At Modine Manufacturing Company, we are Engineering a Cleaner, Healthier World ™. Building on more than 100 years of excellence in thermal management, we provide trusted products and
technologies that help improve our world. Our broad portfolio of systems and solutions support our mission of improving indoor air quality, conserving natural resources, lowering harmful emissions, enabling cleaner running vehicles, and using
environmentally friendly refrigerants.
We sell innovative and environmentally responsible thermal management products and solutions to diversified customers in a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration
(“HVAC&R”) markets. In addition, we are a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway original equipment manufacturer (“OEM”) vehicular applications. Our
primary customers across the globe include:
|
− |
Heating, ventilation and cooling OEMs;
|
|
− |
Construction architects and contractors;
|
|
− |
Wholesalers of heating equipment;
|
|
− |
Agricultural, industrial and construction equipment OEMs;
|
|
− |
Commercial and industrial equipment OEMs; and
|
|
− |
Automobile, truck, bus, and specialty vehicle OEMs.
|
We partner with our customers across industries to provide sustainable components, systems, and services and solve complex heat transfer challenges to ensure their climate solutions and performance technologies work more efficiently, last longer
and add comfort to people’s lives. We work to provide the best possible thermal solutions to our customers by first assessing their entire systems to make sure our products integrate seamlessly with other components. We also focus on product
design, from raw materials to end-of-life recyclability, to optimize total cost of ownership and reduce negative environmental impacts across the product life cycle. We anticipate and prepare for change, keeping pace with new and emerging
regulations and fulfilling the demand for sustainable technologies in response to increasingly stringent emissions, fuel economy, and energy efficiency standards.
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 more than 120 U.S. patents for his heat transfer innovations. The standard of innovation exemplified by A.B. Modine remains the cornerstone of Modine today.
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.
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
Our purpose is to engineer a cleaner, healthier world by providing products and services that improve indoor air quality, reduce water and energy consumption, lower harmful emissions, enable cleaner running vehicles, and use environmentally
friendly refrigerants.
In fiscal 2023, we made significant progress toward transforming Modine. We originally announced our vision for a “new” Modine in late fiscal 2021. In fiscal 2022, we onboarded seasoned leaders with the requisite experience to drive
transformative change, including new segment presidents for our Climate Solutions and Performance Technologies segments. Since that time, we have simplified and segmented our organization, aligning teams, led by general managers, around specific
strategies and market-based verticals within our company. Our new leadership teams have embraced 80/20 principles, which focus on the rule that 80 percent of outputs result from 20 percent of inputs. By applying 80/20 principles through data
analytics to identify these valuable inputs, and instilling the mindset of prioritizing the factors that drive the best results, our teams created a high-performance culture that focuses resources on products and markets with the highest
sustainable growth opportunities and best return profiles, while simplifying and improving our processes. For example, we have been focused on growth opportunities in the data center market. In response to identified opportunities, we
strategically expanded our product offerings in this business and are manufacturing and selling more data center cooling products in North America. We have also improved our commercial acumen and have strengthened our business relationships with
our best customers. In addition, by applying 80/20 principles and improving our commercial pricing methodologies, we have improved our profit margins in fiscal 2023, in spite of significant supply chain challenges and inflationary market
conditions.
Looking ahead, our teams remain focused on executing our transformational strategy. We are applying 80/20 principles throughout our organization, including within our manufacturing facilities to improve efficiencies and further simplify our
businesses. We are also taking steps toward maximizing our share in targeted markets, including data centers, electric vehicles, and HVAC&R, where we see the best opportunities for profitable growth.
During fiscal 2023, our consolidated net sales were $2.3 billion, a 12 percent increase from $2.1 billion in fiscal 2022. This increase was primarily due to higher sales in both our Performance Technologies and Climate Solutions segments. Our
operating income of $150 million in fiscal 2023 increased $31 million from the prior year, primarily due to higher gross profit, partially offset by the absence of a $56 million net impairment reversal recorded in the prior year that primarily
related to the liquid-cooled automotive business, which reverted back to held and used classification upon the termination of a sale agreement with the prospective buyer during fiscal 2022.
Our top five customers are in the commercial vehicle, off-highway and automotive and light vehicle markets and our ten largest customers accounted for 39 percent of our fiscal 2023 sales. In fiscal 2023, 56 percent of our total sales were
generated from customers outside of the U.S., with 49 percent of total sales generated by foreign operations and 7 percent generated by exports from the U.S. In fiscal 2022, 60 percent of our total sales were generated from customers outside of
the U.S., with 53 percent of total sales generated by foreign operations and 7 percent generated by exports from the U.S. In fiscal 2021, 63 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 7 percent generated by exports from the U.S.
Product Groups
We partner with our customers across multiple industries to provide sustainable solutions for a wide range of applications. The following is a summary of our primary product groups, categorized as a percentage of our net sales:
|
Fiscal 2023
|
|
Fiscal 2022
|
Air-cooled
|
28%
|
|
28%
|
Heat transfer
|
23%
|
|
23%
|
Liquid-cooled
|
21%
|
|
22%
|
HVAC & refrigeration
|
15%
|
|
16%
|
Data center cooling
|
7%
|
|
5%
|
Advanced solutions
|
6%
|
|
6%
|
Competitive Position
We compete with many manufacturers of heat transfer and HVAC&R products, some of which are divisions of larger companies. The markets for our products continue to be very dynamic. For example, the expansion of electric vehicle demand has
created opportunities to work with our existing OEM customers, as well as emergent customers focused on zero-emission products. Our OEM customers are faced with significant international competition and maintain global manufacturing footprints to
compete in local markets. In addition, consolidation within the supply base and vertical integration have introduced new or restructured competitors to our 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. Many of 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.
Business Segments
Our chief operating decision maker reviews the separate financial results for each of our operating segments. These results are used to evaluate the performance of each business segment and for making decisions on the allocation of resources.
Financial information for our operating segments is included in Note 22 of the Notes to Consolidated Financial Statements.
Effective April 1, 2022, we began managing the Company under two operating segments, Climate Solutions and Performance Technologies. Our new segment structure aligns businesses serving similar or complimentary end markets, products and
technologies under common segment management. This simplified segment structure allows us to better focus resources on targeted growth opportunities and better enables an efficient application of 80/20 principles across all product lines to
optimize profit margins and cash flow.
The Climate Solutions segment includes the previously-reported Building HVAC Systems (“BHVAC”) and the Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings. The Performance Technologies segment includes the
previously-reported Heavy Duty Equipment and Automotive segments and the CIS Coatings business.
Climate Solutions Segment
The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications. The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and
refrigeration (“HVAC & refrigeration”) products, and data center cooling solutions.
The Climate Solutions segment has strategically aligned its teams around three primary market-based verticals: i) heat transfer products; ii) HVAC & refrigeration; and iii) data center cooling.
