UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

For the fiscal year ended March 31, 20162018

or

For the transition period from ____________ to ____________

Commission file number 1-1373

Registrant's telephone number, including area code (262) 636‑1200

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐    No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐    No ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑   No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K.  ☑☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ☐    No ☑

Approximately 9697 percent of the outstanding shares are held by non-affiliates.  The aggregate market value of these shares was approximately $365$941 million based upon the market price of $7.87$19.25 per share on September 30, 2015,29, 2017, the last business day of our most recently completed second fiscal quarter.  Shares of common stock held by each executive officer and director and by each person known to beneficially own more than 10 percent of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates.  The determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant's common stock, $0.625 par value, was 47,426,52950,502,209 at May 23, 2016.18, 2018.

Portions of the following documents are incorporated by reference into the parts of this Form 10‑K designated to the right of the document listed.

Modine Manufacturing Company specializes in providing innovative thermal management solutions.solutions to diversified global markets and customers.  We are a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on-highwayon- and off-highway original equipment manufacturer (“OEM”) vehicular applications,applications.  In addition, we are a global leader in thermal management technology and solutions for sale into a wide array of building,commercial, industrial, and refrigeration markets.  Our products include radiators and radiator cores, condensers, oil coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation (“EGR”) coolers, building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets.  Our primary product groups include i) powertrain cooling and engine cooling; ii) coils, coolers, and coatings; and iii) heating, ventilation and air conditioning (“HVAC”) equipment, and coils.conditioning.  Our primary customers across the globe are:include:

We focus our development efforts on solutions that meet the ever-increasing heat transfer needs of OEMs and other customers within the automobile, commercial vehicle, construction, agricultural, industrial and commercial HVAC&R industries.  Our products and systems typically are aimed at solving complex heat transfer challenges requiring effective thermal management.  Typical customer and market demands include products and systems that are lighter weight, more compact, more efficient and more durable to meet customer standards as they work to ensure compliance with increasingly stringent global emissions, fuel economy and energy efficiency requirements.  Our heritage provides a depth and breadth of expertise in thermal management, which, when combined with our global manufacturing presence, standardized processes, and state-of-the-art technical resources, enables us to rapidly bring highly valued,highly-valued, customized solutions to our customers.

Modine was incorporated under the laws of the State of Wisconsin on June 23, 1916 by its founder, Arthur B. Modine.  Mr. Modine’s “Turbotube” radiators became standard equipment on the famous Ford Motor Company Model T.  When he died at the age of 95, A.B. Modine had personally been granted more than 120 U.S. patents for his heat transfer innovations.  On the cusp of our 100th year in business, theThe standard of innovation exemplified by A.B. Modine remains the cornerstone of Modine today.

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

Modine pursues market leadership by being a customer-focused, global company delivering exceptional quality, innovation and value. We focus onwill grow our core business of thermal management leadershipwith superior technical solutions in systems, products and highly engineered product and service innovations for diversified, global markets and customers.  We create value by focusing on customer partnerships and providing innovative solutions for our customers' thermal management challenges using cost-effective designs and material technology.services – coupled with a cost competitive structure.

During fiscal 2016,2018, we launchedsuccessfully integrated our recently-acquired Luvata Heat Transfer Solutions (“Luvata HTS”) business, which now operates as our Commercial and Industrial Solutions (“CIS”) segment.  This acquisition, which was completed in the third quarter of fiscal 2017, was particularly key in achieving our “Diversify” and “Grow” objectives within our Strengthen, Diversify and Grow (“SDG”) strategic transformation initiative launched in order to positionfiscal 2016.  Through this acquisition, we successfully broadened our business for long-term success. We aim to strengthencustomer base, increased our business by, among other things, i) right-sizingpresence in non-vehicular markets, and grew our cost structurecompany with CIS segment net sales of $620 million in fiscal 2018.  In addition, we’ve continued strengthening our company through ongoing cost-containment initiatives and ii) implementing a more global, product-based organization to capture synergies across our core business, effectively meet the needsexpansion of our global customers,low-cost country manufacturing footprint.  Looking ahead, we are confident that our SDG strategy will keep us grounded, thriving, and improve our speed to market. In addition, we aim to diversify through expanding our non-vehicular businesses, and grow through both organic and inorganic opportunities.transforming.

 

Our top five customers are in three different markets – automotive, commercial vehicle, and off-highway – and our ten largest customers accounted for 6348 percent of both our fiscal 20162018 sales.  In fiscal 2018, 61 percent of our total sales were generated from customers outside of the U.S., with 56 percent of these sales generated by foreign operations and 2015 sales.5 percent generated by exports from the U.S.  In fiscal 2017, 62 percent of our total sales were generated from customers outside of the U.S., with 55 percent of these sales generated by foreign operations and 7 percent generated by exports from the U.S.  In fiscal 2016, 63 percent of our total sales were generated from customers outside of the U.S., with 54 percent of totalthese sales generated by foreign operations and 9 percent generated by exports from the U.S.  In fiscal 2015, 64 percent of our total sales were generated from customers outside of the U.S., with 55 percent of total sales generated by foreign operations and 9 percent generated by exports from the U.S.  In fiscal 2014, 66 percent of our total sales were generated from customers outside of the U.S., with 56 percent of total sales generated by foreign operations and 10 percent generated by exports from the U.S.

