News Column

MODINE MANUFACTURING CO - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

May 30, 2014

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 6,900 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 radiators and radiator cores, condensers, oil coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation ("EGR") coolers, and building HVAC equipment. 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. 18



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Table of Contents We have established the following Enduring Goals in order to guide our day-to-day actions:

To be the fastest improving company in our industry;

To achieve a 10 percent annual growth rate in revenue;

To attain a 15 percent consolidated ROACE; and

To build a more diversified business model.

Development of New Products and Technology

Our ability to develop new products and technologies based on our building block strategy for new and emerging markets is one of our competitive strengths. Under this strategy, we focus on creating core technologies that can form the basis for multiple products and product lines. 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 our customers.



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 is expected to continue to result, in strong, long-term customer relationships with companies that value partnerships with their suppliers.

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 adjacent and 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. Examples resulting from this process include our recent acquisitions within our Commercial Products segment of Barkell Limited ("Barkell"), which provides us with an expanded product offering in the commercial ventilation market, and Geofinity Manufacturing Company ("Geofinity"), which provides us with a product line of innovative geothermal heat pumps. See Note 3 of the Notes to the Consolidated Financial Statements for further information regarding these acquisitions.



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 2014 was based upon return on average capital employed ("ROACE") and free cash flow, 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 employees to attract, retain, and motivate employees who directly impact the long-term performance of the Company. The plan is comprised of stock options, restricted stock awards, and performance stock awards. The performance stock awards for the performance period from fiscal 2014 through 2016 are based upon three-year average ROACE, three-year average annual revenue growth, and Asia segment operating income at the end of the three-year performance period. 19 -------------------------------------------------------------------------------- Table of Contents To aid in management's focus on guiding the long-term strategies of the Company, we follow our Enduring Goals set forth above. These long-term goals serve as a constant reminder to the management team when making strategic decisions as stewards of the Company.



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 and have entered the final stages of this program. Our objectives of the Europe restructuring program have been:

Manufacturing realignment. We have focused on exiting certain product lines

based on our global product strategy, transferring production 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 as a result of the restructuring.

Improve segment earnings and reduce assets employed. During fiscal 2013, our

Europe segment decided to exit certain non-manufacturing facilities. We are

currently marketing these facilities for sale. During fiscal 2014, we decided

to combine two manufacturing facilities in Germany into one, more competitive

manufacturing operation. In addition to the actions described above, the Company is also focused on global strategic growth opportunities. During fiscal 2014, the Company acquired Barkell, a manufacturer of custom built air handling units. During fiscal 2013, the Company acquired Geofinity, a manufacturer of geothermal heat pumps of both water-to-water and water-to-air models. These acquisitions extended Modine's product offerings in the Commercial Products segment.



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 maker. These results are used by management to evaluate the performance of each segment and to make decisions on the allocation of resources.

North America (38 percent of fiscal 2014 revenues)

Our North America segment includes powertrain and engine cooling products and technologies that we provide to the on-highway and off-highway markets, including automobiles, Class 3-8 trucks, school and transit buses, motor homes and coaches, light trucks, recreational vehicles (e.g. motorcycles and all-terrain vehicles), agricultural, construction, mining, and industrial products (e.g. lift trucks, compressors, and power generation equipment). In addition, this segment also provides heat exchange components for the commercial refrigeration, residential and commercial heating, and air conditioning markets. Overall, sales volume during fiscal 2014 increased slightly compared with the prior year. The commercial vehicle truck market remained at relatively low replacement levels through the first three quarters of fiscal 2014. This market showed some early signs of improvement in the fourth quarter of fiscal 2014, and we expect this improvement will continue into fiscal 2015 as freight volumes trend higher. The automotive markets strengthened during the first half of fiscal 2014, and held at this stronger level through the remainder of the fiscal year. We are anticipating that the automotive markets will remain at the current, strengthened levels into fiscal 2015. The off-highway markets weakened during fiscal 2014. The construction market remained weak throughout the year, and we are not anticipating a significant change during fiscal 2015, although there could be some upside opportunity if commercial construction improves.



The

mining market remained weak throughout fiscal 2014, and we are not anticipating improvement in this market during fiscal 2015 as commodity prices are forecasted to remain at relatively low levels. Agriculture markets weakened on lower crop output and less agriculture equipment investment in fiscal 2014. We are not anticipating significant improvement in this market during fiscal 2015. 20 -------------------------------------------------------------------------------- Table of Contents Our North America business will continue to focus on growing in the markets where its products and manufacturing footprint create a competitive advantage. Our strategy includes reducing lead times in order to bring new and updated products to market, as well as offering a wider product breadth. At the same time, we will focus on evolving existing product lines to meet targeted financial metrics. Our objective is to balance our customer and program portfolio and pursue new business, including both organic and inorganic growth opportunities. We are aiming to improve our operating leverage through manufacturing improvements and a lower fixed cost structure. This includes launching new programs efficiently as well as improving the utilization of our manufacturing footprint. We recently approved the decision to close our manufacturing facility located in McHenry, Illinois. Our manufacturing capacity is under-utilized at this facility and capacity exists in our remaining six manufacturing facilities to absorb its production volumes. We expect to complete this closure over the next 18 months and benefit from annual savings from lower operating costs and improved scale efficiencies once the closure is complete.