Heat Transfer Products
The heat transfer products business provides heat transfer coils, including heat recovery and round tube plate fin coils, to the HVAC&R markets in North America, Europe, and Asia. Its customers include commercial and industrial equipment
manufacturers, distributors, contractors, and end users in a variety of commercial and industrial applications, including commercial and residential HVAC, mobile air conditioning, refrigeration, data center management, and precision and industrial
cooling.
In fiscal 2023, the primary HVAC&R markets served by the heat transfer products business experienced modest growth. We expect strong growth in the residential heat pump and data center markets in fiscal 2024, while the commercial and
residential markets are expected to be relatively flat. Trends influencing our primary markets include refrigerant substitution and energy efficiency requirements, both of which are expected to benefit the commercial HVAC&R markets. Demand
for more efficient HVAC&R systems in buildings and processes is driven by more stringent energy efficiency regulations. In addition, the adoption of heat pump technology in Europe is expected to contribute to market growth.
HVAC & Refrigeration
The HVAC & refrigeration business provides a wide array of solutions to heating; indoor air quality; commercial and industrial refrigeration; and industrial power generation, conversion, and transmission and industrial process markets in
North America, Europe, the Middle East and Africa (“EMEA”), and China.
Heating products, primarily sold to the North American residential and commercial heating markets, include unit heaters (gas-fired, hydronic, electric and oil-fired); duct furnaces (indoor and outdoor); infrared units (high- and low-intensity);
and perimeter heating products (cabinet unit heaters and convectors). The primary customers for these heating products are HVAC wholesalers, installers, and end users in a variety of residential, commercial and industrial applications, including
residential garages, warehousing, manufacturing, and greenhouses. In fiscal 2023, the North American heating market experienced a modest decline, primarily driven by weakness in the residential heating market and the impact of the relatively mild
winter weather this past year. Overall, we expect the North American heating market will be stable in fiscal 2024. Longer term, we anticipate that increasing demands for energy efficiency as well as decarbonization and lower emission initiatives
and regulations will benefit the North American heating market.
Indoor air quality products, primarily sold to the North American school and commercial HVAC markets, include roof-mounted direct- and indirect-fired makeup air units; unit ventilators; single packaged vertical units; and ceiling cassettes.
Customers for these indoor air quality products include mechanical contractors, HVAC wholesalers, installers, and end users in a variety of commercial and industrial applications, primarily connected to the North American education system. In
fiscal 2023, the North American school and commercial HVAC markets experienced strong growth, largely driven by available federal and local government funding for ventilation improvements for schools. We expect the federal funds available for
schools to upgrade facilities, including their HVAC systems, will drive continued strong market growth in fiscal 2024.
Refrigeration products, primarily sold to the commercial and industrial refrigeration markets in EMEA, China, and North America, include evaporator unit coolers, remote condensers, fluid coolers, gas coolers, and dry and brine coolers.
Customers for these coolers and refrigeration products primarily include wholesalers, distributors and resellers, commercial and industrial OEMs, as well as contractors and end users in a variety of commercial and industrial applications, including
supermarkets, refrigerated warehouses, logistic centers, cold rooms, precision and industrial cooling, hospitality, hotels, and restaurants. In fiscal 2023, the commercial and industrial refrigeration markets experienced modest growth. We expect
moderate growth in the global refrigeration markets in fiscal 2024, driven by improving standards of living in emerging countries as well as more stringent energy efficiency regulations, partially offset by investment delays in connection with
general market and economic uncertainties. Regulations focused on eliminating fluorinated gases, which are man-made gases that contribute to the global greenhouse effect, are shifting investments from synthetic to natural gas, including carbon
dioxide cooling solutions, and are driving growth in mature markets in Europe and North America.
Power generation and conversion products, primarily sold to the industrial power generation, conversion, and transmission and industrial process markets in EMEA, China, and North America, include motor and generator cooling coils, transformer
oil coolers, radiators, dryers and industrial heat exchangers. Customers for these products primarily include industrial OEMs as well as contractors and end users in industrial applications and for capital projects within the pulp and paper
industry, including industrial cooling and industrial power conversion, production, and transmission. In fiscal 2023, the pulp and paper sector within the industrial power and process market experienced strong growth, however this growth was
tempered by the overall weakness in demand for power transmission products due to delays in capital investments associated with the impacts of the COVID-19 pandemic, including the shortage of certain components. We expect these markets overall
will be stable in fiscal 2024, with an increase in demand for transformer oil cooler products, driven by higher electricity demands, offset by a softening demand in the pulp and paper sector after a strong year of capital investments.
Data Center Cooling
The data center cooling business provides sustainable cooling solutions for data center markets in North America, EMEA, and Asia, including complete system design, controls, maintenance and monitoring. We provide data center cooling solutions
that feature low global warming potential refrigerants, free cooling technology, and lower water consumption, enabling our customers and end-users to meet their environmental and sustainability goals. Data center products consist of IT cooling
solutions, including precision air conditioning units for data center applications; computer room air conditioning (“CRAC”) and computer room air handler (“CRAH”) units; hybrid fan coils; fan walls; chillers; condensers; and condensing units. In
addition, our data center business sells replacement parts, maintenance service and control solutions for existing equipment and new building management controls and systems. This business serves data center management customers, including large
colocation, cloud service providers and hyperscalers, as well as customers in the commercial and industrial sectors such as telecommunications, healthcare and commercial real estate.
In fiscal 2023, the data center markets that we serve experienced strong growth. We expect continued strong growth in these markets in fiscal 2024, driven by the increasing reliance on digital technologies, specifically colocation and cloud
usage. Market demand for data usage and storage continues to rise, driven by the increased use of IoT (Internet of Things) technology, which connects various devices through the internet, artificial intelligence and machine learning, smart phones,
and digital transformation trends. Digital transformation trends driving market demand include employers offering remote work arrangements, an increased focus on the digital customer experience, as more transactions and customer interactions are
taking place virtually through websites and mobile applications, and the increasing use of 5G technology and its application across global enterprise opportunities, particularly in the healthcare, manufacturing, and energy sectors.
Performance Technologies Segment
The Performance Technologies segment provides products and solutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government
regulations. The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications. In addition, the Performance Technologies segment provides advanced thermal
solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.
The Performance Technologies segment has strategically aligned its teams around three primary market-based verticals: i) air-cooled applications; ii) liquid-cooled applications, and iii) advanced solutions.
Air-Cooled Applications
The air-cooled applications business provides air-cooled heat exchangers and modules for vehicular, stationary power, and industrial applications. This business primarily serves the commercial vehicle, off-highway and power generation markets
in North America, Brazil, Europe, China, India and South Korea. It primarily sells powertrain cooling products, such as radiators, condensers, engine cooling modules, charge air coolers, fan shrouds, and surge tanks. Its customers include
commercial, medium- and heavy-duty truck and engine manufacturers; construction, agricultural, and mining equipment and engine manufacturers; and industrial manufacturers of material handling equipment, generator sets and compressors.