During fiscal 2016,2018, our consolidated net sales were $1.35$2.10 billion, a 1040 percent decreaseincrease from $1.50 billion in fiscal 2015.  The decrease from fiscal 20152017.  This increase was primarily due to a $110$442 million unfavorable impact of foreign currency exchange rate changes associated with the strengtheningadditional sales from our CIS segment, which we owned for four months of the U.S. dollarprior fiscal year, and lowerhigher sales volume to off-highway customers due to market weakness.  During fiscal 2016, we completed a voluntary lump-sum payout program offered to certain eligible former employees participating in all of our U.S. pension plans.  See Note 17other operating segments.  Our operating income of the Notes to Consolidated Financial Statements for additional information.  As a result of lump-sum payouts during fiscal 2016, we recorded $42 million of non-cash pension settlement losses to costs of sales ($9 million) and selling, general, and administrative (“SG&A”) expenses ($33 million).  Gross profit decreased $23 million to $224$92 million in fiscal 20162018 represents a $50 million improvement compared with the prior year, primarily due to $18 million of additional operating income contributed by our CIS segment and higher earnings in the pension settlement lossesAmericas, Asia and an unfavorable impact from changes in foreign currency exchange rates.  SG&A expenses increased to $205 million in fiscal 2016, compared with $184 million in fiscal 2015, primarily due to the pension settlement losses.Building HVAC (“BHVAC”) segments.

In continued support of our SDG initiatives and in an effort to optimize our cost structure and improve the efficiency of our operations, we have engaged in various restructuring activities in recent years, including in fiscal 2016, in support of our Strengthen, Diversify and Grow strategic platform.activities.  As a result, we recorded $17$16 million of restructuring expenses during fiscal 2016.  In addition, we recorded a $10 million asset impairment charge2018, primarily related to a manufacturing facility in Germany.  See Note 6 of the Notes to Consolidated Financial Statements for additional information.

A key metric by which we measure our performance is return on average capital employed (“ROACE”).  We define ROACE as operating income, lessplus restructuring expenses, acquisition-related costs and adjustments, impairment charges, and excluding certain other adjustments,gains or charges, less income tax at a 30 percent rate and earnings attributable to noncontrolling interest; divided by the average of debt plus Modine shareholders’ equity.  We have established a long-term goal of achieving ROACE of 15 percent.  Our ROACE improved 60increased 140 basis points in fiscal 20162018 to 8.48.6 percent compared with 7.87.2 percent in fiscal 2015.  The2017.  This increase was primarily due to improved earnings, partially offset by an increase in ROACE in fiscal 2016 primarily resulted from a decrease in the shareholders’ equity component ofaverage capital employed.  This decrease in shareholders’ equity was primarily attributable to $68 million of foreign currency translation losses, most of which occurred in late fiscal 2015.

 

ROACE is not a measure derived under generally accepted accounting principles (“GAAP”) and should not be considered as a substitute for any measure derived in accordance with GAAP.  We believe that ROACE provides investors with helpful information about our performance, our ability to provide an acceptable return on capital, and our ability to fund future growth.  This measure may not be comparable with similar measures presented by other companies.  The following schedule provides a reconciliation of ROACE to the most directly comparable financial measures calculated andnet earnings, as presented in accordance with GAAP:

We sell products to multiple end markets.  Our Americas, Europe, and Asia segments represent our vehicular businesses and our CIS and BHVAC segments represent our industrial businesses.  The following is a summary of our primary end markets, categorized as a percentage of our net sales:

We compete with many manufacturers of heat transfer and HVAC&R products, some of which are divisions of larger companies.  The markets for our products continue to be very dynamic.  Our traditional OEM customers are faced with dramatically increased international competition and have expanded their global manufacturing footprints to compete in local markets.  In addition, consolidation within the supply base and vertical integration havehas introduced new or restructured competitors to our markets.  Some of these market changes have caused us to experience competition from suppliers in other parts of the world that enjoy economic advantages such as lower labor costs, lower healthcare costs, and lower tax rates.  As a result, we have expanded and continue to expand our geographic footprint, in part to provide more flexibility to serve our customers around the globe.  OurMany of our customers also continue to ask us, as well as their other primary suppliers, to provide research and development (“R&D”), design, and validation support for new potential projects.  This combined work effort often results in stronger customer relationships and more partnership opportunities for us.  It can also introduce risk, to the extent that these requests may require the reallocation of resources at times when actual business awards are pending.

We havePrior to and including fiscal 2018, we assigned specific operations to segments based principally onupon defined markets and geographic locations.  Each operating segment is managed by a vice president and has separate financial results reviewed by our chief operating decision maker.  These results are used by management in evaluating the performance of each business segment and in making decisions on the allocation of resources among our various businesses.  During fiscal 2016,Effective April 1, 2018, we combined our North AmericaAmericas, Europe, and South America segmentsAsia segment operations with the objective of operating as a more global, product-based organization.  As part of this segment combination and our CIS integration activities, we also merged our Americas coils business into the AmericasCIS segment and expect to streamline operations, gain synergiesachieve operational improvements and improve our cost structure.  There was no impact to our consolidated financial statementsorganizational efficiencies as a result.  Beginning for fiscal 2019, we will report financial results for the new Vehicular Thermal Solutions segment, which will include the current Americas, Europe and Asia segments.  Financial information related tofor our operating segments is included in Note 2120 of the Notes to Consolidated Financial Statements.

Americas, Europe, and Asia Segments

The continued globalization of our OEMvehicular customer base requires us to manage our strategic approach, product offerings and the competitive environment on a global basis.  This trend offers significant opportunities for us with our market positioning, including our presence in key globalvehicular markets (U.S., Mexico, Brazil, Europe, Brazil,India, China, India, South Korea, Japan, and Mexico)Japan) and a global product-based organization with the expertise to solve technical challenges.  We are recognized for having strong technical support in all regions, an extensive product breadth,portfolio, and the ability to supportprovide global standard designs for our customers. Many vehicular OEMs continue to expect cost reductions from suppliers while requiring a consistent level of quality.  In addition, these OEMs seek new technology solutions at low prices for their thermal management needs.  In general, this creates challenges for us and the entire supply base, but also provides an opportunity for suppliers, like Modine, who develop innovative solutions at a competitive cost.

