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Modine Manufacturing Company (Modine or the Company) specializes in thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets. We are a leading global developer, manufacturer and marketer of heat exchangers and systems for use in on-highway and off-highway original equipment manufacturer (OEM) vehicular applications, and to a wide array of building, industrial and refrigeration markets. Product lines include radiators and radiator cores, vehicular air conditioning, oil coolers, charge air coolers, heat-transfer packages and modules, building heating, ventilating and air conditioning (HVAC) equipment and exhaust gas recirculation (EGR) coolers. Our primary customers across the globe are:
- Truck, automobile, bus, and specialty vehicle OEMs;
- Agricultural, industrial and construction OEMs;
- Heating and cooling OEMs;
- Construction contractors; and
- Wholesalers of plumbing and heating equipment.
We focus our development efforts on solutions that meet the pressing heat transfer needs of OEMs and other customers within the commercial vehicle, construction, agricultural, industrial and commercial HVAC industries and, more selectively, within the automotive industry. Our products and systems typically are aimed at solving complex heat transfer challenges requiring effective thermal management. The typical demands are for products and systems that are lighter weight, more compact, more efficient and more durable to meet ever increasing customer standards as they work to ensure compliance with increasingly stringent global emissions, fuel economy and energy efficiency requirements. Our Company’s heritage provides a depth and breadth of expertise in thermal management, which, when combined with our global manufacturing presence, standardized processes, and state-of-the-art technical centers and wind tunnels, enables us to rapidly bring customized solutions to customers at the best value.
History
Modine was incorporated under the laws of the State of Wisconsin on June 23, 1916 by its founder, Arthur B. Modine. Mr. Modine’s “Spirex” radiators became standard equipment on the famous Ford Motor Company Model T. When he died at the age of 95, A.B. Modine had been granted a total of 120 U.S. patents for heat transfer innovations. The standard of innovation exemplified by A.B. Modine remains the cornerstone of Modine today.
Terms; Year References
When we use the terms “Modine,” “we,” “us,” the “Company,” or “our” in this report, unless the context requires otherwise, we are referring to Modine Manufacturing Company and its subsidiaries. Our fiscal year ends on March 31. All references to a particular year mean the fiscal year ended March 31 of that year, unless indicated otherwise.
Business Strategy and Results
Modine focuses on thermal management leadership and highly engineered product and service innovations for diversified, global markets and customers. We are committed to enhancing our presence around the world and serving our customers where they are located. We create value by focusing on customer partnerships and providing innovative solutions for our customers' thermal problems. With the appointment of Tom Marry to the role of Executive Vice President and Chief Operating Officer during fiscal 2012, Modine has reintroduced the Chief Operating Officer position to enhance focus on our business operations and help ensure long-range leadership stability. His appointment will ensure operational continuity across all of our segments, allowing consistent execution and continuous improvement of our business processes across the globe.
Modine’s strategy for improved profitability is grounded in diversifying our markets and customer base, differentiating our products and services, technically and commercially, and partnering with customers to deliver the right products in the right markets. Modine’s top five customers are in three different markets – automotive, truck and off-highway – and its ten largest customers accounted for approximately 61 percent of the Company’s fiscal 2012 sales, compared to 58 percent in fiscal 2011. In fiscal 2012, 64 percent of total revenues were generated from sales to customers outside of the U.S., 58 percent of which were generated by Modine’s international operations and 6 percent of which were generated by exports from the U.S. In fiscal 2011, 61 percent of total revenues were generated from sales to customers outside of the U.S., with 56 percent generated by Modine’s international operations and 5 percent generated by exports from the U.S.