During fiscal 2023, the commercial vehicle and off-highway markets in North America and Brazil experienced moderate to strong growth. The European commercial vehicle and off-highway markets remained relatively flat during fiscal 2023, as
compared with fiscal 2022, despite market disruptions from the military conflict between Russia and Ukraine. The off-highway markets in Asia experienced modest declines resulting from cyclical market weakness in fiscal 2023. The commercial
vehicle market in India experienced strong growth during fiscal 2023. Lastly, the power generation market in North America experienced moderate growth. Global supply chain challenges and rising inflation pressures also continued in fiscal 2023
and negatively impacted each of these markets.
In fiscal 2024, we expect stability in the North American and European commercial vehicle markets and moderate growth in the commercial vehicle markets in Brazil and India. Longer term, we expect the continued need by commercial vehicle
manufacturers to meet increasingly stringent emissions and fuel consumption requirements to be a market growth driver. We expect growth in off-highway markets in fiscal 2024. Specifically for the North American agriculture market, we believe that
elevated commodity prices will drive strong demand, particularly for larger agricultural equipment. In addition, our OEM order backlogs remain strong as customers look to replenish large equipment inventory. We also expect growth in the European
and Brazilian agriculture markets, but to a lesser extent than in North America. With regard to construction markets, we expect modest market growth in North America and stable markets in Europe and Asia. Specific to Asia, we anticipate the
construction market will remain relatively weak, however, we expect it to benefit from increasing export sale opportunities. In addition, construction markets may benefit from government infrastructure investments in the U.S., China, and India.
Finally, in regard to the power generation market, we expect strong market growth in North America to be driven by demand for backup power for data centers, power grids, and critical infrastructure, such as hospitals and airports.
Liquid-Cooled Applications
The liquid-cooled applications business provides liquid-cooled heat exchangers for engine, stationary power, and industrial applications. This business primarily serves the automotive, commercial vehicle and off-highway markets in North
America, Brazil, Europe, China, and India. Its products and solutions include aluminum and stainless steel engine oil coolers, exhaust gas recirculation (“EGR”) coolers, liquid charge air coolers, transmission and retarder oil coolers, fuel
coolers, and condensers. Its customers include automobile and light truck OEMs; commercial, medium- and heavy-duty truck and engine manufacturers; Tier-1 filter and front-end module manufacturers and assemblers; and construction and agricultural
equipment manufacturers.
During fiscal 2023, the global commercial vehicle and off-highway markets experienced moderate growth, with the largest gains in the medium- and heavy-duty truck markets. We expect these markets will be stable in fiscal 2024 based upon strong
OEM order backlogs driven by the need to replace aging truck fleets. In addition, compared with fiscal 2023, we expect the raw material markets will stabilize as supply chain challenges begin to ease.
During fiscal 2023, the global automotive market experienced further declines, as semiconductor chip shortages continued to negatively impact the automotive markets, particularly in Europe and North America. In addition, the automotive market
in China was negatively impacted by increased COVID-19 cases and the related lock-downs and supply chain challenges. In fiscal 2024, we expect the automotive markets in Europe and North America will experience modest to moderate growth as
customers look to replenish inventory levels. While we expect the semiconductor chip shortages will persist in fiscal 2024, we expect that the limitations associated with the shortages will ease compared with fiscal 2023. We expect the automotive
market in China, however, will decline slightly in fiscal 2024, as we expect the termination of automotive purchasing incentives by the Chinese government and economic uncertainty will outweigh the favorable impacts of customers replenishing their
inventory levels. Overall, we expect that longer-term growth of the global automotive market will be supported by government tightening of emissions standards for internal combustion engines, in-vehicle technology enhancements and growth in
emerging markets.
Advanced Solutions
The advanced solutions business provides thermal management systems and components for electric vehicles, and factory-applied and aftermarket coating products and application services.
Products and solutions for zero-emission and hybrid vehicles, primary sold to the commercial vehicle, bus and specialty vehicle, off-highway and automotive markets in North America and Europe, include complete battery thermal management systems,
electronics cooling packages, battery chillers, battery cooling plates, coolers and casings for electronics cooling, and coolers for electric axles (“e-axles”). Customers for these products include commercial vehicle, bus and specialty vehicle,
off-highway, and automotive OEMs, e-axle producers, power electronics providers, and electric vehicle startup companies. In fiscal 2023, the primary vehicular markets served by the advanced solutions business experienced strong growth. We expect
continued strong growth in fiscal 2024, as government policies in the U.S. and Europe are driving investments in electric vehicles, as well as the infrastructure necessary for wide-scale adoption of alternative powertrains.
Our advanced solutions business also provides coatings products and application services to the HVAC&R markets in North America and Europe. Our coatings products are designed to extend the life of equipment and components by protecting
against corrosion and foreign matter. Customers for these products and services include manufacturers of commercial and residential HVAC and refrigeration systems, and distributors, contractors, and end users of HVAC&R equipment. In fiscal
2023, the primary HVAC&R markets served by the advanced solutions business experienced modest growth. We expect continued modest growth in these commercial and residential HVAC&R markets in fiscal 2024.
Geographic Areas
We maintain administrative organizations in all key geographic regions to facilitate customer support, development and testing, and other administrative functions. We operate in four continents and within the following countries:
North America
|
South America
|
Europe
|
Asia
|
|
|
|
|
United States
Mexico
|
Brazil
|
Germany
Hungary
Italy
Netherlands
Serbia
Spain
Sweden
United Kingdom
|
China
India
South Korea
United Arab Emirates
|
Our non-U.S. subsidiaries and affiliates manufacture and sell a number of commercial, industrial and building HVAC&R and vehicular products similar to those produced in the U.S.
Exports
Export sales from the U.S. to foreign countries, as a percentage of consolidated net sales, were 7 percent in fiscal 2023, 2022, and 2021.
We believe our international presence positions us to benefit from the anticipated long-term growth of the global commercial, industrial and building HVAC&R and vehicular markets. We are committed to increasing our involvement and
investment in these international markets in the years ahead.
Customer Dependence
Our ten largest customers, some of which are conglomerates or otherwise affiliated with one another, accounted for 39 percent of our consolidated net sales in fiscal 2023. In fiscal 2023 and 2022, our largest customer accounted for less than 10
percent of our sales. In fiscal 2021, Daimler AG, which included Mercedes-Benz Group AG and Daimler Truck AG prior to the spin-off of Daimler Truck AG in fiscal 2022, accounted for more than 10 percent of our sales.