Europe (39 percent of fiscal 2014 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. Economic conditions in Europe during fiscal 2014 remained relatively flat compared to the prior year. Sales to the commercial vehicle market experienced moderate growth, primarily driven by the effect of Euro 5 pre-buys at the end of the calendar year and Euro 6 ramp-up volumes in the fourth quarter of fiscal 2014. The off-highway market remained relatively flat during fiscal 2014, while the premium automotive market experienced moderate growth. The Europe segment has been positively impacted by lower material prices, especially aluminum. During fiscal 2014, we entered the final stages of our Europe restructuring program and began to consolidate two of our manufacturing facilities in Germany into one, more competitive facility. We continue to focus on continuous improvement through the Modine Operating System, low-cost country sourcing, and cost containment. We expect to continue to see price reduction pressure from our customers, along with ongoing increased global customer service expectations and competition from low-cost country competitors. Our objective for the Europe restructuring program is to improve segment ROACE and strengthen our overall competitiveness. After the restructuring is complete, we believe the Europe segment will be well-positioned for improved long-term financial results, driven by a solid customer reputation for technology, service, and program management.



South America (8 percent of fiscal 2014 revenues)

Our South America segment provides products to the on-highway commercial vehicle and off-highway markets, including construction and agricultural applications and industrial application OEMs, primarily for power generation systems. This segment also provides products to the South America aftermarkets for both automotive and commercial vehicle applications. This segment manufactures radiators, charge air coolers, oil coolers, auxiliary coolers (transmission, hydraulic, and power steering), and engine cooling modules. Economic conditions in Brazil remained relatively flat compared to the prior year; however, markets began to deteriorate in late fiscal 2014. The Brazilian agricultural market experienced modest growth during the earlier part of the year, but has since shown declines. The construction market remained relatively flat, due in part to delays in infrastructure investments by the Brazilian government. Sales to the commercial vehicle market experienced moderate growth compared to the prior year, as a result of the effects of the pre-buy prior to the January 2012 change in government emission regulations. Brazil aftermarket volumes also experienced positive growth during fiscal 2014. Despite flat to moderate growth in the Brazil end markets, net sales during fiscal 2014 decreased compared to the prior year, primarily due to unfavorable foreign currency exchange rate changes. 21 -------------------------------------------------------------------------------- Table of Contents We are expecting challenging market conditions in Brazil for the upcoming fiscal year. We anticipate weakened demand from our OEM markets due to the overall slowing of the economy and higher interest rates. In addition, we see a risk of decreased production due to Brazil hosting the World Cup this summer. We do, however, anticipate that government finance and fleet renewal programs will support sales volume to the commercial vehicle and off-highway markets later in the fiscal year. The recent economic slowdown in Brazil will require a focus on cost reductions to maintain profitability with the lower sales volume.



Asia (5 percent of fiscal 2014 revenues)

Our Asia segment provides powertrain cooling systems and engine products to customers in the commercial vehicle, off-highway, and automotive markets.

During fiscal 2014, Asia segment sales volume improved, primarily due to increased export sales from our India operations to European automotive customers and new program launches. Production levels at our manufacturing facility in Chennai, India have increased since last year, and we expect this trend to continue for fiscal 2015. Our manufacturing facilities in China are continuing to ramp up production as well. Modine technology, performance, quality, and reputation have enabled us to win new engine products business in Asia. Emissions standards in China and India have lagged behind Europe and North America. As a result, some local on- and off-highway powertrain cooling customers focus on price versus technology. In the future, we expect to see a shift in these markets towards higher performing, more durable products, which we expect to provide us with additional powertrain cooling opportunities; however, we expect the Asia markets to remain cost sensitive in the near term. Our strategy in this segment is to accelerate growth and achieve profitability. Our focus is on securing new business and further diversifying our product offering and customer base, while continuing to control and reduce costs and increasing our asset utilization and manufacturing capabilities in China and India. We plan to launch new automotive and commercial vehicle programs in fiscal year 2015 and 2016, which will complete the transition of our light assembly facility in Shanghai, China into an engine products-focused manufacturing facility. We are well positioned to take on new programs. We are also looking to increase revenue opportunities with our joint venture in South Korea.



