10-K 1 form10k.htm MODINE MANUFACTURING COMPANY 10-K 3-31-2015

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-K

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

For the fiscal year ended March 31, 2015
 
or
 
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 ☐    No ☑

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 ☐    No ☑

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 ☑    No ☐

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 ☑   No ☐
 



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.  ☑

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 ☐
 
Accelerated Filer ☑
 
Non-accelerated Filer ☐ (Do not check if a smaller reporting company)
 
Smaller reporting company ☐

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

Approximately 97 percent of the outstanding shares are held by non-affiliates.  The aggregate market value of these shares was approximately $550 million based upon the market price of $11.87 per share on September 30, 2014, 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 10 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 47,895,824 at May 22, 2015.

An Exhibit Index appears at pages 77-79 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 2015 Annual
Part III of Form 10-K
Meeting of Shareholders
(Items 10, 11, 12, 13, 14)
 

MODINE MANUFACTURING COMPANY
TABLE OF CONTENTS

PART I
   
 
ITEM 1.
1
 
ITEM 1A.
10
 
ITEM 1B.
14
 
ITEM 2.
15
 
ITEM 3.
16
 
ITEM 4.
16
 
 
16
 
PART II
   
 
ITEM 5.
18
 
ITEM 6.
19
 
ITEM 7.
19
 
ITEM 7A.
35
 
ITEM 8.
39
 
ITEM 9.
72
 
ITEM 9A.
72
 
ITEM 9B.
72
 
PART III
   
 
ITEM 10.
73
 
ITEM 11.
73
 
ITEM 12.
73
 
ITEM 13.
73
 
ITEM 14.
73
 
PART IV
   
 
ITEM 15.
74
 
75
 
76
 
77
 
(This page intentionally left blank.)
 
PART I
ITEM 1.
BUSINESS.

Modine Manufacturing Company specializes in thermal management systems and components, bringing heating and cooling technologies 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.  Products include radiators and radiator cores, condensers, oil coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation (“EGR”) coolers, and building heating, ventilating and air conditioning (“HVAC”) equipment.  Our primary customers across the globe are:

- Automobile, truck, bus, and specialty vehicle OEMs;
- Agricultural, industrial and construction equipment OEMs;
- Heating, ventilation and cooling OEMs;
- Construction architects and contractors; and
- Wholesalers of heating equipment.

We focus our development efforts on solutions that meet the ever-increasing heat transfer needs of OEMs and other customers within the automobile, 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 customer standards as they work to ensure compliance with increasingly stringent global emissions, fuel economy and energy efficiency requirements.  Our 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 resources, enables us to rapidly bring highly valued, customized solutions to our customers.

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 personally been granted a total of 120 U.S. patents for his heat transfer innovations.  The standard of innovation exemplified by A.B. Modine remains the cornerstone of Modine today.

Terms and 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

We focus 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 management problems.

Our strategy for improved profitability is grounded in diversifying our markets and customer base, differentiating our products and services, both technically and commercially, and partnering with customers to deliver the right products in the right markets.  Our top five customers are in three different markets – automotive, commercial vehicle, and off-highway – and our ten largest customers accounted for 63 percent of our fiscal 2015 sales.  In fiscal 2015, 64 percent of our total sales were generated from customers outside of the U.S., with 55 percent of total sales generated by foreign operations and 9 percent generated by exports from the U.S.  In fiscal 2014, 66 percent of our total sales were generated from customers outside of the U.S., with 56 percent of total sales generated by foreign operations and 10 percent generated by exports from the U.S.  In fiscal 2013, 61 percent of our total sales were generated from customers outside of the U.S., with 54 percent of total sales generated by foreign operations and 7 percent generated by exports from the U.S.
 
During fiscal 2015, our consolidated sales were $1.50 billion, a 1 percent increase from $1.48 billion in fiscal 2014.  Sales volume increases to our HVAC and commercial vehicle customers were partially offset by lower sales volume to our off-highway customers and a $42.5 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar.  Gross profit increased $8.3 million to $246.5 million in fiscal 2015 compared with the prior year, primarily due to sales volume improvements and lower warranty costs.  Selling, general and administrative (“SG&A”) expenses increased slightly to $184.5 million in fiscal 2015, compared with $181.7 million in fiscal 2014.

In an effort to optimize our cost structure and improve efficiency of our operations, we have engaged in restructuring activities in our Europe, North America, and South America segments.  As a result, we recorded $4.7 million of restructuring expenses during fiscal 2015.  In addition, we recorded a $7.8 million goodwill impairment charge related to our South America segment in fiscal 2015, primarily caused by a decline in the financial outlook for the segment due to the weak economic environment in Brazil.  We also sold a wind tunnel in our Europe segment in fiscal 2015, an asset which we no longer considered to be a core asset.  As a result of this sale, we recorded a gain of $3.2 million.

Operating income improved $15.5 million in fiscal 2015 compared with the prior year, primarily due to lower restructuring expenses, higher gross profit on increased sales volume, and the gain on the sale of the wind tunnel, partially offset by the goodwill impairment charge.

A key metric by which we measure our performance is return on average capital employed (“ROACE”).  We define ROACE as operating income, less restructuring expenses, impairment charges, certain other adjustments, income tax at a 30 percent rate, and earnings attributable to noncontrolling interest; divided by the average of debt plus Modine shareholders’ equity.  We have established a long-term goal of achieving ROACE of 15 percent.  ROACE was 7.8 percent in fiscal 2015 compared with 8.7 percent in fiscal 2014.  The lower ROACE in fiscal 2015 was primarily due to higher capital employed in fiscal 2015.  Capital employed was negatively impacted by the $119 million reversal of U.S. income tax valuation allowances on March 31, 2014.  See Note 8 of the Notes to Consolidated Financial Statements for further information.

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.  We believe that ROACE provides investors with helpful information about our performance, our ability to provide an acceptable return on capital, and our ability to fund future growth.  This measure may not be comparable 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 2015
   
Fiscal 2014
 
Operating income
 
$
52.7
   
$
37.2
 
Restructuring expenses
   
4.7
     
16.1
 
Impairment charges
   
7.8
     
3.2
 
Gain on sale of wind tunnel
   
(3.2
)
   
-
 
Other adjustments (a)
   
3.2
     
4.8
 
Subtotal
   
65.2
     
61.3
 
Tax applied at 30% rate
   
(19.6
)
   
(18.4
)
Noncontrolling interest
   
(1.0
)
   
(1.5
)
Operating income - adjusted
 
$
44.6
   
$
41.4
 
                 
Average capital employed (see calculation below)
 
$
570.5
   
$
475.5
 
                 
ROACE
   
7.8
%
   
8.7
%
                 
Capital employed (debt + Modine shareholders' equity):
               
Beginning of fiscal year
 
$
589.2
   
$
429.3
 
June 30
   
604.5
     
440.0
 
September 30
   
582.0
     
460.0
 
December 31
   
572.0
     
459.2
 
End of fiscal year
   
504.7
     
589.2
 
Average capital employed (b)
 
$
570.5
   
$
475.5
 
 
  (a) In fiscal 2015, other adjustments consisted of a $3.2 million charge in our South America segment associated with a legal matter in Brazil; see Note 19 of the Notes to Consolidated Financial Statements for further information. In fiscal 2014, other adjustments primarily consisted of $4.3 million of accelerated depreciation related to production equipment that is no longer used in Germany due to manufacturing process changes.
  (b) Average capital employed represents the sum of capital employed for the five most recent quarter-end dates, divided by five.
 
Products

We offer a broad line of products that are categorized as a percentage of net sales as follows:

   
Fiscal 2015
   
Fiscal 2014
 
Modules/Assemblies*
   
25
%
   
26
%
Oil coolers
   
16
%
   
15
%
HVAC equipment
   
13
%
   
11
%
EGR coolers
   
12
%
   
12
%
Charge air coolers
   
10
%
   
11
%
Condensers
   
10
%
   
9
%
Radiators
   
8
%
   
9
%
Other
   
6
%
   
7
%

*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 our products are increasingly competitive and have changed significantly in the past few years.  Our traditional OEM customers are faced with dramatically increased international competition and have expanded their global manufacturing footprint to compete in local markets.  Some of these market changes have caused us 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, we have expanded and continue to expand our geographic footprint, in part to provide more flexibility to serve our customers around the globe.  Our customers also continue to ask us, as well as their other primary suppliers, to provide research and development (“R&D”), design, and validation support for new potential projects.  This combined work effort often results in stronger customer relationships and more partnership opportunities for us.  It can also introduce risk, to the extent that these requests come at a time when actual business awards are pending.

Business Segments

We have assigned specific businesses to segments 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 our chief operating decision maker.  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.  During fiscal 2015, we changed the name of our Commercial Products segment to Building HVAC in order to better reflect the nature of the segment’s product lines.  There were no changes to the operations or reported financial results of the segment as a result.  Financial information related to our operating segments is included in Note 21 of the Notes to Consolidated Financial Statements.

North America, South America, Europe, and Asia Segments

The continued globalization of our OEM customer base has led to the necessity of viewing our strategic approach, product offerings and competitors on a global basis.  This trend offers significant opportunities for us with our market positioning, including our presence in key global markets (U.S., Europe, Brazil, China, India, South Korea, Japan, Russia, and Mexico) and a global product-based organization with expertise to solve technical challenges.  We are recognized for having strong technical support, product breadth and the ability to support global standard designs for our customers.
 
Our main vehicular competitors, AKG Group, BorgWarner, Dana Corporation, Delphi Corporation, Denso Corporation, Mahle Behr, Tata Toyo, TitanX, T. Rad Co. Ltd., Valeo SA, Visteon Corporation and Zhejiang Yinlun Machinery Co. Ltd., have a multi-regional or worldwide presence.  Increasingly, we face heightened competition as these competitors expand their product offerings and manufacturing footprints through expansion into low-cost countries or low-cost sourcing initiatives.  In addition, competitors from some of the low-cost regions are aligning their presence for OEM market expansion.

The North America, South America, Europe, and Asia segments represent our original equipment segments and serve the following markets:

Commercial Vehicle

Market Overview – During fiscal 2015, the North America commercial vehicle market experienced significant volume improvements, particularly in heavy-duty trucks, and we expect the market to remain relatively strong in fiscal 2016.  Favorable economic conditions and freight fundamentals suggest solid underlying freight demand and improved profits for truck fleets, although these gains may be offset by the introduction of new government regulations.  In recent years, new trucks in the U.S., Canada, and the Eurozone have become more expensive due to enhanced vehicle technology, but the enhancements have resulted in improved fuel economy.  Truck buyers making initial capital outlays can expect to experience improved fuel economy and reduced fuel expenses.  These market conditions, coupled with older truck fleets and tight shipping capacity, are expected to result in year-over-year increases in North America truck production.  In Europe, we anticipate Euro 6 commercial vehicle orders to remain relatively slow in the near term, an effect persisting from the pre-buy of Euro 5 truck platforms during fiscal 2014 and compounded by recent unfavorable economic conditions in certain European countries.  Despite these recent challenges, we expect commercial vehicle demand in Europe to improve in fiscal 2016 compared with fiscal 2015.

Other trends influencing the commercial vehicle market include a call by global commercial vehicle manufacturers to standardize U.S., Canada, and Eurozone emission regulations.  If global truck OEMs are successful, this likely would lead to further consolidation of our customer base and competitors, as they leverage higher volumes, consolidate development costs, and rationalize distribution channels.   Additionally, truck makers are evaluating alternative powertrains and fuels, electrification, waste heat recovery and other technologies aimed to improve vehicle efficiency.

