form10k.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K
 
(Mark One)
 
þ   ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2010

or

o   TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 1-1373

MODINE MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)

WISCONSIN
39-0482000
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
1500 DeKoven Avenue, Racine, Wisconsin
53403
(Address of principal executive offices)
(Zip Code)

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

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

Title of each class
Name of each exchange on which registered
   
Common Stock, $0.625 par value
New York Stock Exchange

Securities Registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o    No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o    No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o    No o
 


 
 

 

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

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

Large Accelerated Filer o
Accelerated Filer þ
   
Non-accelerated Filer o (Do not check if a smaller reporting company)
Smaller reporting company o

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

Approximately 59 percent of the outstanding shares are held by non-affiliates.  The aggregate market value of these shares was approximately $254 million based on the market price of $9.27 per share on September 30, 2009, the last day of our most recently completed second fiscal quarter.  Shares of common stock held by each executive officer and director and by each person known to beneficially own more than 5 percent of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates.  The determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant's common stock, $0.625 par value, was 46,261,554 at June 7, 2010.


An Exhibit Index appears at pages 97 - 100 herein.


DOCUMENTS INCORPORATED BY REFERENCE


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


Incorporated Document
Location in Form 10-K
   
   
Proxy Statement for the 2010 Annual
Part III of Form 10-K
Meeting of Shareholders
(Items 10, 11, 12, 13, 14)

 
 

 

TABLE OF CONTENTS

MODINE MANUFACTURING COMPANY - FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2010

     
1
ITEM 1.
   
1
ITEM 1A.
   
10
ITEM 1B.
   
15
ITEM 2.
   
15
ITEM 3.
   
16
ITEM 4.
   
16
     
16
     
17
ITEM 5.
   
17
ITEM 6.
   
18
ITEM 7.
   
19
ITEM 7A.
   
42
ITEM 8.
   
47
ITEM 9.
   
92
ITEM 9A.
   
92
ITEM 9B.
   
92
     
92
ITEM 10.
   
92
ITEM 11.
   
93
ITEM 12.
   
93
ITEM 13.
   
93
ITEM 14.
   
93
     
94
ITEM 15.
   
94
     
95
     
96
     
97

 
 

 
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PART I
ITEM 1.   BUSINESS.

Modine Manufacturing Company (Modine or the Company) specializes in thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets.  We are a leading global developer, manufacturer and marketer of heat exchangers and systems for use in on-highway and off-highway original equipment manufacturer (OEM) vehicular applications, and to a wide array of building, industrial, refrigeration and fuel cell markets.  Product lines include radiators and radiator cores, vehicular air conditioning, oil coolers, charge air coolers, heat-transfer packages and modules, building heating, ventilating and air conditioning (HVAC) equipment and exhaust gas recirculation (EGR) coolers.  Our primary customers across the globe are:

- Truck, automobile, bus, and specialty vehicle OEMs;
- Agricultural and construction OEMs;
- Heating and cooling OEMs;
- Construction contractors;
- Wholesalers of plumbing and heating equipment; and
- Fuel cell manufacturers.

We focus our development efforts on solutions that meet the pressing heat transfer needs of OEMs and other customers within the commercial vehicle, construction, agricultural and commercial HVAC industries and, more selectively, within the automotive industry.  Our products and systems typically are aimed at solving complex heat transfer challenges requiring effective thermal management.  The typical demands are for products and systems that are lighter weight, more compact, more efficient and more durable to meet ever increasing customer standards as they work to ensure compliance with increasingly stringent global emissions requirements.  Our Company’s heritage provides a depth and breadth of expertise in thermal management which combined with our global manufacturing presence, standardized processes, and state-of-the-art technical centers and wind tunnels, enables us to rapidly bring customized solutions to customers at the best value.

History

Modine was incorporated under the laws of the State of Wisconsin on June 23, 1916 by its founder, Arthur B. Modine.  Mr. Modine’s “Spirex” radiators became standard equipment on the famous Ford Motor Company Model T.  When he died at the age of 95, A.B. Modine had been granted a total of 120 U.S. patents for heat transfer innovations.  The standard of innovation exemplified by A.B. Modine remains the cornerstone of Modine today.

Terms; Year References

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

Business Strategy and Results

Modine focuses on thermal management leadership and highly engineered product and service innovations for diversified, global markets and customers.  We are committed to enhancing our presence around the world and serving our customers where they are located.  We create value by focusing on customer partnerships and providing innovative solutions for our customers' thermal problems.

Modine’s strategy for improved profitability is grounded in diversifying our markets and customer base, differentiating our products and services, and partnering with customers on global OEM platforms.  Modine’s top five customers are in three different markets – automotive, truck and off-highway – and its ten largest customers accounted for approximately 57 percent of the Company’s fiscal 2010 sales, compared to 59 percent in fiscal 2009.  In fiscal 2010, 60 percent of total revenues were generated from sales to customers outside of the U.S., 56 percent of which were generated by Modine’s international operations and 4 percent of which were generated by exports from the U.S.  In fiscal 2009, 62 percent of total revenues were generated from sales to customers outside of the U.S., with 57 percent generated by Modine’s international operations and 5 percent generated by exports from the U.S.

 
1


For fiscal 2010, the Company reported revenues from continuing operations of $1.16 billion, a 17 percent decrease from $1.41 billion in fiscal 2009.  For the first half of fiscal 2009, the Company recorded relatively strong sales of $828.4 million.  However, the global economic recession dramatically reduced our sales in the third quarter of fiscal 2009 to $325.6 million and further reduced our sales to $254.8 million in the fourth quarter of fiscal 2009.  In conjunction with this dramatic decline in volumes, combined with impairment and restructuring charges recorded during fiscal 2009, the Company reported a loss from continuing operations of $103.6 million in fiscal 2009.  In the first quarter of fiscal 2010, the Company’s sales remained depressed at $253.6 million.  Since that point, our sales have shown three quarters of sequential improvement, with sales of $324.9 million recorded in the fourth quarter of fiscal 2010.  We are experiencing a slow, but steady improvement in our business levels since the bottom of the recession in the fourth quarter of fiscal 2009.  However, business volumes continue to remain significantly below pre-recessionary volumes experienced in the first half of fiscal 2009.

In response to the declining business and market conditions, the Company focused on its four-point plan, implementing a number of cost and operational efficiency measures designed to improve our longer-term competitiveness:

 
·
Manufacturing realignment – In fiscal 2008, we announced the closures of the Camdenton, Missouri; Pemberville, Ohio; and Logansport, Indiana facilities within the Original Equipment – North America segment and the Tübingen, Germany manufacturing facility within the Original Equipment – Europe segment.  In addition, in October 2009 we announced the closure of the Harrodsburg, Kentucky facility within the Original Equipment – North America segment.  The Pemberville and Tübingen closures have been completed, the Logansport and Harrodsburg closures are anticipated to be completed in the first quarter of fiscal 2011, and the Camdenton closure is anticipated to be completed by the end of fiscal 2011.  In addition, during fiscal 2009, we implemented a significant reduction of direct and indirect costs in our manufacturing facilities.  The reduction in manufacturing costs contributed to an improvement in our gross margin from 13.3 percent in fiscal 2009 to 14.6 percent in fiscal 2010 despite the year-over-year decline in sales volumes.

 
·
Portfolio rationalization – The Company’s business structure is organized around global product lines and a regional operating model.  The Company evaluated product lines within and across the regions to assess them relative to Modine’s competitive position and the overall business attractiveness in order to identify those lower margin product lines that may be divested or exited.  The Company implemented an action plan to deemphasize its automotive module business.  During fiscal 2010, we significantly decreased its exposure to the vehicular heating, ventilation and air conditioning (“HVAC”) business with the sale of our South Korean operation and announced closure of our Harrodsburg, Kentucky facility.  In addition, we sold our 50 percent ownership of Anhui Jianghaui Mando Climate Control Co. Ltd. and our 41 percent investment in Construction Mechaniques Mota, S.A. during the year.

 
·
Capital allocation – The Company’s capital allocation process is designed to allocate capital spending to the product lines and customer programs that will provide the highest return on investment.  Under this process, capital spending was limited to $60.3 million in fiscal 2010, down from $103.3 million in fiscal 2009.  Our capital spending will continue to be limited under this process to $70.0 million in fiscal 2011.
 
 
·
Selling, general and administrative (“SG&A”) cost containment – During fiscal 2009, the Company completed a global workforce reduction, focusing on the realignment of our corporate and regional headquarters.  The global workforce reduction was enabled by the portfolio rationalization and the phase out of certain product lines.  Through this process, our SG&A costs were reduced from $199.6 million in fiscal 2009 to $157.5 million in fiscal 2010.

These actions contributed to a significant improvement in our results from continuing operations from a loss of $103.6 million, or a loss of $3.23 per diluted share in fiscal 2009 to a loss of $20.3 million, or a loss of $0.52 per diluted share in fiscal 2010.  While our results improved substantially year-over-year, the Company still generated a loss from continuing operations due to the low business volumes that have not yet recovered from the global recession.

On September 30, 2009, we completed a public offering of 13.8 million shares of our common stock with cash proceeds of $92.9 million after deducting underwriting discounts, commissions, legal, accounting and printing fees.  The proceeds from this offering along with proceeds from the sale of the South Korean operation and the disposition of assets were used to substantially reduce our outstanding indebtedness.  Outstanding indebtedness decreased $110.0 million from the March 31, 2009 balance of $249.2 million to $139.2 million at March 31, 2010.

 
2


Our investment in research and development (“R&D”) in fiscal 2010 was $56.9 million, or 4.9 percent of sales, compared to $73.2 million, or 5.2 percent of sales, in fiscal 2009.  This level of investment reflects the Company’s continued commitment to R&D in an ever-changing market, balanced with a near-term focus on preserving cash and liquidity through more selective capital investment in order to weather the continued effects of the global recession.  Consistent with the streamlining of the Company’s product portfolio, our current R&D is focused primarily on company-sponsored development in the areas of powertrain cooling, engine products and commercial HVAC products.

Discontinued Operations

During fiscal 2009, the Company announced the intended divestiture of its South Korean-based HVAC business and presented it as held for sale and as a discontinued operation in the consolidated financial statements for all periods presented.  The South Korean-based HVAC business was sold on December 23, 2009 for net cash proceeds of $10.5 million, resulting in a loss on sale of $0.6 million.  On May 1, 2007, the Company announced it would explore strategic alternatives for its Electronics Cooling business and presented it as held for sale and as a discontinued operation in the consolidated financial statements for all periods presented.  The Electronics Cooling business was sold on May 1, 2008 for $13.2 million, resulting in a gain on sale of $2.5 million.  Reported net loss for fiscal 2010, 2009 and 2008 was $29.3 million, $108.6 million and $68.6 million, respectively, or a loss per fully diluted share of $0.75, $3.39 and $2.15, respectively.

Products

The Company offers a broad line of products that can be categorized generally as a percentage of net sales as follows:

   
Fiscal 2010
   
Fiscal 2009
 
             
Modules/Packages*
    32 %     30 %
Oil Coolers
    14 %     16 %
Radiators
    13 %     16 %
Building HVAC
    12 %     11 %
Miscellaneous
    10 %     7 %
Charge-Air Coolers
    8 %     9 %
Exhaust Gas Recirculation ("EGR") Coolers
    7 %     7 %
Vehicular Air Conditioning Parts
    4 %     4 %

*Typically include components such as radiators, oil coolers, charge air coolers, condensers and other purchased components.

Competitive Position

We compete with several manufacturers of heat transfer products, some of which are divisions of larger companies.  The markets for the Company's products are increasingly competitive and have changed significantly in the past few years.  The Company's traditional OEM customers in the U.S. and Europe are faced with dramatically increased international competition and have expanded their worldwide sourcing of parts to compete more effectively with lower cost imports.  These market changes have caused the Company to experience competition from suppliers in other parts of the world that enjoy economic advantages such as lower labor costs, lower healthcare costs, and lower tax rates.  In addition, our customers continue to ask the Company, as well as their other primary suppliers, to participate in R&D, design, and validation responsibilities.  We expect this combined work effort to result in stronger customer relationships and more partnership opportunities for the Company.

Business Segments

The Company has assigned specific businesses to a segment based principally on defined markets and geographical locations.  Each Modine segment is managed at the regional vice president or managing director level and has separate financial results reviewed by its chief operating decision makers.  These results are used by management in evaluating the performance of each business segment, and in making decisions on the allocation of resources among our various businesses.  Our chief operating decision makers evaluate segment performance with an emphasis on gross margin, and secondarily based on operating income of each segment, which includes certain allocations of Corporate SG&A expenses.

 
3


During the first quarter of fiscal 2010, we implemented certain management reporting changes resulting in the transfer of support department costs originally included in Corporate and administrative into the Original Equipment – North America segment.  During the second quarter of fiscal 2010, we implemented certain management reporting changes resulting in the realignment of the Fuel Cell segment into the Original Equipment – North America segment.  The previously reported results for the Original Equipment – North America segment have been retrospectively adjusted to reflect these changes.  Additional information about Modine’s business segments, including sales and assets by geography, is set forth in Note 25 of the Notes to Consolidated Financial Statements.

Original Equipment – Asia, Europe and North America Segments

The continuing globalization of the Company's OEM customer base has led to the necessity of viewing Modine’s strategic approach, product offerings and competitors on a global basis.  This trend offers significant opportunities for Modine with its market positioning, including presence in key global markets (U.S., Europe, China and India) and a global product-based organization with expertise to solve technical challenges.  At the same time, Modine is small enough to stay nimble and respond quickly to customer expectations.  Modine is recognized as having strong technical support, product breadth and the ability to support global standard designs for its customers.

The Company's main competitors, Behr GmbH & Co. K.G., Dana Corporation, Visteon Corporation, Denso Corporation, Delphi Corporation, T.Rad Co. Ltd., Honeywell Thermal Div., Tokyo Radiator Co., Ltd (Calsonic), Valeo SA and TitanX (former Valeo Heavy Duty group now owned by EQT), have a worldwide presence.  Increasingly, the Company faces competition as these competitors expand their product offerings and manufacturing footprints through expansion into low cost countries and low cost country sourcing initiatives.

Specifically, the Original Equipment – North America, Europe and Asia segments serve the following markets:

Commercial Vehicle

Products – Powertrain cooling (“PTC”) (engine cooling modules, radiators, charge-air-coolers, condensers, fan shrouds, and surge tanks); on-engine cooling (exhaust gas recirculation (“EGR”) coolers, engine oil coolers, fuel coolers, charge-air-coolers and intake air coolers); oil coolers (transmission oil coolers and power steering coolers); and fuel coolers

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

Market Overview – We continued to see a weak North American market for commercial vehicles despite being in mid-cycle between emissions legislation.  The significant drop in the global economy in the last two quarters of fiscal 2009 contributed to low production and sales levels not seen in many years in both North America and Europe.  Sales volumes in these markets have remained at these very low levels throughout fiscal 2010.

Other trends influencing the market include the consolidation of major customers into global entities emphasizing the development of global vehicle platforms in order to leverage and reduce development costs and distribution methods.  The emissions regulations and timelines are driving the advancement of product development worldwide and creating demand for incremental thermal transfer products.  At the same time, OEMs expect greater supplier support at lower prices and seek high technology/low cost solutions for their thermal management needs.  In general, this drives a deflationary price environment.

Primary Competitors – Behr GmbH & Co. K.G.; TitanX, Bergstrom, Inc.; T.Rad Co. Ltd.; Tokyo Radiator Co.; Ltd. (Calsonic); Honeywell Thermal Div.; Dayco Ensa SA

Automotive

Products – Powertrain cooling (engine cooling modules, radiators, condensers, charge-air-coolers, auxiliary cooling (power steering coolers and transmission oil coolers), component assemblies, radiators for special applications) and on-engine cooling (EGR coolers, engine oil coolers, fuel coolers, charge-air-coolers and intake air coolers)

 
4


Customers – Automobile, light truck and engine manufacturers

Market Overview – Modine decided to deemphasize portions of the automotive business due to a variety of factors, among them the cost and risk of enormous capital outlays to maintain a scale cost position, the inherent over-capacity in this market segment, and the anticipation of better returns in other markets.  We will continue to support the automotive marketplace with components where complementary Modine technology can be applied to an automotive environment at reasonable returns.  This means moving away from the niche position we enjoyed with cooling modules in the light vehicle segment.  Continued select component supply as a Tier 2 supplier may carry on for some time.

Primary Competitors – Behr GmbH & Co. K.G.; Dana Corporation; Delphi Corporation; Denso Corporation; T.Rad Co. Ltd.; Tokyo Radiator Co.; Ltd. (Calsonic) and Visteon Corporation

Off-Highway

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

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

Market overview – The slowing of the global economy, driven by the steep decline in housing starts and tight credit, has depressed off-highway equipment orders.  The agriculture market has seen a decline in orders as concerns about the overall economy dampened investment in large agriculture equipment.

Overall market trends include a migration toward global machine platforms, driving the multi-region assembly of a common design platform with low cost country sourcing for certain components.  Additionally, fixed emissions regulations and timelines are driving the advancement of product development in both of these markets.  OEMs are rapidly expanding into Asia and prefer suppliers with local production capabilities.  Modine is recognized as having strong technical support, product breadth, and the ability to support global standard designs of its customers.

Primary Competitors – Adams Thermal Systems Inc.; AKG; Delphi Corporation; Denso Corporation; Honeywell Inc.; Zhejiang Yinlun Machinery Co., Ltd.; ThermaSys Corp.; T. Rad Co., Ltd.; Tokyo Radiator Co., Ltd. (Calsonic); Doowon and Donghwan

Fuel Cell

Products – Comprised of heat exchangers, non-typical highly integrated thermal management systems, reactor subsystems and reformer (or fuel processing) components for steam methane reforming, auto-thermal reactors and catalytic partial oxidation systems.  These products are used in both the solid oxide fuel cell (“SOFC”) and proton exchange membrane (“PEM”) technologies.

Customers – The fuel cell group works with targeted customers in the fuel cell or fuel processing industries where close collaborative relationships are formed.  Our customers are developing fuel cell, hydrogen generation and hydrogen infrastructure products that are dependent on thermodynamic and catalytic processes and require Modine’s expertise to provide optimal solutions to their unique thermal management challenges.  One of these customers is Ceres Power, a UK-based developer of micro-CHP (combined heat and power) fuel cell systems used in homes.

Market Overview – Markets served by our customers consist of stationary distributed power generation (primary power applications); micro-CHP (combined heat and power); mobile power (passenger cars, fleet vehicles and industrial vehicles); portable power (man-portable and auxiliary power units for on-board supplementary vehicle power); fuel processing; and the hydrogen infrastructure (refueling stations and on-site hydrogen generation).  Modine has a global presence in these markets and is perceived by our customers as the one of the innovation and technology leaders.