Commercial Products (10 percent of fiscal 2014 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, hotels, restaurants, 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 used for data center cooling applications, 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, building renovations including HVAC replacement, growth in data centers, and school renovations, as well as higher efficiency requirements are growth drivers for our building HVAC products. In fiscal 2014, sales volume for our North American heating products improved, primarily as a result of the very cold winter months experienced in the U.S. Despite the fire during the second quarter of fiscal 2014, temporarily halting production at our Airedale facility in the U.K., we resumed production at temporary facilities during the third quarter and year over year sales volume improved. We are currently reconstructing the facility that was destroyed by the fire and anticipate relocating operations to this new facility in fiscal 2016. In fiscal 2014, we completed the acquisition of Barkell, a custom air handling company located in the U.K. This acquisition helps us expand both our product line and our sales channel in the U.K. In addition, this will help us build on our success in the growing data center air conditioning market by providing innovative solutions, including adiabatic cooling. In fiscal 2013, we acquired Geofinity, a manufacturer of geothermal heat pumps for both water-to-water and water-to-air models, extending Modine's current geothermal heat pump product range beyond Airedale-branded school applications to a wider market. We integrated the production of Geofinity products into our West Kingston, Rhode Island facility to leverage our existing capabilities and resources to serve this growing market, both in the residential and commercial markets. 22 -------------------------------------------------------------------------------- Table of Contents Outlook For fiscal 2015, we anticipate modest improvements in some of our major end markets, partially offset by weakness in others. We anticipate consolidated year over year sales to increase 3 to 8 percent. We expect fiscal 2015 operating income of $65 million to $73 million and diluted earnings per share to be in the range of $0.63 to $0.73, excluding restructuring charges. Diluted earnings per share will be impacted by higher income tax expense going forward, as a result of the reversal of the tax valuation allowance on certain U.S. deferred tax assets.



Consolidated Results of Operations

Fiscal 2014 net sales increased $102 million, or 7 percent, from fiscal 2013, primarily due to improved sales across all of our business segments, except South America, which was unfavorably impacted by foreign currency exchange rate changes. The Company recorded $16 million of restructuring expenses and $3 million of impairment charges, primarily due to our restructuring program in Europe and the decision to close the McHenry, Illinois manufacturing facility. As we have entered the final stages of our Europe restructuring program, we expect lower restructuring expenses in fiscal 2015. In 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 in fiscal 2013, primarily due to our Europe restructuring program.



The following table presents consolidated financial results on a comparative basis for the fiscal years ended March 31, 2014, 2013, and 2012.

Years ended March 31, 2014 2013 2012 (in millions) $'s % of sales $'s % of sales $'s % of sales Net sales $ 1,478 100.0 % $ 1,376 100.0 % $ 1,577 100.0 % Cost of sales 1,240 83.9 % 1,167 84.8 % 1,321 83.7 % Gross profit 238 16.1 % 209 15.2 % 257 16.3 % Selling, general and administrative expenses 182 12.3 % 166 12.1 % 187 11.8 % Restructuring expenses 16 1.1 % 17 1.2 % - - Impairment charges 3 0.2 % 26 1.9 % 2 0.1 % Operating income (loss) 37 2.5 % (1 ) 0.0 % 68 4.3 % Interest expense (12 ) -0.8 % (13 ) -0.9 % (12 ) -0.8 % Other (expense) income - net (1 ) -0.1 % - - (7 ) -0.5 % Earnings (loss) from continuing operations before income taxes 24 1.6 % (13 ) -0.9 % 48 3.1 % Benefit (provision) for income taxes 108 7.3 % (10 ) -0.7 % (10 ) -0.6 % Earnings (loss) from continuing operations $ 132 8.9 % $ (23 ) -1.7 % $ 38 2.4 %



Year Ended March 31, 2014 Compared to Year Ended March 31, 2013:

Fiscal 2014 net sales increased $102 million, or 7 percent, from fiscal 2013, primarily due to an $86 million sales increase in our Europe segment, driven by sales volume improvements within the commercial vehicle and automotive markets. In addition, net sales in our Asia, Commercial Products, and North America segments increased year over year. Our South America segment net sales decreased, however, primarily due to unfavorable foreign currency exchange rate changes. Gross profit increased $29 million to $238 million in fiscal 2014 from the prior year and gross margin improved 90 basis points to 16.1 percent, primarily due to higher sales volume and favorable material costs. Fiscal 2014 SG&A expenses increased $16 million to $182 million from fiscal 2013, primarily due to higher compensation-related expenses, the reversal of a $2 million acquisition-related liability that reduced SG&A expenses in the prior year, and $1 million of costs directly related to the Airedale fire, partially offset by lower professional service expenses. 23 -------------------------------------------------------------------------------- Table of Contents Restructuring expenses were $16 million and $17 million in fiscal 2014 and 2013, respectively, primarily due to employee severance costs related to our Europe restructuring program. In addition, we recorded impairment charges during fiscal 2014 and 2013 of $3 million and $26 million, respectively, primarily related to our Europe restructuring actions. Operating income of $37 million during fiscal 2014 represented a $38 million improvement from fiscal 2013. This improvement was primarily due to higher gross profit on increased sales volume and favorable material costs and lower impairment charges, partially offset by higher SG&A expenses. The Company's benefit for income taxes was $108 million in fiscal 2014 compared to a provision for income taxes of $10 million in fiscal 2013. The large benefit for income taxes in fiscal 2014 was primarily due to the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $11 million and $10 million in fiscal 2014 and 2013, respectively.