Each of our main vehicular competitors, AKG Group, BorgWarner, Dana Corporation, Delphi Corporation, Denso Corporation, Mahle, Behr, Tata Toyo, TitanX, T. Rad Co. Ltd., UFI Filters, Valeo SA, Visteon Corporation,Hanon Systems, and Zhejiang Yinlun Machinery Co. Ltd., have a multi-regional or worldwide presence.  Increasingly, we face heightened competition as these competitors expand their product offerings and manufacturing footprints through expansion into low-costlower-cost countries or low-costlower-cost sourcing initiatives.  In addition, competitors from some low-costlower-cost regions are beginning to expand into new geographic OEMgeographical markets.

The Americas, Europe, and Asia segments represent our original equipment segmentsvehicular businesses and serve the automotive, commercial vehicle, automotive, and off-highway markets.  In addition, our Americas segment provides custom-designed heat exchangers, utilizing microchannel, heat recovery, and round tube plate fin coils, to the commercial refrigeration, residential heating, and commercial heating and air conditioning markets.  The Americas segment also serves Brazil’s automotive and commercial vehicle aftermarkets.  The following summarizes the primary markets served by our original equipmentvehicular segments:

Market Overview – During fiscal 2016,2018, the North America commercial vehicle market remained relatively flat compared withexperienced substantial growth, particularly within the prior year.  Weheavy-duty trucks market.  In fiscal 2019, we expect this market will weaken in fiscal 2017, particularly the markettrend to continue with strong growth for heavy-duty trucks.  Slow economictrucks and modest growth conditions and soft freight fundamentals suggest uneven demand in fiscal 2017; this, coupled with an expectation of continued governmental focus on emissions reductions and fuel efficiency improvements, is causing uncertainty for truck fleets.medium-duty trucks.  In South America, the commercial vehicle market has experienced significant volume declinesrecovered in the past two fiscal years,2018 and we expect this market to remain depressed instrong during fiscal 2017.2019.  In Europe, the commercial vehicle market experienced moderate growth in fiscal 2016,2018 and we expect this trendmarket to continue in fiscal 2017.  In Asia, we anticipate continued market growthremain at similar levels during fiscal 2017.2019.  We expect strong growth in the commercial vehicle market in India during fiscal 2019.

Other trends influencing the commercial and specialty vehicle marketmarkets include a calldesire by global commercial vehicle manufacturers to standardize U.S., Canadian, and Eurozone emission regulations.emissions regulations and the adoption of higher standards, more comparable to Euro6, in China and India.  Global standardization would likely lead to further consolidation of our customer basedevelopment activities for Modine.  Additionally, truck and competitors, as they leverage higher volumes, consolidate development costs, and rationalize distribution channels.  Additionally, truckbus manufacturers are evaluating alternative powertrains and fuels, including electrification, waste heat recovery, and other technologies aimed to improve vehicle efficiency, all of which could present opportunities for us.

Products – Powertrain cooling (engine cooling modules, radiators, charge air coolers, condensers, oil coolers, fan shrouds, and surge tanks); on-engine cooling (EGR coolers, engine oil coolers, fuel coolers, charge air coolers and intake air coolers); and auxiliary coolerscooling (transmission and retarder oil coolers and power steering coolers).; battery thermal management systems.

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

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

Market Overview – The global automotive market improved in most regionsoff-highway markets experienced strong recovery during fiscal 2016.2018. We expect this trend to continue during fiscal 2019.  Production of U.S. agriculture, construction, and mining machinery increased significantly in fiscal 2017, supported by favorable oil prices and monetary policies.  The automotive market is gradually beginning2018, compared to move away from traditional internal combustion engines towards alternative powertrains, such as electric, hybrid, and fuel cell.  This shift is expected to increase the thermal management requirements for these vehicles, and we are capitalizing on this trend by applying our base heat transfer components to new applications.  We expect our global automotive market production to increase in fiscal 2017, with modest market improvements in North America and Europe and stronger improvement in Asia.

Products – Powertrain cooling (engine cooling modules, radiators, condensers, charge air coolers, fuel coolers and oil coolers); auxiliary coolerscooling (power steering coolers and transmission oil coolers); and on-engine cooling (EGR coolers, engine oil coolers, fuel coolers, charge air coolers and intake air coolers).

Customers – Construction, agricultural, and mining equipment and engine manufacturers, and industrial manufacturers of material handling equipment, generator sets and compressors.

Primary Competitors – Adams Thermal Systems Inc.; AKG Group; Denso Corporation; Zhejiang Yinlun Machinery Co., Ltd.; ThermaSys Corp.; Doowon; Donghwan; T. Rad Co. Ltd.; Mahle Industrial Thermal Systems; KALE OTO RADYATÖR; and RAAL.

Building HVAC Segment

Market Overview – After two consecutive years of strong growth, the–The North America heating market contracted slightlyexpanded in fiscal 2016, primarily2018 due to warmer-than-normaloverall positive economic conditions, but was also supported by the increased length of the winter temperatures.season in our key geographic markets.  We expectare planning for modest improvement in the North America heating market in fiscal 2017.2019.  We also anticipate increased market demand for our data center cooling, ventilation and geothermal heat pump products to increase in fiscal 2017.2019 as we expand our product offering in this market.  In addition to North America, we also serve heating, ventilating, and air conditioning (“HVAC”) markets in the United Kingdom, mainland Europe, the Middle East and South Africa.  We expect continued growth in demand for data and connected devices, coupled with increasing requirements for energy-efficient and green solutions, will continue to drive increased demand for our data center cooling products and, in particular, our high-density and free-cooling solutions.  Likewise, we expect improvement in commercial investment, construction marketsmarket activity, and energy efficiency legislation to drive increased demand for our ventilation and geothermalair conditioning products.  We anticipate that recent European legislation, designed to increase equipment efficiency and reduce the use of high global warming potential refrigerants, will result in customer buying pattern shifts over the next two years, and may increase market volatility in the short-term as HVAC equipment providers shift products towards more efficient and environmentally-friendly alternatives.

