | | (1.7 | ) | Ending balance | | $ | 8.3 | | | $ | 10.4 | |
Operating leases: The Company leases various facilities and equipment under operating leases. Rental expense for these leases totaled $11.9 million in fiscal 2016, and $11.5 million in both fiscal 2015 and 2014, and $11.3 million in fiscal 2013.2014.
Future minimum rental commitments at March 31, 20152016 under non-cancelable operating leases were as follows:
Fiscal Year | | | | 2016 | | $ | 8.2 | | 2017 | | | 5.7 | | 2018 | | | 4.3 | | 2019 | | | 3.8 | | 2020 | | | 4.0 | | 2021 and beyond | | | 23.9 | | Total | | $ | 49.9 | |
Fiscal Year | | | | 2017 | | $ | 8.1 | | 2018 | | | 5.6 | | 2019 | | | 4.8 | | 2020 | | | 4.6 | | 2021 | | | 4.1 | | 2022 and beyond | | | 26.3 | | Total | | $ | 53.5 | |
Indemnification agreements: From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years. In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 20152016 is not material.
Commitments: At March 31, 2015,2016, the Company had capital expenditure commitments of $15.5$20.5 million. Significant commitments include tooling and equipment expenditures for new and renewal programs with customers in North Americathe Americas and Europe.Europe segments. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
The Company has a commitment to rebuild the leased Airedale facility, which suffered significant destruction from a fire during fiscal 2014. The Company maintains insurance coverage and believes reimbursement for substantially all losses and costs directly attributable to the fire is probable. See Note 2 for additional information.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Long-term debt was comprised of the following:
| | Fiscal year of maturity | | | March 31, 2015 | | | March 31, 2014 | | | | | | | | | | | | Foreign credit agreements | | 2016 | | | $ | 0.2 | | | $ | 0.5 | | 6.8% Senior Notes | | 2017-2021 | | | | 125.0 | | | | 125.0 | | Revolving credit facility | | 2019 | | | | - | | | | - | | | | | | | | 125.2 | | | | 125.5 | | Capital lease obligations | | 2016-2030 | | | | 4.9 | | | | 6.5 | | | | | | | | 130.1 | | | | 132.0 | | Less: current portion | | | | | | (0.5 | ) | | | (0.8 | ) | Total long-term debt | | | | | $ | 129.6 | | | $ | 131.2 | |
| | Fiscal year of maturity | | | March 31, 2016 | | March 31, 2015 | | | | | | | | | | | Foreign credit agreements | | | 2018-2020 | | | $ | 0.4 | | | $ | 0.2 | | 6.8% Senior Notes | | | 2017-2021 | | | | 125.0 | | | | 125.0 | | Revolving credit facility | | | 2019 | | | | - | | | | - | | | | | | | | | 125.4 | | | | 125.2 | | Other (a) | | | 2017-2030 | | | | 8.6 | | | | 4.9 | | | | | | | | | 134.0 | | | | 130.1 | | Less: current portion | | | | | | | (8.5 | ) | | | (0.5 | ) | Total long-term debt | | | | | | $ | 125.5 | | | $ | 129.6 | |
| (a) | Other long-term debt includes capital lease obligations and other financing-type obligations. |
The Company maintains a $175.0 million domestic revolving credit facility, which expires in August 2018. Borrowings under the credit agreement bear interest at a variable rate based on the London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points (1.6(1.8 percent at March 31, 2015)2016) depending upon the Company’s leverage ratio, as defined below. At March 31, 20152016 and 2014,2015, no borrowings were outstanding under the revolving credit facility.
The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 2016 and 2015 and 2014 of $18.6$28.6 million and $32.4$18.6 million, respectively. At March 31, 2015,2016, the Company’s foreign unused lines of credit totaled $41.0$32.0 million. In aggregate, the Company had total available lines of credit of $216.0$207.0 million at March 31, 2015.2016.
Provisions in the Company’s revolving credit facility, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided a lienliens on substantially all domestic assets. The Company is also subject to a leverage ratio covenant, which requires the Company to limit its consolidated indebtedness, less a portion of the Company’s cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”), and an interest expense coverage ratio, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. The Company was in compliance with its debt covenants as of March 31, 2015.2016.
Long-term debt matures as follows:
Fiscal Year | | | | 2016 | | $ | 0.5 | | 2017 | | | 8.3 | | 2018 | | | 16.3 | | 2019 | | | 16.3 | | 2020 | | | 16.3 | | 2021 & beyond | | | 72.4 | | Total | | $ | 130.1 | |
Fiscal Year | | | | 2017 | | $ | 8.5 | | 2018 | | | 16.5 | | 2019 | | | 16.5 | | 2020 | | | 16.6 | | 2021 | | | 69.4 | | 2022 & beyond | | | 6.5 | | Total | | $ | 134.0 | |
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. At March 31, 20152016 and 2014,2015, the carrying value of Modine’s long-term debt approximated fair value, with the exception of the Senior Notes, which had a fair value of approximately $141.0$139.0 million and $140.0$141.0 million, respectively. The fair value of the Senior Notes is categorized as Level 2 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 17: Note 17: | Pension and Employee Benefit Plans |
Defined Contribution Employee Benefit Plans:
The Company maintains domestic 401(k) plans that allow employees to contribute a portion of their salary to help save for retirement. The Company matched 50 percent of employee contributions, up to 5 percent of employee compensation, during fiscal 2016, 2015, 2014, and 2013.2014. The Company also makes annual employer contributions into active employee accounts based upon a percentage of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary. The Company’s expense for defined contribution employee benefit plans during fiscal 2016, 2015, and 2014 and 2013 was $4.6 million, $5.9 million, $8.3 million, and $4.1$8.3 million, respectively. The decreasedecreasing trend in expense infrom fiscal 2015, as compared with the prior fiscal year,2014 was primarily due to lower discretionary employer contributions.
In addition, the Company maintains a non-qualified deferred compensation plan for eligible employees, and various foreignnon-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans:
Certain foreignnon-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.
Defined Benefit Employee Benefit Plans:
Pension plans: The Company has amaintains non-contributory defined benefit pension planplans that coverscover most of its domestic employees hired on or before December 31, 2003. The benefits provided are based primarily on years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based on a monthly retirement benefit amount. Domestic salaried employees hired after December 31, 2003 are not covered under anya defined benefit plan. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company’s foreign subsidiariesCompany also have legacy defined benefit plans coveringwhich cover a smallsmaller number of active employees.employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany and Austria and are closed to new participants.
The Company contributions ofcontributed $6.7 million, $5.9 million, and $8.0 million and $9.2 million to its U.S. pension plans during fiscal 2016, 2015, and 2014, and 2013, respectively,respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company completed a voluntary lump-sum payout program offered to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer. During fiscal 2016, a total of $65.3 million was paid from pension plan assets for lump-sum payouts, which reduced the Company’s pension obligation by the same amount. In connection with these lump-sum payouts, the Company recorded $42.1 million of non-cash settlement losses related to the accelerated recognition of unamortized actuarial losses previously recorded on the consolidated balance sheets within accumulated other comprehensive loss. During fiscal 2016, the Company recorded $33.3 million and $8.8 million of settlement losses as SG&A expenses and cost of sales, respectively, within the consolidated statements of operations.
Postretirement plans: The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans during fiscal 2016, 2015, and 2014 and 2013 was $0.3 million, $0.1 million, $1.0 million, and $1.1$1.0 million, respectively.
Measurement Date: The Company uses March 31 as the measurement date for its pension and postretirement plans. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s pension plans, for the fiscal years ended March 31, 20152016 and 20142015 were as follows:
| | 2015 | | | 2014 | | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 295.7 | | | $ | 309.6 | | Service cost | | | 0.5 | | | | 0.6 | | Interest cost | | | 13.0 | | | | 13.0 | | Actuarial loss (gain) | | | 40.6 | | | | (10.8 | ) | Benefits paid | | | (14.6 | ) | | | (18.6 | ) | Effect of exchange rate changes | | | (7.0 | ) | | | 1.9 | | Benefit obligation at end of year | | $ | 328.2 | | | $ | 295.7 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 213.7 | | | $ | 200.6 | | Actual return on plan assets | | | 10.8 | | | | 22.2 | | Benefits paid | | | (14.6 | ) | | | (18.6 | ) | Employer contributions | | | 7.1 | | | | 9.5 | | Fair value of plan assets at end of year | | $ | 217.0 | | | $ | 213.7 | | Funded status at end of year | | $ | (111.2 | ) | | $ | (82.0 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (0.8 | ) | | $ | (1.0 | ) | Noncurrent liability | | | (110.4 | ) | | | (81.0 | ) | | | $ | (111.2 | ) | | $ | (82.0 | ) |
| | 2016 | | 2015 | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 328.2 | | | $ | 295.7 | | Service cost | | | 0.6 | | | | 0.5 | | Interest cost | | | 11.2 | | | | 13.0 | | Actuarial (gain) loss | | | (2.8 | ) | | | 40.6 | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | Effect of exchange rate changes | | | 1.9 | | | | (7.0 | ) | Benefit obligation at end of year | | $ | 261.0 | | | $ | 328.2 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 217.0 | | | $ | 213.7 | | Actual return on plan assets | | | (5.3 | ) | | | 10.8 | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | Employer contributions | | | 7.9 | | | | 7.1 | | Fair value of plan assets at end of year | | $ | 141.5 | | | $ | 217.0 | | Funded status at end of year | | $ | (119.5 | ) | | $ | (111.2 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (0.9 | ) | | $ | (0.8 | ) | Noncurrent liability | | | (118.6 | ) | | | (110.4 | ) | | | $ | (119.5 | ) | | $ | (111.2 | ) |
| (a) | In fiscal 2016, $65.3 million was paid from plan assets in connection with lump-sum payouts. |
The accumulated benefit obligation for pension plans was $325.5$257.9 million and $293.0$325.5 million as of March 31, 20152016 and 2014,2015, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $192.3$162.0 million and $153.4$192.3 million as of March 31, 20152016 and 2014,2015, respectively.
Costs for the Company’s pension plans included the following components for the fiscal years ended March 31, 2016, 2015, 2014, and 2013:2014:
| | 2015 | | | 2014 | | | 2013 | | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.5 | | | $ | 0.6 | | | $ | 0.6 | | Interest cost | | | 13.0 | | | | 13.0 | | | | 13.5 | | Expected return on plan assets | | | (16.7 | ) | | | (15.7 | ) | | | (16.1 | ) | Amortization of net actuarial loss | | | 5.5 | | | | 6.3 | | | | 5.0 | | Net periodic benefit cost | | $ | 2.3 | | | $ | 4.2 | | | $ | 3.0 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 46.4 | | | $ | (17.3 | ) | | $ | 27.0 | | Amortization of net actuarial loss | | | (5.5 | ) | | | (6.3 | ) | | | (5.0 | ) | Total recognized in other comprehensive loss (income) | | $ | 40.9 | | | $ | (23.6 | ) | | $ | 22.0 | |
| | 2016 | | 2015 | | 2014 | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.6 | | | $ | 0.5 | | | $ | 0.6 | | Interest cost | | | 11.2 | | | | 13.0 | | | | 13.0 | | Expected return on plan assets | | | (14.9 | ) | | | (16.7 | ) | | | (15.7 | ) | Amortization of net actuarial loss | | | 6.4 | | | | 5.5 | | | | 6.3 | | Settlements (a) | | | 42.1 | | | | - | | | | - | | Net periodic benefit cost | | $ | 45.4 | | | $ | 2.3 | | | $ | 4.2 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 17.5 | | | $ | 46.4 | | | $ | (17.3 | ) | Amortization of net actuarial loss (a) | | | (48.5 | ) | | | (5.5 | ) | | | (6.3 | ) | Total recognized in other comprehensive (income) loss | | $ | (31.0 | ) | | $ | 40.9 | | | $ | (23.6 | ) |
| (a) | During fiscal 2016, in connection with lump-sum payouts to pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company estimates $7.2$5.6 million of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2016. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)2017.
The Company used a discount rate of 4.0%4.1% and 4.7%4.0% as of March 31, 20152016 and 2014,2015, respectively, in determining its benefit obligations under its U.S. pension plans. The Company used a discount rate of 1.3%1.8% and 3.0%1.3% as of March 31, 20152016 and 2014,2015, respectively, in determining its benefit obligations under its foreignnon-U.S. pension plans. The Company used a discount rate of 4.7%4.3%, 4.4%4.7%, and 4.9%4.4% to determine its costs under its U.S. pension plans for the fiscal years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. The Company used a discount rate of 3.0%1.3%, 3.5%3.0%, and 5.0%3.5% to determine its costs under its foreignnon-U.S. pension plans for the fiscal years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. AThe Company used a similar process was used to determine the discount rate for the Company’s foreignits non-U.S. pension obligationsobligations.
Plan assets in the U.S. defined benefit plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted averageweighted-average asset allocations at the measurement dates of March 31, 20152016 and 20142015 were as follows:
| | Target allocation | | | Plan assets | | | | | | | 2015 | | | 2014 | | Equity securities | | | 55 | % | | | 55 | % | | | 57 | % | Debt securities | | | 38 | % | | | 36 | % | | | 37 | % | Alternative assets | | | 5 | % | | | 5 | % | | | 5 | % | Cash | | | 2 | % | | | 4 | % | | | 1 | % | | | | 100 | % | | | 100 | % | | | 100 | % |
| | Target allocation | | Plan assets | | | | | | 2016 | | 2015 | Equity securities | | | 55 | % | | | 56 | % | | | 55 | % | Debt securities | | | 38 | % | | | 36 | % | | | 36 | % | Alternative assets | | | 5 | % | | | 4 | % | | | 5 | % | Cash | | | 2 | % | | | 4 | % | | | 4 | % | | | | 100 | % | | | 100 | % | | | 100 | % |
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 20152016 and 2014,2015, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term return of plan assets, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2016, 2015, 2014 and 20132014 U.S. pension plan expense, the expected rate of return on plan assets was 8.0 percent. For fiscal 20162017 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 8.0 percent.
The Company’s funding policy for domestic qualifiedits U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. The Company expects to make contributions of $6.7$8.1 million to these plans during fiscal 2016.2017.
Estimated pension benefit payments for the next ten fiscal years are as follows:
Fiscal Year | | Estimated pension benefit payments | | 2016 | | $ | 15.1 | | 2017 | | | 15.7 | | 2018 | | | 16.9 | | 2019 | | | 17.2 | | 2020 | | | 18.0 | | 2021-2025 | | | 94.0 | |
Fiscal Year | | Estimated Pension Benefit Payments | | 2017 | | $ | 14.5 | | 2018 | | | 15.2 | | 2019 | | | 15.3 | | 2020 | | | 15.8 | | 2021 | | | 16.1 | | 2022-2026 | | | 79.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 18: Note 18: | Derivative Instruments |
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated, and is effective, as a hedge, and, if so, on the nature of the hedging activity. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Commodity Derivatives: The Company has, from time to time, enteredperiodically enters into futures contracts related to certain forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts wasis to reduce its exposure to changing market prices for future purchases of these commodities. The Company has not designated commodity contracts entered into in fiscal 2013, 2014, 2015, and 20152016 for hedge accounting. Accordingly, unrealized gains and losses on thosethese contracts are recorded within cost of sales. The Company designated contracts entered into prior to fiscal 2013 for hedge accounting. Accordingly, the amounts recorded in accumulated other comprehensive loss (“AOCI”) related to those contracts remained in AOCI until the underlying commodity purchases impacted earnings.
Foreign exchange contracts: The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. The Company has not designated these contracts for hedge accounting. Accordingly, unrealized gains and losses related to changes in fair value are recorded in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| | Balance Sheet Location | | March 31, 2015 | | | March 31, 2014 | | Foreign exchange contracts | | Other current liabilities | | $ | 0.3 | | | $ | 0.2 | | Commodity derivatives | | Other current liabilities | | | 0.1 | | | | 0.1 | | Commodity derivatives | | Other noncurrent liabilities | | | - | | | | 0.1 | |
| Balance Sheet Location | | March 31, 2016 | | | March 31, 2015 | | Foreign exchange contracts | Other current assets | | $ | 0.1 | | | $ | - | | Foreign exchange contracts | Other current liabilities | | | - | | | | 0.3 | | Commodity derivatives | Other current liabilities | | | 0.1 | | | | 0.1 | |
The amounts recorded in AOCI and in the consolidated statements of operations for all of the Company’s derivative financial instruments were as follows:
| | March 31, 2015 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss Recognized in Continuing Operations | | Commodity derivatives | | $ | - | | Cost of sales | | $ | - | | | $ | 0.2 | | Foreign exchange contracts | | | - | | Other income (expense) - net | | | - | | | | 1.1 | | Total | | $ | - | | | | $ | - | | | $ | 1.3 | |
| | March 31, 2014 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss Recognized in Continuing Operations | | Commodity derivatives | | $ | - | | Cost of sales | | $ | 0.5 | | | $ | 0.5 | | Total | | $ | - | | | | $ | 0.5 | | | $ | 0.5 | |
| | March 31, 2013 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss (Gain) Recognized in Continuing Operations | | Commodity derivatives | | $ | 0.5 | | Cost of sales | | $ | 2.6 | | | $ | 4.6 | | Foreign exchange contracts | | | - | | Other income (expense) - net | | | - | | | | (0.3 | ) | Total | | $ | 0.5 | | | | $ | 2.6 | | | $ | 4.3 | |
| Statement of Operations | | Years ended March 31, | | Location | | 2016 | | 2015 | | 2014 | Commodity derivatives | Cost of sales | | $ | (0.7 | ) | | $ | (0.2 | ) | | $ | (0.5 | ) | Foreign exchange contracts | Other income (expense) - net | | | 0.6 | | | | (1.1 | ) | | | - | | Total loss | | | $ | (0.1 | ) | | $ | (1.3 | ) | | $ | (0.5 | ) |
Note 19: Note 19: | Contingencies and Litigation |
Market risk: The Company sells a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, off-highway, automotive, and commercial heating and air conditioning markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or more of the markets it serves. The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits. However, the risk associated with market downturns, such as the downturn experienced in fiscal 2009 and 2010, is still present. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Credit risk: The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 2016 and 2015, two customers each accounted for ten percent or more of the Company’s total sales. In fiscal 2014, and 2013, one customer accounted for ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers represented 63 percent 56 percent, and 59 percent of total sales in both fiscal 2016 and 2015 2014, and 2013, respectively.56 percent in fiscal 2014. At March 31, 2016 and 2015, and 2014, 4745 percent and 4647 percent, respectively, of the Company's trade accounts receivable were from the Company's top ten customers. These customers operate primarily in the automotive, truck, and heavy equipment markets and are influenced by similar market and general economic factors. Collateral or advanced payments are generally not required, but they may be used in those cases where the Company identifies a substantial credit risk.required. The Company has not experienced significant credit losses to customers in the markets served. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company manages credit risk through its focus on the following:
| ·● | Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; |
| ·● | Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; |
| ·● | Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and |
| ·● | Insurance – ensuring that insurance providers maintain acceptable financial ratings. |
Counterparty risks: The Company manages counterparty risks through its focus on the following:
| ·● | Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; |
| ·● | Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and |
| ·● | Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company. |
Europe value added tax: During fiscal 2012, the Company determined it was not properly applying value added tax (“VAT”) to certain cross-border transactions within the Europe segment and established an accrual of $10.7 million for estimated VAT liabilities, including interest and penalties. During fiscal 2013 and 2014, the Company completed the registration and filing process with the taxing authorities and began making payments to the applicable jurisdictions. During fiscal 2015, 2014, and 2013, the Company recorded reductions to SG&A expenses of $2.0 million, $2.9 million and $1.6 million, respectively, as a result of favorable changes to the estimated VAT obligations.
Environmental: The United States Environmental Protection Agency (“USEPA”) has designated the Company as a potentially responsible party (“PRP”) for remediation of three sites where the Company had involvement.sites. These sites include:are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be material to the Company’s financial position due to Modine’sits relatively small portion of contributed materials. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company has recorded environmental investigation and remediation accruals for groundwater contamination at its manufacturing facility in its wholly-owned subsidiary in Brazil (“Modine Brazil”) and subsurface contamination at its former manufacturing facility in the Netherlands along withand groundwater contamination at its manufacturing facility in Brazil. During fiscal 2016, the Company recorded charges totaling $1.6 million, within cost of sales, to establish an environmental accrual for investigative work related to a previously-owned manufacturing facility in the United States. In addition, the Company has recorded accruals for other lesser environmental matters at certain facilities located in the United States. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $3.8$5.1 million and $5.1$3.8 million at March 31, 20152016 and 2014,2015, respectively. As additional information becomes available, the Company will re-assess any potentialthe liability related to these matters and revise the estimated accrual, if necessary. Based on currently available information, the Company believes the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages. During fiscal 2011, one of the adjacent businesses to the Company’s facility in Brazil filed suit against the Company’s subsidiary in Brazil (“Modine Brazil,Brazil”), seeking remediation and certain other damages as a result of the contamination allegedly attributable to the Company’sits operations. The Company is defending this suit and believes that the ultimate outcome of this matter will not be material.
Brazil antitrust investigation: During the fourth quarter of fiscal 2015, Brazil’s Administrative Council for Economic Defense (CADE) provided formal notice to Modine Brazil of an administrative investigation regarding alleged violations of Brazil’s antitrust regulations by Modine Brazil and certain of its employees during a period of time at least seven years ago. Duringprior to the fourth quarternotice. As of fiscalMarch 31, 2016 and March 31, 2015, the Company recorded a charge ofaccrued $2.8 million and $3.2 million (BRL10.0 million) within SG&A expenses,(BRL 10.0 million at each date), respectively, representing the estimated amount that may be incurred in connection with the management and resolution of this matter. Due to the ongoing nature of the investigation,this matter, the Company cannot provide assurance of theits ultimate resolution of this matter at this time.
Other litigation: In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits or proceedings are not expected to have a material adverse effect on the Company’s consolidated financial statements. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 20: Note 20: | Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | Foreign Currency Translation | | | Cash Flow Hedges | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | - | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | - | | | | (45.2 | ) | | | (113.2 | ) | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | - | | | | 5.4 | | | | 5.4 | | Amortization of unrecognized prior service credit (a) | | | - | | | | - | | | | (0.1 | ) | | | (0.1 | ) | Income taxes | | | - | | | | - | | | | 13.2 | | | | 13.2 | | Total other comprehensive loss | | | (68.0 | ) | | | - | | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | - | | | $ | (157.9 | ) | | $ | (198.6 | ) |
| | Foreign Currency Translation | | Defined Benefit Plans | | Total | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | 4.7 | | | | (16.6 | ) | | | (11.9 | ) | Reclassifications: | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 48.3 | | | | 48.3 | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.2 | ) | | | (0.2 | ) | Income taxes | | | - | | | | (11.8 | ) | | | (11.8 | ) | Total other comprehensive loss | | | 4.7 | | | | 19.7 | | | | 24.4 | | | | | | | | | | | | | | | Balance, March 31, 2016 | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) |
| | Foreign Currency Translation | | | Cash Flow Hedges | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2013 | | $ | 17.8 | | | $ | (1.1 | ) | | $ | (145.1 | ) | | $ | (128.4 | ) | | | | | | | | | | | | | | | | | | Other comprehensive income before reclassifications | | | 9.5 | | | | - | | | | 18.7 | | | | 28.2 | | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | - | | | | 6.2 | | | | 6.2 | | Amortization of unrecognized prior service credit (a) | | | - | | | | - | | | | (1.2 | ) | | | (1.2 | ) | Commodity derivatives (b) | | | - | | | | 0.5 | | | | - | | | | 0.5 | | Income taxes | | | - | | | | 0.6 | | | | (9.8 | ) | | | (9.2 | ) | Total other comprehensive income | | | 9.5 | | | | 1.1 | | | | 13.9 | | | | 24.5 | | | | | | | | | | | | | | | | | | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | - | | | $ | (131.2 | ) | | $ | (103.9 | ) |
| | Foreign Currency Translation | | Defined Benefit Plans | | Total | Balance, March 31, 2014 | | $ | 27.3 | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | (45.2 | ) | | | (113.2 | ) | Reclassifications: | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | 5.4 | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.1 | ) | | | (0.1 | ) | Income taxes | | | - | | | | 13.2 | | | | 13.2 | | Total other comprehensive loss | | | (68.0 | ) | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) |
| (a) | Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 17 for additional information about the Company’s pension plans. |
| (b) | Reclassifications for commodity derivatives are included in cost of sales. |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 21: Note 21: | Segment and Geographic Information |
The Company’s product lines consist of heat-transfer components and systems. The Company serves the vehicular, industrial, and building heating, ventilating and air conditioning markets. During fiscal 2015,2016, the Company changedcombined its North America and South America segments into the name of its Commercial ProductsAmericas segment to Building HVAC in orderstreamline operations, gain synergies and improve its cost structure. As a result, the Company recast the prior-period segment financial information to better reflect the nature of the segment’s product lines. There were no changesconform to the operations or reportedcurrent-period presentation. There was no impact to the Company’s consolidated financial results of the segmentstatements as a result. Throughout fiscal 2015,2016, the Company’s fivefour operating segments were as follows:
North America:Americas:
Comprised of vehicular and industrial original equipment products in North America and South America, as well as aftermarket products in South America.
Europe: Comprised of vehicular and industrial original equipment products in Europe.
South America:
Comprised of vehicular and industrial original equipment products and aftermarket products in South America.
Asia: Comprised of vehicular and industrial original equipment products in Asia.
Building HVAC: Comprised of building heating, ventilating and air conditioning products throughout the world.
Each operating segment is managed by a vice president or managing director and has separate financial results reviewed by the Company’s chief operating decision maker. These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
Effective April 1, 2015, the Company combined its North America and South America segment operations, with the objective of streamlining its operations to gain synergies and improve its cost structure. Beginning for fiscal 2016, the Company will report financial results for the new Americas operating segment, which will include both North America and South America.