Primary Competitors – Dana Corporation

 
5


Commercial Products

Products – Unit heaters (gas-fired, hydronic, electric and oil-fired); duct furnaces (indoor and outdoor); infrared units (high intensity and low intensity); hydronic products (commercial fin-tube radiation, cabinet unit heaters, and convectors); roof mounted direct- and indirect-fired makeup air units; unit ventilators; close control units for precise temperature and humidity control applications; chiller units; ceiling cassettes; condensing units and coils for heating, refrigeration, air conditioning and vehicular applications

Customers – Heating and cooling equipment manufacturers; construction contractors; wholesalers of plumbing and heating equipment; installers; and end users in a variety of commercial and industrial applications, including banking and finance, education, transportation, telecommunications, entertainment arenas, pharmaceuticals, electronics, hospitals, defense, petrochemicals, and food and beverage processing

Market Overview – Commercial Products has strong sales in gas unit heaters, coil products and room heating and cooling units.  Efficiency legislation, lower noise requirements, and higher energy costs are driving market opportunities.

Primary Competitors – Lennox International Inc. (ADP); Luvata (Heatcraft / ECO); Thomas & Betts Corp. (Reznor); Mestek Inc. (Sterling); Emerson Electric Company (Liebert Hiross); United Technologies Corporation (Carrier); Johnson Controls, Inc. (York); and McQuay International

South America

Products – Construction and agricultural applications, automotive OEM and industrial applications, aftermarket radiators, charge-air-coolers, oil coolers, auxiliary coolers (transmission, hydraulic and power steering) and engine cooling modules

Customers – Commercial, medium and heavy duty truck and engine manufacturers; bus; and specialty vehicle manufacturers, automobile, light truck vehicle and engine manufacturers; construction and agricultural equipment,  engine manufacturers and industrial manufacturers of material handling equipment; generator sets and compressors

Market Overview – South America provides heat exchanger products to a variety of markets in the domestic Brazilian market as well as for export to North America and Europe.  This segment provides products for on-highway and off-highway markets, automotive OEMs and industrial applications.  South America also provides products to the Brazilian, North American and European aftermarkets for both automotive and commercial applications.

Primary Competitors – Behr GmbH & Co. A.G.; Valeo SA; Denso Corporation and Delphi Corporation
 
 
Geographical Areas

We maintain administrative organizations in three regions - North America, Europe and Asia - to facilitate financial and statutory reporting and tax compliance on a worldwide basis and to support the business units.  Our products are manufactured in the following countries:

North America
Europe
South America
Africa
Asia/Pacific
         
Mexico
Austria
Brazil
South Africa
China
United States
Germany
   
India
 
Hungary
   
Japan
 
Italy
   
South Korea
 
The Netherlands
     
 
United Kingdom
     

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

Exports

The Company exports from North America to foreign countries and receives royalties from foreign licensees.  Export sales as a percentage of net sales were 4 percent for fiscal 2010 and 5 percent for fiscal 2009 and 2008.  Royalties from foreign licenses were $3.3 million, $4.1 million and $4.7 million for fiscal 2010, 2009 and 2008, respectively.

 
6


Modine believes its international presence has positioned the Company to share profitably in the anticipated long-term growth of the global vehicular, commercial and industrial markets.  Modine is committed to increasing its involvement and investment in international markets in the years ahead.

Foreign and Domestic Operations

Financial information relating to the Company's foreign and domestic operations is included in Note 25 of the Notes to Consolidated Financial Statements.

Customer Dependence

Ten customers accounted for approximately 57 percent of the Company's sales in fiscal 2010.  These customers, listed alphabetically, were: BMW; Caterpillar Inc.; Daimler AG; Deere & Company; General Motors; MAN Truck & Bus; Navistar; Oshkosh Corporation; Volkswagen AG and Volvo Group.  In fiscal 2010, 2009 and 2008, BMW was the only customer that accounted for ten percent or more of the Company’s sales.  Generally, goods are supplied to these customers on the basis of individual purchase orders received from them.  When it is in the customer's and the Company's best interests, the Company utilizes long-term sales agreements with customers to minimize investment risks and also to provide the customer with a proven source of competitively priced products.  These contracts are on average three years in duration and may include built-in pricing adjustments.  In certain cases, our customers have requested additional pricing adjustments beyond those included in these long-term contracts.

Backlog of Orders

The Company's operating units maintain their own inventories and production schedules.  Current production capacity is capable of handling the sales volumes expected in fiscal 2011.

Raw Materials

Aluminum, nickel, brass and steel, all essential to the business, are purchased from several domestic and foreign producers.  In general, the Company does not rely on any one supplier for these materials which are, for the most part, available from numerous sources in quantities required by the Company.  The supply of fabricated copper products is highly concentrated between two global suppliers.  All purchases of fabricated copper are currently from one of these suppliers.  The Company normally does not experience material shortages and believes that our suppliers’ production of these materials will be adequate throughout the next fiscal year.  In addition, when possible, Modine has made material pass-through arrangements with its key customers.  Under these arrangements, the Company can pass material cost increases and decreases to its customers.  However, where these pass-through arrangements are utilized, there is a time lag between the time of the material increase or decrease and the time of the pass-through.  To further mitigate the Company’s exposure to fluctuating material prices, we enter into forward contracts from time to time to hedge a portion of our forecasted aluminum purchases, our single largest purchased commodity.  The Company also entered into fixed price contracts to hedge against changes in natural gas price over the winter months.  In addition, the Company utilized collars for certain forecasted copper purchases, and also entered into forward contracts for certain forecasted nickel purchases.  During fiscal 2010, the Company did not enter into any new commodity hedges.  At March 31, 2010, the Company had forward contracts outstanding that hedge less than 5 percent of North American aluminum requirements anticipated to be purchased over the next five years.

Patents

The Company owns outright or has a number of licenses to produce products under patents.  These patents and licenses obtained over a period of years expire at various times.  Because the Company has many product lines, it believes that its business as a whole is not materially dependent upon any particular patent or license, or any particular group of patents or licenses.  Modine considers each of its patents, trademarks and licenses to be of value and aggressively defends its rights throughout the world against infringement. Modine has been granted and/or acquired more than 2,000 patents worldwide over the life of the Company.

 
7


Research and Development

The Company remains committed to its vision of creating value through technology.  Company-sponsored R&D activities support the development of new products, processes and services, and the improvement of existing products, processes, and services.  R&D expenditures were $56.9 million, $73.2 million and $85.8 million in fiscal 2010, 2009 and 2008, respectively.  There were no material expenditures on research activities that were customer-sponsored.  Over the course of the last few years, the Company has become involved in several industry-, university- and government-sponsored research organizations, that conduct research and provide data on technical topics deemed to be of interest to the Company for practical applications in the markets the Company serves.  The research developed as a result is generally shared among the member organizations.

To achieve efficiencies and lower developmental costs, Modine's research and engineering groups work closely with our customers on special projects and systems designs.  In addition, the Company is participating in U.S. government-funded projects, including dual purpose programs in which the Company retains commercial intellectual property rights in technology it develops for the government, such as a contracts with the United States Army Research Development and Engineering Command for the development of advanced battery thermal management systems; the design and demonstration of waste heat recovery systems; development of CO2-based climate control systems; and research and testing directed at the enhancement of EGR cooler in-service performance.

Quality Improvement

Through Modine’s global Quality Management System (“QMS”), the manufacturing facilities in our Original Equipment – Asia, Europe and North America segments and our South America segment are registered to ISO 9001:2008 or ISO/TS 16949:2009 standards, helping to ensure that our customers receive high quality products and services from every Modine facility.  While customer expectations for performance, quality and service have risen continuously over the past years, our QMS has enabled Modine to drive improvements in quality performance and enabled the ongoing delivery of products and services that meet or exceed customer expectations.

The global QMS operates in the context of the Modine Operating System (“MOS”) and the Modine Production System (“MPS”), that focus on leadership and rapid continuous improvement.  Sustainable continuous improvement is driven throughout all functional areas and operating regions of the organization by the principles, processes and behaviors that are core to these systems.
 
Environmental, Health and Safety Matters

Modine is committed to preventing pollution, eliminating waste and reducing environmental risks.  The Company’s existing facilities maintained their Environmental Management System (“EMS”) certification to the international ISO14001 standard through independent third-party audits, while new facilities in Asia and Europe are implementing Modine’s global EMS with subsequent ISO14001 certification.  All Modine locations have established specific environmental improvement targets and objectives for the coming fiscal year.

In fiscal 2010, Modine continued its commitment to reduce its dependence on fossil fuels and to shrink its global carbon footprint.  The Company achieved an 8 percent reduction in energy consumption over fiscal 2009 at those locations with continuing operations.  A year-over-year reduction of approximately 19,900 tons of carbon dioxide was realized, which is equivalent to saving 2.0 million gallons of gasoline.

Modine built on its successful history of environmental stewardship in fiscal 2010 by establishing objectives for reducing waste, air emissions and water use. Air emissions, hazardous waste, and solid wastes declined at facilities with continuing operations by 1.5 million pounds this past fiscal year, an approximate 16 percent improvement.  Water consumption decreased by 11 percent, conserving nearly 1.6 million cubic feet of water.

Modine's commitment to environmental stewardship is also reflected in its reporting of chemical releases as monitored by the United States Environmental Protection Agency's Toxic Chemical Release Inventory program.  The Company's U.S. locations decreased their reported chemical releases by 52 percent from calendar year 2007 to 2008, with a 95 percent decline from 1998 to 2008.  Modine anticipates significant decreases in reported releases for calendar years 2009 and 2010 which will be largely influenced by the elimination of a liquid painting process at its Harrodsburg, Kentucky facility.  That process accounted for 90 percent of the Company’s releases reported in calendar year 2008.

 
8


Although a portion of the above improvements can be attributed to decreased manufacturing volumes, ongoing energy and resource conservation projects along with a continued focus on waste minimization contributed significantly to these achievements.

Modine’s products reflect our sense of environmental responsibility.  The Company continues its development and refinement of environmentally friendly product lines including: R22-free HVAC units; oil, fuel, and EGR coolers for diesel applications, diesel truck idle-off technologies to reduce fuel use and associated air emissions and high efficiency stationary fuel cell applications.  The Airedale Schoolmate HVAC product line with environmentally friendly R410A refrigerant has been coupled with ground source heat pump technology to utilize the natural heat sink properties of the earth to reduce energy consumption.  The Effinity93, which is the most efficient gas-fired unit heater in North America, was introduced in fiscal 2010.

An obligation for remedial activities may arise at Modine-owned facilities due to past practices or as a result of a property purchase or sale.  These expenditures most often relate to sites where past operations followed practices that were considered acceptable under then-existing regulations, but now require investigative and/or remedial work to ensure appropriate environmental protection or where 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.  Two of the Company's currently owned manufacturing facilities and one formerly owned property have been identified as requiring soil and/or groundwater remediation.  Environmental liabilities recorded as of March 31, 2010, 2009, and 2008 to cover the investigative work and remediation for sites in the United States, Brazil, and The Netherlands were $3.0 million, $2.0 million and $2.1 million, respectively.  These liabilities are recorded in the consolidated balance sheet in "accrued expenses and other current liabilities" and "other noncurrent liabilities."

Environmental expenses charged to current operations, including remediation costs, solid waste disposal, and operating and maintenance costs totaled $2.9 million in fiscal 2010.  Operating expenses of some facilities may increase during fiscal year 2011 because of environmental matters but the competitive position of the Company is not expected to change materially as a result of these expenses.

Modine’s health and safety performance showed continued improvement in fiscal 2010, when we recorded a global Recordable Incident Rate (“RIR”) of 1.85, based upon U.S. recordkeeping practices.  This represents a 19 percent year-over-year improvement in recordable injuries over fiscal 2009, and marks the fourth consecutive year of improved RIR.  The fiscal 2010 RIR was the lowest on record for Modine, and is reflective of the Company’s continued commitment to ensuring a safe workplace.  Ten company-owned or joint venture locations ended the year with no recordable injuries. Complementing this achievement were nineteen facilities worldwide that either had no injuries in fiscal year 2010 or exceeded the 10 percent RIR improvement goal.

Employees

The number of persons employed by the Company as of March 31, 2010 was 5,984.

Seasonal Nature of Business

The Company’s operating performance generally is not subject to a significant degree of seasonality as sales to OEMs are dependent upon the demand for new vehicles.  Our Commercial Products segment does experience a degree of seasonality since the demand for HVAC products is affected by heating and cooling seasons, weather patterns, construction, and other factors.  Generally, sales volume within the Commercial Products segment is stronger in the second and third fiscal quarters corresponding with demand for heating products.

Working Capital Items

The Company manufactures products for the original equipment segments on an as-ordered basis, which makes large inventories of such products unnecessary.  In addition, the Company does not experience a significant amount of returned products.  In the Commercial Products segment, the Company maintains varying levels of finished goods inventory due to certain sales programs.  In these areas, the industry and the Company generally make use of extended terms of payment for customers on a limited basis.

 
9


Available Information

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

-
Code of Ethics and Business Conduct, which is applicable to all Modine employees, including the principal executive officer, the principal financial officer, the principal accounting officer and directors;
-
Corporate Governance Guidelines;
-
Audit Committee Charter;
-
Officer Nomination and Compensation Committee Charter;
-
Corporate Governance and Nominating Committee Charter; and
-
Technology Committee Charter.

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

ITEM 1A.     RISK FACTORS.

Our business involves risks.  The following information about these risks should be considered carefully together with the other information contained in this report.  The risks described below are not the only risks we face.  Additional risks not currently known or deemed immaterial as of the date of this report may also result in adverse results for our business.

Financial Risks

Liquidity and Access to Cash

Continued volume declines and potential disruptions in the credit markets may adversely affect our ability to fund our liquidity requirements and to meet our long-term commitments.

Significant volume decreases in the commercial vehicle and automotive markets continue to adversely affect cash flows from operations.  If cash flows are not sufficient to fund our operations, we may be required to rely on the banking and credit markets to meet our financial commitments and short-term liquidity needs.  Disruptions in the capital and credit markets, as have been experienced during 2008 and into 2009, could adversely affect our ability to draw on our revolving credit facility.  Our access to funds under that credit facility is dependent upon the ability of the banks that are parties to the facility to meet their funding commitments.  Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from Modine and other borrowers within a short period of time.  Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect our access to liquidity needed for our business.  Any such disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged.

Our liquidity could be jeopardized by our suppliers suspending normal trade credit terms.

Our liquidity could also be adversely impacted if our suppliers were to suspend normal trade credit terms and require payment in advance or payment on delivery of purchases.  If this were to occur, we would be dependent on other sources of financing to bridge the additional period between payment of our suppliers and receipt of payments from our customers.

 
10


Our debt level and covenant restrictions may increase our vulnerability to market conditions.

As of March 31, 2010, our total consolidated debt was $139.2 million.  This debt level could have important consequences for the Company, including: increasing our vulnerability to general adverse economic, credit market and industry conditions; requiring a substantial portion of our cash flows from operations to be used for the payment of interest rather than to fund working capital, capital expenditures, strategic business actions and general corporate requirements; limiting our ability to obtain additional financing or refinance our existing debt agreements; and limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate.

The agreements governing our debt include covenants that restrict, among other things, our ability to incur additional debt; pay dividends on or repurchase our equity; make investments; and consolidate, merge or transfer all or substantially all of our assets.  Our ability to comply with these covenants may be adversely affected by events beyond our control, including prevailing economic, financial and industry conditions.  These covenants may also require that we take action to reduce our debt or to act in a manner contrary to our short-term or long-term business objectives.  There can be no assurance that we will meet our covenants in the future or that the lenders will waive a failure to meet those tests.  Even if we are able to maintain compliance with our covenants, our revolving debt agreement, with a balance of $7.5 million as of March 31, 2010, matures in fiscal 2012, and adverse economic, credit market and industry conditions could make it difficult to refinance this indebtedness.

Our primary lenders may be required to make a payment to the senior note holders.

Under the terms of the First Amendment to Collateral Agency and Intercreditor Agreement (“Intercreditor Agreement”), 90 days after the expiration of our revolving credit facility in July 2011, certain actions may be required in order to preserve a stated ratio relative to the Company’s indebtedness to the primary lenders on the one hand and the senior note holders on the other.  This portion of the Intercreditor Agreement, if triggered, would require the primary lenders to pay the senior note holders to preserve the relative position of those two groups that existed when the Intercreditor Agreement was executed.  If the outstanding balance on the revolving credit facility at that time is the same as it was as of March 31, 2010, the primary lenders would be required to pay approximately $42 million to the senior note holders in October 2011.  We may be required to reimburse the primary lenders for the rebalancing payment made to the senior note holders.

Recent market trends may require additional funding for our pension plans.

The Company has several non-contributory defined benefit pension plans that cover most of its domestic employees hired on or before December 31, 2003.  The funding policy for these plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations.  The depressed market value of the assets held by these domestic plans has resulted in a $62.9 million underfunded status of these plans.  During fiscal 2011, we will be required to make a funding contribution of $10.9 million related to these domestic plans.  If significant additional funding contributions are necessary, this could have an adverse impact on the Company’s liquidity position.

Market Risks

Customer and Supplier Matters

The current financial condition of the vehicular industry in Europe and the United States could have a negative impact on our ability to finance our operations and disrupt the supply of components to our OEM customers.

Several of our key customers face significant business challenges due to increased competitive conditions and lower consumer demand.  We depend upon the ability of our customers to timely pay the amounts we have billed them for tools and products.  Significant disruption in our customers’ ability to pay us in a timely manner because of financial difficulty or otherwise would negatively impact on our ability to finance our operations.

In addition, because of the challenging conditions within the global vehicular industry, multiple suppliers have filed for bankruptcy.  The bankruptcy or insolvency of other vehicular suppliers or work stoppages or slowdowns due to labor unrest that may affect these suppliers or our OEM customers could lead to supply disruptions that could have an adverse effect on our business.

 
11


Even if such suppliers are not in bankruptcy, many are facing severe financial challenges.  As a result, they could impose restrictive payment terms or cease to supply us, which would have a negative impact on our ability to finance our operations.  Because of the expense of dual sourcing, many of our suppliers are single sourced and hold the tooling for the products we purchase from them.  The process to qualify a new supplier and produce tooling is expensive, time consuming and dependent upon customer approval and qualification.

Our OEM customers continually seek price reductions from us.  These price reductions adversely affect our results of operations and financial condition.

A challenge that we and other suppliers to vehicular OEMs face is continued price reduction pressure from our customers.  Downward pricing pressure has been a characteristic of the automotive industry in recent years and is migrating to all our vehicular OEM markets.  Virtually all such OEMs have aggressive price reduction initiatives that they impose upon their suppliers, and such actions are expected to continue in the future.  In the face of lower prices to customers, the Company must reduce its operating costs in order to maintain profitability.  The Company has taken and continues to take steps to reduce its operating costs to offset customer price reductions; however, price reductions are adversely affecting our profit margins and are expected to do so in the future.  If the Company is unable to offset customer price reductions through improved operating efficiencies, new manufacturing processes, sourcing alternatives, technology enhancements and other cost reduction initiatives, or if we are unable to avoid price reductions from our customers, our results of operations and financial condition could be adversely affected.

The continual pressure to absorb costs adversely affects our profitability.

We continue to be pressured to absorb costs related to product design, engineering and tooling, as well as other items previously paid for directly by OEMs.  They are also requesting that we pay for design, engineering and tooling costs that are incurred prior to the start of production and recover these costs through amortization in the piece price of the applicable component.  Some of these costs cannot be capitalized, which adversely affects our profitability until the programs for which they have been incurred are launched.  If a given program is not launched or is launched with significantly lower volumes than planned, we may not be able to recover the design, engineering and tooling costs from our customers, further adversely affecting our profitability.