Our top customers operate primarily in the commercial vehicle, off-highway, automotive and light vehicle, data center cooling, and commercial air conditioning and refrigeration markets. Our top customers, listed alphabetically, include:
Carrier; Caterpillar; Daimler Truck AG (including Detroit Diesel, Freightliner, Thomas Built Buses, and Western Star Trucks); Deere & Company; Mercedes-Benz Group AG (including AMG, Athlon, and Maybach); Stellantis (including Chrysler, Fiat,
PSA-Peugeot-Citroen, and VM Motori); Trane Technologies; Volkswagen AG (including Audi, MAN, Porsche, Scania, and Navistar); and Volvo Group (including Mack Trucks and Renault Trucks). In addition, our Climate Solutions segment includes
significant sales to a single global technology customer with which we are party to confidentiality agreements. Generally, we supply products to our customers on the basis of individual purchase orders received from them. When it is in the mutual
interest of Modine and our customers, 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 typically three to five years in duration.
Backlog of Orders
Our operating segments maintain their own inventories and production schedules. We believe that our current production capacity is capable of handling our expected sales volume in fiscal 2024 and beyond.
Raw Materials
We purchase aluminum, nickel and steel 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 concentrated between two global suppliers, with other suppliers qualified and supplying lesser amounts to mitigate risk. While our suppliers may become constrained due to global demand, we typically do
not experience raw material shortages and believe that our suppliers’ production of these metals will be adequate throughout the next fiscal year. We typically adjust metals pricing with our raw material suppliers on a monthly basis and our major
fabricated component suppliers on a quarterly basis. When possible, we have included provisions within our long-term customer contracts which provide for adjustments to customer prices, on a prospective basis, based upon increases and decreases in
the cost of key raw materials. When applicable, however, these contract provisions 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 often be a three-month to one-year lag until the time that the price adjustments take effect.
Patents and Other Intellectual Property
We protect our intellectual property through patents, trademarks, trade secrets and copyrights. As a part of our ongoing R&D activities, we routinely seek patents on new products and processes. Our Patent Review Committee manages our
intellectual property strategy and portfolio. We own or license numerous patents worldwide related to our products and operations. Also, 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.
Research and Development
We are committed to building better products that will, in turn, help create a better world. We focus our engineering and R&D efforts on innovative solutions to meet the challenging thermal management needs of OEMs and other customers
within the commercial, industrial, building HVAC&R, commercial vehicle, construction, agricultural, powersports, and automotive and light vehicle markets. Our products and systems are often aimed at solving difficult and complex heat transfer
challenges requiring advanced thermal management, while meeting the demand for being more efficient, lighter weight, more compact, and more durable to ensure compliance with increasingly stringent energy efficiency, fuel economy and emissions
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, totaled $44 million, $50 million, and $46 million in fiscal 2023, 2022, and 2021, respectively. As a percentage of our consolidated net
sales, we spent approximately 2 percent on R&D in fiscal 2023 and 2022, and approximately 3 percent in fiscal 2021. As our key markets continue to change, we are committed to meaningful R&D investment in the years to come. To achieve
efficiencies and lower development costs, our R&D groups work closely with our customers on special projects and system designs. These development projects for the HVAC&R markets primarily focus on sustainable solutions that optimize
thermal efficiency and manufacturing, to support decarbonization efforts and the use of next generation refrigerants, to help minimize global warming potential. Within our data center markets, development projects focus on product advancements to
reduce water and energy consumption. Our vehicular market projects are aimed at providing advanced thermal solutions for electric vehicles that improve fuel efficiency and reduce overall energy consumption. Most of our current R&D activities
are focused on internal development in the areas of building HVAC, commercial and industrial thermal management products, data center cooling, and vehicular and equipment cooling including electric vehicle, powertrain and engine cooling. We also
collaborate with industry, university, and government-sponsored research organizations that conduct research and provide data on practical applications in the markets we serve. 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 capabilities.
Quality Improvement
Globally, we drive quality improvement by maintaining the Global Modine Management System and executing the Modine Quality Strategy.
Our actions and decisions are driven by our purpose: Engineering a Cleaner, Healthier World™. Our strategic journey requires a uniting culture that grounds us, inspires us and
energizes us as we address the world’s most important challenges through innovative products and services with superior quality.
Through our integrated and process-oriented Global Modine Management System, the majority of our manufacturing facilities and administrative offices are registered to ISO 9001:20015 or IATF 16949:2016 standards, helping to ensure that our
customers receive high quality products and services. We regularly monitor our process performance to meet or exceed rising customer expectations for products, services and quality.
Our Global Modine Management System supports our mission and values by applying well-defined improvement principles and leadership behaviors, all based on our 80/20 mindset to facilitate rapid improvements. We drive sustainable and systematic
continuous improvement throughout our company by utilizing the principles, processes and behaviors of the Global Modine Management System.
To ensure future quality, we continue to execute the Modine Quality Strategy, which focuses on people, process, performance, quality engineering and the Global Modine Management System.
Environmental Matters
We are committed to Engineering a Cleaner, Healthier World™ and are working every day to deliver systems and solutions that improve air quality and conserve natural resources. We
concentrate on the benefits our products deliver, including reducing water and energy consumption, lowering harmful emissions, and enabling our customers to use environmentally friendly refrigerants. In addition, we are committed to conducting
business at our global locations in an environmentally conscious manner, specifically by preventing pollution, eliminating waste and reducing environmental risks. We employ waste management programs to advance our environmental stewardship and
minimize our environmental footprint. The majority of our facilities maintain Environmental Management System (“EMS”) certification to the international ISO14001 standard through independent third-party audits.
In regard to providing innovative, climate-resilient solutions that enable our customers to meet their sustainability goals, we are continuously driving energy efficiency across our product portfolio. Our Climate Solutions segment continues to
develop high-efficiency heating and indoor air quality products and data center cooling solutions that reduce both electrical and water usage. Our Lodronic™ Low-Temperature Hydronic Heater, for example, was designed for use with high-efficiency
boilers, geothermal or air-to-water heat pump systems to maximize efficiency and uses 50 percent less electricity than the typical hydronic heater. We are also shifting our product portfolios toward lower-emission propellants and refrigerants
which greatly reduce the environmental impact and enhance energy efficiency for our customers’ heating and cooling systems. Our Performance Technologies segment offerings focus on fuel efficiency and lower emissions. Our oil, charge-air, and EGR
coolers, radiators, air conditioning condensers, and battery thermal management systems for cars, trucks, buses, specialty vehicles, and off-highway equipment allow both electric vehicle and internal combustion systems to run at optimal
temperatures, which promotes better fuel efficiency, lower emissions, and improved vehicle lifespans, while still providing the vehicle performance that our customers expect.
In regard to our global business operations, we are working to reduce both our energy and water usage and have empowered each of our global facilities to create and carry out action plans that contribute to our company-wide reduction goals.
Examples of steps we are taking to meet these goals include the installation of more efficient LED lighting systems, the replacement of inefficient boilers and air compressors, improved building HVAC management systems, increased industrial water
recycling, and the installation of water-saving faucets.