The following is a summary of net sales, gross profit, and operating income by segment:
| | Years ended March 31, | | Net sales: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 573.5 | | | $ | 568.7 | | | $ | 564.5 | | Europe | | | 578.2 | | | | 584.4 | | | | 498.0 | | South America | | | 93.9 | | | | 122.7 | | | | 133.8 | | Asia | | | 81.2 | | | | 71.5 | | | | 59.5 | | Building HVAC | | | 186.3 | | | | 146.5 | | | | 139.3 | | Segment total | | | 1,513.1 | | | | 1,493.8 | | | | 1,395.1 | | Corporate and eliminations | | | (16.7 | ) | | | (16.2 | ) | | | (19.1 | ) | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | Net sales: | | 2016 | | 2015 | | 2014 | Americas | | $ | 585.5 | | | $ | 666.9 | | | $ | 688.3 | | Europe | | | 524.1 | | | | 578.2 | | | | 584.4 | | Asia | | | 79.0 | | | | 81.2 | | | | 71.5 | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | Segment total | | | 1,370.0 | | | | 1,512.6 | | | | 1,490.7 | | Corporate and eliminations | | | (17.5 | ) | | | (16.2 | ) | | | (13.1 | ) | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Gross profit: | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | North America | | $ | 97.0 | | | | 16.9 | % | | $ | 93.5 | | | | 16.4 | % | | $ | 81.4 | | | | 14.4 | % | Europe | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | | | 61.0 | | | | 12.3 | % | South America | | | 12.1 | | | | 12.8 | % | | | 20.8 | | | | 16.9 | % | | | 22.5 | | | | 16.8 | % | Asia | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | | | 1.7 | | | | 2.8 | % | Building HVAC | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | | | 40.8 | | | | 29.3 | % | Segment total | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | | | 207.4 | | | | 14.9 | % | Corporate and eliminations | | | 1.3 | | | | - | | | | 0.8 | | | | - | | | | 1.2 | | | | - | | Gross profit | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % | | $ | 208.6 | | | | 15.2 | % |
67
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Gross profit: | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Americas | | $ | 100.1 | | | | 17.1 | % | | $ | 109.1 | | | | 16.3 | % | | $ | 114.3 | | | | 16.6 | % | Europe | | | 68.1 | | | | 13.0 | % | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | Asia | | | 12.2 | | | | 15.5 | % | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | Building HVAC | | | 54.2 | | | | 29.9 | % | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | Segment total | | | 234.6 | | | | 17.1 | % | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | Corporate and eliminations (a) | | | (11.1 | ) | | | - | | | | 1.3 | | | | - | | | | 0.8 | | | | - | | Gross profit | | $ | 223.5 | | | | 16.5 | % | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | Years ended March 31, | Operating income: | | 2016 | | 2015 | | 2014 | Americas | | $ | 36.2 | | | $ | 33.4 | | | $ | 49.6 | | Europe | | | 13.3 | | | | 25.7 | | | | 9.6 | | Asia | | | 0.8 | | | | 0.3 | | | | (3.3 | ) | Building HVAC | | | 13.9 | | | | 19.1 | | | | 9.4 | | Segment total | | | 64.2 | | | | 78.5 | | | | 65.3 | | Corporate and eliminations (a) | | | (71.7 | ) | | | (25.8 | ) | | | (28.1 | ) | Operating (loss) income | | $ | (7.5 | ) | | $ | 52.7 | | | $ | 37.2 | |
(In millions, except per share amounts)
| | Years ended March 31, | | Operating income: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 45.9 | | | $ | 42.1 | | | $ | 39.2 | | Europe | | | 25.7 | | | | 9.6 | | | | (25.4 | ) | South America | | | (12.3 | ) | | | 7.5 | | | | 11.2 | | Asia | | | 0.3 | | | | (3.3 | ) | | | (8.8 | ) | Building HVAC | | | 19.1 | | | | 9.4 | | | | 10.0 | | Segment total | | | 78.7 | | | | 65.3 | | | | 26.2 | | Corporate and eliminations | | | (26.0 | ) | | | (28.1 | ) | | | (26.8 | ) | Operating income (loss) | | $ | 52.7 | | | $ | 37.2 | | | $ | (0.6 | ) |
| (a) | During fiscal 2016, the Company recorded pension settlement losses of $42.1 million at Corporate, within SG&A expenses ($33.3 million) and cost of sales ($8.8 million). See Note 17 for additional information. |
Inter-segment sales are accounted for based on an established markup over production costs. Net sales for corporate and eliminations primarily represent the elimination of inter-segment sales. The operating loss for corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and also includes a portion of central servicesother costs that are either not directly attributable to an operating segment.segment or not considered when management evaluates segment performance. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of total assets by segment:
| | March 31, | | | | 2015 | | | 2014 | | North America | | $ | 231.8 | | | $ | 218.1 | | Europe | | | 283.1 | | | | 367.9 | | South America | | | 46.5 | | | | 80.1 | | Asia | | | 92.4 | | | | 92.8 | | Building HVAC | | | 131.4 | | | | 132.7 | | Corporate and eliminations | | | 146.4 | | | | 140.7 | | Total assets | | $ | 931.6 | | | $ | 1,032.3 | |
| | March 31, | | | | 2016 | | | 2015 | | Americas | | $ | 267.2 | | | $ | 277.7 | | Europe | | | 301.9 | | | | 282.7 | | Asia | | | 104.0 | | | | 92.2 | | Building HVAC (a) | | | 99.0 | | | | 131.3 | | Corporate and eliminations | | | 148.8 | | | | 147.0 | | Total assets | | $ | 920.9 | | | $ | 930.9 | |
| (a) | As of March 31, 2015, total assets within the Building HVAC segment included $48.0 million of insurance-related assets for the rebuild of the facility damaged by the Airedale fire. See Note 2 for additional information. |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | Capital expenditures: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 25.9 | | | $ | 18.9 | | | $ | 19.0 | | Europe | | | 21.5 | | | | 22.9 | | | | 16.5 | | South America | | | 4.3 | | | | 5.7 | | | | 3.4 | | Asia | | | 3.8 | | | | 4.6 | | | | 7.8 | | Building HVAC | | | 2.8 | | | | 1.0 | | | | 3.1 | | Total capital expenditures | | $ | 58.3 | | | $ | 53.1 | | | $ | 49.8 | |
| | Years ended March 31, | | Capital expenditures: | | 2016 | | | 2015 | | | 2014 | | Americas | | $ | 26.7 | | | $ | 30.2 | | | $ | 24.6 | | Europe | | | 24.8 | | | | 21.5 | | | | 22.9 | | Asia | | | 6.2 | | | | 3.8 | | | | 4.6 | | Building HVAC | | | 5.1 | | | | 2.8 | | | | 1.0 | | Total capital expenditures | | $ | 62.8 | | | $ | 58.3 | | | $ | 53.1 | |
| | Years ended March 31, | | Depreciation and amortization expense: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 18.1 | | | $ | 19.3 | | | $ | 20.1 | | Europe | | | 19.8 | | | | 26.6 | | | | 23.4 | | South America | | | 3.2 | | | | 3.3 | | | | 3.7 | | Asia | | | 7.2 | | | | 6.7 | | | | 6.4 | | Building HVAC | | | 3.3 | | | | 2.2 | | | | 2.2 | | Total depreciation and amortization expense | | $ | 51.6 | | | $ | 58.1 | | | $ | 55.8 | |
| | Years ended March 31, | | Depreciation and amortization expense: | | 2016 | | | 2015 | | | 2014 | | Americas | | $ | 22.1 | | | $ | 21.3 | | | $ | 22.6 | | Europe | | | 18.0 | | | | 19.8 | | | | 26.6 | | Asia | | | 6.5 | | | | 7.2 | | | | 6.7 | | Building HVAC | | | 3.6 | | | | 3.3 | | | | 2.2 | | Total depreciation and amortization expense | | $ | 50.2 | | | $ | 51.6 | | | $ | 58.1 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a summary of net sales by geographical area, based upon the location of the selling unit:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | United States | | $ | 669.3 | | | $ | 645.7 | | | $ | 637.4 | | Germany | | | 193.8 | | | | 229.5 | | | | 214.8 | | Hungary | | | 161.0 | | | | 150.3 | | | | 117.6 | | Austria | | | 118.7 | | | | 109.8 | | | | 97.7 | | Brazil | | | 93.2 | | | | 122.0 | | | | 128.8 | | Other | | | 260.4 | | | | 220.3 | | | | 179.7 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | United States | | $ | 627.6 | | | $ | 669.3 | | | $ | 645.7 | | Germany | | | 155.3 | | | | 193.8 | | | | 229.5 | | Hungary | | | 145.9 | | | | 161.0 | | | | 150.3 | | Austria | | | 113.1 | | | | 118.7 | | | | 109.8 | | Other | | | 310.6 | | | | 353.6 | | | | 342.3 | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | | 2015 | | | 2014 | | United States | | $ | 105.0 | | | $ | 100.7 | | Germany | | | 66.0 | | | | 81.8 | | Other European countries | | | 79.9 | | | | 100.0 | | China | | | 36.3 | | | | 38.9 | | Other | | | 34.9 | | | | 38.2 | | Total property, plant and equipment | | $ | 322.1 | | | $ | 359.6 | |
| | March 31, | | | | 2016 | | | 2015 | | United States | | $ | 92.5 | | | $ | 92.7 | | Austria | | | 44.2 | | | | 41.5 | | China | | | 33.6 | | | | 31.8 | | Germany | | | 32.1 | | | | 47.2 | | Hungary | | | 31.4 | | | | 28.9 | | Other | | | 104.8 | | | | 80.0 | | Total property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
The following is a summary of net sales by product type:end market:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Modules/assemblies | | $ | 367.5 | | | $ | 379.9 | | | $ | 358.5 | | Oil coolers | | | 233.0 | | | | 215.4 | | | | 194.1 | | HVAC equipment | | | 199.6 | | | | 159.5 | | | | 151.8 | | EGR coolers | | | 183.5 | | | | 172.5 | | | | 136.1 | | Charge air coolers | | | 148.9 | | | | 157.0 | | | | 161.8 | | Condensers | | | 140.0 | | | | 129.2 | | | | 128.8 | | Radiators | | | 124.8 | | | | 129.0 | | | | 134.4 | | Other | | | 99.1 | | | | 135.1 | | | | 110.5 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Commercial vehicle | | $ | 459.8 | | | $ | 512.5 | | | $ | 477.0 | | Automotive | | | 396.8 | | | | 401.8 | | | | 395.6 | | Off-highway | | | 206.2 | | | | 274.6 | | | | 320.8 | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | Other | | | 108.3 | | | | 121.2 | | | | 137.7 | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
6967
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) Note 22: Note 22: | Quarterly Financial Data (Unaudited) |
Quarterly financial data is summarized below for the years ended March 31, 20152016 and 2014:2015:
| | Fiscal 2015 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2015 | | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | Earnings (loss) from continuing operations (a) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | Net earnings (loss) attributable to Modine (a) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| | Fiscal 2016 quarters ended | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2016 | | | | | | | | | | | | | | | | | Net sales | | $ | 346.1 | | | $ | 334.0 | | | $ | 328.7 | | | $ | 343.7 | | | $ | 1,352.5 | | Gross profit | | | 57.0 | | | | 45.7 | | | | 58.6 | | | | 62.2 | | | | 223.5 | | Earnings (loss) from continuing operations (a) | | | 5.5 | | | | (22.5 | ) | | | 8.2 | | | | 7.8 | | | | (1.0 | ) | Net earnings (loss) attributable to Modine (a) | | | 5.1 | | | | (22.5 | ) | | | 8.2 | | | | 7.6 | | | | (1.6 | ) | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.11 | | | $ | (0.47 | ) | | $ | 0.17 | | | $ | 0.16 | | | $ | (0.03 | ) | Diluted | | | 0.11 | | | | (0.47 | ) | | | 0.17 | | | | 0.16 | | | | (0.03 | ) |
| | Fiscal 2014 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2014 | | | | | | | | | | | | | | | | | | Net sales | | $ | 375.8 | | | $ | 364.2 | | | $ | 347.0 | | | $ | 390.6 | | | $ | 1,477.6 | | Gross profit | | | 61.9 | | | | 57.2 | | | | 56.8 | | | | 62.3 | | | | 238.2 | | Earnings (loss) from continuing operations (a) (b) | | | 10.6 | | | | 5.0 | | | | (3.4 | ) | | | 119.7 | | | | 131.9 | | Net earnings (loss) attributable to Modine (a) (b) | | | 10.0 | | | | 4.6 | | | | (3.6 | ) | | | 119.4 | | | | 130.4 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.21 | | | $ | 0.10 | | | $ | (0.08 | ) | | $ | 2.51 | | | $ | 2.75 | | Diluted | | | 0.21 | | | | 0.10 | | | | (0.08 | ) | | | 2.49 | | | | 2.72 | |
| | Fiscal 2015 quarters ended | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2015 | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | Earnings (loss) from continuing operations (b) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | Net earnings (loss) attributable to Modine (b) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| (a) | The quarterly financial data presented above includesDuring fiscal 2016, restructuring expenses totaled $2.6 million, $1.0 million, $1.6 million, and $11.4 million for the quarters ended June 30, 2015, September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 6). During the fourth quarter of fiscal 2016, the Company recorded a $9.9 million asset impairment chargescharge related to restructuring actionsa manufacturing facility in Europe, North America,Germany (see Note 6). During fiscal 2016, non-cash pension settlement losses totaled $39.2 million, $1.1 million, and South America segments. $1.8 million for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 17). During the fourth quarter of fiscal 2016, the Company recorded a $9.5 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire (see Note 2). Also during the fourth quarter of fiscal 2016, the Company reversed a deferred tax asset valuation allowance, and, as a result, recorded an income tax benefit of $3.0 million (see Note 8). |
| (b) | During fiscal 2015, restructuring expenses totaled $0.8 million, $1.0 million, $1.9 million, and $1.0 million for the quarters ended June 30, 2014, September 30, 2014, December 31, 2014, and March 31, 2015, respectively.respectively (see Note 6). During the third quarter of fiscal 2015, the Company sold a wind tunnel within the Europe segment and recognized a gain of $3.2 million.million (see Note 6). During the fourth quarter of fiscal 2015, the Company recorded a $7.8 million goodwill impairment charge related to its South America segment. Also during the fourth quarter of fiscal 2015, the Company recorded(see Note 14) and a $3.2 million charge in its South America segment associated with a legal matter in Brazil. During fiscal 2014, restructuring expenses totaled $0.5 million, $0.6 million, $9.4 million, and $5.6 million for the quarters ended June 30, 2013, September 30, 2013, December 31, 2013, and March 31, 2014, respectively. The Company recorded impairment charges of $2.0 million and $1.2 million during the quarters ended December 31, 2013 and March 31, 2014, respectively. See Notes 6, 14, and 19 for additional information. |
| (b) | The quarter ended March 31, 2014 was benefited by the reversal of U.S. income tax valuation allowances totaling $119.2 million. SeeBrazil (see Note 8 for additional information.19). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Modine Manufacturing Company:
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1), present fairly, in all material respects, the financial position of Modine Manufacturing Company and its subsidiaries at March 31, 20152016 and 2014,2015, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 20152016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2015,2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in fiscal 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP Milwaukee, Wisconsin May 29, 201526, 2016 ITEM 9.
| | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not applicable.
ITEM 9A.
| | CONTROLS AND PROCEDURES. |
Conclusion Regarding Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company's President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded the design and operation of the Company's disclosure controls and procedures were effective as of March 31, 2015.2016.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, and effected by the Company's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2015.2016. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based on this assessment, management concluded that, as of March 31, 2015,2016, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20152016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the fourth quarter of fiscal 20152016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
| | OTHER INFORMATION. |
None. PART III
ITEM 10.10 . | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors. The Company incorporates by reference the information appearing in the Company's Proxy Statement for the 20152016 Annual Meeting of Shareholders to be held on July 23, 201521, 2016 (the “2015“2016 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Executive Officers of the Registrant" in this Form 10-K.
Compliance with Section 16(a) of the Exchange Act. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Code of Ethics. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Ethics.” The Company's Code of Ethics (labeled as the Code of Ethics and Business Conduct) is included on its website, www.modine.com (About Modine link).
Board Committee Charters. The Board of Directors has approved charters for its Audit Committee, Officer Nomination and Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee. These charters are included on the Company’s website, www.modine.com (Investors link).
Audit Committee Financial Expert. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Committees of the Board of Directors – Audit Committee.”
Audit Committee Disclosure. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the captions “Committees of the Board of Directors – Audit Committee” and “Board Meetings and Committees.”
Guidelines on Corporate Governance. The Board of Directors has adopted Guidelines on Corporate Governance. The Company’s Guidelines on Corporate Governance are included on its website, www.modine.com (Investors link).
Security Holder Recommendation of Board Nominees. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
ITEM 11.
| | EXECUTIVE COMPENSATION. |
The information appearing in the 20152016 Annual Meeting Proxy Statement under the captions “Compensation Discussion and Analysis,” “Compensation of Directors,” “Committees of the Board of Directors – Officer Nomination and Compensation Committee: Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” is incorporated herein by reference.
ITEM 12.
| | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The Company incorporates by reference the information relating to stock ownership under the caption “Security Ownership of Certain Beneficial Owners and Management,” and under the caption “Equity Compensation Plan Information,” in the 20152016 Annual Meeting Proxy Statement.
ITEM 13.
| | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The Company incorporates by reference the information contained in the 20152016 Annual Meeting Proxy Statement under the captions “Certain Relationships and Related Transactions” and “Director Independence.”
ITEM 14.
| | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The Company incorporates by reference the information contained in the 20152016 Annual Meeting Proxy Statement under the caption “Independent Auditors’ Fees for Fiscal 20152016 and 2014.2015.” PART IV
ITEM 15.
| | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) (a) | Documents Filed. The following documents are filed as part of this Report: |
| Page in Form 10-K | | | 1. The consolidated financial statements of Modine Manufacturing Company and its subsidiaries filed under Item 8: | | | | Consolidated Statements of Operations for the years ended March 31, 2016, 2015 2014 and 20132014 | 3938 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2016, 2015 2014 and 20132014 | 4039 | Consolidated Balance Sheets at March 31, 20152016 and 20142015 | 4140 | Consolidated Statements of Cash Flows for the years ended March 31, 2016, 2015 2014 and 20132014 | 4241 | Consolidated Statements of Shareholders' Equity for the years ended March 31, 2016, 2015 2014 and 20132014 | 4342 | Notes to Consolidated Financial Statements | 44-7043-68 | Report of Independent Registered Public Accounting Firm | 7169 | | | 2. Financial Statement Schedules.Schedules | | | | The following financial statement schedule should be read in conjunction with the consolidated financial statements set forth in Item 8: | | Schedule II -- Valuation and Qualifying Accounts | 7674 | | | Schedules other than those listed above are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements and the notes thereto. | | | | 3. Exhibits and Exhibit Index. | 77-7975-77 | | | See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number. | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 29, 201526, 2016 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. Burke | | | | Thomas A. Burke, President | | | | and Chief Executive Officer | | | | (Principal Executive Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. Burke | | Thomas A. Burke | May 29, 2015 | President, Chief Executive Officer and Director | | (Principal Executive Officer) | May 26, 2016 | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 29, 2015 | Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | May 26, 2016 | | | /s/ Marsha C. Williams | | Marsha C. Williams Director | May 29, 2015 | Director | 26, 2016 | | | /s/ David J. Anderson | | David J. Anderson Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Charles P. Cooley | | Charles P. Cooley Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Suresh V. Garimella | | Suresh V. Garimella Director | May 29, 2015 | Director | 26, 2016 |
/s/ Larry O. Moore | | Larry O. Moore Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Christopher W. Patterson | | Christopher W. Patterson Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Christine Y. Yan | | Christine Y. Yan Director | May 29, 2015 | Director | 26, 2016 | | | /s/ David G. Bills | | David G. Bills Director | May 29, 2015 | Director | 26, 2016 |
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES (A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | | | | Additions | | | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Deductions | | | Balance at End of Period | | | | | | | | | | | | | | | | | | 2015: Allowance for Doubtful Accounts | | $ | 1.1 | | | $ | 0.4 | | | $ | (0.2 | )(b) | | $ | (0.3 | )(a) | | $ | 1.0 | | Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | )(b) | | $ | - | | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | | | | 2014: Allowance for Doubtful Accounts | | $ | 0.8 | | | $ | 0.6 | | | $ | - | (b) | | $ | (0.3 | )(a) | | $ | 1.1 | | Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | (b) | | $ | - | | | $ | 61.2 | | | | | | | | | | | | | | | | | | | | | | | 2013: Allowance for Doubtful Accounts | | $ | 0.8 | | | $ | 0.5 | | | $ | (0.1 | )(b) | | $ | (0.4 | )(a) | | $ | 0.8 | | Valuation Allowance for Deferred Tax Assets | | $ | 146.8 | | | $ | 7.7 | | | $ | 18.3 | (b) | | $ | - | | | $ | 172.8 | |
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | 2016: Valuation Allowance for Deferred Tax Assets | | $ | 48.0 | | | $ | 1.5 | | | $ | 1.3 | | (a) | | $ | 50.8 | | | | | | | | | | | | | | | | | | | | 2015: Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | ) | (a) | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | 2014: Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | | (a) | | $ | 61.2 | |
Notes: | (a) | Bad debts charged off during the year
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| (b) | TranslationForeign currency translation and other adjustments |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 20152016 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By Referenced To | | Filed Herewith | | | | | | | | 3.1 | | Amended and Restated Articles of Incorporation, as amended. | | Exhibit 4.2 to Registrant’s Registration Statement on Form S-3 (333-161030) dated August 4, 2009 | | | | | | | | | | 3.2 | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated February 10, 2015 | | | | | | | | | | 4.1 | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 ("2003 10-K") | | | | | | | | | | 4.2 | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto. | | | | | | | | | | 4.3** | | Note Purchase and Private Shelf Agreement (the “Original Note Purchase Agreement”) dated as of August 12, 2010 among the Registrant and the Series A Purchasers named therein of $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020 and $25,000,000 Private Shelf Facility and each Prudential Affiliate (as defined therein) that may become bound by certain provisions thereof. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 12, 2010 8-K (“August 12, 2010 8-K”) | | | | | | | | | | 4.4** | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to August 12, 2010 8-K | | | | | | | | | | 4.5** | | First Amendment to Note Purchase and Private Shelf Agreement and Waiver dated as of March 15, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated March 15, 2012 8-K | | | | | | | | | | 4.6** | | Second Amendment to Note Purchase and Private Shelf Agreement dated as of April 20, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 20, 2012 8-K | | | | | | | | | | 4.7** | | Third Amendment to Note Purchase and Private Shelf Agreement dated as of August 6, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 6, 2012 8-K | | |
4.8** | | Second Amended and Restated Credit Agreement dated as of August 30, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, LC Issuer, Swing Line Lender and as a Lender, and U.S. Bank, N.A. and Wells Fargo Bank, N.A. as Syndication Agents and as Lenders, BMO Harris Bank N.A., as Documentation Agent and as Lender and Associated Bank, N.A., Comerica Bank and Sovereign Bank as Lenders.Lenders | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated August 30, 2013 (“August 30, 2013 8-K”) | | | | | | | | | | 4.9** | | Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Note Purchase Amendment”) dated as of August 30, 2013, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) pursuant to which the Company and the Note Holders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to August 30, 2013 8-K | | | | | | | | | | 4.10** | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to August 30, 2013 8-K | | | | | | | | | | 4.11 | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | 10.1* | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | 10.2* | | Employment Agreement between the Registrant and Thomas A. Burke dated as of June 15, 2007. | | Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 15, 2007 | | | | | | | | | | 10.3* | | Form of Amendment No. 1 to Employment Agreement entered into as of July 1, 2008 with Thomas A. Burke. | | Exhibit 10.1 to Registrant’sRegistrant���s Current Report on Form 8-K dated July 1, 2008 | | | | | | | | | | 10.4* | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke. | | Exhibit 10(f) to Registrant’s Form 10-K for the year ended March 31, 2004 | | | | | | | | | | 10.5* | | Employment Agreement, dated July 1, 2014, between Modine Holding GmbH and Holger Schwab, effective as of July 1, 2015. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2014 | | | | | | | | | | 10.6* | | 2000 Stock Incentive Plan for Non-Employee Directors (Amended and Restated as of March 16, 2005). | | Appendix A to Registrant’s Proxy Statement for the 2005 Annual Meeting dated June 15, 2005 | | | | | | | | | | 10.7* | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant's Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | 10.8*10.7* | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | 10.9*10.8* | | 2007 Incentive Compensation Plan. | | Appendix A to the Registrant's Proxy Statement dated June 18, 2007 | | |
10.10* | | | | | | | 10.9* | | 2008 Incentive Compensation Plan (Amended and Restated effective May 7, 2014). | | Exhibit 10.1 to Registrant's Current Report on Form 8-K dated July 17, 2014 | | |
| 10.10* | | | | | | 10.11* | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Thomas A. Burke. | | Exhibit 10.17 to Registrant's Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | 10.12*10.11* | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | | | | | | | | | 10.12* | | Form of Fiscal 20152016 Modine Performance Stock Award Agreement (Executive Council members). | | | Exhibit 10.1 to Form 10-Q for the first quarter ended June 30, 2015 ("June 30, 2015 10-Q") | X | | | | | | | | | 10.13* | | Form of Fiscal 20152016 Modine Incentive Stock Options Award Agreement (Executive Council members). | | | Exhibit 10.2 to June 30, 2015 10-Q | X | | | | | | | | | 10.14* | | Form of Fiscal 20152016 Modine Restricted Stock Award Agreement (Executive Council members). | | | Exhibit 10.3 to June 30, 2015 10-Q | X | | | | | | | | | 10.15* | | Form of Fiscal 20152016 Modine Non-Qualified Stock Option Award Agreement. | Agreement | | Exhibit 10.4 to June 30, 2015 10-Q | X | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of independent registered public accounting firm. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Instance Document | | | | X | | | | | | | | 101.SCH | | XBRL Taxonomy Extension Schema | | | | X | | | | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | X | | | | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | X | | | | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | X | | | | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | X |
*Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K.
**Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
s | | | % of sales | | Year Ended March 31, 2016 Compared with Year Ended March 31, 2015: Fiscal 2016 net sales decreased $143 million, or 10 percent, from the prior year, primarily due to lower sales in our Americas and Europe segments. Sales volume increases in our Europe segment were more than offset by a $76 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2016 sales were negatively affected by a $110 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar. Gross profit decreased $23 million to $224 million in fiscal 2016, yet gross margin of 16.5 percent was consistent with the prior year. The decrease in gross profit was primarily due to a $14 million unfavorable impact of foreign currency exchange rate changes, $9 million of pension settlement losses, and lower sales volume in the Americas segment, partially offset by lower material costs, improved production efficiencies, and cost-savings initiatives. Fiscal 2016 SG&A expenses increased $21 million from the prior year. The increase was primarily due to $33 million of pension settlement losses and the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in the prior year, partially offset by ongoing cost-control initiatives and a $10 million favorable impact of foreign currency exchange rate changes. Restructuring expenses increased $12 million in fiscal 2016 compared with the prior year, primarily due to severance expenses in the Europe and Americas segments and equipment transfer costs related to plant consolidation activities in the Americas segment. In fiscal 2016, we recorded a $10 million impairment charge to write down the carrying value of a manufacturing facility in Germany to fair value. In fiscal 2015, we recorded a goodwill impairment charge of $8 million in Brazil and recognized a gain of $3 million from the sale of a wind tunnel in Germany. The operating loss of $8 million in fiscal 2016 represents a $61 million decline from $53 million of operating income in the prior year. This decline was primarily due to $42 million of pension settlement losses, lower gross profit, higher restructuring expenses, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by ongoing cost-control initiatives. Other income during fiscal 2016 includes a $10 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire in fiscal 2014. Our benefit for income taxes was $9 million in fiscal 2016, compared with a provision for income taxes of $19 million in fiscal 2015. This $28 million change was primarily due to $16 million of income tax benefits related to pension settlement losses in the current year, a decrease in pre-tax operating earnings, and a $3 million income tax benefit related to the reversal of a deferred tax asset valuation allowance in the current year.
Year Ended March 31, 2015 Compared with Year Ended March 31, 2014:
Fiscal 2015 net sales increased $18 million, or 1 percent, from fiscal 2014,the prior year, primarily due to sales increases in our Building HVAC Asia, and North AmericaAsia segments, partially offset by lower sales in our South AmericaAmericas segment, as economic conditions in Brazil were weak, and in our Europe segment, where sales increases were more than offset by a $35 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2015 sales were negatively affected by a $43 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar during the year.dollar.
Gross profit increased $9 million to $247 million in fiscal 2015 and gross margin increased 40 basis points to 16.5 percent, primarily due to sales volume improvements and lower warranty costs.
Fiscal 2015 SG&A expenses in fiscal 2015 increased $2 million to $184 million compared withfrom the prior year, primarily due to increased engineering and development costs and SG&A expenses at our Barkell business, which we acquired in the fourth quarter of fiscal 2014, partially offset by $5 million of recoveries from business interruption insurance during fiscal 2015 related to the Airedale fire.
Restructuring expenses decreased $11 million in fiscal 2015 compared with the prior year, primarily due to lower restructuring costs in Germany,our Europe segment, partially offset by higher severance-related costsseverance expenses in South America.our Americas segment.
DuringIn fiscal 2015, we sold a wind tunnel in Germany that we no longer considered to be a core asset, and recognized a gain of $3 million. In addition, we recorded a goodwill impairment charge of $8 million in our South America segment during fiscal 2015.related to Brazil. In fiscal 2014, we recorded $3 million of impairment charges, primarily related to restructuring actions in our Europe segment.
Operating income of $53 million in fiscal 2015 increased $16 million compared with fiscal 2014.the prior year. This improvement was primarily due to higher gross profit on increased sales volume, lower restructuring expenses, and the gain on the sale of the wind tunnel, partially offset by higher impairment charges and slightly higher SG&A expenses.
Our provision for income taxes was $19 million in fiscal 2015, compared with a benefit from income taxes of $108 million in fiscal 2014. The provision for taxes in the U.S. totaled $9 million in fiscal 2015, compared with a significant benefit for taxes in fiscal 2014, which resulted primarily from the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $10 million and $11 million in fiscal 2015 and 2014, respectively. Earnings from discontinued operations of $1 million in fiscal 2015 related to a gain associated with the final collection of proceeds from the fiscal 2009 sale of our Electronic Cooling business.
Year Ended March 31, 2014 Compared with Year Ended March 31, 2013:
In fiscal 2014, net sales increased $102 million, or 7 percent, from fiscal 2013, primarily due to an $86 million sales increase in our Europe segment, driven by sales volume improvements within the commercial vehicle and automotive markets. In addition, sales in our Asia, Building HVAC and North America segments increased year over year. Our South America segment sales decreased, however, primarily due to unfavorable foreign currency exchange rate changes.