Our OEM business, which accounts for approximately 85 percent of our business currently, is dependent upon the health of the markets we serve.

Current global economic and financial market conditions may materially and adversely affect our results of operations and financial condition.  Economic and financial market conditions that adversely affect our customers may cause them to terminate existing purchase orders or to reduce the volume of products they purchase from us in the future.  We are highly susceptible to downward trends in the markets we serve because our customers’ sales and production levels are affected by general economic conditions, including access to credit, the price of fuel, employment levels and trends, interest rates, labor relations issues, regulatory requirements, trade agreements and other factors.  Any significant decline in production levels for current and future customers could result in long-lived asset impairment charges and would reduce our sales and adversely impact our results of operations and financial condition.

The slowdown in the global economy has reduced the demand for commercial vehicles.  The global truck markets are subject to tightening emission standards that drive cyclical demand patterns.  The global construction, agriculture and industrial markets are also impacted by emission regulations and timelines driving the need for advanced product development.  Continuing declines in any of these markets would have an adverse effect on our business.

If we were to lose business with a major OEM customer, our revenue and profitability could be adversely affected.

Deterioration of a business relationship with a major OEM customer could cause the Company’s revenue and profitability to suffer.  We principally compete for new business both at the beginning of the development of new models and upon the redesign of existing models by our major customers.  New model development generally begins two to five years prior to the marketing of such models to the public.  The failure to obtain new business on new models or to retain or increase business on redesigned existing models could adversely affect our business and financial results.  In addition, as a result of the relatively long lead times required for many of our complex structural components, it may be difficult in the short-term for us to obtain new sales to replace any unexpected decline in the sales of existing products.  We may incur significant expense in preparing to meet anticipated customer requirements that may not be recovered.  The loss of a major OEM customer, the loss of business with respect to one or more of the vehicle models that use our products, or a significant decline in the production levels of such vehicles could have an adverse effect on our business, results of operations and financial condition.

 
12


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

In an effort to manage and reduce the cost of purchased goods and services, the Company, like many suppliers and customers, has been consolidating its supply base.  As a result, the Company is dependent upon limited sources of supply for certain components used in the manufacture of our products.  The Company selects its suppliers based on total value (including price, delivery and quality), taking into consideration their production capacities, financial condition and ability to meet demand.  In some cases, it can take several months or longer to find a supplier due to qualification requirements.  However, there can be no assurance that strong demand, capacity limitations or other problems experienced by the Company’s suppliers will not result in occasional shortages or delays in their supply of product to us.  If we were to experience a significant or prolonged shortage of critical components or materials from any of our suppliers and could not procure the components or materials from other sources, the Company would be unable to meet its production schedules for some of its key products and would miss product delivery dates, which would adversely affect our sales, margins and customer relations.

Operational Risks

Restructuring

We may be unable to complete and successfully implement our restructuring plans to reduce costs and increase efficiencies in our businesses and, therefore, we may not achieve the cost savings or timing for completion that we initially projected.

We are implementing several cost savings programs, including plant closures.  Successful implementation of these and other initiatives, including the expansion in low cost countries, is critical to our future competitiveness and our ability to improve our profitability.

We expect to complete the closing of three plants in North America by March 31, 2011.  We have and may continue to experience inefficiencies in the movement of product lines from plants being closed to plants that are remaining open, which could result in delays and reduced cost savings.

We may need to undertake further restructuring actions.

We have initiated certain restructuring actions to realign and resize our production capacity and cost structure to meet current and projected operational and market requirements.  We may need to take additional actions to reduce the Company’s cost structure and the charges related to these actions may have a material adverse effect on our results of operations and financial condition.

Global Nature of the Business

As a global company, we are subject to currency fluctuations, and any significant movement between the U.S. dollar, the euro, and Brazilian real, in particular, could have an adverse effect on our profitability.

Although our financial results are reported in U.S. dollars, a significant portion of our sales and operating costs are realized in euros, the Brazilian real and other currencies.  Our profitability is affected by movements of the U.S. dollar against the euro, the real and other currencies in which we generate revenues and incur expenses.  To the extent that we are unable to match revenues received in foreign currencies with costs paid in the same currency, exchange rate fluctuations in any such currency could have an adverse effect on our financial results.  During times of a strengthening U.S. dollar, our reported sales and earnings from our international operations will be reduced because the applicable local currency will be translated into fewer U.S. dollars.  Significant long-term fluctuations in relative currency values, in particular a significant change in the relative values of the U.S. dollar, euro or real, could have an adverse effect on our profitability and financial condition.

 
13


Reliance Upon Intellectual Property and Product Quality

If we cannot differentiate ourselves from our competitors with our technology, our products may become commodities and our sales and earnings would be adversely affected.

If we were to compete only on cost, our sales would decline substantially.  If we cannot differentiate ourselves from our competitors with our technology, our products may become commodities and our sales and earnings would be adversely affected.

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

The Company owns significant intellectual property, including a large number of patents, trademarks, copyrights and trade secrets, and is involved in numerous licensing arrangements.  The Company’s intellectual property plays an important role in maintaining our competitive position in a number of the markets we serve.  Developments or assertions by or against the Company relating to intellectual property rights could adversely affect the business.  Significant technological developments by others also could adversely affect our business and results of operations.

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

We are exposed to warranty and product liability claims in the event that our products fail to perform as expected, and we may be required to participate in a recall of such products.  Our largest customers have recently extended their warranty protection for their vehicles.  Other OEMs have also similarly extended their warranty programs.  This trend will put additional pressure on the supply base to improve quality systems.  This trend may also result in higher cost recovery claims by OEMs from suppliers whose products incur a higher rate of warranty claims.  Historically, we have experienced relatively low warranty charges from our customers due to our contractual arrangements and improvements in the quality, reliability and durability performance of our products.  If our customers demand higher warranty-related cost recoveries, or if our products fail to perform as expected, it could have a material adverse impact on our results of operations or financial condition.  We are also involved in various legal proceedings incidental to our business.

Compliance with Governmental Regulations
 
We may experience negative or unforeseen tax consequences.

We periodically review the probability of the realization of our deferred tax assets based on forecasts of taxable income in the U.S. and numerous foreign jurisdictions.  In our review, we use historical results, projected future operating results based upon approved business plans, eligible carryforward periods, tax planning opportunities and other relevant considerations.  Adverse changes in the profitability and financial outlook in both the U.S. and numerous foreign jurisdictions may require changes in the valuation allowances to reduce our deferred tax assets or increase tax accruals. Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on our results of operations or financial condition.

Our business is subject to costs associated with environmental, health and safety regulations.

Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials.  We believe that our operations and facilities have been and are being operated in compliance, in all material respects, with such laws and regulations, many of which provide for substantial fines and sanctions for violations.  The operation of our manufacturing facilities entails risks in these areas, however, and there can be no assurance that we will not incur material costs or liabilities relating to such matters.  In addition, potentially significant expenditures could be required in order to comply with evolving environmental, health and safety laws, regulations or other pertinent requirements that may be adopted or imposed in the future.

 
14


We are also expanding our business in China and India where environmental, health and safety regulations are in their infancy.  As a result, we cannot determine how these laws will be implemented and the impact of such regulation on the Company.

ITEM 1B.   UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.   PROPERTIES.

We operate manufacturing facilities in the United States and certain foreign countries.  The Company's world headquarters, including general offices, and laboratory, experimental and tooling facilities are maintained in Racine, Wisconsin.  Additional technical support functions are located in Bonlanden, Germany.

The following table sets forth information regarding our principal properties by business segment as of March 31, 2010.  Properties with less than 20,000 square feet of building space have been omitted from this table.

Location of Facility
 
Building Space and Primary Use
 
Owned or Leased
South America Segment
       
Sao Paulo, Brazil
 
336,000 sq. ft./manufacturing
 
Owned
         
Original Equipment – North America Segment
       
Harrodsburg, KY
 
253,000 sq. ft./manufacturing
 
Owned
Lawrenceburg, TN
 
210,000 sq. ft./manufacturing
 
143,800 Owned;
66,200 Leased
Clinton, TN
 
194,100 sq. ft./manufacturing
 
Owned
Pemberville, OH
 
189,900 sq. ft./manufacturing
 
Owned
McHenry, IL
 
164,700 sq. ft./manufacturing
 
Owned
Jefferson City, MO
 
162,000 sq. ft./manufacturing
 
Owned
Trenton, MO
 
159,900 sq. ft./manufacturing
 
Owned
Washington, IA
 
148,800 sq. ft./manufacturing
 
Owned
Logansport, IN
 
141,600 sq. ft./manufacturing
 
Owned
Joplin, MO
 
139,500 sq. ft./manufacturing
 
Owned
Camdenton, MO
 
128,000 sq. ft./manufacturing
 
Leased
Nuevo Laredo, Mexico (Plant II)
 
  90,000 sq. ft./manufacturing
 
Owned
   
 
   
Original Equipment - Asia Segment
       
Chennai, India
 
118,100 sq. ft./manufacturing
 
Owned
Changzhou, China
 
107,600 sq. ft./manufacturing
 
Owned
Shanghai, China
 
  64,600 sq. ft./manufacturing
 
Leased
         
Original Equipment - Europe Segment
       
Wackersdorf, Germany
 
344,400 sq. ft./assembly
 
Owned
Bonlanden, Germany
 
262,200 sq. ft./administrative & technology center
 
Owned
Kottingbrunn, Austria
 
220,600 sq. ft./manufacturing
 
Owned
Pontevico, Italy
 
153,000 sq. ft./manufacturing
 
Owned
Berndorf, Austria
 
145,700 sq. ft./manufacturing
 
Leased
Tübingen, Germany
 
126,400 sq. ft./manufacturing
 
Owned
Pliezhausen, Germany
 
122,400 sq. ft./manufacturing
 
49,800 Owned;
72,600 Leased
Kirchentellinsfurt, Germany
 
107,600 sq. ft./manufacturing
 
Owned
Mezökövesd, Hungary
 
  90,500 sq. ft./manufacturing
 
Owned
Neuenkirchen, Germany
 
  76,400 sq. ft./manufacturing
 
Owned
Uden, Netherlands
 
  61,900 sq. ft./manufacturing
 
Owned
Gyöngyös, Hungary
 
  57,000 sq. ft./ manufacturing
 
Leased
         
Commercial Products Segment
       
Leeds, United Kingdom
 
269,100 sq. ft./administrative & manufacturing
 
Leased
Nuevo Laredo, Mexico (Plant I)
 
198,500 sq. ft./manufacturing
 
Owned
Buena Vista, VA
 
197,000 sq. ft./manufacturing
 
Owned
Lexington, VA
 
104,000 sq. ft./warehouse
 
Owned
West Kingston, RI
 
  92,800 sq. ft./manufacturing
 
Owned
Laredo, TX
 
  32,000 sq. ft./warehouse
 
Leased
         
Corporate Headquarters
       
Racine, WI
 
458,000 sq. ft./headquarters & technical center
 
Owned

 
15


We consider our plants and equipment to be well maintained and suitable for their purposes.  We review our manufacturing capacity periodically and make the determination as to our need to expand or, conversely, rationalize our facilities as necessary to meet changing market conditions and Company needs.

ITEM 3.   LEGAL PROCEEDINGS.

The information required hereunder is incorporated by reference from Note 26 of the Notes to Consolidated Financial Statements.

ITEM 4.   RESERVED.

EXECUTIVE OFFICERS OF THE REGISTRANT.

The following sets forth the name, age, recent business experience and certain other information relative to each person who was an executive officer as of March 31, 2010.

Name
 
Age
 
Position
Thomas A. Burke
 
53
 
President and Chief Executive Officer (April 2008 – Present); Executive Vice President and Chief Operating Officer (July 2006 – March 2008); and Executive Vice President (May 2005 – July 2006) of the Company.  Prior to joining Modine in May 2005, Mr. Burke worked over a period of nine years in various management positions with Visteon Corporation in Detroit, Michigan, a leading supplier of parts and systems to automotive manufacturers, including as Vice President of North American Operations (2002 – May 2005) and Vice President, European and South American Operations (2001 – 2002).  Prior to working at Visteon, Mr. Burke worked in positions of increasing responsibility at Ford Motor Company.
         
Klaus A. Feldmann
 
56
 
Regional Vice President – Europe (November 2006 - Present); Group Vice President – Europe (2000 – October 2006); General Manager and Managing Director – European Heavy Duty Division (1996 – 2000).
         
Scott L. Bowser
 
46
 
Regional Vice President – Americas (March 2009 - Present); Managing Director – Modine Brazil (April 2006 - March 2009); General Sales Manager – Truck Division (January 2002 – March 2006); Plant Manager at the Company’s Pemberville, OH plant (1998 - 2001).
         
Thomas F. Marry
 
49
 
Regional Vice President – Asia and Commercial Products Group (November 2007 - Present); Managing Director – Powertrain Cooling Products (October 2006 - October 2007); General Manager – Truck Division (2003 - 2006); Director – Engine Products Group (2001 – 2003); Manager – Sales, Marketing and Product Development (1999 - 2001); Marketing Manager (1998 - 1999).
         
Margaret C. Kelsey
 
45
 
Vice President, Corporate Development, General Counsel and Secretary (November 2008 – Present); Vice President Corporate Strategy and Business Development (May 2008 – October 2008); Vice President - Finance, Corporate Treasury and Business Development (January 2007 – April 2008); Corporate Treasurer & Assistant Secretary (January 2006 – December 2006); Senior Counsel & Assistant Secretary (April 2002 - December 2005); Senior Counsel (2001 – March 2002).  Prior to joining the Company in 2001, Ms. Kelsey was a partner with the law firm of Quarles & Brady LLP.

 
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Officer positions are designated in Modine's Bylaws and the persons holding these positions are elected annually by the Board generally at its first meeting after the annual meeting of shareholders in July of each year.

There are no family relationships among the executive officers and directors.  With the exception of Mr. Burke, all of the above executive officers have been employed by Modine in various capacities during the last five years.

There are no arrangements or understandings between any of the above officers and any other person pursuant to which he or she was elected an officer of Modine.

PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Company's common stock is listed on the New York Stock Exchange.  The Company's trading symbol is "MOD."  The table below shows the range of high and low sales prices for the Company's common stock for fiscal 2010 and 2009.  As of March 31, 2010, shareholders of record numbered 3,291.

   
2010
   
2009
 
Quarter
 
High
   
Low
   
Dividends
   
High
   
Low
   
Dividends
 
First
  $ 5.40     $ 2.30     $ -     $ 18.36     $ 12.35     $ 0.1000  
Second
    9.85       4.60       -       19.60       12.07       0.1000  
Third
    12.69       8.74       -       14.03       3.07       0.1000  
Fourth
    12.70       8.76       -       5.76       0.73       -  
TOTAL
                  $ -                     $ 0.3000  

Certain of the Company's debt agreements prohibit the payment of cash dividends and the acquisition of Company stock by the Company.

PERFORMANCE GRAPH

The following graph compares the cumulative five-year total return on the Company’s common stock with similar returns on the Russell 2000 Index and the Standard & Poor’s (S&P) MidCap 400 Industrials Index.  The graph assumes a $100 investment and reinvestment of dividends.

 
17


 
March 31,
 
Initial Investment
   
Indexed Returns
 
   
2005
   
2006
   
2007
   
2008
   
2009
   
2010
 
Company / Index
                                   
Modine Manufacturing Company
  $ 100     $ 107.19     $ 85.66     $ 56.20     $ 10.04     $ 45.14  
Russell 2000 Index
    100       125.85       133.28       115.95       72.47       118.87  
S&P MidCap 400 Industrials Index
    100       133.22       140.59       142.83       85.10       139.97  

ITEM 6.   SELECTED FINANCIAL DATA.

The following selected financial data has been presented on a continuing operations basis, and excludes the discontinued operating results of the South Korean-based HVAC business, the Electronics Cooling business, and the Aftermarket business and the loss on the July 22, 2005 spin-off of the Aftermarket business in fiscal 2006.

(in thousands, except per share amounts)
 
Fiscal Year ended March 31
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
                               
Net sales
  $ 1,163,234     $ 1,408,714     $ 1,601,672     $ 1,525,492     $ 1,401,740  
(Loss) earnings from continuing operations
    (20,298 )     (103,597 )     (54,427 )     39,228       74,406  
Total assets
    840,252       852,132       1,168,283       1,101,573       1,052,095  
Long-term debt - excluding current portion
    135,952       243,982       224,525       173,074       149,576  
Dividends per share
    -       0.30       0.70       0.70       0.70  
Net (loss) earnings from continuing operations
   per share of common stock - basic
    (0.52 )     (3.23 )     (1.70 )     1.21       2.18  
Net (loss) earnings from continuing operations
   per share of common stock - diluted
    (0.52 )     (3.23 )     (1.70 )     1.21       2.15  

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

·
During fiscal 2009, the Company recorded a goodwill impairment charge of $9.0 million within the Original Equipment – Europe segment.  During fiscal 2008, the Company recorded a goodwill impairment charge of $23.8 million within the Original Equipment – North America segment.  Refer to Note 15 of the Notes to Consolidated Financial Statements for additional discussion of these charges.

 
18


·
During fiscal 2010, 2009 and 2008, the Company recorded long-lived asset impairment charges of $6.5 million, $26.8 million and $11.6 million, respectively.  Refer to Note 11 of the Notes to Consolidated Financial Statements for additional discussion of these charges.

·
During fiscal 2009, the Company recognized an impairment charge of $7.6 million recorded in other expense (income) – net on an equity investment.  Refer to Note 12 of the Notes to Consolidated Financial Statements for additional discussion of this charge.

·
During fiscal 2010, the Company’s effective tax rate was negative 93.9 percent, as the Company continues to pay taxes in foreign jurisdictions that earn profits, but does not recognize any tax benefits on losses generated in the U.S., Germany and Austria because we recorded full tax valuation allowances in these jurisdictions.  During fiscal 2009, the Company’s effective tax rate was negative 0.6 percent.  During fiscal 2008, the Company’s effective tax rate was negative 227.5 percent due to a valuation allowance of $59.4 million recorded primarily against the net U.S. deferred tax assets.  During fiscal 2007, the Company’s effective tax rate was 15.8 percent.  Refer to Note 7 of the Notes to Consolidated Financial Statements for additional discussion on the effective tax rate.

·
During fiscal 2010, 2009, 2008 and 2007, the Company incurred $7.3 million, $39.5 million, $10.2 million and $10.7 million, respectively, of restructuring and other repositioning costs.  Refer to Note 14 of the Notes to Consolidated Financial Statements for additional discussion of the events which comprised these costs.

·
During fiscal 2007, the Company acquired the remaining 50 percent of Radiadores Visconde Ltda. (“Modine Brazil”).  During fiscal 2006, the Company acquired Airedale International Air Conditioning Limited.

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

Overview and Strategic Plan
 
Founded in 1916, Modine Manufacturing Company is a worldwide leader in thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets.  We operate on five continents, in 14 countries, with approximately 6,000 employees worldwide.
 