Products – Unit heaters (gas-fired, hydronic, electric and oil-fired); duct furnaces (indoor and outdoor); infrared units (high- and low-intensity); hydronic products (commercial fin-tube radiation, cabinet unit heaters, and convectors); roof-mounted direct- and indirect-fired makeup air units; commercial packaged rooftop ventilation units; unit ventilators; single packaged vertical units; geothermal and water-source heat pumps; precision air conditioning units for data center applications; air-handling units; chillers; ceiling cassettes; hybrid fan coils; and condensing units. Aftersales includes spare parts, maintenance service and control solutions from existing plant equipment and new building management controls and systems.

Customers – Mechanical contractors; HVAC wholesalers; installers; and end users in a variety of commercial and industrial applications, including banking and finance, data center management, education, hospitality, telecommunications, entertainment arenas, hotels, restaurants, hospitals, warehousing, manufacturing, and food and beverage processing.

Primary Competitors – Lennox International Inc. (ADP); CESCommercial Environmental Solutions (Reznor); Mestek Inc. (Sterling); Vertiv (formerly Emerson Electric Company (Liebert)); Stulz; Schneider Electric (APC / Uniflair); Johnson Controls, Inc. (York); Daikin (McQuay International); System Air (ChangeAir); Ingersoll Rand Inc. (Trane); Bard Manufacturing; and Aaon, Inc.

We maintain administrative organizations in fourall key geographical regions – North America, South America, Europe, and Asia – to facilitate customer support, development and testing, and other administrative functions.  We operate in the following countries:

Our non-U.S. subsidiaries and affiliates manufacture and sell a number of vehicular and commercial, industrial and building HVAC and industrial&R products similar to those produced in the U.S.  In addition to normal business risks, operations outside the U.S. are subject to other risks such as changing political, economic and social environments, changing governmental laws, taxes and regulations, foreign currency volatility, and market fluctuations.

Export sales from the U.S. to foreign countries as a percentage of consolidated net sales were 5 percent, 7 percent and 9 percent in both fiscal 2018, 2017 and 2016, and 2015 and 10 percent in fiscal 2014.respectively.

We believe our international presence has positionedpositions us to share profitably in the anticipated long-term growth of the global vehicular and commercial, industrial and building HVAC&R markets.  We are committed to increasing our involvement and investment in international markets in the years ahead.

Financial information relating to our foreign and domestic operations is included in Note 2120 of the Notes to Consolidated Financial Statements.

Our ten largest customers, certain of which are conglomerates, accounted for 6348 percent of our consolidated net sales in fiscal 2016.  These2018.  In fiscal 2018, 2017 and 2016, Daimler AG and Volkswagen AG each accounted for 10 percent or more of our sales.

Our top customers operate primarily in the automotive, commercial vehicle, off-highway, and commercial air conditioning markets. Our top customers, listed alphabetically, were: BMW;include: Carrier, Caterpillar; Daimler AG (including Daimler Trucks, Mercedes- Benz, Mitsubishi Fuso Trucks, Thomas BusesDetroit Diesel, Mercedes-Benz, and Western Star Trucks); Deere & Company; Denso Corporation; FCA Italy S.p.A. (including Chrysler, CNH, Fiat, Iveco, and VM Motori); Ford Motor Co.Navistar (including MWM International); Navistar; Volkswagen AG (including Audi, MAN, Porsche, and Scania); and Volvo.AB Volvo (including Mack Trucks and Renault Trucks).  In both fiscal 2016 and 2015, Daimler AG and Volkswagen AG each accounted for 10addition, our CIS segment includes significant sales generated from a single global technology customer (9 percent or more of our sales.  In fiscal 2014, Daimler AG was the only customer that accounted for 10 percent or more of our sales.CIS segment sales) with which we are party to confidentiality agreements.  Generally, we supply products to our customers on the basis of individual purchase orders received from them.  When it is in the mutual interest of Modine and our customers, we utilize long-term sales agreements to minimize investment risks and provide the customer with a proven source of competitively-priced products.  These contracts are typically three to five years in duration and may include provisions that adjust sales prices in the future.duration.

Our operating segments maintain their own inventories and production schedules.  We believe that our current production capacity is capable of handling the sales volume expected in fiscal 20172019 and beyond.

We purchase aluminum, nickel and steel from several domestic and foreign suppliers.  In general, we do not rely on any one supplier for these materials, which are, for the most part, available from numerous sources in quantities required by us.  The supply of copper and brass material is highly concentrated between two global suppliers.  We normally do not experience raw material shortages and believe that our suppliers’ production of these metals will be adequate throughout the next fiscal year.  We typically adjust metals pricing with our raw material and major fabricated component suppliers on a quarterly basis.  When possible, we have made material pass-through arrangements with key customers, which allow us to pass material costadjust customer prices, on a prospective basis, based upon increases and decreases to our customers.in the cost of key raw materials.  When utilized, however, these pass-through arrangements are typically limited to the underlying cost of the material based upon the London Metal Exchange, and do not include related premiums or fabrication costs.  In addition, there can often be a three-month to one-year lag between the time of the material price increase or decrease and the time that we adjust the price with our customer.

We own or license numerous patents related to our products and operations.  These patents and licenses have been obtained over a period of years and expire at various times.  Because we have many product lines, we believe that our business as a whole is not materially dependent upon any particular patent or license, or any particular group of patents or licenses. We consider each of our patents, trademarks and licenses to be of value and aggressively defend our rights throughout the world against infringement. We have been granted and/or acquired more than 2,2002,400 patents worldwide over the life of our company.

