(in millions) | |
Year Ended March 31, 20172019 Compared with Year Ended March 31, 2016:2018:
Fiscal 20172019 net sales increased $150$110 million, or 115 percent, from the prior year, primarily due to $178 million of incremental sales from our new CIS segment and higher sales in each of our Asia segment,operating segments, partially offset by lower sales in our Americas and BHVAC segments. Sales volume increases in our BHVAC segment were more than offset by an $11a $28 million unfavorable impact of foreign currency exchange rate changes.
Fiscal 20172019 gross profit of $253 million increased $29$9 million from the prior year, andyet gross margin increased 40declined 50 basis points to 16.916.5 percent. These increases wereThe decline in gross margin was primarily due to $26 millionunfavorable material costs, including the direct and indirect impacts of gross profit contributed by the CIStariffs, and temporary operating inefficiencies largely related to increased volumes and multiple new program launches in our VTS segment, cost savings resulting from procurement initiatives, and the absence of $9 million of pension settlement losses recognized in the prior year, partially offset by temporary production inefficiencies in the Americas segment, the unfavorable impact of ahigher sales volume. In addition, gross profit was unfavorably impacted by $4 million inventory purchase accounting adjustmentfrom foreign currency exchange rate changes.
Fiscal 2019 SG&A expenses of $244 million decreased $2 million, or 70 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primarily due to lower integration costs associated with our November 2016 acquisition of the Luvata HTS business and unfavorable material costs. In addition,a $3 million favorable impact of foreign currency exchange rate changes, negatively impacted fiscal 2017 gross profit by $2 million.
Fiscal 2017 SG&A expenses of $205 million were consistent with the prior year, but decreased as a percentage of net sales. During fiscal 2017, $19 million of SG&A expenses in the CIS segment and $15 million of acquisition- and integration-related costs associated with our acquisition of Luvata HTS were largely offset by the absence of $33 million of pension settlement losses recognized in the prior year.
Restructuring expenses decreased $6 million in fiscal 2017 compared with the prior year, primarily due to lower severance expenses, partially offset by higher equipment transferthird-party strategic advisory costs recorded at Corporate and plant consolidationhigher environmental charges within our VTS segment. During fiscal 2019, we recorded $7 million of costs, in the Americas segment.primarily consisting of third-party consulting fees, related to our evaluation of strategic alternatives for our VTS segment’s automotive business.
During fiscal 2017, we sold two previously-closed manufacturing facilities within our Americas segment and a facility within our Europe segment. As a resultFiscal 2019 restructuring expenses of these sales, we recognized net gains totaling $2 million.
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.
Operating income of $39 million in fiscal 2017 represents a $47 million improvement compared with an operating loss of $8 million in the prior year. Fiscal 2017 operating performance improved in our Europe and Asia segments, while operating performance declined in our Americas and BHVAC segments. Operating income was favorably impacted by the absence of $42 million of pension settlement losses and a $10 million impairment charge recognized in the prior year, $8 million of operating income contributed by the CIS segment, and lower restructuring expenses, partially offset by acquisition- and integration-related costs and the impact of the inventory purchase accounting adjustment totaling $19 million.
Fiscal 2017 interest expense increaseddecreased $6 million compared with the prior year, primarily due to new debt used to financelower severance-related expenses associated with the fiscal 2018 closure of a significant portion of our acquisition of Luvata HTS.manufacturing facility in Gailtal, Austria within the CIS segment.
OtherDuring fiscal 2019, we sold our South African business within the BHVAC segment and, as a result, recorded a loss of $2 million.
Operating income during fiscal 2016 included a $10of $110 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire in fiscal 2014.2019 increased $18 million compared with the prior year, primarily due to higher earnings in the CIS and BHVAC segments, partially offset by lower earnings in the VTS segment.
OurThe benefit for income taxes was $5 million in fiscal 2019, compared with a provision for income taxes was $6of $40 million in fiscal 2017,2018. The $45 million change was primarily due to our accounting for the impacts of the Tax Act. As a result of the Tax Act, we recorded provisional income tax charges totaling $38 million in the prior year, compared with a benefit for income taxes of $9tax benefits totaling $8 million in fiscal 2016. Thethe current year. In addition, we recorded income tax benefitbenefits totaling $17 million in fiscal 2016 includedthe current year resulting from the recognition of tax assets for foreign tax credits and other attributes, partially offset by the absence of a $16 million benefit related to pension settlement losses and a $3$9 million benefit from a development tax credit in Hungary recorded in the reversalprior year and changes in the mix of a deferred tax asset valuation allowance in a foreign tax jurisdiction. The income tax provision in fiscal 2017 includes a $2 million provisionoperating earnings. See Note 8 of the Notes to establish a valuation allowance in a separate foreign tax jurisdiction.Consolidated Financial Statements for additional information.
Year Ended March 31, 20162018 Compared with Year Ended March 31, 2015:2017:
Fiscal 20162018 net sales decreased $143increased $600 million, or 1040 percent, from the prior year, primarily due to lower$444 million of additional sales from our CIS segment, which included sales from the acquired Luvata HTS business that we owned for four months of fiscal 2017, higher sales in each of our 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.
Fiscal 2016 gross profit decreased $23 million to $224 million, 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 favorable 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 initiativesother operating segments, and a $10$55 million favorable impact of foreign currency exchange rate changes.
Restructuring expensesFiscal 2018 gross profit of $357 million increased $12$103 million in fiscal 2016 compared withfrom the prior year, primarily due to severance expenses$66 million of additional gross profit from our CIS segment and higher gross profit in our VTS and BHVAC segments. Gross profit was favorably impacted by $9 million from foreign currency exchange rate changes. Gross margin improved 10 basis points to 17.0 percent, primarily due to higher sales volume, savings resulting from cost-reduction initiatives, improved operating efficiencies, and the absence of a $4 million inventory purchase accounting adjustment recorded in the Europeprior year, partially offset by unfavorable material costs and Americas segmentsincremental depreciation and equipment transfer costs related to plant consolidation activities in the Americas segment.amortization expense resulting from purchase accounting for Luvata HTS.
In fiscal 2016, we recorded a $10Fiscal 2018 SG&A expenses of $246 million impairment charge to write down the carrying value of a manufacturing facility in Germany to fair value. In fiscal 2015, we recorded a goodwill impairment charge of $8 million in Brazil and recognized a gain of $3increased $43 million from the sale of a wind tunnel in Germany.
The operating loss of $8 million in fiscal 2016 represents a $61 million decline from $53 million of operating income in the prior year. This decline wasyear, primarily due to $42a $39 million increase in SG&A expenses in our CIS segment, $4 million of pension settlement losses, lower gross profit,strategy consulting fees incurred during fiscal 2018, higher restructuringcompensation-related expenses, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by ongoing cost-control initiatives.lower costs incurred related to the acquisition of Luvata HTS. SG&A expenses, as a percentage of net sales, decreased 180 basis points compared with the prior year.
Other income duringRestructuring expenses of $16 million in fiscal 2016 included a $102018 increased $5 million gaincompared with the prior year, primarily due to severance-related expenses in the CIS segment related to an insurance settlement for equipment losses resulting from the Airedale fireclosure of a manufacturing facility in Austria.
During fiscal 2018, we recorded impairment charges totaling $3 million related to the closure of the CIS manufacturing facility in Austria and the discontinuance of a product line in our BHVAC segment.
During fiscal 2017, we sold three manufacturing facilities within our VTS segment, two of which were previously closed, and recognized net gains totaling $2 million.
Operating income of $92 million in fiscal 2014.2018 increased $50 million compared with the prior year, primarily due to $18 million of additional operating income contributed by our CIS segment and higher earnings in the VTS and BHVAC segments.
Our benefitFiscal 2018 interest expense increased $9 million compared with the prior year, primarily due to debt issued to finance a significant portion of our acquisition of Luvata HTS.
The provision for income taxes was $9$40 million and $6 million in fiscal 2016, compared with a provision for income taxes of $192018 and 2017, respectively. The $34 million in fiscal 2015. This $28 million changeincrease was primarily due to $16$38 million of provisional charges recorded in fiscal 2018 related to the Tax Act and increased operating earnings, partially offset by income tax benefits related to pension settlement lossestotaling $14 million resulting from i) a development tax credit in fiscal 2016, a decrease in operating earnings, and a $3 million income tax benefit related toHungary ($9 million); ii) the reversal of a deferredportion of the valuation allowance in a foreign jurisdiction ($3 million); and iii) a reduction of unrecognized tax assetbenefits resulting from a lapse in statutes of limitations ($2 million), and the absence of a $2 million provision recorded in the prior year to establish a valuation allowance.allowance in a separate foreign jurisdiction.
Segment Results of Operations
Americas | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 534 | | | | 100.0 | % | | $ | 586 | | | | 100.0 | % | | $ | 667 | | | | 100.0 | % | Cost of sales | | | 447 | | | | 83.8 | % | | | 486 | | | | 82.9 | % | | | 558 | | | | 83.7 | % | Gross profit | | | 87 | | | | 16.2 | % | | | 100 | | | | 17.1 | % | | | 109 | | | | 16.3 | % | Selling, general and administrative expenses | | | 54 | | | | 10.1 | % | | | 55 | | | | 9.4 | % | | | 65 | | | | 9.7 | % | Restructuring expenses | | | 7 | | | | 1.3 | % | | | 9 | | | | 1.5 | % | | | 3 | | | | 0.4 | % | Gain on sale of facilities | | | (1 | ) | | | -0.2 | % | | | - | | | | - | | | | - | | | | - | | Impairment charge | | | - | | | | - | | | | - | | | | - | | | | 8 | | | | 1.2 | % | Operating income | | $ | 27 | | | | 5.0 | % | | $ | 36 | | | | 6.2 | % | | $ | 33 | | | | 5.0 | % |
Since the date we acquired Luvata HTS (November 30, 2016), we have included financial results of this acquired business within our CIS segment. Effective April 1, 2018, we merged our Americas coils business into the CIS segment to accelerate operational improvements and organizational efficiencies and formed the VTS segment by combining our Americas, Europe, and Asia operations to enable us to operate as a more global, product-based organization. We began reporting financial results for our new segments beginning in fiscal 2019. Segment financial information for fiscal 2018 and 2017 has been recast to conform to the fiscal 2019 presentation.
VTS | | | | | | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | Net sales | | $ | 1,352 | | | | 100.0 | % | | $ | 1,296 | | | | 100.0 | % | | $ | 1,152 | | | | 100.0 | % | Cost of sales | | | 1,165 | | | | 86.2 | % | | | 1,095 | | | | 84.5 | % | | | 970 | | | | 84.2 | % | Gross profit | | | 187 | | | | 13.8 | % | | | 201 | | | | 15.5 | % | | | 182 | | | | 15.8 | % | Selling, general and administrative expenses | | | 113 | | | | 8.3 | % | | | 110 | | | | 8.4 | % | | | 106 | | | | 9.2 | % | Restructuring expenses | | | 9 | | | | 0.7 | % | | | 7 | | | | 0.6 | % | | | 10 | | | | 0.9 | % | Gain on sale of assets | | | - | | | | - | | | | - | | | | - | | | | (2 | ) | | | -0.2 | % | Operating income | | $ | 65 | | | | 4.8 | % | | $ | 84 | | | | 6.5 | % | | $ | 68 | | | | 5.9 | % |
Year Ended March 31, 20172019 Compared with Year Ended March 31, 2016:2018:
AmericasVTS net sales decreased $52increased $56 million, or 94 percent, in fiscal 20172019 compared with the prior year, primarily due to higher sales volume to off-highway and automotive customers in North America and Asia, partially offset by lower sales volume to commercial vehicle and off-highway customers in North America,Europe and a $21 million unfavorable impact of foreign currency exchange rate changes. Gross profit decreased $14 million and gross margin declined 170 basis points to 13.8 percent. The decline in gross margin was primarily due to unfavorable material costs, including the impacts of tariffs, and temporary operating inefficiencies largely related to increased volumes and new program launches at certain manufacturing facilities, partially offset by higher sales volume. In addition, foreign currency exchange rate changes had an unfavorable $3 million impact on gross profit. SG&A expenses increased $3 million compared with the prior year, yet decreased 10 basis points as a percentage of sales. The increase in SG&A expenses primarily resulted from higher environmental charges related to previously-owned manufacturing facilities in the U.S. and higher compensation-related expenses, partially offset by a $2 million favorable impact of foreign currency exchange rate changes. Restructuring expenses increased $2 million, primarily due to higher severance expenses. Operating income decreased $19 million to $65 million, primarily due to lower gross profit and higher SG&A and restructuring expenses.
Year Ended March 31, 2018 Compared with Year Ended March 31, 2017:
VTS net sales increased $144 million, or 12 percent, in fiscal 2018 compared with the prior year, primarily due to higher sales volume to off-highway and automotive customers and a $5$42 million favorable impact of foreign currency exchange rate changes. Gross profit decreased $13increased $19 million, and gross margin decreased 90 basis points to 16.2 percent in fiscal 2017. These decreases were primarily due to lowerhigher sales volumevolume. Gross margin declined 30 basis points, primarily due to unfavorable material costs, the absence of favorable customer pricing settlements recorded in the prior year, and temporaryhigher depreciation expense resulting from recent production inefficiencies in North America, largely related to product launches and plant consolidation activities,capacity investments, partially offset by cost savings resulting from procurement initiatives,improved operating efficiencies. In addition, foreign currency exchange rate changes had a favorable material costs and lower environmental costs related to a previously-owned manufacturing facility, as compared with the prior year. Fiscal 2017$7 million impact on gross profit. SG&A expenses decreased $1 million from fiscal 2016, primarily due to lower compensation-related expenses and a higher recovery of development costs, partially offset by a $1.6 million charge related to a legal matter in Brazil for which the Company has agreed to a settlement. In fiscal 2017, we recorded $7 million of restructuring expenses, primarily consisting of equipment transfer and plant consolidation costs related to the closure of our Washington, Iowa manufacturing facility, which we completed during fiscal 2017, and severance expenses. In addition, we sold two closed manufacturing facilities in North America and recognized gains totaling $1 million as a result. Operating income of $27 million in fiscal 2017 decreased $9increased $4 million compared with the prior year, primarily due to lower gross profit.
Year Ended March 31, 2016 Compared with Year Ended March 31, 2015:
Americas net sales decreased $81 million, or 12 percent, in fiscal 2016 compared with the prior year. Sales were lower in both North America and Brazil, including a $25 million unfavorable impact of foreign currency exchange rate changes. Sales in North America decreased $43 million, 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. Gross profit decreased $9 million, yet gross margin increased 80 basis points to 17.1 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, higher compensation-related expenses, and $2 million ofhigher environmental charges related to a previously-owned manufacturing facility in the U.S., partially offset by lower material costs, cost savings from completed restructuring activities, and improved production efficiencies. Fiscal 2016 SG&A expenses decreased $10 million from fiscal 2015, primarily due to cost-control initiatives, the absence of a $3$2 million charge forrecorded in the prior year related to a legal matter in Brazil, in the prior year,which has since been settled and paid. As a percentage of sales, SG&A expenses decreased 80 basis points to 8.4 percent. Restructuring expenses decreased $3 million, favorable impact of foreign currency exchange rate changes. In fiscal 2016, we recorded $9 million of restructuring expenses, primarily consisting of severance expenses associated with a voluntary retirement program in the U.S. and the closure of our Washington, Iowa manufacturing facility,due to lower plant consolidation and equipment transfer costs. In fiscal 2017, we sold three manufacturing facilities and, plant consolidation costs in North America. Operating incomeas a result, recognized gains totaling $2 million.
CIS | | | | | | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | Net sales | | $ | 708 | | | | 100.0 | % | | $ | 676 | | | | 100.0 | % | | $ | 232 | | | | 100.0 | % | Cost of sales | | | 593 | | | | 83.8 | % | | | 578 | | | | 85.5 | % | | | 200 | | | | 86.1 | % | Gross profit | | | 115 | | | | 16.2 | % | | | 98 | | | | 14.5 | % | | | 32 | | | | 13.9 | % | Selling, general and administrative expenses | | | 61 | | | | 8.6 | % | | | 60 | | | | 8.8 | % | | | 21 | | | | 9.2 | % | Restructuring expenses | | | - | | | | - | | | | 8 | | | | 1.2 | % | | | - | | | | - | | Impairment charges | | | - | | | | 0.1 | % | | | 1 | | | | 0.2 | % | | | - | | | | - | | Operating income | | $ | 53 | | | | 7.5 | % | | $ | 29 | | | | 4.2 | % | | $ | 11 | | | | 4.7 | % |
Year Ended March 31, 2019 Compared with Year Ended March 31, 2018:
CIS net sales increased $32 million, or 5 percent, in fiscal 2016 increased $3 million2019 compared with the prior year, primarily due to lower SG&A expenses and the absence of an $8 million goodwill impairment charge in fiscal 2015, partially offset by lower gross profit and higher restructuring expenses. Europe
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 524 | | | | 100.0 | % | | $ | 524 | | | | 100.0 | % | | $ | 578 | | | | 100.0 | % | Cost of sales | | | 443 | | | | 84.6 | % | | | 456 | | | | 87.0 | % | | | 509 | | | | 88.1 | % | Gross profit | | | 81 | | | | 15.4 | % | | | 68 | | | | 13.0 | % | | | 69 | | | | 11.9 | % | Selling, general and administrative expenses | | | 42 | | | | 7.9 | % | | | 39 | | | | 7.4 | % | | | 44 | | | | 7.6 | % | Restructuring expenses | | | 3 | | | | 0.6 | % | | | 6 | | | | 1.2 | % | | | 2 | | | | 0.4 | % | Gain on sale of facility | | | (1 | ) | | | -0.2 | % | | | - | | | | - | | | | (3 | ) | | | -0.6 | % | Impairment charge | | | - | | | | - | | | | 10 | | | | 1.9 | % | | | - | | | | - | | Operating income | | $ | 37 | | | | 7.1 | % | | $ | 13 | | | | 2.5 | % | | $ | 26 | | | | 4.5 | % |
Year Ended March 31, 2017 Compared with Year Ended March 31, 2016:
Europe net sales of $524 million in fiscal 2017 were consistent with the prior year, as higher sales volume to automotivedata center and commercial HVAC&R customers, waspartially offset by lower sales volume to commercial vehicle and off-highwayindustrial customers and a $3$5 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $13$17 million and gross margin improved 240170 basis points to 15.416.2 percent, in fiscal 2017, primarily due to cost savings resulting from procurement initiatives, favorable sales mix, and improved production efficiencies, partially offset by unfavorable material costs. SG&A expenses increased $3 million in fiscal 2017, primarily due to higher compensation-related expenses. In fiscal 2017, we recorded $3 million of restructuring expenses, primarily consisting of severance expenses. In addition, we sold a manufacturing facility in Europe and recognized a gain of $1 million as a result. Operating income of $37 million in fiscal 2017 increased $24 million compared with the prior year, primarily due to higher gross profit and the absence of a $10 million impairment charge in the prior year.
Year Ended March 31, 2016 Compared with Year Ended March 31, 2015:
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. Gross profit decreased $1 million, yet gross margin increased 110 basis points to 13.0 percent in fiscal 2016. The gross margin increase was primarily due to higher sales volume and lower material costs. In addition, gross profit was negatively impacted by $9 million from foreign currency exchange rate changes. Fiscal 2016favorable sales mix. SG&A expenses increased $1 million, yet decreased $520 basis points as a percentage of sales. The $1 million from the prior year,increase in SG&A expenses was primarily due to higher compensation-related expenses, including higher commission costs, partially offset by a $6$1 million favorable impact of foreign currency exchange rate changes. In fiscal 2016, weRestructuring expenses decreased $8 million, primarily due to the absence of severance-related expenses recorded $6 million of restructuring expenses, primarilyin the prior year related to severance expenses. In addition, we recorded a $10 million asset impairment charge. These restructuring expenses and impairment charge primarily related tothe closure of a manufacturing facility in Germany, which was generating pre-tax losses, resulting in management decidingAustria. In fiscal 2018, we recorded a $1 million impairment charge related to exit a certain product line.the closure of the Austrian facility. In fiscal 2019, we recorded an additional impairment charge of less than $1 million related to this facility. Operating income of $13$53 million in fiscal 2016 decreased $13increased $24 million, compared with the prior year, primarily due to higher restructuring expenses, an impairment charge,gross profit and the absence of a $3 million gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&Arestructuring expenses.
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 112 | | | | 100.0 | % | | $ | 79 | | | | 100.0 | % | | $ | 81 | | | | 100.0 | % | Cost of sales | | | 93 | | | | 83.2 | % | | | 67 | | | | 84.5 | % | | | 69 | | | | 85.8 | % | Gross profit | | | 19 | | | | 16.8 | % | | | 12 | | | | 15.5 | % | | | 12 | | | | 14.2 | % | Selling, general and administrative expenses | | | 11 | | | | 9.9 | % | | | 11 | | | | 14.5 | % | | | 12 | | | | 13.9 | % | Operating income | | $ | 8 | | | | 6.9 | % | | $ | 1 | | | | 1.0 | % | | $ | - | | | | 0.3 | % |
Year Ended March 31, 20172018 Compared with Year Ended March 31, 2016:2017:
AsiaCIS financial results for fiscal 2017 primarily include four months of results from the acquired Luvata HTS business. These financial results are not comparable to fiscal 2018, which included a full year of Luvata HTS results.
BHVAC | | | | | | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | Net sales | | $ | 212 | | | | 100.0 | % | | $ | 191 | | | | 100.0 | % | | $ | 172 | | | | 100.0 | % | Cost of sales | | | 149 | | | | 70.1 | % | | | 133 | | | | 69.7 | % | | | 124 | | | | 72.2 | % | Gross profit | | | 63 | | | | 29.9 | % | | | 58 | | | | 30.3 | % | | | 48 | | | | 27.8 | % | Selling, general and administrative expenses | | | 35 | | | | 16.4 | % | | | 36 | | | | 18.8 | % | | | 34 | | | | 19.7 | % | Restructuring expenses | | | - | | | | - | | | | - | | | | 0.2 | % | | | 1 | | | | 0.4 | % | Impairment charge | | | - | | | | - | | | | 1 | | | | 0.7 | % | | | - | | | | - | | Loss on sale of assets | | | 2 | | | | 0.8 | % | | | - | | | | - | | | | - | | | | - | | Operating income | | $ | 27 | | | | 12.6 | % | | $ | 20 | | | | 10.6 | % | | $ | 13 | | | | 7.7 | % |
Year Ended March 31, 2019 Compared with Year Ended March 31, 2018:
BHVAC net sales increased $33$21 million, or 4211 percent, in fiscal 20172019 compared with the prior year, primarily due to higher sales volume to automotiveof air conditioning products and off-highway customersparts and controls in Chinathe U.K. and incremental sales from our recently-formed joint ventureheating products in China,North America, partially offset by a $4$1 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $7$5 million, andyet gross margin improved 130declined 40 basis points to 16.8 percent29.9 percent. This slight decline in gross margin primarily resulted from unfavorable material costs and sales mix, partially offset by higher sales volume. SG&A expenses decreased $1 million compared with the prior year and decreased 240 basis points as a percentage of sales, primarily due to cost-control initiatives. During fiscal 2017,2019, we completed the sale of our business in South Africa, and, as a result, recorded a loss of $2 million. Operating income of $27 million increased $7 million, primarily due to higher gross profit.
Year Ended March 31, 2018 Compared with Year Ended March 31, 2017:
BHVAC net sales volume. Fiscal 2017 SG&A expenses were consistent with the prior year. Operating income of $8increased $19 million, or 11 percent, in fiscal 2017 increased $7 million2018 compared with the prior year, primarily due to higher gross profit.
Year Ended March 31, 2016 Compared with Year Ended March 31, 2015:
Asia net sales decreased $2 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to lower sales volume to off-highway customers in Chinaheating and Korea and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales volume to automotive customers in China and increased overall sales in India. Gross margin improved 130 basis points to 15.5 percent in fiscal 2016 compared with the prior year, primarily due to favorable sales mix. Fiscal 2016 SG&A expenses decreased $1 million from the prior year, primarily due to cost-control initiatives, partially offset by acquisition-related costs associated with a joint venture that we formed in late fiscal 2016. Operating income of $1 million in fiscal 2016 increased $1 million compared with the prior year, primarily due to lower SG&A expenses.
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 172 | | | | 100.0 | % | | $ | 181 | | | | 100.0 | % | | $ | 186 | | | | 100.0 | % | Cost of sales | | | 124 | | | | 72.2 | % | | | 127 | | | | 70.1 | % | | | 130 | | | | 70.0 | % | Gross profit | | | 48 | | | | 27.8 | % | | | 54 | | | | 29.9 | % | | | 56 | | | | 30.0 | % | Selling, general and administrative expenses | | | 34 | | | | 19.8 | % | | | 39 | | | | 21.6 | % | | | 37 | | | | 19.8 | % | Restructuring expenses | | | 1 | | | | 0.4 | % | | | 1 | | | | 0.6 | % | | | - | | | | - | | Operating income | | $ | 13 | | | | 7.6 | % | | $ | 14 | | | | 7.7 | % | | $ | 19 | | | | 10.2 | % |
Year Ended March 31, 2017 Compared with Year Ended March 31, 2016:
BHVAC net sales decreased $9 million, or 5 percent, in fiscal 2017 compared with the prior year, primarily due to an $11 million unfavorable impact of foreign currency exchange rate changes and lower school ventilation and heating product sales in North America partially offset by increased air conditioning product sales in the U.K. Gross profit decreased $6 million and gross margin decreased 210 basis points to 27.8 percent in fiscal 2017, primarily due to unfavorable sales mix, unfavorable material costs and higher depreciation expense in the current year resulting from replacement assets associated with the Airedale fire, which we started to depreciate in the fourth quarter of fiscal 2016. In addition, gross profit was unfavorably impacted by $2 million from foreign currency exchange rate changes. Fiscal 2017 SG&A expenses decreased $5 million from fiscal 2016, primarily due to lower commission costs and compensation-related expenses and a $2 million favorable impact of foreign currency exchange rate changes. In fiscal 2017, we recorded $1 million of restructuring expenses consisting of severance expenses. Operating income of $13 million in fiscal 2017 decreased $1 million compared with the prior year, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Year Ended March 31, 2016 Compared with Year Ended March 31, 2015:
BHVAC 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. Gross profit decreased $2 million in fiscal 2016 compared with the prior year, primarily due to a $1 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased 10 basis points to 29.9 percent in fiscal 2016 compared with the prior year. Fiscal 2016 SG&A expenses increased $2 million from the prior year, primarily due to the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in the prior year, partially offset by lower engineering and development costs and a $1 million favorable impact of foreign currency exchange rate changes. In fiscal 2016, we recordedGross profit increased $10 million and gross margin improved 250 basis points to 30.3 percent, primarily due to higher sales volume and improved operating efficiencies in the U.K. SG&A expenses increased $2 million, primarily due to higher commission costs resulting from higher sales. As a percentage of sales, SG&A expenses decreased 90 basis points. Restructuring expenses decreased $1 million, of restructuring expenses consistingprimarily due to the absence of severance expenses.expenses recorded in the prior year. During fiscal 2018, we discontinued a geothermal product line and, as a result, recorded a $1 million impairment charge for intangible assets we no longer use. Operating income of $14$20 million in fiscal 2016 decreased $5increased $7 million, compared with the prior year, primarily due to lowerhigher gross profit and higher SG&A expenses.profit.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents atas of March 31, 20172019 of $34$42 million, and an available borrowing capacity of $153$124 million under lines ofour revolving credit provided by banks in the United States and abroad.facility. Given our extensive international operations, $32approximately $35 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to U.S. taxforeign withholding taxes if repatriated. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 20172019 was $42$103 million, a decrease of $30$21 million from $72$124 million in the prior year. This decrease in operating cash flow was primarily due to payments for acquisition- and integration-related costs,resulted from unfavorable net changes in working capital, partially offset by the favorable impact of stronger earnings. The unfavorable changes in working capital, as compared with the prior year, included higher incentive compensation and other employee benefit payments and higher payments for restructuring activities.inventory levels associated with higher sales levels.
Net cash provided by operating activities in fiscal 20162018 was $72$124 million, an increase of $8$82 million from $64$42 million in the prior year.fiscal 2017. This increase in operating cash flow was primarily due toresulted from an increase in operating earnings, including additional contributions from our CIS segment, lower payments for costs associated with the acquisition and integration of Luvata HTS and restructuring expenses in the current year, and favorable net changes in working capital, including lower incentive compensation payments during fiscal 2016 and the timing of value-added tax payments.capital.
Capital Expenditures
Capital expenditures of $64$74 million during fiscal 20172019 increased $1$3 million compared with fiscal 2016. In fiscal 2017,2018, primarily due to higher capital expenditures in our CIS segment, including investments to expand manufacturing capacity in Serbia and Mexico. Similar to prior years, our capital spending in fiscal 2019 primarily occurred in the Americas and Europe segments,VTS segment, which totaled $26$56 million, and $25 million, respectively. Capital projects in fiscal 2017 included tooling and equipment purchases in conjunction with new and renewal programs with customers, as well as expansions of ourinvestments to expand manufacturing capacity in MexicoChina and Hungary.
At March 31, 2017,2019, our capital expenditure commitments totaled $18$24 million. Significant commitments included tooling and equipment expenditures for new and renewal programs with customers in the Americas, Asia, North America, and Europe segments.
Dividends
We did not pay dividends in fiscal 2017, 2016, or 2015. We currently do not intend to pay dividends in fiscal 2018.within the VTS segment.
Debt
Our total debt outstanding increased $348decreased $30 million to $511$450 million at March 31, 20172019 compared with the prior year, primarily due to new long-termrepayments of debt and borrowings under our revolving credit facility used to finance a significant portion of the $364 million cash consideration for our acquisition of Luvata HTS.during fiscal 2019. See Note 1517 of the Notes to Consolidated Financial Statements for additional information regarding our new credit agreements.
Our debt agreements require us to maintain compliance with various covenants. The term loans require prepayments, asAs defined in the credit agreement, the term loans may require prepayments in the event the Company’sour annual excess cash flow exceeds defined levels, depending upon our leverage ratio, or in the event of certain asset sales. In addition, under our primary debt agreements in the U.S., we are subject to a leverage ratio covenant,covenants, the most restrictive of which requires us to limit our consolidated indebtedness, less a certain portion of our cash balance, both as defined by the credit agreements,agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). As permitted by the credit agreements and in connection with our acquisition of Luvata HTS, the leverage ratio covenant limit has been temporarily raised to no more than three and three-quarters times Adjusted EBITDA through the second quarter of fiscal 2018, and thereafter to no more than three and one-half times Adjusted EBITDA through the first quarter of fiscal 2019. 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. OurMarch 31, 2019, our leverage ratio at March 31, 2017 was 2.9, which was below the maximum permitted ratio of 3.75. Ourand interest expense coverage ratio at March 31, 2017 was 7.0, which exceeded the minimum requirement of 3.0.were 2.1 and 9.0, respectively. We were in compliance with our debt covenants as of March 31, 20172019 and expect to remain in compliance during fiscal 20182020 and beyond.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
| | March 31, 2017 | | | March 31, 2019 | | (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 | | $ | 436.2 | | | $ | 31.3 | | | $ | 81.6 | | | $ | 281.6 | | | $ | 41.7 | | | $ | 377.7 | | | $ | 48.2 | | | $ | 287.8 | | | $ | 16.7 | | | $ | 25.0 | | Interest associated with long-term debt | | | 73.9 | | | | 18.5 | | | | 31.8 | | | | 17.0 | | | | 6.6 | | | | 40.9 | | | | 16.0 | | | | 18.3 | | | | 4.1 | | | | 2.5 | | Capital lease obligations | | | 8.0 | | | | 0.5 | | | | 0.8 | | | | 0.8 | | | | 5.9 | | | Operating lease obligations | | | 69.3 | | | | 12.2 | | | | 19.2 | | | | 13.2 | | | | 24.7 | | | | 70.4 | | | | 14.2 | | | | 21.5 | | | | 11.8 | | | | 22.9 | | Capital expenditure commitments | | | 18.1 | | | | 17.1 | | | | 1.0 | | | | - | | | | - | | | | 23.6 | | | | 23.6 | | | | - | | | | - | | | | - | | Other long-term obligations | | | 4.8 | | | | 2.4 | | | | 1.7 | | | | 0.7 | | | | - | | | Other long-term obligations (a) | | | | 13.3 | | | | 1.4 | | | | 2.1 | | | | 2.0 | | | | 7.8 | | Total contractual obligations | | $ | 610.3 | | | $ | 82.0 | | | $ | 136.1 | | | $ | 313.3 | | | $ | 78.9 | | | $ | 525.9 | | | $ | 103.4 | | | $ | 329.7 | | | $ | 34.6 | | | $ | 58.2 | |
| (a) | Includes capital lease obligations and other long-term obligations. |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $139$119 million as of March 31, 2017.2019. We are unable to determine the ultimate timing of payments for these liabilities; therefore, we have excluded these amounts from the contractual obligations table above. We expect to contribute $13$3 million to our U.S. pension plans during fiscal 2018.2020.
Critical Accounting Policies
The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements. Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements. The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements. In addition, recently issued accounting pronouncements that could significantly impact our financial statementsstatement are includeddisclosed in Note 1 of the Notes to Consolidated Financial Statements.
Revenue Recognition
In fiscal 2019, we adopted new revenue recognition accounting guidance. See Note 1 of the Notes to Consolidated Financial Statements for additional information. In accordance with this new accounting guidance, we recognize revenue based upon consideration specified in a contract and as we satisfy performance obligations by transferring control over our products to our customers, which may be at a point in time or over time. The majority of our revenue is recognized at a point in time, based upon shipment terms. A limited number of our customer contracts provide an enforceable right to payment for performance completed to date. For these contracts, we recognize revenue over time based upon our estimated progress towards the satisfaction of the contract’s performance obligations. We record an allowance for doubtful accounts for estimated uncollectible receivables and we accrue for estimated warranty costs at the time of sale. We base these estimates upon historical experience, current business trends, and current economic conditions.
Acquisitions
From time to time, we make strategic acquisitions that have a material impact on our consolidated results of operations or financial position. We allocate the purchase price of acquired businesses to the identifiable tangible and intangible assets acquired and liabilities assumed in the transaction based upon their estimated fair values as of the acquisition date. We determine the estimated fair values using information available to us and engage third-party valuation specialists when necessary. The estimates we use to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. While we use our best estimates and assumptions, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statement of operations. We are also required to estimate the useful lives of intangible assets to determine the amount of amortization expense to record in future periods. We periodically review the estimated useful lives assigned to our intangible assets to determine whether such estimated useful lives continue to be appropriate. During fiscal 2017, we acquired Luvata HTS. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding this acquisition.
Revenue Recognition
We recognize revenue, including agreed-upon commodity 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. We recognize price increases that are agreed upon in advance 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 net asset values exceed undiscounted cash flows expected to be generated by the assets, or the decline in value is considered to be “other than temporary,” we write down the assets to fair value and record an impairment charge to current operations. We estimate fair value in various ways depending on the nature of the assets under review.underlying assets. Fair value is generally based upon appraised value, estimated salvage value, or selling prices under negotiation, as applicable.
The most significant long-lived assets we evaluated for impairment indicators were property, plant and equipment and intangible assets, which totaled $459$485 million and $134$116 million, respectively, at March 31, 2017, respectively.2019. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment. Our most significant intangible assets evaluated are customer relationships, trade names, and acquired technology, the majority of which are related to our recent acquisition of Luvata HTS. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding this acquisition. CIS segment. We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility. This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy. When such indicators are present, we perform an impairment evaluation.
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. We consider factors such as operating losses, declining financial and market outlooks, and market capitalization when evaluating the necessity for an interim impairment analysis. We test goodwill for impairment at a reporting unit level. Reporting units resulting from recent acquisitions generally represent the highest risk of impairment, which typically decreases as the businesses are integrated into the Company and positioned for future operating and financial performance. Our first step in theWe test goodwill for impairment test is to compareby comparing the fair value of theeach reporting unit towith its carrying value. We determine the fair value of a reporting unit based upon the present value of estimated future cash flows. If the fair value of thea reporting unit exceeds the carrying value of the reporting unit’s net assets, goodwill of that reporting unit is not impaired and further testing is not required. Ifimpaired. However, if the carrying value of the reporting unit’s net assets exceeds theits fair value, ofwe would conclude goodwill is impaired and would record an impairment charge equal to the unit, then we perform the second step of the impairment test to determine the implied fair value ofamount that the reporting unit’s goodwill and any impairment charge. In estimating the implied fair value of goodwill for a reporting unit, we assign fair value to the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of the reporting unit goodwill overexceeds its implied fair value is recorded as an impairment charge.value. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rate, business trends and market conditions. We determine the expected future revenue growth rates and operating profit margins after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for country-specific risks where appropriate.
At March 31, 2017,2019, our goodwill totaled $165$169 million, primarily related to our recently-acquired CIS segment and our BHVAC segment. We will complete goodwill impairment tests for the CISsegments. Each of these segments is comprised of two reporting units in fiscal 2018, within one year of the acquisition date. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding this acquisition.units. We conducted annual goodwill impairment tests for our BHVAC and Asia segments during the fourth quarter of fiscal 20172019 by applying a fair value-based test and determined the fair value of theeach of our reporting units substantially exceeded theirthe respective book values.value.
Warranty Costs
We estimate costs related to product warranties and accrue for such costs at the time of the sale, within cost of sales. We estimate warranty costs based upon the best information available, which includes statistical and analytical analysis of both historical and current claim data. We monitor and adjust our warranty accruals, which totaled $10$9 million at March 31, 2017,2019, if it is probable that expected claims will differ from previous estimates.
Pension Obligations
Our calculation of the expense and liabilities of our pension plans is dependent upon various assumptions. At March 31, 2017,2019, our pension liabilities totaled $122$104 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality rate tables. We base our selection of assumptions on historical trends and economic and market conditions at the time of valuation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods. These differences impact future pension expenses. Currently, participants in our domestic pension plans are not accruing benefits based upon their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.
For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our benefit plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in both fiscal 20172019 and 20162018 was 8.07.5 percent. For fiscal 2018,2020, we have also assumed a rate of 7.5 percent. This 50A change of 25 basis point decreasepoints in the expected rate of return on assets as compared with the prior year, resulted in an increase of less than $1 million inwould impact our estimated fiscal 20182020 pension expense.expense by $0.4 million.
The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds on the measurement date of March 31. For fiscal 20172019 and 2016,2018, for purposes of determining pension expense, we used a discount rate of 4.0 and 4.1 percent.percent, respectively. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows from the affectedour plans. See Note 1618 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 20182020 pension expense by less than $1 million.
Income Taxes
We operate in numerous taxing jurisdictions; therefore, we are subject to regular examinations by federal, state and non-U.S. taxing authorities. Due to the application of complex and sometimes ambiguous tax laws and rulings in the jurisdictions in which we do business, there is an inherent level of uncertainty within our worldwide tax provisions. Despite our belief that our tax return positions are consistent with applicable tax laws, it is possible that taxing authorities could challenge certain positions.
The Tax Act was enacted in December 2017 and included numerous changes to existing U.S. tax regulations, including U.S. corporate tax rates, business deductions, and taxes on income in foreign jurisdictions. We completed our accounting for the impacts of the Tax Act during fiscal 2019. Additional impacts from the Tax Act could result if there are changes in interpretations or applications of the Tax Act’s provisions or if supplementary regulatory guidance is issued.
Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. We adjust these amounts to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in a particular jurisdiction will not be realized. This determination involves significant judgment. In performing this assessment on a jurisdiction-by-jurisdiction basis, we consider historical and projected financial results along with other pertinent information.
We have not recorded a provision for U.S. income taxes on undistributed earnings from our non-U.S. subsidiaries that we have determined to be permanently reinvested in our foreign operations. If management’s intentions or U.S. tax law changes in the future, there could be a significant negative impact on our provision for income taxes. See Note 78 of the Notes to Consolidated Financial Statements for additional information regarding income taxes.
Other Loss Reserves
We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, self-insurance reserves, uncollectible accounts receivable, regulatory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. We estimate these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Note 1820 of the Notes to Consolidated Financial Statements for additional information regarding contingencies and litigation.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of this report.report and identified in our other public filings with the U.S. Securities and Exchange Commission. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| · | Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs, inflation, changes in interest rates, recession and recovery therefrom, restrictions and uncertainty associated with cross-border trade, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China and North America, the still-weak forecasts for the Brazilian economy, and the general uncertainties about the impact of potential regulatory and/or policy changes, including those related to tax and trade, that may be implemented in the United States, as well as continuing uncertainty regarding the longer-term implications of “Brexit”; |
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs (and any potential trade war resulting from tariffs or retaliatory actions), inflation, changes in interest rates, recession and recovery therefrom, restrictions and uncertainty associated with cross-border trade, and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, that have been or may be implemented in the United States or by its trade partners, as well as continuing uncertainty regarding the timing and the short- and long-term implications of “Brexit”;
| · | The impact of potential increases in commodity prices, including our ability to successfully manage our exposure and/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel) on to customers, as well as the inherent lag in timing of such pass-through arrangements; and |
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums or fabrication costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs and the behavior of our suppliers. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
| · | The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives. |
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
| · | Our ability to integrate the former Luvata HTS operations into Modine, realize cost and revenue synergies in accordance with our expectations, and effectively manage any unanticipated risks that arise, while also maintaining stability within the acquired business and appropriate focus on the rest of Modine’s business; |
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
| · | The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; |
Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
| · | Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability; |
| · | Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims; |
| · | 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; |
Unanticipated product or manufacturing difficulties or operating inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims;
| · | Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor pools, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine; |
Unanticipated delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| · | Costs and other effects of the investigation and remediation of environmental contamination; |
Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;
| · | Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith; |
Our ability to effectively and efficiently complete restructuring activities and realize the anticipated benefits of those activities;
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; |
Costs and other effects of the investigation and remediation of environmental contamination; particularly when related to the actions or inactions of others and/or facilities over which we have no control;
| · | The constant and increasing pressures associated with healthcare and associated insurance costs; and |
Our ability to recruit and maintain talent, including personnel in managerial, leadership and administrative functions, in light of tightening global labor markets;
| · | Costs and other effects of unanticipated litigation, claims, or other obligations, including those associated with our acquisition of Luvata HTS. |
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
The constant and increasing pressures associated with healthcare and associated insurance costs; and
Costs and other effects of unanticipated litigation, claims, or other obligations.
Strategic Risks:
| · | Our ability to successfully take advantage of our increased presence in the “industrial” markets, with our Building HVAC and Commercial and Industrial Solutions businesses, without shifting attention away from our vehicular business, where we enjoy and desire to preserve a leading position; and |
Our ability to successfully take advantage of our increased presence in the “industrial” markets, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our VTS business;
| · | Our ability to identify and execute additional growth and diversification opportunities in order to position us for long-term success. |
The success of our evaluation of strategic alternatives for our automotive business within our VTS segment in optimizing the segment’s future profitability;
Our ability to identify and execute additional growth and diversification opportunities in order to position us for long-term success; and
The potential expense, disruption or other impacts that could result from unanticipated actions by activist shareholders.
Financial Risks:
| · | Our ability to fund our global liquidity requirements efficiently for Modine’s current operations, particularly those in our Asia business segment, and meet our long-term commitments in the event of an unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of an unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;
| · | The impact of potential increases in interest rates, particularly in LIBOR and EURIBOR in relation to our variable-rate debt obligations; |
Our ability to maintain our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) in our target range of 1.5 to 2.5 in an efficient manner;
| · | Our ability to bring our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) back into our target range of 1.5 to 2.5 in an efficient manner following our acquisition of Luvata HTS; |
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
| · | Costs arising from the integration of Luvata HTS and the timing and impact of potential purchase accounting adjustments; |
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
| · | The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, and British pound, relative to the U.S. dollar; and |
| · | Our ability to effectively realize the benefits of tax assets in various jurisdictions in whichForward-looking statements are as of the date of this report; we operate. |
In addition to the risks set forth above, we are subject to other risks and uncertainties as identified in our public filings with the U.S. Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
In the normal course of business, we are subject to market exposure from changes in foreign currency exchange rates, interest rates, commodity prices, credit risk and economic conditions.
Foreign Currency Risk
We are subject to the risk of changes in foreign currency exchange rates due to our operations in foreign countries. We have manufacturing facilities in Brazil, China, India, Mexico, South Africa, and throughout Europe. We also have joint ventures in China, Japan and South Korea. We sell and distribute products throughout the world and also purchase raw materials from suppliers in foreign countries. As a result, our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which we do business. WeWhenever possible, we attempt to mitigate foreign currency risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the functional currency of the entity engaging in the transaction. In addition, for certain transactions that are denominated in a currency other than the engaging entity’s functional currency, we may enter into foreign currency derivative contracts to further manage our foreign currency risk. In fiscal 2017,2019, we recorded realized and unrealizeda net loss of $1 million within our statement of operations related to foreign currency gains and losses that netted to a loss of $2 million, which we reported in other income and expense in the consolidated statement of operations.derivative contracts. In addition, our consolidated financial results are impacted by the translation of revenue and expenses in foreign currencies into U.S. dollars. These translation impacts are primarily affected by changes in exchange rates between the U.S. dollar and European currencies, primarily the euro, and changes between the U.S. dollar and the Brazilian real, and between the euro and the British pound.real. In fiscal 2017,2019, more than 50 percent of our sales were generated in countries outside the U.S. A change in foreign currency exchange rates will positively or negatively affect our sales; however, this impact will be offset, usually to a large degree, with a corresponding effect on our cost of sales and other expenses. In fiscal 2017,2019, changes in foreign currency exchange rates negativelyunfavorably impacted our sales by $13$28 million; however, the impact on our operating income was less than $1 million. Foreign currency exchange rate risk can be estimated by measuring the impact of a near-term adverse movement of 10 percent in foreign currency exchange rates. If these rates were 10 percent higher or lower during fiscal 2017,2019, there would not have been a material impact on our fiscal 20172019 earnings.
We maintain foreign-denominated, long-termforeign currency-denominated debt obligations and long-term intercompany loans that are subject to foreign currency exchange risk. As of March 31, 2017, we did not have any long-termWe seek to mitigate this risk through maintaining offsetting positions between external and intercompany loans for which changes in foreign currency exchange rates could materially impact our net earnings.loans; however, Fromfrom time to time, we also enter into foreign currency rate derivative contracts to manage the foreigncurrency exchange rate exposure on these types of loans.exposure. These derivative instruments are typically not accounted for as hedges, and accordingly, gains or losses on the derivatives are recorded in other income and expense in the consolidated statements of operations and act totypically offset anythe foreign currency movementchanges on the outstanding loans receivable or payable.loans.
Interest Rate Risk
We actively seek to reduce the potential volatility of earnings that could arise from changes in interest rates. We generally utilize a mixture of debt maturities and both fixed-rate and variable-rate debt to manage exposure to changes in interest rates. Interest on both our term loans and borrowings under our primary multi-currency revolving credit facility is based upon a variable interest rate, primarily either the London Interbank Offered Rate (“LIBOR”)LIBOR or Euro Interbank Offered Rate (“EURIBOR”),EURIBOR, plus 137.5 to 250 basis points, depending on our leverage ratio. We are subject to risk of fluctuations in LIBOR and EURIBOR and changes in our leverage ratio, which would affect the variable interest rate on our term loans and revolving credit facility and could create variability in interest expense. As of March 31, 2017,2019, our outstanding borrowings on the variable-rate term loans and the revolving credit facility totaled $269$238 million and $40$47 million, respectively. Based upon our outstanding debt with variable interest rates at March 31, 2017,2019, a 100 basis point increase in interest rates would increase our annual interest expense in fiscal 20182020 by approximately $3 million.
Commodity Price Risk
We are dependent upon the supply of raw materials and supplies in our production processes and, from time to time, enter into firm purchase commitments for aluminum, copper, nickel, and natural gas. We maintain agreements with certainCommodity price risk is most prevalent to our vehicular businesses, which provide customized production and service parts to customers to pass through specified raw material price fluctuations inunder multi-year programs. In order to mitigate commodity price risk. The majority ofrisk specific to these agreements containlong-term sales programs, we maintain contract provisions in which the pass-through of thewith certain customers that allow us to prospectively adjust prices based upon raw material price fluctuations canfluctuations. These prospective price adjustments generally lag behind the actual raw material price fluctuations by three months or longer, and typically the arrangementscontract provisions are limited to the underlying material cost based upon the London Metal Exchange and exclude additional cost elements, such as related premiums and fabrication. For our industrial businesses, we predominantly seek to mitigate commodity price risk by adjusting product pricing in response to any applicable price increases. Credit Risk
Credit risk represents the possibility of loss from a customer failing to make payment according to contract terms. Our principal credit risk consists of outstanding trade accounts receivable. At March 31, 2017, 352019, 38 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, commercial vehicle, off-highway, data center cooling and off-highwaycommercial air conditioning markets and are influenced by similar market and general economic factors. In the past, credit losses from our customers have not been significant.
We manage credit risk through a focus on the following:
| · | Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. We consider our holdings in cash and investments to be stable and secure at March 31, 2017;Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. We consider our holdings in cash and investments to be stable and secure at March 31, 2019; |
| · | 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'sTrade 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.Insurance – We monitor our insurance providers to ensure they maintain financial ratings that are acceptable to us. We have not identified any concerns in this regard based upon our reviews. |
Economic Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate. We sell a broad range of products that provide thermal solutions to customers operating primarily in the automotive, commercial vehicle, off-highway, and commercial, industrial, and building HVAC&R markets. We operate in diversified markets as a strategy for offsetting the risk associated with a downturn in any of the markets we serve. However, risk associated with market downturns is still present.
We monitor economic conditions in the U.S. and abroad. As we expand our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes, and the like. We continue to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions.
We pursue new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon our ability to commercialize our investments. Current examples of new and emerging markets for us include those related to waste heat recovery,electric vehicles, coils and coolers outside of North America and the U.K.,in certain markets, and coatings. Our investment in these areas is subject to the risks associated with business integration, technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
We anticipate that recovery within some36
In an effort to manage and reduce our costs, we have been consolidating our supply base. As a result, we are dependent upon limited sources of supply for certain components used in the manufacture of our geographic and end markets may put production pressure on certain suppliers of our raw materials. In particular, there are a limited number of suppliers ofproducts, including aluminum, copper, steel and stainless steel material.(nickel). We are exposed to the risk of suppliers of certain raw materials not being able or willing to meet strong customer demand (including the potential effects of trade laws and tariffs), as they may not increase their output capacity as quickly as customers increase their orders, and of increased prices being charged by raw material suppliers.
In addition, we purchase parts from suppliers that use our tooling to create the parts. In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts. As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require. Even in situations where suppliers are manufacturing parts without the use of our tooling, we face the challenge of obtaining consistently high-quality parts from suppliers that are financially stable. We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate higher-risk supplier situations. In addition to the above risks on the supply side, we are also exposed to risks associated with demands by our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, but these agreements oftensometimes contain provisions for future price reductions. In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: From time to time, we enter into futuresover-the-counter forward contracts related to certain forecasted purchases of aluminum and copper. Our strategy is to reduce our exposure to changing market prices for future purchases of these commodities. In fiscal 2019 and 2018, we designated certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, we record unrealized gains and losses related to the change in the fair value of the contracts in other comprehensive income (loss) within shareholders’ equity and subsequently recognize the gains and losses within cost of sales as the underlying inventory is sold. In fiscal 2017, 2016we did not designate commodity forward contracts for hedge accounting. Accordingly, unrealized gains and 2015,losses on these contracts were recorded within cost of sales. In fiscal 2019, 2018, and 2017, net gains and losses related to commodity derivativeforward contracts which are reported in cost of sales in the consolidated statements of operations, were less than $1 million in each year.
Foreign currency forward contracts: We use derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency exchangeforward contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. We have designated certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, we record unrealized gains and losses related to the change in the fair value of the contracts in other comprehensive income (loss) within shareholders’ equity and subsequently recognize the gains and losses as a component of earnings at the same time and in the same financial statement line that the underlying transactions impact earnings. We have not designated these forward contracts related to foreign currency-denominated assets and liabilities as hedges. Accordingly, for these non-designated contracts, we record unrealized gains and losses related to the change in the fair value of the contracts in other income and expense. Gains and losses on these non-designated foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
Counterparty risks: We manage counterparty risks by ensuring that counterparties to derivative instruments havemaintain credit ratings acceptable to us. At March 31, 2017,2019, all counterparties had a sufficient long-term credit rating.
ITEM 8. ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2017, 20162019, 2018 and 20152017 (In millions, except per share amounts)
| | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | Net sales | | $ | 1,503.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 2,212.7 | | | $ | 2,103.1 | | | $ | 1,503.0 | | Cost of sales | | | 1,249.7 | | | | 1,129.0 | | | | 1,249.9 | | | | 1,847.2 | | | | 1,746.6 | | | | 1,248.6 | | Gross profit | | | 253.3 | | | | 223.5 | | | | 246.5 | | | | 365.5 | | | | 356.5 | | | | 254.4 | | Selling, general and administrative expenses | | | 205.0 | | | | 204.5 | | | | 184.5 | | | | 244.1 | | | | 245.8 | | | | 203.2 | | Restructuring expenses | | | 10.9 | | | | 16.6 | | | | 4.7 | | | | 9.6 | | | | 16.0 | | | | 10.9 | | Gain on sale of facilities | | | (2.0 | ) | | | - | | | | (3.2 | ) | | Impairment charges | | | - | | | | 9.9 | | | | 7.8 | | | | 0.4 | | | | 2.5 | | | | - | | Operating income (loss) | | | 39.4 | | | | (7.5 | ) | | | 52.7 | | | Loss (gain) on sale of assets | | | | 1.7 | | | | - | | | | (2.0 | ) | Operating income | | | | 109.7 | | | | 92.2 | | | | 42.3 | | Interest expense | | | (17.2 | ) | | | (11.1 | ) | | | (11.7 | ) | | | (24.8 | ) | | | (25.6 | ) | | | (17.2 | ) | Other (expense) income – net | | | (1.4 | ) | | | 8.7 | | | | 0.2 | | | Earnings (loss) from continuing operations before income taxes | | | 20.8 | | | | (9.9 | ) | | | 41.2 | | | (Provision) benefit for income taxes | | | (5.9 | ) | | | 8.9 | | | | (19.0 | ) | | Earnings (loss) from continuing operations | | | 14.9 | | | | (1.0 | ) | | | 22.2 | | | Earnings from discontinued operations, net of income taxes | | | - | | | | - | | | | 0.6 | | | Net earnings (loss) | | | 14.9 | | | | (1.0 | ) | | | 22.8 | | | Other expense - net | | | | (4.1 | ) | | | (3.3 | ) | | | (4.3 | ) | Earnings before income taxes | | | | 80.8 | | | | 63.3 | | | | 20.8 | | Benefit (provision) for income taxes | | | | 5.1 | | | | (39.5 | ) | | | (5.9 | ) | Net earnings | | | | 85.9 | | | | 23.8 | | | | 14.9 | | Net earnings attributable to noncontrolling interest | | | (0.7 | ) | | | (0.6 | ) | | | (1.0 | ) | | | (1.1 | ) | | | (1.6 | ) | | | (0.7 | ) | Net earnings (loss) attributable to Modine | | $ | 14.2 | | | $ | (1.6 | ) | | $ | 21.8 | | | Net earnings attributable to Modine | | | $ | 84.8 | | | $ | 22.2 | | | $ | 14.2 | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings (loss) per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.45 | | | Diluted | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.44 | | | | | | | | | | | | | | | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 1.67 | | | $ | 0.44 | | | $ | 0.29 | | Diluted | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 1.65 | | | $ | 0.43 | | | $ | 0.29 | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 47.8 | | | | 47.3 | | | | 47.2 | | | | 50.5 | | | | 49.9 | | | | 47.8 | | Diluted | | | 48.3 | | | | 47.3 | | | | 47.8 | | | | 51.3 | | | | 50.9 | | | | 48.3 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended March 31, 2017, 20162019, 2018 and 20152017 (In millions)
| | 2017 | | | 2016 | | | 2015 | | Net earnings (loss) | | $ | 14.9 | | | $ | (1.0 | ) | | $ | 22.8 | | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | (10.8 | ) | | | 4.6 | | | | (68.2 | ) | Defined benefit plans, net of income taxes of $1.7, $11.8 and ($13.2) million | | | 3.2 | | | | 19.7 | | | | (26.7 | ) | Total other comprehensive (loss) income | | | (7.6 | ) | | | 24.3 | | | | (94.9 | ) | | | | | | | | | | | | | | Comprehensive income (loss) | | | 7.3 | | | | 23.3 | | | | (72.1 | ) | Comprehensive income attributable to noncontrolling interest | | | (0.7 | ) | | | (0.5 | ) | | | (0.8 | ) | Comprehensive income (loss) attributable to Modine | | $ | 6.6 | | | $ | 22.8 | | | $ | (72.9 | ) |
| | 2019 | | | 2018 | | | 2017 | | Net earnings | | $ | 85.9 | | | $ | 23.8 | | | $ | 14.9 | | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | (37.6 | ) | | | 41.8 | | | | (10.8 | ) | Defined benefit plans, net of income taxes of ($0.3), ($0.2) and $1.7 million | | | (1.4 | ) | | | 0.1 | | | | 3.2 | | Cash flow hedges, net of income taxes of $0.1, $0.1 and $0 million | | | 0.4 | | | | 0.1 | | | | - | | Total other comprehensive income (loss) | | | (38.6 | ) | | | 42.0 | | | | (7.6 | ) | | | | | | | | | | | | | | Comprehensive income | | | 47.3 | | | | 65.8 | | | | 7.3 | | Comprehensive income attributable to noncontrolling interest | | | (0.6 | ) | | | (2.1 | ) | | | (0.7 | ) | Comprehensive income attributable to Modine | | $ | 46.7 | | | $ | 63.7 | | | $ | 6.6 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS March 31, 20172019 and 20162018 (In millions, except per share amounts)
| | 2017 | | | 2016 | | | 2019 | | | 2018 | | ASSETS | | | | | | | | | | | | | Cash and cash equivalents | | $ | 34.2 | | | $ | 68.9 | | | $ | 41.7 | | | $ | 39.3 | | Trade accounts receivable – net | | | 295.2 | | | | 189.1 | | | | 338.6 | | | | 342.4 | | Inventories | | | 168.5 | | | | 111.0 | | | | 200.7 | | | | 191.3 | | Other current assets | | | 55.4 | | | | 43.5 | | | | 65.8 | | | | 70.1 | | Total current assets | | | 553.3 | | | | 412.5 | | | | 646.8 | | | | 643.1 | | Property, plant and equipment – net | | | 459.0 | | | | 338.6 | | | | 484.7 | | | | 504.3 | | Intangible assets – net | | | 134.1 | | | | 8.2 | | | | 116.2 | | | | 129.9 | | Goodwill | | | 165.1 | | | | 15.8 | | | | 168.5 | | | | 173.8 | | Deferred income taxes | | | 108.4 | | | | 123.1 | | | | 97.1 | | | | 96.9 | | Other noncurrent assets | | | 29.6 | | | | 22.7 | | | | 24.7 | | | | 25.4 | | Total assets | | $ | 1,449.5 | | | $ | 920.9 | | | $ | 1,538.0 | | | $ | 1,573.4 | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | Short-term debt | | $ | 73.4 | | | $ | 28.6 | | | $ | 66.0 | | | $ | 53.2 | | Long-term debt – current portion | | | 31.8 | | | | 8.5 | | | | 48.6 | | | | 39.9 | | Accounts payable | | | 230.3 | | | | 142.4 | | | | 280.9 | | | | 277.9 | | Accrued compensation and employee benefits | | | 74.8 | | | | 58.6 | | | | 81.7 | | | | 97.3 | | Other current liabilities | | | 45.1 | | | | 35.5 | | | | 39.9 | | | | 47.2 | | Total current liabilities | | | 455.4 | | | | 273.6 | | | | 517.1 | | | | 515.5 | | Long-term debt | | | 405.7 | | | | 125.5 | | | | 335.1 | | | | 386.3 | | Deferred income taxes | | | 9.7 | | | | 4.2 | | | | 8.2 | | | | 9.9 | | Pensions | | | 119.4 | | | | 118.6 | | | | 101.7 | | | | 109.6 | | Other noncurrent liabilities | | | 38.1 | | | | 16.3 | | | | 34.8 | | | | 53.6 | | Total liabilities | | | 1,028.3 | | | | 538.2 | | | | 996.9 | | | | 1,074.9 | | Commitments and contingencies (see Note 18) | | | | | | | | | | Shareholders' equity: | | | | | | | | | | Commitments and contingencies (see Note 20) | | | | | | | | | | Shareholders’ equity: | | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 51.8 million and 49.0 million shares | | | 32.4 | | | | 30.6 | | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 52.8 million and 52.3 million shares | | | | 33.0 | | | | 32.7 | | Additional paid-in capital | | | 216.4 | | | | 185.6 | | | | 238.6 | | | | 229.9 | | Retained earnings | | | 372.4 | | | | 358.2 | | | | 472.1 | | | | 394.9 | | Accumulated other comprehensive loss | | | (181.8 | ) | | | (174.2 | ) | | | (178.4 | ) | | | (140.3 | ) | Treasury stock, at cost, 1.7 million and 1.6 million shares | | | (25.4 | ) | | | (24.0 | ) | | Total Modine shareholders' equity | | | 414.0 | | | | 376.2 | | | Treasury stock, at cost, 2.1 million and 1.8 million shares | | | | (31.4 | ) | | | (27.1 | ) | Total Modine shareholders’ equity | | | | 533.9 | | | | 490.1 | | Noncontrolling interest | | | 7.2 | | | | 6.5 | | | | 7.2 | | | | 8.4 | | Total equity | | | 421.2 | | | | 382.7 | | | | 541.1 | | | | 498.5 | | Total liabilities and equity | | $ | 1,449.5 | | | $ | 920.9 | | | $ | 1,538.0 | | | $ | 1,573.4 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended March 31, 2017, 20162019, 2018 and 20152017 (In millions)
| | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | Net earnings (loss) | | $ | 14.9 | | | $ | (1.0 | ) | | $ | 22.8 | | | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | Net earnings | | | $ | 85.9 | | | $ | 23.8 | | | $ | 14.9 | | Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 58.3 | | | | 50.2 | | | | 51.6 | | | | 76.9 | | | | 76.7 | | | | 58.3 | | Gain on sale of facilities | | | (2.0 | ) | | | - | | | | (3.2 | ) | | Loss (gain) on sale of assets | | | | 1.7 | | | | - | | | | (2.0 | ) | Impairment charges | | | - | | | | 9.9 | | | | 7.8 | | | | 0.4 | | | | 2.5 | | | | - | | Insurance proceeds from Airedale fire | | | - | | | | 5.9 | | | | 12.9 | | | Pension and postretirement expense | | | 3.4 | | | | 45.1 | | | | 2.3 | | | Stock-based compensation expense | | | | 7.9 | | | | 9.5 | | | | 7.4 | | Deferred income taxes | | | (4.6 | ) | | | (18.8 | ) | | | 5.9 | | | | (4.4 | ) | | | 12.1 | | | | (4.6 | ) | Stock-based compensation expense | | | 7.4 | | | | 4.9 | | | | 4.0 | | | Other – net | | | 0.5 | | | | 0.1 | | | | 0.4 | | | | 5.3 | | | | 9.0 | | | | 3.9 | | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | | Changes in operating assets and liabilities, excluding acquisition: | | | | | | | | | | | | | | Trade accounts receivable | | | (25.7 | ) | | | 8.0 | | | | (0.1 | ) | | | (15.3 | ) | | | (26.1 | ) | | | (25.7 | ) | Inventories | | | (3.3 | ) | | | (2.7 | ) | | | (4.2 | ) | | | (22.0 | ) | | | (12.5 | ) | | | (3.3 | ) | Accounts payable | | | 19.9 | | | | (9.9 | ) | | | (2.4 | ) | | | 16.6 | | | | 25.2 | | | | 19.9 | | Accrued compensation and employee benefits | | | (6.5 | ) | | | 0.8 | | | | (5.3 | ) | | | (10.1 | ) | | | 16.4 | | | | (6.5 | ) | Other assets | | | (2.5 | ) | | | (14.5 | ) | | | (24.5 | ) | | | (11.8 | ) | | | (5.0 | ) | | | (2.4 | ) | Other liabilities | | | (18.2 | ) | | | (5.6 | ) | | | (4.5 | ) | | | (27.8 | ) | | | (7.4 | ) | | | (18.2 | ) | Net cash provided by operating activities | | | 41.6 | | | | 72.4 | | | | 63.5 | | | | 103.3 | | | | 124.2 | | | | 41.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Acquisitions – net of cash acquired | | | (364.2 | ) | | | (1.4 | ) | | | - | | | Expenditures for property, plant and equipment | | | (64.4 | ) | | | (62.8 | ) | | | (58.3 | ) | | | (73.9 | ) | | | (71.0 | ) | | | (64.4 | ) | Insurance proceeds from Airedale fire | | | 3.0 | | | | 27.4 | | | | 12.2 | | | Costs to replace building and equipment damaged in Airedale fire | | | (1.0 | ) | | | (41.7 | ) | | | (16.7 | ) | | Acquisition – net of cash acquired | | | | - | | | | - | | | | (364.2 | ) | Proceeds from dispositions of assets | | | 5.7 | | | | 0.4 | | | | 7.6 | | | | 0.3 | | | | 0.3 | | | | 5.7 | | Proceeds from maturities of short-term investments | | | | 4.9 | | | | 4.8 | | | | 2.2 | | Purchases of short-term investments | | | (3.5 | ) | | | (2.7 | ) | | | (5.2 | ) | | | (3.8 | ) | | | (5.5 | ) | | | (3.5 | ) | Proceeds from maturities of short-term investments | | | 2.2 | | | | 2.1 | | | | 2.4 | | | Other – net | | | - | | | | 0.9 | | | | 0.8 | | | | (0.3 | ) | | | (0.2 | ) | | | 2.0 | | Net cash used for investing activities | | | (422.2 | ) | | | (77.8 | ) | | | (57.2 | ) | | | (72.8 | ) | | | (71.6 | ) | | | (422.2 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings of debt | | | 559.1 | | | | 38.0 | | | | 36.4 | | | | 231.2 | | | | 171.0 | | | | 559.1 | | Repayments of debt | | | (202.4 | ) | | | (27.1 | ) | | | (50.9 | ) | | | (251.9 | ) | | | (222.9 | ) | | | (202.4 | ) | Dividend paid to noncontrolling interest | | | | (1.8 | ) | | | (0.9 | ) | | | - | | Financing fees paid | | | (8.7 | ) | | | - | | | | (0.1 | ) | | | - | | | | - | | | | (8.7 | ) | Purchases of treasury stock under share repurchase program | | | - | | | | (6.9 | ) | | | - | | | Dividend paid to noncontrolling interest | | | - | | | | (0.9 | ) | | | - | | | Other – net | | | (0.4 | ) | | | (0.4 | ) | | | - | | | | (3.4 | ) | | | 2.7 | | | | (0.4 | ) | Net cash provided by (used for) financing activities | | | 347.6 | | | | 2.7 | | | | (14.6 | ) | | Net cash (used for) provided by financing activities | | | | (25.9 | ) | | | (50.1 | ) | | | 347.6 | | | | | | | | | | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (1.7 | ) | | | 1.1 | | | | (8.4 | ) | | | (2.7 | ) | | | 3.0 | | | | (1.7 | ) | Net decrease in cash and cash equivalents | | | (34.7 | ) | | | (1.6 | ) | | | (16.7 | ) | | Cash and cash equivalents - beginning of year | | | 68.9 | | | | 70.5 | | | | 87.2 | | | Cash and cash equivalents - end of year | | $ | 34.2 | | | $ | 68.9 | | | $ | 70.5 | | | Net increase (decrease) in cash, cash equivalents and restricted cash | | | | 1.9 | | | | 5.5 | | | | (34.6 | ) | Cash, cash equivalents and restricted cash - beginning of year | | | | 40.3 | | | | 34.8 | | | | 69.4 | | Cash, cash equivalents and restricted cash - end of year | | | $ | 42.2 | | | $ | 40.3 | | | $ | 34.8 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY For the years ended March 31, 2017, 20162019, 2018 and 20152017 (In millions)
| | | | | Additional paid-in capital | | | Retained earnings | | | Accumulated other comprehensive loss | | | Treasury stock, at cost | | | Non- controlling interest | | | Total | | |
Common stock | | | Additional paid-in capital | | | Retained earnings | | | Accumulated other comprehensive loss | | | Treasury stock, at cost | | | Non-controlling interest | | | Total | | | Shares | | | Amount | Common stock | | Shares | | | Amount | | 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 | | | | 49.0 | | | $ | 30.6 | | | $ | 185.6 | | | $ | 358.2 | | | $ | (174.2 | ) | | $ | (24.0 | ) | | $ | 6.5 | | | $ | 382.7 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 14.2 | | | | - | | | | - | | | | - | | | | 14.2 | | | | - | | | | - | | | | - | | | | 14.2 | | | | - | | | | - | | | | - | | | | 14.2 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | (7.6 | ) | Shares issued for acquisition of Luvata HTS | | | 2.2 | | | | 1.4 | | | | 22.9 | | | | - | | | | - | | | | - | | | | - | | | | 24.3 | | | | 2.2 | | | | 1.4 | | | | 22.9 | | | | - | | | | - | | | | - | | | | - | | | | 24.3 | | Stock options and awards including related tax benefits | | | 0.6 | | | | 0.4 | | | | 0.5 | | | | - | | | | - | | | | - | | | | - | | | | 0.9 | | | | 0.6 | | | | 0.4 | | | | 0.5 | | | | - | | | | - | | | | - | | | | - | | | | 0.9 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.4 | ) | | | - | | | | (1.4 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.4 | ) | | | - | | | | (1.4 | ) | Stock-based compensation expense | | | - | | | | - | | | | 7.4 | | | | - | | | | - | | | | - | | | | - | | | | 7.4 | | | | - | | | | - | | | | 7.4 | | | | - | | | | - | | | | - | | | | - | | | | 7.4 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.7 | | | | 0.7 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.7 | | | | 0.7 | | Balance, March 31, 2017 | | | 51.8 | | | $ | 32.4 | | | $ | 216.4 | | | $ | 372.4 | | | $ | (181.8 | ) | | $ | (25.4 | ) | | $ | 7.2 | | | $ | 421.2 | | | | 51.8 | | | | 32.4 | | | | 216.4 | | | | 372.4 | | | | (181.8 | ) | | | (25.4 | ) | | | 7.2 | | | | 421.2 | | Net earnings attributable to Modine | | | | - | | | | - | | | | - | | | | 22.2 | | | | - | | | | - | | | | - | | | | 22.2 | | Other comprehensive income | | | | - | | | | - | | | | - | | | | - | | | | 41.5 | | | | - | | | | 0.5 | | | | 42.0 | | Stock options and awards | | | | 0.5 | | | | 0.3 | | | | 3.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.2 | | Purchase of treasury stock | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.7 | ) | | | - | | | | (1.7 | ) | Adoption of new accounting guidance (Note 1) | | | | - | | | | - | | | | 0.1 | | | | 0.3 | | | | - | | | | - | | | | - | | | | 0.4 | | Stock-based compensation expense | | | | - | | | | - | | | | 9.5 | | | | - | | | | - | | | | - | | | | - | | | | 9.5 | | Dividend paid to noncontrolling interest | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | Net earnings attributable to noncontrolling interest | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.6 | | | | 1.6 | | Balance, March 31, 2018 | | | | 52.3 | | | | 32.7 | | | | 229.9 | | | | 394.9 | | | | (140.3 | ) | | | (27.1 | ) | | | 8.4 | | | | 498.5 | | Adoption of new accounting guidance (Note 1) | | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | - | | | | (7.6 | ) | Net earnings attributable to Modine | | | | - | | | | - | | | | - | | | | 84.8 | | | | - | | | | - | | | | - | | | | 84.8 | | Other comprehensive loss | | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | (0.5 | ) | | | (38.6 | ) | Stock options and awards | | | | 0.5 | | | | 0.3 | | | | 0.8 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4.3 | ) | | | - | | | | (4.3 | ) | Stock-based compensation expense | | | | - | | | | - | | | | 7.9 | | | | - | | | | - | | | | - | | | | - | | | | 7.9 | | Dividend paid to noncontrolling interest | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.8 | ) | | | (1.8 | ) | Net earnings attributable to noncontrolling interest | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | | | 1.1 | | Balance, March 31, 2019 | | | | 52.8 | | | $ | 33.0 | | | $ | 238.6 | | | $ | 472.1 | | | $ | (178.4 | ) | | $ | (31.4 | ) | | $ | 7.2 | | | $ | 541.1 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 1: Note 1: | Significant Accounting Policies |
Nature of operations: Modine Manufacturing Company (“Modine” or the “Company”) specializes in providing innovative thermal management solutions to diversified global markets and customers. The Company is a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway original equipment manufacturer (“OEM”) vehicular applications. In addition, the Company is a global leader in thermal management technology and solutions for sale into a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. The Company’s primary product groups include i) powertrain cooling and engine cooling; ii) coils, coolers, and coatings; and iii) heating, ventilation and air conditioning.
Sale of AIAC Air Conditioning South Africa (Pty) Ltd.: During fiscal 2019, the Company completed the sale of its AIAC Air Conditioning South Africa (Pty) Ltd. business, which was reported within the Building HVAC Systems segment, for a selling price of $0.5 million. As a result of this transaction, the Company recorded a loss of $1.7 million, which included the write-off of accumulated foreign currency translation losses of $0.8 million. The Company reported this loss on the loss on sale of assets line of the consolidated statements of operations. Annual net sales attributable to this disposed business were less than $2.0 million.
Acquisition of Luvata HTS: On November 30, 2016, the Company completed the acquisition of 100%100 percent of the shares of multiple companies held by Luvata Heat Transfer Solutions II AB, a company incorporated in Sweden. Combined, these acquired companies represented the Luvata Heat Transfer Solutions (“Luvata HTS”) business. See Note 2 for additional information.
Airedale facility fire: In September 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 (“BHVAC”) segment. There were no injuries caused by the fire. The Rawdon facility, which was 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 Company suspended operations at the Rawdon site as a result of the fire; however, it transferred operations to temporary facilities while it rebuilt the leased facility. The Company completed the reconstruction and relocation to the Rawdon facility in fiscal 2016. In fiscal 2016, the Company recorded a $9.5 million gain within other income related to an insurance settlement for equipment losses. This gain represented the replacement assets’ cost in excess of the carrying value of the equipment at the time they were destroyed by the fire.
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 earnings. The Company includes Modine’s share of the affiliate’s net earnings in other income and expense. See Note 1113 for additional information.
Discontinued operations: Revenue recognition: The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, which may be at a point in time or over time. The majority of the Company’s revenue is recognized at a point in time, based upon shipment terms. A portion of the Company’s revenue is recognized over time, based upon estimated progress towards satisfaction of the contractual performance obligations. See Note 3 for additional information.
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its customers in cost of sales, and related amounts billed to these customers in net sales.
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 records an allowance for doubtful accounts for estimated uncollectible receivables based upon historical experience or specific customer economic data. The Company recorded an allowance for doubtful accounts of $1.6 million and $2.3 million at March 31, 2019 and 2018, respectively, representing its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable, without recourse, to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During fiscal 2009,2019, 2018, and 2017, the Company sold its Electronics Cooling business. The buyer financed a portion$85.1 million, $65.8 million, and $55.4 million, respectively, of the selling price by issuing promissory notes payableaccounts receivable to Modine.accelerate cash receipts. 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,2019, 2018, and 2017, the Company recorded a gainloss on the sale of $0.9accounts receivable of $0.6 million, ($0.6$0.4 million, after income taxes) during fiscal 2015.and $0.3 million, respectively, in the consolidated statements of operations.
Warranty: The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. The Company records warranty expense, within cost of sales, based upon historical and current claims data or based upon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 16 for additional information.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 2019 and 2018, Company-owned tooling totaled $24.2 million and $22.4 million, respectively. In certain instances, tooling is customer-owned. At the time customer-owned tooling is completed and customer acceptance is obtained, the Company records tooling revenue and related production costs within net sales and cost of sales, respectively, in the consolidated statements of operations. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 2019 and 2018, cost reimbursement receivables related to customer-owned tooling totaled $11.6 million and $10.7 million, respectively.
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 additional information.
Research and development: The Company expenses research and development costs as incurred within selling, general and administrative (“SG&A”) expenses. During fiscal 2019, 2018, and 2017, research and development costs charged to operations totaled $69.8 million, $65.8 million, and $64.4 million, respectively.
Translation of foreign currencies: The Company translates assets and liabilities of foreign subsidiaries and equity investments into U.S. dollars at the period-end exchange rates, and translates income and expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders’ 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 forward contracts to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency-denominated assets and liabilities as well as forecasted transactions. The Company designates certain derivative financial instruments as cash flow hedges for accounting purposes. These instruments are used to manage financial risks and are not speculative. See Note 19 for additional information.
Income taxes: The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. See Note 8 for additional information.
Earnings per share: The Company calculates basic earnings per share based upon the weighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes potential common shares if their inclusion would have an anti-dilutive effect. Certain outstanding restricted stock awards provide recipients with a non-forfeitable right to receive dividends declared by the Company. Therefore, these restricted stock awards are included in computing earnings per share pursuant to the two-class method. See Note 9 for additional information.
Cash and cash equivalents: The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the Company reports the amount of those checks within accounts payable in the consolidated balance sheets.
Short-term investments: The Company invests in time deposits with original maturities of more than three months but no more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2019 and 2018, the Company’s short-term investments totaled $4.3 million and $5.7 million, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost and net realizable value.
Property, plant and equipment: The Company records property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful lives of the assets. The Company charges maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations. Capital expenditures of $17.9 million, $15.8 million, and $12.5 million were accrued within accounts payable at March 31, 2019, 2018, and 2017, respectively.
Goodwill: The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company performed its goodwill impairment test as of March 31, 2019, which did not result in an impairment charge. See Note 15 for additional information.
Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the asset exceeds its fair value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets.
Assets held for sale: The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the asset for sale at a reasonable price in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell, within other noncurrent assets. The Company ceases to record depreciation expense at the time of designation as held for sale. The carrying value of assets held for sale totaled $5.0$1.1 million and $8.5$1.7 million at March 31, 20172019 and 2016,2018, respectively.
Revenue recognition: The Company recognizes sales revenue, including agreed upon commodity 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 upon 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 2017 and 2016, Company-owned tooling totaled $20.8 million and $18.8 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. At the time customer-owned tooling is completed and customer acceptance is obtained, the Company records tooling revenue and related production costs within net sales and cost of sales, respectively, in its consolidated statements of operations. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 2017 and 2016, cost reimbursement receivables related to customer-owned tooling totaled $7.8 million and $8.5 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, within cost of sales, based upon historical and current claims data or based upon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 14 for additional information.
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its customers in cost of sales, and related amounts billed to these customers in net sales.
Research and development: The Company expenses research and development costs as incurred within selling, general and administrative (“SG&A”) expenses. For the years ended March 31, 2017, 2016, and 2015, research and development costs charged to operations totaled $64.4 million, $61.1 million, and $62.0 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-denominated assets and liabilities. These instruments are used to manage financial risks and are not speculative. See Note 17 for additional information.
Income taxes: The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. See Note 7 for additional information.
Earnings per share: The Company calculates basic earnings per share based upon the weighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. 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 8 for additional information.
Cash and cash equivalents: The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the Company reports the amount of those un-presented checks within accounts payable in the consolidated balance sheets.
Short-term investments: The Company invests in time deposits with original maturities of more than three months but no more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2017 and 2016, the Company’s short-term investments totaled $4.7 million and $3.3 million, respectively.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Deferred compensation trusts: The Company maintains deferred compensation trusts to fund future obligations under its non-qualified deferred compensation plan.plans. The trust’strusts’ investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Trade accounts receivable: The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company recorded an allowance for doubtful accounts of $1.4 million and $0.5 million at March 31, 2017 and 2016, respectively, representing its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable, without recourse, to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During the years ended March 31, 2017, 2016, and 2015, the Company sold $55.4 million, $71.3 million, and $87.0 million, respectively, of accounts receivable to accelerate cash receipts. During each of the years ended March 31, 2017, 2016, and 2015, the Company recorded a loss on the sale of accounts receivables of $0.3 million in the consolidated statements of operations.
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost and net realizable value.
Property, plant and equipment: The Company records property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful lives of the assets. The Company charges maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations.
Goodwill: The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company performed its goodwill impairment test as of March 31, 2017, which did not result in an impairment charge. See Note 13 for additional information.
Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the asset exceeds its fair value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets.