Obligations for remedial activities may arise at our facilities due to past practices, or as a result of a property purchase or sale. These obligations 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. We have recorded liabilities for environmental investigative and remediation work at sites in the U.S. and abroad totaling $18 million at March 31, 2023.
Seasonal Nature of Business
Our overall operating performance is generally not subject to a significant degree of seasonality. The Climate Solutions segment experiences some seasonality, as demand for HVAC & refrigeration products can be affected by heating and
cooling seasons, weather patterns, construction, and other factors. Sales volume for our Climate Solutions heating products is generally stronger in our second and third fiscal quarters, corresponding with demand for these products. We generally
expect sales volume for our Climate Solutions refrigeration, power generation and conversion, and heat transfer products to be higher during our first and second fiscal quarters due to the construction seasons in the northern hemisphere. Sales to
Performance Technologies vehicular OEM customers are dependent upon market demand for new vehicles. However, our second fiscal quarter production schedules are typically impacted by customer summer shutdowns and our third fiscal quarter is
affected by holiday schedules.
Working Capital
We manufacture products for the majority of customers on an as-ordered basis, which makes large inventories of finished products unnecessary, with the exception of certain products in our Climate Solutions segment. Within our Climate Solutions
segment, we maintain varying levels of finished goods inventory, primarily related to our heating, indoor air quality, and data center products, due to seasonal demand and the timing of sales programs. In Brazil, within our Performance
Technologies segment, we maintain aftermarket product inventory in order to timely meet customer needs in the Brazilian automotive and commercial vehicle aftermarkets. We have not experienced a significant number of returned products within any of
our businesses.
Human Capital Resource Management
As of March 31, 2023, we employed approximately 11,300 persons worldwide.
We recognize that our continued success is a direct result of the quality of our people. As such, we strive to be an employer of choice in every community in which we operate. We do this by fostering a fair, respectful, and safe work
environment for our people in alignment with our core values.
We have identified priorities that we believe are essential to attract, develop and retain highly-qualified talent. These include, among others, i) providing career development programs; ii) promoting health and safety; iii) fostering diversity
and inclusion in the workplace; and iv) providing competitive compensation and benefits.
Workforce Development
Our operations require expertise across a wide range of disciplines, from engineering and manufacturing to accounting and finance to information technology. Our human resources team at our corporate headquarters and our local facility managers
work to hire talented individuals who align with our values.
All of our new employees go through a comprehensive onboarding program with their managers to ensure proper training is provided to succeed in their respective roles. We also encourage our employees to further develop their skills through both
internal and external training programs.
We are committed to growing our employees’ capabilities. Through our annual Performance and Development Process (“PDP”), we provide all salaried employees with a consistent, structured development and performance review experience. The PDP
provides employees with a development pathway that focuses on both annual performance goals and longer-term career development. In addition, we perform strategic talent reviews and succession planning on a regular cadence.
Health and Safety
The health and safety of our employees is paramount to us. We are committed to conducting our business operations in a safe and healthy manner. We employ a behavior-based safety program which proactively seeks to correct at-risk behaviors
while positively reinforcing safe behaviors. We educate and train employees on safe practices and promote personal accountability and responsibility for safety at all levels of our organization.
We have consistently out-performed the private-industry Recordable Incident Rate (“RIR” as defined by the Occupational Safety and Health Administration) average for the manufacturing sector, which was 3.3 in 2021, the most recent year for which
data is available. During fiscal 2023, we recorded an RIR of 1.06, well below the manufacturing sector average.
Diversity and Inclusion
We are committed to a diverse workforce, founded on respect and value for people of different backgrounds, experiences, and perspectives. Incorporating diverse talent and fostering an inclusive workforce is a key focus of our talent management
strategy. We track and focus on indicators of diversity and inclusion across our global operations, including the number of women in supervisory roles and minority new hires in the U.S.
Competitive Compensation and Benefits
We offer our employees competitive compensation and comprehensive benefit packages. We regularly benchmark our compensation practices and benefits programs against those of comparable industries and in the geographic areas where our facilities
are located. We believe that our compensation and employee benefits are competitive and allow us to attract and retain talent throughout our organization.
Available Information
Through our website, www.modine.com (Investors link), we make available, free of charge, 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, among others:
|
− |
Code of Conduct, which is applicable to all Modine directors and employees, including our executive officers;
|
|
− |
Guidelines on Corporate Governance;
|
|
− |
Audit Committee Charter;
|
|
− |
Human Capital and Compensation Committee Charter;
|
|
− |
Corporate Governance and Nominating Committee Charter; and
|
|
− |
Technology Committee Charter.
|
All of the reports and corporate governance documents referenced 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.
In the ordinary course of our business, we face various market, operational, strategic, financial and general risks. These risks could have a material impact on our business, financial condition, results of operations
and cash flows. Please consider each of the risks described below, along with other information contained in this Annual Report on Form 10-K, when making any investment decisions with respect to our securities.
Our Enterprise Risk Management process seeks to identify and address material risks. We believe that risk-taking is an inherent aspect of operating a global business and, in particular, one focused on growth and
cost-competitiveness. Our goal is to proactively manage risks in a structured approach in conjunction with strategic planning, while preserving and enhancing shareholder value. However, the risks set forth below and elsewhere in this report, as
well as other risks currently unknown or deemed immaterial at the date of this report, could adversely affect us and cause our financial results to vary materially from recent or anticipated future results.
Economic Uncertainties
A downturn or recessionary conditions in the global economy could adversely affect our business, financial position, results of operations and cash flows.
We operate in 15 countries in four continents and serve customers in a wide array of HVAC&R and vehicular markets, including commercial vehicle, off-highway, automotive and light vehicle. As such, our business is impacted by general
economic and industry conditions globally as well as in the regions and countries in which we conduct business. An economic downturn or recession in the global economy could have a material adverse effect on our business, financial position,
results of operations and cash flows. Customer demand for our products and system solutions is impacted by the overall strength of the economy, employment levels, consumer confidence levels, the availability and cost of credit, and the cost of
fuel. For example, rising interest rates associated with inflationary market conditions may drive a higher cost of capital for our customers, which may have a deteriorating impact on overall economic activity and the financial condition of our
customers which could negatively impact the demand for our products. Prolonged recessionary or adverse economic conditions, such as disruptions in the global financial system, could result in our customers or suppliers experiencing significant
economic constraints, including potential bankruptcies.
Supply chain disruptions and inflationary market conditions could adversely affect our business, financial position, results of operations and cash flows.
Market and economic dynamics, including the impacts of the military conflict between Russia and Ukraine and the COVID-19 pandemic, have contributed to global supply chain challenges and inflationary market conditions. Further disruptions or
significant deterioration in market conditions could have a material adverse effect on our business, financial position, results of operations and cash flows.