We remain committed to our vision of creating value through technology and innovation.  We focus our engineering and R&D efforts on solutions that meet challenging heat transfer needs of OEMs and other customers within the automotive, powersports, commercial vehicle, automotive, construction, agricultural, and commercial, industrial, and building HVAC&R markets.  Our products and systems are typicallyoften aimed at solving difficult and complex heat transfer challenges requiring advanced thermal management.  Typical market demands are for products and systems that are lighter weight, more compact, more efficient and more durable to meet customer standards as customers work to ensure compliance with increasingly stringent global emissions and energy efficiency requirements.  Our heritage includes a depth and breadth of expertise in thermal management that, combined with our global manufacturing presence, standardized processes, and state-of-the-art technical resources, enables us to rapidly bring customized solutions to our customers.

R&D expenditures, including certain application engineering costs for specific customer solutions, totaled $66 million, $64 million, and $61 million in fiscal 2018, 2017, and 2016, and $62 million in both fiscal 2015 and 2014.respectively.  Over the last three years, R&D expenditures have been between 43 and 5 percent of our consolidated net sales.  This level of investment reflects our continued commitment to R&D in an ever-changing market.marketplace.  To achieve efficiencies and lower development costs, our R&D groups work closely with our customers on special projects and system designs.  Projects include next generation aluminum radiators,EGR technology, oil coolers, charge air coolers, refrigerant heat exchangers, and waste heat recoverybattery thermal management systems for the automotive, commercial vehicle, agriculturalagriculture, construction, and construction markets;residential and EGR technology,commercial energy storage markets, which enable our customers to efficiently meet tighter regulatorymore stringent emission and energy efficiency standards.  Most of our current R&D activities are focused on internal development in the areas of powertrain cooling, engine cooling, building HVAC, and coilscommercial and industrial thermal management products.  We also collaborate with several industry, university, and government-sponsored research organizations that conduct research and provide data on technical topics of interest to us for practical applications in the markets we serve.  We continue to identify, evaluate and engage in external research projects that complement our strategic internal research initiatives in order to further leverage our significant thermal technology expertise and capability.capabilities.

Through our global Quality Management System (“QMS”), which is an integrated part of our management system, the majority of our manufacturing facilities and administrative offices in our Americas, Europe and Asia segments are registered to ISO 9001:2008 or ISO/TS 16949:2009 standards, helping to ensure that our customers receive high quality products and services from every facility.services.  We have begun to transition to ISO 9001:2015 and IATF 16949:2016 standards.  While customer expectations for performance, quality and service continue to rise, our QMS has allowed us to drive improvements in quality performance and has enabled the ongoing delivery of products, service and value that meet or exceed customer expectations.

TheOur global QMS operates within the context of the Modine Operating System (“MOS”), which focuses on well-defined improvement principles and leadership behaviors to engage our teams in facilitating rapid improvements.  We drive sustainable and systematic continuous improvement throughout all operating segments and functional areas and operating segments of the organization by utilizing the principles, processes and behaviors that are core to these systems.

We are committed to preventing pollution, eliminating waste and reducing environmental risks.  Ourrisks and we have established specific environmental improvement targets and objectives for the upcoming fiscal year.  The majority of our facilities maintain Environmental Management System (“EMS”) certification to the international ISO14001 standard through independent third-party audits. All of our locations have established specific environmental improvement targets and objectives for the upcoming fiscal year.

During fiscal 2016,2018, we launched a global initiative to reduce both our water consumption was relatively flat compared with fiscal 2015.  Over the past five years, we have realized a cumulative 31 percent decrease in ourenergy and water usage using approximately 38 million fewer gallons inby 5 percent by fiscal 2016 than in fiscal 2011.  As in previous years,2020.  In support of this initiative, we continue to systematically identify opportunities and implement measuresrecently implemented building improvements, including LED lighting, at our recently-acquired Grenada, Mississippi manufacturing facility.  These improvements alone are expected to reduce waste and conserve natural resources within the EMS structure.

Our product portfolio reflects our sense of environmental responsibility.  We continue our developmentto develop and refinement ofrefine environmentally-friendly product lines, including oil, fuel, and EGR coolers for gas and diesel applications, light-weight and high-performance powertrain cooling heat exchangers for both combustion and electric vehicle, air cooled refrigerant and liquid heat exchangers used in residential, commercial, and industrial applications, and our Advanced Cooling Systemadvanced cooling system technology.  These products provide increased fuel economies, and enable combustion technologies that reduce harmful gas emissions.emissions for vehicles, and provide energy efficient solutions for building and stationary applications. Our Building HVAC productBHVAC segment offerings, including the Airedale SchoolMate geothermal heat pump; the Effinity^TM, a condensing gas-fired unit heater with industry-leading efficiencies; and the Atherion^TM Commercial Packaged Ventilation System,System; the Airedale SchoolMate® with a water source heat pump; and the Airedale Chiller product line-up, ecodesign compliant with European standards.  These products are helping commercial, industrial and residential users achieve high energy efficiencies and reduce utility costs.  Our geothermal products feature innovative heat pump technologies, providing energy savings and reduced carbon emissions in both heating and cooling seasons.

Obligations for remedial activities may arise at our facilities due to past practices, or as a result of a property purchase or sale.  These expenditures most often relate to sites where past operations followed practices that were considered acceptable under then-existing regulations, but now require investigative and/or remedial work to ensure appropriate environmental protection or where we are a successor to the obligations of prior owners and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance.  Two of our currently-owned manufacturing facilities and three formerly-owned properties have been identified as requiring soil and/or groundwater remediation.  Environmental liabilities for investigative work and remediation at sites in the United States, Brazil,U.S. and the Netherlandsabroad totaled $5$17 million at March 31, 2016.2018.

We recorded a fiscal 2016 globalhave consistently out-performed the private-industry Recordable Incident Rate (“RIR” as defined by OSHA)  of 1.63, which was unchanged compared with our RIR in fiscal 2015.  Our long-term safety performance, as indicated by RIR, improved 20 percent over the past five years.  We have consistently out-performed the private-industry RIR average for the manufacturing sector, which by comparison was 4.03.6 in 2014.