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During fiscal 2012, the Company reported revenues from continuing operations of $1.58 billion, a 9 percent increase from $1.45 billion in fiscal 2011. The Company’s end markets showed improvement from the deep recession experienced during 2009 and 2010. This improvement was seen across most of Modine’s end markets, including the commercial vehicle and off-highway markets. The commercial HVAC markets showed modest market demand growth. The Company’s business volumes improved in fiscal 2012 and were close to the pre-recessionary annual sales of approximately $1.6 billion. Over the last several years, the Company has implemented a number of cost and operational efficiency measures designed to improve our longer-term competitiveness, including the realignment of our manufacturing facilities, portfolio rationalization, capital allocation and selling, general and administrative (SG&A) cost containment. As volumes improve and the benefits of these actions translated into in the Company’s gross margin, which improved from 16.0 percent in fiscal 2011 to 16.3 percent in fiscal 2012. In addition, SG&A as a percentage of sales has declined from 13.1 percent in fiscal 2011 to 12.0 percent in fiscal 2012. With these improvements, the Company reported $67.5 million of earnings from operations in fiscal 2012, which exceeds the earnings from operations of $42.9 million reported in fiscal 2011.
The improved sales volumes and lower cost structure of the Company, along with the absence of the loss on debt extinguishment, resulted in the improvement of earnings from continuing operations to $38.0 million, or $0.80 per fully diluted share during fiscal 2012. This represents an improvement from the earnings from continuing operations of $8.3 million, or $0.18 per fully diluted share reported during fiscal 2011.
The Company measures its performance based on a return on average capital employed (ROACE) metric. The Company defines ROACE as income from operations, less a 30 percent income tax rate, less minority interest; divided by the average of debt plus Modine shareholders’ equity. The Company has established a goal of achieving a ROACE of 11 to 12 percent in the next few years with a longer term goal of 15 percent. ROACE is not a measure derived under generally accepted accounting principles (GAAP) and should not be considered as a substitute for any measure derived in accordance with GAAP. Management believes that ROACE provides investors with helpful information about the Company’s performance, and ability to provide an acceptable return on all the capital utilized by the Company, and fund growth. This measure may be inconsistent with similar measures presented by other companies. The following schedule provides a reconciliation of ROACE to the most directly comparable financial measures calculated and presented in accordance with GAAP for the years ended March 31, 2012 and March 31, 2011:
Fiscal 2012
Fiscal 2011
Income from operations
Tax applied at 30% rate
After tax income from operations
Less: Minority interest
Net operating profit after tax (NOPAT)
Divided by:
Average capital (debt + Modine shareholders' equity, last two year ends / divided by 2)
Return on average capital employed
ROACE improved from 6.3 percent in fiscal 2011 to 9.5 percent in fiscal 2012 primarily due to the 57 percent improvement in income from operations. As the Company looks forward into fiscal 2013, it anticipates that weaker economic conditions in several key markets, including Europe, South America, and Asia, along with planned wind downs of automotive programs may impact net sales unfavorably year over year. This, coupled with the restructuring plans in Europe, will make fiscal 2013 a transitional year.
Revision to Prior Period Financial Statements
The Company revised its fiscal 2010 and fiscal 2011 results in this report for errors identified relating to prior periods. See Note 1 of the Notes to Consolidated Financial Statements for further discussion of the revision.
Products
The Company offers a broad line of products that can be categorized generally as a percentage of net sales as follows:
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Modules/Packages*
Oil Coolers
Radiators
Charge-Air Coolers
Building HVAC
Exhaust Gas Recirculation ("EGR") Coolers
Miscellaneous
Vehicular Air Conditioning Parts
*Typically include components such as radiators, oil coolers, charge air coolers, condensers and other purchased components.
Competitive Position
We compete with several manufacturers of heat transfer and HVAC products, some of which are divisions of larger companies. The markets for the Company's products are increasingly competitive and have changed significantly in the past few years. The Company's traditional OEM customers in the U.S. and Europe are faced with dramatically increased international competition and have expanded their worldwide sourcing of parts to compete more effectively with lower cost imports and have expanded their global footprint to compete in local markets. Some of these market changes have caused the Company to experience competition from suppliers in other parts of the world that enjoy economic advantages such as lower labor costs, lower healthcare costs, and lower tax rates. In addition, the Company has expanded its own geographic footprint in part to allow us to serve our original equipment customers more flexibly across the globe. Our customers also continue to ask the Company, as well as their other primary suppliers, to participate in research and development (R&D), design, and validation responsibilities. This combined work effort often results in stronger customer relationships and more partnership opportunities for the Company.