Environmental liabilities: The Company records liabilities for environmental assessments and remediation efforts in the period in which its responsibility is probable and the costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is probable. To the extent that the required remediation procedures change, or additional contamination is identified, the Company’s estimated environmental liabilities may also change. See Note 18 for additional information.
Self-insurance reserves: The Company retains a portion of the financial risk for variouscertain insurance coverage, including property, general liability, workers compensation, and employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to operations. The Company reviews and updates the amount of its insurance-related reserves on a quarterly basis.
Stock-based compensation:Environmental liabilities: The Company recognizes stock-based compensation usingrecords liabilities for environmental assessments and remediation activities in the fair value method. Accordingly, compensation expense for stock options, restricted stockperiod in which its responsibility is probable and performance-based stock awardsthe costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is calculated based uponprobable. To the fair value ofextent that the instruments atrequired remediation procedures change, or additional contamination is identified, the time of grant, and is recognized as expense over the respective vesting periods.Company’s estimated environmental liabilities may also change. See Note 420 for additional information.
Supplemental cash flow information:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Interest paid | | $ | 22.3 | | | $ | 23.4 | | | $ | 15.4 | | Income taxes paid | | | 22.2 | | | | 20.1 | | | | 12.7 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
New Accounting Guidance:
Pension costsStock-based Compensation
In March 2017,2016, the Financial Accounting Standards Board (“FASB”) issued new guidance related to the income statement presentationsimplify several aspects of net periodic pension costs and net periodic postretirement benefit costs. This guidance requires companies to continue to present the service cost component of net benefit cost within the same financial statement line item as other employee compensation costs; however, other components of net benefit costs are required to be presented outside of results from operations. This will not impact consolidated net earnings. Early adoption is permitted, and theaccounting for stock-based payment transactions. The Company plans to adoptadopted this guidance for thebeginning in its first quarter of fiscal 2018. The Company will recast prior periodselected to conformaccount for forfeitures in the period in which they occur and recorded a cumulative-effect adjustment to the new income statement presentation. As a result,equity. In addition, the Company expectsprospectively adopted the guidance requiring all excess tax benefits or deficiencies to reclassify net benefit costs related to its pension plans totaling approximately $3.0 million in fiscal 2017 ($1.0 million from cost of sales and $2.0 million from SG&A expenses) and $45.0 million in fiscal 2016 ($10.0 million from cost of sales and $35.0 million from SG&A expenses) to other income and expense. The fiscal 2016 net benefit costs included $42.1 million of pension settlement losses related to a completed voluntary lump-sum payout program; see Note 16 for additional information. In fiscal 2018, the Company expects to record approximately $3.0 to $4.0 million of net benefit costs within other income and expense.
Share-based compensation
In March 2016, the FASB issued new guidance to simplify several aspects of accounting for share-based payment transactions, including thebe recognized as income tax effects ofexpense or benefit when share-based payments, recognition of forfeitures, and presentation requirements in the statement of cash flows. This guidance is effective for the Company’s first quarter of fiscal 2018.awards are settled. The Company does not expect the adoptionprovisions of this new guidance willdid not have a material impact on itsthe Company’s consolidated financial statements
Leases
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance. Upon adoptionstatements. As a result of adopting this new guidance, the Company will be requiredrecorded a $0.4 million increase to recognize most leases on its balance sheet. This guidance is effective for the Company’s first quarterboth deferred tax assets and equity as of fiscal 2020. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.April 1, 2017.
Revenue recognitionRecognition In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about revenue arising from contracts with customers. The Company adopted this new guidance is effective for the Company’s first quarter of fiscal 2019 and allows for either a full-retrospective or ausing the modified-retrospective transition method.
The Company is currently in the process of assessingassessed customer contracts and evaluatingevaluated contractual provisions that may result in a change inlight of the timing of revenue recognized in comparison with currentnew guidance. Under current guidance,Through its evaluation process, the Company generally recognizes revenue when products are shipped and riskidentified a limited number of loss has transferred to the customer. The Company is evaluating whether contractual provisions maycustomer contracts that provide an enforceable right to payment for its customized products, which may require revenue recognition prior to the product being shipped to the customer. In addition,As a result of its adoption of the new guidance, the Company is evaluating pricing provisions contained in certainrecorded an increase of its customer contracts$0.7 million to determine the appropriate timingretained earnings as of revenue recognition based uponApril 1, 2018, along with related balance sheet reclassifications. The increase to retained earnings represented $3.0 million of net sales that, had the new guidance.guidance been in effect, the Company would have recognized as of March 31, 2018. See Note 3 for additional information regarding revenue recognition.
Income Taxes: Intra-Entity Transfers of Assets Other than Inventory In October 2016, the FASB issued new guidance related to income tax accounting for intercompany asset transfers. This new guidance requires companies to recognize the income tax effects of intercompany asset transfers other than inventory at the transaction date. The income tax effects of these transfers were previously deferred. The Company continues to evaluate the impactadopted this new guidance for fiscal 2019 using the modified-retrospective transition method. Upon adoption, the Company recorded a decrease to retained earnings of $8.3 million as of April 1, 2018.
Statement of Cash Flows: Restricted Cash In November 2016, the FASB issued new guidance that requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending balances presented within the statement of cash flows. The Company adopted this new guidance for fiscal 2019 using the retrospective transition method. As a result, all prior period information has been recast to be comparable to the new presentation requirements. See Note 10 for information regarding the Company’s restricted cash.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income In February 2018, the FASB issued new guidance related to the accounting for certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from tax reform legislation that was enacted in the U.S. in December 2017. This guidance is effective for the Company as of April 1, 2019 and provides the option to reclassify stranded income tax effects to retained earnings. The Company has determined it will have onnot reclassify stranded income tax effects upon adoption, and therefore, this guidance will not impact its consolidated financial statements.
Supplemental cash flow information:Leases
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance and requires balance sheet recognition for most leases. The Company will adopt this guidance effective April 1, 2019 using a modified-retrospective transition method, under which it expects to elect not to adjust comparative periods. The Company intends to elect the package of practical expedients permitted under the new guidance, and, as a result, the Company has not reassessed the classification of existing leases or initial direct costs thereof, or whether existing contracts contain leases. In addition, the Company plans to elect accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components. The Company does not intend to elect the hindsight practical expedient.
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Interest paid | | $ | 15.4 | | | $ | 10.7 | | | $ | 10.3 | | Income taxes paid | | | 12.7 | | | | 10.1 | | | | 15.9 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 2: AcquisitionsThe Company has completed its assessment of its global lease portfolio and is in the process of finalizing the testing of its new lease accounting software solution and implementing new processes and controls to account for leases in accordance with the new guidance. The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. In addition, the Company leases certain manufacturing and IT equipment and vehicles. Upon adoption of this new guidance, the Company expects to recognize $60.0 to $70.0 million of right-of-use assets and corresponding lease liabilities on its consolidated balance sheet. The Company does not expect the adoption will have a material impact on its consolidated statements of operations or consolidated statements of cash flows.
The cumulative effects on the Company’s consolidated balance sheet, as of April 1, 2018, resulting from the adoption of new accounting guidance were as follows:
| | | | | Adjustments Due to New Accounting Guidance | | | | | | | Balance as of March 31, 2018 | | | Revenue Recognition | | | Intra-entity Transfers of Assets | | | Balance as of April 1, 2018 | | ASSETS | | | | | | | | | | | | | Inventories | | $ | 191.3 | | | $ | (2.0 | ) | | $ | - | | | $ | 189.3 | | Other current assets | | | 70.1 | | | | 3.0 | | | | (8.3 | ) | | | 64.8 | | Deferred income taxes | | | 96.9 | | | | (0.2 | ) | | | - | | | | 96.7 | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | Deferred income taxes | | $ | 9.9 | | | $ | 0.1 | | | $ | - | | | $ | 10.0 | | Retained earnings | | | 394.9 | | | | 0.7 | | | | (8.3 | ) | | | 387.3 | |
Luvata HTS
On November 30, 2016, the Company completed its acquisition of a 100%100 percent ownership interest in the Luvata HTS business for consideration totaling $415.6 million ($388.2 million, net of cash acquired). The purchase price included 2.2 million Modine common shares. The Company estimated the fair value of the common shares, to bevalued at $24.3 million atas of November 30, 2016, which reflects restrictions on the sale of the shares for a minimum of one year. Now operating2016. Operating as Modine’s Commercial and Industrial Solutions (“CIS”) segment, this business is a leading global supplier of coils, coolers and coatings to the heating, ventilation, air conditioning, and refrigeration (“HVAC&R”) industry. CIS’s products coverSee Note 22 for a broad range of heat exchanger coils, commercial refrigeration and industrial coolers, and anti-corrosion coating solutions. The Company’s acquisition of Luvata HTS addressed, in particular, both the “Diversify” and “Grow” commitments of its transformational Strengthen, Diversify and Grow strategy launched in fiscal 2016. This acquisition provided Modine with an expanded industrial business portfolio, broader customer base, and reduced cyclical exposure. For the year ended March 31, 2017, the Company included $177.7 millionsummary of net sales and operating income of $7.5 million within its consolidated statement of operations attributable to four months ofreported by the CIS operations. During the year ended March 31,segment. In fiscal 2018 and 2017, the Company recorded $4.3 million and $14.8 million, respectively, of costs incurred directly related to the acquisition and integration of Luvata HTS as SG&A expenses within the consolidated statementstatements of operations. TheseThe fiscal 2018 costs principallyprimarily consisted of fees for i) transaction advisors, ii)incremental costs associated with integration activities, including legal accounting, and otheraccounting professional services and iii)severance expenses. The fiscal 2017 costs primarily consisted of transaction advisory and due diligence costs and incremental costs directly associated with integration activities.
To fund a significant portion of the Luvata HTS purchase price, In addition, during fiscal 2017, the Company entered into new credit agreements in November 2016. See Note 15 for additional information.charged $4.3 million to cost of sales related to inventory that it wrote-up to fair value upon acquisition.
The Company completed its accounting for the acquisition of Luvata HTS during fiscal 2018 and allocated the total purchase price of Luvata HTS$415.6 million to the identifiable tangible and intangible assets acquired and the liabilities assumed based upon their estimated fair values as of the acquisition date. The Company based the estimated fair values primarily upon third-party valuations using assumptions developed by management and other information compiled by management, including, but not limited to, future expected cash flows. The Company allocated the excess of the purchase price over the net assets recognized to goodwill in the amount of $150.6$151.9 million, none of which the Company expects to beis deductible for income tax purposes. Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition includes Luvata HTS’s workforce and anticipated future cost and revenue synergies.
At the time the March 31, 2017 financial statements were finalized, the Company was awaiting additional information to determine the fair value of certain assets acquired and liabilities assumed and therefore, the allocation of purchase price is considered preliminary. The Company expects to complete its evaluation of these matters in the first or second quarter of fiscal 2018. These matters primarily relate to income tax reserves and contingent liabilities, including reserves for environmental, legal, product warranty, and trade compliance matters.
The Company’s preliminary allocation of the purchase price for its acquisition of Luvata HTS is as follows:
Cash and cash equivalents | | $ | 27.4 | | Trade accounts receivable | | | 86.3 | | Inventories | | | 55.7 | | Property, plant and equipment | | | 120.6 | | Intangible assets | | | 130.2 | | Goodwill | | | 150.6 | | Other assets | | | 38.6 | | Accounts payable | | | (73.7 | ) | Accrued compensation and employee benefits | | | (24.3 | ) | Deferred income taxes | | | (39.3 | ) | Pensions | | | (14.3 | ) | Other liabilities | | | (42.2 | ) | Purchase price | | $ | 415.6 | |
Below is a summary of the methodologies and significant assumptions used in estimating the fair value of certain classes of acquired assets. The fair values were primarily based upon significant inputs that are not observable in the market and thus represent Level 3 measurements. See Note 3 for information regarding Level 3 fair value measurements.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Inventories: The Company determined the fair value of acquired inventory by estimating the selling priceCompany’s allocation of the respective finished goods, less an estimatepurchase price for its acquisition of costs to be incurred to sell the inventory and to complete the work-in-process inventory, if applicable. For raw materials acquired, the Company estimated the cost of replacement. As a result, the Company wrote-up acquired inventory by $4.3 million and subsequently charged this write-up to cost of salesLuvata HTS was as the underlying inventory was sold in the third and fourth quarters of fiscal 2017.
Property, plant and equipment: The Company valued property, plant and equipment primarily utilizing the cost approach and also utilized the market approach in valuing acquired land and buildings. The cost approach considers the amount required to replace an asset by constructing or purchasing a new asset with similar utility and adjusting the value in consideration of depreciation as of the acquisition date. The cost approach relies on assumptions regarding replacement costs and the age and estimated remaining useful lives of the assets. The fair value of property, plant and equipment will be recognized as depreciation expense in our results of operations over the expected remaining useful lives of the individual assets.follows:
Intangible assets: The Company determined the fair value of acquired intangible assets by using variations of the income approach. These methods generally forecast expected future net cash flows discretely associated with each of the identified intangible assets and adjust the forecasts to present value by applying a discount rate intended to reflect risk factors associated with the cash flows and the time value of money. Acquired intangible assets were as follows:
| | Gross Carrying Value | | Weighted- Average Useful Life | Customer relationships | | $ | 58.4 | | 17 years | Trade names | | | 50.1 | | 20 years | Acquired technology | | | 21.7 | | 12 years | Total intangible assets acquired | | $ | 130.2 | | |
Customer relationships, for valuation purposes, represent the estimated fair value of Luvata HTS’s business relationship with existing customers, and were calculated by projecting the future after-tax cash flows from these customers, including the right to deploy and market additional products to them. The Company forecasted anticipated earnings from existing customers using recent years’ sales levels and considering a customer attrition rate based upon historical customer revenue information.
The Company determined the value of acquired trade names using the relief-from-royalty method, a variation of the income approach, which applies an assumed royalty rate to revenue expected to be derived under the acquired trade names. The fair value was estimated to be the present value of the royalties saved because the Company owns the trade names.
The Company also used the relief-from royalty method for its valuation of acquired technology, which largely relates to the design of mechanical and electrical components. The Company considered factors including the estimated contribution of the technology to the overall profitability of the products and the awareness level of the technology and its position in the market.
Cash and cash equivalents | | $ | 27.4 | | Trade accounts receivable | | | 86.1 | | Inventories | | | 55.0 | | Property, plant and equipment | | | 120.4 | | Intangible assets | | | 130.2 | | Goodwill | | | 151.9 | | Other assets | | | 39.1 | | Accounts payable | | | (73.7 | ) | Accrued compensation and employee benefits | | | (24.3 | ) | Deferred income taxes | | | (39.5 | ) | Pensions | | | (14.3 | ) | Other liabilities | | | (42.7 | ) | Purchase price | | $ | 415.6 | |
The following unaudited supplemental pro forma information presents the Company’s consolidated results of operations as though the acquisition of Luvata HTS had occurred at the beginning of fiscal 2016. This pro forma financial information is presented for illustrative purposes only and is not considered to be indicative of the operating results that would have been achieved had the acquisition been completed as of the date indicated or the operating results that may be obtained in the future.indicated.
| | Years ended March 31, | | | | | 2017 | | | 2016 | | | Year ended March 31, 2017 | | Net sales | | $ | 1,881.6 | | | $ | 1,871.9 | | | $ | 1,881.6 | | Net earnings attributable to Modine | | | 35.8 | | | | 1.5 | | | | 35.8 | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.72 | | | $ | 0.03 | | | $ | 0.72 | | Diluted | | | 0.71 | | | | 0.03 | | | | 0.71 | |
The supplemental pro forma financial information includes adjustments for: (i) annual amortization and depreciation expense totaling approximately $13.0 million for acquired tangible and intangible assets, (ii) estimated annual interest expense of approximately $14.0 million resulting from acquisition-related borrowings, and (iii) the estimated income tax impacts related to the pro forma adjustments, considering the statutory tax rates within the applicable jurisdictions. In addition, the pro forma financial information assumes that both $8.6 million of acquisition-related transaction costs, not including costs for integration-related activities, and $4.3 million of inventory purchase accounting adjustments were incurred during fiscal 2016. The pro forma financial information does not reflect achieved or expected cost or revenue synergies.
Note 3: | Revenue Recognition |
Effective April 1, 2018, the Company adopted new revenue recognition accounting guidance using the modified-retrospective transition method and, as a result, recorded a cumulative-effect adjustment to increase retained earnings by $0.7 million. The Company’s consolidated financial statements for the fiscal year ended March 31, 2019 reflect the adoption of this new guidance; however, the comparable prior-year periods have not been recast. See Note 1 for additional information regarding the adjustments to the Company’s consolidated balance sheet as of April 1, 2018.
The Company generates revenue from selling innovative thermal management products and solutions to diversified global markets and customers. The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, which may be at a point in time or over time. The majority of the Company’s revenue is recognized at a point in time, based upon shipment terms. The Company records an allowance for doubtful accounts for estimated uncollectible receivables and accrues for estimated warranty costs at the time of sale. These estimates are based upon historical experience, current business trends, and current economic conditions. The Company accounts for shipping and handling activities as fulfilment costs rather than separate performance obligations, and records shipping and handling costs in cost of sales and related amounts billed to customers in net sales. The Company establishes payment terms with its customers based upon industry and regional practices, which typically do not exceed 90 days. As the Company expects to receive payment from its customers within one year from the time of sale, it disregards the effects of the time value of money in its determination of the transaction price. The Company has not disclosed the value of unsatisfied performance obligations because the revenue associated with customer contracts for which the original expected performance period is greater than one year is immaterial.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a description of the Company’s principal revenue-generating activities:
Vehicular Thermal Solutions (“VTS”) The VTS segment principally generates revenue from providing engineered heat transfer systems and components for use in on- and off-highway original equipment. This segment provides powertrain and engine cooling products, including, but not limited to, radiators, charge air coolers, condensers, oil coolers, EGR coolers, and fuel coolers, to original equipment manufacturers (“OEMs”) in the automotive, commercial vehicle, and off-highway markets in the Americas, Europe, and Asia regions. In addition, the VTS segment designs customer-owned tooling for OEMs and also serves Brazil’s automotive and commercial vehicle aftermarkets.
While the VTS segment provides customized production and service parts to customers under multi-year programs, these programs typically do not contain contractually-guaranteed volumes to be purchased by the customer. As a result, individual purchase orders typically represent the quantities ordered by the customer. With the exception of a small number of VTS customers, the terms within the customer agreement, purchase order, or customer-owned tooling contract do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the VTS segment recognizes revenue primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
In regard to VTS customers with contractual cancellation terms that provide an enforceable right to payment for performance completed to date, the Company recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The VTS segment measures progress by evaluating the production status of ordered products not yet shipped to the customer.
For certain customer programs, the Company agrees to provide annual price reductions based upon contract terms. For these scheduled price reductions, the Company evaluates whether the provisions represent a material right to the customer, and if so, defers associated revenue as a result.
At times, the Company makes up-front incentive payments to certain customers related to future sales under multi-year programs. The Company capitalizes these incentive payments, which it expects to recover through future sales, and amortizes the assets as a reduction to revenue when the related products are sold to customers.
Commercial and Industrial Solutions (“CIS”) The CIS segment principally generates revenue from providing thermal management products, including customized coils and coolers, to the heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets in North America, Europe, and Asia. In addition, the segment applies corrosion protection solutions, which are referred to as coatings, to heat-transfer equipment.
For the sale of coils and coolers, individual customer purchase orders generally represent the Company’s contract with its customers. With the exception of a small number of customers, the applicable customer contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the CIS segment recognizes revenue for its sale of coils and coolers primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For both sales to customers whose contract cancellation terms provide an enforceable right to payment and sales from the coatings businesses, in which the customers control the heat-transfer equipment being enhanced by the coating application, the CIS segment recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The segment measures progress by evaluating the production status towards completion of ordered products or services not yet shipped to its customers.
Building HVAC Systems (“BHVAC”) The BHVAC segment principally generates revenue from providing a variety of heating, ventilating, and air conditioning products, primarily for commercial buildings and related applications in North America and the U.K., as well as mainland Europe and the Middle East.
Heating products are manufactured in the U.S. and are generally sold to independent distributors, who in turn market the heating products to end customers. Because these products are sold to many different customers without contractual or practical limitations, the BHVAC segment recognizes revenue at the time control is transferred to the customer, generally the independent distributor, based upon shipping terms, which is generally upon shipment.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Ventilation and air conditioning products are highly-specified to a customer’s needs; however, the underlying sales contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the BHVAC segment recognizes revenue for these products at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
Disaggregation of Revenue The table below presents revenue to external customers for each of the Company’s business segments by primary end market, by geographic location and based upon the timing of revenue recognition:
| | Year ended March 31, 2019 | | | | VTS | | | CIS | | | BHVAC | | | Segment Total | | Primary end market: | | | | | | | | | | | | | Automotive | | $ | 542.8 | | | $ | - | | | $ | - | | | $ | 542.8 | | Commercial vehicle | | | 387.6 | | | | - | | | | - | | | | 387.6 | | Off-highway | | | 314.1 | | | | - | | | | - | | | | 314.1 | | Commercial HVAC&R | | | - | | | | 506.3 | | | | 167.7 | | | | 674.0 | | Data center cooling | | | - | | | | 145.7 | | | | 41.3 | | | | 187.0 | | Industrial cooling | | | - | | | | 47.8 | | | | - | | | | 47.8 | | Other | | | 107.2 | | | | 7.8 | | | | 3.4 | | | | 118.4 | | Net sales | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | | | | Americas | | $ | 613.7 | | | $ | 413.6 | | | $ | 124.9 | | | $ | 1,152.2 | | Europe | | | 538.2 | | | | 244.8 | | | | 87.5 | | | | 870.5 | | Asia | | | 199.8 | | | | 49.2 | | | | - | | | | 249.0 | | Net sales | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 1,308.5 | | | $ | 571.1 | | | $ | 212.4 | | | $ | 2,092.0 | | Products transferred over time | | | 43.2 | | | | 136.5 | | | | - | | | | 179.7 | | Net sales | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | |
Contract Balances Contract assets and contract liabilities from contracts with customers were as follows:
| | March 31, 2019 | | | March 31, 2018 | | Contract assets | | $ | 22.6 | | | $ | 13.5 | | Contract liabilities | | | 4.0 | | | | 6.8 | |
Contract assets, included within other current assets in the consolidated balance sheets, primarily consist of capitalized costs related to customer-owned tooling contracts, wherein the customer has guaranteed reimbursement, and assets recorded for revenue recognized over time, which represent the Company’s rights to consideration for work completed but not yet billed. The $9.1 million increase in contract assets during fiscal 2019 was primarily related to contract assets totaling $7.4 million as of March 31, 2019 for revenue recognized over time, which were recorded as a result of the Company’s adoption of the new revenue recognition accounting guidance, and customer-owned tooling contracts, under which more costs were capitalized than reimbursed.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $2.8 million decrease in contract liabilities during fiscal 2019 was primarily due to the Company’s satisfaction of performance obligations under customer contracts for which payment had been received in advance.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) Modine Puxin Thermal Systems (Jiangsu) Co. Ltd
On January 29, 2016,Impacts of Adopting New Accounting Guidance The impacts from the Company formed a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co. Ltd. of Yangzhou, China, of which it owns 67 percent, and the joint venture partner, Jiangsu Puxin Heat Exchange System Co., Ltd, owns 33 percent. This joint venture, which is reported in the Asia segment, expedited the Company’s introduction of stainless steel heat exchangers for the light-, medium-, and heavy-duty commercial vehicle markets in China. In fiscal 2016, the Company contributed $1.4 million of cash and equipment and other assets totaling $2.3 million. In fiscal 2017, the Company contributed $0.3 million of additional cash consideration after certain seller indemnification obligations under the agreement were satisfied. 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 activitiesadoption of the joint venture, and, therefore, the financial results of the joint venture are included innew revenue recognition guidance to the Company’s consolidated financial statements. The Company did not present pro forma financial information for this acquisition as the effect is not material to its resultsstatement of operations or financial position.for the year ended March 31, 2019 and its consolidated balance sheet as of March 31, 2019 were as follows:
| | Year ended March 31, 2019 | | | | As Reported | | | Impact of New Accounting Guidance | | | Results Without
Impact of New Accounting Guidance | | Net sales | | $ | 2,212.7 | | | $ | (4.4 | ) | | $ | 2,208.3 | | Net earnings attributable to Modine | | | 84.8 | | | | (2.0 | ) | | | 82.8 | | | | | | | | | | | | | | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 1.67 | | | $ | (0.04 | ) | | $ | 1.63 | | Diluted | | | 1.65 | | | | (0.04 | ) | | | 1.61 | |
| | March 31, 2019 | | | | As Reported | | | Impact of New Accounting Guidance | | | Balances Without
Impact of New Accounting Guidance | | ASSETS | | | | | | | | | | Inventories | | $ | 200.7 | | | $ | 3.8 | | | $ | 204.5 | | Other current assets | | | 65.8 | | | | (7.4 | ) | | | 58.4 | | Deferred income taxes | | | 97.1 | | | | 0.6 | | | | 97.7 | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | Deferred income taxes | | $ | 8.2 | | | $ | (0.3 | ) | | $ | 7.9 | | Retained earnings | | | 472.1 | | | | (2.7 | ) | | | 469.4 | |
Note 3: Note 4: | Fair Value Measurements |
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
| · | Level 1 – Quoted prices for identical instruments in active markets. |
Level 1 – Quoted prices for identical instruments in active markets. | · | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. | · | Level 3 – Model-derived valuations in which one or more significant inputs are not observable. |
Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, and cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. The Company holds trading securities in deferred compensation trusts to fund obligations under certain non-qualified deferred compensation plans. The securities’ fair values, which are recorded as other noncurrent assets, are determined based upon 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 $5.0$6.0 million and $3.2$5.8 million atas of March 31, 20172019 and 2016,2018, respectively. The year-over-year increase primarily relates to a deferred compensation plan in the recently-acquired CIS segment. The fair value of the Company’s long-term debt is disclosed in Note 15.17.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2017 | | | March 31, 2019 | | | | Level 1 | | | Level 2 | | | Total | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 5.6 | | | $ | 5.6 | | | $ | - | | | $ | 3.9 | | | $ | 3.9 | | Common stocks | | | 17.8 | | | | 2.0 | | | | 19.8 | | | Corporate bonds | | | - | | | | 9.3 | | | | 9.3 | | | | - | | | | 9.4 | | | | 9.4 | | Pooled equity funds | | | 56.8 | | | | - | | | | 56.8 | | | | 27.7 | | | | - | | | | 27.7 | | Pooled fixed-income funds | | | 26.5 | | | | - | | | | 26.5 | | | U.S. government and agency securities | | | - | | | | 18.7 | | | | 18.7 | | | | - | | | | 12.3 | | | | 12.3 | | Other | | | 1.4 | | | | 1.4 | | | | 2.8 | | | | 0.1 | | | | 0.9 | | | | 1.0 | | Fair value excluding investment measured at net asset value | | | 102.5 | | | | 37.0 | | | | 139.5 | | | Investment measured at net asset value (a) | | | | | | | | | | | 8.7 | | | Total Fair Value | | | | | | | | | | $ | 148.2 | | | | | | | | | | | | | | | | | | | 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 | | | | - | | | | 48.7 | | | 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 | | | Fair value excluding investment measured at net asset value | | | 99.1 | | | | 35.1 | | | | 134.2 | | | Investment measured at net asset value (a) | | | | | | | | | | | 7.3 | | | Total Fair Value | | | | | | | | | | $ | 141.5 | | | Fair value excluding investments measured at net asset value | | | | 27.8 | | | | 26.5 | | | | 54.3 | | Investments measured at net asset value | | | | | | | | | | | | 100.8 | | Total fair value | | | | | | | | | | | $ | 155.1 | |
| (a) | As a practical expedient, the Company valued a collective trust fund using its net asset value per unit, and therefore, has not classified this investment within the fair value hierarchy. |
| | March 31, 2018 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 11.4 | | | $ | 11.4 | | Common stocks | | | 9.4 | | | | 2.6 | | | | 12.0 | | Corporate bonds | | | - | | | | 9.7 | | | | 9.7 | | Pooled equity funds | | | 64.4 | | | | - | | | | 64.4 | | Pooled fixed-income funds | | | 27.3 | | | | - | | | | 27.3 | | U.S. government and agency securities | | | - | | | | 16.2 | | | | 16.2 | | Other | | | 0.2 | | | | 1.7 | | | | 1.9 | | Fair value excluding investment measured at net asset value | | | 101.3 | | | | 41.6 | | | | 142.9 | | Investment measured at net asset value | | | | | | | | | | | 14.8 | | Total fair value | | | | | | | | | | $ | 157.7 | |
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of common stocks, pooled equity funds and pooled fixed-income funds based upon quoted prices from active markets and classified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain common stocks, corporate bonds pooled equity funds and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 20172019 and 2016,2018, the Company held no Level 3 assets within its pension plans.
As a practical expedient, the Company valued certain investments, including pooled equity, fixed-income and real estate funds, using their net asset value (NAV) per unit, and therefore, has not classified these investments within the fair value hierarchy. The increase in investments valued at NAV in fiscal 2019 was associated with the Company’s revised target asset allocations for its U.S. pension plan; see Note 18 for additional information. The terms and conditions for redemptions vary for the investments valued at NAV. The real estate investment fund may be redeemed at any time with a 90-day notice period. Other investments valued at NAV do not have restrictive redemption frequency or notice period requirements. The Company does not intend to sell or otherwise dispose of these investments at prices different than the NAV per unit.
Note 4: Note 5: | Stock-Based Compensation |
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and other executives that consists of restricted stock andawards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors. The Company’s Board of Directors and the Officer Nomination and Compensation Committee, as applicable, have discretionary authority to set the terms of the awards of stockstock-based awards. Grants to employees during fiscal 2019 were issued under the Company’s Amended and Restated 20082017 Incentive Compensation Plan (“Plan”).Plan. At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2017,2019, approximately 1.62.7 million shares authorized under the 2017 Incentive Compensation Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $7.4$7.9 million, $4.9$9.5 million, and $4.0$7.4 million in fiscal 2017, 2016,2019, 2018, and 2015,2017, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Stock Options: The Company recorded $1.1$1.2 million, $0.9$1.2 million, and $0.9$1.1 million of compensation expense related to stock options in fiscal 2017, 2016,2019, 2018, and 2015,2017, respectively. The fair value of stock options that vested during fiscal 2019, 2018, and 2017 2016, and 2015 was $1.0$1.2 million, $0.9$1.2 million, and $0.9$1.0 million, respectively. As of March 31, 2017,2019, the total compensation expense not yet recognized related to non-vested stock options was $2.1$2.2 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.52.6 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Weighted-average fair value of options | | $ | 4.60 | | | $ | 7.11 | | | $ | 10.21 | | Expected life of awards in years | | | 6.4 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 1.4 | % | | | 1.9 | % | | | 2.1 | % | Expected volatility of the Company's stock | | | 45.5 | % | | | 66.9 | % | | | 76.1 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Fair value of options | | $ | 7.81 | | | $ | 7.30 | | | $ | 4.60 | | Expected life of awards in years | | | 6.3 | | | | 6.4 | | | | 6.4 | | Risk-free interest rate | | | 2.8 | % | | | 1.9 | % | | | 1.4 | % | Expected volatility of the Company’s stock | | | 39.7 | % | | | 44.3 | % | | | 45.5 | % | Expected dividend yield on the Company’s stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of Modine’s common stock on the date of grant. The risk-free interest rate was based upon 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 upon 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 upon historical patterns and the terms of the options. Outstanding options granted vest 25 percent annually for four years. The Company used a pre-vesting forfeiture rate of 2.5 percent as an estimate of expected forfeitures prior to completing the required service period.
A summary of stock option activity for fiscal 20172019 was as follows:
| | Shares | | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | | Shares | | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.5 | | | $ | 10.82 | | | | | | | | | | 1.2 | | | $ | 11.16 | | | | | | | | Granted | | | 0.3 | | | | 10.00 | | | | | | | | | | 0.2 | | | | 17.90 | | | | | | | | Exercised | | | (0.1 | ) | | | 9.23 | | | | | | | | | | (0.1 | ) | | | 9.93 | | | | | | | | Forfeited or expired | | | (0.2 | ) | | | 21.76 | | | | | | | | | | (0.1 | ) | | | 14.51 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 9.83 | | | | 5.5 | | | $ | 4.4 | | | | 1.2 | | | $ | 12.24 | | | | 5.5 | | | $ | 3.3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2017 | | | 1.0 | | | $ | 9.27 | | | | 4.0 | | | $ | 3.6 | | | Exercisable, March 31, 2019 | | | | 0.8 | | | $ | 10.59 | | | | 4.0 | | | $ | 2.9 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20172019 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the fair valueprice of Modine’s common shares.
Additional information related to stock options exercised is as follows:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Intrinsic value of stock options exercised | | $ | 0.7 | | | $ | 4.9 | | | $ | 0.5 | | Proceeds from stock options exercised | | | 1.1 | | | | 4.3 | | | | 0.9 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Intrinsic value of stock options exercised | | $ | 0.5 | | | $ | 0.4 | | | $ | 0.4 | | Proceeds from stock options exercised | | $ | 0.9 | | | $ | 0.5 | | | $ | 0.6 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Restricted Stock: The Company recorded $3.8$4.3 million, $3.5$3.9 million, and $2.8$3.8 million of compensation expense related to restricted stock in fiscal 2017, 2016,2019, 2018, and 2015,2017, respectively. The fair value of restricted stock awards that vested during fiscal 2019, 2018, and 2017 2016, and 2015 was $4.0$4.3 million, $3.4$3.9 million, and $2.3$4.0 million, respectively. At March 31, 2017,2019, the Company had $4.8$5.3 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.42.5 years. The Company values restricted stock awards using the closing market valueprice of its common shares on the date of grant. The restricted stock awards vest 25 percent annually for four years, with the exception of awards to non-employee directors, which fully vest upon grant.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
A summary of restricted stock activity for fiscal 20172019 was as follows:
| | Shares | | | Weighted- average price | | | Shares | | | | | Non-vested balance, beginning | | | 0.6 | | | $ | 11.29 | | | | 0.6 | | | $ | 12.24 | | Granted | | | 0.4 | | | | 9.98 | | | | 0.3 | | | | 17.72 | | Vested | | | (0.4 | ) | | | 10.05 | | | | (0.3 | ) | | | 13.75 | | Forfeited | | | | (0.1 | ) | | | 15.03 | | Non-vested balance, ending | | | 0.6 | | | $ | 11.21 | | | | 0.5 | | | $ | 14.95 | |
Restricted Stock – Performance-Based Shares: The Company recorded $2.5$2.4 million, $0.5$4.4 million, and $0.3$2.5 million of compensation expense related to performance-based stock awards in fiscal 2017, 2016,2019, 2018, and 2015,2017, respectively. At March 31, 2017,2019, the Company had $3.2$2.4 million of total unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be recognized over a weighted-average period of 1.81.5 years. The Company values performance-based stock awards using the closing market valueprice of its common shares on the date of grant.
Shares are earned under the performance portion of the restricted stock award program based upon the attainment of certain financial goals over a three-year period and are awarded after the end of that three-year performance period, if the performance targets have been achieved. The performance components of the programsprogram initiated in fiscal 2017, 2016, and 2015 were2019 is based upon both a target three-year average consolidated cash flow return on averageinvested capital employed (“ROACE”) and a target three-year average annual revenue growth at the end of a three-year performance period, commencing with the fiscal year of grant. The performance components of the programs initiated in fiscal 2018 and 2017 were based upon both a target three-year average consolidated return on capital employed and a target three-year average annual revenue growth at the end of a three-year performance period.
Note 5: Note 6: | Restructuring Activities |
During fiscal 2019, restructuring and repositioning expenses primarily resulted from targeted headcount reductions in Europe and the Americas within the VTS segment. These headcount reductions support the Company’s objective to reduce operational and SG&A cost structures at certain locations. In addition, the Company is in process of transferring product lines associated with the merger of its North American coils business into the CIS segment, in order to accelerate operational improvements and organizational efficiencies.
During fiscal 2018, the Company ceased production at its Gailtal, Austria manufacturing facility, primarily to reduce excess capacity and lower manufacturing costs in Europe. As a result of this facility closure, the Company recorded $8.3 million of restructuring expenses within the CIS segment. These restructuring expenses primarily related to employee severance and related benefits. Fiscal 2018 restructuring activities also included plant consolidation activities, targeted headcount reductions, and certain product line transfers in Europe within the VTS segment. In addition, the Company recorded restructuring expenses associated with the discontinuance of its geothermal product line within the BHVAC segment.
During fiscal 2017, the Company completed a voluntary retirement program for certain U.S. salaried employees and implemented targeted headcount reductions at several locations. The Company engaged in these restructuring activities as part of its Strengthen, Diversify and Grow strategic initiative, particularlylocations, both in support of its objective to reduce operational and SG&A cost structures.
During fiscal 2016, the Company announced a plan to close its Washington, Iowa manufacturing facility and recorded severance costs as a result. The Company completed the transfer of production from Washington to other Americas segment manufacturing facilities in fiscal 2017. Also during fiscal 2016,2017, the Company completed the transfer of production from its McHenry, IllinoisWashington, Iowa manufacturing facility, which was closed and sold, to other AmericasVTS segment manufacturing facilities. These restructuring activities reflect the Company’s focus on operating scale manufacturing facilities to improve overall competitiveness and profitability.in North America.
During fiscal 2015, the Company initiated a headcount reduction plan for the Brazil manufacturing facility within its Americas segment. The headcount reductions were in response to the economic slowdown in Brazil and were aimed at maintaining profitability in this business despite lower sales volume.
In addition, the Company has engaged in restructuring activities within its Europe segment. These restructuring activities have included implementing headcount reductions, exiting certain non-core product lines based upon Modine’s global product strategy, reducing manufacturing costs, consolidating production facilities, and disposing of and selling certain underperforming or non-strategic assets. The Company designed these activities to align the cost structure of the segment with its strategic focus on the commercial vehicle, off-highway, automotive component, and engine product markets, while improving gross margin and return on average capital employed.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Restructuring and repositioning expenses were as follows:
| | Years ended March 31, | | | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | Employee severance and related benefits | | $ | 5.3 | | | $ | 12.8 | | | $ | 1.2 | | | $ | 8.7 | | | $ | 13.0 | | | $ | 5.3 | | Other restructuring and repositioning expenses | | | 5.6 | | | | 3.8 | | | | 3.5 | | | | 0.9 | | | | 3.0 | | | | 5.6 | | Total | | $ | 10.9 | | | $ | 16.6 | | | $ | 4.7 | | | $ | 9.6 | | | $ | 16.0 | | | $ | 10.9 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
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, | | | | 2019 | | | 2018 | | Beginning balance | | $ | 11.0 | | | $ | 6.5 | | Additions | | | 8.7 | | | | 13.0 | | Payments | | | (9.1 | ) | | | (9.4 | ) | Effect of exchange rate changes | | | (0.6 | ) | | | 0.9 | | Ending balance | | $ | 10.0 | | | $ | 11.0 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | Beginning balance | | $ | 14.7 | | | $ | 9.9 | | Additions | | | 5.3 | | | | 12.8 | | Payments | | | (12.9 | ) | | | (8.5 | ) | Effect of exchange rate changes | | | (0.6 | ) | | | 0.5 | | Ending balance | | $ | 6.5 | | | $ | 14.7 | |
During fiscal 2018, the Company recorded a $1.3 million asset impairment charge as a result of the closure of the CIS Austrian facility. During fiscal 2019, the Company recorded an additional $0.4 million asset impairment charge related to this closed facility to reduce its carrying value to its current estimated fair value, less costs to sell.
During fiscal 2017, the Company sold twothree previously-closed manufacturing facilities within its Americas segment and a facility within its EuropeVTS segment for cash proceeds totaling $5.4 million. As a result of the facility sales, the Company recorded net gains totaling $2.0 million.
During fiscal 2015, the Company sold a wind tunnel within its Europe segment for cash proceeds of $5.8 million and recognized a gain of $3.2 million as a result.
During fiscal 2016, the Company recorded an asset impairment charge of $9.9 million within its Europe segment to write down long-lived assets at a manufacturing facility in Germany to fair value.
Note 6: Note 7: | Other Income and Expense |
Other income and expense consisted of the following:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Equity in earnings of non-consolidated affiliate | | $ | 0.7 | | | $ | 0.2 | | | $ | 0.1 | | Interest income | | | 0.4 | | | | 0.4 | | | | 0.4 | | Foreign currency transactions (a) | | | (2.3 | ) | | | (0.6 | ) | | | (1.9 | ) | Net periodic benefit cost (b) | | | (2.9 | ) | | | (3.3 | ) | | | (2.9 | ) | Total other expense - net | | $ | (4.1 | ) | | $ | (3.3 | ) | | $ | (4.3 | ) |
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Equity in earnings of non-consolidated affiliate | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.6 | | Interest income | | | 0.4 | | | | 0.4 | | | | 0.5 | | Foreign currency transactions (a) | | | (1.9 | ) | | | (1.3 | ) | | | (0.9 | ) | Gain from insurance recovery (b) | | | - | | | | 9.5 | | | | - | | Total other (expense) income - net | | $ | (1.4 | ) | | $ | 8.7 | | | $ | 0.2 | |
| (a) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on foreign currency exchange contracts. |
| (b) | During fiscal 2016,Represents net periodic benefit cost, exclusive of service cost, for the Company settled an insurance claim related to machineryCompany’s pension and equipment destroyed in a fire at its Airedale facility and recorded a gain of $9.5 million. See Note 1 for additional information.postretirement plans. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 7:
The U.S. and foreign components of earnings from continuing operations before income taxes and the provisionbenefit or benefitprovision for income taxes consisted of the following:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Components of earnings (loss) before income taxes: | | | | | | | | | | United States | | $ | 22.4 | | | $ | 2.5 | | | $ | (8.6 | ) | Foreign | | | 58.4 | | | | 60.8 | | | | 29.4 | | Total earnings before income taxes | | $ | 80.8 | | | $ | 63.3 | | | $ | 20.8 | | | | | | | | | | | | | | | Income tax (benefit) provision: | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | (20.4 | ) | | $ | 11.6 | | | $ | 0.1 | | Deferred | | | (4.2 | ) | | | 23.3 | | | | (3.8 | ) | State: | | | | | | | | | | | | | Current | | | 0.7 | | | | (0.3 | ) | | | 0.3 | | Deferred | | | 1.9 | | | | 2.0 | | | | (0.2 | ) | Foreign: | | | | | | | | | | | | | Current | | | 19.0 | | | | 16.1 | | | | 10.1 | | Deferred | | | (2.1 | ) | | | (13.2 | ) | | | (0.6 | ) | Total income tax (benefit) provision | | $ | (5.1 | ) | | $ | 39.5 | | | $ | 5.9 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Components of earnings (loss) from continuing operations before income taxes: | | | | | | | | | | United States | | $ | (8.6 | ) | | $ | (15.4 | ) | | $ | 31.1 | | Foreign | | | 29.4 | | | | 5.5 | | | | 10.1 | | Total earnings (loss) from continuing operations before income taxes | | $ | 20.8 | | | $ | (9.9 | ) | | $ | 41.2 | | | | | | | | | | | | | | | Income tax expense (benefit): | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.4 | | Deferred | | | (3.8 | ) | | | (13.0 | ) | | | 7.1 | | State: | | | | | | | | | | | | | Current | | | 0.3 | | | | 0.2 | | | | - | | Deferred | | | (0.2 | ) | | | (2.5 | ) | | | 1.1 | | Foreign: | | | | | | | | | | | | | Current | | | 10.1 | | | | 9.6 | | | | 12.7 | | Deferred | | | (0.6 | ) | | | (3.3 | ) | | | (2.3 | ) | Total income tax expense (benefit) | | $ | 5.9 | | | $ | (8.9 | ) | | $ | 19.0 | |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. Shortly after the Tax Act was enacted, the SEC issued accounting guidance which provided a one-year measurement period during which a company could complete its accounting for the impacts of the Tax Act. To the extent a company’s accounting for certain income tax effects of the Tax Act was incomplete, the company could determine a reasonable estimate for those effects and record a provisional estimate in its financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it was to continue applying the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted.
During fiscal 2018, the Company recorded provisional discrete tax charges totaling $38.0 million related to the Tax Act. The Company adjusted its U.S. deferred tax assets by $19.0 million due to the reduction in the U.S. federal corporate tax rate. This net reduction in deferred tax assets also included the estimated impact on the Company’s net state deferred tax assets. In addition, the Company recorded a $19.0 million charge for the transition tax required under the Tax Act.
During fiscal 2019, the Company completed its accounting for the Tax Act, which resulted in an income tax benefit totaling $7.7 million. The Company determined it will utilize its deferred tax attributes against the transition tax and finalized its fiscal 2018 U.S. federal income tax return. As a result, the Company decreased the provisional charge recorded for the reduction in the U.S. federal corporate tax rate by $9.3 million, since more deferred tax assets were utilized to offset taxable income at a higher fiscal 2018 U.S. federal corporate tax rate. The Company also decreased the transition tax liability to $18.9 million, a reduction of $0.1 million. In addition, the Company recorded a charge of $1.7 million for a reduction to state deferred tax assets.
The Tax Act included a new provision designed to tax global intangible low taxed income (“GILTI”) starting in fiscal 2019. The Company allocateselected to record the tax effects of the GILTI provision as a period expense in the applicable tax year.
The Company’s accounting policy is to allocate the income tax expense among continuing operations, discontinued operations,provision between net earnings and other comprehensive income. The Company applies its accounting for income taxes by tax jurisdiction, and in periods in which there is a loss from continuing operations before income taxes and pre-tax income in other categories (e.g., discontinued operations or other comprehensive income),income, it first allocates the income tax expenseprovision to the other sources ofcomprehensive income, and then records a related tax benefit in continuing operations.the income tax provision.
Income tax expense attributable to earnings from continuing operations before income taxes differed from56
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The reconciliation between the amounts computed by applying the statutory U.S. federal statutory rate and the Company’s effective tax rate was as follows:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Statutory federal tax | | | 21.0 | % | | | 31.5 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 3.6 | | | | 2.9 | | | | (3.3 | ) | Taxes on non-U.S. earnings and losses | | | 3.9 | | | | (3.8 | ) | | | (3.5 | ) | Valuation allowances | | | 4.0 | | | | (5.6 | ) | | | 1.2 | | Tax credits | | | (26.1 | ) | | | (17.3 | ) | | | (9.0 | ) | Compensation | | | (0.1 | ) | | | (0.8 | ) | | | 2.9 | | Tax rate or law changes | | | (12.0 | ) | | | 60.1 | | | | (2.5 | ) | Uncertain tax positions, net of settlements | | | 0.4 | | | | (0.8 | ) | | | 5.6 | | Notional interest deductions | | | (2.5 | ) | | | (3.2 | ) | | | (8.8 | ) | Dividend repatriation | | | 1.6 | | | | 0.2 | | | | 7.1 | | Other | | | (0.1 | ) | | | (0.8 | ) | | | 3.7 | | Effective tax rate | | | (6.3 | %) | | | 62.4 | % | | | 28.4 | % |
During fiscal 2019, the Company recorded income tax ratebenefits totaling $7.7 million related to the Tax Act, as discussed above; recorded income tax benefits totaling $14.5 million as a result of amending previous-year tax returns to recognize foreign tax credits that are expected to be realized based upon future sources of income; and recorded a $2.5 million income tax benefit related to a manufacturing deduction in the following:United States. Also in fiscal 2019, the Company changed its determination of whether it was more likely than not certain deferred tax assets of two separate subsidiaries in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax benefit totaling $1.0 million. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $4.3 million related to other tax jurisdictions and recorded a $2.2 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations.
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | (3.3 | ) | | | 11.5 | | | | 2.4 | | Taxes on non-U.S. earnings and losses | | | (3.5 | ) | | | 26.4 | | | | (4.9 | ) | Valuation allowance | | | 1.2 | | | | (20.9 | ) | | | 8.3 | | Tax credits | | | (9.0 | ) | | | 20.5 | | | | (6.1 | ) | Compensation | | | 2.9 | | | | (3.7 | ) | | | 1.0 | | Tax rate or law changes | | | (2.5 | ) | | | 1.3 | | | | 1.2 | | Uncertain tax positions, net of settlements | | | 5.6 | | | | (4.3 | ) | | | 2.2 | | Notional interest deductions | | | (8.8 | ) | | | - | | | | - | | Dividend repatriation | | | 7.1 | | | | 16.0 | | | | 2.4 | | Other | | | 3.7 | | | | 8.1 | | | | 4.6 | | Effective tax rate | | | 28.4 | % | | | 89.9 | % | | | 46.1 | % |
During fiscal 2018, the Company recorded provisional charges totaling $38.0 million related to the Tax Act, as discussed above, and recognized a $9.0 million Hungarian development tax credit. Also in fiscal 2018, the Company reversed a portion of the valuation allowance on certain deferred tax assets in a foreign jurisdiction after determining it was more likely than not these assets would be realized, and, as a result, recorded an income tax benefit of $2.8 million. In addition, the Company recorded a $1.8 million income tax benefit in fiscal 2018 associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations.
During fiscal 2017, the Company recorded a valuation allowance of $2.0 million on certain deferred tax assets in a foreign jurisdiction after determining it was more likely than not the deferred tax assets would not be realized. Also during fiscal 2017, the Company recorded a net reduction of deferred tax asset valuation allowances totaling $1.8 million in other tax jurisdictions. During fiscal 2016, the Company reversed a valuation allowance of $3.0 million on certain deferred tax assets in a foreign jurisdiction after determining it was more likely than not the deferred tax assets would be realized. In fiscal 2016 and 2015, the Company recorded a net increase in deferred tax asset valuation allowances totaling $5.0 million and $2.6 million, respectively, in other tax jurisdictions.
The Company will continue to provide valuation allowances against its net deferred tax assets in each applicable tax jurisdiction until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized.
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, | | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | Deferred tax assets: | | | | | | | | | | | | | Accounts receivable | | $ | 0.4 | | | $ | 0.1 | | | $ | 0.2 | | | $ | 0.3 | | Inventories | | | 5.0 | | | | 3.6 | | | | 3.4 | | | | 4.1 | | Plant and equipment | | | 3.7 | | | | 4.3 | | | | 1.8 | | | | 2.3 | | Pension and employee benefits | | | 51.8 | | | | 52.6 | | | | 32.7 | | | | 36.0 | | Net operating loss, capital loss, and credit carry-forwards | | | 147.5 | | | | 109.4 | | | Net operating and capital losses | | | | 73.5 | | | | 102.5 | | Credit carryforwards | | | | 60.3 | | | | 36.7 | | Other, principally accrued liabilities | | | 10.9 | | | | 7.5 | | | | 10.0 | | | | 9.9 | | Total gross deferred tax assets | | | 219.3 | | | | 177.5 | | | | 181.9 | | | | 191.8 | | Less: valuation allowances | | | (49.6 | ) | | | (50.8 | ) | | | (43.4 | ) | | | (48.9 | ) | Net deferred tax assets | | | 169.7 | | | | 126.7 | | | | 138.5 | | | | 142.9 | | | | | | | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | | | | | | | Plant and equipment | | | 21.2 | | | | 5.5 | | | | 15.1 | | | | 17.6 | | Goodwill | | | 4.7 | | | | 0.6 | | | | 4.8 | | | | 5.2 | | Intangible assets | | | 43.3 | | | | 1.5 | | | | 28.8 | | | | 32.4 | | Other | | | 1.8 | | | | 0.2 | | | | 0.9 | | | | 0.7 | | Total gross deferred tax liabilities | | | 71.0 | | | | 7.8 | | | | 49.6 | | | | 55.9 | | Net deferred tax asset | | $ | 98.7 | | | $ | 118.9 | | | Net deferred tax assets | | | $ | 88.9 | | | $ | 87.0 | |
Unrecognized tax benefits were as follows:
| | Years ended March 31, | | | | 2019 | | | 2018 | | Beginning balance | | $ | 13.6 | | | $ | 14.2 | | Gross increases - tax positions in prior period | | | 1.6 | | | | 0.8 | | Gross decreases - tax positions in prior period (a) | | | (0.2 | ) | | | (1.2 | ) | Gross increases - due to acquisition | | | - | | | | 1.4 | | Gross increases - tax positions in current period | | | 1.1 | | | | 0.5 | | Settlements | | | (0.1 | ) | | | (0.3 | ) | Lapse of statute of limitations | | | (2.2 | ) | | | (1.8 | ) | Ending balance | | $ | 13.8 | | | $ | 13.6 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | Beginning balance | | $ | 5.9 | | | $ | 5.6 | | Gross increases - tax positions in prior period | | | 0.3 | | | | - | | Gross decreases - tax positions in prior period | | | (0.2 | ) | | | (0.1 | ) | Gross increases - due to acquisition | | | 7.3 | | | | - | | Gross increases - tax positions in current period | | | 0.9 | | | | 0.4 | | Ending balance | | $ | 14.2 | | | $ | 5.9 | |
| (a) | Fiscal 2018 includes $1.0 million related to the reduction of the U.S. federal corporate tax rate as a result of the Tax Act. |
The Company’s liability for unrecognized tax benefits as of March 31, 20172019 was $14.2$13.8 million, and if recognized, $11.9$12.2 million would have an effective tax rate impact. The Company estimates that reductions toa $0.2 million decrease in unrecognized tax benefits induring fiscal 20182020 due to lapses in statutes of limitations and audit settlements will total $2.4 million, which, ifsettlements. If recognized, these reductions would not have a $1.6 millionsignificant impact on the Company’s effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal 20172019 and 2016,2018, interest and penalties included within income tax expense in the consolidated statements of operations were not significant. At March 31, 2017, $0.8 million of2019 and 2018, accrued interest and penalties were included in the consolidated balance sheet. At March 31, 2016, accrued interesttotaled $1.1 million and penalties were not significant.$1.0 million, respectively.
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2017,2019, the Company was under income tax examination in a number of foreign jurisdictions. The following tax years remain subject to examination for the Company’s major tax jurisdictions:
| Germany | Fiscal 2011 - Fiscal 2016 | 2018 | | Italy | Calendar 20112014 - Fiscal 2016 | 2018 | | United States | Fiscal 20142016 - Fiscal 2016 | 2018 |
At March 31, 2017, the Company had federal and state tax credits of $27.4 million that, if not utilized against U.S. taxes, will expire between fiscal 2018 and 2037. The Company also had state and local tax loss carry-forwards of $212.7 million that, if not utilized against state apportioned taxable income, will expire at various times during fiscal 2018 and 2037. In addition, the Company had tax loss and foreign attribute carry-forwards of $485.0 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, $167.0 million of these carry-forwards will expire at various times during fiscal 2018 through 2037, and $318.0 million, mainly related to Germany, Italy, and India, will not expire due to an unlimited carry-forward period.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
At March 31, 2017,2019, the Company provided $0.3had federal and state tax credits of $60.0 million that, if not utilized against U.S. taxes, will expire between fiscal 2020 and 2039. The Company also had state and local tax loss carryforwards totaling $129.5 million that, if not utilized against state apportioned taxable income, will expire between fiscal 2020 and 2039. In addition, the Company had tax loss and foreign attribute carryforwards totaling $351.6 million in various tax jurisdictions throughout the world. Certain of the carryforwards in the U.S. and in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $9.7 million of tax on undistributedthese carryforwards will expire between fiscal 2020 and 2034, and $341.9 million, mainly related to Germany and Italy, will not expire due to an unlimited carryforward period.
The Company’s practice and intention is to reinvest, with certain insignificant exceptions, the earnings of its non-U.S. subsidiaries outside of the U.S., and therefore, the Company has not recorded foreign withholding taxes or deferred income taxes for certain subsidiaries not considered permanently reinvested. Undistributed earnings totaling $505.0 million are considered permanently reinvested inthese earnings. The Company has estimated the Company’s remaining foreign operations, and no provision has been made for taxes that would be payable upon the distribution of such earnings. It is not practicable to estimate thenet amount of unrecognized foreign withholding taxestax and deferred tax liabilityliabilities would total approximately $7.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on such earnings.circumstances existing when remittance occurs.
Note 8: Note 9: | Earnings Per Share |
The components of basic and diluted earnings per share were as follows:
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Basic: | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 14.9 | | | $ | (1.0 | ) | | $ | 22.2 | | Less: Net earnings attributable to noncontrolling interest | | | (0.7 | ) | | | (0.6 | ) | | | (1.0 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | - | | | | (0.2 | ) | Earnings (loss) from continuing operations available to Modine shareholders | | | 14.0 | | | | (1.6 | ) | | | 21.0 | | Earnings from discontinued operations, net of income taxes | | | - | | | | - | | | | 0.6 | | Net earnings (loss) available to Modine shareholders | | $ | 14.0 | | | $ | (1.6 | ) | | $ | 21.6 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.8 | | | | 47.3 | | | | 47.2 | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.45 | | Earnings per share - discontinued operations | | | - | | | | - | | | | 0.01 | | Net earnings (loss) per share - basic | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.46 | | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 14.9 | | | $ | (1.0 | ) | | $ | 22.2 | | Less: Net earnings attributable to noncontrolling interest | | | (0.7 | ) | | | (0.6 | ) | | | (1.0 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.1 | ) | | | - | | | | (0.2 | ) | Earnings (loss) from continuing operations available to Modine shareholders | | | 14.1 | | | | (1.6 | ) | | | 21.0 | | Earnings from discontinued operations, net of income taxes | | | - | | | | - | | | | 0.6 | | Net earnings (loss) available to Modine shareholders | | $ | 14.1 | | | $ | (1.6 | ) | | $ | 21.6 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.8 | | | | 47.3 | | | | 47.2 | | Effect of dilutive securities | | | 0.5 | | | | - | | | | 0.6 | | Weighted-average shares outstanding - diluted | | | 48.3 | | | | 47.3 | | | | 47.8 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.44 | | Earnings per share - discontinued operations | | | - | | | | - | | | | 0.01 | | Net earnings (loss) per share - diluted | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.45 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Basic Earnings Per Share: | | | | | | | | | | Net earnings attributable to Modine | | $ | 84.8 | | | $ | 22.2 | | | $ | 14.2 | | Less: Undistributed earnings attributable to unvested shares | | | (0.4 | ) | | | (0.2 | ) | | | (0.2 | ) | Net earnings available to Modine shareholders | | $ | 84.4 | | | $ | 22.0 | | | $ | 14.0 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.5 | | | | 49.9 | | | | 47.8 | | | | | | | | | | | | | | | Net earnings per share - basic | | $ | 1.67 | | | $ | 0.44 | | | $ | 0.29 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | Net earnings attributable to Modine | | $ | 84.8 | | | $ | 22.2 | | | $ | 14.2 | | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (0.1 | ) | | | (0.1 | ) | Net earnings available to Modine shareholders | | $ | 84.6 | | | $ | 22.1 | | | $ | 14.1 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.5 | | | | 49.9 | | | | 47.8 | | Effect of dilutive securities | | | 0.8 | | | | 1.0 | | | | 0.5 | | Weighted-average shares outstanding - diluted | | | 51.3 | | | | 50.9 | | | | 48.3 | | | | | | | | | | | | | | | Net earnings per share - diluted | | $ | 1.65 | | | $ | 0.43 | | | $ | 0.29 | |
For the years ended March 31,fiscal 2019, 2018 and 2017, 2016, and 2015, the calculation of diluted earnings per share excluded 0.80.4 million, 0.80.2 million, and 0.60.8 million stock options, respectively, because they were anti-dilutive. For
Note 10: | Cash, Cash Equivalents and Restricted Cash |
Cash, cash equivalents and restricted cash consisted of the year ended March 31, 2016,following:
| | March 31, | | | | 2019 | | | 2018 | | Cash and cash equivalents | | $ | 41.7 | | | $ | 39.3 | | Restricted cash | | | 0.5 | | | | 1.0 | | Total cash, cash equivalents and restricted cash | | $ | 42.2 | | | $ | 40.3 | |
Restricted cash, which is reported within other noncurrent assets on the total numberconsolidated balance sheets, consists primarily of potentially-dilutive securities was 0.4 million. However, these securities were not included in the computation of diluted net loss per share since to do so would have decreased the loss per share.deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 9:
Inventories consisted of the following:
| | March 31, | | | March 31, | | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | Raw materials and work in process | | $ | 127.7 | | | $ | 79.5 | | | Raw materials | | | $ | 122.8 | | | $ | 114.4 | | Work in process | | | | 32.2 | | | | 34.8 | | Finished goods | | | 40.8 | | | | 31.5 | | | | 45.7 | | | | 42.1 | | Total inventories | | $ | 168.5 | | | $ | 111.0 | | | $ | 200.7 | | | $ | 191.3 | |
Note 10: Note 12: | Property, Plant and Equipment |
Property, plant and equipment, including depreciable lives, consisted of the following:
| | March 31, | | | March 31, | | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | Land | | $ | 18.9 | | | $ | 7.2 | | | $ | 20.7 | | | $ | 22.6 | | Buildings and improvements (10-40 years) | | | 255.6 | | | | 221.3 | | | | 285.9 | | | | 295.6 | | Machinery and equipment (3-12 years) | | | 755.5 | | | | 694.3 | | | Machinery and equipment (3-15 years) | | | | 848.7 | | | | 840.8 | | Office equipment (3-10 years) | | | 92.5 | | | | 84.1 | | | | 92.0 | | | | 93.0 | | Construction in progress | | | 55.1 | | | | 36.7 | | | | 57.4 | | | | 50.2 | | | | | 1,177.6 | | | | 1,043.6 | | | | 1,304.7 | | | | 1,302.2 | | Less: accumulated depreciation | | | (718.6 | ) | | | (705.0 | ) | | | (820.0 | ) | | | (797.9 | ) | Net property, plant and equipment | | $ | 459.0 | | | $ | 338.6 | | | $ | 484.7 | | | $ | 504.3 | |
Depreciation expense totaled $67.9 million, $67.0 million, and $54.2 million $48.6 million,for fiscal 2019, 2018, and $50.0 million for the years ended March 31, 2017, 2016, and 2015, respectively. Gains and losses related to the disposal of property, plant and equipment are recorded inwithin SG&A expenses. For the years ended March 31,fiscal 2019, 2018, and 2017, 2016, and 2015, total losses related to the disposal of property, plant and equipment were $0.4totaled $0.9 million, $0.4$0.7 million, and $1.1$0.4 million, respectively.
Note 11: Note 13: | Investment in Affiliate |
The Company owns 50 percent of Nikkei Heat Exchanger Company, Ltd. (“NEX”). The Company accounts for its investment in this non-consolidated affiliate using the equity method. At March 31, 20172019 and 2016,2018, the Company included its investment in NEX of $3.3$3.8 million and $3.2$3.6 million, respectively, within other noncurrent assets on the consolidated balance sheets. At March 31, 2017,2019, the investment in NEX is equal to the Company'sCompany’s investment in the underlying net assets.
The Company reports its equity in earnings from NEX within other income and expense in the consolidated statements of operations, using a one-month reporting delay. The Company’s share of NEX’s earnings for the years ended March 31,fiscal 2019, 2018, and 2017 2016,was $0.7 million, $0.2 million, and 2015 was $0.1 million, $0.1 million, and $0.6 million, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 12: Note 14: | Intangible Assets |
Intangible assets consisted of the following:
| | March 31, 2017 | | | March 31, 2016 | | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | Customer relationships | | $ | 60.5 | | | $ | (1.7 | ) | | $ | 58.8 | | | $ | 2.0 | | | $ | (0.4 | ) | | $ | 1.6 | | Trade names | | | 58.4 | | | | (7.2 | ) | | | 51.2 | | | | 8.9 | | | | (6.3 | ) | | | 2.6 | | Acquired technology | | | 27.0 | | | | (2.9 | ) | | | 24.1 | | | | 5.5 | | | | (1.5 | ) | | | 4.0 | | Total intangible assets | | $ | 145.9 | | | $ | (11.8 | ) | | $ | 134.1 | | | $ | 16.4 | | | $ | (8.2 | ) | | $ | 8.2 | |
Intangible assets as of March 31, 2017 include intangible assets related to the Company’s acquisition of Luvata HTS. See Note 2 for additional information.
| | March 31, 2019 | | | March 31, 2018 | | | | Gross Value | | | | | | | | | | | | Accumulated Amortization | | | | | Customer relationships | | $ | 61.5 | | | $ | (9.1 | ) | | $ | 52.4 | | | $ | 64.2 | | | $ | (5.7 | ) | | $ | 58.5 | | Trade names | | | 58.9 | | | | (13.5 | ) | | | 45.4 | | | | 60.6 | | | | (10.8 | ) | | | 49.8 | | Acquired technology | | | 23.9 | | | | (5.5 | ) | | | 18.4 | | | | 25.2 | | | | (3.6 | ) | | | 21.6 | | Total intangible assets | | $ | 144.3 | | | $ | (28.1 | ) | | $ | 116.2 | | | $ | 150.0 | | | $ | (20.1 | ) | | $ | 129.9 | |
The Company recorded $4.1$9.0 million, $1.6$9.7 million, and $1.6$4.1 million of amortization expense during fiscal 2019, 2018, and 2017, 2016, and 2015, respectively. Estimated futureThe Company estimates that it will record $9.0 million of amortization expense is as follows:in fiscal 2020 and approximately $8.0 million of annual amortization expense in fiscal 2021 through 2024.
Fiscal Year | | Estimated Amortization Expense | | 2018 | | $ | 9.4 | | 2019 | | | 9.2 | | 2020 | | | 9.1 | | 2021 | | | 8.5 | | 2022 | | | 7.4 | | 2023 & Beyond | | | 90.5 | |
During fiscal 2018, the BHVAC segment discontinued its geothermal product line and, as a result, recorded a $1.2 million impairment for acquired technology intangible assets it will no longer use. Annual revenue for this discontinued product line was less than $1.0 million.
Changes in the carrying amount of goodwill, by segment and in the aggregate, were as follows:
| | Asia | | | BHVAC | | | CIS | | | Total | | | VTS | | | CIS | | | BHVAC | | | Total | | Balance, March 31, 2015 | | $ | 0.5 | | | $ | 15.7 | | | $ | - | | | $ | 16.2 | | | Balance, March 31, 2017 | | | $ | 0.5 | | | $ | 150.9 | | | $ | 13.7 | | | $ | 165.1 | | Acquired goodwill (a) | | | | - | | | | 1.3 | | | | - | | | | 1.3 | | Effect of exchange rate changes | | | - | | | | (0.4 | ) | | | - | | | | (0.4 | ) | | | - | | | | 6.1 | | | | 1.3 | | | | 7.4 | | Balance, March 31, 2016 | | | 0.5 | | | | 15.3 | | | | - | | | | 15.8 | | | Acquired Goodwill | | | - | | | | - | | | | 150.6 | | | | 150.6 | | | Balance, March 31, 2018 | | | | 0.5 | | | | 158.3 | | | | 15.0 | | | | 173.8 | | Effect of exchange rate changes | | | - | | | | (1.6 | ) | | | 0.3 | | | | (1.3 | ) | | | - | | | | (4.4 | ) | | | (0.9 | ) | | | (5.3 | ) | Balance, March 31, 2017 | | $ | 0.5 | | | $ | 13.7 | | | $ | 150.9 | | | $ | 165.1 | | | Balance, March 31, 2019 | | | $ | 0.5 | | | $ | 153.9 | | | $ | 14.1 | | | $ | 168.5 | |
As a result of its acquisition of Luvata HTS, the Company recorded $150.6 million of goodwill. See Note 2 for additional information.
| (a) | Represents measurement-period adjustments related to the Company’s acquisition of Luvata HTS. See Note 2 for additional information about this acquisition. |
The Company assesses goodwill for impairment annually, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. The Company conducted its annual assessment for goodwill impairment during the fourth quarter of fiscal 20172019 for the reporting units within its BHVACVTS, CIS, and AsiaBHVAC segments, by applying a fair value-based test, and determined that the fair value of its reporting units exceeded their respective book values. The Company will perform goodwill impairment testing for its recently-acquired CIS segment beginning in fiscal 2018.
At both March 31, 20172019 and 2016,2018, accumulated goodwill impairment losses totaled $31.6 million and $8.7$40.3 million within the Americas and Europe segments, respectively.VTS segment.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 14: Note 16: | Product Warranties, Operating Leases, and Other Commitments |
Product warranties: Most of the Company’s products are covered under a warranty period ranging from one to five years. The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. In addition, the Company adjusts its warranty accruals if it becomes probable that expected claims will differ from initial estimates.
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | Years ended March 31, | | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | Beginning balance | | $ | 8.3 | | | $ | 10.4 | | | $ | 9.3 | | | $ | 10.0 | | Warranties recorded at time of sale | | | 5.2 | | | | 5.7 | | | | 5.5 | | | | 6.7 | | Adjustments to pre-existing warranties | | | 0.3 | | | | (1.1 | ) | | | 2.2 | | | | (0.8 | ) | Additions due to acquisition | | | 4.1 | | | | - | | | Adjustments due to acquisition (a) | | | | - | | | | (1.0 | ) | Settlements | | | (7.6 | ) | | | (6.7 | ) | | | (7.3 | ) | | | (6.2 | ) | Effect of exchange rate changes | | | (0.3 | ) | | | - | | | | (0.5 | ) | | | 0.6 | | Ending balance | | $ | 10.0 | | | $ | 8.3 | | | $ | 9.2 | | | $ | 9.3 | |
| (a) | During fiscal 2018, the Company decreased its liability for product warranties by $1.0 million as a result of measurement-period adjustments made in connection with purchase accounting for the acquisition of Luvata HTS. See Note 2 for additional information about this acquisition. |
Operating leases: The Company leases various facilities and equipment under operating leases. Rental expense for these leases totaled $12.8$19.3 million, $11.9$18.5 million, and $11.5$12.8 million in fiscal 2019, 2018, and 2017, 2016, and 2015, respectively.
Future minimum rental commitments at March 31, 20172019 under non-cancelable operating leases were as follows:
Fiscal Year | | | | | | | 2018 | | $ | 12.2 | | | 2019 | | | 10.1 | | | 2020 | | | 9.1 | | | $ | 14.2 | | 2021 | | | 7.8 | | | | 12.4 | | 2022 | | | 5.4 | | | | 9.1 | | 2023 and beyond | | | 24.7 | | | 2023 | | | | 7.1 | | 2024 | | | | 4.7 | | 2025 and beyond | | | | 22.9 | | Total | | $ | 69.3 | | | $ | 70.4 | |
Indemnification agreements: From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years. In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 20172019 was not material.
Commitments: At March 31, 2017,2019, the Company had capital expenditure commitments of $18.1$23.6 million. Significant commitments include tooling and equipment expenditures for new and renewal programs with customers in the Americas, Asia, and Europe segments.VTS segment. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 15:
In November 2016,Long-term debt consisted of the Company entered into new credit agreements to fund a significant portion of its acquisition of Luvata HTS (see Note 2 for additional information). following:
| | Fiscal year of maturity | | | March 31, 2019 | | | March 31, 2018 | | | | | | | | | | | | Term loans | | 2022 | | | $ | 238.4 | | | $ | 267.8 | | 6.8% Senior Notes | | 2021 | | | | 85.0 | | | | 101.0 | | 5.8% Senior Notes | | 2027 | | | | 50.0 | | | | 50.0 | | Other (a) | | - | | | | 14.3 | | | | 12.8 | | | | | | | | | 387.7 | | | | 431.6 | | Less: current portion | | | | | | | (48.6 | ) | | | (39.9 | ) | Less: unamortized debt issuance costs | | | | (4.0 | ) | | | (5.4 | ) | Total long-term debt | | | | | | $ | 335.1 | | | $ | 386.3 | |
| (a) | Other long-term debt includes borrowings by foreign subsidiaries, capital lease obligations and other financing-type obligations. |
Long-term debt matures as follows:
Fiscal Year | | | | 2020 | | $ | 48.6 | | 2021 | | | 101.3 | | 2022 | | | 187.4 | | 2023 | | | 8.8 | | 2024 | | | 8.8 | | 2025 & beyond | | | 32.8 | | Total | | $ | 387.7 | |
The Company executed an amended and restatedmaintains a credit agreement with a syndicate of banks that provides for both U.S. dollar- and euro-denominated term loan facilities and a multi-currency $175.0 million revolving credit facility expiring in November 2021, which replaced the Company’s then-existing revolver that would have expired in August 2018.2021. Based upon the terms of the credit agreement and currency denomination, borrowings under both the term loans and revolving credit facility bear interest at a variable rate, primarily either the London Interbank Offered Rate (“LIBOR”) or Euro Interbank Offered Rate (“EURIBOR”), plus 137.5 to 250 basis points (3.0 percent weighted-average at March 31, 2017) depending on the Company’s leverage ratio, as described below. At March 31, 2017,2019, the Company’sweighted-average interest rates for the outstanding term loanloans and the revolving credit facility borrowings totaled $268.9 million, with repayments scheduled through fiscal 2022. Also in November 2016, the Company issued $50.0 million of 5.8were 3.3 percent Senior Notes with repayments ending in fiscal 2027.and 3.7 percent, respectively.
Long-term debt consisted of the following:
| | Fiscal year of maturity | | | March 31, 2017 | | | March 31, 2016 | | | | | | | | | | | | Term Loans | | | 2022 | | | $ | 268.9 | | | $ | - | | 6.8% Senior Notes | | | 2021 | | | | 117.0 | | | | 125.0 | | 5.8% Senior Notes | | | 2027 | | | | 50.0 | | | | - | | Other (a) | | | 2032 | | | | 8.3 | | | | 9.0 | | | | | | | | | 444.2 | | | | 134.0 | | Less: current portion | | | | | | | (31.8 | ) | | | (8.5 | ) | Less: unamortized debt issuance costs | | | | | | | (6.7 | ) | | | - | | Total long-term debt | | | | | | $ | 405.7 | | | $ | 125.5 | |
| (a) | Other long-term debt includes capital lease obligations and other financing-type obligations. |
Long-term debt matures as follows:
Fiscal Year | | | | 2018 | | $ | 31.8 | | 2019 | | | 38.6 | | 2020 | | | 43.8 | | 2021 | | | 98.3 | | 2022 | | | 184.1 | | 2023 & beyond | | | 47.6 | | Total | | $ | 444.2 | |
At March 31, 2017,2019 and 2018, the Company reported its revolving credit facility borrowings of $40.4$47.1 million and $21.3 million, respectively, as short-term debt on the consolidated balance sheet.sheets. At March 31, 2017,2019, domestic letters of credit totaled $2.0$4.3 million, resulting in available borrowings under the Company’s revolving credit facility of $132.6$123.6 million. The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 20172019 and 20162018 of $33.0$18.9 million and $28.6$31.9 million, respectively. At March 31, 2017, the Company’s foreign unused lines of credit totaled $20.0 million. In aggregate, the Company had total available lines of credit of $152.6 million at March 31, 2017.
Provisions in the Company’s amended and restated credit agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided liens on substantially all domestic assets. In addition, the term loans require prepayments, as definedspecified in the credit agreement, the term loans may require prepayments in the event the Company’s annual excess cash flow exceeds defined levels, depending upon the Company’s leverage ratio, or in the event of certain asset sales. The Company is also subject to a leverage ratio covenant,covenants, the most restrictive of which requires the Company to limit its consolidated indebtedness, less a portion of its cash balance, both as defined by the credit agreement,agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). As permitted by the credit agreements and in connection with the Company’s acquisition of Luvata HTS, this leverage ratio covenant limit has been temporarily raised to no more than three and three-quarters times Adjusted EBITDA through the second quarter of fiscal 2018, and thereafter to no more than three and one-half times Adjusted EBITDA through the first quarter of fiscal 2019. The Company is also subject to an interest expense coverage ratio covenant, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. The Company was in compliance with its debt covenants as of March 31, 2017.2019.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. AtAs of March 31, 20172019 and 2016,2018, the carrying value of Modine’sthe Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of approximately $170.0$137.2 million and $139.0$153.1 million, respectively. The fair value of the Senior Notes areCompany’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 34 for the definition of a Level 2 fair value measurement.
Note 16: Note 18: | Pension and Employee Benefit Plans |
Defined Contribution Employee Benefit Plans:
The Company maintains a domestic 401(k) plansplan that allowallows employees to contribute a portion of their salary to help them save for retirement. The Company matched 50 percent ofcurrently matches employee contributions up to 54.5 percent of employeetheir compensation during fiscal 2017, 2016, and 2015 related to its primary domestic 401(k) plans. The Company also makes annual employer contributions into eligible active employee accounts based upon a percentage of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary.for participants. The Company’s expense for defined contribution employee benefit plans during fiscal 2019, 2018, and 2017 2016, and 2015 was $4.7$6.4 million, $4.6$5.2 million, and $5.9$4.7 million, respectively.
In addition, the Company maintains non-qualified deferred compensation plans for eligible employees, and various non-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans:
Certain non-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.laws.
Defined Benefit Employee Benefit Plans:
Pension plans: As a result of its acquisition of Luvata HTS, the Company acquired defined benefit pension plans in Italy, Austria, and the U.S. with liabilities totaling $14.3 million, representing the aggregate funded status of these acquired plans. These acquired plans are closed to new participants.
In addition, theThe Company maintains non-contributory defined benefit pension plans that cover eligible domestic employees. These plans are closed to new participants. The primary domestic plans cover most of its domestic employees hired on or before December 31, 2003. The2003 and provide benefits provided are based primarily upon years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based upon a monthly retirement benefit amount. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company also have legacy defined benefit plans which cover a smaller number of active employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany, Austria, and AustriaItaly and are closed to new participants.
The Company contributed $8.1$8.0 million, $6.7$13.4 million, and $5.9$8.1 million to its U.S. pension plans during fiscal 2019, 2018, and 2017, 2016,respectively. In addition, the Company contributed $5.9 million, $2.6 million, and 2015,$1.4 million to its non-U.S. pension plans during fiscal 2019, 2018, and 2017, respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company offered a voluntary lump-sum payout program to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer and a total of $65.3 million was paid from pension plan assets during fiscal 2016, 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts) 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 2017, 2016,2019, 2018, and 20152017 was $0.3 million, $0.2 million, and $0.3 million, and $0.1 million, respectively.
Measurement Date:date: The Company uses March 31 as the measurement date for its pension and postretirement plans.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s global pension plans, for the fiscal years ended March 31, 2017 and 2016 were as follows:
| | | Years ended March 31, | | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | Change in benefit obligation: | | | | | | | | | | | | | Benefit obligation at beginning of year | | $ | 261.0 | | | $ | 328.2 | | | $ | 273.6 | | | $ | 269.8 | | Service cost | | | 0.6 | | | | 0.6 | | | | 0.5 | | | | 0.5 | | Interest cost | | | 9.8 | | | | 11.2 | | | | 9.6 | | | | 9.9 | | Actuarial gain | | | (0.5 | ) | | | (2.8 | ) | | Benefits paid (a) | | | (19.8 | ) | | | (78.1 | ) | | Acquired obligations (b) | | | 20.3 | | | | - | | | Actuarial loss | | | | 1.7 | | | | 4.4 | | Benefits paid | | | | (22.8 | ) | | | (16.9 | ) | Curtailment gain (a) | | | | - | | | | (0.3 | ) | Effect of exchange rate changes | | | (1.6 | ) | | | 1.9 | | | | (3.8 | ) | | | 6.2 | | Benefit obligation at end of year | | $ | 269.8 | | | $ | 261.0 | | | $ | 258.8 | | | $ | 273.6 | | | | | | | | | | | | | | | | | | | Change in plan assets: | | | | | | | | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 141.5 | | | $ | 217.0 | | | $ | 157.7 | | | $ | 148.2 | | Actual return on plan assets | | | 11.0 | | | | (5.3 | ) | | | 6.3 | | | | 10.4 | | Benefits paid (a) | | | (19.8 | ) | | | (78.1 | ) | | Benefits paid | | | | (22.8 | ) | | | (16.9 | ) | Employer contributions | | | 9.5 | | | | 7.9 | | | | 13.9 | | | | 16.0 | | Acquired plan assets (b) | | | 6.0 | | | | - | | | Fair value of plan assets at end of year | | $ | 148.2 | | | $ | 141.5 | | | $ | 155.1 | | | $ | 157.7 | | Funded status at end of year | | $ | (121.6 | ) | | $ | (119.5 | ) | | $ | (103.7 | ) | | $ | (115.9 | ) | | | | | | | | | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | | | | | | | | | Current liability | | $ | (2.2 | ) | | $ | (0.9 | ) | | $ | (2.0 | ) | | $ | (6.3 | ) | Noncurrent liability | | | (119.4 | ) | | | (118.6 | ) | | | (101.7 | ) | | | (109.6 | ) | | | $ | (121.6 | ) | | $ | (119.5 | ) | | $ | (103.7 | ) | | $ | (115.9 | ) |
| (a) | InDuring fiscal 2016, $65.3 million was paid from plan assets2018, the Company recorded a pension curtailment gain associated with the closure of a manufacturing facility in connection with lump-sum payouts.Austria (CIS segment). See Note 6 for additional information regarding the closure of this facility. |
| (b) | As a result of its acquisition of Luvata HTS, the Company acquired pension plans in Italy, Austria and the U.S. See Note 2 for additional information. |
As of March 31, 2019, 2018, and 2017, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $36.5 million, $43.4 million, and $39.3 million respectively. In fiscal 2019, the $6.9 million decrease primarily resulted from employer contributions of $5.9 million for benefits paid to plan participants during the year and the impact of foreign currency exchange rate changes, partially offset by service and interest cost totaling $1.1 million. In fiscal 2018, the $4.1 million increase primarily resulted from the impact of foreign currency exchange rate changes and service and interest cost totaling $1.3 million, partially offset by $2.6 million of benefits paid to plan participants.