Our products are in light-, medium- and heavy-duty vehicles, automobiles, commercial heating, ventilation and air conditioning (HVAC) equipment, refrigeration systems, off-highway and industrial equipment, and fuel cell applications.  Our broad product offerings include heat transfer modules and packages, radiators, oil coolers, charge-air-coolers, vehicular air conditioning, building HVAC equipment, and EGR coolers.

Consolidated Strategy

Our goal is to grow profitably as a leading global provider of thermal management technology to a broad range of niche highway, off-highway and industrial end markets.  We expect to achieve this goal over the long-term through both organic growth and through selective acquisitions.  In order to reach our goal, our strategy is diversification by geography and by end market.  We focus on:

·
Development of new products and technologies for diverse end markets;
·
A rigorous strategic planning and corporate development process; and
·
Operational and financial discipline for improved profitability and long-term stability.
 
Development of New Products and Technologies for Increasingly Diverse End Markets
 
Our ability to develop new products and technologies for current and potential customers and for new, emerging markets is one of our competitive strengths.  We own two global, state-of-the-art technology centers, dedicated to the development and testing of products and technologies.  The centers are located in Racine, Wisconsin in the U.S., and in Bonlanden, Germany.  Our reputation for providing quality products and technologies has been a company strength valued by customers, and has led to a history with few product warranty issues.  In fiscal 2010, we spent $56.9 million (representing approximately 36 percent of selling, general and administrative (SG&A) expenses) on our product and technology research and development efforts.
 
 
19

 
We continue to benefit from relationships with customers that recognize the value of having us participate directly in product design, development and validation.  This has resulted and should continue to result in strong, longer-term customer relationships with companies that value partnerships with their suppliers.  In the past several years, our product lines have been under price pressure from increased global competition, primarily from Asia and other low cost areas.  At the same time, many of our products containing higher technology have helped us better manage demands from customers for lower prices.  Many of our technologies are proprietary, difficult to replicate and are patent protected.  We have been granted and/or acquired more than 2,000 patents on our technologies over the life of the Company and work diligently to protect our intellectual property.
 
Strategic Planning and Corporate Development
 
We employ both a short-term and longer-term (three to five year) strategic planning process enabling us to continually assess our opportunities, competitive threats, and economic market challenges.
 
We focus on strengthening our competitive position through strategic, global business development activities.  We continuously look for and take advantage of opportunities to advance our position as a global leader, both by expanding our geographic footprint and by expanding into new end markets – all with a focus on thermal management technologies.  This process allows us to identify product gaps in the marketplace, develop new products and make additional investments to fill those gaps.  An example of our success from this process has been our expansion activities into niche HVAC and refrigeration markets in our Commercial Products segment.
 
Operational and Financial Discipline
 
We operate in an increasingly competitive global marketplace; therefore, we must manage our business with a disciplined focus on increasing productivity and reducing waste.  The competitiveness of the global market place requires us to move toward a greater manufacturing scale in order to create a more competitive cost base.  As costs for materials and purchased parts rise from time to time due to global increases in the metals commodity markets, we seek low-cost country sourcing when appropriate and enter into contracts with some of our customers that provide for these rising costs to be passed through to them on a lag basis.
 
We follow a rigorous financial process for investment and returns, intended to enable increased profitability and cash flows over the long-term with particular emphasis on working capital improvement and prioritization of capital for investment and disposals – driving past and current improvement in global cash and debt management and access to sufficient credit.  This focus helps us identify and take action on underperforming assets in our portfolio, such as our South Korean-based business, which was sold during fiscal 2010.
 
During fiscal 2010, we made significant progress in improving the Company’s liquidity and financial position.  On September 30, 2009, we completed a public offering of 13.8 million shares of our common stock with cash proceeds of $92.9 million after deducting underwriting discounts, commissions, legal, accounting and printing fees.  The proceeds from this offering, along with proceeds from the sale of the South Korean-based business were used to substantially reduce our outstanding indebtedness.  Outstanding indebtedness decreased $110.0 million from the March 31, 2009 balance of $249.2 million to $139.2 million at March 31, 2010.
 
Our executive management incentive compensation plan for fiscal 2010 was based on remaining in compliance with our bank covenants, driving our singular focus on alignment of management interests with shareholders’ interests in our capital allocation and asset management decisions.  In addition, we maintain a long-term incentive compensation plan for officers and certain key employees that is used to attract, retain and motivate key employees who directly impact the long-term performance of the Company.  This plan is comprised of stock options, retention restricted stock awards and performance stock awards, which are based on a mix of earnings per share growth and growth in our stock price relative to the market.

 
20

 
Consolidated Market Conditions and Trends
 
During fiscal 2010, the Company reported revenues from continuing operations of $1.16 billion, a 17 percent decrease from $1.41 billion in fiscal 2009.  During the first half of fiscal 2009, the Company recorded relatively strong sales of $828.4 million.  However, the global economic recession dramatically reduced our sales in the third quarter of fiscal 2009 to $325.6 million and further reduced our sales to $254.8 million in the fourth quarter of fiscal 2009.  In the first quarter of fiscal 2010, the Company’s sales remained depressed at $253.6 million.  Since that point, our sales have shown three quarters of sequential improvement, with sales of $324.9 million recorded in the fourth quarter of fiscal 2010.  We are experiencing a slow, but steady improvement in our business levels since the bottom of the recession in the fourth quarter of fiscal 2009.  However, business volumes continue to remain significantly lower than pre-recessionary volumes experienced in the first half of fiscal 2009.
 
The original equipment manufacturer (OEM) marketplace is extremely competitive and our customers demand that we continue to provide high quality products as well as annual price decreases.  From time to time, we also experience volatility in foreign currency exchange rates and the costs of our purchased parts and raw materials – particularly aluminum, copper, steel, and stainless steel (nickel).  The combination of these factors impacts our profitability.
 
Our Response to Recent Market Conditions
 
In response to the declining business and market conditions facing us, we have focused on our four-point plan and implemented a number of cost and operational efficiency measures designed to improve our longer-term competitiveness:

 
o
Manufacturing realignment.  During fiscal 2008, we announced the closure of three manufacturing facilities in the U.S. (Camdenton, Missouri; Pemberville, Ohio; and Logansport, Indiana), and one manufacturing facility in Europe (Tübingen, Germany).  During fiscal 2010, we announced the closure of our Harrodsburg, Kentucky manufacturing facility in the U.S.  The Pemberville and Tübingen closures have been completed, the Logansport and Harrodsburg closures are anticipated to be completed in the first quarter of fiscal 2011, and the Camdenton closure is anticipated to be completed by the end of fiscal 2011.  During fiscal 2009, we implemented a significant reduction of direct costs in our manufacturing facilities and 20 percent reduction of indirect costs in our manufacturing facilities.  When the manufacturing realignment process is completed, we will compete for new business from a much improved cost position with increased asset utilization.  This process should benefit the Company at both the gross and operating margin levels and help us win incremental, profitable business.  The reduction in manufacturing costs achieved contributed to an improvement in our gross margin from 13.3 percent in fiscal 2009 to 14.6 percent in fiscal 2010, despite the year-over-year decline in sales volumes.  We also have invested in four new plants in low cost countries; Changzhou, China; Nuevo Laredo, Mexico; Gyöngyös, Hungary; and Chennai, India.  These facilities are primarily in the start-up phase with several product launches currently underway and numerous launches planned over the next fiscal year.

 
o
Portfolio rationalization.  The Company’s business structure is organized around three global product lines, Engine Products, Powertrain Cooling Products and Commercial Products, which support our reporting segments.  The Company evaluated product lines within and across its segments to assess them relative to Modine’s competitive position and the overall business attractiveness in order to identify those product lines that should be divested or exited.  The Company has implemented an action plan to deemphasize its automotive module business, which most significantly impacts our Original Equipment – Europe segment.  In addition, during fiscal 2010 the Company significantly decreased its exposure to the vehicular heating, ventilation and air conditioning (HVAC) business with the sale of its South Korean operation for net cash proceeds of $10.5 million and upcoming closure of its Harrodsburg, Kentucky facility.

 
o
Capital allocation.  Our business is capital intensive, requiring a significant amount of investment in the new technologies and products that the Company supports.  We recently introduced an enhanced capital allocation discipline designed to allocate capital spending to the segments and programs that will provide the highest return on our investment.  All business units are measured using specific performance standards and they must earn the right to obtain capital to fund growth through their performance.  During fiscal 2010, our capital expenditures were $60 million, which is significantly below our fiscal 2009 capital expenditures of $103 million and our recent historical rates.
 
 
o
Selling, general and administrative (SG&A) cost containment.  The Company is committed to controlling its overall SG&A, and has implemented an initiative to streamline key business processes within its administrative functions in order to assist with this effort.  During fiscal 2009, we completed a global workforce reduction, focusing on the realignment of our corporate and regional headquarters.  The global workforce reduction was enabled in part by the portfolio rationalization and the phase out of certain product lines.  Through this process, we reduced our SG&A costs 21 percent from $199.6 million in fiscal 2009 to $157.5 million in fiscal 2010.
 
 
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In addition to the actions described above, the Company also focused on mitigating material price changes for our products.  When possible, the Company enters into material pass-through arrangements with its key customers where material price changes are subject to pass-through to these customers on a lag basis.  This lag period can extend up to a year, based on the agreements we have with an individual customer.  We also mitigate growing cost pressures by accelerating new product development and expanding into new and existing niche markets.  We continue to focus on developing new and expanded proprietary technology that is of more value in the marketplace – such as our next generation aluminum radiators and EGR cooler – in order to secure favorable price terms.
 
Segment Information – Strategy, Market Conditions and Trends
 
Each of our business segments is managed at the regional vice president or managing director level with separate financial results reviewed by our chief operating decision makers.  These results are used to evaluate the performance of each business segment, and make decisions on the allocation of resources among our various businesses.  Our chief operating decision-makers evaluate segment performance with an emphasis on gross margin, and secondarily based on operating income of each segment, which includes certain allocations of Corporate SG&A expenses.
 
Original Equipment – Europe (39 percent of fiscal 2010 revenues)
 
Our European operation is primarily engaged in providing powertrain and engine cooling systems as well as vehicular climate control components to various end markets, including automotive, heavy duty and industrial, commercial vehicle, bus and off-highway OEMs.  These systems include cooling modules, radiators, charge air coolers, oil cooling products, EGR products, retarder and transmission cooling components, and HVAC condensers.  Competitors include Behr GmbH & Co. K.G., Valeo, TitanX, Denso Corporation, AKG, and a variety of other companies.
 
The second half of fiscal 2009 was adversely impacted by the rapidly shrinking vehicular markets in Europe.  Among all our served markets, the commercial vehicle market experienced the most drastic downturn.  In fiscal 2010, the declining vehicular markets stabilized, albeit at very low levels.  These markets have recently shown some signs of recovery, although we expect this to be a slow recovery over the next several years.
 
To offset the adverse market conditions, management enacted several measures to reduce operating costs and improve cash generation.  Plant direct and indirect headcount as well as overall SG&A costs have been reduced as a result of the portfolio rationalization and the phase out of certain product lines.  The overall Company reduced headcount in this region by approximately 25 percent.
 
We continue our focus on various lean manufacturing initiatives, low-cost country sourcing and the adjustment of our manufacturing footprint to low cost locations, when appropriate.  Production volumes are increasing in our new Gyöngyös, Hungary facility, and we have completed the phase-out of operations at our facility in Tübingen, Germany.  We expect our European business to benefit from our various technology initiatives, which allow us to distinguish ourselves from competitors in the eyes of our customers.
 
This business is negatively impacted by rising material prices, at least until these rising prices are offset by material pass-through agreements on a time lag.  We also expect to continue to see price reduction demands from our customers along with continuous and ongoing increased customer service expectations and competition from low-cost country competitors.  At the same time, the business has performed well through the global economic recession, is strongly positioned with a solid customer reputation for technology, service and project management, and has been successful in winning additional program awards that are scheduled to begin production in the 2011 time frame.  Going forward, we anticipate further opportunities may arise as a result of competitors leaving the market or being unable to meet customer requirements.
 
Original Equipment – North America (34 percent of fiscal 2010 revenues)
 
Our Original Equipment – North America segment includes products and technologies that are found on vehicles made by commercial vehicle OEMs, including Class 3-8 trucks, school buses, transit buses, motor homes and motor coaches.  It also serves the automotive, heavy duty, and industrial markets, including agricultural and construction markets (e.g. lift trucks, compressors and power generation).
 
 
22

 
The majority of our North American business is derived from commercial vehicle customers.  The Environmental Protection Agency emissions mandates (January 1, 2007 and January 1, 2010) create cyclicality in the Class 8 heavy-truck commercial vehicle build rates due to pre-buy activity that occurs prior to these emission law changes.  The expected cyclical downturn in this market after the January 1, 2007 emissions law change was exacerbated by economic concerns (recession, high oil and diesel prices, and depressed housing market) that have reduced the demand for Class 8 trucks used to haul freight.  As a result, there was no substantial pre-buy activity prior to the January 1, 2010 emissions law change.  While the January 1, 2007 emissions change and economic concerns created a downturn in build rates, the change did provide an opportunity for us as more of our components are required to be included on each new vehicle to meet the new standards.
 
A positive trend in our North American heavy duty and industrial businesses is increased emission standards for agricultural and construction equipment, which is driving increased demand for our components, such as EGR coolers.
 
The overall strategy for this business segment includes the following:
 
 
·
First, our strategy is to reposition the segment, including reassessing our manufacturing footprint, improving sourcing of raw materials and purchased parts, and other programs intended to increase efficiency and right-size capacity.  We recently closed our Pemberville, Ohio manufacturing facility and are in the process of closing three additional North American manufacturing facilities within this segment, and consolidating the business into other existing locations.  These closures are expected to be completed by the end of fiscal 2011.  We will continue to assess our manufacturing footprint to ensure that we have achieved appropriate manufacturing scale within this region.
 
 
·
Second, we are focused on reducing lead times to bring new products to market and offering a wider product breadth, while at the same time rationalizing the existing product lines that do not meet required financial metrics or fit within our overall strategy.
 
 
·
Third, we are focused on pursuing only selected new business opportunities that meet our minimum targeted rates of return, thus enabling profitable growth to the Company.
 
Our fuel cell business supports the highly complex thermal management needs of fuel cell systems, which increasingly are viewed as alternatives to oil-based fuel.  These fuel cell systems are used in stationary power applications, micro-combined heat and power (“CHP”), vehicle engine applications, and hydrogen fuel processing.  Although the market for fuel cell-based systems is still in its relative infancy, in the past year we continued developing products in support of the micro-CHP market.
 
With respect to the micro-CHP market, fuel cell-based systems are expected to emerge, initially in Europe, over the next several years as a direct replacement for the small boilers found in homes using hydronic heating systems.  In addition to efficient production of hot water for heat, the device is designed to produce electricity to supplement the electrical needs of the home, with off-peak electricity sold back to the grid.  We are continuing to work with Ceres Power, a UK-based developer of these systems, to expand the Company’s presence in this residential market.
 
Commercial Products (14 percent of fiscal 2010 revenues)
 
Our Commercial Products business provides a variety of niche products in North America, Europe, Asia and South Africa that are used by engineers, contractors and building owners in applications such as warehouses, repair garages, greenhouses, residential garages, schools, computer rooms, manufacturing facilities, banks, pharmaceutical companies, stadiums and retail stores.  We manufacture coils (copper tube aluminum fin coils, stainless steel tube aluminum fin coils and all aluminum microchannel coils) for heating, refrigeration, air conditioning and vehicular applications.  We also manufacture heating products for commercial applications, including gas, electric, oil and hydronic unit heaters, low intensity infrared and large roof-mounted direct and indirect fired makeup air units.  Our cooling products for commercial applications include single packaged vertical units and unit ventilators used in school room applications, computer room air conditioning units, air- and water-cooled chillers, ceiling cassettes, and roof top cooling units used in a variety of commercial building applications.
 
 
23

 
While revenues remained relatively low due to reduced market demand during the global recession, margins in this business improved primarily from manufacturing efficiencies and reduced SG&A expenses.  Economic conditions, such as demand for new commercial construction and school renovations, are drivers of demand for the heating and cooling products.
 
South America (10 percent of fiscal 2010 revenues)
 
Our South America segment provides heat exchanger products to a variety of markets in the domestic Brazilian market as well as for export to North America and Europe.  This business provides products to the on-highway commercial vehicle markets, off-highway markets, including construction and agricultural applications, automotive OEMs and industrial applications, primarily for power generation systems.  This business also provides products to the Brazilian, North American and European aftermarkets for both automotive and commercial applications.  We manufacture radiators, charge-air-coolers, oil coolers, auxiliary coolers (transmission, hydraulic, and power steering), engine cooling modules and HVAC system modules.
 
The Brazilian agriculture and commercial vehicle markets declined moderately during the global economic downturn.  However, the aftermarket sales under the Radiadores Visconde brand continued to improve.
 
Original Equipment – Asia (3 percent of fiscal 2010 revenues)
 
Our Asian operation is primarily engaged in providing powertrain cooling systems and engine products to customers in commercial vehicle and off-highway markets.  Competitors include, among others, Korens, Behr GmbH & Co. K.G., Tata Toyo, AKG, T.Rad Co. Ltd., and Zhenjiang Yinlin Machinery Co. Ltd.
 
A significant trend in our Asian business is our customers’ emphasis on price versus technology.  This pricing environment requires a low-cost manufacturing profile and continued operating efficiencies in order to maintain a profitable business.
 
Many components that we supply in this region become part of a module, which increases the amount of our content on an engine.  Our strategy in this business segment is to control and reduce costs, secure new business, further diversify our product offering and customer base, and continue to focus on building manufacturing capabilities in China and India to serve the region within the Engine and PTC segments in a more cost competitive manner.  Our new manufacturing facilities in Chennai, India, and Changzhou, China are currently shipping low volumes of products.  We are scheduled to begin production of several new products from both of these new facilities during the next fiscal year.
 
Outlook
 
We have experienced a sequential improvement in our quarterly net sales through fiscal 2010.  However, our sales volumes continue to remain significantly lower than the pre-recessionary volumes experienced in the first half of fiscal 2009.  Our expectations for fiscal 2011 include a modest improvement in sales across all of our segments based on a continued slow recovery from the global recession.  Specifically, we expect partial recovery in the commercial vehicle markets in North America, growth in the off-highway markets in Asia as we launch new programs, and slight improvement in the commercial vehicle, off-highway and automotive markets in Europe.  We expect the positive impact of the sales volume improvements on our results from operations to be largely offset by a less favorable foreign currency translation environment, and particularly as it related to the euro, higher year-over-year metals costs and the lagging nature of our materials pass-through agreements, as well as an increase in SG&A expenses due in large part to higher pension expenses.
 
Consolidated Results of Operations - Continuing Operations
 
Fiscal 2010 and 2009 sales volumes declined significantly as a result of the weakened global economy.  The instability in the global financial and economic markets created a significant downturn in the vehicular markets in which the Company competes.  In fiscal 2009 and 2008, the Company recorded significant goodwill and long-lived asset impairment charges, along with restructuring charges primarily related to workforce reductions.