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. 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.

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 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. 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 intercompany 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. 24 -------------------------------------------------------------------------------- Table of Contents Segment Results of Operations Segment financial results for fiscal 2013 and 2012 have been recast to conform to the fiscal 2014 presentation. The Company has modified its internal financial reporting of intercompany charges for research and development and intercompany royalties between Corporate and the Europe segment, which totaled $9 million and $11 million for fiscal years 2013 and 2012, respectively. There was no impact on the total Company financial results. North America Years ended March 31, 2014 2013 2012 (in millions) $'s % of sales $'s % of sales $'s % of sales Net sales $ 569 100.0 % $ 565 100.0 % $ 602 100.0 % Cost of sales 475 83.6 % 484 85.6 % 512 85.1 % Gross profit 94 16.4 % 81 14.4 % 90 14.9 % Selling, general and administrative expenses 50 8.6 % 40 7.2 % 42 6.9 % Restructuring expenses 1 0.2 % - - - - Impairment charges 1 0.2 % 2 0.3 % - - Operating income $ 42 7.4 % $ 39 6.9 % $ 48 8.0 % North America net sales increased $4 million, or 1 percent, from fiscal 2013 to fiscal 2014, and decreased $37 million, or 6 percent, from fiscal 2012 to fiscal 2013. The fiscal 2014 increase in sales was primarily due to higher sales to automotive and commercial vehicle customers, partially offset by decreased sales to off-highway customers as economic conditions in that market remained relatively weak. The fiscal 2013 decrease in sales was primarily driven by overall weakness in our end markets and the wind-down of certain automotive and military programs. Gross margin increased 200 basis points to 16.4 percent in fiscal 2014, primarily due to lower material costs. 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 increased $10 million from fiscal 2013 to fiscal 2014, primarily due to higher compensation-related expenses and research and development costs. The $2 million 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 a $2 million reduction of a trade compliance liability in fiscal 2012. During the fourth quarter of fiscal 2014, we approved a plan to close our McHenry, Illinois manufacturing facility. As a result of the planned closure, we recorded $1 million of restructuring expenses, primarily related to severance costs, and $1 million of asset impairment charges. We plan to transfer the current production at this facility to other existing North America manufacturing facilities over an 18-month period. Impairment charges totaling $2 million in fiscal 2013 were recorded for idle facilities to reduce their carrying values to their estimated fair value less cost to sell. These fiscal 2013 charges were due to weakness in the commercial real estate market. Fiscal 2014 operating income of $42 million improved $3 million from $39 million in fiscal 2013, primarily due to increased gross profit, partially offset by higher SG&A expenses. Fiscal 2013 operating income declined $9 million, primarily due to lower gross profit from lower sales volume. 25 -------------------------------------------------------------------------------- Table of Contents Europe Years ended March 31, 2014 2013 2012 (in millions) $'s % of sales $'s % of sales $'s % of sales Net sales $ 584 100.0 % $ 498 100.0 % $ 603 100.0 % Cost of sales 513 87.9 % 437 87.7 % 518 85.8 % Gross profit 71 12.1 % 61 12.3 % 85 14.1 % Selling, general and administrative expenses 44 7.6 % 45 9.1 % 57 9.5 % Restructuring expenses 15 2.6 % 17 3.4 % - - Impairment charges 2 0.3 % 24 4.8 % 2 0.4 % Operating income (loss) $ 10 1.6 % $ (25 ) -5.0 % $ 26 4.3 % Europe net sales increased $86 million, or 17 percent, from fiscal 2013 to fiscal 2014, primarily due to increased volume to commercial vehicle customers, higher tooling sales, and a $23 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 profit increased $10 million, while gross margin declined 20 basis points to 12.1 percent in fiscal 2014 compared with the prior year. The decline in gross margin was primarily due to a $5 million favorable customer pricing settlement in the prior year, $4 million of accelerated depreciation in fiscal 2014 for production equipment that is no longer used because of manufacturing process changes, and higher warranty expenses, partially offset by higher sales volume, improved product mix, and lower 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 decreased $1 million from fiscal 2013 to fiscal 2014, primarily due to the favorable impact of restructuring actions completed to date and increased prototype and testing recoveries, partially offset by higher compensation-related expenses. SG&A expenses decreased $12 million from fiscal 2012 to fiscal 2013, primarily due to a $5 million favorable impact of foreign currency exchange rate changes, lower compensation-related expenses, and a change in estimated unpaid value added tax ("VAT") obligations.