The accumulated benefit obligation for pension plans was $266.8$256.9 million and $257.9$271.8 million as of March 31, 20172019 and 2016,2018, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $156.8$159.1 million and $162.0$157.9 million as of March 31, 20172019 and 2016,2018, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Costs for the Company’s global pension plans included the following components for the fiscal years ended March 31, 2017, 2016, and 2015:components:
| | | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | Components of net periodic benefit cost: | | | | | | | | | | | | | | | | | | | Service cost | | $ | 0.6 | | | $ | 0.6 | | | $ | 0.5 | | | $ | 0.5 | | | $ | 0.5 | | | $ | 0.6 | | Interest cost | | | 9.8 | | | | 11.2 | | | | 13.0 | | | | 9.6 | | | | 9.9 | | | | 9.8 | | Expected return on plan assets | | | (12.3 | ) | | | (14.9 | ) | | | (16.7 | ) | | | (12.3 | ) | | | (11.9 | ) | | | (12.3 | ) | Amortization of net actuarial loss | | | 5.6 | | | | 6.4 | | | | 5.5 | | | | 5.6 | | | | 5.6 | | | | 5.6 | | Settlements (a) | | | - | | | | 42.1 | | | | - | | | | 0.2 | | | | 0.3 | | | | - | | Curtailment gain (a) | | | | - | | | | (0.3 | ) | | | - | | Net periodic benefit cost | | $ | 3.7 | | | $ | 45.4 | | | $ | 2.3 | | | $ | 3.6 | | | $ | 4.1 | | | $ | 3.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive income (loss):
| | | | | | | | | | | | | | Net actuarial loss | | $ | 1.0 | | | $ | 17.5 | | | $ | 46.4 | | | $ | (7.7 | ) | | $ | (5.8 | ) | | $ | (1.0 | ) | Amortization of net actuarial loss (a) | | | (5.6 | ) | | | (48.5 | ) | | | (5.5 | ) | | Total recognized in other comprehensive (income) loss | | $ | (4.6 | ) | | $ | (31.0 | ) | | $ | 40.9 | | | Amortization of net actuarial loss | | | | 5.8 | | | | 5.9 | | | | 5.6 | | Total recognized in other comprehensive income (loss) | | | $ | (1.9 | ) | | $ | 0.1 | | | $ | 4.6 | |
| (a) | During fiscal 2016, in connectionThe settlement charges and curtailment gain resulted from activity associated with lump-sum payouts tothe Company’s non-U.S. pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss.plans. |
The Company amortized $5.6 million of net actuarial loss in fiscal 2019, 2018, and 2017. In each of these years, less than $1.0 million of the amortization was attributable to the Company’s non-U.S. pension plans. The Company estimates $5.6$6.0 million of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2018.2020. The fiscal 2020 estimated amortization includes less than $1.0 million related to the Company’s non-U.S. pension plans.
The Company used a discount rate of 4.1%4.0% as of both March 31, 20172019 and 20162018 for determining its benefit obligations under its U.S. pension plans. The Company used a weighted-average discount rate of 1.7%1.4% and 1.8%1.7% as of March 31, 20172019 and 2016,2018, respectively, infor determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 4.1%4.0%, 4.3%4.1%, and 4.7%4.1% to determine its costs under its U.S. pension plans for the fiscal years ended March 31,2019, 2018, and 2017, 2016, and 2015, respectively. The Company used a weighted-average discount rate of 1.7%1.9%, 1.3%1.9%, and 3.0%1.7% to determine its costs under its non-U.S. pension plans for the fiscal years ended March 31,2019, 2018, and 2017, 2016, and 2015, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. The Company used a similar process to determine the discount rate for its non-U.S. pension obligations.
Plan assets in the Company’s U.S. defined benefitpension plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted-average asset allocations at the measurement dates of March 31, 2017 and 2016 were as follows:
| | Target allocation as of March 31, 2017 | | | Plan assets | | | March 31, 2019 | | | March 31, 2018 | | | | | | | 2017 | | | 2016 | | | Target allocation | | | Plan assets | | | Target allocation | | | Plan assets | | Equity securities | | | 60 | % | | | 58 | % | | | 56 | % | | | 65 | % | | | 66 | % | | | 60 | % | | | 58 | % | Debt securities | | | 38 | % | | | 38 | % | | | 36 | % | | | 21 | % | | | 19 | % | | | 38 | % | | | 38 | % | Cash | | | 2 | % | | | 4 | % | | | 4 | % | | Alternative assets | | | - | | | | - | | | | 4 | % | | Real estate investments | | | | 13 | % | | | 12 | % | | | - | | | | - | | Cash and cash equivalents | | | | 1 | % | | | 3 | % | | | 2 | % | | | 4 | % | | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 20172019 and 2016,2018, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term returngrowth of plan assets,principal, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2017, 2016,2019, 2018, and 20152017 U.S. pension plan expense, the expected rate of return on plan assets was 7.5 percent, 7.5 percent and 8.0 percent.percent, respectively. For fiscal 20182020 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 7.5 percent.
The Company’s funding policy for its U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. The Company expects to make contributions of $13.1contribute approximately $3.0 million to these plans during fiscal 2018.2020.
Estimated pension benefit payments for the next ten fiscal years are as follows:
Fiscal Year | | Estimated Pension Benefit Payments | | | Estimated Pension Benefit Payments | | 2018 | | $ | 17.1 | | | 2019 | | | 16.4 | | | 2020 | | | 17.0 | | | $ | 16.0 | | 2021 | | | 17.1 | | | | 16.0 | | 2022 | | | 17.6 | | | | 16.4 | | 2023-2027 | | | 90.4 | | | 2023 | | | | 16.4 | | 2024 | | | | 16.6 | | 2025-2029 | | | | 82.0 | |
Note 17: Note 19: | Derivative Instruments |
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated and is effective, as a hedge, and, if so, on the nature of the hedging activity.
Commodity Derivatives:derivatives: The Company periodically enters into futuresover-the-counter forward contracts related to certain forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts is to reduce its exposure to changing market prices for future purchases of these commodities. In fiscal 2019 and 2018, the Company designated certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses within cost of sales as the underlying inventory is sold. The Company hasdid not designateddesignate commodity contracts entered into in fiscal 2017 2016, and 2015 for hedge accounting. Accordingly, unrealized gains and losses on thesethose contracts arewere recorded within cost of sales.
Foreign exchange contracts:contracts: The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchangeforward contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. In fiscal 2019 and 2018, the Company designated certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in AOCI within shareholders’ equity and subsequently recognizes the gains and losses as a component of earnings at the same time and in the same financial statement line that the underlying transactions impact earnings. The Company has not designated forward contracts related to foreign currency-denominated assets and liabilities as hedges. Accordingly, for these non-designated contracts, for hedge accounting. Accordingly,the Company records unrealized gains and losses related to changes in fair value are recorded in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| Balance Sheet Location | | March 31, 2017 | | | March 31, 2016 | | | Balance Sheet Location | | March 31, 2019 | | | March 31, 2018 | | Derivatives designated as hedges: | | | | | | | | | | Commodity derivatives | Other current assets | | $ | 0.7 | | | $ | - | | | Other current assets | | $ | 0.6 | | | $ | 0.1 | | Commodity derivatives | Other current liabilities | | | - | | | | 0.1 | | | Other current liabilities | | | 0.3 | | | | - | | Foreign exchange contracts | Other current assets | | | 0.2 | | | | 0.1 | | | Other current assets | | | 0.2 | | | | 0.1 | | | | | | | | | | | | | | Derivatives not designated as hedges: | | | | | | | | | | | | Commodity derivatives | | | Other current liabilities | | $ | - | | | $ | 0.2 | | Foreign exchange contracts | | | Other current assets | | | - | | | | 0.2 | | Foreign exchange contracts | | | Other current liabilities | | | 0.5 | | | | 0.6 | |
The amounts recorded in the consolidated statements of operations for the Company’sassociated with derivative financial instruments that the Company designated for hedge accounting were as follows:
| Statement of Operations | | Years ended March 31, | | | Gain (loss) recognized in other comprehensive income | | Statement of Operations | | Gain (loss) reclassified from AOCI | | | Location | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | Location | | 2019 | | | 2018 | | | 2017 | | Commodity derivatives | Cost of sales | | $ | 0.5 | | | $ | (0.7 | ) | | $ | (0.2 | ) | | $ | (0.3 | ) | | $ | 0.2 | | | $ | - | | Cost of sales | | $ | (0.4 | ) | | $ | - | | | $ | - | | Foreign exchange contracts | Other income (expense) - net | | | 1.3 | | | | 0.6 | | | | (1.1 | ) | | | (0.4 | ) | | | 0.1 | | | | - | | Net sales | | | (0.4 | ) | | | 0.1 | | | | - | | Foreign exchange contracts | | | | 1.0 | | | | - | | | | - | | Cost of sales | | | 0.6 | | | | - | | | | - | | Total gains (losses) | | | $ | 1.8 | | | $ | (0.1 | ) | | $ | (1.3 | ) | | $ | 0.3 | | | $ | 0.3 | | | $ | - | | | | $ | (0.2 | ) | | $ | 0.1 | | | $ | - | |
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
| | | | Years ended March 31, | |
| | Statement of Operations Location | | 2019 | | | 2018 | | | 2017 | | Commodity derivatives | | Cost of sales | | $ | - | | | $ | 0.4 | | | $ | 0.5 | | Foreign exchange contracts | | Net sales | | | (0.7 | ) | | | (0.1 | ) | | | - | | Foreign exchange contracts | | Other income (expense) - net | | | (0.3 | ) | | | (0.5 | ) | | | 1.3 | | Total gains (losses) | | | | $ | (1.0 | ) | | $ | (0.2 | ) | | $ | 1.8 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 18: Note 20: | Contingencies and Litigation |
Market risk: Risk The Company sells a broad range of products that provide thermal solutions to customers operating primarily in the automotive, commercial vehicle, construction, agricultural,off-highway, and commercial, industrial, and building HVAC&R markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or more of the markets it serves. The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits. However, the risk associated with market downturns is still present.
Credit risk: Risk The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 2019, 2018, and 2017, 2016 and 2015, two VTS segment customers each accounted for ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers representedwere 50 percent, 48 percent, and 54 percent of total sales in fiscal 2019, 2018, and 2017, and 63 percent of total sales in both fiscal 2016 and 2015.respectively. At March 31, 20172019 and 2016, 352018, 38 percent and 4536 percent, respectively, of the Company'sCompany’s trade accounts receivable were due from the Company'sCompany’s top ten customers. These customers operate primarily in the automotive, truck,commercial vehicle, off-highway, data center cooling and heavy equipmentcommercial air conditioning markets, andwhich are influenced by similar market and general economic factors. Collateral or advanced payments are generally not required. The Company has not experienced significant credit losses to customers in the markets served.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company manages credit risk through its focus on the following:
| · | Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; |
Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; | · | Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; |
Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; | · | Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and |
Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and | · | Insurance – ensuring that insurance providers maintain acceptable financial ratings. |
Insurance – ensuring that insurance providers maintain financial ratings that are acceptable to the Company.
Counterparty risks: Risk The Company manages counterparty risksrisk through its focus on the following:
| · | Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; |
Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; | · | Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and |
Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and | · | Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company. |
Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company.
Environmental:Environmental The United States Environmental Protection Agency has designated the Company as a potentially responsible party for remediation of three sites. These sites are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be material to the Company’s financial position due to its relatively small portion of contributed materials.
As a result of its acquisition of Luvata HTS in fiscal 2017, the Company assumed certain environmental obligations. The Company has recorded environmental accruals related to these matters, the most significant of which relates to historical soil and groundwater contamination remediation and monitoring for a manufacturing site in the United States. In addition, the Company has recorded environmental investigation and remediation accruals related to subsurfacesoil and groundwater contamination at manufacturing facilities in the United States, one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, investigative work related to a previously-owned manufacturing facility in the United States, and groundwater contamination at its manufacturing facility in Brazil, along with accruals for lesser environmental matters at certain other facilities in the United States.States and Brazil. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $16.8$18.9 million and $5.1$16.7 million at March 31, 20172019 and 2016,2018, respectively. As additional information becomes available, the Company will re-assess the liabilities related to these matters and revise the estimated accruals, if necessary. Based upon 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Brazil antitrust investigation: During fiscal 2015, Brazil’s Administrative Council for Economic Defense (CADE) provided formal notice to the Company’s subsidiary in Brazil (“Modine Brazil”) of an administrative investigation regarding alleged violations of Brazil’s antitrust regulations by Modine Brazil and certain of its employees during a period of time at least seven years prior to the notice. As of March 31, 2016, the Company accrued $2.8 million (BRL 10 million) related to this matter. During fiscal 2017, the Company increased its accrual and reached agreement with CADE to settle the matter for $4.7 million (BRL 15 million). As a result, the Company recorded a charge of $1.6 million (BRL 5 million) within SG&A expenses during fiscal 2017. The Company expects to remit payment for the settlement in early fiscal 2018.
Other litigation:Litigation In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits or proceedings are not expected to have a material adverse effect on the Company’s consolidated financial statements.position.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 19: Note 21: | Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Total | | | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | Balance, March 31, 2016 | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) | | Balance, March 31, 2018 | | | $ | (5.5 | ) | | $ | (134.9 | ) | | $ | 0.1 | | | $ | (140.3 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (10.8 | ) | | | (0.3 | ) | | | (11.1 | ) | | | (37.9 | ) | | | (7.1 | ) | | | 0.3 | | | | (44.7 | ) | Reclassifications for amortization of unrecognized net loss (a) | | | - | | | | 5.2 | | | | 5.2 | | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | | - | | | | 5.4 | | | | - | | | | 5.4 | | Foreign currency translation losses (b) | | | | 0.8 | | | | - | | | | - | | | | 0.8 | | Realized losses - net (c) | | | | - | | | | - | | | | 0.2 | | | | 0.2 | | Income taxes | | | - | | | | (1.7 | ) | | | (1.7 | ) | | | - | | | | 0.3 | | | | (0.1 | ) | | | 0.2 | | Total other comprehensive income (loss) | | | (10.8 | ) | | | 3.2 | | | | (7.6 | ) | | | (37.1 | ) | | | (1.4 | ) | | | 0.4 | | | | (38.1 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2019 | | | $ | (42.6 | ) | | $ | (136.3 | ) | | $ | 0.5 | | | $ | (178.4 | ) | | | | | | | | | | | | | | | | | | | | | | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | Balance, March 31, 2017 | | $ | (46.8 | ) | | $ | (135.0 | ) | | $ | (181.8 | ) | | $ | (46.8 | ) | | $ | (135.0 | ) | | $ | - | | | $ | (181.8 | ) | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | | 41.3 | | | | (5.7 | ) | | | 0.3 | | | | 35.9 | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | | - | | | | 5.6 | | | | - | | | | 5.6 | | Realized gains - net (c) | | | | - | | | | - | | | | (0.1 | ) | | | (0.1 | ) | Income taxes | | | | - | | | | 0.2 | | | | (0.1 | ) | | | 0.1 | | Total other comprehensive income | | | | 41.3 | | | | 0.1 | | | | 0.1 | | | | 41.5 | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2018 | | | $ | (5.5 | ) | | $ | (134.9 | ) | | $ | 0.1 | | | $ | (140.3 | ) |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) | | | | | | | | | | | | | | Other comprehensive income (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 | ) |
| (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 1618 for additional information about the Company’s pension plans. |
| (b) | As a result of the sale of a business in South Africa during fiscal 2019, the Company wrote-off $0.8 million of accumulated foreign currency translation losses. See Note 1 for additional information about this transaction. |
| (c) | Amounts represent net gains and losses associated with cash flow hedges that were reclassified to net earnings. See Note 19 for additional information regarding derivative instruments. |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 20: Note 22: | Segment and Geographic Information |
The Company’s product lines consist of heat-transfer components and systems. The Company serves vehicular and commercial, industrial, and building HVAC&R markets. In November 2016, the Company acquired Luvata HTS and, commencing from the acquisition date, has operated and reported results for the acquired business as its Commercial and Industrial Solutions (“CIS”)CIS segment. See Note 2 for additional information regarding the Luvata HTS acquisition.
The Company’sEffective April 1, 2018, the Company formed the VTS segment by combining its Americas, Europe, and Asia operations to enable it to operate as a more global, product-based organization. The Company also merged its Americas coils business into the CIS segment to accelerate operational improvements and organizational efficiencies. The Company began reporting financial results for its new segments representbeginning in fiscal 2019. Segment financial information for fiscal 2018 and 2017 has been recast to conform to the fiscal 2019 presentation.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company’s VTS segment represents its vehicular businessesbusiness and primarily serveserves the automotive, commercial vehicle, and off-highway markets. In addition, the AmericasVTS segment serves the automotive and commercial vehicle aftermarket in Brazil and provides coils to the commercial HVAC&R market in North America.Brazil. The Company’s CIS segment provides coils, coolers, and coating solutions to customers throughout the world. The Company’s BHVAC segment provides heating, ventilating and air conditioning products to customers throughout the world.
Each operating segment is managed by a vice president and has separate financial results reviewed by the Company’s chief operating decision maker. These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
The following is a summary of net sales, gross profit, and operating income by segment:
| | Years ended March 31, | | Net sales: | | 2017 | | | 2016 | | | 2015 | | Americas | | $ | 534.0 | | | $ | 585.5 | | | $ | 666.9 | | Europe | | | 524.3 | | | | 524.1 | | | | 578.2 | | Asia | | | 111.5 | | | | 79.0 | | | | 81.2 | | CIS | | | 177.7 | | | | - | | | | - | | BHVAC | | | 171.6 | | | | 181.4 | | | | 186.3 | | Segment total | | | 1,519.1 | | | | 1,370.0 | | | | 1,512.6 | | Corporate and eliminations | | | (16.1 | ) | | | (17.5 | ) | | | (16.2 | ) | Net sales | | $ | 1,503.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Gross profit: | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Americas | | $ | 86.6 | | | | 16.2 | % | | $ | 100.1 | | | | 17.1 | % | | $ | 109.1 | | | | 16.3 | % | Europe | | | 80.9 | | | | 15.4 | % | | | 68.1 | | | | 13.0 | % | | | 68.7 | | | | 11.9 | % | Asia | | | 18.7 | | | | 16.8 | % | | | 12.2 | | | | 15.5 | % | | | 11.5 | | | | 14.2 | % | CIS | | | 26.0 | | | | 14.6 | % | | | - | | | | - | | | | - | | | | - | | BHVAC | | | 47.8 | | | | 27.8 | % | | | 54.2 | | | | 29.9 | % | | | 55.9 | | | | 30.0 | % | Segment total | | | 260.0 | | | | 17.1 | % | | | 234.6 | | | | 17.1 | % | | | 245.2 | | | | 16.2 | % | Corporate and eliminations (a) | | | (6.7 | ) | | | - | | | | (11.1 | ) | | | - | | | | 1.3 | | | | - | | Gross profit | | $ | 253.3 | | | | 16.9 | % | | $ | 223.5 | | | | 16.5 | % | | $ | 246.5 | | | | 16.5 | % |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | Years ended March 31, | | Operating income: | | 2017 | | | 2016 | | | 2015 | | Americas | | $ | 26.7 | | | $ | 36.2 | | | $ | 33.4 | | Europe | | | 37.1 | | | | 13.3 | | | | 25.7 | | Asia | | | 7.7 | | | | 0.8 | | | | 0.3 | | CIS | | | 7.5 | | | | - | | | | - | | BHVAC | | | 13.1 | | | | 13.9 | | | | 19.1 | | Segment total | | | 92.1 | | | | 64.2 | | | | 78.5 | | Corporate and eliminations (a) | | | (52.7 | ) | | | (71.7 | ) | | | (25.8 | ) | Operating income (loss) | | $ | 39.4 | | | $ | (7.5 | ) | | $ | 52.7 | |
| (a) | During fiscal 2017, the Company recorded $14.8 million of costs incurred directly related to the acquisition and integration of Luvata HTS within SG&A expenses at Corporate. In addition, as a result of purchase accounting for the Luvata HTS acquisition, the Company wrote up acquired inventory to its estimated fair value and charged the write-up to cost of sales as the underlying inventory was sold. The Company recorded $4.3 million in cost of sales related to this inventory step-up at Corporate, as the impact of this purchase accounting adjustment is excluded from the Company’s measure of segment operating performance. 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 16 for additional information about the Company’s pension plans. |
| | Year ended March 31, 2019 | | | | External Sales | | | Inter-segment Sales | | | Total | | Net sales: | | | | | | | | | | VTS | | $ | 1,298.9 | | | $ | 52.8 | | | $ | 1,351.7 | | CIS | | | 704.7 | | | | 2.9 | | | | 707.6 | | BHVAC | | | 209.1 | | | | 3.3 | | | | 212.4 | | Segment total | | | 2,212.7 | | | | 59.0 | | | | 2,271.7 | | Corporate and eliminations | | | - | | | | (59.0 | ) | | | (59.0 | ) | Net sales | | $ | 2,212.7 | | | $ | - | | | $ | 2,212.7 | | | | | | | | | | | | | | | | | Year ended March 31, 2018 | | | | External Sales | | | Inter-segment Sales | | | Total | | Net sales: | | | | | | | | | | | | | VTS | | $ | 1,239.3 | | | $ | 56.4 | | | $ | 1,295.7 | | CIS | | | 674.4 | | | | 1.3 | | | | 675.7 | | BHVAC | | | 189.4 | | | | 1.8 | | | | 191.2 | | Segment total | | | 2,103.1 | | | | 59.5 | | | | 2,162.6 | | Corporate and eliminations | | | - | | | | (59.5 | ) | | | (59.5 | ) | Net sales | | $ | 2,103.1 | | | $ | - | | | $ | 2,103.1 | | | | | | | | | | | | | | | | | Year ended March 31, 2017 | | | | External Sales | | | Inter-segment Sales | | | Total | | Net sales: | | | | | | | | | | | | | VTS | | $ | 1,099.9 | | | $ | 52.3 | | | $ | 1,152.2 | | CIS | | | 231.5 | | | | 0.3 | | | | 231.8 | | BHVAC | | | 171.6 | | | | - | | | | 171.6 | | Segment total | | | 1,503.0 | | | | 52.6 | | | | 1,555.6 | | Corporate and eliminations | | | - | | | | (52.6 | ) | | | (52.6 | ) | Net sales | | $ | 1,503.0 | | | $ | - | | | $ | 1,503.0 | |
Inter-segment sales are accounted for based upon 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 other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance.
The following is a summary of total assets by segment:
| | March 31, | | | | 2017 | | | 2016 | | Americas | | $ | 282.9 | | | $ | 267.2 | | Europe | | | 269.4 | | | | 301.9 | | Asia | | | 111.3 | | | | 104.0 | | CIS | | | 576.0 | | | | - | | BHVAC | | | 85.2 | | | | 99.0 | | Corporate and eliminations | | | 124.7 | | | | 148.8 | | Total assets | | $ | 1,449.5 | | | $ | 920.9 | |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | Capital expenditures: | | 2017 | | | 2016 | | | 2015 | | Americas | | $ | 26.3 | | | $ | 26.7 | | | $ | 30.2 | | Europe | | | 24.7 | | | | 24.8 | | | | 21.5 | | Asia | | | 8.5 | | | | 6.2 | | | | 3.8 | | CIS | | | 3.4 | | | | - | | | | - | | BHVAC | | | 1.5 | | | | 5.1 | | | | 2.8 | | Total capital expenditures | | $ | 64.4 | | | $ | 62.8 | | | $ | 58.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
| | Years ended March 31, | | Depreciation and amortization expense: | | 2017 | | | 2016 | | | 2015 | | Americas | | $ | 22.7 | | | $ | 22.1 | | | $ | 21.3 | | Europe | | | 16.5 | | | | 18.0 | | | | 19.8 | | Asia | | | 7.0 | | | | 6.5 | | | | 7.2 | | CIS | | | 7.9 | | | | - | | | | - | | BHVAC | | | 4.2 | | | | 3.6 | | | | 3.3 | | Total depreciation and amortization expense | | $ | 58.3 | | | $ | 50.2 | | | $ | 51.6 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Gross profit: | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | VTS | | $ | 186.9 | | | | 13.8 | % | | $ | 201.0 | | | | 15.5 | % | | $ | 182.0 | | | | 15.8 | % | CIS | | | 114.9 | | | | 16.2 | % | | | 97.8 | | | | 14.5 | % | | | 32.2 | | | | 13.9 | % | BHVAC | | | 63.4 | | | | 29.9 | % | | | 58.0 | | | | 30.3 | % | | | 47.8 | | | | 27.8 | % | Segment total | | | 365.2 | | | | 16.1 | % | | | 356.8 | | | | 16.5 | % | | | 262.0 | | | | 16.8 | % | Corporate and eliminations (a) | | | 0.3 | | | | - | | | | (0.3 | ) | | | - | | | | (7.6 | ) | | | - | | Gross profit | | $ | 365.5 | | | | 16.5 | % | | $ | 356.5 | | | | 17.0 | % | | $ | 254.4 | | | | 16.9 | % |
| | Years ended March 31, | | Operating income: | | 2019 | | | 2018 | | | 2017 | | VTS | | $ | 64.8 | | | $ | 84.2 | | | $ | 68.4 | | CIS | | | 53.4 | | | | 28.5 | | | | 10.9 | | BHVAC | | | 26.9 | | | | 20.3 | | | | 13.2 | | Segment total | | | 145.1 | | | | 133.0 | | | | 92.5 | | Corporate and eliminations (a) | | | (35.4 | ) | | | (40.8 | ) | | | (50.2 | ) | Operating income | | $ | 109.7 | | | $ | 92.2 | | | $ | 42.3 | |
| (a) | During fiscal 2018 and 2017, the Company recorded $4.3 million and $14.8 million, respectively, of costs incurred directly related to the acquisition and integration of Luvata HTS within SG&A expenses at Corporate. During fiscal 2017, the Company recorded $4.3 million in cost of sales related to an inventory purchase accounting adjustment at Corporate, as the impact was excluded from the Company’s measure of segment operating performance. In addition, the operating loss for Corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance. |
The following is a summary of total assets by segment:
| | March 31, | | | | 2019 | | | 2018 | | VTS | | $ | 749.9 | | | $ | 754.8 | | CIS | | | 604.2 | | | | 630.2 | | BHVAC | | | 89.4 | | | | 88.1 | | Corporate and eliminations | | | 94.5 | | | | 100.3 | | Total assets | | $ | 1,538.0 | | | $ | 1,573.4 | |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | Capital expenditures: | | 2019 | | | 2018 | | | 2017 | | VTS | | $ | 56.2 | | | $ | 61.4 | | | $ | 59.5 | | CIS | | | 16.4 | | | | 9.0 | | | | 3.4 | | BHVAC | | | 1.3 | | | | 0.6 | | | | 1.5 | | Total capital expenditures | | $ | 73.9 | | | $ | 71.0 | | | $ | 64.4 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
| | Years ended March 31, | | Depreciation and amortization expense: | | 2019 | | | 2018 | | | 2017 | | VTS | | $ | 49.5 | | | $ | 48.2 | | | $ | 46.2 | | CIS | | | 23.9 | | | | 24.3 | | | | 7.9 | | BHVAC | | | 3.5 | | | | 4.2 | | | | 4.2 | | Total depreciation and amortization expense | | $ | 76.9 | | | $ | 76.7 | | | $ | 58.3 | |
The following is a summary of net sales by geographical area, based upon the location of the selling unit:
| | Years ended March 31, | | | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | United States | | $ | 657.8 | | | $ | 627.6 | | | $ | 669.3 | | | $ | 1,032.3 | | | $ | 911.4 | | | $ | 657.8 | | Italy | | | | 217.3 | | | | 211.5 | | | | 94.4 | | China | | | | 172.1 | | | | 156.0 | | | | 73.7 | | Hungary | | | 145.6 | | | | 145.9 | | | | 161.0 | | | | 165.6 | | | | 153.9 | | | | 145.6 | | Germany | | | 130.1 | | | | 155.3 | | | | 193.8 | | | | 123.1 | | | | 132.6 | | | | 130.1 | | Austria | | | 125.2 | | | | 113.1 | | | | 118.7 | | | | 116.2 | | | | 151.7 | | | | 125.2 | | Italy | | | 94.4 | | | | 44.1 | | | | 40.6 | | | Other | | | 349.9 | | | | 266.5 | | | | 313.0 | | | | 386.1 | | | | 386.0 | | | | 276.2 | | Net sales | | $ | 1,503.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 2,212.7 | | | $ | 2,103.1 | | | $ | 1,503.0 | |
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | | 2017 | | | 2016 | | United States | | $ | 124.7 | | | $ | 92.5 | | Italy | | | 55.8 | | | | 20.3 | | Mexico | | | 47.0 | | | | 30.9 | | Austria | | | 44.3 | | | | 44.2 | | China | | | 40.0 | | | | 33.6 | | Hungary | | | 37.7 | | | | 31.4 | | Germany | | | 28.9 | | | | 32.1 | | Other | | | 80.6 | | | | 53.6 | | Total property, plant and equipment | | $ | 459.0 | | | $ | 338.6 | |
The following is a summary of net sales by end market:
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Automotive | | $ | 461.0 | | | $ | 396.8 | | | $ | 401.8 | | Commercial vehicle | | | 382.5 | | | | 459.8 | | | | 512.5 | | Off-highway | | | 202.8 | | | | 206.2 | | | | 274.6 | | HVAC&R | | | 400.9 | | | | 232.1 | | | | 229.6 | | Other | | | 55.8 | | | | 57.6 | | | | 77.9 | | Net sales | | $ | 1,503.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | |
| | March 31, | | | | 2019 | | | 2018 | | United States | | $ | 117.7 | | | $ | 121.5 | | China | | | 57.6 | | | | 49.6 | | Mexico | | | 56.3 | | | | 49.4 | | Hungary | | | 55.3 | | | | 59.3 | | Italy | | | 52.4 | | | | 62.0 | | Austria | | | 36.9 | | | | 42.8 | | Germany | | | 32.8 | | | | 37.2 | | Other | | | 75.7 | | | | 82.5 | | Total property, plant and equipment | | $ | 484.7 | | | $ | 504.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 21: The following is a summary of net sales by end market:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Commercial HVAC&R | | $ | 674.0 | | | $ | 648.3 | | | $ | 323.8 | | Automotive | | | 542.8 | | | | 526.0 | | | | 461.0 | | Commercial vehicle | | | 387.6 | | | | 381.7 | | | | 382.5 | | Off-highway | | | 314.1 | | | | 271.2 | | | | 202.8 | | Data center cooling | | | 187.0 | | | | 137.6 | | | | 57.1 | | Industrial cooling | | | 47.8 | | | | 67.6 | | | | 18.6 | | Other | | | 59.4 | | | | 70.7 | | | | 57.2 | | Net sales | | $ | 2,212.7 | | | $ | 2,103.1 | | | $ | 1,503.0 | |
Note 23: | Quarterly Financial Data (Unaudited) |
QuarterlyThe following is a summary of quarterly financial data is summarized below for the years ended March 31, 2017 and 2016:data:
| | Fiscal 2017 quarters ended | | | | | | Fiscal 2019 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2017 | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 347.2 | | | $ | 317.7 | | | $ | 349.8 | | | $ | 488.3 | | | $ | 1,503.0 | | | $ | 566.1 | | | $ | 548.9 | | | $ | 541.0 | | | $ | 556.7 | | | $ | 2,212.7 | | Gross profit | | | 62.0 | | | | 47.7 | | | | 58.7 | | | | 84.9 | | | | 253.3 | | | | 94.3 | | | | 87.9 | | | | 91.7 | | | | 91.6 | | | | 365.5 | | Earnings (loss) from continuing operations (a) | | | 8.9 | | | | (4.0 | ) | | | 1.9 | | | | 8.1 | | | | 14.9 | | | Net earnings (loss) attributable to Modine (a) | | | 8.6 | | | | (4.1 | ) | | | 1.7 | | | | 8.0 | | | | 14.2 | | | Net earnings (a) | | | | 22.5 | | | | 38.7 | | | | 18.3 | | | | 6.4 | | | | 85.9 | | Net earnings attributable to Modine (a) | | | | 22.0 | | | | 38.5 | | | | 18.0 | | | | 6.3 | | | | 84.8 | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | | $ | 0.43 | | | $ | 0.76 | | | $ | 0.36 | | | $ | 0.12 | | | $ | 1.67 | | Diluted | | | | 0.43 | | | | 0.75 | | | | 0.35 | | | | 0.12 | | | | 1.65 | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal 2018 quarters ended | | | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2018 | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | | $ | 515.5 | | | $ | 508.3 | | | $ | 512.7 | | | $ | 566.6 | | | $ | 2,103.1 | | Gross profit | | | | 88.5 | | | | 86.1 | | | | 85.4 | | | | 96.5 | | | | 356.5 | | Net earnings (loss) (b) | | | | 17.4 | | | | 16.3 | | | | (27.9 | ) | | | 18.0 | | | | 23.8 | | Net earnings (loss) attributable to Modine (b) | | | | 17.0 | | | | 15.9 | | | | (28.3 | ) | | | 17.6 | | | | 22.2 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.18 | | | $ | (0.09 | ) | | $ | 0.04 | | | $ | 0.16 | | | $ | 0.29 | | | $ | 0.34 | | | $ | 0.32 | | | $ | (0.57 | ) | | $ | 0.35 | | | $ | 0.44 | | Diluted | | | 0.18 | | | | (0.09 | ) | | | 0.04 | | | | 0.16 | | | | 0.29 | | | | 0.34 | | | | 0.31 | | | | (0.57 | ) | | | 0.34 | | | | 0.43 | |
| | 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 (b) | | | 5.5 | | | | (22.5 | ) | | | 8.2 | | | | 7.8 | | | | (1.0 | ) | Net earnings (loss) attributable to Modine (b) | | | 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 | ) |
| (a) | During fiscal 2017,2019, restructuring expenses totaled $2.3$0.2 million, $2.1 million, $1.6$0.5 million, and $4.9$8.9 million for the quarters ended June 30, 2016, September 30, 2016,2018, December 31, 2016,2018, and March 31, 2017,2019, respectively (see Note 5)6). During the second quarter of fiscal 2019, the Company sold its South African business within the BHVAC segment and, as a result, recorded a loss of $1.7 million (see Note 1). During the third quarter of fiscal 2019, the Company recorded a $0.4 million impairment charge related to a manufacturing facility in Austria (see Note 6). The Company’s income tax benefit for fiscal 2019 includes net benefits of $24.4 million and net charges of $2.2 million in the second and third quarters, respectively, related to the Tax Act and the recognition of foreign tax credits (see Note 8). During fiscal 2017,2019, the Company soldadjusted its valuation allowances on deferred tax assets related to two previously-closed manufacturing facilitiesseparate subsidiaries in its Americas segmentChina and, as a result, recorded a $2.0 million income tax benefit and a facility$1.0 million income tax charge in its Europe segmentthe first and recognized net gains totaling $1.2second quarters, respectively (see Note 8). |
| (b) | During fiscal 2018, restructuring expenses totaled $1.7 million, $0.4 million, $9.4 million, and $0.8 million in the quarters ended September 30, 2016 and March 31, 2017, respectively. During fiscal 2017, acquisition- and integration-related costs totaled $1.4 million, $3.0 million, $7.2 million, and $3.2$4.5 million for the quarters ended June 30, 2016,2017, September 30, 2016,2017, December 31, 2016,2017, and March 31, 2017,2018, respectively (see Note 2)6). During the third quarter of fiscal 2018, the Company recorded a $1.3 million asset impairment charge related to a manufacturing facility in Austria (see Note 6). During the fourth quarter of fiscal 2017,2018, the Company recorded a deferred$1.2 million impairment charge related to intangible assets (see Note 14). The Company recorded income tax charges totaling $35.7 million and $2.3 million during the third and fourth quarters of fiscal 2018, respectively, related to the Tax Act (see Note 8). During the fourth quarter of fiscal 2018, the Company reversed a portion of a valuation allowance related to a foreign tax jurisdiction, and, as a result, recorded income tax expense of $2.0 million (see Note 7). |
| (b) | During 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 5). During the fourth quarter of fiscal 2016, the Company recorded a $9.9 million asset impairment charge related to a manufacturing facility in Germany (see Note 5). During fiscal 2016, non-cash pension settlement losses totaled $39.2 million, $1.1 million, and $1.8 million for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 16). 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. 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 related to a foreign tax jurisdiction of $3.0$2.8 million (see Note 7)8). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors and Shareholders of Modine Manufacturing Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the consolidated financial statements, including the related notes, as listed in the index appearing under Item 15(a)(1), and the financial statement schedule listed in the index appearing under Item 15(a)(2), of Modine Manufacturing Company and its subsidiaries (the “Company”) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1)referred to above present fairly, in all material respects, the financial position of Modine Manufacturingthe Company and its subsidiaries atas of March 31, 20172019 and 2016, 2018, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2017 2019 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the CommitteeCOSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for the income tax effects of Sponsoring Organizationsintra-entity transfers of the Treadway Commission (COSO). assets other than inventory in 2019.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A.9A. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements on the financial statement schedule, and on the Company'sCompany’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidatedfinancial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidatedfinancial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control Over Financial Reporting, management has excluded the Luvata HTS business, operated as the Company's CIS segment, from its assessment of internal control over financial reporting as of March 31, 2017 because it was acquired by the Company in a purchase business combination on November 30, 2016. We have also excluded Luvata HTS from our audit of internal control over financial reporting. Luvata HTS total assets and net sales excluded from management’s assessment and our audit of internal control over financial reporting represent $297 million and $178 million, respectively, of the related consolidated financial statement amounts as of and for the fiscal year ended March 31, 2017.
/s/PricewaterhouseCoopers LLP Milwaukee, Wisconsin May 25, 201723, 2019
We have served as the Company’s auditor since 1935.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not applicable.
Conclusion Regarding Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company'sCompany’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company'sCompany’s disclosure controls and procedures, at a reasonable assurance level, as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded that the Company'sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of March 31, 2017.2019.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, and effected by the Company'sCompany’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2017.2019. In making its assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based upon this assessment, management concluded that, as of March 31, 2017,2019, the Company’s internal control over financial reporting was effective.
Management excluded the Luvata HTS business, operated as the Company’s CIS segment, from its assessment of internal control over financial reporting as of March 31, 2017 because it was acquired by the Company in a purchase business combination on November 30, 2016. The total assets and net sales of Luvata HTS excluded from management’s assessment represent $297 million and $178 million, respectively, of the related consolidated financial statement amounts as of and for the fiscal year ended March 31, 2017.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20172019 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
As part of its post-closing integration activities for the Luvata HTS acquisition, the Company is engagedThere have been no changes in assessing, refining and harmonizing the internal controls and processes of the acquired business with those of the Company.
This process has resulted in a change in the Company’s internal control over financial reporting during the fourth quarter of fiscal 20172019 that hashave materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors. The Company incorporates by reference the information appearing in the Company'sCompany’s Proxy Statement for the 20172019 Annual Meeting of Shareholders to be held on July 20, 201725, 2019 (the “2017“2019 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Executive Officers of the Registrant"“Information about our Executive Officers” in this Form 10-K.
Compliance with Section 16(a)Code of the Exchange ActConduct. The Company incorporates by reference the information appearing in the 2017 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 20172019 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Ethics.Conduct.” The Company'sCompany’s Code of Ethics (labeled as the Code of Conduct)Conduct is included on its website, www.modine.com (About Modine link). We intend to satisfy our disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers of, any provision of our Code of Conduct that applies to our principal executive, financial and accounting officers and our directors by posting such information on our website.
Board Committee Charters. The Board of Directors has approved charters for its Audit Committee, Officer Nomination and Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee. These charters are included on the Company’s website, www.modine.com (Investors link).
Audit Committee Financial Expert. The Company incorporates by reference the information appearing in the 20172019 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 20172019 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 20172019 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
We do not intend to incorporate our internet website and the information contained therein or incorporated therein into this annual report on Form 10-K.
ITEM 11. | EXECUTIVE COMPENSATION. |
The information appearing in the 20172019 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 20172019 Annual Meeting Proxy Statement.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The Company incorporates by reference the information contained in the 20172019 Annual Meeting Proxy Statement under the captions “Certain Relationships and Related Party Transactions” and “Director Independence.”
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The Company incorporates by reference the information contained in the 20172019 Annual Meeting Proxy Statement under the caption “Independent Auditors’Auditor’s Fees for Fiscal 20172019 and 2016.2018.”
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) | Documents Filed. The following documents are filed as part of this Report: |
|
| Page in Form 10-K | | | | | 1. The consolidated financial statements of Modine Manufacturing Company and its subsidiaries filed under Item 8: | | | | | | Consolidated Statements of Operations for the years ended March 31, 2017, 20162019, 2018 and 20152017 | 4138 | | Consolidated Statements of Comprehensive Income for the years ended March 31, 2017, 20162019, 2018 and 20152017 | 4239 | | Consolidated Balance Sheets at March 31, 20172019 and 20162018 | 4340 | | Consolidated Statements of Cash Flows for the years ended March 31, 2017, 20162019, 2018 and 20152017 | 4441 | | Consolidated Statements of Shareholders'Shareholders’ Equity for the years ended March 31, 2017, 20162019, 2018 and 20152017 | 4542 | | Notes to Consolidated Financial Statements | 46-7343-74 | | Report of Independent Registered Public Accounting Firm | 7475-76 | | | | | 2. Financial Statement Schedules | | | | | | The following financial statement schedule should be read in conjunction with the consolidated financial statements set forth in Item 8: | | | Schedule II -- Valuation and Qualifying Accounts | 7980 | | | | | 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. | 80-8281-83 | | | | | See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number. | |
ITEM 16. | FORM 10-K SUMMARY. |
None.
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 25, 2017 | 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 25, 2017 | | President, Chief Executive Officer and Director | | | (Principal Executive Officer) | | | | | | /s/ Michael B. Lucareli
| | | Michael B. Lucareli | May 25, 2017 | | Vice President, Finance and Chief Financial Officer | | | (Principal Financial and Accounting Officer) | | | | | | /s/ Marsha C. Williams
| | | Marsha C. Williams | May 25, 2017 | | Director | | | | | | /s/ David J. Anderson
| | | David J. Anderson | May 25, 2017 | | Director | | | | | | /s/ Charles P. Cooley
| | | Charles P. Cooley | May 25, 2017
| | Director | | | | | | /s/ Suresh V. Garimella
| | | Suresh V. Garimella | May 25, 2017
| | Director | | | | | | /s/ Larry O. Moore
| | | Larry O. Moore | May 25, 2017 | | Director | | | | | | /s/ Christopher W. Patterson
| | | Christopher W. Patterson | May 25, 2017 | | Director | | | | | | /s/ Christine Y. Yan
| | | Christine Y. Yan | May 25, 2017 | | Director | | | | | | /s/ David G. Bills
| | | David G. Bills | May 25, 2017 | | Director | |
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES
(A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTSFor the years ended March 31, 2017, 2016 and 2015
(In millions)
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | 2017: Valuation Allowance for Deferred Tax Assets | | $ | 50.8 | | | $ | (0.3 | ) | | $ | (0.9 | ) | (a) | | $ | 49.6 | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | Notes: | | | | | | | | | | | | | | | | | |
| (a) | Foreign currency translation, increases due to the acquisition of Luvata HTS and other adjustments |
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES (A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2019, 2018 and 2017 (In millions)
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | 2019: Valuation Allowance for Deferred Tax Assets | | $ | 48.9 | | | $ | (1.6 | ) | | $ | (3.9 | ) | (a) | | $ | 43.4 | | | | | | | | | | | | | | | | | | | | 2018: Valuation Allowance for Deferred Tax Assets | | $ | 49.6 | | | $ | (6.7 | ) | | $ | 6.0 | | (a) | | $ | 48.9 | | | | | | | | | | | | | | | | | | | | 2017: Valuation Allowance for Deferred Tax Assets | | $ | 50.8 | | | $ | (0.3 | ) | | $ | (0.9 | ) | (a) | | $ | 49.6 | |
| (a) | Foreign currency translation and other adjustments. The fiscal 2018 and 2017 amounts also included increases associated with the Company’s acquisition of Luvata HTS. |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
EXHIBIT INDEX TO 20172019 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By
Referenced To | | Filed
Herewith | | | | | | | | 2.1 | | Share SaleAmended and Purchase Agreement between Luvata Heat Transfer Solutions II AB and Modine Manufacturing Company, datedRestated Articles of Incorporation, as of September 6, 2016.amended. | | Exhibit 2.13.1 to Registrant’s Current Report on Form 8-K dated September 6, 201610-K for the fiscal year ended March 31, 2018 | | | | | | | | | | 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 | | | | | | | | | | | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated February 10, 201520, 2019 | | | | | | | | | | | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 ("(“2003 10-K"10-K”) | | | | | | | | | | | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto. | | | | | | | | | | | | Note Purchase and Private Shelf Agreement (the “Original Note Purchase Agreement”) dated as of August 12, 2010 among the Registrant and the Series A Purchasers named therein of $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020 and $25,000,000 Private Shelf Facility and each Prudential Affiliate (as defined therein) that may become bound by certain provisions thereof. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 12, 2010 8-K (“August 12, 2010 8-K”) | | | | | | | | | | | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to August 12, 2010 8-K | | | | | | | | | | | | First Amendment to Note Purchase and Private Shelf Agreement and Waiver dated as of March 15, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated March 15, 2012 8-K | | | | | | | | | | | | Second Amendment to Note Purchase and Private Shelf Agreement dated as of April 20, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 20, 2012 8-K | | | | | | | | | | | | Third Amendment to Note Purchase and Private Shelf Agreement dated as of August 6, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 6, 2012 8-K | | |
| | Second Amended and Restated Credit Agreement dated as of August 30, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, LC Issuer, Swing Line Lender and as a Lender, and U.S. Bank, N.A. and Wells Fargo Bank, N.A. as Syndication Agents and as Lenders, BMO Harris Bank N.A., as Documentation Agent and as Lender and Associated Bank, N.A., Comerica Bank and Sovereign Bank as Lenders.Lenders | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated August 30, 2013 (“August 30, 2013 8-K”) | | | | | | | | | | | | Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Note Purchase Amendment”) dated as of August 30, 2013, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) pursuant to which the Company and the Note Holders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to August 30, 2013 8-K | | | | | | | | | | | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to August 30, 2013 8-K | | | | | | | | | | | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | | | Third Amended and Restated Credit Agreement dated as of November 15, 2016, with JPMorgan Chase Bank, N.A. as Administrative Agent and Collateral Agent, Bank of Montreal, U.S. Bank National Association and Wells Fargo Bank, National Association as Syndication Agents, and Bank of America, N.A. and PNC Bank, National Association as Senior Managing Agent.2016. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated November 15, 2016 (“November 15, 2016 8-K”) | | | | | | | | | | | | Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 15, 2016, with PGIM, Inc. and each of the Purchasers described therein relating to the $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020, the $50,000,000 5.75% Secured Senior Notes, Series B and Private Shelf Facility.2016. | | Exhibit 4.2 to November 15, 2016 8-K | | | | | | | | | | Description of Registrant’s securities | | Amendment No 1. to the Company’s Registration Statement on Form 8-A filed on July 17, 2008 | | | 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 | | | | | | | | | | | | Employment Agreement between the Registrant and Thomas A. Burke dated as of June 15, 2007. | | Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 15, 2007 | | | | | | | | | | | | Form of Amendment No. 1 to Employment Agreement entered into as of July 1, 2008 with Thomas A. Burke. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2008 | | | | | | | | | | | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke. | | Exhibit 10(f) to Registrant’s Form 10-K for the year ended March 31, 2004 | | |
10.5* | | Employment Agreement, dated July 1, 2014, between Modine Holding GmbH and Holger Schwab, effective as of July 1, 2015. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2014 | | | | | | | | | | | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant'sRegistrant’s Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | | | 2007 Incentive Compensation Plan. | | Appendix A to the Registrant's Proxy Statement dated June 18, 2007 | | | | | | | | | | 10.9* | | 2008 Incentive Compensation Plan (Amended and Restated effective May 7, 2014). | | Exhibit 10.1 to Registrant'sRegistrant’s Current Report on Form 8-K dated July 17, 2014 | | | | | | | | | | Form of Fiscal 2019 Modine Performance Stock Award Agreement. | | Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | |
| Form of Fiscal 2019 Modine Incentive Stock Option Award Agreement. | | Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | | 10.10* | | | | | | | Form of Fiscal 2019 Modine Restricted Stock Unit Award Agreement. | | Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | | | | | | | | | Form of Fiscal 2019 Modine Non-Qualified Stock Option Award Agreement. | | Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | | | | | | | | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Thomas A. Burke. | | Exhibit 10.17 to Registrant'sRegistrant’s Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | 10.11* | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | | | | | | | | | 10.12* | | Form of Fiscal 2017 Modine Performance Stock Award Agreement.Incentive Compensation Plan. | | Exhibit 10.1 to Registrant’s Current Report on Form 10-Q for the first quarter ended June 30, 2016 ("June 30, 2016 10-Q")8-K dated July 20, 2017 | | | | | | | | | | 10.13* | | Form of Fiscal 20172019 Modine IncentiveNon-Employee Director Restricted Stock OptionsUnit Award Agreement. | | Exhibit 10.210.1 to JuneRegistrant’s Form 10-Q for the quarter ended September 30, 2016 10-Q2018 | | | | | | | | | | 10.14* | | Form of Fiscal 2017 Modine Restricted Stock Award Agreement. | | Exhibit 10.3 to June 30, 2016 10-Q | | | | | | | | | | 10.15* | | Form of Fiscal 2017 Modine Non-Qualified Stock Option Award Agreement. | | Exhibit 10.4 to June 30, 2016 10-Q | | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of independent registered public accounting firm. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | �� | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Instance Document | | | | X | | | | | | | | 101.SCH | | XBRL Taxonomy Extension Schema | | | | X | | | | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | X | | | | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | X | | | | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | X | | | | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | X |
* Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K.
** Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 23, 2019 | Modine Manufacturing Company | | | | | By: | /s/ Thomas A. Burke | | | Thomas A. Burke, President | | | and Chief Executive Officer | | | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. Burke |
| Thomas A. Burke | | President, Chief Executive Officer and Director | May 23, 2019 | (Principal Executive Officer) | | | | /s/ Michael B. Lucareli |
| Michael B. Lucareli | May 23, 2019 | Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | | | | /s/ Marsha C. Williams |
| Marsha C. Williams | May 23, 2019 | Director | | | | /s/ David J. Anderson |
| David J. Anderson | May 23, 2019 | Director | | | | /s/ Eric D. Ashleman |
| Eric D. Ashleman | May 23, 2019 | Director | | | | /s/ David G. Bills |
| David G. Bills | May 23, 2019 | Director | | | | /s/ Charles P. Cooley |
| Charles P. Cooley | May 23, 2019 | Director | | | | /s/ Suresh V. Garimella |
| Suresh V. Garimella | May 23, 2019 | Director | | | | /s/ Larry O. Moore |
| Larry O. Moore | May 23, 2019 | Director | | | | /s/ Christopher W. Patterson |
| Christopher W. Patterson | May 23, 2019 | Director | | | | /s/ Christine Y. Yan |
| Christine Y. Yan | May 23, 2019 | Director | |
84
s | | | % of sales | | |
Year Ended March 31, 20172019 Compared with Year Ended March 31, 2016:2018:
Fiscal 20172019 net sales increased $150$110 million, or 115 percent, from the prior year, primarily due to $178 million of incremental sales from our new CIS segment and higher sales in each of our Asia segment,operating segments, partially offset by lower sales in our Americas and BHVAC segments. Sales volume increases in our BHVAC segment were more than offset by an $11a $28 million unfavorable impact of foreign currency exchange rate changes.
Fiscal 20172019 gross profit of $253 million increased $29$9 million from the prior year, andyet gross margin increased 40declined 50 basis points to 16.916.5 percent. These increases wereThe decline in gross margin was primarily due to $26 millionunfavorable material costs, including the direct and indirect impacts of gross profit contributed by the CIStariffs, and temporary operating inefficiencies largely related to increased volumes and multiple new program launches in our VTS segment, cost savings resulting from procurement initiatives, and the absence of $9 million of pension settlement losses recognized in the prior year, partially offset by temporary production inefficiencies in the Americas segment, the unfavorable impact of ahigher sales volume. In addition, gross profit was unfavorably impacted by $4 million inventory purchase accounting adjustmentfrom foreign currency exchange rate changes.
Fiscal 2019 SG&A expenses of $244 million decreased $2 million, or 70 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primarily due to lower integration costs associated with our November 2016 acquisition of the Luvata HTS business and unfavorable material costs. In addition,a $3 million favorable impact of foreign currency exchange rate changes, negatively impacted fiscal 2017 gross profit by $2 million.
Fiscal 2017 SG&A expenses of $205 million were consistent with the prior year, but decreased as a percentage of net sales. During fiscal 2017, $19 million of SG&A expenses in the CIS segment and $15 million of acquisition- and integration-related costs associated with our acquisition of Luvata HTS were largely offset by the absence of $33 million of pension settlement losses recognized in the prior year.
Restructuring expenses decreased $6 million in fiscal 2017 compared with the prior year, primarily due to lower severance expenses, partially offset by higher equipment transferthird-party strategic advisory costs recorded at Corporate and plant consolidationhigher environmental charges within our VTS segment. During fiscal 2019, we recorded $7 million of costs, in the Americas segment.primarily consisting of third-party consulting fees, related to our evaluation of strategic alternatives for our VTS segment’s automotive business.
During fiscal 2017, we sold two previously-closed manufacturing facilities within our Americas segment and a facility within our Europe segment. As a resultFiscal 2019 restructuring expenses of these sales, we recognized net gains totaling $2 million.
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.
Operating income of $39 million in fiscal 2017 represents a $47 million improvement compared with an operating loss of $8 million in the prior year. Fiscal 2017 operating performance improved in our Europe and Asia segments, while operating performance declined in our Americas and BHVAC segments. Operating income was favorably impacted by the absence of $42 million of pension settlement losses and a $10 million impairment charge recognized in the prior year, $8 million of operating income contributed by the CIS segment, and lower restructuring expenses, partially offset by acquisition- and integration-related costs and the impact of the inventory purchase accounting adjustment totaling $19 million.
Fiscal 2017 interest expense increaseddecreased $6 million compared with the prior year, primarily due to new debt used to financelower severance-related expenses associated with the fiscal 2018 closure of a significant portion of our acquisition of Luvata HTS.manufacturing facility in Gailtal, Austria within the CIS segment.
OtherDuring fiscal 2019, we sold our South African business within the BHVAC segment and, as a result, recorded a loss of $2 million.
Operating income during fiscal 2016 included a $10of $110 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire in fiscal 2014.2019 increased $18 million compared with the prior year, primarily due to higher earnings in the CIS and BHVAC segments, partially offset by lower earnings in the VTS segment.
OurThe benefit for income taxes was $5 million in fiscal 2019, compared with a provision for income taxes was $6of $40 million in fiscal 2017,2018. The $45 million change was primarily due to our accounting for the impacts of the Tax Act. As a result of the Tax Act, we recorded provisional income tax charges totaling $38 million in the prior year, compared with a benefit for income taxes of $9tax benefits totaling $8 million in fiscal 2016. Thethe current year. In addition, we recorded income tax benefitbenefits totaling $17 million in fiscal 2016 includedthe current year resulting from the recognition of tax assets for foreign tax credits and other attributes, partially offset by the absence of a $16 million benefit related to pension settlement losses and a $3$9 million benefit from a development tax credit in Hungary recorded in the reversalprior year and changes in the mix of a deferred tax asset valuation allowance in a foreign tax jurisdiction. The income tax provision in fiscal 2017 includes a $2 million provisionoperating earnings. See Note 8 of the Notes to establish a valuation allowance in a separate foreign tax jurisdiction.Consolidated Financial Statements for additional information.
Year Ended March 31, 20162018 Compared with Year Ended March 31, 2015:2017:
Fiscal 20162018 net sales decreased $143increased $600 million, or 1040 percent, from the prior year, primarily due to lower$444 million of additional sales from our CIS segment, which included sales from the acquired Luvata HTS business that we owned for four months of fiscal 2017, higher sales in each of our 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.
Fiscal 2016 gross profit decreased $23 million to $224 million, 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 favorable 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 initiativesother operating segments, and a $10$55 million favorable impact of foreign currency exchange rate changes.
Restructuring expensesFiscal 2018 gross profit of $357 million increased $12$103 million in fiscal 2016 compared withfrom the prior year, primarily due to severance expenses$66 million of additional gross profit from our CIS segment and higher gross profit in our VTS and BHVAC segments. Gross profit was favorably impacted by $9 million from foreign currency exchange rate changes. Gross margin improved 10 basis points to 17.0 percent, primarily due to higher sales volume, savings resulting from cost-reduction initiatives, improved operating efficiencies, and the absence of a $4 million inventory purchase accounting adjustment recorded in the Europeprior year, partially offset by unfavorable material costs and Americas segmentsincremental depreciation and equipment transfer costs related to plant consolidation activities in the Americas segment.amortization expense resulting from purchase accounting for Luvata HTS.
In fiscal 2016, we recorded a $10Fiscal 2018 SG&A expenses of $246 million impairment charge to write down the carrying value of a manufacturing facility in Germany to fair value. In fiscal 2015, we recorded a goodwill impairment charge of $8 million in Brazil and recognized a gain of $3increased $43 million from the sale of a wind tunnel in Germany.
The operating loss of $8 million in fiscal 2016 represents a $61 million decline from $53 million of operating income in the prior year. This decline wasyear, primarily due to $42a $39 million increase in SG&A expenses in our CIS segment, $4 million of pension settlement losses, lower gross profit,strategy consulting fees incurred during fiscal 2018, higher restructuringcompensation-related expenses, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by ongoing cost-control initiatives.lower costs incurred related to the acquisition of Luvata HTS. SG&A expenses, as a percentage of net sales, decreased 180 basis points compared with the prior year.
Other income duringRestructuring expenses of $16 million in fiscal 2016 included a $102018 increased $5 million gaincompared with the prior year, primarily due to severance-related expenses in the CIS segment related to an insurance settlement for equipment losses resulting from the Airedale fireclosure of a manufacturing facility in Austria.
During fiscal 2018, we recorded impairment charges totaling $3 million related to the closure of the CIS manufacturing facility in Austria and the discontinuance of a product line in our BHVAC segment.
During fiscal 2017, we sold three manufacturing facilities within our VTS segment, two of which were previously closed, and recognized net gains totaling $2 million.
Operating income of $92 million in fiscal 2014.2018 increased $50 million compared with the prior year, primarily due to $18 million of additional operating income contributed by our CIS segment and higher earnings in the VTS and BHVAC segments.
Our benefitFiscal 2018 interest expense increased $9 million compared with the prior year, primarily due to debt issued to finance a significant portion of our acquisition of Luvata HTS.
The provision for income taxes was $9$40 million and $6 million in fiscal 2016, compared with a provision for income taxes of $192018 and 2017, respectively. The $34 million in fiscal 2015. This $28 million changeincrease was primarily due to $16$38 million of provisional charges recorded in fiscal 2018 related to the Tax Act and increased operating earnings, partially offset by income tax benefits related to pension settlement lossestotaling $14 million resulting from i) a development tax credit in fiscal 2016, a decrease in operating earnings, and a $3 million income tax benefit related toHungary ($9 million); ii) the reversal of a deferredportion of the valuation allowance in a foreign jurisdiction ($3 million); and iii) a reduction of unrecognized tax assetbenefits resulting from a lapse in statutes of limitations ($2 million), and the absence of a $2 million provision recorded in the prior year to establish a valuation allowance.allowance in a separate foreign jurisdiction.
Segment Results of Operations
Americas | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 534 | | | | 100.0 | % | | $ | 586 | | | | 100.0 | % | | $ | 667 | | | | 100.0 | % | Cost of sales | | | 447 | | | | 83.8 | % | | | 486 | | | | 82.9 | % | | | 558 | | | | 83.7 | % | Gross profit | | | 87 | | | | 16.2 | % | | | 100 | | | | 17.1 | % | | | 109 | | | | 16.3 | % | Selling, general and administrative expenses | | | 54 | | | | 10.1 | % | | | 55 | | | | 9.4 | % | | | 65 | | | | 9.7 | % | Restructuring expenses | | | 7 | | | | 1.3 | % | | | 9 | | | | 1.5 | % | | | 3 | | | | 0.4 | % | Gain on sale of facilities | | | (1 | ) | | | -0.2 | % | | | - | | | | - | | | | - | | | | - | | Impairment charge | | | - | | | | - | | | | - | | | | - | | | | 8 | | | | 1.2 | % | Operating income | | $ | 27 | | | | 5.0 | % | | $ | 36 | | | | 6.2 | % | | $ | 33 | | | | 5.0 | % |
Since the date we acquired Luvata HTS (November 30, 2016), we have included financial results of this acquired business within our CIS segment. Effective April 1, 2018, we merged our Americas coils business into the CIS segment to accelerate operational improvements and organizational efficiencies and formed the VTS segment by combining our Americas, Europe, and Asia operations to enable us to operate as a more global, product-based organization. We began reporting financial results for our new segments beginning in fiscal 2019. Segment financial information for fiscal 2018 and 2017 has been recast to conform to the fiscal 2019 presentation.
VTS | | | | | | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | Net sales | | $ | 1,352 | | | | 100.0 | % | | $ | 1,296 | | | | 100.0 | % | | $ | 1,152 | | | | 100.0 | % | Cost of sales | | | 1,165 | | | | 86.2 | % | | | 1,095 | | | | 84.5 | % | | | 970 | | | | 84.2 | % | Gross profit | | | 187 | | | | 13.8 | % | | | 201 | | | | 15.5 | % | | | 182 | | | | 15.8 | % | Selling, general and administrative expenses | | | 113 | | | | 8.3 | % | | | 110 | | | | 8.4 | % | | | 106 | | | | 9.2 | % | Restructuring expenses | | | 9 | | | | 0.7 | % | | | 7 | | | | 0.6 | % | | | 10 | | | | 0.9 | % | Gain on sale of assets | | | - | | | | - | | | | - | | | | - | | | | (2 | ) | | | -0.2 | % | Operating income | | $ | 65 | | | | 4.8 | % | | $ | 84 | | | | 6.5 | % | | $ | 68 | | | | 5.9 | % |
Year Ended March 31, 20172019 Compared with Year Ended March 31, 2016:2018:
AmericasVTS net sales decreased $52increased $56 million, or 94 percent, in fiscal 20172019 compared with the prior year, primarily due to higher sales volume to off-highway and automotive customers in North America and Asia, partially offset by lower sales volume to commercial vehicle and off-highway customers in North America,Europe and a $21 million unfavorable impact of foreign currency exchange rate changes. Gross profit decreased $14 million and gross margin declined 170 basis points to 13.8 percent. The decline in gross margin was primarily due to unfavorable material costs, including the impacts of tariffs, and temporary operating inefficiencies largely related to increased volumes and new program launches at certain manufacturing facilities, partially offset by higher sales volume. In addition, foreign currency exchange rate changes had an unfavorable $3 million impact on gross profit. SG&A expenses increased $3 million compared with the prior year, yet decreased 10 basis points as a percentage of sales. The increase in SG&A expenses primarily resulted from higher environmental charges related to previously-owned manufacturing facilities in the U.S. and higher compensation-related expenses, partially offset by a $2 million favorable impact of foreign currency exchange rate changes. Restructuring expenses increased $2 million, primarily due to higher severance expenses. Operating income decreased $19 million to $65 million, primarily due to lower gross profit and higher SG&A and restructuring expenses.
Year Ended March 31, 2018 Compared with Year Ended March 31, 2017:
VTS net sales increased $144 million, or 12 percent, in fiscal 2018 compared with the prior year, primarily due to higher sales volume to off-highway and automotive customers and a $5$42 million favorable impact of foreign currency exchange rate changes. Gross profit decreased $13increased $19 million, and gross margin decreased 90 basis points to 16.2 percent in fiscal 2017. These decreases were primarily due to lowerhigher sales volumevolume. Gross margin declined 30 basis points, primarily due to unfavorable material costs, the absence of favorable customer pricing settlements recorded in the prior year, and temporaryhigher depreciation expense resulting from recent production inefficiencies in North America, largely related to product launches and plant consolidation activities,capacity investments, partially offset by cost savings resulting from procurement initiatives,improved operating efficiencies. In addition, foreign currency exchange rate changes had a favorable material costs and lower environmental costs related to a previously-owned manufacturing facility, as compared with the prior year. Fiscal 2017$7 million impact on gross profit. SG&A expenses decreased $1 million from fiscal 2016, primarily due to lower compensation-related expenses and a higher recovery of development costs, partially offset by a $1.6 million charge related to a legal matter in Brazil for which the Company has agreed to a settlement. In fiscal 2017, we recorded $7 million of restructuring expenses, primarily consisting of equipment transfer and plant consolidation costs related to the closure of our Washington, Iowa manufacturing facility, which we completed during fiscal 2017, and severance expenses. In addition, we sold two closed manufacturing facilities in North America and recognized gains totaling $1 million as a result. Operating income of $27 million in fiscal 2017 decreased $9increased $4 million compared with the prior year, primarily due to lower gross profit.
Year Ended March 31, 2016 Compared with Year Ended March 31, 2015:
Americas net sales decreased $81 million, or 12 percent, in fiscal 2016 compared with the prior year. Sales were lower in both North America and Brazil, including a $25 million unfavorable impact of foreign currency exchange rate changes. Sales in North America decreased $43 million, 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. Gross profit decreased $9 million, yet gross margin increased 80 basis points to 17.1 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, higher compensation-related expenses, and $2 million ofhigher environmental charges related to a previously-owned manufacturing facility in the U.S., partially offset by lower material costs, cost savings from completed restructuring activities, and improved production efficiencies. Fiscal 2016 SG&A expenses decreased $10 million from fiscal 2015, primarily due to cost-control initiatives, the absence of a $3$2 million charge forrecorded in the prior year related to a legal matter in Brazil, in the prior year,which has since been settled and paid. As a percentage of sales, SG&A expenses decreased 80 basis points to 8.4 percent. Restructuring expenses decreased $3 million, favorable impact of foreign currency exchange rate changes. In fiscal 2016, we recorded $9 million of restructuring expenses, primarily consisting of severance expenses associated with a voluntary retirement program in the U.S. and the closure of our Washington, Iowa manufacturing facility,due to lower plant consolidation and equipment transfer costs. In fiscal 2017, we sold three manufacturing facilities and, plant consolidation costs in North America. Operating incomeas a result, recognized gains totaling $2 million.
CIS | | | | | | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | Net sales | | $ | 708 | | | | 100.0 | % | | $ | 676 | | | | 100.0 | % | | $ | 232 | | | | 100.0 | % | Cost of sales | | | 593 | | | | 83.8 | % | | | 578 | | | | 85.5 | % | | | 200 | | | | 86.1 | % | Gross profit | | | 115 | | | | 16.2 | % | | | 98 | | | | 14.5 | % | | | 32 | | | | 13.9 | % | Selling, general and administrative expenses | | | 61 | | | | 8.6 | % | | | 60 | | | | 8.8 | % | | | 21 | | | | 9.2 | % | Restructuring expenses | | | - | | | | - | | | | 8 | | | | 1.2 | % | | | - | | | | - | | Impairment charges | | | - | | | | 0.1 | % | | | 1 | | | | 0.2 | % | | | - | | | | - | | Operating income | | $ | 53 | | | | 7.5 | % | | $ | 29 | | | | 4.2 | % | | $ | 11 | | | | 4.7 | % |
Year Ended March 31, 2019 Compared with Year Ended March 31, 2018:
CIS net sales increased $32 million, or 5 percent, in fiscal 2016 increased $3 million2019 compared with the prior year, primarily due to lower SG&A expenses and the absence of an $8 million goodwill impairment charge in fiscal 2015, partially offset by lower gross profit and higher restructuring expenses. Europe
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 524 | | | | 100.0 | % | | $ | 524 | | | | 100.0 | % | | $ | 578 | | | | 100.0 | % | Cost of sales | | | 443 | | | | 84.6 | % | | | 456 | | | | 87.0 | % | | | 509 | | | | 88.1 | % | Gross profit | | | 81 | | | | 15.4 | % | | | 68 | | | | 13.0 | % | | | 69 | | | | 11.9 | % | Selling, general and administrative expenses | | | 42 | | | | 7.9 | % | | | 39 | | | | 7.4 | % | | | 44 | | | | 7.6 | % | Restructuring expenses | | | 3 | | | | 0.6 | % | | | 6 | | | | 1.2 | % | | | 2 | | | | 0.4 | % | Gain on sale of facility | | | (1 | ) | | | -0.2 | % | | | - | | | | - | | | | (3 | ) | | | -0.6 | % | Impairment charge | | | - | | | | - | | | | 10 | | | | 1.9 | % | | | - | | | | - | | Operating income | | $ | 37 | | | | 7.1 | % | | $ | 13 | | | | 2.5 | % | | $ | 26 | | | | 4.5 | % |
Year Ended March 31, 2017 Compared with Year Ended March 31, 2016:
Europe net sales of $524 million in fiscal 2017 were consistent with the prior year, as higher sales volume to automotivedata center and commercial HVAC&R customers, waspartially offset by lower sales volume to commercial vehicle and off-highwayindustrial customers and a $3$5 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $13$17 million and gross margin improved 240170 basis points to 15.416.2 percent, in fiscal 2017, primarily due to cost savings resulting from procurement initiatives, favorable sales mix, and improved production efficiencies, partially offset by unfavorable material costs. SG&A expenses increased $3 million in fiscal 2017, primarily due to higher compensation-related expenses. In fiscal 2017, we recorded $3 million of restructuring expenses, primarily consisting of severance expenses. In addition, we sold a manufacturing facility in Europe and recognized a gain of $1 million as a result. Operating income of $37 million in fiscal 2017 increased $24 million compared with the prior year, primarily due to higher gross profit and the absence of a $10 million impairment charge in the prior year.
Year Ended March 31, 2016 Compared with Year Ended March 31, 2015:
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. Gross profit decreased $1 million, yet gross margin increased 110 basis points to 13.0 percent in fiscal 2016. The gross margin increase was primarily due to higher sales volume and lower material costs. In addition, gross profit was negatively impacted by $9 million from foreign currency exchange rate changes. Fiscal 2016favorable sales mix. SG&A expenses increased $1 million, yet decreased $520 basis points as a percentage of sales. The $1 million from the prior year,increase in SG&A expenses was primarily due to higher compensation-related expenses, including higher commission costs, partially offset by a $6$1 million favorable impact of foreign currency exchange rate changes. In fiscal 2016, weRestructuring expenses decreased $8 million, primarily due to the absence of severance-related expenses recorded $6 million of restructuring expenses, primarilyin the prior year related to severance expenses. In addition, we recorded a $10 million asset impairment charge. These restructuring expenses and impairment charge primarily related tothe closure of a manufacturing facility in Germany, which was generating pre-tax losses, resulting in management decidingAustria. In fiscal 2018, we recorded a $1 million impairment charge related to exit a certain product line.the closure of the Austrian facility. In fiscal 2019, we recorded an additional impairment charge of less than $1 million related to this facility. Operating income of $13$53 million in fiscal 2016 decreased $13increased $24 million, compared with the prior year, primarily due to higher restructuring expenses, an impairment charge,gross profit and the absence of a $3 million gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&Arestructuring expenses.
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 112 | | | | 100.0 | % | | $ | 79 | | | | 100.0 | % | | $ | 81 | | | | 100.0 | % | Cost of sales | | | 93 | | | | 83.2 | % | | | 67 | | | | 84.5 | % | | | 69 | | | | 85.8 | % | Gross profit | | | 19 | | | | 16.8 | % | | | 12 | | | | 15.5 | % | | | 12 | | | | 14.2 | % | Selling, general and administrative expenses | | | 11 | | | | 9.9 | % | | | 11 | | | | 14.5 | % | | | 12 | | | | 13.9 | % | Operating income | | $ | 8 | | | | 6.9 | % | | $ | 1 | | | | 1.0 | % | | $ | - | | | | 0.3 | % |
Year Ended March 31, 20172018 Compared with Year Ended March 31, 2016:2017:
AsiaCIS financial results for fiscal 2017 primarily include four months of results from the acquired Luvata HTS business. These financial results are not comparable to fiscal 2018, which included a full year of Luvata HTS results.
BHVAC | | | | | | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | Net sales | | $ | 212 | | | | 100.0 | % | | $ | 191 | | | | 100.0 | % | | $ | 172 | | | | 100.0 | % | Cost of sales | | | 149 | | | | 70.1 | % | | | 133 | | | | 69.7 | % | | | 124 | | | | 72.2 | % | Gross profit | | | 63 | | | | 29.9 | % | | | 58 | | | | 30.3 | % | | | 48 | | | | 27.8 | % | Selling, general and administrative expenses | | | 35 | | | | 16.4 | % | | | 36 | | | | 18.8 | % | | | 34 | | | | 19.7 | % | Restructuring expenses | | | - | | | | - | | | | - | | | | 0.2 | % | | | 1 | | | | 0.4 | % | Impairment charge | | | - | | | | - | | | | 1 | | | | 0.7 | % | | | - | | | | - | | Loss on sale of assets | | | 2 | | | | 0.8 | % | | | - | | | | - | | | | - | | | | - | | Operating income | | $ | 27 | | | | 12.6 | % | | $ | 20 | | | | 10.6 | % | | $ | 13 | | | | 7.7 | % |
Year Ended March 31, 2019 Compared with Year Ended March 31, 2018:
BHVAC net sales increased $33$21 million, or 4211 percent, in fiscal 20172019 compared with the prior year, primarily due to higher sales volume to automotiveof air conditioning products and off-highway customersparts and controls in Chinathe U.K. and incremental sales from our recently-formed joint ventureheating products in China,North America, partially offset by a $4$1 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $7$5 million, andyet gross margin improved 130declined 40 basis points to 16.8 percent29.9 percent. This slight decline in gross margin primarily resulted from unfavorable material costs and sales mix, partially offset by higher sales volume. SG&A expenses decreased $1 million compared with the prior year and decreased 240 basis points as a percentage of sales, primarily due to cost-control initiatives. During fiscal 2017,2019, we completed the sale of our business in South Africa, and, as a result, recorded a loss of $2 million. Operating income of $27 million increased $7 million, primarily due to higher gross profit.
Year Ended March 31, 2018 Compared with Year Ended March 31, 2017:
BHVAC net sales volume. Fiscal 2017 SG&A expenses were consistent with the prior year. Operating income of $8increased $19 million, or 11 percent, in fiscal 2017 increased $7 million2018 compared with the prior year, primarily due to higher gross profit.
Year Ended March 31, 2016 Compared with Year Ended March 31, 2015:
Asia net sales decreased $2 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to lower sales volume to off-highway customers in Chinaheating and Korea and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales volume to automotive customers in China and increased overall sales in India. Gross margin improved 130 basis points to 15.5 percent in fiscal 2016 compared with the prior year, primarily due to favorable sales mix. Fiscal 2016 SG&A expenses decreased $1 million from the prior year, primarily due to cost-control initiatives, partially offset by acquisition-related costs associated with a joint venture that we formed in late fiscal 2016. Operating income of $1 million in fiscal 2016 increased $1 million compared with the prior year, primarily due to lower SG&A expenses.
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 172 | | | | 100.0 | % | | $ | 181 | | | | 100.0 | % | | $ | 186 | | | | 100.0 | % | Cost of sales | | | 124 | | | | 72.2 | % | | | 127 | | | | 70.1 | % | | | 130 | | | | 70.0 | % | Gross profit | | | 48 | | | | 27.8 | % | | | 54 | | | | 29.9 | % | | | 56 | | | | 30.0 | % | Selling, general and administrative expenses | | | 34 | | | | 19.8 | % | | | 39 | | | | 21.6 | % | | | 37 | | | | 19.8 | % | Restructuring expenses | | | 1 | | | | 0.4 | % | | | 1 | | | | 0.6 | % | | | - | | | | - | | Operating income | | $ | 13 | | | | 7.6 | % | | $ | 14 | | | | 7.7 | % | | $ | 19 | | | | 10.2 | % |
Year Ended March 31, 2017 Compared with Year Ended March 31, 2016:
BHVAC net sales decreased $9 million, or 5 percent, in fiscal 2017 compared with the prior year, primarily due to an $11 million unfavorable impact of foreign currency exchange rate changes and lower school ventilation and heating product sales in North America partially offset by increased air conditioning product sales in the U.K. Gross profit decreased $6 million and gross margin decreased 210 basis points to 27.8 percent in fiscal 2017, primarily due to unfavorable sales mix, unfavorable material costs and higher depreciation expense in the current year resulting from replacement assets associated with the Airedale fire, which we started to depreciate in the fourth quarter of fiscal 2016. In addition, gross profit was unfavorably impacted by $2 million from foreign currency exchange rate changes. Fiscal 2017 SG&A expenses decreased $5 million from fiscal 2016, primarily due to lower commission costs and compensation-related expenses and a $2 million favorable impact of foreign currency exchange rate changes. In fiscal 2017, we recorded $1 million of restructuring expenses consisting of severance expenses. Operating income of $13 million in fiscal 2017 decreased $1 million compared with the prior year, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Year Ended March 31, 2016 Compared with Year Ended March 31, 2015:
BHVAC 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. Gross profit decreased $2 million in fiscal 2016 compared with the prior year, primarily due to a $1 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased 10 basis points to 29.9 percent in fiscal 2016 compared with the prior year. Fiscal 2016 SG&A expenses increased $2 million from the prior year, primarily due to the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in the prior year, partially offset by lower engineering and development costs and a $1 million favorable impact of foreign currency exchange rate changes. In fiscal 2016, we recordedGross profit increased $10 million and gross margin improved 250 basis points to 30.3 percent, primarily due to higher sales volume and improved operating efficiencies in the U.K. SG&A expenses increased $2 million, primarily due to higher commission costs resulting from higher sales. As a percentage of sales, SG&A expenses decreased 90 basis points. Restructuring expenses decreased $1 million, of restructuring expenses consistingprimarily due to the absence of severance expenses.expenses recorded in the prior year. During fiscal 2018, we discontinued a geothermal product line and, as a result, recorded a $1 million impairment charge for intangible assets we no longer use. Operating income of $14$20 million in fiscal 2016 decreased $5increased $7 million, compared with the prior year, primarily due to lowerhigher gross profit and higher SG&A expenses.profit.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents atas of March 31, 20172019 of $34$42 million, and an available borrowing capacity of $153$124 million under lines ofour revolving credit provided by banks in the United States and abroad.facility. Given our extensive international operations, $32approximately $35 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to U.S. taxforeign withholding taxes if repatriated. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 20172019 was $42$103 million, a decrease of $30$21 million from $72$124 million in the prior year. This decrease in operating cash flow was primarily due to payments for acquisition- and integration-related costs,resulted from unfavorable net changes in working capital, partially offset by the favorable impact of stronger earnings. The unfavorable changes in working capital, as compared with the prior year, included higher incentive compensation and other employee benefit payments and higher payments for restructuring activities.inventory levels associated with higher sales levels.
Net cash provided by operating activities in fiscal 20162018 was $72$124 million, an increase of $8$82 million from $64$42 million in the prior year.fiscal 2017. This increase in operating cash flow was primarily due toresulted from an increase in operating earnings, including additional contributions from our CIS segment, lower payments for costs associated with the acquisition and integration of Luvata HTS and restructuring expenses in the current year, and favorable net changes in working capital, including lower incentive compensation payments during fiscal 2016 and the timing of value-added tax payments.capital.
Capital Expenditures
Capital expenditures of $64$74 million during fiscal 20172019 increased $1$3 million compared with fiscal 2016. In fiscal 2017,2018, primarily due to higher capital expenditures in our CIS segment, including investments to expand manufacturing capacity in Serbia and Mexico. Similar to prior years, our capital spending in fiscal 2019 primarily occurred in the Americas and Europe segments,VTS segment, which totaled $26$56 million, and $25 million, respectively. Capital projects in fiscal 2017 included tooling and equipment purchases in conjunction with new and renewal programs with customers, as well as expansions of ourinvestments to expand manufacturing capacity in MexicoChina and Hungary.