OEMs continue to expect greater supplier support and seek new technology solutions at lower prices for their thermal management needs.  In general, this creates a challenge to the supply base, but also an opportunity for suppliers who develop innovative solutions at a competitive cost.  Global standardization, fuel economy and emissions regulations are driving the advancement of product development worldwide and are creating demand for incremental thermal transfer products that we are well positioned to support.

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); and auxiliary coolers (transmission and retarder oil coolers and power steering coolers).

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

Primary Competitors – Mahle Behr; TitanX; T. Rad Co. Ltd.; BorgWarner; and Tata Toyo.

Off-Highway

Market Overview – The global off-highway markets declined during fiscal 2015.  The U.S. agricultural market has been under pressure from low commodity prices and associated demand, a trend that we expect to continue in fiscal 2016.  We expect these markets will continue to be negatively impacted by higher used equipment inventories, which could suppress new equipment sales, the absence of tax benefits available to customers, and the uncertain interest rate environment.  We expect modest improvements in the European construction and agricultural equipment markets, as we expect Eurozone economic conditions to slowly improve, aided by recent monetary stimulus efforts.  Many mining equipment buyers continued to cut capital investment plans as it appears this market is progressing through a multiple-year cycle of demand declines.  The mining equipment markets remained depressed during fiscal 2015 and are showing little signs of improving in fiscal 2016, especially in the U.S.  The construction market was mixed in fiscal 2015, as some regions began to show signs of improvement during the year, while others remained depressed.  In South America, we anticipate a decline in the agricultural market during fiscal 2016. In Asia, we expect that the China and Korea excavator markets will remain depressed.
 
Overall, off-highway market trends include a migration toward global machine platforms, where economically feasible, driving the multi-region assembly of a common design platform.  OEMs often prefer global suppliers with local production capabilities.  We are recognized as having strong technical support capabilities, product breadth, and the ability to support global standard designs and local manufacturing operations for our customers.

Products – Powertrain cooling (engine cooling modules, radiators, condensers, charge air coolers, fuel coolers and 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, agricultural, and mining equipment and engine manufacturers, and industrial manufacturers of material handling equipment, generator sets and compressors.

Primary Competitors – Adams Thermal Systems Inc.; AKG Group; Denso Corporation; Zhejiang Yinlun Machinery Co., Ltd.; ThermaSys Corp.; Doowon; Donghwan; T. Rad Co. Ltd.; Mahle Industrial Thermal Systems; KALE OTO RADYATÖR; and RAAL.

Automotive

Market Overview – The global automotive market improved in most regions during fiscal 2015, and we expect this trend to continue in fiscal 2016, supported by favorable oil prices and accommodative monetary policies.  Structurally, albeit slowly, the automotive market is beginning to move away from traditional internal combustion engines towards alternative powertrains, such as electric, hybrid, or fuel cell.  This shift is expected to increase the thermal requirements for these vehicles and we are capitalizing on this trend by applying our base heat transfer components to new applications.  We expect our global automotive market production to increase in fiscal 2016, with modest improvements in both North America and Europe and new product launches driving sales volume growth in Asia.

Products – Powertrain cooling (engine cooling assemblies, radiators, condensers and 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 power sports vehicle and engine manufacturers.
 
Primary Competitors – Mahle Behr; Dana Corporation; Delphi Corporation; Denso Corporation; Visteon Corporation; BorgWarner; and Valeo SA.

Building HVAC Segment

Market Overview – The North American heating market has experienced significant volume increases over the past two years.  We expect modest improvement in the North American heating market in fiscal 2016, given the significant market growth seen in the past two fiscal years.  We anticipate market demand for our data center cooling, ventilation, and geothermal heat pump products to increase in fiscal 2016.  Continued growth in global computing power, coupled with increasing requirements for energy-efficient and green solutions, will continue to drive increased demand for our data center cooling products, especially our high-density and free-cooling solutions.  Likewise, a steadily-improving economy, improvement in construction markets, and energy efficiency legislation is expected to drive increased demand for our ventilation and geothermal products.

Products – Unit heaters (gas-fired, hydronic, electric and oil-fired); duct furnaces (indoor and outdoor); infrared units (high- 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; air-handling units; chillers; ceiling cassettes; and 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, hotels, restaurants, hospitals, warehousing, manufacturing, and food and beverage processing.

Primary Competitors – Lennox International Inc. (ADP); CES (Reznor); Mestek Inc. (Sterling); Emerson Electric Company (Liebert); Stulz; Schneider Electric (APC / Uniflair); Johnson Controls, Inc. (York); Daikin (McQuay International); System Air (ChangeAir); Bard Manufacturing; and Aaon, Inc.

Geographical Areas

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

North America
 
South America
 
Europe
 
Asia/Pacific
 
Middle East/Africa
                 
United States
 
Brazil
 
Austria
 
China
 
United Arab Emirates
Mexico
     
Germany
 
India
 
South Africa
       
Hungary
 
Japan
   
       
Italy
 
South Korea
   
       
Netherlands
       
       
Russia
       
       
United Kingdom
       

Our non-U.S. subsidiaries and affiliates manufacture and sell a number of vehicular, building HVAC, 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.

Exports

Export sales from the U.S. to foreign countries as a percentage of net sales were 9 percent, 10 percent, and 7 percent in fiscal 2015, 2014 and 2013, respectively.

We believe our international presence has positioned us to share profitably in the anticipated long-term growth of the global vehicular, commercial, industrial, and building HVAC markets.  We are committed to increasing our involvement and investment in international markets in the years ahead.

Foreign and Domestic Operations

Financial information relating to our foreign and domestic operations is included in Note 21 of the Notes to Consolidated Financial Statements.

Customer Dependence

Our ten largest customers, certain of which are conglomerates, accounted for 63 percent of our sales in fiscal 2015.  These customers, listed alphabetically, were: BMW; Caterpillar; Daimler AG (including Daimler Trucks, Mercedes- Benz, Mitsubishi Fuso Trucks, Thomas Buses and Western Star Trucks); Deere & Company; Denso Corporation; Ford Motor Co.; Navistar; Volkswagen AG (including Audi, MAN, Porsche and Scania); Volvo; and ZF Friedrichshafen AG.  In fiscal 2015, Daimler AG and Volkswagen AG each accounted for 10 percent or more of our sales.  In fiscal 2014 and 2013, Daimler AG was the only customer that accounted for 10 percent or more of our sales.  Generally, we supply products to our customers on the basis of individual purchase orders received from them.  When it is in the customer's and our best interests, we utilize long‑term sales agreements to minimize investment risks and 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

Our operating segments maintain their own inventories and production schedules.  We believe that our current production capacity is capable of handling the sales volume expected in fiscal 2016 and beyond.

Raw Materials

Aluminum, nickel and steel are purchased from several domestic and foreign suppliers.  In general, we do not rely on any one supplier for these materials, which are, for the most part, available from numerous sources in quantities required by us.  The supply of copper and brass material is highly concentrated between two global suppliers.  We normally do not experience material shortages and believe that our suppliers’ production of these metals will be adequate throughout the next fiscal year.  Metals pricing with our raw material and major fabricated component suppliers are typically adjusted on a quarterly basis.  When possible, we have made material pass-through arrangements with key customers, which allow us to pass material cost increases and decreases to our customers.  When utilized, however, these pass-through arrangements are typically limited to the underlying cost of the material based upon the London Metal Exchange, and do not include related premiums or fabrication costs.  In addition, there can be a time lag between the time of the material price increase or decrease and the time that we adjust the price with our customer.  This time lag typically ranges from three months to one year.

Patents

We own or license numerous patents related to our products and operations.  These patents and licenses have been obtained over a period of years and expire at various times.  Because we have many product lines, we believe that our business as a whole is not materially dependent upon any particular patent or license, or any particular group of patents or licenses. We consider each of our patents, trademarks and licenses to be of value and aggressively defend our rights throughout the world against infringement. We have been granted and/or acquired more than 2,000 patents worldwide over the life of our company.

Research and Development

We remain committed to our vision of creating value through technology and innovation.  We focus our engineering and R&D efforts on solutions that meet challenging heat transfer needs of OEMs and other customers within the commercial vehicle, automotive, construction, agricultural, industrial and building HVAC markets.  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 customer standards as customers work to ensure compliance with increasingly stringent global emissions and energy efficiency requirements.  Our heritage includes a depth and breadth of expertise in thermal management that, combined with our global manufacturing presence, standardized processes, and state-of-the-art technical resources, enables us to rapidly bring customized solutions to our customers.

R&D expenditures, including certain application engineering costs for specific customer solutions, were $62 million in fiscal 2015 and 2014 and $68 million in fiscal 2013.  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, our R&D groups work closely with our customers on special projects and system designs.  Projects include next generation aluminum radiators, charge air coolers and waste heat recovery systems for the automotive, commercial vehicle, agricultural and construction markets, and EGR technology, which enables our customers to efficiently meet tighter regulatory emission standards.  Most of our current R&D activities are focused on internal development in the areas of powertrain cooling, engine, and building HVAC products.  We also collaborate with several industry, university, and government-sponsored research organizations that conduct research and provide data on technical topics of interest to us for practical applications in the markets we serve.  We received $1 million, $1 million, and $2 million of reimbursements from government-sponsored organizations during fiscal 2015, 2014 and 2013, respectively.

We continue to identify, evaluate and engage in external research projects that complement our strategic internal research initiatives in order to further leverage our significant thermal technology expertise and capability.
 
Quality Improvement

Through our global Quality Management System (“QMS”), our 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 facility.  While customer expectations for performance, quality and service have risen continuously over recent years, our QMS has allowed us to drive improvements in quality performance and has enabled the ongoing delivery of products and services that meet or exceed customer expectations.

The global QMS operates within the context of the Modine Operating System (“MOS”), which focuses on well-defined improvement principles and leadership behaviors to engage our teams in driving rapid improvements.  We drive sustainable and systematic continuous improvement throughout all functional areas and operating segments of the organization by utilizing the principles, processes and behaviors that are core to these systems.

Environmental, Health and Safety Matters

We are committed to preventing pollution, eliminating waste and reducing environmental risks.  Our facilities maintain Environmental Management System (“EMS”) certification to the international ISO14001 standard through independent third-party audits. All of our locations have established specific environmental improvement targets and objectives for the upcoming fiscal year.

In fiscal 2015, our carbon emissions, resulting from our on-site use of natural gas and propane and from our use of electricity generated by off-site sources, decreased slightly (normalized for sales) compared with the prior year.  We will continue to identify and implement carbon reduction opportunities when feasible over the upcoming fiscal year.

During fiscal 2015, our water consumption decreased 10 percent, saving nine million gallons of water. This decrease was a continuation of consecutive improvements over the past seven years, during which we have realized a cumulative 44 percent decrease in our water usage.  In fiscal 2015, we consumed 67 million fewer gallons of water than we did in fiscal 2008. As in previous years, we continue to systematically identify opportunities and implement measures to reduce waste and conserve natural resources within the EMS structure.

Our fiscal 2015 volatile organic air emissions decreased 20 percent compared with fiscal 2014, primarily due to operational improvements in a solvent cleaning process.  We are actively pursuing alternative manufacturing processes that use more environmentally-friendly materials.

Our commitment to environmental stewardship is reflected in our reporting of chemical releases, as monitored by the United States Environmental Protection Agency's Toxic Chemical Release Inventory program.  Our U.S. locations decreased their reported chemical releases by 98 percent over the 10-year period from 2003 to 2013. This long-term improvement is the result of manufacturing efficiencies and a transition to more environmentally-friendly manufacturing technologies and raw materials.

Our product portfolio reflects our sense of environmental responsibility.  We continue our 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 our Advanced Cooling System technology. These products provide increased fuel economies and enable combustion technologies that reduce harmful gas emissions. Our Building HVAC segment offerings, including the Airedale SchoolMate geothermal 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. Our geothermal products feature innovative heat pump technologies, providing energy savings and reduced carbon emissions in both heating and cooling seasons.

