form10k.htm


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

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

For the fiscal year ended March 31, 2013

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 þ    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.  þ
 
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 98 percent of the outstanding shares are held by non-affiliates.  The aggregate market value of these shares was approximately $344 million based on the market price of $7.38 per share on September 30, 2012, 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 47,216,322 at May 23, 2013.

An Exhibit Index appears at pages 78-81 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 2013 Annual
 
Part III of Form 10-K
Meeting of Shareholders
 
(Items 10, 11, 12, 13, 14)

 
 

 
 
MODINE MANUFACTURING COMPANY
TABLE OF CONTENTS
 
PART I 1
       
  ITEM 1. BUSINESS. 1
       
  ITEM 1A.      RISK FACTORS. 9
       
  ITEM 1B. UNRESOLVED STAFF COMMENTS. 13
       
  ITEM 2. PROPERTIES. 13
       
  ITEM 3. LEGAL PROCEEDINGS. 14
       
  ITEM 4 .MINE SAFETY DISCLOSURES. 14
       
    EXECUTIVE OFFICERS OF THE REGISTRANT. 15
       
PART II
16
       
  ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. 16
       
  ITEM 6. SELECTED FINANCIAL DATA. 17
       
  ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 18
       
  ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 34
       
  ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 37
       
  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 73
       
  ITEM 9A. CONTROLS AND PROCEDURES. 73
       
  ITEM 9B. OTHER INFORMATION. 74
       
PART III 74
       
  ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. 74
       
  ITEM 11. EXECUTIVE COMPENSATION. 74
       
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. 74
       
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. 75
       
  ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. 75
       
PART IV 75
       
  ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. 75
       
    SIGNATURES 76
       
    SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 77
       
    EXHIBIT INDEX 78
 
 
 


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PART I

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 and refrigeration markets.  Product lines include radiators and radiator cores, condensers, 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, industrial and construction equipment OEMs;
- Heating and cooling OEMs;
- Construction contractors; and
- Wholesalers of plumbing and heating equipment.

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, industrial and commercial HVAC industries.  Our products and systems typically are aimed at solving complex heat transfer challenges requiring effective thermal management.  Typical customer and market demands include products and systems that are lighter weight, more compact, more efficient and more durable to meet ever increasing customer standards as they work to ensure compliance with increasingly stringent global emissions, fuel economy and energy efficiency requirements.  Our Company’s heritage provides a depth and breadth of expertise in thermal management, which, when combined with our global manufacturing presence, standardized processes, and state-of-the-art technical 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 “Turbotube” radiators became standard equipment on the famous Ford Motor Company Model T.  When he died at the age of 95, A.B. Modine had 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 otherwise requires, we are referring to Modine Manufacturing Company.  Our fiscal year ends on March 31 and, accordingly, all references to a particular year mean the fiscal year ended March 31 of that year, unless indicated otherwise.

Business Strategy and Results

Modine 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, technically and commercially, and partnering with customers to deliver the right products in the right markets.  Modine’s top five customers are in three different markets – automotive, truck and off-highway – and our ten largest customers accounted for 59 percent of the Company’s fiscal 2013 sales, compared to 61 percent in fiscal 2012.  In fiscal 2013, 61 percent of total sales were generated from customers outside of the U.S., 54 percent of which were generated by Modine’s foreign operations and 7 percent of which were generated by exports from the U.S.  In fiscal 2012, 64 percent of total sales were generated from customers outside of the U.S., with 58 percent generated by foreign operations and 6 percent generated by exports from the U.S.
 
 
1

 
During fiscal 2013, the Company reported total sales of $1.38 billion, a 13 percent decrease from $1.58 billion in fiscal 2012.  Sales were negatively affected by weak end market demand as the global economy slowed over the past fiscal year. This decline was seen across most of Modine’s end markets, including, in particular, the commercial vehicle and off-highway markets.  Gross profit declined $48.0 million from $256.6 million in fiscal 2012 to $208.6 million in fiscal 2013, primarily as a result of lower sales volume.  As sales volume and gross profit declined, the Company proactively managed its selling, general and administrative (“SG&A”) expenses, resulting in a $20.3 million decrease from fiscal 2012 to fiscal 2013.  Over the last several years, the Company has implemented a number of cost and operational efficiency measures designed to improve our longer-term competitiveness, including the realignment of our manufacturing facilities, portfolio rationalization, capital allocation and SG&A cost containment.  These measures have positioned the Company to better absorb any future volume declines caused by the overall global economy.

During fiscal 2013, the Company also initiated its Europe restructuring program, which is designed to align the cost structure of the segment with our strategic focus on the commercial vehicle, off-highway and engine product markets, while improving gross margin and return on average capital employed (“ROACE”).  The Company recorded $25.9 million of asset impairment charges and $17.0 million of restructuring expenses, primarily related to the Europe restructuring program, in fiscal 2013.  The Company reported an operating loss of $0.6 million in fiscal 2013, compared to operating income of $67.5 million in fiscal 2012.

The lower sales volume and costs associated with the Europe restructuring program were the primary factors causing the loss from continuing operations of $22.8 million or $0.52 per fully diluted share during fiscal 2013.  These results compare to earnings from continuing operations of $38.0 million or $0.80 per fully diluted share during fiscal 2012.

The Company measures its performance based on a ROACE metric.  ROACE is defined as operating income, less impairment charges, restructuring expenses, a 30 percent income tax rate, and minority interest; divided by the average of debt plus Modine shareholders’ equity.  The Company has established a goal of achieving ROACE of 11 to 12 percent in the next few years with a longer term goal of 15 percent.  ROACE is not a measure derived under generally accepted accounting principles (“GAAP”) and should not be considered as a substitute for any measure derived in accordance with GAAP.  Management believes that ROACE provides investors with helpful information about the Company’s performance, its ability to provide an acceptable return on capital, and its ability to fund future growth.  This measure may be inconsistent with similar measures presented by other companies.  The following schedule provides a reconciliation of ROACE to the most directly comparable financial measures calculated and presented in accordance with GAAP:

   
Fiscal 2013
   
Fiscal 2012
 
Operating (loss) income
  $ (0.6 )   $ 67.5  
Impairment charges
    25.9       2.5  
Restructuring expenses
    17.0       -  
Subtotal
    42.3       70.0  
Tax applied at 30% rate
    (12.7 )     (21.0 )
Minority interest
    (1.4 )     (0.3 )
Operating income - adjusted
  $ 28.2     $ 48.7  
                 
Divided by: Average capital (debt + Modine shareholders' equity for the last two year-ends / divided by 2)
  $ 459.3     $ 494.6  
                 
ROACE
    6.1 %     9.8 %

ROACE declined from 9.8 percent in fiscal 2012 to 6.1 percent in fiscal 2013.   This decline was primarily due to lower gross profit on lower sales volume as a result of relatively weak economic conditions during fiscal 2013.

Products

The Company offers a broad line of products that are categorized as a percentage of net sales as follows:
 
 
2

 
   
Fiscal 2013
   
Fiscal 2012
 
             
Modules/Packages*
    26 %     26 %
Oil Coolers
    14 %     16 %
Charge-Air Coolers
    12 %     11 %
Building HVAC
    11 %     10 %
Radiators
    10 %     12 %
Exhaust Gas Recirculation ("EGR") Coolers
    10 %     10 %
Condensers
    9 %     6 %
Miscellaneous
    8 %     9 %
 

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

Competitive Position

We compete with many manufacturers of heat transfer and HVAC 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 and have expanded their global footprint to compete in local markets.  Some of 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.  As a result, the Company has expanded its own geographic footprint, in part to allow us to more flexibly serve our original equipment customers across the globe.  Our customers also continue to ask the Company, as well as their other primary suppliers, to participate in research and development (“R&D”), design, and validation responsibilities.  This combined work effort often results 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 geographic locations.  Each operating segment is managed by a vice president or managing director and has separate financial results reviewed by the Company’s chief operating decision 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.  Financial information related to the Company’s operating segments is included in Note 21 of the Notes to Consolidated Financial Statements.

North America, Europe, South America and Asia Segments

The continued 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, Brazil, China, India, South Korea and Mexico) and a global product-based organization with expertise to solve technical challenges.  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, AKG (Autokühler Gmbh & Co. KG), Behr GmbH & Co. K.G., Dana Corporation, Dayco Ensa SA (Borg Warner), Visteon Corporation, Denso Corporation, Delphi Corporation, T.Rad Co. Ltd., Honeywell Thermal Div., Valeo SA and TitanX, have a multi-regional or worldwide presence.  Increasingly, the Company faces heightened competition as these competitors expand their product offerings and manufacturing footprints through expansion into low cost countries and low cost country sourcing initiatives.  In addition, competitors from some of the low cost regions are expanding their presence in OEM markets in their home countries and abroad.

The North America, Europe, South America and Asia segments represent the Company’s original equipment segments and serve the following markets:
 
 
3

 
Commercial Vehicle

Products – Powertrain cooling (engine cooling modules, radiators, charge-air-coolers, condensers, oil coolers, fan shrouds, and surge tanks); on-engine cooling (EGR coolers, engine oil coolers, fuel coolers, charge-air-coolers and intake air coolers); oil coolers (transmission and retarder 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 – In fiscal 2013, the commercial vehicle market proved disappointing.  During the first half of fiscal 2013, North America experienced a drop in heavy-truck order backlog.  Recent order activity has provided more optimism with consistent, yet tepid gains.  In addition, recent U.S. housing market improvements should spur both heavy- and medium-duty truck demands going forward.  In Europe truck makers reduced demand due to the Eurozone economic uncertainty.

Other trends influencing the market include the continued consolidation of major customers into global entities that emphasize the development of global vehicle platforms in order to leverage and reduce development costs and distribution methods.  In the U.S. and Canada, truck quality improvements coupled with lower economic expectations have muted the robust truck demand experienced in the mid-2000’s.  Fundamental trucking productivity changes (reduced length of haul, lighter freight, better routing, and fewer empty trucks) is also causing a structural downshift in new truck demand.

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.

Fuel economy and emissions regulations are driving the advancement of product development worldwide and creating demand for incremental thermal transfer products, such as those relating to waste heat recovery.

Primary Competitors – Behr GmbH & Co. K.G.; TitanX, T.Rad Co. Ltd.; Honeywell Thermal Div.; Dayco Ensa SA

Off-Highway

Products – Powertrain cooling (engine cooling modules, radiators, condensers, charge-air-coolers, fuel coolers, oil 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 agricultural market is currently at relatively high levels and facing structural changes in crop prices, especially corn.  Mining equipment markets remain lower due to reduced commodity demand, especially coal, global economic uncertainty and a subdued China economic recovery.  Construction markets showed modest improvement in fiscal 2013.  However, fiscal 2013 demand was muted due to challenging global economic conditions which caused high inventory levels at the dealers of our OEM customers.

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, including the current adoption of Tier IV emissions requirements in the mature region construction markets.  OEMs are continuing their expansion into Asia and prefer global 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.; Doowon; Valeo SA; Donghwan; TRad Co. Ltd.; and RAAL.

 
4

 
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), on-engine cooling (EGR coolers, engine oil coolers, fuel coolers, charge-air-coolers and intake air coolers); and battery cooling (layered core battery chillers)

Customers – Automobile, light truck and engine manufacturers

Market Overview – Modine supports the automotive marketplace with components where complementary Modine technology can be applied to an automotive environment at reasonable returns.  Modine has continued the process of deemphasizing our focus on automotive modules due to the cost and risk of large 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.

Primary Competitors – Behr GmbH & Co. K.G.; Dana Corporation; Delphi Corporation; Denso Corporation; Visteon Corporation, Showa, and Dayco Ensa SA.