Gross profit increased $29 million to $238 million in fiscal 2014 from the prior year and gross margin increased 90 basis points to 16.1 percent, primarily due to higher sales volume and favorable material costs.
SG&A expenses in fiscal 2014 increased $16 million to $182 million from fiscal 2013, primarily due to higher compensation-related expenses, the reversal of a $2 million acquisition-related liability that reduced SG&A expenses in the prior year, and $1 million of costs directly related to the Airedale fire, partially offset by lower professional service expenses.
Restructuring expenses were $16 million and $17 million in fiscal 2014 and 2013, respectively, primarily due to employee severance costs related to restructuring activities within our Europe segment. In addition, we recorded impairment charges during fiscal 2014 and 2013 of $3 million and $26 million, respectively, primarily related to our restructuring actions in the Europe segment.
Operating income of $37 million during fiscal 2014 represented a $38 million improvement compared with fiscal 2013. This improvement was primarily due to higher gross profit on increased sales volume and favorable material costs and lower impairment charges, partially offset by higher SG&A expenses.
Our benefit for income taxes was $108 million in fiscal 2014 compared with a provision for income taxes of $10 million in fiscal 2013. The large benefit for income taxes in fiscal 2014 was primarily due to the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $11 million and $10 million in fiscal 2014 and 2013, respectively.
Segment Results of Operations
During fiscal 2015, we changed the name of our Commercial Products segment to Building HVAC in order to better reflect the nature of the segment’s product lines. There were no changes to the operations or reported financial results of the segment as a result.
Effective April 1, 2015,2016, we combined our North America and South America segments into the Americas segment to streamline operations, with the objective of streamlining our operations to gain synergies and improve our cost structure. Beginning forAs a result, we recast the prior-period segment financial information to conform to the current-period presentation. There was no impact to our consolidated financial statements as a result.
Americas | | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 586 | | | | 100.0 | % | | $ | 667 | | | | 100.0 | % | | $ | 688 | | | | 100.0 | % | Cost of sales | | | 486 | | | | 82.9 | % | | | 558 | | | | 83.7 | % | | | 574 | | | | 83.4 | % | Gross profit | | | 100 | | | | 17.1 | % | | | 109 | | | | 16.3 | % | | | 114 | | | | 16.6 | % | Selling, general and administrative expenses | | | 55 | | | | 9.4 | % | | | 65 | | | | 9.7 | % | | | 62 | | | | 9.0 | % | Restructuring expenses | | | 9 | | | | 1.5 | % | | | 3 | | | | 0.4 | % | | | 1 | | | | 0.2 | % | Impairment charges | | | - | | | | - | | | | 8 | | | | 1.2 | % | | | 1 | | | | 0.2 | % | Operating income | | $ | 36 | | | | 6.2 | % | | $ | 33 | | | | 5.0 | % | | $ | 50 | | | | 7.2 | % |
Americas net sales decreased $81 million, or 12 percent, in fiscal 2016 we will report financial results forcompared with the new Americas operating segment, which will includeprior year. Sales were lower in both North America and South America. North America | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 574 | | | | 100.0 | % | | $ | 569 | | | | 100.0 | % | | $ | 565 | | | | 100.0 | % | Cost of sales | | | 477 | | | | 83.1 | % | | | 475 | | | | 83.6 | % | | | 484 | | | | 85.6 | % | Gross profit | | | 97 | | | | 16.9 | % | | | 94 | | | | 16.4 | % | | | 81 | | | | 14.4 | % | Selling, general and administrative expenses | | | 50 | | | | 8.7 | % | | | 50 | | | | 8.6 | % | | | 40 | | | | 7.2 | % | Restructuring expenses | | | 1 | | | | 0.2 | % | | | 1 | | | | 0.2 | % | | | - | | | | - | | Impairment charges | | | - | | | | - | | | | 1 | | | | 0.2 | % | | | 2 | | | | 0.3 | % | Operating income | | $ | 46 | | | | 8.0 | % | | $ | 42 | | | | 7.4 | % | | $ | 39 | | | | 6.9 | % |
foreign currency exchange rate changes. Sales in North America net sales increased $5decreased $43 million, or 1 percent, from fiscal 2014 to fiscal 2015, and increased $4 million, or 1 percent, from fiscal 2013 to fiscal 2014. The fiscal 2015 sales increase was primarily due to lower sales volume to off-highway and commercial vehicle customers, partially offset by higher sales volume to automotive customers. Sales volume to all markets in Brazil also declined during fiscal 2016, as economic conditions in Brazil remained weak. Sales decreased $21 million, or 3 percent, in fiscal 2015 compared with fiscal 2014, primarily due to lower sales in Brazil and a $9 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in North America, where higher sales volume to commercial vehicle customers were partially offset by decreased sales volume to off-highway customers as economic conditions in that market remained relatively weak. The fiscal 2014 sales increase, compared with fiscal 2013, was primarily due to higher sales volume to automotive and commercial vehicle customers, partially offset by decreasedlower sales volume to off-highway customers.
Gross profit decreased $9 million, yet gross margin increased 5080 basis points to 16.917.1 percent in fiscal 2016. The decrease in gross profit was primarily due to lower sales volume, a $3 million unfavorable impact of foreign currency exchange rate changes, and $2 million of environmental charges for investigative work related to a previously-owned manufacturing facility, partially offset by lower material costs, cost savings from the McHenry, Illinois manufacturing facility closure, and improved production efficiencies. Gross profit decreased $5 million and gross margin decreased 30 basis points to 16.3 percent in fiscal 2015 compared with fiscal 2014, primarily due to lower sales volume in Brazil, partially offset by lower warranty costs and sales volume improvements partially offset by unfavorable sales mix. The gross margin increasein North America.
Fiscal 2016 SG&A expenses decreased $10 million from fiscal 2013 to fiscal 2014 wasthe prior year, primarily due to lower material costs.
ongoing cost-control initiatives, the absence of a $3 million charge for a legal matter in Brazil in the prior year, and a $3 million favorable impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $50increased $3 million during fiscal 2015 were consistent with fiscal 2014. The $10 million increase in SG&A expenses in fiscal 2014 wasfrom the prior year, primarily due to higher compensation-related expenses and increased engineering and development costs.the $3 million charge for the legal matter in fiscal 2015.
During fiscal 2014, we approved a plan to close our McHenry, Illinois manufacturing facility and are currently in the process of transferring the facility’s production to other North America segment manufacturing facilities, which we expect to complete within the first six months of fiscal 2016. We recorded $1 million of restructuring expenses during fiscal 2015, primarily related to equipment transfer costs incurred to relocate McHenry’s product lines to other manufacturing facilities. In fiscal 2014, as a result of the planned closure,2016, we recorded $1$9 million of restructuring expenses, primarily related to severance expenses associated with a voluntary retirement program in the U.S., and the planned closure of our Washington, Iowa manufacturing facility, which we expect to complete during fiscal 2017, and equipment transfer costs and $1related to plant consolidation activities in North America. In fiscal 2015, we recorded $3 million of assetrestructuring expenses, primarily related to severance expenses in Brazil, to better align our cost structure with the market conditions in Brazil, and equipment transfer costs related to the closure of our McHenry, Illinois manufacturing facility, which we completed during fiscal 2016. We also recorded an $8 million goodwill impairment charges.charge during fiscal 2015, primarily due to a decline in the financial outlook for Brazil.
Operating income in fiscal 2015 of $46 million increased $4 million from $42$36 million in fiscal 2014, primarily due to2016 increased gross profit. Fiscal 2014 operating income improved $3 million compared with fiscal 2013,the prior year, primarily due to increased gross profit,lower SG&A expenses and the absence of the goodwill impairment charge in the prior year, partially offset by lower gross profit and higher restructuring expenses. Operating income of $33 million in fiscal 2015 decreased $17 million compared with the prior year, primarily due to the goodwill impairment charge, lower gross profit, and higher SG&A and restructuring expenses. 2627
Europe | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % | | $ | 498 | | | | 100.0 | % | Cost of sales | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % | | | 437 | | | | 87.7 | % | Gross profit | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % | | | 61 | | | | 12.3 | % | Selling, general and administrative expenses | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % | | | 45 | | | | 9.1 | % | Restructuring expenses | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % | | | 17 | | | | 3.4 | % | Impairment charges | | | - | | | | - | | | | 2 | | | | 0.3 | % | | | 24 | | | | 4.8 | % | Gain on sale of wind tunnel | | | (3 | ) | | | -0.6 | % | | | - | | | | - | | | | - | | | | - | | Operating income (loss) | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % | | $ | (25 | ) | | | -5.0 | % |
Europe
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 524 | | | | 100.0 | % | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % | Cost of sales | | | 456 | | | | 87.0 | % | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % | Gross profit | | | 68 | | | | 13.0 | % | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % | Selling, general and administrative expenses | | | 39 | | | | 7.4 | % | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % | Restructuring expenses | | | 6 | | | | 1.2 | % | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % | Impairment charges | | | 10 | | | | 1.9 | % | | | - | | | | - | | | | 2 | | | | 0.3 | % | Gain on sale of wind tunnel | | | - | | | | - | | | | (3 | ) | | | -0.6 | % | | | - | | | | - | | Operating income | | $ | 13 | | | | 2.5 | % | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % |
Europe net sales decreased $54 million, or 9 percent, in fiscal 2016 compared with the prior year, primarily due to a $76 million unfavorable impact of foreign currency exchange rate changes and lower sales volume to off-highway customers, partially offset by increased sales volume to commercial vehicle and automotive customers. Sales decreased $6 million, or 1 percent, fromin fiscal 2014 to2015 compared with fiscal 2015,2014, primarily due to a $35 million unfavorable impact of foreign currency exchange rate changes and lower tooling sales, partially offset by increased sales volume to commercial vehicle and automotive customers.
Gross profit decreased $1 million, yet gross margin increased 110 basis points to 13.0 percent in fiscal 2016. The $86 million, or 17 percent,gross margin increase in sales from fiscal 2013 to fiscal 2014 was primarily due to increasedhigher sales volume to commercial vehicle customers, higher tooling sales, and a $23lower material costs. In addition, gross profit was negatively impacted by $9 million favorable impact offrom foreign currency exchange rate changes.
Gross In fiscal 2015, gross margin decreased 20 basis points to 11.9 percent incompared with fiscal 2015,2014, primarily due to unfavorable sales mix, production inefficiencies caused by increased volume at certain manufacturing facilities and plant consolidation activities, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by the absence of $4 million of accelerated depreciation recorded in the prior yearfiscal 2014 for production equipment that is no longer used and lower warranty costs. Gross profit increased $10
Fiscal 2016 SG&A expenses decreased $5 million while gross margin declined 20 basis points to 12.1 percent in fiscal 2014 compared with fiscal 2013. This decrease in gross margin wasfrom the prior year, primarily due to a $5$6 million favorable customer pricing settlement in the prior year, $4 millionimpact of accelerated depreciation in fiscal 2014, and higher warranty costs, partially offset by higher sales volume, favorable sales mix, and lower material costs.
foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $44 million were consistent with the prior year, as higher engineering and development costs were offset by a favorable impact of foreign currency exchange rate changes. SG&A expenses decreased $1
In fiscal 2016, we recorded $6 million from fiscal 2013 to fiscal 2014, primarily due to the favorable impact of restructuring actionsexpenses, primarily related to severance expenses. In addition, we recorded a $10 million asset impairment charge. These restructuring expenses and lower engineering and development costs, partially offset by higher compensation-related expenses.
Duringimpairment charge primarily related to a manufacturing facility in Germany, which was generating pre-tax losses, resulting in management deciding to exit a certain product line in the future. In fiscal 2015, we recorded $2 million of restructuring expenses, primarily due to plant consolidation activities, as we substantially completed the combination of two manufacturing facilities in Germany into one, more competitive manufacturing operation. Also during fiscal 2015,and we sold a wind tunnel that we no longer considered to be a core asset for cash proceeds of $6 million, which resulted in a gain of $3 million. DuringIn fiscal 2014, and fiscal 2013, we recorded $15 million and $17 million, respectively, of restructuring expenses, primarily related to employee severance costs. Alsoexpenses, and $2 million of asset impairment charges.
Operating income of $13 million in fiscal 20142016 decreased $13 million compared with the prior year, primarily due to an increase in restructuring expenses and 2013 we recorded asset impairment charges totaling $2and the absence of a $3 million and $24 million, respectively, primarily related to several facilities that we have sold or expect to sell.
gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&A expenses. Operating income of $26 million in fiscal 2015 increased $16 million compared with fiscal 2014,the prior year, primarily due to a reduction in restructuring expenses and impairment charges and the gain from selling the wind tunnel. Operating income of $10 million in fiscal 2014 improved $35 million compared with fiscal 2013, primarily due to lower asset impairment charges and increased sales volume, which drove higher gross profit. 2728
South America | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 94 | | | | 100.0 | % | | $ | 123 | | | | 100.0 | % | | $ | 134 | | | | 100.0 | % | Cost of sales | | | 82 | | | | 87.2 | % | | | 102 | | | | 83.1 | % | | | 111 | | | | 83.2 | % | Gross profit | | | 12 | | | | 12.8 | % | | | 21 | | | | 16.9 | % | | | 23 | | | | 16.8 | % | Selling, general and administrative expenses | | | 14 | | | | 15.9 | % | | | 13 | | | | 10.8 | % | | | 12 | | | | 8.4 | % | Restructuring expenses | | | 2 | | | | 1.6 | % | | | - | | | | - | | | | - | | | | - | | Impairment charges | | | 8 | | | | 8.4 | % | | | - | | | | - | | | | - | | | | - | | Operating (loss) income | | $ | (12 | ) | | | -13.1 | % | | $ | 8 | | | | 6.1 | % | | $ | 11 | | | | 8.4 | % |
South America | | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 79 | | | | 100.0 | % | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % | Cost of sales | | | 67 | | | | 84.5 | % | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % | Gross profit | | | 12 | | | | 15.5 | % | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % | Selling, general and administrative expenses | | | 11 | | | | 14.5 | % | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % | Operating income (loss) | | $ | 1 | | | | 1.0 | % | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % |
Asia net sales decreased $29$2 million, or 243 percent, in fiscal 20152016 compared with fiscal 2014,the prior year, primarily due to lower sales volume to commercial vehicle, off-highway customers in China and automotive customers, as economic conditions in Brazil were generally weak in fiscal 2015,Korea and a $9 million unfavorable impact of foreign currency exchange rate changes, primarily due to the strengthening of the U.S. dollar versus the Brazilian real. Sales decreased $11 million, or 8 percent, in fiscal 2014 compared with fiscal 2013, primarily due to a $14$4 million unfavorable impact of foreign currency exchange rate changes, partially offset by increasedhigher sales volume to commercial vehicle customers.
Gross profit decreased $9 million and gross margin decreased to 12.8 percentautomotive customers in fiscal 2015 compared with the prior year, primarily due to lower sales volume. Gross profit decreased $2 million from fiscal 2013 to fiscal 2014, primarily due to a $2 million unfavorable impact of foreign currency exchange rate changes.
SG&A expenses in fiscal 2015 increased $1 million compared with fiscal 2014, primarily due to a $3 million charge for a legal matter in Brazil (see Note 19 of the Notes to Consolidated Financial Statements for more information), partially offset by the favorable impact of cost control measures and a $1 million favorable impact of foreign currency exchange rate changes. SG&A expenses increased $1 million from fiscal 2013 to fiscal 2014, primarily due to the reversal of a $2 million acquisition-related liability in fiscal 2013 and higher compensation-related expenses in fiscal 2014, partially offset by a $2 million favorable impact of foreign currency exchange rate changes.
During fiscal 2015, we recorded $2 million of restructuring expenses for employee severance-related costs to reduce headcount and better align our cost structure with the market conditions in Brazil. We also recorded an $8 million goodwill impairment charge during fiscal 2015, which was primarily caused by a decline in the financial outlook for the South America segment.
The $12 million operating loss in fiscal 2015 represented a $20 million decline compared with the prior year and was primarily due to lower gross profit on lower sales volume and the goodwill impairment charge. Operating income decreased $3 million from fiscal 2013 to fiscal 2014, primarily due to lower gross profit on lower sales volumeChina and increased SG&A expenses.
Asia | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % | | $ | 60 | | | | 100.0 | % | Cost of sales | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % | | | 58 | | | | 97.2 | % | Gross profit | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % | | | 2 | | | | 2.8 | % | Selling, general and administrative expenses | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % | | | 11 | | | | 17.6 | % | Operating income (loss) | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % | | $ | (9 | ) | | | -14.8 | % |
Asia netoverall sales in India. Sales increased $9 million, or 13 percent, in fiscal 2015 compared with fiscal 2014, primarily due to new automotive program launches in China and higherincreased overall sales across all markets in India, partially offset by lower sales volume within theto off-highway markets in China and Korea. Salescustomers.
Gross margin increased $12 million, or 20130 basis points to 15.5 percent in fiscal 20142016 compared with fiscal 2013,the prior year, primarily due to higherfavorable sales volume in the automotive and off-highway markets. mix. Gross profit increased $3 million and gross margin increased 170 basis points to 14.2 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume. Gross profit increased $7
Fiscal 2016 SG&A expenses decreased $1 million and gross margin increased to 12.5 percent in fiscal 2014 compared with fiscal 2013,from the prior year, primarily due to higher sales volume.
cost-control initiatives, partially offset by acquisition-related costs associated with a joint venture that we formed in fiscal 2016. See Note 3 to the Notes to Consolidated Financial Statements for additional information on this joint venture. Fiscal 2015 SG&A expenses in fiscal 2015 were consistent with the prior year, yet decreased as a percentage of sales. SG&A expenses increased
Operating income of $1 million in fiscal 20142016 increased $1 million compared with fiscal 2013, yet decreased slightly as a percentage of sales.
the prior year, primarily due to lower SG&A expenses. Operating income of less than $1 million in fiscal 2015 represented a $3 million improvement compared with the operating loss in the prior year, and was primarily due to higher gross profit on increased sales volume. The $3 million operating loss in fiscal 2014 represented a $6 million improvement from fiscal 2013, primarily due to higher gross profit.
Building HVAC | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % | | $ | 139 | | | | 100.0 | % | Cost of sales | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % | | | 98 | | | | 70.7 | % | Gross profit | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % | | | 41 | | | | 29.3 | % | Selling, general and administrative expenses | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % | | | 31 | | | | 22.1 | % | Operating income | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % | | $ | 10 | | | | 7.2 | % |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | (in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Net sales | | $ | 181 | | | | 100.0 | % | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % | Cost of sales | | | 127 | | | | 70.1 | % | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % | Gross profit | | | 54 | | | | 29.9 | % | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % | Selling, general and administrative expenses | | | 39 | | | | 21.6 | % | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % | Restructuring expenses | | | 1 | | | | 0.6 | % | | | - | | | | - | | | | - | | | | - | | Operating income | | $ | 14 | | | | 7.7 | % | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % |
Building HVAC net sales decreased $5 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to a $6 million unfavorable impact of foreign currency exchange rate changes and lower sales at our businesses in the U.K., as unfavorable currency conditions resulted in increased competition from other mainland European suppliers, partially offset by increased ventilation product sales in North America. Sales increased $40 million, or 27 percent, in fiscal 2015 compared with the prior year,fiscal 2014, primarily due to a $23 million increase in sales at our Airedale businessbusinesses in the U.K. and increased heating product sales in North America, as we experienced anothera strong heating season in fiscal 2015. The sales increase at Airedalein the U.K. was primarily due to a $13 million increase in sales at Barkell, which we acquired in the fourth quarter of fiscal 2014, and the continuing recovery from the Airedale fire, which caused a temporary halt in production during the prior fiscal year. In
Gross profit decreased $2 million in fiscal 2014, despite2016 compared with the negative impact of the Airedale fire, sales increased $7 million, or 5 percent,prior year, primarily due to increased heating product salesa $1 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased 10 basis points to 29.9 percent in North America.
fiscal 2016 compared with the prior year. Gross profit increased $13 million and gross margin improved 40 basis points to 30.0 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume. Fiscal 2016 SG&A expenses increased $2 million from the prior year, primarily due to higher sales volume. Gross profit increased $2the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in fiscal 2014 compared with the prior year, primarily due topartially offset by lower engineering and development costs and a $1 million favorable sales mix.
impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses increased $3 million or 9 percent, in fiscal 2015 compared withfrom the prior year, primarily due to additional costs from Barkell and increased expenses associated with higher sales levels, partially offset by $5 million ofthe recoveries from business interruption insurance for the Airedale fire. SG&A expenses increased $3 million, or 10 percent, in
In fiscal 2014 compared with fiscal 2013, primarily due to higher compensation-related expenses,2016, we recorded $1 million of non-recoverable costs directlyrestructuring expenses, primarily related to the Airedale fire, and increased acquisition-related expenses for Barkell.severance expenses.
Operating income of $19$14 million increased $10in fiscal 2016 decreased $5 million compared with the prior year, primarily due to lower gross profit and higher SG&A expenses. Operating income of $19 million in fiscal 2015 increased $10 million compared with the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses. Operating income decreased $1 million from fiscal 2013 to fiscal 2014, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at March 31, 20152016 of $71$69 million, and an available borrowing capacity of $216$207 million under lines of credit provided by banks in the United States and abroad. Due to the timing of insurance proceeds related to the Airedale fire, our cash and cash equivalents at March 31, 2015 include approximately $13 million of advances from our insurance provider that will be spent for recovery and reconstruction costs. Given our extensive international operations, significant amounts$49 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds would be subject to U.S. tax if repatriated. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.
During fiscal 2016, our Board of Directors approved a $50 million share repurchase program, which expires in November 2016. We repurchased $7 million of shares under this program in fiscal 2016. Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 2016 was $72 million, an increase of $8 million from $64 million in the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital, including lower incentive compensation payments during fiscal 2016 and the timing of value-added tax payments. Net cash provided by operating activities in fiscal 2015 was $64 million, a decrease of $41 million from $105 million in the prior year. This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, including higher incentive compensation payments during fiscal 2015 related to fiscal 2014 performance, and the timing of customer-owned tooling reimbursements. Net cash provided by operating activities in fiscal 2014 was $105 million, an increase of $56 million from $49 million in the prior year. The increase in operating cash flows resulted from an increase in gross profit, partially offset by higher SG&A expenses, and improvements in working capital as compared with fiscal 2013.
We expect to be reimbursed by our insurance provider for substantially all losses and expenses directly related to the fire at our Airedale manufacturing facility, including substantially all costs to reconstruct the facility. The expected timing of cash recoveries from our insurance provider is such that we do not expect the fire will have a significant adverse effect on our liquidity.
Capital Expenditures
Capital expenditures of $58$63 million during fiscal 20152016 increased $5 million compared with fiscal 2014.2015. In fiscal 2015,2016, our capital spending primarily occurred in the North AmericaAmericas and Europe segments, which totaled $26$27 million and $22$25 million, respectively. Capital projects in fiscal 20152016 included tooling and equipment purchases in conjunction with program launchesnew and renewal programs with customers, as well as a building expansion at our Nuevo Laredo manufacturing facility in the North America segment.customers.
At March 31, 2015,2016, our capital expenditure commitments totaled $16$21 million. Significant commitments included tooling and equipment expenditures for new and renewal programs with customers in North Americathe Americas and Europe.Europe segments.
Dividends
We did not pay dividends in fiscal 2016, 2015, 2014, or 2013.2014. We currently do not intend to pay dividends in fiscal 2016.2017.
Debt
Our total debt outstanding decreased $16increased $14 million to $149$163 million at March 31, 20152016, compared with the prior year, as our debt repayments exceeded our borrowings.primarily due to borrowings in China and Mexico for capital investments. See Note 16 of the Notes to Consolidated Financial Statements for furtheradditional information regarding our debt agreements.
Our debt agreements require us to maintain compliance with various covenants. Under our primary debt agreements in the U.S., we are subject to a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a certain portion of our cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
Our leverage ratio for the four fiscal quarters ended March 31, 20152016 was 1.2, which was below the maximum permitted ratio of 3.25. Our interest expense coverage ratio for the four fiscal quarters ended March 31, 20152016 was 10.3,10.5, which exceeded the minimum requirement of 3.0. We were in compliance with our debt covenants as of March 31, 20152016 and expect to remain in compliance during fiscal 20162017 and beyond. In the event of an acquisition, our leverage ratio may be temporarily raised for several quarters, per the terms of our debt agreements.
Pension Obligations
Our net pension liabilities totaled $111 million for plans in the U.S. and at certain foreign subsidiaries as of March 31, 2015. We contributed $7 million to these plans in fiscal 2015 and expect to contribute approximately $8 million to our pension plans during fiscal 2016. In May 2015, we approved a program to offer a voluntary, lump-sum pension payout to certain eligible former employees who participate in our U.S. pension plan. If the lump-sum payout is elected by the participant, the payout would effectively settle our pension obligation with that participant, thereby eliminating the risk of future changes in our pension obligation for that participant. As a result of this program, we expect to record a settlement loss of approximately $20-30 million in the second quarter of fiscal 2016, based on estimated participation rates and estimated actuarial assumptions. This settlement loss would represent the accelerated recognition of unamortized actuarial losses associated with our pension liabilities. The lump-sum settlements will be paid from plan assets and will not impact our operating cash flow.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
| | March 31, 2015 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 125.2 | | | $ | 0.2 | | | $ | 24.0 | | | $ | 32.0 | | | $ | 69.0 | | Interest associated with long-term debt | | | 38.8 | | | | 8.5 | | | | 16.1 | | | | 11.9 | | | | 2.3 | | Capital lease obligations | | | 4.9 | | | | 0.3 | | | | 0.6 | | | | 0.6 | | | | 3.4 | | Operating lease obligations | | | 49.9 | | | | 8.2 | | | | 10.0 | | | | 7.8 | | | | 23.9 | | Capital expenditure commitments | | | 15.5 | | | | 13.0 | | | | 2.5 | | | | - | | | | - | | Other long-term obligations | | | 10.9 | | | | 1.6 | | | | 3.2 | | | | 2.6 | | | | 3.5 | | Total contractual obligations | | $ | 245.2 | | | $ | 31.8 | | | $ | 56.4 | | | $ | 54.9 | | | $ | 102.1 | |
| | March 31, 2016 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 125.4 | | | $ | 8.0 | | | $ | 32.2 | | | $ | 85.2 | | | $ | - | | Interest associated with long-term debt | | | 30.3 | | | | 8.5 | | | | 14.1 | | | | 7.7 | | | | - | | Capital lease obligations | | | 8.6 | | | | 0.5 | | | | 0.8 | | | | 0.8 | | | | 6.5 | | Operating lease obligations | | | 53.5 | | | | 8.1 | | | | 10.4 | | | | 8.7 | | | | 26.3 | | Capital expenditure commitments | | | 20.5 | | | | 20.0 | | | | 0.5 | | | | - | | | | - | | Other long-term obligations | | | 3.6 | | | | 1.7 | | | | 1.2 | | | | 0.7 | | | | - | | Total contractual obligations | | $ | 241.9 | | | $ | 46.8 | | | $ | 59.2 | | | $ | 103.1 | | | $ | 32.8 | |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $121$129 million as of March 31, 2015.2016. We are unable to determine the ultimate timing of payments for these liabilities; therefore, we have excluded these amounts from the contractual obligations table above.
We have a contractual commitmentexpect to rebuild the leased Airedale facility, which suffered significant destruction from a firecontribute $8 million to our U.S. pension plans during fiscal 2014. We maintain insurance coverage and believe reimbursement for reconstruction costs is probable. The estimated costs associated with the reconstruction of the Airedale facility of $48 million have been excluded from the contractual obligations table above. See Note 2 of the Notes to Consolidated Financial Statements for further information.2017.