Obligations 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 we are 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 our currently-owned manufacturing facilities and two formerly-owned properties 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 Netherlands totaled $3.8 million at March 31, 2015.
 
We recorded a fiscal 2015 global Recordable Incident Rate (“RIR” as defined by OSHA) of 1.63, which increased slightly over the fiscal 2014 rate of 1.59.  Our long-term safety performance, as indicated by RIR, improved 18 percent over the past five years.  We have consistently out-performed the private-industry RIR average, which, by comparison, was 3.10 in 2013.

For our U.S. locations, annual workers’ compensation claims reported in fiscal 2015 decreased approximately $2 million as compared with fiscal 2010, representing an 84 percent improvement. We attribute these lower claims to the continued strengthening of our safety culture.

Our behavior-based safety program is a proactive global effort under which we seek to correct at-risk behaviors, and positively reinforce safe behaviors. Our behavior-based safety program is our long-term commitment to improving our safety culture.

Employees

We employed approximately 6,900 persons worldwide as of March 31, 2015.

Seasonal Nature of Business

Our overall operating performance is generally not subject to a significant degree of seasonality, as sales to OEM customers are dependent upon market demand for new vehicles.  However, our second fiscal quarter production schedules are typically impacted by customer summer shut downs and our third fiscal quarter is affected by holiday schedules.   Additionally, our Building HVAC segment experiences some seasonality as demand for HVAC products can be affected by heating and cooling seasons, weather patterns, construction, and other factors.  Generally, sales volume within the Building HVAC segment is stronger in our second and third fiscal quarters, corresponding with demand for heating products.

Working Capital

We manufacture products for the original equipment markets on an as-ordered basis, which makes large inventories of such products unnecessary.  In our Building HVAC segment, we maintain varying levels of finished goods inventory due to seasonal demand and certain sales programs.  In these areas, we make use of extended payment terms, not to exceed 90 days, for our Building HVAC customers on a limited basis.  In our South America segment, we maintain higher levels of aftermarket product inventory in order to timely meet customer needs in the Brazilian automotive and commercial vehicle aftermarkets.  We do not experience a significant number of returned products within any of our operating segments.

Available Information

We make available, free of charge through our website, www.modine.com (Investors 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 directors and employees, including the principal executive officer, the principal financial officer, and the principal accounting officer;
- 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.
RISK FACTORS.

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

A.
MARKET RISKS

Customer and Supplier Matters

Our OEM business, which accounts for approximately 84 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 as our customers’ sales and production levels are affected by general economic conditions, including access to credit, the price of fuel and electricity, employment levels and trends, interest rates, labor relations issues, regulatory requirements, trade agreements and other market 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 a reduction in our sales, thereby adversely impacting our results of operations and financial condition.

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, along with 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 response, we must reduce our operating costs in order to maintain profitability.  We have taken, and will continue to take, steps to reduce our operating costs to offset customer price reductions; however, price reductions adversely affect our profit margins and are expected to do so in the future.  If we are unable to avoid price reductions for our customers, or if we are unable to offset price reductions through improved operating efficiencies and manufacturing processes, sourcing alternatives, technology enhancements and other cost reduction initiatives, our results of operations and financial condition could be adversely affected.

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 our revenue and profitability to suffer.  We principally compete for new business both during the initial 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 marketing 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.
 
We could be adversely affected if we experience shortages of components or materials from our suppliers.

In an effort to manage and reduce our cost of purchased goods and services, we, like many suppliers and customers, have been consolidating our supply base.  As a result, we are dependent upon limited sources of supply for certain components used in the manufacture of our products.  We select our suppliers based on total value (including price, delivery and quality), taking into consideration their production capacities, financial condition and ability to meet our 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, financial instability, or other problems experienced by our 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, we would be unable to meet our production schedules and miss product delivery dates, which would adversely affect our sales, results of operations and customer relationships.

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

Increases in the costs of materials could have a significant effect on our results of operations and on those of others in our industry.  We have sought to alleviate this risk by including material pass-through provisions in our customer contracts when possible.  Under these arrangements, we can pass certain material cost increases and decreases to our 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 our exposure, we have, from time to time, entered into forward contracts to hedge a portion of our forecasted aluminum and copper purchases.  However, these 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 costs previously paid directly by OEMs.  OEM customers often 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 product.  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.

Competitive Environment

We face strong competition.

The competitive environment has changed dramatically over the past few years as our traditional OEM customers, faced with intense international competition, have expanded their sourcing of components. As a result, we have experienced competition from suppliers in other parts of the world that enjoy economic advantages, such as lower labor costs, lower health care costs, lower tax rates, lower costs associated with legal compliance, and, in some cases, export or raw materials subsidies. Increased competition could adversely affect our business and our results of operations.

Exposure to Foreign Currencies

As a global company, we are subject to foreign currency rate fluctuations, and a 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 lower 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 results of operations and financial condition.
 
B.
OPERATIONAL RISKS

Challenges of Maintaining a Competitive Cost Structure

We may be unable to maintain competitive cost structures within our business.

In efforts to optimize our cost structure and improve efficiency of our operations, we have engaged in restructuring activities in our Europe, North America and South America segments.  Successful implementation of these cost-reduction initiatives, and in particular the consolidation of manufacturing facilities in Europe and North America and headcount reductions in Brazil due to the economic slowdown, is critical to our future competitiveness and ability to improve profitability and generate a level of cost savings sufficient to effectively compete within those segments and across Modine as a whole.

Challenges of Product Launches

We are in the midst of launching a significant number of new programs at our facilities across the world.  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.  We commit significant time and financial resources to ensure the successful launch of new products and programs.  Managing product launches is difficult as we are launching many new products and programs in each of our segments.  Due to our high level of launch activity, we must 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 or 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 production inefficiencies or long-lived asset impairment charges.

Complexities of Global Presence

We are subject to risks related to our international operations.

We have manufacturing and technical facilities located in North America, South America, Europe, Asia, and Africa.  In fiscal 2015, 55 percent of our sales were from non-U.S. operations.  Consequently, our global operations are subject to numerous risks and uncertainties, including changes in monetary and fiscal policies, trade restrictions or prohibitions, import or other charges or taxes, fluctuations in foreign currency exchange and interest rates, limitations on the repatriation of funds, changing economic conditions, unreliable intellectual property protection and legal systems, insufficient infrastructures, social unrest, political instability and disputes, incompatible business practices, and international terrorism.  In addition, compliance with multiple and often conflicting laws and regulations of various countries is burdensome and expensive.

Reliance upon Technology Advantage

If we cannot differentiate ourselves from our competitors with our technology, our existing and potential customers may seek lower prices 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 and cannot differentiate ourselves from our competitors with our technology or to provide high quality products and services, we may experience price erosion, lower sales, and lower margins.  Significant technological developments by others also could adversely affect our business and results of operations.
 
Developments or assertions by or against us relating to intellectual property rights could adversely affect our business.

We own significant intellectual property, including a large number of patents, trademarks, copyrights and trade secrets.  Our 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 us relating to intellectual property rights could adversely affect our business and 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, or a material breach of our information security, could result in delays in receiving inventory and supplies or filling customer orders, and/or the release of otherwise confidential information, adversely affecting our customer service and relationships as well as our reputation.  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 adverse effect on our business, financial condition, results of operations and reputation.

Claims and Litigation

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

In the event our products fail to perform as expected, we are exposed to warranty and product liability claims and may be required to participate in a recall or other field campaign of such products.  Many of our OEM customers have extended warranty protection for their 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 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 results of operations.

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 and there can be no assurance we will avoid 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 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 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 19 of the Notes to Consolidated Financial Statements for further discussion.

C.
STRATEGIC RISK

Growth Strategies

Inability to identify and execute acquisitions may adversely impact our business and operating results.

We expect to pursue growth opportunities through acquisitions and business ventures.  There can be no assurance we will be able to identify attractive targets and successfully complete transactions in the future.  If we are unable to complete additional acquisitions, our growth may be limited.  Recent and future acquisitions will require integration of operations, sales and marketing, information technology, finance, and administrative functions.  If we are unable to successfully integrate acquisitions and operate these businesses profitably, we may not achieve the financial or operational success expected from the acquisitions.
 
D.
FINANCIAL RISKS

Liquidity and Access to Cash

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

We have several defined benefit pension plans that cover most of our domestic employees hired on or before December 31, 2003.  Our 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.  Our domestic plans have an unfunded balance of $80 million.  During fiscal 2016, we anticipate making funding contributions totaling approximately $7 million related to these domestic plans.  Funding requirements for our defined benefit plans are dependent upon, among other things, interest rates, underlying asset returns, mortality rate tables, and the impact of legislative or regulatory changes.  Should changes in actuarial assumptions or other factors result in the requirement of significant additional funding contributions, our liquidity position could be adversely affected.

Income Taxes

We may be subject to additional income tax expense or exposure due to negative or unexpected tax consequences.

Unfavorable changes in the financial outlook of our operations in certain jurisdictions could lead to adverse changes in our valuation allowance assertions for our deferred tax assets.  Additionally, the subjectivity of or changes in tax laws and regulations in jurisdictions where we have significant operations could materially affect our results of operations.  We are subject to tax audits by governmental authorities in each taxing jurisdiction in which we operate.  Unfavorable or unexpected outcomes from one or more such tax audits could adversely affect our results of operations and financial position.
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.
 
ITEM 2.
PROPERTIES.

We operate manufacturing facilities in the U.S. and multiple foreign countries.  Our world headquarters, including general offices and laboratory, experimental and tooling facilities, is located in Racine, Wisconsin.  We have additional technical support functions 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, 2015.  Properties with less than 20,000 square feet of building space have been omitted from this table.

Location of Facility
Building Space
Primary Use
Owned or Leased
 
North America Segment
 
Lawrenceburg, TN
453,800 sq. ft.
Manufacturing
143,800 Owned;
 
310,000 Leased
 
Nuevo Laredo, Mexico
370,500 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
 
Joplin, MO
139,500 sq. ft.
Manufacturing
Owned
 
Laredo, TX
45,000 sq. ft.
Warehouse
Leased
 
 
 
 
 
 
Europe Segment
 
Bonlanden, Germany
205,300 sq. ft.
Administrative & technology center
Owned
 
Kottingbrunn, Austria
220,600 sq. ft.
Manufacturing
Owned
 
Pontevico, Italy
150,700 sq. ft.
Manufacturing
Owned
 
Pliezhausen, Germany
125,900 sq. ft.
Manufacturing
48,400 Owned;
 
77,500 Leased
 
Mezökövesd, Hungary
154,000 sq. ft.
Manufacturing
Owned
 
Wackersdorf, Germany
109,800 sq. ft.
Assembly
Owned
 
Kirchentellinsfurt, Germany
107,600 sq. ft.
Manufacturing
Owned
 
Uden, Netherlands
83,200 sq. ft.
Manufacturing
60,600 Owned;
 
22,600 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 & technology center
Owned
 
 
 
 
 
 
Asia Segment
 
Chennai, India
118,100 sq. ft.
Manufacturing
Owned
 
Changzhou, China
107,600 sq. ft.
Manufacturing
Owned
 
Shanghai, China
80,300 sq. ft.
Manufacturing
Leased
 
Cheonan, South Korea
46,300 sq. ft.
Manufacturing (Joint Venture)
Leased
 
 
 
 
 
 
Building HVAC Segment
 
Leeds, United Kingdom
269,100 sq. ft.
Administrative & manufacturing
Leased
(a)
Leeds, United Kingdom
104,400 sq. ft.
Administrative & manufacturing
Leased (temporary)
(a)
Leeds, United Kingdom
55,700 sq. ft.
Manufacturing
Leased (temporary)
(a)
Leeds, United Kingdom
27,200 sq. ft.
Warehouse
Leased (temporary)
(a)
Consett, United Kingdom
30,000 sq. ft.
Administrative & manufacturing
Owned
 
Consett, United Kingdom
20,000 sq. ft.
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
 

 
(a)
Our Leeds, United Kingdom facility suffered significant destruction as a result of a fire on September 6, 2013.  We transferred operations to other temporarily-leased facilities in Leeds, United Kingdom, which have been included in the table above, and we are in the process of rebuilding the facility.  See Note 2 of the Notes to Consolidated Financial Statements for further information.
 