At March 31, 2017,2019, our capital expenditure commitments totaled $18$24 million. Significant commitments included tooling and equipment expenditures for new and renewal programs with customers in the Americas, Asia, North America, and Europe segments.
Dividends
We did not pay dividends in fiscal 2017, 2016, or 2015. We currently do not intend to pay dividends in fiscal 2018.within the VTS segment.
Debt
Our total debt outstanding increased $348decreased $30 million to $511$450 million at March 31, 20172019 compared with the prior year, primarily due to new long-termrepayments of debt and borrowings under our revolving credit facility used to finance a significant portion of the $364 million cash consideration for our acquisition of Luvata HTS.during fiscal 2019. See Note 1517 of the Notes to Consolidated Financial Statements for additional information regarding our new credit agreements.
Our debt agreements require us to maintain compliance with various covenants. The term loans require prepayments, asAs defined in the credit agreement, the term loans may require prepayments in the event the Company’sour annual excess cash flow exceeds defined levels, depending upon our leverage ratio, or in the event of certain asset sales. In addition, under our primary debt agreements in the U.S., we are subject to a leverage ratio covenant,covenants, the most restrictive of which requires us to limit our consolidated indebtedness, less a certain portion of our cash balance, both as defined by the credit agreements,agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). As permitted by the credit agreements and in connection with our acquisition of Luvata HTS, the leverage ratio covenant limit has been temporarily raised to no more than three and three-quarters times Adjusted EBITDA through the second quarter of fiscal 2018, and thereafter to no more than three and one-half times Adjusted EBITDA through the first quarter of fiscal 2019. 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. OurMarch 31, 2019, our leverage ratio at March 31, 2017 was 2.9, which was below the maximum permitted ratio of 3.75. Ourand interest expense coverage ratio at March 31, 2017 was 7.0, which exceeded the minimum requirement of 3.0.were 2.1 and 9.0, respectively. We were in compliance with our debt covenants as of March 31, 20172019 and expect to remain in compliance during fiscal 20182020 and beyond.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
| | March 31, 2017 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 436.2 | | | $ | 31.3 | | | $ | 81.6 | | | $ | 281.6 | | | $ | 41.7 | | Interest associated with long-term debt | | | 73.9 | | | | 18.5 | | | | 31.8 | | | | 17.0 | | | | 6.6 | | Capital lease obligations | | | 8.0 | | | | 0.5 | | | | 0.8 | | | | 0.8 | | | | 5.9 | | Operating lease obligations | | | 69.3 | | | | 12.2 | | | | 19.2 | | | | 13.2 | | | | 24.7 | | Capital expenditure commitments | | | 18.1 | | | | 17.1 | | | | 1.0 | | | | - | | | | - | | Other long-term obligations | | | 4.8 | | | | 2.4 | | | | 1.7 | | | | 0.7 | | | | - | | Total contractual obligations | | $ | 610.3 | | | $ | 82.0 | | | $ | 136.1 | | | $ | 313.3 | | | $ | 78.9 | |
| | March 31, 2019 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 377.7 | | | $ | 48.2 | | | $ | 287.8 | | | $ | 16.7 | | | $ | 25.0 | | Interest associated with long-term debt | | | 40.9 | | | | 16.0 | | | | 18.3 | | | | 4.1 | | | | 2.5 | | Operating lease obligations | | | 70.4 | | | | 14.2 | | | | 21.5 | | | | 11.8 | | | | 22.9 | | Capital expenditure commitments | | | 23.6 | | | | 23.6 | | | | - | | | | - | | | | - | | Other long-term obligations (a) | | | 13.3 | | | | 1.4 | | | | 2.1 | | | | 2.0 | | | | 7.8 | | Total contractual obligations | | $ | 525.9 | | | $ | 103.4 | | | $ | 329.7 | | | $ | 34.6 | | | $ | 58.2 | |
| (a) | Includes capital lease obligations and other long-term obligations. |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $139$119 million as of March 31, 2017.2019. We are unable to determine the ultimate timing of payments for these liabilities; therefore, we have excluded these amounts from the contractual obligations table above. We expect to contribute $13$3 million to our U.S. pension plans during fiscal 2018.2020.
Critical Accounting Policies
The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements. Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements. The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements. In addition, recently issued accounting pronouncements that could significantly impact our financial statementsstatement are includeddisclosed in Note 1 of the Notes to Consolidated Financial Statements.
Revenue Recognition
In fiscal 2019, we adopted new revenue recognition accounting guidance. See Note 1 of the Notes to Consolidated Financial Statements for additional information. In accordance with this new accounting guidance, we recognize revenue based upon consideration specified in a contract and as we satisfy performance obligations by transferring control over our products to our customers, which may be at a point in time or over time. The majority of our revenue is recognized at a point in time, based upon shipment terms. A limited number of our customer contracts provide an enforceable right to payment for performance completed to date. For these contracts, we recognize revenue over time based upon our estimated progress towards the satisfaction of the contract’s performance obligations. We record an allowance for doubtful accounts for estimated uncollectible receivables and we accrue for estimated warranty costs at the time of sale. We base these estimates upon historical experience, current business trends, and current economic conditions.
Acquisitions
From time to time, we make strategic acquisitions that have a material impact on our consolidated results of operations or financial position. We allocate the purchase price of acquired businesses to the identifiable tangible and intangible assets acquired and liabilities assumed in the transaction based upon their estimated fair values as of the acquisition date. We determine the estimated fair values using information available to us and engage third-party valuation specialists when necessary. The estimates we use to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. While we use our best estimates and assumptions, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statement of operations. We are also required to estimate the useful lives of intangible assets to determine the amount of amortization expense to record in future periods. We periodically review the estimated useful lives assigned to our intangible assets to determine whether such estimated useful lives continue to be appropriate. During fiscal 2017, we acquired Luvata HTS. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding this acquisition.
Revenue Recognition
We recognize revenue, including agreed-upon commodity 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. We recognize price increases that are agreed upon in advance 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 net asset values exceed undiscounted cash flows expected to be generated by the assets, or the decline in value is considered to be “other than temporary,” we write down the assets to fair value and record an impairment charge to current operations. We estimate fair value in various ways depending on the nature of the assets under review.underlying assets. Fair value is generally based upon appraised value, estimated salvage value, or selling prices under negotiation, as applicable.
The most significant long-lived assets we evaluated for impairment indicators were property, plant and equipment and intangible assets, which totaled $459$485 million and $134$116 million, respectively, at March 31, 2017, respectively.2019. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment. Our most significant intangible assets evaluated are customer relationships, trade names, and acquired technology, the majority of which are related to our recent acquisition of Luvata HTS. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding this acquisition. CIS segment. We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility. This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy. When such indicators are present, we perform an impairment evaluation.
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. We consider factors such as operating losses, declining financial and market outlooks, and market capitalization when evaluating the necessity for an interim impairment analysis. We test goodwill for impairment at a reporting unit level. Reporting units resulting from recent acquisitions generally represent the highest risk of impairment, which typically decreases as the businesses are integrated into the Company and positioned for future operating and financial performance. Our first step in theWe test goodwill for impairment test is to compareby comparing the fair value of theeach reporting unit towith its carrying value. We determine the fair value of a reporting unit based upon the present value of estimated future cash flows. If the fair value of thea reporting unit exceeds the carrying value of the reporting unit’s net assets, goodwill of that reporting unit is not impaired and further testing is not required. Ifimpaired. However, if the carrying value of the reporting unit’s net assets exceeds theits fair value, ofwe would conclude goodwill is impaired and would record an impairment charge equal to the unit, then we perform the second step of the impairment test to determine the implied fair value ofamount that the reporting unit’s goodwill and any impairment charge. In estimating the implied fair value of goodwill for a reporting unit, we assign fair value to the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of the reporting unit goodwill overexceeds its implied fair value is recorded as an impairment charge.value. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rate, business trends and market conditions. We determine the expected future revenue growth rates and operating profit margins after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for country-specific risks where appropriate.
At March 31, 2017,2019, our goodwill totaled $165$169 million, primarily related to our recently-acquired CIS segment and our BHVAC segment. We will complete goodwill impairment tests for the CISsegments. Each of these segments is comprised of two reporting units in fiscal 2018, within one year of the acquisition date. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding this acquisition.units. We conducted annual goodwill impairment tests for our BHVAC and Asia segments during the fourth quarter of fiscal 20172019 by applying a fair value-based test and determined the fair value of theeach of our reporting units substantially exceeded theirthe respective book values.value.
Warranty Costs
We estimate costs related to product warranties and accrue for such costs at the time of the sale, within cost of sales. We estimate warranty costs based upon the best information available, which includes statistical and analytical analysis of both historical and current claim data. We monitor and adjust our warranty accruals, which totaled $10$9 million at March 31, 2017,2019, if it is probable that expected claims will differ from previous estimates.
Pension Obligations
Our calculation of the expense and liabilities of our pension plans is dependent upon various assumptions. At March 31, 2017,2019, our pension liabilities totaled $122$104 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality rate tables. We base our selection of assumptions on historical trends and economic and market conditions at the time of valuation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods. These differences impact future pension expenses. Currently, participants in our domestic pension plans are not accruing benefits based upon their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.
For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our benefit plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in both fiscal 20172019 and 20162018 was 8.07.5 percent. For fiscal 2018,2020, we have also assumed a rate of 7.5 percent. This 50A change of 25 basis point decreasepoints in the expected rate of return on assets as compared with the prior year, resulted in an increase of less than $1 million inwould impact our estimated fiscal 20182020 pension expense.expense by $0.4 million.
The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds on the measurement date of March 31. For fiscal 20172019 and 2016,2018, for purposes of determining pension expense, we used a discount rate of 4.0 and 4.1 percent.percent, respectively. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows from the affectedour plans. See Note 1618 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 20182020 pension expense by less than $1 million.
Income Taxes
We operate in numerous taxing jurisdictions; therefore, we are subject to regular examinations by federal, state and non-U.S. taxing authorities. Due to the application of complex and sometimes ambiguous tax laws and rulings in the jurisdictions in which we do business, there is an inherent level of uncertainty within our worldwide tax provisions. Despite our belief that our tax return positions are consistent with applicable tax laws, it is possible that taxing authorities could challenge certain positions.
The Tax Act was enacted in December 2017 and included numerous changes to existing U.S. tax regulations, including U.S. corporate tax rates, business deductions, and taxes on income in foreign jurisdictions. We completed our accounting for the impacts of the Tax Act during fiscal 2019. Additional impacts from the Tax Act could result if there are changes in interpretations or applications of the Tax Act’s provisions or if supplementary regulatory guidance is issued.
Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. We adjust these amounts to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in a particular jurisdiction will not be realized. This determination involves significant judgment. In performing this assessment on a jurisdiction-by-jurisdiction basis, we consider historical and projected financial results along with other pertinent information.
We have not recorded a provision for U.S. income taxes on undistributed earnings from our non-U.S. subsidiaries that we have determined to be permanently reinvested in our foreign operations. If management’s intentions or U.S. tax law changes in the future, there could be a significant negative impact on our provision for income taxes. See Note 78 of the Notes to Consolidated Financial Statements for additional information regarding income taxes.
Other Loss Reserves
We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, self-insurance reserves, uncollectible accounts receivable, regulatory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. We estimate these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Note 1820 of the Notes to Consolidated Financial Statements for additional information regarding contingencies and litigation.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of this report.report and identified in our other public filings with the U.S. Securities and Exchange Commission. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| · | Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs, inflation, changes in interest rates, recession and recovery therefrom, restrictions and uncertainty associated with cross-border trade, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China and North America, the still-weak forecasts for the Brazilian economy, and the general uncertainties about the impact of potential regulatory and/or policy changes, including those related to tax and trade, that may be implemented in the United States, as well as continuing uncertainty regarding the longer-term implications of “Brexit”; |
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs (and any potential trade war resulting from tariffs or retaliatory actions), inflation, changes in interest rates, recession and recovery therefrom, restrictions and uncertainty associated with cross-border trade, and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, that have been or may be implemented in the United States or by its trade partners, as well as continuing uncertainty regarding the timing and the short- and long-term implications of “Brexit”;
| · | The impact of potential increases in commodity prices, including our ability to successfully manage our exposure and/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel) on to customers, as well as the inherent lag in timing of such pass-through arrangements; and |
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums or fabrication costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs and the behavior of our suppliers. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
| · | The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives. |
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
| · | Our ability to integrate the former Luvata HTS operations into Modine, realize cost and revenue synergies in accordance with our expectations, and effectively manage any unanticipated risks that arise, while also maintaining stability within the acquired business and appropriate focus on the rest of Modine’s business; |
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
| · | The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; |
Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
| · | Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability; |
| · | Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims; |
| · | 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; |
Unanticipated product or manufacturing difficulties or operating inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims;
| · | Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor pools, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine; |
Unanticipated delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| · | Costs and other effects of the investigation and remediation of environmental contamination; |
Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;
| · | Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith; |
Our ability to effectively and efficiently complete restructuring activities and realize the anticipated benefits of those activities;
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; |
Costs and other effects of the investigation and remediation of environmental contamination; particularly when related to the actions or inactions of others and/or facilities over which we have no control;
| · | The constant and increasing pressures associated with healthcare and associated insurance costs; and |
Our ability to recruit and maintain talent, including personnel in managerial, leadership and administrative functions, in light of tightening global labor markets;
| · | Costs and other effects of unanticipated litigation, claims, or other obligations, including those associated with our acquisition of Luvata HTS. |
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
The constant and increasing pressures associated with healthcare and associated insurance costs; and
Costs and other effects of unanticipated litigation, claims, or other obligations.
Strategic Risks:
| · | Our ability to successfully take advantage of our increased presence in the “industrial” markets, with our Building HVAC and Commercial and Industrial Solutions businesses, without shifting attention away from our vehicular business, where we enjoy and desire to preserve a leading position; and |
Our ability to successfully take advantage of our increased presence in the “industrial” markets, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our VTS business;
| · | Our ability to identify and execute additional growth and diversification opportunities in order to position us for long-term success. |
The success of our evaluation of strategic alternatives for our automotive business within our VTS segment in optimizing the segment’s future profitability;
Our ability to identify and execute additional growth and diversification opportunities in order to position us for long-term success; and
The potential expense, disruption or other impacts that could result from unanticipated actions by activist shareholders.
Financial Risks:
| · | Our ability to fund our global liquidity requirements efficiently for Modine’s current operations, particularly those in our Asia business segment, and meet our long-term commitments in the event of an unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of an unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;
| · | The impact of potential increases in interest rates, particularly in LIBOR and EURIBOR in relation to our variable-rate debt obligations; |
Our ability to maintain our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) in our target range of 1.5 to 2.5 in an efficient manner;
| · | Our ability to bring our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) back into our target range of 1.5 to 2.5 in an efficient manner following our acquisition of Luvata HTS; |
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
| · | Costs arising from the integration of Luvata HTS and the timing and impact of potential purchase accounting adjustments; |
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
| · | The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, and British pound, relative to the U.S. dollar; and |
| · | Our ability to effectively realize the benefits of tax assets in various jurisdictions in whichForward-looking statements are as of the date of this report; we operate. |
In addition to the risks set forth above, we are subject to other risks and uncertainties as identified in our public filings with the U.S. Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
In the normal course of business, we are subject to market exposure from changes in foreign currency exchange rates, interest rates, commodity prices, credit risk and economic conditions.
Foreign Currency Risk
We are subject to the risk of changes in foreign currency exchange rates due to our operations in foreign countries. We have manufacturing facilities in Brazil, China, India, Mexico, South Africa, and throughout Europe. We also have joint ventures in China, Japan and South Korea. We sell and distribute products throughout the world and also purchase raw materials from suppliers in foreign countries. As a result, our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which we do business. WeWhenever possible, we attempt to mitigate foreign currency risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the functional currency of the entity engaging in the transaction. In addition, for certain transactions that are denominated in a currency other than the engaging entity’s functional currency, we may enter into foreign currency derivative contracts to further manage our foreign currency risk. In fiscal 2017,2019, we recorded realized and unrealizeda net loss of $1 million within our statement of operations related to foreign currency gains and losses that netted to a loss of $2 million, which we reported in other income and expense in the consolidated statement of operations.derivative contracts. In addition, our consolidated financial results are impacted by the translation of revenue and expenses in foreign currencies into U.S. dollars. These translation impacts are primarily affected by changes in exchange rates between the U.S. dollar and European currencies, primarily the euro, and changes between the U.S. dollar and the Brazilian real, and between the euro and the British pound.real. In fiscal 2017,2019, more than 50 percent of our sales were generated in countries outside the U.S. A change in foreign currency exchange rates will positively or negatively affect our sales; however, this impact will be offset, usually to a large degree, with a corresponding effect on our cost of sales and other expenses. In fiscal 2017,2019, changes in foreign currency exchange rates negativelyunfavorably impacted our sales by $13$28 million; however, the impact on our operating income was less than $1 million. Foreign currency exchange rate risk can be estimated by measuring the impact of a near-term adverse movement of 10 percent in foreign currency exchange rates. If these rates were 10 percent higher or lower during fiscal 2017,2019, there would not have been a material impact on our fiscal 20172019 earnings.
We maintain foreign-denominated, long-termforeign currency-denominated debt obligations and long-term intercompany loans that are subject to foreign currency exchange risk. As of March 31, 2017, we did not have any long-termWe seek to mitigate this risk through maintaining offsetting positions between external and intercompany loans for which changes in foreign currency exchange rates could materially impact our net earnings.loans; however, Fromfrom time to time, we also enter into foreign currency rate derivative contracts to manage the foreigncurrency exchange rate exposure on these types of loans.exposure. These derivative instruments are typically not accounted for as hedges, and accordingly, gains or losses on the derivatives are recorded in other income and expense in the consolidated statements of operations and act totypically offset anythe foreign currency movementchanges on the outstanding loans receivable or payable.loans.
Interest Rate Risk
We actively seek to reduce the potential volatility of earnings that could arise from changes in interest rates. We generally utilize a mixture of debt maturities and both fixed-rate and variable-rate debt to manage exposure to changes in interest rates. Interest on both our term loans and borrowings under our primary multi-currency revolving credit facility is based upon a variable interest rate, primarily either the London Interbank Offered Rate (“LIBOR”)LIBOR or Euro Interbank Offered Rate (“EURIBOR”),EURIBOR, plus 137.5 to 250 basis points, depending on our leverage ratio. We are subject to risk of fluctuations in LIBOR and EURIBOR and changes in our leverage ratio, which would affect the variable interest rate on our term loans and revolving credit facility and could create variability in interest expense. As of March 31, 2017,2019, our outstanding borrowings on the variable-rate term loans and the revolving credit facility totaled $269$238 million and $40$47 million, respectively. Based upon our outstanding debt with variable interest rates at March 31, 2017,2019, a 100 basis point increase in interest rates would increase our annual interest expense in fiscal 20182020 by approximately $3 million.
Commodity Price Risk
We are dependent upon the supply of raw materials and supplies in our production processes and, from time to time, enter into firm purchase commitments for aluminum, copper, nickel, and natural gas. We maintain agreements with certainCommodity price risk is most prevalent to our vehicular businesses, which provide customized production and service parts to customers to pass through specified raw material price fluctuations inunder multi-year programs. In order to mitigate commodity price risk. The majority ofrisk specific to these agreements containlong-term sales programs, we maintain contract provisions in which the pass-through of thewith certain customers that allow us to prospectively adjust prices based upon raw material price fluctuations canfluctuations. These prospective price adjustments generally lag behind the actual raw material price fluctuations by three months or longer, and typically the arrangementscontract provisions are limited to the underlying material cost based upon the London Metal Exchange and exclude additional cost elements, such as related premiums and fabrication. For our industrial businesses, we predominantly seek to mitigate commodity price risk by adjusting product pricing in response to any applicable price increases. Credit Risk
Credit risk represents the possibility of loss from a customer failing to make payment according to contract terms. Our principal credit risk consists of outstanding trade accounts receivable. At March 31, 2017, 352019, 38 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, commercial vehicle, off-highway, data center cooling and off-highwaycommercial air conditioning markets and are influenced by similar market and general economic factors. In the past, credit losses from our customers have not been significant.
We manage credit risk through a focus on the following:
| · | Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. We consider our holdings in cash and investments to be stable and secure at March 31, 2017;Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. We consider our holdings in cash and investments to be stable and secure at March 31, 2019; |
| · | 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'sTrade 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.Insurance – We monitor our insurance providers to ensure they maintain financial ratings that are acceptable to us. We have not identified any concerns in this regard based upon our reviews. |
Economic Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate. We sell a broad range of products that provide thermal solutions to customers operating primarily in the automotive, commercial vehicle, off-highway, and commercial, industrial, and building HVAC&R markets. We operate in diversified markets as a strategy for offsetting the risk associated with a downturn in any of the markets we serve. However, risk associated with market downturns is still present.
We monitor economic conditions in the U.S. and abroad. As we expand our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes, and the like. We continue to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions.
We pursue new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon our ability to commercialize our investments. Current examples of new and emerging markets for us include those related to waste heat recovery,electric vehicles, coils and coolers outside of North America and the U.K.,in certain markets, and coatings. Our investment in these areas is subject to the risks associated with business integration, technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
We anticipate that recovery within some36
In an effort to manage and reduce our costs, we have been consolidating our supply base. As a result, we are dependent upon limited sources of supply for certain components used in the manufacture of our geographic and end markets may put production pressure on certain suppliers of our raw materials. In particular, there are a limited number of suppliers ofproducts, including aluminum, copper, steel and stainless steel material.(nickel). We are exposed to the risk of suppliers of certain raw materials not being able or willing to meet strong customer demand (including the potential effects of trade laws and tariffs), as they may not increase their output capacity as quickly as customers increase their orders, and of increased prices being charged by raw material suppliers.
In addition, we purchase parts from suppliers that use our tooling to create the parts. In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts. As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require. Even in situations where suppliers are manufacturing parts without the use of our tooling, we face the challenge of obtaining consistently high-quality parts from suppliers that are financially stable. We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate higher-risk supplier situations. In addition to the above risks on the supply side, we are also exposed to risks associated with demands by our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, but these agreements oftensometimes contain provisions for future price reductions. In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: From time to time, we enter into futuresover-the-counter forward contracts related to certain forecasted purchases of aluminum and copper. Our strategy is to reduce our exposure to changing market prices for future purchases of these commodities. In fiscal 2019 and 2018, we designated certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, we record unrealized gains and losses related to the change in the fair value of the contracts in other comprehensive income (loss) within shareholders’ equity and subsequently recognize the gains and losses within cost of sales as the underlying inventory is sold. In fiscal 2017, 2016we did not designate commodity forward contracts for hedge accounting. Accordingly, unrealized gains and 2015,losses on these contracts were recorded within cost of sales. In fiscal 2019, 2018, and 2017, net gains and losses related to commodity derivativeforward contracts which are reported in cost of sales in the consolidated statements of operations, were less than $1 million in each year.
Foreign currency forward contracts: We use derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency exchangeforward contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. We have designated certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, we record unrealized gains and losses related to the change in the fair value of the contracts in other comprehensive income (loss) within shareholders’ equity and subsequently recognize the gains and losses as a component of earnings at the same time and in the same financial statement line that the underlying transactions impact earnings. We have not designated these forward contracts related to foreign currency-denominated assets and liabilities as hedges. Accordingly, for these non-designated contracts, we record unrealized gains and losses related to the change in the fair value of the contracts in other income and expense. Gains and losses on these non-designated foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
Counterparty risks: We manage counterparty risks by ensuring that counterparties to derivative instruments havemaintain credit ratings acceptable to us. At March 31, 2017,2019, all counterparties had a sufficient long-term credit rating.
ITEM 8. ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2017, 20162019, 2018 and 20152017 (In millions, except per share amounts)
| | 2017 | | | 2016 | | | 2015 | | Net sales | | $ | 1,503.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | | Cost of sales | | | 1,249.7 | | | | 1,129.0 | | | | 1,249.9 | | Gross profit | | | 253.3 | | | | 223.5 | | | | 246.5 | | Selling, general and administrative expenses | | | 205.0 | | | | 204.5 | | | | 184.5 | | Restructuring expenses | | | 10.9 | | | | 16.6 | | | | 4.7 | | Gain on sale of facilities | | | (2.0 | ) | | | - | | | | (3.2 | ) | Impairment charges | | | - | | | | 9.9 | | | | 7.8 | | Operating income (loss) | | | 39.4 | | | | (7.5 | ) | | | 52.7 | | Interest expense | | | (17.2 | ) | | | (11.1 | ) | | | (11.7 | ) | Other (expense) income – net | | | (1.4 | ) | | | 8.7 | | | | 0.2 | | Earnings (loss) from continuing operations before income taxes | | | 20.8 | | | | (9.9 | ) | | | 41.2 | | (Provision) benefit for income taxes | | | (5.9 | ) | | | 8.9 | | | | (19.0 | ) | Earnings (loss) from continuing operations | | | 14.9 | | | | (1.0 | ) | | | 22.2 | | Earnings from discontinued operations, net of income taxes | | | - | | | | - | | | | 0.6 | | Net earnings (loss) | | | 14.9 | | | | (1.0 | ) | | | 22.8 | | Net earnings attributable to noncontrolling interest | | | (0.7 | ) | | | (0.6 | ) | | | (1.0 | ) | Net earnings (loss) attributable to Modine | | $ | 14.2 | | | $ | (1.6 | ) | | $ | 21.8 | | | | | | | | | | | | | | | Earnings (loss) per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.45 | | Diluted | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.44 | | | | | | | | | | | | | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.46 | | Diluted | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.45 | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | Basic | | | 47.8 | | | | 47.3 | | | | 47.2 | | Diluted | | | 48.3 | | | | 47.3 | | | | 47.8 | |
| | 2019 | | | 2018 | | | 2017 | | Net sales | | $ | 2,212.7 | | | $ | 2,103.1 | | | $ | 1,503.0 | | Cost of sales | | | 1,847.2 | | | | 1,746.6 | | | | 1,248.6 | | Gross profit | | | 365.5 | | | | 356.5 | | | | 254.4 | | Selling, general and administrative expenses | | | 244.1 | | | | 245.8 | | | | 203.2 | | Restructuring expenses | | | 9.6 | | | | 16.0 | | | | 10.9 | | Impairment charges | | | 0.4 | | | | 2.5 | | | | - | | Loss (gain) on sale of assets | | | 1.7 | | | | - | | | | (2.0 | ) | Operating income | | | 109.7 | | | | 92.2 | | | | 42.3 | | Interest expense | | | (24.8 | ) | | | (25.6 | ) | | | (17.2 | ) | Other expense - net | | | (4.1 | ) | | | (3.3 | ) | | | (4.3 | ) | Earnings before income taxes | | | 80.8 | | | | 63.3 | | | | 20.8 | | Benefit (provision) for income taxes | | | 5.1 | | | | (39.5 | ) | | | (5.9 | ) | Net earnings | | | 85.9 | | | | 23.8 | | | | 14.9 | | Net earnings attributable to noncontrolling interest | | | (1.1 | ) | | | (1.6 | ) | | | (0.7 | ) | Net earnings attributable to Modine | | $ | 84.8 | | | $ | 22.2 | | | $ | 14.2 | | | | | | | | | | | | | | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 1.67 | | | $ | 0.44 | | | $ | 0.29 | | Diluted | | $ | 1.65 | | | $ | 0.43 | | | $ | 0.29 | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | Basic | | | 50.5 | | | | 49.9 | | | | 47.8 | | Diluted | | | 51.3 | | | | 50.9 | | | | 48.3 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended March 31, 2017, 20162019, 2018 and 20152017 (In millions)
| | 2017 | | | 2016 | | | 2015 | | Net earnings (loss) | | $ | 14.9 | | | $ | (1.0 | ) | | $ | 22.8 | | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | (10.8 | ) | | | 4.6 | | | | (68.2 | ) | Defined benefit plans, net of income taxes of $1.7, $11.8 and ($13.2) million | | | 3.2 | | | | 19.7 | | | | (26.7 | ) | Total other comprehensive (loss) income | | | (7.6 | ) | | | 24.3 | | | | (94.9 | ) | | | | | | | | | | | | | | Comprehensive income (loss) | | | 7.3 | | | | 23.3 | | | | (72.1 | ) | Comprehensive income attributable to noncontrolling interest | | | (0.7 | ) | | | (0.5 | ) | | | (0.8 | ) | Comprehensive income (loss) attributable to Modine | | $ | 6.6 | | | $ | 22.8 | | | $ | (72.9 | ) |
| | 2019 | | | 2018 | | | 2017 | | Net earnings | | $ | 85.9 | | | $ | 23.8 | | | $ | 14.9 | | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | (37.6 | ) | | | 41.8 | | | | (10.8 | ) | Defined benefit plans, net of income taxes of ($0.3), ($0.2) and $1.7 million | | | (1.4 | ) | | | 0.1 | | | | 3.2 | | Cash flow hedges, net of income taxes of $0.1, $0.1 and $0 million | | | 0.4 | | | | 0.1 | | | | - | | Total other comprehensive income (loss) | | | (38.6 | ) | | | 42.0 | | | | (7.6 | ) | | | | | | | | | | | | | | Comprehensive income | | | 47.3 | | | | 65.8 | | | | 7.3 | | Comprehensive income attributable to noncontrolling interest | | | (0.6 | ) | | | (2.1 | ) | | | (0.7 | ) | Comprehensive income attributable to Modine | | $ | 46.7 | | | $ | 63.7 | | | $ | 6.6 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS March 31, 20172019 and 20162018 (In millions, except per share amounts)
| | 2017 | | | 2016 | | ASSETS | | | | | | | Cash and cash equivalents | | $ | 34.2 | | | $ | 68.9 | | Trade accounts receivable – net | | | 295.2 | | | | 189.1 | | Inventories | | | 168.5 | | | | 111.0 | | Other current assets | | | 55.4 | | | | 43.5 | | Total current assets | | | 553.3 | | | | 412.5 | | Property, plant and equipment – net | | | 459.0 | | | | 338.6 | | Intangible assets – net | | | 134.1 | | | | 8.2 | | Goodwill | | | 165.1 | | | | 15.8 | | Deferred income taxes | | | 108.4 | | | | 123.1 | | Other noncurrent assets | | | 29.6 | | | | 22.7 | | Total assets | | $ | 1,449.5 | | | $ | 920.9 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | Short-term debt | | $ | 73.4 | | | $ | 28.6 | | Long-term debt – current portion | | | 31.8 | | | | 8.5 | | Accounts payable | | | 230.3 | | | | 142.4 | | Accrued compensation and employee benefits | | | 74.8 | | | | 58.6 | | Other current liabilities | | | 45.1 | | | | 35.5 | | Total current liabilities | | | 455.4 | | | | 273.6 | | Long-term debt | | | 405.7 | | | | 125.5 | | Deferred income taxes | | | 9.7 | | | | 4.2 | | Pensions | | | 119.4 | | | | 118.6 | | Other noncurrent liabilities | | | 38.1 | | | | 16.3 | | Total liabilities | | | 1,028.3 | | | | 538.2 | | Commitments and contingencies (see Note 18) | | | | | | | | | 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 51.8 million and 49.0 million shares | | | 32.4 | | | | 30.6 | | Additional paid-in capital | | | 216.4 | | | | 185.6 | | Retained earnings | | | 372.4 | | | | 358.2 | | Accumulated other comprehensive loss | | | (181.8 | ) | | | (174.2 | ) | Treasury stock, at cost, 1.7 million and 1.6 million shares | | | (25.4 | ) | | | (24.0 | ) | Total Modine shareholders' equity | | | 414.0 | | | | 376.2 | | Noncontrolling interest | | | 7.2 | | | | 6.5 | | Total equity | | | 421.2 | | | | 382.7 | | Total liabilities and equity | | $ | 1,449.5 | | | $ | 920.9 | |
| | 2019 | | | 2018 | | ASSETS | | | | | | | Cash and cash equivalents | | $ | 41.7 | | | $ | 39.3 | | Trade accounts receivable – net | | | 338.6 | | | | 342.4 | | Inventories | | | 200.7 | | | | 191.3 | | Other current assets | | | 65.8 | | | | 70.1 | | Total current assets | | | 646.8 | | | | 643.1 | | Property, plant and equipment – net | | | 484.7 | | | | 504.3 | | Intangible assets – net | | | 116.2 | | | | 129.9 | | Goodwill | | | 168.5 | | | | 173.8 | | Deferred income taxes | | | 97.1 | | | | 96.9 | | Other noncurrent assets | | | 24.7 | | | | 25.4 | | Total assets | | $ | 1,538.0 | | | $ | 1,573.4 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | Short-term debt | | $ | 66.0 | | | $ | 53.2 | | Long-term debt – current portion | | | 48.6 | | | | 39.9 | | Accounts payable | | | 280.9 | | | | 277.9 | | Accrued compensation and employee benefits | | | 81.7 | | | | 97.3 | | Other current liabilities | | | 39.9 | | | | 47.2 | | Total current liabilities | | | 517.1 | | | | 515.5 | | Long-term debt | | | 335.1 | | | | 386.3 | | Deferred income taxes | | | 8.2 | | | | 9.9 | | Pensions | | | 101.7 | | | | 109.6 | | Other noncurrent liabilities | | | 34.8 | | | | 53.6 | | Total liabilities | | | 996.9 | | | | 1,074.9 | | Commitments and contingencies (see Note 20) | | | | | | | | | Shareholders’ equity: | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 52.8 million and 52.3 million shares | | | 33.0 | | | | 32.7 | | Additional paid-in capital | | | 238.6 | | | | 229.9 | | Retained earnings | | | 472.1 | | | | 394.9 | | Accumulated other comprehensive loss | | | (178.4 | ) | | | (140.3 | ) | Treasury stock, at cost, 2.1 million and 1.8 million shares | | | (31.4 | ) | | | (27.1 | ) | Total Modine shareholders’ equity | | | 533.9 | | | | 490.1 | | Noncontrolling interest | | | 7.2 | | | | 8.4 | | Total equity | | | 541.1 | | | | 498.5 | | Total liabilities and equity | | $ | 1,538.0 | | | $ | 1,573.4 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended March 31, 2017, 20162019, 2018 and 20152017 (In millions)
| | 2017 | | | 2016 | | | 2015 | | Cash flows from operating activities: | | | | | | | | | | Net earnings (loss) | | $ | 14.9 | | | $ | (1.0 | ) | | $ | 22.8 | | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 58.3 | | | | 50.2 | | | | 51.6 | | Gain on sale of facilities | | | (2.0 | ) | | | - | | | | (3.2 | ) | Impairment charges | | | - | | | | 9.9 | | | | 7.8 | | Insurance proceeds from Airedale fire | | | - | | | | 5.9 | | | | 12.9 | | Pension and postretirement expense | | | 3.4 | | | | 45.1 | | | | 2.3 | | Deferred income taxes | | | (4.6 | ) | | | (18.8 | ) | | | 5.9 | | Stock-based compensation expense | | | 7.4 | | | | 4.9 | | | | 4.0 | | Other – net | | | 0.5 | | | | 0.1 | | | | 0.4 | | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | Trade accounts receivable | | | (25.7 | ) | | | 8.0 | | | | (0.1 | ) | Inventories | | | (3.3 | ) | | | (2.7 | ) | | | (4.2 | ) | Accounts payable | | | 19.9 | | | | (9.9 | ) | | | (2.4 | ) | Accrued compensation and employee benefits | | | (6.5 | ) | | | 0.8 | | | | (5.3 | ) | Other assets | | | (2.5 | ) | | | (14.5 | ) | | | (24.5 | ) | Other liabilities | | | (18.2 | ) | | | (5.6 | ) | | | (4.5 | ) | Net cash provided by operating activities | | | 41.6 | | | | 72.4 | | | | 63.5 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Acquisitions – net of cash acquired | | | (364.2 | ) | | | (1.4 | ) | | | - | | Expenditures for property, plant and equipment | | | (64.4 | ) | | | (62.8 | ) | | | (58.3 | ) | Insurance proceeds from Airedale fire | | | 3.0 | | | | 27.4 | | | | 12.2 | | Costs to replace building and equipment damaged in Airedale fire | | | (1.0 | ) | | | (41.7 | ) | | | (16.7 | ) | Proceeds from dispositions of assets | | | 5.7 | | | | 0.4 | | | | 7.6 | | Purchases of short-term investments | | | (3.5 | ) | | | (2.7 | ) | | | (5.2 | ) | Proceeds from maturities of short-term investments | | | 2.2 | | | | 2.1 | | | | 2.4 | | Other – net | | | - | | | | 0.9 | | | | 0.8 | | Net cash used for investing activities | | | (422.2 | ) | | | (77.8 | ) | | | (57.2 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 559.1 | | | | 38.0 | | | | 36.4 | | Repayments of debt | | | (202.4 | ) | | | (27.1 | ) | | | (50.9 | ) | Financing fees paid | | | (8.7 | ) | | | - | | | | (0.1 | ) | Purchases of treasury stock under share repurchase program | | | - | | | | (6.9 | ) | | | - | | Dividend paid to noncontrolling interest | | | - | | | | (0.9 | ) | | | - | | Other – net | | | (0.4 | ) | | | (0.4 | ) | | | - | | Net cash provided by (used for) financing activities | | | 347.6 | | | | 2.7 | | | | (14.6 | ) | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (1.7 | ) | | | 1.1 | | | | (8.4 | ) | Net decrease in cash and cash equivalents | | | (34.7 | ) | | | (1.6 | ) | | | (16.7 | ) | Cash and cash equivalents - beginning of year | | | 68.9 | | | | 70.5 | | | | 87.2 | | Cash and cash equivalents - end of year | | $ | 34.2 | | | $ | 68.9 | | | $ | 70.5 | |
| | 2019 | | | 2018 | | | 2017 | | Cash flows from operating activities: | | | | | | | | | | Net earnings | | $ | 85.9 | | | $ | 23.8 | | | $ | 14.9 | | Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 76.9 | | | | 76.7 | | | | 58.3 | | Loss (gain) on sale of assets | | | 1.7 | | | | - | | | | (2.0 | ) | Impairment charges | | | 0.4 | | | | 2.5 | | | | - | | Stock-based compensation expense | | | 7.9 | | | | 9.5 | | | | 7.4 | | Deferred income taxes | | | (4.4 | ) | | | 12.1 | | | | (4.6 | ) | Other – net | | | 5.3 | | | | 9.0 | | | | 3.9 | | Changes in operating assets and liabilities, excluding acquisition: | | | | | | | | | | | | | Trade accounts receivable | | | (15.3 | ) | | | (26.1 | ) | | | (25.7 | ) | Inventories | | | (22.0 | ) | | | (12.5 | ) | | | (3.3 | ) | Accounts payable | | | 16.6 | | | | 25.2 | | | | 19.9 | | Accrued compensation and employee benefits | | | (10.1 | ) | | | 16.4 | | | | (6.5 | ) | Other assets | | | (11.8 | ) | | | (5.0 | ) | | | (2.4 | ) | Other liabilities | | | (27.8 | ) | | | (7.4 | ) | | | (18.2 | ) | Net cash provided by operating activities | | | 103.3 | | | | 124.2 | | | | 41.7 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (73.9 | ) | | | (71.0 | ) | | | (64.4 | ) | Acquisition – net of cash acquired | | | - | | | | - | | | | (364.2 | ) | Proceeds from dispositions of assets | | | 0.3 | | | | 0.3 | | | | 5.7 | | Proceeds from maturities of short-term investments | | | 4.9 | | | | 4.8 | | | | 2.2 | | Purchases of short-term investments | | | (3.8 | ) | | | (5.5 | ) | | | (3.5 | ) | Other – net | | | (0.3 | ) | | | (0.2 | ) | | | 2.0 | | Net cash used for investing activities | | | (72.8 | ) | | | (71.6 | ) | | | (422.2 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 231.2 | | | | 171.0 | | | | 559.1 | | Repayments of debt | | | (251.9 | ) | | | (222.9 | ) | | | (202.4 | ) | Dividend paid to noncontrolling interest | | | (1.8 | ) | | | (0.9 | ) | | | - | | Financing fees paid | | | - | | | | - | | | | (8.7 | ) | Other – net | | | (3.4 | ) | | | 2.7 | | | | (0.4 | ) | Net cash (used for) provided by financing activities | | | (25.9 | ) | | | (50.1 | ) | | | 347.6 | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (2.7 | ) | | | 3.0 | | | | (1.7 | ) | Net increase (decrease) in cash, cash equivalents and restricted cash | | | 1.9 | | | | 5.5 | | | | (34.6 | ) | Cash, cash equivalents and restricted cash - beginning of year | | | 40.3 | | | | 34.8 | | | | 69.4 | | Cash, cash equivalents and restricted cash - end of year | | $ | 42.2 | | | $ | 40.3 | | | $ | 34.8 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY For the years ended March 31, 2017, 20162019, 2018 and 20152017 (In millions)
| | | | | Additional paid-in capital | | | Retained earnings | | | Accumulated other comprehensive loss | | | Treasury stock, at cost | | | Non- controlling interest | | | Total | | | Common stock | Shares | | | Amount | 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 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 14.2 | | | | - | | | | - | | | | - | | | | 14.2 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | (7.6 | ) | Shares issued for acquisition of Luvata HTS | | | 2.2 | | | | 1.4 | | | | 22.9 | | | | - | | | | - | | | | - | | | | - | | | | 24.3 | | Stock options and awards including related tax benefits | | | 0.6 | | | | 0.4 | | | | 0.5 | | | | - | | | | - | | | | - | | | | - | | | | 0.9 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.4 | ) | | | - | | | | (1.4 | ) | Stock-based compensation expense | | | - | | | | - | | | | 7.4 | | | | - | | | | - | | | | - | | | | - | | | | 7.4 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.7 | | | | 0.7 | | Balance, March 31, 2017 | | | 51.8 | | | $ | 32.4 | | | $ | 216.4 | | | $ | 372.4 | | | $ | (181.8 | ) | | $ | (25.4 | ) | | $ | 7.2 | | | $ | 421.2 | |
| |
Common stock | | | Additional paid-in capital | | | Retained earnings | | | Accumulated other comprehensive loss | | | Treasury stock, at cost | | | Non-controlling interest | | | Total | | Shares | | | Amount | Balance, March 31, 2016 | | | 49.0 | | | $ | 30.6 | | | $ | 185.6 | | | $ | 358.2 | | | $ | (174.2 | ) | | $ | (24.0 | ) | | $ | 6.5 | | | $ | 382.7 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 14.2 | | | | - | | | | - | | | | - | | | | 14.2 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | (7.6 | ) | Shares issued for acquisition of Luvata HTS | | | 2.2 | | | | 1.4 | | | | 22.9 | | | | - | | | | - | | | | - | | | | - | | | | 24.3 | | Stock options and awards including related tax benefits | | | 0.6 | | | | 0.4 | | | | 0.5 | | | | - | | | | - | | | | - | | | | - | | | | 0.9 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.4 | ) | | | - | | | | (1.4 | ) | Stock-based compensation expense | | | - | | | | - | | | | 7.4 | | | | - | | | | - | | | | - | | | | - | | | | 7.4 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.7 | | | | 0.7 | | Balance, March 31, 2017 | | | 51.8 | | | | 32.4 | | | | 216.4 | | | | 372.4 | | | | (181.8 | ) | | | (25.4 | ) | | | 7.2 | | | | 421.2 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 22.2 | | | | - | | | | - | | | | - | | | | 22.2 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 41.5 | | | | - | | | | 0.5 | | | | 42.0 | | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 3.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.2 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.7 | ) | | | - | | | | (1.7 | ) | Adoption of new accounting guidance (Note 1) | | | - | | | | - | | | | 0.1 | | | | 0.3 | | | | - | | | | - | | | | - | | | | 0.4 | | Stock-based compensation expense | | | - | | | | - | | | | 9.5 | | | | - | | | | - | | | | - | | | | - | | | | 9.5 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.6 | | | | 1.6 | | Balance, March 31, 2018 | | | 52.3 | | | | 32.7 | | | | 229.9 | | | | 394.9 | | | | (140.3 | ) | | | (27.1 | ) | | | 8.4 | | | | 498.5 | | Adoption of new accounting guidance (Note 1) | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | - | | | | (7.6 | ) | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 84.8 | | | | - | | | | - | | | | - | | | | 84.8 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | (0.5 | ) | | | (38.6 | ) | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 0.8 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4.3 | ) | | | - | | | | (4.3 | ) | Stock-based compensation expense | | | - | | | | - | | | | 7.9 | | | | - | | | | - | | | | - | | | | - | | | | 7.9 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.8 | ) | | | (1.8 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | | | 1.1 | | Balance, March 31, 2019 | | | 52.8 | | | $ | 33.0 | | | $ | 238.6 | | | $ | 472.1 | | | $ | (178.4 | ) | | $ | (31.4 | ) | | $ | 7.2 | | | $ | 541.1 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 1: Note 1: | Significant Accounting Policies |
Nature of operations: Modine Manufacturing Company (“Modine” or the “Company”) specializes in providing innovative thermal management solutions to diversified global markets and customers. The Company is a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway original equipment manufacturer (“OEM”) vehicular applications. In addition, the Company is a global leader in thermal management technology and solutions for sale into a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. The Company’s primary product groups include i) powertrain cooling and engine cooling; ii) coils, coolers, and coatings; and iii) heating, ventilation and air conditioning.
Sale of AIAC Air Conditioning South Africa (Pty) Ltd.: During fiscal 2019, the Company completed the sale of its AIAC Air Conditioning South Africa (Pty) Ltd. business, which was reported within the Building HVAC Systems segment, for a selling price of $0.5 million. As a result of this transaction, the Company recorded a loss of $1.7 million, which included the write-off of accumulated foreign currency translation losses of $0.8 million. The Company reported this loss on the loss on sale of assets line of the consolidated statements of operations. Annual net sales attributable to this disposed business were less than $2.0 million.
Acquisition of Luvata HTS: On November 30, 2016, the Company completed the acquisition of 100%100 percent of the shares of multiple companies held by Luvata Heat Transfer Solutions II AB, a company incorporated in Sweden. Combined, these acquired companies represented the Luvata Heat Transfer Solutions (“Luvata HTS”) business. See Note 2 for additional information.
Airedale facility fire: In September 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 (“BHVAC”) segment. There were no injuries caused by the fire. The Rawdon facility, which was 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 Company suspended operations at the Rawdon site as a result of the fire; however, it transferred operations to temporary facilities while it rebuilt the leased facility. The Company completed the reconstruction and relocation to the Rawdon facility in fiscal 2016. In fiscal 2016, the Company recorded a $9.5 million gain within other income related to an insurance settlement for equipment losses. This gain represented the replacement assets’ cost in excess of the carrying value of the equipment at the time they were destroyed by the fire.
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 earnings. The Company includes Modine’s share of the affiliate’s net earnings in other income and expense. See Note 1113 for additional information.
Discontinued operations: Revenue recognition: The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, which may be at a point in time or over time. The majority of the Company’s revenue is recognized at a point in time, based upon shipment terms. A portion of the Company’s revenue is recognized over time, based upon estimated progress towards satisfaction of the contractual performance obligations. See Note 3 for additional information.
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its customers in cost of sales, and related amounts billed to these customers in net sales.
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 records an allowance for doubtful accounts for estimated uncollectible receivables based upon historical experience or specific customer economic data. The Company recorded an allowance for doubtful accounts of $1.6 million and $2.3 million at March 31, 2019 and 2018, respectively, representing its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable, without recourse, to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During fiscal 2009,2019, 2018, and 2017, the Company sold its Electronics Cooling business. The buyer financed a portion$85.1 million, $65.8 million, and $55.4 million, respectively, of the selling price by issuing promissory notes payableaccounts receivable to Modine.accelerate cash receipts. 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,2019, 2018, and 2017, the Company recorded a gainloss on the sale of $0.9accounts receivable of $0.6 million, ($0.6$0.4 million, after income taxes) during fiscal 2015.and $0.3 million, respectively, in the consolidated statements of operations.
Warranty: The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. The Company records warranty expense, within cost of sales, based upon historical and current claims data or based upon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 16 for additional information.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 2019 and 2018, Company-owned tooling totaled $24.2 million and $22.4 million, respectively. In certain instances, tooling is customer-owned. At the time customer-owned tooling is completed and customer acceptance is obtained, the Company records tooling revenue and related production costs within net sales and cost of sales, respectively, in the consolidated statements of operations. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 2019 and 2018, cost reimbursement receivables related to customer-owned tooling totaled $11.6 million and $10.7 million, respectively.
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 additional information.
Research and development: The Company expenses research and development costs as incurred within selling, general and administrative (“SG&A”) expenses. During fiscal 2019, 2018, and 2017, research and development costs charged to operations totaled $69.8 million, $65.8 million, and $64.4 million, respectively.
Translation of foreign currencies: The Company translates assets and liabilities of foreign subsidiaries and equity investments into U.S. dollars at the period-end exchange rates, and translates income and expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders’ 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 forward contracts to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency-denominated assets and liabilities as well as forecasted transactions. The Company designates certain derivative financial instruments as cash flow hedges for accounting purposes. These instruments are used to manage financial risks and are not speculative. See Note 19 for additional information.
Income taxes: The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. See Note 8 for additional information.
Earnings per share: The Company calculates basic earnings per share based upon the weighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes potential common shares if their inclusion would have an anti-dilutive effect. Certain outstanding restricted stock awards provide recipients with a non-forfeitable right to receive dividends declared by the Company. Therefore, these restricted stock awards are included in computing earnings per share pursuant to the two-class method. See Note 9 for additional information.
Cash and cash equivalents: The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the Company reports the amount of those checks within accounts payable in the consolidated balance sheets.
Short-term investments: The Company invests in time deposits with original maturities of more than three months but no more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2019 and 2018, the Company’s short-term investments totaled $4.3 million and $5.7 million, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost and net realizable value.
Property, plant and equipment: The Company records property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful lives of the assets. The Company charges maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations. Capital expenditures of $17.9 million, $15.8 million, and $12.5 million were accrued within accounts payable at March 31, 2019, 2018, and 2017, respectively.
Goodwill: The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company performed its goodwill impairment test as of March 31, 2019, which did not result in an impairment charge. See Note 15 for additional information.
Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the asset exceeds its fair value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets.
Assets held for sale: The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the asset for sale at a reasonable price in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell, within other noncurrent assets. The Company ceases to record depreciation expense at the time of designation as held for sale. The carrying value of assets held for sale totaled $5.0$1.1 million and $8.5$1.7 million at March 31, 20172019 and 2016,2018, respectively.
Revenue recognition: The Company recognizes sales revenue, including agreed upon commodity 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 upon 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 2017 and 2016, Company-owned tooling totaled $20.8 million and $18.8 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. At the time customer-owned tooling is completed and customer acceptance is obtained, the Company records tooling revenue and related production costs within net sales and cost of sales, respectively, in its consolidated statements of operations. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 2017 and 2016, cost reimbursement receivables related to customer-owned tooling totaled $7.8 million and $8.5 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, within cost of sales, based upon historical and current claims data or based upon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 14 for additional information.
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its customers in cost of sales, and related amounts billed to these customers in net sales.
Research and development: The Company expenses research and development costs as incurred within selling, general and administrative (“SG&A”) expenses. For the years ended March 31, 2017, 2016, and 2015, research and development costs charged to operations totaled $64.4 million, $61.1 million, and $62.0 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-denominated assets and liabilities. These instruments are used to manage financial risks and are not speculative. See Note 17 for additional information.
Income taxes: The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. See Note 7 for additional information.
Earnings per share: The Company calculates basic earnings per share based upon the weighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. 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 8 for additional information.
Cash and cash equivalents: The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the Company reports the amount of those un-presented checks within accounts payable in the consolidated balance sheets.
Short-term investments: The Company invests in time deposits with original maturities of more than three months but no more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2017 and 2016, the Company’s short-term investments totaled $4.7 million and $3.3 million, respectively.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Deferred compensation trusts: The Company maintains deferred compensation trusts to fund future obligations under its non-qualified deferred compensation plan.plans. The trust’strusts’ investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Trade accounts receivable: The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company recorded an allowance for doubtful accounts of $1.4 million and $0.5 million at March 31, 2017 and 2016, respectively, representing its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable, without recourse, to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During the years ended March 31, 2017, 2016, and 2015, the Company sold $55.4 million, $71.3 million, and $87.0 million, respectively, of accounts receivable to accelerate cash receipts. During each of the years ended March 31, 2017, 2016, and 2015, the Company recorded a loss on the sale of accounts receivables of $0.3 million in the consolidated statements of operations.
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost and net realizable value.
Property, plant and equipment: The Company records property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful lives of the assets. The Company charges maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations.
Goodwill: The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company performed its goodwill impairment test as of March 31, 2017, which did not result in an impairment charge. See Note 13 for additional information.
Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the asset exceeds its fair value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets.
Environmental liabilities: The Company records liabilities for environmental assessments and remediation efforts in the period in which its responsibility is probable and the costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is probable. To the extent that the required remediation procedures change, or additional contamination is identified, the Company’s estimated environmental liabilities may also change. See Note 18 for additional information.
Self-insurance reserves: The Company retains a portion of the financial risk for variouscertain insurance coverage, including property, general liability, workers compensation, and employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to operations. The Company reviews and updates the amount of its insurance-related reserves on a quarterly basis.
Stock-based compensation:Environmental liabilities: The Company recognizes stock-based compensation usingrecords liabilities for environmental assessments and remediation activities in the fair value method. Accordingly, compensation expense for stock options, restricted stockperiod in which its responsibility is probable and performance-based stock awardsthe costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is calculated based uponprobable. To the fair value ofextent that the instruments atrequired remediation procedures change, or additional contamination is identified, the time of grant, and is recognized as expense over the respective vesting periods.Company’s estimated environmental liabilities may also change. See Note 420 for additional information.
Supplemental cash flow information:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Interest paid | | $ | 22.3 | | | $ | 23.4 | | | $ | 15.4 | | Income taxes paid | | | 22.2 | | | | 20.1 | | | | 12.7 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
New Accounting Guidance:
Pension costsStock-based Compensation
In March 2017,2016, the Financial Accounting Standards Board (“FASB”) issued new guidance related to the income statement presentationsimplify several aspects of net periodic pension costs and net periodic postretirement benefit costs. This guidance requires companies to continue to present the service cost component of net benefit cost within the same financial statement line item as other employee compensation costs; however, other components of net benefit costs are required to be presented outside of results from operations. This will not impact consolidated net earnings. Early adoption is permitted, and theaccounting for stock-based payment transactions. The Company plans to adoptadopted this guidance for thebeginning in its first quarter of fiscal 2018. The Company will recast prior periodselected to conformaccount for forfeitures in the period in which they occur and recorded a cumulative-effect adjustment to the new income statement presentation. As a result,equity. In addition, the Company expectsprospectively adopted the guidance requiring all excess tax benefits or deficiencies to reclassify net benefit costs related to its pension plans totaling approximately $3.0 million in fiscal 2017 ($1.0 million from cost of sales and $2.0 million from SG&A expenses) and $45.0 million in fiscal 2016 ($10.0 million from cost of sales and $35.0 million from SG&A expenses) to other income and expense. The fiscal 2016 net benefit costs included $42.1 million of pension settlement losses related to a completed voluntary lump-sum payout program; see Note 16 for additional information. In fiscal 2018, the Company expects to record approximately $3.0 to $4.0 million of net benefit costs within other income and expense.
Share-based compensation
In March 2016, the FASB issued new guidance to simplify several aspects of accounting for share-based payment transactions, including thebe recognized as income tax effects ofexpense or benefit when share-based payments, recognition of forfeitures, and presentation requirements in the statement of cash flows. This guidance is effective for the Company’s first quarter of fiscal 2018.awards are settled. The Company does not expect the adoptionprovisions of this new guidance willdid not have a material impact on itsthe Company’s consolidated financial statements
Leases
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance. Upon adoptionstatements. As a result of adopting this new guidance, the Company will be requiredrecorded a $0.4 million increase to recognize most leases on its balance sheet. This guidance is effective for the Company’s first quarterboth deferred tax assets and equity as of fiscal 2020. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.April 1, 2017.
Revenue recognitionRecognition In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about revenue arising from contracts with customers. The Company adopted this new guidance is effective for the Company’s first quarter of fiscal 2019 and allows for either a full-retrospective or ausing the modified-retrospective transition method.
The Company is currently in the process of assessingassessed customer contracts and evaluatingevaluated contractual provisions that may result in a change inlight of the timing of revenue recognized in comparison with currentnew guidance. Under current guidance,Through its evaluation process, the Company generally recognizes revenue when products are shipped and riskidentified a limited number of loss has transferred to the customer. The Company is evaluating whether contractual provisions maycustomer contracts that provide an enforceable right to payment for its customized products, which may require revenue recognition prior to the product being shipped to the customer. In addition,As a result of its adoption of the new guidance, the Company is evaluating pricing provisions contained in certainrecorded an increase of its customer contracts$0.7 million to determine the appropriate timingretained earnings as of revenue recognition based uponApril 1, 2018, along with related balance sheet reclassifications. The increase to retained earnings represented $3.0 million of net sales that, had the new guidance.guidance been in effect, the Company would have recognized as of March 31, 2018. See Note 3 for additional information regarding revenue recognition.
Income Taxes: Intra-Entity Transfers of Assets Other than Inventory In October 2016, the FASB issued new guidance related to income tax accounting for intercompany asset transfers. This new guidance requires companies to recognize the income tax effects of intercompany asset transfers other than inventory at the transaction date. The income tax effects of these transfers were previously deferred. The Company continues to evaluate the impactadopted this new guidance for fiscal 2019 using the modified-retrospective transition method. Upon adoption, the Company recorded a decrease to retained earnings of $8.3 million as of April 1, 2018.
Statement of Cash Flows: Restricted Cash In November 2016, the FASB issued new guidance that requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending balances presented within the statement of cash flows. The Company adopted this new guidance for fiscal 2019 using the retrospective transition method. As a result, all prior period information has been recast to be comparable to the new presentation requirements. See Note 10 for information regarding the Company’s restricted cash.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income In February 2018, the FASB issued new guidance related to the accounting for certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from tax reform legislation that was enacted in the U.S. in December 2017. This guidance is effective for the Company as of April 1, 2019 and provides the option to reclassify stranded income tax effects to retained earnings. The Company has determined it will have onnot reclassify stranded income tax effects upon adoption, and therefore, this guidance will not impact its consolidated financial statements.
Supplemental cash flow information:Leases
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance and requires balance sheet recognition for most leases. The Company will adopt this guidance effective April 1, 2019 using a modified-retrospective transition method, under which it expects to elect not to adjust comparative periods. The Company intends to elect the package of practical expedients permitted under the new guidance, and, as a result, the Company has not reassessed the classification of existing leases or initial direct costs thereof, or whether existing contracts contain leases. In addition, the Company plans to elect accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components. The Company does not intend to elect the hindsight practical expedient.
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Interest paid | | $ | 15.4 | | | $ | 10.7 | | | $ | 10.3 | | Income taxes paid | | | 12.7 | | | | 10.1 | | | | 15.9 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 2: AcquisitionsThe Company has completed its assessment of its global lease portfolio and is in the process of finalizing the testing of its new lease accounting software solution and implementing new processes and controls to account for leases in accordance with the new guidance. The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. In addition, the Company leases certain manufacturing and IT equipment and vehicles. Upon adoption of this new guidance, the Company expects to recognize $60.0 to $70.0 million of right-of-use assets and corresponding lease liabilities on its consolidated balance sheet. The Company does not expect the adoption will have a material impact on its consolidated statements of operations or consolidated statements of cash flows.
The cumulative effects on the Company’s consolidated balance sheet, as of April 1, 2018, resulting from the adoption of new accounting guidance were as follows:
| | | | | Adjustments Due to New Accounting Guidance | | | | | | | Balance as of March 31, 2018 | | | Revenue Recognition | | | Intra-entity Transfers of Assets | | | Balance as of April 1, 2018 | | ASSETS | | | | | | | | | | | | | Inventories | | $ | 191.3 | | | $ | (2.0 | ) | | $ | - | | | $ | 189.3 | | Other current assets | | | 70.1 | | | | 3.0 | | | | (8.3 | ) | | | 64.8 | | Deferred income taxes | | | 96.9 | | | | (0.2 | ) | | | - | | | | 96.7 | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | Deferred income taxes | | $ | 9.9 | | | $ | 0.1 | | | $ | - | | | $ | 10.0 | | Retained earnings | | | 394.9 | | | | 0.7 | | | | (8.3 | ) | | | 387.3 | |
Luvata HTS
On November 30, 2016, the Company completed its acquisition of a 100%100 percent ownership interest in the Luvata HTS business for consideration totaling $415.6 million ($388.2 million, net of cash acquired). The purchase price included 2.2 million Modine common shares. The Company estimated the fair value of the common shares, to bevalued at $24.3 million atas of November 30, 2016, which reflects restrictions on the sale of the shares for a minimum of one year. Now operating2016. Operating as Modine’s Commercial and Industrial Solutions (“CIS”) segment, this business is a leading global supplier of coils, coolers and coatings to the heating, ventilation, air conditioning, and refrigeration (“HVAC&R”) industry. CIS’s products coverSee Note 22 for a broad range of heat exchanger coils, commercial refrigeration and industrial coolers, and anti-corrosion coating solutions. The Company’s acquisition of Luvata HTS addressed, in particular, both the “Diversify” and “Grow” commitments of its transformational Strengthen, Diversify and Grow strategy launched in fiscal 2016. This acquisition provided Modine with an expanded industrial business portfolio, broader customer base, and reduced cyclical exposure. For the year ended March 31, 2017, the Company included $177.7 millionsummary of net sales and operating income of $7.5 million within its consolidated statement of operations attributable to four months ofreported by the CIS operations. During the year ended March 31,segment. In fiscal 2018 and 2017, the Company recorded $4.3 million and $14.8 million, respectively, of costs incurred directly related to the acquisition and integration of Luvata HTS as SG&A expenses within the consolidated statementstatements of operations. TheseThe fiscal 2018 costs principallyprimarily consisted of fees for i) transaction advisors, ii)incremental costs associated with integration activities, including legal accounting, and otheraccounting professional services and iii)severance expenses. The fiscal 2017 costs primarily consisted of transaction advisory and due diligence costs and incremental costs directly associated with integration activities.
To fund a significant portion of the Luvata HTS purchase price, In addition, during fiscal 2017, the Company entered into new credit agreements in November 2016. See Note 15 for additional information.charged $4.3 million to cost of sales related to inventory that it wrote-up to fair value upon acquisition.
The Company completed its accounting for the acquisition of Luvata HTS during fiscal 2018 and allocated the total purchase price of Luvata HTS$415.6 million to the identifiable tangible and intangible assets acquired and the liabilities assumed based upon their estimated fair values as of the acquisition date. The Company based the estimated fair values primarily upon third-party valuations using assumptions developed by management and other information compiled by management, including, but not limited to, future expected cash flows. The Company allocated the excess of the purchase price over the net assets recognized to goodwill in the amount of $150.6$151.9 million, none of which the Company expects to beis deductible for income tax purposes. Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition includes Luvata HTS’s workforce and anticipated future cost and revenue synergies.
At the time the March 31, 2017 financial statements were finalized, the Company was awaiting additional information to determine the fair value of certain assets acquired and liabilities assumed and therefore, the allocation of purchase price is considered preliminary. The Company expects to complete its evaluation of these matters in the first or second quarter of fiscal 2018. These matters primarily relate to income tax reserves and contingent liabilities, including reserves for environmental, legal, product warranty, and trade compliance matters.
The Company’s preliminary allocation of the purchase price for its acquisition of Luvata HTS is as follows:
Cash and cash equivalents | | $ | 27.4 | | Trade accounts receivable | | | 86.3 | | Inventories | | | 55.7 | | Property, plant and equipment | | | 120.6 | | Intangible assets | | | 130.2 | | Goodwill | | | 150.6 | | Other assets | | | 38.6 | | Accounts payable | | | (73.7 | ) | Accrued compensation and employee benefits | | | (24.3 | ) | Deferred income taxes | | | (39.3 | ) | Pensions | | | (14.3 | ) | Other liabilities | | | (42.2 | ) | Purchase price | | $ | 415.6 | |
Below is a summary of the methodologies and significant assumptions used in estimating the fair value of certain classes of acquired assets. The fair values were primarily based upon significant inputs that are not observable in the market and thus represent Level 3 measurements. See Note 3 for information regarding Level 3 fair value measurements.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Inventories: The Company determined the fair value of acquired inventory by estimating the selling priceCompany’s allocation of the respective finished goods, less an estimatepurchase price for its acquisition of costs to be incurred to sell the inventory and to complete the work-in-process inventory, if applicable. For raw materials acquired, the Company estimated the cost of replacement. As a result, the Company wrote-up acquired inventory by $4.3 million and subsequently charged this write-up to cost of salesLuvata HTS was as the underlying inventory was sold in the third and fourth quarters of fiscal 2017.
Property, plant and equipment: The Company valued property, plant and equipment primarily utilizing the cost approach and also utilized the market approach in valuing acquired land and buildings. The cost approach considers the amount required to replace an asset by constructing or purchasing a new asset with similar utility and adjusting the value in consideration of depreciation as of the acquisition date. The cost approach relies on assumptions regarding replacement costs and the age and estimated remaining useful lives of the assets. The fair value of property, plant and equipment will be recognized as depreciation expense in our results of operations over the expected remaining useful lives of the individual assets.follows:
Intangible assets: The Company determined the fair value of acquired intangible assets by using variations of the income approach. These methods generally forecast expected future net cash flows discretely associated with each of the identified intangible assets and adjust the forecasts to present value by applying a discount rate intended to reflect risk factors associated with the cash flows and the time value of money. Acquired intangible assets were as follows:
| | Gross Carrying Value | | Weighted- Average Useful Life | Customer relationships | | $ | 58.4 | | 17 years | Trade names | | | 50.1 | | 20 years | Acquired technology | | | 21.7 | | 12 years | Total intangible assets acquired | | $ | 130.2 | | |
Customer relationships, for valuation purposes, represent the estimated fair value of Luvata HTS’s business relationship with existing customers, and were calculated by projecting the future after-tax cash flows from these customers, including the right to deploy and market additional products to them. The Company forecasted anticipated earnings from existing customers using recent years’ sales levels and considering a customer attrition rate based upon historical customer revenue information.
The Company determined the value of acquired trade names using the relief-from-royalty method, a variation of the income approach, which applies an assumed royalty rate to revenue expected to be derived under the acquired trade names. The fair value was estimated to be the present value of the royalties saved because the Company owns the trade names.
The Company also used the relief-from royalty method for its valuation of acquired technology, which largely relates to the design of mechanical and electrical components. The Company considered factors including the estimated contribution of the technology to the overall profitability of the products and the awareness level of the technology and its position in the market.
Cash and cash equivalents | | $ | 27.4 | | Trade accounts receivable | | | 86.1 | | Inventories | | | 55.0 | | Property, plant and equipment | | | 120.4 | | Intangible assets | | | 130.2 | | Goodwill | | | 151.9 | | Other assets | | | 39.1 | | Accounts payable | | | (73.7 | ) | Accrued compensation and employee benefits | | | (24.3 | ) | Deferred income taxes | | | (39.5 | ) | Pensions | | | (14.3 | ) | Other liabilities | | | (42.7 | ) | Purchase price | | $ | 415.6 | |
The following unaudited supplemental pro forma information presents the Company’s consolidated results of operations as though the acquisition of Luvata HTS had occurred at the beginning of fiscal 2016. This pro forma financial information is presented for illustrative purposes only and is not considered to be indicative of the operating results that would have been achieved had the acquisition been completed as of the date indicated or the operating results that may be obtained in the future.indicated.
| | Years ended March 31, | | | | 2017 | | | 2016 | | Net sales | | $ | 1,881.6 | | | $ | 1,871.9 | | Net earnings attributable to Modine | | | 35.8 | | | | 1.5 | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | Basic | | $ | 0.72 | | | $ | 0.03 | | Diluted | | | 0.71 | | | | 0.03 | |
| | Year ended March 31, 2017 | | Net sales | | $ | 1,881.6 | | Net earnings attributable to Modine | | | 35.8 | | Net earnings per share attributable to Modine shareholders: | | | | | Basic | | $ | 0.72 | | Diluted | | | 0.71 | |
The supplemental pro forma financial information includes adjustments for: (i) annual amortization and depreciation expense totaling approximately $13.0 million for acquired tangible and intangible assets, (ii) estimated annual interest expense of approximately $14.0 million resulting from acquisition-related borrowings, and (iii) the estimated income tax impacts related to the pro forma adjustments, considering the statutory tax rates within the applicable jurisdictions. In addition, the pro forma financial information assumes that both $8.6 million of acquisition-related transaction costs, not including costs for integration-related activities, and $4.3 million of inventory purchase accounting adjustments were incurred during fiscal 2016. The pro forma financial information does not reflect achieved or expected cost or revenue synergies.
Note 3: | Revenue Recognition |
Effective April 1, 2018, the Company adopted new revenue recognition accounting guidance using the modified-retrospective transition method and, as a result, recorded a cumulative-effect adjustment to increase retained earnings by $0.7 million. The Company’s consolidated financial statements for the fiscal year ended March 31, 2019 reflect the adoption of this new guidance; however, the comparable prior-year periods have not been recast. See Note 1 for additional information regarding the adjustments to the Company’s consolidated balance sheet as of April 1, 2018.
The Company generates revenue from selling innovative thermal management products and solutions to diversified global markets and customers. The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, which may be at a point in time or over time. The majority of the Company’s revenue is recognized at a point in time, based upon shipment terms. The Company records an allowance for doubtful accounts for estimated uncollectible receivables and accrues for estimated warranty costs at the time of sale. These estimates are based upon historical experience, current business trends, and current economic conditions. The Company accounts for shipping and handling activities as fulfilment costs rather than separate performance obligations, and records shipping and handling costs in cost of sales and related amounts billed to customers in net sales. The Company establishes payment terms with its customers based upon industry and regional practices, which typically do not exceed 90 days. As the Company expects to receive payment from its customers within one year from the time of sale, it disregards the effects of the time value of money in its determination of the transaction price. The Company has not disclosed the value of unsatisfied performance obligations because the revenue associated with customer contracts for which the original expected performance period is greater than one year is immaterial.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a description of the Company’s principal revenue-generating activities:
Vehicular Thermal Solutions (“VTS”) The VTS segment principally generates revenue from providing engineered heat transfer systems and components for use in on- and off-highway original equipment. This segment provides powertrain and engine cooling products, including, but not limited to, radiators, charge air coolers, condensers, oil coolers, EGR coolers, and fuel coolers, to original equipment manufacturers (“OEMs”) in the automotive, commercial vehicle, and off-highway markets in the Americas, Europe, and Asia regions. In addition, the VTS segment designs customer-owned tooling for OEMs and also serves Brazil’s automotive and commercial vehicle aftermarkets.
While the VTS segment provides customized production and service parts to customers under multi-year programs, these programs typically do not contain contractually-guaranteed volumes to be purchased by the customer. As a result, individual purchase orders typically represent the quantities ordered by the customer. With the exception of a small number of VTS customers, the terms within the customer agreement, purchase order, or customer-owned tooling contract do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the VTS segment recognizes revenue primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
In regard to VTS customers with contractual cancellation terms that provide an enforceable right to payment for performance completed to date, the Company recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The VTS segment measures progress by evaluating the production status of ordered products not yet shipped to the customer.
For certain customer programs, the Company agrees to provide annual price reductions based upon contract terms. For these scheduled price reductions, the Company evaluates whether the provisions represent a material right to the customer, and if so, defers associated revenue as a result.
At times, the Company makes up-front incentive payments to certain customers related to future sales under multi-year programs. The Company capitalizes these incentive payments, which it expects to recover through future sales, and amortizes the assets as a reduction to revenue when the related products are sold to customers.
Commercial and Industrial Solutions (“CIS”) The CIS segment principally generates revenue from providing thermal management products, including customized coils and coolers, to the heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets in North America, Europe, and Asia. In addition, the segment applies corrosion protection solutions, which are referred to as coatings, to heat-transfer equipment.
For the sale of coils and coolers, individual customer purchase orders generally represent the Company’s contract with its customers. With the exception of a small number of customers, the applicable customer contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the CIS segment recognizes revenue for its sale of coils and coolers primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For both sales to customers whose contract cancellation terms provide an enforceable right to payment and sales from the coatings businesses, in which the customers control the heat-transfer equipment being enhanced by the coating application, the CIS segment recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The segment measures progress by evaluating the production status towards completion of ordered products or services not yet shipped to its customers.
Building HVAC Systems (“BHVAC”) The BHVAC segment principally generates revenue from providing a variety of heating, ventilating, and air conditioning products, primarily for commercial buildings and related applications in North America and the U.K., as well as mainland Europe and the Middle East.
Heating products are manufactured in the U.S. and are generally sold to independent distributors, who in turn market the heating products to end customers. Because these products are sold to many different customers without contractual or practical limitations, the BHVAC segment recognizes revenue at the time control is transferred to the customer, generally the independent distributor, based upon shipping terms, which is generally upon shipment.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Ventilation and air conditioning products are highly-specified to a customer’s needs; however, the underlying sales contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the BHVAC segment recognizes revenue for these products at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
Disaggregation of Revenue The table below presents revenue to external customers for each of the Company’s business segments by primary end market, by geographic location and based upon the timing of revenue recognition:
| | Year ended March 31, 2019 | | | | VTS | | | CIS | | | BHVAC | | | Segment Total | | Primary end market: | | | | | | | | | | | | | Automotive | | $ | 542.8 | | | $ | - | | | $ | - | | | $ | 542.8 | | Commercial vehicle | | | 387.6 | | | | - | | | | - | | | | 387.6 | | Off-highway | | | 314.1 | | | | - | | | | - | | | | 314.1 | | Commercial HVAC&R | | | - | | | | 506.3 | | | | 167.7 | | | | 674.0 | | Data center cooling | | | - | | | | 145.7 | | | | 41.3 | | | | 187.0 | | Industrial cooling | | | - | | | | 47.8 | | | | - | | | | 47.8 | | Other | | | 107.2 | | | | 7.8 | | | | 3.4 | | | | 118.4 | | Net sales | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | | | | Americas | | $ | 613.7 | | | $ | 413.6 | | | $ | 124.9 | | | $ | 1,152.2 | | Europe | | | 538.2 | | | | 244.8 | | | | 87.5 | | | | 870.5 | | Asia | | | 199.8 | | | | 49.2 | | | | - | | | | 249.0 | | Net sales | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 1,308.5 | | | $ | 571.1 | | | $ | 212.4 | | | $ | 2,092.0 | | Products transferred over time | | | 43.2 | | | | 136.5 | | | | - | | | | 179.7 | | Net sales | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | |
Contract Balances Contract assets and contract liabilities from contracts with customers were as follows:
| | March 31, 2019 | | | March 31, 2018 | | Contract assets | | $ | 22.6 | | | $ | 13.5 | | Contract liabilities | | | 4.0 | | | | 6.8 | |
Contract assets, included within other current assets in the consolidated balance sheets, primarily consist of capitalized costs related to customer-owned tooling contracts, wherein the customer has guaranteed reimbursement, and assets recorded for revenue recognized over time, which represent the Company’s rights to consideration for work completed but not yet billed. The $9.1 million increase in contract assets during fiscal 2019 was primarily related to contract assets totaling $7.4 million as of March 31, 2019 for revenue recognized over time, which were recorded as a result of the Company’s adoption of the new revenue recognition accounting guidance, and customer-owned tooling contracts, under which more costs were capitalized than reimbursed.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $2.8 million decrease in contract liabilities during fiscal 2019 was primarily due to the Company’s satisfaction of performance obligations under customer contracts for which payment had been received in advance.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) Modine Puxin Thermal Systems (Jiangsu) Co. Ltd
On January 29, 2016,Impacts of Adopting New Accounting Guidance The impacts from the Company formed a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co. Ltd. of Yangzhou, China, of which it owns 67 percent, and the joint venture partner, Jiangsu Puxin Heat Exchange System Co., Ltd, owns 33 percent. This joint venture, which is reported in the Asia segment, expedited the Company’s introduction of stainless steel heat exchangers for the light-, medium-, and heavy-duty commercial vehicle markets in China. In fiscal 2016, the Company contributed $1.4 million of cash and equipment and other assets totaling $2.3 million. In fiscal 2017, the Company contributed $0.3 million of additional cash consideration after certain seller indemnification obligations under the agreement were satisfied. 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 activitiesadoption of the joint venture, and, therefore, the financial results of the joint venture are included innew revenue recognition guidance to the Company’s consolidated financial statements. The Company did not present pro forma financial information for this acquisition as the effect is not material to its resultsstatement of operations or financial position.for the year ended March 31, 2019 and its consolidated balance sheet as of March 31, 2019 were as follows:
| | Year ended March 31, 2019 | | | | As Reported | | | Impact of New Accounting Guidance | | | Results Without
Impact of New Accounting Guidance | | Net sales | | $ | 2,212.7 | | | $ | (4.4 | ) | | $ | 2,208.3 | | Net earnings attributable to Modine | | | 84.8 | | | | (2.0 | ) | | | 82.8 | | | | | | | | | | | | | | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 1.67 | | | $ | (0.04 | ) | | $ | 1.63 | | Diluted | | | 1.65 | | | | (0.04 | ) | | | 1.61 | |
| | March 31, 2019 | | | | As Reported | | | Impact of New Accounting Guidance | | | Balances Without
Impact of New Accounting Guidance | | ASSETS | | | | | | | | | | Inventories | | $ | 200.7 | | | $ | 3.8 | | | $ | 204.5 | | Other current assets | | | 65.8 | | | | (7.4 | ) | | | 58.4 | | Deferred income taxes | | | 97.1 | | | | 0.6 | | | | 97.7 | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | Deferred income taxes | | $ | 8.2 | | | $ | (0.3 | ) | | $ | 7.9 | | Retained earnings | | | 472.1 | | | | (2.7 | ) | | | 469.4 | |
Note 3: Note 4: | Fair Value Measurements |
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
| · | Level 1 – Quoted prices for identical instruments in active markets. |
Level 1 – Quoted prices for identical instruments in active markets. | · | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. | · | Level 3 – Model-derived valuations in which one or more significant inputs are not observable. |
Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, and cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. The Company holds trading securities in deferred compensation trusts to fund obligations under certain non-qualified deferred compensation plans. The securities’ fair values, which are recorded as other noncurrent assets, are determined based upon 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 $5.0$6.0 million and $3.2$5.8 million atas of March 31, 20172019 and 2016,2018, respectively. The year-over-year increase primarily relates to a deferred compensation plan in the recently-acquired CIS segment. The fair value of the Company’s long-term debt is disclosed in Note 15.17.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2017 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 5.6 | | | $ | 5.6 | | Common stocks | | | 17.8 | | | | 2.0 | | | | 19.8 | | Corporate bonds | | | - | | | | 9.3 | | | | 9.3 | | Pooled equity funds | | | 56.8 | | | | - | | | | 56.8 | | Pooled fixed-income funds | | | 26.5 | | | | - | | | | 26.5 | | U.S. government and agency securities | | | - | | | | 18.7 | | | | 18.7 | | Other | | | 1.4 | | | | 1.4 | | | | 2.8 | | Fair value excluding investment measured at net asset value | | | 102.5 | | | | 37.0 | | | | 139.5 | | Investment measured at net asset value (a) | | | | | | | | | | | 8.7 | | Total Fair Value | | | | | | | | | | $ | 148.2 | | | | | | | | | | | | | | | | | 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 | | | | - | | | | 48.7 | | 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 | | Fair value excluding investment measured at net asset value | | | 99.1 | | | | 35.1 | | | | 134.2 | | Investment measured at net asset value (a) | | | | | | | | | | | 7.3 | | Total Fair Value | | | | | | | | | | $ | 141.5 | |
| | March 31, 2019 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 3.9 | | | $ | 3.9 | | Corporate bonds | | | - | | | | 9.4 | | | | 9.4 | | Pooled equity funds | | | 27.7 | | | | - | | | | 27.7 | | U.S. government and agency securities | | | - | | | | 12.3 | | | | 12.3 | | Other | | | 0.1 | | | | 0.9 | | | | 1.0 | | Fair value excluding investments measured at net asset value | | | 27.8 | | | | 26.5 | | | | 54.3 | | Investments measured at net asset value | | | | | | | | | | | 100.8 | | Total fair value | | | | | | | | | | $ | 155.1 | |
| (a) | As a practical expedient, the Company valued a collective trust fund using its net asset value per unit, and therefore, has not classified this investment within the fair value hierarchy. |
| | March 31, 2018 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 11.4 | | | $ | 11.4 | | Common stocks | | | 9.4 | | | | 2.6 | | | | 12.0 | | Corporate bonds | | | - | | | | 9.7 | | | | 9.7 | | Pooled equity funds | | | 64.4 | | | | - | | | | 64.4 | | Pooled fixed-income funds | | | 27.3 | | | | - | | | | 27.3 | | U.S. government and agency securities | | | - | | | | 16.2 | | | | 16.2 | | Other | | | 0.2 | | | | 1.7 | | | | 1.9 | | Fair value excluding investment measured at net asset value | | | 101.3 | | | | 41.6 | | | | 142.9 | | Investment measured at net asset value | | | | | | | | | | | 14.8 | | Total fair value | | | | | | | | | | $ | 157.7 | |
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of common stocks, pooled equity funds and pooled fixed-income funds based upon quoted prices from active markets and classified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain common stocks, corporate bonds pooled equity funds and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 20172019 and 2016,2018, the Company held no Level 3 assets within its pension plans.