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; commercial packaged rooftop ventilation units; unit ventilators; single packaged vertical units; geothermal and water-source heat pumps; precision air conditioning units for data center applications; chillers; ceiling cassettes; condensing units

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

Market Overview – Commercial Products has strong sales in gas unit heaters, data center air conditioning products, and room heating and cooling units.  Efficiency legislation, indoor air quality, lower noise requirements, growth in data centers, and higher energy costs are driving opportunities in these market areas.

Primary Competitors – Lennox International Inc. (ADP); ABB (Reznor); Mestek Inc. (Sterling); Emerson Electric Company (Liebert); Stulz; Schneider Electric (APC / Uniflair); United Technologies Corporation (Carrier); Johnson Controls, Inc. (York); Daikin (McQuay International); and Bard Manufacturing

Geographical Areas

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

North America
 
Europe
 
South America
 
Asia/Pacific
 
Africa
                 
Canada
 
Austria
 
Brazil
 
China
 
South Africa
Mexico
 
Germany
     
India
   
United States
 
Hungary
     
Japan
   
   
Italy
     
South Korea
   
   
The Netherlands
           
   
Russia
           
   
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, taxes and regulations, foreign currency volatility, and market fluctuations.
 
 
5

 
Exports

The Company exports product from North America to foreign countries and also receives royalties from foreign licensees.  Export sales from the U.S. as a percentage of net sales were 7 percent for fiscal 2013, 6 percent for fiscal 2012 and 5 percent for fiscal 2011.  Royalties from foreign licenses were $1.0 million, $1.2 million and $1.6 million for fiscal 2013, 2012 and 2011, respectively.

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 21 of the Notes to Consolidated Financial Statements.

Customer Dependence

The Company’s ten largest customers accounted for 59 percent of the Company's sales in fiscal 2013.  These customers, listed alphabetically, were: BMW; Caterpillar Inc.; Daimler AG; Deere & Company; Denso Corporation; Ford Motor Co.; Navistar; PACCAR; Volkswagen AG and Volvo Group.  In fiscal 2013, Daimler AG was the only customer that accounted for ten percent or more of total Company sales.  In fiscal 2012, no one customer accounted for ten percent or more of total Company sales, while in fiscal 2011 BMW was the only customer that accounted for ten percent or more of total Company sales.  Generally, products 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 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.

Backlog of Orders

The Company's operating units maintain their own inventories and production schedules.  We believe that our current production capacity is capable of handling the sales volume expected in fiscal 2014.

Raw Materials

Aluminum, nickel and steel 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 copper and brass material is highly concentrated between two global suppliers.  The Company normally does not experience material shortages and believes that our suppliers’ production of these metals will be adequate throughout the next fiscal year.  Metals pricing with the Company’s raw material and major fabricated component suppliers are typically adjusted on a quarterly basis.  When possible, Modine has made material pass-through arrangements with its key customers, which allows the Company to pass material cost increases and decreases to its customers.  However, where these pass-through arrangements are utilized, there can be a time lag between the time of the material increase or decrease and the time of price adjustment.  This time lag can range from three months to one year.

Patents

The Company owns outright or has a number of licenses to produce products under patents.  These patents and licenses have been obtained over a period of years and 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.
 
 
6

 
Research and Development

The Company remains committed to its vision of creating value through technology.  We focus our R&D efforts on solutions that meet the most current and pressing heat transfer needs, as well as the anticipated future heat transfer needs, of OEMs and other customers within the commercial vehicle, automotive, construction, agricultural, industrial 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.  Typical market demands are for products and systems that are lighter weight, more compact, more efficient and more durable to meet ever increasing customer standards as customers work to ensure compliance with increasingly stringent global emissions and energy efficiency 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.

R&D expenditures were $68.4 million, $70.2 million and $67.0 million in fiscal 2013, 2012 and 2011, respectively.  Over the last three years, R&D expenditures have been between 4 and 5 percent of sales.  This level of investment reflects our continued commitment to R&D in an ever-changing market.  To achieve efficiencies and lower development costs, Modine’s R&D groups work closely with our customers on special projects and system designs.  Recent R&D projects have included development of waste heat recovery systems for major U.S.-based engine and truck manufacturers in conjunction with the U.S. Department of Energy to help these 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.  Our current R&D activities are focused primarily on company-sponsored development in the areas of powertrain cooling, engine products and commercial HVAC products.  The Company is also involved with several industry-, university- and government-sponsored research organizations that conduct research and provide data on technical topics which are of interest to the Company for practical applications in the markets we serve.  The research developed as a result is generally shared among the member organizations.  In addition, we are participating in several 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 the design and demonstration of waste heat recovery systems and research and testing directed at the enhancement of EGR cooler performance.  Government reimbursements totaled approximately $2 million in fiscal 2013.

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.  We continue to identify, evaluate and engage in external research projects that complement strategic internal research initiatives in order to further leverage the Company’s significant thermal technology expertise and capability.

Quality Improvement

Through Modine’s global Quality Management System (“QMS”), the manufacturing facilities in our North America, Europe, South America and Asia segments are registered to ISO 9001:2008 or ISO/TS 16949:2009 standards, helping to ensure that our customers receive high quality products and services from every Modine facility.  While customer expectations for performance, quality and service have risen continuously over the past years, our QMS has allowed 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”), which focuses on leadership behaviors and rapid continuous improvement.  Sustainable and systematic 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 facilities maintain Environmental Management System (“EMS”) certification to the international ISO14001 standard through independent third-party audits. All Modine locations have established specific environmental improvement targets and objectives for the coming fiscal year.
 
 
7

 
In fiscal 2013, Modine’s carbon emissions resulting from its on-site use of natural gas and propane, and from its use of electricity generated by off-site sources, were relatively flat compared to the prior year.  We will continue to identify and implement carbon reduction opportunities when feasible over the coming fiscal year.

Modine’s generation of air emissions, hazardous wastes, and solid wastes decreased 3.6 percent in fiscal 2013.  Water consumption decreased significantly, with reductions in all business segments accounting for a 21 percent global reduction, equivalent to saving greater than 28 million gallons of water. This past year’s result is a continuation of a sustained effort over the past five years which has realized a 32 percent decrease in the Company’s water use.  As in previous years, Modine continues to systematically identify opportunities and implement measures to reduce waste and conserve natural resources within the structure of its EMS.

Modine's commitment to environmental stewardship is 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 98 percent over the 10-year period 2001 to 2011. This long-term improvement is the result of Modine’s transition to more environmentally friendly manufacturing technologies and raw materials.

Modine’s product portfolio reflects its sense of environmental responsibility.  The Company continues its development and refinement of environmentally friendly product lines including oil, fuel, and EGR coolers for diesel applications, light weight and high performance powertrain cooling heat exchangers, and its Advanced Cooling System technology introduced in fiscal 2013. These products provide increased fuel economies and enable combustion technologies that reduce harmful gas emissions. Modine’s Commercial Products segment offerings, including the Airedale Schoolmate geo-thermal heat pump, the Effinity93, the most efficient gas-fired unit heater in North America, and the AtherionTM Commercial Packaged Ventilation System, are helping commercial, industrial and residential users achieve high energy efficiencies and reduce utility costs. Modine’s acquisition in fiscal 2013 of Geofinity Manufacturing Company further strengthens our product line with innovative geothermal heat pump technologies providing energy savings and reduced carbon emissions in both the heating and cooling seasons.

An obligation for remedial activities may arise at our facilities due to past practices or as a result of a property purchase or sale.  These expenditures most often relate to sites where past operations followed practices that were considered acceptable under then-existing regulations, but now require investigative and/or remedial work to ensure appropriate environmental protection or where 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.  Three 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 for investigative work and remediation at sites in the United States, Brazil, and The Netherlands totaled approximately $5 million at March 31, 2013.

Modine recorded a fiscal 2013 global Recordable Incident Rate (“RIR”) of 1.75, representing an 11 percent year over year increase. Although this result did not meet Modine’s global objective for the fiscal year, Modine’s long-term safety performance as indicated by RIR improved 24 percent over the past five years, with 43 percent fewer injuries in fiscal 2013 when compared to fiscal 2008.  Modine has consistently out-performed the private-industry RIR average which, by comparison, was 3.50 in 2011.

Modine continues its global introduction and implementation of a behavior-based safety program first introduced in fiscal 2012. The program is a proactive effort which not only seeks to correct at-risk behaviors, but also to positively reinforce safe behaviors. Modine’s behavior-based safety program is a long-term commitment to improve Modine’s safety culture.  It complements numerous preexisting safety policies and practices, and is expected to be a significant factor in driving continuous improvement in this area.

Employees

The Company employed approximately 6,500 persons as of March 31, 2013.

Seasonal Nature of Business

The Company’s overall operating performance generally is not subject to a significant degree of seasonality as sales to OEM customers are dependent upon market demand for new vehicles.  Our Commercial Products segment does experience a degree of seasonality since the demand for HVAC products can be affected by heating and cooling seasons, weather patterns, construction, and other factors.  Generally, sales volume within the Commercial Products segment is stronger in our second and third fiscal quarters, corresponding with demand for heating products.
 
 
8

 
Working Capital Items

The Company manufactures products in the original equipment markets on an as-ordered basis, which makes large inventories of such products unnecessary.  In the Commercial Products segment, the Company maintains varying levels of finished goods inventory due to seasonal demand and certain sales programs.  In these areas, the Company makes use of extended payment terms, not to exceed 90 days, for customers on a limited basis.  The Company does not experience a significant amount of returned products within any of its operating segments.

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 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 and other materials relating to corporate governance may also be obtained without charge by contacting Corporate Secretary, Modine Manufacturing Company, 1500 DeKoven Avenue, Racine, Wisconsin 53403-2552.  We do not intend to incorporate our internet website and the information contained therein or incorporated therein into this annual report on Form 10-K.
 
ITEM 1A.

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 adversely impact our business results.

A.
OPERATIONAL RISKS

Complexities of Global Presence

We are subject to risks related to our international operations.

We operate on five continents, in 16 countries.  In fiscal 2013, 54 percent of our sales were from non-U.S. operations.  Numerous risks and uncertainties affect our international operations.  These risks and uncertainties include political and economic instability, compliance with existing and future laws, regulations and policies, including those related to investments, taxation, trade, employment, anti-corruption and repatriation of earnings. Compliance with multiple and potentially conflicting laws and regulations of various countries is burdensome and expensive.
 
 
9

 
Challenges of Product Launches

We are in the midst of launching a significant number of new programs at our facilities across the world and the success of these launches is critical to our business.
 
We design technologically advanced products, and the processes required to produce these products can be difficult and complex.  The Company commits significant time and financial resources to ensure the successful launch of new products and programs.  Managing the product launch process is highly difficult because we are launching many new products and programs in each segment of the Company.  Due to this launch activity, we need to appropriately deploy our operational and administrative resources to take advantage of this increase in our business.  If we do not successfully launch the products and programs, we may lose market share and damage relationships with our customers, which could negatively affect our business.  In addition, any failure in our manufacturing strategy for these new products or programs could result in long-lived asset impairment charges.

Environmental, Health and Safety Regulations

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

Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials.  The operation of our manufacturing facilities entails risks in these areas, however, and there can be no assurance that we will not incur material costs or liabilities relating to such matters.  Our financial responsibility to clean up contaminated property may extend to previously owned or used property, properties owned by unrelated companies, as well as properties that we currently own and use, regardless of whether the contamination is attributable to prior owners.  In addition, potentially significant expenditures could be required in order to comply with evolving environmental, health and safety laws, regulations or other pertinent requirements that may be adopted or imposed in the future.

We are currently working with environmental consultants to remediate groundwater contamination at our facility in Brazil that has, over a period of years, migrated to neighboring properties, and subsurface contamination at our former manufacturing facility in The Netherlands.  Remediation of these contaminations could result in potentially significant expenditures.  See Note 18 of the Notes to Consolidated Financial Statements for further discussion.

Restructuring

We may be unable to complete and successfully implement our European restructuring plans.