In February 2022, Russian troops invaded Ukraine and the military conflict is ongoing. In response to the military conflict, governments in the U.S. and abroad have imposed sanctions against Russia and Belarus, which could adversely affect the
global economy and financial markets in which we operate. We do not have manufacturing operations in Ukraine or Russia nor any significant business relationships with Ukraine- or Russian-based customers or suppliers. To date, the military
conflict has not materially impacted our business or operations. An expansion of the military conflict, geographically or politically, could result in further market disruptions, including volatility in raw material prices and credit and capital
markets, supply chain challenges, and an increase in the threat of cyberattacks on the global supply chain, which could adversely affect our business, financial position, results or operations and cash flows.
Since its onset, the COVID-19 pandemic has broadly impacted the global economy and our key end markets. The direct effects on our company in fiscal 2023 from the COVID-19 pandemic were relatively limited. However, the pandemic, along with
other market and economic dynamics, have contributed to global supply chain challenges, labor shortages and inflationary market conditions. Raw material and logistic prices have increased and we, like many companies, have experienced delays and
shortages in certain purchased commodities and components. In addition, our Performance Technologies segment has been impacted by lower order volume associated with semiconductor shortages.
At this time, we cannot reasonably estimate the full impact of the ongoing supply chain challenges or inflationary market conditions. If we, our suppliers, or our customers continue to experience prolonged shutdowns or
other significant business disruptions, it is possible that our ability to conduct business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on our
business, financial position, results of operations and cash flows.
A future widespread outbreak of an illness or other public health threat could adversely affect our business, financial position, results of operations and cash flows.
An outbreak of a disease or public health threat, including a significant resurgence of COVID-19, in the future could create economic and financial disruptions and adversely affect our businesses around the world.
Potential impacts of epidemics, pandemics, or other health crises include, but are not limited to, (i) staffing shortages if portions of our workforce are unable to work effectively due to illness, quarantines, government actions, facility
closures, or other restrictions; (ii) short- or long-term disruptions in our supply chain and our ability to deliver products to our customers; (iii) deterioration in the markets that we or our customers operate in, which may result in lower sales
or a lack in the ability of our customers to pay us; and (iv) significant volatility or negative pressure in the financial markets, which could adversely affect our access to capital and/or financing.
Customer and Supplier Matters
Increases in costs of materials, including aluminum, copper, steel and stainless steel (nickel), other raw materials and purchased components, could place significant pressure on our results of
operations.
Further potential increases in the costs of raw materials and other purchased components, which may be impacted by a variety of factors, including changes in trade laws, tariffs, sanctions, inflation, the behavior of our suppliers and
significant fluctuations in demand, could have a significant adverse effect on our results of operations. In the shorter-term, our ability to adjust for cost increases is limited when prices are fixed for current orders. In these cases, if we are
not able to recover such cost increases through price increases to our customers, such cost increases will have an adverse effect on our results of operations. With regard to our longer-term sales programs, we have sought to reduce the risk of
cost increases by including provisions within our customer contracts, where possible, which provide for prospective price adjustments based upon increases and decreases in the cost of key raw materials. However, where these contract provisions are
applicable, there can often be a three-month to one-year lag until the time of the price adjustment. To further mitigate our exposure, from time to time we enter 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.
We could be adversely affected if we experience shortages of components or materials from our suppliers.
In an effort to manage and reduce our costs while balancing supply risk, we have added key suppliers to our supply base during the last year. We are, however, still dependent upon limited sources of supply for certain components used in the
manufacture of our products, including aluminum, copper, steel and stainless steel (nickel). We select our suppliers based upon total value (including price, delivery and quality), taking into consideration their production capacities, financial
condition and willingness and ability to meet our demand. In some cases, it can take several months or longer to identify and accept a new supplier due to qualification requirements.
Strong demand, the potential effects of trade laws and tariffs, capacity constraints, financial instability, public health crises, such as pandemics and epidemics, or other circumstances experienced by our suppliers could result in shortages or
delays in their supply of product to us, or a significant price increase resulting in our need to resource to a different supplier. If we experience significant or prolonged shortages of any critical
components or materials from our suppliers and could not procure the components or materials from other sources, we may be unable to meet our production schedules and could miss product delivery dates, which would adversely affect our sales,
results of operations and customer relationships.
Our results of operations could be adversely affected by price reduction pressures from OEMs.
Although we have negotiated price increases for certain customer contracts in response to the current inflationary market conditions, we have historically faced price-reduction pressure from our vehicular OEM customers and expect to face price
reduction pressure from them in the future. We have taken, and will continue to take, steps to reduce our operating costs to offset both inflationary pressures and contractual price reductions in order to achieve profit margins that are acceptable
to us. For existing contractual price reductions, if we are unable to offset price reductions through improved operating efficiencies and manufacturing processes, sourcing alternatives, technology enhancements and other cost reduction initiatives,
or through price negotiations, our results of operations could be adversely affected.
As part of our application of the 80/20 principles, we have improved our commercial acumen, including our pricing methodology, and have clear, strategic targets in terms of profit margins for new sales programs. To the extent contractual price
reductions are unavoidable for new sales programs, we contemplate them in our overall strategy and adjust pricing as necessary to provide satisfactory profit margins throughout the duration of the sales programs. While we believe that this pricing
strategy will strengthen our business and allow us to focus our resources on higher margin sales programs, it is possible that it may result in a lower overall win rate for new business in the shorter-term. If our pricing strategy results in
winning less new business, our results of operations could be adversely affected.
Our net sales and profitability could be adversely affected from business losses or declines with major customers.
Deterioration of a business relationship with a major customer could cause our sales and profitability to suffer. In certain areas of our businesses, a large portion of sales are attributable to a relatively small number of customers. In our
vehicular businesses, 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 sales of existing products. The loss of a major customer in any of our businesses, the loss of
business with respect to one or more of the vehicle models that use our vehicular products, or a significant decline in the production levels of such vehicles could have an adverse effect on our business, results of operations and cash flows.
Customer pressure to absorb costs adversely affects our profitability.
Vehicular 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 results of operations.
Climate Change and ESG-Related Risks
Global climate change and related emphasis on ESG matters by various stakeholders could negatively affect our business.
Increased public awareness and concern regarding global climate change may result in more regional and/or federal requirements to reduce or mitigate the effects of greenhouse gas emissions. There continues to be a lack of consistent climate
legislation, which creates economic and regulatory uncertainty. Such regulatory uncertainty extends to our product portfolio and overall costs of compliance, which may impact the demand for our products and/ or require us to make increased capital
expenditures to meet new standards and regulations. Further, our customers or other market participants may impose emissions or other environmental standards upon us through regulation, market-based emissions policies or consumer preference that
we may not be able to timely meet, or which may not be economically feasible for us, due to the required level of capital investment or technological advancement.