As a practical expedient, the Company valued certain investments, including pooled equity, fixed-income and real estate funds, using their net asset value (NAV) per unit, and therefore, has not classified these investments within the fair value hierarchy. The increase in investments valued at NAV in fiscal 2019 was associated with the Company’s revised target asset allocations for its U.S. pension plan; see Note 18 for additional information. The terms and conditions for redemptions vary for the investments valued at NAV. The real estate investment fund may be redeemed at any time with a 90-day notice period. Other investments valued at NAV do not have restrictive redemption frequency or notice period requirements. The Company does not intend to sell or otherwise dispose of these investments at prices different than the NAV per unit.
Note 4: Note 5: | Stock-Based Compensation |
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and other executives that consists of restricted stock andawards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors. The Company’s Board of Directors and the Officer Nomination and Compensation Committee, as applicable, have discretionary authority to set the terms of the awards of stockstock-based awards. Grants to employees during fiscal 2019 were issued under the Company’s Amended and Restated 20082017 Incentive Compensation Plan (“Plan”).Plan. At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2017,2019, approximately 1.62.7 million shares authorized under the 2017 Incentive Compensation Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $7.4$7.9 million, $4.9$9.5 million, and $4.0$7.4 million in fiscal 2017, 2016,2019, 2018, and 2015,2017, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Stock Options: The Company recorded $1.1$1.2 million, $0.9$1.2 million, and $0.9$1.1 million of compensation expense related to stock options in fiscal 2017, 2016,2019, 2018, and 2015,2017, respectively. The fair value of stock options that vested during fiscal 2019, 2018, and 2017 2016, and 2015 was $1.0$1.2 million, $0.9$1.2 million, and $0.9$1.0 million, respectively. As of March 31, 2017,2019, the total compensation expense not yet recognized related to non-vested stock options was $2.1$2.2 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.52.6 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Weighted-average fair value of options | | $ | 4.60 | | | $ | 7.11 | | | $ | 10.21 | | Expected life of awards in years | | | 6.4 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 1.4 | % | | | 1.9 | % | | | 2.1 | % | Expected volatility of the Company's stock | | | 45.5 | % | | | 66.9 | % | | | 76.1 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Fair value of options | | $ | 7.81 | | | $ | 7.30 | | | $ | 4.60 | | Expected life of awards in years | | | 6.3 | | | | 6.4 | | | | 6.4 | | Risk-free interest rate | | | 2.8 | % | | | 1.9 | % | | | 1.4 | % | Expected volatility of the Company’s stock | | | 39.7 | % | | | 44.3 | % | | | 45.5 | % | Expected dividend yield on the Company’s stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of Modine’s common stock on the date of grant. The risk-free interest rate was based upon 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 upon 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 upon historical patterns and the terms of the options. Outstanding options granted vest 25 percent annually for four years. The Company used a pre-vesting forfeiture rate of 2.5 percent as an estimate of expected forfeitures prior to completing the required service period.
A summary of stock option activity for fiscal 20172019 was as follows:
| | Shares | | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.5 | | | $ | 10.82 | | | | | | | | Granted | | | 0.3 | | | | 10.00 | | | | | | | | Exercised | | | (0.1 | ) | | | 9.23 | | | | | | | | Forfeited or expired | | | (0.2 | ) | | | 21.76 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 9.83 | | | | 5.5 | | | $ | 4.4 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2017 | | | 1.0 | | | $ | 9.27 | | | | 4.0 | | | $ | 3.6 | |
| | Shares | | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.2 | | | $ | 11.16 | | | | | | | | Granted | | | 0.2 | | | | 17.90 | | | | | | | | Exercised | | | (0.1 | ) | | | 9.93 | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 14.51 | | | | | | | | Outstanding, ending | | | 1.2 | | | $ | 12.24 | | | | 5.5 | | | $ | 3.3 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2019 | | | 0.8 | | | $ | 10.59 | | | | 4.0 | | | $ | 2.9 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20172019 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the fair valueprice of Modine’s common shares.
Additional information related to stock options exercised is as follows:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Intrinsic value of stock options exercised | | $ | 0.7 | | | $ | 4.9 | | | $ | 0.5 | | Proceeds from stock options exercised | | | 1.1 | | | | 4.3 | | | | 0.9 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Intrinsic value of stock options exercised | | $ | 0.5 | | | $ | 0.4 | | | $ | 0.4 | | Proceeds from stock options exercised | | $ | 0.9 | | | $ | 0.5 | | | $ | 0.6 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Restricted Stock: The Company recorded $3.8$4.3 million, $3.5$3.9 million, and $2.8$3.8 million of compensation expense related to restricted stock in fiscal 2017, 2016,2019, 2018, and 2015,2017, respectively. The fair value of restricted stock awards that vested during fiscal 2019, 2018, and 2017 2016, and 2015 was $4.0$4.3 million, $3.4$3.9 million, and $2.3$4.0 million, respectively. At March 31, 2017,2019, the Company had $4.8$5.3 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.42.5 years. The Company values restricted stock awards using the closing market valueprice of its common shares on the date of grant. The restricted stock awards vest 25 percent annually for four years, with the exception of awards to non-employee directors, which fully vest upon grant.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
A summary of restricted stock activity for fiscal 20172019 was as follows:
| | Shares | | | Weighted- average price | | Non-vested balance, beginning | | | 0.6 | | | $ | 11.29 | | Granted | | | 0.4 | | | | 9.98 | | Vested | | | (0.4 | ) | | | 10.05 | | Non-vested balance, ending | | | 0.6 | | | $ | 11.21 | |
| | Shares | | | | | Non-vested balance, beginning | | | 0.6 | | | $ | 12.24 | | Granted | | | 0.3 | | | | 17.72 | | Vested | | | (0.3 | ) | | | 13.75 | | Forfeited | | | (0.1 | ) | | | 15.03 | | Non-vested balance, ending | | | 0.5 | | | $ | 14.95 | |
Restricted Stock – Performance-Based Shares: The Company recorded $2.5$2.4 million, $0.5$4.4 million, and $0.3$2.5 million of compensation expense related to performance-based stock awards in fiscal 2017, 2016,2019, 2018, and 2015,2017, respectively. At March 31, 2017,2019, the Company had $3.2$2.4 million of total unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be recognized over a weighted-average period of 1.81.5 years. The Company values performance-based stock awards using the closing market valueprice of its common shares on the date of grant.
Shares are earned under the performance portion of the restricted stock award program based upon the attainment of certain financial goals over a three-year period and are awarded after the end of that three-year performance period, if the performance targets have been achieved. The performance components of the programsprogram initiated in fiscal 2017, 2016, and 2015 were2019 is based upon both a target three-year average consolidated cash flow return on averageinvested capital employed (“ROACE”) and a target three-year average annual revenue growth at the end of a three-year performance period, commencing with the fiscal year of grant. The performance components of the programs initiated in fiscal 2018 and 2017 were based upon both a target three-year average consolidated return on capital employed and a target three-year average annual revenue growth at the end of a three-year performance period.
Note 5: Note 6: | Restructuring Activities |
During fiscal 2019, restructuring and repositioning expenses primarily resulted from targeted headcount reductions in Europe and the Americas within the VTS segment. These headcount reductions support the Company’s objective to reduce operational and SG&A cost structures at certain locations. In addition, the Company is in process of transferring product lines associated with the merger of its North American coils business into the CIS segment, in order to accelerate operational improvements and organizational efficiencies.
During fiscal 2018, the Company ceased production at its Gailtal, Austria manufacturing facility, primarily to reduce excess capacity and lower manufacturing costs in Europe. As a result of this facility closure, the Company recorded $8.3 million of restructuring expenses within the CIS segment. These restructuring expenses primarily related to employee severance and related benefits. Fiscal 2018 restructuring activities also included plant consolidation activities, targeted headcount reductions, and certain product line transfers in Europe within the VTS segment. In addition, the Company recorded restructuring expenses associated with the discontinuance of its geothermal product line within the BHVAC segment.
During fiscal 2017, the Company completed a voluntary retirement program for certain U.S. salaried employees and implemented targeted headcount reductions at several locations. The Company engaged in these restructuring activities as part of its Strengthen, Diversify and Grow strategic initiative, particularlylocations, both in support of its objective to reduce operational and SG&A cost structures.
During fiscal 2016, the Company announced a plan to close its Washington, Iowa manufacturing facility and recorded severance costs as a result. The Company completed the transfer of production from Washington to other Americas segment manufacturing facilities in fiscal 2017. Also during fiscal 2016,2017, the Company completed the transfer of production from its McHenry, IllinoisWashington, Iowa manufacturing facility, which was closed and sold, to other AmericasVTS segment manufacturing facilities. These restructuring activities reflect the Company’s focus on operating scale manufacturing facilities to improve overall competitiveness and profitability.in North America.
During fiscal 2015, the Company initiated a headcount reduction plan for the Brazil manufacturing facility within its Americas segment. The headcount reductions were in response to the economic slowdown in Brazil and were aimed at maintaining profitability in this business despite lower sales volume.
In addition, the Company has engaged in restructuring activities within its Europe segment. These restructuring activities have included implementing headcount reductions, exiting certain non-core product lines based upon Modine’s global product strategy, reducing manufacturing costs, consolidating production facilities, and disposing of and selling certain underperforming or non-strategic assets. The Company designed these activities to align the cost structure of the segment with its strategic focus on the commercial vehicle, off-highway, automotive component, and engine product markets, while improving gross margin and return on average capital employed.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Restructuring and repositioning expenses were as follows:
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Employee severance and related benefits | | $ | 5.3 | | | $ | 12.8 | | | $ | 1.2 | | Other restructuring and repositioning expenses | | | 5.6 | | | | 3.8 | | | | 3.5 | | Total | | $ | 10.9 | | | $ | 16.6 | | | $ | 4.7 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Employee severance and related benefits | | $ | 8.7 | | | $ | 13.0 | | | $ | 5.3 | | Other restructuring and repositioning expenses | | | 0.9 | | | | 3.0 | | | | 5.6 | | Total | | $ | 9.6 | | | $ | 16.0 | | | $ | 10.9 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
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, | | | | 2019 | | | 2018 | | Beginning balance | | $ | 11.0 | | | $ | 6.5 | | Additions | | | 8.7 | | | | 13.0 | | Payments | | | (9.1 | ) | | | (9.4 | ) | Effect of exchange rate changes | | | (0.6 | ) | | | 0.9 | | Ending balance | | $ | 10.0 | | | $ | 11.0 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | Beginning balance | | $ | 14.7 | | | $ | 9.9 | | Additions | | | 5.3 | | | | 12.8 | | Payments | | | (12.9 | ) | | | (8.5 | ) | Effect of exchange rate changes | | | (0.6 | ) | | | 0.5 | | Ending balance | | $ | 6.5 | | | $ | 14.7 | |
During fiscal 2018, the Company recorded a $1.3 million asset impairment charge as a result of the closure of the CIS Austrian facility. During fiscal 2019, the Company recorded an additional $0.4 million asset impairment charge related to this closed facility to reduce its carrying value to its current estimated fair value, less costs to sell.
During fiscal 2017, the Company sold twothree previously-closed manufacturing facilities within its Americas segment and a facility within its EuropeVTS segment for cash proceeds totaling $5.4 million. As a result of the facility sales, the Company recorded net gains totaling $2.0 million.
During fiscal 2015, the Company sold a wind tunnel within its Europe segment for cash proceeds of $5.8 million and recognized a gain of $3.2 million as a result.
During fiscal 2016, the Company recorded an asset impairment charge of $9.9 million within its Europe segment to write down long-lived assets at a manufacturing facility in Germany to fair value.
Note 6: Note 7: | Other Income and Expense |
Other income and expense consisted of the following:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Equity in earnings of non-consolidated affiliate | | $ | 0.7 | | | $ | 0.2 | | | $ | 0.1 | | Interest income | | | 0.4 | | | | 0.4 | | | | 0.4 | | Foreign currency transactions (a) | | | (2.3 | ) | | | (0.6 | ) | | | (1.9 | ) | Net periodic benefit cost (b) | | | (2.9 | ) | | | (3.3 | ) | | | (2.9 | ) | Total other expense - net | | $ | (4.1 | ) | | $ | (3.3 | ) | | $ | (4.3 | ) |
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Equity in earnings of non-consolidated affiliate | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.6 | | Interest income | | | 0.4 | | | | 0.4 | | | | 0.5 | | Foreign currency transactions (a) | | | (1.9 | ) | | | (1.3 | ) | | | (0.9 | ) | Gain from insurance recovery (b) | | | - | | | | 9.5 | | | | - | | Total other (expense) income - net | | $ | (1.4 | ) | | $ | 8.7 | | | $ | 0.2 | |
| (a) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on foreign currency exchange contracts. |
| (b) | During fiscal 2016,Represents net periodic benefit cost, exclusive of service cost, for the Company settled an insurance claim related to machineryCompany’s pension and equipment destroyed in a fire at its Airedale facility and recorded a gain of $9.5 million. See Note 1 for additional information.postretirement plans. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 7:
The U.S. and foreign components of earnings from continuing operations before income taxes and the provisionbenefit or benefitprovision for income taxes consisted of the following:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Components of earnings (loss) before income taxes: | | | | | | | | | | United States | | $ | 22.4 | | | $ | 2.5 | | | $ | (8.6 | ) | Foreign | | | 58.4 | | | | 60.8 | | | | 29.4 | | Total earnings before income taxes | | $ | 80.8 | | | $ | 63.3 | | | $ | 20.8 | | | | | | | | | | | | | | | Income tax (benefit) provision: | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | (20.4 | ) | | $ | 11.6 | | | $ | 0.1 | | Deferred | | | (4.2 | ) | | | 23.3 | | | | (3.8 | ) | State: | | | | | | | | | | | | | Current | | | 0.7 | | | | (0.3 | ) | | | 0.3 | | Deferred | | | 1.9 | | | | 2.0 | | | | (0.2 | ) | Foreign: | | | | | | | | | | | | | Current | | | 19.0 | | | | 16.1 | | | | 10.1 | | Deferred | | | (2.1 | ) | | | (13.2 | ) | | | (0.6 | ) | Total income tax (benefit) provision | | $ | (5.1 | ) | | $ | 39.5 | | | $ | 5.9 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Components of earnings (loss) from continuing operations before income taxes: | | | | | | | | | | United States | | $ | (8.6 | ) | | $ | (15.4 | ) | | $ | 31.1 | | Foreign | | | 29.4 | | | | 5.5 | | | | 10.1 | | Total earnings (loss) from continuing operations before income taxes | | $ | 20.8 | | | $ | (9.9 | ) | | $ | 41.2 | | | | | | | | | | | | | | | Income tax expense (benefit): | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.4 | | Deferred | | | (3.8 | ) | | | (13.0 | ) | | | 7.1 | | State: | | | | | | | | | | | | | Current | | | 0.3 | | | | 0.2 | | | | - | | Deferred | | | (0.2 | ) | | | (2.5 | ) | | | 1.1 | | Foreign: | | | | | | | | | | | | | Current | | | 10.1 | | | | 9.6 | | | | 12.7 | | Deferred | | | (0.6 | ) | | | (3.3 | ) | | | (2.3 | ) | Total income tax expense (benefit) | | $ | 5.9 | | | $ | (8.9 | ) | | $ | 19.0 | |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. Shortly after the Tax Act was enacted, the SEC issued accounting guidance which provided a one-year measurement period during which a company could complete its accounting for the impacts of the Tax Act. To the extent a company’s accounting for certain income tax effects of the Tax Act was incomplete, the company could determine a reasonable estimate for those effects and record a provisional estimate in its financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it was to continue applying the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted.
During fiscal 2018, the Company recorded provisional discrete tax charges totaling $38.0 million related to the Tax Act. The Company adjusted its U.S. deferred tax assets by $19.0 million due to the reduction in the U.S. federal corporate tax rate. This net reduction in deferred tax assets also included the estimated impact on the Company’s net state deferred tax assets. In addition, the Company recorded a $19.0 million charge for the transition tax required under the Tax Act.
During fiscal 2019, the Company completed its accounting for the Tax Act, which resulted in an income tax benefit totaling $7.7 million. The Company determined it will utilize its deferred tax attributes against the transition tax and finalized its fiscal 2018 U.S. federal income tax return. As a result, the Company decreased the provisional charge recorded for the reduction in the U.S. federal corporate tax rate by $9.3 million, since more deferred tax assets were utilized to offset taxable income at a higher fiscal 2018 U.S. federal corporate tax rate. The Company also decreased the transition tax liability to $18.9 million, a reduction of $0.1 million. In addition, the Company recorded a charge of $1.7 million for a reduction to state deferred tax assets.
The Tax Act included a new provision designed to tax global intangible low taxed income (“GILTI”) starting in fiscal 2019. The Company allocateselected to record the tax effects of the GILTI provision as a period expense in the applicable tax year.
The Company’s accounting policy is to allocate the income tax expense among continuing operations, discontinued operations,provision between net earnings and other comprehensive income. The Company applies its accounting for income taxes by tax jurisdiction, and in periods in which there is a loss from continuing operations before income taxes and pre-tax income in other categories (e.g., discontinued operations or other comprehensive income),income, it first allocates the income tax expenseprovision to the other sources ofcomprehensive income, and then records a related tax benefit in continuing operations.the income tax provision.
Income tax expense attributable to earnings from continuing operations before income taxes differed from56
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The reconciliation between the amounts computed by applying the statutory U.S. federal statutory rate and the Company’s effective tax rate was as follows:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Statutory federal tax | | | 21.0 | % | | | 31.5 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 3.6 | | | | 2.9 | | | | (3.3 | ) | Taxes on non-U.S. earnings and losses | | | 3.9 | | | | (3.8 | ) | | | (3.5 | ) | Valuation allowances | | | 4.0 | | | | (5.6 | ) | | | 1.2 | | Tax credits | | | (26.1 | ) | | | (17.3 | ) | | | (9.0 | ) | Compensation | | | (0.1 | ) | | | (0.8 | ) | | | 2.9 | | Tax rate or law changes | | | (12.0 | ) | | | 60.1 | | | | (2.5 | ) | Uncertain tax positions, net of settlements | | | 0.4 | | | | (0.8 | ) | | | 5.6 | | Notional interest deductions | | | (2.5 | ) | | | (3.2 | ) | | | (8.8 | ) | Dividend repatriation | | | 1.6 | | | | 0.2 | | | | 7.1 | | Other | | | (0.1 | ) | | | (0.8 | ) | | | 3.7 | | Effective tax rate | | | (6.3 | %) | | | 62.4 | % | | | 28.4 | % |
During fiscal 2019, the Company recorded income tax ratebenefits totaling $7.7 million related to the Tax Act, as discussed above; recorded income tax benefits totaling $14.5 million as a result of amending previous-year tax returns to recognize foreign tax credits that are expected to be realized based upon future sources of income; and recorded a $2.5 million income tax benefit related to a manufacturing deduction in the following:United States. Also in fiscal 2019, the Company changed its determination of whether it was more likely than not certain deferred tax assets of two separate subsidiaries in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax benefit totaling $1.0 million. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $4.3 million related to other tax jurisdictions and recorded a $2.2 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations.
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | (3.3 | ) | | | 11.5 | | | | 2.4 | | Taxes on non-U.S. earnings and losses | | | (3.5 | ) | | | 26.4 | | | | (4.9 | ) | Valuation allowance | | | 1.2 | | | | (20.9 | ) | | | 8.3 | | Tax credits | | | (9.0 | ) | | | 20.5 | | | | (6.1 | ) | Compensation | | | 2.9 | | | | (3.7 | ) | | | 1.0 | | Tax rate or law changes | | | (2.5 | ) | | | 1.3 | | | | 1.2 | | Uncertain tax positions, net of settlements | | | 5.6 | | | | (4.3 | ) | | | 2.2 | | Notional interest deductions | | | (8.8 | ) | | | - | | | | - | | Dividend repatriation | | | 7.1 | | | | 16.0 | | | | 2.4 | | Other | | | 3.7 | | | | 8.1 | | | | 4.6 | | Effective tax rate | | | 28.4 | % | | | 89.9 | % | | | 46.1 | % |
During fiscal 2018, the Company recorded provisional charges totaling $38.0 million related to the Tax Act, as discussed above, and recognized a $9.0 million Hungarian development tax credit. Also in fiscal 2018, the Company reversed a portion of the valuation allowance on certain deferred tax assets in a foreign jurisdiction after determining it was more likely than not these assets would be realized, and, as a result, recorded an income tax benefit of $2.8 million. In addition, the Company recorded a $1.8 million income tax benefit in fiscal 2018 associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations.
During fiscal 2017, the Company recorded a valuation allowance of $2.0 million on certain deferred tax assets in a foreign jurisdiction after determining it was more likely than not the deferred tax assets would not be realized. Also during fiscal 2017, the Company recorded a net reduction of deferred tax asset valuation allowances totaling $1.8 million in other tax jurisdictions. During fiscal 2016, the Company reversed a valuation allowance of $3.0 million on certain deferred tax assets in a foreign jurisdiction after determining it was more likely than not the deferred tax assets would be realized. In fiscal 2016 and 2015, the Company recorded a net increase in deferred tax asset valuation allowances totaling $5.0 million and $2.6 million, respectively, in other tax jurisdictions.
The Company will continue to provide valuation allowances against its net deferred tax assets in each applicable tax jurisdiction until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized.
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, | | | | 2017 | | | 2016 | | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.4 | | | $ | 0.1 | | Inventories | | | 5.0 | | | | 3.6 | | Plant and equipment | | | 3.7 | | | | 4.3 | | Pension and employee benefits | | | 51.8 | | | | 52.6 | | Net operating loss, capital loss, and credit carry-forwards | | | 147.5 | | | | 109.4 | | Other, principally accrued liabilities | | | 10.9 | | | | 7.5 | | Total gross deferred tax assets | | | 219.3 | | | | 177.5 | | Less: valuation allowances | | | (49.6 | ) | | | (50.8 | ) | Net deferred tax assets | | | 169.7 | | | | 126.7 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Plant and equipment | | | 21.2 | | | | 5.5 | | Goodwill | | | 4.7 | | | | 0.6 | | Intangible assets | | | 43.3 | | | | 1.5 | | Other | | | 1.8 | | | | 0.2 | | Total gross deferred tax liabilities | | | 71.0 | | | | 7.8 | | Net deferred tax asset | | $ | 98.7 | | | $ | 118.9 | |
| | March 31, | | | | 2019 | | | 2018 | | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.2 | | | $ | 0.3 | | Inventories | | | 3.4 | | | | 4.1 | | Plant and equipment | | | 1.8 | | | | 2.3 | | Pension and employee benefits | | | 32.7 | | | | 36.0 | | Net operating and capital losses | | | 73.5 | | | | 102.5 | | Credit carryforwards | | | 60.3 | | | | 36.7 | | Other, principally accrued liabilities | | | 10.0 | | | | 9.9 | | Total gross deferred tax assets | | | 181.9 | | | | 191.8 | | Less: valuation allowances | | | (43.4 | ) | | | (48.9 | ) | Net deferred tax assets | | | 138.5 | | | | 142.9 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Plant and equipment | | | 15.1 | | | | 17.6 | | Goodwill | | | 4.8 | | | | 5.2 | | Intangible assets | | | 28.8 | | | | 32.4 | | Other | | | 0.9 | | | | 0.7 | | Total gross deferred tax liabilities | | | 49.6 | | | | 55.9 | | Net deferred tax assets | | $ | 88.9 | | | $ | 87.0 | |
Unrecognized tax benefits were as follows:
| | Years ended March 31, | | | | 2019 | | | 2018 | | Beginning balance | | $ | 13.6 | | | $ | 14.2 | | Gross increases - tax positions in prior period | | | 1.6 | | | | 0.8 | | Gross decreases - tax positions in prior period (a) | | | (0.2 | ) | | | (1.2 | ) | Gross increases - due to acquisition | | | - | | | | 1.4 | | Gross increases - tax positions in current period | | | 1.1 | | | | 0.5 | | Settlements | | | (0.1 | ) | | | (0.3 | ) | Lapse of statute of limitations | | | (2.2 | ) | | | (1.8 | ) | Ending balance | | $ | 13.8 | | | $ | 13.6 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | Beginning balance | | $ | 5.9 | | | $ | 5.6 | | Gross increases - tax positions in prior period | | | 0.3 | | | | - | | Gross decreases - tax positions in prior period | | | (0.2 | ) | | | (0.1 | ) | Gross increases - due to acquisition | | | 7.3 | | | | - | | Gross increases - tax positions in current period | | | 0.9 | | | | 0.4 | | Ending balance | | $ | 14.2 | | | $ | 5.9 | |
| (a) | Fiscal 2018 includes $1.0 million related to the reduction of the U.S. federal corporate tax rate as a result of the Tax Act. |
The Company’s liability for unrecognized tax benefits as of March 31, 20172019 was $14.2$13.8 million, and if recognized, $11.9$12.2 million would have an effective tax rate impact. The Company estimates that reductions toa $0.2 million decrease in unrecognized tax benefits induring fiscal 20182020 due to lapses in statutes of limitations and audit settlements will total $2.4 million, which, ifsettlements. If recognized, these reductions would not have a $1.6 millionsignificant impact on the Company’s effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal 20172019 and 2016,2018, interest and penalties included within income tax expense in the consolidated statements of operations were not significant. At March 31, 2017, $0.8 million of2019 and 2018, accrued interest and penalties were included in the consolidated balance sheet. At March 31, 2016, accrued interesttotaled $1.1 million and penalties were not significant.$1.0 million, respectively.
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2017,2019, the Company was under income tax examination in a number of foreign jurisdictions. The following tax years remain subject to examination for the Company’s major tax jurisdictions:
| Germany | Fiscal 2011 - Fiscal 2016 | 2018 | | Italy | Calendar 20112014 - Fiscal 2016 | 2018 | | United States | Fiscal 20142016 - Fiscal 2016 | 2018 |
At March 31, 2017, the Company had federal and state tax credits of $27.4 million that, if not utilized against U.S. taxes, will expire between fiscal 2018 and 2037. The Company also had state and local tax loss carry-forwards of $212.7 million that, if not utilized against state apportioned taxable income, will expire at various times during fiscal 2018 and 2037. In addition, the Company had tax loss and foreign attribute carry-forwards of $485.0 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, $167.0 million of these carry-forwards will expire at various times during fiscal 2018 through 2037, and $318.0 million, mainly related to Germany, Italy, and India, will not expire due to an unlimited carry-forward period.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
At March 31, 2017,2019, the Company provided $0.3had federal and state tax credits of $60.0 million that, if not utilized against U.S. taxes, will expire between fiscal 2020 and 2039. The Company also had state and local tax loss carryforwards totaling $129.5 million that, if not utilized against state apportioned taxable income, will expire between fiscal 2020 and 2039. In addition, the Company had tax loss and foreign attribute carryforwards totaling $351.6 million in various tax jurisdictions throughout the world. Certain of the carryforwards in the U.S. and in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $9.7 million of tax on undistributedthese carryforwards will expire between fiscal 2020 and 2034, and $341.9 million, mainly related to Germany and Italy, will not expire due to an unlimited carryforward period.
The Company’s practice and intention is to reinvest, with certain insignificant exceptions, the earnings of its non-U.S. subsidiaries outside of the U.S., and therefore, the Company has not recorded foreign withholding taxes or deferred income taxes for certain subsidiaries not considered permanently reinvested. Undistributed earnings totaling $505.0 million are considered permanently reinvested inthese earnings. The Company has estimated the Company’s remaining foreign operations, and no provision has been made for taxes that would be payable upon the distribution of such earnings. It is not practicable to estimate thenet amount of unrecognized foreign withholding taxestax and deferred tax liabilityliabilities would total approximately $7.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on such earnings.circumstances existing when remittance occurs.
Note 8: Note 9: | Earnings Per Share |
The components of basic and diluted earnings per share were as follows:
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Basic: | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 14.9 | | | $ | (1.0 | ) | | $ | 22.2 | | Less: Net earnings attributable to noncontrolling interest | | | (0.7 | ) | | | (0.6 | ) | | | (1.0 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | - | | | | (0.2 | ) | Earnings (loss) from continuing operations available to Modine shareholders | | | 14.0 | | | | (1.6 | ) | | | 21.0 | | Earnings from discontinued operations, net of income taxes | | | - | | | | - | | | | 0.6 | | Net earnings (loss) available to Modine shareholders | | $ | 14.0 | | | $ | (1.6 | ) | | $ | 21.6 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.8 | | | | 47.3 | | | | 47.2 | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.45 | | Earnings per share - discontinued operations | | | - | | | | - | | | | 0.01 | | Net earnings (loss) per share - basic | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.46 | | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 14.9 | | | $ | (1.0 | ) | | $ | 22.2 | | Less: Net earnings attributable to noncontrolling interest | | | (0.7 | ) | | | (0.6 | ) | | | (1.0 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.1 | ) | | | - | | | | (0.2 | ) | Earnings (loss) from continuing operations available to Modine shareholders | | | 14.1 | | | | (1.6 | ) | | | 21.0 | | Earnings from discontinued operations, net of income taxes | | | - | | | | - | | | | 0.6 | | Net earnings (loss) available to Modine shareholders | | $ | 14.1 | | | $ | (1.6 | ) | | $ | 21.6 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.8 | | | | 47.3 | | | | 47.2 | | Effect of dilutive securities | | | 0.5 | | | | - | | | | 0.6 | | Weighted-average shares outstanding - diluted | | | 48.3 | | | | 47.3 | | | | 47.8 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.44 | | Earnings per share - discontinued operations | | | - | | | | - | | | | 0.01 | | Net earnings (loss) per share - diluted | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.45 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Basic Earnings Per Share: | | | | | | | | | | Net earnings attributable to Modine | | $ | 84.8 | | | $ | 22.2 | | | $ | 14.2 | | Less: Undistributed earnings attributable to unvested shares | | | (0.4 | ) | | | (0.2 | ) | | | (0.2 | ) | Net earnings available to Modine shareholders | | $ | 84.4 | | | $ | 22.0 | | | $ | 14.0 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.5 | | | | 49.9 | | | | 47.8 | | | | | | | | | | | | | | | Net earnings per share - basic | | $ | 1.67 | | | $ | 0.44 | | | $ | 0.29 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | Net earnings attributable to Modine | | $ | 84.8 | | | $ | 22.2 | | | $ | 14.2 | | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (0.1 | ) | | | (0.1 | ) | Net earnings available to Modine shareholders | | $ | 84.6 | | | $ | 22.1 | | | $ | 14.1 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.5 | | | | 49.9 | | | | 47.8 | | Effect of dilutive securities | | | 0.8 | | | | 1.0 | | | | 0.5 | | Weighted-average shares outstanding - diluted | | | 51.3 | | | | 50.9 | | | | 48.3 | | | | | | | | | | | | | | | Net earnings per share - diluted | | $ | 1.65 | | | $ | 0.43 | | | $ | 0.29 | |
For the years ended March 31,fiscal 2019, 2018 and 2017, 2016, and 2015, the calculation of diluted earnings per share excluded 0.80.4 million, 0.80.2 million, and 0.60.8 million stock options, respectively, because they were anti-dilutive. For
Note 10: | Cash, Cash Equivalents and Restricted Cash |
Cash, cash equivalents and restricted cash consisted of the year ended March 31, 2016,following:
| | March 31, | | | | 2019 | | | 2018 | | Cash and cash equivalents | | $ | 41.7 | | | $ | 39.3 | | Restricted cash | | | 0.5 | | | | 1.0 | | Total cash, cash equivalents and restricted cash | | $ | 42.2 | | | $ | 40.3 | |
Restricted cash, which is reported within other noncurrent assets on the total numberconsolidated balance sheets, consists primarily of potentially-dilutive securities was 0.4 million. However, these securities were not included in the computation of diluted net loss per share since to do so would have decreased the loss per share.deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 9:
Inventories consisted of the following:
| | March 31, | | | | 2017 | | | 2016 | | Raw materials and work in process | | $ | 127.7 | | | $ | 79.5 | | Finished goods | | | 40.8 | | | | 31.5 | | Total inventories | | $ | 168.5 | | | $ | 111.0 | |
| | March 31, | | | | 2019 | | | 2018 | | Raw materials | | $ | 122.8 | | | $ | 114.4 | | Work in process | | | 32.2 | | | | 34.8 | | Finished goods | | | 45.7 | | | | 42.1 | | Total inventories | | $ | 200.7 | | | $ | 191.3 | |
Note 10: Note 12: | Property, Plant and Equipment |
Property, plant and equipment, including depreciable lives, consisted of the following:
| | March 31, | | | | 2017 | | | 2016 | | Land | | $ | 18.9 | | | $ | 7.2 | | Buildings and improvements (10-40 years) | | | 255.6 | | | | 221.3 | | Machinery and equipment (3-12 years) | | | 755.5 | | | | 694.3 | | Office equipment (3-10 years) | | | 92.5 | | | | 84.1 | | Construction in progress | | | 55.1 | | | | 36.7 | | | | | 1,177.6 | | | | 1,043.6 | | Less: accumulated depreciation | | | (718.6 | ) | | | (705.0 | ) | Net property, plant and equipment | | $ | 459.0 | | | $ | 338.6 | |
| | March 31, | | | | 2019 | | | 2018 | | Land | | $ | 20.7 | | | $ | 22.6 | | Buildings and improvements (10-40 years) | | | 285.9 | | | | 295.6 | | Machinery and equipment (3-15 years) | | | 848.7 | | | | 840.8 | | Office equipment (3-10 years) | | | 92.0 | | | | 93.0 | | Construction in progress | | | 57.4 | | | | 50.2 | | | | | 1,304.7 | | | | 1,302.2 | | Less: accumulated depreciation | | | (820.0 | ) | | | (797.9 | ) | Net property, plant and equipment | | $ | 484.7 | | | $ | 504.3 | |
Depreciation expense totaled $67.9 million, $67.0 million, and $54.2 million $48.6 million,for fiscal 2019, 2018, and $50.0 million for the years ended March 31, 2017, 2016, and 2015, respectively. Gains and losses related to the disposal of property, plant and equipment are recorded inwithin SG&A expenses. For the years ended March 31,fiscal 2019, 2018, and 2017, 2016, and 2015, total losses related to the disposal of property, plant and equipment were $0.4totaled $0.9 million, $0.4$0.7 million, and $1.1$0.4 million, respectively.
Note 11: Note 13: | Investment in Affiliate |
The Company owns 50 percent of Nikkei Heat Exchanger Company, Ltd. (“NEX”). The Company accounts for its investment in this non-consolidated affiliate using the equity method. At March 31, 20172019 and 2016,2018, the Company included its investment in NEX of $3.3$3.8 million and $3.2$3.6 million, respectively, within other noncurrent assets on the consolidated balance sheets. At March 31, 2017,2019, the investment in NEX is equal to the Company'sCompany’s investment in the underlying net assets.
The Company reports its equity in earnings from NEX within other income and expense in the consolidated statements of operations, using a one-month reporting delay. The Company’s share of NEX’s earnings for the years ended March 31,fiscal 2019, 2018, and 2017 2016,was $0.7 million, $0.2 million, and 2015 was $0.1 million, $0.1 million, and $0.6 million, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 12: Note 14: | Intangible Assets |
Intangible assets consisted of the following:
| | March 31, 2017 | | | March 31, 2016 | | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | Customer relationships | | $ | 60.5 | | | $ | (1.7 | ) | | $ | 58.8 | | | $ | 2.0 | | | $ | (0.4 | ) | | $ | 1.6 | | Trade names | | | 58.4 | | | | (7.2 | ) | | | 51.2 | | | | 8.9 | | | | (6.3 | ) | | | 2.6 | | Acquired technology | | | 27.0 | | | | (2.9 | ) | | | 24.1 | | | | 5.5 | | | | (1.5 | ) | | | 4.0 | | Total intangible assets | | $ | 145.9 | | | $ | (11.8 | ) | | $ | 134.1 | | | $ | 16.4 | | | $ | (8.2 | ) | | $ | 8.2 | |
Intangible assets as of March 31, 2017 include intangible assets related to the Company’s acquisition of Luvata HTS. See Note 2 for additional information.
| | March 31, 2019 | | | March 31, 2018 | | | | Gross Value | | | | | | | | | | | | Accumulated Amortization | | | | | Customer relationships | | $ | 61.5 | | | $ | (9.1 | ) | | $ | 52.4 | | | $ | 64.2 | | | $ | (5.7 | ) | | $ | 58.5 | | Trade names | | | 58.9 | | | | (13.5 | ) | | | 45.4 | | | | 60.6 | | | | (10.8 | ) | | | 49.8 | | Acquired technology | | | 23.9 | | | | (5.5 | ) | | | 18.4 | | | | 25.2 | | | | (3.6 | ) | | | 21.6 | | Total intangible assets | | $ | 144.3 | | | $ | (28.1 | ) | | $ | 116.2 | | | $ | 150.0 | | | $ | (20.1 | ) | | $ | 129.9 | |
The Company recorded $4.1$9.0 million, $1.6$9.7 million, and $1.6$4.1 million of amortization expense during fiscal 2019, 2018, and 2017, 2016, and 2015, respectively. Estimated futureThe Company estimates that it will record $9.0 million of amortization expense is as follows:in fiscal 2020 and approximately $8.0 million of annual amortization expense in fiscal 2021 through 2024.
Fiscal Year | | Estimated Amortization Expense | | 2018 | | $ | 9.4 | | 2019 | | | 9.2 | | 2020 | | | 9.1 | | 2021 | | | 8.5 | | 2022 | | | 7.4 | | 2023 & Beyond | | | 90.5 | |
During fiscal 2018, the BHVAC segment discontinued its geothermal product line and, as a result, recorded a $1.2 million impairment for acquired technology intangible assets it will no longer use. Annual revenue for this discontinued product line was less than $1.0 million.
Changes in the carrying amount of goodwill, by segment and in the aggregate, were as follows:
| | Asia | | | BHVAC | | | CIS | | | Total | | 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 | | Acquired Goodwill | | | - | | | | - | | | | 150.6 | | | | 150.6 | | Effect of exchange rate changes | | | - | | | | (1.6 | ) | | | 0.3 | | | | (1.3 | ) | Balance, March 31, 2017 | | $ | 0.5 | | | $ | 13.7 | | | $ | 150.9 | | | $ | 165.1 | |
| | VTS | | | CIS | | | BHVAC | | | Total | | Balance, March 31, 2017 | | $ | 0.5 | | | $ | 150.9 | | | $ | 13.7 | | | $ | 165.1 | | Acquired goodwill (a) | | | - | | | | 1.3 | | | | - | | | | 1.3 | | Effect of exchange rate changes | | | - | | | | 6.1 | | | | 1.3 | | | | 7.4 | | Balance, March 31, 2018 | | | 0.5 | | | | 158.3 | | | | 15.0 | | | | 173.8 | | Effect of exchange rate changes | | | - | | | | (4.4 | ) | | | (0.9 | ) | | | (5.3 | ) | Balance, March 31, 2019 | | $ | 0.5 | | | $ | 153.9 | | | $ | 14.1 | | | $ | 168.5 | |
As a result of its acquisition of Luvata HTS, the Company recorded $150.6 million of goodwill. See Note 2 for additional information.
| (a) | Represents measurement-period adjustments related to the Company’s acquisition of Luvata HTS. See Note 2 for additional information about this acquisition. |
The Company assesses goodwill for impairment annually, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. The Company conducted its annual assessment for goodwill impairment during the fourth quarter of fiscal 20172019 for the reporting units within its BHVACVTS, CIS, and AsiaBHVAC segments, by applying a fair value-based test, and determined that the fair value of its reporting units exceeded their respective book values. The Company will perform goodwill impairment testing for its recently-acquired CIS segment beginning in fiscal 2018.
At both March 31, 20172019 and 2016,2018, accumulated goodwill impairment losses totaled $31.6 million and $8.7$40.3 million within the Americas and Europe segments, respectively.VTS segment.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 14: Note 16: | Product Warranties, Operating Leases, and Other Commitments |
Product warranties: Most of the Company’s products are covered under a warranty period ranging from one to five years. The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. In addition, the Company adjusts its warranty accruals if it becomes probable that expected claims will differ from initial estimates.
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | | 2017 | | | 2016 | | Beginning balance | | $ | 8.3 | | | $ | 10.4 | | Warranties recorded at time of sale | | | 5.2 | | | | 5.7 | | Adjustments to pre-existing warranties | | | 0.3 | | | | (1.1 | ) | Additions due to acquisition | | | 4.1 | | | | - | | Settlements | | | (7.6 | ) | | | (6.7 | ) | Effect of exchange rate changes | | | (0.3 | ) | | | - | | Ending balance | | $ | 10.0 | | | $ | 8.3 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | Beginning balance | | $ | 9.3 | | | $ | 10.0 | | Warranties recorded at time of sale | | | 5.5 | | | | 6.7 | | Adjustments to pre-existing warranties | | | 2.2 | | | | (0.8 | ) | Adjustments due to acquisition (a) | | | - | | | | (1.0 | ) | Settlements | | | (7.3 | ) | | | (6.2 | ) | Effect of exchange rate changes | | | (0.5 | ) | | | 0.6 | | Ending balance | | $ | 9.2 | | | $ | 9.3 | |
| (a) | During fiscal 2018, the Company decreased its liability for product warranties by $1.0 million as a result of measurement-period adjustments made in connection with purchase accounting for the acquisition of Luvata HTS. See Note 2 for additional information about this acquisition. |
Operating leases: The Company leases various facilities and equipment under operating leases. Rental expense for these leases totaled $12.8$19.3 million, $11.9$18.5 million, and $11.5$12.8 million in fiscal 2019, 2018, and 2017, 2016, and 2015, respectively.
Future minimum rental commitments at March 31, 20172019 under non-cancelable operating leases were as follows:
Fiscal Year | | | | 2018 | | $ | 12.2 | | 2019 | | | 10.1 | | 2020 | | | 9.1 | | 2021 | | | 7.8 | | 2022 | | | 5.4 | | 2023 and beyond | | | 24.7 | | Total | | $ | 69.3 | |
Fiscal Year | | | | 2020 | | $ | 14.2 | | 2021 | | | 12.4 | | 2022 | | | 9.1 | | 2023 | | | 7.1 | | 2024 | | | 4.7 | | 2025 and beyond | | | 22.9 | | Total | | $ | 70.4 | |
Indemnification agreements: From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years. In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 20172019 was not material.
Commitments: At March 31, 2017,2019, the Company had capital expenditure commitments of $18.1$23.6 million. Significant commitments include tooling and equipment expenditures for new and renewal programs with customers in the Americas, Asia, and Europe segments.VTS segment. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 15:
In November 2016,Long-term debt consisted of the Company entered into new credit agreements to fund a significant portion of its acquisition of Luvata HTS (see Note 2 for additional information). following:
| | Fiscal year of maturity | | | March 31, 2019 | | | March 31, 2018 | | | | | | | | | | | | Term loans | | 2022 | | | $ | 238.4 | | | $ | 267.8 | | 6.8% Senior Notes | | 2021 | | | | 85.0 | | | | 101.0 | | 5.8% Senior Notes | | 2027 | | | | 50.0 | | | | 50.0 | | Other (a) | | - | | | | 14.3 | | | | 12.8 | | | | | | | | | 387.7 | | | | 431.6 | | Less: current portion | | | | | | | (48.6 | ) | | | (39.9 | ) | Less: unamortized debt issuance costs | | | | (4.0 | ) | | | (5.4 | ) | Total long-term debt | | | | | | $ | 335.1 | | | $ | 386.3 | |
| (a) | Other long-term debt includes borrowings by foreign subsidiaries, capital lease obligations and other financing-type obligations. |
Long-term debt matures as follows:
Fiscal Year | | | | 2020 | | $ | 48.6 | | 2021 | | | 101.3 | | 2022 | | | 187.4 | | 2023 | | | 8.8 | | 2024 | | | 8.8 | | 2025 & beyond | | | 32.8 | | Total | | $ | 387.7 | |
The Company executed an amended and restatedmaintains a credit agreement with a syndicate of banks that provides for both U.S. dollar- and euro-denominated term loan facilities and a multi-currency $175.0 million revolving credit facility expiring in November 2021, which replaced the Company’s then-existing revolver that would have expired in August 2018.2021. Based upon the terms of the credit agreement and currency denomination, borrowings under both the term loans and revolving credit facility bear interest at a variable rate, primarily either the London Interbank Offered Rate (“LIBOR”) or Euro Interbank Offered Rate (“EURIBOR”), plus 137.5 to 250 basis points (3.0 percent weighted-average at March 31, 2017) depending on the Company’s leverage ratio, as described below. At March 31, 2017,2019, the Company’sweighted-average interest rates for the outstanding term loanloans and the revolving credit facility borrowings totaled $268.9 million, with repayments scheduled through fiscal 2022. Also in November 2016, the Company issued $50.0 million of 5.8were 3.3 percent Senior Notes with repayments ending in fiscal 2027.and 3.7 percent, respectively.
Long-term debt consisted of the following:
| | Fiscal year of maturity | | | March 31, 2017 | | | March 31, 2016 | | | | | | | | | | | | Term Loans | | | 2022 | | | $ | 268.9 | | | $ | - | | 6.8% Senior Notes | | | 2021 | | | | 117.0 | | | | 125.0 | | 5.8% Senior Notes | | | 2027 | | | | 50.0 | | | | - | | Other (a) | | | 2032 | | | | 8.3 | | | | 9.0 | | | | | | | | | 444.2 | | | | 134.0 | | Less: current portion | | | | | | | (31.8 | ) | | | (8.5 | ) | Less: unamortized debt issuance costs | | | | | | | (6.7 | ) | | | - | | Total long-term debt | | | | | | $ | 405.7 | | | $ | 125.5 | |
| (a) | Other long-term debt includes capital lease obligations and other financing-type obligations. |
Long-term debt matures as follows:
Fiscal Year | | | | 2018 | | $ | 31.8 | | 2019 | | | 38.6 | | 2020 | | | 43.8 | | 2021 | | | 98.3 | | 2022 | | | 184.1 | | 2023 & beyond | | | 47.6 | | Total | | $ | 444.2 | |
At March 31, 2017,2019 and 2018, the Company reported its revolving credit facility borrowings of $40.4$47.1 million and $21.3 million, respectively, as short-term debt on the consolidated balance sheet.sheets. At March 31, 2017,2019, domestic letters of credit totaled $2.0$4.3 million, resulting in available borrowings under the Company’s revolving credit facility of $132.6$123.6 million. The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 20172019 and 20162018 of $33.0$18.9 million and $28.6$31.9 million, respectively. At March 31, 2017, the Company’s foreign unused lines of credit totaled $20.0 million. In aggregate, the Company had total available lines of credit of $152.6 million at March 31, 2017.
Provisions in the Company’s amended and restated credit agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided liens on substantially all domestic assets. In addition, the term loans require prepayments, as definedspecified in the credit agreement, the term loans may require prepayments in the event the Company’s annual excess cash flow exceeds defined levels, depending upon the Company’s leverage ratio, or in the event of certain asset sales. The Company is also subject to a leverage ratio covenant,covenants, the most restrictive of which requires the Company to limit its consolidated indebtedness, less a portion of its cash balance, both as defined by the credit agreement,agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). As permitted by the credit agreements and in connection with the Company’s acquisition of Luvata HTS, this leverage ratio covenant limit has been temporarily raised to no more than three and three-quarters times Adjusted EBITDA through the second quarter of fiscal 2018, and thereafter to no more than three and one-half times Adjusted EBITDA through the first quarter of fiscal 2019. The Company is also subject to an interest expense coverage ratio covenant, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. The Company was in compliance with its debt covenants as of March 31, 2017.2019.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. AtAs of March 31, 20172019 and 2016,2018, the carrying value of Modine’sthe Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of approximately $170.0$137.2 million and $139.0$153.1 million, respectively. The fair value of the Senior Notes areCompany’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 34 for the definition of a Level 2 fair value measurement.
Note 16: Note 18: | Pension and Employee Benefit Plans |
Defined Contribution Employee Benefit Plans:
The Company maintains a domestic 401(k) plansplan that allowallows employees to contribute a portion of their salary to help them save for retirement. The Company matched 50 percent ofcurrently matches employee contributions up to 54.5 percent of employeetheir compensation during fiscal 2017, 2016, and 2015 related to its primary domestic 401(k) plans. The Company also makes annual employer contributions into eligible active employee accounts based upon a percentage of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary.for participants. The Company’s expense for defined contribution employee benefit plans during fiscal 2019, 2018, and 2017 2016, and 2015 was $4.7$6.4 million, $4.6$5.2 million, and $5.9$4.7 million, respectively.
In addition, the Company maintains non-qualified deferred compensation plans for eligible employees, and various non-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans:
Certain non-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.laws.
Defined Benefit Employee Benefit Plans:
Pension plans: As a result of its acquisition of Luvata HTS, the Company acquired defined benefit pension plans in Italy, Austria, and the U.S. with liabilities totaling $14.3 million, representing the aggregate funded status of these acquired plans. These acquired plans are closed to new participants.
In addition, theThe Company maintains non-contributory defined benefit pension plans that cover eligible domestic employees. These plans are closed to new participants. The primary domestic plans cover most of its domestic employees hired on or before December 31, 2003. The2003 and provide benefits provided are based primarily upon years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based upon a monthly retirement benefit amount. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company also have legacy defined benefit plans which cover a smaller number of active employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany, Austria, and AustriaItaly and are closed to new participants.
The Company contributed $8.1$8.0 million, $6.7$13.4 million, and $5.9$8.1 million to its U.S. pension plans during fiscal 2019, 2018, and 2017, 2016,respectively. In addition, the Company contributed $5.9 million, $2.6 million, and 2015,$1.4 million to its non-U.S. pension plans during fiscal 2019, 2018, and 2017, respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company offered a voluntary lump-sum payout program to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer and a total of $65.3 million was paid from pension plan assets during fiscal 2016, 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts) 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 2017, 2016,2019, 2018, and 20152017 was $0.3 million, $0.2 million, and $0.3 million, and $0.1 million, respectively.
Measurement Date:date: The Company uses March 31 as the measurement date for its pension and postretirement plans.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s global pension plans, for the fiscal years ended March 31, 2017 and 2016 were as follows:
| | 2017 | | | 2016 | | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 261.0 | | | $ | 328.2 | | Service cost | | | 0.6 | | | | 0.6 | | Interest cost | | | 9.8 | | | | 11.2 | | Actuarial gain | | | (0.5 | ) | | | (2.8 | ) | Benefits paid (a) | | | (19.8 | ) | | | (78.1 | ) | Acquired obligations (b) | | | 20.3 | | | | - | | Effect of exchange rate changes | | | (1.6 | ) | | | 1.9 | | Benefit obligation at end of year | | $ | 269.8 | | | $ | 261.0 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 141.5 | | | $ | 217.0 | | Actual return on plan assets | | | 11.0 | | | | (5.3 | ) | Benefits paid (a) | | | (19.8 | ) | | | (78.1 | ) | Employer contributions | | | 9.5 | | | | 7.9 | | Acquired plan assets (b) | | | 6.0 | | | | - | | Fair value of plan assets at end of year | | $ | 148.2 | | | $ | 141.5 | | Funded status at end of year | | $ | (121.6 | ) | | $ | (119.5 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (2.2 | ) | | $ | (0.9 | ) | Noncurrent liability | | | (119.4 | ) | | | (118.6 | ) | | | $ | (121.6 | ) | | $ | (119.5 | ) |
| | Years ended March 31, | | | | 2019 | | | 2018 | | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 273.6 | | | $ | 269.8 | | Service cost | | | 0.5 | | | | 0.5 | | Interest cost | | | 9.6 | | | | 9.9 | | Actuarial loss | | | 1.7 | | | | 4.4 | | Benefits paid | | | (22.8 | ) | | | (16.9 | ) | Curtailment gain (a) | | | - | | | | (0.3 | ) | Effect of exchange rate changes | | | (3.8 | ) | | | 6.2 | | Benefit obligation at end of year | | $ | 258.8 | | | $ | 273.6 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 157.7 | | | $ | 148.2 | | Actual return on plan assets | | | 6.3 | | | | 10.4 | | Benefits paid | | | (22.8 | ) | | | (16.9 | ) | Employer contributions | | | 13.9 | | | | 16.0 | | Fair value of plan assets at end of year | | $ | 155.1 | | | $ | 157.7 | | Funded status at end of year | | $ | (103.7 | ) | | $ | (115.9 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (2.0 | ) | | $ | (6.3 | ) | Noncurrent liability | | | (101.7 | ) | | | (109.6 | ) | | | $ | (103.7 | ) | | $ | (115.9 | ) |
| (a) | InDuring fiscal 2016, $65.3 million was paid from plan assets2018, the Company recorded a pension curtailment gain associated with the closure of a manufacturing facility in connection with lump-sum payouts.Austria (CIS segment). See Note 6 for additional information regarding the closure of this facility. |
| (b) | As a result of its acquisition of Luvata HTS, the Company acquired pension plans in Italy, Austria and the U.S. See Note 2 for additional information. |
As of March 31, 2019, 2018, and 2017, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $36.5 million, $43.4 million, and $39.3 million respectively. In fiscal 2019, the $6.9 million decrease primarily resulted from employer contributions of $5.9 million for benefits paid to plan participants during the year and the impact of foreign currency exchange rate changes, partially offset by service and interest cost totaling $1.1 million. In fiscal 2018, the $4.1 million increase primarily resulted from the impact of foreign currency exchange rate changes and service and interest cost totaling $1.3 million, partially offset by $2.6 million of benefits paid to plan participants.
The accumulated benefit obligation for pension plans was $266.8$256.9 million and $257.9$271.8 million as of March 31, 20172019 and 2016,2018, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $156.8$159.1 million and $162.0$157.9 million as of March 31, 20172019 and 2016,2018, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Costs for the Company’s global pension plans included the following components for the fiscal years ended March 31, 2017, 2016, and 2015:components:
| | 2017 | | | 2016 | | | 2015 | | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.6 | | | $ | 0.6 | | | $ | 0.5 | | Interest cost | | | 9.8 | | | | 11.2 | | | | 13.0 | | Expected return on plan assets | | | (12.3 | ) | | | (14.9 | ) | | | (16.7 | ) | Amortization of net actuarial loss | | | 5.6 | | | | 6.4 | | | | 5.5 | | Settlements (a) | | | - | | | | 42.1 | | | | - | | Net periodic benefit cost | | $ | 3.7 | | | $ | 45.4 | | | $ | 2.3 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | Net actuarial loss | | $ | 1.0 | | | $ | 17.5 | | | $ | 46.4 | | Amortization of net actuarial loss (a) | | | (5.6 | ) | | | (48.5 | ) | | | (5.5 | ) | Total recognized in other comprehensive (income) loss | | $ | (4.6 | ) | | $ | (31.0 | ) | | $ | 40.9 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.5 | | | $ | 0.5 | | | $ | 0.6 | | Interest cost | | | 9.6 | | | | 9.9 | | | | 9.8 | | Expected return on plan assets | | | (12.3 | ) | | | (11.9 | ) | | | (12.3 | ) | Amortization of net actuarial loss | | | 5.6 | | | | 5.6 | | | | 5.6 | | Settlements (a) | | | 0.2 | | | | 0.3 | | | | - | | Curtailment gain (a) | | | - | | | | (0.3 | ) | | | - | | Net periodic benefit cost | | $ | 3.6 | | | $ | 4.1 | | | $ | 3.7 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive income (loss):
| | | | | | | | | | | | | Net actuarial loss | | $ | (7.7 | ) | | $ | (5.8 | ) | | $ | (1.0 | ) | Amortization of net actuarial loss | | | 5.8 | | | | 5.9 | | | | 5.6 | | Total recognized in other comprehensive income (loss) | | $ | (1.9 | ) | | $ | 0.1 | | | $ | 4.6 | |
| (a) | During fiscal 2016, in connectionThe settlement charges and curtailment gain resulted from activity associated with lump-sum payouts tothe Company’s non-U.S. pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss.plans. |
The Company amortized $5.6 million of net actuarial loss in fiscal 2019, 2018, and 2017. In each of these years, less than $1.0 million of the amortization was attributable to the Company’s non-U.S. pension plans. The Company estimates $5.6$6.0 million of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2018.2020. The fiscal 2020 estimated amortization includes less than $1.0 million related to the Company’s non-U.S. pension plans.
The Company used a discount rate of 4.1%4.0% as of both March 31, 20172019 and 20162018 for determining its benefit obligations under its U.S. pension plans. The Company used a weighted-average discount rate of 1.7%1.4% and 1.8%1.7% as of March 31, 20172019 and 2016,2018, respectively, infor determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 4.1%4.0%, 4.3%4.1%, and 4.7%4.1% to determine its costs under its U.S. pension plans for the fiscal years ended March 31,2019, 2018, and 2017, 2016, and 2015, respectively. The Company used a weighted-average discount rate of 1.7%1.9%, 1.3%1.9%, and 3.0%1.7% to determine its costs under its non-U.S. pension plans for the fiscal years ended March 31,2019, 2018, and 2017, 2016, and 2015, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. The Company used a similar process to determine the discount rate for its non-U.S. pension obligations.
Plan assets in the Company’s U.S. defined benefitpension plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted-average asset allocations at the measurement dates of March 31, 2017 and 2016 were as follows:
| | Target allocation as of March 31, 2017 | | | Plan assets | | | | | | | 2017 | | | 2016 | | Equity securities | | | 60 | % | | | 58 | % | | | 56 | % | Debt securities | | | 38 | % | | | 38 | % | | | 36 | % | Cash | | | 2 | % | | | 4 | % | | | 4 | % | Alternative assets | | | - | | | | - | | | | 4 | % | | | | 100 | % | | | 100 | % | | | 100 | % |
| | March 31, 2019 | | | March 31, 2018 | | | | Target allocation | | | Plan assets | | | Target allocation | | | Plan assets | | Equity securities | | | 65 | % | | | 66 | % | | | 60 | % | | | 58 | % | Debt securities | | | 21 | % | | | 19 | % | | | 38 | % | | | 38 | % | Real estate investments | | | 13 | % | | | 12 | % | | | - | | | | - | | Cash and cash equivalents | | | 1 | % | | | 3 | % | | | 2 | % | | | 4 | % | | | | 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, 20172019 and 2016,2018, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term returngrowth of plan assets,principal, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2017, 2016,2019, 2018, and 20152017 U.S. pension plan expense, the expected rate of return on plan assets was 7.5 percent, 7.5 percent and 8.0 percent.percent, respectively. For fiscal 20182020 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 7.5 percent.
The Company’s funding policy for its U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. The Company expects to make contributions of $13.1contribute approximately $3.0 million to these plans during fiscal 2018.2020.
Estimated pension benefit payments for the next ten fiscal years are as follows:
Fiscal Year | | Estimated Pension Benefit Payments | | 2018 | | $ | 17.1 | | 2019 | | | 16.4 | | 2020 | | | 17.0 | | 2021 | | | 17.1 | | 2022 | | | 17.6 | | 2023-2027 | | | 90.4 | |
Fiscal Year | | Estimated Pension Benefit Payments | | 2020 | | $ | 16.0 | | 2021 | | | 16.0 | | 2022 | | | 16.4 | | 2023 | | | 16.4 | | 2024 | | | 16.6 | | 2025-2029 | | | 82.0 | |
Note 17: Note 19: | Derivative Instruments |
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated and is effective, as a hedge, and, if so, on the nature of the hedging activity.
Commodity Derivatives:derivatives: The Company periodically enters into futuresover-the-counter forward contracts related to certain forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts is to reduce its exposure to changing market prices for future purchases of these commodities. In fiscal 2019 and 2018, the Company designated certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses within cost of sales as the underlying inventory is sold. The Company hasdid not designateddesignate commodity contracts entered into in fiscal 2017 2016, and 2015 for hedge accounting. Accordingly, unrealized gains and losses on thesethose contracts arewere recorded within cost of sales.
Foreign exchange contracts:contracts: The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchangeforward contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. In fiscal 2019 and 2018, the Company designated certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in AOCI within shareholders’ equity and subsequently recognizes the gains and losses as a component of earnings at the same time and in the same financial statement line that the underlying transactions impact earnings. The Company has not designated forward contracts related to foreign currency-denominated assets and liabilities as hedges. Accordingly, for these non-designated contracts, for hedge accounting. Accordingly,the Company records unrealized gains and losses related to changes in fair value are recorded in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| Balance Sheet Location | | March 31, 2017 | | | March 31, 2016 | | Commodity derivatives | Other current assets | | $ | 0.7 | | | $ | - | | Commodity derivatives | Other current liabilities | | | - | | | | 0.1 | | Foreign exchange contracts | Other current assets | | | 0.2 | | | | 0.1 | |
| | Balance Sheet Location | | March 31, 2019 | | | March 31, 2018 | | Derivatives designated as hedges: | | | | | | | | | Commodity derivatives | | Other current assets | | $ | 0.6 | | | $ | 0.1 | | Commodity derivatives | | Other current liabilities | | | 0.3 | | | | - | | Foreign exchange contracts | | Other current assets | | | 0.2 | | | | 0.1 | | | | | | | | | | | | | Derivatives not designated as hedges: | | | | | | | | | | | Commodity derivatives | | Other current liabilities | | $ | - | | | $ | 0.2 | | Foreign exchange contracts | | Other current assets | | | - | | | | 0.2 | | Foreign exchange contracts | | Other current liabilities | | | 0.5 | | | | 0.6 | |
The amounts recorded in the consolidated statements of operations for the Company’sassociated with derivative financial instruments that the Company designated for hedge accounting were as follows:
| Statement of Operations | | Years ended March 31, | | | Location | | 2017 | | | 2016 | | | 2015 | | Commodity derivatives | Cost of sales | | $ | 0.5 | | | $ | (0.7 | ) | | $ | (0.2 | ) | Foreign exchange contracts | Other income (expense) - net | | | 1.3 | | | | 0.6 | | | | (1.1 | ) | Total gains (losses) | | | $ | 1.8 | | | $ | (0.1 | ) | | $ | (1.3 | ) |
| | Gain (loss) recognized in other comprehensive income | | Statement of Operations | | Gain (loss) reclassified from AOCI | | | | 2019 | | | 2018 | | | 2017 | | Location | | 2019 | | | 2018 | | | 2017 | | Commodity derivatives | | $ | (0.3 | ) | | $ | 0.2 | | | $ | - | | Cost of sales | | $ | (0.4 | ) | | $ | - | | | $ | - | | Foreign exchange contracts | | | (0.4 | ) | | | 0.1 | | | | - | | Net sales | | | (0.4 | ) | | | 0.1 | | | | - | | Foreign exchange contracts | | | 1.0 | | | | - | | | | - | | Cost of sales | | | 0.6 | | | | - | | | | - | | Total gains (losses) | | $ | 0.3 | | | $ | 0.3 | | | $ | - | | | | $ | (0.2 | ) | | $ | 0.1 | | | $ | - | |
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
| | | | Years ended March 31, | |
| | Statement of Operations Location | | 2019 | | | 2018 | | | 2017 | | Commodity derivatives | | Cost of sales | | $ | - | | | $ | 0.4 | | | $ | 0.5 | | Foreign exchange contracts | | Net sales | | | (0.7 | ) | | | (0.1 | ) | | | - | | Foreign exchange contracts | | Other income (expense) - net | | | (0.3 | ) | | | (0.5 | ) | | | 1.3 | | Total gains (losses) | | | | $ | (1.0 | ) | | $ | (0.2 | ) | | $ | 1.8 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 18: Note 20: | Contingencies and Litigation |
Market risk: Risk The Company sells a broad range of products that provide thermal solutions to customers operating primarily in the automotive, commercial vehicle, construction, agricultural,off-highway, and commercial, industrial, and building HVAC&R markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or more of the markets it serves. The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits. However, the risk associated with market downturns is still present.
Credit risk: Risk The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 2019, 2018, and 2017, 2016 and 2015, two VTS segment customers each accounted for ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers representedwere 50 percent, 48 percent, and 54 percent of total sales in fiscal 2019, 2018, and 2017, and 63 percent of total sales in both fiscal 2016 and 2015.respectively. At March 31, 20172019 and 2016, 352018, 38 percent and 4536 percent, respectively, of the Company'sCompany’s trade accounts receivable were due from the Company'sCompany’s top ten customers. These customers operate primarily in the automotive, truck,commercial vehicle, off-highway, data center cooling and heavy equipmentcommercial air conditioning markets, andwhich are influenced by similar market and general economic factors. Collateral or advanced payments are generally not required. The Company has not experienced significant credit losses to customers in the markets served.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company manages credit risk through its focus on the following:
| · | Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; |
Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; | · | Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; |
Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; | · | Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and |
Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and | · | Insurance – ensuring that insurance providers maintain acceptable financial ratings. |
Insurance – ensuring that insurance providers maintain financial ratings that are acceptable to the Company.
Counterparty risks: Risk The Company manages counterparty risksrisk through its focus on the following:
| · | Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; |
Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; | · | Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and |
Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and | · | Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company. |
Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company.
Environmental:Environmental The United States Environmental Protection Agency has designated the Company as a potentially responsible party for remediation of three sites. These sites are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be material to the Company’s financial position due to its relatively small portion of contributed materials.
As a result of its acquisition of Luvata HTS in fiscal 2017, the Company assumed certain environmental obligations. The Company has recorded environmental accruals related to these matters, the most significant of which relates to historical soil and groundwater contamination remediation and monitoring for a manufacturing site in the United States. In addition, the Company has recorded environmental investigation and remediation accruals related to subsurfacesoil and groundwater contamination at manufacturing facilities in the United States, one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, investigative work related to a previously-owned manufacturing facility in the United States, and groundwater contamination at its manufacturing facility in Brazil, along with accruals for lesser environmental matters at certain other facilities in the United States.States and Brazil. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $16.8$18.9 million and $5.1$16.7 million at March 31, 20172019 and 2016,2018, respectively. As additional information becomes available, the Company will re-assess the liabilities related to these matters and revise the estimated accruals, if necessary. Based upon 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Brazil antitrust investigation: During fiscal 2015, Brazil’s Administrative Council for Economic Defense (CADE) provided formal notice to the Company’s subsidiary in Brazil (“Modine Brazil”) of an administrative investigation regarding alleged violations of Brazil’s antitrust regulations by Modine Brazil and certain of its employees during a period of time at least seven years prior to the notice. As of March 31, 2016, the Company accrued $2.8 million (BRL 10 million) related to this matter. During fiscal 2017, the Company increased its accrual and reached agreement with CADE to settle the matter for $4.7 million (BRL 15 million). As a result, the Company recorded a charge of $1.6 million (BRL 5 million) within SG&A expenses during fiscal 2017. The Company expects to remit payment for the settlement in early fiscal 2018.
Other litigation:Litigation In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits or proceedings are not expected to have a material adverse effect on the Company’s consolidated financial statements.position.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 19: Note 21: | Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2016 | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (10.8 | ) | | | (0.3 | ) | | | (11.1 | ) | Reclassifications for amortization of unrecognized net loss (a) | | | - | | | | 5.2 | | | | 5.2 | | Income taxes | | | - | | | | (1.7 | ) | | | (1.7 | ) | Total other comprehensive income (loss) | | | (10.8 | ) | | | 3.2 | | | | (7.6 | ) | | | | | | | | | | | | | | Balance, March 31, 2017 | | $ | (46.8 | ) | | $ | (135.0 | ) | | $ | (181.8 | ) |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | Balance, March 31, 2018 | | $ | (5.5 | ) | | $ | (134.9 | ) | | $ | 0.1 | | | $ | (140.3 | ) | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (37.9 | ) | | | (7.1 | ) | | | 0.3 | | | | (44.7 | ) | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | - | | | | 5.4 | | Foreign currency translation losses (b) | | | 0.8 | | | | - | | | | - | | | | 0.8 | | Realized losses - net (c) | | | - | | | | - | | | | 0.2 | | | | 0.2 | | Income taxes | | | - | | | | 0.3 | | | | (0.1 | ) | | | 0.2 | | Total other comprehensive income (loss) | | | (37.1 | ) | | | (1.4 | ) | | | 0.4 | | | | (38.1 | ) | | | | | | | | | | | | | | | | | | Balance, March 31, 2019 | | $ | (42.6 | ) | | $ | (136.3 | ) | | $ | 0.5 | | | $ | (178.4 | ) | | | | | | | | | | | | | | | | | | | | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | Balance, March 31, 2017 | | $ | (46.8 | ) | | $ | (135.0 | ) | | $ | - | | | $ | (181.8 | ) | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | 41.3 | | | | (5.7 | ) | | | 0.3 | | | | 35.9 | | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.6 | | | | - | | | | 5.6 | | Realized gains - net (c) | | | - | | | | - | | | | (0.1 | ) | | | (0.1 | ) | Income taxes | | | - | | | | 0.2 | | | | (0.1 | ) | | | 0.1 | | Total other comprehensive income | | | 41.3 | | | | 0.1 | | | | 0.1 | | | | 41.5 | | | | | | | | | | | | | | | | | | | Balance, March 31, 2018 | | $ | (5.5 | ) | | $ | (134.9 | ) | | $ | 0.1 | | | $ | (140.3 | ) |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) | | | | | | | | | | | | | | Other comprehensive income (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 | ) |
| (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 1618 for additional information about the Company’s pension plans. |
| (b) | As a result of the sale of a business in South Africa during fiscal 2019, the Company wrote-off $0.8 million of accumulated foreign currency translation losses. See Note 1 for additional information about this transaction. |
| (c) | Amounts represent net gains and losses associated with cash flow hedges that were reclassified to net earnings. See Note 19 for additional information regarding derivative instruments. |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 20: Note 22: | Segment and Geographic Information |
The Company’s product lines consist of heat-transfer components and systems. The Company serves vehicular and commercial, industrial, and building HVAC&R markets. In November 2016, the Company acquired Luvata HTS and, commencing from the acquisition date, has operated and reported results for the acquired business as its Commercial and Industrial Solutions (“CIS”)CIS segment. See Note 2 for additional information regarding the Luvata HTS acquisition.
The Company’sEffective April 1, 2018, the Company formed the VTS segment by combining its Americas, Europe, and Asia operations to enable it to operate as a more global, product-based organization. The Company also merged its Americas coils business into the CIS segment to accelerate operational improvements and organizational efficiencies. The Company began reporting financial results for its new segments representbeginning in fiscal 2019. Segment financial information for fiscal 2018 and 2017 has been recast to conform to the fiscal 2019 presentation.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company’s VTS segment represents its vehicular businessesbusiness and primarily serveserves the automotive, commercial vehicle, and off-highway markets. In addition, the AmericasVTS segment serves the automotive and commercial vehicle aftermarket in Brazil and provides coils to the commercial HVAC&R market in North America.Brazil. The Company’s CIS segment provides coils, coolers, and coating solutions to customers throughout the world. The Company’s BHVAC segment provides heating, ventilating and air conditioning products to customers throughout the world.
Each operating segment is managed by a vice president and has separate financial results reviewed by the Company’s chief operating decision maker. These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
The following is a summary of net sales, gross profit, and operating income by segment:
| | Years ended March 31, | | Net sales: | | 2017 | | | 2016 | | | 2015 | | Americas | | $ | 534.0 | | | $ | 585.5 | | | $ | 666.9 | | Europe | | | 524.3 | | | | 524.1 | | | | 578.2 | | Asia | | | 111.5 | | | | 79.0 | | | | 81.2 | | CIS | | | 177.7 | | | | - | | | | - | | BHVAC | | | 171.6 | | | | 181.4 | | | | 186.3 | | Segment total | | | 1,519.1 | | | | 1,370.0 | | | | 1,512.6 | | Corporate and eliminations | | | (16.1 | ) | | | (17.5 | ) | | | (16.2 | ) | Net sales | | $ | 1,503.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Gross profit: | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Americas | | $ | 86.6 | | | | 16.2 | % | | $ | 100.1 | | | | 17.1 | % | | $ | 109.1 | | | | 16.3 | % | Europe | | | 80.9 | | | | 15.4 | % | | | 68.1 | | | | 13.0 | % | | | 68.7 | | | | 11.9 | % | Asia | | | 18.7 | | | | 16.8 | % | | | 12.2 | | | | 15.5 | % | | | 11.5 | | | | 14.2 | % | CIS | | | 26.0 | | | | 14.6 | % | | | - | | | | - | | | | - | | | | - | | BHVAC | | | 47.8 | | | | 27.8 | % | | | 54.2 | | | | 29.9 | % | | | 55.9 | | | | 30.0 | % | Segment total | | | 260.0 | | | | 17.1 | % | | | 234.6 | | | | 17.1 | % | | | 245.2 | | | | 16.2 | % | Corporate and eliminations (a) | | | (6.7 | ) | | | - | | | | (11.1 | ) | | | - | | | | 1.3 | | | | - | | Gross profit | | $ | 253.3 | | | | 16.9 | % | | $ | 223.5 | | | | 16.5 | % | | $ | 246.5 | | | | 16.5 | % |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | Years ended March 31, | | Operating income: | | 2017 | | | 2016 | | | 2015 | | Americas | | $ | 26.7 | | | $ | 36.2 | | | $ | 33.4 | | Europe | | | 37.1 | | | | 13.3 | | | | 25.7 | | Asia | | | 7.7 | | | | 0.8 | | | | 0.3 | | CIS | | | 7.5 | | | | - | | | | - | | BHVAC | | | 13.1 | | | | 13.9 | | | | 19.1 | | Segment total | | | 92.1 | | | | 64.2 | | | | 78.5 | | Corporate and eliminations (a) | | | (52.7 | ) | | | (71.7 | ) | | | (25.8 | ) | Operating income (loss) | | $ | 39.4 | | | $ | (7.5 | ) | | $ | 52.7 | |
| (a) | During fiscal 2017, the Company recorded $14.8 million of costs incurred directly related to the acquisition and integration of Luvata HTS within SG&A expenses at Corporate. In addition, as a result of purchase accounting for the Luvata HTS acquisition, the Company wrote up acquired inventory to its estimated fair value and charged the write-up to cost of sales as the underlying inventory was sold. The Company recorded $4.3 million in cost of sales related to this inventory step-up at Corporate, as the impact of this purchase accounting adjustment is excluded from the Company’s measure of segment operating performance. 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 16 for additional information about the Company’s pension plans. |
| | Year ended March 31, 2019 | | | | External Sales | | | Inter-segment Sales | | | Total | | Net sales: | | | | | | | | | | VTS | | $ | 1,298.9 | | | $ | 52.8 | | | $ | 1,351.7 | | CIS | | | 704.7 | | | | 2.9 | | | | 707.6 | | BHVAC | | | 209.1 | | | | 3.3 | | | | 212.4 | | Segment total | | | 2,212.7 | | | | 59.0 | | | | 2,271.7 | | Corporate and eliminations | | | - | | | | (59.0 | ) | | | (59.0 | ) | Net sales | | $ | 2,212.7 | | | $ | - | | | $ | 2,212.7 | | | | | | | | | | | | | | | | | Year ended March 31, 2018 | | | | External Sales | | | Inter-segment Sales | | | Total | | Net sales: | | | | | | | | | | | | | VTS | | $ | 1,239.3 | | | $ | 56.4 | | | $ | 1,295.7 | | CIS | | | 674.4 | | | | 1.3 | | | | 675.7 | | BHVAC | | | 189.4 | | | | 1.8 | | | | 191.2 | | Segment total | | | 2,103.1 | | | | 59.5 | | | | 2,162.6 | | Corporate and eliminations | | | - | | | | (59.5 | ) | | | (59.5 | ) | Net sales | | $ | 2,103.1 | | | $ | - | | | $ | 2,103.1 | | | | | | | | | | | | | | | | | Year ended March 31, 2017 | | | | External Sales | | | Inter-segment Sales | | | Total | | Net sales: | | | | | | | | | | | | | VTS | | $ | 1,099.9 | | | $ | 52.3 | | | $ | 1,152.2 | | CIS | | | 231.5 | | | | 0.3 | | | | 231.8 | | BHVAC | | | 171.6 | | | | - | | | | 171.6 | | Segment total | | | 1,503.0 | | | | 52.6 | | | | 1,555.6 | | Corporate and eliminations | | | - | | | | (52.6 | ) | | | (52.6 | ) | Net sales | | $ | 1,503.0 | | | $ | - | | | $ | 1,503.0 | |
Inter-segment sales are accounted for based upon 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 other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance.
