Note 18: Contingencies and Litigation

Market risk: The Company sells a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, off-highway, automotive and commercial heating and air conditioning markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or more of the markets it serves. The Company pursues new market opportunities after careful consideration of the potential associated risks and benefits. However, the risk associated with market downturns, such as the downturn experienced in fiscal 2009 and 2010, is still present.

Credit risk: The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 2013 and 2011, one customer accounted for ten percent or more of the total Company sales, while in fiscal 2012, no customer accounted for ten percent or more of total Company sales. Sales to the Company's top ten customers were 59 percent, 61 percent and 58 percent of total sales in fiscal 2013, 2012 and 2011, respectively. At March 31, 2013 and 2012, 51 percent and 54 percent, respectively, of the Company's trade accounts receivable were from the Company's top ten individual customers. These customers operate primarily in the automotive, truck and heavy equipment markets and are influenced by similar market and general economic factors. Collateral or advanced payments are generally not required, but they may be used in those cases where a substantial credit risk is identified. Credit losses to customers operating in the markets served by the Company have not been significant.

The Company manages credit risk through its focus on the following:

Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments;

Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news;

Pension assets – ensuring that investments within these plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers are adhering to the Company's investment policies and directives, and ensuring that exposure to high risk investments is limited; and

Insurance – ensuring that insurance providers maintain financial ratings that are acceptable to the Company.

Counterparty risks: The Company manages counterparty risks through its focus on the following:

Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees;

Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and

Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company.

Europe value added tax: During fiscal 2012, the Company determined that it was not properly applying value added tax ("VAT") to various cross border transactions within the Europe segment. During the fourth quarter of fiscal 2012, the Company recorded a charge within SG&A expenses to establish a liability of $10.7 million for estimated unpaid VAT, including interest and penalties, which may be levied against the Company by taxing authorities. During fiscal 2013, the Company completed the registration and filing process with several taxing authorities and began making payments to the applicable jurisdictions. In addition, SG&A expenses in fiscal 2013 included a $1.6 million reduction as a result of changes to the estimated VAT obligation. The Company's accrual for estimated VAT exposures, including interest and penalties, was $4.4 million at March 31, 2013.

Trade Compliance: During fiscal 2011, the Company determined that it was not in compliance with certain trade regulations related to import and export activity between its warehouse in Laredo, Texas and its plant in Nuevo Laredo, Mexico. As part of the investigation process, the Company disclosed these trade compliance issues to certain government agencies and has fully cooperated with these agencies. At March 31, 2011, the Company had an estimated liability for the trade regulation issues of $4.5 million, which consisted of an estimate for unpaid duties, potential interest and penalties. During fiscal 2012, the Company made a voluntary payment of $2.1 million to one government agency and a second government agency closed the matter with no payment required, resulting in the Company's reduction of the liability by $2.3 million within SG&A expenses.

Environmental: The United States Environmental Protection Agency ("USEPA") has designated the Company as a potentially responsible party ("PRP") for remediation of three sites where the Company had involvement. These sites include: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned and allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be material to the Company's financial position due to Modine's relatively small portion of contributed materials.

The Company has recorded environmental investigation and remediation accruals for groundwater contamination at its manufacturing facility in Brazil and subsurface contamination at its former manufacturing facility in The Netherlands, along with other lesser environmental issues at certain facilities located in the United States. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $5.2 million and $6.9 million at March 31, 2013 and 2012, respectively. During fiscal 2012, additional reserves of $1.0 million were recorded as a component of continuing operations and reductions to the reserves of $0.5 million were recorded as a component of discontinued operations. During fiscal 2011, the Company recorded charges of $4.9 million of which $2.9 million were recorded as a component of loss from discontinued operations. As additional information becomes available, any potential liability related to these matters will be assessed and the estimated accrual will be revised, if necessary. Based on currently available information, Modine believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position or overall trends in results of operations. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages. During fiscal 2011, one of the adjacent businesses to the Company's operation in Brazil filed suit against Modine's Brazilian subsidiary seeking remediation and certain other damages as a result of the contamination. The Company is defending this suit and believes that the ultimate outcome of this matter will not be material.

Other litigation: In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits are not expected to have a material adverse effect on the Company's consolidated financial statements.