We are implementing a restructuring program within our Europe segment.  Successful implementation of these initiatives is critical to our future competitiveness and our ability to improve our profitability within that segment and across Modine as a whole.

Reliance Upon Technology Advantage

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

Price, quality, delivery, technological innovation and application engineering development are the primary elements of competition in our markets. If we fail to keep pace with technological changes or to provide high quality products and services, we may experience price erosion, lower revenues and lower margins. If we cannot differentiate ourselves from our competitors with our technology or cannot keep pace with technological changes, our products may become commodities, which could result in price erosion, lower sales and lower margins.  

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.
 
 
10

 
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 or other field campaign of such products.  Many of our OEM customers have extended warranty protection fortheir vehicles, putting pressure on the supply base to extend warranty coverage as well.  Historically, we have experienced relatively low warranty charges from our customers due to our contractual arrangements and the quality, reliability and durability 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 and/or financial condition.  We are also involved in various legal proceedings from time to time incidental to our business.  If any such proceeding has a negative result, it could adversely affect our business and/or results of operations.

Information Technology Systems

We may be adversely affected by any disruption in our information technology systems.

Our operations are dependent upon our information technology systems, which encompass all of our major business functions.  A substantial disruption in our information technology systems for a prolonged time period could result in delays in receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships. Our systems might be damaged or interrupted by natural or man-made events (caused by us, by our service providers or others) or by computer viruses, physical or electronic break-ins and similar disruptions affecting the internet. Such delays, problems or costs could have a material effect on our business, financial condition and results of operations.

Internal Control over Financial Reporting

Inherent limitations of internal controls impacting financial statements.

Our internal control over financial reporting and our operating internal controls may not prevent or detect misstatements because of inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud.  Effective internal controls can provide only reasonable assurance with respect to financial statement accuracy.

B.
MARKET RISKS

Customer and Supplier Matters

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

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 as well as by customer specific issues.  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.

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 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 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.
 
 
11

 
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 and is migrating to all of our vehicular OEM markets.  Virtually all such OEMs impose aggressive price reduction initiatives upon their suppliers, and we expect such actions 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.

Fluctuations in costs of materials (including steel, copper, aluminum, nickel, other raw materials and energy) put significant pressure on our results of operations.

The rising cost of materials has a significant effect on our results of operations, and on those of others in our industry.  We have sought to alleviate the impact of increasing costs by including material pass-through provisions in our contracts with our 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 can be a time lag between the time of the material increase or decrease and the time of the pass-through.  This time lag can range between three months and one year.  To further mitigate the Company’s exposure to fluctuating material prices, we have entered into forward contracts from time to time to hedge a portion of our forecasted aluminum and copper purchases.  However, the hedges may only partially offset increases in material costs, and significant increases could have an adverse effect on our results of operations.

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.  OEM customers request that we pay for design, engineering and tooling costs that are incurred prior to the start of production and recover these costs through amortization in the piece price of the 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.

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.
 
 
12

 
Exposure to Foreign Currencies

As a global company, we are subject to currency fluctuations, and any significant movement between the U.S. dollar and 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.

C.
FINANCIAL RISKS

Liquidity and Access to Cash

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

The Company has several 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 domestic plans have an unfunded balance of $84 million.  During fiscal 2014, we anticipate making a funding contribution of approximately $8 million related to these domestic plans.  If significant additional funding contributions are necessary, this could have an adverse impact on our liquidity position.

ITEM 1B.

None.

ITEM 2.

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, Sao Paulo, Brazil, Leeds, United Kingdom and Changzhou, China.

The following table sets forth information regarding our principal properties as of March 31, 2013.  Properties with less than 20,000 square feet of building space have been omitted from this table.
 
 
13

 
Location of Facility
Building Space and Primary Use
Owned or Leased
North America Segment
   
Lawrenceburg, TN
353,800 sq. ft./manufacturing
143,800 Owned;
   
210,000 Leased
Nuevo Laredo, Mexico
288,500 sq. ft./manufacturing
Owned
Harrodsburg, KY
253,000 sq. ft./manufacturing
Owned
Jefferson City, MO
220,000 sq. ft./manufacturing
162,000 Owned;
   
58,000 Leased
Washington, IA
165,400 sq. ft./manufacturing
148,800 Owned;
   
16,600 Leased
McHenry, IL
164,700 sq. ft./manufacturing
Owned
Trenton, MO
159,900 sq. ft./manufacturing
Owned
Logansport, IN
141,600 sq. ft./manufacturing
Owned
Joplin, MO
139,500 sq. ft./manufacturing
Owned
Laredo, TX
45,000 sq. ft./warehouse
Leased
     
Europe Segment
   
Bonlanden, Germany
262,200 sq. ft./administrative & technology center
Owned
Kottingbrunn, Austria
220,600 sq. ft./manufacturing
Owned
Pontevico, Italy
150,700 sq. ft./manufacturing
Owned
Mezökövesd, Hungary
146,500 sq. ft./manufacturing
Owned
Pliezhausen, Germany
125,900 sq. ft./manufacturing
48,400 Owned;
    77,500 Leased
Wackersdorf, Germany
109,800 sq. ft./assembly
Owned
Kirchentellinsfurt, Germany
107,600 sq. ft./manufacturing
Owned
Uden, Netherlands
93,300 sq. ft./manufacturing
61,900 Owned;
    31,400 Leased
Neuenkirchen, Germany
76,400 sq. ft./manufacturing
Owned
Gyöngyös, Hungary
58,300 sq. ft./ manufacturing
Leased
     
South America Segment
   
Sao Paulo, Brazil
342,900 sq. ft./manufacturing
Owned
     
Asia Segment
   
Chennai, India
118,100 sq. ft./manufacturing
Owned
Changzhou, China
107,600 sq. ft./manufacturing
Owned
Shanghai, China
80,298 sq. ft./manufacturing
Leased
Cheonam, South Korea
46,284 sq. ft./manufacturing (Joint Venture)
Leased
     
Commercial Products Segment
   
Leeds, United Kingdom
269,100 sq. ft./administrative & manufacturing
Leased
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
     
Corporate Headquarters
   
Racine, WI
458,000 sq. ft./headquarters & technology center
Owned

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

ITEM 3.

The information required hereunder is incorporated by reference from Note 18 of the Notes to Consolidated Financial Statements.

ITEM 4.

Not applicable.
 
 
14

 
EXECUTIVE OFFICERS OF THE REGISTRANT.

The following sets forth the name, age, recent business experience and certain other information relative to each executive officer of the Company.

Name
 
Age as of
March 31,
2013
 
Position
Scott L. Bowser
 
48
 
Regional Vice President – Asia (July 2012 – Present); Regional Vice President – Americas (March 2009 – July 2012); 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).  Prior to joining Modine, Mr. Bowser held positions at The Pierce Company.
 
Thomas A. Burke
 
55
 
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).  Prior to joining Modine in May 2005, Mr. Burke held positions at Visteon Corporation and Ford Motor Company.
 
Margaret C. Kelsey
 
48
 
Vice President, 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 (April 2001 – March 2002).  Prior to joining the Company in 2001, Ms. Kelsey was a partner with the law firm of Quarles & Brady LLP.
 
Michael B. Lucareli
 
44
 
Vice President, Finance and Chief Financial Officer (October 2011 – present); Vice President, Finance, Chief Financial Officer and Treasurer (July 2010 – October 2011); Vice President, Finance and Corporate Treasurer (May 2008 – July 2010); Managing Director Financial Operations (November 2006 – May 2008); Director, Financial Operations and Analysis (May 2004 – October 2006); Director, Business Development and Strategic Planning (November 2002 – May 2004); and Business Development and Investor Relations Manager (1999 – October 2002).  Prior to joining Modine, Mr. Lucareli held positions at Associated Bank, Alpha Investment Group and SEI Corporation.
 
Thomas F. Marry
 
52
 
Executive Vice President and Chief Operating Officer (February 2012 – Present); Executive Vice President – Europe, Asia and Commercial Products Group (May 2011 – February 2012); Regional Vice President – Asia and Commercial Products Group (November 2007 – May 2011); 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).  Prior to joining Modine, Mr. Marry held positions at General Motors, Robert Bosch and Milwaukee Electric Tool.
 
Holger Schwab
 
45
 
Regional Vice President – Europe (July 2012 – Present).  Prior to joining Modine, Mr. Schwab held various leadership positions at Valeo in North America and Europe and at Thermal Werke.
 
Scott D. Wollenberg
 
44
 
Regional Vice President – North America (July 2012 – Present); Chief Technology Officer (July 2011 – May 2013); Vice President – Global Research and Engineering (May 2010 – June 2011).  In addition, from 1992 through 2010, Mr. Wollenberg held various engineering and product management positions at the Company.  Prior to joining the Company in 1992, Mr. Wollenberg was in the co-operative engineering program at Harrison Radiator, a division of General Motors.
 
 
 
15

 
Executive 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.  In addition, the Officer Nomination and Compensation Committee of the Board may recommend and the Board of Directors approve promotions and other actions with regard to executive officers at any time during the fiscal year.

There are no family relationships among the executive officers and directors.  All of the executive officers of Modine have been employed by Modine in various capacities during the last five years with the exception of Mr. Schwab, who joined Modine in July 2012.

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

PART II

ITEM 5.

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 closing sales prices for the Company's common stock for fiscal 2013 and 2012.  As of March 31, 2013, shareholders of record numbered 2,910.
 
   
2013
   
2012
 
Quarter
 
High
   
Low
   
High
   
Low
 
First
  $ 9.10     $ 5.50     $ 17.94     $ 13.90  
Second
    8.23       5.80       16.02       8.85  
Third
    8.31       6.14       11.65       8.09  
Fourth
    9.63       8.02       11.36       8.25  

The Company did not pay dividends in fiscal 2013 or 2012.  The Company is permitted under its debt agreements to pay dividends on its common stock subject to an aggregate amount based on the calculation of debt covenants, as further described under “Liquidity and Capital Resources” under Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.  The Company currently does not intend to pay dividends in fiscal 2014.

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.
 
 
16

 
 
March 31,
 
Initial Investment
   
Indexed Returns
 
   
2008
   
2009
   
2010
   
2011
   
2012
   
2013
 
Company / Index
                                   
Modine Manufacturing Company
  $ 100     $ 17.87     $ 80.33     $ 115.35     $ 63.10     $ 65.03  
Russell 2000 Index
    100       62.50       101.72       127.96       127.73       148.55  
S&P MidCap 400 Industrials Index
    100       59.59       98.00       131.44       135.08       168.15  

ITEM 6.

The following data should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this report.
 
(in millions, except per share amounts)
 
Fiscal Year ended March 31
 
   
2013
   
2012
   
2011
   
2010
   
2009
 
                               
Net sales
  $ 1,376.0     $ 1,577.2     $ 1,448.2     $ 1,162.6     $ 1,406.9  
(Loss) earnings from continuing operations
    (22.8 )     38.0       8.3       (22.8 )     (107.3 )
Total assets
    818.8       893.5       917.7       841.6       852.8  
Long-term debt - excluding current portion
    132.5       141.9       138.6       136.0       244.0  
Dividends per share
    -       -       -       -       0.30  
(Loss) earnings per share from continuing operations - basic:
    (0.52 )     0.81       0.18       (0.58 )     (3.35 )
(Loss) earnings per share from continuing operations - diluted:
    (0.52 )     0.80       0.18       (0.58 )     (3.35 )
 
 
17

 
The following factors impact the comparability of the selected financial data presented above:
 
·
During fiscal 2013, 2012, 2011, 2010 and 2009, the Company recorded long-lived asset impairment charges of $25.9 million, $2.5 million, $3.5 million, $6.5 million and $26.8 million, respectively.  Refer to Note 5 of the Notes to Consolidated Financial Statements for additional discussion.

