Note 16: Pension and Employee Benefit Plans

Defined Contribution Employee Benefit Plans:

The Company maintains domestic 401(k) plans that allow employees to contribute a portion of their salary to help save for retirement. The Company matched 50 percent of employee contributions, up to 5 percent of employee compensation, during fiscal 2017, 2016, and 2015 related to its primary domestic 401(k) plans. The Company also makes annual employer contributions into eligible active employee accounts based upon a percentage of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary. The Company’s expense for defined contribution employee benefit plans during fiscal 2017, 2016, and 2015 was $4.7 million, $4.6 million, and $5.9 million, respectively.

In addition, the Company maintains non-qualified deferred compensation plans for eligible employees, and various non-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.

Statutory Termination Plans:

Certain non-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.

Defined Benefit Employee Benefit Plans:

Pension plans: As a result of its acquisition of Luvata HTS, the Company acquired defined benefit pension plans in Italy, Austria, and the U.S. with liabilities totaling $14.3 million, representing the aggregate funded status of these acquired plans. These acquired plans are closed to new participants.

In addition, the Company maintains non-contributory defined benefit pension plans that cover most of its domestic employees hired on or before December 31, 2003. The benefits provided are based primarily upon years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based upon a monthly retirement benefit amount. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company also have legacy defined benefit plans which cover a smaller number of active employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany and Austria and are closed to new participants.

The Company contributed $8.1 million, $6.7 million, and $5.9 million to its U.S. pension plans during fiscal 2017, 2016, and 2015, respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.

During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company offered a voluntary lump-sum payout program to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer and a total of $65.3 million was paid from pension plan assets during fiscal 2016, which reduced the Company’s pension obligation by the same amount. In connection with these lump-sum payouts, the Company recorded $42.1 million of non-cash settlement losses related to the accelerated recognition of unamortized actuarial losses previously recorded on the consolidated balance sheets within accumulated other comprehensive loss. During fiscal 2016, the Company recorded $33.3 million and $8.8 million of settlement losses as SG&A expenses and cost of sales, respectively, within the consolidated statements of operations.

Postretirement plans: The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans during fiscal 2017, 2016, and 2015 was $0.3 million, $0.3 million, and $0.1 million, respectively.

Measurement Date: The Company uses March 31 as the measurement date for its pension and postretirement plans.

Changes in benefit obligations and plan assets, as well as the funded status of the Company’s pension plans, for the fiscal years ended March 31, 2017 and 2016 were as follows:

	2017			2016
Change in benefit obligation:
Benefit obligation at beginning of year	$	261.0		$	328.2
Service cost		0.6			0.6
Interest cost		9.8			11.2
Actuarial gain		(0.5	)		(2.8	)
Benefits paid (a)		(19.8	)		(78.1	)
Acquired obligations (b)		20.3			-
Effect of exchange rate changes		(1.6	)		1.9
Benefit obligation at end of year	$	269.8		$	261.0

Change in plan assets:
Fair value of plan assets at beginning of year	$	141.5		$	217.0
Actual return on plan assets		11.0			(5.3	)
Benefits paid (a)		(19.8	)		(78.1	)
Employer contributions		9.5			7.9
Acquired plan assets (b)		6.0			-
Fair value of plan assets at end of year	$	148.2		$	141.5
Funded status at end of year	$	(121.6	)	$	(119.5	)

Amounts recognized in the consolidated balance sheets:
Current liability	$	(2.2	)	$	(0.9	)
Noncurrent liability		(119.4	)		(118.6	)
	$	(121.6	)	$	(119.5	)

(a)

In fiscal 2016, $65.3 million was paid from plan assets in connection with lump-sum payouts.

(b)

As a result of its acquisition of Luvata HTS, the Company acquired pension plans in Italy, Austria and the U.S. See Note 2 for additional information.

The accumulated benefit obligation for pension plans was $266.8 million and $257.9 million as of March 31, 2017 and 2016, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $156.8 million and $162.0 million as of March 31, 2017 and 2016, respectively.

Costs for the Company’s pension plans included the following components for the fiscal years ended March 31, 2017, 2016, and 2015:

	2017			2016			2015
Components of net periodic benefit cost:
Service cost	$	0.6		$	0.6		$	0.5
Interest cost		9.8			11.2			13.0
Expected return on plan assets		(12.3	)		(14.9	)		(16.7	)
Amortization of net actuarial loss		5.6			6.4			5.5
Settlements (a)		-			42.1			-
Net periodic benefit cost	$	3.7		$	45.4		$	2.3

Other changes in benefit obligation recognized in other comprehensive loss (income):
Net actuarial loss	$	1.0		$	17.5		$	46.4
Amortization of net actuarial loss (a)		(5.6	)		(48.5	)		(5.5	)
Total recognized in other comprehensive (income) loss	$	(4.6	)	$	(31.0	)	$	40.9

(a)

During fiscal 2016, in connection with lump-sum payouts to pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss.

The Company estimates $5.6 million of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2018.

The Company used a discount rate of 4.1% as of both March 31, 2017 and 2016 for determining its benefit obligations under its U.S. pension plans. The Company used a weighted-average discount rate of 1.7% and 1.8% as of March 31, 2017 and 2016, respectively, in determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 4.1%, 4.3%, and 4.7% to determine its costs under its U.S. pension plans for the fiscal years ended March 31, 2017, 2016, and 2015, respectively. The Company used a discount rate of 1.7%, 1.3%, and 3.0% to determine its costs under its non-U.S. pension plans for the fiscal years ended March 31, 2017, 2016, and 2015, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. The Company used a similar process to determine the discount rate for its non-U.S. pension obligations.

Plan assets in the U.S. defined benefit plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted-average asset allocations at the measurement dates of March 31, 2017 and 2016 were as follows:

	Target allocation as of March 31, 2017			Plan assets
				2017			2016
Equity securities		60	%		58	%		56	%
Debt securities		38	%		38	%		36	%
Cash		2	%		4	%		4	%
Alternative assets		-			-			4	%
		100	%		100	%		100	%

Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 2017 and 2016, the Company’s pension plans did not directly own shares of Modine common stock.

The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term return of plan assets, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.

The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2017, 2016, and 2015 U.S. pension plan expense, the expected rate of return on plan assets was 8.0 percent. For fiscal 2018 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 7.5 percent.

The Company’s funding policy for its U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. The Company expects to make contributions of $13.1 million to these plans during fiscal 2018.

Estimated pension benefit payments for the next ten fiscal years are as follows:

Fiscal Year	Estimated Pension Benefit Payments
2018	$	17.1
2019		16.4
2020		17.0
2021		17.1
2022		17.6
2023-2027		90.4