 
24


The following table presents consolidated results from continuing operations on a comparative basis for the years ended March 31, 2010, 2009 and 2008:

Years ended March 31
 
2010
   
2009
   
2008
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
                                     
Net sales
  $ 1,163       100.0 %   $ 1,409       100.0 %   $ 1,602       100.0 %
Cost of sales
    993       85.4 %     1,222       86.7 %     1,359       84.8 %
Gross profit
    170       14.6 %     187       13.3 %     243       15.2 %
Selling, general and administrative expenses
    158       13.6 %     200       14.2 %     218       13.6 %
Restructuring (income) charges
    (1 )     -0.1 %     30       2.1 %     4       0.2 %
Impairment of goodwill and long-lived assets
    7       0.6 %     36       2.6 %     35       2.2 %
Earnings (loss) from operations
    7       0.6 %     (79 )     -5.6 %     (14 )     -0.9 %
Interest expense
    23       2.0 %     14       1.0 %     11       0.7 %
Other (income) expense - net
    (6 )     -0.5 %     10       0.7 %     (8 )     -0.5 %
Loss from continuing operations before income taxes
    (10 )     -0.9 %     (103 )     -7.3 %     (17 )     -1.1 %
Provision for income taxes
    10       0.9 %     1       0.1 %     38       2.4 %
Loss from continuing operations
  $ (20 )     -1.7 %   $ (104 )     -7.4 %   $ (54 )     -3.4 %

Year Ended March 31, 2010 Compared to Year Ended March 31, 2009:

Net sales decreased $246 million, or 17.5 percent, to $1.2 billion in fiscal 2010 from $1.4 billion in fiscal 2009 driven by the continuing sales volume deterioration as a result of the weakened global economy.  Medium/heavy duty truck sales are down approximately 20 percent for all markets and agriculture and construction sales volumes are down over 35 percent for all markets.

Gross profit decreased $17 million, or 9.1 percent, to $170 million in fiscal 2010 from $187 million in fiscal 2009, due primarily to the reduction in sales volumes from fiscal 2009 to fiscal 2010.  Gross margin improved from 13.3 percent in fiscal 2009 to 14.6 percent in fiscal 2010.  This increase is primarily related to the focus on cost reduction activities in the manufacturing facilities through the execution of the four-point plan and the impact of favorable materials pricing.

SG&A expenses decreased $42 million, or 21.0 percent, to $158 million in fiscal 2010 from $200 million in fiscal 2009, and decreased as a percentage of sales from 14.2 percent to 13.6 percent.  The overall reduction of SG&A reflects our intense focus on lowering our administrative cost structure and executing on our portfolio rationalization strategy through the execution of the four-point plan.

Restructuring income was recorded during fiscal 2010 related to the reversal of severance liabilities within our European business as a result of favorable benefits negotiations partially offset by restructuring charges related to the announced closure of our Harrodsburg, Kentucky facility.  Restructuring charges of $30 million in fiscal 2009 related to workforce reductions at our Corporate headquarters in Racine, Wisconsin and European headquarters in Bonlanden, Germany.

Long-lived asset impairment charges of $7 million were recorded in fiscal 2010 primarily related to long-lived assets in our North American business for certain assets that were not able to support their asset bases and for the Harrodsburg, Kentucky manufacturing facility based on our planned closure of this facility.  Long-lived asset impairment charges of $36 million in fiscal 2009 included a goodwill impairment charge of $9 million in our Original Equipment – Europe segment and long-lived asset impairment charges of $27 million against certain assets in our European, North American and Commercial Products businesses.

Interest expense increased $9 million from fiscal 2009 to fiscal 2010 based on increased borrowings early in fiscal 2010 at increased interest rates along with the $3.4 million penalty to the holders of our senior notes in connection with the mandatory prepayments of debt with a portion of the cash proceeds from the common stock offering on September 30, 2009.  Also included in interest expense was the amortization of $0.8 million of capitalized debt issuance costs and interest rate derivatives in proportion with the mandatory prepayment of the senior notes.

 
25


Other income of $6 million for fiscal 2010 represents a $16 million improvement from other expense of $10 million in fiscal 2009.  Fiscal 2010 other income consists primarily of foreign currency transaction gains on inter-company loans denominated in foreign currencies and a $1.5 million gain on the sale of our 50 percent ownership of Anhui Jianghaui Mando Climate Control Co. Ltd. while fiscal 2009 consisted primarily of foreign currency transaction losses on inter-company loans denominated in foreign currencies and an impairment charge related to an equity investment with a decline in its value that was “other than temporary.”
 
The provision for income taxes increased $9 million in fiscal 2010 from $1 million in fiscal 2009.  The increase in the provision for income taxes was due to an increase in pre-tax earnings from certain tax jurisdictions outside the U.S. primarily in Brazil, Germany and Austria as compared to the prior year.

Year Ended March 31, 2009 Compared to Year Ended March 31, 2008:

Net sales decreased $193 million, or 12.0 percent, to $1.4 billion in fiscal 2009 from $1.6 billion in fiscal 2008 driven by overall sales volume deterioration as a result of the weakened global economy.  Automotive and medium/heavy duty truck sales were down approximately 30 percent and 25 percent, respectively, within the Original Equipment – Europe segment.

Gross profit decreased $56 million, or 23.0 percent, to $187 million in fiscal 2009 from $243 million in fiscal 2008.  Gross margin decreased from 15.2 percent in fiscal 2008 to 13.3 percent in fiscal 2009.  This decrease was primarily related to underabsorption of fixed costs in our manufacturing facilities based on the depressed sales volumes and a shift in our product mix toward lower margin products in Europe.  Lower material costs and a reduction of direct and indirect manufacturing costs in our facilities, comprised of workforce reductions and other indirect cost reduction activities, partially offset this decrease.

SG&A expenses decreased $18 million, or 8.3 percent, to $200 million in fiscal 2009 from $218 million in fiscal 2008, but increased as a percentage of sales from 13.6 percent to 14.2 percent.  The overall reduction of SG&A expense was due to the positive impact of our SG&A containment efforts.  These were partially offset by a $2 million increase in repositioning costs included in SG&A as the Company realigned the Corporate and Regional headquarters.  Restructuring charges increased $26 million primarily related to a workforce reduction at the Corporate headquarters in Racine, Wisconsin and throughout the European facilities, including the European headquarters in Bonlanden, Germany.  During fiscal 2009, asset impairment charges of $36 million were recorded including a goodwill impairment charge of $9 million in the Original Equipment – Europe segment, a long-lived asset impairment charge of $16 million recorded in the Original Equipment – North America segment, and a long-lived asset impairment charge of $10 million recorded in the Original Equipment – Europe segment.  The decrease in gross profit combined with the restructuring and impairment charges contributed to the $65 million decrease in operating income from fiscal 2008 to fiscal 2009.

Interest expense increased $3 million from fiscal 2008 to fiscal 2009 related to an increase in outstanding debt during fiscal 2009 and an increase in interest rates in conjunction with the amendment of our primary debt agreements in February 2009.  Borrowings increased during fiscal 2009 to finance capital expenditures of $103 million.

For fiscal 2009, other expense was $10 million.  For fiscal 2008, other income was $8 million.  The $18 million change in fiscal 2009 was due to foreign currency transaction losses on inter-company loans denominated in a foreign currency in Brazil and an $8 million impairment charge related to an equity investment with a decline in its value that was “other than temporary.”

The provision for income taxes decreased $37 million, or 97 percent, to $1 million in fiscal 2009 from $38 million in fiscal 2008.  The decrease in the provision for income taxes was due to overall losses in tax jurisdictions outside of the U.S. compared to earnings recorded in fiscal 2008.  A valuation allowance of $33 million was recorded against net deferred tax assets in tax jurisdictions where it was more likely than not that the deferred tax assets will not be realized.

 
26


Discontinued Operations

During fiscal 2009, the Company announced the intended divestiture of its South Korean-based HVAC business and presented it as held for sale and as a discontinued operation in the consolidated financial statements for all periods presented.  The South Korean-based HVAC business was sold on December 23, 2009 for $10.5 million, resulting in a loss on sale of $0.6 million.  On May 1, 2007, the Company announced it would explore strategic alternatives for its Electronics Cooling business and presented it as held for sale and as a discontinued operation in the consolidated financial statements for all periods presented.  The Electronics Cooling business was sold on May 1, 2008 for $13.2 million, resulting in a gain on sale of $2.5 million.

Segment Results of Operations

Original Equipment Europe

Years ended March 31
 
2010
   
2009
   
2008
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
                                     
Net sales
  $ 469       100.0 %   $ 597       100.0 %   $ 758       100.0 %
Cost of sales
    410       87.4 %     520       87.1 %     618       81.5 %
Gross profit
    59       12.6 %     77       12.9 %     140       18.5 %
Selling, general and administrative expenses
    38       8.1 %     49       8.2 %     50       6.6 %
Restructuring (income) charges
    (3 )     -0.6 %     22       3.7 %     -       0.0 %
Impairment of goodwill and long-lived assets
    1       0.2 %     19       3.2 %     5       0.7 %
Income (loss) from continuing operations
  $ 23       4.9 %   $ (13 )     -2.2 %   $ 85       11.2 %

Net sales within the Original Equipment – Europe segment decreased $161 million, or 21.2 percent from fiscal 2008 to fiscal 2009 primarily on a $179 million decline in underlying vehicular sales volumes, partially offset by an $18 million favorable impact of foreign currency exchange rate changes.  The $128 million, or 21.4 percent decline in net sales from fiscal 2009 to fiscal 2010 was based primarily on a 47 percent decline in medium/heavy duty truck sales and a 46 percent decline in agriculture and construction sales volumes.

The decrease in gross margin from fiscal 2008 to fiscal 2009 was largely related to the underabsorption of fixed manufacturing costs with the declining sales volumes and changing mix of products toward lower margin business.  Repositioning costs of $2 million were included in cost of sales in fiscal 2009 related to the closure of the Tübingen, Germany facility.  Gross margin remained relatively consistent from fiscal 2009 to fiscal 2010.  The underabsorption of fixed manufacturing costs as a result of the decrease in sales volumes was offset by the reduction of direct and indirect costs in the manufacturing facilities and the favorable impact of materials pricing.

SG&A expenses were consistent from fiscal 2008 to fiscal 2009.  SG&A expenses decreased $11 million from fiscal 2009 to fiscal 2010 largely due to the positive impact of SG&A cost reduction efforts.  Restructuring charges of $22 million were recorded in fiscal 2009 as the result of a reduction in workforce throughout the European facilities including at the European headquarters in Bonlanden, Germany.  Restructuring income of $3 million was recorded during fiscal 2010 related to the reversal of severance liabilities as the result of favorable benefits negotiations.  A goodwill impairment charge of $9 million was recorded in fiscal 2009, which represents an impairment of the full amount of goodwill recorded within the segment.  This impairment was based on a declining outlook for the segment with sales volumes and lower gross margin related to the underabsorption of fixed manufacturing costs and the change in product mix.  In addition, long-lived asset impairment charges of $10 million were recorded in fiscal 2009 related to certain manufacturing facilities with projected cash flows unable to support their asset bases.

Income from continuing operations decreased $98 million in fiscal 2009 to a loss from continuing operations of $13 million primarily due to the significant decrease in sales and gross margin coupled with the restructuring and asset impairment charges.  The income from continuing operations of $23 million in fiscal 2010 was an improvement of $36 million from fiscal 2009 primarily due to the reduced SG&A expenses and absence of significant restructuring and impairment charges recorded during fiscal 2009.

 
27


Original Equipment North America

Years ended March 31
 
2010
   
2009
   
2008
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
                                     
Net sales
  $ 413       100.0 %   $ 500       100.0 %   $ 524       100.0 %
Cost of sales
    369       89.3 %     457       91.4 %     494       94.3 %
Gross profit
    44       10.7 %     43       8.6 %     30       5.7 %
Selling, general and administrative expenses
    36       8.7 %     60       12.0 %     67       12.8 %
Restructuring charges
    1       0.2 %     3       0.6 %     4       0.8 %
Impairment of goodwill and long-lived assets
    5       1.2 %     16       3.2 %     27       5.2 %
Income (loss) from continuing operations
  $ 2       0.5 %   $ (36 )     -7.2 %   $ (68 )     -13.0 %

During fiscal 2010, we implemented certain management reporting changes resulting in the realignment of the Fuel Cell segment into the Original Equipment – North America segment.  The previously reported results for the Original Equipment – North America segment have been retrospectively adjusted to reflect these changes for comparative purposes.

Net sales within the Original Equipment – North America segment decreased $24 million, or 4.6 percent, from fiscal 2008 to fiscal 2009, and decreased $87 million, or 17.4 percent, from fiscal 2009 to fiscal 2010.  The sales decline is largely due to the downturn in the North American truck market following the January 1, 2007 emission law change, which has been further exacerbated by the impact of the global recession.  Net sales within this segment continue to be adversely impacted by the depressed heavy duty and medium duty North American truck markets and the automotive vehicular markets.

Gross margin increased from 5.7 percent in fiscal 2008 to 8.6 percent in fiscal 2009, and improved to 10.7 percent in fiscal 2010.  The improved gross margin is primarily attributable to a significant reduction in direct and indirect costs in the North American manufacturing facilities and the positive impact of materials pricing.  In fiscal 2009, we entered into a license agreement with Bloom Energy, a leading developer of fuel cell-based distributed energy systems, under which Bloom Energy licensed our thermal management technology for an up-front fee of $12.0 million.  In addition to licensing this technology, we also provided certain transition services to Bloom Energy, including the sale of products through December 2009.  We received an advance payment of $0.7 million for these transition services, and received additional compensation for the supply of products to Bloom Energy over this time.  The total up-front compensation received of $12.7 million was recognized as revenue over the 15-month term of these agreements, of which $10 million of revenue was recognized during fiscal 2009.  During fiscal 2010, the remaining $2.7 million was recognized as revenue.

SG&A expenses decreased $7 million from fiscal 2008 to fiscal 2009, and decreased a further $24 million in fiscal 2010.  The fiscal 2009 decrease was primarily attributed to the positive impact of SG&A reduction efforts.  The fiscal 2010 decrease is due to additional cost reduction actions and the absence of significant consulting fees incurred in fiscal 2009 in connection with the manufacturing realignment.  Restructuring charges recorded in fiscal 2010 relate to the announced closure of our Harrodsburg, Kentucky manufacturing facility.  The majority of the restructuring charges recorded during fiscal 2009 related to a workforce reduction at the Racine, Wisconsin headquarters.  Fiscal 2008 restructuring charges related to plant closures.  A goodwill impairment charge of $24 million was recorded during fiscal 2008 as a result of a declining outlook for this segment.  These reduced expectations were based on declining sales volumes and lower gross margin related to plant closures, product-line transfers and continued customer pricing pressures that impacted the North American vehicular industry.  In addition, a long-lived asset impairment charge of $3 million was recorded during fiscal 2008 as the result of a program line which was not able to support its asset base.  Long-lived asset impairment charges of $16 million were recorded in fiscal 2009 for a facility with projected cash flows unable to support its asset base, for assets related to a cancelled program, a program that was not able to support its asset base and assets no longer in use.  Asset impairment charges of $5 million recorded during fiscal 2010 related to a program that was not able to support its asset base and the pending closure of the Harrodsburg, Kentucky manufacturing facility, which had a net book value that exceeded its fair value.

 
28


Loss from continuing operations improved $32 million in fiscal 2009 to a loss from continuing operations of $36 million primarily due to improved gross margin coupled with the decrease in year-over-year impairment charges.  Results from continuing operations improved $38 million in fiscal 2010 to income from continuing operations of $2 million, based primarily on the improved gross margin, reduction in SG&A expenses and reduced impairment charges.
 
Commercial Products

Years ended March 31
 
2010
   
2009
   
2008
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
                                     
Net sales
  $ 170       100.0 %   $ 188       100.0 %   $ 198       100.0 %
Cost of sales
    123       72.4 %     145       77.1 %     154       77.8 %
Gross profit
    47       27.6 %     43       22.9 %     44       22.2 %
Selling, general and administrative expenses
    26       15.3 %     28       14.9 %     32       16.2 %
Restructuring charges
    -       0.0 %     1       0.3 %     -       0.0 %
Impairment of goodwill and long-lived assets
    -       0.0 %     1       0.3 %     3       1.5 %
Income from continuing operations
  $ 21       12.4 %   $ 14       7.4 %   $ 9       4.5 %

Net sales within the Commercial Products segment decreased $10 million, or 5.1 percent, from fiscal 2008 to fiscal 2009, and decreased $18 million, or 9.6 percent in fiscal 2010.  The fiscal 2009 decrease was primarily driven by $12 million of unfavorable foreign currency exchange rate changes, slightly offset by continued strength in air conditioning sales in the United Kingdom and the success of new product launches.  The fiscal 2010 decrease was based primarily on an overall reduction in sales volume with the deterioration in the global economy and a $5.0 million unfavorable impact of foreign currency exchange rate changes.

Gross margin increased from 22.2 percent in fiscal 2008 to 22.9 percent in fiscal 2009, with continued improvement to 27.6 percent in fiscal 2010.  The continued improvement from fiscal 2008 to fiscal 2010 was due to lower material costs, manufacturing cost improvements and productivity initiatives.  SG&A expenses decreased year-over-year from fiscal 2008 through fiscal 2010 due to the positive impact of SG&A reduction efforts.  Long-lived asset impairment charges of $3 million and $1 million were recorded in fiscal 2008 and 2009, respectively, as the result of the cancellation of a product in its development stage.  Income from continuing operations increased $5 million in fiscal 2009 and a further $7 million in fiscal 2010 based on the continued improvement in gross margin and the reduction in SG&A expenses.

South America

Years ended March 31
 
2010
   
2009
   
2008
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
                                     
Net sales
  $ 118       100.0 %   $ 136       100.0 %   $ 137       100.0 %
Cost of sales
    94       79.7 %     108       79.4 %     111       81.0 %
Gross profit
    24       20.3 %     28       20.6 %     26       19.0 %
Selling, general and administrative expenses
    15       12.7 %     16       11.8 %     15       10.9 %
Restructuring charges
    1       0.8 %     -       0.0 %     -       0.0 %
Income from continuing operations
  $ 8       6.8 %   $ 12       8.8 %   $ 11       8.0 %

Net sales within South America were consistent from fiscal 2008 to fiscal 2009.  The strength in the Brazilian agricultural and commercial vehicle markets were offset by a $2 million unfavorable impact from foreign currency exchange rate changes.  Net sales decreased $18 million in fiscal 2010 based on reduced sales volumes within Brazil’s commercial vehicles markets, partially offset by the favorable impact of foreign currency exchange rates of $6 million.

Gross margin improved from 19.0 percent in fiscal 2008 to 20.6 percent in fiscal 2009, and decreased slightly to 20.3 percent in fiscal 2010.  The gross margin improvement from fiscal 2008 to fiscal 2009 was the result of performance improvements in the manufacturing facility.  The decrease in fiscal 2010 was due to the underabsorption of fixed costs with the reduced sales volumes.  SG&A expenses increased $1 million from fiscal 2008 to fiscal 2009 due to increased salary costs, and decreased $1 million in fiscal 2010 due to the positive impact of SG&A reduction efforts within the region.  Restructuring charges of $1 million recorded during fiscal 2010 related to a workforce reduction within the Brazilian operations.  Income from continuing operations improved $1 million from fiscal 2008 to fiscal 2009 based on the improved gross margin, and decreased $4 million from fiscal 2009 to fiscal 2010 based on the reduced sales volumes and gross margin decline.