·
During fiscal 2013, 2010 and 2009, the Company incurred $17.0 million, $6.0 million and $39.5 million, respectively, of restructuring and other repositioning costs.  Refer to Note 5 of the Notes to Consolidated Financial Statements for additional discussion.

·
During fiscal 2011, the Company recognized total costs of $19.9 million for the early extinguishment of debt and the write-off of unamortized debt issuance costs.  During fiscal 2010, the Company recognized a prepayment penalty of $3.5 million related to a partial pay down of debt.
 
·
During fiscal 2009, the Company recorded impairment charges of $9.0 million related to goodwill in the Europe segment and $7.6 million related to an equity investment.

·
Selected financial data has been presented on a continuing operations basis, and excludes the discontinued operating results of the South Korean HVAC business, which the Company sold during fiscal 2010, and the Electronics Cooling business, which the Company sold during fiscal 2009.
 
ITEM 7.
 
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 16 countries, and with approximately 6,500 employees worldwide.
 
Our products are in light-, medium- and heavy-duty vehicles, commercial heating, ventilation and air conditioning (“HVAC”) equipment, refrigeration systems and off-highway and industrial equipment.  Our broad product offerings include heat transfer modules and packages, radiators, oil coolers, charge air coolers, condensers, building HVAC equipment, and EGR coolers.

Company Strategy

Our goal is to grow profitably as a leading global provider of thermal management technology to a broad range of on-highway, off-highway, industrial and building HVAC end markets.  We expect to achieve this goal over the long-term through both organic growth and selective acquisitions.  We focus on:
 
Development of new products and technologies for diverse geographic and end markets;
A rigorous strategic planning and corporate development process; and
Operational and financial discipline to ensure improved profitability and long-term stability.
 
Development of New Products and Technology
 
Our ability to develop new products and technologies for current and potential customers and for new and 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 and Bonlanden, Germany.  Our reputation for providing high quality products and technologies has been a Company strength valued by customers, and has led to a history with relatively few product warranty issues.  In fiscal 2013, we spent $68 million (representing 41 percent of SG&A expenses) on product and technology research and development efforts.
 
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, long-term customer relationships with companies that value partnerships with their suppliers.  In the past several years, our product lines have experienced customer pricing pressure attributable to increased global competition, primarily from Asia and other low cost regions.  At the same time, many of our products containing improved technology have helped us better manage demands from customers for lower prices.  Many of our technologies are proprietary, difficult to replicate and patent protected.  We have been granted and/or acquired more than 2,000 patents on our technologies over the life of the Company, and we work diligently to protect our intellectual property.
 
 
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Strategic Planning and Corporate Development
 
We employ both short-term (one year) and longer-term (five-to-seven year) strategic planning processes, 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, by expanding our geographic footprint and by expanding into new end markets and product areas – all with a focus on thermal management technologies.  This process allows us to identify product and market gaps, develop new products and make additional investments to fill those gaps.  A recent example of this process is our acquisition of Geofinity Manufacturing Company (“Geofinity”), which provides Modine with a product line of innovative geothermal heat pumps in both water-to-water and water-to-air models, within our Commercial Products segment.
 
Operational and Financial Discipline
 
We operate in an increasingly competitive global marketplace; therefore, we manage our business with a disciplined focus on increasing productivity and reducing waste.  The competitiveness of the global marketplace 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 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. Particular emphasis is given to working capital improvement and prioritization of capital for investment and disposals.
 
Our executive management incentive compensation (annual cash incentive) plan for fiscal 2013 was based on ROACE, driving our singular focus on alignment of management interests with shareholders’ interests in our capital allocation and asset management decisions.  In addition, we provide a long-term incentive compensation plan for officers and certain key employees to attract, retain and motivate key employees who directly impact the long-term performance of the Company.  The plan initiated in fiscal 2013 is comprised of stock options, restricted stock awards and performance stock awards.  The performance stock awards are based on three year average ROACE, cumulative revenue and Europe ROACE at the end of fiscal 2015.
 
Consolidated Market Conditions and Trends
 
During fiscal 2013, total Company net sales were $1,376 million, a 13 percent decrease from $1,577 million in fiscal 2012.  Sales were negatively impacted by weak demand in each of our end markets, along with the planned wind-down of certain non-strategic automotive module programs.
 
The OEM marketplace is extremely competitive and our customers demand that we continue to provide high quality products as well as frequent price decreases.  From time to time, we also experience volatility in foreign currency exchange rates and in 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.
 
 
19

 
Our Response to Recent Market Conditions
 
In response to the challenging business and market conditions facing us in Europe, we initiated our Europe restructuring program in fiscal 2013 with the following objectives:
 
·
Manufacturing realignment.  We are focused on exiting certain products based on our global product strategy, transferring product lines and reducing headcount, with the goal of reducing manufacturing costs and improving gross margin.

·
SG&A expense reduction.  Our Europe segment is committed to controlling their overall SG&A expenses and has implemented headcount reductions at the segment headquarters.  Through this process we are targeting annual expense savings of $7 million to $9 million over the next couple of years.

·
Improve segment earnings and lower assets employed.  During fiscal 2013, our Europe segment decided to exit several facilities.  We are currently marketing these facilities for sale.
 
In addition to the actions described above, the Company is also focused on global strategic growth opportunities.  During fiscal 2013, the Commercial Products segment acquired Geofinity, a manufacturer of geothermal heat pumps of both water-to-water and water-to-air models. This acquisition extends Modine’s current geothermal heat pump product range beyond Airedale-branded school applications to a wider market.
 
Segment Information – Strategy, Market Conditions and Trends
 
Each of our operating segments is managed by a vice president or managing director and has separate financial results reviewed by our chief operating decision makers.  These results are used by management to evaluate the performance of each segment and to make decisions on the allocation of resources.
 
North America (40 percent of fiscal 2013 revenues)
 
Our North America segment includes products and technologies that we provide to the on-highway, commercial vehicle and automotive markets, including Class 3-8 trucks, school buses, transit buses, motor homes, motor coaches and light trucks.  This segment also serves the off-highway equipment markets, including agricultural, construction and industrial products (e.g. lift trucks, compressors and power generation).
 
The recent weakness in the commercial vehicle, agriculture and construction markets resulted in a reduction in revenue for our North America segment in fiscal 2013.  Despite the revenue shortfall, our restructuring program that we completed in fiscal 2012 and favorable metals pricing allowed for positive operating results.   Our manufacturing footprint consolidation and fixed-cost reduction efforts over the past several years continued to provide operating leverage even with lower sales volume.  Our North America business will continue to focus on growing in the markets where its products and manufacturing footprint create a competitive advantage.
 
The overall strategy for the North America segment includes the following:
 
 
·
Reducing lead times to bring new or updated products to market and offering a wider product breadth, while at the same time evolving or rationalizing the existing product lines to meet targeted financial metrics that fit within our overall strategy.
 
 
·
Balancing our customer and program portfolio and pursuing new business opportunities that meet our minimum targeted rates of return, thus enabling profitable growth for the Company.  This includes a focus on both organic and inorganic growth opportunities.

 
·
Growing revenue with an adjacent market focus in order to leverage the competitive cost structure and to improve asset utilization.
 
Europe (36 percent of fiscal 2013 revenues)
 
Our Europe segment is primarily engaged in providing powertrain and engine cooling systems, as well as vehicular climate control components to OEM end markets, including automotive, heavy duty and industrial, commercial vehicle, bus and off-highway.  These systems include cooling modules, radiators, charge air coolers, oil cooling products, EGR products, retarder and transmission cooling components and HVAC condensers.
 
 
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Economic conditions in Europe remain weak with stagnant growth and Euro 6 truck program volumes continue to be low as a result.  We maintain our focus on continuous improvement by the deployment of the Modine Operating System, low-cost country sourcing and cost containment.  Our goal for the Europe restructuring program is to improve return on assets by implementing actions similar to those that were previously completed during restructuring in the North America segment.  In addition, we expect our Europe segment to benefit from various technology initiatives that allow us to distinguish ourselves from competitors in the eyes of our customers.  We also anticipate that this segment will continue to gain market share in the commercial vehicle and off-highway segments as we focus on these strategically important markets.
 
The Europe segment has recently been positively impacted by softening material prices, and has been successful in winning additional program awards, particularly in the commercial vehicle market.  These awards have helped to offset the planned wind-down of a large automotive cooling module program.  In the future, we 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.
 
After the completion of the Europe restructuring program, we believe this segment will be well positioned for improved long-term financial results with a solid customer reputation for technology, service and program management.
 
South America (10 percent of fiscal 2013 revenues)
 
Our South America segment provides heat exchange 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 to the on-highway commercial vehicle markets, off-highway markets, including for use in construction and agricultural applications, automotive OEMs, and industrial application OEMs, primarily for power generation systems.  The South America segment also provides products to the Brazilian, North American and European aftermarkets for both automotive and commercial applications.  This segment manufactures radiators, charge-air-coolers, oil coolers, auxiliary coolers (transmission, hydraulic and power steering), engine cooling modules and HVAC system modules.
 
The South America segment experienced a softening in sales after December 2011 due to the pre-buy of commercial vehicles ahead of the January 1, 2012 change in government required emissions standards in Brazil.  In recent years, there has been a continuing trend in Brazil with customers moving away from copper-based products and shifting to aluminum.  We are transitioning our manufacturing facility to ensure we have the necessary capability to supply our current and future customers as they transition to aluminum-based products.  In the future, growth drivers in this segment include expected agricultural land and infrastructure improvements in Brazil as well as the increasing regulatory focus on energy efficiency and environmental emission standards.
 
Asia (4 percent of fiscal 2013 revenues)
 
Our Asia segment is primarily engaged in providing powertrain cooling systems and engine products to customers in the commercial vehicle, off-highway and automotive markets.  Modine technology, performance, quality and reputation have enabled us to win new engine products business in Asia.  Emissions standards in China and India lag behind Europe and North America.  As a result, some local on- and off-highway powertrain cooling customers focus on price versus technology.  However, in the future, we expect to see a shift in these markets towards higher performing, more durable products, which may provide us additional powertrain cooling opportunities at that time.  In addition, many components we supply in the region become part of a module, which increases the amount of our content on an engine.
 
Our strategy in this segment is to control and reduce costs, secure new business, further diversify our product offering and customer base, and continue to focus on increasing our asset utilization and building manufacturing capabilities in China and India to serve the region in a cost competitive manner.  Our manufacturing facility in Chennai, India is currently producing at low volumes.  However, we expect continued increases in production levels for fiscal 2014.  Our manufacturing facility in Changzhou, China is continuing to ramp up production.  In fiscal 2013, we completed the transformation of our light assembly facility in Shanghai, China into an engine products-focused manufacturing facility.  We are scheduled to begin production of several new products from these three facilities during fiscal 2014.
 
Our objectives for this segment are to accelerate growth and achieve profitability.  We are well positioned to take on new programs and are looking to increase the utilization of our manufacturing facilities in China and India and increase revenue opportunities at our joint ventures in Korea and Japan.
 
 
21

 
Commercial Products (10 percent of fiscal 2013 revenues)
 
Our Commercial Products segment manufactures and distributes a variety of HVAC products, primarily for commercial building and related applications in North America, Europe, Asia and South Africa. We sell our heating and cooling products through various channels to consulting engineers, contractors, and building owners for applications such as warehouses, repair garages, greenhouses, residential garages, schools, data centers, manufacturing facilities, banks, pharmaceutical companies, stadiums and retail stores.
 
Our heating products include gas, electric, oil and hydronic unit heaters, low intensity infrared, and large roof-mounted direct and indirect fired makeup air units.  Our cooling products include single packaged vertical units and unit ventilators used in school room applications, precision air conditioning units, air- and water-cooled chillers, ceiling cassettes, and roof top packaged ventilation units used in a variety of commercial building applications.  Economic conditions, such as demand for new commercial construction, growth in data centers, and school renovations, as well as higher efficiency requirements are growth drivers for our heating and cooling products.
 