Restructuring expenses decreased $2 million from fiscal 2013 to fiscal 2014, primarily due to lower severance costs related to our Europe restructuring program.

We recorded $2 million of impairment charges during fiscal 2014, primarily related to the planned closure of a facility in Germany as we combine two manufacturing facilities into one, more competitive manufacturing operation. In addition, 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. Operating income of $10 million in fiscal 2014 was an improvement of $35 million from fiscal 2013, primarily due to lower asset impairment charges related to several assets held for sale and increased sales volume driving higher gross profit. The operating loss of $25 million in fiscal 2013 represents a $51 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. 26 -------------------------------------------------------------------------------- Table of Contents South America Years ended March 31, 2014 2013 2012 (in millions) $'s % of sales $'s % of sales $'s % of sales Net sales $ 123 100.0 % $ 134 100.0 % $ 176 100.0 % Cost of sales 102 83.1 % 111 83.2 % 145 82.4 % Gross profit 21 16.9 % 23 16.8 % 31 17.6 % Selling, general and administrative expenses 13 10.8 % 12 8.4 % 21 11.7 % Operating income $ 8 6.1 % $ 11 8.4 % $ 10 5.9 % South America net sales decreased $11 million, or 8 percent, in fiscal 2014, primarily due to a $14 million unfavorable impact of foreign currency exchange rate changes, partially offset by increased sales volume to commercial vehicle customers. Net sales decreased $42 million, or 24 percent, from fiscal 2012 to 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 increased 10 basis points to 16.9 percent in fiscal 2014, while gross profit decreased $2 million, primarily due to a $2 million unfavorable impact of foreign currency exchange rate changes. Gross profit decreased $8 million from fiscal 2012 to fiscal 2013, primarily due to lower sales volume and a $4 million unfavorable impact of foreign currency exchange rate changes. Fiscal 2014 SG&A expenses increased $1 million from fiscal 2013, primarily due to the reversal of a $2 million acquisition-related liability in the prior year and higher compensation-related expenses in fiscal 2014, partially offset by a $2 million favorable impact of foreign currency exchange rate changes. SG&A expenses decreased $9 million from fiscal 2012 to fiscal 2013, primarily due to the reversal of the $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 2013 to fiscal 2014, primarily due to lower gross profit on lower sales volume and increased SG&A expenses. Operating income improved slightly from fiscal 2012 to fiscal 2013, primarily due to lower SG&A expenses, partially offset by the reduction in gross profit. Asia Years ended March 31, 2014 2013 2012 (in millions) $'s % of sales $'s % of sales $'s % of sales Net sales $ 72 100.0 % $ 60 100.0 % $ 84 100.0 % Cost of sales 63 87.5 % 58 97.2 % 76 90.6 % Gross profit 9 12.5 % 2 2.8 % 8 9.4 % Selling, general and administrative expenses 12 17.2 % 11 17.6 % 10 12.3 % Operating loss $ (3 ) -4.7 % $ (9 ) -14.8 % $ (2 ) -2.9 % Asia net sales increased $12 million, or 20 percent, from fiscal 2013 to fiscal 2014, primarily due to higher sales volume in the automotive and off-highway markets. Net sales decreased $24 million, or 29 percent, from fiscal 2012 to fiscal 2013, primarily due to a decrease in automotive module sales and a decline in the off-highway vehicular market, including lower excavator sales. Gross profit increased $7 million and gross margin increased to 12.5 percent in fiscal 2014, primarily due to higher sales volume and ongoing cost control measures. Gross margin declined to 2.8 percent in fiscal 2013 from fiscal 2012, primarily due to lower sales volume and costs associated with converting our Shanghai manufacturing facility to a high-volume oil cooler production facility.



SG&A expenses increased $1 million in fiscal 2014 and fiscal 2013, primarily due to our continued investment for growth in this segment.