The following is a summary of total assets by segment:
| | March 31, | | | | 2017 | | | 2016 | | Americas | | $ | 282.9 | | | $ | 267.2 | | Europe | | | 269.4 | | | | 301.9 | | Asia | | | 111.3 | | | | 104.0 | | CIS | | | 576.0 | | | | - | | BHVAC | | | 85.2 | | | | 99.0 | | Corporate and eliminations | | | 124.7 | | | | 148.8 | | Total assets | | $ | 1,449.5 | | | $ | 920.9 | |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | Capital expenditures: | | 2017 | | | 2016 | | | 2015 | | Americas | | $ | 26.3 | | | $ | 26.7 | | | $ | 30.2 | | Europe | | | 24.7 | | | | 24.8 | | | | 21.5 | | Asia | | | 8.5 | | | | 6.2 | | | | 3.8 | | CIS | | | 3.4 | | | | - | | | | - | | BHVAC | | | 1.5 | | | | 5.1 | | | | 2.8 | | Total capital expenditures | | $ | 64.4 | | | $ | 62.8 | | | $ | 58.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
| | Years ended March 31, | | Depreciation and amortization expense: | | 2017 | | | 2016 | | | 2015 | | Americas | | $ | 22.7 | | | $ | 22.1 | | | $ | 21.3 | | Europe | | | 16.5 | | | | 18.0 | | | | 19.8 | | Asia | | | 7.0 | | | | 6.5 | | | | 7.2 | | CIS | | | 7.9 | | | | - | | | | - | | BHVAC | | | 4.2 | | | | 3.6 | | | | 3.3 | | Total depreciation and amortization expense | | $ | 58.3 | | | $ | 50.2 | | | $ | 51.6 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Gross profit: | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | VTS | | $ | 186.9 | | | | 13.8 | % | | $ | 201.0 | | | | 15.5 | % | | $ | 182.0 | | | | 15.8 | % | CIS | | | 114.9 | | | | 16.2 | % | | | 97.8 | | | | 14.5 | % | | | 32.2 | | | | 13.9 | % | BHVAC | | | 63.4 | | | | 29.9 | % | | | 58.0 | | | | 30.3 | % | | | 47.8 | | | | 27.8 | % | Segment total | | | 365.2 | | | | 16.1 | % | | | 356.8 | | | | 16.5 | % | | | 262.0 | | | | 16.8 | % | Corporate and eliminations (a) | | | 0.3 | | | | - | | | | (0.3 | ) | | | - | | | | (7.6 | ) | | | - | | Gross profit | | $ | 365.5 | | | | 16.5 | % | | $ | 356.5 | | | | 17.0 | % | | $ | 254.4 | | | | 16.9 | % |
| | Years ended March 31, | | Operating income: | | 2019 | | | 2018 | | | 2017 | | VTS | | $ | 64.8 | | | $ | 84.2 | | | $ | 68.4 | | CIS | | | 53.4 | | | | 28.5 | | | | 10.9 | | BHVAC | | | 26.9 | | | | 20.3 | | | | 13.2 | | Segment total | | | 145.1 | | | | 133.0 | | | | 92.5 | | Corporate and eliminations (a) | | | (35.4 | ) | | | (40.8 | ) | | | (50.2 | ) | Operating income | | $ | 109.7 | | | $ | 92.2 | | | $ | 42.3 | |
| (a) | During fiscal 2018 and 2017, the Company recorded $4.3 million and $14.8 million, respectively, of costs incurred directly related to the acquisition and integration of Luvata HTS within SG&A expenses at Corporate. During fiscal 2017, the Company recorded $4.3 million in cost of sales related to an inventory purchase accounting adjustment at Corporate, as the impact was excluded from the Company’s measure of segment operating performance. In addition, the operating loss for Corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance. |
The following is a summary of total assets by segment:
| | March 31, | | | | 2019 | | | 2018 | | VTS | | $ | 749.9 | | | $ | 754.8 | | CIS | | | 604.2 | | | | 630.2 | | BHVAC | | | 89.4 | | | | 88.1 | | Corporate and eliminations | | | 94.5 | | | | 100.3 | | Total assets | | $ | 1,538.0 | | | $ | 1,573.4 | |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | Capital expenditures: | | 2019 | | | 2018 | | | 2017 | | VTS | | $ | 56.2 | | | $ | 61.4 | | | $ | 59.5 | | CIS | | | 16.4 | | | | 9.0 | | | | 3.4 | | BHVAC | | | 1.3 | | | | 0.6 | | | | 1.5 | | Total capital expenditures | | $ | 73.9 | | | $ | 71.0 | | | $ | 64.4 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
| | Years ended March 31, | | Depreciation and amortization expense: | | 2019 | | | 2018 | | | 2017 | | VTS | | $ | 49.5 | | | $ | 48.2 | | | $ | 46.2 | | CIS | | | 23.9 | | | | 24.3 | | | | 7.9 | | BHVAC | | | 3.5 | | | | 4.2 | | | | 4.2 | | Total depreciation and amortization expense | | $ | 76.9 | | | $ | 76.7 | | | $ | 58.3 | |
The following is a summary of net sales by geographical area, based upon the location of the selling unit:
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | United States | | $ | 657.8 | | | $ | 627.6 | | | $ | 669.3 | | Hungary | | | 145.6 | | | | 145.9 | | | | 161.0 | | Germany | | | 130.1 | | | | 155.3 | | | | 193.8 | | Austria | | | 125.2 | | | | 113.1 | | | | 118.7 | | Italy | | | 94.4 | | | | 44.1 | | | | 40.6 | | Other | | | 349.9 | | | | 266.5 | | | | 313.0 | | Net sales | | $ | 1,503.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | United States | | $ | 1,032.3 | | | $ | 911.4 | | | $ | 657.8 | | Italy | | | 217.3 | | | | 211.5 | | | | 94.4 | | China | | | 172.1 | | | | 156.0 | | | | 73.7 | | Hungary | | | 165.6 | | | | 153.9 | | | | 145.6 | | Germany | | | 123.1 | | | | 132.6 | | | | 130.1 | | Austria | | | 116.2 | | | | 151.7 | | | | 125.2 | | Other | | | 386.1 | | | | 386.0 | | | | 276.2 | | Net sales | | $ | 2,212.7 | | | $ | 2,103.1 | | | $ | 1,503.0 | |
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | | 2017 | | | 2016 | | United States | | $ | 124.7 | | | $ | 92.5 | | Italy | | | 55.8 | | | | 20.3 | | Mexico | | | 47.0 | | | | 30.9 | | Austria | | | 44.3 | | | | 44.2 | | China | | | 40.0 | | | | 33.6 | | Hungary | | | 37.7 | | | | 31.4 | | Germany | | | 28.9 | | | | 32.1 | | Other | | | 80.6 | | | | 53.6 | | Total property, plant and equipment | | $ | 459.0 | | | $ | 338.6 | |
The following is a summary of net sales by end market:
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Automotive | | $ | 461.0 | | | $ | 396.8 | | | $ | 401.8 | | Commercial vehicle | | | 382.5 | | | | 459.8 | | | | 512.5 | | Off-highway | | | 202.8 | | | | 206.2 | | | | 274.6 | | HVAC&R | | | 400.9 | | | | 232.1 | | | | 229.6 | | Other | | | 55.8 | | | | 57.6 | | | | 77.9 | | Net sales | | $ | 1,503.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | |
| | March 31, | | | | 2019 | | | 2018 | | United States | | $ | 117.7 | | | $ | 121.5 | | China | | | 57.6 | | | | 49.6 | | Mexico | | | 56.3 | | | | 49.4 | | Hungary | | | 55.3 | | | | 59.3 | | Italy | | | 52.4 | | | | 62.0 | | Austria | | | 36.9 | | | | 42.8 | | Germany | | | 32.8 | | | | 37.2 | | Other | | | 75.7 | | | | 82.5 | | Total property, plant and equipment | | $ | 484.7 | | | $ | 504.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 21: The following is a summary of net sales by end market:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Commercial HVAC&R | | $ | 674.0 | | | $ | 648.3 | | | $ | 323.8 | | Automotive | | | 542.8 | | | | 526.0 | | | | 461.0 | | Commercial vehicle | | | 387.6 | | | | 381.7 | | | | 382.5 | | Off-highway | | | 314.1 | | | | 271.2 | | | | 202.8 | | Data center cooling | | | 187.0 | | | | 137.6 | | | | 57.1 | | Industrial cooling | | | 47.8 | | | | 67.6 | | | | 18.6 | | Other | | | 59.4 | | | | 70.7 | | | | 57.2 | | Net sales | | $ | 2,212.7 | | | $ | 2,103.1 | | | $ | 1,503.0 | |
Note 23: | Quarterly Financial Data (Unaudited) |
QuarterlyThe following is a summary of quarterly financial data is summarized below for the years ended March 31, 2017 and 2016:data:
| | Fiscal 2017 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2017 | | | | | | | | | | | | | | | | | | Net sales | | $ | 347.2 | | | $ | 317.7 | | | $ | 349.8 | | | $ | 488.3 | | | $ | 1,503.0 | | Gross profit | | | 62.0 | | | | 47.7 | | | | 58.7 | | | | 84.9 | | | | 253.3 | | Earnings (loss) from continuing operations (a) | | | 8.9 | | | | (4.0 | ) | | | 1.9 | | | | 8.1 | | | | 14.9 | | Net earnings (loss) attributable to Modine (a) | | | 8.6 | | | | (4.1 | ) | | | 1.7 | | | | 8.0 | | | | 14.2 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.18 | | | $ | (0.09 | ) | | $ | 0.04 | | | $ | 0.16 | | | $ | 0.29 | | Diluted | | | 0.18 | | | | (0.09 | ) | | | 0.04 | | | | 0.16 | | | | 0.29 | |
| | Fiscal 2019 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2019 | | | | | | | | | | | | | | | | | | Net sales | | $ | 566.1 | | | $ | 548.9 | | | $ | 541.0 | | | $ | 556.7 | | | $ | 2,212.7 | | Gross profit | | | 94.3 | | | | 87.9 | | | | 91.7 | | | | 91.6 | | | | 365.5 | | Net earnings (a) | | | 22.5 | | | | 38.7 | | | | 18.3 | | | | 6.4 | | | | 85.9 | | Net earnings attributable to Modine (a) | | | 22.0 | | | | 38.5 | | | | 18.0 | | | | 6.3 | | | | 84.8 | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.43 | | | $ | 0.76 | | | $ | 0.36 | | | $ | 0.12 | | | $ | 1.67 | | Diluted | | | 0.43 | | | | 0.75 | | | | 0.35 | | | | 0.12 | | | | 1.65 | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal 2018 quarters ended | | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2018 | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 515.5 | | | $ | 508.3 | | | $ | 512.7 | | | $ | 566.6 | | | $ | 2,103.1 | | Gross profit | | | 88.5 | | | | 86.1 | | | | 85.4 | | | | 96.5 | | | | 356.5 | | Net earnings (loss) (b) | | | 17.4 | | | | 16.3 | | | | (27.9 | ) | | | 18.0 | | | | 23.8 | | Net earnings (loss) attributable to Modine (b) | | | 17.0 | | | | 15.9 | | | | (28.3 | ) | | | 17.6 | | | | 22.2 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.34 | | | $ | 0.32 | | | $ | (0.57 | ) | | $ | 0.35 | | | $ | 0.44 | | Diluted | | | 0.34 | | | | 0.31 | | | | (0.57 | ) | | | 0.34 | | | | 0.43 | |
| | 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 (b) | | | 5.5 | | | | (22.5 | ) | | | 8.2 | | | | 7.8 | | | | (1.0 | ) | Net earnings (loss) attributable to Modine (b) | | | 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 | ) |
| (a) | During fiscal 2017,2019, restructuring expenses totaled $2.3$0.2 million, $2.1 million, $1.6$0.5 million, and $4.9$8.9 million for the quarters ended June 30, 2016, September 30, 2016,2018, December 31, 2016,2018, and March 31, 2017,2019, respectively (see Note 5)6). During the second quarter of fiscal 2019, the Company sold its South African business within the BHVAC segment and, as a result, recorded a loss of $1.7 million (see Note 1). During the third quarter of fiscal 2019, the Company recorded a $0.4 million impairment charge related to a manufacturing facility in Austria (see Note 6). The Company’s income tax benefit for fiscal 2019 includes net benefits of $24.4 million and net charges of $2.2 million in the second and third quarters, respectively, related to the Tax Act and the recognition of foreign tax credits (see Note 8). During fiscal 2017,2019, the Company soldadjusted its valuation allowances on deferred tax assets related to two previously-closed manufacturing facilitiesseparate subsidiaries in its Americas segmentChina and, as a result, recorded a $2.0 million income tax benefit and a facility$1.0 million income tax charge in its Europe segmentthe first and recognized net gains totaling $1.2second quarters, respectively (see Note 8). |
| (b) | During fiscal 2018, restructuring expenses totaled $1.7 million, $0.4 million, $9.4 million, and $0.8 million in the quarters ended September 30, 2016 and March 31, 2017, respectively. During fiscal 2017, acquisition- and integration-related costs totaled $1.4 million, $3.0 million, $7.2 million, and $3.2$4.5 million for the quarters ended June 30, 2016,2017, September 30, 2016,2017, December 31, 2016,2017, and March 31, 2017,2018, respectively (see Note 2)6). During the third quarter of fiscal 2018, the Company recorded a $1.3 million asset impairment charge related to a manufacturing facility in Austria (see Note 6). During the fourth quarter of fiscal 2017,2018, the Company recorded a deferred$1.2 million impairment charge related to intangible assets (see Note 14). The Company recorded income tax charges totaling $35.7 million and $2.3 million during the third and fourth quarters of fiscal 2018, respectively, related to the Tax Act (see Note 8). During the fourth quarter of fiscal 2018, the Company reversed a portion of a valuation allowance related to a foreign tax jurisdiction, and, as a result, recorded income tax expense of $2.0 million (see Note 7). |
| (b) | During 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 5). During the fourth quarter of fiscal 2016, the Company recorded a $9.9 million asset impairment charge related to a manufacturing facility in Germany (see Note 5). During fiscal 2016, non-cash pension settlement losses totaled $39.2 million, $1.1 million, and $1.8 million for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 16). 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. 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 related to a foreign tax jurisdiction of $3.0$2.8 million (see Note 7)8). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors and Shareholders of Modine Manufacturing Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the consolidated financial statements, including the related notes, as listed in the index appearing under Item 15(a)(1), and the financial statement schedule listed in the index appearing under Item 15(a)(2), of Modine Manufacturing Company and its subsidiaries (the “Company”) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1)referred to above present fairly, in all material respects, the financial position of Modine Manufacturingthe Company and its subsidiaries atas of March 31, 20172019 and 2016, 2018, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2017 2019 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the CommitteeCOSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for the income tax effects of Sponsoring Organizationsintra-entity transfers of the Treadway Commission (COSO). assets other than inventory in 2019.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A.9A. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements on the financial statement schedule, and on the Company'sCompany’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidatedfinancial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidatedfinancial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control Over Financial Reporting, management has excluded the Luvata HTS business, operated as the Company's CIS segment, from its assessment of internal control over financial reporting as of March 31, 2017 because it was acquired by the Company in a purchase business combination on November 30, 2016. We have also excluded Luvata HTS from our audit of internal control over financial reporting. Luvata HTS total assets and net sales excluded from management’s assessment and our audit of internal control over financial reporting represent $297 million and $178 million, respectively, of the related consolidated financial statement amounts as of and for the fiscal year ended March 31, 2017.
/s/PricewaterhouseCoopers LLP Milwaukee, Wisconsin May 25, 201723, 2019
We have served as the Company’s auditor since 1935.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not applicable.
Conclusion Regarding Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company'sCompany’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company'sCompany’s disclosure controls and procedures, at a reasonable assurance level, as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded that the Company'sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of March 31, 2017.2019.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, and effected by the Company'sCompany’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2017.2019. In making its assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based upon this assessment, management concluded that, as of March 31, 2017,2019, the Company’s internal control over financial reporting was effective.
Management excluded the Luvata HTS business, operated as the Company’s CIS segment, from its assessment of internal control over financial reporting as of March 31, 2017 because it was acquired by the Company in a purchase business combination on November 30, 2016. The total assets and net sales of Luvata HTS excluded from management’s assessment represent $297 million and $178 million, respectively, of the related consolidated financial statement amounts as of and for the fiscal year ended March 31, 2017.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20172019 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
As part of its post-closing integration activities for the Luvata HTS acquisition, the Company is engagedThere have been no changes in assessing, refining and harmonizing the internal controls and processes of the acquired business with those of the Company.
This process has resulted in a change in the Company’s internal control over financial reporting during the fourth quarter of fiscal 20172019 that hashave materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors. The Company incorporates by reference the information appearing in the Company'sCompany’s Proxy Statement for the 20172019 Annual Meeting of Shareholders to be held on July 20, 201725, 2019 (the “2017“2019 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Executive Officers of the Registrant"“Information about our Executive Officers” in this Form 10-K.
Compliance with Section 16(a)Code of the Exchange ActConduct. The Company incorporates by reference the information appearing in the 2017 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 20172019 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Ethics.Conduct.” The Company'sCompany’s Code of Ethics (labeled as the Code of Conduct)Conduct is included on its website, www.modine.com (About Modine link). We intend to satisfy our disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers of, any provision of our Code of Conduct that applies to our principal executive, financial and accounting officers and our directors by posting such information on our website.
Board Committee Charters. The Board of Directors has approved charters for its Audit Committee, Officer Nomination and Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee. These charters are included on the Company’s website, www.modine.com (Investors link).
Audit Committee Financial Expert. The Company incorporates by reference the information appearing in the 20172019 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 20172019 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 20172019 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
We do not intend to incorporate our internet website and the information contained therein or incorporated therein into this annual report on Form 10-K.
ITEM 11. | EXECUTIVE COMPENSATION. |
The information appearing in the 20172019 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 20172019 Annual Meeting Proxy Statement.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The Company incorporates by reference the information contained in the 20172019 Annual Meeting Proxy Statement under the captions “Certain Relationships and Related Party Transactions” and “Director Independence.”
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The Company incorporates by reference the information contained in the 20172019 Annual Meeting Proxy Statement under the caption “Independent Auditors’Auditor’s Fees for Fiscal 20172019 and 2016.2018.”
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) | Documents Filed. The following documents are filed as part of this Report: |
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| 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, 2017, 20162019, 2018 and 20152017 | 4138 | | Consolidated Statements of Comprehensive Income for the years ended March 31, 2017, 20162019, 2018 and 20152017 | 4239 | | Consolidated Balance Sheets at March 31, 20172019 and 20162018 | 4340 | | Consolidated Statements of Cash Flows for the years ended March 31, 2017, 20162019, 2018 and 20152017 | 4441 | | Consolidated Statements of Shareholders'Shareholders’ Equity for the years ended March 31, 2017, 20162019, 2018 and 20152017 | 4542 | | Notes to Consolidated Financial Statements | 46-7343-74 | | Report of Independent Registered Public Accounting Firm | 7475-76 | | | | | 2. Financial Statement Schedules | | | | | | The following financial statement schedule should be read in conjunction with the consolidated financial statements set forth in Item 8: | | | Schedule II -- Valuation and Qualifying Accounts | 7980 | | | | | 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. | 80-8281-83 | | | | | See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number. | |
ITEM 16. | FORM 10-K SUMMARY. |
None.
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 25, 2017 | 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 25, 2017 | | President, Chief Executive Officer and Director | | | (Principal Executive Officer) | | | | | | /s/ Michael B. Lucareli
| | | Michael B. Lucareli | May 25, 2017 | | Vice President, Finance and Chief Financial Officer | | | (Principal Financial and Accounting Officer) | | | | | | /s/ Marsha C. Williams
| | | Marsha C. Williams | May 25, 2017 | | Director | | | | | | /s/ David J. Anderson
| | | David J. Anderson | May 25, 2017 | | Director | | | | | | /s/ Charles P. Cooley
| | | Charles P. Cooley | May 25, 2017
| | Director | | | | | | /s/ Suresh V. Garimella
| | | Suresh V. Garimella | May 25, 2017
| | Director | | | | | | /s/ Larry O. Moore
| | | Larry O. Moore | May 25, 2017 | | Director | | | | | | /s/ Christopher W. Patterson
| | | Christopher W. Patterson | May 25, 2017 | | Director | | | | | | /s/ Christine Y. Yan
| | | Christine Y. Yan | May 25, 2017 | | Director | | | | | | /s/ David G. Bills
| | | David G. Bills | May 25, 2017 | | Director | |
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES
(A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTSFor the years ended March 31, 2017, 2016 and 2015
(In millions)
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | 2017: Valuation Allowance for Deferred Tax Assets | | $ | 50.8 | | | $ | (0.3 | ) | | $ | (0.9 | ) | (a) | | $ | 49.6 | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | Notes: | | | | | | | | | | | | | | | | | |
| (a) | Foreign currency translation, increases due to the acquisition of Luvata HTS and other adjustments |
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES (A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2019, 2018 and 2017 (In millions)
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | 2019: Valuation Allowance for Deferred Tax Assets | | $ | 48.9 | | | $ | (1.6 | ) | | $ | (3.9 | ) | (a) | | $ | 43.4 | | | | | | | | | | | | | | | | | | | | 2018: Valuation Allowance for Deferred Tax Assets | | $ | 49.6 | | | $ | (6.7 | ) | | $ | 6.0 | | (a) | | $ | 48.9 | | | | | | | | | | | | | | | | | | | | 2017: Valuation Allowance for Deferred Tax Assets | | $ | 50.8 | | | $ | (0.3 | ) | | $ | (0.9 | ) | (a) | | $ | 49.6 | |
| (a) | Foreign currency translation and other adjustments. The fiscal 2018 and 2017 amounts also included increases associated with the Company’s acquisition of Luvata HTS. |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
EXHIBIT INDEX TO 20172019 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By
Referenced To | | Filed
Herewith | | | | | | | | 2.1 | | Share SaleAmended and Purchase Agreement between Luvata Heat Transfer Solutions II AB and Modine Manufacturing Company, datedRestated Articles of Incorporation, as of September 6, 2016.amended. | | Exhibit 2.13.1 to Registrant’s Current Report on Form 8-K dated September 6, 201610-K for the fiscal year ended March 31, 2018 | | | | | | | | | | 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 | | | | | | | | | | | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated February 10, 201520, 2019 | | | | | | | | | | | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 ("(“2003 10-K"10-K”) | | | | | | | | | | | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto. | | | | | | | | | | | | Note Purchase and Private Shelf Agreement (the “Original Note Purchase Agreement”) dated as of August 12, 2010 among the Registrant and the Series A Purchasers named therein of $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020 and $25,000,000 Private Shelf Facility and each Prudential Affiliate (as defined therein) that may become bound by certain provisions thereof. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 12, 2010 8-K (“August 12, 2010 8-K”) | | | | | | | | | | | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to August 12, 2010 8-K | | | | | | | | | | | | First Amendment to Note Purchase and Private Shelf Agreement and Waiver dated as of March 15, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated March 15, 2012 8-K | | | | | | | | | | | | Second Amendment to Note Purchase and Private Shelf Agreement dated as of April 20, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 20, 2012 8-K | | | | | | | | | | | | Third Amendment to Note Purchase and Private Shelf Agreement dated as of August 6, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 6, 2012 8-K | | |
| | Second Amended and Restated Credit Agreement dated as of August 30, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, LC Issuer, Swing Line Lender and as a Lender, and U.S. Bank, N.A. and Wells Fargo Bank, N.A. as Syndication Agents and as Lenders, BMO Harris Bank N.A., as Documentation Agent and as Lender and Associated Bank, N.A., Comerica Bank and Sovereign Bank as Lenders.Lenders | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated August 30, 2013 (“August 30, 2013 8-K”) | | | | | | | | | | | | Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Note Purchase Amendment”) dated as of August 30, 2013, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) pursuant to which the Company and the Note Holders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to August 30, 2013 8-K | | | | | | | | | | | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to August 30, 2013 8-K | | | | | | | | | | | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | | | Third Amended and Restated Credit Agreement dated as of November 15, 2016, with JPMorgan Chase Bank, N.A. as Administrative Agent and Collateral Agent, Bank of Montreal, U.S. Bank National Association and Wells Fargo Bank, National Association as Syndication Agents, and Bank of America, N.A. and PNC Bank, National Association as Senior Managing Agent.2016. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated November 15, 2016 (“November 15, 2016 8-K”) | | | | | | | | | | | | Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 15, 2016, with PGIM, Inc. and each of the Purchasers described therein relating to the $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020, the $50,000,000 5.75% Secured Senior Notes, Series B and Private Shelf Facility.2016. | | Exhibit 4.2 to November 15, 2016 8-K | | | | | | | | | | Description of Registrant’s securities | | Amendment No 1. to the Company’s Registration Statement on Form 8-A filed on July 17, 2008 | | | 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 | | | | | | | | | | | | Employment Agreement between the Registrant and Thomas A. Burke dated as of June 15, 2007. | | Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 15, 2007 | | | | | | | | | | | | Form of Amendment No. 1 to Employment Agreement entered into as of July 1, 2008 with Thomas A. Burke. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2008 | | | | | | | | | | | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke. | | Exhibit 10(f) to Registrant’s Form 10-K for the year ended March 31, 2004 | | |
10.5* | | Employment Agreement, dated July 1, 2014, between Modine Holding GmbH and Holger Schwab, effective as of July 1, 2015. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2014 | | | | | | | | | | | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant'sRegistrant’s Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | | | 2007 Incentive Compensation Plan. | | Appendix A to the Registrant's Proxy Statement dated June 18, 2007 | | | | | | | | | | 10.9* | | 2008 Incentive Compensation Plan (Amended and Restated effective May 7, 2014). | | Exhibit 10.1 to Registrant'sRegistrant’s Current Report on Form 8-K dated July 17, 2014 | | | | | | | | | | Form of Fiscal 2019 Modine Performance Stock Award Agreement. | | Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | |
| Form of Fiscal 2019 Modine Incentive Stock Option Award Agreement. | | Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | | 10.10* | | | | | | | Form of Fiscal 2019 Modine Restricted Stock Unit Award Agreement. | | Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | | | | | | | | | Form of Fiscal 2019 Modine Non-Qualified Stock Option Award Agreement. | | Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | | | | | | | | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Thomas A. Burke. | | Exhibit 10.17 to Registrant'sRegistrant’s Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | 10.11* | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | | | | | | | | | 10.12* | | Form of Fiscal 2017 Modine Performance Stock Award Agreement.Incentive Compensation Plan. | | Exhibit 10.1 to Registrant’s Current Report on Form 10-Q for the first quarter ended June 30, 2016 ("June 30, 2016 10-Q")8-K dated July 20, 2017 | | | | | | | | | | 10.13* | | Form of Fiscal 20172019 Modine IncentiveNon-Employee Director Restricted Stock OptionsUnit Award Agreement. | | Exhibit 10.210.1 to JuneRegistrant’s Form 10-Q for the quarter ended September 30, 2016 10-Q2018 | | | | | | | | | | 10.14* | | Form of Fiscal 2017 Modine Restricted Stock Award Agreement. | | Exhibit 10.3 to June 30, 2016 10-Q | | | | | | | | | | 10.15* | | Form of Fiscal 2017 Modine Non-Qualified Stock Option Award Agreement. | | Exhibit 10.4 to June 30, 2016 10-Q | | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of independent registered public accounting firm. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | �� | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Instance Document | | | | X | | | | | | | | 101.SCH | | XBRL Taxonomy Extension Schema | | | | X | | | | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | X | | | | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | X | | | | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | X | | | | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | X |
* Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K.
** Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 23, 2019 | Modine Manufacturing Company | | | | | By: | /s/ Thomas A. Burke | | | Thomas A. Burke, President | | | and Chief Executive Officer | | | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. Burke |
| Thomas A. Burke | | President, Chief Executive Officer and Director | May 23, 2019 | (Principal Executive Officer) | | | | /s/ Michael B. Lucareli |
| Michael B. Lucareli | May 23, 2019 | Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | | | | /s/ Marsha C. Williams |
| Marsha C. Williams | May 23, 2019 | Director | | | | /s/ David J. Anderson |
| David J. Anderson | May 23, 2019 | Director | | | | /s/ Eric D. Ashleman |
| Eric D. Ashleman | May 23, 2019 | Director | | | | /s/ David G. Bills |
| David G. Bills | May 23, 2019 | Director | | | | /s/ Charles P. Cooley |
| Charles P. Cooley | May 23, 2019 | Director | | | | /s/ Suresh V. Garimella |
| Suresh V. Garimella | May 23, 2019 | Director | | | | /s/ Larry O. Moore |
| Larry O. Moore | May 23, 2019 | Director | | | | /s/ Christopher W. Patterson |
| Christopher W. Patterson | May 23, 2019 | Director | | | | /s/ Christine Y. Yan |
| Christine Y. Yan | May 23, 2019 | Director | |
84
s | | | % of sales | | |
Year Ended March 31, 20172019 Compared with Year Ended March 31, 2016:2018:
Fiscal 20172019 net sales increased $150$110 million, or 115 percent, from the prior year, primarily due to $178 million of incremental sales from our new CIS segment and higher sales in each of our Asia segment,operating segments, partially offset by lower sales in our Americas and BHVAC segments. Sales volume increases in our BHVAC segment were more than offset by an $11a $28 million unfavorable impact of foreign currency exchange rate changes.
Fiscal 20172019 gross profit of $253 million increased $29$9 million from the prior year, andyet gross margin increased 40declined 50 basis points to 16.916.5 percent. These increases wereThe decline in gross margin was primarily due to $26 millionunfavorable material costs, including the direct and indirect impacts of gross profit contributed by the CIStariffs, and temporary operating inefficiencies largely related to increased volumes and multiple new program launches in our VTS segment, cost savings resulting from procurement initiatives, and the absence of $9 million of pension settlement losses recognized in the prior year, partially offset by temporary production inefficiencies in the Americas segment, the unfavorable impact of ahigher sales volume. In addition, gross profit was unfavorably impacted by $4 million inventory purchase accounting adjustmentfrom foreign currency exchange rate changes.
Fiscal 2019 SG&A expenses of $244 million decreased $2 million, or 70 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primarily due to lower integration costs associated with our November 2016 acquisition of the Luvata HTS business and unfavorable material costs. In addition,a $3 million favorable impact of foreign currency exchange rate changes, negatively impacted fiscal 2017 gross profit by $2 million.
Fiscal 2017 SG&A expenses of $205 million were consistent with the prior year, but decreased as a percentage of net sales. During fiscal 2017, $19 million of SG&A expenses in the CIS segment and $15 million of acquisition- and integration-related costs associated with our acquisition of Luvata HTS were largely offset by the absence of $33 million of pension settlement losses recognized in the prior year.
Restructuring expenses decreased $6 million in fiscal 2017 compared with the prior year, primarily due to lower severance expenses, partially offset by higher equipment transferthird-party strategic advisory costs recorded at Corporate and plant consolidationhigher environmental charges within our VTS segment. During fiscal 2019, we recorded $7 million of costs, in the Americas segment.primarily consisting of third-party consulting fees, related to our evaluation of strategic alternatives for our VTS segment’s automotive business.
During fiscal 2017, we sold two previously-closed manufacturing facilities within our Americas segment and a facility within our Europe segment. As a resultFiscal 2019 restructuring expenses of these sales, we recognized net gains totaling $2 million.
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.
Operating income of $39 million in fiscal 2017 represents a $47 million improvement compared with an operating loss of $8 million in the prior year. Fiscal 2017 operating performance improved in our Europe and Asia segments, while operating performance declined in our Americas and BHVAC segments. Operating income was favorably impacted by the absence of $42 million of pension settlement losses and a $10 million impairment charge recognized in the prior year, $8 million of operating income contributed by the CIS segment, and lower restructuring expenses, partially offset by acquisition- and integration-related costs and the impact of the inventory purchase accounting adjustment totaling $19 million.
Fiscal 2017 interest expense increaseddecreased $6 million compared with the prior year, primarily due to new debt used to financelower severance-related expenses associated with the fiscal 2018 closure of a significant portion of our acquisition of Luvata HTS.manufacturing facility in Gailtal, Austria within the CIS segment.
OtherDuring fiscal 2019, we sold our South African business within the BHVAC segment and, as a result, recorded a loss of $2 million.
Operating income during fiscal 2016 included a $10of $110 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire in fiscal 2014.2019 increased $18 million compared with the prior year, primarily due to higher earnings in the CIS and BHVAC segments, partially offset by lower earnings in the VTS segment.
OurThe benefit for income taxes was $5 million in fiscal 2019, compared with a provision for income taxes was $6of $40 million in fiscal 2017,2018. The $45 million change was primarily due to our accounting for the impacts of the Tax Act. As a result of the Tax Act, we recorded provisional income tax charges totaling $38 million in the prior year, compared with a benefit for income taxes of $9tax benefits totaling $8 million in fiscal 2016. Thethe current year. In addition, we recorded income tax benefitbenefits totaling $17 million in fiscal 2016 includedthe current year resulting from the recognition of tax assets for foreign tax credits and other attributes, partially offset by the absence of a $16 million benefit related to pension settlement losses and a $3$9 million benefit from a development tax credit in Hungary recorded in the reversalprior year and changes in the mix of a deferred tax asset valuation allowance in a foreign tax jurisdiction. The income tax provision in fiscal 2017 includes a $2 million provisionoperating earnings. See Note 8 of the Notes to establish a valuation allowance in a separate foreign tax jurisdiction.Consolidated Financial Statements for additional information.
Year Ended March 31, 20162018 Compared with Year Ended March 31, 2015:2017:
Fiscal 20162018 net sales decreased $143increased $600 million, or 1040 percent, from the prior year, primarily due to lower$444 million of additional sales from our CIS segment, which included sales from the acquired Luvata HTS business that we owned for four months of fiscal 2017, higher sales in each of our 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.
Fiscal 2016 gross profit decreased $23 million to $224 million, 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 favorable 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 initiativesother operating segments, and a $10$55 million favorable impact of foreign currency exchange rate changes.
Restructuring expensesFiscal 2018 gross profit of $357 million increased $12$103 million in fiscal 2016 compared withfrom the prior year, primarily due to severance expenses$66 million of additional gross profit from our CIS segment and higher gross profit in our VTS and BHVAC segments. Gross profit was favorably impacted by $9 million from foreign currency exchange rate changes. Gross margin improved 10 basis points to 17.0 percent, primarily due to higher sales volume, savings resulting from cost-reduction initiatives, improved operating efficiencies, and the absence of a $4 million inventory purchase accounting adjustment recorded in the Europeprior year, partially offset by unfavorable material costs and Americas segmentsincremental depreciation and equipment transfer costs related to plant consolidation activities in the Americas segment.amortization expense resulting from purchase accounting for Luvata HTS.
In fiscal 2016, we recorded a $10Fiscal 2018 SG&A expenses of $246 million impairment charge to write down the carrying value of a manufacturing facility in Germany to fair value. In fiscal 2015, we recorded a goodwill impairment charge of $8 million in Brazil and recognized a gain of $3increased $43 million from the sale of a wind tunnel in Germany.
The operating loss of $8 million in fiscal 2016 represents a $61 million decline from $53 million of operating income in the prior year. This decline wasyear, primarily due to $42a $39 million increase in SG&A expenses in our CIS segment, $4 million of pension settlement losses, lower gross profit,strategy consulting fees incurred during fiscal 2018, higher restructuringcompensation-related expenses, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by ongoing cost-control initiatives.lower costs incurred related to the acquisition of Luvata HTS. SG&A expenses, as a percentage of net sales, decreased 180 basis points compared with the prior year.
Other income duringRestructuring expenses of $16 million in fiscal 2016 included a $102018 increased $5 million gaincompared with the prior year, primarily due to severance-related expenses in the CIS segment related to an insurance settlement for equipment losses resulting from the Airedale fireclosure of a manufacturing facility in Austria.
During fiscal 2018, we recorded impairment charges totaling $3 million related to the closure of the CIS manufacturing facility in Austria and the discontinuance of a product line in our BHVAC segment.
During fiscal 2017, we sold three manufacturing facilities within our VTS segment, two of which were previously closed, and recognized net gains totaling $2 million.
Operating income of $92 million in fiscal 2014.2018 increased $50 million compared with the prior year, primarily due to $18 million of additional operating income contributed by our CIS segment and higher earnings in the VTS and BHVAC segments.
Our benefitFiscal 2018 interest expense increased $9 million compared with the prior year, primarily due to debt issued to finance a significant portion of our acquisition of Luvata HTS.
The provision for income taxes was $9$40 million and $6 million in fiscal 2016, compared with a provision for income taxes of $192018 and 2017, respectively. The $34 million in fiscal 2015. This $28 million changeincrease was primarily due to $16$38 million of provisional charges recorded in fiscal 2018 related to the Tax Act and increased operating earnings, partially offset by income tax benefits related to pension settlement lossestotaling $14 million resulting from i) a development tax credit in fiscal 2016, a decrease in operating earnings, and a $3 million income tax benefit related toHungary ($9 million); ii) the reversal of a deferredportion of the valuation allowance in a foreign jurisdiction ($3 million); and iii) a reduction of unrecognized tax assetbenefits resulting from a lapse in statutes of limitations ($2 million), and the absence of a $2 million provision recorded in the prior year to establish a valuation allowance.allowance in a separate foreign jurisdiction.
Segment Results of Operations
Americas | | | | | | | | | | | | | | | | | | | | | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 534 | | | | 100.0 | % | | $ | 586 | | | | 100.0 | % | | $ | 667 | | | | 100.0 | % | Cost of sales | | | 447 | | | | 83.8 | % | | | 486 | | | | 82.9 | % | | | 558 | | | | 83.7 | % | Gross profit | | | 87 | | | | 16.2 | % | | | 100 | | | | 17.1 | % | | | 109 | | | | 16.3 | % | Selling, general and administrative expenses | | | 54 | | | | 10.1 | % | | | 55 | | | | 9.4 | % | | | 65 | | | | 9.7 | % | Restructuring expenses | | | 7 | | | | 1.3 | % | | | 9 | | | | 1.5 | % | | | 3 | | | | 0.4 | % | Gain on sale of facilities | | | (1 | ) | | | -0.2 | % | | | - | | | | - | | | | - | | | | - | | Impairment charge | | | - | | | | - | | | | - | | | | - | | | | 8 | | | | 1.2 | % | Operating income | | $ | 27 | | | | 5.0 | % | | $ | 36 | | | | 6.2 | % | | $ | 33 | | | | 5.0 | % |
Since the date we acquired Luvata HTS (November 30, 2016), we have included financial results of this acquired business within our CIS segment. Effective April 1, 2018, we merged our Americas coils business into the CIS segment to accelerate operational improvements and organizational efficiencies and formed the VTS segment by combining our Americas, Europe, and Asia operations to enable us to operate as a more global, product-based organization. We began reporting financial results for our new segments beginning in fiscal 2019. Segment financial information for fiscal 2018 and 2017 has been recast to conform to the fiscal 2019 presentation.
VTS | | | | | | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | Net sales | | $ | 1,352 | | | | 100.0 | % | | $ | 1,296 | | | | 100.0 | % | | $ | 1,152 | | | | 100.0 | % | Cost of sales | | | 1,165 | | | | 86.2 | % | | | 1,095 | | | | 84.5 | % | | | 970 | | | | 84.2 | % | Gross profit | | | 187 | | | | 13.8 | % | | | 201 | | | | 15.5 | % | | | 182 | | | | 15.8 | % | Selling, general and administrative expenses | | | 113 | | | | 8.3 | % | | | 110 | | | | 8.4 | % | | | 106 | | | | 9.2 | % | Restructuring expenses | | | 9 | | | | 0.7 | % | | | 7 | | | | 0.6 | % | | | 10 | | | | 0.9 | % | Gain on sale of assets | | | - | | | | - | | | | - | | | | - | | | | (2 | ) | | | -0.2 | % | Operating income | | $ | 65 | | | | 4.8 | % | | $ | 84 | | | | 6.5 | % | | $ | 68 | | | | 5.9 | % |
Year Ended March 31, 20172019 Compared with Year Ended March 31, 2016:2018:
AmericasVTS net sales decreased $52increased $56 million, or 94 percent, in fiscal 20172019 compared with the prior year, primarily due to higher sales volume to off-highway and automotive customers in North America and Asia, partially offset by lower sales volume to commercial vehicle and off-highway customers in North America,Europe and a $21 million unfavorable impact of foreign currency exchange rate changes. Gross profit decreased $14 million and gross margin declined 170 basis points to 13.8 percent. The decline in gross margin was primarily due to unfavorable material costs, including the impacts of tariffs, and temporary operating inefficiencies largely related to increased volumes and new program launches at certain manufacturing facilities, partially offset by higher sales volume. In addition, foreign currency exchange rate changes had an unfavorable $3 million impact on gross profit. SG&A expenses increased $3 million compared with the prior year, yet decreased 10 basis points as a percentage of sales. The increase in SG&A expenses primarily resulted from higher environmental charges related to previously-owned manufacturing facilities in the U.S. and higher compensation-related expenses, partially offset by a $2 million favorable impact of foreign currency exchange rate changes. Restructuring expenses increased $2 million, primarily due to higher severance expenses. Operating income decreased $19 million to $65 million, primarily due to lower gross profit and higher SG&A and restructuring expenses.
Year Ended March 31, 2018 Compared with Year Ended March 31, 2017:
VTS net sales increased $144 million, or 12 percent, in fiscal 2018 compared with the prior year, primarily due to higher sales volume to off-highway and automotive customers and a $5$42 million favorable impact of foreign currency exchange rate changes. Gross profit decreased $13increased $19 million, and gross margin decreased 90 basis points to 16.2 percent in fiscal 2017. These decreases were primarily due to lowerhigher sales volumevolume. Gross margin declined 30 basis points, primarily due to unfavorable material costs, the absence of favorable customer pricing settlements recorded in the prior year, and temporaryhigher depreciation expense resulting from recent production inefficiencies in North America, largely related to product launches and plant consolidation activities,capacity investments, partially offset by cost savings resulting from procurement initiatives,improved operating efficiencies. In addition, foreign currency exchange rate changes had a favorable material costs and lower environmental costs related to a previously-owned manufacturing facility, as compared with the prior year. Fiscal 2017$7 million impact on gross profit. SG&A expenses decreased $1 million from fiscal 2016, primarily due to lower compensation-related expenses and a higher recovery of development costs, partially offset by a $1.6 million charge related to a legal matter in Brazil for which the Company has agreed to a settlement. In fiscal 2017, we recorded $7 million of restructuring expenses, primarily consisting of equipment transfer and plant consolidation costs related to the closure of our Washington, Iowa manufacturing facility, which we completed during fiscal 2017, and severance expenses. In addition, we sold two closed manufacturing facilities in North America and recognized gains totaling $1 million as a result. Operating income of $27 million in fiscal 2017 decreased $9increased $4 million compared with the prior year, primarily due to lower gross profit.
Year Ended March 31, 2016 Compared with Year Ended March 31, 2015:
Americas net sales decreased $81 million, or 12 percent, in fiscal 2016 compared with the prior year. Sales were lower in both North America and Brazil, including a $25 million unfavorable impact of foreign currency exchange rate changes. Sales in North America decreased $43 million, 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. Gross profit decreased $9 million, yet gross margin increased 80 basis points to 17.1 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, higher compensation-related expenses, and $2 million ofhigher environmental charges related to a previously-owned manufacturing facility in the U.S., partially offset by lower material costs, cost savings from completed restructuring activities, and improved production efficiencies. Fiscal 2016 SG&A expenses decreased $10 million from fiscal 2015, primarily due to cost-control initiatives, the absence of a $3$2 million charge forrecorded in the prior year related to a legal matter in Brazil, in the prior year,which has since been settled and paid. As a percentage of sales, SG&A expenses decreased 80 basis points to 8.4 percent. Restructuring expenses decreased $3 million, favorable impact of foreign currency exchange rate changes. In fiscal 2016, we recorded $9 million of restructuring expenses, primarily consisting of severance expenses associated with a voluntary retirement program in the U.S. and the closure of our Washington, Iowa manufacturing facility,due to lower plant consolidation and equipment transfer costs. In fiscal 2017, we sold three manufacturing facilities and, plant consolidation costs in North America. Operating incomeas a result, recognized gains totaling $2 million.
CIS | | | | | | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | Net sales | | $ | 708 | | | | 100.0 | % | | $ | 676 | | | | 100.0 | % | | $ | 232 | | | | 100.0 | % | Cost of sales | | | 593 | | | | 83.8 | % | | | 578 | | | | 85.5 | % | | | 200 | | | | 86.1 | % | Gross profit | | | 115 | | | | 16.2 | % | | | 98 | | | | 14.5 | % | | | 32 | | | | 13.9 | % | Selling, general and administrative expenses | | | 61 | | | | 8.6 | % | | | 60 | | | | 8.8 | % | | | 21 | | | | 9.2 | % | Restructuring expenses | | | - | | | | - | | | | 8 | | | | 1.2 | % | | | - | | | | - | | Impairment charges | | | - | | | | 0.1 | % | | | 1 | | | | 0.2 | % | | | - | | | | - | | Operating income | | $ | 53 | | | | 7.5 | % | | $ | 29 | | | | 4.2 | % | | $ | 11 | | | | 4.7 | % |
Year Ended March 31, 2019 Compared with Year Ended March 31, 2018:
CIS net sales increased $32 million, or 5 percent, in fiscal 2016 increased $3 million2019 compared with the prior year, primarily due to lower SG&A expenses and the absence of an $8 million goodwill impairment charge in fiscal 2015, partially offset by lower gross profit and higher restructuring expenses. Europe
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 524 | | | | 100.0 | % | | $ | 524 | | | | 100.0 | % | | $ | 578 | | | | 100.0 | % | Cost of sales | | | 443 | | | | 84.6 | % | | | 456 | | | | 87.0 | % | | | 509 | | | | 88.1 | % | Gross profit | | | 81 | | | | 15.4 | % | | | 68 | | | | 13.0 | % | | | 69 | | | | 11.9 | % | Selling, general and administrative expenses | | | 42 | | | | 7.9 | % | | | 39 | | | | 7.4 | % | | | 44 | | | | 7.6 | % | Restructuring expenses | | | 3 | | | | 0.6 | % | | | 6 | | | | 1.2 | % | | | 2 | | | | 0.4 | % | Gain on sale of facility | | | (1 | ) | | | -0.2 | % | | | - | | | | - | | | | (3 | ) | | | -0.6 | % | Impairment charge | | | - | | | | - | | | | 10 | | | | 1.9 | % | | | - | | | | - | | Operating income | | $ | 37 | | | | 7.1 | % | | $ | 13 | | | | 2.5 | % | | $ | 26 | | | | 4.5 | % |
Year Ended March 31, 2017 Compared with Year Ended March 31, 2016:
Europe net sales of $524 million in fiscal 2017 were consistent with the prior year, as higher sales volume to automotivedata center and commercial HVAC&R customers, waspartially offset by lower sales volume to commercial vehicle and off-highwayindustrial customers and a $3$5 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $13$17 million and gross margin improved 240170 basis points to 15.416.2 percent, in fiscal 2017, primarily due to cost savings resulting from procurement initiatives, favorable sales mix, and improved production efficiencies, partially offset by unfavorable material costs. SG&A expenses increased $3 million in fiscal 2017, primarily due to higher compensation-related expenses. In fiscal 2017, we recorded $3 million of restructuring expenses, primarily consisting of severance expenses. In addition, we sold a manufacturing facility in Europe and recognized a gain of $1 million as a result. Operating income of $37 million in fiscal 2017 increased $24 million compared with the prior year, primarily due to higher gross profit and the absence of a $10 million impairment charge in the prior year.
Year Ended March 31, 2016 Compared with Year Ended March 31, 2015:
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. Gross profit decreased $1 million, yet gross margin increased 110 basis points to 13.0 percent in fiscal 2016. The gross margin increase was primarily due to higher sales volume and lower material costs. In addition, gross profit was negatively impacted by $9 million from foreign currency exchange rate changes. Fiscal 2016favorable sales mix. SG&A expenses increased $1 million, yet decreased $520 basis points as a percentage of sales. The $1 million from the prior year,increase in SG&A expenses was primarily due to higher compensation-related expenses, including higher commission costs, partially offset by a $6$1 million favorable impact of foreign currency exchange rate changes. In fiscal 2016, weRestructuring expenses decreased $8 million, primarily due to the absence of severance-related expenses recorded $6 million of restructuring expenses, primarilyin the prior year related to severance expenses. In addition, we recorded a $10 million asset impairment charge. These restructuring expenses and impairment charge primarily related tothe closure of a manufacturing facility in Germany, which was generating pre-tax losses, resulting in management decidingAustria. In fiscal 2018, we recorded a $1 million impairment charge related to exit a certain product line.the closure of the Austrian facility. In fiscal 2019, we recorded an additional impairment charge of less than $1 million related to this facility. Operating income of $13$53 million in fiscal 2016 decreased $13increased $24 million, compared with the prior year, primarily due to higher restructuring expenses, an impairment charge,gross profit and the absence of a $3 million gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&Arestructuring expenses.
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 112 | | | | 100.0 | % | | $ | 79 | | | | 100.0 | % | | $ | 81 | | | | 100.0 | % | Cost of sales | | | 93 | | | | 83.2 | % | | | 67 | | | | 84.5 | % | | | 69 | | | | 85.8 | % | Gross profit | | | 19 | | | | 16.8 | % | | | 12 | | | | 15.5 | % | | | 12 | | | | 14.2 | % | Selling, general and administrative expenses | | | 11 | | | | 9.9 | % | | | 11 | | | | 14.5 | % | | | 12 | | | | 13.9 | % | Operating income | | $ | 8 | | | | 6.9 | % | | $ | 1 | | | | 1.0 | % | | $ | - | | | | 0.3 | % |
Year Ended March 31, 20172018 Compared with Year Ended March 31, 2016:2017:
AsiaCIS financial results for fiscal 2017 primarily include four months of results from the acquired Luvata HTS business. These financial results are not comparable to fiscal 2018, which included a full year of Luvata HTS results.
BHVAC | | | | | | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | Net sales | | $ | 212 | | | | 100.0 | % | | $ | 191 | | | | 100.0 | % | | $ | 172 | | | | 100.0 | % | Cost of sales | | | 149 | | | | 70.1 | % | | | 133 | | | | 69.7 | % | | | 124 | | | | 72.2 | % | Gross profit | | | 63 | | | | 29.9 | % | | | 58 | | | | 30.3 | % | | | 48 | | | | 27.8 | % | Selling, general and administrative expenses | | | 35 | | | | 16.4 | % | | | 36 | | | | 18.8 | % | | | 34 | | | | 19.7 | % | Restructuring expenses | | | - | | | | - | | | | - | | | | 0.2 | % | | | 1 | | | | 0.4 | % | Impairment charge | | | - | | | | - | | | | 1 | | | | 0.7 | % | | | - | | | | - | | Loss on sale of assets | | | 2 | | | | 0.8 | % | | | - | | | | - | | | | - | | | | - | | Operating income | | $ | 27 | | | | 12.6 | % | | $ | 20 | | | | 10.6 | % | | $ | 13 | | | | 7.7 | % |
Year Ended March 31, 2019 Compared with Year Ended March 31, 2018:
BHVAC net sales increased $33$21 million, or 4211 percent, in fiscal 20172019 compared with the prior year, primarily due to higher sales volume to automotiveof air conditioning products and off-highway customersparts and controls in Chinathe U.K. and incremental sales from our recently-formed joint ventureheating products in China,North America, partially offset by a $4$1 million unfavorable impact of foreign currency exchange rate changes. Gross profit increased $7$5 million, andyet gross margin improved 130declined 40 basis points to 16.8 percent29.9 percent. This slight decline in gross margin primarily resulted from unfavorable material costs and sales mix, partially offset by higher sales volume. SG&A expenses decreased $1 million compared with the prior year and decreased 240 basis points as a percentage of sales, primarily due to cost-control initiatives. During fiscal 2017,2019, we completed the sale of our business in South Africa, and, as a result, recorded a loss of $2 million. Operating income of $27 million increased $7 million, primarily due to higher gross profit.
Year Ended March 31, 2018 Compared with Year Ended March 31, 2017:
BHVAC net sales volume. Fiscal 2017 SG&A expenses were consistent with the prior year. Operating income of $8increased $19 million, or 11 percent, in fiscal 2017 increased $7 million2018 compared with the prior year, primarily due to higher gross profit.
Year Ended March 31, 2016 Compared with Year Ended March 31, 2015:
Asia net sales decreased $2 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to lower sales volume to off-highway customers in Chinaheating and Korea and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales volume to automotive customers in China and increased overall sales in India. Gross margin improved 130 basis points to 15.5 percent in fiscal 2016 compared with the prior year, primarily due to favorable sales mix. Fiscal 2016 SG&A expenses decreased $1 million from the prior year, primarily due to cost-control initiatives, partially offset by acquisition-related costs associated with a joint venture that we formed in late fiscal 2016. Operating income of $1 million in fiscal 2016 increased $1 million compared with the prior year, primarily due to lower SG&A expenses.
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Net sales | | $ | 172 | | | | 100.0 | % | | $ | 181 | | | | 100.0 | % | | $ | 186 | | | | 100.0 | % | Cost of sales | | | 124 | | | | 72.2 | % | | | 127 | | | | 70.1 | % | | | 130 | | | | 70.0 | % | Gross profit | | | 48 | | | | 27.8 | % | | | 54 | | | | 29.9 | % | | | 56 | | | | 30.0 | % | Selling, general and administrative expenses | | | 34 | | | | 19.8 | % | | | 39 | | | | 21.6 | % | | | 37 | | | | 19.8 | % | Restructuring expenses | | | 1 | | | | 0.4 | % | | | 1 | | | | 0.6 | % | | | - | | | | - | | Operating income | | $ | 13 | | | | 7.6 | % | | $ | 14 | | | | 7.7 | % | | $ | 19 | | | | 10.2 | % |
Year Ended March 31, 2017 Compared with Year Ended March 31, 2016:
BHVAC net sales decreased $9 million, or 5 percent, in fiscal 2017 compared with the prior year, primarily due to an $11 million unfavorable impact of foreign currency exchange rate changes and lower school ventilation and heating product sales in North America partially offset by increased air conditioning product sales in the U.K. Gross profit decreased $6 million and gross margin decreased 210 basis points to 27.8 percent in fiscal 2017, primarily due to unfavorable sales mix, unfavorable material costs and higher depreciation expense in the current year resulting from replacement assets associated with the Airedale fire, which we started to depreciate in the fourth quarter of fiscal 2016. In addition, gross profit was unfavorably impacted by $2 million from foreign currency exchange rate changes. Fiscal 2017 SG&A expenses decreased $5 million from fiscal 2016, primarily due to lower commission costs and compensation-related expenses and a $2 million favorable impact of foreign currency exchange rate changes. In fiscal 2017, we recorded $1 million of restructuring expenses consisting of severance expenses. Operating income of $13 million in fiscal 2017 decreased $1 million compared with the prior year, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Year Ended March 31, 2016 Compared with Year Ended March 31, 2015:
BHVAC 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. Gross profit decreased $2 million in fiscal 2016 compared with the prior year, primarily due to a $1 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased 10 basis points to 29.9 percent in fiscal 2016 compared with the prior year. Fiscal 2016 SG&A expenses increased $2 million from the prior year, primarily due to the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in the prior year, partially offset by lower engineering and development costs and a $1 million favorable impact of foreign currency exchange rate changes. In fiscal 2016, we recordedGross profit increased $10 million and gross margin improved 250 basis points to 30.3 percent, primarily due to higher sales volume and improved operating efficiencies in the U.K. SG&A expenses increased $2 million, primarily due to higher commission costs resulting from higher sales. As a percentage of sales, SG&A expenses decreased 90 basis points. Restructuring expenses decreased $1 million, of restructuring expenses consistingprimarily due to the absence of severance expenses.expenses recorded in the prior year. During fiscal 2018, we discontinued a geothermal product line and, as a result, recorded a $1 million impairment charge for intangible assets we no longer use. Operating income of $14$20 million in fiscal 2016 decreased $5increased $7 million, compared with the prior year, primarily due to lowerhigher gross profit and higher SG&A expenses.profit.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents atas of March 31, 20172019 of $34$42 million, and an available borrowing capacity of $153$124 million under lines ofour revolving credit provided by banks in the United States and abroad.facility. Given our extensive international operations, $32approximately $35 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to U.S. taxforeign withholding taxes if repatriated. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 20172019 was $42$103 million, a decrease of $30$21 million from $72$124 million in the prior year. This decrease in operating cash flow was primarily due to payments for acquisition- and integration-related costs,resulted from unfavorable net changes in working capital, partially offset by the favorable impact of stronger earnings. The unfavorable changes in working capital, as compared with the prior year, included higher incentive compensation and other employee benefit payments and higher payments for restructuring activities.inventory levels associated with higher sales levels.
Net cash provided by operating activities in fiscal 20162018 was $72$124 million, an increase of $8$82 million from $64$42 million in the prior year.fiscal 2017. This increase in operating cash flow was primarily due toresulted from an increase in operating earnings, including additional contributions from our CIS segment, lower payments for costs associated with the acquisition and integration of Luvata HTS and restructuring expenses in the current year, and favorable net changes in working capital, including lower incentive compensation payments during fiscal 2016 and the timing of value-added tax payments.capital.
Capital Expenditures
Capital expenditures of $64$74 million during fiscal 20172019 increased $1$3 million compared with fiscal 2016. In fiscal 2017,2018, primarily due to higher capital expenditures in our CIS segment, including investments to expand manufacturing capacity in Serbia and Mexico. Similar to prior years, our capital spending in fiscal 2019 primarily occurred in the Americas and Europe segments,VTS segment, which totaled $26$56 million, and $25 million, respectively. Capital projects in fiscal 2017 included tooling and equipment purchases in conjunction with new and renewal programs with customers, as well as expansions of ourinvestments to expand manufacturing capacity in MexicoChina and Hungary.
At March 31, 2017,2019, our capital expenditure commitments totaled $18$24 million. Significant commitments included tooling and equipment expenditures for new and renewal programs with customers in the Americas, Asia, North America, and Europe segments.
Dividends
We did not pay dividends in fiscal 2017, 2016, or 2015. We currently do not intend to pay dividends in fiscal 2018.within the VTS segment.
Debt
Our total debt outstanding increased $348decreased $30 million to $511$450 million at March 31, 20172019 compared with the prior year, primarily due to new long-termrepayments of debt and borrowings under our revolving credit facility used to finance a significant portion of the $364 million cash consideration for our acquisition of Luvata HTS.during fiscal 2019. See Note 1517 of the Notes to Consolidated Financial Statements for additional information regarding our new credit agreements.
Our debt agreements require us to maintain compliance with various covenants. The term loans require prepayments, asAs defined in the credit agreement, the term loans may require prepayments in the event the Company’sour annual excess cash flow exceeds defined levels, depending upon our leverage ratio, or in the event of certain asset sales. In addition, under our primary debt agreements in the U.S., we are subject to a leverage ratio covenant,covenants, the most restrictive of which requires us to limit our consolidated indebtedness, less a certain portion of our cash balance, both as defined by the credit agreements,agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). As permitted by the credit agreements and in connection with our acquisition of Luvata HTS, the leverage ratio covenant limit has been temporarily raised to no more than three and three-quarters times Adjusted EBITDA through the second quarter of fiscal 2018, and thereafter to no more than three and one-half times Adjusted EBITDA through the first quarter of fiscal 2019. 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. OurMarch 31, 2019, our leverage ratio at March 31, 2017 was 2.9, which was below the maximum permitted ratio of 3.75. Ourand interest expense coverage ratio at March 31, 2017 was 7.0, which exceeded the minimum requirement of 3.0.were 2.1 and 9.0, respectively. We were in compliance with our debt covenants as of March 31, 20172019 and expect to remain in compliance during fiscal 20182020 and beyond.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
| | March 31, 2017 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 436.2 | | | $ | 31.3 | | | $ | 81.6 | | | $ | 281.6 | | | $ | 41.7 | | Interest associated with long-term debt | | | 73.9 | | | | 18.5 | | | | 31.8 | | | | 17.0 | | | | 6.6 | | Capital lease obligations | | | 8.0 | | | | 0.5 | | | | 0.8 | | | | 0.8 | | | | 5.9 | | Operating lease obligations | | | 69.3 | | | | 12.2 | | | | 19.2 | | | | 13.2 | | | | 24.7 | | Capital expenditure commitments | | | 18.1 | | | | 17.1 | | | | 1.0 | | | | - | | | | - | | Other long-term obligations | | | 4.8 | | | | 2.4 | | | | 1.7 | | | | 0.7 | | | | - | | Total contractual obligations | | $ | 610.3 | | | $ | 82.0 | | | $ | 136.1 | | | $ | 313.3 | | | $ | 78.9 | |
| | March 31, 2019 | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 377.7 | | | $ | 48.2 | | | $ | 287.8 | | | $ | 16.7 | | | $ | 25.0 | | Interest associated with long-term debt | | | 40.9 | | | | 16.0 | | | | 18.3 | | | | 4.1 | | | | 2.5 | | Operating lease obligations | | | 70.4 | | | | 14.2 | | | | 21.5 | | | | 11.8 | | | | 22.9 | | Capital expenditure commitments | | | 23.6 | | | | 23.6 | | | | - | | | | - | | | | - | | Other long-term obligations (a) | | | 13.3 | | | | 1.4 | | | | 2.1 | | | | 2.0 | | | | 7.8 | | Total contractual obligations | | $ | 525.9 | | | $ | 103.4 | | | $ | 329.7 | | | $ | 34.6 | | | $ | 58.2 | |
| (a) | Includes capital lease obligations and other long-term obligations. |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $139$119 million as of March 31, 2017.2019. We are unable to determine the ultimate timing of payments for these liabilities; therefore, we have excluded these amounts from the contractual obligations table above. We expect to contribute $13$3 million to our U.S. pension plans during fiscal 2018.2020.
Critical Accounting Policies
The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements. Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements. The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements. In addition, recently issued accounting pronouncements that could significantly impact our financial statementsstatement are includeddisclosed in Note 1 of the Notes to Consolidated Financial Statements.
Revenue Recognition
In fiscal 2019, we adopted new revenue recognition accounting guidance. See Note 1 of the Notes to Consolidated Financial Statements for additional information. In accordance with this new accounting guidance, we recognize revenue based upon consideration specified in a contract and as we satisfy performance obligations by transferring control over our products to our customers, which may be at a point in time or over time. The majority of our revenue is recognized at a point in time, based upon shipment terms. A limited number of our customer contracts provide an enforceable right to payment for performance completed to date. For these contracts, we recognize revenue over time based upon our estimated progress towards the satisfaction of the contract’s performance obligations. We record an allowance for doubtful accounts for estimated uncollectible receivables and we accrue for estimated warranty costs at the time of sale. We base these estimates upon historical experience, current business trends, and current economic conditions.
Acquisitions
From time to time, we make strategic acquisitions that have a material impact on our consolidated results of operations or financial position. We allocate the purchase price of acquired businesses to the identifiable tangible and intangible assets acquired and liabilities assumed in the transaction based upon their estimated fair values as of the acquisition date. We determine the estimated fair values using information available to us and engage third-party valuation specialists when necessary. The estimates we use to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. While we use our best estimates and assumptions, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statement of operations. We are also required to estimate the useful lives of intangible assets to determine the amount of amortization expense to record in future periods. We periodically review the estimated useful lives assigned to our intangible assets to determine whether such estimated useful lives continue to be appropriate. During fiscal 2017, we acquired Luvata HTS. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding this acquisition.
Revenue Recognition
We recognize revenue, including agreed-upon commodity 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. We recognize price increases that are agreed upon in advance 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 net asset values exceed undiscounted cash flows expected to be generated by the assets, or the decline in value is considered to be “other than temporary,” we write down the assets to fair value and record an impairment charge to current operations. We estimate fair value in various ways depending on the nature of the assets under review.underlying assets. Fair value is generally based upon appraised value, estimated salvage value, or selling prices under negotiation, as applicable.
The most significant long-lived assets we evaluated for impairment indicators were property, plant and equipment and intangible assets, which totaled $459$485 million and $134$116 million, respectively, at March 31, 2017, respectively.2019. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment. Our most significant intangible assets evaluated are customer relationships, trade names, and acquired technology, the majority of which are related to our recent acquisition of Luvata HTS. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding this acquisition. CIS segment. We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility. This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy. When such indicators are present, we perform an impairment evaluation.
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. We consider factors such as operating losses, declining financial and market outlooks, and market capitalization when evaluating the necessity for an interim impairment analysis. We test goodwill for impairment at a reporting unit level. Reporting units resulting from recent acquisitions generally represent the highest risk of impairment, which typically decreases as the businesses are integrated into the Company and positioned for future operating and financial performance. Our first step in theWe test goodwill for impairment test is to compareby comparing the fair value of theeach reporting unit towith its carrying value. We determine the fair value of a reporting unit based upon the present value of estimated future cash flows. If the fair value of thea reporting unit exceeds the carrying value of the reporting unit’s net assets, goodwill of that reporting unit is not impaired and further testing is not required. Ifimpaired. However, if the carrying value of the reporting unit’s net assets exceeds theits fair value, ofwe would conclude goodwill is impaired and would record an impairment charge equal to the unit, then we perform the second step of the impairment test to determine the implied fair value ofamount that the reporting unit’s goodwill and any impairment charge. In estimating the implied fair value of goodwill for a reporting unit, we assign fair value to the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of the reporting unit goodwill overexceeds its implied fair value is recorded as an impairment charge.value. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rate, business trends and market conditions. We determine the expected future revenue growth rates and operating profit margins after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for country-specific risks where appropriate.
At March 31, 2017,2019, our goodwill totaled $165$169 million, primarily related to our recently-acquired CIS segment and our BHVAC segment. We will complete goodwill impairment tests for the CISsegments. Each of these segments is comprised of two reporting units in fiscal 2018, within one year of the acquisition date. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding this acquisition.units. We conducted annual goodwill impairment tests for our BHVAC and Asia segments during the fourth quarter of fiscal 20172019 by applying a fair value-based test and determined the fair value of theeach of our reporting units substantially exceeded theirthe respective book values.value.
Warranty Costs
We estimate costs related to product warranties and accrue for such costs at the time of the sale, within cost of sales. We estimate warranty costs based upon the best information available, which includes statistical and analytical analysis of both historical and current claim data. We monitor and adjust our warranty accruals, which totaled $10$9 million at March 31, 2017,2019, if it is probable that expected claims will differ from previous estimates.
Pension Obligations
Our calculation of the expense and liabilities of our pension plans is dependent upon various assumptions. At March 31, 2017,2019, our pension liabilities totaled $122$104 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality rate tables. We base our selection of assumptions on historical trends and economic and market conditions at the time of valuation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods. These differences impact future pension expenses. Currently, participants in our domestic pension plans are not accruing benefits based upon their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.
For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our benefit plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in both fiscal 20172019 and 20162018 was 8.07.5 percent. For fiscal 2018,2020, we have also assumed a rate of 7.5 percent. This 50A change of 25 basis point decreasepoints in the expected rate of return on assets as compared with the prior year, resulted in an increase of less than $1 million inwould impact our estimated fiscal 20182020 pension expense.expense by $0.4 million.
The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds on the measurement date of March 31. For fiscal 20172019 and 2016,2018, for purposes of determining pension expense, we used a discount rate of 4.0 and 4.1 percent.percent, respectively. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows from the affectedour plans. See Note 1618 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 20182020 pension expense by less than $1 million.
Income Taxes
We operate in numerous taxing jurisdictions; therefore, we are subject to regular examinations by federal, state and non-U.S. taxing authorities. Due to the application of complex and sometimes ambiguous tax laws and rulings in the jurisdictions in which we do business, there is an inherent level of uncertainty within our worldwide tax provisions. Despite our belief that our tax return positions are consistent with applicable tax laws, it is possible that taxing authorities could challenge certain positions.
The Tax Act was enacted in December 2017 and included numerous changes to existing U.S. tax regulations, including U.S. corporate tax rates, business deductions, and taxes on income in foreign jurisdictions. We completed our accounting for the impacts of the Tax Act during fiscal 2019. Additional impacts from the Tax Act could result if there are changes in interpretations or applications of the Tax Act’s provisions or if supplementary regulatory guidance is issued.
Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. We adjust these amounts to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in a particular jurisdiction will not be realized. This determination involves significant judgment. In performing this assessment on a jurisdiction-by-jurisdiction basis, we consider historical and projected financial results along with other pertinent information.
We have not recorded a provision for U.S. income taxes on undistributed earnings from our non-U.S. subsidiaries that we have determined to be permanently reinvested in our foreign operations. If management’s intentions or U.S. tax law changes in the future, there could be a significant negative impact on our provision for income taxes. See Note 78 of the Notes to Consolidated Financial Statements for additional information regarding income taxes.
Other Loss Reserves
We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, self-insurance reserves, uncollectible accounts receivable, regulatory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. We estimate these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Note 1820 of the Notes to Consolidated Financial Statements for additional information regarding contingencies and litigation.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of this report.report and identified in our other public filings with the U.S. Securities and Exchange Commission. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| · | Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs, inflation, changes in interest rates, recession and recovery therefrom, restrictions and uncertainty associated with cross-border trade, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China and North America, the still-weak forecasts for the Brazilian economy, and the general uncertainties about the impact of potential regulatory and/or policy changes, including those related to tax and trade, that may be implemented in the United States, as well as continuing uncertainty regarding the longer-term implications of “Brexit”; |
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs (and any potential trade war resulting from tariffs or retaliatory actions), inflation, changes in interest rates, recession and recovery therefrom, restrictions and uncertainty associated with cross-border trade, and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, that have been or may be implemented in the United States or by its trade partners, as well as continuing uncertainty regarding the timing and the short- and long-term implications of “Brexit”;
| · | The impact of potential increases in commodity prices, including our ability to successfully manage our exposure and/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel) on to customers, as well as the inherent lag in timing of such pass-through arrangements; and |
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums or fabrication costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs and the behavior of our suppliers. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
| · | The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives. |
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
| · | Our ability to integrate the former Luvata HTS operations into Modine, realize cost and revenue synergies in accordance with our expectations, and effectively manage any unanticipated risks that arise, while also maintaining stability within the acquired business and appropriate focus on the rest of Modine’s business; |
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
| · | The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; |
Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
| · | Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability; |
| · | Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims; |
| · | 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; |
Unanticipated product or manufacturing difficulties or operating inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims;
| · | Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor pools, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine; |
Unanticipated delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| · | Costs and other effects of the investigation and remediation of environmental contamination; |
Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;
| · | Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith; |
Our ability to effectively and efficiently complete restructuring activities and realize the anticipated benefits of those activities;
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; |
Costs and other effects of the investigation and remediation of environmental contamination; particularly when related to the actions or inactions of others and/or facilities over which we have no control;
| · | The constant and increasing pressures associated with healthcare and associated insurance costs; and |
Our ability to recruit and maintain talent, including personnel in managerial, leadership and administrative functions, in light of tightening global labor markets;
| · | Costs and other effects of unanticipated litigation, claims, or other obligations, including those associated with our acquisition of Luvata HTS. |
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
The constant and increasing pressures associated with healthcare and associated insurance costs; and
Costs and other effects of unanticipated litigation, claims, or other obligations.
Strategic Risks:
| · | Our ability to successfully take advantage of our increased presence in the “industrial” markets, with our Building HVAC and Commercial and Industrial Solutions businesses, without shifting attention away from our vehicular business, where we enjoy and desire to preserve a leading position; and |
Our ability to successfully take advantage of our increased presence in the “industrial” markets, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our VTS business;
| · | Our ability to identify and execute additional growth and diversification opportunities in order to position us for long-term success. |
The success of our evaluation of strategic alternatives for our automotive business within our VTS segment in optimizing the segment’s future profitability;
Our ability to identify and execute additional growth and diversification opportunities in order to position us for long-term success; and
The potential expense, disruption or other impacts that could result from unanticipated actions by activist shareholders.
Financial Risks:
| · | Our ability to fund our global liquidity requirements efficiently for Modine’s current operations, particularly those in our Asia business segment, and meet our long-term commitments in the event of an unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of an unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;
| · | The impact of potential increases in interest rates, particularly in LIBOR and EURIBOR in relation to our variable-rate debt obligations; |
Our ability to maintain our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) in our target range of 1.5 to 2.5 in an efficient manner;
| · | Our ability to bring our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) back into our target range of 1.5 to 2.5 in an efficient manner following our acquisition of Luvata HTS; |
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
| · | Costs arising from the integration of Luvata HTS and the timing and impact of potential purchase accounting adjustments; |
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
| · | The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, and British pound, relative to the U.S. dollar; and |
| · | Our ability to effectively realize the benefits of tax assets in various jurisdictions in whichForward-looking statements are as of the date of this report; we operate. |
In addition to the risks set forth above, we are subject to other risks and uncertainties as identified in our public filings with the U.S. Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
In the normal course of business, we are subject to market exposure from changes in foreign currency exchange rates, interest rates, commodity prices, credit risk and economic conditions.
Foreign Currency Risk
We are subject to the risk of changes in foreign currency exchange rates due to our operations in foreign countries. We have manufacturing facilities in Brazil, China, India, Mexico, South Africa, and throughout Europe. We also have joint ventures in China, Japan and South Korea. We sell and distribute products throughout the world and also purchase raw materials from suppliers in foreign countries. As a result, our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which we do business. WeWhenever possible, we attempt to mitigate foreign currency risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the functional currency of the entity engaging in the transaction. In addition, for certain transactions that are denominated in a currency other than the engaging entity’s functional currency, we may enter into foreign currency derivative contracts to further manage our foreign currency risk. In fiscal 2017,2019, we recorded realized and unrealizeda net loss of $1 million within our statement of operations related to foreign currency gains and losses that netted to a loss of $2 million, which we reported in other income and expense in the consolidated statement of operations.derivative contracts. In addition, our consolidated financial results are impacted by the translation of revenue and expenses in foreign currencies into U.S. dollars. These translation impacts are primarily affected by changes in exchange rates between the U.S. dollar and European currencies, primarily the euro, and changes between the U.S. dollar and the Brazilian real, and between the euro and the British pound.real. In fiscal 2017,2019, more than 50 percent of our sales were generated in countries outside the U.S. A change in foreign currency exchange rates will positively or negatively affect our sales; however, this impact will be offset, usually to a large degree, with a corresponding effect on our cost of sales and other expenses. In fiscal 2017,2019, changes in foreign currency exchange rates negativelyunfavorably impacted our sales by $13$28 million; however, the impact on our operating income was less than $1 million. Foreign currency exchange rate risk can be estimated by measuring the impact of a near-term adverse movement of 10 percent in foreign currency exchange rates. If these rates were 10 percent higher or lower during fiscal 2017,2019, there would not have been a material impact on our fiscal 20172019 earnings.
We maintain foreign-denominated, long-termforeign currency-denominated debt obligations and long-term intercompany loans that are subject to foreign currency exchange risk. As of March 31, 2017, we did not have any long-termWe seek to mitigate this risk through maintaining offsetting positions between external and intercompany loans for which changes in foreign currency exchange rates could materially impact our net earnings.loans; however, Fromfrom time to time, we also enter into foreign currency rate derivative contracts to manage the foreigncurrency exchange rate exposure on these types of loans.exposure. These derivative instruments are typically not accounted for as hedges, and accordingly, gains or losses on the derivatives are recorded in other income and expense in the consolidated statements of operations and act totypically offset anythe foreign currency movementchanges on the outstanding loans receivable or payable.loans.
Interest Rate Risk
We actively seek to reduce the potential volatility of earnings that could arise from changes in interest rates. We generally utilize a mixture of debt maturities and both fixed-rate and variable-rate debt to manage exposure to changes in interest rates. Interest on both our term loans and borrowings under our primary multi-currency revolving credit facility is based upon a variable interest rate, primarily either the London Interbank Offered Rate (“LIBOR”)LIBOR or Euro Interbank Offered Rate (“EURIBOR”),EURIBOR, plus 137.5 to 250 basis points, depending on our leverage ratio. We are subject to risk of fluctuations in LIBOR and EURIBOR and changes in our leverage ratio, which would affect the variable interest rate on our term loans and revolving credit facility and could create variability in interest expense. As of March 31, 2017,2019, our outstanding borrowings on the variable-rate term loans and the revolving credit facility totaled $269$238 million and $40$47 million, respectively. Based upon our outstanding debt with variable interest rates at March 31, 2017,2019, a 100 basis point increase in interest rates would increase our annual interest expense in fiscal 20182020 by approximately $3 million.
Commodity Price Risk
We are dependent upon the supply of raw materials and supplies in our production processes and, from time to time, enter into firm purchase commitments for aluminum, copper, nickel, and natural gas. We maintain agreements with certainCommodity price risk is most prevalent to our vehicular businesses, which provide customized production and service parts to customers to pass through specified raw material price fluctuations inunder multi-year programs. In order to mitigate commodity price risk. The majority ofrisk specific to these agreements containlong-term sales programs, we maintain contract provisions in which the pass-through of thewith certain customers that allow us to prospectively adjust prices based upon raw material price fluctuations canfluctuations. These prospective price adjustments generally lag behind the actual raw material price fluctuations by three months or longer, and typically the arrangementscontract provisions are limited to the underlying material cost based upon the London Metal Exchange and exclude additional cost elements, such as related premiums and fabrication. For our industrial businesses, we predominantly seek to mitigate commodity price risk by adjusting product pricing in response to any applicable price increases. Credit Risk
Credit risk represents the possibility of loss from a customer failing to make payment according to contract terms. Our principal credit risk consists of outstanding trade accounts receivable. At March 31, 2017, 352019, 38 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, commercial vehicle, off-highway, data center cooling and off-highwaycommercial air conditioning markets and are influenced by similar market and general economic factors. In the past, credit losses from our customers have not been significant.
We manage credit risk through a focus on the following:
| · | Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. We consider our holdings in cash and investments to be stable and secure at March 31, 2017;Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. We consider our holdings in cash and investments to be stable and secure at March 31, 2019; |
| · | 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'sTrade 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.Insurance – We monitor our insurance providers to ensure they maintain financial ratings that are acceptable to us. We have not identified any concerns in this regard based upon our reviews. |
Economic Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate. We sell a broad range of products that provide thermal solutions to customers operating primarily in the automotive, commercial vehicle, off-highway, and commercial, industrial, and building HVAC&R markets. We operate in diversified markets as a strategy for offsetting the risk associated with a downturn in any of the markets we serve. However, risk associated with market downturns is still present.
We monitor economic conditions in the U.S. and abroad. As we expand our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes, and the like. We continue to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions.
We pursue new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon our ability to commercialize our investments. Current examples of new and emerging markets for us include those related to waste heat recovery,electric vehicles, coils and coolers outside of North America and the U.K.,in certain markets, and coatings. Our investment in these areas is subject to the risks associated with business integration, technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
We anticipate that recovery within some36
In an effort to manage and reduce our costs, we have been consolidating our supply base. As a result, we are dependent upon limited sources of supply for certain components used in the manufacture of our geographic and end markets may put production pressure on certain suppliers of our raw materials. In particular, there are a limited number of suppliers ofproducts, including aluminum, copper, steel and stainless steel material.(nickel). We are exposed to the risk of suppliers of certain raw materials not being able or willing to meet strong customer demand (including the potential effects of trade laws and tariffs), as they may not increase their output capacity as quickly as customers increase their orders, and of increased prices being charged by raw material suppliers.
In addition, we purchase parts from suppliers that use our tooling to create the parts. In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts. As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require. Even in situations where suppliers are manufacturing parts without the use of our tooling, we face the challenge of obtaining consistently high-quality parts from suppliers that are financially stable. We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate higher-risk supplier situations. In addition to the above risks on the supply side, we are also exposed to risks associated with demands by our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, but these agreements oftensometimes contain provisions for future price reductions. In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: From time to time, we enter into futuresover-the-counter forward contracts related to certain forecasted purchases of aluminum and copper. Our strategy is to reduce our exposure to changing market prices for future purchases of these commodities. In fiscal 2019 and 2018, we designated certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, we record unrealized gains and losses related to the change in the fair value of the contracts in other comprehensive income (loss) within shareholders’ equity and subsequently recognize the gains and losses within cost of sales as the underlying inventory is sold. In fiscal 2017, 2016we did not designate commodity forward contracts for hedge accounting. Accordingly, unrealized gains and 2015,losses on these contracts were recorded within cost of sales. In fiscal 2019, 2018, and 2017, net gains and losses related to commodity derivativeforward contracts which are reported in cost of sales in the consolidated statements of operations, were less than $1 million in each year.
Foreign currency forward contracts: We use derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency exchangeforward contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. We have designated certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, we record unrealized gains and losses related to the change in the fair value of the contracts in other comprehensive income (loss) within shareholders’ equity and subsequently recognize the gains and losses as a component of earnings at the same time and in the same financial statement line that the underlying transactions impact earnings. We have not designated these forward contracts related to foreign currency-denominated assets and liabilities as hedges. Accordingly, for these non-designated contracts, we record unrealized gains and losses related to the change in the fair value of the contracts in other income and expense. Gains and losses on these non-designated foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
Counterparty risks: We manage counterparty risks by ensuring that counterparties to derivative instruments havemaintain credit ratings acceptable to us. At March 31, 2017,2019, all counterparties had a sufficient long-term credit rating.