The Commercial Products segment has higher margins than our other operating segments, and we intend to continue to invest in this business in order to capitalize on its higher returns.  In fiscal 2013, we acquired Geofinity, a manufacturer of geothermal heat pumps for both water-to-water and water-to-air models. Geofinity extends Modine’s current geothermal heat pump product range beyond Airedale-branded school applications to a wider market.  We have integrated the production of Geofinity products into our West Kingston, RI facility in order to leverage our existing capabilities to serve this growing market, both in the residential and commercial markets.
 
Outlook
 
For fiscal 2014, we expect growth in South America and stabilization in the China off-highway market.  In addition, we anticipate sequential improvement in the North American commercial vehicle market with the majority of this improvement in the second half of fiscal 2014.  In Europe, we expect further declines in the commercial vehicle and automotive markets and slight growth in the off-highway market.  We anticipate consolidated year over year sales to be flat to an increase of 5 percent.  We expect diluted earnings per share to be in the range of $0.45 to $0.55, excluding the impact of cash and non-cash restructuring costs.
 
Consolidated Results of Operations - Continuing Operations
 
Fiscal 2013 sales volume declined 13 percent due to an overall reduction across all of our business segments, primarily due to market weakness.  The Company recorded impairment charges of $26 million and restructuring expenses totaling $17 million primarily related to our Europe restructuring program.  As we continue our Europe restructuring program, we expect to record additional restructuring expenses in fiscal 2014.  In fiscal 2012, sales increased 9 percent as our end markets partially recovered from the economic recession.

The following table presents consolidated financial results on a comparative basis for the years ended March 31, 2013, 2012 and 2011.
 
 
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Years ended March 31
 
2013
   
2012
   
2011
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
                                     
Net sales
  $ 1,376       100.0 %   $ 1,577       100.0 %   $ 1,448       100.0 %
Cost of sales
    1,167       84.8 %     1,321       83.7 %     1,216       84.0 %
Gross profit
    209       15.2 %     257       16.3 %     232       16.0 %
Selling, general and administrative expenses
    166       12.1 %     187       11.8 %     186       12.8 %
Impairment charges
    26       1.9 %     2       0.1 %     3       0.2 %
Restructuring expenses
    17       1.2 %     -       -       -       -  
Operating (loss) income
    (1 )     0.0 %     68       4.3 %     43       2.9 %
Interest expense
    (13 )     -0.9 %     (12 )     -0.8 %     (34 )     -2.3 %
Other income (expense) – net
    -       -       (7 )     -0.5 %     4       0.3 %
(Loss) earnings from continuing operations before income taxes
    (13 )     -0.9 %     48       3.1 %     13       0.9 %
Provision for income taxes
    (10 )     -0.7 %     (10 )     -0.6 %     (5 )     -0.3 %
(Loss) earnings from continuing operations
  $ (23 )     -1.7 %   $ 38       2.4 %   $ 8       0.6 %

Year Ended March 31, 2013 Compared to Year Ended March 31, 2012:

Fiscal 2013 net sales of $1,376 million were $201 million, or 13 percent, lower than $1,577 million in fiscal 2012, due to decreased overall sales volume and a $61 million unfavorable impact of foreign currency exchange rate changes.  Automotive and commercial vehicle net sales decreased 21 percent and 14 percent, respectively, from fiscal 2012 to fiscal 2013.

Fiscal 2013 gross profit of $209 million decreased $48 million, or 19 percent, from $257 million in fiscal 2012.  The gross profit decrease was driven by reduced sales volume and an $8 million unfavorable impact of foreign currency exchange rate changes.  Gross margin decreased 110 basis points from 16.3 percent in fiscal 2012 to 15.2 percent in fiscal 2013.  The gross margin decline was primarily attributable to lower fixed-cost absorption on the reduced sales volume.

Fiscal 2013 SG&A expenses decreased $21 million to $166 million from $187 million in fiscal 2012 primarily due to lower compensation-related expense and a $7 million favorable impact of foreign currency exchange rate changes.  During fiscal 2013 SG&A expenses as a percentage of net sales increased 30 basis points from fiscal 2012 as sales declined at a faster rate than SG&A expenses.  SG&A expenses as a percentage of net sales was relatively in line with our stated goal of SG&A cost containment and a long-term target of 11 to 12 percent.

Fiscal 2013 impairment charges of $26 million were recorded primarily to reduce the carrying values of facilities held for sale to their estimated fair value less cost to sell within the Europe and North America segments.

Restructuring expenses of $17 million during fiscal 2013 relate to our Europe restructuring program, primarily due to headcount reductions at the segment headquarters and a manufacturing facility, along with equipment transfer costs.

Fiscal 2013 operating loss of $1 million represents a $69 million decline from operating income of $68 million during fiscal 2012.  This decrease was primarily due to lower sales volume, $26 million of impairment charges and $17 million of restructuring expenses during fiscal 2013.

The $7 million improvement in other expense from fiscal 2012 to fiscal 2013 was primarily due to a reduction of foreign currency exchange losses on inter-company loans and other obligations denominated in foreign currencies.
 
Despite the loss from continuing operations in fiscal 2013, the provision for income taxes remained flat at $10 million for fiscal 2013 and 2012.  This was primarily due to the income tax valuation allowances recorded in the U.S., Germany and China.

Year Ended March 31, 2012 Compared to Year Ended March 31, 2011:
 
 
23

 
Fiscal 2012 net sales of $1,577 million were $129 million, or 9 percent, higher than $1,448 million in fiscal 2011 driven by a 19 percent increase in commercial vehicle sales and a 13 percent increase in off-highway sales, along with a $33 million favorable impact of foreign currency exchange rate changes.

Fiscal 2012 gross profit of $257 million increased $25 million, or 11 percent, from $232 million in fiscal 2011.  The gross profit increase was primarily due to improved sales volume and a $5 million favorable impact of foreign currency exchange rate changes.  Gross margin improved 30 basis points from 16.0 percent in fiscal 2011 to 16.3 percent in fiscal 2012.  The gross margin improvement was primarily attributable to better fixed-cost absorption on improved sales volume.

Fiscal 2012 SG&A expenses were comparable to fiscal 2011, yet decreased 100 basis points to 11.8 percent as a percentage of net sales.

Fiscal 2012 operating income of $68 million improved $25 million from $43 million in fiscal 2011 primarily due to higher gross profit on increased sales volume.

Fiscal 2012 interest expense decreased $22 million from fiscal 2011 primarily due to $20 million of costs related to the debt refinancing completed during the second quarter of fiscal 2011, including $17 million of prepayment penalties and $3 million of write-offs of unamortized financing costs.

Other expense of $7 million for fiscal 2012 represents an $11 million decline from other income of $4 million in fiscal 2011 due to $8 million of foreign currency exchange losses on inter-company loans and other obligations denominated in a foreign currency.

Fiscal 2012 provision for income taxes increased to $10 million from $5 million in fiscal 2011.  The increase in the provision for income taxes was primarily due to a $4 million versus $8 million Hungarian development tax incentive credit in fiscal 2012 and fiscal 2011, respectively.

Segment Results of Operations

North America
                                   
                                     
Years ended March 31
 
2013
   
2012
   
2011
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
                                     
Net sales
  $ 565       100.0 %   $ 602       100.0 %   $ 573       100.0 %
Cost of sales
    484       85.6 %     512       85.1 %     494       86.2 %
Gross profit
    81       14.4 %     90       14.9 %     79       13.8 %
Selling, general and administrative expenses
    40       7.2 %     42       6.9 %     46       8.0 %
Impairment charges
    2       0.3 %     -       -       1       0.2 %
Operating income
  $ 39       6.9 %   $ 48       8.0 %   $ 32       5.6 %

North America net sales increased $29 million, or 5 percent, from fiscal 2011 to fiscal 2012, and decreased $37 million, or 6 percent, from fiscal 2012 to fiscal 2013.  The fiscal 2012 increase in sales was primarily due to improvement in the North American commercial vehicle market, while the decrease in fiscal 2013 was primarily driven by overall weakness in our end markets and the wind-down of certain automotive and military programs.

Gross margin improved from 13.8 percent in fiscal 2011 to 14.9 percent in fiscal 2012, but declined to 14.4 percent in fiscal 2013.  The gross margin improvement from fiscal 2011 to fiscal 2012 was a result of improved operating leverage on higher sales volume and plant performance efficiencies.  The gross margin decline from fiscal 2012 to fiscal 2013 was primarily due to lower sales volume, partially offset by lower material costs.

SG&A expenses decreased $4 million from fiscal 2011 to fiscal 2012, and decreased $2 million in fiscal 2013.  Fiscal 2012 SG&A expenses were favorably impacted by a $2 million reversal of a trade compliance liability that was no longer required, a reduction in pension costs and lower management compensation expenses.  The decrease in SG&A expenses in fiscal 2013 was primarily due to the favorable impact of cost reduction initiatives and lower pension expenses, partially offset by the $2 million reduction of a trade compliance liability in fiscal 2012.
 
 
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Impairment charges totaling $2 million in fiscal 2013 and $1 million in fiscal 2011 were recorded for idle facilities to reduce the carrying values to their estimated fair value less cost to sell.  These charges were each due to weakness in the commercial real estate market.

Fiscal 2012 operating income of $48 million improved $16 million from $32 million in fiscal 2011 primarily due to gross margin improvements from higher sales volume and plant performance efficiencies, along with reduced SG&A expenses.  Fiscal 2013 operating income declined $9 million to $39 million primarily due to lower gross profit from lower sales volume.

Europe
                                   
                                     
Years ended March 31
 
2013
   
2012
   
2011
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
                                     
Net sales
  $ 498       100.0 %   $ 603       100.0 %   $ 547       100.0 %
Cost of sales
    437       87.7 %     518       85.8 %     471       86.2 %
Gross profit
    61       12.3 %     85       14.1 %     76       13.8 %
Selling, general and administrative expenses
    36       7.2 %     46       7.6 %     46       8.4 %
Impairment charges
    24       4.8 %     2       0.4 %     2       0.4 %
Restructuring expenses
    17       3.4 %     -       -       -       -  
Operating (loss) income
  $ (16 )     -3.2 %   $ 37       6.1 %   $ 28       5.1 %

Europe net sales increased $56 million or 10 percent from fiscal 2011 to fiscal 2012 primarily due to increased sales to the commercial vehicle and off-highway markets along with a $24 million favorable impact of foreign currency exchange rate changes.  The $105 million, or 17 percent, decrease in net sales from fiscal 2012 to fiscal 2013 was driven by the planned wind-down of the automotive module business, a slowdown in demand in the commercial vehicle and off-highway markets and a $34 million unfavorable impact of foreign currency exchange rate changes.

Gross margin improved 30 basis points to 14.1 percent from fiscal 2011 to fiscal 2012 primarily due to the leverage impact of higher sales volume, partially offset by program launch inefficiencies and higher material costs.  Gross margin declined 180 basis points to 12.3 percent from fiscal 2012 to fiscal 2013.  This decrease was primarily due to lower sales volume and costs associated with new program launches, partially offset by lower material costs.

SG&A expenses remained flat from fiscal 2011 to fiscal 2012, but decreased as a percentage of net sales.  SG&A expenses decreased $10 million from fiscal 2012 to fiscal 2013, primarily due to a $5 million favorable impact of foreign currency exchange rate changes, lower compensation expenses from headcount reductions as part of the Europe restructuring program and a change in estimated unpaid value added tax (“VAT”) obligations.
 
As part of our Europe restructuring program, we recorded asset impairment charges totaling $24 million during fiscal 2013, primarily related to several facilities held for sale to reduce the carrying values to their estimated fair value less cost to sell.