Critical Accounting Policies
The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements. Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements. The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements. In addition, recently issued accounting pronouncements that could significantly impact our financial statements are included in Note 1 of the Notes to Consolidated Financial Statements. Revenue Recognition
We recognize revenue, including agreed-upon commodity price increases or decreases,prices, when the risks and rewards of ownership are transferred to our customers, which generally occurs upon shipment. Revenue is recorded net of applicable provisions for sales rebates, volume incentives, and returns and allowances. At the time of revenue recognition, we also record estimates for bad debt expense and warranty expense. We base these estimates on historical experience, current business trends, and current economic conditions. PriceWe recognize price increases that are agreed upon in advance are recognized as revenue when the products are shipped to our customers. Impairment of Long-Lived Assets
We perform impairment evaluations of long-lived assets, including property, plant and equipment, intangible assets and equity investments, whenever business conditions or events indicate that those assets may be impaired. We consider factors such as operating losses, declining financial outlooks and market conditions, when evaluating the necessity for an impairment analysis. When the estimated futurenet asset values exceed undiscounted cash flows expected to be generated by the assets are less than the carrying value of the long-lived assets, or the decline in value is considered to be “other than temporary,” we write down the assets are written down to fair market value and arecord an impairment charge is recorded to current operations. We estimate fair market value in various ways depending on the nature of the assets under review. Fair value is generally based on appraised value, estimated salvage value, or selling prices under negotiation, or estimated cancellation charges, as applicable. The most significant long-lived assets that we have evaluated for impairment areindicators were property, plant and equipment, which totaled $322$339 million at March 31, 2015.2016. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment. We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility. This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy. When such indicators are present, we perform an impairment evaluation by comparing the estimated future undiscounted cash flows expectedevaluation. During fiscal 2016, we recorded a $10 million impairment charge related to be generated in thea manufacturing facility in Germany. See Note 6 of the Notes to the net book value of the long-lived assets within that facility. We estimate the undiscounted cash flows based on the expected future cash flows to be generated by the manufacturing facility over its remaining useful life. When the estimated future undiscounted cash flows are less than the net book value of the long-lived assets, we write such assets down to fair value, which we generally estimate based upon appraisals or estimated salvage value.Consolidated Financial Statements for additional information.
Impairment of Goodwill
We perform goodwill impairment tests annually, as of March 31, unless business events or other conditions exist that require a more frequent evaluation. At March 31, 2016, our goodwill totaled $16 million, primarily related to our Building HVAC segment. We consider factors such as operating losses, declining financial and market outlooks and market capitalization when evaluating the necessity for an interim impairment analysis. Goodwill is tested for impairment at a reporting unit level, which we have determined to be at the operating segment level. Our first step in this test is to compare the fair value of the reporting unit to its carrying value. We determine the fair value of a reporting unit based upon the present value of estimated future cash flows. If the fair value of the reporting unit exceeds the carrying value of the unit’s net assets, goodwill of that reporting unit is not impaired and further testing is not required. If the carrying value of the reporting unit’s net assets exceeds the fair value of the unit, then we perform the second step of the impairment test to determine the implied fair value of the reporting unit’s goodwill and any impairment charge. In estimating the implied fair value of goodwill for a reporting unit, we assign the fair value to the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of the reporting unit goodwill over its implied fair value is recorded as an impairment charge. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rate, business trends and market conditions. TheWe determine the expected future revenue growth rates and operating profit margins are determined after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for country-specific risks where appropriate.
We conducted our annual assessment for goodwill impairment during the fourth quarter of fiscal 20152016 by applying a fair value-based test. The South Americatest and determined the fair value of our reporting units carrying valuesubstantially exceeded its fair value; therefore, we performed the second step of the goodwill impairment test, as described above. As a result, we determined our South America reporting unit’s goodwill was fully impaired and recorded an $8 million goodwill impairment charge. As fiscal 2015 progressed, we experienced relatively weak financial results for our South America reporting unit. During the fourth quarter of fiscal 2015, our outlook for the markets served by our South America reporting unit, primarily in Brazil, shifted from a view that the markets may begin to recover to a view that the market downturn may be more prolonged. The economic weakness in Brazil has negatively affected our expected future cash flows for the South America segment. Our impairment analysis assumed a discount rate of 22 percent, which corresponds to our cost of capital adjusted for a higher expectation of future inflation and uncertainty in the Brazilian economy, and future revenue growth and operating profit margins based upon our current outlook for the South America reporting unit.their respective book values.
Warranty Costs
We estimate costs related to product warranties and accrue for such costs at the time of the sale, within cost of sales. We estimate warranty costs based upon the best information available, which includes statistical and analytical analysis of both historical and current claim data. We monitor and adjust original estimatesour warranty accruals, which totaled $8 million at March 31, 2016, if we expect futureit is probable that expected claims will differ from the initialprevious estimates. 32
Tooling Costs
We capitalize production tooling costs incurred in the manufacture of products for customer programs as a component of property, plant and equipment, net of any customer reimbursements, when we retain title to the tooling. We depreciate these capitalized costs in cost of sales over the estimated life of the asset, which is generally three years. For customer-owned tooling costs incurred, we record a receivable when the customer has guaranteed reimbursement to us. Reimbursement typically occurs prior to the start of production, but this can vary by program and by customer. We do not have any significant customer arrangements under which customer-owned tooling costs were not accompanied by guaranteed reimbursements.
Assets Held for Sale
Assets are considered to be held for sale when management approves and commits to a formal plan to actively market the asset for sale, at a sales price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, the sale of the asset is expected to be completed within one year, and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, we record the carrying value of the asset at the lower of its carrying value or estimated fair value, less costs to sell. We cease recording depreciation expense at the time of designation as held for sale.
Pension Obligations
TheOur calculation of the expense and liabilities of our pension plans is dependent upon various assumptions. At March 31, 2016, our pension liabilities totaled $120 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality rate tables. We basedbase our selection of assumptions on historical trends and economic and market conditions at the time of valuation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods. These differences impact future pension expenses. Currently, participants in our domestic pension plans are not accruing benefits based on their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.
In late calendar 2014, the U.S. Society of Actuaries issued updated mortality and mortality improvement tables, which effectively increased life expectancies. We considered the new mortality tables, along with characteristics of our plan-specific populations, in developing our best estimate of the expected mortality of plan participants for our March 31, 2015 measurement date. The impact of the new mortality assumptions resulted in an increase of approximately $9 million in both our U.S. pension plans’ actuarial loss and pension benefit obligation.
For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our benefit plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in fiscal 20152016 and 20142015 was 8.0 percent. For fiscal 2016,2017, we have also assumed a rate of 8.0 percent. The impact of a 25 basis point decrease in the expected rate of return on assets would result in an increase of $0.5$0.4 million in fiscal 20162017 pension expense.
The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds reset annually on the measurement date of March 31. For fiscal 2015,2016, we used a discount rate of 4.04.1 percent, compared with 4.74.0 percent in fiscal 2014.2015. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows from the affected plans. See Note 17 of the Notes to Consolidated Financial Statements for additional information. A change in the assumed discount rate of 25 basis points would impact our fiscal 20162017 pension expense by less than $0.1 million.
Income Taxes 33
Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. We adjust these amounts to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in certain jurisdictions will not be realized. This determination involves significant judgment. In performing this assessment on a jurisdiction-by-jurisdiction basis, we consider historical and projected financial results along with other pertinent information.
We have not recorded a provision for U.S. income taxes on undistributed earnings from our non-U.S. subsidiaries that we have determined to be permanently reinvested in our foreign operations. If management’s intentions or U.S. tax law changes in the future, there could be a significant negative impact on our provision for income taxes.
See Note 8 of the Notes to Consolidated Financial Statements for additional information regarding income taxes. Other Loss Reserves
We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, self-insurance reserves, uncollectible accounts receivable, recoverability of deferred income taxes, regulatory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. We estimate these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Note 19 of the Notes to Consolidated Financial Statements for additional detailsinformation regarding contingencies and litigation. Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of this report. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| · | Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs, inflation, changes in interest rates, recession and recovery therefrom, restrictions associated with importing and exporting and foreign ownership, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China Western Europe, Russia and North America, and the continued deterioration in and weak forecasts for the Brazilian economy; |
| · | The impact of potential increases in commodity prices, particularlyincluding our ability to successfully manage our exposure to the changingand/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel); |
| · | Our ability to successfully manage commodity risk and/or pass increasing commodity prices on to customers, as well as the inherent lag in timing of such pass-through pricing;arrangements; and |
| · | The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental emissions standards.and/or energy standards and objectives. |
Operational Risks:
| · | The overall health and increasing price-down focus of our original equipment manufacturer customers in light of some remaining economic and market-specific challenges, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; |
| · | Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction pressures from customers, particularly in the face of macro-economic instability; |
| · | Our ability to effectively and efficiently complete the restructuring activities in our North America, Europe, and South America segments and realize expected commercial and operational efficiencies and associated cost reductionssavings and increased competitivenessother benefits associated with our Strengthen, Diversify and profitability as a result;Grow transformational strategy; |
| · | Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims; |
| · | Our ability to obtain and retain profitable business in our Asia segment, and, in particular, in China; |
| · | Unanticipated delays or modifications initiated by major customers with respect to product launches, product applications or requirements; |
| · | Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, particularly in light of some continuing economic challenges in areas of the world in which we and our suppliers operate; |
| · | Complexities and inefficiencies introduced by the September 2013 fire at our Airedale facility in the U.K., including ourOur ability to continue to meet customer demands at temporary locations, to timelyeffectively and efficiently complete restructuring activities in our Europe segment and realize expected cost reductions and effectively deploy insurance proceeds to replace machineryincreased competitiveness and equipment and rebuild the facility with minimal financial impact from the business interruption, and to complete and relocate to the new facility in an efficient, timely manner;profitability as a result; |
| · | Our ability to complete the transition of our Washington, Iowa production to other facilities efficiently and effectively; |
| · | Costs and other effects of the remediation of environmental contamination; |
| · | Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith; |
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; and |
| · | Costs and other effects of unanticipated litigation or claims, and the increasingconstant pressures associated with rising healthcare and insurance costs. |
Strategic Risks:
| · | Our ability to identify and implementexecute appropriate growthopportunities to enable us to achieve our Strengthen, Diversify and diversification strategies thatGrow transformational strategy in order to position us for long-term success. |
Financial Risks:
| · | Our ability to fund our global liquidity requirements efficiently, particularly those in our Asia business segment, and meet our long-term commitments in the event of any unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
| · | The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, British pound, and Indian rupee relative to the U.S. dollar; and |
| · | Our ability to realize the benefits of tax assets in various jurisdictions in which we operate. |
In addition to the risks set forth above, we are subject to other risks and uncertainties as identified in our public filings with the U.S. Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.
ITEM 7A.7A . | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
In the normal course of business, we are subject to market exposure from changes in foreign exchange rates, interest rates, commodity prices, credit risk and economic conditions. Foreign Currency Risk
We are subject to the risk of changes in foreign currency exchange rates due to our operations in foreign countries. We have manufacturing facilities in Brazil, China, India, Mexico, South Africa, and throughout Europe. We also have joint ventures in China, Japan and South Korea. We sell and distribute products throughout the world and also purchase raw materials from foreign countries. As a result, our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which we do business. We attempt to mitigate foreign currency risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the functional currency of the subsidiary engaging in the transaction. Our financial results are principally exposed to changes in exchange rates between the U.S. dollar and the European currencies, primarily the euro, and changes between the U.S. dollar and the Brazilian real.real, and between the euro and the British pound. In fiscal 2016, 2015, 2014, and 2013,2014, more than 50 percent of our sales were generated in countries outside the U.S. A change in foreign exchange rates will positively or negatively affect our sales; however, this impact will be offset, usually to a large degree, with an offsettinga corresponding effect on our expenses. In fiscal 2015,2016, changes in foreign currencies negatively impacted our sales by $43$110 million; however, the impact on our operating income was less than $1only $4 million. Foreign currency exchange risk can be estimated by measuring the impact of a near-term adverse movement of 10 percent in foreign currency exchange rates. If these rates were 10 percent higher or lower during fiscal 2015,2016, there would not have been a material impact on our fiscal 20152016 earnings. We maintain, from time to time, foreign-denominated, long-term debt obligations and long-term intercompany loans that are subject to foreign currency exchange risk. As of March 31, 2015, there were no third-party foreign-denominated, long-term debt obligations or2016, we did not have any long-term intercompany loans for which changes in foreign currency exchange rates would impact our net earnings. From time to time, we enter into currency rate derivative contracts to manage the foreign exchange rate exposure on these types of loans. These derivative instruments are typically not treated as hedges, and accordingly, gains or losses on the derivatives are recorded in other income and expense in the consolidated statements of operations and act to offset any currency movement on the outstanding loans receivable or payable.
Interest Rate Risk
Our interest rate risk policies are designedWe actively seek to reduce the potential volatility of earnings that could arise from changes in interest rates. We generally utilize a mixture of debt maturities and both fixed-rate and floating-rate debt to manage exposure to changes in interest rates. Our domestic revolving credit facility is based on a variable interest rate of London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points, depending on our leverage ratio. We are subject to risk of fluctuations in LIBOR and changes in our leverage ratio, which would affect the variable interest rate on our revolving credit facility and could create variability in interest expense. There were no borrowings outstanding under the revolving credit facility as of March 31, 2015.2016. Based on our outstanding debt with variable interest rates at March 31, 2015,2016, a 100 basis point increase in interest rates would increase our annual interest expense in fiscal 20162017 by less than $1 million.
Commodity Price Risk
We are dependent upon the supply of raw materials and supplies in the production process and, from time to time, enter into firm purchase commitments for aluminum, copper, nickel, and natural gas. We maintain agreements with certain customers to pass through specified raw material price fluctuations in order to mitigate commodity price risk. The majority of these agreements contain provisions in which the pass-through of the price fluctuations can lag behind the actual fluctuations by three months or longer, and typically the arrangements are limited to the underlying material cost based upon the London Metal Exchange.
Credit Risk
Credit risk represents the possibility of loss from a customer's failurecustomer failing to make payment according to contract terms. Our principal credit risk consists of outstanding trade accounts receivable. At March 31, 2015, 472016, 45 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, commercial vehicle, and off-highway markets and are influenced by similar market and general economic factors. In the past, credit losses from our customers have not been significant.
We manage credit risk through a focus on the following:
| · | Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. OurWe consider our holdings in cash and investments were consideredto be stable and secure at March 31, 2015;2016; |
| · | Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer's financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer's financial condition and applicable business news; |
| · | Pension assets – We have retained outside advisors to assist in the management of the assets in our pension plans. In making investment decisions, we utilize an established risk management protocol that focuses on protection of the plan assets against downside risk. We ensure that investments within these plans provide appropriate diversification, the investments are monitored by investment teams, and portfolio managers adhere to the established investment policies. We believe the plan assets are subject to appropriate investment policies and controls; and |
| · | Insurance – We monitor our insurance providers to ensure they have acceptable financial ratings. We have not identified any concerns in this regard based upon our reviews. |
Economic Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate. We sell a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, automotive, off-highway, and building HVAC markets. We operate in diversified markets as a strategy for offsetting the risk associated with a downturn in any of the markets we serve. However, risk associated with market downturns, such as the global downturn experienced in fiscal 2009 and fiscal 2010, is still present.
We monitor economic conditions in the U.S., in our foreign markets and elsewhere. As we expand our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes and the like. We continue to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions.
We pursue new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon our ability to commercialize our investments. Current examples of new and emerging markets for us include those related to waste heat recovery, coils, and the Chinese and Indian markets. Our investment in these areas is subject to the risks associated with business integration, technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
We anticipate that continued recovery from the global recessionwithin some of our geographic and economicend markets, and particularly growth in China may put production pressure on certain suppliers of our raw materials. In particular, there are a limited number of suppliers of aluminum, copper, and steel material. We are exposed to the risk of suppliers of certain raw materials not being able to meet customer demand as they may not increase their output capacity as quickly as customers increase their orders, and of increased prices being charged by raw material suppliers.
In addition, we purchase parts from suppliers that use our tooling to create the parts. In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts. As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require. Even in situations where suppliers are manufacturing parts without the use of our tooling, we face the challenge of obtaining consistently high-quality parts from suppliers that are financially stable. We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate higher-risk supplier situations.
In addition to the above risks on the supply side, we are also exposed to risks associated with demands by our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, but these agreements often contain provisions for future price reductions. In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: We have enteredFrom time to time, we enter into futures contracts from time to time, related to certain forecasted purchases of aluminum and copper. Our strategy wasis to reduce our exposure to changing market prices for future purchases of these commodities. In fiscal 2016, 2015, 2014, and 2013,2014, expenses related to commodity derivative contracts totaled less than $1 million $1 million, and $5 million, respectively.each year. Foreign currency forward contracts: Our foreign exchange risk management strategy uses derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. We have not designated these forward contracts as hedges. Accordingly, we record unrealized gains and losses related to the change in the fair value of the contracts in other income and expense. Gains and losses on these foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
Counterparty risks: We manage counterparty risks by ensuring that counterparties to derivative instruments have credit ratings acceptable to us. At March 31, 2015,2016, all counterparties had a sufficient long-term credit rating. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions, except per share amounts)
| | 2015 | | | 2014 | | | 2013 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | | Cost of sales | | | 1,249.9 | | | | 1,239.4 | | | | 1,167.4 | | Gross profit | | | 246.5 | | | | 238.2 | | | | 208.6 | | Selling, general and administrative expenses | | | 184.5 | | | | 181.7 | | | | 166.3 | | Restructuring expenses | | | 4.7 | | | | 16.1 | | | | 17.0 | | Impairment charges | | | 7.8 | | | | 3.2 | | | | 25.9 | | Gain on sale of wind tunnel | | | (3.2 | ) | | | - | | | | - | | Operating income (loss) | | | 52.7 | | | | 37.2 | | | | (0.6 | ) | Interest expense | | | (11.7 | ) | | | (12.4 | ) | | | (12.6 | ) | Other income (expense) – net | | | 0.2 | | | | (0.8 | ) | | | 0.2 | | Earnings (loss) from continuing operations before income taxes | | | 41.2 | | | | 24.0 | | | | (13.0 | ) | (Provision) benefit for income taxes | | | (19.0 | ) | | | 107.9 | | | | (9.8 | ) | Earnings (loss) from continuing operations | | | 22.2 | | | | 131.9 | | | | (22.8 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) | | | 22.8 | | | | 131.9 | | | | (22.8 | ) | Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Net earnings (loss) attributable to Modine | | $ | 21.8 | | | $ | 130.4 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Earnings (loss) per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.45 | | | $ | 2.75 | | | $ | (0.52 | ) | Diluted | | $ | 0.44 | | | $ | 2.72 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.46 | | | $ | 2.75 | | | $ | (0.52 | ) | Diluted | | $ | 0.45 | | | $ | 2.72 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | | | Basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | Diluted | | | 47.8 | | | | 47.6 | | | | 46.6 | |
| | 2016 | | 2015 | | 2014 | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | | Cost of sales | | | 1,129.0 | | | | 1,249.9 | | | | 1,239.4 | | Gross profit | | | 223.5 | | | | 246.5 | | | | 238.2 | | Selling, general and administrative expenses | | | 204.5 | | | | 184.5 | | | | 181.7 | | Restructuring expenses | | | 16.6 | | | | 4.7 | | | | 16.1 | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | Operating (loss) income | | | (7.5 | ) | | | 52.7 | | | | 37.2 | | Interest expense | | | (11.1 | ) | | | (11.7 | ) | | | (12.4 | ) | Other income (expense) – net | | | 8.7 | | | | 0.2 | | | | (0.8 | ) | (Loss) earnings from continuing operations before income taxes | | | (9.9 | ) | | | 41.2 | | | | 24.0 | | Benefit (provision) for income taxes | | | 8.9 | | | | (19.0 | ) | | | 107.9 | | (Loss) earnings from continuing operations | | | (1.0 | ) | | | 22.2 | | | | 131.9 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings | | | (1.0 | ) | | | 22.8 | | | | 131.9 | | Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Net (loss) earnings attributable to Modine | | $ | (1.6 | ) | | $ | 21.8 | | | $ | 130.4 | | | | | | | | | | | | | | | (Loss) earnings per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | Diluted | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | | | | | | | | | | | | | | Net (loss) earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | Diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | Basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | Diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | 2015 | | | 2014 | | | 2013 | | Net earnings (loss) | | $ | 22.8 | | | $ | 131.9 | | | $ | (22.8 | ) | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | (68.2 | ) | | | 9.7 | | | | (17.1 | ) | Defined benefit plans, net of income taxes of ($13.2), $9.8 and $0 million | | | (26.7 | ) | | | 13.9 | | | | (23.6 | ) | Cash flow hedges, net of income taxes of $0, $0.6 and $0 million | | | - | | | | 1.1 | | | | 2.6 | | Total other comprehensive income (loss) | | | (94.9 | ) | | | 24.7 | | | | (38.1 | ) | | | | | | | | | | | | | | Comprehensive income (loss) | | | (72.1 | ) | | | 156.6 | | | | (60.9 | ) | Comprehensive income attributable to noncontrolling interest | | | (0.8 | ) | | | (1.7 | ) | | | (1.4 | ) | Comprehensive income (loss) attributable to Modine | | $ | (72.9 | ) | | $ | 154.9 | | | $ | (62.3 | ) |
| | 2016 | | 2015 | | 2014 | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | 4.6 | | | | (68.2 | ) | | | 9.7 | | Defined benefit plans, net of income taxes of $11.8, ($13.2) and $9.8 million | | | 19.7 | | | | (26.7 | ) | | | 13.9 | | Cash flow hedges, net of income taxes of $0, $0 and $0.6 million | | | - | | | | - | | | | 1.1 | | Total other comprehensive income (loss) | | | 24.3 | | | | (94.9 | ) | | | 24.7 | | | | | | | | | | | | | | | Comprehensive income (loss) | | | 23.3 | | | | (72.1 | ) | | | 156.6 | | Comprehensive income attributable to noncontrolling interest | | | (0.5 | ) | | | (0.8 | ) | | | (1.7 | ) | Comprehensive income (loss) attributable to Modine | | $ | 22.8 | | | $ | (72.9 | ) | | $ | 154.9 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS March 31, 20152016 and 20142015 (In millions, except per share amounts)
| | 2015 | | | 2014 | | ASSETS | | | | | | | Cash and cash equivalents | | $ | 70.5 | | | $ | 87.2 | | Trade accounts receivable – net | | | 192.9 | | | | 221.1 | | Inventories | | | 107.7 | | | | 116.8 | | Deferred income taxes | | | 13.4 | | | | 13.0 | | Other current assets | | | 79.7 | | | | 60.7 | | Total current assets | | | 464.2 | | | | 498.8 | | Property, plant and equipment – net | | | 322.1 | | | | 359.6 | | Intangible assets – net | | | 9.9 | | | | 12.4 | | Goodwill | | | 16.2 | | | | 28.7 | | Deferred income taxes | | | 102.7 | | | | 98.6 | | Other noncurrent assets | | | 16.5 | | | | 34.2 | | Total assets | | $ | 931.6 | | | $ | 1,032.3 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | Short-term debt | | $ | 18.6 | | | $ | 32.4 | | Long-term debt – current portion | | | 0.5 | | | | 0.8 | | Accounts payable | | | 152.0 | | | | 171.1 | | Accrued compensation and employee benefits | | | 56.7 | | | | 70.8 | | Other current liabilities | | | 83.4 | | | | 82.1 | | Total current liabilities | | | 311.2 | | | | 357.2 | | Long-term debt | | | 129.6 | | | | 131.2 | | Deferred income taxes | | | 3.4 | | | | 7.3 | | Pensions | | | 110.4 | | | | 81.0 | | Other noncurrent liabilities | | | 16.4 | | | | 27.0 | | Total liabilities | | | 571.0 | | | | 603.7 | | Commitments and contingencies (see Note 19) | | | | | | | | | Shareholders' equity: | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 48.6 million and 48.3 million shares | | | 30.4 | | | | 30.2 | | Additional paid-in capital | | | 180.6 | | | | 175.7 | | Retained earnings | | | 359.8 | | | | 338.0 | | Accumulated other comprehensive loss | | | (198.6 | ) | | | (103.9 | ) | Treasury stock, at cost, 0.7 million shares | | | (16.2 | ) | | | (15.2 | ) | Total Modine shareholders' equity | | | 356.0 | | | | 424.8 | | Noncontrolling interest | | | 4.6 | | | | 3.8 | | Total equity | | | 360.6 | | | | 428.6 | | Total liabilities and equity | | $ | 931.6 | | | $ | 1,032.3 | |
| | 2016 | | 2015 | ASSETS | | | | | | | Cash and cash equivalents | | $ | 68.9 | | | $ | 70.5 | | Trade accounts receivable – net | | | 189.1 | | | | 192.9 | | Inventories | | | 111.0 | | | | 107.7 | | Other current assets | | | 43.5 | | | | 79.7 | | Total current assets | | | 412.5 | | | | 450.8 | | Property, plant and equipment – net | | | 338.6 | | | | 322.1 | | Intangible assets – net | | | 8.2 | | | | 9.9 | | Goodwill | | | 15.8 | | | | 16.2 | | Deferred income taxes | | | 123.1 | | | | 115.4 | | Other noncurrent assets | | | 22.7 | | | | 16.5 | | Total assets | | $ | 920.9 | | | $ | 930.9 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | Short-term debt | | $ | 28.6 | | | $ | 18.6 | | Long-term debt – current portion | | | 8.5 | | | | 0.5 | | Accounts payable | | | 142.4 | | | | 152.0 | | Accrued compensation and employee benefits | | | 58.6 | | | | 56.7 | | Other current liabilities | | | 35.5 | | | | 83.0 | | Total current liabilities | | | 273.6 | | | | 310.8 | | Long-term debt | | | 125.5 | | | | 129.6 | | Deferred income taxes | | | 4.2 | | | | 3.1 | | Pensions | | | 118.6 | | | | 110.4 | | Other noncurrent liabilities | | | 16.3 | | | | 16.4 | | Total liabilities | | | 538.2 | | | | 570.3 | | Commitments and contingencies (see Note 19) | | | | | | | | | Shareholders' equity: | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 49.0 million and 48.6 million shares | | | 30.6 | | | | 30.4 | | Additional paid-in capital | | | 185.6 | | | | 180.6 | | Retained earnings | | | 358.2 | | | | 359.8 | | Accumulated other comprehensive loss | | | (174.2 | ) | | | (198.6 | ) | Treasury stock, at cost, 1.6 million and 0.7 million shares | | | (24.0 | ) | | | (16.2 | ) | Total Modine shareholders' equity | | | 376.2 | | | | 356.0 | | Noncontrolling interest | | | 6.5 | | | | 4.6 | | Total equity | | | 382.7 | | | | 360.6 | | Total liabilities and equity | | $ | 920.9 | | | $ | 930.9 | |
The notes to consolidated financial statements are an integral part of these statements. 4140
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | 2015 | | | 2014 | | | 2013 | | Cash flows from operating activities: | | | | | | | | | | Net earnings (loss) | | $ | 22.8 | | | $ | 131.9 | | | $ | (22.8 | ) | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 51.6 | | | | 58.1 | | | | 55.8 | | Insurance proceeds from Airedale fire | | | 12.9 | | | | 16.9 | | | | - | | Pension and postretirement expense | | | 2.3 | | | | 3.2 | | | | 1.9 | | Gain on sale of wind tunnel | | | (3.2 | ) | | | - | | | | - | | Impairment charges | | | 7.8 | | | | 3.2 | | | | 25.9 | | Loss from disposition of property, plant and equipment | | | 1.1 | | | | 2.6 | | | | 2.5 | | Deferred income taxes | | | 5.9 | | | | (116.1 | ) | | | 0.6 | | Stock-based compensation expense | | | 4.0 | | | | 3.6 | | | | 3.1 | | Other – net | | | (0.7 | ) | | | (0.5 | ) | | | 4.1 | | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | Trade accounts receivable | | | (0.1 | ) | | | (18.2 | ) | | | 15.1 | | Inventories | | | (4.2 | ) | | | (0.1 | ) | | | (0.8 | ) | Accounts payable | | | (2.4 | ) | | | 15.2 | | | | (3.2 | ) | Accrued compensation and employee benefits | | | (5.3 | ) | | | 17.5 | | | | 1.9 | | Other assets | | | (24.5 | ) | | | 2.1 | | | | (6.6 | ) | Other liabilities | | | (4.5 | ) | | | (14.9 | ) | | | (28.7 | ) | Net cash provided by operating activities | | | 63.5 | | | | 104.5 | | | | 48.8 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (58.3 | ) | | | (53.1 | ) | | | (49.8 | ) | Insurance proceeds from Airedale fire | | | 12.2 | | | | 20.7 | | | | - | | Costs to replace building and equipment damaged in Airedale fire | | | (16.7 | ) | | | (4.2 | ) | | | - | | Proceeds from dispositions of assets | | | 7.6 | | | | 2.9 | | | | 0.4 | | Purchases of short-term investments | | | (5.2 | ) | | | - | | | | - | | Proceeds from maturities of short-term investments | | | 2.4 | | | | - | | | | - | | Acquisitions – net of cash acquired | | | - | | | | (7.8 | ) | | | (4.9 | ) | Other – net | | | 0.8 | | | | - | | | | (1.6 | ) | Net cash used for investing activities | | | (57.2 | ) | | | (41.5 | ) | | | (55.9 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 36.4 | | | | 152.6 | | | | 166.7 | | Repayments of debt | | | (50.9 | ) | | | (152.4 | ) | | | (167.1 | ) | Financing fees paid | | | (0.1 | ) | | | (0.9 | ) | | | - | | Dividend paid to noncontrolling interest | | | - | | | | (0.5 | ) | | | - | | Other – net | | | - | | | | (0.3 | ) | | | 0.7 | | Net cash (used for) provided by financing activities | | | (14.6 | ) | | | (1.5 | ) | | | 0.3 | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (8.4 | ) | | | 1.9 | | | | (0.8 | ) | Net (decrease) increase in cash and cash equivalents | | | (16.7 | ) | | | 63.4 | | | | (7.6 | ) | Cash and cash equivalents - beginning of year | | | 87.2 | | | | 23.8 | | | | 31.4 | | Cash and cash equivalents - end of year | | $ | 70.5 | | | $ | 87.2 | | | $ | 23.8 | |
| | 2016 | | 2015 | | 2014 | Cash flows from operating activities: | | | | | | | | | | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 50.2 | | | | 51.6 | | | | 58.1 | | Insurance proceeds from Airedale fire | | | 5.9 | | | | 12.9 | | | | 16.9 | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | Pension and postretirement expense | | | 45.1 | | | | 2.3 | | | | 3.2 | | Loss from disposition of property, plant and equipment | | | 0.4 | | | | 1.1 | | | | 2.6 | | Deferred income taxes | | | (18.8 | ) | | | 5.9 | | | | (116.1 | ) | Stock-based compensation expense | | | 4.9 | | | | 4.0 | | | | 3.6 | | Other – net | | | (0.3 | ) | | | (0.7 | ) | | | (0.5 | ) | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | Trade accounts receivable | | | 8.0 | | | | (0.1 | ) | | | (18.2 | ) | Inventories | | | (2.7 | ) | | | (4.2 | ) | | | (0.1 | ) | Accounts payable | | | (9.9 | ) | | | (2.4 | ) | | | 15.2 | | Accrued compensation and employee benefits | | | 0.8 | | | | (5.3 | ) | | | 17.5 | | Other assets | | | (14.5 | ) | | | (24.5 | ) | | | 2.1 | | Other liabilities | | | (5.6 | ) | | | (4.5 | ) | | | (14.9 | ) | Net cash provided by operating activities | | | 72.4 | | | | 63.5 | | | | 104.5 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (62.8 | ) | | | (58.3 | ) | | | (53.1 | ) | Insurance proceeds from Airedale fire | | | 27.4 | | | | 12.2 | | | | 20.7 | | Costs to replace building and equipment damaged in Airedale fire | | | (41.7 | ) | | | (16.7 | ) | | | (4.2 | ) | Acquisitions – net of cash acquired | | | (1.4 | ) | | | - | | | | (7.8 | ) | Proceeds from dispositions of assets | | | 0.4 | | | | 7.6 | | | | 2.9 | | Purchases of short-term investments | | | (2.7 | ) | | | (5.2 | ) | | | - | | Proceeds from maturities of short-term investments | | | 2.1 | | | | 2.4 | | | | - | | Other – net | | | 0.9 | | | | 0.8 | | | | - | | Net cash used for investing activities | | | (77.8 | ) | | | (57.2 | ) | | | (41.5 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 38.0 | | | | 36.4 | | | | 152.6 | | Repayments of debt | | | (27.1 | ) | | | (50.9 | ) | | | (152.4 | ) | Purchases of treasury stock under share repurchase program | | | (6.9 | ) | | | - | | | | - | | Financing fees paid | | | - | | | | (0.1 | ) | | | (0.9 | ) | Dividend paid to noncontrolling interest | | | (0.9 | ) | | | - | | | | (0.5 | ) | Other – net | | | (0.4 | ) | | | - | | | | (0.3 | ) | Net cash provided by (used for) financing activities | | | 2.7 | | | | (14.6 | ) | | | (1.5 | ) | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | 1.1 | | | | (8.4 | ) | | | 1.9 | | Net (decrease) increase in cash and cash equivalents | | | (1.6 | ) | | | (16.7 | ) | | | 63.4 | | Cash and cash equivalents - beginning of year | | | 70.5 | | | | 87.2 | | | | 23.8 | | Cash and cash equivalents - end of year | | $ | 68.9 | | | $ | 70.5 | | | $ | 87.2 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | Common stock | | | Additional paid-in capital | | | Retained earnings | | | Accumulated other comprehensive loss | | | Treasury stock, at cost | | | Non- | | | Total | | | | Shares | | | Amount | | | | | | | | | | | | | | Balance, March 31, 2012 | | | 47.4 | | | $ | 29.6 | | | $ | 168.3 | | | $ | 231.8 | | | $ | (90.3 | ) | | $ | (14.5 | ) | | $ | 1.2 | | | $ | 326.1 | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (24.2 | ) | | | - | | | | - | | | | - | | | | (24.2 | ) | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | - | | | | (38.1 | ) | Stock options and awards including related tax benefits | | | 0.4 | | | | 0.3 | | | | (0.2 | ) | | | - | | | | - | | | | - | | | | - | | | | 0.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.1 | ) | | | - | | | | (0.1 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.1 | | | | - | | | | - | | | | - | | | | - | | | | 3.1 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.4 | | | | 1.4 | | Balance, March 31, 2013 | | | 47.8 | | | | 29.9 | | | | 171.2 | | | | 207.6 | | | | (128.4 | ) | | | (14.6 | ) | | | 2.6 | | | | 268.3 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | | Stock options and awards including related tax benefits | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | | Balance, March 31, 2014 | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) | Stock options and awards including related tax benefits | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | | Balance, March 31, 2015 | | | 48.6 | | | $ | 30.4 | | | $ | 180.6 | | | $ | 359.8 | | | $ | (198.6 | ) | | $ | (16.2 | ) | | $ | 4.6 | | | $ | 360.6 | |
| | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other comprehensive | | | Treasury stock, at | | | Non- controlling | | | Total | | | Shares | | | Amount | | | capital | | | earnings | | | loss | | | cost | | | interest | | | | | Balance, March 31, 2013 | | | 47.8 | | | $ | 29.9 | | | $ | 171.2 | | | $ | 207.6 | | | $ | (128.4 | ) | | $ | (14.6 | ) | | $ | 2.6 | | | $ | 268.3 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | | Stock options and awards including related tax benefits | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) | Stock-based compensation expense | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | | Balance, March 31, 2014 | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) | Stock options and awards including related tax benefits | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | | Balance, March 31, 2015 | | | 48.6 | | | | 30.4 | | | | 180.6 | | | | 359.8 | | | | (198.6 | ) | | | (16.2 | ) | | | 4.6 | | | | 360.6 | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (1.6 | ) | | | - | | | | - | | | | - | | | | (1.6 | ) | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.4 | | | | - | | | | (0.1 | ) | | | 24.3 | | Stock options and awards including related tax benefits | | | 0.4 | | | | 0.2 | | | | 0.1 | | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7.8 | ) | | | - | | | | (7.8 | ) | Stock-based compensation expense | | | - | | | | - | | | | 4.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.9 | | Contribution by noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2.3 | | | | 2.3 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.6 | | | | 0.6 | | Balance, March 31, 2016 | | | 49.0 | | | $ | 30.6 | | | $ | 185.6 | | | $ | 358.2 | | | $ | (174.2 | ) | | $ | (24.0 | ) | | $ | 6.5 | | | $ | 382.7 | |
The notes to consolidated financial statements are an integral part of these statements. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 1: | Significant Accounting Policies |
Nature of operations: Modine Manufacturing Company (“Modine” or the “Company”) specializes in thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets. The Company is a leading global developer, manufacturer and marketer of heat exchangers and systems for use in on-highway and off-highway original equipment manufacturer (“OEM”) vehicular applications, and a wide array of building, industrial and refrigeration markets. ProductThe Company’s product lines include radiators and radiator cores, condensers, oil coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation (“EGR”) coolers, and building heating, ventilating and air conditioning (“HVAC”) equipment.equipment, and coils.