ITEM 8. ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2017, 20162019, 2018 and 20152017 (In millions, except per share amounts)
| | 2017 | | | 2016 | | | 2015 | | Net sales | | $ | 1,503.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | | Cost of sales | | | 1,249.7 | | | | 1,129.0 | | | | 1,249.9 | | Gross profit | | | 253.3 | | | | 223.5 | | | | 246.5 | | Selling, general and administrative expenses | | | 205.0 | | | | 204.5 | | | | 184.5 | | Restructuring expenses | | | 10.9 | | | | 16.6 | | | | 4.7 | | Gain on sale of facilities | | | (2.0 | ) | | | - | | | | (3.2 | ) | Impairment charges | | | - | | | | 9.9 | | | | 7.8 | | Operating income (loss) | | | 39.4 | | | | (7.5 | ) | | | 52.7 | | Interest expense | | | (17.2 | ) | | | (11.1 | ) | | | (11.7 | ) | Other (expense) income – net | | | (1.4 | ) | | | 8.7 | | | | 0.2 | | Earnings (loss) from continuing operations before income taxes | | | 20.8 | | | | (9.9 | ) | | | 41.2 | | (Provision) benefit for income taxes | | | (5.9 | ) | | | 8.9 | | | | (19.0 | ) | Earnings (loss) from continuing operations | | | 14.9 | | | | (1.0 | ) | | | 22.2 | | Earnings from discontinued operations, net of income taxes | | | - | | | | - | | | | 0.6 | | Net earnings (loss) | | | 14.9 | | | | (1.0 | ) | | | 22.8 | | Net earnings attributable to noncontrolling interest | | | (0.7 | ) | | | (0.6 | ) | | | (1.0 | ) | Net earnings (loss) attributable to Modine | | $ | 14.2 | | | $ | (1.6 | ) | | $ | 21.8 | | | | | | | | | | | | | | | Earnings (loss) per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.45 | | Diluted | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.44 | | | | | | | | | | | | | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.46 | | Diluted | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.45 | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | Basic | | | 47.8 | | | | 47.3 | | | | 47.2 | | Diluted | | | 48.3 | | | | 47.3 | | | | 47.8 | |
| | 2019 | | | 2018 | | | 2017 | | Net sales | | $ | 2,212.7 | | | $ | 2,103.1 | | | $ | 1,503.0 | | Cost of sales | | | 1,847.2 | | | | 1,746.6 | | | | 1,248.6 | | Gross profit | | | 365.5 | | | | 356.5 | | | | 254.4 | | Selling, general and administrative expenses | | | 244.1 | | | | 245.8 | | | | 203.2 | | Restructuring expenses | | | 9.6 | | | | 16.0 | | | | 10.9 | | Impairment charges | | | 0.4 | | | | 2.5 | | | | - | | Loss (gain) on sale of assets | | | 1.7 | | | | - | | | | (2.0 | ) | Operating income | | | 109.7 | | | | 92.2 | | | | 42.3 | | Interest expense | | | (24.8 | ) | | | (25.6 | ) | | | (17.2 | ) | Other expense - net | | | (4.1 | ) | | | (3.3 | ) | | | (4.3 | ) | Earnings before income taxes | | | 80.8 | | | | 63.3 | | | | 20.8 | | Benefit (provision) for income taxes | | | 5.1 | | | | (39.5 | ) | | | (5.9 | ) | Net earnings | | | 85.9 | | | | 23.8 | | | | 14.9 | | Net earnings attributable to noncontrolling interest | | | (1.1 | ) | | | (1.6 | ) | | | (0.7 | ) | Net earnings attributable to Modine | | $ | 84.8 | | | $ | 22.2 | | | $ | 14.2 | | | | | | | | | | | | | | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 1.67 | | | $ | 0.44 | | | $ | 0.29 | | Diluted | | $ | 1.65 | | | $ | 0.43 | | | $ | 0.29 | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | Basic | | | 50.5 | | | | 49.9 | | | | 47.8 | | Diluted | | | 51.3 | | | | 50.9 | | | | 48.3 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended March 31, 2017, 20162019, 2018 and 20152017 (In millions)
| | 2017 | | | 2016 | | | 2015 | | Net earnings (loss) | | $ | 14.9 | | | $ | (1.0 | ) | | $ | 22.8 | | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | (10.8 | ) | | | 4.6 | | | | (68.2 | ) | Defined benefit plans, net of income taxes of $1.7, $11.8 and ($13.2) million | | | 3.2 | | | | 19.7 | | | | (26.7 | ) | Total other comprehensive (loss) income | | | (7.6 | ) | | | 24.3 | | | | (94.9 | ) | | | | | | | | | | | | | | Comprehensive income (loss) | | | 7.3 | | | | 23.3 | | | | (72.1 | ) | Comprehensive income attributable to noncontrolling interest | | | (0.7 | ) | | | (0.5 | ) | | | (0.8 | ) | Comprehensive income (loss) attributable to Modine | | $ | 6.6 | | | $ | 22.8 | | | $ | (72.9 | ) |
| | 2019 | | | 2018 | | | 2017 | | Net earnings | | $ | 85.9 | | | $ | 23.8 | | | $ | 14.9 | | Other comprehensive income (loss): | | | | | | | | | | | | | Foreign currency translation | | | (37.6 | ) | | | 41.8 | | | | (10.8 | ) | Defined benefit plans, net of income taxes of ($0.3), ($0.2) and $1.7 million | | | (1.4 | ) | | | 0.1 | | | | 3.2 | | Cash flow hedges, net of income taxes of $0.1, $0.1 and $0 million | | | 0.4 | | | | 0.1 | | | | - | | Total other comprehensive income (loss) | | | (38.6 | ) | | | 42.0 | | | | (7.6 | ) | | | | | | | | | | | | | | Comprehensive income | | | 47.3 | | | | 65.8 | | | | 7.3 | | Comprehensive income attributable to noncontrolling interest | | | (0.6 | ) | | | (2.1 | ) | | | (0.7 | ) | Comprehensive income attributable to Modine | | $ | 46.7 | | | $ | 63.7 | | | $ | 6.6 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS March 31, 20172019 and 20162018 (In millions, except per share amounts)
| | 2017 | | | 2016 | | ASSETS | | | | | | | Cash and cash equivalents | | $ | 34.2 | | | $ | 68.9 | | Trade accounts receivable – net | | | 295.2 | | | | 189.1 | | Inventories | | | 168.5 | | | | 111.0 | | Other current assets | | | 55.4 | | | | 43.5 | | Total current assets | | | 553.3 | | | | 412.5 | | Property, plant and equipment – net | | | 459.0 | | | | 338.6 | | Intangible assets – net | | | 134.1 | | | | 8.2 | | Goodwill | | | 165.1 | | | | 15.8 | | Deferred income taxes | | | 108.4 | | | | 123.1 | | Other noncurrent assets | | | 29.6 | | | | 22.7 | | Total assets | | $ | 1,449.5 | | | $ | 920.9 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | Short-term debt | | $ | 73.4 | | | $ | 28.6 | | Long-term debt – current portion | | | 31.8 | | | | 8.5 | | Accounts payable | | | 230.3 | | | | 142.4 | | Accrued compensation and employee benefits | | | 74.8 | | | | 58.6 | | Other current liabilities | | | 45.1 | | | | 35.5 | | Total current liabilities | | | 455.4 | | | | 273.6 | | Long-term debt | | | 405.7 | | | | 125.5 | | Deferred income taxes | | | 9.7 | | | | 4.2 | | Pensions | | | 119.4 | | | | 118.6 | | Other noncurrent liabilities | | | 38.1 | | | | 16.3 | | Total liabilities | | | 1,028.3 | | | | 538.2 | | Commitments and contingencies (see Note 18) | | | | | | | | | 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 51.8 million and 49.0 million shares | | | 32.4 | | | | 30.6 | | Additional paid-in capital | | | 216.4 | | | | 185.6 | | Retained earnings | | | 372.4 | | | | 358.2 | | Accumulated other comprehensive loss | | | (181.8 | ) | | | (174.2 | ) | Treasury stock, at cost, 1.7 million and 1.6 million shares | | | (25.4 | ) | | | (24.0 | ) | Total Modine shareholders' equity | | | 414.0 | | | | 376.2 | | Noncontrolling interest | | | 7.2 | | | | 6.5 | | Total equity | | | 421.2 | | | | 382.7 | | Total liabilities and equity | | $ | 1,449.5 | | | $ | 920.9 | |
| | 2019 | | | 2018 | | ASSETS | | | | | | | Cash and cash equivalents | | $ | 41.7 | | | $ | 39.3 | | Trade accounts receivable – net | | | 338.6 | | | | 342.4 | | Inventories | | | 200.7 | | | | 191.3 | | Other current assets | | | 65.8 | | | | 70.1 | | Total current assets | | | 646.8 | | | | 643.1 | | Property, plant and equipment – net | | | 484.7 | | | | 504.3 | | Intangible assets – net | | | 116.2 | | | | 129.9 | | Goodwill | | | 168.5 | | | | 173.8 | | Deferred income taxes | | | 97.1 | | | | 96.9 | | Other noncurrent assets | | | 24.7 | | | | 25.4 | | Total assets | | $ | 1,538.0 | | | $ | 1,573.4 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | Short-term debt | | $ | 66.0 | | | $ | 53.2 | | Long-term debt – current portion | | | 48.6 | | | | 39.9 | | Accounts payable | | | 280.9 | | | | 277.9 | | Accrued compensation and employee benefits | | | 81.7 | | | | 97.3 | | Other current liabilities | | | 39.9 | | | | 47.2 | | Total current liabilities | | | 517.1 | | | | 515.5 | | Long-term debt | | | 335.1 | | | | 386.3 | | Deferred income taxes | | | 8.2 | | | | 9.9 | | Pensions | | | 101.7 | | | | 109.6 | | Other noncurrent liabilities | | | 34.8 | | | | 53.6 | | Total liabilities | | | 996.9 | | | | 1,074.9 | | Commitments and contingencies (see Note 20) | | | | | | | | | Shareholders’ equity: | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 52.8 million and 52.3 million shares | | | 33.0 | | | | 32.7 | | Additional paid-in capital | | | 238.6 | | | | 229.9 | | Retained earnings | | | 472.1 | | | | 394.9 | | Accumulated other comprehensive loss | | | (178.4 | ) | | | (140.3 | ) | Treasury stock, at cost, 2.1 million and 1.8 million shares | | | (31.4 | ) | | | (27.1 | ) | Total Modine shareholders’ equity | | | 533.9 | | | | 490.1 | | Noncontrolling interest | | | 7.2 | | | | 8.4 | | Total equity | | | 541.1 | | | | 498.5 | | Total liabilities and equity | | $ | 1,538.0 | | | $ | 1,573.4 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended March 31, 2017, 20162019, 2018 and 20152017 (In millions)
| | 2017 | | | 2016 | | | 2015 | | Cash flows from operating activities: | | | | | | | | | | Net earnings (loss) | | $ | 14.9 | | | $ | (1.0 | ) | | $ | 22.8 | | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 58.3 | | | | 50.2 | | | | 51.6 | | Gain on sale of facilities | | | (2.0 | ) | | | - | | | | (3.2 | ) | Impairment charges | | | - | | | | 9.9 | | | | 7.8 | | Insurance proceeds from Airedale fire | | | - | | | | 5.9 | | | | 12.9 | | Pension and postretirement expense | | | 3.4 | | | | 45.1 | | | | 2.3 | | Deferred income taxes | | | (4.6 | ) | | | (18.8 | ) | | | 5.9 | | Stock-based compensation expense | | | 7.4 | | | | 4.9 | | | | 4.0 | | Other – net | | | 0.5 | | | | 0.1 | | | | 0.4 | | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | Trade accounts receivable | | | (25.7 | ) | | | 8.0 | | | | (0.1 | ) | Inventories | | | (3.3 | ) | | | (2.7 | ) | | | (4.2 | ) | Accounts payable | | | 19.9 | | | | (9.9 | ) | | | (2.4 | ) | Accrued compensation and employee benefits | | | (6.5 | ) | | | 0.8 | | | | (5.3 | ) | Other assets | | | (2.5 | ) | | | (14.5 | ) | | | (24.5 | ) | Other liabilities | | | (18.2 | ) | | | (5.6 | ) | | | (4.5 | ) | Net cash provided by operating activities | | | 41.6 | | | | 72.4 | | | | 63.5 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Acquisitions – net of cash acquired | | | (364.2 | ) | | | (1.4 | ) | | | - | | Expenditures for property, plant and equipment | | | (64.4 | ) | | | (62.8 | ) | | | (58.3 | ) | Insurance proceeds from Airedale fire | | | 3.0 | | | | 27.4 | | | | 12.2 | | Costs to replace building and equipment damaged in Airedale fire | | | (1.0 | ) | | | (41.7 | ) | | | (16.7 | ) | Proceeds from dispositions of assets | | | 5.7 | | | | 0.4 | | | | 7.6 | | Purchases of short-term investments | | | (3.5 | ) | | | (2.7 | ) | | | (5.2 | ) | Proceeds from maturities of short-term investments | | | 2.2 | | | | 2.1 | | | | 2.4 | | Other – net | | | - | | | | 0.9 | | | | 0.8 | | Net cash used for investing activities | | | (422.2 | ) | | | (77.8 | ) | | | (57.2 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 559.1 | | | | 38.0 | | | | 36.4 | | Repayments of debt | | | (202.4 | ) | | | (27.1 | ) | | | (50.9 | ) | Financing fees paid | | | (8.7 | ) | | | - | | | | (0.1 | ) | Purchases of treasury stock under share repurchase program | | | - | | | | (6.9 | ) | | | - | | Dividend paid to noncontrolling interest | | | - | | | | (0.9 | ) | | | - | | Other – net | | | (0.4 | ) | | | (0.4 | ) | | | - | | Net cash provided by (used for) financing activities | | | 347.6 | | | | 2.7 | | | | (14.6 | ) | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (1.7 | ) | | | 1.1 | | | | (8.4 | ) | Net decrease in cash and cash equivalents | | | (34.7 | ) | | | (1.6 | ) | | | (16.7 | ) | Cash and cash equivalents - beginning of year | | | 68.9 | | | | 70.5 | | | | 87.2 | | Cash and cash equivalents - end of year | | $ | 34.2 | | | $ | 68.9 | | | $ | 70.5 | |
| | 2019 | | | 2018 | | | 2017 | | Cash flows from operating activities: | | | | | | | | | | Net earnings | | $ | 85.9 | | | $ | 23.8 | | | $ | 14.9 | | Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 76.9 | | | | 76.7 | | | | 58.3 | | Loss (gain) on sale of assets | | | 1.7 | | | | - | | | | (2.0 | ) | Impairment charges | | | 0.4 | | | | 2.5 | | | | - | | Stock-based compensation expense | | | 7.9 | | | | 9.5 | | | | 7.4 | | Deferred income taxes | | | (4.4 | ) | | | 12.1 | | | | (4.6 | ) | Other – net | | | 5.3 | | | | 9.0 | | | | 3.9 | | Changes in operating assets and liabilities, excluding acquisition: | | | | | | | | | | | | | Trade accounts receivable | | | (15.3 | ) | | | (26.1 | ) | | | (25.7 | ) | Inventories | | | (22.0 | ) | | | (12.5 | ) | | | (3.3 | ) | Accounts payable | | | 16.6 | | | | 25.2 | | | | 19.9 | | Accrued compensation and employee benefits | | | (10.1 | ) | | | 16.4 | | | | (6.5 | ) | Other assets | | | (11.8 | ) | | | (5.0 | ) | | | (2.4 | ) | Other liabilities | | | (27.8 | ) | | | (7.4 | ) | | | (18.2 | ) | Net cash provided by operating activities | | | 103.3 | | | | 124.2 | | | | 41.7 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (73.9 | ) | | | (71.0 | ) | | | (64.4 | ) | Acquisition – net of cash acquired | | | - | | | | - | | | | (364.2 | ) | Proceeds from dispositions of assets | | | 0.3 | | | | 0.3 | | | | 5.7 | | Proceeds from maturities of short-term investments | | | 4.9 | | | | 4.8 | | | | 2.2 | | Purchases of short-term investments | | | (3.8 | ) | | | (5.5 | ) | | | (3.5 | ) | Other – net | | | (0.3 | ) | | | (0.2 | ) | | | 2.0 | | Net cash used for investing activities | | | (72.8 | ) | | | (71.6 | ) | | | (422.2 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Borrowings of debt | | | 231.2 | | | | 171.0 | | | | 559.1 | | Repayments of debt | | | (251.9 | ) | | | (222.9 | ) | | | (202.4 | ) | Dividend paid to noncontrolling interest | | | (1.8 | ) | | | (0.9 | ) | | | - | | Financing fees paid | | | - | | | | - | | | | (8.7 | ) | Other – net | | | (3.4 | ) | | | 2.7 | | | | (0.4 | ) | Net cash (used for) provided by financing activities | | | (25.9 | ) | | | (50.1 | ) | | | 347.6 | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (2.7 | ) | | | 3.0 | | | | (1.7 | ) | Net increase (decrease) in cash, cash equivalents and restricted cash | | | 1.9 | | | | 5.5 | | | | (34.6 | ) | Cash, cash equivalents and restricted cash - beginning of year | | | 40.3 | | | | 34.8 | | | | 69.4 | | Cash, cash equivalents and restricted cash - end of year | | $ | 42.2 | | | $ | 40.3 | | | $ | 34.8 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY For the years ended March 31, 2017, 20162019, 2018 and 20152017 (In millions)
| | | | | Additional paid-in capital | | | Retained earnings | | | Accumulated other comprehensive loss | | | Treasury stock, at cost | | | Non- controlling interest | | | Total | | | Common stock | Shares | | | Amount | 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 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 14.2 | | | | - | | | | - | | | | - | | | | 14.2 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | (7.6 | ) | Shares issued for acquisition of Luvata HTS | | | 2.2 | | | | 1.4 | | | | 22.9 | | | | - | | | | - | | | | - | | | | - | | | | 24.3 | | Stock options and awards including related tax benefits | | | 0.6 | | | | 0.4 | | | | 0.5 | | | | - | | | | - | | | | - | | | | - | | | | 0.9 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.4 | ) | | | - | | | | (1.4 | ) | Stock-based compensation expense | | | - | | | | - | | | | 7.4 | | | | - | | | | - | | | | - | | | | - | | | | 7.4 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.7 | | | | 0.7 | | Balance, March 31, 2017 | | | 51.8 | | | $ | 32.4 | | | $ | 216.4 | | | $ | 372.4 | | | $ | (181.8 | ) | | $ | (25.4 | ) | | $ | 7.2 | | | $ | 421.2 | |
| |
Common stock | | | Additional paid-in capital | | | Retained earnings | | | Accumulated other comprehensive loss | | | Treasury stock, at cost | | | Non-controlling interest | | | Total | | Shares | | | Amount | Balance, March 31, 2016 | | | 49.0 | | | $ | 30.6 | | | $ | 185.6 | | | $ | 358.2 | | | $ | (174.2 | ) | | $ | (24.0 | ) | | $ | 6.5 | | | $ | 382.7 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 14.2 | | | | - | | | | - | | | | - | | | | 14.2 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | (7.6 | ) | Shares issued for acquisition of Luvata HTS | | | 2.2 | | | | 1.4 | | | | 22.9 | | | | - | | | | - | | | | - | | | | - | | | | 24.3 | | Stock options and awards including related tax benefits | | | 0.6 | | | | 0.4 | | | | 0.5 | | | | - | | | | - | | | | - | | | | - | | | | 0.9 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.4 | ) | | | - | | | | (1.4 | ) | Stock-based compensation expense | | | - | | | | - | | | | 7.4 | | | | - | | | | - | | | | - | | | | - | | | | 7.4 | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.7 | | | | 0.7 | | Balance, March 31, 2017 | | | 51.8 | | | | 32.4 | | | | 216.4 | | | | 372.4 | | | | (181.8 | ) | | | (25.4 | ) | | | 7.2 | | | | 421.2 | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 22.2 | | | | - | | | | - | | | | - | | | | 22.2 | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 41.5 | | | | - | | | | 0.5 | | | | 42.0 | | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 3.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.2 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.7 | ) | | | - | | | | (1.7 | ) | Adoption of new accounting guidance (Note 1) | | | - | | | | - | | | | 0.1 | | | | 0.3 | | | | - | | | | - | | | | - | | | | 0.4 | | Stock-based compensation expense | | | - | | | | - | | | | 9.5 | | | | - | | | | - | | | | - | | | | - | | | | 9.5 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.6 | | | | 1.6 | | Balance, March 31, 2018 | | | 52.3 | | | | 32.7 | | | | 229.9 | | | | 394.9 | | | | (140.3 | ) | | | (27.1 | ) | | | 8.4 | | | | 498.5 | | Adoption of new accounting guidance (Note 1) | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | - | | | | (7.6 | ) | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 84.8 | | | | - | | | | - | | | | - | | | | 84.8 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | (0.5 | ) | | | (38.6 | ) | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 0.8 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4.3 | ) | | | - | | | | (4.3 | ) | Stock-based compensation expense | | | - | | | | - | | | | 7.9 | | | | - | | | | - | | | | - | | | | - | | | | 7.9 | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.8 | ) | | | (1.8 | ) | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | | | 1.1 | | Balance, March 31, 2019 | | | 52.8 | | | $ | 33.0 | | | $ | 238.6 | | | $ | 472.1 | | | $ | (178.4 | ) | | $ | (31.4 | ) | | $ | 7.2 | | | $ | 541.1 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 1: Note 1: | Significant Accounting Policies |
Nature of operations: Modine Manufacturing Company (“Modine” or the “Company”) specializes in providing innovative thermal management solutions to diversified global markets and customers. The Company is a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway original equipment manufacturer (“OEM”) vehicular applications. In addition, the Company is a global leader in thermal management technology and solutions for sale into a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. The Company’s primary product groups include i) powertrain cooling and engine cooling; ii) coils, coolers, and coatings; and iii) heating, ventilation and air conditioning.
Sale of AIAC Air Conditioning South Africa (Pty) Ltd.: During fiscal 2019, the Company completed the sale of its AIAC Air Conditioning South Africa (Pty) Ltd. business, which was reported within the Building HVAC Systems segment, for a selling price of $0.5 million. As a result of this transaction, the Company recorded a loss of $1.7 million, which included the write-off of accumulated foreign currency translation losses of $0.8 million. The Company reported this loss on the loss on sale of assets line of the consolidated statements of operations. Annual net sales attributable to this disposed business were less than $2.0 million.
Acquisition of Luvata HTS: On November 30, 2016, the Company completed the acquisition of 100%100 percent of the shares of multiple companies held by Luvata Heat Transfer Solutions II AB, a company incorporated in Sweden. Combined, these acquired companies represented the Luvata Heat Transfer Solutions (“Luvata HTS”) business. See Note 2 for additional information.
Airedale facility fire: In September 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 (“BHVAC”) segment. There were no injuries caused by the fire. The Rawdon facility, which was 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 Company suspended operations at the Rawdon site as a result of the fire; however, it transferred operations to temporary facilities while it rebuilt the leased facility. The Company completed the reconstruction and relocation to the Rawdon facility in fiscal 2016. In fiscal 2016, the Company recorded a $9.5 million gain within other income related to an insurance settlement for equipment losses. This gain represented the replacement assets’ cost in excess of the carrying value of the equipment at the time they were destroyed by the fire.
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 earnings. The Company includes Modine’s share of the affiliate’s net earnings in other income and expense. See Note 1113 for additional information.
Discontinued operations: Revenue recognition: The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, which may be at a point in time or over time. The majority of the Company’s revenue is recognized at a point in time, based upon shipment terms. A portion of the Company’s revenue is recognized over time, based upon estimated progress towards satisfaction of the contractual performance obligations. See Note 3 for additional information.
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its customers in cost of sales, and related amounts billed to these customers in net sales.
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 records an allowance for doubtful accounts for estimated uncollectible receivables based upon historical experience or specific customer economic data. The Company recorded an allowance for doubtful accounts of $1.6 million and $2.3 million at March 31, 2019 and 2018, respectively, representing its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable, without recourse, to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During fiscal 2009,2019, 2018, and 2017, the Company sold its Electronics Cooling business. The buyer financed a portion$85.1 million, $65.8 million, and $55.4 million, respectively, of the selling price by issuing promissory notes payableaccounts receivable to Modine.accelerate cash receipts. 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,2019, 2018, and 2017, the Company recorded a gainloss on the sale of $0.9accounts receivable of $0.6 million, ($0.6$0.4 million, after income taxes) during fiscal 2015.and $0.3 million, respectively, in the consolidated statements of operations.
Warranty: The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. The Company records warranty expense, within cost of sales, based upon historical and current claims data or based upon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 16 for additional information.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 2019 and 2018, Company-owned tooling totaled $24.2 million and $22.4 million, respectively. In certain instances, tooling is customer-owned. At the time customer-owned tooling is completed and customer acceptance is obtained, the Company records tooling revenue and related production costs within net sales and cost of sales, respectively, in the consolidated statements of operations. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 2019 and 2018, cost reimbursement receivables related to customer-owned tooling totaled $11.6 million and $10.7 million, respectively.
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 additional information.
Research and development: The Company expenses research and development costs as incurred within selling, general and administrative (“SG&A”) expenses. During fiscal 2019, 2018, and 2017, research and development costs charged to operations totaled $69.8 million, $65.8 million, and $64.4 million, respectively.
Translation of foreign currencies: The Company translates assets and liabilities of foreign subsidiaries and equity investments into U.S. dollars at the period-end exchange rates, and translates income and expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders’ 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 forward contracts to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency-denominated assets and liabilities as well as forecasted transactions. The Company designates certain derivative financial instruments as cash flow hedges for accounting purposes. These instruments are used to manage financial risks and are not speculative. See Note 19 for additional information.
Income taxes: The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. See Note 8 for additional information.
Earnings per share: The Company calculates basic earnings per share based upon the weighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes potential common shares if their inclusion would have an anti-dilutive effect. Certain outstanding restricted stock awards provide recipients with a non-forfeitable right to receive dividends declared by the Company. Therefore, these restricted stock awards are included in computing earnings per share pursuant to the two-class method. See Note 9 for additional information.
Cash and cash equivalents: The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the Company reports the amount of those checks within accounts payable in the consolidated balance sheets.
Short-term investments: The Company invests in time deposits with original maturities of more than three months but no more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2019 and 2018, the Company’s short-term investments totaled $4.3 million and $5.7 million, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost and net realizable value.
Property, plant and equipment: The Company records property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful lives of the assets. The Company charges maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations. Capital expenditures of $17.9 million, $15.8 million, and $12.5 million were accrued within accounts payable at March 31, 2019, 2018, and 2017, respectively.
Goodwill: The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company performed its goodwill impairment test as of March 31, 2019, which did not result in an impairment charge. See Note 15 for additional information.
Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the asset exceeds its fair value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets.
Assets held for sale: The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the asset for sale at a reasonable price in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell, within other noncurrent assets. The Company ceases to record depreciation expense at the time of designation as held for sale. The carrying value of assets held for sale totaled $5.0$1.1 million and $8.5$1.7 million at March 31, 20172019 and 2016,2018, respectively.
Revenue recognition: The Company recognizes sales revenue, including agreed upon commodity 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 upon 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 2017 and 2016, Company-owned tooling totaled $20.8 million and $18.8 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. At the time customer-owned tooling is completed and customer acceptance is obtained, the Company records tooling revenue and related production costs within net sales and cost of sales, respectively, in its consolidated statements of operations. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 2017 and 2016, cost reimbursement receivables related to customer-owned tooling totaled $7.8 million and $8.5 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, within cost of sales, based upon historical and current claims data or based upon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 14 for additional information.
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its customers in cost of sales, and related amounts billed to these customers in net sales.
Research and development: The Company expenses research and development costs as incurred within selling, general and administrative (“SG&A”) expenses. For the years ended March 31, 2017, 2016, and 2015, research and development costs charged to operations totaled $64.4 million, $61.1 million, and $62.0 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-denominated assets and liabilities. These instruments are used to manage financial risks and are not speculative. See Note 17 for additional information.
Income taxes: The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. See Note 7 for additional information.
Earnings per share: The Company calculates basic earnings per share based upon the weighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. 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 8 for additional information.
Cash and cash equivalents: The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the Company reports the amount of those un-presented checks within accounts payable in the consolidated balance sheets.
Short-term investments: The Company invests in time deposits with original maturities of more than three months but no more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2017 and 2016, the Company’s short-term investments totaled $4.7 million and $3.3 million, respectively.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Deferred compensation trusts: The Company maintains deferred compensation trusts to fund future obligations under its non-qualified deferred compensation plan.plans. The trust’strusts’ investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Trade accounts receivable: The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company recorded an allowance for doubtful accounts of $1.4 million and $0.5 million at March 31, 2017 and 2016, respectively, representing its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable, without recourse, to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During the years ended March 31, 2017, 2016, and 2015, the Company sold $55.4 million, $71.3 million, and $87.0 million, respectively, of accounts receivable to accelerate cash receipts. During each of the years ended March 31, 2017, 2016, and 2015, the Company recorded a loss on the sale of accounts receivables of $0.3 million in the consolidated statements of operations.
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost and net realizable value.
Property, plant and equipment: The Company records property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful lives of the assets. The Company charges maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations.
Goodwill: The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company performed its goodwill impairment test as of March 31, 2017, which did not result in an impairment charge. See Note 13 for additional information.
Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the asset exceeds its fair value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets.
Environmental liabilities: The Company records liabilities for environmental assessments and remediation efforts in the period in which its responsibility is probable and the costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is probable. To the extent that the required remediation procedures change, or additional contamination is identified, the Company’s estimated environmental liabilities may also change. See Note 18 for additional information.
Self-insurance reserves: The Company retains a portion of the financial risk for variouscertain insurance coverage, including property, general liability, workers compensation, and employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to operations. The Company reviews and updates the amount of its insurance-related reserves on a quarterly basis.
Stock-based compensation:Environmental liabilities: The Company recognizes stock-based compensation usingrecords liabilities for environmental assessments and remediation activities in the fair value method. Accordingly, compensation expense for stock options, restricted stockperiod in which its responsibility is probable and performance-based stock awardsthe costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is calculated based uponprobable. To the fair value ofextent that the instruments atrequired remediation procedures change, or additional contamination is identified, the time of grant, and is recognized as expense over the respective vesting periods.Company’s estimated environmental liabilities may also change. See Note 420 for additional information.
Supplemental cash flow information:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Interest paid | | $ | 22.3 | | | $ | 23.4 | | | $ | 15.4 | | Income taxes paid | | | 22.2 | | | | 20.1 | | | | 12.7 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
New Accounting Guidance:
Pension costsStock-based Compensation
In March 2017,2016, the Financial Accounting Standards Board (“FASB”) issued new guidance related to the income statement presentationsimplify several aspects of net periodic pension costs and net periodic postretirement benefit costs. This guidance requires companies to continue to present the service cost component of net benefit cost within the same financial statement line item as other employee compensation costs; however, other components of net benefit costs are required to be presented outside of results from operations. This will not impact consolidated net earnings. Early adoption is permitted, and theaccounting for stock-based payment transactions. The Company plans to adoptadopted this guidance for thebeginning in its first quarter of fiscal 2018. The Company will recast prior periodselected to conformaccount for forfeitures in the period in which they occur and recorded a cumulative-effect adjustment to the new income statement presentation. As a result,equity. In addition, the Company expectsprospectively adopted the guidance requiring all excess tax benefits or deficiencies to reclassify net benefit costs related to its pension plans totaling approximately $3.0 million in fiscal 2017 ($1.0 million from cost of sales and $2.0 million from SG&A expenses) and $45.0 million in fiscal 2016 ($10.0 million from cost of sales and $35.0 million from SG&A expenses) to other income and expense. The fiscal 2016 net benefit costs included $42.1 million of pension settlement losses related to a completed voluntary lump-sum payout program; see Note 16 for additional information. In fiscal 2018, the Company expects to record approximately $3.0 to $4.0 million of net benefit costs within other income and expense.
Share-based compensation
In March 2016, the FASB issued new guidance to simplify several aspects of accounting for share-based payment transactions, including thebe recognized as income tax effects ofexpense or benefit when share-based payments, recognition of forfeitures, and presentation requirements in the statement of cash flows. This guidance is effective for the Company’s first quarter of fiscal 2018.awards are settled. The Company does not expect the adoptionprovisions of this new guidance willdid not have a material impact on itsthe Company’s consolidated financial statements
Leases
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance. Upon adoptionstatements. As a result of adopting this new guidance, the Company will be requiredrecorded a $0.4 million increase to recognize most leases on its balance sheet. This guidance is effective for the Company’s first quarterboth deferred tax assets and equity as of fiscal 2020. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.April 1, 2017.
Revenue recognitionRecognition In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about revenue arising from contracts with customers. The Company adopted this new guidance is effective for the Company’s first quarter of fiscal 2019 and allows for either a full-retrospective or ausing the modified-retrospective transition method.
The Company is currently in the process of assessingassessed customer contracts and evaluatingevaluated contractual provisions that may result in a change inlight of the timing of revenue recognized in comparison with currentnew guidance. Under current guidance,Through its evaluation process, the Company generally recognizes revenue when products are shipped and riskidentified a limited number of loss has transferred to the customer. The Company is evaluating whether contractual provisions maycustomer contracts that provide an enforceable right to payment for its customized products, which may require revenue recognition prior to the product being shipped to the customer. In addition,As a result of its adoption of the new guidance, the Company is evaluating pricing provisions contained in certainrecorded an increase of its customer contracts$0.7 million to determine the appropriate timingretained earnings as of revenue recognition based uponApril 1, 2018, along with related balance sheet reclassifications. The increase to retained earnings represented $3.0 million of net sales that, had the new guidance.guidance been in effect, the Company would have recognized as of March 31, 2018. See Note 3 for additional information regarding revenue recognition.
Income Taxes: Intra-Entity Transfers of Assets Other than Inventory In October 2016, the FASB issued new guidance related to income tax accounting for intercompany asset transfers. This new guidance requires companies to recognize the income tax effects of intercompany asset transfers other than inventory at the transaction date. The income tax effects of these transfers were previously deferred. The Company continues to evaluate the impactadopted this new guidance for fiscal 2019 using the modified-retrospective transition method. Upon adoption, the Company recorded a decrease to retained earnings of $8.3 million as of April 1, 2018.
Statement of Cash Flows: Restricted Cash In November 2016, the FASB issued new guidance that requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending balances presented within the statement of cash flows. The Company adopted this new guidance for fiscal 2019 using the retrospective transition method. As a result, all prior period information has been recast to be comparable to the new presentation requirements. See Note 10 for information regarding the Company’s restricted cash.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income In February 2018, the FASB issued new guidance related to the accounting for certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from tax reform legislation that was enacted in the U.S. in December 2017. This guidance is effective for the Company as of April 1, 2019 and provides the option to reclassify stranded income tax effects to retained earnings. The Company has determined it will have onnot reclassify stranded income tax effects upon adoption, and therefore, this guidance will not impact its consolidated financial statements.
Supplemental cash flow information:Leases
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance and requires balance sheet recognition for most leases. The Company will adopt this guidance effective April 1, 2019 using a modified-retrospective transition method, under which it expects to elect not to adjust comparative periods. The Company intends to elect the package of practical expedients permitted under the new guidance, and, as a result, the Company has not reassessed the classification of existing leases or initial direct costs thereof, or whether existing contracts contain leases. In addition, the Company plans to elect accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components. The Company does not intend to elect the hindsight practical expedient.
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Interest paid | | $ | 15.4 | | | $ | 10.7 | | | $ | 10.3 | | Income taxes paid | | | 12.7 | | | | 10.1 | | | | 15.9 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 2: AcquisitionsThe Company has completed its assessment of its global lease portfolio and is in the process of finalizing the testing of its new lease accounting software solution and implementing new processes and controls to account for leases in accordance with the new guidance. The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. In addition, the Company leases certain manufacturing and IT equipment and vehicles. Upon adoption of this new guidance, the Company expects to recognize $60.0 to $70.0 million of right-of-use assets and corresponding lease liabilities on its consolidated balance sheet. The Company does not expect the adoption will have a material impact on its consolidated statements of operations or consolidated statements of cash flows.
The cumulative effects on the Company’s consolidated balance sheet, as of April 1, 2018, resulting from the adoption of new accounting guidance were as follows:
| | | | | Adjustments Due to New Accounting Guidance | | | | | | | Balance as of March 31, 2018 | | | Revenue Recognition | | | Intra-entity Transfers of Assets | | | Balance as of April 1, 2018 | | ASSETS | | | | | | | | | | | | | Inventories | | $ | 191.3 | | | $ | (2.0 | ) | | $ | - | | | $ | 189.3 | | Other current assets | | | 70.1 | | | | 3.0 | | | | (8.3 | ) | | | 64.8 | | Deferred income taxes | | | 96.9 | | | | (0.2 | ) | | | - | | | | 96.7 | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | Deferred income taxes | | $ | 9.9 | | | $ | 0.1 | | | $ | - | | | $ | 10.0 | | Retained earnings | | | 394.9 | | | | 0.7 | | | | (8.3 | ) | | | 387.3 | |
Luvata HTS
On November 30, 2016, the Company completed its acquisition of a 100%100 percent ownership interest in the Luvata HTS business for consideration totaling $415.6 million ($388.2 million, net of cash acquired). The purchase price included 2.2 million Modine common shares. The Company estimated the fair value of the common shares, to bevalued at $24.3 million atas of November 30, 2016, which reflects restrictions on the sale of the shares for a minimum of one year. Now operating2016. Operating as Modine’s Commercial and Industrial Solutions (“CIS”) segment, this business is a leading global supplier of coils, coolers and coatings to the heating, ventilation, air conditioning, and refrigeration (“HVAC&R”) industry. CIS’s products coverSee Note 22 for a broad range of heat exchanger coils, commercial refrigeration and industrial coolers, and anti-corrosion coating solutions. The Company’s acquisition of Luvata HTS addressed, in particular, both the “Diversify” and “Grow” commitments of its transformational Strengthen, Diversify and Grow strategy launched in fiscal 2016. This acquisition provided Modine with an expanded industrial business portfolio, broader customer base, and reduced cyclical exposure. For the year ended March 31, 2017, the Company included $177.7 millionsummary of net sales and operating income of $7.5 million within its consolidated statement of operations attributable to four months ofreported by the CIS operations. During the year ended March 31,segment. In fiscal 2018 and 2017, the Company recorded $4.3 million and $14.8 million, respectively, of costs incurred directly related to the acquisition and integration of Luvata HTS as SG&A expenses within the consolidated statementstatements of operations. TheseThe fiscal 2018 costs principallyprimarily consisted of fees for i) transaction advisors, ii)incremental costs associated with integration activities, including legal accounting, and otheraccounting professional services and iii)severance expenses. The fiscal 2017 costs primarily consisted of transaction advisory and due diligence costs and incremental costs directly associated with integration activities.
To fund a significant portion of the Luvata HTS purchase price, In addition, during fiscal 2017, the Company entered into new credit agreements in November 2016. See Note 15 for additional information.charged $4.3 million to cost of sales related to inventory that it wrote-up to fair value upon acquisition.
The Company completed its accounting for the acquisition of Luvata HTS during fiscal 2018 and allocated the total purchase price of Luvata HTS$415.6 million to the identifiable tangible and intangible assets acquired and the liabilities assumed based upon their estimated fair values as of the acquisition date. The Company based the estimated fair values primarily upon third-party valuations using assumptions developed by management and other information compiled by management, including, but not limited to, future expected cash flows. The Company allocated the excess of the purchase price over the net assets recognized to goodwill in the amount of $150.6$151.9 million, none of which the Company expects to beis deductible for income tax purposes. Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition includes Luvata HTS’s workforce and anticipated future cost and revenue synergies.
At the time the March 31, 2017 financial statements were finalized, the Company was awaiting additional information to determine the fair value of certain assets acquired and liabilities assumed and therefore, the allocation of purchase price is considered preliminary. The Company expects to complete its evaluation of these matters in the first or second quarter of fiscal 2018. These matters primarily relate to income tax reserves and contingent liabilities, including reserves for environmental, legal, product warranty, and trade compliance matters.
The Company’s preliminary allocation of the purchase price for its acquisition of Luvata HTS is as follows:
Cash and cash equivalents | | $ | 27.4 | | Trade accounts receivable | | | 86.3 | | Inventories | | | 55.7 | | Property, plant and equipment | | | 120.6 | | Intangible assets | | | 130.2 | | Goodwill | | | 150.6 | | Other assets | | | 38.6 | | Accounts payable | | | (73.7 | ) | Accrued compensation and employee benefits | | | (24.3 | ) | Deferred income taxes | | | (39.3 | ) | Pensions | | | (14.3 | ) | Other liabilities | | | (42.2 | ) | Purchase price | | $ | 415.6 | |
Below is a summary of the methodologies and significant assumptions used in estimating the fair value of certain classes of acquired assets. The fair values were primarily based upon significant inputs that are not observable in the market and thus represent Level 3 measurements. See Note 3 for information regarding Level 3 fair value measurements.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Inventories: The Company determined the fair value of acquired inventory by estimating the selling priceCompany’s allocation of the respective finished goods, less an estimatepurchase price for its acquisition of costs to be incurred to sell the inventory and to complete the work-in-process inventory, if applicable. For raw materials acquired, the Company estimated the cost of replacement. As a result, the Company wrote-up acquired inventory by $4.3 million and subsequently charged this write-up to cost of salesLuvata HTS was as the underlying inventory was sold in the third and fourth quarters of fiscal 2017.
Property, plant and equipment: The Company valued property, plant and equipment primarily utilizing the cost approach and also utilized the market approach in valuing acquired land and buildings. The cost approach considers the amount required to replace an asset by constructing or purchasing a new asset with similar utility and adjusting the value in consideration of depreciation as of the acquisition date. The cost approach relies on assumptions regarding replacement costs and the age and estimated remaining useful lives of the assets. The fair value of property, plant and equipment will be recognized as depreciation expense in our results of operations over the expected remaining useful lives of the individual assets.follows:
Intangible assets: The Company determined the fair value of acquired intangible assets by using variations of the income approach. These methods generally forecast expected future net cash flows discretely associated with each of the identified intangible assets and adjust the forecasts to present value by applying a discount rate intended to reflect risk factors associated with the cash flows and the time value of money. Acquired intangible assets were as follows:
| | Gross Carrying Value | | Weighted- Average Useful Life | Customer relationships | | $ | 58.4 | | 17 years | Trade names | | | 50.1 | | 20 years | Acquired technology | | | 21.7 | | 12 years | Total intangible assets acquired | | $ | 130.2 | | |
Customer relationships, for valuation purposes, represent the estimated fair value of Luvata HTS’s business relationship with existing customers, and were calculated by projecting the future after-tax cash flows from these customers, including the right to deploy and market additional products to them. The Company forecasted anticipated earnings from existing customers using recent years’ sales levels and considering a customer attrition rate based upon historical customer revenue information.
The Company determined the value of acquired trade names using the relief-from-royalty method, a variation of the income approach, which applies an assumed royalty rate to revenue expected to be derived under the acquired trade names. The fair value was estimated to be the present value of the royalties saved because the Company owns the trade names.
The Company also used the relief-from royalty method for its valuation of acquired technology, which largely relates to the design of mechanical and electrical components. The Company considered factors including the estimated contribution of the technology to the overall profitability of the products and the awareness level of the technology and its position in the market.
Cash and cash equivalents | | $ | 27.4 | | Trade accounts receivable | | | 86.1 | | Inventories | | | 55.0 | | Property, plant and equipment | | | 120.4 | | Intangible assets | | | 130.2 | | Goodwill | | | 151.9 | | Other assets | | | 39.1 | | Accounts payable | | | (73.7 | ) | Accrued compensation and employee benefits | | | (24.3 | ) | Deferred income taxes | | | (39.5 | ) | Pensions | | | (14.3 | ) | Other liabilities | | | (42.7 | ) | Purchase price | | $ | 415.6 | |
The following unaudited supplemental pro forma information presents the Company’s consolidated results of operations as though the acquisition of Luvata HTS had occurred at the beginning of fiscal 2016. This pro forma financial information is presented for illustrative purposes only and is not considered to be indicative of the operating results that would have been achieved had the acquisition been completed as of the date indicated or the operating results that may be obtained in the future.indicated.
| | Years ended March 31, | | | | 2017 | | | 2016 | | Net sales | | $ | 1,881.6 | | | $ | 1,871.9 | | Net earnings attributable to Modine | | | 35.8 | | | | 1.5 | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | Basic | | $ | 0.72 | | | $ | 0.03 | | Diluted | | | 0.71 | | | | 0.03 | |
| | Year ended March 31, 2017 | | Net sales | | $ | 1,881.6 | | Net earnings attributable to Modine | | | 35.8 | | Net earnings per share attributable to Modine shareholders: | | | | | Basic | | $ | 0.72 | | Diluted | | | 0.71 | |
The supplemental pro forma financial information includes adjustments for: (i) annual amortization and depreciation expense totaling approximately $13.0 million for acquired tangible and intangible assets, (ii) estimated annual interest expense of approximately $14.0 million resulting from acquisition-related borrowings, and (iii) the estimated income tax impacts related to the pro forma adjustments, considering the statutory tax rates within the applicable jurisdictions. In addition, the pro forma financial information assumes that both $8.6 million of acquisition-related transaction costs, not including costs for integration-related activities, and $4.3 million of inventory purchase accounting adjustments were incurred during fiscal 2016. The pro forma financial information does not reflect achieved or expected cost or revenue synergies.
Note 3: | Revenue Recognition |
Effective April 1, 2018, the Company adopted new revenue recognition accounting guidance using the modified-retrospective transition method and, as a result, recorded a cumulative-effect adjustment to increase retained earnings by $0.7 million. The Company’s consolidated financial statements for the fiscal year ended March 31, 2019 reflect the adoption of this new guidance; however, the comparable prior-year periods have not been recast. See Note 1 for additional information regarding the adjustments to the Company’s consolidated balance sheet as of April 1, 2018.
The Company generates revenue from selling innovative thermal management products and solutions to diversified global markets and customers. The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, which may be at a point in time or over time. The majority of the Company’s revenue is recognized at a point in time, based upon shipment terms. The Company records an allowance for doubtful accounts for estimated uncollectible receivables and accrues for estimated warranty costs at the time of sale. These estimates are based upon historical experience, current business trends, and current economic conditions. The Company accounts for shipping and handling activities as fulfilment costs rather than separate performance obligations, and records shipping and handling costs in cost of sales and related amounts billed to customers in net sales. The Company establishes payment terms with its customers based upon industry and regional practices, which typically do not exceed 90 days. As the Company expects to receive payment from its customers within one year from the time of sale, it disregards the effects of the time value of money in its determination of the transaction price. The Company has not disclosed the value of unsatisfied performance obligations because the revenue associated with customer contracts for which the original expected performance period is greater than one year is immaterial.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a description of the Company’s principal revenue-generating activities:
Vehicular Thermal Solutions (“VTS”) The VTS segment principally generates revenue from providing engineered heat transfer systems and components for use in on- and off-highway original equipment. This segment provides powertrain and engine cooling products, including, but not limited to, radiators, charge air coolers, condensers, oil coolers, EGR coolers, and fuel coolers, to original equipment manufacturers (“OEMs”) in the automotive, commercial vehicle, and off-highway markets in the Americas, Europe, and Asia regions. In addition, the VTS segment designs customer-owned tooling for OEMs and also serves Brazil’s automotive and commercial vehicle aftermarkets.
While the VTS segment provides customized production and service parts to customers under multi-year programs, these programs typically do not contain contractually-guaranteed volumes to be purchased by the customer. As a result, individual purchase orders typically represent the quantities ordered by the customer. With the exception of a small number of VTS customers, the terms within the customer agreement, purchase order, or customer-owned tooling contract do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the VTS segment recognizes revenue primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
In regard to VTS customers with contractual cancellation terms that provide an enforceable right to payment for performance completed to date, the Company recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The VTS segment measures progress by evaluating the production status of ordered products not yet shipped to the customer.
For certain customer programs, the Company agrees to provide annual price reductions based upon contract terms. For these scheduled price reductions, the Company evaluates whether the provisions represent a material right to the customer, and if so, defers associated revenue as a result.
At times, the Company makes up-front incentive payments to certain customers related to future sales under multi-year programs. The Company capitalizes these incentive payments, which it expects to recover through future sales, and amortizes the assets as a reduction to revenue when the related products are sold to customers.
Commercial and Industrial Solutions (“CIS”) The CIS segment principally generates revenue from providing thermal management products, including customized coils and coolers, to the heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets in North America, Europe, and Asia. In addition, the segment applies corrosion protection solutions, which are referred to as coatings, to heat-transfer equipment.
For the sale of coils and coolers, individual customer purchase orders generally represent the Company’s contract with its customers. With the exception of a small number of customers, the applicable customer contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the CIS segment recognizes revenue for its sale of coils and coolers primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For both sales to customers whose contract cancellation terms provide an enforceable right to payment and sales from the coatings businesses, in which the customers control the heat-transfer equipment being enhanced by the coating application, the CIS segment recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The segment measures progress by evaluating the production status towards completion of ordered products or services not yet shipped to its customers.
Building HVAC Systems (“BHVAC”) The BHVAC segment principally generates revenue from providing a variety of heating, ventilating, and air conditioning products, primarily for commercial buildings and related applications in North America and the U.K., as well as mainland Europe and the Middle East.
Heating products are manufactured in the U.S. and are generally sold to independent distributors, who in turn market the heating products to end customers. Because these products are sold to many different customers without contractual or practical limitations, the BHVAC segment recognizes revenue at the time control is transferred to the customer, generally the independent distributor, based upon shipping terms, which is generally upon shipment.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Ventilation and air conditioning products are highly-specified to a customer’s needs; however, the underlying sales contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the BHVAC segment recognizes revenue for these products at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
Disaggregation of Revenue The table below presents revenue to external customers for each of the Company’s business segments by primary end market, by geographic location and based upon the timing of revenue recognition:
| | Year ended March 31, 2019 | | | | VTS | | | CIS | | | BHVAC | | | Segment Total | | Primary end market: | | | | | | | | | | | | | Automotive | | $ | 542.8 | | | $ | - | | | $ | - | | | $ | 542.8 | | Commercial vehicle | | | 387.6 | | | | - | | | | - | | | | 387.6 | | Off-highway | | | 314.1 | | | | - | | | | - | | | | 314.1 | | Commercial HVAC&R | | | - | | | | 506.3 | | | | 167.7 | | | | 674.0 | | Data center cooling | | | - | | | | 145.7 | | | | 41.3 | | | | 187.0 | | Industrial cooling | | | - | | | | 47.8 | | | | - | | | | 47.8 | | Other | | | 107.2 | | | | 7.8 | | | | 3.4 | | | | 118.4 | | Net sales | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | | | | Americas | | $ | 613.7 | | | $ | 413.6 | | | $ | 124.9 | | | $ | 1,152.2 | | Europe | | | 538.2 | | | | 244.8 | | | | 87.5 | | | | 870.5 | | Asia | | | 199.8 | | | | 49.2 | | | | - | | | | 249.0 | | Net sales | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 1,308.5 | | | $ | 571.1 | | | $ | 212.4 | | | $ | 2,092.0 | | Products transferred over time | | | 43.2 | | | | 136.5 | | | | - | | | | 179.7 | | Net sales | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | |
Contract Balances Contract assets and contract liabilities from contracts with customers were as follows:
| | March 31, 2019 | | | March 31, 2018 | | Contract assets | | $ | 22.6 | | | $ | 13.5 | | Contract liabilities | | | 4.0 | | | | 6.8 | |
Contract assets, included within other current assets in the consolidated balance sheets, primarily consist of capitalized costs related to customer-owned tooling contracts, wherein the customer has guaranteed reimbursement, and assets recorded for revenue recognized over time, which represent the Company’s rights to consideration for work completed but not yet billed. The $9.1 million increase in contract assets during fiscal 2019 was primarily related to contract assets totaling $7.4 million as of March 31, 2019 for revenue recognized over time, which were recorded as a result of the Company’s adoption of the new revenue recognition accounting guidance, and customer-owned tooling contracts, under which more costs were capitalized than reimbursed.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $2.8 million decrease in contract liabilities during fiscal 2019 was primarily due to the Company’s satisfaction of performance obligations under customer contracts for which payment had been received in advance.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) Modine Puxin Thermal Systems (Jiangsu) Co. Ltd
On January 29, 2016,Impacts of Adopting New Accounting Guidance The impacts from the Company formed a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co. Ltd. of Yangzhou, China, of which it owns 67 percent, and the joint venture partner, Jiangsu Puxin Heat Exchange System Co., Ltd, owns 33 percent. This joint venture, which is reported in the Asia segment, expedited the Company’s introduction of stainless steel heat exchangers for the light-, medium-, and heavy-duty commercial vehicle markets in China. In fiscal 2016, the Company contributed $1.4 million of cash and equipment and other assets totaling $2.3 million. In fiscal 2017, the Company contributed $0.3 million of additional cash consideration after certain seller indemnification obligations under the agreement were satisfied. 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 activitiesadoption of the joint venture, and, therefore, the financial results of the joint venture are included innew revenue recognition guidance to the Company’s consolidated financial statements. The Company did not present pro forma financial information for this acquisition as the effect is not material to its resultsstatement of operations or financial position.for the year ended March 31, 2019 and its consolidated balance sheet as of March 31, 2019 were as follows:
| | Year ended March 31, 2019 | | | | As Reported | | | Impact of New Accounting Guidance | | | Results Without
Impact of New Accounting Guidance | | Net sales | | $ | 2,212.7 | | | $ | (4.4 | ) | | $ | 2,208.3 | | Net earnings attributable to Modine | | | 84.8 | | | | (2.0 | ) | | | 82.8 | | | | | | | | | | | | | | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | Basic | | $ | 1.67 | | | $ | (0.04 | ) | | $ | 1.63 | | Diluted | | | 1.65 | | | | (0.04 | ) | | | 1.61 | |
| | March 31, 2019 | | | | As Reported | | | Impact of New Accounting Guidance | | | Balances Without
Impact of New Accounting Guidance | | ASSETS | | | | | | | | | | Inventories | | $ | 200.7 | | | $ | 3.8 | | | $ | 204.5 | | Other current assets | | | 65.8 | | | | (7.4 | ) | | | 58.4 | | Deferred income taxes | | | 97.1 | | | | 0.6 | | | | 97.7 | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | Deferred income taxes | | $ | 8.2 | | | $ | (0.3 | ) | | $ | 7.9 | | Retained earnings | | | 472.1 | | | | (2.7 | ) | | | 469.4 | |
Note 3: Note 4: | Fair Value Measurements |
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
| · | Level 1 – Quoted prices for identical instruments in active markets. |
Level 1 – Quoted prices for identical instruments in active markets. | · | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. | · | Level 3 – Model-derived valuations in which one or more significant inputs are not observable. |
Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, and cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. The Company holds trading securities in deferred compensation trusts to fund obligations under certain non-qualified deferred compensation plans. The securities’ fair values, which are recorded as other noncurrent assets, are determined based upon 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 $5.0$6.0 million and $3.2$5.8 million atas of March 31, 20172019 and 2016,2018, respectively. The year-over-year increase primarily relates to a deferred compensation plan in the recently-acquired CIS segment. The fair value of the Company’s long-term debt is disclosed in Note 15.17.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2017 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 5.6 | | | $ | 5.6 | | Common stocks | | | 17.8 | | | | 2.0 | | | | 19.8 | | Corporate bonds | | | - | | | | 9.3 | | | | 9.3 | | Pooled equity funds | | | 56.8 | | | | - | | | | 56.8 | | Pooled fixed-income funds | | | 26.5 | | | | - | | | | 26.5 | | U.S. government and agency securities | | | - | | | | 18.7 | | | | 18.7 | | Other | | | 1.4 | | | | 1.4 | | | | 2.8 | | Fair value excluding investment measured at net asset value | | | 102.5 | | | | 37.0 | | | | 139.5 | | Investment measured at net asset value (a) | | | | | | | | | | | 8.7 | | Total Fair Value | | | | | | | | | | $ | 148.2 | | | | | | | | | | | | | | | | | 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 | | | | - | | | | 48.7 | | 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 | | Fair value excluding investment measured at net asset value | | | 99.1 | | | | 35.1 | | | | 134.2 | | Investment measured at net asset value (a) | | | | | | | | | | | 7.3 | | Total Fair Value | | | | | | | | | | $ | 141.5 | |
| | March 31, 2019 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 3.9 | | | $ | 3.9 | | Corporate bonds | | | - | | | | 9.4 | | | | 9.4 | | Pooled equity funds | | | 27.7 | | | | - | | | | 27.7 | | U.S. government and agency securities | | | - | | | | 12.3 | | | | 12.3 | | Other | | | 0.1 | | | | 0.9 | | | | 1.0 | | Fair value excluding investments measured at net asset value | | | 27.8 | | | | 26.5 | | | | 54.3 | | Investments measured at net asset value | | | | | | | | | | | 100.8 | | Total fair value | | | | | | | | | | $ | 155.1 | |
| (a) | As a practical expedient, the Company valued a collective trust fund using its net asset value per unit, and therefore, has not classified this investment within the fair value hierarchy. |
| | March 31, 2018 | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 11.4 | | | $ | 11.4 | | Common stocks | | | 9.4 | | | | 2.6 | | | | 12.0 | | Corporate bonds | | | - | | | | 9.7 | | | | 9.7 | | Pooled equity funds | | | 64.4 | | | | - | | | | 64.4 | | Pooled fixed-income funds | | | 27.3 | | | | - | | | | 27.3 | | U.S. government and agency securities | | | - | | | | 16.2 | | | | 16.2 | | Other | | | 0.2 | | | | 1.7 | | | | 1.9 | | Fair value excluding investment measured at net asset value | | | 101.3 | | | | 41.6 | | | | 142.9 | | Investment measured at net asset value | | | | | | | | | | | 14.8 | | Total fair value | | | | | | | | | | $ | 157.7 | |
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of common stocks, pooled equity funds and pooled fixed-income funds based upon quoted prices from active markets and classified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain common stocks, corporate bonds pooled equity funds and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 20172019 and 2016,2018, the Company held no Level 3 assets within its pension plans.
As a practical expedient, the Company valued certain investments, including pooled equity, fixed-income and real estate funds, using their net asset value (NAV) per unit, and therefore, has not classified these investments within the fair value hierarchy. The increase in investments valued at NAV in fiscal 2019 was associated with the Company’s revised target asset allocations for its U.S. pension plan; see Note 18 for additional information. The terms and conditions for redemptions vary for the investments valued at NAV. The real estate investment fund may be redeemed at any time with a 90-day notice period. Other investments valued at NAV do not have restrictive redemption frequency or notice period requirements. The Company does not intend to sell or otherwise dispose of these investments at prices different than the NAV per unit.
Note 4: Note 5: | Stock-Based Compensation |
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and other executives that consists of restricted stock andawards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors. The Company’s Board of Directors and the Officer Nomination and Compensation Committee, as applicable, have discretionary authority to set the terms of the awards of stockstock-based awards. Grants to employees during fiscal 2019 were issued under the Company’s Amended and Restated 20082017 Incentive Compensation Plan (“Plan”).Plan. At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2017,2019, approximately 1.62.7 million shares authorized under the 2017 Incentive Compensation Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $7.4$7.9 million, $4.9$9.5 million, and $4.0$7.4 million in fiscal 2017, 2016,2019, 2018, and 2015,2017, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Stock Options: The Company recorded $1.1$1.2 million, $0.9$1.2 million, and $0.9$1.1 million of compensation expense related to stock options in fiscal 2017, 2016,2019, 2018, and 2015,2017, respectively. The fair value of stock options that vested during fiscal 2019, 2018, and 2017 2016, and 2015 was $1.0$1.2 million, $0.9$1.2 million, and $0.9$1.0 million, respectively. As of March 31, 2017,2019, the total compensation expense not yet recognized related to non-vested stock options was $2.1$2.2 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.52.6 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Weighted-average fair value of options | | $ | 4.60 | | | $ | 7.11 | | | $ | 10.21 | | Expected life of awards in years | | | 6.4 | | | | 6.3 | | | | 6.3 | | Risk-free interest rate | | | 1.4 | % | | | 1.9 | % | | | 2.1 | % | Expected volatility of the Company's stock | | | 45.5 | % | | | 66.9 | % | | | 76.1 | % | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Fair value of options | | $ | 7.81 | | | $ | 7.30 | | | $ | 4.60 | | Expected life of awards in years | | | 6.3 | | | | 6.4 | | | | 6.4 | | Risk-free interest rate | | | 2.8 | % | | | 1.9 | % | | | 1.4 | % | Expected volatility of the Company’s stock | | | 39.7 | % | | | 44.3 | % | | | 45.5 | % | Expected dividend yield on the Company’s stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of Modine’s common stock on the date of grant. The risk-free interest rate was based upon 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 upon 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 upon historical patterns and the terms of the options. Outstanding options granted vest 25 percent annually for four years. The Company used a pre-vesting forfeiture rate of 2.5 percent as an estimate of expected forfeitures prior to completing the required service period.
A summary of stock option activity for fiscal 20172019 was as follows:
| | Shares | | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.5 | | | $ | 10.82 | | | | | | | | Granted | | | 0.3 | | | | 10.00 | | | | | | | | Exercised | | | (0.1 | ) | | | 9.23 | | | | | | | | Forfeited or expired | | | (0.2 | ) | | | 21.76 | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 9.83 | | | | 5.5 | | | $ | 4.4 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2017 | | | 1.0 | | | $ | 9.27 | | | | 4.0 | | | $ | 3.6 | |
| | Shares | | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | Outstanding, beginning | | | 1.2 | | | $ | 11.16 | | | | | | | | Granted | | | 0.2 | | | | 17.90 | | | | | | | | Exercised | | | (0.1 | ) | | | 9.93 | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 14.51 | | | | | | | | Outstanding, ending | | | 1.2 | | | $ | 12.24 | | | | 5.5 | | | $ | 3.3 | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2019 | | | 0.8 | | | $ | 10.59 | | | | 4.0 | | | $ | 2.9 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20172019 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the fair valueprice of Modine’s common shares.
Additional information related to stock options exercised is as follows:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Intrinsic value of stock options exercised | | $ | 0.7 | | | $ | 4.9 | | | $ | 0.5 | | Proceeds from stock options exercised | | | 1.1 | | | | 4.3 | | | | 0.9 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Intrinsic value of stock options exercised | | $ | 0.5 | | | $ | 0.4 | | | $ | 0.4 | | Proceeds from stock options exercised | | $ | 0.9 | | | $ | 0.5 | | | $ | 0.6 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Restricted Stock: The Company recorded $3.8$4.3 million, $3.5$3.9 million, and $2.8$3.8 million of compensation expense related to restricted stock in fiscal 2017, 2016,2019, 2018, and 2015,2017, respectively. The fair value of restricted stock awards that vested during fiscal 2019, 2018, and 2017 2016, and 2015 was $4.0$4.3 million, $3.4$3.9 million, and $2.3$4.0 million, respectively. At March 31, 2017,2019, the Company had $4.8$5.3 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.42.5 years. The Company values restricted stock awards using the closing market valueprice of its common shares on the date of grant. The restricted stock awards vest 25 percent annually for four years, with the exception of awards to non-employee directors, which fully vest upon grant.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
A summary of restricted stock activity for fiscal 20172019 was as follows:
| | Shares | | | Weighted- average price | | Non-vested balance, beginning | | | 0.6 | | | $ | 11.29 | | Granted | | | 0.4 | | | | 9.98 | | Vested | | | (0.4 | ) | | | 10.05 | | Non-vested balance, ending | | | 0.6 | | | $ | 11.21 | |
| | Shares | | | | | Non-vested balance, beginning | | | 0.6 | | | $ | 12.24 | | Granted | | | 0.3 | | | | 17.72 | | Vested | | | (0.3 | ) | | | 13.75 | | Forfeited | | | (0.1 | ) | | | 15.03 | | Non-vested balance, ending | | | 0.5 | | | $ | 14.95 | |
Restricted Stock – Performance-Based Shares: The Company recorded $2.5$2.4 million, $0.5$4.4 million, and $0.3$2.5 million of compensation expense related to performance-based stock awards in fiscal 2017, 2016,2019, 2018, and 2015,2017, respectively. At March 31, 2017,2019, the Company had $3.2$2.4 million of total unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be recognized over a weighted-average period of 1.81.5 years. The Company values performance-based stock awards using the closing market valueprice of its common shares on the date of grant.
Shares are earned under the performance portion of the restricted stock award program based upon the attainment of certain financial goals over a three-year period and are awarded after the end of that three-year performance period, if the performance targets have been achieved. The performance components of the programsprogram initiated in fiscal 2017, 2016, and 2015 were2019 is based upon both a target three-year average consolidated cash flow return on averageinvested capital employed (“ROACE”) and a target three-year average annual revenue growth at the end of a three-year performance period, commencing with the fiscal year of grant. The performance components of the programs initiated in fiscal 2018 and 2017 were based upon both a target three-year average consolidated return on capital employed and a target three-year average annual revenue growth at the end of a three-year performance period.
Note 5: Note 6: | Restructuring Activities |
During fiscal 2019, restructuring and repositioning expenses primarily resulted from targeted headcount reductions in Europe and the Americas within the VTS segment. These headcount reductions support the Company’s objective to reduce operational and SG&A cost structures at certain locations. In addition, the Company is in process of transferring product lines associated with the merger of its North American coils business into the CIS segment, in order to accelerate operational improvements and organizational efficiencies.
During fiscal 2018, the Company ceased production at its Gailtal, Austria manufacturing facility, primarily to reduce excess capacity and lower manufacturing costs in Europe. As a result of this facility closure, the Company recorded $8.3 million of restructuring expenses within the CIS segment. These restructuring expenses primarily related to employee severance and related benefits. Fiscal 2018 restructuring activities also included plant consolidation activities, targeted headcount reductions, and certain product line transfers in Europe within the VTS segment. In addition, the Company recorded restructuring expenses associated with the discontinuance of its geothermal product line within the BHVAC segment.
During fiscal 2017, the Company completed a voluntary retirement program for certain U.S. salaried employees and implemented targeted headcount reductions at several locations. The Company engaged in these restructuring activities as part of its Strengthen, Diversify and Grow strategic initiative, particularlylocations, both in support of its objective to reduce operational and SG&A cost structures.
During fiscal 2016, the Company announced a plan to close its Washington, Iowa manufacturing facility and recorded severance costs as a result. The Company completed the transfer of production from Washington to other Americas segment manufacturing facilities in fiscal 2017. Also during fiscal 2016,2017, the Company completed the transfer of production from its McHenry, IllinoisWashington, Iowa manufacturing facility, which was closed and sold, to other AmericasVTS segment manufacturing facilities. These restructuring activities reflect the Company’s focus on operating scale manufacturing facilities to improve overall competitiveness and profitability.in North America.
During fiscal 2015, the Company initiated a headcount reduction plan for the Brazil manufacturing facility within its Americas segment. The headcount reductions were in response to the economic slowdown in Brazil and were aimed at maintaining profitability in this business despite lower sales volume.
In addition, the Company has engaged in restructuring activities within its Europe segment. These restructuring activities have included implementing headcount reductions, exiting certain non-core product lines based upon Modine’s global product strategy, reducing manufacturing costs, consolidating production facilities, and disposing of and selling certain underperforming or non-strategic assets. The Company designed these activities to align the cost structure of the segment with its strategic focus on the commercial vehicle, off-highway, automotive component, and engine product markets, while improving gross margin and return on average capital employed.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Restructuring and repositioning expenses were as follows:
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Employee severance and related benefits | | $ | 5.3 | | | $ | 12.8 | | | $ | 1.2 | | Other restructuring and repositioning expenses | | | 5.6 | | | | 3.8 | | | | 3.5 | | Total | | $ | 10.9 | | | $ | 16.6 | | | $ | 4.7 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Employee severance and related benefits | | $ | 8.7 | | | $ | 13.0 | | | $ | 5.3 | | Other restructuring and repositioning expenses | | | 0.9 | | | | 3.0 | | | | 5.6 | | Total | | $ | 9.6 | | | $ | 16.0 | | | $ | 10.9 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
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, | | | | 2019 | | | 2018 | | Beginning balance | | $ | 11.0 | | | $ | 6.5 | | Additions | | | 8.7 | | | | 13.0 | | Payments | | | (9.1 | ) | | | (9.4 | ) | Effect of exchange rate changes | | | (0.6 | ) | | | 0.9 | | Ending balance | | $ | 10.0 | | | $ | 11.0 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | Beginning balance | | $ | 14.7 | | | $ | 9.9 | | Additions | | | 5.3 | | | | 12.8 | | Payments | | | (12.9 | ) | | | (8.5 | ) | Effect of exchange rate changes | | | (0.6 | ) | | | 0.5 | | Ending balance | | $ | 6.5 | | | $ | 14.7 | |
During fiscal 2018, the Company recorded a $1.3 million asset impairment charge as a result of the closure of the CIS Austrian facility. During fiscal 2019, the Company recorded an additional $0.4 million asset impairment charge related to this closed facility to reduce its carrying value to its current estimated fair value, less costs to sell.
During fiscal 2017, the Company sold twothree previously-closed manufacturing facilities within its Americas segment and a facility within its EuropeVTS segment for cash proceeds totaling $5.4 million. As a result of the facility sales, the Company recorded net gains totaling $2.0 million.
During fiscal 2015, the Company sold a wind tunnel within its Europe segment for cash proceeds of $5.8 million and recognized a gain of $3.2 million as a result.
During fiscal 2016, the Company recorded an asset impairment charge of $9.9 million within its Europe segment to write down long-lived assets at a manufacturing facility in Germany to fair value.
Note 6: Note 7: | Other Income and Expense |
Other income and expense consisted of the following:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Equity in earnings of non-consolidated affiliate | | $ | 0.7 | | | $ | 0.2 | | | $ | 0.1 | | Interest income | | | 0.4 | | | | 0.4 | | | | 0.4 | | Foreign currency transactions (a) | | | (2.3 | ) | | | (0.6 | ) | | | (1.9 | ) | Net periodic benefit cost (b) | | | (2.9 | ) | | | (3.3 | ) | | | (2.9 | ) | Total other expense - net | | $ | (4.1 | ) | | $ | (3.3 | ) | | $ | (4.3 | ) |
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Equity in earnings of non-consolidated affiliate | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.6 | | Interest income | | | 0.4 | | | | 0.4 | | | | 0.5 | | Foreign currency transactions (a) | | | (1.9 | ) | | | (1.3 | ) | | | (0.9 | ) | Gain from insurance recovery (b) | | | - | | | | 9.5 | | | | - | | Total other (expense) income - net | | $ | (1.4 | ) | | $ | 8.7 | | | $ | 0.2 | |
| (a) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on foreign currency exchange contracts. |
| (b) | During fiscal 2016,Represents net periodic benefit cost, exclusive of service cost, for the Company settled an insurance claim related to machineryCompany’s pension and equipment destroyed in a fire at its Airedale facility and recorded a gain of $9.5 million. See Note 1 for additional information.postretirement plans. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 7:
The U.S. and foreign components of earnings from continuing operations before income taxes and the provisionbenefit or benefitprovision for income taxes consisted of the following:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Components of earnings (loss) before income taxes: | | | | | | | | | | United States | | $ | 22.4 | | | $ | 2.5 | | | $ | (8.6 | ) | Foreign | | | 58.4 | | | | 60.8 | | | | 29.4 | | Total earnings before income taxes | | $ | 80.8 | | | $ | 63.3 | | | $ | 20.8 | | | | | | | | | | | | | | | Income tax (benefit) provision: | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | (20.4 | ) | | $ | 11.6 | | | $ | 0.1 | | Deferred | | | (4.2 | ) | | | 23.3 | | | | (3.8 | ) | State: | | | | | | | | | | | | | Current | | | 0.7 | | | | (0.3 | ) | | | 0.3 | | Deferred | | | 1.9 | | | | 2.0 | | | | (0.2 | ) | Foreign: | | | | | | | | | | | | | Current | | | 19.0 | | | | 16.1 | | | | 10.1 | | Deferred | | | (2.1 | ) | | | (13.2 | ) | | | (0.6 | ) | Total income tax (benefit) provision | | $ | (5.1 | ) | | $ | 39.5 | | | $ | 5.9 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Components of earnings (loss) from continuing operations before income taxes: | | | | | | | | | | United States | | $ | (8.6 | ) | | $ | (15.4 | ) | | $ | 31.1 | | Foreign | | | 29.4 | | | | 5.5 | | | | 10.1 | | Total earnings (loss) from continuing operations before income taxes | | $ | 20.8 | | | $ | (9.9 | ) | | $ | 41.2 | | | | | | | | | | | | | | | Income tax expense (benefit): | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | Current | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.4 | | Deferred | | | (3.8 | ) | | | (13.0 | ) | | | 7.1 | | State: | | | | | | | | | | | | | Current | | | 0.3 | | | | 0.2 | | | | - | | Deferred | | | (0.2 | ) | | | (2.5 | ) | | | 1.1 | | Foreign: | | | | | | | | | | | | | Current | | | 10.1 | | | | 9.6 | | | | 12.7 | | Deferred | | | (0.6 | ) | | | (3.3 | ) | | | (2.3 | ) | Total income tax expense (benefit) | | $ | 5.9 | | | $ | (8.9 | ) | | $ | 19.0 | |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. Shortly after the Tax Act was enacted, the SEC issued accounting guidance which provided a one-year measurement period during which a company could complete its accounting for the impacts of the Tax Act. To the extent a company’s accounting for certain income tax effects of the Tax Act was incomplete, the company could determine a reasonable estimate for those effects and record a provisional estimate in its financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it was to continue applying the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted.
During fiscal 2018, the Company recorded provisional discrete tax charges totaling $38.0 million related to the Tax Act. The Company adjusted its U.S. deferred tax assets by $19.0 million due to the reduction in the U.S. federal corporate tax rate. This net reduction in deferred tax assets also included the estimated impact on the Company’s net state deferred tax assets. In addition, the Company recorded a $19.0 million charge for the transition tax required under the Tax Act.
During fiscal 2019, the Company completed its accounting for the Tax Act, which resulted in an income tax benefit totaling $7.7 million. The Company determined it will utilize its deferred tax attributes against the transition tax and finalized its fiscal 2018 U.S. federal income tax return. As a result, the Company decreased the provisional charge recorded for the reduction in the U.S. federal corporate tax rate by $9.3 million, since more deferred tax assets were utilized to offset taxable income at a higher fiscal 2018 U.S. federal corporate tax rate. The Company also decreased the transition tax liability to $18.9 million, a reduction of $0.1 million. In addition, the Company recorded a charge of $1.7 million for a reduction to state deferred tax assets.
The Tax Act included a new provision designed to tax global intangible low taxed income (“GILTI”) starting in fiscal 2019. The Company allocateselected to record the tax effects of the GILTI provision as a period expense in the applicable tax year.
The Company’s accounting policy is to allocate the income tax expense among continuing operations, discontinued operations,provision between net earnings and other comprehensive income. The Company applies its accounting for income taxes by tax jurisdiction, and in periods in which there is a loss from continuing operations before income taxes and pre-tax income in other categories (e.g., discontinued operations or other comprehensive income),income, it first allocates the income tax expenseprovision to the other sources ofcomprehensive income, and then records a related tax benefit in continuing operations.the income tax provision.
Income tax expense attributable to earnings from continuing operations before income taxes differed from56
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The reconciliation between the amounts computed by applying the statutory U.S. federal statutory rate and the Company’s effective tax rate was as follows:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Statutory federal tax | | | 21.0 | % | | | 31.5 | % | | | 35.0 | % | State taxes, net of federal benefit | | | 3.6 | | | | 2.9 | | | | (3.3 | ) | Taxes on non-U.S. earnings and losses | | | 3.9 | | | | (3.8 | ) | | | (3.5 | ) | Valuation allowances | | | 4.0 | | | | (5.6 | ) | | | 1.2 | | Tax credits | | | (26.1 | ) | | | (17.3 | ) | | | (9.0 | ) | Compensation | | | (0.1 | ) | | | (0.8 | ) | | | 2.9 | | Tax rate or law changes | | | (12.0 | ) | | | 60.1 | | | | (2.5 | ) | Uncertain tax positions, net of settlements | | | 0.4 | | | | (0.8 | ) | | | 5.6 | | Notional interest deductions | | | (2.5 | ) | | | (3.2 | ) | | | (8.8 | ) | Dividend repatriation | | | 1.6 | | | | 0.2 | | | | 7.1 | | Other | | | (0.1 | ) | | | (0.8 | ) | | | 3.7 | | Effective tax rate | | | (6.3 | %) | | | 62.4 | % | | | 28.4 | % |
During fiscal 2019, the Company recorded income tax ratebenefits totaling $7.7 million related to the Tax Act, as discussed above; recorded income tax benefits totaling $14.5 million as a result of amending previous-year tax returns to recognize foreign tax credits that are expected to be realized based upon future sources of income; and recorded a $2.5 million income tax benefit related to a manufacturing deduction in the following:United States. Also in fiscal 2019, the Company changed its determination of whether it was more likely than not certain deferred tax assets of two separate subsidiaries in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax benefit totaling $1.0 million. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $4.3 million related to other tax jurisdictions and recorded a $2.2 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations.
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | | (3.3 | ) | | | 11.5 | | | | 2.4 | | Taxes on non-U.S. earnings and losses | | | (3.5 | ) | | | 26.4 | | | | (4.9 | ) | Valuation allowance | | | 1.2 | | | | (20.9 | ) | | | 8.3 | | Tax credits | | | (9.0 | ) | | | 20.5 | | | | (6.1 | ) | Compensation | | | 2.9 | | | | (3.7 | ) | | | 1.0 | | Tax rate or law changes | | | (2.5 | ) | | | 1.3 | | | | 1.2 | | Uncertain tax positions, net of settlements | | | 5.6 | | | | (4.3 | ) | | | 2.2 | | Notional interest deductions | | | (8.8 | ) | | | - | | | | - | | Dividend repatriation | | | 7.1 | | | | 16.0 | | | | 2.4 | | Other | | | 3.7 | | | | 8.1 | | | | 4.6 | | Effective tax rate | | | 28.4 | % | | | 89.9 | % | | | 46.1 | % |
During fiscal 2018, the Company recorded provisional charges totaling $38.0 million related to the Tax Act, as discussed above, and recognized a $9.0 million Hungarian development tax credit. Also in fiscal 2018, the Company reversed a portion of the valuation allowance on certain deferred tax assets in a foreign jurisdiction after determining it was more likely than not these assets would be realized, and, as a result, recorded an income tax benefit of $2.8 million. In addition, the Company recorded a $1.8 million income tax benefit in fiscal 2018 associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations.
During fiscal 2017, the Company recorded a valuation allowance of $2.0 million on certain deferred tax assets in a foreign jurisdiction after determining it was more likely than not the deferred tax assets would not be realized. Also during fiscal 2017, the Company recorded a net reduction of deferred tax asset valuation allowances totaling $1.8 million in other tax jurisdictions. During fiscal 2016, the Company reversed a valuation allowance of $3.0 million on certain deferred tax assets in a foreign jurisdiction after determining it was more likely than not the deferred tax assets would be realized. In fiscal 2016 and 2015, the Company recorded a net increase in deferred tax asset valuation allowances totaling $5.0 million and $2.6 million, respectively, in other tax jurisdictions.
The Company will continue to provide valuation allowances against its net deferred tax assets in each applicable tax jurisdiction until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized.
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, | | | | 2017 | | | 2016 | | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.4 | | | $ | 0.1 | | Inventories | | | 5.0 | | | | 3.6 | | Plant and equipment | | | 3.7 | | | | 4.3 | | Pension and employee benefits | | | 51.8 | | | | 52.6 | | Net operating loss, capital loss, and credit carry-forwards | | | 147.5 | | | | 109.4 | | Other, principally accrued liabilities | | | 10.9 | | | | 7.5 | | Total gross deferred tax assets | | | 219.3 | | | | 177.5 | | Less: valuation allowances | | | (49.6 | ) | | | (50.8 | ) | Net deferred tax assets | | | 169.7 | | | | 126.7 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Plant and equipment | | | 21.2 | | | | 5.5 | | Goodwill | | | 4.7 | | | | 0.6 | | Intangible assets | | | 43.3 | | | | 1.5 | | Other | | | 1.8 | | | | 0.2 | | Total gross deferred tax liabilities | | | 71.0 | | | | 7.8 | | Net deferred tax asset | | $ | 98.7 | | | $ | 118.9 | |
| | March 31, | | | | 2019 | | | 2018 | | Deferred tax assets: | | | | | | | Accounts receivable | | $ | 0.2 | | | $ | 0.3 | | Inventories | | | 3.4 | | | | 4.1 | | Plant and equipment | | | 1.8 | | | | 2.3 | | Pension and employee benefits | | | 32.7 | | | | 36.0 | | Net operating and capital losses | | | 73.5 | | | | 102.5 | | Credit carryforwards | | | 60.3 | | | | 36.7 | | Other, principally accrued liabilities | | | 10.0 | | | | 9.9 | | Total gross deferred tax assets | | | 181.9 | | | | 191.8 | | Less: valuation allowances | | | (43.4 | ) | | | (48.9 | ) | Net deferred tax assets | | | 138.5 | | | | 142.9 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Plant and equipment | | | 15.1 | | | | 17.6 | | Goodwill | | | 4.8 | | | | 5.2 | | Intangible assets | | | 28.8 | | | | 32.4 | | Other | | | 0.9 | | | | 0.7 | | Total gross deferred tax liabilities | | | 49.6 | | | | 55.9 | | Net deferred tax assets | | $ | 88.9 | | | $ | 87.0 | |
Unrecognized tax benefits were as follows:
| | Years ended March 31, | | | | 2019 | | | 2018 | | Beginning balance | | $ | 13.6 | | | $ | 14.2 | | Gross increases - tax positions in prior period | | | 1.6 | | | | 0.8 | | Gross decreases - tax positions in prior period (a) | | | (0.2 | ) | | | (1.2 | ) | Gross increases - due to acquisition | | | - | | | | 1.4 | | Gross increases - tax positions in current period | | | 1.1 | | | | 0.5 | | Settlements | | | (0.1 | ) | | | (0.3 | ) | Lapse of statute of limitations | | | (2.2 | ) | | | (1.8 | ) | Ending balance | | $ | 13.8 | | | $ | 13.6 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | Beginning balance | | $ | 5.9 | | | $ | 5.6 | | Gross increases - tax positions in prior period | | | 0.3 | | | | - | | Gross decreases - tax positions in prior period | | | (0.2 | ) | | | (0.1 | ) | Gross increases - due to acquisition | | | 7.3 | | | | - | | Gross increases - tax positions in current period | | | 0.9 | | | | 0.4 | | Ending balance | | $ | 14.2 | | | $ | 5.9 | |
| (a) | Fiscal 2018 includes $1.0 million related to the reduction of the U.S. federal corporate tax rate as a result of the Tax Act. |
The Company’s liability for unrecognized tax benefits as of March 31, 20172019 was $14.2$13.8 million, and if recognized, $11.9$12.2 million would have an effective tax rate impact. The Company estimates that reductions toa $0.2 million decrease in unrecognized tax benefits induring fiscal 20182020 due to lapses in statutes of limitations and audit settlements will total $2.4 million, which, ifsettlements. If recognized, these reductions would not have a $1.6 millionsignificant impact on the Company’s effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal 20172019 and 2016,2018, interest and penalties included within income tax expense in the consolidated statements of operations were not significant. At March 31, 2017, $0.8 million of2019 and 2018, accrued interest and penalties were included in the consolidated balance sheet. At March 31, 2016, accrued interesttotaled $1.1 million and penalties were not significant.$1.0 million, respectively.