We recorded $17 million of restructuring expenses related to our Europe restructuring program during fiscal 2013.  These charges were primarily for severance and termination costs related to headcount reductions at our segment headquarters and at a manufacturing facility.

Operating income of $37 million in fiscal 2012 was an improvement of $9 million from fiscal 2011, primarily due to increased sales volume driving higher gross profit.  The operating loss of $16 million in fiscal 2013 represents a $53 million decrease from operating income for fiscal 2012, primarily due to $24 million of asset impairment charges, $17 million of restructuring expenses and lower gross profit on lower sales volume.
 
 
25

 
South America
                                   
                                     
Years ended March 31
 
2013
   
2012
   
2011
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
                                     
Net sales
  $ 134       100.0 %   $ 176       100.0 %   $ 159       100.0 %
Cost of sales
    111       83.2 %     145       82.4 %     128       80.3 %
Gross profit
    23       16.8 %     31       17.6 %     31       19.7 %
Selling, general and administrative expenses
    12       8.4 %     21       11.7 %     18       11.5 %
Operating income
  $ 11       8.4 %   $ 10       5.9 %   $ 13       8.2 %

South America net sales increased $17 million in fiscal 2012 primarily due to increased sales volume within the commercial vehicle market, as a result of the January 1, 2012 change in emissions standards.  In addition, sales were positively impacted by volume increases in the off-highway market and aftermarket business, as well as a $4 million favorable impact of foreign currency exchange rate changes.  Net sales decreased $42 million to $134 million in fiscal 2013 primarily due to weakness in the commercial vehicle market following the pre-buy ahead of the January 1, 2012 change in emissions standards and an unfavorable impact of foreign currency exchange rate changes of $25 million.

Gross margin decreased from 19.7 percent in fiscal 2011 to 17.6 percent in fiscal 2012 primarily due to higher commodity costs, additional costs associated with the transition from copper- to aluminum-based products and the negative foreign currency impact on export and aftermarket sales sold in U.S. dollars.  Gross margin decreased further in fiscal 2013 to 16.8 percent primarily due to sales volume decreases.  Gross profit decreased $8 million from fiscal 2012 to fiscal 2013, which includes a $4 million unfavorable impact of foreign currency exchange rate changes.

Fiscal 2012 SG&A expenses increased $3 million from fiscal 2011 as a result of personnel costs, a $1 million environmental remediation charge and higher freight costs.  SG&A expenses decreased $9 million from fiscal 2012 to fiscal 2013, primarily due to the reversal of a $2 million acquisition related liability, lower freight costs and a $2 million favorable impact of foreign currency exchange rate changes.

Operating income decreased $3 million from fiscal 2011 to fiscal 2012 due to lower gross margin and increased SG&A expenses.  Operating income was comparable from fiscal 2012 to fiscal 2013 as lower SG&A expenses were partially offset by the reduction in gross profit from lower sales volume.

Asia
                                   
                                     
Years ended March 31
 
2013
   
2012
   
2011
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
                                     
Net sales
  $ 60       100.0 %   $ 84       100.0 %   $ 64       100.0 %
Cost of sales
    58       97.2 %     76       90.6 %     59       91.8 %
Gross profit
    2       2.8 %     8       9.4 %     5       8.2 %
Selling, general and administrative expenses
    11       17.6 %     10       12.3 %     8       13.0 %
Operating loss
  $ (9 )     -14.8 %   $ (2 )     -2.9 %   $ (3 )     -4.8 %

Asia net sales increased $20 million from fiscal 2011 to fiscal 2012 primarily due to new program launch activities and the ramp-up of production in this segment.  Net sales decreased $24 million to $60 million in fiscal 2013 primarily due to a decrease in automotive module sales as we continue the strategic exit of this business and a decline in the off-highway vehicular market, including lower excavator sales, due to the weakened economic conditions in China.

Fiscal 2012 gross margin improved to 9.4 percent from sales volume increases resulting in better fixed cost absorption.  Gross margin declined to 2.8 percent in fiscal 2013 primarily due to lower sales volume and costs associated with converting our Shanghai manufacturing facility to a high volume oil cooler production facility.
 
 
26

 
SG&A expenses increased $2 million in fiscal 2012 and $1 million in fiscal 2013 as we are investing for growth in this segment.

The operating loss improved slightly to $2 million in fiscal 2012, but increased to $9 million in fiscal 2013.  The increase in the segment operating loss during fiscal 2013 was primarily due to lower gross profit on lower sales volume.

Commercial Products
                                   
                                     
Years ended March 31
 
2013
   
2012
   
2011
 
(dollars in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
                                     
Net sales
  $ 139       100.0 %   $ 142       100.0 %   $ 126       100.0 %
Cost of sales
    98       70.7 %     100       70.1 %     87       68.9 %
Gross profit
    41       29.3 %     42       29.9 %     39       31.1 %
Selling, general and administrative expenses
    31       22.1 %     28       19.9 %     26       21.0 %
Operating income
  $ 10       7.2 %   $ 14       10.0 %   $ 13       10.1 %

Commercial Products net sales increased $16 million, or 13 percent, from fiscal 2011 to fiscal 2012, and decreased $3 million, or 2 percent in fiscal 2013.  The fiscal 2012 improvement was primarily due to increased sales volume of North America cooling and heating products and a $2 million favorable impact of foreign currency exchange rate changes.  The fiscal 2013 decline was primarily due to decreased sales volume in the United Kingdom as a result of weak economic conditions in the first half of fiscal 2013, partially offset by increased sales volume of heating products in the U.S.

Gross margin decreased from 31.1 percent in fiscal 2011 to 29.9 percent in fiscal 2012 and to 29.3 percent in fiscal 2013.  The decreases in gross margin were primarily due to unfavorable changes in product mix and, in fiscal 2012, due to higher material costs.

SG&A expenses increased $2 million from fiscal 2011 to $28 million in fiscal 2012 and increased $3 million from fiscal 2012 to fiscal 2013.  The increase in fiscal 2012 was the result of planned spending increases for new product development and expanded marketing efforts.  The increase in fiscal 2013 includes expenses associated with the acquisition of Geofinity.  This acquisition provides Modine with a full line of innovative geothermal heat pumps in both water-to-water and water-to-air models.

Operating income increased slightly from fiscal 2011 to fiscal 2012 primarily due to increased sales volume, partially offset by higher material and SG&A costs.  Operating income decreased $4 million from fiscal 2012 to fiscal 2013 primarily due to increased SG&A expenses.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operating activities, our cash and cash equivalents at March 31, 2013 of $24 million and available borrowings of $191 million under lines of credit provided by banks in the United States and abroad.  We believe these sources of liquidity will be sufficient to satisfy future operating costs and capital expenditures.

Net Cash Provided by Operating Activities

Net cash provided by operating activities in fiscal 2013 was $49 million, an increase of $3 million from the prior year of $46 million.  In fiscal 2013, cash flows from operating activities were negatively impacted by a decline in gross profit, partially offset by lower SG&A expenses, and positively impacted by working capital changes, including trade accounts receivable and accounts payable, during fiscal 2013 as compared to fiscal 2012.

Net cash provided by operating activities in fiscal 2012 of $46 million, increased $25 million from fiscal 2011, driven by the absence of a pre-payment penalty on senior notes in fiscal 2012 and a $6 million reduction in contributions to our U.S. pension plan versus the prior year.
 
 
27

 
Capital Expenditures

Capital expenditures were $50 million for fiscal 2013, which was $14 million lower than fiscal 2012 and $5 million lower than fiscal 2011.  In fiscal 2013, our capital spending primarily occurred in the North America segment, which totaled $19 million, the Europe segment, which totaled $17 million and the Asia segment, which totaled $8 million.  Capital projects in fiscal 2013 primarily included tooling and equipment purchases in conjunction with program launches with customers in North America, Europe and Asia.

At March 31, 2013, we had capital expenditure commitments of $12 million.  Significant commitments include tooling and equipment expenditures for new and renewal platforms with customers in Europe and North America along with new program launches in Asia.

Dividends

The Company did not pay dividends in fiscal 2013, 2012 or 2011.  Our credit agreements allow for an aggregate amount of restricted payments, including cash dividends, based on our leverage ratio being less than 3.0 to 1.0.  Based on the leverage ratio for the period ended March 31, 2013, we would be allowed to make restricted payments of up to $35 million.  If the leverage ratio remains less than 3.0 to 1.0 for fiscal 2014, we would be allowed to make restricted payments of up to $40 million under our current credit agreements.  The maximum amount of restricted payments we would be allowed to make over the remaining term of our current credit agreements is $40 million annually.

Total Debt

Our total debt outstanding decreased less than $1 million to $164 million at March 31, 2013 compared to March 31, 2012.  The composition of our outstanding debt changed due to a $10 million decrease in long-term debt, the absence of any outstanding borrowings on our revolving credit facility as of March 31, 2013, and a $9 million increase in short-term debt primarily within Asia to fund future growth initiatives within the segment.  Our cash balance of $24 million at March 31, 2013 is $8 million lower than March 31, 2012.  See Note 15 of the Notes to Consolidated Financial Statements for further information regarding our debt agreements.

Our current debt agreements require us to maintain compliance with various covenants.  Under our primary debt agreements in the U.S., we are subject to an adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) to interest expense (interest expense coverage ratio) covenant and a debt to adjusted EBITDA (leverage ratio) covenant.  Adjusted EBITDA is defined as earnings from continuing operations before interest expense and income taxes, adjusted to exclude unusual, non-recurring or extraordinary non-cash charges and up to $40 million of cash restructuring and repositioning charges, not to exceed $20 million in any fiscal year, and further adjusted to add back depreciation and amortization.  Adjusted EBITDA is a non-GAAP metric that is not defined by generally accepted accounting principles (“GAAP”) and should not be considered an alternative to earnings from continuing operations.  Our calculation of adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

We are required to maintain the interest expense coverage ratio and leverage ratio covenants based on the following:

 
Interest Expense Coverage
 
Leverage Ratio
 
Ratio Covenant (Not
 
Covenant (Not Permitted
 
Permitted to Be Less Than)
 
to Be Greater Than)
Fiscal quarter ending on or before August 12, 2014
3.00 to 1.0
 
3.25 to 1.0
All fiscal quarters ending thereafter
3.00 to 1.0
 
3.00 to 1.0
 
 
28

 
Our adjusted EBITDA for the four consecutive quarters ended March 31, 2013 was $98 million.  The following table presents a calculation of adjusted EBITDA:
 
(dollars in millions)
 
   
Quarter Ended June 30, 2012
   
Quarter Ended
September 30, 2012
   
Quarter Ended
December 31, 2012
   
Quarter Ended
March 31, 2013
   
Total
 
Loss from continuing operations
  $ (1.0 )   $ (11.8 )   $ (8.4 )   $ (1.6 )   $ (22.8 )
Net earnings attributable to noncontrolling interest
    (0.3 )     (0.3 )     (0.3 )     (0.5 )     (1.4 )
Consolidated interest expense
    3.0       3.4       2.8       3.4       12.6  
Provision for income taxes
    2.0       1.8       1.5       4.5       9.8  
Depreciation and amortization expense
    14.1       14.1       13.6       14.0       55.8  
Non-cash items
    0.3       16.8       8.3       1.8       27.2  
Restructuring expenses
    4.8       1.5       1.4       9.3       17.0  
Adjusted EBITDA
  $ 22.9     $ 25.5     $ 18.9     $ 30.9     $ 98.2  

Our interest expense coverage ratio for the four fiscal quarters ended March 31, 2013 was 7.55, which exceeded the minimum requirement of 3.00.  The following table presents a calculation of our interest expense coverage ratio:

   
Four Quarters Ended
March 31, 2013
 
       
Consolidated interest expense
  $ 12.6  
Plus: Costs to sell receivables
    0.4  
Total consolidated interest expense
  $ 13.0  
         
Adjusted EBITDA
  $ 98.2  
         
Interest expense coverage ratio
    7.55  

Our leverage ratio for the four fiscal quarters ended March 31, 2013 was 1.85, which was below the maximum permitted ratio of 3.25.  The following table presents a calculation of our leverage ratio:

   
Four Quarters Ended
March 31, 2013
 
       
Debt per balance sheet
  $ 163.6  
Plus: Derivative financial instruments
    1.4  
Letters of credit as defined by the debt agreement
    1.4  
Indebtedness attributed to sales of receivables
    15.5  
Total debt
  $ 181.9  
         
Adjusted EBITDA
  $ 98.2  
         
Leverage ratio
    1.85  

We expect to remain in compliance with our debt covenants during fiscal 2014 and beyond.