 
29


Original Equipment Asia

Years ended March 31
 
2010
   
2009
   
2008
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
                                     
Net sales
  $ 32       100.0 %   $ 17       100.0 %   $ 15       100.0 %
Cost of sales
    32       100.0 %     18       105.9 %     14       93.3 %
Gross profit
    -       0.0 %     (1 )     -5.9 %     1       6.7 %
Selling, general and administrative expenses
    5       15.6 %     8       47.1 %     7       46.7 %
Loss from continuing operations
  $ (5 )     -15.6 %   $ (9 )     -52.9 %   $ (6 )     -40.0 %

The Original Equipment – Asia segment is currently in an expansion phase.  Net sales within the Original Equipment – Asia segment increased $2 million in fiscal 2009 and $15 million in fiscal 2010.  The gradual increase in sales is attributed to a growing presence in the region and the completion of construction of new facilities.  The new manufacturing facility in Changzhou, China began production in the third quarter of fiscal 2008, and the Chennai, India facility began production in the second quarter of fiscal 2009.  These facilities are currently in low volume production.  The minimal gross margin is due to inefficiencies at these start-up facilities.  SG&A expenses increased $1 million in fiscal 2009 and decreased $3 million in fiscal 2010.  The increase in SG&A in 2009 was due to ongoing expansion in this region with the construction of new manufacturing facilities in China and India, as well as growth of the corporate office in China.  The decrease in SG&A in fiscal 2010 resulted from positive cost reduction efforts within the region.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operating activities and borrowings under lines of credit provided by banks in the United States and abroad.  On September 30, 2009, we completed a public offering of 13.8 million shares of our common stock, including 1.8 million shares issued pursuant to the fully exercised underwriters’ option to purchase additional shares, at a price of $7.15 per share.  The proceeds of the common stock offering were $92.9 million, after deducting underwriting discounts, commissions, legal, accounting and printing fees of $5.8 million.  On December 23, 2009, we sold 100 percent of the shares of our South Korea-based HVAC business for net cash proceeds of $10.5 million.

During fiscal 2010, the Company reported cash flows from operating activities of $61.9 million, which is $31.6 million lower than the $93.5 million reported in the prior year.  Operating results improved year-over-year, due to reduced SG&A expenses and the absence of significant asset impairment and restructuring charges similar to those incurred in fiscal 2009.  Despite the improvement in our operating results, net cash provided by operating activities decreased due to investment in working capital balances during fiscal 2010.  The most significant working capital increase was in accounts receivable, which reduced operating cash flows by $52.1 million as we invested in accounts receivable to support an increase in net sales in the fourth quarter of fiscal 2010 as compared to the fourth quarter of fiscal 2009.  Fourth quarter fiscal 2010 net sales were $70.1 million higher than the same quarter for the prior fiscal year.  Despite the increase in accounts receivable, days sales outstanding improved 4 days to 43 days through the continued active, customer-supported management of accounts receivable payment terms.

Outstanding indebtedness decreased $110.0 million to $139.2 million at March 31, 2010 from the March 31, 2009 balance of $249.2 million.  We were required to prepay our outstanding revolving credit facility and Senior Note borrowings with 50 percent of the net proceeds from the common stock offering, resulting in a mandatory prepayment of $46.4 million.  In conjunction with the mandatory prepayment of the Senior Note borrowings, we were required to pay a prepayment penalty of $3.4 million to the holders of the Senior Notes.  In addition to the mandatory prepayment, we voluntarily repaid the majority of our outstanding revolving credit facility with a portion of the proceeds from the common stock offering and the sale of our South Korea-based HVAC business.  Cash balances increased $0.2 million from $43.5 million at March 31, 2009 to $43.7 million at March 31, 2010.

 
30


We have $130.6 million available for future borrowings under our domestic revolving credit facility.  In addition to this revolving credit facility, unused lines of credit also exist in Europe and Brazil totaling $36.5 million at March 31, 2010.  In the aggregate, total available lines of credit of $167.1 million exist at March 31, 2010.  On May 10, 2010, Modine Holding GmbH and Modine Europe GmbH, each a subsidiary of the Company, entered into a 15.0 million euro ($19.2 million U.S. equivalent) Credit Facility Agreement to replace an existing 15.0 million euro credit agreement.  The availability of funds under the credit facilities is subject to our ability to remain in compliance with the financial covenants and limitations in our respective debt agreements.

We believe that our internally generated operating cash flows, working capital management efforts and existing cash balances, together with access to available external borrowings, will be sufficient to satisfy future operating costs and capital expenditures.

Intercreditor Agreement

During fiscal 2010, we generated positive cash flows from operations.  We used this cash, plus the proceeds from the common stock offering and the sale of our South Korea-based HVAC business, to voluntarily repay the majority of our domestic revolving credit facility.  At March 31, 2010, there was $7.5 million outstanding under the revolving credit facility, which represents a significant reduction from the $87.0 million outstanding balance at March 31, 2009.  In addition, at March 31, 2010, we had $121.5 million outstanding on the senior notes.

In conjunction with the First Amendment to Credit Agreement and Waiver with our primary lenders and Waiver and Second Amendment to the Note Purchase Agreements with the senior note holders each dated as of February 17, 2009, the primary lenders and senior note holders entered into a Collateral Agency and Intercreditor Agreement, to which we consented.  This agreement provides for the sharing of payments received in respect of the collateral and the guarantees provided by the Company to the primary lenders and senior note holders.  On September 18, 2009, the primary lenders and senior note holders entered into a First Amendment to Collateral Agency and Intercreditor Agreement (“Intercreditor Agreement”), to which we consented.  Under the terms of the Intercreditor Agreement, 90 days after the expiration of our revolving credit facility in July 2011, certain actions may be required in order to preserve a stated ratio relative to the Company’s indebtedness to the primary lenders on the one hand and the senior note holders on the other.  This portion of the Intercreditor Agreement, if triggered, would require the primary lenders to pay the senior note holders to preserve the relative position of those two groups that existed when the Intercreditor Agreement was executed.  If the outstanding balance on the revolving credit facility at that time is the same as it was as of March 31, 2010, the primary lenders would be required to pay approximately $42 million to the senior note holders in October 2011.

We currently plan to refinance our revolving credit facility prior to its expiration in July 2011.  In the unlikely event that we were unable to complete this refinancing prior to October 2010 (one year prior to the potential rebalancing described above), and if the Intercreditor Agreement terms remain in their current state, we may be required to classify the above-described payment from the primary lenders to the senior note holders as a current liability in our Consolidated Balance Sheet.  This current liability classification may be required as we may need to reimburse the primary lender for the rebalancing payment made to the senior note holders.  If that were to occur, we believe that our existing cash balances, internally generated operating cash flows and availability on our revolving credit facilities would be sufficient to fund this required payment and any potential associated obligations.

Debt Covenants

Our debt agreements require us to maintain compliance with various covenants.  One restrictive limitation is a minimum adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) covenant.  Adjusted EBITDA is defined as our (loss) earnings from continuing operations before interest expense and provision for income taxes, adjusted to exclude unusual, non-recurring or extraordinary non-cash charges and up to $34.0 million of cash restructuring and repositioning charges and further adjusted to add back depreciation and amortization expense. Adjusted EBITDA does not represent, and should not be considered, an alternative to (loss) earnings from continuing operations as determined by generally accepted accounting principles (GAAP), and our calculation may not be comparable to similarly titled measures reported by other companies.  For the four consecutive quarters ended March 31, 2010, we were required to maintain adjusted EBITDA of $35.0 million.  Our adjusted EBITDA for the four consecutive quarters ended March 31, 2010 was $86.2 million, which exceeded the minimum adjusted EBITDA requirement by $51.2 million.  The following table presents a calculation of adjusted EBITDA:

 
31


(dollars in thousands)
   
Quarter Ended June 30, 2009
   
Quarter Ended September 30, 2009
   
Quarter Ended December 31, 2009
   
Quarter Ended March 31, 2010
   
Total
 
(Loss) earnings from continuing operations
  $ (5,642 )   $ (4,886 )   $ 2,125     $ (11,895 )   $ (20,298 )
Consolidated interest expense
    5,459       9,643       3,793       3,993       22,888  
Provision for income taxes
    1,016       871       238       7,707       9,832  
Depreciation and amortization expense (a)
    15,755       16,183       16,045       15,329       63,312  
Non-cash (income) charges (b)
    (2,036 )     3,264       583       4,662       6,473  
Restructuring and repositioning charges (income) (c)
    2,263       (2,334 )     2,463       1,557       3,949  
Adjusted EBITDA
  $ 16,815     $ 22,741     $ 25,247     $ 21,353     $ 86,156  

 
(a)
Depreciation and amortization expense represents total depreciation and amortization from continuing operations less accelerated depreciation that has been included in non-cash charges described in footnote (b) below.

 
(b)
Non-cash (income) charges are comprised of long-lived asset impairments, non-cash restructuring and repositioning charges, exchange gains or losses on inter-company loans and non-cash charges that are unusual, non-recurring or extraordinary, as follows:

(dollars in thousands)
   
Quarter Ended June 30, 2009
   
Quarter Ended September 30, 2009
   
Quarter Ended December 31, 2009
   
Quarter Ended March 31, 2010
   
Total
 
Long-lived asset impairments
  $ 994     $ 3,849     $ 273     $ 1,432     $ 6,548  
Non-cash restructuring and repositioning charges
    820       767       718       1,006       3,311  
Exchange (gains) losses on intercompany loans
    (3,871 )     (1,226 )     (412 )     1,939       (3,570 )
Provision for uncollectible notes receivable
    (59 )     (327 )     4       (214 )     (596 )
Supplemental executive retirement plan settlement
    80       201       -       499       780  
Non-cash charges
  $ (2,036 )   $ 3,264     $ 583     $ 4,662     $ 6,473  

 
(c)
Restructuring and repositioning charges (income) represent cash restructuring and repositioning costs incurred in conjunction with the restructuring activities announced on or after January 31, 2008.  See Note 14 of the Notes to Consolidated Financial Statements for further discussion on these activities.

In addition to the minimum adjusted EBITDA covenant, we are not permitted to incur capital expenditures greater than $70.0 million for fiscal 2010 and for all fiscal years thereafter.  The Company was in compliance with the capital expenditures limitation in fiscal 2010 based on actual capital expenditures of $60.3 million.  We expect to remain in compliance with this covenant for fiscal 2011 and beyond.

Beginning with the fourth quarter of fiscal 2010, we are subject to an adjusted EBITDA to interest expense (interest expense coverage ratio) covenant and a debt to adjusted EBITDA (leverage ratio) covenant as follows:

 
32


   
Interest Expense Coverage Ratio Covenant (Not Permitted to Be Less Than):
 
Leverage Ratio Covenant (Not Permitted to Be Greater Than):
Fiscal quarter ended March 31, 2010
 
1.50 to 1.0
 
7.25 to 1.0
Fiscal quarter ending June 30, 2010
 
2.00 to 1.0
 
5.50 to 1.0
Fiscal quarter ending September 30, 2010
 
2.50 to 1.0
 
4.75 to 1.0
Fiscal quarter ending December 31, 2010
 
3.00 to 1.0
 
3.75 to 1.0
Fiscal quarters ending March 31, 2011 and June 30, 2011
 
3.00 to 1.0
 
3.50 to 1.0
All fiscal quarters ending thereafter
 
3.00 to 1.0
 
3.00 to 1.0

Our interest expense coverage ratio for fiscal 2010 was 4.38, which exceeded the minimum requirement of 1.50.  The following table presents a calculation of our interest expense coverage ratio:

   
Four Quarters Ended
March 31, 2010
 
       
Consolidated interest expense
  $ 22,888  
Less: Prepayment penalty classified as interest
    (3,449 )
Plus: Other items (a)
    213  
Total consolidated interest expense
  $ 19,652  
         
Adjusted EBITDA
  $ 86,156  
         
Interest expense coverage ratio
    4.38  

 
(a)
Other items include line of credit fees and costs associated with the sale of receivables.

Our leverage ratio for fiscal 2010 was 1.69, which was below the maximum allowed ratio of 7.25.  The following table presents a calculation of our leverage ratio:

   
Four Quarters Ended
March 31, 2010
 
       
Debt per balance sheet
  $ 139,197  
Less: Cash collateral on commodity derivatives
    (4,000 )
Plus: Indebtedness attributed to sales of accounts receivable
    3,326  
Commodity derivative liability
    1,243  
Standby letters of credit
    5,968  
Total consolidated debt
  $ 145,734  
         
Adjusted EBITDA
  $ 86,156  
         
Leverage ratio
    1.69  

We expect to remain in compliance with the interest expense coverage ratio covenant and leverage ratio covenant during fiscal 2011 and through the term of the revolving credit facility based on our projected financial results.

Off-Balance Sheet Arrangements

None.

 
33


Contractual Obligations

(in thousands)
 
March 31, 2010
 
   
Total
   
Less than 1 year
   
1 - 3 years
   
4 - 5 years
   
More than 5 years
 
                               
Long-term debt
  $ 136,186     $ 234     $ 36,198     $ 56,641     $ 43,113  
Interest associated with long-term debt
    56,043       12,975       23,537       15,041       4,490  
Capital lease obligations
    7,243       238       516       562       5,927  
Operating lease obligations
    12,620       4,442       3,431       1,749       2,998  
Capital expenditure commitments
    29,578       26,905       2,602       71       -  
Other long-term obligations
    6,711       1,040       130       130       5,411  
Total contractual obligations
  $ 248,381     $ 45,834     $ 66,414     $ 74,194     $ 61,939  

Interest for the revolving credit facility is calculated using a weighted average interest rate of 4.99 percent.  Interest for the fixed-rate notes is calculated using the contractual interest rates of 10.0 percent for $60.7 million of the notes and 10.75 percent for $60.7 million of the notes.

As further discussed under “Liquidity and Capital Resources,” under the terms of the Intercreditor Agreement, as amended, the primary lenders may be required to pay approximately $42 million to the senior note holders in October 2011 if a rebalancing of the Company’s indebtedness to the primary lenders and the senior note holders is required.  If this rebalancing becomes necessary, it would increase the debt maturities in the 1 to 3 years column.

The capital expenditure commitments consist primarily of tooling and equipment expenditures for new and renewal platforms with new and current customers on a global basis.

Our gross liability for uncertain tax positions and pension obligation were $4.5 million and $86.1 million, respectively, as of March 31, 2010.  We are unable to determine the ultimate timing of these liabilities and have therefore excluded from the contractual obligations table above.  

Net Cash Provided by Operating Activities

Net cash provided by operating activities in fiscal 2010 was $61.9 million which decreased $31.6 million from the prior year of $93.5 million, driven by an increase in working capital consistent with the modest growth in volumes throughout fiscal 2010.  The most significant change in operating assets and liabilities contributing to the overall decrease in cash provided by operating activities in fiscal 2010 was a $52.1 million increase in accounts receivable based on an increase in net sales of $70.1 million for the fourth quarter of fiscal 2010 as compared to the same quarter for fiscal 2009.

Net cash provided by operating activities in fiscal 2009 was $93.5 million which increased $11.8 million from the prior year of $81.7 million, driven by working capital management partially offset by a reduction in earnings.  Major changes in operating assets and liabilities contributing to the overall increase in cash provided by operating activities in fiscal 2009 were a $117.5 million decrease in accounts receivable based on active management of accounts receivables including the sale of receivables and an $11.8 million year-over-year increase in cash due to a decrease in inventories in response to lower sales volumes.  These increases were partially offset by a $52.3 million decrease in accounts payable due to timing of payments and less activity due to lower sales and a $5.3 million decrease from income taxes.

Capital Expenditures

Capital expenditures were $60.3 million for fiscal 2010, which was $43.0 million lower than the prior year.  The primary spending occurred in the Original Equipment – Europe segment, which totaled $36.6 million, the Original Equipment – North America segment, which totaled $12.9 million and the Original Equipment – Asia segment, which accounted for $8.0 million in capital spending.  Capital spending in fiscal 2010 included tooling and equipment purchases in conjunction with new global program launches with new and current customers in Europe, Asia and North America, along with completion of construction of new facilities in Asia and Europe.  Capital expenditures of $60.3 million for fiscal 2010 were below the $70.0 million limitation in our primary debt agreements.

 
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Capital expenditures were $103.3 million for fiscal 2009, which was $13.9 million higher than the prior year.  The primary spending occurred in the Original Equipment – North America segment,which totaled $25.9 million, the Original Equipment – Europe segment, which totaled $54.5 million and the Original Equipment – Asia segment, which accounted for $16.0 million in capital spending.  The increase in capital expenditures primarily related to tooling and equipment purchases in conjunction with new global program launches with new and current customers in Europe, Asia and North America, along with the construction of new facilities in Asia and Europe.

Capital expenditures were $89.4 million for fiscal 2008.  The primary spending occurred in the Original Equipment – North America segment, which totaled $25.1 million, the Original Equipment – Europe segment, which totaled $35.9 million and the Original Equipment – Asia segment, which accounted for $15.2 million in capital spending.  The increase in capital expenditures during the period primarily related to tooling and equipment purchases in conjunction with new global program launches with new and current customers in Europe, Asia and North America, along with the construction of new facilities in Asia and Europe.

Proceeds from the Sale of Discontinued Operations

Modine received net cash proceeds of $10.5 million for the sale of the shares of its South Korea-based HVAC business during fiscal 2010.  Modine received cash of $10.6 million and subordinated promissory notes totaling $2.5 million for the sale of the assets of its Electronics Cooling business during fiscal 2009.  Refer to Note 13 of the Notes to Consolidated Financial Statements for further discussion of these divestitures.
 
Proceeds from the Disposition of Assets

In fiscal 2010, the Company sold its 50 percent ownership of Anhui Jianghaui Mando Climate Control Co. Ltd. for $4.9 million, and the Company received $3.8 million from the disposition of other assets.

In fiscal 2009, the Company received proceeds from disposition of assets of $7.1 million, including approximately $3.7 million from the sale of a corporate aircraft and $3.4 million from the sale of other assets.

In fiscal 2008, the Company received proceeds from the disposition of assets of $10.0 million, including approximately $5.0 million from the sale of a corporate aircraft, $3.2 million from the sale of the Richland, South Carolina facility that closed in fiscal 2007, and $1.8 million from the sale of other equipment.

Changes in Total Debt

In fiscal 2010, total debt decreased $110.0 million, primarily with the proceeds from the common stock offering and the sale of our South Korea-based HVAC business.  Domestically, debt decreased by $107.6 million.  International debt decreased by $2.4 million during fiscal 2010 through reductions in short-term borrowings at the foreign subsidiaries.

In fiscal 2009, total debt increased $24.7 million primarily from new borrowings in North America.  Domestically, debt grew by $18.0 million with borrowings on the revolving credit facility used primarily to fund capital expenditures.  International debt increased $6.7 million during fiscal 2009 through short-term borrowings at the foreign subsidiaries.