We employed approximately 7,10011,700 persons worldwide as of March 31, 2016.2018.

Our overall operating performance is generally not subject to a significant degree of seasonality, as sales to OEM customers are dependent upon market demand for new vehicles.  However, our second fiscal quarter production schedules are typically impacted by customer summer shut downs and our third fiscal quarter is affected by holiday schedules.  Additionally, our Building HVAC segment experiencesCIS and BHVAC segments experience some seasonality as demand for HVAC&R products can be affected by heating and cooling seasons, weather patterns, construction, and other factors.  Generally,We expect sales volume within our CIS segment to be higher during our first two fiscal quarters due to the Building HVACconstruction seasons in the northern hemisphere.  Sales volume within the BHVAC segment is generally stronger in our second and third fiscal quarters, corresponding with demand for heating products.

We manufacture products for the original equipment marketsmajority of customers in our vehicular and CIS segments on an as-ordered basis, which makes large inventories of finished products unnecessary.  In our Building HVACBHVAC segment, we maintain varying levels of finished goods inventory due to seasonal demand and certain sales programs.  In these areas, we make use of extended payment terms, not to exceed 90 days, for our Building HVAC customers on a limited basis.  In Brazil, within our Americas segment, we maintain higher levels of aftermarket product inventory in order to timely meet customer needs in the Brazilian automotive and commercial vehicle aftermarkets.  We do not experience a significant number of returned products within any of our operating segments.

Through our website, www.modine.com (Investors link), we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, other Securities Exchange Act reports and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).  Our reports are also available free of charge on the SEC’s website, www.sec.gov.  Also available free of charge on our website are the following corporate governance documents:documents, among others:

All of the reports and corporate governance documents referenced above and other materials relating to corporate governance may also be obtained without charge by contacting Corporate Secretary, Modine Manufacturing Company, 1500 DeKoven Avenue, Racine, Wisconsin 53403-2552.  We do not intend to incorporate our internet website and the information contained therein or incorporated therein into this annual report on Form 10-K.

In the ordinary course of our business, we face various market, operational, strategic, and financial risks.  These risks could have an impact on our business, financial condition, and results of operations.  Our most significant risks are set forth below and elsewhere in this Annual Report on Form 10-K.

Our Enterprise Risk Management (“ERM”) process seeks to identify and address significant risks.  We believe that risk-taking is an inherent aspect of operating a global business and, in particular, one focused on growth and cost-competitiveness.  Our goal is to proactively manage risks in a structured approach in conjunction with strategic planning, with the intent to preserve and enhance shareowner value.  However, the risks set forth below and elsewhere in this report, as well as other risks currently unknown or deemed immaterial at the date of this report, could adversely affect us and cause our financial results to vary materially from recent or anticipated future results.

Our OEMvehicular customers continually seek price reductions from us.  These price reductions adversely affect our results of operations.

Our net sales and profitability could be adversely affected from business which currently accountslosses or declines with major customers.

Deterioration of a business relationship with a major customer could cause our sales and profitability to suffer.  Generally speaking, this risk is highest in our vehicular business segments, where a large portion of sales are attributable to a relatively small number of customers.  We principally compete for approximately 81new vehicular business both during the initial development of new models and upon the redesign of existing models by our major customers.  New model development generally begins two to five years prior to marketing such models to the public.  The failure to obtain new business on new models or to retain or increase business on redesigned existing models could adversely affect our business and financial results.  In addition, as a result of the relatively long lead times required for many of our complex vehicular components, it may be difficult in the short term for us to obtain new sales to replace any unexpected decline in sales of existing products.  We may incur significant expense in preparing to meet anticipated customer requirements that may not be recovered.  The loss of a major customer, the loss of business with respect to one or more of the vehicle models that use our vehicular products, or a significant decline in the production levels of such vehicles could have an adverse effect on our business, results of operations and financial condition.

Our CIS segment includes significant sales generated from a single global technology customer (9 percent of our netCIS segment sales) with which we are party to confidentiality agreements.  Sales to this customer have historically fluctuated significantly from one quarter or fiscal year to the next.  While we expect to be able to manage troughs and take advantage of peaks, to the extent we are unable to predict and mitigate lower sales islevels or respond in a timely fashion to higher sales levels, the results of operations for the CIS segment could be adversely affected.

We are dependent upon the health of the customers and markets we serve.

We are highly susceptible to unfavorable trends in the markets we serve as our customers’ sales and production levels are affected by general economic conditions, including access to credit, the price of fuel and electricity, employment levels and trends, interest rates, labor relations issues, regulatory requirements, trade agreements and other market factors, as well as by customer-specific issues.  Any significant decline in production levels for current and future customers could result in asset impairment charges and a reduction in our sales, thereby adversely impacting our results of operations and financial condition.

If we were to lose business with a major OEM customer,Fluctuations in costs of materials (including aluminum, copper, steel and stainless steel (nickel), other raw materials and energy) could place significant pressure on our net sales and profitability could be adversely affected.results of operations.