Basis of presentation: The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States. These principles require management to make certain estimates and assumptions in determining assets, liabilities, revenue, expenses and related disclosures. Actual amounts could differ materially from those estimates.
Consolidation principles: The consolidated financial statements include the accounts of Modine Manufacturing Company and its majority-owned or Modine-controlled subsidiaries. The Company eliminates intercompany transactions and balances in consolidation.
The Company accounts for investments in non-consolidated affiliated companies in which its ownership is 20 percent or more using the equity method. The Company states these investments at cost, plus or minus a proportionate share of undistributed net income (loss). The Company includes Modine’s share of the affiliatesaffiliate’s net income (loss) in other income and expense. See Note 12 for further discussion.additional information.
Discontinued operations: During fiscal 2009, the Company sold its Electronics Cooling business. The buyer financed a portion of the selling price by issuing promissory notes payable to Modine. During fiscal 2015, the Company received $1.5 million from the buyer, which represented the final payment on the promissory notes. The Company had previously recorded a reserve against a portion of the promissory notes due to collectability concerns. As a result, the Company recorded a gain of $0.9 million ($0.6 million after income taxes) during fiscal 2015.
Assets held for sale: The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the assets for sale at a price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell.sell, within other noncurrent assets. The Company ceases to record depreciation expense at the time of designation as held for sale.
Revenue recognition: The Company recognizes sales revenue, including agreed upon commodity price increases or decreases,prices, when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product and risk of loss have transferred to the customer, persuasive evidence of an arrangement exists, and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The Company makes appropriate provisions for uncollectible accounts receivable based on historical data or specific customer economic data. The Company records sales discounts, which are offered for prompt payment by certain customers, as a reduction to net sales.
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 20152016 and 2014,2015, Company-owned tooling totaled $18.7$18.8 million and $28.6$18.7 million, respectively. In certain instances, the Company makes upfront payments for customer-owned tooling costs, and subsequently receives reimbursement from customers for the upfront payments. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 20152016 and 2014,2015, cost reimbursement receivables related to customer-owned tooling totaled $11.6$8.5 million and $10.3$11.6 million, respectively.
Warranty: The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. The Company records warranty expense based upon historical and current claims data or based onupon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 15 for further discussion.additional information. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its OEM customers in cost of sales, and related amounts billed to these customers in net sales. The Company records shipping and handling costs incurred upon the shipment of products to its HVAC and aftermarket customers in selling, general and administrative (“SG&A”) expenses. For the years ended March 31, 2016, 2015, 2014, and 2013, these2014, shipping and handling costs recorded in SG&A expenses were $2.5 million, $4.9 million, $4.0 million, and $4.3$4.0 million, respectively.
Research and development: The Company expenses research and development costs as incurred within SG&A expenses. For the years ended March 31, 2016, 2015, 2014, and 2013,2014, research and development costs charged to operations totaled $61.1 million, $62.0 million, $61.7 million, and $68.4$61.7 million, respectively.
Translation of foreign currencies: The Company translates assets and liabilities of foreign subsidiaries and equity investments into U.S. dollars at the period-end exchange rates, and translates income and expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders' equity. The Company includes foreign currency transaction gains or losses in the statement of operations within other income and expense.
Derivative instruments: The Company enters into derivative financial instruments from time to time to manage certain financial risks. The Company enters into futures contracts to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. These instruments are used to manage financial risks and are not speculative. See Note 18 for further discussion.additional information.
Income taxes: The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. See Note 8 for further discussion.additional information.
Earnings per share: The Company calculates basic earnings per share based upon the weighted averageweighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. Restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company. Therefore, these restricted stock awards are included in computing earnings per share pursuant to the two-class method. See Note 9 for further discussion.additional information.
Cash and cash equivalents: The Company considers all highly liquidhighly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the amount of those un-presented checks is included in accounts payable.
Short-term investments: The Company invests in time deposits with original maturities of more than three months but no more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2016 and 2015, the Company’s short-term investments totaled $3.3 million and $2.8 million, respectively.
Deferred compensation trust: The Company maintains a deferred compensation trust to fund future obligations under its non-qualified deferred compensation plan. The trust’s investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Trade accounts receivable: The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company recorded an allowance for doubtful accounts $1.0of $0.5 million and $1.1$1.0 million at March 31, 2016 and 2015, and 2014, respectively, representsrepresenting its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable without recourse to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During the years ended March 31, 2016, 2015, 2014, and 2013,2014, the Company sold, without recourse, $71.3 million, $87.0 million, $82.4 million, and $99.1$82.4 million of accounts receivable to accelerate cash receipts. During each of the years ended March 31, 2016, 2015, 2014, and 2013,2014, the Company recorded a loss on the sale of accounts receivables of $0.3 million in the consolidated statements of operations. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost on a first-in, first-out basis or weighted average basis, or marketand net realizable value.
Property, plant and equipment: The Company statesrecords property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful life of the asset. The Company charges maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations.
Goodwill: The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company recognizes an impairment loss if the book value of goodwill exceeds the fair value. The Company performed theits goodwill impairment test as of March 31, 2015 and as a2016, which did not result recordedin an impairment charge of $7.8 million related to its South America segment.charge. See Note 14 for further discussion.additional information.
Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment and writes them down to fair value when facts andwhenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the assets may not be recoverable through estimated future undiscounted cash flows. If an impairment has occurred, the Company writes down the asset toexceeds its estimated fair value and recognizes the impairment loss as a charge against current operations.value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets. See Note 6 for further discussion.additional information.
Environmental expenditures:liabilities: The Company capitalizesrecords liabilities for environmental expenditures that qualify as property, plantassessments and equipment or substantially increaseremediation efforts in the economic value or extend the useful life of an asset. The Company expenses all other expenditures as incurred. If a loss arising from environmental mattersperiod which its responsibility is probable and the costs can be reasonably estimated,estimated. To the Company records an accrual forextent that the amountrequired remediation procedures change, or additional contamination is identified, the Company’s estimate of the estimated loss.environmental liabilities may change. See Note 19 for further discussion.additional information.
Self-insurance reserves: The Company retains a portion of the financial risk for various insurance coverage, including property, general liability, workers compensation, and employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to operations. The Company reviews and updates the evaluationamount of insurance claims and the reasonableness of the relatedits insurance-related reserves on a quarterly basis.
Stock-based compensation: The Company recognizes stock-based compensation using the fair value method. Accordingly, compensation expense for stock options, restricted stock and performance-based stock awards is calculated based upon the fair value of the instruments at the time of grant, and is recognized as expense over the respective vesting periods. See Note 5 for further discussion.
Out of period adjustments: During the second quarter of fiscal 2014, the Company recorded a customer pricing adjustment that related to prior fiscal years. The impact of this error to the second quarter of fiscal 2014 decreased pre-tax earnings by $0.6 million ($0.5 million after-tax). During the first quarter of fiscal 2013, the Company identified an error related to certain commodity hedges that should have been deemed ineffective in the fourth quarter of fiscal 2012, which overstated pre-tax earnings by $0.5 million in the first quarter of fiscal 2013. The Company does not believe that these errors were material to its financial statements for fiscal 2014 or 2013.additional information.
New accounting guidance: In May 2014,March 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify several aspects of accounting for share-based payment transactions, including the income tax consequences. This guidance is effective for the Company’s first quarter of fiscal 2018. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance. Upon adoption of this new guidance, the Company will be required to recognize most leases on its balance sheet. This guidance is effective for the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In November 2015, the FASB issued new guidance, as part of its simplification initiative, that requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The Company adopted this guidance, on a retrospective basis, for its fiscal year ending March 31, 2016. As a result, the Company reclassified approximately $13.0 million of deferred tax assets from current assets to noncurrent assets as of March 31, 2015 to conform to the current-period presentation. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about revenue arising from contracts with customers. This new guidance is effective for the Company’s first quarter of fiscal 2018 at the earliest.2019. The Company is currently evaluating the impact the newthis guidance will have on its consolidated financial statements. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Supplemental cash flow information:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Interest paid | | $ | 10.3 | | | $ | 12.6 | | | $ | 11.6 | | Income taxes paid | | | 15.9 | | | | 11.4 | | | | 12.4 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Interest paid | | $ | 10.7 | | | $ | 10.3 | | | $ | 12.6 | | Income taxes paid | | | 10.1 | | | | 15.9 | | | | 11.4 | |
Note 2: | Airedale Facility Fire |
On September 6, 2013, a fire caused significant destruction to the Company’s Airedale manufacturing facility and offices in Rawdon (Leeds), United Kingdom. The Company reports Airedale’s financial results within the Building HVAC segment (previously known as Commercial Products).segment. There were no injuries caused by the fire. The Rawdon facility, which wasis leased, was used to manufacture cooling products and solutions for a variety of applications, including data centers, clean rooms, retail, leisure and process cooling. The fire caused a temporary manufacturing suspensionCompany suspended operations at the Rawdon site;site as a result of the fire; however, the Companyit transferred its operations to temporary facilities and is in the process of rebuildingwhile it rebuilt the leased facility. The Company expects to completecompleted the reconstruction and return its operationsrelocation to the Rawdon sitefacility in late fiscal 2016.
The Company maintainsCompany’s insurance coverage forcovered damage to the leased facility, equipment, inventory, and other assets, as well as business interruption and lost profits, and recovery-related expenses caused by the fire. TheSince the date of the fire, the Company believes that reimbursementhas received cumulative cash proceeds of $96.0 million from its insurance provider is probable for substantially allcovered losses, and has recorded losses and costs directly attributablecaused by the fire in the same statement of operations line as the related insurance recovery. In fiscal 2016, the Company recorded a $9.5 million gain within other income related to an insurance settlement for equipment losses. This gain represents the replacement assets’ cost in excess of the carrying value of the equipment at the time it was destroyed by the fire. During fiscal 2015, the Company recorded $4.6 million of recoveries from business interruption insurance relating to fiscal 2015 and 2014 lost profits within SG&A expenses. Since the date of the fire, the Company has received cumulative cash proceeds of $62.7 million from its insurance provider for covered losses. In addition, the Company has written-off inventory of $4.7 million and equipment with a net book value of $1.4 million and incurred costs directly attributable to the fire totaling $22.0 million. The Company has recorded these losses and costs, which totaled $28.1 million, in the same statement of operations line as the related insurance recovery.
The terms of the Rawdon lease agreement obligateobligated the Company to rebuild the damaged facility. Through March 31, 2015,Upon completion of the rebuilt facility in fiscal 2016, the Company has capitalized reconstruction costs of $21.2 million,fulfilled this obligation and has recorded this asset on the consolidated balance sheet within other current assets. The Company currently estimates costs of reconstruction will total $48.0 million; accordingly, we recorded a $48.0 million other current liability as of March 31, 2015. As of March 31, 2015, we recorded an $18.0 million receivable from the Company’s insurance provider within other current assets, which represented covered losses to date in excess of cumulative cash proceeds received. As of March 31, 2014,removed both the liability to rebuild the facility was $45.0 million ($37.0 million withinand the capitalized reconstruction costs from its consolidated balance sheet. As of March 31, 2015, the other current liabilitiesliability to rebuild the facility was $48.0 million and $8.0 million within other noncurrent liabilities), and the receivablecurrent assets related to receivables from the Company’s insurance provider was $25.4 million ($18.4 million within other current assets and $7.0 million within other noncurrent assets).capitalized reconstructions costs totaled $39.2 million.
On January 29, 2016, the Company formed a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co. Ltd. of Yangzhou, China, of which it owns 67%, and the joint venture partner, Jiangsu Puxin Heat Exchange System Co., Ltd, owns 33%. This joint venture, which is reported in the Asia segment, will expedite the Company’s introduction of stainless steel heat exchangers for the light-, medium-, and heavy-duty commercial vehicle markets in China. The Company contributed cash of $1.4 million, with additional cash consideration of $0.5 million payable after six months subject to the sellers’ indemnification obligations under the agreement, and equipment and other assets totaling $2.3 million. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in acquired equipment and other long-lived assets totaling $1.5 million and working capital net assets of $0.8 million. The Company controls the primary management decisions and revenue-generating activities of the joint venture, and, therefore, the financial results of the joint venture are included in the Company’s consolidated financial statements.
On February 28, 2014, the Company acquired 100 percent of the shares of Barkell Limited of Consett, United Kingdom for cash consideration of $7.8 million, net of cash acquired. This acquisition provides Modine with an expanded product offering into the air handling market within the Building HVAC segment. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in intangible assets for acquired technology and customer relationships totaling $4.7 million; property, plant and equipment of $2.0 million; and working capital net assets of $1.1 million. Acquired technology consists of a fully developed product line and technical processes, and the customer relationships represent established sales channel and customer relationships. The Company is amortizing these acquired intangible assets over ten years.
On July 25, 2012, the Company completed the acquisition46
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The results of operations of these acquired businesses are included in the Company’s consolidated statements of operations since the dates of acquisition. The Company did not present pro forma financial information as the effectseffect of these acquisitions areis not material to theits results of operations or financial position. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2007, the Company acquired the remaining 50 percent of Radiadores Visconde Ltda. The purchase agreement included a $2.0 million note, which was payable subject to the resolution of certain obligations of the sellers. During fiscal 2013, the Company and the sellers reached a final resolution under which the Company is not obligated to pay the note to the sellers. As a result, the Company recorded a $2.0 million reduction to SG&A expenses in the South America segment during fiscal 2013.
Note 4: | Fair Value Measurements |
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
| ·● | Level 1 – Quoted prices for identical instruments in active markets. |
| ·● | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
| ·● | Level 3 – Model-derived valuations in which one or more significant inputs are not observable. |
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, fair value is based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash and cash equivalents, short-term investments, trade accounts receivable, and accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. The Company holds trading securities in a deferred compensation trust to fund obligations under Modine’s non-qualified deferred compensation plan. The securities’ fair values, which are recorded as other noncurrent assets, are determined based on quoted prices from active markets and classified within Level 1 of the valuation hierarchy. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. The fair values of the Company’s trading securities and deferred compensation obligations each totaled $3.0$3.2 million and $2.6$3.0 million at March 31, 20152016 and 2014,2015, respectively. The fair value of the Company’s long-term debt is disclosed in Note 16.
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2015 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 8.1 | | | $ | - | | | $ | 8.1 | | Common stocks | | | 40.5 | | | | 2.2 | | | | - | | | | 42.7 | | Corporate bonds | | | - | | | | 23.5 | | | | - | | | | 23.5 | | Pooled equity funds | | | 69.0 | | | | 11.4 | | | | - | | | | 80.4 | | Pooled fixed-income funds | | | 15.5 | | | | - | | | | - | | | | 15.5 | | U.S. government and agency securities | | | - | | | | 39.8 | | | | - | | | | 39.8 | | Other | | | 0.7 | | | | 6.3 | | | | - | | | | 7.0 | | Total | | $ | 125.7 | | | $ | 91.3 | | | $ | - | | | $ | 217.0 | |
| | March 31, 2016 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 5.8 | | | $ | 5.8 | | Common stocks | | | 23.7 | | | | 1.3 | | | | 25.0 | | Corporate bonds | | | - | | | | 8.4 | | | | 8.4 | | Pooled equity funds | | | 48.7 | | | | 7.3 | | | | 56.0 | | Pooled fixed-income funds | | | 26.3 | | | | - | | | | 26.3 | | U.S. government and agency securities | | | - | | | | 18.4 | | | | 18.4 | | Other | | | 0.4 | | | | 1.2 | | | | 1.6 | | Total | | $ | 99.1 | | | $ | 42.4 | | | $ | 141.5 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
| | March 31, 2014 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 11.3 | | | $ | - | | | $ | 11.3 | | Common stocks | | | 40.1 | | | | 2.1 | | | | - | | | | 42.2 | | Corporate bonds | | | - | | | | 21.3 | | | | - | | | | 21.3 | | Pooled equity funds | | | 68.9 | | | | 11.9 | | | | - | | | | 80.8 | | Pooled fixed-income funds | | | 14.1 | | | | - | | | | - | | | | 14.1 | | U.S. government and agency securities | | | - | | | | 37.0 | | | | - | | | | 37.0 | | Other | | | 1.6 | | | | 5.4 | | | | - | | | | 7.0 | | Total | | $ | 124.7 | | | $ | 89.0 | | | $ | - | | | $ | 213.7 | |
| | March 31, 2015 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 8.1 | | | $ | 8.1 | | Common stocks | | | 40.5 | | | | 2.2 | | | | 42.7 | | Corporate bonds | | | - | | | | 23.5 | | | | 23.5 | | Pooled equity funds | | | 69.0 | | | | 11.4 | | | | 80.4 | | Pooled fixed-income funds | | | 15.5 | | | | - | | | | 15.5 | | U.S. government and agency securities | | | - | | | | 39.8 | | | | 39.8 | | Other | | | 0.7 | | | | 6.3 | | | | 7.0 | | Total | | $ | 125.7 | | | $ | 91.3 | | | $ | 217.0 | |
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of common stocks, pooled equity funds and pooled fixed-income funds based on quoted prices from active markets and classifyclassified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain common stocks, corporate bonds, pooled equity funds and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 2016 and 2015, the Company held no Level 3 assets within its pension plans.
Assets held for sale: The Company valued assets held for sale based on Level 3 market-based valuation inputs. The carrying value of assets held for sale totaled $3.2$8.5 million and $11.6$3.2 million at March 31, 20152016 and 2014,2015, respectively. See Note 6 for further discussion.additional information.
Note 5: | Stock-Based Compensation |
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and executives that consists of restricted stock and stock option componentsoptions granted for retention and performance, (2) a discretionary equity program for management and other key employees, and (3) stock optionsawards and/or stock awardsoptions for non-employee directors. The Company’s Board of Directors and the Officer Nomination and Compensation Committee, as applicable, have discretionary authority to set the terms of the awards of stock under the Company’s Amended and Restated 2008 Incentive Compensation Plan (“Plan”). At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2015,2016, approximately 4.03.3 million shares authorized under the Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $4.9 million, $4.0 million, $3.6 million, and $3.1$3.6 million in fiscal 2016, 2015, 2014, and 2013,2014, respectively.
Stock Options: The Company recorded $0.9 million, $0.8$0.9 million, and $1.1$0.8 million of compensation expense related to stock options in fiscal 2016, 2015, 2014, and 2013,2014, respectively. The fair value of stock options that vested during fiscal 2016, 2015, 2014, and 20132014 was $0.9 million, $0.8$0.9 million, and $1.3$0.8 million, respectively. As of March 31, 2015,2016, the total compensation expense not yet recognized related to non-vested stock options was $1.7$2.0 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.72.5 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:
| | 2015 | | | 2014 | | | 2013 | | Weighted average fair value of options | | $ | 10.21 | | | $ | 7.76 | | | $ | 4.26 | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 2.1 | % | | | 1.3 | % | | | 0.9 | % | Expected volatility of the Company's stock | | | 76.1 | % | | | 88.7 | % | | | 87.4 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| | 2016 | | 2015 | | 2014 | Weighted-average fair value of options | | $ | 7.11 | | | $ | 10.21 | | | $ | 7.76 | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 1.9 | % | | | 2.1 | % | | | 1.3 | % | Expected volatility of the Company's stock | | | 66.9 | % | | | 76.1 | % | | | 88.7 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of the common stock on the date of grant. The risk-free interest rate was based on yields of U.S. Treasury zero-coupon issues with a term corresponding to the expected life of the options. The expected volatility assumption was based on changes in the Company’s historical common stock prices over the same time frame as the expected life of the awards. The expected dividend yield is zero as the Company currently does not anticipate paying dividends over the expected life of the options. The expected lives of the awards are based on historical patterns and the terms of the options. Outstanding options granted during fiscal 2015 and fiscal 2014 vest 25 percent annually for four years. All outstanding options granted prior to fiscal 2014 vested 25 percent on the grant date and 25 percent annually thereafter for the subsequent three years. The Company used a pre-vesting forfeiture rate of 2.5 percent for these periods as an estimate of expected forfeitures prior to completing the required service period.