With the exception of our Leeds, United Kingdom facility that suffered significant destruction caused by fire (see (a) above), we consider our plants and equipment to be well maintained and suitable for their purposes.  We review our manufacturing capacity periodically and make a determination as to our need to expand or, conversely, rationalize our facilities as necessary to meet changing market conditions and our needs.

ITEM 3.
LEGAL PROCEEDINGS.

The information required hereunder is incorporated by reference from Note 19 of the Notes to Consolidated Financial Statements.

ITEM 4.
MINE SAFETY DISCLOSURES.

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT.

The following sets forth the name, age (as of March 31, 2015), recent business experience and certain other information relative to each executive officer of the Company.

Name
 
Age
 
Position
Scott L. Bowser
 
50
 
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
 
57
 
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 Ford Motor Company and Visteon Corporation.
 
Margaret C. Kelsey
 
50
 
Vice President, Legal and Corporate Communications, General Counsel and Secretary (April 2014 – present); Vice President, General Counsel and Secretary (November 2008 – March 2014); 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
 
46
 
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
 
54
 
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.
 
Matthew J. McBurney
 
45
 
Vice President, Building HVAC (May 2011 – Present); Director, Commercial Products Group (CPG) – North America (June 2007 – May 2011); Business and Product Development Manager – CPG (November 2006 – June 2007); Business Development Manager – CPG (May 2006 – October 2006); Plant Superintendent at the Company’s Richland, SC plant (November 2003 – May 2006); Program Manager - Automotive (March 2000 – November 2003). In addition, from 1992 through 2000, Mr. McBurney held various engineering positions at the Company.  Prior to joining Modine, Mr. McBurney was a Production Manager for Avenue International Radiator, Inc.
 
Holger Schwab
 
50
 
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
 
46
 
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.

Executive Officer positions are designated in our 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 approves 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 us 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.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is listed on the New York Stock Exchange.  Our trading symbol is MOD.  The table below shows the range of high and low closing sales prices for our common stock for fiscal 2015 and 2014.  As of March 31, 2015, shareholders of record numbered 2,762.

   
Fiscal 2015
   
Fiscal 2014
 
Quarter
 
High
   
Low
   
High
   
Low
 
First
 
$
17.51
   
$
13.46
   
$
11.15
   
$
8.68
 
Second
   
16.15
     
11.87
     
14.78
     
10.88
 
Third
   
13.96
     
11.25
     
15.17
     
11.92
 
Fourth
   
13.82
     
12.11
     
15.69
     
10.79
 

We did not pay dividends during fiscal 2015 or 2014.  Under our debt agreements, we are permitted to pay dividends on our common stock, subject to certain restrictions 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.  We currently do not intend to pay dividends in fiscal 2016.

PERFORMANCE GRAPH

The following graph compares the cumulative five-year total return on our 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.
 
 
       
Indexed Returns
 
   
Initial Investment
   
Years ended March 31,
 
Company / Index
 
March 31, 2010
   
2011
   
2012
   
2013
   
2014
   
2015
 
Modine Manufacturing Company
 
$
100
   
$
143.59
   
$
78.56
   
$
80.96
   
$
130.34
   
$
119.84
 
Russell 2000 Index
   
100
     
125.79
     
125.56
     
146.03
     
182.39
     
182.39
 
S&P MidCap 400 Industrials Index
   
100
     
134.13
     
137.84
     
171.58
     
211.94
     
225.97
 
 
ITEM 6.
SELECTED FINANCIAL DATA.

The following data should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this report.

   
Years ended March 31,
 
(in millions, except per share amounts)
 
2015
   
2014
   
2013
   
2012
   
2011
 
                     
Net sales
 
$
1,496.4
   
$
1,477.6
   
$
1,376.0
   
$
1,577.2
   
$
1,448.2
 
Earnings (loss) from continuing operations
   
22.2
     
131.9
     
(22.8
)
   
38.0
     
8.3
 
Total assets
   
931.6
     
1,032.3
     
818.8
     
893.5
     
917.7
 
Long-term debt - excluding current portion
   
129.6
     
131.2
     
132.5
     
141.9
     
138.6
 
Earnings (loss) per share from continuing operations - basic:
   
0.45
     
2.75
     
(0.52
)
   
0.81
     
0.18
 
Earnings (loss) per share from continuing operations - diluted:
   
0.44
     
2.72
     
(0.52
)
   
0.80
     
0.18
 

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

  · During fiscal 2015, we recorded a $7.8 million goodwill impairment charge in our South America segment.  See Note 14 of the Notes to Consolidated Financial Statements for additional information.

  · During fiscal 2015, 2014, and 2013, we incurred $4.7 million, $16.1 million and $17.0 million, respectively, of restructuring expenses.  See Note 6 of the Notes to Consolidated Financial Statements for additional information.

  · During fiscal 2014, we reversed $119.2 million of U.S. deferred tax asset valuation allowances.  See Note 8 of the Notes to Consolidated Financial Statements for additional information.

  · During fiscal 2014, 2013, 2012, and 2011, we recorded long-lived asset impairment charges of $3.2 million, $25.9 million, $2.5 million, and $3.5 million, respectively.  See Note 6 of the Notes to Consolidated Financial Statements for additional information.

  · During fiscal 2011, we recognized $19.9 million of total costs for the early extinguishment of debt and the write-off of debt issuance costs.

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

Overview
 
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 employ approximately 6,900 persons 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.

We have established the following Enduring Goals to guide our day-to-day actions and business development strategies, as we continuously strive towards these goals:

  · Growth: To grow our business and achieve a 10 percent average annual revenue growth rate;
  · Return on Capital:  To attain a 15 percent consolidated return on average capital employed (“ROACE”), which helps ensure selectiveness of growth opportunities and avoidance of low-margin or value-destroying business;
  · Diversification:  To build a more diversified business model in order to be less vulnerable to market cyclicality and commercial pressures; and
  · Fastest improving:  To become the fastest improving company in our industry by building on our culture of trust and continuous improvement.
 
Development of New Products and Technology
 
Our ability to develop new products and technologies based upon 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 processes.  This has resulted, and we expect it 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, which enable 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, and develop new products and make additional investments to fill those gaps.  Our acquisitions within our Building HVAC 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, are examples of our business development activities.  See Note 3 of the Notes to 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.  In efforts to optimize our cost structure and improve efficiency of our operations, we have engaged in restructuring activities in our North America, Europe, and South America segments.  In addition, costs for materials and purchased parts rise from time to time due to global increases in commodity markets.  As a result, 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. We place particular emphasis on working capital improvement and prioritization of capital for investment and disposals.
 
Our executive management incentive compensation (annual cash incentive) plan for fiscal 2015 was based upon ROACE and free cash flow, driving our focus on alignment of management and 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 our company.  The plan is comprised of stock options, restricted stock, and performance-based stock awards.  The performance-based stock awards for the fiscal 2015 through 2017 performance period are based upon three-year average consolidated ROACE and three-year average annual revenue growth.

To aid in management’s focus on guiding our long-term strategies, 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 our company.
 
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 2015 net sales)
 
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), and 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 2015 increased slightly compared with the prior year.  The commercial vehicle market improved from the prior year and demonstrated sustained strength throughout fiscal 2015.  This trend was driven by higher freight volumes, as well as fleet replacements of aging trucks.  We are anticipating strong commercial vehicle sales volume to continue into fiscal 2016, especially for Class 8 trucks.  The automotive markets remained strong throughout fiscal 2015, consistent with the trend experienced in the prior year.  We are anticipating the automotive markets will show modest improvements in fiscal 2016.  Overall, the off-highway markets weakened during fiscal 2015, with the most significant declines occurring in the agricultural market, as farmers decreased their investment in agricultural equipment based on lower crop prices.  We anticipate the agricultural market will remain depressed in fiscal 2016.  In addition, the mining market remained weak throughout fiscal 2015, as the mining industry was investing in less equipment, primarily due to lower oil and metal prices.  We anticipate the mining market will remain depressed in fiscal 2016 as commodity prices are forecasted to remain at relatively low levels.   The construction market was relatively consistent with the prior year, and we are not anticipating any significant changes in the outlook for residential or commercial construction during fiscal 2016.
 
Our North America business will continue to focus on growth in the markets where its products and manufacturing footprint create a competitive advantage.  Our strategy includes reducing lead times in order to more quickly bring new and updated products to market, as well as expanding our 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 pursuit of new business, including both organic and inorganic growth opportunities. We are working 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 are in the process of completing our planned closure of our McHenry, Illinois manufacturing facility and transfer of its production to other facilities within our segment.  We expect to complete this closure in the first six months of fiscal 2016 and to see the benefits of lower operating costs and improved scale efficiencies once the closure is complete.  In April 2015, we announced our intention to close our Washington, Iowa manufacturing facility over approximately 2-3 years.  As a result, we expect to incur approximately $2 million of employee severance-related costs during fiscal 2016 and $2-3 million of further restructuring and repositioning expenses during the closure period, in addition to temporary inefficiencies, as we transfer production to other facilities.  We anticipate annual savings of at least $9 million once the closure is complete.  We expect these targeted plant consolidation activities will result in a more competitive cost structure, thereby yielding additional revenue and growth opportunities.
 
Europe (38 percent of fiscal 2015 net sales)
 
Our Europe segment provides powertrain and engine cooling systems, as well as vehicular climate control components, to OEM end markets, including the automotive, commercial vehicle, and off-highway markets.  These systems include cooling modules, radiators, charge air coolers, oil cooling products, EGR products, retarder and transmission cooling components, and HVAC condensers.
 
Overall, economic conditions in Europe remained relatively flat during fiscal 2015 as compared with the prior year.  Sales to the commercial vehicle market experienced moderate growth, primarily driven by the Euro 6 ramp-up, which began in late fiscal 2014.  The premium automotive market experienced moderate growth during fiscal 2015, while the off-highway market remained relatively flat compared with the prior year.  Sales volume growth during fiscal 2015, as compared with the prior year, was more than offset by an unfavorable impact of foreign currency exchange rate changes, namely the strengthening of the U.S. dollar versus the euro.  During fiscal 2015, our Europe segment substantially completed its combination of two manufacturing facilities in Germany into one, more competitive manufacturing operation.
 
We continue to focus on continuous improvements, low-cost country sourcing, and cost containment.  We expect continued price-reduction pressure from our customers, along with increased global customer service expectations and competition from competitors operating in low-cost countries.  Our objective with our restructuring actions has been to improve segment ROACE and strengthen our overall competitiveness.  As a result of our restructuring activities during the past several years, we believe our Europe segment is well-positioned for improved long-term financial results, driven by our strong customer reputation for technology, service, and program management.
 
South America (6 percent of fiscal 2015 net sales)
 
Our South America segment provides products to the 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 the automotive and commercial vehicle markets.  The majority of sales in our South America segment are to customers in Brazil.  Our key products within the South America segment include radiators, charge air coolers, oil coolers, auxiliary coolers (transmission, hydraulic, and power steering), and engine cooling modules.
 