27 -------------------------------------------------------------------------------- Table of Contents The operating loss improved to $3 million in fiscal 2014, primarily due to higher gross profit on increased sales volume. The operating loss increased to $9 million in fiscal 2013 from fiscal 2012, primarily due to lower gross profit on lower sales. Commercial Products Years ended March 31, 2014 2013 2012 (in millions) $'s % of sales $'s % of sales $'s % of sales Net sales $ 146 100.0 % $ 139 100.0 % $ 142 100.0 % Cost of sales 103 70.4 % 98 70.7 % 100 70.1 % Gross profit 43 29.6 % 41 29.3 % 42 29.9 % Selling, general and administrative expenses 34 23.2 % 31 22.1 % 28 19.9 % Operating income $ 9 6.4 % $ 10 7.2 % $ 14 10.0 % Commercial Products net sales increased $7 million, or 5 percent, from fiscal 2013 to fiscal 2014, primarily due to increased heating product sales in North America. Our sales in fiscal 2014 were negatively impacted by the fire that destroyed our Airedale facility on September 6, 2013. Net sales decreased $3 million, or 2 percent, from fiscal 2012 to fiscal 2013, 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 North America. Gross profit increased $2 million in fiscal 2014, primarily due to favorable product mix, which resulted in an increase in gross margin of 30 basis points to 29.6 percent. Gross profit decreased $1 million from fiscal 2012 to fiscal 2013, primarily due to unfavorable product mix. SG&A expenses increased $3 million from fiscal 2013 to $34 million in fiscal 2014, primarily due to higher compensation-related expenses, $1 million of non-recoverable costs directly related to the Airedale fire, and increased acquisition-related expenses. The Barkell acquisition, completed on February 28, 2014, provides us with a product line of custom air handling units and an expanded sales channel in the U.K. The increase in SG&A expenses from fiscal 2012 to fiscal 2013 included expenses associated with the acquisition of Geofinity. Operating income decreased slightly from fiscal 2013 to fiscal 2014, primarily due to higher SG&A expenses, partially offset by higher gross profit. Operating income decreased $4 million from fiscal 2012 to fiscal 2013, primarily due to increased SG&A expenses. Airedale Facility Fire On September 6, 2013, a fire caused significant destruction to our Airedale manufacturing facility and offices in Rawdon (Leeds), United Kingdom. Although production was temporarily halted, we have transferred operations to temporary facilities and are currently operating at near pre-fire capacity. We expect construction of the new facility to begin in the second quarter of fiscal 2015 and anticipate relocating into the rebuilt facility during fiscal 2016. We maintain insurance coverage for damage to the facility, equipment, inventory and other assets, business interruption and lost profits, and recovery-related expenses caused by the fire. We believe that reimbursement from our insurance provider is probable for substantially all losses and expenses that are directly attributable to the fire, other than $1 million of charges during fiscal 2014, primarily related to the write-off of certain assets (leasehold improvements) that were not covered by insurance. We expect to record insurance reimbursements related to lost profits (business interruption) during the recovery period in the quarter in which such reimbursements are realized. No reimbursements related to lost profits were recorded during fiscal 2014. We expect to realize insurance reimbursements for lost profits related to fiscal 2014 in the first or second quarter of fiscal 2015. See Note 2 of the Notes to the Consolidated Financial Statements for further information.



Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operating activities, our cash and cash equivalents at March 31, 2014 of $87 million and our available borrowing capacity of $218 million under lines of credit provided by banks in the United States and abroad. Because of the timing of insurance proceeds related to the Airedale fire, our cash and cash equivalents at March 31, 2014 include approximately $17 million of advances from our insurance provider that remain to be spent for recovery and reconstruction costs. We believe our sources of liquidity will be sufficient to satisfy future operating costs and capital expenditure requirements for our domestic and international operations. 28 -------------------------------------------------------------------------------- Table of Contents Net Cash Provided by Operating Activities Net cash provided by operating activities in fiscal 2014 was $105 million, an increase of $56 million from $49 million in the prior year. The increase in operating cash flows resulted from an increase in gross profit, partially offset by higher SG&A expenses, and improvements in working capital as compared to fiscal 2013.



Net cash provided by operating activities in fiscal 2013 was $49 million, an increase of $3 million from fiscal 2012. 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 during fiscal 2013 as compared to fiscal 2012.

We expect to be reimbursed by our insurance provider for substantially all losses and expenses that are directly related to the fire at our Airedale manufacturing facility, including costs to reconstruct the facility. The expected timing of cash recoveries from our insurance provider is such that we do not expect the fire will have a significant adverse effect on our liquidity.

Capital Expenditures

Capital expenditures were $53 million for fiscal 2014, or $3 million higher than fiscal 2013 and $11 million lower than fiscal 2012. In fiscal 2014, our capital spending primarily occurred in the Europe segment, which totaled $23 million, the North America segment, which totaled $19 million, and the South America segment, which totaled $6 million. Capital projects in fiscal 2014 primarily included tooling and equipment purchases in conjunction with program launches with customers in North America, Europe, and South America.



At March 31, 2014, we had capital expenditure commitments of $9 million. Significant commitments include tooling and equipment expenditures for new and renewal platforms with customers in North America and Europe.

Dividends

The Company did not pay dividends in fiscal 2014, 2013, or 2012. We currently do not intend to pay dividends in fiscal 2015.