There is a growing consensus that greenhouse gas emissions are linked to global climate changes. Climate changes, such as extreme weather conditions, create financial risk to our business. For example, the demand for our products and services
may be affected by unseasonable weather conditions. Climate changes could also disrupt our operations by impacting the availability and cost of materials needed for manufacturing and could increase insurance and other operating costs. We could
also face indirect financial risks passed through the supply chain, and process disruptions due to climate changes could result in price modifications for our products and the resources needed to produce them.
Furthermore, customer, investor, and employee expectations in areas such as the environment, social matters and corporate governance (ESG) have been rapidly evolving and increasing. Specifically, certain customers are requiring information on
our environmental sustainability goals and commitments, which we have not yet released publicly. There can be no assurance of the extent to which any of our future plans will be achieved, or that any investments we make in furtherance of achieving
any such plans, targets, goals or other commitments will meet customer, investor, employee or other stakeholder expectations and desires or any regulatory or legal standards regarding sustainability performance.
Additionally, the enhanced stakeholder focus on ESG matters requires the continuous monitoring of various and evolving standards and the associated reporting requirements. A failure to adequately meet stakeholder expectations may result in the
loss of business, diluted market valuation, an inability to attract and retain customers or an inability to attract and retain top talent.
Competitive Environment
Continued and increased competition could adversely affect our business and our results of operations.
The global competitive environment continues to be dynamic as many of our customers, faced with intense international competition, have expanded their sourcing of components. As a result, we experience 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. In addition, consolidation and
vertical integration within the supply base have introduced new or restructured competitors to our markets. Increased competition could adversely affect our business and our results of operations.
Complexities of Global Presence
We are subject to risks related to our international operations and global customer base.
We have manufacturing and technical facilities located in North America, South America, Europe, and Asia. In fiscal 2023, 56 percent of our sales were generated from customers outside the U.S., with 49 percent of these sales generated by our
non-U.S. operations. Our global operations are subject to complex international laws and regulations and numerous risks and uncertainties, including changes in monetary and fiscal policies, including those related to tax and trade, cross-border
trade restrictions or prohibitions, import or other charges or taxes, fluctuations in foreign currency exchange and interest rates, inflation, changing economic conditions, public health crises, including COVID-19, unreliable intellectual property
protection and legal systems, insufficient infrastructures, social unrest, political instability and disputes (including, for example, impacts of the military conflict in Ukraine), incompatible business practices, and international terrorism.
Changes in policies or laws governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we either manufacture products, such as Mexico, or buy raw materials, such as China,
could have a material adverse effect on our results of operations. In addition, compliance with multiple and often conflicting laws and regulations of various countries can be challenging and expensive.
Embargoes or sanctions imposed by the U.S. government or those abroad that restrict or prohibit sales to or purchases from specific persons or countries or based upon product classification may expose us to potential criminal and civil sanctions
to the extent that we are alleged or found to be in violation, whether intentional or unintentional. Governments in the U.S. and abroad have imposed sanctions on Russia in connection with the military conflict in Ukraine. While we do not have
manufacturing operations in Ukraine or Russia nor any significant business relationships with Ukraine- or Russian-based customers or suppliers, we are actively monitoring the sanctions requirements and reacting as necessary to ensure compliance.
We cannot predict future regulatory requirements to which our business operations may be subject or the manner in which existing laws might be administered or interpreted.
In addition, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other similar anti-corruption laws generally prohibit companies and their intermediaries from making payments to improperly influence foreign government officials or
other persons for the purpose of obtaining or retaining business. In recent years, there has been a substantial increase in the global enforcement of anti-corruption laws. In the event that we believe our employees or agents may have violated
applicable anti-corruption laws, or if we are subject to allegations of any such violations, we may have to expend significant time and financial resources toward the investigation and remediation of the matter, which could disrupt our business and
result in a material adverse effect on our financial condition, results of operations and reputation.
Challenges of Maintaining a Competitive Cost Structure
We may be unable to maintain competitive cost structures within our business.
In recent years, we have engaged in various restructuring activities in order to optimize our manufacturing footprint and cost structure. These restructuring activities have included targeted headcount reductions that support our objective of
reducing operational and SG&A cost structures and the consolidation and/or closure of manufacturing facilities in North America, Europe and Asia. In addition, we continue to focus on reducing costs for materials and services through targeted
adjustments and negotiations with our supply base. Our successful execution of these initiatives, and our ability to identify and execute future opportunities to optimize our cost structures, is critical to enable us to establish a cost structure
that will improve and sustain our long-term competitiveness. Any failure to do so could, in turn, adversely affect our results of operations and financial condition.
Challenges of Program Launches
We launch 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 spend significant time and financial resources to ensure the successful launch of new products and programs. Due
to our high level of launch activity, particularly within our Performance Technologies segment, we must appropriately manage these launches and deploy our operational and administrative resources to take advantage of the resulting increase in our
business. If we do not successfully launch new 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 operating inefficiencies or asset impairment charges, which could adversely affect our results of operations.
Information Technology (IT) Systems
We may be adversely affected by a substantial disruption in, or material breach of, our IT systems.
We are dependent upon our IT infrastructure, including network, hardware, and software systems, to conduct our business. Despite network and other cybersecurity measures we have in place, our IT systems could be compromised or we could
experience a cybersecurity breach from computer viruses, ransomware, phishing, break-ins or similar disruptions. A substantial disruption in our IT systems for a prolonged time period, or a material breach of our IT systems, could result in delays
in receiving inventory and supplies or filling customer orders, and/or the release of otherwise confidential information, including personal information that is protected by the General Data Protection Regulation, adversely affecting our customer
service and relationships as well as our reputation, and could lead to significant remediation expenses and litigation risks. Our systems, and the systems of our service providers or others, could be breached, damaged or interrupted by
cyber-attacks or other intentional or unintentional events, or by natural disasters or occurrences, many of which may, despite our best efforts, be beyond our ability to effectively detect, anticipate or control. This impact may be heightened by
the increased prevalence of hybrid and/or remote work arrangements that were first offered in connection with mitigating the spread of COVID-19. Further, the military conflict in Ukraine and the associated political uncertainty may increase the
threat of cyberattacks on the global supply chain, which could directly or indirectly impact our operations. Any such events and the related delays, problems or costs could have a material adverse effect on our business, financial condition,
results of operations and reputation.
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 material expenditures could be required in order for our products and operations to comply with evolving environmental, health and safety laws, regulations (including those developed as a concern to climate control), or other
requirements that may be adopted or imposed in the future. Future costs to remediate contamination or to comply with environmental, health and safety laws and regulations could adversely affect our business, results of operations and financial
condition.
Claims and Litigation
We may incur material losses and costs as a result of warranty and product liability claims and litigation or other legal proceedings.
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 vehicular customers offer
extended warranty protection for their vehicles and require their supply base to extend warranty coverage as well. 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, results of operations, financial condition and reputation.