Economic conditions in Brazil were generally weak during fiscal 2015, resulting in sales volume declines across the OEM markets that we serve, as compared with the prior year.  Higher interest rates and Brazil’s presidential election in 2014 caused uncertainty in the local markets and contributed to customers delaying purchases.  Despite these conditions, sales to the local aftermarkets remained relatively stable during fiscal 2015.  In response to the economic slowdown in Brazil, we implemented restructuring and cost reduction measures, including a headcount reduction plan, with the objective of reducing our cost structure to enable profitable operations despite lower sales volume.  During the fourth quarter of fiscal 2015, we recorded an $8 million goodwill impairment charge due to a decline in the South America segment’s financial outlook, driven by the weak Brazilian economy.
 
Although we anticipate realizing cost savings from our restructuring and headcount reduction plans and the ability to benefit from our improved cost structure when the economy improves, we expect challenging market conditions to continue in Brazil for fiscal 2016, driven by the overall slowdown of the Brazilian economy and rising inflation and utility rates.
 
Asia (5 percent of fiscal 2015 net sales)
 
Our Asia segment provides powertrain cooling systems and engine products to customers in the commercial vehicle, off-highway, and automotive markets.
 
During fiscal 2015, Asia segment sales volume improved, primarily due to new automotive program launches in China and higher sales across all markets in India.  Production levels at our manufacturing facility in Chennai, India increased compared with fiscal 2014, and we expect this trend to continue in fiscal 2016.  Our manufacturing facilities in China are continuing to ramp up production as well.  Our technology, performance, quality, and reputation have enabled us to win new engine products business in Asia.  Emissions standards in China and India have generally lagged behind those in North America and Europe.  As a result, some local on- and off-highway powertrain cooling customers focus on price more than technology.  This can make it more challenging for us to compete in some markets.  In the future, we expect to see a shift in these markets towards higher performing, more durable products, which we expect will provide us with additional powertrain cooling opportunities; however, we expect the Asia markets to remain cost-focused in the near term.
 
Our strategy in this segment is to accelerate growth and achieve sustained profitability. Our focus is on securing new business and further diversifying our product offering and customer base, while controlling costs and increasing our asset utilization and manufacturing capabilities.  We launched several new automotive programs during fiscal 2015 and plan to launch more in fiscal 2016.  We believe we are well positioned for growth and new programs.  We are also anticipating growth opportunities in connection with our joint venture in South Korea.
 
Building HVAC (13 percent of fiscal 2015 net sales)
 
Our Building HVAC segment manufactures and distributes a variety of HVAC products, primarily for commercial buildings and related applications in North America, Europe, the Middle East, 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, hospitals, 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, air-handling equipment, and rooftop 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, and higher efficiency requirements are growth drivers for our building HVAC products.  In fiscal 2015, sales volume for our North America heating products continued to improve, primarily due to general market growth and increased market share.  Our Airedale business in the U.K. continued to operate at temporary facilities during fiscal 2015 due to a fire during the second quarter of fiscal 2014 that destroyed the primary Airedale facility.  Sales for our Airedale U.K. business surpassed pre-fire levels during fiscal 2015.  We are currently reconstructing the facility that was destroyed by the fire and anticipate relocating operations to this new facility in late fiscal 2016.
 
We expect continued growth in the various HVAC markets we serve during fiscal 2016, although at varied rates.  The North America markets that we serve are heavily impacted by construction activity and building regulations.  Growth rates in these markets have recently increased as manufacturing, housing and business investment are rising.  In addition, we expect sales growth in the U.K. markets that we serve during fiscal 2016.  Our Building HVAC segment has grown through strategic acquisitions in recent years, such as Barkell, a manufacturer of custom air handling units located in the U.K., which we acquired in late fiscal 2014, and Geofinity, a manufacturer of geothermal heat pumps, which we acquired in fiscal 2013.  Both of these acquisitions enabled us to expand our product lines and sales channels.  We will continue to pursue growth opportunities in line with our overall business strategy.
 
Consolidated Results of Operations
 
Fiscal 2015 net sales increased $18 million, or 1 percent, from fiscal 2014, primarily due to sales increases in our Building HVAC, Asia, and North America segments, partially offset by lower sales in our South America segment, as economic conditions in Brazil were weak, and in our Europe segment, where sales volume increases were more than offset by unfavorable foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar during the year.  During fiscal 2015, we recorded $5 million of restructuring expenses in our Europe, North America, and South America segments, for restructuring activities intended to improve our cost structure and the efficiency of our operations.  We recorded an $8 million goodwill impairment charge in our South America segment during fiscal 2015, due to a decline in the financial outlook for the segment, driven by the weak Brazilian economy.  Also in fiscal 2015, we sold a wind tunnel in our Europe segment, which resulted in a gain of $3 million. Operating income in fiscal 2015 of $53 million increased $16 million compared with the prior year.
 
In fiscal 2014, sales increased $102 million, or 7 percent, from fiscal 2013, primarily due to increased sales volume across all of our business segments, except South America, which was unfavorably impacted by foreign currency exchange rate changes.  In fiscal 2014, we recorded $16 million of restructuring expenses and $3 million of impairment charges, primarily due to restructuring activities in our Europe and North America segments.  Operating income in fiscal 2014 of $37 million increased $38 million compared with fiscal 2013.

The following table presents our consolidated financial results on a comparative basis for the fiscal years ended March 31, 2015, 2014, and 2013.

   
Years ended March 31,
 
   
2015
   
2014
   
2013
 
(in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
Net sales
 
$
1,496
     
100.0
%
 
$
1,478
     
100.0
%
 
$
1,376
     
100.0
%
Cost of sales
   
1,249
     
83.5
%
   
1,240
     
83.9
%
   
1,167
     
84.8
%
Gross profit
   
247
     
16.5
%
   
238
     
16.1
%
   
209
     
15.2
%
Selling, general and administrative expenses
   
184
     
12.3
%
   
182
     
12.3
%
   
166
     
12.1
%
Restructuring expenses
   
5
     
0.3
%
   
16
     
1.1
%
   
17
     
1.2
%
Impairment charges
   
8
     
0.5
%
   
3
     
0.2
%
   
26
     
1.9
%
Gain on sale of wind tunnel
   
(3
)
   
-0.2
%
   
-
     
-
     
-
     
-
 
Operating income (loss)
   
53
     
3.6
%
   
37
     
2.5
%
   
(1
)
   
0.0
%
Interest expense
   
(12
)
   
-0.8
%
   
(12
)
   
-0.8
%
   
(13
)
   
-0.9
%
Other income (expense) – net
   
-
     
-
     
(1
)
   
-0.1
%
   
-
     
-
 
Earnings (loss) from continuing operations before income taxes
   
41
     
2.8
%
   
24
     
1.6
%
   
(13
)
   
-0.9
%
(Provision) benefit for income taxes
   
(19
)
   
-1.3
%
   
108
     
7.3
%
   
(10
)
   
-0.7
%
Earnings (loss) from continuing operations
 
$
22
     
1.5
%
 
$
132
     
8.9
%
 
$
(23
)
   
-1.7
%

Year Ended March 31, 2015 Compared with Year Ended March 31, 2014:

Fiscal 2015 net sales increased $18 million, or 1 percent, from fiscal 2014, primarily due to sales increases in our Building HVAC, Asia, and North America segments, partially offset by lower sales in our South America segment, as economic conditions in Brazil were weak, and in our Europe segment, where sales increases were more than offset by a $35 million unfavorable impact of foreign currency exchange rate changes.  In total, our fiscal 2015 sales were negatively affected by a $43 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar during the year.

Gross profit increased $9 million to $247 million in fiscal 2015 and gross margin increased 40 basis points to 16.5 percent, primarily due to sales volume improvements and lower warranty costs.

SG&A expenses in fiscal 2015 increased $2 million to $184 million compared with the prior year, primarily due to increased engineering and development costs and SG&A expenses at our Barkell business, which we acquired in the fourth quarter of fiscal 2014, partially offset by $5 million of recoveries from business interruption insurance during fiscal 2015 related to the Airedale fire.

Restructuring expenses decreased $11 million in fiscal 2015 compared with the prior year, due to lower restructuring costs in Germany, partially offset by higher severance-related costs in South America.

During fiscal 2015, we sold a wind tunnel in Germany that we no longer considered to be a core asset, and recognized a gain of $3 million.  In addition, we recorded a goodwill impairment charge of $8 million in our South America segment during fiscal 2015.  In fiscal 2014, we recorded $3 million of impairment charges, primarily related to restructuring actions in our Europe segment.

Operating income of $53 million in fiscal 2015 increased $16 million compared with fiscal 2014.  This improvement was primarily due to higher gross profit on increased sales volume, lower restructuring expenses, and the gain on the sale of the wind tunnel, partially offset by higher impairment charges and slightly higher SG&A expenses.

Our provision for income taxes was $19 million in fiscal 2015 compared with a benefit from income taxes of $108 million in fiscal 2014.  The provision for taxes in the U.S. totaled $9 million in fiscal 2015, compared with a significant benefit for taxes in fiscal 2014, which resulted primarily from the reversal of U.S. income tax valuation allowances totaling $119 million.  The provision for taxes in foreign jurisdictions totaled $10 million and $11 million in fiscal 2015 and 2014, respectively.
 
Earnings from discontinued operations of $1 million in fiscal 2015 related to a gain associated with the final collection of proceeds from the fiscal 2009 sale of our Electronic Cooling business.

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

In 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, sales in our Asia, Building HVAC and North America segments increased year over year.  Our South America segment 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 increased 90 basis points to 16.1 percent, primarily due to higher sales volume and favorable material costs.

SG&A expenses in fiscal 2014 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.

Restructuring expenses were $16 million and $17 million in fiscal 2014 and 2013, respectively, primarily due to employee severance costs related to restructuring activities within our Europe segment.  In addition, we recorded impairment charges during fiscal 2014 and 2013 of $3 million and $26 million, respectively, primarily related to our restructuring actions in the Europe segment.

Operating income of $37 million during fiscal 2014 represented a $38 million improvement compared with 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.

Our benefit for income taxes was $108 million in fiscal 2014 compared with 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.

Segment Results of Operations

During fiscal 2015, we changed the name of our Commercial Products segment to Building HVAC in order to better reflect the nature of the segment’s product lines.  There were no changes to the operations or reported financial results of the segment as a result.

Effective April 1, 2015, we combined our North America and South America segment operations, with the objective of streamlining our operations to gain synergies and improve our cost structure.  Beginning for fiscal 2016, we will report financial results for the new Americas operating segment, which will include both North America and South America.
 
North America
           
 
Years ended March 31,
 
2015
2014
2013
(in millions)
$'s
 
% of sales
 
$'s
 
% of sales
 
$'s
 
% of sales
 
Net sales
 
$
574
     
100.0
%
 
$
569
     
100.0
%
 
$
565
     
100.0
%
Cost of sales
   
477
     
83.1
%
   
475
     
83.6
%
   
484
     
85.6
%
Gross profit
   
97
     
16.9
%
   
94
     
16.4
%
   
81
     
14.4
%
Selling, general and administrative expenses
   
50
     
8.7
%
   
50
     
8.6
%
   
40
     
7.2
%
Restructuring expenses
   
1
     
0.2
%
   
1
     
0.2
%
   
-
     
-
 
Impairment charges
   
-
     
-
     
1
     
0.2
%
   
2
     
0.3
%
Operating income
 
$
46
     
8.0
%
 
$
42
     
7.4
%
 
$
39
     
6.9
%

North America net sales increased $5 million, or 1 percent, from fiscal 2014 to fiscal 2015, and increased $4 million, or 1 percent, from fiscal 2013 to fiscal 2014.  The fiscal 2015 sales increase was primarily due to higher sales volume to commercial vehicle customers, partially offset by decreased sales volume to off-highway customers as economic conditions in that market remained relatively weak.  The fiscal 2014 sales increase, compared with fiscal 2013, was primarily due to higher sales volume to automotive and commercial vehicle customers, partially offset by decreased sales volume to off-highway customers.