Debt

Our total debt outstanding was $164 million at March 31, 2014 and 2013. During fiscal 2014, the Company entered into a $175 million Amended and Restated Credit Agreement with a syndicate of banks. The multi-currency credit agreement, which expires in August 2018, replaced our then-existing $145.0 million revolving credit facility that would have expired in August 2014. See Note 16 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 a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a certain portion of our cash balance, both as defined by the credit agreement, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments ("Adjusted EBITDA"). We are also subject to an interest expense coverage ratio, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense. 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 GAAP net earnings. Our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. 29



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Table of Contents The following table presents a calculation of Adjusted EBITDA for fiscal 2014:

Year Ended March 31, 2014 Net earnings attributable to Modine $ 130.4 Interest expense 12.4 Benefit from income taxes (107.9 ) Depreciation and amortization 58.1 Restructuring expenses 16.1 Impairment charges 3.2 Other adjustments 3.2 Adjusted EBITDA $ 115.5 Our leverage ratio for the four fiscal quarters ended March 31, 2014 was 1.2, which was below the maximum permitted ratio of 3.25. Our interest expense coverage ratio for the four fiscal quarters ended March 31, 2014 was 9.6, which exceeded the minimum requirement of 3.0. We were in compliance with our debt covenants as of March 31, 2014 and expect to remain in compliance during fiscal 2015 and beyond.



Off-Balance Sheet Arrangements

None. Contractual Obligations March 31, 2014 Less than 1 More than (in millions) Total year 1 - 3 years 4 - 5 years 5 years Long-term debt $ 125.5 $ 0.3 $ 8.1 $ 32.0$ 85.1 Interest associated with long-term debt 47.3 8.5 17.0 14.1 7.7 Capital lease obligations 6.5 0.5 0.7 0.7 4.6 Operating lease obligations 27.4 7.9 9.7 4.4 5.4 Capital expenditure commitments 8.6 8.4 0.2 - - Other long-term obligations 14.1 2.2 3.5 3.2 5.2 Total contractual obligations $ 229.4$ 27.8$ 39.2$ 54.4$ 108.0 Our gross liabilities for pensions, postretirement benefits, and uncertain tax positions total $90 million as of March 31, 2014. We are unable to determine the ultimate timing of these liabilities and have therefore excluded these amounts from the contractual obligations table above. We have a contractual commitment to rebuild the leased Airedale facility, which suffered significant destruction from a fire during fiscal 2014. We maintain insurance coverage and believe reimbursement for reconstruction costs is probable. The estimated costs associated with the reconstruction of the Airedale facility of $45 million have been excluded from the contractual obligations table above. See Note 2 of the Notes to Consolidated Financial Statements for further information.



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. 30 -------------------------------------------------------------------------------- Table of Contents Revenue Recognition We recognize revenue, including agreed upon commodity price increases or decreases, when the risks and rewards of ownership are transferred to our customers, which generally occurs upon shipment. Revenue is recorded net of applicable provisions for sales rebates, volume incentives, and returns and allowances. At the time of revenue recognition, we also record estimates for bad debt expense and warranty expense. We base these estimates on historical experience, current business trends and current economic conditions. Price increases agreed upon in advance are recognized as revenue when the products are shipped to our customers.



Impairment of Long-Lived Assets

We perform impairment evaluations of long-lived assets, including property, plant and equipment, intangible assets and equity investments, whenever business conditions or events indicate that those assets may be impaired. We consider factors such as operating losses, declining 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 is based on appraised value, estimated salvage value, selling prices 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 $360 million at March 31, 2014. 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. 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 interim impairment analysis. Goodwill is tested for impairment at a reporting unit level, which we have determined to be at the 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.



Warranty Costs

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 if we expect future claims will differ from the initial estimates. 31 -------------------------------------------------------------------------------- Table of Contents 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.



Assets Held for Sale

Assets are considered to be held for sale when management approves and commits to a formal plan to actively market the asset for sale at a sales price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, the sale of the asset is 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 recording depreciation expense at the time of designation as held for sale.



Pension Obligations

The calculation of the expense and liabilities of our pension plans is dependent upon various assumptions. The most significant assumptions include the discount rate, long-term expected return on plan assets, and the mortality rate tables. We based our selection of assumptions 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 expenses. Currently, participants in our domestic pension plans are not accruing benefits based on their current service as the plans do not include increases in annual earnings or 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 2014 and 2013 was 8.0 percent. For fiscal 2015, 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 2015 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 2014, we used a discount rate of 4.7 percent, compared to 4.4 percent in fiscal 2013. 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 17 of the Notes to Consolidated Financial Statements for additional information. Changing the assumed discount rate by 25 basis points would impact our fiscal 2015 pension expense by $0.1 million.