A summary of stock option activity for fiscal 20152016 was as follows:
| | Shares | | | Weighted average exercise price | | | Weighted average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.6 | | | $ | 13.15 | | | | | | | | Granted | | | 0.1 | | | | 14.94 | | | | | | | | Exercised | | | (0.1 | ) | | | 8.71 | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 29.41 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 11.99 | | | | 5.3 | | | $ | 5.7 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2015 | | | 1.2 | | | $ | 12.13 | | | | 4.5 | | | $ | 4.9 | |
| | Shares | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.5 | | | $ | 11.99 | | | | | | | | Granted | | | 0.2 | | | | 11.39 | | | | | | | | Exercised | | | (0.1 | ) | | | 5.82 | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 27.33 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 10.82 | | | | 5.3 | | | $ | 3.0 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2016 | | | 1.1 | | | $ | 10.41 | | | | 4.3 | | | $ | 3.0 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20152016 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the fair value of Modine’s common shares.
Additional information related to stock options exercised during fiscal 2016, 2015, 2014, and 20132014 was as follows:
| | 2015 | | | 2014 | | | 2013 | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 1.1 | | | $ | 0.1 | | Proceeds from stock options exercised | | $ | 0.6 | | | $ | 1.1 | | | $ | 0.1 | |
| | 2016 | | | 2015 | | | 2014 | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 0.4 | | | $ | 1.1 | | Proceeds from stock options exercised | | $ | 0.5 | | | $ | 0.6 | | | $ | 1.1 | |
Restricted Stock: The Company recorded $3.5 million, $2.8 million, $2.2 million, and $1.8$2.2 million of compensation expense related to restricted stock in fiscal 2016, 2015, 2014 and 2013,2014, respectively. The fair value of restricted stock awards that vested during fiscal 2016, 2015, and 2014 and 2013 was $3.4 million, $2.3 million, $1.6 million, and $1.3$1.6 million, respectively. At March 31, 2015,2016, the Company had $4.6$4.7 million of total unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.52.4 years. The Company values restricted stock awards using the closing market value of its common shares on the date of grant. The restricted stock awards vest 25 percent annually for four years, with the exception of awards to non-employee directors, which fully vest upon grant.
A summary of restricted stock activity for fiscal 20152016 was as follows:
| | Shares | | | Weighted average price | | Non-vested balance, beginning | | | 0.6 | | | $ | 8.66 | | Granted | | | 0.3 | | | | 14.92 | | Vested | | | (0.2 | ) | | | 9.73 | | Non-vested balance, ending | | | 0.7 | | | $ | 10.68 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | Shares | | Weighted- average price | Non-vested balance, beginning | | | 0.7 | | | $ | 10.68 | | Granted | | | 0.3 | | | | 11.18 | | Vested | | | (0.4 | ) | | | 10.01 | | Non-vested balance, ending | | | 0.6 | | | $ | 11.29 | |
Restricted Stock – Performance-Based Shares: The Company recorded $0.5 million, $0.3 million $0.6 million and $0.2$0.6 million of compensation expense related to performance-based stock awards in fiscal 2016, 2015, 2014 and 2013,2014, respectively. At March 31, 2015,2016, the Company had $1.6$1.2 million of total unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be recognized over a weighted-average period of 1.81.7 years. The Company values performance-based stock awards using the closing market value of its common shares aton the date of grant. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shares are earned under the performance portion of the restricted stock award program based upon the attainment of certain financial goals over a three-year period and are awarded atafter the end of that three-year performance period, if the performance targets have been achieved. A new performance period may begin each fiscal year; therefore, multiple performance periods, with distinct goals, may operate simultaneously.
The performance componentcomponents of the programprograms initiated in fiscal 2016 and fiscal 2015 waswere based upon both a target three-year average consolidated return on average capital employed (“ROACE”) and a target three-year average annual revenue growth at the end of thea three-year performance period, coveringcommencing with the fiscal 2015 through fiscal 2017.year of grant. For the program initiated in fiscal 2014, the performance award was based upon a target three-year average ROACE, three-year average annual revenue growth, and Asia segment operating income at the end of the three-year performance period. For the program initiated in fiscal 2013, the performance award was based upon a target three-year average consolidated ROACE, cumulative revenue over the three-year performance period and Europe ROACE at the end of the three-year performance period.
Note 6: Note 6: | Restructuring Activities |
During fiscal 2016, the Company offered a voluntary retirement program to certain U.S. salaried employees. The program was offered as part of the Company’s Strengthen, Diversify and Grow transformational initiative and supports the objective of reducing operational and SG&A cost structures.
Also during fiscal 2016, the Company announced a plan to close its Washington, Iowa manufacturing facility and is in the process of transferring the facility’s production to other Americas segment manufacturing facilities, which it expects to complete by the end of fiscal 2017. In addition, the Company completed the transfer of production from its McHenry, Illinois manufacturing facility to other Americas segment manufacturing facilities. These restructuring activities reflect the Company’s focus on operating scale manufacturing facilities to improve overall competitiveness and profitability.
During fiscal 2015, the Company implementedinitiated a headcount reduction plan for its Brazil manufacturing facility within its South AmericaAmericas segment. The headcount reductions were in response to the economic slowdown in Brazil and reflect the Company’s objective to maintain profitability in the segmentthis business despite lower sales volume.
During fiscal 2014,In addition, the Company approved a plancontinues to close its McHenry, Illinois manufacturing facility, reflecting its focus on operating scale manufacturing facilities to improve overall competitiveness and profitability. The Company is in the process of transferring the facility’s production to other existing North America segment manufacturing facilities.
During fiscal 2013, the Company initiatedexecute restructuring activities within its Europe segment. TheThese restructuring activities have included implementing headcount reductions, exiting certain non-core product lines based upon Modine’s global product strategy, reducing manufacturing costs, consolidating production facilities, implementing headcount reductions, and disposing of and selling certain underperforming or non-strategic assets. The Company designed these activities were designed to align the cost structure of the segment with its strategic focus on the commercial vehicle, off-highway, automotive component, and engine product markets, while improving gross margin and return on average capital employed.
Restructuring and repositioning expenses for fiscal 2015, 2014, and 2013 were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Employee severance and related benefits | | $ | 1.2 | | | $ | 14.8 | | | $ | 14.9 | | Accelerated depreciation | | | - | | | | 4.3 | | | | - | | Other restructuring and repositioning expenses | | | 3.5 | | | | 1.3 | | | | 2.1 | | Total | | $ | 4.7 | | | $ | 20.4 | | | $ | 17.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Employee severance and related benefits | | $ | 12.8 | | | $ | 1.2 | | | $ | 14.8 | | Accelerated depreciation | | | - | | | | - | | | | 4.3 | | Other restructuring and repositioning expenses | | | 3.8 | | | | 3.5 | | | | 1.3 | | Total | | $ | 16.6 | | | $ | 4.7 | | | $ | 20.4 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
During fiscal 2016, 2015, 2014, and 2013,2014, the Company recorded $16.6 million, $4.7 million, $16.1 million and $17.0$16.1 million, respectively, of restructuring and repositioning expenses as restructuring expenses in the consolidated statement of operations. During fiscal 2014, the Company recorded $4.3 million of restructuring and repositioning expenses within cost of sales in the consolidated statement of operations. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 19.4 | | | $ | 11.6 | | Additions | | | 1.2 | | | | 14.8 | | Payments | | | (7.3 | ) | | | (7.8 | ) | Effect of exchange rate changes | | | (3.4 | ) | | | 0.8 | | Ending balance | | $ | 9.9 | | | $ | 19.4 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 9.9 | | | $ | 19.4 | | Additions | | | 12.8 | | | | 1.2 | | Payments | | | (8.5 | ) | | | (7.3 | ) | Effect of exchange rate changes | | | 0.5 | | | | (3.4 | ) | Ending balance | | $ | 14.7 | | | $ | 9.9 | |
During fiscal 2016, the Company identified potential impairment indicators related to a manufacturing facility in Germany, including pre-tax losses and its strategic decision to exit a certain product line in the future. In response, the Company performed an impairment evaluation and recorded an asset impairment charge of $9.9 million within its Europe segment to write down the manufacturing facility’s long-lived assets to fair value. The Company determined fair value using Level 3 inputs, primarily consisting of a facility appraisal, which considered the market rental value, and estimated scrap values, which considered the specialized nature of the machinery and equipment.
During fiscal 2014, the Company recorded asset impairment charges totaling $3.2 million, including $2.0 million within its Europe segment, primarily due to a manufacturing facility in Germany that the Company plans to close,has closed, and $1.2 million within its North AmericaAmericas segment, related to the planned closure of its McHenry, Illinois manufacturing facility. During fiscal 2013, the Company recorded asset impairment charges of $24.1 and $1.8 million within its Europe and North America segments, respectively, to reduce the carrying values of certain facilities held for sale to their estimated fair values, less costs to sell.
During fiscal 2015, the Company sold a wind tunnel within its Europe segment which was previously reported as an asset held for sale, for cash proceeds of $5.8 million and recognized a gain of $3.2 million. Also during fiscal 2015, the Company reclassified $4.7 million of its assets held for sale to property, plant and equipment, related to a facility in the Europe segment that is no longer being actively marketed for sale. At March 31, 20152016 and 2014,2015, assets held for sale of $3.2$8.5 million and $11.6$3.2 million, respectively, were included in other noncurrent assets and consisted of facilities that the Company is marketing for sale.
In April 2015, the Company announced its intent to close its Washington, Iowa manufacturing facility within the North America segment. As a result of the planned closure, the Company expects to incur approximately $2.0 million of employee severance-related costs during fiscal 2016 and additional restructuring and repositioning expenses during the closure period, as production is transferred to other facilities within the North America segment.
Note 7: | Other Income and Expense |
Other income and expense consisted of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Equity in earnings of non-consolidated affiliate | | $ | 0.6 | | | $ | 0.7 | | | $ | 0.3 | | Interest income | | | 0.5 | | | | 0.5 | | | | 0.9 | | Foreign currency transactions | | | (0.9 | ) | | | (2.0 | ) | | | (1.1 | ) | Other non-operating income - net | | | - | | | | - | | | | 0.1 | | Total other income (expense) - net | | $ | 0.2 | | | $ | (0.8 | ) | | $ | 0.2 | |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Equity in earnings of non-consolidated affiliate | | $ | 0.1 | | | $ | 0.6 | | | $ | 0.7 | | Interest income | | | 0.4 | | | | 0.5 | | | | 0.5 | | Foreign currency transactions (a) | | | (1.3 | ) | | | (0.9 | ) | | | (2.0 | ) | Gain from insurance recovery (b) | | | 9.5 | | | | - | | | | - | | Total other income (expense) - net | | $ | 8.7 | | | $ | 0.2 | | | $ | (0.8 | ) |
Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency denominated
| (a) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on foreign currency exchange contracts. |
| (b) | During fiscal 2016, the Company settled an insurance claim related to machinery and equipment destroyed in a fire at its Airedale facility and recorded a gain of $9.5 million. See Note 2 for additional information. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The U.S. and foreign components of earnings (loss) from continuing operations before income taxes and the provision (benefit)or benefit for income taxes consisted of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Components of earnings (loss) from continuing operations before income taxes: | | | | | | | | | | United States | | $ | 31.1 | | | $ | 14.1 | | | $ | 10.2 | | Foreign | | | 10.1 | | | | 9.9 | | | | (23.2 | ) | Total earnings (loss) from continuing operations before income taxes | | $ | 41.2 | | | $ | 24.0 | | | $ | (13.0 | ) | | | | | | | | | | | | | | Income tax expense (benefit): | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | 0.4 | | | $ | (2.0 | ) | | $ | 2.6 | | Deferred | | | 7.1 | | | | (95.8 | ) | | | (2.6 | ) | State: | | | | | | | | | | | | | Current | | | - | | | | 0.2 | | | | 0.2 | | Deferred | | | 1.1 | | | | (21.4 | ) | | | (0.2 | ) | Foreign: | | | | | | | | | | | | | Current | | | 12.7 | | | | 10.0 | | | | 6.4 | | Deferred | | | (2.3 | ) | | | 1.1 | | | | 3.4 | | Total income tax expense (benefit) | | $ | 19.0 | | | $ | (107.9 | ) | | $ | 9.8 | |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Components of (loss) earnings from continuing operations before income taxes: | | | | | | | | | | United States | | $ | (15.4 | ) | | $ | 31.1 | | | $ | 14.1 | | Foreign | | | 5.5 | | | | 10.1 | | | | 9.9 | | Total (loss) earnings from continuing operations before income taxes | | $ | (9.9 | ) | | $ | 41.2 | | | $ | 24.0 | | | | | | | | | | | | | | | Income tax (benefit) expense: | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | 0.1 | | | $ | 0.4 | | | $ | (2.0 | ) | Deferred | | | (13.0 | ) | | | 7.1 | | | | (95.8 | ) | State: | | | | | | | | | | | | | Current | | | 0.2 | | | | - | | | | 0.2 | | Deferred | | | (2.5 | ) | | | 1.1 | | | | (21.4 | ) | Foreign: | | | | | | | | | | | | | Current | | | 9.6 | | | | 12.7 | | | | 10.0 | | Deferred | | | (3.3 | ) | | | (2.3 | ) | | | 1.1 | | Total income tax (benefit) expense | | $ | (8.9 | ) | | $ | 19.0 | | | $ | (107.9 | ) |
The Company allocates income tax expense among continuing operations, discontinued operations, and other comprehensive income. The Company applies accounting for income taxes by tax jurisdiction, and in periods in which there is a loss from continuing operations before income taxes and pre-tax income in other categories (e.g., discontinued operations or other comprehensive income), it first allocates income tax expense to the other sources of income, and records a related tax benefit in continuing operations.
Income tax expense attributable to earnings (loss) from continuing operations before income taxes differed from the amounts computed by applying the statutory U.S. federal income tax rate as a result of the following:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 2.4 | | | | 2.1 | | | | (1.3 | ) | Taxes on non-U.S. earnings and losses | | | (4.9 | ) | | | (3.8 | ) | | | (23.8 | ) | Valuation allowance | | | 8.3 | | | | (471.7 | ) | | | (59.3 | ) | Tax credits | | | (6.1 | ) | | | (7.1 | ) | | | 37.0 | | Compensation | | | 1.0 | | | | 0.4 | | | | (13.0 | ) | Tax rate or law changes | | | 1.2 | | | | (9.2 | ) | | | 0.9 | | Uncertain tax positions net of settlements | | | 2.2 | | | | 0.4 | | | | (41.9 | ) | Brazil interest on equity | | | - | | | | (1.7 | ) | | | 3.2 | | Dividend repatriation | | | 2.4 | | | | 5.8 | | | | (11.4 | ) | Other | | | 4.6 | | | | 0.2 | | | | (0.8 | ) | Effective tax rate | | | 46.1 | % | | | (449.6 | %) | | | (75.4 | %) |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 11.5 | | | | 2.4 | | | | 2.1 | | Taxes on non-U.S. earnings and losses | | | 26.4 | | | | (4.9 | ) | | | (3.8 | ) | Valuation allowance | | | (20.9 | ) | | | 8.3 | | | | (471.7 | ) | Tax credits | | | 20.5 | | | | (6.1 | ) | | | (7.1 | ) | Compensation | | | (3.7 | ) | | | 1.0 | | | | 0.4 | | Tax rate or law changes | | | 1.3 | | | | 1.2 | | | | (9.2 | ) | Uncertain tax positions, net of settlements | | | (4.3 | ) | | | 2.2 | | | | 0.4 | | Dividend repatriation | | | 16.0 | | | | 2.4 | | | | 5.8 | | Other | | | 8.1 | | | | 4.6 | | | | (1.5 | ) | Effective tax rate | | | 89.9 | % | | | 46.1 | % | | | (449.6 | %) |
The Company recorded an additional valuation allowance of $5.0 million, $2.6 million and $12.3 million in fiscal 2016, 2015, and 2014, respectively, against net deferred tax assets in certain foreign jurisdictions after determining it was more likely than not that the net deferred tax assets in these jurisdictions will not be realized. The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions going forward until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2016 and 2014, the Company concluded it no longer needed a valuation allowance on certain U.S. deferred tax assets after determining it was more likely than not they would be realized. As a result, the Company recorded a $119.2 million reversalreversals of its deferred tax asset valuation allowance.allowance of $3.0 million and $119.2 million in fiscal 2016 and 2014, respectively. Also during fiscal 2014, the Company recorded income tax benefits totaling $2.2 million related to foreign tax law changes. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | March 31, | | | | 2015 | | | 2014 | | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.3 | | | $ | 0.2 | | Inventories | | | 3.8 | | | | 4.1 | | Plant and equipment | | | 0.8 | | | | 2.4 | | Pension and employee benefits | | | 50.5 | | | | 39.1 | | Net operating loss, capital loss, and credit carryforwards | | | 105.0 | | | | 122.4 | | Other, principally accrued liabilities | | | 6.8 | | | | 10.3 | | Total gross deferred tax assets | | | 167.2 | | | | 178.5 | | Less: valuation allowance | | | (48.0 | ) | | | (61.2 | ) | Net deferred tax assets | | | 119.2 | | | | 117.3 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Goodwill | | | 0.6 | | | | 4.2 | | Plant and equipment | | | 5.3 | | | | 7.6 | | Other | | | 1.0 | | | | 1.7 | | Total gross deferred tax liabilities | | | 6.9 | | | | 13.5 | | Net deferred tax asset | | $ | 112.3 | | | $ | 103.8 | |
| | March 31, | | | 2016 | | 2015 | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.1 | | | $ | 0.3 | | Inventories | | | 3.6 | | | | 3.8 | | Plant and equipment | | | 4.3 | | | | 0.8 | | Pension and employee benefits | | | 52.6 | | | | 50.5 | | Net operating loss, capital loss, and credit carryforwards | | | 109.4 | | | | 105.0 | | Other, principally accrued liabilities | | | 6.9 | | | | 6.8 | | Total gross deferred tax assets | | | 176.9 | | | | 167.2 | | Less: valuation allowance | | | (50.8 | ) | | | (48.0 | ) | Net deferred tax assets | | | 126.1 | | | | 119.2 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Plant and equipment | | | 5.5 | | | | 5.3 | | Goodwill | | | 0.6 | | | | 0.6 | | Other | | | 1.1 | | | | 1.0 | | Total gross deferred tax liabilities | | | 7.2 | | | | 6.9 | | Net deferred tax asset | | $ | 118.9 | | | $ | 112.3 | |
Deferred tax assets and liabilities are reported inAs of March 31, 2016, the Company adopted new accounting guidance, which requires that all deferred taxes be presented as non-current on the consolidated balance sheets as follows:sheets. See Note 1 for additional information.
| | March 31, | | | | 2015 | | | 2014 | | Current deferred tax asset | | $ | 13.4 | | | $ | 13.0 | | Noncurrent deferred tax asset | | | 102.7 | | | | 98.6 | | Current deferred tax liability (other current liabilities) | | | (0.4 | ) | | | (0.5 | ) | Noncurrent deferred tax liability | | | (3.4 | ) | | | (7.3 | ) | Total | | $ | 112.3 | | | $ | 103.8 | |
Unrecognized tax benefits were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 2.1 | | | $ | 9.0 | | Gross increases - tax positions in prior period | | | 3.1 | | | | 2.5 | | Gross decreases - tax positions in prior period | | | - | | | | (7.0 | ) | Gross increases - tax positions in current period | | | 0.4 | | | | 0.1 | | Settlements | | | - | | | | (1.9 | ) | Lapse of statute of limitations | | | - | | | | (0.8 | ) | Effect of exchange rate changes | | | - | | | | 0.2 | | Ending balance | | $ | 5.6 | | | $ | 2.1 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 5.6 | | | $ | 2.1 | | Gross increases - tax positions in prior period | | | - | | | | 3.1 | | Gross decreases - tax positions in prior period | | | (0.1 | ) | | | - | | Gross increases - tax positions in current period | | | 0.4 | | | | 0.4 | | Ending balance | | $ | 5.9 | | | $ | 5.6 | |
The Company’s liability for unrecognized tax benefits as of March 31, 20152016 was $5.6$5.9 million, and if recognized, $3.0$3.5 million would have an effective tax rate impact.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. At March 31, 20152016 and 2014,2015, accrued interest and penalties were not significant. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2015,2016, the Company was under income tax examination in a number of foreign jurisdictions. The Company does not anticipate a significant change in unrecognized tax benefits during the next twelve months.
The following tax years remain subject to examination for the Company’s major tax jurisdictions:
Austria | Fiscal 2012 - 20142015 | Brazil | Calendar 20102011 - 20142015 | Germany | Fiscal 20112012 - 20142015 | United States | Fiscal 2012 – 20142013 - 2015 |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
At March 31, 2015,2016, the Company had foreign tax credit carry forwards of $1.8 million that, if not utilized against domestic taxes, will expire in fiscal 2016 and 2017. The Company also had federal and state research and development tax credits of $20.9$23.3 million that, if not utilized against domestic taxes, will expire between fiscal 2018 and 2035.2036. The Company also had various state and local tax loss carry forwards of $186.0$190.8 million that, if not utilized against state apportioned taxable income, will expire at various times during fiscal 20162017 through 2034.2036. In addition, the Company had tax loss carry forwards of $304.6$330.7 million in various tax jurisdictions throughout the world. Certain of the carry forwards in the U.S. and many in foreign jurisdictions are offset by a valuation allowance. If not utilized against taxable income, $159.3$156.9 million of these tax losses will expire at various times during fiscal 20162017 through 2035, and $145.3$173.8 million, mainly related to India,Germany, Austria and Germany,India, will not expire due to an unlimited carry-forward period.
At March 31, 2015,2016, the Company provided $0.8$1.1 million of tax on undistributed earnings for certain subsidiaries not considered permanently reinvested. Undistributed earnings totaling $442.0$491.0 million are considered permanently reinvested in the Company’s remaining foreign operations, and no provision has been made for any taxes that would be payable upon the distribution of such earnings. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 9: | Earnings Per Share |
The components of basic and diluted earnings per share arewere as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Basic: | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 22.2 | | | $ | 131.9 | | | $ | (22.8 | ) | Less: Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (1.7 | ) | | | - | | Earnings (loss) from continuing operations available to Modine shareholders | | | 21.0 | | | | 128.7 | | | | (24.2 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) available to Modine shareholders | | $ | 21.6 | | | $ | 128.7 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Weighted average shares outstanding - basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.45 | | | $ | 2.75 | | | $ | (0.52 | ) | Earnings per share - discontinued operations | | | 0.01 | | | | - | | | | - | | Net earnings (loss) per share - basic | | $ | 0.46 | | | $ | 2.75 | | | $ | (0.52 | ) | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 22.2 | | | $ | 131.9 | | | $ | (22.8 | ) | Less: Net earnings attributable to noncontrolling interest | | | (1.0 | ) | | | (1.5 | ) | | | (1.4 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (0.9 | ) | | | - | | Earnings (loss) from continuing operations available to Modine shareholders | | | 21.0 | | | | 129.5 | | | | (24.2 | ) | Earnings from discontinued operations, net of income taxes | | | 0.6 | | | | - | | | | - | | Net earnings (loss) available to Modine shareholders | | $ | 21.6 | | | $ | 129.5 | | | $ | (24.2 | ) | | | | | | | | | | | | | | Weighted average shares outstanding - basic | | | 47.2 | | | | 46.9 | | | | 46.6 | | Effect of dilutive securities | | | 0.6 | | | | 0.7 | | | | - | | Weighted average shares outstanding - diluted | | | 47.8 | | | | 47.6 | | | | 46.6 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.44 | | | $ | 2.72 | | | $ | (0.52 | ) | Earnings per share - discontinued operations | | | 0.01 | | | | - | | | | - | | Net earnings (loss) per share - diluted | | $ | 0.45 | | | $ | 2.72 | | | $ | (0.52 | ) |
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Basic: | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (1.7 | ) | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 128.7 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 128.7 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | Net (loss) earnings per share - basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (0.9 | ) | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 129.5 | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 129.5 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | Effect of dilutive securities | | | - | | | | 0.6 | | | | 0.7 | | Weighted-average shares outstanding - diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | Net (loss) earnings per share - diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | |
For the years ended March 31, 2016, 2015, 2014, and 2013,2014, the calculation of diluted earnings per share excluded 0.8 million, 0.6 million, 0.8 million, and 1.10.8 million stock options, respectively, because they were anti-dilutive. For the year ended March 31, 2013,2016, the total number of potential dilutive securities was 0.30.4 million. However, these securities were not included in the computation of diluted net loss per share since to do so would decrease the loss per share.
Inventories consisted of the following:
| | March 31, | | | | 2015 | | | 2014 | | Raw materials and work in process | | $ | 80.7 | | | $ | 89.2 | | Finished goods | | | 27.0 | | | | 27.6 | | Total inventories | | $ | 107.7 | | | $ | 116.8 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | March 31, | | | 2016 | | 2015 | Raw materials and work in process | | $ | 79.5 | | | $ | 80.7 | | Finished goods | | | 31.5 | | | | 27.0 | | Total inventories | | $ | 111.0 | | | $ | 107.7 | |
Note 11: Note11: | Property, Plant and Equipment |
Property, plant and equipment, including depreciable lives, consisted of the following:
| | March 31, | | | | 2015 | | | 2014 | | Land | | $ | 8.2 | | | $ | 10.4 | | Buildings and improvements (10-40 years) | | | 221.0 | | | | 228.1 | | Machinery and equipment (3-12 years) | | | 652.0 | | | | 715.1 | | Office equipment (3-10 years) | | | 81.9 | | | | 89.5 | | Construction in progress | | | 31.7 | | | | 35.5 | | | | | 994.8 | | | | 1,078.6 | | Less: accumulated depreciation | | | (672.7 | ) | | | (719.0 | ) | Net property, plant and equipment | | $ | 322.1 | | | $ | 359.6 | |
| | March 31, | | | 2016 | | 2015 | Land | | $ | 7.2 | | | $ | 8.2 | | Buildings and improvements (10-40 years) | | | 221.3 | | | | 221.0 | | Machinery and equipment (3-12 years) | | | 694.3 | | | | 652.0 | | Office equipment (3-10 years) | | | 84.1 | | | | 81.9 | | Construction in progress | | | 36.7 | | | | 31.7 | | | | | 1,043.6 | | | | 994.8 | | Less: accumulated depreciation | | | (705.0 | ) | | | (672.7 | ) | Net property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
Depreciation expense totaled $48.6 million, $50.0 million $57.3 million and $55.1$57.3 million for the years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. Gains and losses related to the disposal of property, plant and equipment are recorded in SG&A expenses. Total losses related to the disposal of property, plant and equipment were $0.4 million, $1.1 million $2.6 million and $2.5$2.6 million for the years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively.
Note 12: Note 12: | Investment in Affiliate |
The Company’s investment in its non-consolidated affiliate is accounted for under the equity method. The Company has a 50 percent ownership of Nikkei Heat Exchanger Company, Ltd. (“NEX”). At both March 31, 20152016 and 2014,2015, the Company included the investment in NEX of $3.2 million and $3.4 million, respectively, in other noncurrent assets. At March 31, 2015,2016, the investment in NEX is equal to the Company's investment in the underlying assets.