Off-Balance Sheet Arrangements

None.

Contractual Obligations
 
 
29

 
(in millions)  March 31, 2013
     
   
Total
   
Less than 1 year
   
1 - 3 years
   
4 - 5 years
   
More than 5 years
 
                               
Long-term debt
  $ 126.9     $ 0.3     $ 1.6     $ 24.0     $ 101.0  
Interest associated with long-term debt
    56.0       8.6       17.1       16.1       14.2  
Capital lease obligations
    6.1       0.2       0.6       0.6       4.7  
Operating lease obligations
    22.3       6.5       7.5       4.0       4.3  
Capital expenditure commitments
    11.9       7.8       4.1       -       -  
Other long-term obligations
    12.7       2.4       3.1       2.3       4.9  
Total contractual obligations
  $ 235.9     $ 25.8     $ 34.0     $ 47.0     $ 129.1  

Our gross liabilities for pensions, postretirement benefits, and uncertain tax positions total $126 million as of March 31, 2013.  We are unable to determine the ultimate timing of these liabilities and have therefore excluded these amounts from the contractual obligations table above.
 
Critical Accounting Policies
 
The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements.  Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements.  The following discussion of these judgments and estimates is intended to supplement the Significant Accounting Policies presented in Note 1 of the Notes to Consolidated Financial Statements.  In addition, recently issued accounting pronouncements that impact our financial statements are included in Note 1 of the Notes to Consolidated Financial Statements.
 
Revenue Recognition
 
We recognize revenue, including agreed upon commodity price increases, as products are shipped to customers and the risks and rewards of ownership are transferred to our customers.  Revenue is recorded net of applicable provisions for sales rebates, volume incentives, and returns and allowances.  At the time of revenue recognition, we also record estimates for bad debt expense and warranty expense.  We base these estimates on historical experience, current business trends and current economic conditions.  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.  We recognize 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.
 
Impairment of Long-Lived Assets
 
We perform impairment evaluations of long-lived assets, including property, plant and equipment, intangible assets and equity investments, whenever business conditions or events indicate that those assets may be impaired.  We consider factors such as operating losses, declining 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.  Fair value can be based on appraised value, estimated salvage value, sales price under negotiation or estimated cancellation charges, as applicable.
 
The most significant long-lived assets that we have evaluated for impairment are property, plant and equipment, which totaled $356 million at March 31, 2013.  Within property, plant and equipment, the most significant assets evaluated are buildings and improvements, and machinery and equipment.  We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level.  We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility.  This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer programs manufactured in the plant; changes in manufacturing strategy; and shifting of programs to other facilities under a manufacturing realignment strategy.  When such indicators are present, we perform an impairment evaluation by comparing the estimated future undiscounted cash flows 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 its remaining useful life.  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 value, which is generally estimated based on appraisals or estimated salvage value.
 
 
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The majority of the long-lived asset impairment charges during fiscal 2013, 2012 and 2011 have been recorded within our Europe and North America segments for facilities held for sale to reduce their carrying value to estimated fair value less costs to sell.  The Europe segment initiated a restructuring program in fiscal 2013, including the decision to sell certain assets, which resulted in long-lived asset impairment charges totaling $24 million.  Further unanticipated adverse changes in any of our segments could result in the need to perform additional impairment evaluations in the future.
 
Impairment of Goodwill
 
We perform goodwill impairment tests annually, as of March 31, unless business events or other conditions exist that require a more frequent evaluation.  We consider factors such as operating losses, declining outlooks and market capitalization when evaluating the necessity for an impairment analysis.  Goodwill is tested for impairment at a reporting unit level, determined to be at an operating segment level.  The first step in this test is to compare the fair value of the reporting unit to its carrying value. We determine the fair value of a reporting unit based on the present value of estimated future cash flows.  If the fair value of the reporting unit exceeds the carrying value of the unit’s net assets, goodwill of that reporting unit is not impaired and further testing is not required.  If the carrying value of the reporting unit’s net assets exceeds the fair value of the unit, then we perform the second step of the impairment test to determine the implied fair value of the reporting unit’s goodwill and any impairment charge.  Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating margins used to calculate estimated future cash flows, risk-adjusted discount rate, business trends and market conditions.  The discount rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for risk where appropriate.  To the extent that the carrying value of the unit’s net assets exceeds the fair value, an impairment charge is recognized.
 
At March 31, 2013, our goodwill totaled $29 million, which was primarily comprised of $12 million in our South America segment and $16 million in our Commercial Products segment.  The South America segment had operating income of $11 million and $10 million in fiscal 2013 and 2012, respectively.  The Commercial Products segment had operating income of $10 million and $14 million for fiscal 2013 and 2012, respectively.  The future discounted cash flows of these segments continue to exceed their carrying value, indicating that the goodwill recorded in these segments is not impaired at March 31, 2013.
 
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 are adjusted when it becomes probable that expected claims will differ significantly from these initial estimates.

Tooling Costs

Production tooling costs incurred by us in manufacturing products for customer programs are capitalized as a component of property, plant and equipment, net of any customer reimbursements, when we retain title to the tooling.  These capitalized costs are depreciated in cost of sales over the estimated life of the asset, which is generally three years.  For customer-owned tooling costs incurred, a receivable is recorded when the customer has guaranteed reimbursement to us.  Reimbursement typically occurs prior to the start of production, but this varies for some programs and customers.  We do not have any significant customer arrangements under which customer-owned tooling costs were not accompanied by guaranteed reimbursements.
 
 
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Assets Held for Sale

Assets are considered to be held for sale when management approves and commits to a formal plan to actively market the assets for sale at a sales price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, the sale of the asset is probable and expected to be completed within one year, and it is unlikely that significant changes will be made to the plan.  Upon designation as held for sale, the carrying value of the asset is recorded at the lower of its carrying value or estimated fair value, less cost to sell.  We cease to record depreciation expense at the time of designation as held for sale.  We are currently marketing for sale several held for sale facilities with carrying values totaling $11 million at March 31, 2013.

Pensions and Postretirement Benefits

The calculation of the expense and liabilities of our 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 economic and market conditions at the time of valuation.  In accordance with GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods.  These differences impact future pension or postretirement benefit expenses.  We replaced the existing domestic defined benefit pension plan with a defined contribution plan for salaried-paid employees hired on or after January 1, 2004.  We believe the current defined contribution plan for domestic employees will, in general, allow us a greater degree of flexibility in managing retirement benefit costs on a long-term basis.  Currently, none of our domestic pension plans include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan formula.

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

To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets.  The long-term rate of return utilized in fiscal 2013 and 2012 was 8.0 percent.  For fiscal 2014, the Company has also assumed a rate of 8.0 percent.  The impact of a 25 basis point decrease in the expected rate of return on assets would result in a $0.5 million increase in fiscal 2014 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 2013, we used a discount rate of 4.4 percent, compared to 4.9 percent in fiscal 2012.  The Company determined these rates based on a yield curve that was created following an analysis of the projected cash flows from the affected plans.  See Note 16 of the Notes to Consolidated Financial Statements for additional information.  Changing the assumed discount rate by 25 basis points would impact our fiscal 2014 pension expense by $0.1 million.

A key assumption in our postretirement benefit liability and expense is the healthcare cost trend rate.  Our assumed healthcare trend rate for fiscal year 2013 was 7.5 percent, and we expect this rate to remain at 7.5 percent for fiscal 2014.  This rate is projected to decline gradually to 5.0 percent in fiscal year 2019 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 our postretirement 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 have an insignificant impact on our postretirement liability and expense.

Other Loss Reserves

We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, product liability claims, regulatory compliance, litigation, self-insurance reserves, recoverability of deferred income taxes, and uncollectible accounts receivable.  Establishing loss reserves for these exposures 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 18 of the Notes to Consolidated Financial Statements for additional details regarding contingencies and litigation.
 
 
32

 
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. of this report.  Other risks and uncertainties include, but are not limited to, the following:

Operational Risks:

·
Our ability to successfully implement our Europe restructuring plans and drive cost reductions and increased profitability and return on assets as a result;

·
The overall health of our customers in light of broad economic and specific market challenges and the potential impact on us from any deterioration in the stability or performance of any of our customers;

·
The impact of operational inefficiencies as a result of program launches and product transfers;

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

·
Costs and other effects of the remediation of environmental contamination;

·
Our ability to obtain and retain profitable business at facilities in our Asia segment, and in particular, in China;

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

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

·
Increasingly complex and restrictive laws and regulations in various jurisdictions in which we operate and the costs associated with compliance therewith;

·
Unanticipated problems with suppliers meeting our time, quantity, quality and price demands;

·
Work stoppages or interference at our facilities or those of our major customers and/or suppliers; and

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

Market Risks:

·
Economic, social and political conditions, changes and challenges in the markets where we and our customers operate and compete, including foreign currency exchange rate fluctuations (particularly the value of the euro and Brazilian real relative to the U.S. dollar), tariffs, inflation, changes in interest rates, recession, restrictions associated with importing and exporting and foreign ownership, and, in particular, the continuing slow recovery of certain markets in China and Brazil and the economic uncertainties in the European Union;

·
The impact of increases in commodity prices, particularly our exposure to the changing prices of aluminum, copper, steel and stainless steel (nickel);

·
Our ability or inability to successfully hedge commodity risk and/or pass increasing commodity prices on to customers as well as the inherent lag in timing of such pass-through pricing; and
 
·
The impact of environmental laws and regulations on our business and the business of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental emissions standards.
 
 
33

 
Financial Risks:

·
Our ability to fund our liquidity requirements and meet our long-term commitments in the event of any renewed disruption in the credit markets or extended recessionary conditions in the global economy; and

·
Our ability to realize future tax benefits.

Strategic Risks:

·
Our ability to identify and implement appropriate growth and diversification strategies that position us for long-term success.

In addition to the risks set forth above, we are subject to other risks and uncertainties identified in our public filings with the U.S. Securities and Exchange Commission.  We do not assume any obligation to update any forward-looking statements.
 
ITEM 7A.
 
In the normal course of business, Modine is subject to market exposure from changes in foreign exchange rates, interest rates, commodity prices, credit risk and economic conditions.
 
Foreign Currency Risk
 
We are subject to the risk of changes in foreign currency exchange rates due to our operations in foreign countries. We have manufacturing facilities in Brazil, China, India, Mexico, South Africa, and throughout Europe.  We also have an equity investment in a Japanese company and a joint venture in South Korea.  We sell and distribute products throughout the world.  As a result, our financial results are affected by factors such as changes in foreign currency exchange rates or economic conditions in the foreign markets in which we manufacture, distribute and sell products.  We attempt to mitigate foreign currency risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the functional currency of the subsidiary engaging in the transaction.  Our financial results are principally exposed to changes in exchange rates between the U.S. dollar and the European currencies, primarily the euro, and changes between the U.S. dollar and the Brazilian real.  In fiscal 2013, 2012 and 2011, more than 50 percent of our sales were generated in countries outside the U.S.  A change in foreign exchange rates will positively or negatively affect our sales; however, this impact will be offset to a large degree with an offsetting effect on our expenses.  In fiscal 2013, changes in foreign currencies negatively impacted our sales by $61 million; however the impact on our fiscal 2013 operating loss was less than $1 million.  Foreign exchange risk can be estimated by measuring the impact of a near-term adverse movement of 10 percent in foreign currency exchange rates.  If these rates were 10% higher or lower at March 31, 2013, there would not have been a material impact on our fiscal 2013 loss from continuing operations.
 