In fiscal 2008, total debt increased $47.2 million primarily from new borrowings in North America.  Domestically, debt grew by $43.0 million with borrowings on the revolving credit facility used primarily to fund capital expenditures.  International debt increased $4.2 million during fiscal 2008.

Common Stock and Treasury Stock

On September 30, 2009, the Company completed a public offering of 13.8 million shares of its common stock at a price of $7.15 per share.  Cash proceeds were $92.9 million after deducting underwriting discounts, commissions, legal, accounting and printing fees of $5.8 million.  

The Company repurchased approximately 5,000 and 54,000 common shares for treasury at a cost of $0.03 million and $0.6 million in fiscal 2010 and 2009, respectively.  During fiscal 2008, the Company repurchased and retired 250,000 shares of the Company’s common stock for $6.9 million under the anti-dilution portion of a common share repurchase program.  In addition, the Company repurchased approximately 42,000 common shares for treasury at a cost of $0.8 million in fiscal 2008.  The Company’s amended debt agreements with its primary lenders and note holders prohibit future acquisitions by the Company of shares of its common stock.  Common stock and treasury stock activity is further detailed in Note 22 of the Notes to Consolidated Financial Statements.

 
35


Dividends Paid

On February 17, 2009, the Company announced that it has suspended its quarterly cash dividend on its common stock indefinitely as required by the amended debt agreements.  As a result, the Company paid no dividends in fiscal 2010.  Dividends paid on our common stock were $9.7 million for fiscal 2009 and $22.6 million for fiscal 2008.  The effective dividend rates paid were 30 cents per share for fiscal 2009 and 70 cents per share for fiscal 2008.

Settlement of Derivative Contracts

The Company entered into future contracts related to forecasted purchases of aluminum and natural gas that are treated as cash flow hedges.  Unrealized gains and losses on these contracts are deferred as a component of accumulated other comprehensive (loss) income, and recognized as a component of earnings at the same time that the underlying purchases of aluminum and natural gas impact earnings.  During fiscal 2010, 2009 and 2008, $5.9 million, $4.5 million and $2.0 million of expense, respectively, was recorded in cost of sales related to the settlement of certain futures contracts.  At March 31, 2010, $2.0 million of unrealized losses remain deferred in other comprehensive (loss) income, and will be realized as a component of cost of sales over the next 63 months.  The Company also entered into future contracts related to forecasted purchases of copper and nickel which are not designated as cash flow hedges.  Therefore, gains and losses on these contracts are recorded directly in the consolidated statement of operations.  There was no income or expense recorded in fiscal 2010 related to future contracts for copper or nickel.  During fiscal 2009 and 2008, $4.4 million of expense and $0.2 million of income, respectively, was recorded in cost of sales related to these future contracts.  In fiscal 2009, the Company also entered into zero cost collars to offset the foreign exchange exposure on inter-company loans.  These contracts were not designated as hedges; accordingly transaction gains and losses on the derivatives are recorded in other income – net in the consolidated statement of operations.  During fiscal 2009, $1.4 million of income was recorded to other income – net in the consolidated statement of operations related to these zero cost collars.  The Company did not enter into zero cost collars to offset foreign exchange exposure on inter-company loans during fiscal 2010.

In fiscal 2007, the Company entered into two forward-starting swaps in anticipation of a $75.0 million private placement debt offering that occurred on December 7, 2006.  These swaps were settled during fiscal 2007 with a loss of $1.8 million being recorded.  This loss was reflected as a component of accumulated other comprehensive (loss) income and is being amortized to interest expense over the respective lives of the debt offerings.  During fiscal 2010 and 2009, $0.9 million and $0.3 million of this loss, respectively, was recognized as interest expense.  The expense for fiscal 2010 includes $0.5 million of amortization in proportion with the mandatory prepayment of the senior notes on September 30, 2009.  At March 31, 2010, $0.6 million of the loss is deferred in accumulated other comprehensive (loss) income, net of taxes.
 
Research and Development
 
We focus our research and development (“R&D”) efforts on solutions that meet the most current and pressing heat transfer needs of OEMs and other customers within the commercial vehicle, construction, agricultural and commercial HVAC industries and, more selectively, within the automotive industry.  Our products and systems typically are aimed at solving difficult and complex heat transfer challenges requiring advanced thermal management.  The typical demands are for products and systems that are lighter weight, more compact, more efficient and more durable in nature to meet ever increasing customer standards as customers work to ensure compliance with increasingly stringent global emissions requirements.  Our Company’s heritage includes depth and breadth of expertise in thermal management that, combined with our global manufacturing presence, standardized processes, and state-of-the-art technical centers and wind tunnels, enables us to rapidly bring customized solutions to customers at the best value.

Our investment in R&D in fiscal 2010 was $56.9 million, or 4.9 percent of sales, compared to $73.2 million, or 5.2 percent of sales, in fiscal 2009.  This level of investment reflects the Company’s continued commitment to R&D in an ever-changing market, balanced with a near-term focus on preserving cash and liquidity through more selective capital investment.  Consistent with the streamlining of the Company’s product portfolio, our current research is focused primarily on company-sponsored development in the areas of powertrain cooling, engine products and commercial HVAC products.

 
36


Recent R&D projects have included development of waste heat recovery systems developed for major U.S.-based engine and truck manufacturers in conjunction with the U.S. Department of Energy to help engine and truck manufacturers meet ever increasing demands for emissions reduction, while simultaneously improving powertrain efficiency and, thus, fuel economy; next generation aluminum radiators for the commercial vehicle, agricultural and constructions markets; and EGR technology, which enables our customers to efficiently meet tighter regulatory emissions standards.

Through our proactive R&D, we are developing new technologies designed to keep our customers within federal and international guidelines and regulations well into the future.  In late fiscal 2009, we also formed an Advanced Solutions Research team that is focused on identifying external research projects that complement strategic internal research initiatives, some of which are government-sponsored, in order to further leverage the Company’s significant thermal technology expertise and capability.
 
Modine has been granted more than 2,000 worldwide patents over the life of the Company.  Modine is focused on the long-term commercialization of our intellectual property and research, and believes that these investments will result in new and next generation products and technologies.
 
Critical Accounting Policies
 
The following critical accounting policies reflect the more significant judgments and estimates used in preparing the financial statements.  Application of these policies results in accounting estimates that have the greatest potential for a significant impact on Modine's financial statements.  The following discussion of these judgments and estimates is intended to supplement the Significant Accounting Policies presented in Note 2 of the Notes to Consolidated Financial Statements.
 
Revenue Recognition
 
The Company recognizes revenue, including agreed upon commodity price increases, as products are shipped to customers and the risks and rewards of ownership are transferred to our customers.  The revenue is recorded net of applicable provisions for sales rebates, volume incentives, and returns and allowances.  At the time of revenue recognition, the Company also provides an estimate of potential bad debts and warranty expense.  The Company bases these estimates on historical experience, current business trends and current economic conditions.  The Company recognizes revenue from various licensing agreements when earned except in those cases where collection is uncertain, or the amount cannot reasonably be estimated until formal accounting reports are received from the licensee.
 
Contractual commodity price increases may also be included in revenue.  Price increases agreed upon in advance are recognized as revenue when the products are shipped to our customers.  In certain situations, the price increases are recognized as revenue at the time products are shipped in accordance with the contractual arrangements with our customers, but are offset by appropriate provisions for estimated commodity price increases which may ultimately not be collected.  These provisions are established based on historical experience, current business trends and current economic conditions.  There was no provision for estimated commodity price increases at March 31, 2010 and 2009.
 
Impairment of Long-Lived and Amortized Intangible Assets
 
The Company performs impairment evaluations of its long-lived assets, including property, plant and equipment, intangible assets with finite lives and equity investments, whenever business conditions or events indicate that those assets may be impaired.  The Company considers factors such as operating losses, declining outlooks and market capitalization when evaluating the necessity for an impairment analysis.  When the estimated future undiscounted cash flows to be generated by the assets are less than the carrying value of the long-lived assets, or the decline in value is considered to be “other than temporary”, the assets are written down to fair market value and a charge is recorded to current operations.  Fair market value is estimated in various ways depending on the nature of the assets under review.  This value can be based on appraised value, estimated salvage value, sales price under negotiation or estimated cancellation charges, as applicable.  The Company recorded long-lived asset and equity investment impairment charges of $6.5 million, $34.7 million and $11.6 million during fiscal 2010, 2009 and 2008, respectively.
 
The most significant long-lived assets that have been subject to impairment evaluations are the Company’s net property, plant and equipment, which totaled $418.6 million at March 31, 2010.  Within property, plant and equipment, the most significant assets evaluated are buildings and improvements, and machinery and equipment.  The Company evaluates impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level.  The Company monitors its manufacturing plant 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 programs manufactured in the plant, consisting of new program launches, reductions, and phase-outs; and shifting of programs to other facilities under the Company’s manufacturing realignment strategy.  When such indicators are present, the Company performs an impairment evaluation by comparing the estimated future undiscounted cash flows expected to be generated in the manufacturing facility to the net book value of the long-lived assets within that facility.  The undiscounted cash flows are estimated based on the expected future cash flows to be generated by the manufacturing facility over the remaining useful life of the machinery and equipment within that facility.  When the estimated future undiscounted cash flows are less than the net book value of the long-lived assets, such assets are written down to fair market value, which is generally estimated based on appraisals or estimated salvage value.
 
 
37


The majority of the long-lived asset impairment charges during fiscal 2010, 2009 and 2008 have been recorded within the Company’s Original Equipment – Europe and Original Equipment – North America segments.  These segments have experienced the most significant adverse impact of sales volume declines and changing mix of programs within the manufacturing facilities.  In addition, these segments had program phase-outs and cancellations, many of which were in the automotive markets.  Further unanticipated adverse changes in these segments could result in the need to perform additional impairment evaluations in the future.
 
The Company’s four-point plan is designed to attain a more competitive cost base and improve the Company’s longer term competitiveness, and this plan reduces the risk of potential long-lived asset impairment charges in the future.  The manufacturing realignment strategy of this plan is designed to improve the utilization of the Company’s facilities, with fewer facilities, but operating at higher capacities.  The portfolio rationalization strategy of this plan is designed to identify products where the Company can earn a sufficient return on its investment, and divest or exit products which do not meet required financial metrics.  Recent portfolio rationalization actions include a phase out of automotive powertrain cooling within North America and module/automotive powertrain cooling within Europe.  These strategies create better facility utilization and greater profitability in product mix, which are designed to allow the manufacturing facilities to withstand more significant adverse changes before an impairment charge is necessary.
 
Impairment of Goodwill and Indefinite-Lived Intangible Assets
 
Impairment tests are conducted at least annually unless business events or other conditions exist which would require a more frequent evaluation.  The Company considers factors such as operating losses, declining outlooks and market capitalization when evaluating the necessity for an impairment analysis.  The annual review of goodwill and other intangible assets with indefinite lives for impairment is conducted in the third quarter.  The recoverability of goodwill and other intangible assets with indefinite lives is determined by estimating the future discounted cash flows of the reporting unit to which the goodwill and other intangible assets with indefinite lives relates.  The rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for risk where appropriate.  In determining the estimated future cash flows, current and future levels of income are considered as well as business trends and market conditions.  To the extent that book value exceeds the fair value, an impairment is recognized.  During fiscal 2009 it was determined that the Original Equipment – Europe segment goodwill was fully impaired, necessitating a charge of $9.0 million.  During fiscal 2008 it was determined that the Original Equipment – North America segment goodwill was fully impaired, necessitating a charge of $23.8 million.
 
At March 31, 2010 the Company had goodwill of $29.6 million recorded which was primarily comprised of $13.9 million within the South America segment and $15.2 million within the Commercial Products segment.  The South America and Commercial Products segments reported operating income of $7.6 million and $20.5 million for fiscal 2010 compared to $11.9 million and $14.5 million for fiscal 2009, respectively.  Despite the current global economic conditions, these segments have reported and continue to forecast strong financial results.  The future discounted cash flows of these segments continue to substantially exceed their carrying value indicating that the goodwill recorded in these segments is fully realizable at March 31, 2010.  If, in future periods, these segments experience a significant unanticipated economic downturn in the markets in which they operate, this would require an impairment review.
 
 
38


Warranty

Estimated costs related to product warranties are accrued at the time of the sale and recorded in cost of sales.  Estimated costs are based on the best information available, which includes using statistical and analytical analysis of both historical and current claim data.  Original estimates, accrued at the time of sale, are adjusted when it becomes probable that expected claims will differ materially from these initial estimates.

Tooling Costs

Pre-production tooling costs incurred by the Company in manufacturing products under various customer programs are capitalized as a component of property, plant and equipment, net of any customer reimbursements, when the Company retains title to the tooling.  These costs are amortized over the program life and are recorded in cost of sales in the consolidated statements of operations.  For customer-owned tooling costs incurred by the Company, a receivable is recorded when the customer has guaranteed reimbursement to the Company.  The reimbursement period may vary by program and customer.  No significant arrangements existed during the years ended March 31, 2010 and 2009 where customer-owned tooling costs were not accompanied by guaranteed reimbursements.

Assets Held for Sale

Assets or businesses are considered to be held for sale when management approves and commits to a formal plan to actively market the assets or business for sale at a sale price reasonable in relation to its fair value, the asset or business is available for immediate sale in its present condition, the sale of the asset or business is probably and expected to be comleted within one year and it is unlikely that significant changes will be made to the plan.  Upon designation as held for sale, the carrying value of the assets of the business are recorded at the lower of their carrying value or their estimated fair value, less costs to sell.  The Company ceases to record depreciation expense at the time of designation as held for sale.  The Company classified the South Korean business as held for sale at March 31, 2009.  Certain facilities which the Company has closed or intends to close and are currently marketing for sale were classified as held for sale at March 31, 2010.

Pensions and Postretirement Benefits Plans

The calculation of the expense and liabilities of Modine's pension and postretirement plans is dependent upon various assumptions.  The most significant assumptions include the discount rate, long-term expected return on plan assets, and future trends in healthcare costs.  The selection of assumptions is based on historical trends and known economic and market conditions at the time of valuation.  In accordance with generally accepted accounting principles, actual results that differ from these assumptions are accumulated and amortized over future periods.  These differences may impact future pension or postretirement benefit expenses and liabilities.  The Company replaced the existing defined benefit pension plan with a defined contribution plan for salaried-paid employees hired on or after January 1, 2004.  The Modine Salaried Employee Pension Plan was modified so that no service performed after March 31, 2006 would be counted when calculating an employee’s years of credited service under the pension plan formula.  During fiscal 2008, the plan was modified so that no increases in annual earnings after December 31, 2007 would be included in calculating the average annual portion under the pension plan formula.  We believe the defined contribution plan will, in general, allow the Company a greater degree of flexibility in managing retirement benefit costs on a long-term basis.

For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to the domestic pension plans since the domestic plans comprise 100 percent of the Company’s total benefit plan assets and the large majority of the Company’s pension plan expense.

To determine the expected rate of return, Modine considers such factors as (a) the actual return earned on plan assets, (b) historical rates of returns 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 covered by the plan assets.  The long-term rate of return utilized in fiscal 2010 and fiscal 2009 was 7.90 percent.  For fiscal 2011, the Company has assumed a rate of 8.10 percent.  The impact of a 25 basis point decrease in the expected rate of return on assets would result in a $0.5 million increase in fiscal 2011 pension expense.

The discount rate reflects rates available on long-term, high quality fixed-income corporate bonds, reset annually on the measurement date of March 31.  For fiscal 2010, the Company used a discount rate of 5.93 percent, reflecting a decrease from 7.73 percent in fiscal 2009.  The Company based this decision on a yield curve that was created following an analysis of the projected cash flows from the affected plans.  See Note 4 of the Notes to Consolidated Financial Statements for additional information.  Changing Modine’s discount rate by 25 basis points would impact the fiscal 2011 domestic pension expense by approximately $0.6 million.

 
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A key determinant in the amount of the postretirement benefit obligation and expense is the healthcare cost trend rate.  The healthcare trend rate for fiscal year 2010 was 7.50 percent, and the Company expects this to be 6.75 percent for fiscal 2011.  This rate is projected to decline gradually to 5 percent in fiscal year 2014 and remain at that level thereafter.  An annual "cap" that was established for most retiree healthcare and life insurance plans between fiscal 1994 and 1996 limits Modine’s liability.  Beginning in February 2002, the Company discontinued providing postretirement benefits for salaried and non-union employees hired on or after that date.  Furthermore, effective January 1, 2009, the plan was modified to eliminate coverage for retired participants that are Medicare eligible.  A one percent increase in the healthcare trend rate would result in no substantial increase in postretirement expense and an increase in postretirement benefit obligations of approximately $0.3 million.

Other Loss Reserves

The Company has a number of other loss exposures, such as environmental and product liability claims, litigation, self-insurance reserves, recoverability of deferred income tax benefits, and accounts receivable loss reserves.  Establishing loss reserves for these matters requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability.  The Company estimates these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated.  See Note 26 of the Notes to Consolidated Financial Statements for additional details of certain contingencies and litigation.
 
Forward-Looking Statements
 
This report, including, but not limited to, the discussion under “Outlook” 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. in this report.  Other risks and uncertainties include, but are not limited to, the following:

·
Economic, social and political conditions, changes and challenges in the markets where Modine operates and competes (including currency exchange rate fluctuations (particularly the value of the euro relative to the U.S. dollar), tariffs, inflation, changes in interest rates, recession, and restrictions associated with importing and exporting and foreign ownership);

·
The impact on Modine of increases in commodity prices, particularly Modine’s exposure to the changing prices of aluminum and copper;

·
Modine’s ability or inability to pass increasing commodity prices on to customers as well as the inherent lag in timing of such pass-through pricing;

·
Modine’s ability to remain in compliance with its debt agreements and financial covenants going forward;

·
The impact the weak global economy is having on Modine, its customers and its suppliers and any worsening of such economic conditions;

·
Modine’s ability to fund its liquidity requirements and meet its long-term commitments given the continued decline and disruption in the credit markets due to the world-wide credit risks;

·
The secondary effects on Modine’s future cash flows and liquidity that may result from the manner in which Modine’s customers and lenders deal with the economic crisis and its consequences;

·
Modine’s ability to limit capital spending;

·
Modine’s ability to successfully implement restructuring plans and drive cost reductions as a result;

 
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·
Modine’s ability to maintain adequate liquidity to carry out restructuring plans while investing for future growth;

·
Modine’s ability to satisfactorily service its customers during the implementation and execution of any restructuring plans and/or new product launches;

·
Work stoppages or interference at Modine or Modine’s major customers;

·
Modine’s ability to avoid or limit inefficiencies in the transitioning of products from production facilities to be closed to other existing or new production facilities;

·
Modine’s ability to successfully execute its four-point plan;

·
Modine’s ability to further cut costs to increase its gross margin and to maintain and grow its business, including its ability to cost effectively produce products in low cost countries;

·
Modine’s impairment of assets resulting from business downturns;

·
Modine’s ability to realize future tax benefits;

·
Customers’ actual production demand for new products and technologies, including market acceptance of a particular vehicle model or engine;

·
Modine’s ability to maintain customer relationships while rationalizing its business;

·
Modine’s ability to maintain current programs and compete effectively for new business, including its ability to offset or otherwise address increasing pricing pressures from its competitors and price reduction pressures from its customers;

·
Modine’s ability to obtain profitable business at its new facilities in China, Hungary, Mexico and India and to produce quality products at these facilities;

·
Unanticipated problems with suppliers meeting Modine’s time and price demands;

·
The impact of environmental laws and regulations on Modine’s business and the business of Modine’s customers, including Modine’s ability to take advantage of opportunities to supply alternative new technologies to meet environmental emissions standards;

·
Changes in the anticipated sales mix to products with lower margins;

·
Modine’s association with a particular industry, such as the automobile industry, that could have an adverse effect on Modine’s stock price;

·
The nature of the vehicular industry, including the failure of build rates to return to pre-recessionary levels and the dependence of these markets on the health of the economy;

·
Unanticipated product or manufacturing difficulties, including unanticipated warranty claims;

·
Unanticipated delays or modifications initiated by major customers with respect to product applications or requirements;

·
Costs and other effects of unanticipated litigation or claims, and the increasing pressures associated with rising healthcare and insurance costs; and

·
Other risks and uncertainties identified by the Company in public filings with the U.S. Securities and Exchange Commission.