The Company reports the results of operations for NEX in the consolidated financial statements using a one-month reporting delay. The Company reports equity in earnings from non-consolidated affiliates within other income and expense in the consolidated statements of operations. The Company’s share of NEX’s earnings for the years ended March 31, 2016, 2015, and 2014 and 2013 was $0.1 million, $0.6 million $0.7 million and $0.3$0.7 million, respectively. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Intangible assets consisted of the following:
| | March 31, 2015 | | | March 31, 2014 | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | | $ | 10.1 | | | $ | (5.7 | ) | | $ | 4.4 | | Acquired technology | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | | | 5.8 | | | | (0.2 | ) | | | 5.6 | | Customer relationships | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | | | 2.4 | | | | - | | | | 2.4 | | Total intangible assets | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | | | $ | 18.3 | | | $ | (5.9 | ) | | $ | 12.4 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | March 31, 2016 | | | March 31, 2015 | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 8.9 | | | $ | (6.3 | ) | | $ | 2.6 | | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | Acquired technology | | | 5.5 | | | | (1.5 | ) | | | 4.0 | | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | Customer relationships | | | 2.0 | | | | (0.4 | ) | | | 1.6 | | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | Total intangible assets | | $ | 16.4 | | | $ | (8.2 | ) | | $ | 8.2 | | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | |
The Company recorded $1.6 million, $0.8$1.6 million and $0.7$0.8 million of amortization expense during fiscal 2016, 2015 2014 and 2013,2014, respectively. Estimated future amortization expense is as follows:
Fiscal Year | | Estimated Amortization Expense | | 2016 | | $ | 1.6 | | 2017 | | | 1.6 | | 2018 | | | 1.6 | | 2019 | | | 1.5 | | 2020 | | | 1.4 | | 2021 & Beyond | | | 2.2 | |
Fiscal Year | | Estimated Amortization Expense | | 2017 | | $ | 1.6 | | 2018 | | | 1.6 | | 2019 | | | 1.5 | | 2020 | | | 1.3 | | 2021 | | | 0.8 | | 2022 & Beyond | | | 1.4 | |
Changes in the carrying amount of goodwill, by segment and in the aggregate, were as follows:
| | South America | | | Asia | | | Building HVAC | | | Total | | Balance, March 31, 2013 | | $ | 12.2 | | | $ | 0.5 | | | $ | 16.0 | | | $ | 28.7 | | Effect of exchange rate changes | | | (1.3 | ) | | | - | | | | 1.3 | | | | - | | Balance, March 31, 2014 | | | 10.9 | | | | 0.5 | | | | 17.3 | | | | 28.7 | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | Balance, March 31, 2015 | | $ | - | | | $ | 0.5 | | | $ | 15.7 | | | $ | 16.2 | |
| | Americas | | Asia | | Building HVAC | | Total | Balance, March 31, 2014 | | $ | 10.9 | | | $ | 0.5 | | | $ | 17.3 | | | $ | 28.7 | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | Balance, March 31, 2015 | | | - | | | | 0.5 | | | | 15.7 | | | | 16.2 | | Effect of exchange rate changes | | | - | | | | - | | | | (0.4 | ) | | | (0.4 | ) | Balance, March 31, 2016 | | $ | - | | | $ | 0.5 | | | $ | 15.3 | | | $ | 15.8 | |
The Company assesses goodwill for impairment annually, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. The Company conducted its annual assessment for goodwill impairment during the fourth quarter of fiscal 20152016 by applying a fair value-based test. Thetest and determined that the fair value of its reporting units exceeded their respective book values. In fiscal 2015, the Company determined its South America reporting unit’s goodwill was fully impaired and recorded a $7.8 million goodwill impairment charge as a result.within the Americas segment in connection with its annual assessment. The impairment charge was primarily caused by a decline in the financial outlook for the South America reporting unit. During the fourth quarter of fiscal 2015, the Company’s outlook for the markets served by its South America reporting unit, primarily in Brazil, shifted from a view that the markets may begin to recover to a view that the market downturn may be more prolonged. The economic weakness in Brazil has negatively affected the Company’s expected future cash flows for the South America segment. The fair value of the Company’s remaining reporting units exceeded their respective book values.Brazil.
As ofAt both March 31, 2016 and 2015, accumulated goodwill impairment losses within the South America segment totaled $7.8 million. As of March 31, 2015 and 2014, accumulated goodwill impairment losses totaled $23.8$31.6 million and $8.7 million within the North AmericaAmericas and Europe segments, respectively.
Note 15: Note 15: | Product Warranties, Operating Leases, and Other Commitments |
Product warranties: Modine provides product warranties for various product lines, withMost of the Company’s products are covered under a warranty periods generallyperiod ranging from one to five years. The Company accruesrecords a liability for estimated futureproduct warranty costs inobligations at the period in whichtime of sale to a customer based upon historical warranty experience. In addition, the sale is recorded. The Company bases warranty expense estimates on the best information available using analytical and statistical analysis of both historical and current claim data. The Company adjusts these expensesits warranty accruals if it becomes probable that expected claims will differ from initial estimates recorded at the time of sale.estimates. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | | 2015 | | | 2014 | | Beginning balance | | $ | 14.0 | | | $ | 12.6 | | Accruals for warranties issued | | | 5.8 | | | | 6.0 | | Accruals related to pre-existing warranties | | | 1.5 | | | | 8.3 | | Settlements | | | (9.2 | ) | | | (13.0 | ) | Effect of exchange rate changes | | | (1.7 | ) | | | 0.1 | | Ending balance | | $ | 10.4 | | | $ | 14.0 | |
| | Years ended March 31, | | | 2016 | | 2015 | Beginning balance | | $ | 10.4 | | | $ | 14.0 | | Warranties recorded at time of sale | | | 5.7 | | | | 5.8 | | Adjustments to pre-existing warranties | | | (1.1 | ) | | | 1.5 | | Settlements | | | (6.7 | ) | | | (9.2 | ) | Effect of exchange rate changes | | | - | | | | (1.7 | ) | Ending balance | | $ | 8.3 | | | $ | 10.4 | |
Operating leases: The Company leases various facilities and equipment under operating leases. Rental expense for these leases totaled $11.9 million in fiscal 2016, and $11.5 million in both fiscal 2015 and 2014, and $11.3 million in fiscal 2013.2014.
Future minimum rental commitments at March 31, 20152016 under non-cancelable operating leases were as follows:
Fiscal Year | | | | 2016 | | $ | 8.2 | | 2017 | | | 5.7 | | 2018 | | | 4.3 | | 2019 | | | 3.8 | | 2020 | | | 4.0 | | 2021 and beyond | | | 23.9 | | Total | | $ | 49.9 | |
Fiscal Year | | | | 2017 | | $ | 8.1 | | 2018 | | | 5.6 | | 2019 | | | 4.8 | | 2020 | | | 4.6 | | 2021 | | | 4.1 | | 2022 and beyond | | | 26.3 | | Total | | $ | 53.5 | |
Indemnification agreements: From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years. In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 20152016 is not material.
Commitments: At March 31, 2015,2016, the Company had capital expenditure commitments of $15.5$20.5 million. Significant commitments include tooling and equipment expenditures for new and renewal programs with customers in North Americathe Americas and Europe.Europe segments. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
The Company has a commitment to rebuild the leased Airedale facility, which suffered significant destruction from a fire during fiscal 2014. The Company maintains insurance coverage and believes reimbursement for substantially all losses and costs directly attributable to the fire is probable. See Note 2 for additional information.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Long-term debt was comprised of the following:
| | Fiscal year of maturity | | | March 31, 2015 | | | March 31, 2014 | | | | | | | | | | | | Foreign credit agreements | | 2016 | | | $ | 0.2 | | | $ | 0.5 | | 6.8% Senior Notes | | 2017-2021 | | | | 125.0 | | | | 125.0 | | Revolving credit facility | | 2019 | | | | - | | | | - | | | | | | | | 125.2 | | | | 125.5 | | Capital lease obligations | | 2016-2030 | | | | 4.9 | | | | 6.5 | | | | | | | | 130.1 | | | | 132.0 | | Less: current portion | | | | | | (0.5 | ) | | | (0.8 | ) | Total long-term debt | | | | | $ | 129.6 | | | $ | 131.2 | |
| | Fiscal year of maturity | | | March 31, 2016 | | March 31, 2015 | | | | | | | | | | | Foreign credit agreements | | | 2018-2020 | | | $ | 0.4 | | | $ | 0.2 | | 6.8% Senior Notes | | | 2017-2021 | | | | 125.0 | | | | 125.0 | | Revolving credit facility | | | 2019 | | | | - | | | | - | | | | | | | | | 125.4 | | | | 125.2 | | Other (a) | | | 2017-2030 | | | | 8.6 | | | | 4.9 | | | | | | | | | 134.0 | | | | 130.1 | | Less: current portion | | | | | | | (8.5 | ) | | | (0.5 | ) | Total long-term debt | | | | | | $ | 125.5 | | | $ | 129.6 | |
| (a) | Other long-term debt includes capital lease obligations and other financing-type obligations. |
The Company maintains a $175.0 million domestic revolving credit facility, which expires in August 2018. Borrowings under the credit agreement bear interest at a variable rate based on the London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points (1.6(1.8 percent at March 31, 2015)2016) depending upon the Company’s leverage ratio, as defined below. At March 31, 20152016 and 2014,2015, no borrowings were outstanding under the revolving credit facility.
The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 2016 and 2015 and 2014 of $18.6$28.6 million and $32.4$18.6 million, respectively. At March 31, 2015,2016, the Company’s foreign unused lines of credit totaled $41.0$32.0 million. In aggregate, the Company had total available lines of credit of $216.0$207.0 million at March 31, 2015.2016.
Provisions in the Company’s revolving credit facility, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided a lienliens on substantially all domestic assets. The Company is also subject to a leverage ratio covenant, which requires the Company to limit its consolidated indebtedness, less a portion of the Company’s cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”), and an interest expense coverage ratio, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. The Company was in compliance with its debt covenants as of March 31, 2015.2016.
Long-term debt matures as follows:
Fiscal Year | | | | 2016 | | $ | 0.5 | | 2017 | | | 8.3 | | 2018 | | | 16.3 | | 2019 | | | 16.3 | | 2020 | | | 16.3 | | 2021 & beyond | | | 72.4 | | Total | | $ | 130.1 | |
Fiscal Year | | | | 2017 | | $ | 8.5 | | 2018 | | | 16.5 | | 2019 | | | 16.5 | | 2020 | | | 16.6 | | 2021 | | | 69.4 | | 2022 & beyond | | | 6.5 | | Total | | $ | 134.0 | |
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. At March 31, 20152016 and 2014,2015, the carrying value of Modine’s long-term debt approximated fair value, with the exception of the Senior Notes, which had a fair value of approximately $141.0$139.0 million and $140.0$141.0 million, respectively. The fair value of the Senior Notes is categorized as Level 2 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 17: Note 17: | Pension and Employee Benefit Plans |
Defined Contribution Employee Benefit Plans:
The Company maintains domestic 401(k) plans that allow employees to contribute a portion of their salary to help save for retirement. The Company matched 50 percent of employee contributions, up to 5 percent of employee compensation, during fiscal 2016, 2015, 2014, and 2013.2014. The Company also makes annual employer contributions into active employee accounts based upon a percentage of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary. The Company’s expense for defined contribution employee benefit plans during fiscal 2016, 2015, and 2014 and 2013 was $4.6 million, $5.9 million, $8.3 million, and $4.1$8.3 million, respectively. The decreasedecreasing trend in expense infrom fiscal 2015, as compared with the prior fiscal year,2014 was primarily due to lower discretionary employer contributions.
In addition, the Company maintains a non-qualified deferred compensation plan for eligible employees, and various foreignnon-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans:
Certain foreignnon-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.
Defined Benefit Employee Benefit Plans:
Pension plans: The Company has amaintains non-contributory defined benefit pension planplans that coverscover most of its domestic employees hired on or before December 31, 2003. The benefits provided are based primarily on years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based on a monthly retirement benefit amount. Domestic salaried employees hired after December 31, 2003 are not covered under anya defined benefit plan. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company’s foreign subsidiariesCompany also have legacy defined benefit plans coveringwhich cover a smallsmaller number of active employees.employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany and Austria and are closed to new participants.
The Company contributions ofcontributed $6.7 million, $5.9 million, and $8.0 million and $9.2 million to its U.S. pension plans during fiscal 2016, 2015, and 2014, and 2013, respectively,respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company completed a voluntary lump-sum payout program offered to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer. During fiscal 2016, a total of $65.3 million was paid from pension plan assets for lump-sum payouts, which reduced the Company’s pension obligation by the same amount. In connection with these lump-sum payouts, the Company recorded $42.1 million of non-cash settlement losses related to the accelerated recognition of unamortized actuarial losses previously recorded on the consolidated balance sheets within accumulated other comprehensive loss. During fiscal 2016, the Company recorded $33.3 million and $8.8 million of settlement losses as SG&A expenses and cost of sales, respectively, within the consolidated statements of operations.
Postretirement plans: The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans during fiscal 2016, 2015, and 2014 and 2013 was $0.3 million, $0.1 million, $1.0 million, and $1.1$1.0 million, respectively.
Measurement Date: The Company uses March 31 as the measurement date for its pension and postretirement plans. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s pension plans, for the fiscal years ended March 31, 20152016 and 20142015 were as follows:
| | 2015 | | | 2014 | | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 295.7 | | | $ | 309.6 | | Service cost | | | 0.5 | | | | 0.6 | | Interest cost | | | 13.0 | | | | 13.0 | | Actuarial loss (gain) | | | 40.6 | | | | (10.8 | ) | Benefits paid | | | (14.6 | ) | | | (18.6 | ) | Effect of exchange rate changes | | | (7.0 | ) | | | 1.9 | | Benefit obligation at end of year | | $ | 328.2 | | | $ | 295.7 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 213.7 | | | $ | 200.6 | | Actual return on plan assets | | | 10.8 | | | | 22.2 | | Benefits paid | | | (14.6 | ) | | | (18.6 | ) | Employer contributions | | | 7.1 | | | | 9.5 | | Fair value of plan assets at end of year | | $ | 217.0 | | | $ | 213.7 | | Funded status at end of year | | $ | (111.2 | ) | | $ | (82.0 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (0.8 | ) | | $ | (1.0 | ) | Noncurrent liability | | | (110.4 | ) | | | (81.0 | ) | | | $ | (111.2 | ) | | $ | (82.0 | ) |
| | 2016 | | 2015 | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 328.2 | | | $ | 295.7 | | Service cost | | | 0.6 | | | | 0.5 | | Interest cost | | | 11.2 | | | | 13.0 | | Actuarial (gain) loss | | | (2.8 | ) | | | 40.6 | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | Effect of exchange rate changes | | | 1.9 | | | | (7.0 | ) | Benefit obligation at end of year | | $ | 261.0 | | | $ | 328.2 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 217.0 | | | $ | 213.7 | | Actual return on plan assets | | | (5.3 | ) | | | 10.8 | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | Employer contributions | | | 7.9 | | | | 7.1 | | Fair value of plan assets at end of year | | $ | 141.5 | | | $ | 217.0 | | Funded status at end of year | | $ | (119.5 | ) | | $ | (111.2 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (0.9 | ) | | $ | (0.8 | ) | Noncurrent liability | | | (118.6 | ) | | | (110.4 | ) | | | $ | (119.5 | ) | | $ | (111.2 | ) |
| (a) | In fiscal 2016, $65.3 million was paid from plan assets in connection with lump-sum payouts. |
The accumulated benefit obligation for pension plans was $325.5$257.9 million and $293.0$325.5 million as of March 31, 20152016 and 2014,2015, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $192.3$162.0 million and $153.4$192.3 million as of March 31, 20152016 and 2014,2015, respectively.
Costs for the Company’s pension plans included the following components for the fiscal years ended March 31, 2016, 2015, 2014, and 2013:2014:
| | 2015 | | | 2014 | | | 2013 | | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.5 | | | $ | 0.6 | | | $ | 0.6 | | Interest cost | | | 13.0 | | | | 13.0 | | | | 13.5 | | Expected return on plan assets | | | (16.7 | ) | | | (15.7 | ) | | | (16.1 | ) | Amortization of net actuarial loss | | | 5.5 | | | | 6.3 | | | | 5.0 | | Net periodic benefit cost | | $ | 2.3 | | | $ | 4.2 | | | $ | 3.0 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 46.4 | | | $ | (17.3 | ) | | $ | 27.0 | | Amortization of net actuarial loss | | | (5.5 | ) | | | (6.3 | ) | | | (5.0 | ) | Total recognized in other comprehensive loss (income) | | $ | 40.9 | | | $ | (23.6 | ) | | $ | 22.0 | |
| | 2016 | | 2015 | | 2014 | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.6 | | | $ | 0.5 | | | $ | 0.6 | | Interest cost | | | 11.2 | | | | 13.0 | | | | 13.0 | | Expected return on plan assets | | | (14.9 | ) | | | (16.7 | ) | | | (15.7 | ) | Amortization of net actuarial loss | | | 6.4 | | | | 5.5 | | | | 6.3 | | Settlements (a) | | | 42.1 | | | | - | | | | - | | Net periodic benefit cost | | $ | 45.4 | | | $ | 2.3 | | | $ | 4.2 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 17.5 | | | $ | 46.4 | | | $ | (17.3 | ) | Amortization of net actuarial loss (a) | | | (48.5 | ) | | | (5.5 | ) | | | (6.3 | ) | Total recognized in other comprehensive (income) loss | | $ | (31.0 | ) | | $ | 40.9 | | | $ | (23.6 | ) |
| (a) | During fiscal 2016, in connection with lump-sum payouts to pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company estimates $7.2$5.6 million of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2016. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)2017.
The Company used a discount rate of 4.0%4.1% and 4.7%4.0% as of March 31, 20152016 and 2014,2015, respectively, in determining its benefit obligations under its U.S. pension plans. The Company used a discount rate of 1.3%1.8% and 3.0%1.3% as of March 31, 20152016 and 2014,2015, respectively, in determining its benefit obligations under its foreignnon-U.S. pension plans. The Company used a discount rate of 4.7%4.3%, 4.4%4.7%, and 4.9%4.4% to determine its costs under its U.S. pension plans for the fiscal years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. The Company used a discount rate of 3.0%1.3%, 3.5%3.0%, and 5.0%3.5% to determine its costs under its foreignnon-U.S. pension plans for the fiscal years ended March 31, 2016, 2015, 2014, and 2013,2014, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. AThe Company used a similar process was used to determine the discount rate for the Company’s foreignits non-U.S. pension obligationsobligations.
Plan assets in the U.S. defined benefit plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted averageweighted-average asset allocations at the measurement dates of March 31, 20152016 and 20142015 were as follows:
| | Target allocation | | | Plan assets | | | | | | | 2015 | | | 2014 | | Equity securities | | | 55 | % | | | 55 | % | | | 57 | % | Debt securities | | | 38 | % | | | 36 | % | | | 37 | % | Alternative assets | | | 5 | % | | | 5 | % | | | 5 | % | Cash | | | 2 | % | | | 4 | % | | | 1 | % | | | | 100 | % | | | 100 | % | | | 100 | % |
| | Target allocation | | Plan assets | | | | | | 2016 | | 2015 | Equity securities | | | 55 | % | | | 56 | % | | | 55 | % | Debt securities | | | 38 | % | | | 36 | % | | | 36 | % | Alternative assets | | | 5 | % | | | 4 | % | | | 5 | % | Cash | | | 2 | % | | | 4 | % | | | 4 | % | | | | 100 | % | | | 100 | % | | | 100 | % |
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 20152016 and 2014,2015, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term return of plan assets, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2016, 2015, 2014 and 20132014 U.S. pension plan expense, the expected rate of return on plan assets was 8.0 percent. For fiscal 20162017 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 8.0 percent.
The Company’s funding policy for domestic qualifiedits U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. The Company expects to make contributions of $6.7$8.1 million to these plans during fiscal 2016.2017.
Estimated pension benefit payments for the next ten fiscal years are as follows:
Fiscal Year | | Estimated pension benefit payments | | 2016 | | $ | 15.1 | | 2017 | | | 15.7 | | 2018 | | | 16.9 | | 2019 | | | 17.2 | | 2020 | | | 18.0 | | 2021-2025 | | | 94.0 | |
Fiscal Year | | Estimated Pension Benefit Payments | | 2017 | | $ | 14.5 | | 2018 | | | 15.2 | | 2019 | | | 15.3 | | 2020 | | | 15.8 | | 2021 | | | 16.1 | | 2022-2026 | | | 79.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 18: Note 18: | Derivative Instruments |
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated, and is effective, as a hedge, and, if so, on the nature of the hedging activity. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Commodity Derivatives: The Company has, from time to time, enteredperiodically enters into futures contracts related to certain forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts wasis to reduce its exposure to changing market prices for future purchases of these commodities. The Company has not designated commodity contracts entered into in fiscal 2013, 2014, 2015, and 20152016 for hedge accounting. Accordingly, unrealized gains and losses on thosethese contracts are recorded within cost of sales. The Company designated contracts entered into prior to fiscal 2013 for hedge accounting. Accordingly, the amounts recorded in accumulated other comprehensive loss (“AOCI”) related to those contracts remained in AOCI until the underlying commodity purchases impacted earnings.
Foreign exchange contracts: The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchange contracts to hedge specific foreign currency denominatedcurrency-denominated assets and liabilities. The Company has not designated these contracts for hedge accounting. Accordingly, unrealized gains and losses related to changes in fair value are recorded in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| | Balance Sheet Location | | March 31, 2015 | | | March 31, 2014 | | Foreign exchange contracts | | Other current liabilities | | $ | 0.3 | | | $ | 0.2 | | Commodity derivatives | | Other current liabilities | | | 0.1 | | | | 0.1 | | Commodity derivatives | | Other noncurrent liabilities | | | - | | | | 0.1 | |
| Balance Sheet Location | | March 31, 2016 | | | March 31, 2015 | | Foreign exchange contracts | Other current assets | | $ | 0.1 | | | $ | - | | Foreign exchange contracts | Other current liabilities | | | - | | | | 0.3 | | Commodity derivatives | Other current liabilities | | | 0.1 | | | | 0.1 | |
The amounts recorded in AOCI and in the consolidated statements of operations for all of the Company’s derivative financial instruments were as follows:
| | March 31, 2015 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss Recognized in Continuing Operations | | Commodity derivatives | | $ | - | | Cost of sales | | $ | - | | | $ | 0.2 | | Foreign exchange contracts | | | - | | Other income (expense) - net | | | - | | | | 1.1 | | Total | | $ | - | | | | $ | - | | | $ | 1.3 | |
| | March 31, 2014 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss Recognized in Continuing Operations | | Commodity derivatives | | $ | - | | Cost of sales | | $ | 0.5 | | | $ | 0.5 | | Total | | $ | - | | | | $ | 0.5 | | | $ | 0.5 | |
| | March 31, 2013 | | | | Amount of Loss Recognized in AOCI | | Statement of Operations Location | | Loss Reclassified from AOCI into Continuing Operations | | | Total Loss (Gain) Recognized in Continuing Operations | | Commodity derivatives | | $ | 0.5 | | Cost of sales | | $ | 2.6 | | | $ | 4.6 | | Foreign exchange contracts | | | - | | Other income (expense) - net | | | - | | | | (0.3 | ) | Total | | $ | 0.5 | | | | $ | 2.6 | | | $ | 4.3 | |
| Statement of Operations | | Years ended March 31, | | Location | | 2016 | | 2015 | | 2014 | Commodity derivatives | Cost of sales | | $ | (0.7 | ) | | $ | (0.2 | ) | | $ | (0.5 | ) | Foreign exchange contracts | Other income (expense) - net | | | 0.6 | | | | (1.1 | ) | | | - | | Total loss | | | $ | (0.1 | ) | | $ | (1.3 | ) | | $ | (0.5 | ) |
Note 19: Note 19: | Contingencies and Litigation |
Market risk: The Company sells a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, off-highway, automotive, and commercial heating and air conditioning markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or more of the markets it serves. The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits. However, the risk associated with market downturns, such as the downturn experienced in fiscal 2009 and 2010, is still present. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Credit risk: The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 2016 and 2015, two customers each accounted for ten percent or more of the Company’s total sales. In fiscal 2014, and 2013, one customer accounted for ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers represented 63 percent 56 percent, and 59 percent of total sales in both fiscal 2016 and 2015 2014, and 2013, respectively.56 percent in fiscal 2014. At March 31, 2016 and 2015, and 2014, 4745 percent and 4647 percent, respectively, of the Company's trade accounts receivable were from the Company's top ten customers. These customers operate primarily in the automotive, truck, and heavy equipment markets and are influenced by similar market and general economic factors. Collateral or advanced payments are generally not required, but they may be used in those cases where the Company identifies a substantial credit risk.required. The Company has not experienced significant credit losses to customers in the markets served. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company manages credit risk through its focus on the following:
| ·● | Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; |
| ·● | Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; |
| ·● | Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and |
| ·● | Insurance – ensuring that insurance providers maintain acceptable financial ratings. |
Counterparty risks: The Company manages counterparty risks through its focus on the following:
| ·● | Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; |
| ·● | Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and |
| ·● | Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company. |
Europe value added tax: During fiscal 2012, the Company determined it was not properly applying value added tax (“VAT”) to certain cross-border transactions within the Europe segment and established an accrual of $10.7 million for estimated VAT liabilities, including interest and penalties. During fiscal 2013 and 2014, the Company completed the registration and filing process with the taxing authorities and began making payments to the applicable jurisdictions. During fiscal 2015, 2014, and 2013, the Company recorded reductions to SG&A expenses of $2.0 million, $2.9 million and $1.6 million, respectively, as a result of favorable changes to the estimated VAT obligations.
Environmental: The United States Environmental Protection Agency (“USEPA”) has designated the Company as a potentially responsible party (“PRP”) for remediation of three sites where the Company had involvement.sites. These sites include:are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be material to the Company’s financial position due to Modine’sits relatively small portion of contributed materials. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company has recorded environmental investigation and remediation accruals for groundwater contamination at its manufacturing facility in its wholly-owned subsidiary in Brazil (“Modine Brazil”) and subsurface contamination at its former manufacturing facility in the Netherlands along withand groundwater contamination at its manufacturing facility in Brazil. During fiscal 2016, the Company recorded charges totaling $1.6 million, within cost of sales, to establish an environmental accrual for investigative work related to a previously-owned manufacturing facility in the United States. In addition, the Company has recorded accruals for other lesser environmental matters at certain facilities located in the United States. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $3.8$5.1 million and $5.1$3.8 million at March 31, 20152016 and 2014,2015, respectively. As additional information becomes available, the Company will re-assess any potentialthe liability related to these matters and revise the estimated accrual, if necessary. Based on currently available information, the Company believes the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages. During fiscal 2011, one of the adjacent businesses to the Company’s facility in Brazil filed suit against the Company’s subsidiary in Brazil (“Modine Brazil,Brazil”), seeking remediation and certain other damages as a result of the contamination allegedly attributable to the Company’sits operations. The Company is defending this suit and believes that the ultimate outcome of this matter will not be material.
Brazil antitrust investigation: During the fourth quarter of fiscal 2015, Brazil’s Administrative Council for Economic Defense (CADE) provided formal notice to Modine Brazil of an administrative investigation regarding alleged violations of Brazil’s antitrust regulations by Modine Brazil and certain of its employees during a period of time at least seven years ago. Duringprior to the fourth quarternotice. As of fiscalMarch 31, 2016 and March 31, 2015, the Company recorded a charge ofaccrued $2.8 million and $3.2 million (BRL10.0 million) within SG&A expenses,(BRL 10.0 million at each date), respectively, representing the estimated amount that may be incurred in connection with the management and resolution of this matter. Due to the ongoing nature of the investigation,this matter, the Company cannot provide assurance of theits ultimate resolution of this matter at this time.
Other litigation: In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits or proceedings are not expected to have a material adverse effect on the Company’s consolidated financial statements. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 20: Note 20: | Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | Foreign Currency Translation | | | Cash Flow Hedges | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | - | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | - | | | | (45.2 | ) | | | (113.2 | ) | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | - | | | | 5.4 | | | | 5.4 | | Amortization of unrecognized prior service credit (a) | | | - | | | | - | | | | (0.1 | ) | | | (0.1 | ) | Income taxes | | | - | | | | - | | | | 13.2 | | | | 13.2 | | Total other comprehensive loss | | | (68.0 | ) | | | - | | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | - | | | $ | (157.9 | ) | | $ | (198.6 | ) |
| | Foreign Currency Translation | | Defined Benefit Plans | | Total | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | 4.7 | | | | (16.6 | ) | | | (11.9 | ) | Reclassifications: | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 48.3 | | | | 48.3 | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.2 | ) | | | (0.2 | ) | Income taxes | | | - | | | | (11.8 | ) | | | (11.8 | ) | Total other comprehensive loss | | | 4.7 | | | | 19.7 | | | | 24.4 | | | | | | | | | | | | | | | Balance, March 31, 2016 | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) |
| | Foreign Currency Translation | | | Cash Flow Hedges | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2013 | | $ | 17.8 | | | $ | (1.1 | ) | | $ | (145.1 | ) | | $ | (128.4 | ) | | | | | | | | | | | | | | | | | | Other comprehensive income before reclassifications | | | 9.5 | | | | - | | | | 18.7 | | | | 28.2 | | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | - | | | | 6.2 | | | | 6.2 | | Amortization of unrecognized prior service credit (a) | | | - | | | | - | | | | (1.2 | ) | | | (1.2 | ) | Commodity derivatives (b) | | | - | | | | 0.5 | | | | - | | | | 0.5 | | Income taxes | | | - | | | | 0.6 | | | | (9.8 | ) | | | (9.2 | ) | Total other comprehensive income | | | 9.5 | | | | 1.1 | | | | 13.9 | | | | 24.5 | | | | | | | | | | | | | | | | | | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | - | | | $ | (131.2 | ) | | $ | (103.9 | ) |
| | Foreign Currency Translation | | Defined Benefit Plans | | Total | Balance, March 31, 2014 | | $ | 27.3 | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | (45.2 | ) | | | (113.2 | ) | Reclassifications: | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | 5.4 | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.1 | ) | | | (0.1 | ) | Income taxes | | | - | | | | 13.2 | | | | 13.2 | | Total other comprehensive loss | | | (68.0 | ) | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) |
| (a) | Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 17 for additional information about the Company’s pension plans. |
| (b) | Reclassifications for commodity derivatives are included in cost of sales. |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 21: Note 21: | Segment and Geographic Information |
The Company’s product lines consist of heat-transfer components and systems. The Company serves the vehicular, industrial, and building heating, ventilating and air conditioning markets. During fiscal 2015,2016, the Company changedcombined its North America and South America segments into the name of its Commercial ProductsAmericas segment to Building HVAC in orderstreamline operations, gain synergies and improve its cost structure. As a result, the Company recast the prior-period segment financial information to better reflect the nature of the segment’s product lines. There were no changesconform to the operations or reportedcurrent-period presentation. There was no impact to the Company’s consolidated financial results of the segmentstatements as a result. Throughout fiscal 2015,2016, the Company’s fivefour operating segments were as follows:
North America:Americas:
Comprised of vehicular and industrial original equipment products in North America and South America, as well as aftermarket products in South America.