Gross margin increased 50 basis points to 16.9 percent in fiscal 2015, primarily due to lower warranty costs and sales volume improvements, partially offset by unfavorable sales mix.  The gross margin increase from fiscal 2013 to fiscal 2014 was primarily due to lower material costs.

SG&A expenses of $50 million during fiscal 2015 were consistent with fiscal 2014.  The $10 million increase in SG&A expenses in fiscal 2014 was primarily due to higher compensation-related expenses and increased engineering and development costs.

During fiscal 2014, we approved a plan to close our McHenry, Illinois manufacturing facility and are currently in the process of transferring the facility’s production to other North America segment manufacturing facilities, which we expect to complete within the first six months of fiscal 2016.  We recorded $1 million of restructuring expenses during fiscal 2015, primarily related to equipment transfer costs incurred to relocate McHenry’s product lines to other manufacturing facilities.  In fiscal 2014, 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.

Operating income in fiscal 2015 of $46 million increased $4 million from $42 million in fiscal 2014, primarily due to increased gross profit.  Fiscal 2014 operating income improved $3 million compared with fiscal 2013, primarily due to increased gross profit, partially offset by higher SG&A expenses.
 
Europe
                       
   
Years ended March 31,
 
   
2015
   
2014
   
2013
 
(in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
Net sales
 
$
578
     
100.0
%
 
$
584
     
100.0
%
 
$
498
     
100.0
%
Cost of sales
   
509
     
88.1
%
   
513
     
87.9
%
   
437
     
87.7
%
Gross profit
   
69
     
11.9
%
   
71
     
12.1
%
   
61
     
12.3
%
Selling, general and administrative expenses
   
44
     
7.6
%
   
44
     
7.6
%
   
45
     
9.1
%
Restructuring expenses
   
2
     
0.4
%
   
15
     
2.6
%
   
17
     
3.4
%
Impairment charges
   
-
     
-
     
2
     
0.3
%
   
24
     
4.8
%
Gain on sale of wind tunnel
   
(3
)
   
-0.6
%
   
-
     
-
     
-
     
-
 
Operating income (loss)
 
$
26
     
4.5
%
 
$
10
     
1.6
%
 
$
(25
)
   
-5.0
%

Europe net sales decreased $6 million, or 1 percent, from fiscal 2014 to fiscal 2015, primarily due to a $35 million unfavorable impact of foreign currency exchange rate changes and lower tooling sales, partially offset by increased sales volume to commercial vehicle and automotive customers.  The $86 million, or 17 percent, increase in sales from fiscal 2013 to fiscal 2014 was primarily due to increased sales volume to commercial vehicle customers, higher tooling sales, and a $23 million favorable impact of foreign currency exchange rate changes.

Gross margin decreased 20 basis points to 11.9 percent in fiscal 2015, primarily due to unfavorable sales mix, production inefficiencies caused by increased volume at certain manufacturing facilities and plant consolidation activities, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by the absence of $4 million of accelerated depreciation recorded in the prior year for production equipment that is no longer used and lower warranty costs.  Gross profit increased $10 million, while gross margin declined 20 basis points to 12.1 percent in fiscal 2014 compared with fiscal 2013.  This decrease 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, and higher warranty costs, partially offset by higher sales volume, favorable sales mix, and lower material costs.

SG&A expenses of $44 million were consistent with the prior year, as higher engineering and development costs were offset by a favorable impact of foreign currency exchange rate changes.  SG&A expenses decreased $1 million from fiscal 2013 to fiscal 2014, primarily due to the favorable impact of restructuring actions and lower engineering and development costs, partially offset by higher compensation-related expenses.

During fiscal 2015, we recorded $2 million of restructuring expenses, primarily due to plant consolidation activities as we substantially completed the combination of two manufacturing facilities in Germany into one, more competitive manufacturing operation.  Also during fiscal 2015, we sold a wind tunnel that we no longer considered to be a core asset for cash proceeds of $6 million, which resulted in a gain of $3 million.  During fiscal 2014 and fiscal 2013, we recorded $15 million and $17 million, respectively, of restructuring expenses, primarily related to employee severance costs.  Also in fiscal 2014 and 2013 we recorded asset impairment charges totaling $2 million and $24 million, respectively, primarily related to several facilities that we have sold or expect to sell.

Operating income of $26 million in fiscal 2015 increased $16 million compared with fiscal 2014, primarily due to a reduction in restructuring expenses and impairment charges and the gain from selling the wind tunnel.  Operating income of $10 million in fiscal 2014 improved $35 million compared with fiscal 2013, primarily due to lower asset impairment charges and increased sales volume, which drove higher gross profit.
 
South America
                       
   
Years ended March 31,
 
   
2015
   
2014
   
2013
 
(in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
Net sales
 
$
94
     
100.0
%
 
$
123
     
100.0
%
 
$
134
     
100.0
%
Cost of sales
   
82
     
87.2
%
   
102
     
83.1
%
   
111
     
83.2
%
Gross profit
   
12
     
12.8
%
   
21
     
16.9
%
   
23
     
16.8
%
Selling, general and administrative expenses
   
14
     
15.9
%
   
13
     
10.8
%
   
12
     
8.4
%
Restructuring expenses
   
2
     
1.6
%
   
-
     
-
     
-
     
-
 
Impairment charges
   
8
     
8.4
%
   
-
     
-
     
-
     
-
 
Operating (loss) income
 
$
(12
)
   
-13.1
%
 
$
8
     
6.1
%
 
$
11
     
8.4
%

South America net sales decreased $29 million, or 24 percent, in fiscal 2015 compared with fiscal 2014, primarily due to lower sales volume to commercial vehicle, off-highway and automotive customers, as economic conditions in Brazil were generally weak in fiscal 2015, and a $9 million unfavorable impact of foreign currency exchange rate changes, primarily due to the strengthening of the U.S. dollar versus the Brazilian real.  Sales decreased $11 million, or 8 percent, in fiscal 2014 compared with fiscal 2013, primarily due to a $14 million unfavorable impact of foreign currency exchange rate changes, partially offset by increased sales volume to commercial vehicle customers.

Gross profit decreased $9 million and gross margin decreased to 12.8 percent in fiscal 2015 compared with the prior year, primarily due to lower sales volume.  Gross profit decreased $2 million from fiscal 2013 to fiscal 2014, primarily due to a $2 million unfavorable impact of foreign currency exchange rate changes.

SG&A expenses in fiscal 2015 increased $1 million compared with fiscal 2014, primarily due to a $3 million charge for a legal matter in Brazil (see Note 19 of the Notes to Consolidated Financial Statements for more information), partially offset by the favorable impact of cost control measures and a $1 million favorable impact of foreign currency exchange rate changes.  SG&A expenses increased $1 million from fiscal 2013 to fiscal 2014, primarily due to the reversal of a $2 million acquisition-related liability in fiscal 2013 and higher compensation-related expenses in fiscal 2014, partially offset by a $2 million favorable impact of foreign currency exchange rate changes.

During fiscal 2015, we recorded $2 million of restructuring expenses for employee severance-related costs to reduce headcount and better align our cost structure with the market conditions in Brazil. We also recorded an $8 million goodwill impairment charge during fiscal 2015, which was primarily caused by a decline in the financial outlook for the South America segment.

The $12 million operating loss in fiscal 2015 represented a $20 million decline compared with the prior year and was primarily due to lower gross profit on lower sales volume and the goodwill impairment charge.  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.

Asia
                       
   
Years ended March 31,
 
   
2015
   
2014
   
2013
 
(in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
Net sales
 
$
81
     
100.0
%
 
$
72
     
100.0
%
 
$
60
     
100.0
%
Cost of sales
   
69
     
85.8
%
   
63
     
87.5
%
   
58
     
97.2
%
Gross profit
   
12
     
14.2
%
   
9
     
12.5
%
   
2
     
2.8
%
Selling, general and administrative expenses
   
12
     
13.9
%
   
12
     
17.2
%
   
11
     
17.6
%
Operating income (loss)
 
$
-
     
0.3
%
 
$
(3
)
   
-4.7
%
 
$
(9
)
   
-14.8
%

Asia net sales increased $9 million, or 13 percent, in fiscal 2015 compared with fiscal 2014, primarily due to new automotive program launches in China and higher sales across all markets in India, partially offset by lower sales volume within the off-highway markets in China and Korea.  Sales increased $12 million, or 20 percent, in fiscal 2014 compared with fiscal 2013, primarily due to higher sales volume in the automotive and off-highway markets.
 
Gross profit increased $3 million and gross margin increased to 14.2 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume.  Gross profit increased $7 million and gross margin increased to 12.5 percent in fiscal 2014 compared with fiscal 2013, primarily due to higher sales volume.

SG&A expenses in fiscal 2015 were consistent with the prior year, yet decreased as a percentage of sales.  SG&A expenses increased $1 million in fiscal 2014 compared with fiscal 2013, yet decreased slightly as a percentage of sales.

Operating income of less than $1 million in fiscal 2015 represented a $3 million improvement compared with the prior year and was primarily due to higher gross profit on increased sales volume.  The $3 million operating loss in fiscal 2014 represented a $6 million improvement from fiscal 2013, primarily due to higher gross profit.

Building HVAC
                       
   
Years ended March 31,
 
   
2015
   
2014
   
2013
 
(in millions)
 
$'s
   
% of sales
   
$'s
   
% of sales
   
$'s
   
% of sales
 
Net sales
 
$
186
     
100.0
%
 
$
146
     
100.0
%
 
$
139
     
100.0
%
Cost of sales
   
130
     
70.0
%
   
103
     
70.4
%
   
98
     
70.7
%
Gross profit
   
56
     
30.0
%
   
43
     
29.6
%
   
41
     
29.3
%
Selling, general and administrative expenses
   
37
     
19.8
%
   
34
     
23.2
%
   
31
     
22.1
%
Operating income
 
$
19
     
10.2
%
 
$
9
     
6.4
%
 
$
10
     
7.2
%

Building HVAC net sales increased $40 million, or 27 percent, in fiscal 2015 compared with the prior year, primarily due to a $23 million increase in sales at our Airedale business and increased heating product sales in North America as we experienced another strong heating season in fiscal 2015.  The sales increase at Airedale was primarily due to a $13 million increase in sales at Barkell, which we acquired in the fourth quarter of fiscal 2014, and the continuing recovery from the Airedale fire, which caused a temporary halt in production during the prior fiscal year.  In fiscal 2014, despite the negative impact of the Airedale fire, sales increased $7 million, or 5 percent, primarily due to increased heating product sales in North America.

Gross profit increased $13 million and gross margin improved to 30.0 percent in fiscal 2015 compared with the prior year, primarily due to higher sales volume. Gross profit increased $2 million in fiscal 2014 compared with the prior year, primarily due to favorable sales mix.

SG&A expenses increased $3 million, or 9 percent, in fiscal 2015 compared with the prior year, primarily due to additional costs from Barkell and increased expenses associated with higher sales levels, partially offset by $5 million of recoveries from business interruption insurance for the Airedale fire.  SG&A expenses increased $3 million, or 10 percent, in fiscal 2014 compared with fiscal 2013, primarily due to higher compensation-related expenses, $1 million of non-recoverable costs directly related to the Airedale fire, and increased acquisition-related expenses for Barkell.

Operating income of $19 million increased $10 million in fiscal 2015 compared with the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses.  Operating income decreased $1 million from fiscal 2013 to fiscal 2014, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at March 31, 2015 of $71 million, and an available borrowing capacity of $216 million under lines of credit provided by banks in the United States and abroad.  Due to the timing of insurance proceeds related to the Airedale fire, our cash and cash equivalents at March 31, 2015 include approximately $13 million of advances from our insurance provider that will be spent for recovery and reconstruction costs.  Given our extensive international operations, significant amounts of our cash and cash equivalents are held by our non-U.S. subsidiaries. We have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.