Other Loss Reserves

We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, self-insurance reserves, uncollectible accounts receivable, recoverability of deferred income taxes, regulatory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. The Company estimates these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Note 19 of the Notes to Consolidated Financial Statements for additional details regarding contingencies and litigation. 32 -------------------------------------------------------------------------------- Table of Contents 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 complete our Europe restructuring plans and realize expected

cost reductions and increased profitability and return on assets as a result;

Complexities and inefficiencies introduced by the September 2013 fire at our

Airedale facility in the U.K., including our ability to meet customer demands

at temporary locations for an extended period of time and to realize insurance

proceeds effectively to replace machinery and equipment and rebuild the facility with minimal financial impact from the business interruption;



The overall health of our customers and suppliers in light of continuing broad

economic and market-specific challenges and the potential impact on us from any

deterioration in the stability or performance of any of our major customers or

suppliers;



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;



Unanticipated product or manufacturing difficulties or inefficiencies,

including unanticipated program launch and product transfer challenges and

warranty claims;



Our ability to obtain and retain profitable business in our Asia segment, and

in particular, in China;

Unanticipated delays or modifications initiated by major customers with respect

to product launches, product applications or requirements;

Our ability to complete the transition of our McHenry, Illinois production to

other facilities efficiently and effectively;

Costs and other effects of the remediation of environmental contamination;

Increasingly complex and restrictive laws and regulations, including those

associated with being a U.S. public company and others present in various

jurisdictions in which we operate, and the costs associated with compliance

therewith;



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,

Brazilian real, and Indian rupee relative to the U.S. dollar), tariffs,

inflation, changes in interest rates, recession and recovery therefrom,

restrictions associated with importing and exporting and foreign ownership,

and, in particular, the continuing recovery of certain markets in China, Brazil

and the United Kingdom and the remaining economic uncertainties in the European

Union; 33



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The impact of increases in commodity prices, particularly our exposure to the

changing prices of aluminum, copper, steel and stainless steel (nickel);

Our ability 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. Financial Risks:



Our ability to fund our global liquidity requirements efficiently, particularly

those in our Asia business segment, and meet our long-term commitments in the

event of any unexpected disruption in or tightening of the credit markets or

extended recessionary conditions in the global economy; and

Our ability to realize future tax benefits in various jurisdictions in which we

operate. 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 as identified in our public filings with the U.S. Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

In the normal course of business, 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 joint ventures in Japan and 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 2014, 2013, and 2012, 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 2014, changes in foreign currencies positively impacted our sales by $8 million; however the impact on our fiscal 2014 operating income was a negative impact of approximately $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 percent higher or lower at March 31, 2014, there would not have been a material impact on our fiscal 2014 earnings. We maintain, from time to time, foreign-denominated, long-term debt obligations and long-term intercompany loans that are subject to foreign currency exchange risk. As of March 31, 2014, there were no third-party foreign-denominated, long-term debt obligations or intercompany 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 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 -------------------------------------------------------------------------------- Table of Contents 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 125 to 225 basis points depending upon our leverage ratio. We are subject to risk of fluctuations in LIBOR and changes in our leverage ratio, which would affect the variable interest rate on the revolving credit facility and create variability in interest expense. There were no borrowings outstanding under the revolving credit facility as of March 31, 2014. Based on our outstanding debt with variable interest rates at March 31, 2014, a 100 basis point increase in interest rates would increase our annual interest expense in fiscal 2015 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 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, 2014, 46 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, 2014;

Trade accounts receivable - Prior to granting credit, we evaluate each

customer, taking into consideration the customer's financial condition, payment

experience and credit information. After credit is granted, we actively

monitor the customer's financial condition and applicable business news;

Pension assets - We have retained outside advisors to assist in the management

of the assets in our pension plans. In making investment decisions, we 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, the

investments are subject to monitoring by investment teams and 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 upon our reviews.

Economic Risk

Economic risk is the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate. We sell a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, automotive, heavy equipment, 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. 35 -------------------------------------------------------------------------------- Table of Contents We monitor economic conditions in the U.S., in our foreign markets and elsewhere. As we expand our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes and the like. We continue to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions. We pursue new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon our ability to commercialize our investments. Current examples of new and emerging markets for 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 parts. In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts. As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require. Even in situations where suppliers are manufacturing parts without the use of Modine tooling, we face the challenge of obtaining consistently high-quality parts from suppliers that are financially stable. We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate 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 is to reduce our exposure to changing market prices for future purchases of these commodities. In fiscal 2014, 2013, and fiscal 2012, expenses related to commodity derivative contracts totaled $1 million, $5 million, and $3 million, respectively. Subsequent to fiscal 2012, we have not designated commodity contracts for hedge accounting. 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, 2014, all counterparties had a sufficient long-term credit rating. 36



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