Europe: Comprised of vehicular and industrial original equipment products in Europe.
South America:
Comprised of vehicular and industrial original equipment products and aftermarket products in South America.
Asia: Comprised of vehicular and industrial original equipment products in Asia.
Building HVAC: Comprised of building heating, ventilating and air conditioning products throughout the world.
Each operating segment is managed by a vice president or managing director and has separate financial results reviewed by the Company’s chief operating decision maker. These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
Effective April 1, 2015, the Company combined its North America and South America segment operations, with the objective of streamlining its operations to gain synergies and improve its cost structure. Beginning for fiscal 2016, the Company will report financial results for the new Americas operating segment, which will include both North America and South America.
The following is a summary of net sales, gross profit, and operating income by segment:
| | Years ended March 31, | | Net sales: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 573.5 | | | $ | 568.7 | | | $ | 564.5 | | Europe | | | 578.2 | | | | 584.4 | | | | 498.0 | | South America | | | 93.9 | | | | 122.7 | | | | 133.8 | | Asia | | | 81.2 | | | | 71.5 | | | | 59.5 | | Building HVAC | | | 186.3 | | | | 146.5 | | | | 139.3 | | Segment total | | | 1,513.1 | | | | 1,493.8 | | | | 1,395.1 | | Corporate and eliminations | | | (16.7 | ) | | | (16.2 | ) | | | (19.1 | ) | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | Net sales: | | 2016 | | 2015 | | 2014 | Americas | | $ | 585.5 | | | $ | 666.9 | | | $ | 688.3 | | Europe | | | 524.1 | | | | 578.2 | | | | 584.4 | | Asia | | | 79.0 | | | | 81.2 | | | | 71.5 | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | Segment total | | | 1,370.0 | | | | 1,512.6 | | | | 1,490.7 | | Corporate and eliminations | | | (17.5 | ) | | | (16.2 | ) | | | (13.1 | ) | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Gross profit: | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | North America | | $ | 97.0 | | | | 16.9 | % | | $ | 93.5 | | | | 16.4 | % | | $ | 81.4 | | | | 14.4 | % | Europe | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | | | 61.0 | | | | 12.3 | % | South America | | | 12.1 | | | | 12.8 | % | | | 20.8 | | | | 16.9 | % | | | 22.5 | | | | 16.8 | % | Asia | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | | | 1.7 | | | | 2.8 | % | Building HVAC | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | | | 40.8 | | | | 29.3 | % | Segment total | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | | | 207.4 | | | | 14.9 | % | Corporate and eliminations | | | 1.3 | | | | - | | | | 0.8 | | | | - | | | | 1.2 | | | | - | | Gross profit | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % | | $ | 208.6 | | | | 15.2 | % |
67
| | Years ended March 31, | | | 2016 | | 2015 | | 2014 | Gross profit: | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | Americas | | $ | 100.1 | | | | 17.1 | % | | $ | 109.1 | | | | 16.3 | % | | $ | 114.3 | | | | 16.6 | % | Europe | | | 68.1 | | | | 13.0 | % | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | Asia | | | 12.2 | | | | 15.5 | % | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | Building HVAC | | | 54.2 | | | | 29.9 | % | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | Segment total | | | 234.6 | | | | 17.1 | % | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | Corporate and eliminations (a) | | | (11.1 | ) | | | - | | | | 1.3 | | | | - | | | | 0.8 | | | | - | | Gross profit | | $ | 223.5 | | | | 16.5 | % | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | Years ended March 31, | Operating income: | | 2016 | | 2015 | | 2014 | Americas | | $ | 36.2 | | | $ | 33.4 | | | $ | 49.6 | | Europe | | | 13.3 | | | | 25.7 | | | | 9.6 | | Asia | | | 0.8 | | | | 0.3 | | | | (3.3 | ) | Building HVAC | | | 13.9 | | | | 19.1 | | | | 9.4 | | Segment total | | | 64.2 | | | | 78.5 | | | | 65.3 | | Corporate and eliminations (a) | | | (71.7 | ) | | | (25.8 | ) | | | (28.1 | ) | Operating (loss) income | | $ | (7.5 | ) | | $ | 52.7 | | | $ | 37.2 | |
(In millions, except per share amounts)
| | Years ended March 31, | | Operating income: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 45.9 | | | $ | 42.1 | | | $ | 39.2 | | Europe | | | 25.7 | | | | 9.6 | | | | (25.4 | ) | South America | | | (12.3 | ) | | | 7.5 | | | | 11.2 | | Asia | | | 0.3 | | | | (3.3 | ) | | | (8.8 | ) | Building HVAC | | | 19.1 | | | | 9.4 | | | | 10.0 | | Segment total | | | 78.7 | | | | 65.3 | | | | 26.2 | | Corporate and eliminations | | | (26.0 | ) | | | (28.1 | ) | | | (26.8 | ) | Operating income (loss) | | $ | 52.7 | | | $ | 37.2 | | | $ | (0.6 | ) |
| (a) | During fiscal 2016, the Company recorded pension settlement losses of $42.1 million at Corporate, within SG&A expenses ($33.3 million) and cost of sales ($8.8 million). See Note 17 for additional information. |
Inter-segment sales are accounted for based on an established markup over production costs. Net sales for corporate and eliminations primarily represent the elimination of inter-segment sales. The operating loss for corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and also includes a portion of central servicesother costs that are either not directly attributable to an operating segment.segment or not considered when management evaluates segment performance. MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of total assets by segment:
| | March 31, | | | | 2015 | | | 2014 | | North America | | $ | 231.8 | | | $ | 218.1 | | Europe | | | 283.1 | | | | 367.9 | | South America | | | 46.5 | | | | 80.1 | | Asia | | | 92.4 | | | | 92.8 | | Building HVAC | | | 131.4 | | | | 132.7 | | Corporate and eliminations | | | 146.4 | | | | 140.7 | | Total assets | | $ | 931.6 | | | $ | 1,032.3 | |
| | March 31, | | | | 2016 | | | 2015 | | Americas | | $ | 267.2 | | | $ | 277.7 | | Europe | | | 301.9 | | | | 282.7 | | Asia | | | 104.0 | | | | 92.2 | | Building HVAC (a) | | | 99.0 | | | | 131.3 | | Corporate and eliminations | | | 148.8 | | | | 147.0 | | Total assets | | $ | 920.9 | | | $ | 930.9 | |
| (a) | As of March 31, 2015, total assets within the Building HVAC segment included $48.0 million of insurance-related assets for the rebuild of the facility damaged by the Airedale fire. See Note 2 for additional information. |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | Capital expenditures: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 25.9 | | | $ | 18.9 | | | $ | 19.0 | | Europe | | | 21.5 | | | | 22.9 | | | | 16.5 | | South America | | | 4.3 | | | | 5.7 | | | | 3.4 | | Asia | | | 3.8 | | | | 4.6 | | | | 7.8 | | Building HVAC | | | 2.8 | | | | 1.0 | | | | 3.1 | | Total capital expenditures | | $ | 58.3 | | | $ | 53.1 | | | $ | 49.8 | |
| | Years ended March 31, | | Capital expenditures: | | 2016 | | | 2015 | | | 2014 | | Americas | | $ | 26.7 | | | $ | 30.2 | | | $ | 24.6 | | Europe | | | 24.8 | | | | 21.5 | | | | 22.9 | | Asia | | | 6.2 | | | | 3.8 | | | | 4.6 | | Building HVAC | | | 5.1 | | | | 2.8 | | | | 1.0 | | Total capital expenditures | | $ | 62.8 | | | $ | 58.3 | | | $ | 53.1 | |
| | Years ended March 31, | | Depreciation and amortization expense: | | 2015 | | | 2014 | | | 2013 | | North America | | $ | 18.1 | | | $ | 19.3 | | | $ | 20.1 | | Europe | | | 19.8 | | | | 26.6 | | | | 23.4 | | South America | | | 3.2 | | | | 3.3 | | | | 3.7 | | Asia | | | 7.2 | | | | 6.7 | | | | 6.4 | | Building HVAC | | | 3.3 | | | | 2.2 | | | | 2.2 | | Total depreciation and amortization expense | | $ | 51.6 | | | $ | 58.1 | | | $ | 55.8 | |
| | Years ended March 31, | | Depreciation and amortization expense: | | 2016 | | | 2015 | | | 2014 | | Americas | | $ | 22.1 | | | $ | 21.3 | | | $ | 22.6 | | Europe | | | 18.0 | | | | 19.8 | | | | 26.6 | | Asia | | | 6.5 | | | | 7.2 | | | | 6.7 | | Building HVAC | | | 3.6 | | | | 3.3 | | | | 2.2 | | Total depreciation and amortization expense | | $ | 50.2 | | | $ | 51.6 | | | $ | 58.1 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a summary of net sales by geographical area, based upon the location of the selling unit:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | United States | | $ | 669.3 | | | $ | 645.7 | | | $ | 637.4 | | Germany | | | 193.8 | | | | 229.5 | | | | 214.8 | | Hungary | | | 161.0 | | | | 150.3 | | | | 117.6 | | Austria | | | 118.7 | | | | 109.8 | | | | 97.7 | | Brazil | | | 93.2 | | | | 122.0 | | | | 128.8 | | Other | | | 260.4 | | | | 220.3 | | | | 179.7 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | United States | | $ | 627.6 | | | $ | 669.3 | | | $ | 645.7 | | Germany | | | 155.3 | | | | 193.8 | | | | 229.5 | | Hungary | | | 145.9 | | | | 161.0 | | | | 150.3 | | Austria | | | 113.1 | | | | 118.7 | | | | 109.8 | | Other | | | 310.6 | | | | 353.6 | | | | 342.3 | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | | 2015 | | | 2014 | | United States | | $ | 105.0 | | | $ | 100.7 | | Germany | | | 66.0 | | | | 81.8 | | Other European countries | | | 79.9 | | | | 100.0 | | China | | | 36.3 | | | | 38.9 | | Other | | | 34.9 | | | | 38.2 | | Total property, plant and equipment | | $ | 322.1 | | | $ | 359.6 | |
| | March 31, | | | | 2016 | | | 2015 | | United States | | $ | 92.5 | | | $ | 92.7 | | Austria | | | 44.2 | | | | 41.5 | | China | | | 33.6 | | | | 31.8 | | Germany | | | 32.1 | | | | 47.2 | | Hungary | | | 31.4 | | | | 28.9 | | Other | | | 104.8 | | | | 80.0 | | Total property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
The following is a summary of net sales by product type:end market:
| | Years ended March 31, | | | | 2015 | | | 2014 | | | 2013 | | Modules/assemblies | | $ | 367.5 | | | $ | 379.9 | | | $ | 358.5 | | Oil coolers | | | 233.0 | | | | 215.4 | | | | 194.1 | | HVAC equipment | | | 199.6 | | | | 159.5 | | | | 151.8 | | EGR coolers | | | 183.5 | | | | 172.5 | | | | 136.1 | | Charge air coolers | | | 148.9 | | | | 157.0 | | | | 161.8 | | Condensers | | | 140.0 | | | | 129.2 | | | | 128.8 | | Radiators | | | 124.8 | | | | 129.0 | | | | 134.4 | | Other | | | 99.1 | | | | 135.1 | | | | 110.5 | | Net sales | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | |
| | Years ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | Commercial vehicle | | $ | 459.8 | | | $ | 512.5 | | | $ | 477.0 | | Automotive | | | 396.8 | | | | 401.8 | | | | 395.6 | | Off-highway | | | 206.2 | | | | 274.6 | | | | 320.8 | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | Other | | | 108.3 | | | | 121.2 | | | | 137.7 | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
6967
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) Note 22: Note 22: | Quarterly Financial Data (Unaudited) |
Quarterly financial data is summarized below for the years ended March 31, 20152016 and 2014:2015:
| | Fiscal 2015 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2015 | | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | Earnings (loss) from continuing operations (a) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | Net earnings (loss) attributable to Modine (a) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| | Fiscal 2016 quarters ended | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2016 | | | | | | | | | | | | | | | | | Net sales | | $ | 346.1 | | | $ | 334.0 | | | $ | 328.7 | | | $ | 343.7 | | | $ | 1,352.5 | | Gross profit | | | 57.0 | | | | 45.7 | | | | 58.6 | | | | 62.2 | | | | 223.5 | | Earnings (loss) from continuing operations (a) | | | 5.5 | | | | (22.5 | ) | | | 8.2 | | | | 7.8 | | | | (1.0 | ) | Net earnings (loss) attributable to Modine (a) | | | 5.1 | | | | (22.5 | ) | | | 8.2 | | | | 7.6 | | | | (1.6 | ) | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.11 | | | $ | (0.47 | ) | | $ | 0.17 | | | $ | 0.16 | | | $ | (0.03 | ) | Diluted | | | 0.11 | | | | (0.47 | ) | | | 0.17 | | | | 0.16 | | | | (0.03 | ) |
| | Fiscal 2014 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2014 | | | | | | | | | | | | | | | | | | Net sales | | $ | 375.8 | | | $ | 364.2 | | | $ | 347.0 | | | $ | 390.6 | | | $ | 1,477.6 | | Gross profit | | | 61.9 | | | | 57.2 | | | | 56.8 | | | | 62.3 | | | | 238.2 | | Earnings (loss) from continuing operations (a) (b) | | | 10.6 | | | | 5.0 | | | | (3.4 | ) | | | 119.7 | | | | 131.9 | | Net earnings (loss) attributable to Modine (a) (b) | | | 10.0 | | | | 4.6 | | | | (3.6 | ) | | | 119.4 | | | | 130.4 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.21 | | | $ | 0.10 | | | $ | (0.08 | ) | | $ | 2.51 | | | $ | 2.75 | | Diluted | | | 0.21 | | | | 0.10 | | | | (0.08 | ) | | | 2.49 | | | | 2.72 | |
| | Fiscal 2015 quarters ended | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2015 | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | Earnings (loss) from continuing operations (b) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | Net earnings (loss) attributable to Modine (b) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| (a) | The quarterly financial data presented above includesDuring fiscal 2016, restructuring expenses totaled $2.6 million, $1.0 million, $1.6 million, and $11.4 million for the quarters ended June 30, 2015, September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 6). During the fourth quarter of fiscal 2016, the Company recorded a $9.9 million asset impairment chargescharge related to restructuring actionsa manufacturing facility in Europe, North America,Germany (see Note 6). During fiscal 2016, non-cash pension settlement losses totaled $39.2 million, $1.1 million, and South America segments. $1.8 million for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 17). During the fourth quarter of fiscal 2016, the Company recorded a $9.5 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire (see Note 2). Also during the fourth quarter of fiscal 2016, the Company reversed a deferred tax asset valuation allowance, and, as a result, recorded an income tax benefit of $3.0 million (see Note 8). |
| (b) | During fiscal 2015, restructuring expenses totaled $0.8 million, $1.0 million, $1.9 million, and $1.0 million for the quarters ended June 30, 2014, September 30, 2014, December 31, 2014, and March 31, 2015, respectively.respectively (see Note 6). During the third quarter of fiscal 2015, the Company sold a wind tunnel within the Europe segment and recognized a gain of $3.2 million.million (see Note 6). During the fourth quarter of fiscal 2015, the Company recorded a $7.8 million goodwill impairment charge related to its South America segment. Also during the fourth quarter of fiscal 2015, the Company recorded(see Note 14) and a $3.2 million charge in its South America segment associated with a legal matter in Brazil. During fiscal 2014, restructuring expenses totaled $0.5 million, $0.6 million, $9.4 million, and $5.6 million for the quarters ended June 30, 2013, September 30, 2013, December 31, 2013, and March 31, 2014, respectively. The Company recorded impairment charges of $2.0 million and $1.2 million during the quarters ended December 31, 2013 and March 31, 2014, respectively. See Notes 6, 14, and 19 for additional information. |
| (b) | The quarter ended March 31, 2014 was benefited by the reversal of U.S. income tax valuation allowances totaling $119.2 million. SeeBrazil (see Note 8 for additional information.19). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Modine Manufacturing Company:
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1), present fairly, in all material respects, the financial position of Modine Manufacturing Company and its subsidiaries at March 31, 20152016 and 2014,2015, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 20152016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2015,2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in fiscal 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP Milwaukee, Wisconsin May 29, 201526, 2016 ITEM 9.
| | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not applicable.
ITEM 9A.
| | CONTROLS AND PROCEDURES. |
Conclusion Regarding Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company's President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded the design and operation of the Company's disclosure controls and procedures were effective as of March 31, 2015.2016.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, and effected by the Company's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2015.2016. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based on this assessment, management concluded that, as of March 31, 2015,2016, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20152016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the fourth quarter of fiscal 20152016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
| | OTHER INFORMATION. |
None. PART III
ITEM 10.10 . | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors. The Company incorporates by reference the information appearing in the Company's Proxy Statement for the 20152016 Annual Meeting of Shareholders to be held on July 23, 201521, 2016 (the “2015“2016 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Executive Officers of the Registrant" in this Form 10-K.
Compliance with Section 16(a) of the Exchange Act. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Code of Ethics. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Ethics.” The Company's Code of Ethics (labeled as the Code of Ethics and Business Conduct) is included on its website, www.modine.com (About Modine link).
Board Committee Charters. The Board of Directors has approved charters for its Audit Committee, Officer Nomination and Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee. These charters are included on the Company’s website, www.modine.com (Investors link).
Audit Committee Financial Expert. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Committees of the Board of Directors – Audit Committee.”
Audit Committee Disclosure. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the captions “Committees of the Board of Directors – Audit Committee” and “Board Meetings and Committees.”
Guidelines on Corporate Governance. The Board of Directors has adopted Guidelines on Corporate Governance. The Company’s Guidelines on Corporate Governance are included on its website, www.modine.com (Investors link).
Security Holder Recommendation of Board Nominees. The Company incorporates by reference the information appearing in the 20152016 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
ITEM 11.
| | EXECUTIVE COMPENSATION. |
The information appearing in the 20152016 Annual Meeting Proxy Statement under the captions “Compensation Discussion and Analysis,” “Compensation of Directors,” “Committees of the Board of Directors – Officer Nomination and Compensation Committee: Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” is incorporated herein by reference.
ITEM 12.
| | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The Company incorporates by reference the information relating to stock ownership under the caption “Security Ownership of Certain Beneficial Owners and Management,” and under the caption “Equity Compensation Plan Information,” in the 20152016 Annual Meeting Proxy Statement.
ITEM 13.
| | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The Company incorporates by reference the information contained in the 20152016 Annual Meeting Proxy Statement under the captions “Certain Relationships and Related Transactions” and “Director Independence.”
ITEM 14.
| | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The Company incorporates by reference the information contained in the 20152016 Annual Meeting Proxy Statement under the caption “Independent Auditors’ Fees for Fiscal 20152016 and 2014.2015.” PART IV
ITEM 15.
| | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) (a) | Documents Filed. The following documents are filed as part of this Report: |
| Page in Form 10-K | | | 1. The consolidated financial statements of Modine Manufacturing Company and its subsidiaries filed under Item 8: | | | | Consolidated Statements of Operations for the years ended March 31, 2016, 2015 2014 and 20132014 | 3938 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2016, 2015 2014 and 20132014 | 4039 | Consolidated Balance Sheets at March 31, 20152016 and 20142015 | 4140 | Consolidated Statements of Cash Flows for the years ended March 31, 2016, 2015 2014 and 20132014 | 4241 | Consolidated Statements of Shareholders' Equity for the years ended March 31, 2016, 2015 2014 and 20132014 | 4342 | Notes to Consolidated Financial Statements | 44-7043-68 | Report of Independent Registered Public Accounting Firm | 7169 | | | 2. Financial Statement Schedules.Schedules | | | | The following financial statement schedule should be read in conjunction with the consolidated financial statements set forth in Item 8: | | Schedule II -- Valuation and Qualifying Accounts | 7674 | | | Schedules other than those listed above are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements and the notes thereto. | | | | 3. Exhibits and Exhibit Index. | 77-7975-77 | | | See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number. | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 29, 201526, 2016 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. Burke | | | | Thomas A. Burke, President | | | | and Chief Executive Officer | | | | (Principal Executive Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. Burke | | Thomas A. Burke | May 29, 2015 | President, Chief Executive Officer and Director | | (Principal Executive Officer) | May 26, 2016 | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 29, 2015 | Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | May 26, 2016 | | | /s/ Marsha C. Williams | | Marsha C. Williams Director | May 29, 2015 | Director | 26, 2016 | | | /s/ David J. Anderson | | David J. Anderson Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Charles P. Cooley | | Charles P. Cooley Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Suresh V. Garimella | | Suresh V. Garimella Director | May 29, 2015 | Director | 26, 2016 |
/s/ Larry O. Moore | | Larry O. Moore Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Christopher W. Patterson | | Christopher W. Patterson Director | May 29, 2015 | Director | 26, 2016 | | | /s/ Christine Y. Yan | | Christine Y. Yan Director | May 29, 2015 | Director | 26, 2016 | | | /s/ David G. Bills | | David G. Bills Director | May 29, 2015 | Director | 26, 2016 |
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES (A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2016, 2015 2014 and 20132014 (In millions)
| | | | | Additions | | | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Deductions | | | Balance at End of Period | | | | | | | | | | | | | | | | | | 2015: Allowance for Doubtful Accounts | | $ | 1.1 | | | $ | 0.4 | | | $ | (0.2 | )(b) | | $ | (0.3 | )(a) | | $ | 1.0 | | Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | )(b) | | $ | - | | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | | | | 2014: Allowance for Doubtful Accounts | | $ | 0.8 | | | $ | 0.6 | | | $ | - | (b) | | $ | (0.3 | )(a) | | $ | 1.1 | | Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | (b) | | $ | - | | | $ | 61.2 | | | | | | | | | | | | | | | | | | | | | | | 2013: Allowance for Doubtful Accounts | | $ | 0.8 | | | $ | 0.5 | | | $ | (0.1 | )(b) | | $ | (0.4 | )(a) | | $ | 0.8 | | Valuation Allowance for Deferred Tax Assets | | $ | 146.8 | | | $ | 7.7 | | | $ | 18.3 | (b) | | $ | - | | | $ | 172.8 | |
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | 2016: Valuation Allowance for Deferred Tax Assets | | $ | 48.0 | | | $ | 1.5 | | | $ | 1.3 | | (a) | | $ | 50.8 | | | | | | | | | | | | | | | | | | | | 2015: Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | ) | (a) | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | 2014: Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | | (a) | | $ | 61.2 | |
Notes: | (a) | Bad debts charged off during the year
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| (b) | TranslationForeign currency translation and other adjustments |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 20152016 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By Referenced To | | Filed Herewith | | | | | | | | 3.1 | | Amended and Restated Articles of Incorporation, as amended. | | Exhibit 4.2 to Registrant’s Registration Statement on Form S-3 (333-161030) dated August 4, 2009 | | | | | | | | | | 3.2 | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated February 10, 2015 | | | | | | | | | | 4.1 | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 ("2003 10-K") | | | | | | | | | | 4.2 | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto. | | | | | | | | | | 4.3** | | Note Purchase and Private Shelf Agreement (the “Original Note Purchase Agreement”) dated as of August 12, 2010 among the Registrant and the Series A Purchasers named therein of $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020 and $25,000,000 Private Shelf Facility and each Prudential Affiliate (as defined therein) that may become bound by certain provisions thereof. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 12, 2010 8-K (“August 12, 2010 8-K”) | | | | | | | | | | 4.4** | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to August 12, 2010 8-K | | | | | | | | | | 4.5** | | First Amendment to Note Purchase and Private Shelf Agreement and Waiver dated as of March 15, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated March 15, 2012 8-K | | | | | | | | | | 4.6** | | Second Amendment to Note Purchase and Private Shelf Agreement dated as of April 20, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 20, 2012 8-K | | | | | | | | | | 4.7** | | Third Amendment to Note Purchase and Private Shelf Agreement dated as of August 6, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 6, 2012 8-K | | |
4.8** | | Second Amended and Restated Credit Agreement dated as of August 30, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, LC Issuer, Swing Line Lender and as a Lender, and U.S. Bank, N.A. and Wells Fargo Bank, N.A. as Syndication Agents and as Lenders, BMO Harris Bank N.A., as Documentation Agent and as Lender and Associated Bank, N.A., Comerica Bank and Sovereign Bank as Lenders.Lenders | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated August 30, 2013 (“August 30, 2013 8-K”) | | | | | | | | | | 4.9** | | Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Note Purchase Amendment”) dated as of August 30, 2013, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) pursuant to which the Company and the Note Holders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to August 30, 2013 8-K | | | | | | | | | | 4.10** | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to August 30, 2013 8-K | | | | | | | | | | 4.11 | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | 10.1* | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | 10.2* | | Employment Agreement between the Registrant and Thomas A. Burke dated as of June 15, 2007. | | Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 15, 2007 | | | | | | | | | | 10.3* | | Form of Amendment No. 1 to Employment Agreement entered into as of July 1, 2008 with Thomas A. Burke. | | Exhibit 10.1 to Registrant’sRegistrant���s Current Report on Form 8-K dated July 1, 2008 | | | | | | | | | | 10.4* | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke. | | Exhibit 10(f) to Registrant’s Form 10-K for the year ended March 31, 2004 | | | | | | | | | | 10.5* | | Employment Agreement, dated July 1, 2014, between Modine Holding GmbH and Holger Schwab, effective as of July 1, 2015. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2014 | | | | | | | | | | 10.6* | | 2000 Stock Incentive Plan for Non-Employee Directors (Amended and Restated as of March 16, 2005). | | Appendix A to Registrant’s Proxy Statement for the 2005 Annual Meeting dated June 15, 2005 | | | | | | | | | | 10.7* | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant's Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | 10.8*10.7* | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | 10.9*10.8* | | 2007 Incentive Compensation Plan. | | Appendix A to the Registrant's Proxy Statement dated June 18, 2007 | | |
10.10* | | | | | | | 10.9* | | 2008 Incentive Compensation Plan (Amended and Restated effective May 7, 2014). | | Exhibit 10.1 to Registrant's Current Report on Form 8-K dated July 17, 2014 | | |
| 10.10* | | | | | | 10.11* | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Thomas A. Burke. | | Exhibit 10.17 to Registrant's Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | 10.12*10.11* | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | | | | | | | | | 10.12* | | Form of Fiscal 20152016 Modine Performance Stock Award Agreement (Executive Council members). | | | Exhibit 10.1 to Form 10-Q for the first quarter ended June 30, 2015 ("June 30, 2015 10-Q") | X | | | | | | | | | 10.13* | | Form of Fiscal 20152016 Modine Incentive Stock Options Award Agreement (Executive Council members). | | | Exhibit 10.2 to June 30, 2015 10-Q | X | | | | | | | | | 10.14* | | Form of Fiscal 20152016 Modine Restricted Stock Award Agreement (Executive Council members). | | | Exhibit 10.3 to June 30, 2015 10-Q | X | | | | | | | | | 10.15* | | Form of Fiscal 20152016 Modine Non-Qualified Stock Option Award Agreement. | Agreement | | Exhibit 10.4 to June 30, 2015 10-Q | X | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of independent registered public accounting firm. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Instance Document | | | | X | | | | | | | | 101.SCH | | XBRL Taxonomy Extension Schema | | | | X | | | | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | X | | | | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | X | | | | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | X | | | | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | X |
*Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K.
**Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
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