DeteriorationIncreases in the costs of materials, which may be impacted by a business relationship withvariety of factors, including changes in trade laws and tariffs, could have a major OEMsignificant adverse effect on our results of operations.  We have sought to alleviate this risk by including material pass-through provisions in our customer could cause our salescontracts when possible.  Under these arrangements, we adjust customer prices, on a prospective basis, based upon increases and profitabilitydecreases in the cost of key raw materials.  However, where these pass-through arrangements are utilized, there can often be a three-month to suffer.  We principally compete for new business both duringone-year lag between the initial development of new models and upon the redesign of existing models by our major customers.  New model development generally begins two to five years prior to marketing such models to the public.  The failure to obtain new business on new models or to retain or increase business on redesigned existing models could adversely affect our business and financial results.  In addition, as a resulttime of the relatively long lead times required for manymaterial increase or decrease and the time of the price adjustment.  To further mitigate our exposure, we, from time to time, enter into forward contracts to hedge a portion of our complex components, itforecasted aluminum and copper purchases.  However, these hedges may be difficultonly partially offset increases in the short-term for us to obtain new sales to replace any unexpected decline in the sales of existing products.  We may incurmaterial costs, and significant expense in preparing to meet anticipated customer requirements that may not be recovered.  The loss of a major OEM customer, the loss of business with respect to one or more of the vehicle models that use our products, or a significant decline in the production levels of such vehiclesincreases could have an adverse effect on our business, results of operations and financial condition.operations.

We could be adversely affected if we experience shortages of components or materials from our suppliers.

In an effort to manage and reduce our cost of purchased goods and services, we, like many suppliers and customers, have been consolidating our supply base.  As a result, we are dependent upon limited sources of supply for certain components used in the manufacture of our products.  We select our suppliers based onupon total value (including price, delivery and quality), taking into consideration their production capacities, financial condition and ability to meet our demand.  In some cases, it can take several months or longer to find a supplier due to qualification requirements.  However, strong demand, the potential effects of trade laws and tariffs, capacity limitations, financial instability, or other problems experienced by our suppliers could result in shortages or delays in their supply of product to us.  If we were to experience a significant or prolonged shortage of critical components or materials from any of our suppliers and could not procure the components or materials from other sources, we would be unable to meet our production schedules and we would miss product delivery dates, which would adversely affect our sales, results of operations and customer relationships.

OEM customersCustomers often request that we pay for design, engineering and tooling costs that are incurred prior to the start of production and recover these costs through amortization in the piece price of the product.  Some of these costs cannot be capitalized, which adversely affects our profitability until the programs for which they have been incurred are launched.  If a given program is not launched, or is launched with significantly lower volumes than planned, we may not be able to recover the design, engineering and tooling costs from our customers, further adversely affecting our profitability.results of operations.

We face strong competition.

The competitive environment continues to be dynamic as many of our traditional OEM customers, faced with intense international competition, have expanded their sourcing of components.  As a result, we have experiencedexperience competition from suppliers in other parts of the world that enjoy economic advantages, such as lower labor costs, lower health care costs, lower tax rates, lower costs associated with legal compliance, and, in some cases, export or raw materials subsidies.  In addition, consolidation and vertical integration within the supply base have introduced new or restructured competitors to our markets.  Increased competition could adversely affect our business and our results of operations.

 

As a global company, we are subject to foreign currency rate fluctuations, which may affect our financial results.

Although our financial results are reported in U.S. dollars, a significant portion of our sales and operating costs are realized in foreign currencies, including the euro, British pound, Brazilian real and others.  Our sales and profitability are affected by movements of the U.S. dollar against foreign currencies in which we generate sales and incur expenses.  To the extent that we are unable to match sales in foreign currencies with costs paid in the same currency, exchange rate fluctuations in any such currency could have an adverse effect on our financial results.  During times of a strengthening U.S. dollar, our reported sales and earnings from our international operations will be lower because the applicable local currency will be translated into fewer U.S. dollars.  In certain instances, currency rate fluctuations may create pricing pressure relative to competitors quoting in different currencies, which could result in our products becoming less competitive.  Significant long-term fluctuations in relative currency values, in particular a significant change in the relative values of the U.S. dollar, euro, British pound or Brazilian real, could have an adverse effect on our results of operations and financial condition.

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

As parta result of the “Strengthen” objective of our Strengthen, Diversify and GrowSDG transformational strategy, we are transitioninghave transitioned to a more global, product-based organization.  We have engaged in restructuring activities in our Americas, Europe, CIS and EuropeBHVAC segments in effortsorder to optimize our manufacturing footprint and cost structure.  These restructuring activities includeincluded the consolidation and/or closure of manufacturing facilities in North America and Europe, as well as targeted headcount reductions that will support our objective of reducing operational and SG&A cost structures.  In addition, we are focusedcontinue to focus on reducing costs for materials and services through targeted adjustments and negotiations with our supply base.  Our successful execution of these initiatives, and our ability to identify and execute future opportunities to optimize our cost structures, is critical to enable us to establish a cost environment that will increase and sustain our long-term competitiveness.  Any failure to do so could, in turn, adversely affect our results of operations and financial condition.

We are in the midst of launchingcontinue to launch a significant number of new programs at our facilities across the world.  The success of these launches is critical to our business.

We design technologically advanced products, and the processes required to produce these products can be difficult and complex.  We commit significant time and financial resources to ensure the successful launch of new products and programs.  Due to our high level of launch activity in each of our segments, we must appropriately manage these launches and deploy our operational and administrative resources to take advantage of this increase in our business.  If we do not successfully launch the products and programs, we may lose market share or damage relationships with our customers, which could negatively affect our business.  In addition, any failure in our manufacturing strategy for these new products or programs could result in production inefficiencies or asset impairment charges.

We are subject to risks related to our international operations.

We have manufacturing and technical facilities located in North America, South America, Europe, Asia, and Africa.  In fiscal 2016, 542018, 57 percent of our sales were from non-U.S. operations.  Consequently, our global operations are subject to complex international laws and regulations and numerous risks and uncertainties, including changes in monetary and fiscal policies, including those related to tax and trade, cross-border trade restrictions or prohibitions, import or other charges or taxes, fluctuations in foreign currency exchange and interest rates, limitations on the repatriation of funds, changing economic conditions, unreliable intellectual property protection and legal systems, insufficient infrastructures, social unrest, political instability and disputes, incompatible business practices, and international terrorism.  Changes in policies or laws governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we manufacture products, such as Mexico, could have a material adverse effect on our results of operations.  In addition, compliance with multiple and often conflicting laws and regulations of various countries is burdensome and expensive.