 
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Modine does 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, Modine is subject to market exposure from changes in foreign exchange rates, interest rates, credit risk, economic risk and commodity price risk.
 
Foreign Currency Risk
 
Modine is subject to the risk of changes in foreign currency exchange rates due to its operations in foreign countries. Modine has manufacturing facilities in Brazil, China, Mexico, South Africa, India and throughout Europe.  It also has an equity investment in a Japanese company.  Modine sells and distributes its products throughout the world.  As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company manufactures, distributes and sells its products.  The Company attempts to mitigate foreign current risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the functional currency of the Modine entity engaging in the contract.  The Company's operating results are principally exposed to changes in exchange rates between the U.S. dollar and the European currencies, primarily the euro, and changes between the U.S. dollar and the Brazilian real.  Changes in foreign currency exchange rates for the Company's foreign subsidiaries reporting in local currencies are generally reported as a component of shareholders' equity.  Weakening of the U.S. dollar to other foreign currencies during fiscal 2010, especially the euro and real, has led to improvement of the Company’s foreign results.  This improvement is evident in the Company’s favorable currency translation adjustments of $22.9 million recorded in fiscal 2010.  In fiscal 2009, the Company experienced a general strengthening of the U.S. dollar to these foreign currencies, which resulted in an unfavorable currency translation adjustment of $91.4 million.  As of March 31, 2010 and 2009, the Company's foreign subsidiaries had net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk of $88.5 million and $71.8 million, respectively.  The potential decrease in the net current assets from a hypothetical 10 percent adverse change in quoted foreign currency exchange rates would be approximately $8.9 million.  This sensitivity analysis presented assumes a parallel shift in foreign currency exchange rates.  Exchange rates rarely move in the same direction relative to the U.S. dollar.  This assumption may overstate the impact of changing exchange rates on individual assets and liabilities denominated in a foreign currency.
 
During the second half of fiscal 2010 and into the first two months of fiscal 2011, the Company experienced a strengthening of the U.S. dollar to the euro as the euro declined with credit concerns relating to certain members of the European Economic Union, particularly Greece.  The decline of the euro has contributed to recent unfavorable currency translation adjustments as the results of the Original Equipment – Europe segment are translated to the U.S. dollar.  If this segment records a consistent level of income from operations in fiscal 2011 as it did in fiscal 2010, a hypothetical 10 percent decline in the euro relative to the U.S. dollar would reduce the Company’s consolidated earnings in a range of $1 million to $2 million.
 
The Company has, from time to time, certain foreign-denominated, long-term debt obligations and long-term inter-company loans that are sensitive to foreign currency exchange rates.  As of March 31, 2010 there were no third-party foreign-denominated, long-term debt obligations.  The Company has inter-company loans outstanding at March 31, 2010 as follows:
 
 
·
$6.0 million loan to its wholly owned subsidiary, Modine do Brasil Sistemas Termicos Ltda. (Modine Brazil), that matures on May 8, 2011;
 
 
·
$13.0 million loan to its wholly owned subsidiary, Modine Thermal Systems India, that matures on April 30, 2013;
 
 
·
$12.0 million between two loans to its wholly owned subsidiary, Modine Thermal Systems Co (Changzhou, China), with various maturity dates through June 2012;
 
 
·
$4.7 million loan to its wholly owned subsidiary, Modine U.K. Dollar Limited, that matures on November 30, 2011; and
 
 
·
$45.4 million between two loans to its wholly owned subsidiary, Modine Holding GmbH, with various maturity dates through January 31, 2020.
 
 
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These inter-company loans are sensitive to movement in foreign exchange rates, and the Company did not have any derivative instruments that hedge this exposure at March 31, 2010.  In fiscal 2008, the Company entered into a zero cost collar to hedge the foreign exchange exposure on inter-company loans outstanding with Modine Brazil.  This collar was settled on March 31, 2008 for a loss of 3.9 million reais ($2.3 million U.S. equivalent).  In fiscal 2009, the Company entered into a purchase option contract to hedge the foreign exchange exposure on inter-company loans outstanding with Modine Brazil.  The Company settled this derivative instrument on February 11, 2009 for cash proceeds of $1.8 million.  These derivative instruments were not being treated as hedges, and accordingly, transaction gains or losses on the derivatives were being recorded in other (income) expense – net in the consolidated statement of operations and acted to offset any currency movement on the outstanding loan receivable.
 
Interest Rate Risk

Modine's interest rate risk policies are designed to reduce the potential volatility of earnings that could arise from changes in interest rates.  The Company generally utilizes a mixture of debt maturities together with both fixed-rate and floating-rate debt to manage its exposure to interest rate variations related to its borrowings.  The domestic revolving credit facility is based on a variable interest rate of London Interbank Offered Rate (“LIBOR”) plus 475 basis points.  The Company is subject to future fluctuations in LIBOR, which would affect the variable interest rate on the revolving credit facility and create variability in interest expense.  A 100 basis point increase in LIBOR would increase annual interest expense by $0.1 million based on the March 31, 2010 revolving credit facility balance.  The Company has, from time to time, entered into interest rate derivatives to manage variability in interest rates.  These interest rate derivatives have been treated as cash flow hedges of forecasted transactions and, accordingly, derivative gains or losses are reflected as a component of accumulated other comprehensive (loss) income and are amortized to interest expense over the respective lives of the borrowings.  During the years ended March 31, 2010 and 2009, $0.9 million and $0.3 million of expense, respectively, was recorded in the consolidated statement of operations related to the amortization of interest rate derivative losses.  The expense for the year ended March 31, 2010 includes $0.5 million of amortization in proportion with the mandatory prepayment of the senior notes on September 30, 2009.  At March 31, 2010, $0.6 million of net unrealized losses remain deferred in accumulated other comprehensive (loss) income.  The following table presents the future principal cash flows and weighted average interest rates by expected maturity dates for our long-term debt.  The fair value of the long-term debt is estimated by discounting the future cash flows at rates offered to the Company for similar debt instruments of comparable maturities.  The book value of the debt approximates fair value, with the exception of the $121.5 million fixed rate notes, which have a fair value of approximately $132.0 million at March 31, 2010.

As of March 31, 2010, long-term debt matures as follows:
 
Years ending March 31
     
   
Expected Maturity Date
 
(dollars in thousands)
 
2011
   
2012
   
2013
   
2014
   
2015
   
Thereafter
   
Total
 
                                           
Fixed rate (U.S. dollars)
    -     $ 9,375     $ 18,750     $ 23,438     $ 32,601     $ 37,288     $ 121,452  
Average interest rate
    -       -       -       -       -       10.38 %        
Variable rate (U.S. dollars)
    -     $ 7,500       -       -       -       -     $ 7,500  
Average interest rate
    -       4.99 %     -       -       -       -          

As further discussed under “Liquidity and Capital Resources” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the terms of the Intercreditor Agreement the primary lenders may be required to pay approximately $42 million to the senior note holders in October 2011 if a rebalancing of the Company’s indebtedness to the primary lenders and the senior note holders is required.  If this rebalancing becomes necessary, it would accelerate the debt maturity from the fiscal 2015 and thereafter columns.

Credit Risk

Credit risk is the possibility of loss from a customer's failure to make payment according to contract terms.  The Company's principal credit risk consists of outstanding trade receivables.  Prior to granting credit, the Company evaluates each customer, taking into consideration the customer's financial condition, payment experience and credit information.  After credit is granted, the Company actively monitors the customer's financial condition and developing business news.  Approximately 47 percent of the trade receivables balance at March 31, 2010 was concentrated with the Company's top ten customers.  Modine's history of incurring credit losses from customers has not been material, and the Company does not expect that trend to change.  However, the current economic uncertainty, especially within the global automotive and commercial vehicle markets, makes it difficult to predict future financial conditions of significant customers within these markets.  Deterioration in the financial condition of a significant customer could have a material adverse effect on the Company’s results of operations and liquidity.

 
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The adverse events in the global financial markets over the past two years have increased credit risks on investments to which Modine is exposed or where Modine has an interest.  The Company manages these credit risks through its focus on the following:

 
·
Cash and investments – Cash deposits and short-term investments are reviewed to ensure banks have credit ratings acceptable to the Company and that all short-term investments are maintained in secured or guaranteed instruments.  The Company’s holdings in cash and investments were considered stable and secure at March 31, 2010;
 
·
Pension assets – The Company has retained outside advisors to assist in the management of the assets in the Company’s defined benefit plans.  In making investment decisions, the Company has been guided by an established risk management protocol that focuses on protection of the plan assets against downside risk.  The Company monitors investments in its pension plans to ensure that these plans provide appropriate diversification, investment teams and portfolio managers are adhering to the Company’s investment policies and directives, and exposure to high risk securities and other similar assets is limited.  The Company believes it has appropriate investment policies and controls and proactive investment advisors; and
 
·
Insurance – The Company monitors its insurance providers to ensure that they have acceptable financial ratings, and no concerns have been identified through this review.

Economic Risk

Economic risk is the possibility of loss resulting from economic instability in certain areas of the world or significant downturns in markets that the Company supplies.  The Company sells a broad range of products that provide thermal solutions to a diverse group of customers operating primarily in the automotive, truck, heavy equipment and commercial heating and air conditioning markets.  The adverse events in the global financial markets over the past two years have created a significant downturn in the vehicular markets, in which the Company competes, and to a lesser extent in the commercial heating and air conditioning markets.  The current economic uncertainty makes it difficult to predict future conditions within these markets.  A sustained economic downturn in any of these markets could have a material adverse effect on the future results of operations or the Company’s liquidity and potentially result in the impairment of related assets.

The Company is responding to these market conditions through its continued implementation of its four-point plan as follows:

 
·
Manufacturing realignment – aligning the manufacturing footprint to maximize asset utilization and improve the Company’s cost competitive position;
 
·
Portfolio rationalization – identifying products or businesses that should be divested or exited as they do not meet required financial metrics;
 
·
SG&A expense reduction – reducing SG&A expenses and SG&A expenses as a percentage of sales through diligent cost containment actions; and
 
·
Capital allocation discipline – allocating capital spending to operating segments and business programs that will provide the highest return on investment.

With respect to international instability, the Company continues to monitor economic conditions in the U.S. and elsewhere.  During fiscal 2010 there was weakening of the U.S. dollar.  The euro and Brazilian real strengthened against the dollar by 2 percent and 30 percent, respectively.  The Chinese renminbi strengthened less than one percent against the U.S. dollar in fiscal 2010.  From March 31, 2010 through May 25, 2010, the U.S. dollar has strengthened by approximately 8.7 percent against the euro based on economic uncertainty within Europe.  This results in foreign currency translation losses as the Company translates the Original Equipment – Europe financial results into U.S. dollars.  As Modine expands its 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.

 
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The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon the Company's ability to commercialize its investments.  Current examples of new and emerging markets for Modine include those related to exhaust gas recirculation and waste heat recovery.  Modine's investment in these areas is subject to the risks associated with business integration, technological success, customers' and market acceptance, and Modine's ability to meet the demands of its customers as these markets emerge.

Future recovery from the global recession or continued economic growth in China are expected to put production pressure on certain of the Company's suppliers of raw materials.  In particular, there are a limited number of suppliers of copper, steel and aluminum fin stock serving a more robust market.  The Company is exposed to the risk of supply of certain raw materials not being able to meet customer demand and of increased prices being charged by raw material suppliers.

In addition to the purchase of raw materials, the Company purchases parts from suppliers that use the Company's tooling to create the part.  In most instances, the Company does not have duplicate tooling for the manufacture of its purchased parts.  As a result, the Company is exposed to the risk of a supplier of such parts being unable to provide the quantity or quality of parts that the Company requires.  Even in situations where suppliers are manufacturing parts without the use of Company tooling, the Company faces the challenge of obtaining high-quality parts from suppliers.  The Company has implemented a supplier risk management program that utilizes industry sources to identify and mitigate high risk supplier situations.

In addition to the above risks on the supply side, the Company is also exposed to risks associated with demands by its customers for decreases in the price of the Company's products.  The Company attempts to offset these risks with firm agreements with its customers whenever possible but these agreements generally carry annual price down provisions as well.

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.  However, the risk associated with any market downturn, including the current global economic downturn, is still present.

Commodity Price Risk

The Company is dependent upon the supply of certain raw materials and supplies in the production process and has, from time to time, entered into firm purchase commitments for copper, aluminum, nickel, and natural gas.  The Company utilizes an aluminum hedging strategy from time to time by entering into fixed price contracts to help offset changing commodity prices.  The Company utilizes collars from time to time for certain forecasted copper purchases, and also enters into forward contracts from time to time for certain forecasted nickel purchases.  The Company does maintain agreements with certain customers to pass through certain material price fluctuations in order to mitigate the commodity price risk.  The majority of these agreements contain provisions in which the pass-through of the price fluctuations can lag behind the actual fluctuations by a quarter or longer.

Hedging and Foreign Currency Exchange Contracts

The Company uses derivative financial instruments in a limited way as a tool to manage certain financial risks.  Their use is restricted primarily to hedging assets and obligations already held by Modine, and they are used to protect cash flows rather than generate income or engage in speculative activity.  Leveraged derivatives are prohibited by Company policy.

Commodity Derivatives: The Company enters into futures contracts from time to time related to certain of the Company’s forecasted purchases of aluminum and natural gas.  The Company’s strategy in entering into these contracts is to reduce its exposure to changing purchase prices for future purchase of these commodities.  These contracts have been designated as cash flow hedges by the Company.  Accordingly, unrealized gains and losses on these contracts are deferred as a component of accumulated other comprehensive (loss) income, and recognized as a component of earnings at the same time that the underlying purchases of aluminum and natural gas impact earnings.  During the years ended March 31, 2010 and 2009, $5.9 million and $4.5 million of expense, respectively, was recorded in the consolidated statement of operations related to the settlement of certain futures contracts.  At March 31, 2010, $2.0 million of unrealized losses remain deferred in accumulated other comprehensive (loss) income, and will be realized as a component of cost of sales over the next 63 months.  During fiscal 2010, the Company did not enter into any new futures contracts for commodities.

 
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In addition, the Company has entered into futures contracts from time to time related to certain of the Company’s forecasted purchases of copper and nickel.  The Company’s strategy in entering into these contracts is to reduce its exposure to changing purchase prices for future purchases of these commodities.  The Company has not designated these contracts as hedges; therefore, gains and losses on these contracts are recorded directly in the consolidated statements of operations.  There were no futures contracts entered into for fiscal 2010.  During the year ended March 31, 2009 and 2008, $4.4 million of expense and $0.2 million of income, respectively, was recorded in cost of sales related to these futures contracts.

Foreign exchange contracts: Modine maintains a foreign exchange risk management strategy that uses derivative financial instruments in a limited way to mitigate foreign currency exchange risk.  Modine periodically enters into foreign currency exchange contracts to hedge specific foreign currency-denominated transactions.  Generally, these contracts have terms of 90 or fewer days.  The effect of this practice is to minimize the impact of foreign exchange rate movements on Modine’s earnings.  Modine’s foreign currency exchange contracts do not subject it to significant risk due to exchange rate movements because gains and losses on these contracts offset gains and losses on the assets and liabilities being hedged.

As of March 31, 2010, the Company had no outstanding forward foreign exchange contracts.  Non-U.S. dollar financing transactions through inter-company loans or local borrowings in the corresponding currency generally are effective as hedges of long-term investments.

The Company has a number of investments in wholly owned foreign subsidiaries and a non-consolidated foreign joint venture.  The net assets of these subsidiaries are exposed to currency exchange rate volatility.  From time to time, the Company uses non-derivative financial instruments to hedge, or offset, this exposure.

Interest rate derivatives: As further noted above under the section entitled “Interest Rate Risk,” the Company has, from time to time, entered into interest rate derivatives to manage the variability in interest rates.  These interest rate derivatives have been treated as cash flow hedges of forecasted transactions and, accordingly, derivative gains or losses are reflected as a component of accumulated other comprehensive (loss) income and are amortized to interest expense over the respective lives of the borrowings.

Counterparty risks: The Company manages counterparty risks by ensuring that counterparties to derivative instruments have credit ratings acceptable to the Company.  At March 31, 2010, all counterparties had a sufficient long-term credit rating.

 
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 2010, 2009 and 2008
(In thousands, except per share amounts)

   
2010
   
2009
   
2008
 
Net sales
  $ 1,163,234     $ 1,408,714     $ 1,601,672  
Cost of sales
    993,025       1,221,680       1,358,872  
Gross profit
    170,209       187,034       242,800  
Selling, general and administrative expenses
    157,502       199,613       217,835  
Restructuring (income) charges
    (679 )     30,404       3,565  
Impairment of goodwill and long-lived assets
    6,548       36,139       35,343  
Earnings (loss) from operations
    6,838       (79,122 )     (13,943 )
Interest expense
    22,888       13,775       11,070  
Other (income) expense – net
    (5,584 )     10,056       (8,394 )
Loss from continuing operations before income taxes
    (10,466 )     (102,953 )     (16,619 )
Provision for income taxes
    9,832       644       37,808  
Loss from continuing operations
    (20,298 )     (103,597 )     (54,427 )
Loss from discontinued operations (net of income taxes)
    (8,370 )     (7,481 )     (14,206 )
(Loss) gain on sale of discontinued operations (net of income taxes)
    (611 )     2,466       -  
Net loss
  $ (29,279 )   $ (108,612 )   $ (68,633 )
                         
Loss from continuing operations per common share:
                       
Basic
  $ (0.52 )   $ (3.23 )   $ (1.70 )
Diluted
  $ (0.52 )   $ (3.23 )   $ (1.70 )
                         
Net loss per common share:
                       
Basic
  $ (0.75 )   $ (3.39 )   $ (2.15 )
Diluted
  $ (0.75 )   $ (3.39 )   $ (2.15 )

The notes to consolidated financial statements are an integral part of these statements.

 
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MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, 2010 and 2009
(In thousands, except per share amounts)

   
2010
   
2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 43,657     $ 43,536  
Short-term investments
    1,239       1,189  
Trade receivables, less allowance for doubtful accounts of $2,420 and $2,831
    167,745       122,266  
Inventories