We maintain, from time to time, foreign-denominated, long-term debt obligations and long-term inter-company loans that are subject to foreign currency exchange risk.  As of March 31, 2013, there were no third-party foreign-denominated, long-term debt obligations or inter-company loans for which changes in foreign currency exchange rates would impact our net earnings.  We have, from time to time, entered into currency rate derivatives to manage the fluctuation in foreign exchange rate exposure on these types of loans.  These derivative instruments have typically not been treated as hedges, and accordingly, gains or losses on the derivatives are recorded in other income and expense in the consolidated statements of operations and act to offset any currency movement on the outstanding loans receivable or payable.
 
 
34

 
Interest Rate Risk

Our interest rate risk policies are designed to reduce the potential volatility of earnings that could arise from changes in interest rates.  We generally utilize a mixture of debt maturities and both fixed-rate and floating-rate debt to manage exposure to changes in interest rates.  Our domestic revolving credit facility is based on a variable interest rate of London Interbank Offered Rate (“LIBOR”) plus 150 to 250 basis points depending upon our leverage ratio.  As of March 31, 2013, our variable interest rate was LIBOR plus 200 basis points, or 2.2 percent.  We are subject to risk of fluctuations in LIBOR and changes in our leverage ratio, which would affect the variable interest rate on the revolving credit facility and create variability in interest expense.  There were no borrowings outstanding under the revolving credit facility as of March 31, 2013.  A 100 basis point increase in LIBOR would increase interest expense by $0.1 million based on an assumed revolving credit facility balance of $10 million.  Based on our outstanding debt with variable interest rates at March 31, 2013, a 100 basis point increase in interest rates would increase our annual interest expense in fiscal 2014 by less than $1 million.

Commodity Price Risk

We are dependent upon the supply of raw materials and supplies in the production process and have, from time to time, entered into firm purchase commitments for copper, aluminum, nickel, and natural gas.  We have utilized aluminum and copper hedging strategies, from time to time, by entering into fixed price contracts to help offset changing commodity prices.  The Company maintains 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 three months or longer.

Credit Risk

Credit risk is the possibility of loss from a customer's failure to make payment according to contract terms.  Our principal credit risk consists of outstanding trade accounts receivable.  At March 31, 2013, 51 percent of our trade accounts receivables balance was concentrated with our top ten customers.  These customers operate primarily in the automotive, truck and heavy equipment markets and are influenced by similar market and general economic factors.  In the past, credit losses from our customers have not been significant.

We manage credit risk through a focus on the following:

 
·
Cash and investments – Cash deposits and short-term investments are reviewed to ensure banks have acceptable credit ratings and that short-term investments are maintained in secured or guaranteed instruments.  Our holdings in cash and investments were considered stable and secure at March 31, 2013;
 
·
Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer's financial condition, payment experience and credit information.  After credit is granted, we actively monitor the customer's financial condition and applicable business news;
 
·
Pension assets – We have retained outside advisors to assist in the management of the assets in the defined benefit plans.  In making investment decisions, we have been guided by an established risk management protocol that focuses on protection of the plan assets against downside risk.  We ensure that investments within these plans provide appropriate diversification, are subject to monitoring by investment teams and ensure that portfolio managers adhere to the established investment policies.  We believe the plan assets are subject to appropriate investment policies and controls; and
 
·
Insurance – We monitor our insurance providers to ensure that they have acceptable financial ratings.  We have not identified any concerns in this regard based on our reviews.

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 we operate.  We sell a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, heavy equipment, automotive and commercial heating and air conditioning markets.  We operate in diversified markets as a strategy for offsetting the risk associated with a downturn in any of the markets we serve.  However, risk associated with market downturns, such as the global downturn experienced in fiscal 2009 and fiscal 2010, is still present.

We monitor economic conditions in the U.S., in our foreign markets and elsewhere.  As we expand our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes and the like.  We continue to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions.
 
 
35

 
We pursue new market opportunities after careful consideration of the potential associated risks and benefits.  Successes in new markets are dependent upon our ability to commercialize our investments.  Current examples of new and emerging markets for Modine include those related to waste heat recovery and expansion into the Chinese and Indian markets.  Our investment in these areas is subject to the risks associated with business integration, technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.

We anticipate that continued recovery from the global recession and economic growth in China may put production pressure on certain suppliers of our raw materials.  In particular, there are a limited number of suppliers of copper, steel and aluminum material.  We are exposed to the risk of suppliers of certain raw materials not being able to meet customer demand as they may not increase their output capacity as quickly as customers increase their orders and of increased prices being charged by raw material suppliers.

In addition, we purchase parts from suppliers that use Modine tooling to create the part.  In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts.  As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require.  Even in situations where suppliers are manufacturing parts without the use of Modine tooling, we face the challenge of obtaining consistently high-quality parts from suppliers.  We have implemented a supplier risk management program that utilizes inside and third-party tools to identify and mitigate high risk supplier situations.

In addition to the above risks on the supply side, we are also exposed to risks associated with demands by our customers for decreases in the price of our products.  We attempt to offset this risk with firm agreements with our customers whenever possible, but these agreements often contain provisions for future price reductions.

Hedging and Foreign Currency Forward Contracts

We use derivative financial instruments as a tool to manage certain financial risks.  Leveraged derivatives are prohibited by company policy.

Commodity Derivatives: We have entered into futures contracts, from time to time, related to certain forecasted purchases of aluminum and copper.  Our strategy in entering into these contracts was to reduce our exposure to changing market prices for future purchases of these commodities.  In fiscal 2013, fiscal 2012 and fiscal 2011, expenses related to commodity derivative contracts totaled $5 million, $3 million and zero, respectively.  We did not enter into any futures contracts during the second, third or fourth quarter of fiscal 2013.

Foreign currency forward contracts: Our foreign exchange risk management strategy uses derivative financial instruments in a limited way to mitigate foreign currency exchange risk.  We periodically enter into foreign currency exchange contracts to hedge specific foreign currency-denominated assets and liabilities.  We have not designated these forward contracts as hedges.  Accordingly, unrealized gains and losses related to the change in the fair value of the contracts are recorded in other income and expense.  Gains and losses on these foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.

We have a number of investments in 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, we use financial instruments to hedge, or offset, this exposure.

Counterparty risks: We manage counterparty risks by ensuring that counterparties to derivative instruments have credit ratings acceptable to us.  At March 31, 2013, 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, 2013, 2012 and 2011
(In millions, except per share amounts)

   
2013
   
2012
   
2011
 
Net sales
  $ 1,376.0     $ 1,577.2     $ 1,448.2  
Cost of sales
    1,167.4       1,320.6       1,215.9  
Gross profit
    208.6       256.6       232.3  
Selling, general and administrative expenses
    166.3       186.6       185.9  
Impairment charges
    25.9       2.5       3.5  
Restructuring expenses
    17.0       -       -  
Operating (loss) income
    (0.6 )     67.5       42.9  
Interest expense
    (12.6 )     (12.5 )     (33.7 )
Other income (expense) – net
    0.2       (7.1 )     3.6  
(Loss) earnings from continuing operations before income taxes
    (13.0 )     47.9       12.8  
Provision for income taxes
    (9.8 )     (9.9 )     (4.5 )
(Loss) earnings from continuing operations
    (22.8 )     38.0       8.3  
Earnings (loss) from discontinued operations, net of income taxes
    -       0.8       (3.1 )
Net (loss) earnings
    (22.8 )     38.8       5.2  
Net earnings attributable to noncontrolling interest
    (1.4 )     (0.3 )     -  
Net (loss) earnings attributable to Modine
  $ (24.2 )   $ 38.5     $ 5.2  
                         
(Loss) earnings per share from continuing operations attributable to Modine shareholders:
                       
Basic
  $ (0.52 )   $ 0.81     $ 0.18  
Diluted
  $ (0.52 )   $ 0.80     $ 0.18  
                         
Net (loss) earnings per share attributable to Modine shareholders:
                       
Basic
  $ (0.52 )   $ 0.83     $ 0.11  
Diluted
  $ (0.52 )   $ 0.82     $ 0.11  
                         
Weighted average shares outstanding:
                       
Basic
    46.6       46.5       46.2  
Diluted
    46.6       46.9       46.7  
 
The notes to consolidated financial statements are an integral part of these statements.

 
37


MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended March 31, 2013, 2012 and 2011
(In millions)

   
2013
   
2012
   
2011
 
Net (loss) earnings
  $ (22.8 )   $ 38.8     $ 5.2  
Other comprehensive (loss) income:
                       
Foreign currency translation
    (17.1 )     (22.6 )     16.5  
Cash flow hedges, net of income taxes of $0, $0.1 million and $1.0 million
    2.6       (3.4 )     2.3  
Defined benefit plans, net of income taxes of $0, $0 and $2.8 million
    (23.6 )     (41.4 )     8.6  
Total other comprehensive (loss) income
    (38.1 )     (67.4 )     27.4  
                         
Comprehensive (loss) income
    (60.9 )     (28.6 )     32.6  
Comprehensive income attributable to noncontrolling interest
    (1.4 )     (0.3 )     -  
Comprehensive (loss) income attributable to Modine
  $ (62.3 )   $ (28.9 )   $ 32.6  
 
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, 2013 and 2012
(In millions, except per share amounts)

   
2013
   
2012
 
ASSETS
           
Cash and cash equivalents
  $ 23.8     $ 31.4  
Trade accounts receivable – net
    194.5       216.1  
Inventories
    118.8       120.8  
Other current assets
    61.9       59.2  
Total current assets
    399.0       427.5  
Property, plant and equipment – net
    355.9       412.1  
Investment in affiliate
    3.3       3.7  
Intangible assets – net
    8.3       5.8  
Goodwill
    28.7       29.9  
Other noncurrent assets
    23.6       14.5  
Total assets
  $ 818.8     $ 893.5  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Short-term debt
  $ 30.6     $ 21.3  
Long-term debt – current portion
    0.5       1.1  
Accounts payable
    150.7       156.9  
Accrued compensation and employee benefits
    51.2       50.6  
Other current liabilities
    47.1       67.7  
Total current liabilities
    280.1       297.6  
Long-term debt
    132.5       141.9  
Deferred income taxes
    8.6       12.3  
Pensions
    108.0       94.1  
Postretirement benefits
    6.7       6.4  
Other noncurrent liabilities
    14.6       15.1  
Total liabilities
    550.5       567.4  
Commitments and contingencies (see Note 18)
               
Shareholders' equity:
               
Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none
    -       -  
Common stock, $0.625 par value, authorized 80.0 million shares, issued 47.8 million and 47.4 million shares
    29.9       29.6  
Additional paid-in capital
    171.2       168.3  
Retained earnings
    207.6       231.8  
Accumulated other comprehensive loss
    (128.4 )     (90.3 )
Treasury stock at cost: 0.6 million shares
    (14.6 )     (14.5 )
Total Modine shareholders' equity
    265.7       324.9  
Noncontrolling interest
    2.6       1.2  
Total equity
    268.3       326.1  
Total liabilities and equity
  $ 818.8     $ 893.5  
 
The notes to consolidated financial statements are an integral part of these statements.
 
 
39

 
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 2013, 2012 and 2011
(In millions)

   
2013
   
2012
   
2011
 
Cash flows from operating activities:
                 
Net (loss) earnings
  $ (22.8 )   $ 38.8     $ 5.2  
Adjustments to reconcile net (loss) earnings with net cash provided by operating activities:
                       
Depreciation and amortization
    55.8       57.7<