Business Optimization and Growth Strategies
Inability to execute on our strategic initiatives may adversely impact our business and operating results.
We are well on our way in our strategic transformation. We onboarded seasoned leaders and segmented our organization, aligning teams led by general managers around specific strategies and market-based verticals. Our leadership teams have
created a high-performance culture and are prioritizing resources on products and markets with the highest growth opportunities and best return profiles. We plan to continue to employ an 80/20 mindset across our businesses, including within our
manufacturing facilities, to optimize profit margins and cash flow. However, if we are unable to successfully execute on our strategic initiatives, we may not achieve the financial or operational successes anticipated.
In addition, we will continue to review our business portfolio and pursue acquisitions to accelerate growth. There can be no assurance we will be able to identify attractive acquisition targets. If we are unable to successfully execute on
organic growth opportunities or complete acquisitions in the future, our growth may be limited. In addition, future acquisitions will require integration of operations, sales and marketing, information technology, finance, and administrative
functions. If we are unable to successfully integrate future acquisitions and operate these businesses profitably, we may not achieve the financial or operational success expected from the acquisitions.
Liquidity and Access to Cash
Our indebtedness may limit our use of cash flow to support operating, development and investment activities, and failure to comply with our debt covenants could adversely affect our liquidity and
financial results.
As of March 31, 2023, we had total outstanding indebtedness of $353 million. Our indebtedness and related debt service obligations (i) require that significant cash flow from operations be used for principal and interest payments, which reduces
the funds we have available for other business purposes; (ii) limit our flexibility in planning for or reacting to changes in our business and market conditions; and (iii) expose us to interest rate risk, since the majority of our debt obligations
carry variable interest rates.
Our credit agreements contain financial covenants that, among other things, require us to maintain a minimum interest coverage ratio and impose a maximum leverage ratio. Failure to comply with debt covenants could result in an event of default,
which, if not cured or waived, could result in us being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be
adversely affected by increased costs and interest rates.
Market trends and regulatory requirements may require additional funding for our pension plans.
Our defined benefit pension plans in the U.S. are frozen to new participants. Our funding policy 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 liability totaling $20 million as of March 31, 2023. As a result of funding relief provisions within the American Rescue Plan Act of 2021, we do not expect to make cash contributions to our U.S.
plans during fiscal 2024. Funding requirements for our defined benefit plans are dependent upon, among other things, interest rates, underlying asset returns, mortality rate assumptions, 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 cash flows and financial condition could be adversely affected.
Goodwill and Intangible Assets
Our balance sheet includes significant amounts of goodwill and intangible assets. An impairment of a significant portion of these assets would adversely affect our financial results.
Our balance sheet includes goodwill and intangible assets totaling $247 million at March 31, 2023. We perform goodwill impairment tests annually, as of March 31, or more frequently if business events or other conditions exist that require a
more frequent evaluation. In addition, we review intangible assets for impairment whenever business conditions or other events indicate that the assets may be impaired. If we determine the carrying value of an asset is impaired, we write down the
asset to fair value and record an impairment charge to current operations.
We use judgment in determining if an indication of impairment exists. For our annual goodwill impairment tests, we use estimates and assumptions, including revenue growth rates and operating profit margins
to calculate estimated future cash flows and risk-adjusted discount rates. We cannot predict the occurrence of future events or circumstances, including lower than forecasted revenues, market trends that fall below our current expectations,
actions of key customers, increases in discount rates, and the continued general economic uncertainties, which could adversely affect the carrying value of goodwill and intangible assets. An impairment of a significant portion of goodwill or
intangible assets could have a material adverse effect on our financial results.
Income Taxes
We may be subject to additional income tax expense or become subject to additional tax exposure.
The subjectivity of or changes in tax laws and regulations in jurisdictions where we have significant operations could materially affect our results of operations and financial condition. We are also subject to tax audits in each jurisdiction
in which we operate. Unfavorable or unexpected outcomes from one or more tax audits could adversely affect our results of operations and financial condition.
In addition, as of March 31, 2023, our net deferred tax assets totaled $79 million. Each quarter, we evaluate the probability that our deferred tax assets will be realized and determine whether valuation allowances or adjustments thereto are
needed. This determination involves judgement and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. Future events or circumstances, such as lower taxable income or
unfavorable changes in the financial outlook of our operations in certain jurisdictions, could require us to establish further valuation allowances, which could have a material adverse effect on our results of operations and financial condition.
Customers and Markets
We are dependent upon the health of the customers and markets we serve.
We are highly susceptible to unfavorable trends or disruptions in the markets we serve, as our customers’ financial condition and performance are affected by general economic conditions, including supply chain challenges, access to credit, the
price of fuel and electricity, employment levels and trends, interest rates, labor relations issues, regulatory requirements, government-imposed restrictions relating to health crises or other unusual events, trade agreements and other market
factors, as well as by customer-specific issues. Any significant decline in demand for our products and solutions, including those driven by customer production levels, by current and future customers could result in asset impairment charges and a
reduction in our sales, thereby adversely impacting our results of operations, cash flows and financial condition.
Exposure to Foreign Currencies
As a global company, we are subject to foreign currency rate fluctuations, which affect our financial results.
Although our financial results are reported in U.S. dollars, a significant portion of our sales and operating costs are realized in foreign currencies. Our sales and profitability are affected by movements of the U.S. dollar against foreign
currencies in which we generate sales and incur expenses. To the extent that we are unable to match sales 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. In certain
instances, currency rate fluctuations may create pricing pressure relative to competitors quoting in different currencies, which could result in our products becoming less competitive. Significant long-term fluctuations in relative currency values
could have an adverse effect on our results of operations and financial condition.
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 fail to provide high quality, innovative products and services that both meet or exceed customer expectations and address their ever-evolving needs, we may experience price erosion, lower sales, and lower profit
margins. Significant technological developments by our competitors or 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 and license 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. As we maintain or expand our operations in jurisdictions where the enforcement of intellectual property rights is less robust, the risk of others duplicating our proprietary technologies increases, despite our efforts to protect
them. Developments or assertions by or against us relating to intellectual property rights could adversely affect our business and results of operations.
Attracting and Retaining Talent
Our continued success is dependent on being able to attract, develop and retain qualified personnel.
Our ability to sustain and grow our business requires us to hire, develop, and retain skilled and diverse personnel throughout our organization. We depend significantly on the engagement of our employees and their skills, experience and
industry knowledge to support our objectives and initiatives. We have observed tightening and increased competitiveness in the labor markets and have experienced labor shortages at certain of our manufacturing locations. Any prolonged labor
shortages or significant employee turnover could negatively impact productivity and result in increased labor costs, such as increased overtime to meet demand or increased wage rates necessary to attract and retain employees. Overall, difficulty in
attracting, developing, and retaining qualified personnel could adversely affect our business and results of operations.