Net Cash Provided by Operating Activities

Net cash provided by operating activities in fiscal 2015 was $64 million, a decrease of $41 million from $105 million in the prior year.  This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, including higher incentive compensation payments during fiscal 2015 related to fiscal 2014 performance and the timing of customer-owned tooling reimbursements.
 
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 with fiscal 2013.

We expect to be reimbursed by our insurance provider for substantially all losses and expenses directly related to the fire at our Airedale manufacturing facility, including substantially all 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 of $58 million during fiscal 2015 increased $5 million compared with fiscal 2014.  In fiscal 2015, our capital spending primarily occurred in the North America and Europe segments, which totaled $26 million and $22 million, respectively.  Capital projects in fiscal 2015 included tooling and equipment purchases in conjunction with program launches with customers, as well as a building expansion at our Nuevo Laredo manufacturing facility in the North America segment.

At March 31, 2015, our capital expenditure commitments totaled $16 million.  Significant commitments included tooling and equipment expenditures for new and renewal programs with customers in North America and Europe.

Dividends

We did not pay dividends in fiscal 2015, 2014, or 2013.  We currently do not intend to pay dividends in fiscal 2016.

Debt

Our total debt outstanding decreased $16 million to $149 million at March 31, 2015 compared with the prior year, as our debt repayments exceeded our borrowings.  See Note 16 of the Notes to Consolidated Financial Statements for further information regarding our debt agreements.

Our 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.

Our leverage ratio for the four fiscal quarters ended March 31, 2015 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, 2015 was 10.3, which exceeded the minimum requirement of 3.0.  We were in compliance with our debt covenants as of March 31, 2015 and expect to remain in compliance during fiscal 2016 and beyond.

Pension Obligations

Our net pension liabilities totaled $111 million for plans in the U.S. and at certain foreign subsidiaries as of March 31, 2015.  We contributed $7 million to these plans in fiscal 2015 and expect to contribute approximately $8 million to our pension plans during fiscal 2016. In May 2015, we approved a program to offer a voluntary, lump-sum pension payout to certain eligible former employees who participate in our U.S. pension plan.  If the lump-sum payout is elected by the participant, the payout would effectively settle our pension obligation with that participant, thereby eliminating the risk of future changes in our pension obligation for that participant.  As a result of this program, we expect to record a settlement loss of approximately $20-30 million in the second quarter of fiscal 2016, based on estimated participation rates and estimated actuarial assumptions.  This settlement loss would represent the accelerated recognition of unamortized actuarial losses associated with our pension liabilities.  The lump-sum settlements will be paid from plan assets and will not impact our operating cash flow.
 
Off-Balance Sheet Arrangements

None.

Contractual Obligations

   
March 31, 2015
 
(in millions)
 
Total
   
Less than 1 year
   
1 - 3 years
   
4 - 5 years
   
More than 5 years
 
                     
Long-term debt
 
$
125.2
   
$
0.2
   
$
24.0
   
$
32.0
   
$
69.0
 
Interest associated with long-term debt
   
38.8
     
8.5
     
16.1
     
11.9
     
2.3
 
Capital lease obligations
   
4.9
     
0.3
     
0.6
     
0.6
     
3.4
 
Operating lease obligations
   
49.9
     
8.2
     
10.0
     
7.8
     
23.9
 
Capital expenditure commitments
   
15.5
     
13.0
     
2.5
     
-
     
-
 
Other long-term obligations
   
10.9
     
1.6
     
3.2
     
2.6
     
3.5
 
Total contractual obligations
 
$
245.2
   
$
31.8
   
$
56.4
   
$
54.9
   
$
102.1
 

Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $121 million as of March 31, 2015.  We are unable to determine the ultimate timing of these liabilities; therefore, we have 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 $48 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 could significantly 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 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 conditions, 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.  We estimate fair market value in various ways depending on the nature of the assets under review.  Fair value is generally 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 $322 million at March 31, 2015.  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 products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy.  When such indicators are present, we perform an impairment evaluation 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.  We estimate the undiscounted cash flows 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, we write such assets down to fair value, which we generally estimate based upon 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 financial and market 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.  Our 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 upon 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.  In estimating the implied fair value of goodwill for a reporting unit, we assign the fair value to the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of the reporting unit goodwill over its implied fair value is recorded as an 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 profit margins used to calculate estimated future cash flows, the risk-adjusted discount rate, business trends and market conditions. The expected future revenue growth rates and operating profit margins are determined after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount rate used in determining discounted cash flows is a rate corresponding to our cost of capital, adjusted for country-specific risks where appropriate.
 
We conducted our annual assessment for goodwill impairment during the fourth quarter of fiscal 2015 by applying a fair value-based test.  The South America reporting units carrying value exceeded its fair value; therefore, we performed the second step of the goodwill impairment test, as described above.   As a result, we determined our South America reporting unit’s goodwill was fully impaired and recorded an $8 million goodwill impairment charge.  As fiscal 2015 progressed, we experienced relatively weak financial results for our South America reporting unit.  During the fourth quarter of fiscal 2015, our outlook for the markets served by our South America reporting unit, primarily in Brazil, shifted from a view that the markets may begin to recover to a view that the market downturn may be more prolonged.  The economic weakness in Brazil has negatively affected our expected future cash flows for the South America segment.  Our impairment analysis assumed a discount rate of 22 percent, which corresponds to our cost of capital adjusted for a higher expectation of future inflation and uncertainty in the Brazilian economy, and future revenue growth and operating profit margins based upon our current outlook for the South America reporting unit.

Warranty Costs

We estimate costs related to product warranties and accrue for such costs at the time of the sale, within cost of sales.  We estimate warranty costs based upon the best information available, which includes statistical and analytical analysis of both historical and current claim data.  We adjust original estimates if we expect future claims will differ from the initial estimates.
 
Tooling Costs

We capitalize production tooling costs incurred in the manufacture of products for customer programs as a component of property, plant and equipment, net of any customer reimbursements, when we retain title to the tooling.  We depreciate these capitalized costs in cost of sales over the estimated life of the asset, which is generally three years.  For customer-owned tooling costs incurred, we record a receivable when the customer has guaranteed reimbursement to us.  Reimbursement typically occurs prior to the start of production, but this can vary by program and by customer.  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 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, we record the carrying value of the asset at the lower of its carrying value or estimated fair value, less costs 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 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 U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods.  These differences impact future pension expenses.  Currently, participants in our domestic pension plans are not accruing benefits based on their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.

In late calendar 2014, the U.S. Society of Actuaries issued updated mortality and mortality improvement tables, which effectively increased life expectancies.  We considered the new mortality tables, along with characteristics of our plan-specific populations, in developing our best estimate of the expected mortality of plan participants for our March 31, 2015 measurement date.  The impact of the new mortality assumptions resulted in an increase of approximately $9 million in both our U.S. pension plans’ actuarial loss and pension benefit obligation.

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

To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets.  The long-term rate of return utilized in fiscal 2015 and 2014 was 8.0 percent.  For fiscal 2016, we have 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 an increase of $0.5 million in fiscal 2016 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 2015, we used a discount rate of 4.0 percent, compared with 4.7 percent in fiscal 2014.  We determined these rates based upon 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.  A change in the assumed discount rate of 25 basis points would impact our fiscal 2016 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.  We estimate 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.
 
Forward-Looking Statements
 
This report, including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995.  Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of this report.  Other risks and uncertainties include, but are not limited to, the following:
 
Market Risks:
 
  · Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs, inflation, changes in interest rates, recession and recovery therefrom, restrictions associated with importing and exporting and foreign ownership, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China, Western Europe, Russia and North America, and the continued deterioration in and weak forecasts for the Brazilian economy;

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

  · Our ability to successfully manage 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 current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental emissions standards.
 
Operational Risks:
 
  · The overall health and increasing price-down focus of our original equipment manufacturer customers in light of some remaining 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;

  · 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, particularly in the face of macro-economic instability;

  · Our ability to effectively and efficiently complete the restructuring activities in our North America, Europe, and South America segments and realize expected cost reductions and increased competitiveness and profitability as a result;

  · 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;
 
  · Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, particularly in light of some continuing economic challenges in areas of the world in which we and our suppliers operate;
 
  · Complexities and inefficiencies introduced by the September 2013 fire at our Airedale facility in the U.K., including our ability to continue to meet customer demands at temporary locations, to timely realize and effectively deploy insurance proceeds to replace machinery and equipment and rebuild the facility with minimal financial impact from the business interruption, and to complete and relocate to the new facility in an efficient, timely manner;

  · Our ability to complete the transition of our Washington, Iowa 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;

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

  · The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, and Indian rupee relative to the U.S. dollar; and

  · Our ability to realize the benefits of tax assets in various jurisdictions in which we operate.
 
In addition to the risks set forth above, we are subject to other risks and uncertainties as identified in our public filings with the U.S. Securities and Exchange Commission.  We do not assume any obligation to update any forward-looking statements.
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
In the normal course of business, we are subject to market exposure from changes in foreign 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 and also purchase raw materials from foreign countries.  As a result, our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which we do business.  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 2015, 2014, and 2013, 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, usually to a large degree, with an offsetting effect on our expenses.  In fiscal 2015, changes in foreign currencies negatively impacted our sales by $43 million; however, the impact on our operating income 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 percent higher or lower during fiscal 2015, there would not have been a material impact on our fiscal 2015 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, 2015, there were no third-party foreign-denominated, long-term debt obligations or long-term intercompany loans for which changes in foreign currency exchange rates would impact our net earnings.  From time to time, we enter into currency rate derivative contracts to manage the exchange rate exposure on these types of loans.  These derivative instruments are typically not 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.
 
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 on 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 our revolving credit facility and could create variability in interest expense.  There were no borrowings outstanding under the revolving credit facility as of March 31, 2015.  Based on our outstanding debt with variable interest rates at March 31, 2015, a 100 basis point increase in interest rates would increase our annual interest expense in fiscal 2016 by less than $1 million.

Commodity Price Risk

We are dependent upon the supply of raw materials and supplies in the production process and, from time to time, enter into firm purchase commitments for aluminum, copper, nickel, and natural gas. We maintain agreements with certain customers to pass through specified raw material price fluctuations in order to mitigate 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, and typically, the arrangements are limited to the underlying material cost based upon the London Metal Exchange.

Credit Risk

Credit risk represents 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, 2015, 47 percent of our trade accounts receivable balance was concentrated with our top ten customers.  These customers operate primarily in the automotive, commercial vehicle, and off-highway markets and are influenced by similar market and general economic factors.  In the past, credit losses from our customers have not been significant.

We manage credit risk through a focus on the following:

· Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings and short-term investments are maintained in secured or guaranteed instruments.  Our holdings in cash and investments were considered stable and secure at March 31, 2015;
 
· 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 utilize an established risk management protocol that focuses on protection of the plan assets against downside risk.  We ensure that investments within these plans provide appropriate diversification, the investments are monitored by investment teams, and portfolio managers adhere to the established investment policies.  We believe the plan assets are subject to appropriate investment policies and controls; and
· Insurance – We monitor our insurance providers to ensure they have acceptable financial ratings.  We have not identified any concerns in this regard based upon our reviews.

Economic Risk

Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate.  We sell a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, automotive, off-highway, and building HVAC 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.

We pursue new market opportunities after careful consideration of the potential, associated risks and benefits.  Successes in new markets are dependent upon our ability to commercialize our investments.  Current examples of new and emerging markets for us include those related to waste heat recovery and 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 aluminum, copper, and steel 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 our tooling to create the parts.  In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts.  As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require.  Even in situations where suppliers are manufacturing parts without the use of our tooling, we face the challenge of obtaining consistently high-quality parts from suppliers that are financially stable.  We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate higher-risk supplier situations.

In addition to the above risks on the supply side, we are also exposed to risks associated with demands by our customers for decreases in the price of our products.  We attempt to offset this risk with firm agreements with our customers whenever possible, but these agreements often contain provisions for future price reductions.  In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.

Hedging and Foreign Currency Forward Contracts

We use derivative financial instruments as a tool to manage certain financial risks.  We prohibit the use of leveraged derivatives.

Commodity derivatives: We have entered into futures contracts, from time to time, related to certain forecasted purchases of aluminum and copper.  Our strategy was to reduce our exposure to changing market prices for future purchases of these commodities.  In fiscal 2015, 2014, and 2013, expenses related to commodity derivative contracts totaled less than $1 million, $1 million, and $5 million, respectively.
 
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, we record unrealized gains and losses related to the change in the fair value of the contracts in other income and expense.  Gains and losses on these foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.

Counterparty risks: We manage counterparty risks by ensuring that counterparties to derivative instruments have credit ratings acceptable to us.  At March 31, 2015, all counterparties had a sufficient long-term credit rating.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 2015, 2014 and 2013
(In millions, except per share amounts)

   
2015
   
2014
   
2013
 
Net sales
 
$
1,496.4
   
$
1,477.6
   
$
1,376.0
 
Cost of sales
   
1,249.9
     
1,239.4
     
1,167.4
 
Gross profit
   
246.5
     
238.2
     
208.6
 
Selling, general and administrative expenses
   
184.5
     
181.7
     
166.3
 
Restructuring expenses
   
4.7
     
16.1
     
17.0
 
Impairment charges
   
7.8
     
3.2
     
25.9
 
Gain on sale of wind tunnel
   
(3.2
)
   
-
     
-
 
Operating income (loss)
   
52.7
     
37.2
     
(0.6
)
Interest expense
   
(11.7
)
   
(12.4
)
   
(12.6
)
Other income (expense) – net
   
0.2
     
(0.8
)
   
0.2
 
Earnings (loss) from continuing operations before income taxes
   
41.2
     
24.0
     
(13.0
)
(Provision) benefit for income taxes
   
(19.0
)
   
107.9
     
(9.8
)
Earnings (loss) from continuing operations
   
22.2
     
131.9
     
(22.8
)
Earnings from discontinued operations, net of income taxes
   
0.6
     
-
     
-
 
Net earnings (loss)
   
22.8
     
131.9
     
(22.8
)
Net earnings attributable to noncontrolling interest
   
(1.0
)
   
(1.5
)
   
(1.4
)
Net earnings (loss) attributable to Modine
 
$
21.8
   
$
130.4
   
$
(24.2
)
                         
Earnings (loss) per share from continuing operations attributable to Modine shareholders:
                       
Basic
 
$
0.45
   
$
2.75
   
$
(0.52
)
Diluted
 
$
0.44
   
$
2.72
   
$
(0.52
)
                         
Net earnings (loss) per share attributable to Modine shareholders:
                       
Basic
 
$
0.46
   
$
2.75
   
$
(0.52
)
Diluted
 
$
0.45
   
$
2.72
   
$
(0.52
)
                         
Weighted average shares outstanding:
                       
Basic
   
47.2
     
46.9
     
46.6
 
Diluted
   
47.8
     
47.6
     
46.6
 

The notes to consolidated financial statements are an integral part of these statements.
 
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended March 31, 2015, 2014 and 2013
(In millions)

   
2015
   
2014
   
2013
 
Net earnings (loss)
 
$
22.8
   
$
131.9
   
$
(22.8
)
Other comprehensive income (loss):
                       
Foreign currency translation
   
(68.2
)
   
9.7
     
(17.1
)
Defined benefit plans, net of income taxes of ($13.2), $9.8 and $0 million
   
(26.7
)
   
13.9
     
(23.6
)
Cash flow hedges, net of income taxes of $0, $0.6 and $0 million
   
-
     
1.1
     
2.6
 
Total other comprehensive income (loss)
   
(94.9
)
   
24.7
     
(38.1
)
                         
Comprehensive income (loss)
   
(72.1
)
   
156.6
     
(60.9
)
Comprehensive income attributable to noncontrolling interest
   
(0.8
)
   
(1.7
)
   
(1.4
)
Comprehensive income (loss) attributable to Modine
 
$
(72.9
)
 
$
154.9
   
$
(62.3
)

The notes to consolidated financial statements are an integral part of these statements.
 
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, 2015 and 2014
(In millions, except per share amounts)

   
2015
   
2014
 
ASSETS
       
Cash and cash equivalents
 
$
70.5
   
$
87.2
 
Trade accounts receivable – net
   
192.9
     
221.1
 
Inventories
   
107.7
     
116.8
 
Deferred income taxes
   
13.4
     
13.0
 
Other current assets
   
79.7
     
60.7
 
Total current assets
   
464.2
     
498.8
 
Property, plant and equipment – net
   
322.1
     
359.6
 
Intangible assets – net
   
9.9
     
12.4
 
Goodwill
   
16.2
     
28.7
 
Deferred income taxes
   
102.7
     
98.6
 
Other noncurrent assets
   
16.5
     
34.2
 
Total assets
 
$
931.6
   
$
1,032.3
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Short-term debt
 
$
18.6
   
$
32.4
 
Long-term debt – current portion
   
0.5
     
0.8
 
Accounts payable
   
152.0
     
171.1
 
Accrued compensation and employee benefits
   
56.7
     
70.8
 
Other current liabilities
   
83.4
     
82.1
 
Total current liabilities
   
311.2
     
357.2
 
Long-term debt
   
129.6
     
131.2
 
Deferred income taxes
   
3.4
     
7.3
 
Pensions
   
110.4
     
81.0
 
Other noncurrent liabilities
   
16.4
     
27.0
 
Total liabilities
   
571.0
     
603.7
 
Commitments and contingencies (see Note 19)
               
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 48.6 million and 48.3 million shares
   
30.4
     
30.2
 
Additional paid-in capital
   
180.6
     
175.7
 
Retained earnings
   
359.8
     
338.0
 
Accumulated other comprehensive loss
   
(198.6
)
   
(103.9
)
Treasury stock, at cost, 0.7 million shares
   
(16.2
)
   
(15.2
)
Total Modine shareholders' equity
   
356.0
     
424.8
 
Noncontrolling interest
   
4.6
     
3.8
 
Total equity
   
360.6
     
428.6
 
Total liabilities and equity
 
$
931.6
   
$
1,032.3
 

The notes to consolidated financial statements are an integral part of these statements.
 
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 2015, 2014 and 2013
(In millions)

   
2015
   
2014
   
2013
 
Cash flows from operating activities:
           
Net earnings (loss)
 
$
22.8
   
$
131.9
   
$
(22.8
)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
                       
Depreciation and amortization
   
51.6
     
58.1
     
55.8
 
Insurance proceeds from Airedale fire
   
12.9
     
16.9
     
-
 
Pension and postretirement expense
   
2.3
     
3.2
     
1.9
 
Gain on sale of wind tunnel
   
(3.2
)
   
-
     
-
 
Impairment charges
   
7.8
     
3.2
     
25.9
 
Loss from disposition of property, plant and equipment
   
1.1
     
2.6
     
2.5
 
Deferred income taxes
   
5.9
     
(116.1
)
   
0.6
 
Stock-based compensation expense
   
4.0
     
3.6
     
3.1
 
Other – net
   
(0.7
)
   
(0.5
)
   
4.1
 
Changes in operating assets and liabilities, excluding acquisitions:
                       
Trade accounts receivable
   
(0.1
)
   
(18.2
)
   
15.1
 
Inventories
   
(4.2
)
   
(0.1
)
   
(0.8
)
Accounts payable
   
(2.4
)
   
15.2
     
(3.2
)
Accrued compensation and employee benefits
   
(5.3
)
   
17.5
     
1.9
 
Other assets
   
(24.5
)
   
2.1
     
(6.6
)
Other liabilities
   
(4.5
)
   
(14.9
)
   
(28.7
)
Net cash provided by operating activities
   
63.5
     
104.5
     
48.8
 
                         
Cash flows from investing activities:
                       
Expenditures for property, plant and equipment
   
(58.3
)
   
(53.1
)
   
(49.8
)
Insurance proceeds from Airedale fire
   
12.2
     
20.7
     
-
 
Costs to replace building and equipment damaged in Airedale fire
   
(16.7
)
   
(4.2
)
   
-
 
Proceeds from dispositions of assets
   
7.6
     
2.9
     
0.4
 
Purchases of short-term investments
   
(5.2
)
   
-
     
-
 
Proceeds from maturities of short-term investments
   
2.4
     
-
     
-
 
Acquisitions – net of cash acquired
   
-
     
(7.8
)
   
(4.9
)
Other – net
   
0.8
     
-
     
(1.6
)
Net cash used for investing activities
   
(57.2
)
   
(41.5
)
   
(55.9
)
                         
Cash flows from financing activities:
                       
Borrowings of debt
   
36.4
     
152.6
     
166.7
 
Repayments of debt
   
(50.9
)
   
(152.4
)
   
(167.1
)
Financing fees paid
   
(0.1
)
   
(0.9
)
   
-
 
Dividend paid to noncontrolling interest
   
-
     
(0.5
)
   
-
 
Other – net
   
-
     
(0.3
)
   
0.7
 
Net cash (used for) provided by financing activities
   
(14.6
)
   
(1.5
)
   
0.3
 
                         
Effect of exchange rate changes on cash
   
(8.4
)
   
1.9
     
(0.8
)
Net (decrease) increase in cash and cash equivalents
   
(16.7
)
   
63.4
     
(7.6
)
Cash and cash equivalents - beginning of year
   
87.2
     
23.8
     
31.4
 
Cash and cash equivalents - end of year
 
$
70.5
   
$
87.2
   
$
23.8
 

The notes to consolidated financial statements are an integral part of these statements.
 
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended March 31, 2015, 2014 and 2013
(In millions)
 
   
Common stock
   
 
Additional
paid-in
capital
   
Retained
earnings
   
Accumulated
other
comprehensive
loss
   
Treasury
stock, at
cost
   
Non-
controlling
interest
   
Total
 
   
Shares
   
Amount
                         
Balance, March 31, 2012
   
47.4
   
$
29.6
   
$
168.3
   
$
231.8
   
$
(90.3
)
 
$
(14.5
)
 
$
1.2
   
$
326.1
 
Net loss attributable to Modine
   
-
     
-
     
-
     
(24.2
)
   
-
     
-
     
-
     
(24.2
)
Other comprehensive loss
   
-
     
-
     
-
     
-
     
(38.1
)
   
-
     
-
     
(38.1
)
Stock options and awards including related tax benefits
   
0.4
     
0.3
     
(0.2
)
   
-
     
-
     
-
     
-
     
0.1
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
-
     
(0.1
)
   
-
     
(0.1
)
Stock-based compensation expense
   
-
     
-
     
3.1
     
-
     
-
     
-
     
-
     
3.1
 
Net earnings attributable to noncontrolling interest
   
-
     
-
     
-
     
-
     
-
     
-
     
1.4
     
1.4
 
Balance, March 31, 2013
   
47.8
     
29.9
     
171.2
     
207.6
     
(128.4
)
   
(14.6
)
   
2.6
     
268.3
 
Net earnings attributable to Modine
   
-
     
-
     
-
     
130.4
     
-
     
-
     
-
     
130.4
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
24.5
     
-
     
0.2
     
24.7
 
Stock options and awards including related tax benefits
   
0.5