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2017,2019, the Company was under income tax examination in a number of foreign jurisdictions. The following tax years remain subject to examination for the Company’s major tax jurisdictions:
| Germany | Fiscal 2011 - Fiscal 2016 | 2018 | | Italy | Calendar 20112014 - Fiscal 2016 | 2018 | | United States | Fiscal 20142016 - Fiscal 2016 | 2018 |
At March 31, 2017, the Company had federal and state tax credits of $27.4 million that, if not utilized against U.S. taxes, will expire between fiscal 2018 and 2037. The Company also had state and local tax loss carry-forwards of $212.7 million that, if not utilized against state apportioned taxable income, will expire at various times during fiscal 2018 and 2037. In addition, the Company had tax loss and foreign attribute carry-forwards of $485.0 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, $167.0 million of these carry-forwards will expire at various times during fiscal 2018 through 2037, and $318.0 million, mainly related to Germany, Italy, and India, will not expire due to an unlimited carry-forward period.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
At March 31, 2017,2019, the Company provided $0.3had federal and state tax credits of $60.0 million that, if not utilized against U.S. taxes, will expire between fiscal 2020 and 2039. The Company also had state and local tax loss carryforwards totaling $129.5 million that, if not utilized against state apportioned taxable income, will expire between fiscal 2020 and 2039. In addition, the Company had tax loss and foreign attribute carryforwards totaling $351.6 million in various tax jurisdictions throughout the world. Certain of the carryforwards in the U.S. and in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $9.7 million of tax on undistributedthese carryforwards will expire between fiscal 2020 and 2034, and $341.9 million, mainly related to Germany and Italy, will not expire due to an unlimited carryforward period.
The Company’s practice and intention is to reinvest, with certain insignificant exceptions, the earnings of its non-U.S. subsidiaries outside of the U.S., and therefore, the Company has not recorded foreign withholding taxes or deferred income taxes for certain subsidiaries not considered permanently reinvested. Undistributed earnings totaling $505.0 million are considered permanently reinvested inthese earnings. The Company has estimated the Company’s remaining foreign operations, and no provision has been made for taxes that would be payable upon the distribution of such earnings. It is not practicable to estimate thenet amount of unrecognized foreign withholding taxestax and deferred tax liabilityliabilities would total approximately $7.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on such earnings.circumstances existing when remittance occurs.
Note 8: Note 9: | Earnings Per Share |
The components of basic and diluted earnings per share were as follows:
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Basic: | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 14.9 | | | $ | (1.0 | ) | | $ | 22.2 | | Less: Net earnings attributable to noncontrolling interest | | | (0.7 | ) | | | (0.6 | ) | | | (1.0 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | - | | | | (0.2 | ) | Earnings (loss) from continuing operations available to Modine shareholders | | | 14.0 | | | | (1.6 | ) | | | 21.0 | | Earnings from discontinued operations, net of income taxes | | | - | | | | - | | | | 0.6 | | Net earnings (loss) available to Modine shareholders | | $ | 14.0 | | | $ | (1.6 | ) | | $ | 21.6 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.8 | | | | 47.3 | | | | 47.2 | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.45 | | Earnings per share - discontinued operations | | | - | | | | - | | | | 0.01 | | Net earnings (loss) per share - basic | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.46 | | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | Earnings (loss) from continuing operations | | $ | 14.9 | | | $ | (1.0 | ) | | $ | 22.2 | | Less: Net earnings attributable to noncontrolling interest | | | (0.7 | ) | | | (0.6 | ) | | | (1.0 | ) | Less: Undistributed earnings attributable to unvested shares | | | (0.1 | ) | | | - | | | | (0.2 | ) | Earnings (loss) from continuing operations available to Modine shareholders | | | 14.1 | | | | (1.6 | ) | | | 21.0 | | Earnings from discontinued operations, net of income taxes | | | - | | | | - | | | | 0.6 | | Net earnings (loss) available to Modine shareholders | | $ | 14.1 | | | $ | (1.6 | ) | | $ | 21.6 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.8 | | | | 47.3 | | | | 47.2 | | Effect of dilutive securities | | | 0.5 | | | | - | | | | 0.6 | | Weighted-average shares outstanding - diluted | | | 48.3 | | | | 47.3 | | | | 47.8 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | Earnings (loss) per share - continuing operations | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.44 | | Earnings per share - discontinued operations | | | - | | | | - | | | | 0.01 | | Net earnings (loss) per share - diluted | | $ | 0.29 | | | $ | (0.03 | ) | | $ | 0.45 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Basic Earnings Per Share: | | | | | | | | | | Net earnings attributable to Modine | | $ | 84.8 | | | $ | 22.2 | | | $ | 14.2 | | Less: Undistributed earnings attributable to unvested shares | | | (0.4 | ) | | | (0.2 | ) | | | (0.2 | ) | Net earnings available to Modine shareholders | | $ | 84.4 | | | $ | 22.0 | | | $ | 14.0 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.5 | | | | 49.9 | | | | 47.8 | | | | | | | | | | | | | | | Net earnings per share - basic | | $ | 1.67 | | | $ | 0.44 | | | $ | 0.29 | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | Net earnings attributable to Modine | | $ | 84.8 | | | $ | 22.2 | | | $ | 14.2 | | Less: Undistributed earnings attributable to unvested shares | | | (0.2 | ) | | | (0.1 | ) | | | (0.1 | ) | Net earnings available to Modine shareholders | | $ | 84.6 | | | $ | 22.1 | | | $ | 14.1 | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.5 | | | | 49.9 | | | | 47.8 | | Effect of dilutive securities | | | 0.8 | | | | 1.0 | | | | 0.5 | | Weighted-average shares outstanding - diluted | | | 51.3 | | | | 50.9 | | | | 48.3 | | | | | | | | | | | | | | | Net earnings per share - diluted | | $ | 1.65 | | | $ | 0.43 | | | $ | 0.29 | |
For the years ended March 31,fiscal 2019, 2018 and 2017, 2016, and 2015, the calculation of diluted earnings per share excluded 0.80.4 million, 0.80.2 million, and 0.60.8 million stock options, respectively, because they were anti-dilutive. For
Note 10: | Cash, Cash Equivalents and Restricted Cash |
Cash, cash equivalents and restricted cash consisted of the year ended March 31, 2016,following:
| | March 31, | | | | 2019 | | | 2018 | | Cash and cash equivalents | | $ | 41.7 | | | $ | 39.3 | | Restricted cash | | | 0.5 | | | | 1.0 | | Total cash, cash equivalents and restricted cash | | $ | 42.2 | | | $ | 40.3 | |
Restricted cash, which is reported within other noncurrent assets on the total numberconsolidated balance sheets, consists primarily of potentially-dilutive securities was 0.4 million. However, these securities were not included in the computation of diluted net loss per share since to do so would have decreased the loss per share.deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 9:
Inventories consisted of the following:
| | March 31, | | | | 2017 | | | 2016 | | Raw materials and work in process | | $ | 127.7 | | | $ | 79.5 | | Finished goods | | | 40.8 | | | | 31.5 | | Total inventories | | $ | 168.5 | | | $ | 111.0 | |
| | March 31, | | | | 2019 | | | 2018 | | Raw materials | | $ | 122.8 | | | $ | 114.4 | | Work in process | | | 32.2 | | | | 34.8 | | Finished goods | | | 45.7 | | | | 42.1 | | Total inventories | | $ | 200.7 | | | $ | 191.3 | |
Note 10: Note 12: | Property, Plant and Equipment |
Property, plant and equipment, including depreciable lives, consisted of the following:
| | March 31, | | | | 2017 | | | 2016 | | Land | | $ | 18.9 | | | $ | 7.2 | | Buildings and improvements (10-40 years) | | | 255.6 | | | | 221.3 | | Machinery and equipment (3-12 years) | | | 755.5 | | | | 694.3 | | Office equipment (3-10 years) | | | 92.5 | | | | 84.1 | | Construction in progress | | | 55.1 | | | | 36.7 | | | | | 1,177.6 | | | | 1,043.6 | | Less: accumulated depreciation | | | (718.6 | ) | | | (705.0 | ) | Net property, plant and equipment | | $ | 459.0 | | | $ | 338.6 | |
| | March 31, | | | | 2019 | | | 2018 | | Land | | $ | 20.7 | | | $ | 22.6 | | Buildings and improvements (10-40 years) | | | 285.9 | | | | 295.6 | | Machinery and equipment (3-15 years) | | | 848.7 | | | | 840.8 | | Office equipment (3-10 years) | | | 92.0 | | | | 93.0 | | Construction in progress | | | 57.4 | | | | 50.2 | | | | | 1,304.7 | | | | 1,302.2 | | Less: accumulated depreciation | | | (820.0 | ) | | | (797.9 | ) | Net property, plant and equipment | | $ | 484.7 | | | $ | 504.3 | |
Depreciation expense totaled $67.9 million, $67.0 million, and $54.2 million $48.6 million,for fiscal 2019, 2018, and $50.0 million for the years ended March 31, 2017, 2016, and 2015, respectively. Gains and losses related to the disposal of property, plant and equipment are recorded inwithin SG&A expenses. For the years ended March 31,fiscal 2019, 2018, and 2017, 2016, and 2015, total losses related to the disposal of property, plant and equipment were $0.4totaled $0.9 million, $0.4$0.7 million, and $1.1$0.4 million, respectively.
Note 11: Note 13: | Investment in Affiliate |
The Company owns 50 percent of Nikkei Heat Exchanger Company, Ltd. (“NEX”). The Company accounts for its investment in this non-consolidated affiliate using the equity method. At March 31, 20172019 and 2016,2018, the Company included its investment in NEX of $3.3$3.8 million and $3.2$3.6 million, respectively, within other noncurrent assets on the consolidated balance sheets. At March 31, 2017,2019, the investment in NEX is equal to the Company'sCompany’s investment in the underlying net assets.
The Company reports its equity in earnings from NEX within other income and expense in the consolidated statements of operations, using a one-month reporting delay. The Company’s share of NEX’s earnings for the years ended March 31,fiscal 2019, 2018, and 2017 2016,was $0.7 million, $0.2 million, and 2015 was $0.1 million, $0.1 million, and $0.6 million, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 12: Note 14: | Intangible Assets |
Intangible assets consisted of the following:
| | March 31, 2017 | | | March 31, 2016 | | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | Customer relationships | | $ | 60.5 | | | $ | (1.7 | ) | | $ | 58.8 | | | $ | 2.0 | | | $ | (0.4 | ) | | $ | 1.6 | | Trade names | | | 58.4 | | | | (7.2 | ) | | | 51.2 | | | | 8.9 | | | | (6.3 | ) | | | 2.6 | | Acquired technology | | | 27.0 | | | | (2.9 | ) | | | 24.1 | | | | 5.5 | | | | (1.5 | ) | | | 4.0 | | Total intangible assets | | $ | 145.9 | | | $ | (11.8 | ) | | $ | 134.1 | | | $ | 16.4 | | | $ | (8.2 | ) | | $ | 8.2 | |
Intangible assets as of March 31, 2017 include intangible assets related to the Company’s acquisition of Luvata HTS. See Note 2 for additional information.
| | March 31, 2019 | | | March 31, 2018 | | | | Gross Value | | | | | | | | | | | | Accumulated Amortization | | | | | Customer relationships | | $ | 61.5 | | | $ | (9.1 | ) | | $ | 52.4 | | | $ | 64.2 | | | $ | (5.7 | ) | | $ | 58.5 | | Trade names | | | 58.9 | | | | (13.5 | ) | | | 45.4 | | | | 60.6 | | | | (10.8 | ) | | | 49.8 | | Acquired technology | | | 23.9 | | | | (5.5 | ) | | | 18.4 | | | | 25.2 | | | | (3.6 | ) | | | 21.6 | | Total intangible assets | | $ | 144.3 | | | $ | (28.1 | ) | | $ | 116.2 | | | $ | 150.0 | | | $ | (20.1 | ) | | $ | 129.9 | |
The Company recorded $4.1$9.0 million, $1.6$9.7 million, and $1.6$4.1 million of amortization expense during fiscal 2019, 2018, and 2017, 2016, and 2015, respectively. Estimated futureThe Company estimates that it will record $9.0 million of amortization expense is as follows:in fiscal 2020 and approximately $8.0 million of annual amortization expense in fiscal 2021 through 2024.
Fiscal Year | | Estimated Amortization Expense | | 2018 | | $ | 9.4 | | 2019 | | | 9.2 | | 2020 | | | 9.1 | | 2021 | | | 8.5 | | 2022 | | | 7.4 | | 2023 & Beyond | | | 90.5 | |
During fiscal 2018, the BHVAC segment discontinued its geothermal product line and, as a result, recorded a $1.2 million impairment for acquired technology intangible assets it will no longer use. Annual revenue for this discontinued product line was less than $1.0 million.
Changes in the carrying amount of goodwill, by segment and in the aggregate, were as follows:
| | Asia | | | BHVAC | | | CIS | | | Total | | 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 | | Acquired Goodwill | | | - | | | | - | | | | 150.6 | | | | 150.6 | | Effect of exchange rate changes | | | - | | | | (1.6 | ) | | | 0.3 | | | | (1.3 | ) | Balance, March 31, 2017 | | $ | 0.5 | | | $ | 13.7 | | | $ | 150.9 | | | $ | 165.1 | |
| | VTS | | | CIS | | | BHVAC | | | Total | | Balance, March 31, 2017 | | $ | 0.5 | | | $ | 150.9 | | | $ | 13.7 | | | $ | 165.1 | | Acquired goodwill (a) | | | - | | | | 1.3 | | | | - | | | | 1.3 | | Effect of exchange rate changes | | | - | | | | 6.1 | | | | 1.3 | | | | 7.4 | | Balance, March 31, 2018 | | | 0.5 | | | | 158.3 | | | | 15.0 | | | | 173.8 | | Effect of exchange rate changes | | | - | | | | (4.4 | ) | | | (0.9 | ) | | | (5.3 | ) | Balance, March 31, 2019 | | $ | 0.5 | | | $ | 153.9 | | | $ | 14.1 | | | $ | 168.5 | |
As a result of its acquisition of Luvata HTS, the Company recorded $150.6 million of goodwill. See Note 2 for additional information.
| (a) | Represents measurement-period adjustments related to the Company’s acquisition of Luvata HTS. See Note 2 for additional information about this acquisition. |
The Company assesses goodwill for impairment annually, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. The Company conducted its annual assessment for goodwill impairment during the fourth quarter of fiscal 20172019 for the reporting units within its BHVACVTS, CIS, and AsiaBHVAC segments, by applying a fair value-based test, and determined that the fair value of its reporting units exceeded their respective book values. The Company will perform goodwill impairment testing for its recently-acquired CIS segment beginning in fiscal 2018.
At both March 31, 20172019 and 2016,2018, accumulated goodwill impairment losses totaled $31.6 million and $8.7$40.3 million within the Americas and Europe segments, respectively.VTS segment.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 14: Note 16: | Product Warranties, Operating Leases, and Other Commitments |
Product warranties: Most of the Company’s products are covered under a warranty period ranging from one to five years. The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. In addition, the Company adjusts its warranty accruals if it becomes probable that expected claims will differ from initial estimates.
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | | 2017 | | | 2016 | | Beginning balance | | $ | 8.3 | | | $ | 10.4 | | Warranties recorded at time of sale | | | 5.2 | | | | 5.7 | | Adjustments to pre-existing warranties | | | 0.3 | | | | (1.1 | ) | Additions due to acquisition | | | 4.1 | | | | - | | Settlements | | | (7.6 | ) | | | (6.7 | ) | Effect of exchange rate changes | | | (0.3 | ) | | | - | | Ending balance | | $ | 10.0 | | | $ | 8.3 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | Beginning balance | | $ | 9.3 | | | $ | 10.0 | | Warranties recorded at time of sale | | | 5.5 | | | | 6.7 | | Adjustments to pre-existing warranties | | | 2.2 | | | | (0.8 | ) | Adjustments due to acquisition (a) | | | - | | | | (1.0 | ) | Settlements | | | (7.3 | ) | | | (6.2 | ) | Effect of exchange rate changes | | | (0.5 | ) | | | 0.6 | | Ending balance | | $ | 9.2 | | | $ | 9.3 | |
| (a) | During fiscal 2018, the Company decreased its liability for product warranties by $1.0 million as a result of measurement-period adjustments made in connection with purchase accounting for the acquisition of Luvata HTS. See Note 2 for additional information about this acquisition. |
Operating leases: The Company leases various facilities and equipment under operating leases. Rental expense for these leases totaled $12.8$19.3 million, $11.9$18.5 million, and $11.5$12.8 million in fiscal 2019, 2018, and 2017, 2016, and 2015, respectively.
Future minimum rental commitments at March 31, 20172019 under non-cancelable operating leases were as follows:
Fiscal Year | | | | 2018 | | $ | 12.2 | | 2019 | | | 10.1 | | 2020 | | | 9.1 | | 2021 | | | 7.8 | | 2022 | | | 5.4 | | 2023 and beyond | | | 24.7 | | Total | | $ | 69.3 | |
Fiscal Year | | | | 2020 | | $ | 14.2 | | 2021 | | | 12.4 | | 2022 | | | 9.1 | | 2023 | | | 7.1 | | 2024 | | | 4.7 | | 2025 and beyond | | | 22.9 | | Total | | $ | 70.4 | |
Indemnification agreements: From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years. In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 20172019 was not material.
Commitments: At March 31, 2017,2019, the Company had capital expenditure commitments of $18.1$23.6 million. Significant commitments include tooling and equipment expenditures for new and renewal programs with customers in the Americas, Asia, and Europe segments.VTS segment. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 15:
In November 2016,Long-term debt consisted of the Company entered into new credit agreements to fund a significant portion of its acquisition of Luvata HTS (see Note 2 for additional information). following:
| | Fiscal year of maturity | | | March 31, 2019 | | | March 31, 2018 | | | | | | | | | | | | Term loans | | 2022 | | | $ | 238.4 | | | $ | 267.8 | | 6.8% Senior Notes | | 2021 | | | | 85.0 | | | | 101.0 | | 5.8% Senior Notes | | 2027 | | | | 50.0 | | | | 50.0 | | Other (a) | | - | | | | 14.3 | | | | 12.8 | | | | | | | | | 387.7 | | | | 431.6 | | Less: current portion | | | | | | | (48.6 | ) | | | (39.9 | ) | Less: unamortized debt issuance costs | | | | (4.0 | ) | | | (5.4 | ) | Total long-term debt | | | | | | $ | 335.1 | | | $ | 386.3 | |
| (a) | Other long-term debt includes borrowings by foreign subsidiaries, capital lease obligations and other financing-type obligations. |
Long-term debt matures as follows:
Fiscal Year | | | | 2020 | | $ | 48.6 | | 2021 | | | 101.3 | | 2022 | | | 187.4 | | 2023 | | | 8.8 | | 2024 | | | 8.8 | | 2025 & beyond | | | 32.8 | | Total | | $ | 387.7 | |
The Company executed an amended and restatedmaintains a credit agreement with a syndicate of banks that provides for both U.S. dollar- and euro-denominated term loan facilities and a multi-currency $175.0 million revolving credit facility expiring in November 2021, which replaced the Company’s then-existing revolver that would have expired in August 2018.2021. Based upon the terms of the credit agreement and currency denomination, borrowings under both the term loans and revolving credit facility bear interest at a variable rate, primarily either the London Interbank Offered Rate (“LIBOR”) or Euro Interbank Offered Rate (“EURIBOR”), plus 137.5 to 250 basis points (3.0 percent weighted-average at March 31, 2017) depending on the Company’s leverage ratio, as described below. At March 31, 2017,2019, the Company’sweighted-average interest rates for the outstanding term loanloans and the revolving credit facility borrowings totaled $268.9 million, with repayments scheduled through fiscal 2022. Also in November 2016, the Company issued $50.0 million of 5.8were 3.3 percent Senior Notes with repayments ending in fiscal 2027.and 3.7 percent, respectively.
Long-term debt consisted of the following:
| | Fiscal year of maturity | | | March 31, 2017 | | | March 31, 2016 | | | | | | | | | | | | Term Loans | | | 2022 | | | $ | 268.9 | | | $ | - | | 6.8% Senior Notes | | | 2021 | | | | 117.0 | | | | 125.0 | | 5.8% Senior Notes | | | 2027 | | | | 50.0 | | | | - | | Other (a) | | | 2032 | | | | 8.3 | | | | 9.0 | | | | | | | | | 444.2 | | | | 134.0 | | Less: current portion | | | | | | | (31.8 | ) | | | (8.5 | ) | Less: unamortized debt issuance costs | | | | | | | (6.7 | ) | | | - | | Total long-term debt | | | | | | $ | 405.7 | | | $ | 125.5 | |
| (a) | Other long-term debt includes capital lease obligations and other financing-type obligations. |
Long-term debt matures as follows:
Fiscal Year | | | | 2018 | | $ | 31.8 | | 2019 | | | 38.6 | | 2020 | | | 43.8 | | 2021 | | | 98.3 | | 2022 | | | 184.1 | | 2023 & beyond | | | 47.6 | | Total | | $ | 444.2 | |
At March 31, 2017,2019 and 2018, the Company reported its revolving credit facility borrowings of $40.4$47.1 million and $21.3 million, respectively, as short-term debt on the consolidated balance sheet.sheets. At March 31, 2017,2019, domestic letters of credit totaled $2.0$4.3 million, resulting in available borrowings under the Company’s revolving credit facility of $132.6$123.6 million. The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 20172019 and 20162018 of $33.0$18.9 million and $28.6$31.9 million, respectively. At March 31, 2017, the Company’s foreign unused lines of credit totaled $20.0 million. In aggregate, the Company had total available lines of credit of $152.6 million at March 31, 2017.
Provisions in the Company’s amended and restated credit agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided liens on substantially all domestic assets. In addition, the term loans require prepayments, as definedspecified in the credit agreement, the term loans may require prepayments in the event the Company’s annual excess cash flow exceeds defined levels, depending upon the Company’s leverage ratio, or in the event of certain asset sales. The Company is also subject to a leverage ratio covenant,covenants, the most restrictive of which requires the Company to limit its consolidated indebtedness, less a portion of its cash balance, both as defined by the credit agreement,agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). As permitted by the credit agreements and in connection with the Company’s acquisition of Luvata HTS, this leverage ratio covenant limit has been temporarily raised to no more than three and three-quarters times Adjusted EBITDA through the second quarter of fiscal 2018, and thereafter to no more than three and one-half times Adjusted EBITDA through the first quarter of fiscal 2019. The Company is also subject to an interest expense coverage ratio covenant, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. The Company was in compliance with its debt covenants as of March 31, 2017.2019.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. AtAs of March 31, 20172019 and 2016,2018, the carrying value of Modine’sthe Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of approximately $170.0$137.2 million and $139.0$153.1 million, respectively. The fair value of the Senior Notes areCompany’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 34 for the definition of a Level 2 fair value measurement.
Note 16: Note 18: | Pension and Employee Benefit Plans |
Defined Contribution Employee Benefit Plans:
The Company maintains a domestic 401(k) plansplan that allowallows employees to contribute a portion of their salary to help them save for retirement. The Company matched 50 percent ofcurrently matches employee contributions up to 54.5 percent of employeetheir compensation during fiscal 2017, 2016, and 2015 related to its primary domestic 401(k) plans. The Company also makes annual employer contributions into eligible active employee accounts based upon a percentage of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary.for participants. The Company’s expense for defined contribution employee benefit plans during fiscal 2019, 2018, and 2017 2016, and 2015 was $4.7$6.4 million, $4.6$5.2 million, and $5.9$4.7 million, respectively.
In addition, the Company maintains non-qualified deferred compensation plans for eligible employees, and various non-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans:
Certain non-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.laws.
Defined Benefit Employee Benefit Plans:
Pension plans: As a result of its acquisition of Luvata HTS, the Company acquired defined benefit pension plans in Italy, Austria, and the U.S. with liabilities totaling $14.3 million, representing the aggregate funded status of these acquired plans. These acquired plans are closed to new participants.
In addition, theThe Company maintains non-contributory defined benefit pension plans that cover eligible domestic employees. These plans are closed to new participants. The primary domestic plans cover most of its domestic employees hired on or before December 31, 2003. The2003 and provide benefits provided are based primarily upon years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based upon a monthly retirement benefit amount. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company also have legacy defined benefit plans which cover a smaller number of active employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany, Austria, and AustriaItaly and are closed to new participants.
The Company contributed $8.1$8.0 million, $6.7$13.4 million, and $5.9$8.1 million to its U.S. pension plans during fiscal 2019, 2018, and 2017, 2016,respectively. In addition, the Company contributed $5.9 million, $2.6 million, and 2015,$1.4 million to its non-U.S. pension plans during fiscal 2019, 2018, and 2017, respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company offered a voluntary lump-sum payout program to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer and a total of $65.3 million was paid from pension plan assets during fiscal 2016, 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts) 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 2017, 2016,2019, 2018, and 20152017 was $0.3 million, $0.2 million, and $0.3 million, and $0.1 million, respectively.
Measurement Date:date: The Company uses March 31 as the measurement date for its pension and postretirement plans.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s global pension plans, for the fiscal years ended March 31, 2017 and 2016 were as follows:
| | 2017 | | | 2016 | | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 261.0 | | | $ | 328.2 | | Service cost | | | 0.6 | | | | 0.6 | | Interest cost | | | 9.8 | | | | 11.2 | | Actuarial gain | | | (0.5 | ) | | | (2.8 | ) | Benefits paid (a) | | | (19.8 | ) | | | (78.1 | ) | Acquired obligations (b) | | | 20.3 | | | | - | | Effect of exchange rate changes | | | (1.6 | ) | | | 1.9 | | Benefit obligation at end of year | | $ | 269.8 | | | $ | 261.0 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 141.5 | | | $ | 217.0 | | Actual return on plan assets | | | 11.0 | | | | (5.3 | ) | Benefits paid (a) | | | (19.8 | ) | | | (78.1 | ) | Employer contributions | | | 9.5 | | | | 7.9 | | Acquired plan assets (b) | | | 6.0 | | | | - | | Fair value of plan assets at end of year | | $ | 148.2 | | | $ | 141.5 | | Funded status at end of year | | $ | (121.6 | ) | | $ | (119.5 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (2.2 | ) | | $ | (0.9 | ) | Noncurrent liability | | | (119.4 | ) | | | (118.6 | ) | | | $ | (121.6 | ) | | $ | (119.5 | ) |
| | Years ended March 31, | | | | 2019 | | | 2018 | | Change in benefit obligation: | | | | | | | Benefit obligation at beginning of year | | $ | 273.6 | | | $ | 269.8 | | Service cost | | | 0.5 | | | | 0.5 | | Interest cost | | | 9.6 | | | | 9.9 | | Actuarial loss | | | 1.7 | | | | 4.4 | | Benefits paid | | | (22.8 | ) | | | (16.9 | ) | Curtailment gain (a) | | | - | | | | (0.3 | ) | Effect of exchange rate changes | | | (3.8 | ) | | | 6.2 | | Benefit obligation at end of year | | $ | 258.8 | | | $ | 273.6 | | | | | | | | | | | Change in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 157.7 | | | $ | 148.2 | | Actual return on plan assets | | | 6.3 | | | | 10.4 | | Benefits paid | | | (22.8 | ) | | | (16.9 | ) | Employer contributions | | | 13.9 | | | | 16.0 | | Fair value of plan assets at end of year | | $ | 155.1 | | | $ | 157.7 | | Funded status at end of year | | $ | (103.7 | ) | | $ | (115.9 | ) | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | Current liability | | $ | (2.0 | ) | | $ | (6.3 | ) | Noncurrent liability | | | (101.7 | ) | | | (109.6 | ) | | | $ | (103.7 | ) | | $ | (115.9 | ) |
| (a) | InDuring fiscal 2016, $65.3 million was paid from plan assets2018, the Company recorded a pension curtailment gain associated with the closure of a manufacturing facility in connection with lump-sum payouts.Austria (CIS segment). See Note 6 for additional information regarding the closure of this facility. |
| (b) | As a result of its acquisition of Luvata HTS, the Company acquired pension plans in Italy, Austria and the U.S. See Note 2 for additional information. |
As of March 31, 2019, 2018, and 2017, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $36.5 million, $43.4 million, and $39.3 million respectively. In fiscal 2019, the $6.9 million decrease primarily resulted from employer contributions of $5.9 million for benefits paid to plan participants during the year and the impact of foreign currency exchange rate changes, partially offset by service and interest cost totaling $1.1 million. In fiscal 2018, the $4.1 million increase primarily resulted from the impact of foreign currency exchange rate changes and service and interest cost totaling $1.3 million, partially offset by $2.6 million of benefits paid to plan participants.
The accumulated benefit obligation for pension plans was $266.8$256.9 million and $257.9$271.8 million as of March 31, 20172019 and 2016,2018, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $156.8$159.1 million and $162.0$157.9 million as of March 31, 20172019 and 2016,2018, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Costs for the Company’s global pension plans included the following components for the fiscal years ended March 31, 2017, 2016, and 2015:components:
| | 2017 | | | 2016 | | | 2015 | | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.6 | | | $ | 0.6 | | | $ | 0.5 | | Interest cost | | | 9.8 | | | | 11.2 | | | | 13.0 | | Expected return on plan assets | | | (12.3 | ) | | | (14.9 | ) | | | (16.7 | ) | Amortization of net actuarial loss | | | 5.6 | | | | 6.4 | | | | 5.5 | | Settlements (a) | | | - | | | | 42.1 | | | | - | | Net periodic benefit cost | | $ | 3.7 | | | $ | 45.4 | | | $ | 2.3 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | Net actuarial loss | | $ | 1.0 | | | $ | 17.5 | | | $ | 46.4 | | Amortization of net actuarial loss (a) | | | (5.6 | ) | | | (48.5 | ) | | | (5.5 | ) | Total recognized in other comprehensive (income) loss | | $ | (4.6 | ) | | $ | (31.0 | ) | | $ | 40.9 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Components of net periodic benefit cost: | | | | | | | | | | Service cost | | $ | 0.5 | | | $ | 0.5 | | | $ | 0.6 | | Interest cost | | | 9.6 | | | | 9.9 | | | | 9.8 | | Expected return on plan assets | | | (12.3 | ) | | | (11.9 | ) | | | (12.3 | ) | Amortization of net actuarial loss | | | 5.6 | | | | 5.6 | | | | 5.6 | | Settlements (a) | | | 0.2 | | | | 0.3 | | | | - | | Curtailment gain (a) | | | - | | | | (0.3 | ) | | | - | | Net periodic benefit cost | | $ | 3.6 | | | $ | 4.1 | | | $ | 3.7 | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive income (loss):
| | | | | | | | | | | | | Net actuarial loss | | $ | (7.7 | ) | | $ | (5.8 | ) | | $ | (1.0 | ) | Amortization of net actuarial loss | | | 5.8 | | | | 5.9 | | | | 5.6 | | Total recognized in other comprehensive income (loss) | | $ | (1.9 | ) | | $ | 0.1 | | | $ | 4.6 | |
| (a) | During fiscal 2016, in connectionThe settlement charges and curtailment gain resulted from activity associated with lump-sum payouts tothe Company’s non-U.S. pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss.plans. |
The Company amortized $5.6 million of net actuarial loss in fiscal 2019, 2018, and 2017. In each of these years, less than $1.0 million of the amortization was attributable to the Company’s non-U.S. pension plans. The Company estimates $5.6$6.0 million of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2018.2020. The fiscal 2020 estimated amortization includes less than $1.0 million related to the Company’s non-U.S. pension plans.
The Company used a discount rate of 4.1%4.0% as of both March 31, 20172019 and 20162018 for determining its benefit obligations under its U.S. pension plans. The Company used a weighted-average discount rate of 1.7%1.4% and 1.8%1.7% as of March 31, 20172019 and 2016,2018, respectively, infor determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 4.1%4.0%, 4.3%4.1%, and 4.7%4.1% to determine its costs under its U.S. pension plans for the fiscal years ended March 31,2019, 2018, and 2017, 2016, and 2015, respectively. The Company used a weighted-average discount rate of 1.7%1.9%, 1.3%1.9%, and 3.0%1.7% to determine its costs under its non-U.S. pension plans for the fiscal years ended March 31,2019, 2018, and 2017, 2016, and 2015, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. The Company used a similar process to determine the discount rate for its non-U.S. pension obligations.
Plan assets in the Company’s U.S. defined benefitpension plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted-average asset allocations at the measurement dates of March 31, 2017 and 2016 were as follows:
| | Target allocation as of March 31, 2017 | | | Plan assets | | | | | | | 2017 | | | 2016 | | Equity securities | | | 60 | % | | | 58 | % | | | 56 | % | Debt securities | | | 38 | % | | | 38 | % | | | 36 | % | Cash | | | 2 | % | | | 4 | % | | | 4 | % | Alternative assets | | | - | | | | - | | | | 4 | % | | | | 100 | % | | | 100 | % | | | 100 | % |
| | March 31, 2019 | | | March 31, 2018 | | | | Target allocation | | | Plan assets | | | Target allocation | | | Plan assets | | Equity securities | | | 65 | % | | | 66 | % | | | 60 | % | | | 58 | % | Debt securities | | | 21 | % | | | 19 | % | | | 38 | % | | | 38 | % | Real estate investments | | | 13 | % | | | 12 | % | | | - | | | | - | | Cash and cash equivalents | | | 1 | % | | | 3 | % | | | 2 | % | | | 4 | % | | | | 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, 20172019 and 2016,2018, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term returngrowth of plan assets,principal, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2017, 2016,2019, 2018, and 20152017 U.S. pension plan expense, the expected rate of return on plan assets was 7.5 percent, 7.5 percent and 8.0 percent.percent, respectively. For fiscal 20182020 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 7.5 percent.
The Company’s funding policy for its U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. The Company expects to make contributions of $13.1contribute approximately $3.0 million to these plans during fiscal 2018.2020.
Estimated pension benefit payments for the next ten fiscal years are as follows:
Fiscal Year | | Estimated Pension Benefit Payments | | 2018 | | $ | 17.1 | | 2019 | | | 16.4 | | 2020 | | | 17.0 | | 2021 | | | 17.1 | | 2022 | | | 17.6 | | 2023-2027 | | | 90.4 | |
Fiscal Year | | Estimated Pension Benefit Payments | | 2020 | | $ | 16.0 | | 2021 | | | 16.0 | | 2022 | | | 16.4 | | 2023 | | | 16.4 | | 2024 | | | 16.6 | | 2025-2029 | | | 82.0 | |
Note 17: Note 19: | Derivative Instruments |
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated and is effective, as a hedge, and, if so, on the nature of the hedging activity.
Commodity Derivatives:derivatives: The Company periodically enters into futuresover-the-counter forward contracts related to certain forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts is to reduce its exposure to changing market prices for future purchases of these commodities. In fiscal 2019 and 2018, the Company designated certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses within cost of sales as the underlying inventory is sold. The Company hasdid not designateddesignate commodity contracts entered into in fiscal 2017 2016, and 2015 for hedge accounting. Accordingly, unrealized gains and losses on thesethose contracts arewere recorded within cost of sales.
Foreign exchange contracts:contracts: The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchangeforward contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. In fiscal 2019 and 2018, the Company designated certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in AOCI within shareholders’ equity and subsequently recognizes the gains and losses as a component of earnings at the same time and in the same financial statement line that the underlying transactions impact earnings. The Company has not designated forward contracts related to foreign currency-denominated assets and liabilities as hedges. Accordingly, for these non-designated contracts, for hedge accounting. Accordingly,the Company records unrealized gains and losses related to changes in fair value are recorded in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| Balance Sheet Location | | March 31, 2017 | | | March 31, 2016 | | Commodity derivatives | Other current assets | | $ | 0.7 | | | $ | - | | Commodity derivatives | Other current liabilities | | | - | | | | 0.1 | | Foreign exchange contracts | Other current assets | | | 0.2 | | | | 0.1 | |
| | Balance Sheet Location | | March 31, 2019 | | | March 31, 2018 | | Derivatives designated as hedges: | | | | | | | | | Commodity derivatives | | Other current assets | | $ | 0.6 | | | $ | 0.1 | | Commodity derivatives | | Other current liabilities | | | 0.3 | | | | - | | Foreign exchange contracts | | Other current assets | | | 0.2 | | | | 0.1 | | | | | | | | | | | | | Derivatives not designated as hedges: | | | | | | | | | | | Commodity derivatives | | Other current liabilities | | $ | - | | | $ | 0.2 | | Foreign exchange contracts | | Other current assets | | | - | | | | 0.2 | | Foreign exchange contracts | | Other current liabilities | | | 0.5 | | | | 0.6 | |
The amounts recorded in the consolidated statements of operations for the Company’sassociated with derivative financial instruments that the Company designated for hedge accounting were as follows:
| Statement of Operations | | Years ended March 31, | | | Location | | 2017 | | | 2016 | | | 2015 | | Commodity derivatives | Cost of sales | | $ | 0.5 | | | $ | (0.7 | ) | | $ | (0.2 | ) | Foreign exchange contracts | Other income (expense) - net | | | 1.3 | | | | 0.6 | | | | (1.1 | ) | Total gains (losses) | | | $ | 1.8 | | | $ | (0.1 | ) | | $ | (1.3 | ) |
| | Gain (loss) recognized in other comprehensive income | | Statement of Operations | | Gain (loss) reclassified from AOCI | | | | 2019 | | | 2018 | | | 2017 | | Location | | 2019 | | | 2018 | | | 2017 | | Commodity derivatives | | $ | (0.3 | ) | | $ | 0.2 | | | $ | - | | Cost of sales | | $ | (0.4 | ) | | $ | - | | | $ | - | | Foreign exchange contracts | | | (0.4 | ) | | | 0.1 | | | | - | | Net sales | | | (0.4 | ) | | | 0.1 | | | | - | | Foreign exchange contracts | | | 1.0 | | | | - | | | | - | | Cost of sales | | | 0.6 | | | | - | | | | - | | Total gains (losses) | | $ | 0.3 | | | $ | 0.3 | | | $ | - | | | | $ | (0.2 | ) | | $ | 0.1 | | | $ | - | |
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
| | | | Years ended March 31, | |
| | Statement of Operations Location | | 2019 | | | 2018 | | | 2017 | | Commodity derivatives | | Cost of sales | | $ | - | | | $ | 0.4 | | | $ | 0.5 | | Foreign exchange contracts | | Net sales | | | (0.7 | ) | | | (0.1 | ) | | | - | | Foreign exchange contracts | | Other income (expense) - net | | | (0.3 | ) | | | (0.5 | ) | | | 1.3 | | Total gains (losses) | | | | $ | (1.0 | ) | | $ | (0.2 | ) | | $ | 1.8 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 18: Note 20: | Contingencies and Litigation |
Market risk: Risk The Company sells a broad range of products that provide thermal solutions to customers operating primarily in the automotive, commercial vehicle, construction, agricultural,off-highway, and commercial, industrial, and building HVAC&R markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or more of the markets it serves. The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits. However, the risk associated with market downturns is still present.
Credit risk: Risk The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 2019, 2018, and 2017, 2016 and 2015, two VTS segment customers each accounted for ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers representedwere 50 percent, 48 percent, and 54 percent of total sales in fiscal 2019, 2018, and 2017, and 63 percent of total sales in both fiscal 2016 and 2015.respectively. At March 31, 20172019 and 2016, 352018, 38 percent and 4536 percent, respectively, of the Company'sCompany’s trade accounts receivable were due from the Company'sCompany’s top ten customers. These customers operate primarily in the automotive, truck,commercial vehicle, off-highway, data center cooling and heavy equipmentcommercial air conditioning markets, andwhich are influenced by similar market and general economic factors. Collateral or advanced payments are generally not required. The Company has not experienced significant credit losses to customers in the markets served.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company manages credit risk through its focus on the following:
| · | Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; |
Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; | · | Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; |
Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; | · | Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and |
Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and | · | Insurance – ensuring that insurance providers maintain acceptable financial ratings. |
Insurance – ensuring that insurance providers maintain financial ratings that are acceptable to the Company.
Counterparty risks: Risk The Company manages counterparty risksrisk through its focus on the following:
| · | Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; |
Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; | · | Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and |
Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and | · | Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company. |
Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company.
Environmental:Environmental The United States Environmental Protection Agency has designated the Company as a potentially responsible party for remediation of three sites. These sites are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be material to the Company’s financial position due to its relatively small portion of contributed materials.
As a result of its acquisition of Luvata HTS in fiscal 2017, the Company assumed certain environmental obligations. The Company has recorded environmental accruals related to these matters, the most significant of which relates to historical soil and groundwater contamination remediation and monitoring for a manufacturing site in the United States. In addition, the Company has recorded environmental investigation and remediation accruals related to subsurfacesoil and groundwater contamination at manufacturing facilities in the United States, one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, investigative work related to a previously-owned manufacturing facility in the United States, and groundwater contamination at its manufacturing facility in Brazil, along with accruals for lesser environmental matters at certain other facilities in the United States.States and Brazil. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $16.8$18.9 million and $5.1$16.7 million at March 31, 20172019 and 2016,2018, respectively. As additional information becomes available, the Company will re-assess the liabilities related to these matters and revise the estimated accruals, if necessary. Based upon 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Brazil antitrust investigation: During fiscal 2015, Brazil’s Administrative Council for Economic Defense (CADE) provided formal notice to the Company’s subsidiary in Brazil (“Modine Brazil”) of an administrative investigation regarding alleged violations of Brazil’s antitrust regulations by Modine Brazil and certain of its employees during a period of time at least seven years prior to the notice. As of March 31, 2016, the Company accrued $2.8 million (BRL 10 million) related to this matter. During fiscal 2017, the Company increased its accrual and reached agreement with CADE to settle the matter for $4.7 million (BRL 15 million). As a result, the Company recorded a charge of $1.6 million (BRL 5 million) within SG&A expenses during fiscal 2017. The Company expects to remit payment for the settlement in early fiscal 2018.
Other litigation:Litigation In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits or proceedings are not expected to have a material adverse effect on the Company’s consolidated financial statements.position.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 19: Note 21: | Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2016 | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (10.8 | ) | | | (0.3 | ) | | | (11.1 | ) | Reclassifications for amortization of unrecognized net loss (a) | | | - | | | | 5.2 | | | | 5.2 | | Income taxes | | | - | | | | (1.7 | ) | | | (1.7 | ) | Total other comprehensive income (loss) | | | (10.8 | ) | | | 3.2 | | | | (7.6 | ) | | | | | | | | | | | | | | Balance, March 31, 2017 | | $ | (46.8 | ) | | $ | (135.0 | ) | | $ | (181.8 | ) |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | Balance, March 31, 2018 | | $ | (5.5 | ) | | $ | (134.9 | ) | | $ | 0.1 | | | $ | (140.3 | ) | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (37.9 | ) | | | (7.1 | ) | | | 0.3 | | | | (44.7 | ) | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | - | | | | 5.4 | | Foreign currency translation losses (b) | | | 0.8 | | | | - | | | | - | | | | 0.8 | | Realized losses - net (c) | | | - | | | | - | | | | 0.2 | | | | 0.2 | | Income taxes | | | - | | | | 0.3 | | | | (0.1 | ) | | | 0.2 | | Total other comprehensive income (loss) | | | (37.1 | ) | | | (1.4 | ) | | | 0.4 | | | | (38.1 | ) | | | | | | | | | | | | | | | | | | Balance, March 31, 2019 | | $ | (42.6 | ) | | $ | (136.3 | ) | | $ | 0.5 | | | $ | (178.4 | ) | | | | | | | | | | | | | | | | | | | | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | Balance, March 31, 2017 | | $ | (46.8 | ) | | $ | (135.0 | ) | | $ | - | | | $ | (181.8 | ) | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | 41.3 | | | | (5.7 | ) | | | 0.3 | | | | 35.9 | | Reclassifications: | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.6 | | | | - | | | | 5.6 | | Realized gains - net (c) | | | - | | | | - | | | | (0.1 | ) | | | (0.1 | ) | Income taxes | | | - | | | | 0.2 | | | | (0.1 | ) | | | 0.1 | | Total other comprehensive income | | | 41.3 | | | | 0.1 | | | | 0.1 | | | | 41.5 | | | | | | | | | | | | | | | | | | | Balance, March 31, 2018 | | $ | (5.5 | ) | | $ | (134.9 | ) | | $ | 0.1 | | | $ | (140.3 | ) |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Total | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) | | | | | | | | | | | | | | Other comprehensive income (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 | ) |
| (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 1618 for additional information about the Company’s pension plans. |
| (b) | As a result of the sale of a business in South Africa during fiscal 2019, the Company wrote-off $0.8 million of accumulated foreign currency translation losses. See Note 1 for additional information about this transaction. |
| (c) | Amounts represent net gains and losses associated with cash flow hedges that were reclassified to net earnings. See Note 19 for additional information regarding derivative instruments. |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 20: Note 22: | Segment and Geographic Information |
The Company’s product lines consist of heat-transfer components and systems. The Company serves vehicular and commercial, industrial, and building HVAC&R markets. In November 2016, the Company acquired Luvata HTS and, commencing from the acquisition date, has operated and reported results for the acquired business as its Commercial and Industrial Solutions (“CIS”)CIS segment. See Note 2 for additional information regarding the Luvata HTS acquisition.
The Company’sEffective April 1, 2018, the Company formed the VTS segment by combining its Americas, Europe, and Asia operations to enable it to operate as a more global, product-based organization. The Company also merged its Americas coils business into the CIS segment to accelerate operational improvements and organizational efficiencies. The Company began reporting financial results for its new segments representbeginning in fiscal 2019. Segment financial information for fiscal 2018 and 2017 has been recast to conform to the fiscal 2019 presentation.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company’s VTS segment represents its vehicular businessesbusiness and primarily serveserves the automotive, commercial vehicle, and off-highway markets. In addition, the AmericasVTS segment serves the automotive and commercial vehicle aftermarket in Brazil and provides coils to the commercial HVAC&R market in North America.Brazil. The Company’s CIS segment provides coils, coolers, and coating solutions to customers throughout the world. The Company’s BHVAC segment provides heating, ventilating and air conditioning products to customers throughout the world.
Each operating segment is managed by a vice president and has separate financial results reviewed by the Company’s chief operating decision maker. These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
The following is a summary of net sales, gross profit, and operating income by segment:
| | Years ended March 31, | | Net sales: | | 2017 | | | 2016 | | | 2015 | | Americas | | $ | 534.0 | | | $ | 585.5 | | | $ | 666.9 | | Europe | | | 524.3 | | | | 524.1 | | | | 578.2 | | Asia | | | 111.5 | | | | 79.0 | | | | 81.2 | | CIS | | | 177.7 | | | | - | | | | - | | BHVAC | | | 171.6 | | | | 181.4 | | | | 186.3 | | Segment total | | | 1,519.1 | | | | 1,370.0 | | | | 1,512.6 | | Corporate and eliminations | | | (16.1 | ) | | | (17.5 | ) | | | (16.2 | ) | Net sales | | $ | 1,503.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | |
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Gross profit: | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | Americas | | $ | 86.6 | | | | 16.2 | % | | $ | 100.1 | | | | 17.1 | % | | $ | 109.1 | | | | 16.3 | % | Europe | | | 80.9 | | | | 15.4 | % | | | 68.1 | | | | 13.0 | % | | | 68.7 | | | | 11.9 | % | Asia | | | 18.7 | | | | 16.8 | % | | | 12.2 | | | | 15.5 | % | | | 11.5 | | | | 14.2 | % | CIS | | | 26.0 | | | | 14.6 | % | | | - | | | | - | | | | - | | | | - | | BHVAC | | | 47.8 | | | | 27.8 | % | | | 54.2 | | | | 29.9 | % | | | 55.9 | | | | 30.0 | % | Segment total | | | 260.0 | | | | 17.1 | % | | | 234.6 | | | | 17.1 | % | | | 245.2 | | | | 16.2 | % | Corporate and eliminations (a) | | | (6.7 | ) | | | - | | | | (11.1 | ) | | | - | | | | 1.3 | | | | - | | Gross profit | | $ | 253.3 | | | | 16.9 | % | | $ | 223.5 | | | | 16.5 | % | | $ | 246.5 | | | | 16.5 | % |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | Years ended March 31, | | Operating income: | | 2017 | | | 2016 | | | 2015 | | Americas | | $ | 26.7 | | | $ | 36.2 | | | $ | 33.4 | | Europe | | | 37.1 | | | | 13.3 | | | | 25.7 | | Asia | | | 7.7 | | | | 0.8 | | | | 0.3 | | CIS | | | 7.5 | | | | - | | | | - | | BHVAC | | | 13.1 | | | | 13.9 | | | | 19.1 | | Segment total | | | 92.1 | | | | 64.2 | | | | 78.5 | | Corporate and eliminations (a) | | | (52.7 | ) | | | (71.7 | ) | | | (25.8 | ) | Operating income (loss) | | $ | 39.4 | | | $ | (7.5 | ) | | $ | 52.7 | |
| (a) | During fiscal 2017, the Company recorded $14.8 million of costs incurred directly related to the acquisition and integration of Luvata HTS within SG&A expenses at Corporate. In addition, as a result of purchase accounting for the Luvata HTS acquisition, the Company wrote up acquired inventory to its estimated fair value and charged the write-up to cost of sales as the underlying inventory was sold. The Company recorded $4.3 million in cost of sales related to this inventory step-up at Corporate, as the impact of this purchase accounting adjustment is excluded from the Company’s measure of segment operating performance. 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 16 for additional information about the Company’s pension plans. |
| | Year ended March 31, 2019 | | | | External Sales | | | Inter-segment Sales | | | Total | | Net sales: | | | | | | | | | | VTS | | $ | 1,298.9 | | | $ | 52.8 | | | $ | 1,351.7 | | CIS | | | 704.7 | | | | 2.9 | | | | 707.6 | | BHVAC | | | 209.1 | | | | 3.3 | | | | 212.4 | | Segment total | | | 2,212.7 | | | | 59.0 | | | | 2,271.7 | | Corporate and eliminations | | | - | | | | (59.0 | ) | | | (59.0 | ) | Net sales | | $ | 2,212.7 | | | $ | - | | | $ | 2,212.7 | | | | | | | | | | | | | | | | | Year ended March 31, 2018 | | | | External Sales | | | Inter-segment Sales | | | Total | | Net sales: | | | | | | | | | | | | | VTS | | $ | 1,239.3 | | | $ | 56.4 | | | $ | 1,295.7 | | CIS | | | 674.4 | | | | 1.3 | | | | 675.7 | | BHVAC | | | 189.4 | | | | 1.8 | | | | 191.2 | | Segment total | | | 2,103.1 | | | | 59.5 | | | | 2,162.6 | | Corporate and eliminations | | | - | | | | (59.5 | ) | | | (59.5 | ) | Net sales | | $ | 2,103.1 | | | $ | - | | | $ | 2,103.1 | | | | | | | | | | | | | | | | | Year ended March 31, 2017 | | | | External Sales | | | Inter-segment Sales | | | Total | | Net sales: | | | | | | | | | | | | | VTS | | $ | 1,099.9 | | | $ | 52.3 | | | $ | 1,152.2 | | CIS | | | 231.5 | | | | 0.3 | | | | 231.8 | | BHVAC | | | 171.6 | | | | - | | | | 171.6 | | Segment total | | | 1,503.0 | | | | 52.6 | | | | 1,555.6 | | Corporate and eliminations | | | - | | | | (52.6 | ) | | | (52.6 | ) | Net sales | | $ | 1,503.0 | | | $ | - | | | $ | 1,503.0 | |
Inter-segment sales are accounted for based upon 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 other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance.
The following is a summary of total assets by segment:
| | March 31, | | | | 2017 | | | 2016 | | Americas | | $ | 282.9 | | | $ | 267.2 | | Europe | | | 269.4 | | | | 301.9 | | Asia | | | 111.3 | | | | 104.0 | | CIS | | | 576.0 | | | | - | | BHVAC | | | 85.2 | | | | 99.0 | | Corporate and eliminations | | | 124.7 | | | | 148.8 | | Total assets | | $ | 1,449.5 | | | $ | 920.9 | |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | Capital expenditures: | | 2017 | | | 2016 | | | 2015 | | Americas | | $ | 26.3 | | | $ | 26.7 | | | $ | 30.2 | | Europe | | | 24.7 | | | | 24.8 | | | | 21.5 | | Asia | | | 8.5 | | | | 6.2 | | | | 3.8 | | CIS | | | 3.4 | | | | - | | | | - | | BHVAC | | | 1.5 | | | | 5.1 | | | | 2.8 | | Total capital expenditures | | $ | 64.4 | | | $ | 62.8 | | | $ | 58.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
| | Years ended March 31, | | Depreciation and amortization expense: | | 2017 | | | 2016 | | | 2015 | | Americas | | $ | 22.7 | | | $ | 22.1 | | | $ | 21.3 | | Europe | | | 16.5 | | | | 18.0 | | | | 19.8 | | Asia | | | 7.0 | | | | 6.5 | | | | 7.2 | | CIS | | | 7.9 | | | | - | | | | - | | BHVAC | | | 4.2 | | | | 3.6 | | | | 3.3 | | Total depreciation and amortization expense | | $ | 58.3 | | | $ | 50.2 | | | $ | 51.6 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Gross profit: | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | VTS | | $ | 186.9 | | | | 13.8 | % | | $ | 201.0 | | | | 15.5 | % | | $ | 182.0 | | | | 15.8 | % | CIS | | | 114.9 | | | | 16.2 | % | | | 97.8 | | | | 14.5 | % | | | 32.2 | | | | 13.9 | % | BHVAC | | | 63.4 | | | | 29.9 | % | | | 58.0 | | | | 30.3 | % | | | 47.8 | | | | 27.8 | % | Segment total | | | 365.2 | | | | 16.1 | % | | | 356.8 | | | | 16.5 | % | | | 262.0 | | | | 16.8 | % | Corporate and eliminations (a) | | | 0.3 | | | | - | | | | (0.3 | ) | | | - | | | | (7.6 | ) | | | - | | Gross profit | | $ | 365.5 | | | | 16.5 | % | | $ | 356.5 | | | | 17.0 | % | | $ | 254.4 | | | | 16.9 | % |
| | Years ended March 31, | | Operating income: | | 2019 | | | 2018 | | | 2017 | | VTS | | $ | 64.8 | | | $ | 84.2 | | | $ | 68.4 | | CIS | | | 53.4 | | | | 28.5 | | | | 10.9 | | BHVAC | | | 26.9 | | | | 20.3 | | | | 13.2 | | Segment total | | | 145.1 | | | | 133.0 | | | | 92.5 | | Corporate and eliminations (a) | | | (35.4 | ) | | | (40.8 | ) | | | (50.2 | ) | Operating income | | $ | 109.7 | | | $ | 92.2 | | | $ | 42.3 | |
| (a) | During fiscal 2018 and 2017, the Company recorded $4.3 million and $14.8 million, respectively, of costs incurred directly related to the acquisition and integration of Luvata HTS within SG&A expenses at Corporate. During fiscal 2017, the Company recorded $4.3 million in cost of sales related to an inventory purchase accounting adjustment at Corporate, as the impact was excluded from the Company’s measure of segment operating performance. In addition, the operating loss for Corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance. |
The following is a summary of total assets by segment:
| | March 31, | | | | 2019 | | | 2018 | | VTS | | $ | 749.9 | | | $ | 754.8 | | CIS | | | 604.2 | | | | 630.2 | | BHVAC | | | 89.4 | | | | 88.1 | | Corporate and eliminations | | | 94.5 | | | | 100.3 | | Total assets | | $ | 1,538.0 | | | $ | 1,573.4 | |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | Capital expenditures: | | 2019 | | | 2018 | | | 2017 | | VTS | | $ | 56.2 | | | $ | 61.4 | | | $ | 59.5 | | CIS | | | 16.4 | | | | 9.0 | | | | 3.4 | | BHVAC | | | 1.3 | | | | 0.6 | | | | 1.5 | | Total capital expenditures | | $ | 73.9 | | | $ | 71.0 | | | $ | 64.4 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
| | Years ended March 31, | | Depreciation and amortization expense: | | 2019 | | | 2018 | | | 2017 | | VTS | | $ | 49.5 | | | $ | 48.2 | | | $ | 46.2 | | CIS | | | 23.9 | | | | 24.3 | | | | 7.9 | | BHVAC | | | 3.5 | | | | 4.2 | | | | 4.2 | | Total depreciation and amortization expense | | $ | 76.9 | | | $ | 76.7 | | | $ | 58.3 | |
The following is a summary of net sales by geographical area, based upon the location of the selling unit:
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | United States | | $ | 657.8 | | | $ | 627.6 | | | $ | 669.3 | | Hungary | | | 145.6 | | | | 145.9 | | | | 161.0 | | Germany | | | 130.1 | | | | 155.3 | | | | 193.8 | | Austria | | | 125.2 | | | | 113.1 | | | | 118.7 | | Italy | | | 94.4 | | | | 44.1 | | | | 40.6 | | Other | | | 349.9 | | | | 266.5 | | | | 313.0 | | Net sales | | $ | 1,503.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | |
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | United States | | $ | 1,032.3 | | | $ | 911.4 | | | $ | 657.8 | | Italy | | | 217.3 | | | | 211.5 | | | | 94.4 | | China | | | 172.1 | | | | 156.0 | | | | 73.7 | | Hungary | | | 165.6 | | | | 153.9 | | | | 145.6 | | Germany | | | 123.1 | | | | 132.6 | | | | 130.1 | | Austria | | | 116.2 | | | | 151.7 | | | | 125.2 | | Other | | | 386.1 | | | | 386.0 | | | | 276.2 | | Net sales | | $ | 2,212.7 | | | $ | 2,103.1 | | | $ | 1,503.0 | |
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | | 2017 | | | 2016 | | United States | | $ | 124.7 | | | $ | 92.5 | | Italy | | | 55.8 | | | | 20.3 | | Mexico | | | 47.0 | | | | 30.9 | | Austria | | | 44.3 | | | | 44.2 | | China | | | 40.0 | | | | 33.6 | | Hungary | | | 37.7 | | | | 31.4 | | Germany | | | 28.9 | | | | 32.1 | | Other | | | 80.6 | | | | 53.6 | | Total property, plant and equipment | | $ | 459.0 | | | $ | 338.6 | |
The following is a summary of net sales by end market:
| | Years ended March 31, | | | | 2017 | | | 2016 | | | 2015 | | Automotive | | $ | 461.0 | | | $ | 396.8 | | | $ | 401.8 | | Commercial vehicle | | | 382.5 | | | | 459.8 | | | | 512.5 | | Off-highway | | | 202.8 | | | | 206.2 | | | | 274.6 | | HVAC&R | | | 400.9 | | | | 232.1 | | | | 229.6 | | Other | | | 55.8 | | | | 57.6 | | | | 77.9 | | Net sales | | $ | 1,503.0 | | | $ | 1,352.5 | | | $ | 1,496.4 | |
| | March 31, | | | | 2019 | | | 2018 | | United States | | $ | 117.7 | | | $ | 121.5 | | China | | | 57.6 | | | | 49.6 | | Mexico | | | 56.3 | | | | 49.4 | | Hungary | | | 55.3 | | | | 59.3 | | Italy | | | 52.4 | | | | 62.0 | | Austria | | | 36.9 | | | | 42.8 | | Germany | | | 32.8 | | | | 37.2 | | Other | | | 75.7 | | | | 82.5 | | Total property, plant and equipment | | $ | 484.7 | | | $ | 504.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 21: The following is a summary of net sales by end market:
| | Years ended March 31, | | | | 2019 | | | 2018 | | | 2017 | | Commercial HVAC&R | | $ | 674.0 | | | $ | 648.3 | | | $ | 323.8 | | Automotive | | | 542.8 | | | | 526.0 | | | | 461.0 | | Commercial vehicle | | | 387.6 | | | | 381.7 | | | | 382.5 | | Off-highway | | | 314.1 | | | | 271.2 | | | | 202.8 | | Data center cooling | | | 187.0 | | | | 137.6 | | | | 57.1 | | Industrial cooling | | | 47.8 | | | | 67.6 | | | | 18.6 | | Other | | | 59.4 | | | | 70.7 | | | | 57.2 | | Net sales | | $ | 2,212.7 | | | $ | 2,103.1 | | | $ | 1,503.0 | |
Note 23: | Quarterly Financial Data (Unaudited) |
QuarterlyThe following is a summary of quarterly financial data is summarized below for the years ended March 31, 2017 and 2016:data:
| | Fiscal 2017 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2017 | | | | | | | | | | | | | | | | | | Net sales | | $ | 347.2 | | | $ | 317.7 | | | $ | 349.8 | | | $ | 488.3 | | | $ | 1,503.0 | | Gross profit | | | 62.0 | | | | 47.7 | | | | 58.7 | | | | 84.9 | | | | 253.3 | | Earnings (loss) from continuing operations (a) | | | 8.9 | | | | (4.0 | ) | | | 1.9 | | | | 8.1 | | | | 14.9 | | Net earnings (loss) attributable to Modine (a) | | | 8.6 | | | | (4.1 | ) | | | 1.7 | | | | 8.0 | | | | 14.2 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.18 | | | $ | (0.09 | ) | | $ | 0.04 | | | $ | 0.16 | | | $ | 0.29 | | Diluted | | | 0.18 | | | | (0.09 | ) | | | 0.04 | | | | 0.16 | | | | 0.29 | |
| | Fiscal 2019 quarters ended | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2019 | | | | | | | | | | | | | | | | | | Net sales | | $ | 566.1 | | | $ | 548.9 | | | $ | 541.0 | | | $ | 556.7 | | | $ | 2,212.7 | | Gross profit | | | 94.3 | | | | 87.9 | | | | 91.7 | | | | 91.6 | | | | 365.5 | | Net earnings (a) | | | 22.5 | | | | 38.7 | | | | 18.3 | | | | 6.4 | | | | 85.9 | | Net earnings attributable to Modine (a) | | | 22.0 | | | | 38.5 | | | | 18.0 | | | | 6.3 | | | | 84.8 | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.43 | | | $ | 0.76 | | | $ | 0.36 | | | $ | 0.12 | | | $ | 1.67 | | Diluted | | | 0.43 | | | | 0.75 | | | | 0.35 | | | | 0.12 | | | | 1.65 | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal 2018 quarters ended | | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2018 | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 515.5 | | | $ | 508.3 | | | $ | 512.7 | | | $ | 566.6 | | | $ | 2,103.1 | | Gross profit | | | 88.5 | | | | 86.1 | | | | 85.4 | | | | 96.5 | | | | 356.5 | | Net earnings (loss) (b) | | | 17.4 | | | | 16.3 | | | | (27.9 | ) | | | 18.0 | | | | 23.8 | | Net earnings (loss) attributable to Modine (b) | | | 17.0 | | | | 15.9 | | | | (28.3 | ) | | | 17.6 | | | | 22.2 | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.34 | | | $ | 0.32 | | | $ | (0.57 | ) | | $ | 0.35 | | | $ | 0.44 | | Diluted | | | 0.34 | | | | 0.31 | | | | (0.57 | ) | | | 0.34 | | | | 0.43 | |
| | 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 (b) | | | 5.5 | | | | (22.5 | ) | | | 8.2 | | | | 7.8 | | | | (1.0 | ) | Net earnings (loss) attributable to Modine (b) | | | 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 | ) |
| (a) | During fiscal 2017,2019, restructuring expenses totaled $2.3$0.2 million, $2.1 million, $1.6$0.5 million, and $4.9$8.9 million for the quarters ended June 30, 2016, September 30, 2016,2018, December 31, 2016,2018, and March 31, 2017,2019, respectively (see Note 5)6). During the second quarter of fiscal 2019, the Company sold its South African business within the BHVAC segment and, as a result, recorded a loss of $1.7 million (see Note 1). During the third quarter of fiscal 2019, the Company recorded a $0.4 million impairment charge related to a manufacturing facility in Austria (see Note 6). The Company’s income tax benefit for fiscal 2019 includes net benefits of $24.4 million and net charges of $2.2 million in the second and third quarters, respectively, related to the Tax Act and the recognition of foreign tax credits (see Note 8). During fiscal 2017,2019, the Company soldadjusted its valuation allowances on deferred tax assets related to two previously-closed manufacturing facilitiesseparate subsidiaries in its Americas segmentChina and, as a result, recorded a $2.0 million income tax benefit and a facility$1.0 million income tax charge in its Europe segmentthe first and recognized net gains totaling $1.2second quarters, respectively (see Note 8). |
| (b) | During fiscal 2018, restructuring expenses totaled $1.7 million, $0.4 million, $9.4 million, and $0.8 million in the quarters ended September 30, 2016 and March 31, 2017, respectively. During fiscal 2017, acquisition- and integration-related costs totaled $1.4 million, $3.0 million, $7.2 million, and $3.2$4.5 million for the quarters ended June 30, 2016,2017, September 30, 2016,2017, December 31, 2016,2017, and March 31, 2017,2018, respectively (see Note 2)6). During the third quarter of fiscal 2018, the Company recorded a $1.3 million asset impairment charge related to a manufacturing facility in Austria (see Note 6). During the fourth quarter of fiscal 2017,2018, the Company recorded a deferred$1.2 million impairment charge related to intangible assets (see Note 14). The Company recorded income tax charges totaling $35.7 million and $2.3 million during the third and fourth quarters of fiscal 2018, respectively, related to the Tax Act (see Note 8). During the fourth quarter of fiscal 2018, the Company reversed a portion of a valuation allowance related to a foreign tax jurisdiction, and, as a result, recorded income tax expense of $2.0 million (see Note 7). |
| (b) | During 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 5). During the fourth quarter of fiscal 2016, the Company recorded a $9.9 million asset impairment charge related to a manufacturing facility in Germany (see Note 5). During fiscal 2016, non-cash pension settlement losses totaled $39.2 million, $1.1 million, and $1.8 million for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 16). 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. 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 related to a foreign tax jurisdiction of $3.0$2.8 million (see Note 7)8). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors and Shareholders of Modine Manufacturing Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the consolidated financial statements, including the related notes, as listed in the index appearing under Item 15(a)(1), and the financial statement schedule listed in the index appearing under Item 15(a)(2), of Modine Manufacturing Company and its subsidiaries (the “Company”) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1)referred to above present fairly, in all material respects, the financial position of Modine Manufacturingthe Company and its subsidiaries atas of March 31, 20172019 and 2016, 2018, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2017 2019 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the CommitteeCOSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for the income tax effects of Sponsoring Organizationsintra-entity transfers of the Treadway Commission (COSO). assets other than inventory in 2019.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A.9A. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements on the financial statement schedule, and on the Company'sCompany’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidatedfinancial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidatedfinancial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control Over Financial Reporting, management has excluded the Luvata HTS business, operated as the Company's CIS segment, from its assessment of internal control over financial reporting as of March 31, 2017 because it was acquired by the Company in a purchase business combination on November 30, 2016. We have also excluded Luvata HTS from our audit of internal control over financial reporting. Luvata HTS total assets and net sales excluded from management’s assessment and our audit of internal control over financial reporting represent $297 million and $178 million, respectively, of the related consolidated financial statement amounts as of and for the fiscal year ended March 31, 2017.
/s/PricewaterhouseCoopers LLP Milwaukee, Wisconsin May 25, 201723, 2019
We have served as the Company’s auditor since 1935.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not applicable.
Conclusion Regarding Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company'sCompany’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company'sCompany’s disclosure controls and procedures, at a reasonable assurance level, as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded that the Company'sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of March 31, 2017.2019.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, and effected by the Company'sCompany’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2017.2019. In making its assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based upon this assessment, management concluded that, as of March 31, 2017,2019, the Company’s internal control over financial reporting was effective.
Management excluded the Luvata HTS business, operated as the Company’s CIS segment, from its assessment of internal control over financial reporting as of March 31, 2017 because it was acquired by the Company in a purchase business combination on November 30, 2016. The total assets and net sales of Luvata HTS excluded from management’s assessment represent $297 million and $178 million, respectively, of the related consolidated financial statement amounts as of and for the fiscal year ended March 31, 2017.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20172019 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
As part of its post-closing integration activities for the Luvata HTS acquisition, the Company is engagedThere have been no changes in assessing, refining and harmonizing the internal controls and processes of the acquired business with those of the Company.
This process has resulted in a change in the Company’s internal control over financial reporting during the fourth quarter of fiscal 20172019 that hashave materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors. The Company incorporates by reference the information appearing in the Company'sCompany’s Proxy Statement for the 20172019 Annual Meeting of Shareholders to be held on July 20, 201725, 2019 (the “2017“2019 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Executive Officers of the Registrant"“Information about our Executive Officers” in this Form 10-K.
Compliance with Section 16(a)Code of the Exchange ActConduct. The Company incorporates by reference the information appearing in the 2017 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 20172019 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Ethics.Conduct.” The Company'sCompany’s Code of Ethics (labeled as the Code of Conduct)Conduct is included on its website, www.modine.com (About Modine link). We intend to satisfy our disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers of, any provision of our Code of Conduct that applies to our principal executive, financial and accounting officers and our directors by posting such information on our website.
Board Committee Charters. The Board of Directors has approved charters for its Audit Committee, Officer Nomination and Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee. These charters are included on the Company’s website, www.modine.com (Investors link).
Audit Committee Financial Expert. The Company incorporates by reference the information appearing in the 20172019 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 20172019 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 20172019 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
We do not intend to incorporate our internet website and the information contained therein or incorporated therein into this annual report on Form 10-K.
ITEM 11. | EXECUTIVE COMPENSATION. |
The information appearing in the 20172019 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 20172019 Annual Meeting Proxy Statement.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The Company incorporates by reference the information contained in the 20172019 Annual Meeting Proxy Statement under the captions “Certain Relationships and Related Party Transactions” and “Director Independence.”
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The Company incorporates by reference the information contained in the 20172019 Annual Meeting Proxy Statement under the caption “Independent Auditors’Auditor’s Fees for Fiscal 20172019 and 2016.2018.”
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) | Documents Filed. The following documents are filed as part of this Report: |
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| 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, 2017, 20162019, 2018 and 20152017 | 4138 | | Consolidated Statements of Comprehensive Income for the years ended March 31, 2017, 20162019, 2018 and 20152017 | 4239 | | Consolidated Balance Sheets at March 31, 20172019 and 20162018 | 4340 | | Consolidated Statements of Cash Flows for the years ended March 31, 2017, 20162019, 2018 and 20152017 | 4441 | | Consolidated Statements of Shareholders'Shareholders’ Equity for the years ended March 31, 2017, 20162019, 2018 and 20152017 | 4542 | | Notes to Consolidated Financial Statements | 46-7343-74 | | Report of Independent Registered Public Accounting Firm | 7475-76 | | | | | 2. Financial Statement Schedules | | | | | | The following financial statement schedule should be read in conjunction with the consolidated financial statements set forth in Item 8: | | | Schedule II -- Valuation and Qualifying Accounts | 7980 | | | | | 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. | 80-8281-83 | | | | | See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number. | |
ITEM 16. | FORM 10-K SUMMARY. |
None.
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 25, 2017 | 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 25, 2017 | | President, Chief Executive Officer and Director | | | (Principal Executive Officer) | | | | | | /s/ Michael B. Lucareli
| | | Michael B. Lucareli | May 25, 2017 | | Vice President, Finance and Chief Financial Officer | | | (Principal Financial and Accounting Officer) | | | | | | /s/ Marsha C. Williams
| | | Marsha C. Williams | May 25, 2017 | | Director | | | | | | /s/ David J. Anderson
| | | David J. Anderson | May 25, 2017 | | Director | | | | | | /s/ Charles P. Cooley
| | | Charles P. Cooley | May 25, 2017
| | Director | | | | | | /s/ Suresh V. Garimella
| | | Suresh V. Garimella | May 25, 2017
| | Director | | | | | | /s/ Larry O. Moore
| | | Larry O. Moore | May 25, 2017 | | Director | | | | | | /s/ Christopher W. Patterson
| | | Christopher W. Patterson | May 25, 2017 | | Director | | | | | | /s/ Christine Y. Yan
| | | Christine Y. Yan | May 25, 2017 | | Director | | | | | | /s/ David G. Bills
| | | David G. Bills | May 25, 2017 | | Director | |
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES
(A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTSFor the years ended March 31, 2017, 2016 and 2015
(In millions)
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | 2017: Valuation Allowance for Deferred Tax Assets | | $ | 50.8 | | | $ | (0.3 | ) | | $ | (0.9 | ) | (a) | | $ | 49.6 | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | Notes: | | | | | | | | | | | | | | | | | |
| (a) | Foreign currency translation, increases due to the acquisition of Luvata HTS and other adjustments |
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES (A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2019, 2018 and 2017 (In millions)
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | 2019: Valuation Allowance for Deferred Tax Assets | | $ | 48.9 | | | $ | (1.6 | ) | | $ | (3.9 | ) | (a) | | $ | 43.4 | | | | | | | | | | | | | | | | | | | | 2018: Valuation Allowance for Deferred Tax Assets | | $ | 49.6 | | | $ | (6.7 | ) | | $ | 6.0 | | (a) | | $ | 48.9 | | | | | | | | | | | | | | | | | | | | 2017: Valuation Allowance for Deferred Tax Assets | | $ | 50.8 | | | $ | (0.3 | ) | | $ | (0.9 | ) | (a) | | $ | 49.6 | |
| (a) | Foreign currency translation and other adjustments. The fiscal 2018 and 2017 amounts also included increases associated with the Company’s acquisition of Luvata HTS. |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
EXHIBIT INDEX TO 20172019 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By
Referenced To | | Filed
Herewith | | | | | | | | 2.1 | | Share SaleAmended and Purchase Agreement between Luvata Heat Transfer Solutions II AB and Modine Manufacturing Company, datedRestated Articles of Incorporation, as of September 6, 2016.amended. | | Exhibit 2.13.1 to Registrant’s Current Report on Form 8-K dated September 6, 201610-K for the fiscal year ended March 31, 2018 | | | | | | | | | | 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 | | | | | | | | | | | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated February 10, 201520, 2019 | | | | | | | | | | | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 ("(“2003 10-K"10-K”) | | | | | | | | | | | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto. | | | | | | | | | | | | Note Purchase and Private Shelf Agreement (the “Original Note Purchase Agreement”) dated as of August 12, 2010 among the Registrant and the Series A Purchasers named therein of $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020 and $25,000,000 Private Shelf Facility and each Prudential Affiliate (as defined therein) that may become bound by certain provisions thereof. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 12, 2010 8-K (“August 12, 2010 8-K”) | | | | | | | | | | | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to August 12, 2010 8-K | | | | | | | | | | | | First Amendment to Note Purchase and Private Shelf Agreement and Waiver dated as of March 15, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated March 15, 2012 8-K | | | | | | | | | | | | Second Amendment to Note Purchase and Private Shelf Agreement dated as of April 20, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 20, 2012 8-K | | | | | | | | | | | | Third Amendment to Note Purchase and Private Shelf Agreement dated as of August 6, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 6, 2012 8-K | | |
| | Second Amended and Restated Credit Agreement dated as of August 30, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, LC Issuer, Swing Line Lender and as a Lender, and U.S. Bank, N.A. and Wells Fargo Bank, N.A. as Syndication Agents and as Lenders, BMO Harris Bank N.A., as Documentation Agent and as Lender and Associated Bank, N.A., Comerica Bank and Sovereign Bank as Lenders.Lenders | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated August 30, 2013 (“August 30, 2013 8-K”) | | | | | | | | | | | | Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Note Purchase Amendment”) dated as of August 30, 2013, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) pursuant to which the Company and the Note Holders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to August 30, 2013 8-K | | | | | | | | | | | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to August 30, 2013 8-K | | | | | | | | | | | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | | | Third Amended and Restated Credit Agreement dated as of November 15, 2016, with JPMorgan Chase Bank, N.A. as Administrative Agent and Collateral Agent, Bank of Montreal, U.S. Bank National Association and Wells Fargo Bank, National Association as Syndication Agents, and Bank of America, N.A. and PNC Bank, National Association as Senior Managing Agent.2016. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated November 15, 2016 (“November 15, 2016 8-K”) | | | | | | | | | | | | Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 15, 2016, with PGIM, Inc. and each of the Purchasers described therein relating to the $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020, the $50,000,000 5.75% Secured Senior Notes, Series B and Private Shelf Facility.2016. | | Exhibit 4.2 to November 15, 2016 8-K | | | | | | | | | | Description of Registrant’s securities | | Amendment No 1. to the Company’s Registration Statement on Form 8-A filed on July 17, 2008 | | | 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 | | | | | | | | | | | | Employment Agreement between the Registrant and Thomas A. Burke dated as of June 15, 2007. | | Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 15, 2007 | | | | | | | | | | | | Form of Amendment No. 1 to Employment Agreement entered into as of July 1, 2008 with Thomas A. Burke. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2008 | | | | | | | | | | | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke. | | Exhibit 10(f) to Registrant’s Form 10-K for the year ended March 31, 2004 | | |
10.5* | | Employment Agreement, dated July 1, 2014, between Modine Holding GmbH and Holger Schwab, effective as of July 1, 2015. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2014 | | | | | | | | | | | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant'sRegistrant’s Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | | | 2007 Incentive Compensation Plan. | | Appendix A to the Registrant's Proxy Statement dated June 18, 2007 | | | | | | | | | | 10.9* | | 2008 Incentive Compensation Plan (Amended and Restated effective May 7, 2014). | | Exhibit 10.1 to Registrant'sRegistrant’s Current Report on Form 8-K dated July 17, 2014 | | | | | | | | | | Form of Fiscal 2019 Modine Performance Stock Award Agreement. | | Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | |
| Form of Fiscal 2019 Modine Incentive Stock Option Award Agreement. | | Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | | 10.10* | | | | | | | Form of Fiscal 2019 Modine Restricted Stock Unit Award Agreement. | | Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | | | | | | | | | Form of Fiscal 2019 Modine Non-Qualified Stock Option Award Agreement. | | Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended June 30, 2018 | | | | | | | | | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Thomas A. Burke. | | Exhibit 10.17 to Registrant'sRegistrant’s Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | 10.11* | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | | | | | | | | | 10.12* | | Form of Fiscal 2017 Modine Performance Stock Award Agreement.Incentive Compensation Plan. | | Exhibit 10.1 to Registrant’s Current Report on Form 10-Q for the first quarter ended June 30, 2016 ("June 30, 2016 10-Q")8-K dated July 20, 2017 | | | | | | | | | | 10.13* | | Form of Fiscal 20172019 Modine IncentiveNon-Employee Director Restricted Stock OptionsUnit Award Agreement. | | Exhibit 10.210.1 to JuneRegistrant’s Form 10-Q for the quarter ended September 30, 2016 10-Q2018 | | | | | | | | | | 10.14* | | Form of Fiscal 2017 Modine Restricted Stock Award Agreement. | | Exhibit 10.3 to June 30, 2016 10-Q | | | | | | | | | | 10.15* | | Form of Fiscal 2017 Modine Non-Qualified Stock Option Award Agreement. | | Exhibit 10.4 to June 30, 2016 10-Q | | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of independent registered public accounting firm. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | �� | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Instance Document | | | | X | | | | | | | | 101.SCH | | XBRL Taxonomy Extension Schema | | | | X | | | | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | X | | | | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | X | | | | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | X | | | | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | X |
* Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K.
** Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 23, 2019 | Modine Manufacturing Company | | | | | By: | /s/ Thomas A. Burke | | | Thomas A. Burke, President | | | and Chief Executive Officer | | | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. Burke |
| Thomas A. Burke | | President, Chief Executive Officer and Director | May 23, 2019 | (Principal Executive Officer) | | | | /s/ Michael B. Lucareli |
| Michael B. Lucareli | May 23, 2019 | Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | | | | /s/ Marsha C. Williams |
| Marsha C. Williams | May 23, 2019 | Director | | | | /s/ David J. Anderson |
| David J. Anderson | May 23, 2019 | Director | | | | /s/ Eric D. Ashleman |
| Eric D. Ashleman | May 23, 2019 | Director | | | | /s/ David G. Bills |
| David G. Bills | May 23, 2019 | Director | | | | /s/ Charles P. Cooley |
| Charles P. Cooley | May 23, 2019 | Director | | | | /s/ Suresh V. Garimella |
| Suresh V. Garimella | May 23, 2019 | Director | | | | /s/ Larry O. Moore |
| Larry O. Moore | May 23, 2019 | Director | | | | /s/ Christopher W. Patterson |
| Christopher W. Patterson | May 23, 2019 | Director | | | | /s/ Christine Y. Yan |
| Christine Y. Yan | May 23, 2019 | Director | |
84
s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | |