TABLE OF CONTENTS

 

 

ITEM 1 – ELECTION OF DIRECTORS

The Board of Directors (the “Board of Directors” or the “Board”) of Modine Manufacturing Company (the “Company” or “Modine”) nominated three current members of the Board, Dr. Suresh V. Garimella, Christopher W. Patterson, and Christine Y. Yan, to stand for election at the 2018 Annual Meeting of Shareholders.  If elected, each director would serve until the 2021 Annual Meeting of Shareholders and the election of his or her successor.  The persons appointed as proxies will vote “FOR” the election of these nominees, unless instructions to the contrary are given to them.  The nominees have indicated that they are able and willing to serve as directors.  While it is not anticipated that any of the nominees will be unable to take office, if that happens, the proxies will vote “FOR” the substitute nominee(s) designated by the Board of Directors.

The Company’s Bylaws require that each director retire at the close of the term in which he or she attains the age of 70 years, except that the provision will not apply to any director who has been exempted from it by a resolution passed by a two-third’s vote of the Board of Directors.

The Company’s Amended and Restated Articles of Incorporation provide that the Board of Directors shall be divided into three classes, as nearly equal in number as possible, serving staggered three-year terms.  The Board of Directors currently consists of nine members with three classes of three directors each.

In accordance with the Company’s Bylaws, a director shall hold office until (i) the end of such director’s term and until the director’s successor shall have been elected, (ii) there is a decrease in the allowable number of directors, or (iii) his or her death, resignation or removal.  Vacancies may be filled by the shareholders or the remaining directors. See Selection of Nominees to the Board of Directors below.

Qualifications of Modine’s Board of Directors

Modine’s Board consists of proven business and technology leaders from various industries, disciplines and end markets who have the knowledge and experience necessary for a deep understanding of Modine, its products and its businesses.  That knowledge and experience has been gained or enhanced in a wide variety of ways, including through years of service on Modine’s Board, employment with industry leaders that have business models and strategies similar to the Company’s or product markets important to the Company, and leadership positions in technologically innovative institutions.  The Board benefits from the interplay among a group of directors who have diverse and distinguished backgrounds, which are described in further detail in this section.  Modine’s directors are dedicated individuals with high integrity and discipline who have a strong desire to use their skills to govern Modine in a responsible manner.

The Board of Directors’ Corporate Governance and Nominating Committee (the “Nominating Committee”), a committee consisting of all of the independent directors of the Company, has determined that the Board needs certain specialized expertise as well as broad leadership experience to direct the Company to achieve its strategic goals.  The Nominating Committee considers the following qualities and experiences to be necessary for the proper functioning of a Board of a responsible, global, technology-driven company:

·

Business operations leadership;

·

Relevant industry experience;

·

Global business experience;

·

Financial expertise;

·

Technological expertise;

·

Corporate governance expertise;

·

Financial markets experience; and

·

Strategic planning and execution expertise, including mergers and acquisitions experience.

 

In addition, from time to time, the Nominating Committee considers additional attributes that are more specific to the Company’s strategic and business emphasis at any given point.

A description of the qualities provided by each Board member is included below with the description of the individual’s experience and public company directorships, all as of May 25, 2018.

The chart below summarizes the specific qualifications, attributes, and skills for each director.  An “X” in the chart below indicates that the item is a specific reason that the director was nominated to serve on the Board.  The lack of an “X” does not mean that the director does not possess that qualification or skill.  Rather, an “X” indicates a specific area of focus or expertise of a director on which the Board currently relies.

 

 

2018 Nominees for Director

Based upon the recommendation of the Nominating Committee, the Board approved the nominations of Dr. Suresh V. Garimella, Mr. Christopher W. Patterson and Ms. Christine Y. Yan for election as directors.  Dr. Garimella, Mr. Patterson and Ms. Yan are considered independent under the New York Stock Exchange (“NYSE”) corporate governance rules.  Each of these nominees were last elected to the Board in 2015, at which time they each received the support of not less than 97% of the votes cast.

The Board of Directors recommends a vote “FOR” Dr. Suresh V. Garimella, Mr. Christopher W. Patterson, and Ms. Christine Y. Yan.

Vote Required for Approval

Directors in an uncontested election are elected by a majority of the votes cast by holders of shares of the Company’s common stock entitled to vote in the election at a shareholder meeting at which a quorum is present.  Because abstentions and broker non-votes are not considered votes cast, they will not have an effect on the vote.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CORPORATE GOVERNANCE

The Company’s business is managed under the direction of its Board of Directors, pursuant to its Amended and Restated Articles of Incorporation, its Bylaws and the laws of the State of Wisconsin.  Members of the Board of Directors are kept informed of the Company’s operations through discussions with the CEO and key members of management, by reviewing materials provided to them, and by participating in meetings of the Board of Directors and its committees.

The Company reviews and evaluates its corporate governance policies and practices, particularly in light of the rules of the Securities and Exchange Commission (“SEC”) and the NYSE, and believes that its current policies and practices meet these requirements.  The Company’s corporate governance policies, including its Guidelines on Corporate Governance and charters for committees of the Board, are available on its website, www.modine.com, and are also available in print to any shareholder or other interested person upon request.

Code of Conduct

The Company’s Code of Conduct (the “Code”) summarizes the compliance and ethical standards and expectations the Company has for all of its employees (including the principal executive officer, principal financial officer and principal accounting officer) and directors with respect to their conduct in furtherance of Company business.  It contains procedures for reporting suspected violations of the Code, including procedures for the reporting of questionable accounting or auditing matters or other concerns regarding accounting, internal accounting controls or auditing matters.  The Company has established a Business Ethics Program that includes an Internet and phone Helpline through which employees and others may report concerns regarding such matters in confidence and, if desired, anonymously.  A copy of the Code, as well as further information regarding the Business Ethics Program, is available on the Company’s website, www.modine.com.  These materials are also available in print to any shareholder or other interested person upon request.  If we make any substantive amendment to the Code, we will disclose the nature of such amendment on our website or in a current report on Form 8-K.  In addition, if a waiver of the Code is granted to an executive officer or director, we will disclose the nature of such waiver on our website, in a press release or in a current report on Form 8-K.

Director Independence

The Company’s Guidelines on Corporate Governance require that a majority of the Board’s members be independent.  The Company also believes it is in its best interest to have the President and CEO of the Company serve as a director.  At a minimum, to qualify as “independent,” a director must meet the independence standards of the NYSE.  The Nominating Committee assesses independence on a regular basis, and each director is responsible for bringing any changes in his or her status that may affect his or her independence to the attention of the Nominating Committee.  In addition, on an annual basis the directors complete a questionnaire prepared by the Company that is designed to elicit information that the Board uses to assess director independence.  At least annually, the Board reviews the relationships that each director has with the Company.  Only those directors that the Board affirmatively determines have no material relationship with the Company, and who do not have any of the relationships that prevent independence under the standards of the NYSE, are considered to be independent directors.

The Board has determined that all of the current directors, other than Mr. Burke, are independent within the meaning of the listing standards of the NYSE.  The Board concluded that none of these directors has any of the relationships with the Company set forth in the NYSE listing standards or any other business or other relationships with the Company that would preclude a determination of his or her independence.  Mr. Burke is not independent due to his position as President and CEO of the Company.

Certain Relationships and Related Party Transactions

The Code requires that all officers, employees and directors of the Company avoid any situation that conflicts with the proper discharge of his or her responsibility to the Company or that impairs his or her ability to exercise independence of judgment with respect to the transactions in which he or she is involved for the Company.  Significant transactions with the Company’s officers, employees or directors, their relatives, or enterprises in which they have material interests, are not permitted unless such transactions are fully disclosed and approved by the Board of Directors or the Audit Committee as being in the best interest of the Company.

Modine is a large global organization that engages in thousands of purchases, sales and other transactions annually.  Modine may enter into purchase and sale transactions with other companies, universities and entities in which members of the Board of Directors are employed or are members of the Board of Directors for such entities.  Modine enters into these arrangements in the ordinary course of business and at competitive prices and terms.  The Company anticipates that similar transactions may occur in the fiscal year ending March 31, 2019.

 

At the end of each fiscal year, each director and officer must respond to a questionnaire that requires him or her to identify certain information about his or her immediate family and any transaction or relationship that occurred during the year or any proposed transaction that involves Modine (or any subsidiary or affiliate of Modine) and that individual, his or her immediate family, or any entity with which he, she or such immediate family member is associated.  All responses to the questionnaires are reviewed by the Company’s Legal Department and shared with the President and CEO, as appropriate.  In addition, the Company independently searches its records for potential transactions with known related parties.  Based upon such review, there were no related party transactions with respect to persons who were officers or directors during fiscal 2018.

Lead Director

Marsha C. Williams assumed the position of Lead Director in July 2013.  As Lead Director, Ms. Williams presides over meetings of the shareholders, the Board of Directors, and executive sessions of the Board of Directors, and carries out such other duties as directed by the Board of Directors and as listed in the Company’s Guidelines on Corporate Governance.  The Company believes this leadership structure is in the best interest of the Company’s shareholders at present because it allows the Company to benefit from the unique leadership ability that Ms. Williams possesses and from her business and corporate governance experience.  The Board does not intend to nominate a Chairman at this time.

Risk Oversight

The Board of Directors has overall responsibility for risk oversight for the Company.  Management provides the Board with information on a regular basis to keep the members of the Board of Directors apprised of identified risks.  These risks, including financial, organizational, reputational and strategic risks, are reviewed and discussed with the Board as part of the business and operating review conducted at each of the Board’s regular meetings.  As described below under Committees of the Board of Directors, the Board of Directors has delegated certain responsibilities to its committees.  The committees have oversight of risks that fall within their areas of responsibility.  The Audit Committee has primary oversight of the Company’s financial reporting, internal control and compliance risks.  The Officer Nomination and Compensation Committee evaluates the risks arising from the Company’s compensation policies and programs.  Management is responsible for managing risk and the Company’s enterprise risk management program.

Selection of Nominees to the Board of Directors

The Nominating Committee considers prospective candidates for Board membership who are recommended by its members, as well as those recommended by management, shareholders and independent consultants hired by the Nominating Committee.  The Nominating Committee may also decide to engage a professional search firm to assist in identifying qualified candidates.  When such a search firm is engaged, the Nominating Committee sets its fees and scope of engagement.

Once the Nominating Committee identifies a prospective nominee, it initially determines whether to conduct a full evaluation of the candidate.  The Nominating Committee makes its initial determination based on the information provided to it with the recommendation of the prospective candidate, as well as the Nominating Committee’s own knowledge of the prospective candidate, which may be supplemented by inquiries to the person making the recommendation or others.

The Nominating Committee evaluates the prospective nominee, considering factors it deems appropriate, including the current composition of the Board and the evaluations of other prospective nominees.  In assessing candidates, the Board considers the required areas of expertise set forth above in the Board Skills Matrix (business operations leadership; relevant industry experience; global business experience; financial expertise; technological expertise; corporate governance expertise; financial markets experience; and strategic planning, including mergers and acquisitions); additional attributes that are more specific to the Company’s strategic direction and business emphasis at any given point; and such additional factors as the individual’s education, contribution to the diversity of the Board, and other factors frequently encountered by a global business.

In choosing a candidate for Board membership, every effort is made to complement and supplement skills within the existing Board and to strengthen any identified areas.  Further criteria include a candidate’s personal and professional ethics, integrity and values, as well as his or her willingness and ability to devote sufficient time to attend meetings and participate effectively on the Board.

In connection with this evaluation, the Board determines whether to interview the prospective nominee.  If an interview is warranted, one or more members of the Board of Directors, and others as appropriate, will interview prospective nominees.  After completing the evaluation and interview, the Nominating Committee makes a recommendation to the Board regarding the nomination of a candidate, and the Board acts on that recommendation.

 

Shareholder Nominations and Recommendations of Director Candidates

The Bylaws of the Company provide that any shareholder who is entitled to vote for the election of directors at a meeting called for such purpose may nominate persons for election to the Board of Directors.  Shareholders who desire to nominate a person or persons for election to the Board or to present business at the next annual meeting must comply with the notice requirements in the Company’s Bylaws, a copy of which is available from the Company’s Secretary.  For consideration at the 2019 Annual Meeting of Shareholders, nominations or the presentation of other business must be received by the Secretary no earlier than April 10, 2019 and no later than May 5, 2019.  Shareholders who want to submit a recommendation for a director candidate for the Board may submit the recommendation to the Board using the procedure described below under Shareholder and Other Interested Persons’ Communication with the Board.  The Nominating Committee intends to evaluate candidates recommended by shareholders in the same manner that it evaluates other candidates. The Nominating Committee requests that it receive any such recommendations for the 2019 Annual Meeting of Shareholders by October 4, 2018.

Shareholder and Other Interested Persons’ Communication with the Board

Shareholders and other interested persons wishing to communicate with the Board of Directors or with a Board member (including the Lead Director) should address communications to the Board or to the particular Board member, c/o Secretary, Modine Manufacturing Company, 1500 DeKoven Avenue, Racine, Wisconsin 53403-2552.  In accordance with a process approved by the Board of Directors, the Secretary reviews all such correspondence.  The Secretary forwards to the Board a summary of all such correspondence and copies of all correspondence that, in the opinion of the Secretary, deal with the functions of the Board or committees thereof or that she otherwise determines requires their attention.  Concerns relating to accounting, internal controls or auditing matters are immediately brought to the attention of the Company’s Business Ethics Committee and handled in accordance with procedures established by the Audit Committee with respect to such matters.  From time to time, the Board may change the process by which shareholders and other interested persons may communicate with the Board of Directors or its members.  Please refer to the Company’s website, www.modine.com, for any changes to this process.

Committees of the Board of Directors

Audit Committee

The Audit Committee is a standing committee of the Board of Directors, established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  The charter of the Audit Committee is available on the Company’s website, www.modine.com.

The Audit Committee is responsible for, among other things, appointing and overseeing the work of the Company’s independent registered public accounting firm for the purpose of preparing and issuing an audit report and performing related work, and for discussing with the independent registered public accounting firm appropriate staffing and compensation.  The Audit Committee also oversees management’s implementation of systems of internal controls; monitors the preparation of quarterly and annual financial reports by management; determines whether the independent registered public accounting firm is independent; and reviews management’s programs to monitor and address matters associated with compliance with the Company’s Code of Conduct.  The functions of the Audit Committee are more fully described below in the Report of the Audit Committee in this proxy statement.

The Board of Directors has determined that each member of the Audit Committee is independent as defined in the corporate governance listing standards of the NYSE relating to audit committees.  The Board of Directors has also determined that each Audit Committee member satisfies the financial literacy and experience requirements of the NYSE, and that Mr. Cooley (the Chair of the Committee) and Mr. Anderson qualify as audit committee financial experts within the meaning of the SEC rules.

Officer Nomination and Compensation Committee

The Officer Nomination and Compensation Committee of the Board of Directors (the “ONC Committee”) is composed exclusively of non-employee, independent directors with no business relationship with the Company, other than in their capacity as directors, and no interlocking relationships with the Company that are subject to disclosure under the rules of the SEC related to proxy statements.  The charter of the ONC Committee is available on the Company’s website, www.modine.com.

The ONC Committee oversees and provides strategic direction to management regarding the Company’s executive compensation practices.  The ONC Committee reviews the performance of the executive officers, other than the CEO, and works in conjunction with the Nominating Committee to review the performance of the CEO; reviews candidates for positions as officers; makes recommendations to the Board on certain officer candidates; makes recommendations to the Board on compensation of the CEO; determines, with the CEO’s recommendations, the compensation of non-CEO executive officers and other officers of the Company; considers recommendations made by its independent compensation consultant relating to director compensation and presents those recommendations to the Board; administers the incentive compensation plans in which executive officers and directors participate; and reviews the Company’s benefit programs made available to some or all salaried employees of the Company.  The ONC Committee has the authority to delegate the aforementioned responsibilities to subcommittees comprised of independent Board members.

 

Mr. Burke, as President and CEO, recommends to the ONC Committee any compensation changes affecting the Company’s officers, including the named executive officers (“NEOs”), other than himself.  Mr. Burke presents to the ONC Committee the performance and leadership behavior goals and expectations of each such officer and the level of achievement of those goals as well as the Company’s performance during the fiscal year.  The ONC Committee reviews Mr. Burke’s recommendations and either approves or does not approve any compensation matters affecting such officers of the Company.  Mr. Burke has no role in setting his own compensation.

In fiscal 2018, the ONC Committee retained Farient Advisors LLC (“Farient”) as its independent executive compensation consultant.  Farient reports directly to the ONC Committee and provides no services to the Company.  The ONC Committee has determined that Farient is independent under the NYSE Listing Standards.  A representative of Farient attends meetings of the ONC Committee upon invitation by the Chair of the ONC Committee, either by phone or in person, and communicates with the Chair between meetings as necessary.  Farient conducted a comprehensive benchmarking analysis of the Company’s pay levels for the CEO, non-CEO executive officers and other officers of the Company, by pay component, using proxy data of the Company’s self-selected peers (as discussed in the Compensation Discussion and Analysis, below) and compensation survey data. In addition, Farient benchmarked the Company’s executive pay programs and practices, including severance and change-in-control arrangements, as well as its goals and performance.  The ONC Committee considered Farient’s analyses in making its decisions; however, the ONC Committee made all decisions regarding the compensation of Modine’s officers, including its NEOs (except for the CEO, whose compensation is set by the full Board).  Additionally, Farient regularly updated the ONC Committee on regulatory and market trends and assisted with the benchmarking of Board of Director compensation practices and levels.

Corporate Governance and Nominating Committee

The Nominating Committee develops and implements policies and practices relating to corporate governance matters, including reviewing and monitoring implementation of the Company’s Guidelines on Corporate Governance and the Code of Conduct; develops and reviews background information on prospective nominees to the Board and makes recommendations to the Board regarding such persons; supervises the Board’s annual self-evaluation; and works with the ONC Committee, as appropriate, to review and monitor succession plans relating to the CEO and to evaluate the performance of the CEO.  The Nominating Committee is composed exclusively of independent directors with no business relationship with the Company, other than in their capacity as directors, and no interlocking relationships with the Company that are subject to disclosure under the rules of the SEC related to proxy statements.  The charter of the Nominating Committee is available on the Company’s website, www.modine.com.

Technology Committee

The Technology Committee reviews and makes recommendations, as appropriate, to the entire Board of Directors on major strategies and other subjects related to the Company’s approach, emphasis, and direction with regard to technical innovation and opportunities; the technology acquisition process to assure ongoing business growth; and development and implementation of measurement and tracking systems important to successful innovation.  The charter of the Technology Committee is available on the Company’s website, www.modine.com.

Compensation Committee Interlocks and Insider Participation

None of our executive officers currently serves, or has served during the last year, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board of Directors or Compensation Committee.

Board Meetings and Committees

The Board of Directors held five meetings during the fiscal year ended March 31, 2018 and had the following four standing committees: Audit; Officer Nomination and Compensation; Corporate Governance and Nominating; and Technology.

In July of each year, the Board selects the members of each of the committees.  All incumbent directors attended at least 75 percent of the aggregate of the Board meetings and meetings of committees on which he or she served during fiscal 2018.

 

The following table lists the members of each of the standing committees and the number of meetings held by each committee during fiscal 2018:

 

 

Attendance at the Annual Meeting.  Although the Company does not have a formal policy that its directors attend the Annual Meeting of Shareholders, it expects them to do so and the Company’s directors historically have attended these meetings.  All of the directors attended the 2017 Annual Meeting of Shareholders.  The Board of Directors conducts a regular meeting immediately after the Annual Meeting of Shareholders.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of shares of the Company’s common stock as of May 25, 2018 by persons known by the Company to beneficially own more than five percent of the outstanding shares:

 

 

(1)

The number of shares is as of the date the shareholder reported the holdings in filings under the Exchange Act, unless more recent information was provided.  The above beneficial ownership information is based on information furnished by the specified persons and is determined in accordance with Exchange Act Rule 13d-3, and other facts known to the Company.

(2)

Based on Amendment No. 2 to Schedule 13G filed under the Exchange Act on February 9, 2018, Dimensional Fund Advisors LP (“DFA”) has the sole power to vote or direct the vote of 3,875,186 shares and the sole power to dispose or direct the disposition of 4,059,387 shares.  DFA is a registered investment adviser to four mutual funds and serves as investment manager or sub-adviser to various other clients (the “Funds”).  In these roles, DFA or its subsidiaries (together, “Dimensional”) may possess voting and/or investment power over securities of the Company that are owned by the Funds, and it may be deemed to be the beneficial owner over such shares. Dimensional disclaims beneficial ownership of such securities.

 

(3)

Based on Amendment No. 4 to Schedule 13G filed under the Exchange Act on February 9, 2018, The Vanguard Group (“Vanguard”) has the sole power to vote 55,795 shares, shared power to vote 13,300 shares, the sole power to dispose or direct the disposition of 3,974,975 shares, and shared power to dispose or direct the disposition of 64,395 shares.  Vanguard Fiduciary Trust Company and Vanguard Australia, Ltd., each a wholly owned subsidiary of Vanguard, are beneficial owners of 51,095 shares and 18,000 shares, respectively, as a result of serving as investment managers to their respective clients.

 

(4)	Based on Amendment No. 4 to Schedule 13G filed under the Exchange Act on February 7, 2018, Frontier Capital Management Co., LLC has the sole power to vote or direct the vote of 1,768,692 shares and the sole power to dispose or direct the disposition of 4,029,123 shares.

 

(5)	Based on Amendment No. 5 to Schedule 13G filed under the Exchange Act on January 25, 2018, BlackRock, Inc. and certain subsidiaries of BlackRock, Inc. have the sole power to vote or direct the vote of 3,633,355 shares and the sole power to dispose or direct the disposition of 3,764,008 shares.

 

(6)

Based on Amendment No. 37 to Schedule 13D filed under the Exchange Act on February 14, 2017, each reporting person included in the Schedule 13D has the sole power to vote or direct the vote of or the sole power to dispose or direct the disposition of the reported shares as follows: (i) Gabelli Funds, LLC has sole power to vote or direct the vote of or the sole power to dispose or direct the disposition of 1,054,000 shares; GAMCO Asset Management Inc. (“GAMCO”) has sole power to vote or direct the vote of 1,514,291 shares and the sole power to dispose or direct the disposition of 1,683,791 shares; and Teton Advisors, Inc., has sole power to vote or direct the vote and the independent power to dispose or direct the disposition of 196,600 shares.  The other reporting persons listed in Amendment No. 37, which are GGCP, Inc., GAMCO Investors, Inc., Associated Capital Group, Inc. and Mario J. Gabelli have no sole or shared power to vote or direct the vote of or the sole or shared power to dispose or direct the disposition of any shares.  The reporting persons listed in Amendment No. 37 are affiliates of one another.

 

The following table sets forth information regarding the beneficial ownership of shares of the Company’s common stock as of May 25, 2018 by:

 

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Each director, director-nominee and “named executive officer” (as described below under Compensation Discussion and Analysis); and

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all directors and executive officers of the Company as a group.

 

* Represents less than one percent of the class.

 

(1)	Includes shares of common stock that are issuable upon the exercise of stock options exercisable within 60 days of May 25, 2018, and restricted stock units.  Such information is not necessarily to be construed as an admission of beneficial ownership.

 

COMPENSATION OF DIRECTORS

Employees of Modine do not receive any compensation for serving on the Board.  Non-employee directors, including the Lead Director of the Board, are entitled to receive the following: an annual retainer of $80,000, payable quarterly; an additional annual retainer of $10,000 for acting as Chair of either the ONC Committee or the Nominating Committee, an additional annual retainer of $7,500 for acting as Chair of the Technology Committee, and an additional annual retainer of $15,000 for acting as Chair of the Audit Committee; reimbursement for travel, lodging, and related expenses incurred in attending Board and/or committee meetings; and travel-accident and director and officer liability insurance.

The Amended and Restated 2008 Incentive Compensation Plan (the “2008 Incentive Plan”) and the 2017 Incentive Compensation Plan (the “2017 Incentive Plan,” and together with the 2008 Incentive Plan, the “Incentive Plans”) give discretion to the Board, or a committee of the Board, to grant stock options and stock awards to non-employee directors.  Under the 2017 Incentive Plan, the maximum number of stock awards that can be granted to a non-employee director per year is 50,000. The Board or the ONC Committee, as applicable, has broad discretionary authority to set the terms of awards under each of the Incentive Plans.  It is the current practice of the Board of Directors to evaluate compensation and make grants of unrestricted stock awards to each non-employee director on an annual basis.  For the 2018 fiscal year, non-employee directors, including the Lead Director of the Board, were entitled to receive equity awards with a value of $120,000.  The Lead Director was also entitled to additional equity compensation with a value of $100,000.  Consistent with this, the Company granted each non-employee director of the Company (other than the Lead Director) 7,079 unrestricted shares of stock (or restricted stock units, if a director so elected) in July 2017.  The Company granted Ms. Williams, the Lead Director, 12,978 shares of stock at the same time.  The Company granted Ms. Williams the greater number of shares to compensate her for her service as Lead Director.  As Lead Director, Ms. Williams, among other duties, generally attends all meetings of the Board’s committees but does not receive any attendance fee for those meetings.

Directors have the option of deferring either or both of their cash fees and/or equity compensation in accordance with the Company’s Non-Employee Director Compensation Policy.  For cash compensation, the directors may elect to defer up to 100% of their annual retainer and fees into the Modine Manufacturing Company Directors Deferred Compensation Plan and receive an investment return on the deferred funds as if the funds were invested in permitted mutual funds.  The directors’ deferred compensation accounts are unsecured obligations of the Company.  Distributions commence following termination of service as a director. Ms. Yan deferred her cash fees into the Modine Manufacturing Company Directors Deferred Compensation Plan in fiscal 2018.

For fiscal 2018, the directors were entitled to defer their equity compensation by electing in advance to receive an award of restricted stock units rather than a grant of unrestricted shares of the Company’s common stock.  These grants of restricted stock units are immediately vested but are not distributed until a director’s termination of service.  Mr. Bills, Mr. Cooley, Mr. Patterson, and Ms. Yan all elected to receive a grant of restricted stock units in lieu of a grant of unrestricted shares of the Company’s common stock for their July 2017 equity awards.

2018 Director Compensation Table

The following table sets forth compensation paid to non-employee members of the Company’s Board of Directors in fiscal 2018:

 

 

(1)	These amounts include amounts deferred at the director’s election into the Modine Manufacturing Company Directors Deferred Compensation Plan.

(2)

In July 2017, all of the independent directors, other than Ms. Williams, were granted 7,079 shares of unrestricted stock or restricted stock units.  As explained above, the Company granted 12,978 shares of unrestricted stock to Ms. Williams at the same time.  None of the directors included in the table above held any unvested stock awards as of the end of fiscal 2018.

 

(3)

Represents the aggregate grant date fair value of stock grants computed in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 718.  The assumptions used to determine the value of the awards are discussed in Note 4 of the Notes to Consolidated Financial Statements contained in the Company’s Form 10-K for the fiscal year ended March 31, 2018.

(4)

Represents the change in pension value between the end of fiscal 2017 and the end of fiscal 2018 under the Modine Manufacturing Company Director Emeritus Retirement Plan.  The change in pension value is solely a result of the change in the interest rate used to calculate the present value of the pension benefit under the Director Emeritus Retirement Plan because no benefits otherwise continue to accrue under that plan.  The Company used discount rates of 4.0 percent and 4.1 percent, respectively, to calculate the present value of the pension benefit obligation at March 31, 2018 and March 31, 2017.

The Board of Directors adopted the Director Emeritus Retirement Plan pursuant to which any person, other than an employee of the Company, who was or became a director of Modine on or after April 1, 1992 and who retired from the Board would be paid a retirement benefit equal to the annualized sum directors were paid for their service to the Company as directors (including Board meeting attendance fees but excluding any applicable committee attendance fees) in effect at the time such director ceased his or her service as a director.  The retirement benefit continues for the period of time equal in length to the duration of the director’s Board service.  If a director dies before retirement or after retirement during such period, his or her spouse or other beneficiary would receive the benefit.  In the event of a change in control (as defined in the Director Emeritus Retirement Plan) of Modine, each eligible director, or his or her spouse or other beneficiary entitled to receive a retirement benefit through him or her, would be entitled to receive a lump-sum payment equal to the present value of the total of all benefit payments that would otherwise be payable under the Director Emeritus Retirement Plan.  The retirement benefit is not payable if the director, directly or indirectly, competes with the Company or if the director is convicted of fraud or a felony and such fraud or felony is determined by disinterested members of the Board of Directors to have damaged Modine.  Effective July 1, 2000, the Director Emeritus Retirement Plan was frozen with no further benefits accruing under it.  Ms. Williams accrued pension benefits under the Director Emeritus Retirement Plan until it was frozen on July 1, 2000.

Share Ownership Guidelines - Directors

Since 2008, the Board has maintained share ownership guidelines for incumbent members of the Board of Directors.  The Board believes that in order to further align the interests of members of the Board and shareholders, members of the Board should have a meaningful personal investment in the Company.  Only shares of stock, either restricted or unrestricted, including any deferred by a director in accordance with the Company’s Non-Employee Director Compensation Policy, count toward the guideline figures.  The current guidelines generally provide that five years after joining the Board, directors are expected to hold shares of Company stock with a value of at least five times the value of the director’s current annual cash retainer.  All directors are currently in compliance with these guidelines.  The share ownership guidelines for officers of the Company are described below in the Compensation Discussion and Analysis – Share Ownership Guidelines - Officers.

Compensation-Related Risk Assessment

In fiscal 2018, the ONC Committee assessed each element of compensation – base salary, and short-and long-term incentives – as well as other plans covering employees in international locations to determine whether any of such elements or plans promotes excessive or unreasonable risk-taking.  The ONC Committee determined that the Company’s compensation policies and practices encourage behaviors that drive the performance of the Company as a whole and balance short-term results with longer-term results in the interests of shareholders.  The ONC Committee determined that any risks arising from the Company’s compensation policies and practices are not reasonably likely to have a material adverse effect on the Company.

 

COMPENSATION DISCUSSION AND ANALYSIS

Introduction

This Compensation Discussion and Analysis describes the material components of compensation paid to Modine’s Principal Executive Officer, Principal Financial Officer, and other certain highly compensated executive officers, as described in the 2018 Summary Compensation Table on page 31.  In the discussion below, we refer to this group of executives as the NEOs. This group includes the executive officers for whom specific compensation disclosure is required under the rules of the SEC.  This group includes the following executive officers:

·

Thomas A. Burke, President and CEO;

·

Michael B. Lucareli, Vice President, Finance and CFO;

·

Thomas F. Marry, Executive Vice President and COO;

·

Holger Schwab, Former Vice President, Vehicular Thermal Solutions; and

·

Dennis P. Appel, Vice President, Commercial and Industrial Solutions.

 

The compensation for these individuals is listed in the tables on pages 31 through 37 of this Proxy Statement.

In this Compensation Discussion and Analysis, we will also explain the objectives of our compensation programs, why we pay the compensation we do and how that fits with the Company’s commitment to provide value to our shareholders.

Executive Summary

The ONC Committee seeks to pay our NEOs fairly and to align executive compensation with the Company’s performance.  The ONC Committee believes this approach will enhance shareholder return over the long term.

The ONC Committee seeks to help the Company achieve its short- and long-term financial goals and encourage its executive officers to act as owners of the Company.  The ONC Committee believes these goals can be accomplished through a compensation program that provides a balanced mix of cash and equity-based compensation.  Base salary is designed to attract and retain executives by compensating them for their day-to-day activities, level of responsibility and sustained individual performance.  The annual cash incentive is intended to reward recipients for the achievement of annual operating goals that are critical to the Company’s short-term business objectives.  The equity portion of the compensation package provides incentives that are intended to focus executives on the Company’s long-term success, align the executives’ returns with those of shareholders, encourage long-term retention, and reward the executives for the Company’s superior long-term performance.

The ONC Committee believes the structure of its executive compensation program is aligned with the Company’s overall performance in fiscal 2018.  In fiscal 2018, the Company, among other things:

·

Achieved sales of $2.1 billion, a 40 percent increase over fiscal 2017, adjusted operating income of $120.1 million, a 66 percent increase over fiscal 2017, and adjusted earnings per share of $1.54, a 97 percent increase compared with the prior year;

 

·

Achieved a significant year-over-year improvement in free cash flow, and a reduction in the Company’s leverage ratio below the target of 2.5 times;

 

·

Substantially completed the integration of the Luvata Heat Transfer Solutions business (“Luvata HTS”) into Modine, now operating as the Commercial and Industrial Solutions segment.  Also, completed the transition of the Vehicular Thermal Solutions segment from three regionally managed segments in the Americas, Europe and Asia to one global organization;

 

·

Continued the focus on developing efficient manufacturing facilities, through (i) the closure of the Gailtal, Austria manufacturing facility, (ii) the completion of the expansion of the Mezökövesd, Hungary manufacturing facility, and (iii) the announcement of the expansion of the Changzhou, China manufacturing facility;

 

·

Substantially improved the quality of products delivered to its customers by utilizing process discipline and system standardization, resulting in a 29% year-over-year improvement in global warranty metrics;

·

Established the Office of Strategic Planning and Development, which (i) actively investigates and continuously evaluates potential acquisition opportunities, and (ii) is conducting comprehensive strategic analyses for each of Modine’s three business segments with a focus on accelerating revenue growth;

 

·

Continued our focus on safety, recording a global Recordable Incident Rate (“RIR”) significantly better than the 2016 private-industry RIR average for the manufacturing sector.  Modine’s behavior-based safety program, which seeks to correct at-risk behaviors and positively reinforces safe behaviors, was a strong driver in this improvement; and

 

·

Increased, in measurable ways, the improvement capability of employees across the globe, utilizing the Modine Operating System’s principles of accountable mentoring.

 

For a reconciliation of adjusted operating income, adjusted earnings per share, and free cash flow, which are non-GAAP financial measures, to the most directly comparable GAAP financial measures, please see the financial tables included in Exhibit 99.1 to the Current Report on Form 8-K furnished to the SEC by Modine on May 23, 2018.

The ONC Committee’s actions in fiscal 2018 included the following:

·

Set CEO and CFO compensation at or near the median of Modine’s peer group of companies and the median of a broad survey of manufacturing companies, weighted equally, and compensation for the other NEOs at or near the median of a broad survey of manufacturing companies in order to meet its objective of offering competitive compensation.

 

·

Approved Return on Average Capital Employed (“ROACE”) and Adjusted Operating Income Growth as the equally-weighted performance metrics in the Management Incentive Plan (“MIP”) (the short-term cash bonus plan) for fiscal 2018.  These performance goals drive alignment of management and shareholders’ interests in both our asset management decisions and earnings growth targets.

 

·

Approved ROACE and Average Annual Revenue Growth as the performance metrics for the Long-Term Incentive Plan (the “LTIP”) for fiscal 2018 to incentivize meeting and exceeding the Company’s operating performance goals over the three-year performance cycle.  The two metrics are designed to focus management on key metrics and provide a compelling equity-based incentive plan with carefully selected standards, mitigating risk by avoiding short-term gains at the expense of the long-term health of the Company.  The long-term pay orientation of the Company’s compensation system (compensation mix and time horizon of the LTIP) appropriately reflects the capital intensive nature, the investment time horizon and customer planning time horizon (i.e., long-term orders and partnering for end-product production) of the business.

 

·

Reviewed the composition of the Company’s Peer Group used for CEO and CFO compensation and company performance comparisons.

 

·

Conducted a risk assessment of the Company’s compensation practices and found no evidence of unreasonable risk taking in the Company’s compensation plans and arrangements.

 

·

Reviewed the Company’s succession plan for each executive officer and other key employees of the Company.

 

·

Established compensation for the Board of Directors, utilizing analysis provided by Farient.

 

·

Reviewed the Company’s guidelines regarding stock ownership requirements for Company officers and members of the Board of Directors and confirmed compliance therewith.

 

·

Reviewed regulatory, shareholder and market changes, including governance best practices as applicable to the Company.

 

·

Approved the 2017 Incentive Plan, which was subsequently approved by the Company’s shareholders at the annual meeting held in July 2017, and under which equity grants will be made to NEOs beginning in fiscal 2019.

 

·

Transitioned from retention restricted stock awards to retention restricted stock unit awards.

 

·

Reviewed status of equity spend under the Incentive Plans.

 

·

Reviewed CEO pay-for-performance alignment, utilizing analysis provided by Farient.

 

Shareholder Advisory Vote on Executive Compensation

A nonbinding advisory vote on the compensation of the Company’s NEOs received the affirmative vote of over 95% of the shares represented at the 2017 Annual Meeting of Shareholders, demonstrating very strong support for the Company’s executive compensation program. Nonetheless, the Company and ONC Committee are mindful of the results of the shareholder advisory vote and take the vote into consideration when determining and evaluating the Company’s executive compensation philosophy, program and disclosure.  For example, the Company has continued its ongoing efforts to be fully transparent about the link between pay and performance in its Pay for Performance discussion immediately below.  In addition, during one-on-one conversations, sponsored road shows and other regular communications with shareholders, the Company routinely discusses its performance in the context of underlying incentive compensation metrics and emphasizes management’s active use of those same metrics in the Company’s daily operations.

Pay for Performance

The ONC Committee believes that the Company’s compensation program should encourage management to create long-term, sustained value for shareholders and to act like owners of the Company. To achieve this objective, the compensation program is designed to balance short- and long-term considerations while rewarding management in a way that reflects the Company’s performance over time. The ONC Committee further supports this objective with a strong pay-for-performance philosophy.

The key elements of the Company’s executive compensation program that support the pay-for-performance philosophy include:

·

A median compensation positioning strategy that targets total pay as well as each element of compensation at the median of the market, and allows actual compensation to vary from the median based on higher or lower performance, i.e., above median for above-market performance and below median for below-market performance;

·

A significant portion of compensation tied to performance, including short-term and long-term incentives tied to strong financial/operational performance;

·

Use of measures of performance for incentives that balance strong growth and returns and provide a direct link to shareholder value over time;

·

A significant weighting on equity-based long-term incentives, particularly performance stock; and

·

Share ownership guidelines (described on page 28), requiring that executives be meaningfully invested in the Company’s stock, and therefore be personally invested in the Company’s performance.

As has been the case in previous years, in fiscal 2018, the ONC Committee requested that Farient, the ONC Committee’s independent compensation consultant, assess the relationship between our executive compensation and performance over time, with particular focus on the CEO.

To conduct this analysis, Farient used its alignment methodology to test whether the Company’s Performance-Adjusted Compensation^TM (PAC^TM) is: (1) reasonable for the Company’s revenue size, peer group and total shareholder return (TSR) performance; and (2) sensitive to the Company’s TSR over time, given that TSR is an objective, transparent measure that shareholders generally rely upon when conducting a long-term pay-for-performance evaluation. PAC measures compensation outcomes after performance has occurred, rather than target compensation, which represents “expected” compensation before performance has occurred. Farient compared the CEO’s PAC (including actual salary, actual short-term incentive awards, and performance-adjusted long-term incentive values) over rolling 3-year periods to TSR for the same rolling 3-year periods, and tested the results against those same variables for companies in the industry groups that are most relevant to Modine, namely Capital Goods and Automobiles and Components. The Company’s PAC was then compared to a range of values, as indicated by the upper and lower boundaries on the chart on page 20. This range reflects reasonable compensation outcomes, as determined by the companies in the relevant industries, for the performance achieved. All PAC values on the chart, current and historical, for both the Company and companies in the relevant industry groups, are adjusted to reflect the Company’s current size of approximately $2.1 billion in revenue.

Farient’s analysis of the Company’s pay for performance indicates that the CEO’s compensation historically has been and continues to be strongly aligned with the Company’s performance and shareholder interests in that it is both reasonable and closely correlated to Company performance over time. Farient reached this conclusion, with which the ONC Committee agreed, because the data points for the Company’s CEOs have historically been below the upper boundary, which indicates reasonable compensation, and because the PAC generally moves up as performance rises, and generally moves down as performance falls. Specifically, for the three-year period from 2016 through 2018, the CEO’s PAC was closely aligned with performance, reflecting: (1) an annual incentive payout of 145% of Target due to the Company’s performance versus its predetermined objectives for the fiscal 2018 MIP; and (2) an award payout at 138% of Target for the fiscal 2016-2018 performance stock awards cycle, due to the Company’s performance versus its predetermined objectives under the fiscal 2016 LTIP.

 

 

Market Benchmarking of Executive Pay

The ONC Committee targets total pay, as well as each element of compensation, at the median of a peer group of companies and the median of a broad survey of manufacturing, weighted equally, for the CEO and CFO and at the median of a broad survey of manufacturing companies for the other NEOs.  The ONC Committee believes that targeting the median is an objective way of ensuring that the Company’s executive compensation practices are competitive and reasonable relative to the broader market.  Actual pay may vary from the median based on differences in individual performance, job responsibilities, tenure and experience for the individuals being compared, as well as based on actual performance of the Company.

During fiscal 2018, the ONC Committee reviewed the composition of the Company’s peer group.  As a group, the peers have characteristics and markets similar to those of the Company.  These characteristics and markets are as follows:

·

U.S. headquartered companies traded on major U.S. exchanges involved in these industries: industrial machinery; construction machinery and heavy trucks; agriculture and farm machinery; auto parts and equipment; electrical components and equipment; and building products (HVAC-related);

·

Companies with revenue between $600 million and $4 billion (approximately 0.3 to 2 times Modine’s budgeted revenue), with proxy pay data size adjusted to estimate pay for an approximately $2 billion revenue company; and

 

·

Technology-intensive companies with a strong focus on OEM suppliers, distributed product expertise and global industrial customers in the vehicular and industrial/commercial (e.g., HVAC) arena.

 

Based on its review, the ONC Committee did not change the composition of the peer group for fiscal 2018.

The following is the Company’s current peer group:

 

 

The ONC Committee uses the publically available peer group data to assist in the evaluation of the:

·

Compensation levels of the Company’s CEO and CFO;

·

Company’s compensation practices; and

·

Company’s relative performance and relative pay for performance for specified periods of time.

 

The ONC Committee used the 2017 Mercer U.S. Executive Benchmark Database (the “Database”), which compiles data of manufacturing companies with revenues between approximately $800 million and $3.2 billion to evaluate competitive pay levels of certain corporate officers and other key employees in addition to those of the CEO and CFO, and with revenues between $100 million and $2.5 billion to evaluate competitive pay levels of certain officers and other key employees who are heads of business units.  Survey pay data was size adjusted to approximate pay for a $2 billion revenue company for corporate officers and key corporate employees, and to approximate pay for business units with revenue similar to those of Modine’s business units for officers and key employees who are heads of business units.  Mercer did not identify, and the ONC Committee was not aware of, the identities of the companies whose information is reflected in the Database.  The ONC Committee recognizes that the Company attracts employees from a broad range of companies and its comparison data reflects that fact.  The ONC Committee does not use the survey data in a formulaic manner.  If the compensation of a particular NEO is substantially greater or less than the median in the survey for the same position, the ONC Committee takes the survey information into account when setting base salary, cash incentive targets and long-term incentive target value, but also exercises its discretion, taking into consideration the individual’s performance, tenure, experience and changes in job responsibilities.

The overall resulting pay positioning for the corporate officers and other key employees as a group is slightly below the median of the market data as defined above.

Description of Executive Compensation Program

The ONC Committee sets the compensation philosophy at Modine in a manner intended to promote the Company’s achievement of its short- and long-term financial goals and encourage its executive officers to act as owners of the Company.  In addition, the ONC Committee focuses on attracting and retaining employees who are qualified, motivated and committed to excellence.  The ONC Committee believes these goals can be accomplished through a compensation program that provides a balanced mix of cash and equity-based compensation.  Base salary is designed to attract and retain executives by compensating them for their day-to-day activities, level of responsibility and sustained individual performance.  The annual cash incentive is intended to reward the recipients for achievement of annual operating goals that are critical to the Company’s short-term business objectives.  The equity portion of the compensation package provides incentives that are intended to focus executives on the Company’s long-term success, align the executives’ returns with those of shareholders, encourage long-term retention, and reward the executive for the Company’s superior long-term performance.

The ONC Committee’s actions are guided by the following beliefs:

·

Compensation is a primary factor in attracting and retaining employees, and the Company can only achieve its goals if it attracts and retains qualified and highly skilled people;

·

All elements of executive compensation, including base salary, targeted annual incentives (cash-based), and targeted long-term incentives (equity-based), are set to levels that the ONC Committee believes ensure that executives are fairly, but not excessively, compensated;

 

·

Strong financial and operational performance is expected, and shareholder value must be preserved and enhanced over time;

·

Compensation must be linked to the interests of shareholders and the most effective means of ensuring this linkage is by granting equity incentives such as stock awards, stock options and performance stock awards;

·

Operating units of the Company are interdependent, and the Company, as a whole, benefits from cooperation and close collaboration among individual units, so it is important in the Company’s incentive plans to reward overall corporate results and focus on priorities that impact the total Company; and

·

The executive compensation program should reflect the economic condition of the Company, as well as Company performance relative to peers, so that in a year in which the Company underperforms, the compensation of the executive officers should be lower than in years when the Company is achieving or exceeding its objectives.

As reflected in this Compensation Discussion and Analysis, the ONC Committee believes the compensation program is aligned with these principles.

The CEO participates in the same programs and receives compensation generally based upon the same factors as the other NEOs.  However, the level of the CEO’s compensation is even more heavily dependent upon the Company’s performance than the compensation of other NEOs.  Mr. Burke’s overall compensation reflects a greater degree of policy- and decision-making authority and a higher level of responsibility for the strategic direction and financial and operational results of the Company.  Given his key role in policy- and decision-making, the ONC Committee believes that the CEO’s compensation should be weighted more heavily toward equity awards so his compensation more directly correlates with the Company’s performance.

Elements of Executive Compensation for Fiscal 2018

The following is a summary of the elements of the Company’s executive compensation program:

 

 

Base Salary

Base salary is designed to attract and retain executives by compensating them for their day-to-day activities, level of responsibility and sustained individual performance.  Individual performance, based upon achievement of annual performance objectives and demonstration of leadership behaviors as reflected in each employee’s performance development plan, is a key component in determining base salary and any adjustments to base salary, and is a subjective determination made by the ONC Committee and, for the NEOs other than the CEO, the CEO.  The determination of base salary affects every other element of executive compensation because all of the other components, including short-term, performance-based awards, long-term incentive compensation payouts, retirement benefits and severance, are based on the amount of the individual’s base salary.  The ONC Committee annually reviews base salaries of the NEOs to ensure that the compensation levels are aligned with the ONC Committee’s principles, based on individual responsibility, performance and job scope.

The ONC Committee increased each NEO’s base salary in fiscal 2018.  The percentage increase for each NEO was based upon both subjective and objective criteria, including the individual performance of each NEO, the length of tenure in their current positions, and their respective compensation relative to the market midpoint for their functions.

The table below illustrates the base salary for each NEO in fiscal 2018, with increases effective in July 2017.

 

 

The Nominating Committee, working with the ONC Committee, evaluates the individual performance of the Company’s CEO by evaluating Mr. Burke’s achievement of his performance development plan goals.  Following discussion with the CEO, the ONC Committee recommends the CEO’s base salary to the Board of Directors based upon this evaluation.

Short-Term, Performance-Based Cash Award

The Management Incentive Plan (the “MIP”) is Modine’s broadly applicable short-term, performance cash award plan designed to motivate and reward the Company’s leaders.  All NEOs participate in the MIP.  The ONC Committee’s objectives for the MIP are to encourage continuous (short-term) operational improvements with metrics that also drive total shareholder return.  The ONC Committee believes the MIP metrics should be challenging but achievable and well-defined so they are understood by the MIP participants and, accordingly, actively drive results.

The ONC Committee approved the use of two independent and equally-weighted performance goals for the fiscal 2018 MIP.  As in fiscal 2017, the MIP continued to use the ROACE performance metric and the Adjusted Operating Income Growth metric for the fiscal 2018 MIP.  For purposes of the MIP, ROACE equals Net Operating Profit After Taxes (“NOPAT”) divided by Average Capital Employed.  A description of the NOPAT and Average Capital Employed calculations under the MIP is provided below.  Adjusted Operating Income Growth is the percentage change in Adjusted Operating Income from fiscal 2017 to fiscal 2018.  A description of the Adjusted Operating Income calculation is provided below.  The ONC Committee has negative discretion to reduce the amounts otherwise payable under the MIP.

 

The ONC Committee chose to use the ROACE metric, based on Adjusted Operating Income, to incentivize management by rewarding underlying financial performance and to prevent potential distorted incentives that could result from the uncertain nature of continuing restructuring activities and any other unusual or non-recurring events.  Use of the ROACE metric is expected to reward long-term growth and the creation of shareholder value through the profitable deployment of additional capital.  The ONC Committee chose to use the Adjusted Operating Income Growth metric to incentivize increased earnings and shareholder return.  The ONC Committee considered the Company’s business plan as well as 15 years of historical performance results for vehicle and capital goods manufacturing peers and Modine when setting the ROACE and Adjusted Operating Income Growth goals.  As a result, for the fiscal 2018 MIP, the ONC Committee maintained the ROACE Threshold, Target and Maximum goals at 5%, 9% and 15%, respectively.  With respect to Adjusted Operating Income Growth, the ONC Committee maintained the Threshold, Target and Maximum goals at 2%, 6% and 12%, respectively.  The ONC Committee maintained payout percentages at the same levels as for the fiscal 2017 MIP.

The specific levels for the MIP metrics for fiscal 2018 were as follows:

 

 

Assuming achievement of the Target level for each metric, the NEOs would receive the following percentages of base salary: Mr. Burke – 100 percent; Mr. Lucareli – 70 percent; Mr. Marry – 80 percent; Mr. Appel – 50 percent; and Mr. Schwab – 50 percent.  Assuming Threshold achievement for each metric, each of the NEOs would receive 10 percent of the Target amount.  Assuming Maximum level achievement for each metric, each of the NEOs would receive 200 percent of the Target amount.  The Company pays amounts between the Threshold and Target and/or between Target and Maximum levels on a linear basis for achievement above Threshold and below Maximum.

For purposes of calculating ROACE under the MIP, NOPAT equals Adjusted Operating Income multiplied by 70 percent (assuming a 30 percent income tax rate), and further adjusted to exclude earnings attributable to non-controlling interests.  Adjusted Operating Income equals operating income plus or minus certain Permitted Adjustments, which include impairment charges, restructuring-related expenses, acquisition-related costs and adjustments and certain other gains or charges.  The impact of the adoption of new U.S. GAAP accounting standards and significant changes in the Company’s accounting methods is another Permitted Adjustment.  The Committee has negative discretion to disregard any Permitted Adjustments if disregarding any of them would result in a reduction in payment.  Average capital employed equals total debt plus shareholders’ equity measured on each of the following quarter ends: March 31, 2017; June 30, 2017; September 30, 2017; December 31, 2017 and March 31, 2018; divided by five.  Adjusted Operating Income Growth is equal to the Adjusted Operating Income for fiscal 2018 minus the Adjusted Operating Income for fiscal 2017, divided by the Adjusted Operating Income for fiscal 2017.

For purposes of the MIP metrics, the Company’s ROACE for fiscal year 2018 was 8.6 percent, and Adjusted Operating Income Growth was 66.3 percent.  As a result, the Committee approved a payment for the MIP participants at the following levels:  90 percent of Target for the ROACE metric, and 200 percent of Target for the Adjusted Operating Income Growth metric.  Both metrics were weighted equally, for a total combined approved MIP payment at 145 percent of Target.

Equity Incentives – Long-Term Incentive Compensation

The long-term incentive element of the Company’s executive compensation program is intended to attract, retain and motivate key employees who directly impact the performance of the Company over a timeframe greater than a year.  Long-term compensation is equity-based so that the interests of the Company’s executive officers are directly aligned with the interests of shareholders.  The equity portion of the compensation package provides an incentive that rewards superior long-term performance and provides financial consequences for underperformance.

The performance period for Performance Stock under the long-term incentive compensation plan initiated in June 2015 was completed as of March 31, 2018.  The amount of the potential award varied based upon the achievement of Threshold, Target or Maximum performance levels.  The Company used two measures to determine payouts— three-year average ROACE and three-year Annual Revenue Growth.  The Company’s three-year average ROACE was set to be equal to NOPAT divided by average capital employed (averaged for fiscal 2016 – fiscal 2018).  The Annual Revenue Growth metric was the simple three-year average of the Company’s annual change in revenue over the performance period, as reported on the Company’s audited financial statements.  Each metric for performance stock awards is calculated independently of the other metrics, and was each weighted at 50 percent of the total award.  The Threshold performance goal was the minimum performance goal that must have been achieved by the Company for the NEOs to earn shares of common stock.

The performance goals for the LTIP metrics for performance stock awards for the period ending in fiscal 2018 were as follows:

 

 

For the performance period ended in fiscal 2018, the Company’s three-year average ROACE was 7.9 percent, which exceeded the Threshold and resulted in a payout equal to 76 percent of Target for the ROACE metric.  The Company’s three-year average Annual Revenue Growth was 13.8 percent, and resulted in a payout equal to 200 percent of Target for the average Annual Revenue Growth metric.  Overall, the payout under the LTIP for the Performance Stock was 138 percent of the Target for the total award.

As it did in fiscal 2017, in fiscal 2018 the ONC Committee approved equity grants as a percentage of base salary and included the use of performance stock awards as part of the Company’s long-term incentive compensation plan.  For fiscal 2018, the Company’s long-term incentive plan included:

Performance Stock Awards (40 percent of long-term incentive dollars at Target).  Shares of performance stock are earned by achieving corporate financial goals over a three-year period (ending March 31, 2020) and become vested after the end of that three-year period.  Payout levels vary based upon the achievement of Threshold, Target or Maximum goals in each of the ROACE and Average Revenue Growth metrics, as described below.  Once earned, the performance stock awards are not subject to any restriction.  Determinations of the achievement of performance goals for the performance stock awards are not made until the Company’s audited financial statements covering the last year in the performance period are completed and the results for the fiscal year are announced publicly.

Stock Options (20 percent of long-term incentive dollars at Target).  The ONC Committee believes that stock options focus executives on driving long-term performance.  Stock options have an exercise price equal to the fair market value of the common stock on the effective date of the grant so recipients recognize a value only if and to the extent that the value of the common stock increases.  The stock options granted in fiscal 2018 vest in four equal annual installments commencing on the first anniversary of the effective date of the grant.  The stock options expire ten years from the date of grant.

Retention Restricted Stock Unit Awards (40 percent of long-term incentive dollars at Target).  Retention restricted stock unit awards reward employees for their continued commitment to the Company.  The Company grants the employees restricted stock units which vest in four equal annual installments commencing on the first anniversary of the effective date of the grant.  As stated in Fiscal 2018 Compensation Highlights, the Company transitioned from retention restricted stock awards to retention restricted stock unit awards in fiscal 2018.

In fiscal 2018, the ONC Committee utilized two metrics for the award of performance stock awards – ROACE and Average Revenue Growth over the three-year performance period.  Each metric for performance stock awards is weighted at 50 percent and is calculated independently of the other metric.  These two metrics are intended to reward long-term growth and the creation of shareholder value through the profitable deployment of additional capital and to emphasize the importance of revenue growth for the Company.  The Threshold performance goal is the minimum performance goal that must be achieved by the Company for the NEO to earn shares of common stock.

For purposes of the LTIP, ROACE means NOPAT divided by average capital employed.  The calculation of ROACE is based on a three-year average ROACE for fiscal 2018 through fiscal 2020 with each annual ROACE averaged over five points (i.e., each fiscal year quarter and prior fiscal year end).  Annual Revenue Growth is the simple three-year average of the Company’s annual change in revenue over the performance period, as reported in the Company’s audited financial statements.  A description of the NOPAT and average capital employed calculations under the LTIP is provided below.

For the fiscal 2018 through fiscal 2020 LTIP, the ONC Committee considered the Company’s business plan as well as more than 15 years of historical performance results for peers and other manufacturing companies and the Company when setting the ROACE and Revenue Growth goals. For both the ROACE and the Revenue Growth goals, the ONC Committee made no adjustments to the Threshold, Target or Maximum levels, or the payout percentages, compared to the fiscal 2016 through fiscal 2018 LTIP.  The goals at the Threshold, Target, and Maximum levels are intended to incentivize participants to achieve the Threshold level and strive for greater performance beyond the Threshold level.

The specific three-year performance goals for the LTIP metrics for performance stock awards granted in fiscal 2018 are as follows:

 

 

The specific levels of performance stock award metrics are set forth below:

 

 

If actual ROACE or Annual Revenue Growth for the performance period is between Threshold and Target and/or between Target and Maximum, the number of shares of common stock earned will be determined on a linear basis.  In the event that the Company’s actual ROACE or Annual Revenue Growth does not meet the Threshold for the performance period, no common stock will be earned under this performance stock award metric.  In the event that the Company’s actual ROACE or Annual Revenue Growth exceeds the Maximum for the performance period, only the Maximum percentage of the Target number of shares of common stock will be earned.  Notwithstanding the foregoing, the ONC Committee retains the discretion to decrease the number of shares of common stock earned under the LTIP.

The Company measures its profitability using ROACE (a measure indicative of the efficiency and profitability of its capital investments), so the ONC Committee used the ROACE metric to incentivize management to continue to improve the Company’s profitability.  Similarly, because Annual Revenue Growth is a key measure of growth that is easy to understand and communicate, the ONC Committee used the Annual Revenue Growth metric to incentivize management to create additional shareholder value through the continued growth of the Company.  For both metrics, the ONC Committee set the Threshold level at what it believed to be an acceptable return and set the Maximum level at what it believed to be exceptional performance with each corresponding to an appropriate competitive pay-out level.  Achievement and payout for each measure is calculated and paid out independently of the other measure.

As mentioned in the discussion above regarding the calculations of ROACE under the MIP, NOPAT equals Adjusted Operating Income multiplied by 70 percent (assuming a 30 percent income tax rate), and further adjusted to exclude earnings (losses) attributable to non-controlling interests.  Adjusted Operating Income equals operating income plus or minus certain Permitted Adjustments, which include impairment charges, restructuring-related expenses, acquisition-related costs and adjustments and certain other gains or charges.  The impact of the adoption of new U.S. GAAP accounting standards and significant changes in the Company’s accounting methods is another Permitted Adjustment.  The Committee has negative discretion to disregard any Permitted Adjustments, if disregarding any of them would result in a reduced payout under the LTIP.

As mentioned above, the ONC Committee approves the equity grants for each NEO under the long-term incentive plan as a percentage of base salary.  Assuming achievement of the Target level for each metric under the performance stock awards, the NEOs would receive the following percentages of base salary in equity grants under the long-term incentive plan approved in fiscal 2018: Mr. Burke – 250 percent; Mr. Lucareli – 150 percent; Mr. Marry – 175 percent; Mr. Appel – 100 percent; and Mr. Schwab – 100 percent.  The percentages for each of the NEO’s (other than Mr. Appel, who did not participate in the fiscal 2017 LTIP) were unchanged from those for fiscal 2017.  Mr. Schwab forfeited his equity grants under the long-term incentive plan approved for fiscal 2018 due to his March 31, 2018 resignation. The table below sets forth the number of shares subject to stock options and the number of restricted stock units issued to each NEO in fiscal 2018 as well as the number of performance stock awards that would be earned upon achievement of each of the long-term incentive plan metrics on March 31, 2020:

 

 

Executive Compensation in Fiscal 2019

Consistent with the Committee’s desire to maintain “timeless” metrics, for the fiscal 2019 MIP the ONC Committee approved two metrics, Free Cash Flow Margin (“FCF %”)  and Adjusted Operating Income Growth, as the performance measures under the plan.  FCF % replaces the ROACE metric that the Company had used for the MIP in recent years, and is an appropriate metric because it aligns management incentives with shareholder interests; is a measure of capital efficiency, including capital spending and working capital management; and is impacted by the strength of the Company’s balance sheet.  FCF % is equal to net cash provided by operating activities, less expenditures for property, plant and equipment, plus or minus permitted adjustments, divided by net sales.  The Adjusted Operating Income Growth metric remains unchanged from fiscal 2018 and will be determined in a similar manner as in fiscal 2018.  Each metric is independent of the other, the metrics are equally weighted, and each metric will be adjusted to account for certain approved items.

For fiscal 2019, the ONC Committee approved the Company’s LTIP for fiscal 2019 through fiscal 2021 to include: retention restricted stock unit awards (40 percent of long-term incentive dollars at Target); stock options (20 percent of long-term incentive dollars at Target); and performance stock awards (40 percent of long-term incentive dollars at Target).  The vesting schedules for retention restricted stock unit awards and stock options are the same, namely 25 percent each year over a period of four years, beginning on the first anniversary of the grant.  Performance stock awards have a three-year performance period, which is the same duration as in prior years, and the ONC Committee approved two performance metrics – three-year Average Cash Flow Return on Invested Capital (“CFROIC”) and three-year Average Annual Revenue Growth, also consistent with the Committee’s desire to maintain “timeless” metrics.  CFROIC replaces the ROACE metric that the Company had used for the LTIP in recent years, and is an appropriate metric because it strengthens the focus on capital spending and free cash flow generation, and improves comparability across businesses.  CFROIC is defined as Cash Flow Conversion divided by Average Capital Employed.  Cash Flow Conversion is described as the Company’s net cash provided by operating activities, less expenditures for property, plant and equipment, plus cash interest paid, plus or minus permitted adjustments.  Average Capital Employed is described as the Company’s total debt plus shareholders’ equity, excluding from shareholders’ equity any equity attributable to minority shareholders.  Annual Capital Employed will be averaged over five points (i.e., the last day of each fiscal quarter and prior fiscal year-end).  The Average Annual Revenue Growth metric remains unchanged from fiscal 2018 and will be determined in a similar manner as in fiscal 2018.  Each metric is independent of the other and the metrics are weighted equally at 50 percent each.

Employment and Post-Employment Benefits

The NEOs receive the same basic employee benefits that are offered by the Company to all salaried employees within the region where the individual resides.  These benefits include medical and dental coverage, disability insurance and life insurance.  The cost of these benefits is partially borne by the employee, including each NEO.

Except for benefits provided to Mr. Schwab under his employment agreement, the Company does not generally provide perquisites to any of the NEOs.  Under his employment agreement, Mr. Schwab received a company car, accident insurance, and a retirement supplement.  The Company provided these benefits as they are customary in Germany.

The Company offers retirement benefits to its employees through tax-qualified plans, including an employee- and employer-funded Modine 401(k) Retirement Plan for U.S. Salaried Employees (the “401(k) Retirement Plan”).  Under its primary 401(k) Retirement Plan for years prior to calendar year 2018, the Company matched 50 percent of employee contributions for up to 5 percent of employee compensation, up to the maximum allowed by law.  While the benefit is available to all of the Company’s full-time employees in the U.S., each individual participant’s 401(k) Retirement Plan balance may vary due to a combination of differing annual amounts contributed by the employee, the investment choices of the participant (the same investment choices are available to all participants in the plan) and the number of years the person has participated in the 401(k) Retirement Plan.

The Company has historically also made an annual contribution to the 401(k) Retirement Plan equal to a certain percentage of base salary and bonus for each full-time U.S. salaried employee, including the NEOs.  In May 2018, the Company contributed an amount equal to two percent of eligible earnings (defined as calendar 2017 salary and MIP paid in calendar 2017) for each full-time, U.S. employee on the payroll as of December 31, 2017.  The percentage contributed was determined based upon the assessment of business financial performance balanced against the need to offer competitive benefits.

Beginning with calendar year 2018, which ends during fiscal 2019, the Company makes matching contributions to an NEO’s account under the 401(k) Retirement Plan or Deferred Compensation Plan, as applicable, equal to the sum of 100 percent of the first three percent of compensation an NEO elects to defer to the 401(k) Retirement Plan or Deferred Compensation Plan, as applicable, and 50 percent of the next three percent of compensation an NEO elects to defer to the 401(k) Retirement Plan or Deferred Compensation Plan, as applicable.  The Company does not currently anticipate that it will make a discretionary contribution to the NEOs’ accounts under the 401(k) Retirement Plan or Deferred Compensation Plan for compensation earned in 2018 or future calendar years.

 

The Company’s defined benefit pension plan, which is frozen, is more fully described in the Pension Benefits Table for Fiscal 2018 below.  Mr. Lucareli and Mr. Marry participate in the Company’s defined benefit pension plan.  Mr. Burke joined the Company after the defined benefit pension plan was closed to new participants.  Mr. Schwab did not participate in the U.S. Company-sponsored pension plan because he is a citizen of Germany, but as Mr. Schwab’s employer, Modine Holding GmbH provided a cash benefit of 10 percent of his base salary to fund a retirement benefit.

In addition to the employee benefits applicable to U.S. employees in general, certain highly compensated employees of the Company, including the NEOs, may participate in the following plans:

Deferred Compensation Plan. The Deferred Compensation Plan is a nonqualified plan that allows a highly compensated employee to defer up to 10 percent of base salary.  Salary deferred pursuant to the Deferred Compensation Plan is an asset of the Company.  The sums deferred do not earn a preferential rate of return and the investment alternatives are generally the same as the 401(k) Retirement Plan.  Payments out of the Deferred Compensation Plan are not made until termination of service or retirement.  As part of the Company’s objective of restoring in this plan amounts that exceeded the allowable Company match and Company contributions to the 401(k) Retirement Plan because of statutory limits, the Company contributes an amount equal to the amount of the employer match and employer contribution that was not allowed to be contributed to the 401(k) Retirement Plan for such individuals due to statutory limits.

Executive Supplemental Retirement Plan (“SERP”).  The SERP is a nonqualified pension plan.  The SERP, like the defined benefit pension plan, is frozen and intended to be an extension of the Company’s qualified pension plan.  Under the SERP, salary and bonus that are in excess of statutory limits are taken into account in determining nonqualified benefits payable to an employee.

The Company has a severance plan that was last updated by the ONC Committee in fiscal 2012 (the “Severance Plan”) for members of the Executive Council as recommended to the Committee by the Company’s CEO, to ensure consistent treatment of individuals in such positions in the event of an involuntary termination of employment without cause.  The policy provides that such individuals would be paid their annual base salary at the time of termination in installment payments over the course of the year following termination, and would be eligible to elect Company-paid COBRA continuation coverage for one year following termination.  In order to receive these benefits, participants are required to release the Company from any and all liability.  All NEOs other than Mr. Burke (who has a separate employment agreement) and Mr. Schwab (who had a separate employment agreement in effect until his resignation on March 31, 2018), are covered under the Severance Plan.  While the Severance Plan also provides for separate benefits upon an involuntary termination at the time of a change in control, Mr. Appel is the only NEO currently covered under the change in control provisions under the Severance Plan.

Share Ownership Guidelines - Officers

The Company has maintained share ownership guidelines for directors and officers of the Company, including the NEOs, since 2008.  The Board continues to believe that directors and officers should have a meaningful personal investment in the Company.  Only shares of stock, either restricted or unrestricted, count toward compliance with the guidelines.

The current guidelines provide that on the fifth anniversary of appointment to the position the President and CEO is expected to hold shares of Company stock with a value of at least four times his annual base salary.  In addition, the guidelines now do not distinguish between NEOs and other officers and provide that all officers, other than the President and CEO, are expected to hold shares of Company stock with a value of at least two times their current annual base salary.  The stock value is determined by using the higher of the stock price at the time of measurement or the average stock price over the previous three years.  The ONC Committee reviews the guidelines and compliance therewith on at least an annual basis.  The chair of the Nominating Committee evaluates whether an exception should be made for any officer, who, due to his or her unique financial circumstances or other extenuating circumstances, would incur a hardship by complying with the applicable guideline after the initial five-year period and, in such an event, may make an exception to the guidelines for such individual.  Additionally, the guidelines may be temporarily waived for an officer who has an unusual personal circumstance or is approaching retirement and has a need to diversify his/her stock holdings.  Each of the NEOs who has been an officer of the Company for at least five years is currently in compliance with the stock ownership guidelines.

 

Related Policies Applicable to Executive Officers

Under the Company’s Insider Trading Policy, all directors and executive officers, including the NEOs, are prohibited from holding shares of Company stock in a margin account or otherwise pledging shares of Company stock in any way, and all directors and employees of the Company are prohibited from engaging in hedging or monetizing transactions involving Company stock.   The ONC Committee has also implemented an incentive compensation recoupment (or “clawback”) policy.  Effective beginning with awards granted in fiscal 2013, the clawback policy requires forfeiture or repayment of any awards granted under the Incentive Plan (i.e., the MIP (cash bonus) or any long-term equity awards) if the ONC Committee determines that a participant committed an act of misconduct that is adverse, or reasonably expected to be adverse, to the best interests of the Company or its shareholders.

Employment Agreements

The Company has an employment agreement with Mr. Burke, which was not amended during fiscal 2018.  Modine Europe GmbH (f/k/a Modine Holding GmbH), a German subsidiary, had an employment agreement with Mr. Schwab, as is customary in Germany.  Mr. Schwab had entered into an employment agreement with Modine Holding GmbH in July 2014, but this agreement was mutually terminated effective March 31, 2018 with Mr. Schwab’s resignation from Modine.  Modine filed an 8-K containing Mr. Schwab’s employment agreement on July 3, 2014.  The Company also has change in control agreements with Mr. Marry, Mr. Lucareli, and certain other key employees.  The purpose of these agreements is to ensure continuity and, in the case of a change in control, the continued dedication of key employees during any period of uncertainty due to a proposed or pending change in control of the Company.  Mr. Appel’s treatment in the event of a change in control will be governed by the Severance Plan.  See Potential Post-Employment Payments below for additional information about benefits in the event of a change in control under the change in control agreements and the Severance Plan.

Tax Implications for NEOs

The ONC Committee generally seeks to structure compensation amounts and arrangements so that they do not result in penalties for the NEOs under the Internal Revenue Code of 1986, as amended (the “Code”).  For example, Section 409A of the Code imposes substantial penalties and results in the loss of any tax deferral for nonqualified deferred compensation that does not meet the requirements of that section.  The ONC Committee has generally structured the elements of the Company’s compensation program so that they are either not characterized as nonqualified deferred compensation under Section 409A or meet the distribution, timing and other requirements of Section 409A.  Without these steps, certain elements of compensation could result in substantial tax liability for the NEOs.  Section 280G and related provisions of the Code impose substantial excise taxes on so-called “excess parachute payments” payable to certain executives upon a change in control and results in the loss of the compensation deductions for such payments by the executive’s employer.  When the Company entered into the employment agreement with Mr. Burke and the change in control agreements with all of the other NEOs (other than Mr. Schwab and Mr. Appel), all of which were entered into prior to 2009, the ONC Committee structured the change in control payment under the employment and change in control agreements with the NEOs (other than Mr. Schwab and Mr. Appel ) to include a gross up for excise taxes imposed under Section 280G in order to preserve the after-tax value of those payments for those executives.  The portion of the Severance Plan applicable in a change in control, which is applicable to those (such as Mr. Appel) joining the Company’s senior management on or after the date of adoption of the policy, does not provide excise tax gross ups in the event of a change in control.

Tax Implications of IRC Section 162(m)

For tax years beginning prior to calendar year 2018, Section 162(m) of the Code generally disallowed a tax deduction to public companies for compensation over $1,000,000 paid to a company’s CEO and the other NEOs who are covered by Section 162(m).  For such tax years, qualifying performance-based compensation was not subject to the deduction limit if certain requirements were met.

For tax years beginning prior to calendar year 2018, the ONC Committee believed that it was generally in the Company’s best interest to attempt to structure compensation amounts and plans in a manner that satisfies the requirements of Section 162(m).  However, the ONC Committee also recognized the need to retain flexibility to approve compensation amounts and plans that may not meet Section 162(m) standards in order to enable the Company to meet its overall objectives.  Accordingly, the Board and the ONC Committee expressly reserved the authority to award non-deductible compensation in appropriate circumstances.  Further, because of uncertainties as to the application and interpretation of Section 162(m) and the regulations issued thereunder, no assurance can be given that compensation granted in tax years beginning prior to 2018 that was intended by the Company to satisfy the requirements for deductibility under Section 162(m) would do so.

 

For tax years beginning after December 31, 2017, tax reform legislation signed into law on December 22, 2017 (“Tax Reform”) repealed the qualifying performance-based compensation exception to the $1,000,000 deduction limitation. Tax Reform provided some transition relief preserving the qualifying performance-based compensation exception for certain qualifying performance-based compensation payable pursuant to a legally binding contract in place on November 2, 2017. However, given the uncertain scope of such transition relief under Tax Reform, no assurance can be given that compensation paid to the NEOs after March 31, 2018 (in 2018 or future years) pursuant to the MIP or LTIP or for past grants under the 2008 Incentive Plan will satisfy the requirements for the qualifying performance-based compensation exemption from Section 162(m) as extended through transition relief despite any intention by the ONC Committee to meet the qualifying performance-based compensation requirements with respect to such amounts. Further, the ONC Committee reserves the right to modify compensation that was initially intended to be exempt from Section 162(m) if it determines that such modifications are consistent with Modine’s business needs.

Finally, under Tax Reform, for tax years beginning after December 31, 2017, except to the extent preserved by transition relief, Section 162(m) will disallow a U.S. tax deduction for compensation payable to each of our NEOs in excess of $1,000,000 in any tax year. In addition, for any officer that is an NEO of Modine whose compensation is subject to this limitation in fiscal 2018 or any later tax year, that officer’s compensation will remain subject to this annual deductibility limitation for any future tax year regardless of whether he or she remains an NEO.

 

COMPENSATION COMMITTEE REPORT

The ONC Committee of the Board of Directors has reviewed and discussed the Compensation Discussion and Analysis with management; and, based on that review and discussion, the ONC Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s proxy statement and the Company’s annual report on Form 10-K for the fiscal year ended March 31, 2018.

THE OFFICER NOMINATION AND COMPENSATION COMMITTEE

Christopher W. Patterson, Chair

Charles P. Cooley

Suresh V. Garimella

Larry O. Moore