 

If we cannot differentiate ourselves from our competitors with our technology, our existing and potential customers may seek lower prices and our sales and earnings may be adversely affected.

Price, quality, delivery, technological innovation, and application engineering development are the primary elements of competition in our markets.  If we fail to keep pace with technological changes and cannot differentiate ourselves from our competitors with our technology or fail to provide high quality, innovative products and services that both meet or exceed customer expectations and address their ever-evolving needs, we may experience price erosion, lower sales, and lower profit margins.  Significant technological developments by our competitors or others also could adversely affect our business and results of operations.

Developments or assertions by or against us relating to intellectual property rights could adversely affect our business.

We own significant intellectual property, including a large number of patents, trademarks, copyrights and trade secrets.  Our intellectual property plays an important role in maintaining our competitive position in a number of the markets we serve.  As we expand our operations in jurisdictions where the enforcement of intellectual property rights is less robust, the risk of others duplicating our proprietary technologies increases, despite our efforts to protect them.  Developments or assertions by or against us relating to intellectual property rights could adversely affect our business and results of operations.

We may be adversely affected by any disruption in, or breach of, our information technology systems.

Our operations are dependent upon our information technology systems, which encompass all of our major business functions.  A substantial disruption in our information technology systems for a prolonged time period, or a materialsignificant breach of our information security, could result in delays in receiving inventory and supplies or filling customer orders, and/or the release of otherwise confidential information, adversely affecting our customer service and relationships as well as our reputation.  We recognizereputation, and could lead to significant remediation expenses and litigation risks.  Our systems, and the volume of cyber attacks is increasing; therefore, we employ commercially practical efforts to avoid such attacks, regardless of source, and provide reasonable assurance that we can appropriately mitigate an attack, should it occur.  Each year, we evaluate our threat profile and our countermeasures in a continuing effort to maintain the integritysystems of our systems and data.  In addition, our systems mightservice providers or others, could be breached, damaged or interrupted by cyber attacks or other man-made intentional or unintentional events, or by natural disasters or man-madeoccurrences, many of which may, despite our best efforts, be beyond our ability to effectively detect, anticipate or control.  Any such events (caused by us, by our service providers or others).  Suchand the related delays, problems or costs could have a material adverse effect on our business, financial condition, results of operations and reputation.

We may incur material losses and costs as a result of warranty and product liability claims and litigation or other legal proceedings.

In the event our products fail to perform as expected, we are exposed to warranty and product liability claims and may be required to participate in a recall or other field campaign of such products.  Many of our OEMvehicular customers haveoffer extended warranty protection for their vehicles puttingand put pressure on thetheir supply base to extend warranty coverage as well.  If our customers demand higher warranty-related cost recoveries, or if our products fail to perform as expected, it could have a material adverse impact on our results of operations and financial condition.  We are also involved in various legal proceedings from time to time incidental to our business.  If any such proceeding has a negative result, it could adversely affect our business, and results of operations.operations and financial condition.

We could be adversely impacted by the costs of environmental, health and safety regulations.

Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials.  The operation of our manufacturing facilities entails risks in these areas and there can be no assurance we will avoid material costs or liabilities relating to such matters.  Our financial responsibility to clean up contaminated property may extend to previously ownedpreviously-owned or used property, properties owned by unrelated companies, as well as properties we currently own and use, regardless of whether the contamination is attributable to prior owners.  In addition, potentially significant expenditures could be required in order to comply with evolving environmental, health and safety laws, regulations or other requirements that may be adopted or imposed in the future.

Inability to identify and execute on inorganic- and organic-growth opportunities may adversely impact our business and operating results.

As part of the “Grow” objective of our Strengthen, Diversify and Grow transformational strategy, weWe expect to aggressivelycontinue to pursue acquisitions in “industrial” markets and expand our market share in high-growth engine and powertrain cooling areas through focused research and development activities and commercial pursuits.  There can be no assurance we will be able to identify attractive acquisition targets and/or organic growth opportunities.  If we are unable to successfully complete such transactions in the future, our growth may be limited.  In addition, recent and future acquisitions will require integration of operations, sales and marketing, information technology, finance, and administrative functions.  If we are unable to successfully integrate acquisitions and operate these businesses profitably, we may not achieve the financial or operational success expected from the acquisitions.

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

We have several defined benefit pension plans that cover mostin the U.S., all of our domestic employees hired on or before December 31, 2003.which are frozen to new participants.  Our funding policy for these plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations.  Our domestic plans have an unfunded balanceliability of $90$73 million.  During fiscal 2017,2019, we anticipate making funding contributions totaling approximately $8$6 million related to these domestic plans.  Funding requirements for our defined benefit plans are dependent upon, among other things, interest rates, underlying asset returns, mortality rate tables, and the impact of legislative or regulatory changes.  Should changes in actuarial assumptions or other factors result in the requirement of significant additional funding contributions, our liquidity positionfinancial condition could be adversely affected.

We may be subject to additional income tax expense or exposure duebecome subject to negative or unexpectedadditional tax consequences.exposure.

Unfavorable changes in the financial outlook of our operations in certain jurisdictions could lead to adverse changes in our valuation allowance assertions for our deferred tax assets.  Additionally, the subjectivity of or changes in tax laws and regulations in jurisdictions where we have significant operations could materially affect our results of operations.  WeOn December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).  The Tax Act includes broad and complex changes to the U.S. tax code, including, but not limited to (i) a reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018, and (ii) a transition tax on certain unrepatriated earnings of foreign subsidiaries.  In addition, we are subject to tax audits by governmental authorities in each taxing jurisdiction in which we operate.  Unfavorable or unexpected outcomes from one or more such tax audits could adversely affect our results of operations and financial position.condition.